UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended June 30, 2016

or

Commission File Number 001-36184

 

RELYPSA, INC.

(Exact name of registrant as specified in its charter)

 

 

100 Cardinal Way

Redwood City, CA 94063

(Address of principal executive offices) (Zip Code)

(650) 421-9500

(Registrant’s telephone number, including area code)

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

As of August 1, 2016, the registrant had 44,882,597 shares of common stock outstanding.

 

 

 

 

 

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Relypsa, Inc.

Quarterly Report on Form 10-Q

Index

 

 

 

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Relypsa, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

 

 

See accompanying notes.

 

 

 

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Relypsa, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

 

 

See accompanying notes.

 

 

 

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Relypsa, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

See accompanying notes.

 

 

 

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Relypsa, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

See accompanying notes.

 

 

 

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Relypsa, Inc.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

 

 

1.  Description of Business and Significant Accounting Policies

Organization

Relypsa, Inc. (Relypsa or the Company) is a biopharmaceutical company focused on the discovery, development and commercialization of polymer-based drugs to treat conditions that are often overlooked and undertreated, but that can have a serious impact on patients’ lives and even be life-threatening. On October 21, 2015, the U.S. Food and Drug Administration (FDA) approved the Company’s first drug, Veltassa® (patiromer) for oral suspension, for treatment of hyperkalemia. Hyperkalemia is a life-threatening condition defined as abnormally elevated levels of potassium in the blood. The Company launched Veltassa in December 2015 and it is available for prescription to patients in the United States through a limited number of specialty pharmacies and specialty distributors. The Company commenced operations on October 29, 2007. The Company’s principal operations are based in Redwood City, California and it operates in one segment.

On July 20, 2016, the Company entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Galenica AG, a public limited company existing under the laws of Switzerland (Galenica), and Vifor Pharma USA Inc., a Delaware corporation and an indirect wholly owned subsidiary of Galenica (Merger Sub). Pursuant to the terms of the Merger Agreement, Merger Sub has commenced a tender offer to purchase all of the issued and outstanding shares of common stock of the Company, par value $0.001 per share (the Shares), at a purchase price of $32.00 per Share (the Offer Price), payable to the holder thereof in cash, without interest and less any applicable withholding taxes (the Offer).

As soon as practicable following the consummation of the Offer and subject to the satisfaction or waiver of the other conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company and the Company will survive the Merger as a wholly owned subsidiary of Galenica (the Merger). The Merger will be effected in accordance with the Merger Agreement and under Section 251(h) of the General Corporation Law of the State of Delaware (the DGCL), which permits completion of the Merger upon the acquisition by Merger Sub in the Offer of at least such percentage of the Company’s stock as would be required to adopt the Merger Agreement at a meeting of the Company’s stockholders. Accordingly, if, following the Offer, a number of Shares have been tendered such that Merger Sub holds a majority of the outstanding Shares, the Merger Agreement contemplates that the parties will cause the closing of the Merger as soon as practicable without a vote of the Company’s stockholders in accordance with Section 251(h) of the DGCL. At the effective time of the Merger, each outstanding Share (other than Shares held by Galenica, Merger Sub or the Company or their direct or indirect wholly owned subsidiaries, Shares irrevocably accepted for purchase pursuant to the Offer and Shares held by stockholders who are entitled to demand and who have properly and validly perfected their statutory rights of appraisal under Delaware law) will be automatically converted into the right to receive an amount in cash equal to the Offer Price (the Merger Consideration), without interest, less any applicable withholding taxes, upon the surrender of the certificate representing such Share.  The obligation of Merger Sub to purchase Shares tendered in the Offer is subject to the satisfaction or waiver of a number of closing conditions set forth in the Merger Agreement, including the tender of a majority of the Shares in the Offer and the expiration or earlier termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company does not expect there to be a significant period of time between the consummation of the Offer and the consummation of the Merger.

The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the U.S. Securities Exchange Commission (SEC).

Offerings

 

On November 4, 2015, the Company filed a shelf registration statement on Form S-3, which permitted: (a) the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $300.0 million of its common stock, preferred stock, debt securities, warrants and/or units; and (b) as part of the $300.0 million, the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $75.0 million of its common stock that may be issued and sold under a sales agreement with Cantor Fitzgerald & Co in one or more at-the-market offerings. During January and February 2016, the Company sold 2,509,372 shares pursuant to its current at-the-market offering at a weighted-average sale price of $18.18 for aggregate offering proceeds of $45.6 million, and the Company received aggregate net proceeds of $44.2 million.

 

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Basis of Presentation

The unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2016 and 2015 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2015. The consolidated financial statements include all normal recurring adjustments, which the Company considers necessary for a fair presentation of our financial position at such dates and our operating results and cash flows for those periods. Results for the interim periods are not necessarily indicative of the results for the entire year. For more complete financial information, these condensed consolidated financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC.

Use of Estimates

The preparation of these unaudited interim condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States, or GAAP, requires management to make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenues, inventories, clinical trial accruals, manufacturing accruals, fair value of assets and liabilities, income taxes, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers, as amended by ASU 2015-14, that outlines a single comprehensive model for entities to use in accounting for revenue recognition and supersedes most current revenue recognition guidance, including industry-specific guidance. The amendments in this accounting standard update are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. The amendments in this accounting standard update are effective for the Company for interim and annual reporting periods beginning after January 1, 2018; with early adoption permitted on January 1, 2017. The Company is currently assessing the impact that this standard will have on its consolidated financial statements. 

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. The ASU requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. This ASU requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements. 

 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements. 

 

Liquidity

The Company has never been profitable and, as of June 30, 2016, the Company has an accumulated deficit of $622.8 million. The Company may continue to incur substantial operating losses even after it begins to generate meaningful revenues from Veltassa. If the Company is unable to achieve the level of revenues from product sales that is contemplated in its operating plan and the Company is unable to raise additional funds through public or private equity, debt financings or other sources, the Company has contingency plans to implement cost cutting actions to reduce its working capital requirements. These reductions in expenditures may have an adverse impact on the Company’s ability to achieve certain of its planned objectives, which could have a material adverse effect on the business, results of operations, and financial condition. The Company will need to generate significant revenues to achieve profitability and may never do so.

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Inventory

Inventory is composed of raw materials, intermediate materials, which are classified as work-in-process and finished goods, which are goods that are available for sale. Inventory costs include amounts related to third-party contract manufacturing, shipping costs, amortization of up-front payments to contract manufacturers, or CMOs, packaging services and manufacturing overhead. Inventory is carried at weighted average cost. The Company has contracted with third party manufacturers that produce the raw and intermediate materials used in the production of Veltassa as well as the finished product. In connection with production of inventory, the Company may be required to provide payments to third party manufacturers in advance of transfer of title or risk of loss. These amounts are included in inventory as raw materials on the accompanying condensed consolidated balance sheets. Inventories are stated at the lower of cost or market. If the Company identifies excess, obsolete or unsalable product, the Company will write down its inventory to its net realizable value in the period it is identified. The Company received FDA approval for Veltassa on October 21, 2015 and began capitalizing inventory starting in October 2015. Cost incurred prior to approval have been recorded as research and development expense in the condensed consolidated statements of operations.

Accounts Receivable

The Company extends credit to customers for product sales resulting in accounts receivable. Customer accounts are monitored for past due amounts. Past due accounts receivable, determined to be uncollectible, are written off against the allowance for doubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses and existing economic factors, and are adjusted periodically. The accounts receivable are reported in the condensed consolidated balance sheets, net of allowances for doubtful accounts and cash discounts, generally 2% of the sales price, as an incentive for prompt payment. As of June 30, 2016 and December 31, 2015, the Company had a trade accounts receivable balance of $1.3 million and $0.5 million, respectively, related to Veltassa product sales. There was no allowance for doubtful accounts at June 30, 2016 and December 31, 2015.

 

Revenue Recognition

Revenue is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Revenues are deferred for fees received before earned or until no further obligations exist. The Company exercises judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Product Revenue and Net Product Sales

The Company’s product revenues consist of U.S. sales of Veltassa and are recognized once the Company meets all four revenue recognition criteria described above. Veltassa was approved by the FDA on October 21, 2015 and the Company commenced shipments of Veltassa to specialty pharmacies and specialty distributors in late December 2015. The Company presently does not have the ability to estimate the extent of rebates or chargebacks or product that may ultimately be returned due to our lack of history with Veltassa product revenues at this time. Accordingly, the price is not considered to be deemed fixed or determinable at the time of the shipment to the specialty pharmacy or specialty distributor. Therefore, the Company recognizes revenue once the specialty pharmacy has filled the patient’s prescription for Veltassa or specialty distributor sells Veltassa. This approach is frequently referred to as the “sell-through” revenue recognition model. Under the sell-through approach, revenue is recognized when the specialty pharmacy provides product to a patient based on the fulfillment of a prescription or specialty distributor sells product to a hospital or other eligible entity. As of June 30, 2016 and December 31, 2015, the Company had a deferred revenue balance of $0.7 million and $0.5 million, respectively, related to Veltassa product sales.

 

The Company recognizes revenues from product sales net of accruals for estimated customer credits, rebates, discounts, distribution services fees, chargebacks and Medicare Part D coverage gap reimbursements at the time of sale, which we refer to as net product sales.

 

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Collaboration and License Revenue

In August 2015, the Company entered into a collaboration and license agreement (License Agreement) with Vifor Fresenius Medical Care Renal Pharma (VFMCRP), pursuant to which the Company granted to VFMCRP an exclusive, royalty-bearing license to the Company’s patents to develop and commercialize Veltassa outside the United States and Japan (Licensed Territory).  The License Agreement sets forth the parties’ respective obligations for development, commercialization, regulatory and manufacturing and supply activities. In exchange for the Company entering into the License Agreement, VFMCRP agreed to pay the Company an upfront cash payment of $40.0 million.  The upfront payment was allocated to the 1) license and work on the submission of Marketing Authorization Application (MAA) deliverable, 2) an R&D deliverable and 3) a committee participation deliverable using the relative estimated selling price method. The Company estimated the best estimate of selling price (BESP) of the license based on a probability-adjusted present value of the expected cash flows. The BESP for the other deliverables was estimated by using internal estimates of the cost to perform the specific services plus a normal profit margin for providing the services. The determination of the BESP of the license involved significant judgment regarding the patient populations in the Licensed Territory, the percent of patients that would be treated and receive payment coverage, the duration of treatment of patients, the time and probability to achieve regulatory and pricing approval, and an appropriate discount rate.

 

Embedded Derivatives Related to Debt Instruments

 

Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the debt instrument. Upon the occurrence of a default or a change of control, the Company may prepay (or may be required to prepay) the outstanding amount of the debt. The prepayment premiums are considered a contingent put option liability, as the holder of the debt may exercise the option to prepay, and is considered an embedded derivative. If the Company were required to prepay the debt in September 2016 upon the occurrence of a change of control, the total amount of prepayment premiums would be approximately $50.0 million. The embedded derivative is presented together with the debt instrument and the related debt discount on a combined basis. The fair value of the contingent put option liability was determined by using a risk-neutral valuation model and the assumptions included in the valuation of the embedded derivative as of June 30, 2016 included an assumption of a change of control of 50% in the near term.  As of June 30, 2016, the embedded derivative had a carrying value of $25.5 million. Changes in the estimated fair value of the bifurcated embedded derivatives are reported as gains or losses in interest and other (expense) income, net in the condensed consolidated statement of operations.

 

 

Net Loss per Common Share

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per common share is calculated by dividing the net loss by the weighted-average number of common stock equivalents outstanding for the period using the treasury stock method.

The following outstanding shares of common stock equivalents were excluded from the computations of diluted net loss per common share attributable to common stockholders for the periods presented as the effect of including such securities would be antidilutive (in thousands):

 

 

 

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2.  Fair Value Measurements

The following tables set forth the fair value of the Company’s financial instruments that were measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

As of June 30, 2016, the Company’s Level 3 liability is comprised of a contingent put option liability. The following table sets forth a summary of the changes in the estimated fair value of the Company’s contingent put option, which are measured at fair value on a recurring basis (in thousands):

 

 

Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds as Level 1. When quoted market prices are not available for the specific security, then the Company estimates fair value by using benchmark yields, reported trades, broker/dealer quotes, and issuer spreads; these securities are classified as Level 2. The Company classifies corporate bonds, commercial paper, agency bonds and U.S. government bonds as Level 2. In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. The Company classified a contingent put option liability as a Level 3 liability. See Note 6 “Borrowings,” for further description. The fair value of the contingent put option liability was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default and change of control provisions, holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions, or the contingent put option. The fair value of the underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery rate in default, and discounting such cash flows back to the reporting date using a risk-free rate. The carrying value of the underlying debt facility approximates fair value. Changes to the estimated fair value of the contingent put option will be recorded in interest and other (expense) income, net in the condensed consolidated statement of operations.

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The carrying values of the Company’s financial instruments, such as cash equivalents, trade receivables, other receivables, accounts payable, accrued liabilities and line of credit approximate fair value due to the short-term nature of these items.

There were no transfers between Level 1, Level 2, and Level 3 during the periods presented.

 

 

3.  Cash, Cash Equivalents, and Short-Term Investments

The following is a summary of cash, cash equivalents, and short-term investments (in thousands):

 

 

 

For the three and six month periods ended June 30, 2016 and 2015, there were no realized gains or losses on the available-for-sale securities.  

All of the Company’s available-for-sale securities are subject to a periodic impairment review. The Company considers a debt security to be impaired when its fair value is less than its carrying cost, in which case the Company would further review the investment to determine whether it is other-than-temporarily impaired. When the Company evaluates an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, intent to sell, and whether it is more likely than not the Company will be required to sell the investment before the recovery of its cost basis. If an investment is other-than-temporarily impaired, the Company writes it down through earnings to its impaired value and establishes that as a new cost basis for the investment. The Company did not identify any of its available-for-sale securities as other-than-temporarily impaired in any of the periods presented. As of June 30, 2016, no investment was in a continuous unrealized loss position for more than one year, the unrealized losses were not due to change in credit risk and the Company believes that is more likely than not the investments will be held until maturity or a forecasted recovery of fair value.

 

 

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4.  Inventory

The Company began capitalizing inventory in October 2015 once the FDA approved Veltassa. Inventories consist of the following (in thousands):

 

 

 

5. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

 

6.  Borrowings

 

Credit Agreement

On April 27, 2016, the Company entered into a Credit Agreement (the Credit Agreement) with Athyrium Opportunities II Acquisition LP and Healthcare Royalty Partners III, L.P. (the Lenders) and Cantor Fitzgerald Securities, as the Administrative Agent, for an aggregate principal amount of $150.0 million in senior secured loans (the Loans). Principal payments on the Loans are paid in equal quarterly installments of 6.67% of the Loans beginning on December 2018, with the outstanding balance to be repaid on April 27, 2022. The Loans bear interest at a rate of 11.5% per year, to be paid quarterly beginning June 15, 2016 and include an interest-only period of 30 months, which may be extended up to 48 months upon meeting certain conditions.  As of June 30, 2016 the outstanding principal balance and the net carrying value of the Credit Agreement was $150.0 million and $133.0 million, respectively. Upon execution of the Credit Agreement, the Company paid a closing fee to the Lenders of $1.5 million.

The Company is also required to make mandatory prepayments of the borrowings under the Credit Agreement, subject to specified exceptions, with the proceeds of asset sales, extraordinary receipts, debt issuances and specified other events. In addition, upon the occurrence of a change of control, the Company may prepay (or certain of the Lenders may require the Company to prepay), the outstanding amount of the Loans. Upon the prepayment or repayment of all or any of the outstanding principal balance, the Company shall pay in addition to such prepayment, a prepayment premium equal to (i) with respect to any such prepayment paid on or prior to April 27, 2018, an amount equal to the greater of (a) 1.00% of the principal amount prepaid and (b) the amount, if any, by which (1) the present value as of such date of determination of (x) 111.50% of the principal amount prepaid plus (y) all required interest payments that would have been due on the principal amount prepaid through and including April 27, 2018, computed using a discount rate equal to the three month treasury rate plus 1.00%, exceeds (2) the principal amount prepaid, (ii) with respect to any prepayment paid or required to be paid after April 27, 2018 but on or prior to April 27, 2019, 11.50% of the principal amount prepaid, (iii) with respect to any prepayment paid or required to be paid after April 27, 2019 but on or prior to April 27, 2020, 5.75% of the principal amount of the Borrowings prepaid, (iv) with respect to any prepayment paid or required to be paid after April 27, 2020 but on or prior to April 27, 2021, 2.875% of the principal amount prepaid and (v) with respect to any prepayment paid or required to be prepaid thereafter, 0.00% of the principal amount prepaid.  The Company shall also pay an exit fee in an amount equal to 2.00% of the principal amount prepaid or repaid. If the Company were required to prepay the loan in September 2016 upon the occurrence of a change of control, the total amount of the prepayment premium would be approximately $50.0 million. The prepayment premiums are considered a contingent put option liability, as the holder of the Loans may exercise the option to prepay, and is considered an embedded derivative. The valuation of the contingent put option liability is described further in Note 2. The assumption included in the valuation of the embedded derivative as of June 30, 2016 included an assumption of a change in control of 50% in the near term.

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The obligations under the Credit Agreement are secured by a lien on substantially all of the Company’s tangible and intangible property. The Credit Agreement contains certain affirmative covenants, negative covenants and events of default, including, covenants and restrictions that among other things, require the Company and its subsidiary to satisfy a certain financial covenant and limits the ability of the Company and its subsidiary’s ability to, incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales or sale and leaseback transactions, and declare dividends or redeem or repurchase capital stock. A failure to comply with these covenants could permit the Lenders under the Credit Agreement to declare the outstanding principal amount, together with accrued interest and fees, to be immediately due and payable.

In connection with the Credit Agreement, the Company issued to the Lenders warrants to purchase up to an aggregate of 239,872 shares of the Company’s common stock at an exercise price equal to $18.76 per share. The fair value of the warrants issued was $3.3 million at the issuance date and was estimated using the Black-Scholes model with the following assumptions: a risk-free interest rate of 1.69%, a life of 7 years, a volatility factor of 83.32%, and no dividend yield. These warrants are exercisable immediately upon issuance, and excluding certain mergers or acquisitions, will expire on the seven-year anniversary of the date of issuance. As of June 30, 2016, all of these warrants were outstanding. 

 

The following are the future principal payments under the terms of the Credit Agreement:

 

 

Capital Loan

On May 30, 2014, the Company entered into an Amended and Restated Loan and Security Agreement (the Amended Loan Agreement) with Oxford Finance LLC and Silicon Valley Bank to amend and restate in its entirety the Loan and Security Agreement, (the Original Agreement), dated January 31, 2013. As of December 31, 2015, $15.0 million was outstanding under the Amended Loan Agreement.

 

The Capital Loan was paid in full in April 2016, when Athyrium Opportunities II Acquisition LP and Healthcare Royalty Partners III, L.P. and the Company entered into the Credit Agreement. The Company used a portion of the proceeds under the Credit Agreement to repay the Capital Loan’s outstanding principle balance, final payment fee, prepayment fee, and accrued interest totaling approximately $17.0 million. As a result of repayment of the Capital Loan, an expense of $1.2 million was recognized as interest and other (expense) income, net during the three and six month period ended June 30, 2016.

 

 

7. Collaboration and License Agreement

In August 2015, the Company entered into a collaboration and license agreement (License Agreement) with VFMCRP, pursuant to which the Company granted to VFMCRP an exclusive, royalty-bearing license to the Company’s patents to develop and commercialize Veltassa outside the United States and Japan (Licensed Territory).  The License Agreement sets forth the parties’ respective obligations for development, commercialization, regulatory and manufacturing and supply activities. In exchange for the Company entering into the License Agreement, VFMCRP agreed to pay the Company an upfront cash payment of $40.0 million. VFMCRP also agreed to pay the Company up to $125.0 million in milestone payments upon achievement of certain regulatory, commercial and net sales milestones and tiered, double digit royalties on net sales in the Licensed Territory.  

The Company identified the following deliverables per the terms of the License Agreement: 1) the granting of the licenses to VFMCRP; 2) working with VFMCRP on the submission of the Marketing Authorization Application (MAA); 3) performance of research and development activities; 4) participation in the joint steering committee (JSC) and joint development committee (JDC) and 5) manufacturing and supply activities.

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The arrangement consideration allocated to the license and work on the submission of MAA will be recognized as collaboration and license revenue over the estimated performance period beginning upon the delivery of the license in August 2015. The amount allocated to the research and development activities and JSC and JDC participation are being recognized over the estimated performance period. For the three and six months ended June 30, 2016, revenue of $3.1 million and $14.9 million, respectively, was recognized. There were no collaboration and license revenue for the three and six months ended June 30, 2015. As of June 30, 2016, the Company had $0.4 million and $6.2 million in short-term deferred revenues and long-term deferred revenues, respectively related to collaboration and license revenue.

 

 

8.  Commitments and Contingencies

Lanxess Corporation

On January 9, 2014, the Company entered into a Manufacturing and Supply Agreement (the Lanxess Supply Agreement) with Lanxess that supersedes an earlier agreement, the Memorandum of Understanding that was executed on November 27, 2012. Under the Supply Agreement, Lanxess has agreed to manufacture and supply for commercial sale the active pharmaceutical ingredient (API) for Veltassa. The Lanxess Supply Agreement terminates on December 31, 2020 unless terminated earlier. Under the Lanxess Supply Agreement, Lanxess is obligated to manufacture the Company’s commercial supply of API for Veltassa, and the Company is obligated to purchase from Lanxess such products manufactured, pursuant to the terms and conditions of the Lanxess Supply Agreement.

DPx Fine Chemicals

On May 14, 2014, the Company entered into a Manufacturing and Supply Agreement (the DPx Supply Agreement) with DPx Fine Chemicals Austria GmbH & Co KG (DPx Fine Chemicals), formerly DSM Fine Chemicals Austria NFG GMBH & Co. KG. Under the DPx Supply Agreement, DPx Fine Chemicals has agreed to manufacture and supply for commercial sale the API for Veltassa. Under the DPx Supply Agreement, the Company is obligated to make certain minimum purchases of API.

On March 7, 2016, the Company entered into Amendment No. 1 to the DPx Supply Agreement (the Amendment). The Amendment extends the term of the DPx Supply Agreement for two years until May 14, 2023, unless earlier terminated pursuant to the terms of the DPx Supply Agreement, and provides for an increase in the Company’s purchasing commitment.

 

Purchase Commitments

The following are the combined future minimum payments primarily under the terms of the Lanxess Supply Agreement and the DPx Supply Agreement as of June 30, 2016.  These amounts are based on estimates of future timing, quantity discounts and manufacturing efficiencies (in thousands):

 

 

 

Operating Lease

On June 26, 2014, the Company entered into a new lease (the Lease) for office and laboratory facilities in Redwood City, California that serves as the Company’s principal executive offices. The Lease commenced on February 1, 2015, following the landlord’s construction of certain improvements to the premises required under the Lease. The Lease terminates 10 years after the commencement and the Company has an option to extend the Lease for an additional five years upon written notice to landlord. On July 10, 2015, the Company amended the Lease to expand the existing premises. The term of the expanded premises has the same termination date as the existing lease.

The Company entered into a sublease agreement with a third party in March 2016 with monthly payments of $45,833. The sublease period ends on January 31, 2017. The rental income received from this sublease is included as a reduction of rent expense in the condensed consolidated statements of operations.

 

 

 

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9.  Equity Compensation Plans and Stock-Based Compensation

The following table summarizes option activity under the Company’s equity compensation plans and related information (in thousands, except per share and contractual term amounts):

 

 

The weighted-average grant-date estimated fair value of options granted during the three months ended June 30, 2016 and 2015 was $12.35 and $24.63, respectively. During the six months ended June 30, 2016 and 2015, the weighted-average grant-date estimated fair value of options granted was $13.44 and $24.80, respectively. The aggregate intrinsic value of options outstanding and exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of June 30, 2016.

 

 

Stock-Based Compensation Expense

Stock-based compensation expense included in the Company’s consolidated statements of operations is as follows (in thousands):

 

 

As of June 30, 2016, the total unrecognized stock-based compensation expense related to stock options and the employee stock purchase plan (ESPP) was $42.1 million, which is expected to be recognized over an estimated weighted-average period of 2.6 years.

 

Included in stock-based compensation expense above are performance based options and restricted stock units awarded in November 2015. The options and restricted stock units will vest upon the achievement of certain pre-established corporate performance-related goals.

The estimated grant date fair value of employee stock options was calculated using the Black-Scholes valuation model, based on the following assumptions:

 

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The fair value of nonemployee stock options was calculated using the Black-Scholes valuation model, based on the following assumptions:

 

Expected stock price volatility is based on an average of the Company’s volatility and several peer public companies due to the Company’s limited history.

Restricted Stock Units

During 2016, the Company granted restricted stock unit (RSUs) awards subject to time-based vesting criteria. RSUs subject to time-based vesting criteria entitle holders to receive shares of common stock at the end of a specified period of time. For RSUs subject to time-based vesting criteria, vesting is based on continuous employment or service of the holder to the Company. The fair value of RSUs is measured based on the number of shares granted and the closing market price of our common stock on the date of grant. The following table summarizes restricted stock unit activity for the six months ended June 30, 2016 (in thousands, except per share amounts):

 

 

The total unrecognized stock-based compensation expense related to non-vested RSUs at June 30, 2016, was $17.1 million, and is expected to be recognized over a weighted-average period of approximately 2.6 years.

 

 

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10.  Subsequent Events

On July 20, 2016, the Company entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Galenica AG, a public limited company existing under the laws of Switzerland (Galenica), and Vifor Pharma USA Inc., a Delaware corporation and an indirect wholly owned subsidiary of Galenica (Merger Sub). Pursuant to the terms of the Merger Agreement, Merger Sub has commenced a tender offer to purchase all of the issued and outstanding shares of common stock of the Company, par value $0.001 per share (the Shares), at a purchase price of $32.00 per Share (the Offer Price), payable to the holder thereof in cash, without interest and less any applicable withholding taxes (the Offer).

As soon as practicable following the consummation of the Offer and subject to the satisfaction or waiver of the other conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company and the Company will survive the Merger as a wholly owned subsidiary of Galenica (the Merger). The Merger will be effected in accordance with the Merger Agreement and under Section 251(h) of the General Corporation Law of the State of Delaware (the DGCL), which permits completion of the Merger upon the acquisition by Merger Sub in the Offer of at least such percentage of the Company’s stock as would be required to adopt the Merger Agreement at a meeting of the Company’s stockholders. Accordingly, if, following the Offer, a number of Shares have been tendered such that Merger Sub holds a majority of the outstanding Shares, the Merger Agreement contemplates that the parties will cause the closing of the Merger as soon as practicable without a vote of the Company’s stockholders in accordance with Section 251(h) of the DGCL. At the effective time of the Merger, each outstanding Share (other than Shares held by Galenica, Merger Sub or the Company or their direct or indirect wholly owned subsidiaries, Shares irrevocably accepted for purchase pursuant to the Offer and Shares held by stockholders who are entitled to demand and who have properly and validly perfected their statutory rights of appraisal under Delaware law) will be automatically converted into the right to receive an amount in cash equal to the Offer Price (the Merger Consideration), without interest, less any applicable withholding taxes, upon the surrender of the certificate representing such Share.  The obligation of Merger Sub to purchase Shares tendered in the Offer is subject to the satisfaction or waiver of a number of closing conditions set forth in the Merger Agreement, including the tender of a majority of the Shares in the Offer and the expiration or earlier termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company does not expect there to be a significant period of time between the consummation of the Offer and the consummation of the Merger.

 

The Merger Agreement includes customary termination rights for both the Company and Parent including, among others, the right to terminate in the event that the acceptance time has not occurred on or before December 15, 2016. Additionally, the Company has agreed to pay Parent a termination fee of $49.0 million in cash upon termination of the Merger Agreement under certain specified circumstances, including in connection with a termination of the Merger Agreement by the Company to accept a competing transaction proposal.

 

 

 

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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 in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015.

In addition, the following discussion contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q and do not assume the consummation of the pending acquisition of us by Galenica AG.  We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of polymer-based drugs to treat conditions that are often overlooked and undertreated, but that can have a serious impact on patients’ lives and even be life-threatening. On October 21, 2015 the U.S. Food and Drug Administration, or FDA, approved our first drug, Veltassa ^® (patiromer) for oral suspension, for the treatment of hyperkalemia. Hyperkalemia is a life-threatening condition defined as abnormally elevated levels of potassium in the blood.

Veltassa is a non-absorbed, high capacity potassium binding polymer with a well-established mode of action. In our clinical trials, Veltassa met its efficacy endpoints, reducing serum potassium, or potassium in the blood, to target levels, sustaining potassium in the desired range and was well tolerated for up to 52 weeks.

We commenced the commercial launch of Veltassa in the United States on December 21, 2015, the date the medicine was first available for prescription in the United States.

 

Veltassa is being distributed directly to patients via three nationally-recognized specialty mail order pharmacies and to hospitals through a network of authorized specialty distributors. Our distribution partners provide broad reach to fill prescriptions and deliver Veltassa to patients across the country. We are working with national and regional payers in order to secure formulary access for Veltassa. Formulary access is being placed on a payer’s list of covered drugs for reimbursement.

Since commencing operations in October 2007, we have devoted substantially all our efforts to identifying and developing products utilizing our proprietary polymer drug discovery technology, including Veltassa, and we have devoted substantially all of our financial resources to the development and commercialization of Veltassa. We may continue to incur substantial operating losses even after we begin to generate meaningful revenue from Veltassa. Through June 30, 2016, we have primarily funded our operations from the sale and issuance of common stock, convertible preferred stock, convertible promissory notes, a payment to us under our collaboration agreement with Vifor Fresenius Medical Care Renal Pharma Ltd., or VFMCRP, and various credit facilities.

Polymeric-based drugs like Veltassa generally require large quantities of drug substance as compared to small molecule drugs. Our goal is to develop a supply chain with multiple suppliers and significantly decrease our cost of goods within the first few years of commercialization of Veltassa, enabling us to achieve gross margins similar to those achieved by other companies that produce non-absorbed polymeric drugs. We have no manufacturing facilities and all of our manufacturing activities are contracted out to third parties. We expect to continue to make significant investments relating to our commercial manufacturing process and inventory of Veltassa, as well as for commercialization and marketing related activities associated with Veltassa.

We have entered into a License Agreement with VFMCRP, pursuant to which VFMCRP will develop and commercialize Veltassa outside the United States and Japan. VFMCRP submitted a Marketing Authorization Application, or MAA, with the European Medicines Agency, or EMA, for Veltassa in April 2016.

Recent Development

On July 20, 2016, we entered into an Agreement and Plan of Merger (Merger Agreement) with Galenica AG, a public limited company existing under the laws of Switzerland (Parent) and Vifor Pharma USA Inc., a Delaware corporation and an indirect wholly

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owned subsidiary of Parent (Merger Sub). Pursuant to the terms of the Merger Agreement, Merger Sub will commence a tender offer to purchase all of the our issued and outstanding shares of common stock at a purchase price of $32.00 per Share payable to the holder thereof in cash, without interest and less any applicable withholding taxes. Subject to the terms and conditions of the Merger Agreement, we expect the closing under the Merger Agreement to occur during the third quarter of 2016.

Critical Accounting Polices and Significant Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from management’s estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

While our significant accounting policies are described in the Notes to our financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Revenue Recognition

Revenue is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Revenues are deferred for fees received before earned or until no further obligations exist. We exercise judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer’s payment history and on the creditworthiness of the customer.

Product Revenue and Net Product Sales  Our product revenues consist of U.S. sales of Veltassa and are recognized once we meet all four revenue recognition criteria described above. Upon receipt of product by the specialty pharmacy or specialty distributor, we meet three of the four revenue recognition criteria in that persuasive evidence of an arrangement exists, delivery has occurred, and collectability is reasonably assured. However, at the time of receipt of product by the specialty pharmacy or specialty distributor, we presently do not have the ability to estimate product that will ultimately be returned due to our lack of history with product revenues at this time. Accordingly, the price is not deemed fixed or determinable. Therefore, we recognize revenue once the specialty pharmacy has filled the patient’s prescription for Veltassa or specialty distributor sells Veltassa. This approach is frequently referred to as the “sell-through” revenue recognition model. Under the sell-through approach, revenue is recognized when the specialty pharmacy provides product to a patient based on the fulfillment of a prescription or specialty distributor sells product to a hospital or other eligible entity.

We recognize revenues from product sales net of accruals for estimated customer credits, rebates, discounts, distribution services fees, chargebacks and Medicare Part D coverage gap reimbursements at the time of sale.

Customer Credits:    The specialty pharmacies and specialty distributors are offered various forms of consideration including allowances, discounts, service fees and prompt payment discounts. We expect the specialty pharmacies and specialty distributors will earn prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized. Allowances, discounts and service fees are also deducted from product sales as they are earned.

Rebates:    Allowances for rebates include contractually agreed upon rebates for commercial payers, mandated discounts under the Medicaid Drug Rebate Program, and other legal requirements with public sector benefit providers. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g., Medicaid) benefit providers that are owed after the final dispensing of the product to a benefit plan participant. The allowance for rebates is based on contractual rebate levels or statutory discount rates and expected utilization. Our estimates for the expected utilization of rebates are based in part on data received from our channel partners and vendors. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual balance for known prior quarter's unpaid rebates. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

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Chargebacks:    Chargebacks are discounts that occur when contracted customers purchase directly from the Company or from a specialty distributor at a contracted purchase price. Contracted customers, which currently consist primarily of Public Health Service covered entities, non-profit clinics, Federal government entities purchasing via the Federal Supply Schedule, and certain health systems, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to us the difference between the Wholesale Acquisition Price (WAC) and the customer’s contracted price. The allowance for chargebacks is based on known sales to contracted customers.

Medicare Part D Coverage Gap:    Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for expected Medicare Part D coverage gap are based in part on data received from our channel partners and vendors. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-payment assistance:    Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

We analyze the adequacy of our accruals for sales deductions quarterly. Amounts accrued for sales deductions are adjusted when trends or significant events indicate the adjustment is appropriate. Accruals are also adjusted to reflect actual results. Amounts recorded in accrued liabilities in the Condensed Consolidated Balance Sheets for sales deductions for the six months ended June 30, 2016 were:

 

 

Collaboration and License Revenue

We have generated revenue pursuant to our collaboration and license agreement with VFMCRP, which we recorded as collaboration and license revenue. During September 2015, we received an upfront payment of $40.0 million, which is being recognized over the estimated performance period. For the three and six months ended June 30, 2016, revenue of $3.1 million and $14.9 million, respectively, was recognized. As of June 30, 2016, we had $0.4 million and $6.2 million in short-term deferred revenues and long-term deferred revenues, respectively. We may also be entitled to additional milestone payments and other contingent payments upon the occurrence of specific events.

 

Embedded Derivatives Related to Debt Instruments

 

Embedded derivatives that are required to be bifurcated from their host contract are evaluated and valued separately from the debt instrument. Upon the occurrence of a default or change of control, we may prepay (or may be required to prepay) the outstanding amount of the debt. The prepayment premiums are considered a contingent put option liability, as the holder of the debt may exercise the option to prepay, and is considered an embedded derivative. If we were required to prepay the debt in September 2016 upon the occurrence of a change of control, the total amount of prepayment premiums would be approximately $50.0 million. The embedded derivative is presented together with the debt instrument and the related debt discount on a combined basis. The fair value of the contingent put option liability was determined by using a risk-neutral valuation model and the assumptions included in the valuation of the embedded derivative as of June 30, 2016 included an assumption of a change of control of 50% in the near term.  As of June 30, 2016, the embedded derivative had a carrying value of $25.5 million. Changes in the estimated fair value of the bifurcated embedded derivatives are reported as gains and losses in interest and other (expense) income, net in the condensed consolidated statement of operations.

 

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Inventory

Inventories are stated at the lower of cost or market. We determine the cost of our inventories, which include amounts related to third-party contract manufacturing, shipping costs, amortization of plant modifications at our CMOs, packaging services and manufacturing overhead. Inventory is carried at weighted average cost. We capitalize inventory costs at our suppliers when, based on management’s judgment, the realization of future economic benefit is probable at each given supplier. We received FDA approval for Veltassa on October 21, 2015 and began capitalizing inventory starting in October 2015. Costs incurred prior to approval have been recorded as research and development expense in our condensed consolidated statement of operations. As a result, we expect inventory balances and cost of sales for the next several quarters will reflect a lower average per unit cost of materials. We are dependent on increases in product sales for the utilization of inventory. 

Accounts Receivable

We extend credit to customers for product sales resulting in accounts receivable. Customer accounts are monitored for past due amounts. Past due accounts receivable, determined to be uncollectible, are written off against the allowance for doubtful accounts. Allowances for doubtful accounts are estimated based upon past due amounts, historical losses and existing economic factors, and are adjusted periodically. The accounts receivable are reported in the condensed consolidated balance sheets, net of allowances for doubtful accounts and cash discounts, generally 2% of the sales price, as an incentive for prompt payment. As of June 30, 2016 and December 31, 2015, we had trade accounts receivable balances of $1.3 million and $0.5 million, respectively, related to Veltassa product sales. There were no allowance for doubtful accounts at June 30, 2016 and December 31, 2015.

Results of Operations

Comparison of Three Months Ended June 30, 2016 and 2015

 

Net product revenues    During the three months ended June 30, 2016, we recognized $2.1 million in product sales of Veltassa, net of distribution service fees, customer credits, rebates, chargebacks, Medicare Part D coverage gap and co-payment assistance. Our commercial launch of Veltassa occurred in December 2015. There were no product sales for the three months ended June 30, 2015.

 

 

Collaboration and License Revenue    During the three months ended June 30, 2016, we recognized $3.1 million in collaboration and license revenue. There was no collaboration and license revenue for the three months ended June 30, 2015. This increase in collaboration revenue is due to the recognition of $3.1 million in collaboration and license revenue from an upfront payment of $40.0 million from VFMCRP made pursuant to our license agreement with VFMCRP in August 2015.

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Cost of Goods Sold    Our cost of goods sold relates to the sales of Veltassa upon commercial launch in the United States in December 2015. Prior to receiving regulatory approval for Veltassa from the FDA in October 2015, we had expensed as research and development expense all costs incurred in the manufacturing of Veltassa to be sold upon commercialization. As such, the inventory cost of Veltassa sold during the three-month period ended June 30, 2016 amounted to $0.3 million. If related costs had not previously been expensed as research and development expense prior to receiving FDA approval, total cost of goods sold would have been approximately $0.8 million during the three-month period ended June 30, 2016. We expect that the inventory cost of Veltassa sold in future quarters will increase as we produce and then sell Veltassa that has an inventory cost that reflects the full cost of manufacturing the product.

Research and Development    During the three months ended June 30, 2016, research and development expenses decreased $1.1 million, or 6% as compared to the corresponding period in 2015. The decrease was primarily due to a decrease of $3.4 million in commercial supply manufacturing. As a result of the approval of Veltassa by the FDA in October 2015, we began capitalizing our commercial manufacturing expense as inventory in October 2015. This decrease was offset by an increase in clinical trial activities of $2.0 million related to Phase 4 clinical studies of Veltassa.

Selling, General, and Administrative    During the three months ended June 30, 2016, selling, general, and administrative expenses increased $32.9 million, or 162% as compared to the corresponding period in 2015. The increase was primarily due to an increase of $17.8 million in personnel costs resulting from an increase in headcount and employee stock-based compensation to support the expanding operations and commercialization of Veltassa. Furthermore, we incurred increases in service provider expenses of $8.8 million in commercial related activities and $5.7 million in professional and consulting fees.

Interest and other (expense) income, net    During the three months ended June 30, 2016, interest and other (expense) income, net changed $14.1 million as compared to the corresponding period in 2015. The change was primarily due to a change in fair value of our contingent put option of $13.2 million and $1.2 million in expenses related to the extinguishment of the Capital Loan.

Interest expense  During the three months ended June 30, 2016, interest expense increased $3.4 million as compared to the corresponding period in 2015. The increase is primarily due to interest expense associated with our $150.0 million Credit Agreement entered into in April 2016.

Comparison of Six Months Ended June 30, 2016 and 2015

 

Net product revenues    During the six months ended June 30, 2016, we recognized $2.7 million in product sales of Veltassa, net of distribution service fees, customer credits, rebates, chargebacks, Medicare Part D coverage gap and co-payment assistance. Our commercial launch of Veltassa occurred in December 2015. There were no product sales for the six months ended June 30, 2015.

 

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Collaboration and License Revenue    During the six months ended June 30, 2016, we recognized $14.9 million in collaboration and license revenue. There were no collaboration and license revenue for the six months ended June 30, 2015. This increase in collaboration revenue is due to the recognition of $14.9 million in collaboration and license revenue from an upfront payment of $40.0 million from Vifor Fresenius Medical Care Renal Pharma made pursuant to our license agreement with VFMCRP in August 2015.

Cost of Goods Sold    Our cost of goods sold relates to the sales of Veltassa upon commercial launch in the United States in December 2015. Prior to receiving regulatory approval for Veltassa from the FDA in October 2015, we had expensed as research and development expense all costs incurred in the manufacturing of Veltassa to be sold upon commercialization. As such, the inventory cost of Veltassa sold during the six-month period ended June 30, 2016 amounted to $0.3 million. If related costs had not previously been expensed as research and development expense prior to receiving FDA approval, total cost of goods sold would have been approximately $1.0 million during the six-month period ended June 30, 2016. We expect that the inventory cost of Veltassa sold in future quarters will increase as we produce and then sell Veltassa that has an inventory cost that reflects the full cost of manufacturing the product.

Research and Development    During the six months ended June 30, 2016, research and development expenses decreased $0.6 million, or 2% as compared to the corresponding period in 2015. The decrease was primarily due to a decrease of $5.5 million commercial supply manufacturing. As a result of the approval of Veltassa by the FDA in October 2015, we began capitalizing our commercial manufacturing expense as inventory in October 2015. This decrease was offset by an increase in clinical trial activities of $4.9 million related to Phase 1 drug-drug interaction studies and Phase 4 clinical studies of Veltassa.

Selling, General, and Administrative    During the six months ended June 30, 2016, selling, general, and administrative expenses increased $70.0 million, or 207% as compared to the corresponding period in 2015. The increase was primarily due to an increase of $38.8 million in personnel costs resulting from an increase in headcount and employee stock-based compensation to support the expanding operations and commercialization of Veltassa. Furthermore, we incurred increases in service provider expenses of $18.7 million in commercial related activities and $11.3 million in professional and consulting fees.

Interest and other (expense) income, net    During the six months ended June 30, 2016, interest and other (expense) income, net changed $13.9 million as compared to the corresponding period in 2015. The change was primarily due to a change in fair value of our contingent put option of $13.2 million and $1.2 million in expenses related to the extinguishment of the Capital Loan.

Interest expense  During the six months ended June 30, 2016, interest expense increased $3.4 million as compared to the corresponding period in 2015. The increase is primarily due to interest expense associated with our $150.0 million Credit Agreement entered into in April 2016.

Liquidity and Capital Resources

Since inception through June 30, 2016, our operations have been financed primarily through net proceeds of $638.8 million pursuant to our public common stock offerings, sales of shares of our convertible preferred stock and the issuance of promissory notes. In addition, we have received financing through our recent Credit Agreement with Athyrium Opportunities II Acquisition LP and Healthcare Royalty Partners II, L.P., capital loans, equipment lines of credit and we received $40.0 million from VFMCRP pursuant to the terms of our collaboration and license agreement. As of June 30, 2016, we had $257.7 million of cash, cash equivalents and short-term investments. Our cash, cash equivalents and short-term investments are held in a variety of interest-bearing instruments, including corporate debt securities, commercial paper, agency bonds and money market accounts. Cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation, and we seek to minimize the potential effects of concentration and degrees of risk.

In November 2015, we filed a shelf registration statement on Form S-3, which permitted: (a) the offering, issuance and sale by us of up to a maximum aggregate offering price of $300.0 million of our common stock, preferred stock, debt securities, warrants, purchase contracts and/or units; and (b) as part of the $300.0 million, the offering, issuance and sale by us of up to a maximum aggregate offering price of $75.0 million of our common stock that could be sold under a sales agreement with Cantor Fitzgerald & Co. in one or more at-the-market offerings. During January and February 2016, we sold 2,509,372 shares pursuant to our current at-the-market offering at a weighted-average sale price of $18.18 per share for an aggregate offering price of $45.6 million, and we received aggregate net proceeds of $44.2 million.

In April 2016, we entered into a Credit Agreement for an aggregate principal amount of $150.0 million in senior secured loans (the Loans), which amount bears interest through maturity at 11.5% per annum.  The principal payments under the Credit Agreement are paid in equal quarterly installments of 6.67% of the Loans beginning on December 2018, with the outstanding balance to be repaid on April 27, 2022. The Loans bear interest at a rate of 11.5 percent per year, to be paid quarterly beginning June 15, 2016 and include an interest-only period of 30 months, which may be extended up to 48 months upon meeting certain conditions. In connection with entering into the Credit Agreement, we used approximately $17.0 million of the net proceeds to pay off all outstanding obligations under our loan and security agreement, as amended, with Oxford Finance LLC and Silicon Valley Bank.

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Our primary uses of cash are to fund operating expenses, which have historically been primarily research and development related expenditures. However, with the commercial launch of Veltassa in December 2015, we are making significant investments and expect to continue to do so in costs relating to our commercial manufacturing process and inventory of Veltassa, as well as for commercialization and marketing related activities associated with Veltassa. We have never been profitable and, as of June 30, 2016, we had an accumulated deficit of $622.8 million. We will continue to incur net operating losses, even if we generate meaningful revenues from the sales of Veltassa. We will need substantial additional funding to support our future operating activities and adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition. We will need to generate significant revenues to achieve profitability and we may never do so.

Summary of Cash Flows

The following table shows a summary of our cash flows for each of the six months ended June 30, 2016 and 2015.

 

 

Cash Flows from Operating Activities.    Net cash used in operating activities was $159.5 million for the six months ended June 30, 2016 and consisted primarily of our net loss of $138.4 million less noncash charges such as stock-based compensation expense of $15.0 million, change in fair value of contingent put option of $13.2 million and depreciation and amortization of $1.4 million. The significant items in the change in operating assets and liabilities include increases in inventory of $23.0 million and prepaid and other assets of $1.2 million. Additionally, there were decreases in accrued liabilities of $14.4 million and deferred revenue of $14.6 million. These uses of cash were offset by an increase in accounts payable of $2.1 million.

Net cash used in operating activities was $47.5 million for the six months ended June 30, 2015 and consisted primarily of our net loss of $68.9 million less noncash charges such as stock-based compensation expense of $7.8 million and depreciation and amortization of $2.6 million. The significant items in the change in operating assets and liabilities include an $11.0 million increase in accrued and other liabilities primarily related to an increase in manufacturing activities as we prepare for commercial launch offset by a decrease of $1.8 million in other assets and restricted cash.

Cash Flows from Investing Activities.    Net cash provided by investing activities was $7.1 million for the six months ended June 30, 2016 and was primarily due to maturities of short-term investments of $159.1 million. This was offset by the purchase of investments of $150.0 million and purchases of fixed assets of $2.1 million.  

Net cash used in investing activities was $155.5 million for the six months ended June 30, 2015 and was primarily due to the purchase of investments of $233.2 million and purchases of fixed assets of $4.5 million. These uses of cash were partially offset by maturities of short-term investments of $79.1 million and sales of short-term investments of $3.0 million.

Cash Flows from Financing Activities.     Net cash provided by financing activities for the six months ended June 30, 2016 was $178.9 million and consisted primarily of net proceeds from our at-the-market offering of $44.2 million and $150.0 million in gross proceeds from our credit agreement. These proceeds were partially offset by the payment of approximately $15.2 million to pay off all outstanding obligations under our Amended and Restated Loan and Security Agreement with Oxford Finance LLC and Silicon Valley Bank.

Net cash provided by financing activities for the six months ended June 30, 2015 was $215.9 million and consisted primarily of net proceeds from our follow-on offering of $161.9 million and aggregate net proceeds our at-the-market offering of $51.8 million.

Operating and Capital Expenditure Requirements

We have not achieved profitability on a quarterly or annual basis since our inception and we may continue to incur substantial operating losses even if we begin to generate meaningful revenues from the sales of Veltassa. We expect our cash expenditures to increase in the near term as we continue to expand U.S. commercial activities related to Veltassa, including headcount growth, manufacturing of commercial supply, and increase our selling, general and administrative infrastructure.

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As of June 30, 2016, we had $257.7 million in cash, cash equivalents and short-term investments, which is available to fund future operations. We believe that our existing cash, cash equivalents and short-term investments and anticipated revenues will be sufficient to fund our operations into the second quarter of 2017. If we are unable to achieve the level of revenues from product sales that is contemplated in our operating plan and if we are unable to raise additional funds through public or private equity, debt financings or other sources, we have contingency plans to implement cost cutting actions to reduce our working capital requirements. These reductions in expenditures may have an adverse impact on our ability to achieve certain of our planned objectives.  In addition, our operating plan may change as a result of many other factors currently unknown to us and beyond our control, and we may need to seek additional funds sooner than planned, through public or private equity, debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may affect our business. Also, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

Our future funding requirements will depend on many factors, including, but not limited to:

Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate:

 

In addition, under the terms and prior to the termination of the Merger Agreement, we must receive Galenica’s approval of certain expenditures above certain dollar amounts, as set forth in the Merger Agreement.  

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of June 30, 2016 (in thousands):

 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations and foreign currency exchange rates fluctuations.

Cash, Cash Equivalents and Short-Term Investments

As of June 30, 2016, we had cash, cash equivalents and short-term investments of $257.7 million, which consist of bank deposits, money market funds, corporate bonds, agency bonds, U.S. government bonds and commercial paper. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations in interest income have not been significant.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed, nor do we anticipate being exposed to material risks due to changes in interest rates. The average duration of all of our available-for-sale investments held as of June 30, 2016, was less than 12 months. Due to the short-term nature of these financial instruments, we believe there is no material exposure to interest rate risk, and/or credit risk, arising from our portfolio of financial instruments. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

Credit Agreement

Principal payments on our Credit Agreement are paid in equal quarterly installments of 6.67 percent of the Loans beginning on December 2018, with the outstanding balance to be repaid on April 27, 2022. The Loans bear interest at a rate of 11.5 percent per year, to be paid quarterly beginning June 15, 2016 and include an interest-only period of 30 months, which may be extended up to 48 months upon meeting certain conditions. The outstanding borrowings carry a fixed interest rate, however, changes in market interest rates may affect the fair value of the Loan, but do not impact earnings or cash flows. The net carrying value of the Credit Agreement as of June 30, 2016 is $133.0 million and approximates fair value.  

The following are the future principal payments under the terms of the Credit Agreement:

 

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Foreign Currency Exchange Rate Fluctuations

We are exposed to some degree of foreign exchange risk as a result of entering into transactions denominated in currencies other than U.S. dollars, particularly in Euros. In particular, we pay our CROs outside of the United States in the currencies of their respective jurisdictions. In addition, we may be subject to fluctuations in foreign currency exchange risk with our CMOs that are located in jurisdictions that have currencies other than U.S. dollars. Due to the uncertain timing of expected payments in foreign currencies, we do not utilize any forward foreign exchange contracts.

A hypothetical 10% change in foreign exchange rates during any of the preceding periods presented would not have had a material impact on our financial statements.

 

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive and financial officers, evaluated the effectiveness of our disclosures controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of June 30, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2016, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2016 identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II.  OTHER INFORMATION.

 

Item 1.  Legal Proceedings.

We are not subject to any material legal proceedings.

 

Item 1A.  Risk Factors.  

Our business involves significant risks, some of which are described below. You should carefully consider these risks, as well as the other information in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, cash flows, the trading price of our common stock and growth prospects. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business.

On July 20, 2016, the Company entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with Galenica AG, a public limited company existing under the laws of Switzerland (Galenica), and Vifor Pharma USA Inc., a Delaware corporation and an indirect wholly owned subsidiary of Galenica (Merger Sub). Pursuant to the terms of the Merger Agreement, Merger Sub has commenced a tender offer to purchase all of the issued and outstanding shares of common stock of the Company, par value $0.001 per share (the Shares), at a purchase price of $32.00 per Share (the Offer Price), payable to the holder thereof in cash, without interest and less any applicable withholding taxes (the Offer).

As soon as practicable following the consummation of the Offer and subject to the satisfaction or waiver of the other conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company and the Company will survive the Merger as a wholly owned subsidiary of Galenica (the Merger). The Merger will be effected in accordance with the Merger Agreement and under Section 251(h) of the General Corporation Law of the State of Delaware (the DGCL), which permits completion of the Merger upon the acquisition by Merger Sub in the Offer of at least such percentage of the Company’s stock as would be required to adopt the Merger Agreement at a meeting of the Company’s stockholders. Accordingly, if, following the Offer, a number of Shares have been tendered such that Merger Sub holds a majority of the outstanding Shares, the Merger Agreement contemplates that the parties will cause the closing of the Merger as soon as practicable without a vote of the Company’s stockholders in accordance with Section 251(h) of the DGCL. At the effective time of the Merger, each outstanding Share (other than Shares held by Galenica, Merger Sub or the Company or their direct or indirect wholly owned subsidiaries, Shares irrevocably accepted for purchase pursuant to the Offer and Shares held by stockholders who are entitled to demand and who have properly and validly perfected their statutory rights of appraisal under Delaware law) will be automatically converted into the right to receive an amount in cash equal to the Offer Price (the Merger Consideration), without interest, less any applicable withholding taxes, upon the surrender of the certificate representing such Share.  The obligation of Merger Sub to purchase Shares tendered in the Offer is subject to the satisfaction or waiver of a number of closing conditions set forth in the Merger Agreement, including the tender of a majority of the Shares in the Offer and the expiration or earlier termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company does not expect there to be a significant period of time between the consummation of the Offer and the consummation of the Merger.

Except for the risk factors relating to consummation of the Merger, the following risk factors have been prepared assuming the consummation of the pending acquisition of us by Galenica does not occur.

Risks Related to the Merger

The announcement and pendency of the acquisition of us by Galenica pursuant to the Offer and subsequent Merger could have an adverse effect on our stock price and/or our business, financial condition, results of operations or business prospects.

The announcement and pendency of the Offer and Merger could disrupt our business in the following ways, among others:

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Should they occur, any of these matters could adversely affect our stock price or harm our financial condition, results of operations or business prospects.

Merger Sub’s obligation to purchase Shares in the Offer and the closing of the Merger are subject to certain conditions, the Merger Agreement may be terminated in accordance with its terms and the Merger may not be consummated.

The obligation of Merger Sub to purchase Shares tendered in the Offer is subject to customary conditions, including (i) that the number of Shares validly tendered and not withdrawn in accordance with the terms of the Offer, together with the Shares then owned by Merger Sub, represent at least a majority of all then outstanding Shares, and (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

The Merger Agreement contains a number of conditions that must be fulfilled to complete the Merger, including (i) Merger Sub’s irrevocable acceptance for payment of all of the Shares validly tendered and not validly withdrawn pursuant to the Offer and (ii) the absence of any law or order making illegal, prohibiting or otherwise preventing the closing of the Merger.

These conditions to Merger Sub’s acceptance of Shares for payment in the Offer and the closing of the Merger may not be fulfilled and, accordingly, the Merger may not be consummated.  These conditions are described in more detail in the Merger Agreement, which we filed as an exhibit to the Current Report on Form 8-K filed with the SEC on July 21, 2016.

We intend to pursue all required approvals in accordance with the Merger Agreement. However, no assurance can be given that the required approvals will be obtained and, even if all such approvals are obtained, no assurance can be given as to the terms, conditions and timing of the approvals or that they will satisfy the terms of the Merger Agreement.

In addition, if the Offer is not consummated by December 15, 2016, either we or Galenica may choose to terminate the Merger Agreement.  In addition, we or Galenica may elect to terminate the Merger Agreement in certain other circumstances, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the closing of the Merger.  If the Merger Agreement is terminated under certain circumstances, we would be required to pay Galenica a termination fee equal to $49.0 million.

Failure to complete the Merger could negatively impact our stock price and our future business and financial results.

If the Merger is not consummated, our ongoing businesses may be materially and adversely affected and, without realizing any of the benefits of having completed the Merger, we will be subject to a number of risks, including the following:

In addition to the above risks, we may be required to pay Galenica a termination fee equal to $49.0 million, which may materially adversely affect our financial results. If the Merger is not consummated, these risks may materialize and may materially and adversely affect our business, financial results and share price.

The Merger Agreement contains provisions that restrict our ability to pursue alternatives to the Merger and for our board of directors to change its recommendation that our stockholders accept the Offer and tender their Shares to Merger Sub pursuant to the Offer and, in specified circumstances, could require us to pay Galenica a termination fee of $49.0 million.

Under the Merger Agreement, until the consummation of the Merger or the termination of the Merger Agreement, we are restricted, subject to certain exceptions, in our ability to solicit, initiate, knowingly encourage, facilitate or assist any proposal, inquiry, indication

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of interest or offer that constitutes or could reasonably be expected to lead to a competing acquisition proposal.  Further, during such period, we are also restricted, subject to certain exceptions, in our ability to conduct, maintain, engage in or otherwise participate in any discussions or negotiations, or furnish non-public information to any third person with respect to any inquiry, proposal, indication of interest or offer that constitutes or could reasonably be expected to lead to a competing acquisition proposal.  Under certain circumstances, we may terminate the Merger Agreement in order to enter into an agreement with respect to a superior proposal, if our board of directors (after consultation with our outside legal counsel and financial advisors) determines in good faith that such proposal is more favorable to our stockholders (taking into account any changes to the Merger Agreement proposed by Galenica within three business days of Galenica’s receipt of the terms of such proposal, or within two business days of Galenica’s receipt of any material amendment to such proposal) than the Offer and the Merger.  If our board of directors recommends such superior proposal to our stockholders but does not terminate the Merger Agreement, Galenica would be entitled to terminate the Merger Agreement.  Under these and certain other specified circumstances, we would be required to pay Galenica a termination fee equal to $49.0 million.  These provisions could discourage a third party that may have an interest in acquiring all or a significant part of us from considering or proposing such a transaction, or might result in a third party proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable to Galenica in certain circumstances.

While the Merger is pending, we will be subject to business uncertainties that could adversely affect our business.

Uncertainty about the effect of the Merger on our employees, customers and suppliers may have an adverse effect on our company.  These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is consummated and for a period of time thereafter, and could cause customers, suppliers and others who deal with us to seek to change existing business relationships with us.  Employee retention may be challenging during the pendency of the Merger, as certain of our employees may experience uncertainty about their future roles.  If our key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the Company or Galenica, our business could be seriously harmed.  In addition, the Merger Agreement restricts us from taking specified actions until the Merger occurs without the consent of Galenica.  These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the consummation of the Merger.

We and Galenica must obtain required approvals and governmental and regulatory consents to consummate the Merger, which if delayed or not granted or granted with unacceptable conditions, may prevent, delay or jeopardize the consummation of the Merger and result in additional expenditures of money and resources.

The obligation of Merger Sub to purchase Shares tendered in the Offer is subject to customary conditions, including (i) that the number of Shares validly tendered and not withdrawn in accordance with the terms of the Offer, together with the Shares then owned by Merger Sub, represent at least a majority of all then outstanding Shares, and (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In addition, the Merger Agreement contains a number of conditions that must be fulfilled to complete the Merger, including (i) Merger Sub’s irrevocable acceptance for payment of all of the Shares validly tendered and not validly withdrawn pursuant to the Offer and (ii) the absence of any law or order making illegal, prohibiting or otherwise preventing the closing of the Merger.  

We and Galenica can provide no assurance that all required approvals and consents will be obtained.  For example, private parties who may be adversely affected by the Merger and individual states may bring legal actions under the antitrust laws in certain circumstances.  Although we and Galenica believe that the consummation of the Merger would not violate any antitrust law, there can be no assurance that a challenge to the Merger on antitrust grounds will not be made or, if a challenge is made, what the result will be.  Such a challenge may delay or jeopardize the consummation of the Merger. We are not aware of any legal actions brought by private parties or individual states under the antitrust laws.

Further, no assurance can be given that our stockholders will tender a sufficient number of Shares to trigger Merger Sub’s obligation to purchase the Shares or that the required closing conditions will be satisfied, and, if all required consents and approvals are obtained and the closing conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals or clearances.   A governmental entity could also enact a law or order making illegal, prohibiting or otherwise preventing the closing of the Merger.  Any of these and other circumstances could result in a failure to consummate the Merger.

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Our directors and officers may have interests in the Merger different from the interests of our stockholders.

Certain of our directors and executive officers negotiated the terms of the Merger Agreement, and our board of directors approved the Merger Agreement and recommended that our stockholders accept the Offer and tender their Shares to Merger Sub pursuant to the Offer.  These directors and executive officers may have interests in the Merger that are different from, or in addition to, those of our stockholders generally.  These interests include, but are not limited to, the treatment in the Merger of stock options, restricted stock units, change of control employment agreements and other rights held by our directors and executive officers, and provisions in the Merger Agreement regarding continued indemnification of and advancement of expenses to our directors and officers.  Our stockholders should be aware of these interests when they consider our board of directors’ recommendation that they accept the Offer and tender their Shares to Merger Sub pursuant to the Offer.

Our board of directors was aware of these interests when it determined that it was in the best interests of the Company and our stockholders to enter into the Merger Agreement, approved the Merger Agreement and recommended that our stockholders accept the Offer and tender their Shares to Merger Sub pursuant to the Offer.

Because the Merger Consideration to be paid to our stockholders is a fixed amount of cash per share of our common stock and does not include the issuance of any Galenica securities, our stockholders will not realize any potential future gains from the post-Merger combined business.

The amount of cash to be paid under the Merger Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, including any potential long-term value of the successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock.  Upon consummation of the Merger, our stockholders will have no ongoing equity participation in the Company and they will cease to participate in the Company’s future earnings or growth, if any, or to benefit from increases, if any, in the value of the Company’s common stock, and will not participate in any potential future sale of the Company to a third party or any potential recapitalization of the Company.

We will incur direct and indirect costs as a result of the Merger.

We will incur substantial expenses in connection with and as a result of completing the Merger. While we have assumed that a certain level of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses.  Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately.

Risks Related to Our Dependence on Veltassa^® (patiromer) for oral suspension and Our Business, Limited Operating History, Financial Condition and Capital Requirements

We are substantially dependent on the success of our first and only drug, Veltassa^® (patiromer) for oral suspension, or Veltassa.

We are dependent on the successful commercialization of our first and only drug, Veltassa, which was approved by the U.S. Food and Drug Administration, or FDA, on October 21, 2015 for the treatment of hyperkalemia, a life-threatening condition defined as abnormally elevated levels of potassium in the blood. Veltassa became available for prescription on December 21, 2015. The commercial success of Veltassa will depend on a number of factors, including the following:

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Many of these factors are beyond our control. Accordingly, we cannot be certain that we will ever be able to generate meaningful revenue through the sale of Veltassa. If we are not successful in commercializing Veltassa, or are significantly delayed in doing so, our business will be materially harmed.

Veltassa, or any future product candidates, may never achieve market acceptance or commercial success, which will depend, in part, upon the degree of acceptance among physicians, patients, patient advocacy groups, health care payers and the medical community.

Veltassa, or any future product candidates, may not achieve market acceptance among physicians, patients, patient advocacy groups, health care payers and the medical community, and may not be commercially successful. Market acceptance of Veltassa, or any future product candidates for which we receive approval, depends on a number of factors, including:

Any failure by Veltassa, or any future product candidates that obtain regulatory approval, to achieve market acceptance or commercial success would adversely affect our results of operations.

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The prescribing information for Veltassa contains a boxed warning, which may adversely affect the commercial success of the product and our business and may materially harm our results of operations.

The prescribing information for Veltassa includes a boxed warning that Veltassa binds to many other orally administered medications.  This binding could decrease the gastrointestinal absorption and reduce the efficacy of such other oral medications. The prescribing information for Veltassa instructs that it should be taken at least six hours before or six hours after other oral medications, and that Veltassa or the other oral medication should be chosen if adequate dosing separation is not possible.

As part of our development of Veltassa, we initially completed 18 rat studies and six in vitro tests (conducted in test tubes). The rat studies showed modest binding with two of 18 drugs, valsartan and rosiglitazone, and the initial in vitro tests showed no binding between Veltassa and the six drugs tested, which included valsartan. In preparation for our Phase 3 clinical studies and in parallel to our initial studies, we conducted additional in vitro DDI tests to evaluate 28 drugs for interactions with Veltassa, with such drugs being considered representative of many drug classes. The proposed list of 28 drugs was discussed with the FDA at various times during the clinical development process. In these additional in vitro tests, we tested the most extreme binding conditions, with the highest clinical dose of Veltassa tested against the lowest clinical dose of the drug being tested. In these additional in vitro tests, half of the drugs tested showed no binding and the other half showed binding. We did not observe any clinically meaningful DDIs in our clinical studies, although our clinical studies were not designed to examine the clinical impact of DDIs directly.

In September 2015, we initiated Phase 1 in vivo (conducted in humans) DDI studies to evaluate whether Veltassa binds to certain drugs in humans that showed binding in our in vitro tests. Such human DDI studies were conducted with the following drugs: amlodipine, clopidogrel, cinacalcet, ciprofloxacin, furosemide, levothyroxine, lithium, metformin, metroprolol, trimethoprim, verapamil and warfarin. In January 2016, we announced the results from these studies. When Veltassa was administered at the same time as the drugs being tested, there was no clinically meaningful reduction in absorption for nine of the 12 drugs. Three drugs showed reduced absorption when they were co-administered with Veltassa, however, when dosing of Veltassa and these drugs was separated by 3 hours, no reduction in absorption was observed.

In February 2016, we discussed the results of our Phase 1 DDI studies with the FDA. Based on the discussion, we submitted a supplemental NDA, or sNDA, to the FDA in May 2016 requesting a change to the prescribing information for Veltassa. We cannot predict whether this sNDA will result in a change to the prescribing information for Veltassa. We also cannot predict the commercial impact our Phase 1 DDI studies or a change in the prescribing information, if any, will have on Veltassa.

The prescribing information for Veltassa also includes a limitation of use that Veltassa should not be used as an emergency treatment for life-threatening hyperkalemia because of its delayed onset of action. The prescribing information also includes the following warnings and precautions: a section regarding worsening gastrointestinal motility with an instruction to avoid using Veltassa in patients with severe constipation, bowel obstruction or impaction, including abnormal post-operative bowel motility disorders, because Veltassa may be ineffective and may worsen gastrointestinal conditions, and a section regarding hypomagnesemia indicating Veltassa binds to magnesium in the colon, which can lead to hypomagnesemia, with an instruction to monitor serum magnesium, or magnesium in the blood.

The boxed warning, dosing separation, limitation of use and other warnings and precautions may adversely affect the commercial success of Veltassa and our business, and may materially harm our results of operations.

We have recently built our commercial capabilities. If we are unable to optimize these capabilities on our own, and through our collaborators, we will not be able to successfully commercialize Veltassa, or any future product candidates, or generate product revenue.

We have recently built our commercial capabilities, and we have only limited experience commercializing a pharmaceutical product. Our ability to optimize our commercial, medical affairs, marketing, sales, market access, and managerial capabilities will depend on a number of factors, including our ability to:

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Optimizing our commercial capabilities, including our sales capabilities, may be more expensive and time consuming than we anticipate, requiring us to divert resources from other intended purposes. Any failure or delay in optimizing these capabilities may adversely impact the successful commercialization of Veltassa or any future product candidate. In addition, our initial sales force may be materially less than the actual number of sales representatives required to successfully commercialize Veltassa. As such, we may be required to hire substantially more sales representatives than expected to adequately support the commercialization of Veltassa.

We also rely on the commercial capabilities of our collaborators, Sanofi Aventis U.S. LLC, or Sanofi, and VFMCRP. In August 2015, we entered into a Detailing Agreement with Sanofi pursuant to which Sanofi’s nephrology sales force is complementing our commercialization efforts in the United States, and we entered into a License Agreement with VFMCRP pursuant to which VFMCRP will develop and commercialize Veltassa outside the United States and Japan.

Our arrangements with Sanofi and VFMCRP, or any other third-party collaborators, may result in lower product revenue than if we directly sold and distributed Veltassa, and some or all of the product revenue we receive will depend upon the efforts of such third parties, and these efforts may not be successful. In addition, our arrangement with VFMCRP may divert resources from our efforts to market Veltassa in the United States. We may also choose to collaborate with additional third parties that have direct sales forces and established distribution systems to further augment our own, and our collaborators’, sales force and distribution systems. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize Veltassa.

If we are unable to optimize our commercial capabilities, on our own and through our collaborators, we may be unable to successfully commercialize Veltassa or any future product candidate, and our revenue will suffer and we will incur significant additional losses.

If we fail to obtain and sustain an adequate level of payer formulary access and/or reimbursement for Veltassa, or any future products, sales would be adversely affected.

There will be no commercially viable market for Veltassa without formulary access and reimbursement from third-party government and commercial payers. Formulary access is being placed on a payer’s list of covered drugs for potential reimbursement. In addition, even if there is a commercially viable market, if the level of access and/or reimbursement is below our expectations, our revenue and gross margins will be adversely affected.

Obtaining formulary approval can be an expensive and time-consuming process. We cannot be certain if and when we will obtain formulary approval for Veltassa or any future products into our target markets. Even if we do obtain formulary approval, third-party payers, such as government or private health care insurers, carefully review and increasingly question the coverage of, and challenge the prices charged for, drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. We may engage in contracting with some or all payers and certain contracts require us to provide discounts or rebates to achieve our contracting goals, including appropriate formulary placement, and such discounts or rebates may adversely impact our ability to achieve profitability.

In addition, a current trend in the U.S. health care industry is toward cost containment. Third-party payers are exerting increasing influence on decisions regarding the use of and access to particular treatments, and many third-party payers limit coverage of, or reimbursement for, newly approved health care products. Cost-control initiatives could decrease the price we might establish for Veltassa or any future product, which could result in product revenues being lower than anticipated.

If the price for Veltassa, or any future products, decrease or if governmental and other third-party payers do not provide adequate coverage and reimbursement levels, our revenue and prospects for profitability will suffer. In addition, reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis.

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Veltassa may face significant competition and our failure to effectively compete may prevent us from achieving significant market penetration.

The pharmaceutical market is highly competitive and dynamic, and is characterized by rapid and substantial technological development and product innovations. Veltassa has been approved for the treatment of hyperkalemia. While current options for the chronic management of hyperkalemia are limited, we compete against well-known treatment options, including sodium polystyrene sulfonate (e.g., Kayexalate^®). In addition, there are potential new treatment options for hyperkalemia. In December 2015, AstraZeneca PLC completed its purchase of ZS Pharma, Inc., or ZS Pharma, and is developing a zirconium silicate particle to treat hyperkalemia referred to as sodium zirconium cyclosilicate, or ZS-9. The New Drug Application, or NDA, for ZS-9 was submitted to the FDA in May 2015, and the MAA for ZS-9 was submitted to the EMA in December 2015. Although the FDA issued a Complete Response Letter in May 2016 regarding the NDA for ZS-9, the FDA may approve ZS-9 in the future. Ardelyx, Inc. has announced that it is developing two treatments for hyperkalemia: a potassium-binding polymer based on polystyrene sulfonate and a potential drug to enhance potassium secretion. In order to compete successfully in this market, we will have to demonstrate that the treatment of hyperkalemia with Veltassa is a worthwhile alternative to existing or new therapies for hyperkalemia.

We face significant competition from many pharmaceutical and biotechnology companies that are also researching and selling products designed to address these markets. Many of our competitors have materially greater financial, manufacturing, marketing, research and drug development resources than we do. Large pharmaceutical companies in particular have extensive expertise in nonclinical and clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with our competitors.

Failure to effectively compete against established treatment options for hyperkalemia or in the future with new products currently in development would harm our business, financial condition and results of operations.

We have a limited operating history, have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future. We have only one approved drug and limited commercial sales, which, together with our limited operating history, make it difficult to assess our future viability.

Pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. To date, we have focused principally on developing and commercializing Veltassa, which is our only approved drug. We are not profitable and have incurred losses in each year since our inception in August 2007. We have only a limited operating history upon which to evaluate our business and prospects. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical industry. To date, we have generated only limited revenue from product sales. We continue to incur significant operating expenses related to our ongoing operations. Our net loss for the three months ended June 30, 2016 was approximately $83.6 million. As of June 30, 2016, we had an accumulated deficit of $622.8 million. We may continue to incur substantial operating losses even if we generate meaningful revenues from the sales of Veltassa. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. 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.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.

Since our inception, most of our resources have been dedicated to the nonclinical and clinical development of Veltassa. As of June 30, 2016, we had working capital of approximately $255.8 million and capital resources consisting of cash, cash equivalents and short-term investments of approximately $257.7 million. We believe that we will continue to expend substantial resources for the foreseeable future as we continue development and commercialization of Veltassa and develop any other product candidates we may choose to pursue. These expenditures will include costs associated with research and development, conducting nonclinical studies and clinical trials, obtaining regulatory approvals, manufacturing and supply and sales and marketing. In addition, other unanticipated costs may arise. We believe that our existing cash, cash equivalents and short-term investments and anticipated revenues will be sufficient to fund our operations into the second quarter of 2017. However, our operating plan may change as a result of many factors, and we may need to seek additional funds sooner than planned, through public or private equity, debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

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Veltassa has not yet been approved for marketing by any foreign regulatory authority and may never receive approval by foreign regulatory authorities, which would adversely impact our ability to generate revenue, our business and our results of operations.

Under our License Agreement with VFMCRP, we are relying on VFMCRP to develop and commercialize Veltassa outside of the United States and Japan, and VFMCRP submitted an MAA for Veltassa to the EMA in April 2016. To gain approval to market Veltassa in Europe and other foreign jurisdictions, we and our collaborators must provide the foreign regulatory authorities with clinical data that adequately demonstrates the safety and efficacy of Veltassa for the intended indication applied for in the respective regulatory filing. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in, or following, clinical trials even after promising results in earlier nonclinical or clinical studies. These setbacks have been caused by, among other things, nonclinical findings made while clinical studies were underway and safety or efficacy observations made in clinical studies, including previously unreported adverse events. Success in nonclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results of clinical trials by other parties may not be indicative of the results in trials we may conduct. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, and such regulations differ from country to country.

Foreign regulatory authorities can delay, limit or deny approval to market Veltassa for many reasons, including:

Veltassa may not receive foreign marketing approval despite having achieved its specified endpoints in clinical trials and having obtained FDA approval. Foreign regulatory authorities have substantial discretion in evaluating the results of these trials, and may interpret the data from these trials differently than the FDA. Clinical data often is susceptible to varying interpretations and many companies that have believed that their products performed satisfactorily in clinical trials have nonetheless failed to obtain foreign regulatory approval for their product. Foreign regulatory authorities may disagree with the trial design and interpretation of data from nonclinical studies and clinical trials.

Based on these factors, foreign regulatory authorities may request additional information from us and VFMCRP, including data from additional clinical and/or non-clinical trials, which could be time consuming and expensive and, ultimately, may not grant marketing approval for Veltassa. In addition, we may be required to conduct additional clinical trials under our License Agreement with VFMCRP in order to obtain approval to market in foreign jurisdictions, and such clinical trials may not generate the data needed for approval, may be expensive to conduct, may cause delay, and may divert resources from our efforts to market Veltassa in the United States and otherwise operate our business.

Any delay in obtaining, or inability to obtain, foreign regulatory approval would delay or prevent commercialization of Veltassa in foreign jurisdictions and would have a material adverse impact on our business and prospects.

We rely completely on third-party suppliers to manufacture our clinical drug supply of Veltassa, and we rely on third parties to produce commercial supply of Veltassa and nonclinical, clinical and commercial supplies of any future product candidate.

We do not currently have, nor do we plan to acquire, the infrastructure or internal capability to produce our commercial supply of Veltassa and we lack the internal resources and the capability to manufacture any product candidates on a nonclinical, clinical or commercial scale. The FDA and other comparable foreign regulatory authorities must approve our contract manufacturers to manufacture the active pharmaceutical ingredient and final drug product for Veltassa, or any future product candidates.

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We do not directly control the manufacturing of, and are completely dependent on, our contract manufacturers for compliance with the cGMP for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or foreign regulatory authorities, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no direct control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. Furthermore, all of our contract manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes our manufacturers to regulatory risks for the production of such materials and products. As a result, failure to meet the regulatory requirements for the production of those materials and products may generally affect the regulatory clearance of our contract manufacturers’ facility. If the FDA or a comparable foreign regulatory agency does not approve these facilities for the manufacture of Veltassa, or any future product candidates, or if it withdraws its approval in the future, we may need to find alternative manufacturing facilities, which would negatively impact our ability to develop, obtain regulatory approval for or market Veltassa, or any future product candidates, if approved.

We and our third-party suppliers continue to refine and improve the manufacturing process, certain aspects of which are complex and unique, and we may encounter difficulties with new or existing processes, particularly as we seek to significantly increase our capacity to commercialize Veltassa. For example, we have analyzed the impurities identified in the manufactured registration batches of Veltassa and we believe the levels of impurities, including the levels of genotoxic and special toxicological concern impurities, are below the suggested guidance recommendations; however, toxicological assessments might change based on our future findings. Our reliance on contract manufacturers also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.

Our current drug substance is acquired from only two suppliers and our finished drug product is acquired from a single-source supplier. The loss of these suppliers, or their failure to supply us with the drug substance or the finished drug product, would materially and adversely affect our business.  

We currently operate under a multi-year Manufacturing and Supply Agreement with Lanxess Corporation, or Lanxess, and a multi-year Manufacturing and Supply Agreement with DPx Fine Chemicals Austria GmbH & Co KG, or DPx Fine Chemicals, formerly DSM Fine Chemicals Austria NFG GMBH & Co. KG, for the manufacture and supply of drug substance. However, we do not currently have additional suppliers of drug substance under contract, and Lanxess is currently the only FDA-appproved drug substance supplier for Veltassa. In April 2016, we submitted a sNDA for DPx Fine Chemicals to be approved as a supplier of drug substance. In addition, we currently operate under a multi-year Supply Agreement with Patheon Inc., or Patheon, for the manufacture and supply of finished drug product. However, we do not have an alternative supplier of finished drug product under contract, and only Patheon has been approved by FDA as a finished drug product supplier for Veltassa. Lanxess and Patheon are currently manufacturing our commercial supply of Veltassa.

Although we have entered into long-term commercial supply agreements with Lanxess, DPx Fine Chemicals and Patheon, we may be unable do so with alternative suppliers and manufacturers or do so on commercially reasonable terms, which would have a material adverse impact upon our business.

In addition, we currently rely on our contract manufacturers to purchase from third-party suppliers the materials necessary to produce Veltassa, including all of the starting/raw materials and excipient, such as methyl-2-fluoro-acrylate monomer, or MFA. We do not have direct control over the acquisition of those materials by our contract manufacturers. Moreover, outside of our drug substance suppliers, we currently do not have any agreements for the commercial production of those materials.

We are dependent on the approval of additional drug substance and drug product suppliers to ensure sufficient supply to meet our anticipated market demand and to reduce the manufacturing cost of Veltassa. Our inability to obtain approval for additional suppliers and/or the inability of our suppliers to achieve larger scale production, would materially and adversely affect our business.

Polymeric-based drugs like Veltassa generally require large quantities of drug substance, as compared to small molecule drugs. Thus, we will require larger scale and/or multiple suppliers of drug substance and drug product in order to produce sufficient quantities of Veltassa to meet our anticipated market demand. Our current suppliers of drug substance, Lanxess and DPx Fine Chemicals, do not currently have the capacity to manufacture Veltassa in the quantities that we believe will be sufficient to meet anticipated market demand. Our business plan assumes that we are able to develop a supply chain with multiple suppliers and significantly decrease our cost of goods within the first several years of commercialization of Veltassa, enabling us to achieve gross margins similar to those achieved by other companies that produce non-absorbed polymeric drugs. If we are unable to reduce the manufacturing cost of Veltassa, our operating results will suffer and our ability to achieve profitability will be significantly jeopardized.

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Because we submitted our NDA with single source suppliers for drug substance and drug product, we will need to obtain approval from the FDA for these additional suppliers, including approval for the testing necessary to prove equivalence of drug substance and product produced by the additional suppliers. Further, we are dependent on our drug substance and product suppliers to be able to fully scale up the production of Veltassa as well as validate certain process improvements in order to reach the quantities we anticipate needing.

We are also dependent upon the appropriate sourcing of starting/raw material, including large quantities, measured in metric tons, of MFA. While we believe there are multiple alternative suppliers of MFA, we will need our drug substance suppliers to qualify these alternate MFA suppliers to prevent a possible disruption of the manufacture of the starting materials necessary to produce Veltassa. If our drug substance manufacturer is unable to source, or we are unable to purchase, MFA on acceptable terms, of sufficient quality, and in adequate quantities, if at all, the ability of Veltassa to reach its market potential, or any future product candidates to be launched, would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of Veltassa or any future product candidates.

If there is a disruption to our contract manufacturers’ or suppliers’ relevant operations, we will have no other means of producing Veltassa until they restore the affected facilities or we or they procure alternative manufacturing facilities. Additionally, any damage to or destruction of our contract manufacturers’ or suppliers’ facilities or equipment may significantly impair our ability to manufacture Veltassa on a timely basis.

If we fail to maintain an effective distribution process utilizing cold-chain logistics for Veltassa, our business may be adversely affected.

We have contracted with a third-party logistics company to warehouse Veltassa and distribute it to pharmacies and specialty distributors who will supply Veltassa to the market. We require that Veltassa be maintained at a controlled refrigerated temperature throughout the distribution chain. This distribution chain requires significant coordination among our manufacturing, supply-chain and finance teams, as well as commercial departments, including market access, sales, and marketing. In addition, failure to coordinate financial systems could negatively impact our ability to accurately report product revenue. If we are unable to effectively manage the distribution process, sales of Veltassa may be delayed or severely compromised and our results of operations may be harmed.

In addition, the use of cold-chain logistics and a distribution network for Veltassa involves certain risks, including, but not limited to, risks that distributors or pharmacies may:

Veltassa has a limited room temperature shelf life, and if we do not effectively maintain our cold-chain supply logistics, then we may experience an unusual number of product returns or out of date product. Any such failure may result in decreased product sales and lower product revenue, which would harm our business.

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Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Furthermore, we rely on contract research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials and, while we have agreements governing their committed activities, we have limited influence over their actual performance. Failure can occur at any time during the clinical trial process. The results of nonclinical and clinical studies of Veltassa, and any future product candidates, may not be predictive of the results of later-stage clinical trials. For example, the positive results generated to date in clinical studies for Veltassa do not ensure that future clinical trials will demonstrate similar results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through nonclinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies, and we cannot be certain that we will not face similar setbacks. Even if our clinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.

In addition, under the Pediatric Research Equity Act of 2003, as amended and reauthorized by the Food and Drug Administration Amendments Act of 2007, an NDA or supplement to an NDA must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own` initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. As part of our NDA for Veltassa, we requested deferral for submission of pediatric data until after approval of the product for use in adults. We expect to begin our first pediatric studies in late 2016.

We are conducting, and plan to conduct in the future, additional clinical trials of Veltassa, and plan to support investigator sponsored trials, or ISTs, and such trials may not meet their pre-specified endpoints, may generate data that are not consistent with the current label for Veltassa, may generate new or unexpected adverse events and may require us to submit amendments to our label to the FDA. We do not know whether future clinical trials will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. Clinical trials can be delayed or aborted for a variety of reasons, including delay or failure to:

Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs or treatments that may be approved for the indications we are investigating.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by an independent Safety Review Board for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.

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Further, conducting clinical trials in foreign countries, as we have historically done, presents additional risks that may delay completion of our clinical trials. These risks include the failure of physicians or enrolled patients in foreign countries to adhere to clinical protocols as a result of differences in healthcare services or cultural customs, managing additional administrative burdens associated with foreign regulatory schemes, as well as political and economic risks relevant to such foreign countries.

If we experience delays in the completion of, or termination of, any clinical trial of Veltassa, or any future product candidates, the commercial prospects of Veltassa, or any future product candidates, may be harmed, and our ability to generate product revenues from Veltassa, or any future product candidates, will be delayed. If any clinical trial of Veltassa generates data that are not consistent with the current prescribing information and medication guide for the product, or generates additional safety, efficacy, tolerability or convenience concerns for the product, our ability to generate product revenue from Veltassa may be harmed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

We rely on third parties to conduct some of our nonclinical studies and all of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to successfully commercialize Veltassa and unable to obtain regulatory approval for, or successfully commercialize, any future product candidates.

We do not have the ability to independently conduct clinical trials and, in some cases, nonclinical studies. We rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as CROs, to conduct our clinical trials. The third parties with whom we contract for execution of our clinical trials play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, these third parties are not our employees, and except for contractual duties and obligations, we have limited ability to control the amount or timing of resources that they devote to our programs. Although we rely on these third parties to conduct some of our nonclinical studies and all of our clinical trials, we remain responsible for ensuring that each of our nonclinical studies and clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, including some regulations commonly referred to as good clinical practices, or cGCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial subjects are adequately informed of the potential risks of participating in clinical trials.

In addition, the execution of nonclinical studies and clinical trials, and the subsequent compilation and analysis of the data produced, requires coordination among various parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with one another. Moreover, these third parties may also have relationships with other commercial entities, some of which may compete with us. These third parties may terminate their agreements with us upon as little as 30 days’ prior written notice. Some of these agreements may also be terminated by such third parties under certain other circumstances, including our insolvency. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or GCPs, or for any other reason, we may need to enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may need to be repeated. If any of the foregoing were to occur, we may not be able to successfully commercialize Veltassa or to obtain regulatory approval for or successfully commercialize the product candidate being tested in such trials.

Our clinical drug development program may not uncover all possible adverse events that patients who take Veltassa may experience. The number of subjects exposed to Veltassa treatment and the average exposure time in the clinical development program may be inadequate to detect rare adverse events, or chance findings, that may only be detected after Veltassa is administered to more patients and for greater periods of time.

Clinical trials by their nature utilize a sample of the potential patient population. However, with a limited number of subjects and limited duration of exposure, we cannot be fully assured that other adverse events or reactions with Veltassa, such as rare and severe side effects, may not be uncovered after a significantly larger number of patients are exposed to the drug. Further, we have not designed our clinical trials to determine the effect and safety consequences on total body potassium levels of lowering serum potassium over a multi-year period.

In our clinical trials, the most common adverse reactions (occurring in ≥ 2% of patients treated) were constipation, hypomagnesemia, diarrhea, nausea, abdominal discomfort, and flatulence. Most adverse reactions were mild to moderate. Constipation generally resolved during the course of treatment. Mild to moderate hypersensitivity reactions were reported in 0.3% of patients treated. Reactions have also included edema of the lips.

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Although we have monitored the subjects in our studies for certain safety concerns and we have not seen evidence of significant safety concerns in our clinical trials, it is possible that there may be unforeseen safety findings with increased patient exposure to Veltassa. While most adverse reactions were mild to moderate these may occur in a more severe form while taking Veltassa. For example, in our clinical trials, we have seen some reductions in blood pressure, which may lead to hypotension, and some reductions in serum magnesium, which in severe forms may lead to weakness, muscle cramps, cardiac arrhythmia, increased irritability of the nervous system with tremors and jerking, confusion or seizures. Further, a degradant of Veltassa is calcium fluoride, which may lead to increased levels of fluoride resulting in bone fragility, tooth decays or nephrotoxicity. Although none of the symptoms associated with severe hypomagnesemia or acute fluoride toxicity have been reported in our clinical studies, patients may experience these more severe side effects while taking Veltassa.

If safety problems occur or are identified after Veltassa reaches the market, the FDA may require that we amend the labeling of Veltassa, recall Veltassa, or even withdraw approval for Veltassa.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of Veltassa or any future product candidates.

We face an inherent risk of product liability as a result of the clinical testing of Veltassa and any future product candidates, and we face an even greater risk with the commercialization of Veltassa or any future product candidates. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

Our inability to maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect against potential product liability claims could prevent or inhibit the commercialization of Veltassa or any future products we develop. We currently carry product liability insurance covering use in our clinical trials in the amount of $10.0 million for each occurrence and $10.0 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses.

We will need to manage the size of our organization, and we may experience difficulties in managing our recent growth.

As of June 30, 2016, we had 429 full-time employees, which includes 295 employees who joined in 2015. We will need to manage the significant and rapid growth of our organization, including a geographically dispersed national customer-facing team, and the integration and retention of new personnel. If we are unable to manage our significant growth and retain our new personnel, then our business may be materially harmed.

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If we fail to attract and retain highly qualified personnel, we may be unable to successfully develop Veltassa or any future product candidates, conduct our clinical trials and commercialize Veltassa or any future product candidates.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified personnel. In particular, we are highly dependent upon our experienced senior management. The loss of services of any of these individuals could delay or prevent the successful development of our product pipeline, completion of our planned clinical trials or the commercialization of Veltassa or any future product candidates. Although we have entered into employment agreements with our senior management team, these agreements do not provide for a fixed term of service.

Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. In addition, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

Significant disruptions of information technology systems or breaches of data security could adversely affect our business.

Our business is increasingly dependent on critical, complex and interdependent information technology systems to support business processes as well as internal and external communications. The size and complexity of our computer systems make them vulnerable to breakdown, malicious intrusion and computer viruses. We have developed systems and processes that are designed to protect our information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach; however, such measures cannot provide absolute security, and we have taken, and will take, additional security measures to protect against any future intrusion. Any failure to protect against breakdowns, malicious intrusions and computer viruses may result in the impairment of production and key business processes. In addition, our systems are potentially vulnerable to data security breaches, whether by employees or others, which may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or could lead to the public exposure of personal information of our employees, clinical trial patients, customers, and others. Such disruptions and breaches of security could expose us to liability and have a material adverse effect on the operating results and financial condition of our business.

Our Credit Agreement contains restrictions that limit our flexibility in operating our business.

In April 2016, we entered into a Credit Agreement for an aggregate principal amount of $150.0 million in senior secured loans, which amount bears interest through maturity at 11.5% per annum. Our Credit Agreement contains various covenants that limit our ability to engage in specified types of transactions without our lenders’ prior consent. These covenants limit our ability to, among other things:

In addition, our Credit Agreement contains a liquidity covenant which requires us to maintain a minimum of $45.0 million of cash and certain cash equivalents; provided, that this minimum liquidity requirement does not apply if we maintain consolidated net sales of at least $85.0 million in a four fiscal quarter period.

The covenants in our Credit Agreement limit our ability to take certain actions and, in the event that we breach one or more covenants, our lenders may choose to declare an event of default and require that we immediately repay all amounts outstanding of the aggregate principal amount of $150.0 million, plus exit fees, prepayment premiums, penalties and interest, and foreclose on the collateral granted to them to secure such indebtedness. Such repayment could have a material adverse effect on our business, operating results and financial condition.

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We incur significant costs as a result of operating as a public company, and our management will devote substantial time to compliance initiatives. We may fail to comply with the rules that apply to public companies, including Section 404 of the Sarbanes-Oxley Act of 2002, which could result in sanctions or other penalties that would harm our business.

We incur significant legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and regulations regarding corporate governance practices. The listing requirements of The NASDAQ Global Select Market require that we satisfy certain corporate governance requirements relating to director independence, distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our management and other personnel must devote a substantial amount of time to ensure that we maintain compliance with all of these requirements. Moreover, the reporting requirements, rules and regulations have increased our legal and financial compliance costs and make some activities more time consuming and costly. Any changes we have made, and may make in the future, to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company, may also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’ insurance, on acceptable terms.

We are subject to Section 404 of The Sarbanes-Oxley Act of 2002, or Section 404, and the related rules of the Securities and Exchange Commission, or SEC, which generally require our management and independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting.

During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the required reports. Furthermore, if we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our stock to fall. In addition, as a public company we are required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from The NASDAQ Global Select Market or other adverse consequences that would materially harm our business.

In addition, we implemented an enterprise resource planning, or ERP, system for our company. The ERP system is intended to combine and streamline the management of our financial, accounting, human resources, sales and marketing and other functions, enabling us to manage operations and track performance more effectively. However, the ERP system requires us to complete many processes and procedures for the effective use of the system or to run our business using the system, which may result in substantial costs. Any disruptions or difficulties in implementing or using the ERP system could adversely affect our controls and harm our business, including our ability to accurately report financial results on a timely basis, forecast or make sales and collect our receivables. Moreover, such disruption or difficulties could result in unanticipated costs and diversion of management attention.

If we are not successful in discovering, developing, acquiring or commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.

Although a substantial amount of our effort will focus on the continued clinical testing and commercialization of Veltassa, a key element of our strategy is to discover, develop and commercialize a portfolio of products utilizing proprietary discovery and development technology. We are seeking to do so through our internal research programs and/or by selectively pursuing commercially synergistic in-licensing or acquisition of additional compounds. All of our other potential product candidates remain in the discovery stage. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

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If we fail to develop and successfully commercialize other product candidates, our business and future prospects may be harmed and our business will be more vulnerable to any problems that we encounter in developing and commercializing Veltassa.

Our current collaboration arrangements, and any collaboration arrangement that we may enter into in the future, may not be successful, which could adversely affect our ability to develop and commercialize Veltassa and potential future product candidates.

Our collaboration arrangements with VFMCRP and Sanofi, and any collaboration arrangements that we may enter into in the future, may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. In addition, disagreements between us and our collaborators may lead to delays in the development process or commercialization and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve, particularly if neither of the parties has final decision-making authority. Our collaboration arrangements also may be terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business or reputation.

In addition, we may also seek additional collaboration arrangements, as permitted under our Credit Agreement or as approved by our lenders, with other pharmaceutical or biotechnology companies for the development or commercialization of Veltassa and for potential future product candidates. We may enter into these arrangements on a selective basis depending on the merits of retaining rights for ourselves as compared to entering into selective collaboration arrangements with leading pharmaceutical or biotechnology companies, both in the United States and internationally. We will face, to the extent that we decide to enter into additional collaboration arrangements, significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement. We may not be successful in our efforts to establish and implement any additional collaboration arrangements should we choose to do so, and the terms we may establish may not be favorable to us.

If we engage in acquisitions, we will incur a variety of costs and we may never realize the anticipated benefits of such acquisitions.

Although we currently have no intent to do so, we may attempt to acquire businesses, technologies, services, products or product candidates that we believe are a strategic fit with our business. If we do undertake any acquisitions, the process of integrating an acquired business, technology, service, products or product candidates into our business may result in unforeseen operating difficulties and expenditures, including diversion of resources and management’s attention from our core business. In addition, we may fail to retain key executives and employees of the companies we may acquire, which may reduce the value of the acquisition or give rise to additional integration costs. Future acquisitions could result in additional issuances of equity securities that would dilute the ownership of existing stockholders. Future acquisitions could also result in the incurrence of debt, contingent liabilities or the amortization of expenses related to other intangible assets, any of which could adversely affect our operating results. In addition, we may fail to realize the anticipated benefits of any acquisition.

If Veltassa is approved for commercialization outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.

We have entered into the License Agreement with VFMCRP to commercialize Veltassa outside of the United States and Japan if the product receives the applicable approvals for commercialization, and we may enter into additional agreements with third parties to commercialize Veltassa in Japan. We expect that we will be subject to additional risks related to such international business relationships, including:

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Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our research and development activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials, including the components of our product and product candidates and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage.

Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the recent global financial crisis, could result in a variety of risks to our business, including reduced ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters and other facilities are located in the San Francisco Bay Area, which in the past has experienced severe earthquakes. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.

If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as our enterprise financial systems or manufacturing resource planning and enterprise quality systems, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.

Furthermore, integral parties in our supply chain are operating from single sites, increasing their vulnerability to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business.

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Risks Related to Government Regulation

We will be subject to ongoing regulatory obligations for Veltassa, and any future products, and continued regulatory review, which may result in significant additional expense. Additionally, Veltassa, and any future product, may be subject to labeling and other restrictions and market withdrawal, and we may be required to manage additional time and resource-intensive operational challenges and be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems, including emerging safety issues, with our products.

Even if a drug is FDA-approved, regulatory authorities may still impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-marketing studies. For example, as part of our FDA approval for Veltassa, we have a post-marketing commitment to conduct pediatric studies. Furthermore, the existing FDA regulations and any new legislation addressing drug safety issues could result in delays or increased costs to assure compliance. Veltassa will be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information, including both federal and state requirements in the United States. In addition, manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. As such, we may not promote our products for indications or uses for which they do not have FDA approval.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing, or labeling of a product, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may:

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our commercialization of, and revenues from, Veltassa. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are unable to generate meaningful revenues from the sale of Veltassa our potential for achieving profitability will be diminished and the capital necessary to fund our operations will be increased.

Currently, Veltassa is approved solely for the treatment of hyperkalemia and, unless we seek regulatory approval for additional indications, we will be prohibited from marketing Veltassa for any other indication.

Currently, Veltassa is approved solely for the treatment of hyperkalemia. We do not have plans to seek approval of Veltassa for any other indication at this time. The FDA strictly regulates the promotional claims that may be made about prescription products. While Veltassa has been studied in the setting of hyperkalemia associated with the use of RAAS inhibitors, Veltassa may not be promoted for uses that are not approved by the FDA as reflected in its approved labeling. Under applicable regulations, the ability of a company to make marketing statements about the effectiveness of its drug outside of the statements made in the label, referred to as “off-label” marketing, is prohibited. If we are found to have promoted such off-label uses, we may become subject to significant liability.

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If we fail to comply, or are found to have failed to comply, with FDA and other regulations related to the promotion of Veltassa for unapproved uses, we could be subject to criminal penalties, substantial fines or other sanctions and damage awards.

The regulations relating to the promotion of products before approval or for unapproved uses are complex and subject to substantial interpretation by the FDA and other government agencies. We were not permitted to promote Veltassa before we received marketing approval from the FDA. And even though we have received marketing approval, physicians may nevertheless prescribe it to their patients in a manner that is inconsistent with the approved label. We have implemented compliance and training programs designed to ensure that our sales and marketing practices comply with applicable regulations. Notwithstanding these programs, the FDA or other government agencies may allege or find that our practices constitute prohibited promotion of Veltassa for unapproved uses. We also cannot be sure that our employees complied with company policies and applicable regulations regarding the promotion of products before approval or will comply with such policies and regulations regarding unapproved uses. Over the past several years, a significant number of pharmaceutical and biotechnology companies have been the target of inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative entities in connection with the promotion of products for unapproved uses and other sales practices, including the Department of Justice and various U.S. Attorneys’ Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations, violations of the Food, Drug and Cosmetic Act, the False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged violations in connection with the promotion of products before approval or for unapproved uses, pricing and Medicare and/or Medicaid reimbursement. Many of these investigations originate as “qui tam” actions under the False Claims Act. Under the False Claims Act, any individual can bring a claim on behalf of the government alleging that a person or entity has presented a false claim, or caused a false claim to be submitted, to the government for payment. The person bringing a qui tam suit is entitled to a share of any recovery or settlement. Qui tam suits, also commonly referred to as “whistleblower suits,” are often brought by current or former employees. In a qui tam suit, the government must decide whether to intervene and prosecute the case. If it declines, the individual may pursue the case alone.

If the FDA or any other governmental agency initiates an enforcement action against us or if we are the subject of a qui tam suit and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses, we could be subject to substantial civil or criminal fines or damage awards and other sanctions such as consent decrees and corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations. Any such fines, awards or other sanctions would have an adverse effect on our revenue, business, financial prospects and reputation.

We are required to report to regulatory authorities adverse events that may occur during the use of Veltassa or any future product, and if we fail to do so we could be subject to sanctions that would materially harm our business.

FDA and foreign regulatory authority regulations require that we report certain information about adverse events whether or not Veltassa, or any future product, may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We may receive adverse event reports in potentially large numbers from a variety of sources, including from physicians, other healthcare providers and patients as well as from clinical trials, patient support programs, scientific literature and media. We may fail to report adverse events we become aware of within the required timeframe.

We may also fail to appreciate that we have become aware of reportable safety information, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA or a foreign regulatory agency could take action, including criminal prosecution, the imposition of civil monetary penalties, seizure of our products or delay in approval or clearance of future products.

If third-party manufacturers fail to comply with manufacturing regulations, our financial results and financial condition will be adversely affected.

Before they can begin commercial manufacture of Veltassa, contract manufacturers must obtain regulatory approval of their manufacturing facilities, processes and quality systems. In addition, pharmaceutical manufacturing facilities are continuously subject to inspection by the FDA and foreign regulatory authorities, before and after product approval. Due to the complexity of the processes used to manufacture pharmaceutical products and product candidates, any potential third-party manufacturer may be unable to continue to pass or initially pass federal, state or international regulatory inspections in a cost-effective manner.

If a third-party manufacturer with whom we contract is unable to comply with manufacturing regulations, we may be subject to fines, unanticipated compliance expenses, recall or seizure of our products, total or partial suspension of production and/or enforcement actions, including injunctions, and criminal or civil prosecution. These possible sanctions would adversely affect our financial results and financial condition.

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If we want to expand the geographies in which we may market Veltassa, we will need to obtain additional regulatory approvals.

We are relying on VFMCRP to develop and commercialize Veltassa outside of the United States and Japan, and VFMCRP submitted the MAA for Veltassa to the EMA in April 2016. In order to obtain a MAA or other regulatory approvals outside of the United States, we may be required to conduct additional clinical trials or studies to support our applications, which would be time consuming and expensive, and may produce results that do not result in regulatory approvals. Further, we will have to expend substantial time and resources in order to manage our collaboration with VFMCRP to promote and commercialize Veltassa outside of the United States and Japan. If we do not obtain regulatory approvals for Veltassa in foreign jurisdictions, our ability to expand our business outside the United States will be severely limited.

Our failure to obtain regulatory approvals in foreign jurisdictions for Veltassa would prevent us from marketing our products internationally.

In order to market any product in the European Economic Area, or EEA (which is composed of the 28 Member States of the European Union plus Norway, Iceland and Liechtenstein), and many other foreign jurisdictions, separate regulatory approvals are required. In the EEA, medicinal products can only be commercialized after obtaining a MAA. Before granting the MAA, the EMA, or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

The approval procedures vary among countries and can involve additional clinical testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not be able to file for regulatory approvals or to do so on a timely basis, and even if we do file we may not receive necessary approvals to commercialize our products in any market.

We are subject to healthcare laws, regulation and enforcement; our failure to comply with these laws could have a material adverse effect on our results of operations and financial conditions.

We are subject to healthcare, statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. The laws that may affect our ability to operate as a commercial organization include:

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If our operations are found to be in violation of any of the laws described above or any other governmental laws and regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to market our products and adversely impact our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Further, the Patient Protection and Affordable Care Act, or PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

The PPACA also imposes new reporting and disclosure requirements on drug manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers. In addition, drug manufacturers will also be required to report and disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. Manufacturers were required to begin data collection on August 1, 2013 and report such data to the government by March 31, 2014 and by the 90th calendar day of each year thereafter.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians for marketing. Some states mandate implementation of compliance programs and/or the tracking and reporting of gifts, compensation, and other remuneration to physicians. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.

We may not obtain regulatory approval for the commercialization of any future product candidates.

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. Although we have obtained approval to market Veltassa in the United States, neither we nor any future collaboration partner is permitted to market any future product candidate in the United States until we receive approval of an NDA from the FDA. Obtaining regulatory approval to commercialize a product candidate can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA and other applicable United States and foreign regulatory requirements may subject us to administrative or judicially imposed sanctions or other actions, including:

Prior to obtaining approval to commercialize a drug candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA or other foreign regulatory agencies, that such drug candidates are safe and effective for their intended uses. The number of nonclinical studies and clinical trials that will be required for FDA approval varies depending on the drug candidate, the disease or condition that the drug candidate is designed to address, and the regulations applicable to any particular drug candidate. Results from nonclinical studies and clinical trials can be interpreted in different ways. Even if we believe the nonclinical or clinical data for our drug candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatory authorities. Administering drug candidates to humans may produce undesirable side effects, which could interrupt, delay or halt clinical trials and result in the FDA or other regulatory authorities denying approval of a drug candidate for any or all targeted indications.

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FDA approval of an NDA or NDA supplement is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantial discretion in the approval process and we may encounter matters with the FDA that require us to expend additional time and resources and delay or prevent the approval of our product candidates. Despite the time and expense exerted, failure can occur at any stage. The FDA can delay, limit or deny approval of a drug candidate for many reasons, including, but not limited to, the following:

If any future product candidate fails to demonstrate safety and efficacy in clinical trials or does not gain regulatory approval, our business and results of operations may be materially and adversely harmed.

Legislative or regulatory healthcare reforms in the United States may make it more difficult and costly for us to obtain regulatory clearance or approval of any future product candidates and to manufacture, market and distribute our products after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future product candidates. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

Each of these would likely entail substantial time and cost and could materially harm our business and our financial results. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any future products would harm our business, financial condition and results of operations.

Risks Related to Intellectual Property

We may become subject to claims alleging infringement of third parties’ patents or proprietary rights and/or claims seeking to invalidate our patents, which would be costly, time consuming and, if successfully asserted against us, delay, hinder, or prevent the development and commercialization of Veltassa or any future product candidates.

There have been many lawsuits and other proceedings asserting patents and other intellectual property rights in the pharmaceutical and biotechnology industries. We cannot be certain that Veltassa or any future product candidates will not infringe existing or future third-party patents. Because patent applications can take many years to issue and may be confidential for 18 months or more after filing, there may be applications now pending of which we are unaware and which may later result in issued patents that we may infringe by commercializing Veltassa or future product candidates. Moreover, we may face claims from non-practicing entities that have no relevant product revenue and against whom our own patent portfolio may thus have no deterrent effect. In addition, Veltassa has a complex structure that makes it difficult to conduct a thorough search and review of all potentially relevant third-party patents. We may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use of Veltassa.

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We may be subject to third-party claims in the future against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing a third party’s patents. We may be required to indemnify our current or future collaborators against such claims. If a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. As a result of patent infringement claims, or in order to avoid potential claims, we or our collaborators may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or forced to redesign it, or to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. Even if we are successful in defending against such claims, such litigation can be expensive and time consuming to litigate and would divert management’s attention from our core business. Any of these events could harm our business significantly.

In addition to infringement claims against us, if third parties prepare and file patent applications in the United States that also claim technology similar or identical to ours, we may have to participate in interference or derivation proceedings in the U.S. Patent and Trademark Office, or the USPTO, to determine which party is entitled to a patent on the disputed invention. Two oppositions have been filed in the European Patent Office challenging European Patent No. 2365988 by Hexal AG and Teva.  We plan to defend this patent, but we cannot be certain of the outcome of such proceedings and we may lose patent term in Europe. We may also become involved in other opposition proceedings in the European Patent Office or similar offices in other jurisdictions regarding our intellectual property rights with respect to our products and technology. Since patent applications are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to our product candidates.

If our intellectual property related to Veltassa or any future product candidates is not adequate, we may not be able to compete effectively in our market.

We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to Veltassa and our development programs. Any disclosure to or misappropriation by third parties of our confidential or proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.

The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or license may fail to result in issued patents in the United States or in foreign countries. Even if patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. For example, patents granted by the European Patent Office may be opposed by any person within nine months from the publication of the grant. Similar proceedings are available in other jurisdictions, and in some jurisdictions third parties can raise questions of validity with a patent office even before a patent has granted. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. For example, a third party may develop a competitive product that provides therapeutic benefits similar to Veltassa but has a sufficiently different composition to fall outside the scope of our patent protection. If the breadth or strength of protection provided by the patents and patent applications we hold or pursue with respect to Veltassa or any future product candidates is successfully challenged, then our ability to commercialize Veltassa or any future product candidates could be negatively affected, and we may face unexpected competition that could have a material adverse impact on our business. Further, if we encounter delays in our clinical trials, the period of time during which we could market Veltassa or any future product candidates under patent protection would be reduced.

Even where laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and the outcome of such litigation would be uncertain. If we or one of our current or future collaborators were to initiate legal proceedings against a third party to enforce a patent covering Veltassa or one of our future products, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability against our intellectual property related to Veltassa, we would lose at least part, and perhaps all, of the patent protection on Veltassa. Such a loss of patent protection would have a material adverse impact on our business. Moreover, our competitors could counterclaim that we infringe their intellectual property, and some of our competitors have substantially greater intellectual property portfolios than we do.

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We also rely on trade secret protection and confidentiality agreements to protect proprietary know-how that may not be patentable, processes for which patents may be difficult to obtain and/or enforce and any other elements of our product development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we require all of our employees to assign their inventions to us, and endeavor to execute confidentiality agreements with all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology, we cannot be certain that we have executed such agreements with all parties who may have helped to develop our intellectual property or who had access to our proprietary information, nor can we be certain that our agreements will not be breached. We cannot guarantee that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.

If we fail to comply with our obligations under our IP License and Assignment Agreement, we could lose license rights that are important to our business.

We are a party to an IP License and Assignment Agreement with Ilypsa, Inc., or Ilypsa, which is a subsidiary of Amgen Inc., pursuant to which we license key intellectual property relating to our drug discovery and development technology. Although our obligations under the license are limited, the license agreement does impose certain diligence, notice and other obligations not currently applicable to us. If we fail to comply with these obligations, Ilypsa (Amgen) may have the right to terminate the license, other than in respect of Veltassa.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve both technological and legal complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The USPTO and various foreign patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions to maintain patent applications and issued patents. Noncompliance with these requirements can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

We have not yet registered trademarks for Veltassa in many jurisdictions outside the United States and failure to secure such registrations could adversely affect our business.

We have a registered trademark for Veltassa in the United States, and trademark applications in numerous foreign countries, many of which have been approved and many of which are under examination. Our trademark applications for Veltassa outside the United States may be rejected during trademark registration proceedings. We are given an opportunity to respond to those rejections, but we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties can oppose pending trademark applications and seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. And regardless of any application or registration, third parties may object to our use of Veltassa if they were to have legitimate prior conflicting rights. Moreover, any name we propose to use with any product candidates in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. 

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We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.

Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business. Furthermore, while we intend to protect our intellectual property rights in our expected significant markets, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market Veltassa or any future products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain and enforce adequate intellectual property protection for our technology.

Risks Related to Our Common Stock

Our stock price is volatile and our stockholders may not be able to resell shares of our common stock at or above the price they paid.

The trading price of our common stock is highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this Quarterly Report on Form 10-Q and others such as:

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In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that may have been unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business, which could seriously harm our financial position. Any adverse determination in litigation could also subject us to significant liabilities.

If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as a result, our stock price may decline.

We may from time to time issue additional shares of our common stock or securities convertible into our common stock, including in future financings or similar arrangements. For example, we filed a shelf registration statement in November 2015 pursuant to which we recently issued shares of our common stock in an at-the-market offering, and we may issue additional shares in the at-the market offering or other registered offerings under the shelf registration statement. If we issue additional shares of our common stock, our stockholders may experience immediate dilution and, as a result, our stock price may decline.

If we do not achieve our publicly disclosed milestones or goals within the expected timing, our stockholders may lose confidence in our ability to achieve future success and, as a result, our stock price may decline.

From time to time, we may publicly disclose information related to certain anticipated company milestones or goals and estimated timing for achieving them, including clinical, regulatory, commercial and collaboration milestones or goals. However, we may fail to achieve these milestones or goals, or fail to do so within the expected timing or as projected by the analysts who follow us, and our stockholders and potential stockholders may lose confidence in our ability to achieve future success. As a result, our stock price may decline.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

As of June 30, 2016, our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates beneficially owned approximately 47% of our outstanding voting stock. These stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that certain stockholders may believe are in their best interest.

Sales of a substantial number of shares of our common stock in the public market, or short sales of our common stock, could cause our stock price to fall.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, including after the lapse any legal restrictions on resale, the trading price of our common stock could decline. We have outstanding a total of approximately 44.8 million shares of common stock.

In addition, as of June 30, 2016, approximately 10.3 million shares of common stock that are either subject to outstanding options, issuable upon vesting of outstanding restricted stock units, reserved for future issuance under our equity incentive plans or subject to outstanding warrants are eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

The trading price of our common stock could also decline as result of short sales. Selling short is a technique used by a stockholder to take advantage of an anticipated decline in the price of a security. When an investor sells stock that such investor does not own, it is known as a short sale. The seller, anticipating that the price of the stock will go down, intends to buy stock to cover such seller’s sale at a later date. If the price of the stock goes down, the seller will profit to the extent of the difference between the price at which he or she originally sold it less his or her later purchase price. Short sales enable the seller to profit in a down market. Short sales could place significant downward pressure on the price of our common stock.

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Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could significantly reduce the value of our shares to a potential acquirer or delay or prevent changes in control or changes in our management without the consent of our board of directors. The provisions in our charter documents include the following:

In addition, these provisions would apply even if we were to receive an offer that some stockholders may consider beneficial.

We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction. For a description of our capital stock, see the section titled “Description of Capital Stock.”

In addition, certain provisions in our IP License and Assignment Agreement may discourage certain takeover or acquisition attempts, including that in the event we undergo a change of control, we shall pay to Ilypsa (Amgen) an increasing amount of the purchase price, less certain expenses, of such transaction, ranging from approximately 6.7% to 10% of such amount, up to a cap of $30.0 million.

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

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In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:

We may be required to pay severance benefits to our employees who are terminated in connection with a change in control, which could harm our financial condition or results.

Each of our executive officers is party to an employment agreement, and each of our other employees is party to an agreement or participates in a plan, that provides change in control severance benefits including cash payments for severance and other benefits and acceleration of vesting of stock options and restricted stock units in the event of a termination of employment in connection with a change in control of us. The payment of these severance benefits could harm our financial condition and results. The accelerated vesting of options and restricted stock units could result in dilution to our existing stockholders and harm the market price of our common stock. In addition, these potential severance benefits may discourage or prevent third parties from seeking a business combination with us.

We do not currently intend to pay dividends on our common stock, and, consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.

We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our loan and security agreements restrict our ability to pay dividends. Therefore, our stockholders are not likely to receive any dividends on our common stock for the foreseeable future. Since we do not intend to pay dividends, our stockholders’ ability to receive a return on their investment will depend on any future appreciation in the market value of our common stock. There is no guarantee that our common stock will appreciate or even maintain the price at which our holders have purchased it.

Our ability to use our net operating loss carryforwards may be limited.

As of December 31, 2015, we had net operating loss carryforwards of approximately $387.6 million and $252.4 million for both U.S. federal and California income tax purposes, respectively, which begin to expire in 2027 for U.S. federal income tax purposes and 2017 for California income tax purposes. If a corporation undergoes an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, the corporation may be subject to annual limits on its ability to utilize its net operating loss carryforwards. An ownership change is, as a general matter, triggered by sales or acquisitions of the corporation’s stock in excess of 50 percentage points on a cumulative basis during a three-year period by persons owning 5% or more of the corporation’s total equity value. We have performed an initial analysis under Section 382 of the Code and believe that we have in the past experienced ownership changes that will result in a limitation on our ability to utilize our net operating loss carryforwards. As a result of this analysis, we have removed the deferred tax assets for net operating losses of $28.6 million generated through December 31, 2014 from our deferred tax asset schedule and have recorded a corresponding decrease to our valuation allowance. Our net operating loss carryforwards may also be subject to further limitations in the future as a result of additional ownership changes.

 

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None.

Use of Proceeds

Not applicable.

Issuer Purchases of Equity Securities

None.

 

 

Item 3.  Defaults Upon Senior Securities.

None.

 

 

Item 4.  Mine Safety Disclosures.

Not applicable.

 

 

Item 5.  Other Information.

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 5.02 - Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers” of Form 8-K.

 

On August 1, 2016, we appointed Monte R. Montgomery as our Chief Accounting Officer.  Mr. Montgomery will continue to serve as our Vice President, Finance and, effective as of August 1, 2016, he began serving as our principal accounting officer.

Mr. Montgomery, age 44, has served as our Vice President, Finance since February 2014, and as our Executive Director, Finance from February 2013 to February 2014.  Prior to joining the company, Mr. Montgomery served as Director, Finance at Amgen, Inc., a pharmaceutical company, or Amgen, from July 2012 to December 2012, following Amgen’s acquisition of KAI Pharmaceuticals, Inc., a pharmaceutical company, or KAI.  Prior to Amgen, Mr. Montgomery served as Executive Director, Finance at KAI from October 2008 to July 2012.

In connection with his appointment to Chief Accounting Officer, Mr. Montgomery entered into our standard form of indemnification agreement which generally requires us, among other things, to indemnify Mr. Montgomery against liabilities that may arise by reason of his status as an officer of the company, other than liabilities arising from willful misconduct.

 

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Item 6.  Exhibits

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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