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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           .

Commission File Number 001-33451

Albireo Pharma, Inc.

(Exact name of registrant as specified in its charter)

s

Delaware
(State or other jurisdiction of incorporation or organization)

    

90-0136863
(IRS Employer Identification No.)

10 Post Office Square, Suite 1000, Boston, MA

(Address of principal executive offices)

02109
(Zip code)

Registrant’s telephone number, including area code: (857) 254-5555

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

ALBO

The Nasdaq Capital Market

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of October 28, 2021, there were 19,278,634 shares of Common Stock, $0.01 par value per share, outstanding.

Table of Contents

Albireo Pharma, Inc.

     

Page

Cautionary Note Regarding Forward-Looking Statements

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

6

Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020

6

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

7

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2021 and 2020

8

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020

9

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020

10

Notes to Condensed Consolidated Financial Statements

11

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

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

39

Item 4. Controls and Procedures

39

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

40

Item 1A. Risk Factors

40

Item 5. Other Information

40

Item 6. Exhibits

42

Signatures

43

All brand names, trademarks or service marks appearing in this quarterly report are the property of their respective owners. The registrant’s use or display of another party’s trademark, service mark, trade dress or product in this quarterly report is not intended to, and does not, imply a relationship with, or endorsement or sponsorship of, the registrant by such other party.

2

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, that relate to future events or to our future operating or financial performance. Any forward-looking statement involves known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statement. Forward-looking statements include statements, other than statements of historical fact, about, among other things:

our commercialization plans and expectations for commercializing Bylvay globally;
the progress, number, scope, cost, duration or results of our development activities, nonclinical studies and clinical trials of Bylvay™ (odevixibat), elobixibat, A3907, A2342 or any of our other product candidates or programs, such as the target indication(s) for development or approval, the size, design, population, conduct, cost, objective or endpoints of any clinical trial, or the timing for initiation or completion of or availability of results from any clinical trial (including BOLD, our pivotal clinical trial of Bylvay in patients with biliary atresia or ASSERT, our pivotal trial of Bylvay in Alagille syndrome, or ALGS) for submission, review or approval of any regulatory filing, or for meeting with regulatory authorities;
the potential benefits that may be derived from any of our product candidates;
the timing of and our ability to obtain and maintain regulatory approval of our existing product candidates, any product candidates that we may develop, and any related restrictions, limitations, or warnings in the label of any approved product candidates;
any payment that EA Pharma Co., Ltd., or EA Pharma, may make to us or any other action or decision that EA Pharma may make concerning elobixibat or our business relationship;
the potential impacts of the COVID-19 pandemic on our business operations or financial condition;
our future operations, financial position, revenues, costs, expenses, uses of cash, capital requirements, our need for additional financing or the period for which our existing cash resources will be sufficient to meet our operating requirements; or
our strategies, prospects, plans, expectations, forecasts or objectives.

Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “forecast,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “targets,” “likely,” “will,” “would,” “could,” “should,” “continue,” “scheduled” and similar expressions or phrases, or the negative of those expressions or phrases, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these statements are based on our estimates or projections of the future that are subject to known and unknown risks and uncertainties and other important factors that may cause our actual results, level of activity, performance, experience or achievements to differ materially from those expressed or implied by any forward-looking statement. Actual results, level of activity, performance, experience or achievements may differ materially from those expressed or implied by any forward-looking statement as a result of various important factors, including our critical accounting policies and risks and uncertainties relating, among other things, to:

the design, size, duration and endpoints for, and results from BOLD, our pivotal trial of Bylvay in biliary atresia, and ASSERT our pivotal trial of Bylvay in ALGS, or any other trials that will be required to obtain marketing approval for Bylvay to treat patients with Biliary atresia, ALGS or any other pediatric cholestatic liver disease or for A3907 and A2342 as potential treatments for adult liver and viral diseases;

3

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whether favorable findings from clinical trials of Bylvay to date, including findings in our completed Phase 3 clinical trial in PFIC and findings in indications other than PFIC, will be predictive of results from future clinical trials, including our pivotal trial of Bylvay in biliary atresia and pivotal trial of Bylvay in ALGS;
the outcome and interpretation by regulatory authorities of an ongoing third-party study pooling and analyzing long-term PFIC patient data;
the timing for initiation or completion of, or for availability of data from, our pivotal trial of Bylvay in biliary atresia and our pivotal trial of Bylvay in ALGS, and the outcomes of such trials;
delays or other challenges in the recruitment of patients for the pivotal trial of Bylvay in biliary atresia and the pivotal trial of Bylvay in ALGS;
the COVID-19 pandemic, which may negatively impact the conduct of, and the timing of initiation, enrollment, completion and reporting with respect to, our clinical trials; negatively impact the supply of drug product for our clinical and preclinical programs; and/or result in other adverse impacts on our business;
the competitive environment and commercial opportunity for a treatment for PFIC and potentially other orphan pediatric cholestatic liver diseases;
the conduct and results of clinical trials and nonclinical studies and assessments of Bylvay, A3907, A2342 or any of our other product candidates and programs, including the performance of third parties engaged to execute them and difficulties or delays in patient enrollment and data analysis;
the medical benefit that may be derived from Bylvay, A3907, A2342 or any of our other product candidates;
the extent to which our agreement with EA Pharma for elobixibat generates nondilutive income for us;
the timing and success of submission, acceptance and approval of regulatory filings and any related restrictions, limitations or warnings in the label of any approved product candidates;
whether we are able to effectively commercialize Bylvay in patients with PFIC;
the significant control or influence that EA Pharma has over the commercialization of elobixibat in Japan and the development and commercialization of elobixibat in EA Pharma’s other licensed territories;
whether we elect to seek and, if so, our ability to establish a license or other partnering transaction with a third party for elobixibat in the United States or Europe;
the accuracy of our estimates regarding expenses, costs, future revenues, uses of cash and capital requirements;
our ability to obtain additional financing on reasonable terms, or at all;
our ability to establish additional licensing, collaboration or similar arrangements on favorable terms and our ability to attract collaborators with development, regulatory and commercialization expertise;
the success of competing third-party products or product candidates;
our ability to successfully commercialize any approved product candidates, including their rate and degree of market acceptance;

4

Table of Contents

whether we are able to maintain compliance with the terms and conditions of our loan and security agreement with Hercules Capital, Inc.;
our ability to expand and protect our intellectual property estate;
regulatory developments in the United States and other countries;
the effectiveness of our internal control over financial reporting;
the performance of our third-party suppliers, manufacturers and contract research organizations and our ability to obtain alternative sources of raw materials;
our ability to attract and retain key personnel; and
our ability to comply with regulatory requirements relating to our business, and the costs of compliance with those requirements, including those on data privacy and security.

These and other risks and uncertainties are described in greater detail under the caption “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, in Item 1A of Part II of this quarterly report, and in other filings that we make with the Securities and Exchange Commission, or SEC. As a result of the risks and uncertainties, the results or events indicated by the forward-looking statements may not occur. We caution you not to place undue reliance on any forward-looking statement.

In addition, any forward-looking statement in this quarterly report represents our views only as of the filing date of this quarterly report and should not be relied upon as representing our views as of any subsequent date. We anticipate that subsequent events and developments may cause our views to change. Although we may elect to update these forward-looking statements publicly at some point in the future, we specifically disclaim any obligation to do so, except as required by applicable law. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

5

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Albireo Pharma, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)

    

September 30, 

    

December 31, 

2021

2020

Assets

Current assets:

Cash and cash equivalents

$

262,612

$

251,272

Accounts receivable, net

1,307

Inventory

196

Prepaid expenses and other current assets

 

7,779

 

10,593

Total current assets

 

271,894

 

261,865

Property and equipment, net

775

478

Goodwill

 

17,260

 

17,260

Other assets

 

6,516

 

6,004

Total assets

$

296,445

$

285,607

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

7,222

$

5,283

Accrued expenses

 

20,884

 

19,051

Other current liabilities

 

5,043

 

948

Total current liabilities

 

33,149

 

25,282

Liability related to sale of future royalties

68,513

65,894

Note payable, net of discount

9,929

9,621

Other long-term liabilities

3,138

3,579

Total liabilities

 

114,729

 

104,376

Stockholders’ Equity:

Preferred stock, $0.01 par value per share — 50,000,000 shares authorized at September 30, 2021 and December 31, 2020; 0 and 0 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

Common stock, $0.01 par value per share — 60,000,000 and 30,000,000 shares authorized at September 30, 2021 and December 31, 2020, respectively; 19,283,269 and 19,275,509 shares issued and outstanding at September 30, 2021, respectively, and 19,107,040 shares issued and outstanding at December 31, 2020

 

193

 

191

Additional paid-in capital

 

472,363

 

456,472

Accumulated other comprehensive loss

 

(722)

 

(8,612)

Accumulated deficit

 

(289,888)

 

(266,820)

Treasury stock at cost, 7,760 shares and 0 shares at September 30, 2021 and December 31, 2020, respectively

(230)

Total stockholders’ equity

 

181,716

 

181,231

Total liabilities and stockholders’ equity

$

296,445

$

285,607

See accompanying notes to Condensed Consolidated Financial Statements.

6

Table of Contents

Albireo Pharma, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

    

2021

    

2020

    

2021

    

2020

    

Revenue:

Product revenue, net

$

1,060

$

$

1,060

$

Royalty revenue

2,604

2,131

6,998

5,592

Total revenue

3,664

2,131

8,058

5,592

Cost of product revenue

431

431

Gross profit

3,233

2,131

7,627

5,592

Operating expenses:

Research and development

 

21,083

 

22,200

 

61,920

 

56,727

Selling, general and administrative

 

17,612

 

11,663

 

49,825

 

28,290

Other operating expense (income), net

 

3,719

 

(4,628)

 

7,873

 

(4,556)

Total operating expenses

 

42,414

 

29,235

 

119,618

 

80,461

Operating loss

 

(39,181)

 

(27,104)

 

(111,991)

 

(74,869)

Other income (loss):

Gain from sale of priority review voucher, net of transaction costs

103,387

103,387

Interest expense, net

 

(3,331)

 

(3,639)

 

(10,675)

 

(7,965)

Net income (loss) before income taxes

 

60,875

 

(30,743)

 

(19,279)

 

(82,834)

Provision for income taxes

 

3,789

 

 

3,789

 

Net income (loss)

$

57,086

$

(30,743)

$

(23,068)

$

(82,834)

Net income (loss) per share attributable to holders of common stock:

Basic

$

2.96

$

(1.96)

$

(1.20)

$

(5.54)

Diluted

$

2.90

$

(1.96)

$

(1.20)

$

(5.54)

Weighted-average common shares outstanding:

Basic

 

19,258,905

 

15,704,293

 

19,197,536

 

14,942,213

Diluted

19,651,243

15,704,293

19,197,536

14,942,213

See accompanying notes to Condensed Consolidated Financial Statements.

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Albireo Pharma, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

    

2021

    

2020

    

2021

    

2020

    

Net income (loss)

$

57,086

$

(30,743)

$

(23,068)

$

(82,834)

Other comprehensive income (loss):

Foreign currency translation adjustment

 

3,657

 

(4,031)

 

7,890

 

(4,309)

Total other comprehensive income (loss)

 

3,657

 

(4,031)

 

7,890

 

(4,309)

Total comprehensive income (loss)

$

60,743

$

(34,774)

$

(15,178)

$

(87,143)

See accompanying notes to Condensed Consolidated Financial Statements.

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Albireo Pharma, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(unaudited)

Accumulated

    

    

  

Additional

    

Other

    

Treasury Stock

    

Total

Common Stock

Paid-In

Comprehensive

Accumulated

At Cost

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (loss)

    

Deficit

    

Shares

    

Amount

    

Equity

Balance--December 31, 2020

19,107,040

$

191

$

456,472

$

(8,612)

$

(266,820)

$

$

181,231

Stock-based compensation expense

3,062

3,062

Exercise of options and vesting of RSUs

85,765

1

403

404

Other comprehensive income

6,954

6,954

Net loss

(43,733)

(43,733)

Balance--March 31, 2021

19,192,805

$

192

$

459,937

$

(1,658)

$

(310,553)

$

$

147,918

Stock-based compensation expense

 

 

3,504

 

3,504

Exercise of options and vesting of RSUs

47,490

 

 

1,224

 

1,224

Other comprehensive loss

 

 

 

(2,721)

(2,721)

Net loss

 

 

 

(36,421)

(36,421)

Balance--June 30, 2021

19,240,295

$

192

$

464,665

$

(4,379)

$

(346,974)

$

$

113,504

Stock-based compensation expense

6,706

6,706

Exercise of options and vesting of RSUs

35,466

1

751

752

Issuance of common stock under the at-the-market sales agreement, net of costs

7,508

241

241

Other comprehensive income

3,657

3,657

Purchases of treasury stock, at cost

(7,760)

(230)

(230)

Net income

57,086

57,086

Balance--September 30, 2021

19,283,269

$

193

$

472,363

$

(722)

$

(289,888)

(7,760)

$

(230)

$

181,716

Accumulated

    

    

  

Additional

    

Other

    

Total

Common Stock

Paid-In

Comprehensive

Accumulated

Stockholders’

    

Shares

    

Amount

    

Capital

    

Income (loss)

    

Deficit

Equity

Balance--December 31, 2019

12,749,443

$

127

$

245,769

$

6,452

$

(159,187)

$

93,161

Stock-based compensation expense

2,381

2,381

Exercise of options and vesting of RSUs

37,662

94

94

Issuance of common stock, net of costs

2,190,750

22

42,977

42,999

Other comprehensive income

6,287

6,287

Net loss

(31,488)

(31,488)

Balance--March 31, 2020

14,977,855

$

149

$

291,221

$

12,739

$

(190,675)

$

113,434

Stock-based compensation expense

 

 

2,603

 

2,603

Exercise of options and vesting of RSUs

11,166

 

 

138

 

138

Issuance of warrants

 

 

113

 

113

Other comprehensive loss

(6,565)

(6,565)

Net loss

 

 

 

(20,603)

(20,603)

Balance--June 30, 2020

14,989,021

$

149

$

294,075

$

6,174

$

(211,278)

$

89,120

Stock-based compensation expense

5,089

5,089

Exercise of options and vesting of RSUs

84,477

1

1,924

1,925

Issuance of common stock, net of costs

4,000,000

40

150,360

150,400

Other comprehensive loss

(4,031)

(4,031)

Net loss

(30,743)

(30,743)

Balance--September 30, 2020

19,073,498

$

190

$

451,448

$

2,143

$

(242,021)

$

211,760

See accompanying notes to Condensed Consolidated Financial Statements.

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Albireo Pharma, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Nine Months Ended September 30, 

    

2021

    

2020

Cash flows from operating activities:

Net loss

$

(23,068)

$

(82,834)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

Gain from sale of priority review voucher, net of transaction costs

(103,387)

Accretion of liability related to sale of future royalties

 

9,428

  

 

7,670

Accretion of debt discount and amortization of issuance costs

 

308

  

 

135

Depreciation and amortization

 

167

  

 

119

Share based compensation expense

 

13,272

  

 

10,073

Foreign currency adjustments

7,776

(3,968)

Changes in operating assets and liabilities:

 

  

 

Accounts receivable, net

(1,307)

Inventory

(196)

Prepaid expenses and other current assets

 

2,765

  

 

1,770

Other assets

 

293

  

 

425

Accounts payable

 

2,023

  

 

(1,221)

Accrued expenses

 

2,068

  

 

(3,213)

Other current and long-term liabilities

 

(3,810)

  

 

(1,790)

Net cash used in operating activities

 

(93,668)

  

 

(72,834)

Cash flows from investing activities:

 

  

 

Purchase of property and equipment

 

(465)

  

 

(78)

Proceeds from sale of priority review voucher, net of transaction costs

103,387

Net cash provided by (used in) investing activities

 

102,922

  

 

(78)

Cash flows from financing activities:

 

  

 

Proceeds from issuance of note payable, net of issuance costs

 

  

 

9,521

Proceeds from issuance of common stock, net of issuance costs

 

241

  

 

193,399

Proceeds from royalty agreement, net of issuance costs

14,750

Proceeds from exercise of options

2,378

2,156

Payments related to repurchases of common stock

 

(230)

  

 

Net cash provided by financing activities

 

2,389

  

 

219,826

Effect of exchange rate changes on cash and cash equivalents

 

(303)

  

 

(66)

Net increase in cash and cash equivalents

 

11,340

  

 

146,848

Cash and cash equivalents—beginning of period

 

251,272

  

 

131,843

Cash and cash equivalents—end of period

$

262,612

$

278,691

Supplemental disclosures of cash and non-cash activities

 

  

  

 

  

Warrants issued with long-term debt

$

$

113

Deferred issuance costs included in accrued expenses

$

  

$

34

See accompanying notes to Condensed Consolidated Financial Statements.

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Albireo Pharma, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Summary of significant accounting policies and basis of presentation

Organization

Albireo Pharma, Inc. (the Company), is a commercial-stage biopharmaceutical company focused on the development and commercialization of novel bile acid modulators to treat orphan pediatric liver diseases and other liver and gastrointestinal diseases and disorders. The Company’s product pipeline includes Bylvay (odevixibat) approved in the US and Europe, elobixibat, approved in Japan for the treatment of chronic constipation, a Phase 1 product candidate and multiple preclinical candidates. Bylvay (odevixibat) was approved by the U.S. Food and Drug Administration on July 20, 2021 for the treatment of pruritis in patients with progressive familial intrahepatic cholestasis (PFIC) ages 3 months or older, and authorized by the European Medicines Agency on July 16, 2021 for the treatment of PFIC in patients 6 months or older. Bylvay was also granted marketing authorization by the UK Medicines and Healthcare Products Regulatory Agency (MHRA) in September 2021 for the treatment of PFIC in patients 6 months or older. Bylvay is also in Phase 3 development for the treatment of biliary atresia and Alagille syndrome (ALGS), each a rare, life-threatening disorder affecting young children.

Since its inception, the Company has devoted substantially all of its resources to its research and development efforts, including activities to develop its product candidates, prepare for potential commercialization of Bylvay in PFIC in 2021 and to provide general and administrative support for these operations.

The Company has primarily funded its operations with proceeds from the sales of common stock, the sale of royalties, upfront and milestone payments for regional agreements, proceeds from the issuance of debt, and the sale of a Priority Review Voucher (PRV). As of September 30, 2021, the Company has raised an aggregate of $356.9 million through the issuance of common stock, net of issuance costs, $59.3 million from the sale of its future royalties, $9.5 million through the Loan and Security Agreement, net of issuance costs, and net proceeds of $103.4 million, after deducting commission costs, from the sale of the PRV.

The Company has incurred significant operating losses and negative cash flows from operations since inception. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future. In addition, the Company anticipates that its expenses will increase significantly in connection with ongoing activities to support the launch of Bylvay for PFIC and the advancement of Bylvay in its later stage clinical trials and providing administrative support.

As a result, the Company will need substantial additional funding to support its continued operations and growth strategy. Until such a time as the Company can generate significant revenue from product sales, if ever, the Company expects to finance its operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. The Company may be unable to raise additional funds or enter into such other agreements on favorable terms, or at all. If the Company fails to raise capital or enter into such agreements as, and when, needed, the Company may have to significantly delay, scale back or discontinue the development and commercialization of one or more of its product candidates or delay its pursuit of potential in-licenses or acquisitions.

As of September 30, 2021, the Company had cash and cash equivalents of $262.6 million. Management believes that its cash and cash equivalent resources at September 30, 2021 will be sufficient to allow the Company to fund its current operating plan through at least the next twelve months from the issuance of these financial statements.

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The Company is subject to those risks associated with any biopharmaceutical company that has substantial expenditures for research and development. There can be no assurance that the Company’s research and development projects will be successful, that products developed will obtain necessary regulatory approval, or that any approved product will be commercially viable. In addition, the Company operates in an environment of rapid technological change and is largely dependent on the services of its employees and consultants. If the Company fails to become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and be forced to reduce its operations.

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. In the opinion of management, all adjustments (including normal recurring adjustments) considered necessary for fair presentation have been included in the Condensed Consolidated Financial Statements. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the full fiscal year, any other interim period or any future fiscal year. The Condensed Consolidated Financial Statements are prepared on a basis consistent with prior periods.

Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB).

Principles of consolidation

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its direct or indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Foreign currency translation

Functional currency

Items included in the financial statements of each entity comprising the Company are measured using the currency of the primary economic environment in which the entity operates (the functional currency).

Transactions and balances

Foreign currency transactions in each entity comprising the Company are remeasured into the functional currency of the entity using the exchange rates prevailing at the respective transaction dates. Foreign exchange gains and losses resulting from the settlement of such transactions and from the remeasurement at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized within other operating (income) expense, net in the Condensed Consolidated Statements of Operations.

The results and financial position of the Company that have a functional currency different from the USD are translated into the presentation currency as follows:

a.assets and liabilities presented are translated at the closing exchange rate as of September 30, 2021 and December 31, 2020;

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b.income and expenses for each statement of comprehensive loss are translated at the average exchange rate for the applicable period; and
c.significant transactions use the closing exchange rate on the date of the transaction.

All resulting exchange differences arising from such translations are recognized directly in other comprehensive income (loss) and presented as a separate component of equity.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements and accompanying notes. Management must apply significant judgment in this process. On an ongoing basis, the Company evaluates its estimates and assumptions, including but not limited to accruals, including its clinical trial accruals and revenue deductions related to rebates, chargebacks and other discounts, realizability of deferred tax assets and the accretion of interest on the monetization liability. Actual results could materially differ from these estimates.

Revenue recognition

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services in accordance with ASC 606 Revenue from Contracts with Customers. To determine revenue recognition for contracts with its customers, the Company performs the following five step assessment: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines which goods and services are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Revenue, net

The Company recognizes revenue on sales of Bylvay when a customer obtains control of the product, which occurs at a point in time and upon delivery. The Company sells Bylvay to a limited number of specialty pharmacies and a specialty distributor which dispense the product directly to patients. The specialty pharmacies and specialty distributor are referred to as the Company’s customers. The Company also sells Bylvay to its customers in the European Union, which includes a limited number of pharmacies.

The Company provides the right of return to its customers for unopened product for a limited time before and after its expiration date. We currently estimate product returns using available industry data as well as the Company’s visibility into the inventory remaining in the distribution channel.

The Company has written contracts with each of its customers that have a single performance obligation to deliver products upon receipt of a customer order and these obligations are satisfied when delivery occurs and the customer receives Bylvay. The Company evaluates creditworthiness of each of its customers to determine whether collection is reasonably assured. The wholesale acquisition cost that the Company charges its customers for Bylvay is adjusted to arrive at our estimated net product revenues by deducting components of variable consideration which include (i) estimated government rebates and discounts related to Medicaid and other government programs, (ii) estimated costs of incentives offered to certain indirect customers including patients, and (iii) trade allowances, such as invoice discounts for prompt payment and customer fees. Product revenue, net in the U.S. was $0.8 million and $0.3 million in Europe for

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the three months and nine months ended September 30, 2021. There was no product revenue for the three and nine months ended September 30, 2020.

Rebates and Discounts

The Company contracts with the Centers for Medicare & Medicaid Services and other government agencies in the U.S. to make Bylvay available to eligible patients. As a result, the Company estimates any rebates and discounts and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The Company’s estimates of rebates and discounts are based on the government mandated discounts, which are statutorily-defined and applicable to these government funded programs and assumptions developed using historical experience with actual payments and redemptions. The Company recorded $0.1 million and $0.0 million in such estimates as of September 30, 2021 and December 31, 2020, respectively, in accounts receivable, net of allowance for credit losses and other liabilities on the consolidated balance sheets.

The Company contracts with national authorities in Europe to make Bylvay available to eligible patients. In jurisdictions in which final pricing is subject to ongoing negotiations with the government, the Company estimates the rebate expected to be due and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. The Company’s estimates of such liabilities are based on current invoice pricing and total prior units sold and assumptions developed using benchmarks of Bylvay pricing approved in other relevant European jurisdictions. The Company recorded less than $0.1 million and $0.0 million in such estimates as of September 30, 2021 and December 31, 2020, respectively, in other liabilities on the consolidated balance sheets.

Other Incentives

Other incentives that the Company offers to indirect customers include co-pay assistance cards provided by the Company for patients who reside in states that permit co-pay assistance programs. The Company’s co-pay assistance program is intended to reduce each participating patient’s portion of the financial responsibility for Bylvay’s purchase price to a specified dollar amount. The Company estimates the amount of co-pay assistance provided to eligible patients based on the terms of the program when product is dispensed by the specialty pharmacies to the patients. These estimates are based on redemption information provided by third-party claims processing organizations. The Company funds this incentive program through upfront payments which included a $0.1 million dollar payment in the quarter ended September 30, 2021. The Company recorded less than $0.1 million and $0.0 million in such estimates as of September 30, 2021 and December 31, 2020, respectively, in prepaid expenses and other current assets on the consolidated balance sheets.

Trade Allowances

The Company provides invoice discounts on Bylvay sales its customers for prompt payment and records these discounts as a reduction to gross product revenues. These discounts are based on contractual terms. The company also pays fees to its distributors for their services as well as data that they provide to the Company. Trade allowances are recorded in accounts receivable, net of allowance for credit losses on the consolidated balance sheets and were $0.1 million.

Trade Receivables, net

Accounts receivable, net related to product sales are recorded in accounts receivable, net of allowance for credit losses on the consolidated balance sheets were approximately $1.3 million and $0 million as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, we had no allowance for doubtful accounts. An allowance for doubtful accounts is determined based on the company’s assessment of the credit worthiness and financial condition of our customers, aging of receivables, as well as the general economic environment. Any allowance would reduce the net receivables to the amount that is expected to be collected.

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Milestone Payments

At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Royalties

For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

In 2012, the Company entered into a license agreement (the Agreement) with EA Pharma Co., Ltd. (EA Pharma, formerly Ajinomoto Pharmaceuticals Co., Ltd.) to develop a select product candidate (elobixibat) for registration and subsequent commercialization in select markets. In conjunction with the Agreement, the Company granted EA Pharma an exclusive license to its intellectual property for development and commercialization activities in the designated field and territories. The Company has completed all of its performance obligations under the Agreement.

As of September 30, 2021, the Company is eligible to receive an additional regulatory-based milestone payment under the Agreement of $5.0 million if a specified regulatory event is achieved for elobixibat. The cash payments and any other payments for milestones and royalties from EA Pharma are non-refundable, non-creditable and not subject to set-off.

The Agreement will continue until the last royalty period for any product in the territory, which is defined as the period when there are no remaining patent rights or regulatory exclusivity in place for any products subject to royalties. EA Pharma may terminate the Agreement upon 180 days’ prior written notice to the Company. Either party may terminate the Agreement for the other party’s uncured material breach or insolvency and in certain other circumstances agreed to by the parties.

Monetization of Future Royalties

In December 2017, the Company entered into a royalty interest acquisition agreement (RIAA) with HCR pursuant to which it sold to HCR the right to receive all royalties from sales in Japan and sales milestones achieved from any covered territory potentially payable to the Company under the Agreement, up to a specified maximum “cap” amount of $78.8 million, based on the funds the Company received from HCR. In January 2018, the Company received $44.5 million from HCR, net of certain transaction expenses, under the RIAA. On June 8, 2020, the parties entered into an amendment to the RIAA pursuant to which HCR agreed to pay the Company an additional $14.8 million, net of certain transaction expenses, in exchange for the elimination of the (i) $78.8 million cap amount on HCR’s rights to receive royalties on sales in Japan and sales milestones for elobixibat in certain other territories that may become payable by EA Pharma and (ii) the $15.0 million payable to the Company if a specified sales milestone is achieved for elobixibat in Japan. The Company is obligated to make royalty interest payments to HCR under the RIAA only to the extent it receives future Japanese royalties, sales milestones or other specified payments from EA Pharma. Although the Company sold its rights to receive royalties from the sales of elobixibat in Japan, as a result of its ongoing involvement

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in the cash flows related to these royalties, the Company will continue to account for these royalties and milestones as revenue. Upon receipt of the payments from HCR the Company recorded net cash totaling $59.3 million as a liability related to sale of future royalties (royalty obligation). The royalty obligation will be amortized using the effective interest rate method.

The following table shows the activity within the liability account for the nine-month period ended September 30, 2021:

    

September 30, 2021

    

(in thousands) 

Liability related to sale of future royalties—beginning balance

 

$

68,594

Accretion of interest expense on liability related to royalty monetization

9,428

Repayment of the liability

(6,956)

Liability related to sale of future royalties—ending balance

 

$

71,066

Less current portion classified within accrued expenses

(2,553)

Long-term liability related to sale of future royalties

 

$

68,513

The Company records estimated royalties due for the current period in accrued expenses until the payment is received from EA Pharma at which time the Company then remits payment to HCR. As royalties are remitted to HCR, the balance of the royalty obligation will be effectively repaid over the life of the RIAA. In order to determine the accretion of the royalty obligation, the Company is required to estimate the total amount of future royalty payments to be received and submitted to HCR, as noted above. The sum of these amounts less the $59.3 million proceeds the Company received will be recorded as interest expense over the life of the royalty obligation. At September 30, 2021, the Company’s estimate of its total interest expense resulted in an annual effective interest rate of approximately 18.7%.

The Company periodically assesses the estimated royalty payments to HCR and to the extent such payments are greater or less than its initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively adjust the accretion of interest on the royalty obligation. There are a number of factors that could materially affect the amount and the timing of royalty payments, most of which are not within the Company’s control. Such factors include, but are not limited to, the rate of elobixibat prescriptions, the number of doses administered, the introduction of competing products, manufacturing or other delays, patent protection, adverse events that result in governmental health authority imposed restrictions on the use of the drug products, significant changes in foreign exchange rates as the royalties remitted to HCR are in U.S. dollars while sales of elobixibat are in Japanese yen, and sales never achieving forecasted numbers, which would result in reduced royalty payments and reduced non-cash interest expense over the life of the royalty obligation. To the extent future royalties result in an amount less than the liability, the Company is not obligated to fund any such shortfall.

Inventory

The Company commenced capitalizing inventory for Bylvay upon FDA approval on July 20, 2021. All commercial manufacturing expenses were expensed as research and development expenses prior to FDA approval. Manufacturing of the Company’s active pharmaceutical ingredient (API) and drug product occurred prior to FDA approval. As a result, manufacturing costs, which totaled approximately $1.6 million, were not capitalized, and instead were expensed as research and development expenses from 2020 to 2021. All packaging of the Company’s drug product occurred after FDA approval and is included as capitalized inventory within Finished goods.

Recent accounting pronouncements

There are no recently issued accounting pronouncements the Company has not yet adopted that will materially impact the Company’s consolidated financial statements.

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2. Fair Value of financial instruments

When measuring the fair value of financial instruments, the Company evaluates valuation techniques such as the market approach, the income approach and the cost approach. A three-level valuation hierarchy, which prioritizes the inputs to valuation techniques that are used to measure fair value, is based upon whether such inputs are observable or unobservable.

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets;

Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that reflect the reporting entity’s estimate of assumptions that market participants would use in pricing the asset or liability.

The following tables represent information about the Company’s financial assets that are measured at fair value on a recurring basis (in thousands):

September 30, 2021

Level 1

Level 2

Level 3

Cash Equivalents:

    

Money market funds

$

256,451

$

$

Total

$

256,451

$

$

December 31, 2020

Level 1

Level 2

Level 3

Cash Equivalents:

    

Money market funds

$

242,854

$

$

Total

$

242,854

$

$

The Company’s financial instruments consist mainly of cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses, other current liabilities, and note payable. The carrying amounts of cash equivalents, prepaid expenses and other current liabilities, accounts payable, accrued expenses, and other current liabilities approximate their estimated fair value due to their short-term maturities. At September 30, 2021, the Company believes the carrying value of the Loan and Security Agreement with Hercules Capital, Inc., approximates the fair value of the note payable.

3. Commitments and contingencies

Agreements with CROs and CMOs

As of September 30, 2021, the Company had various agreements with CROs and CMOs for the conduct of specified research and development activities and based on the terms of the respective agreements, the Company is contractually obligated to make future payments of up to $11.8 million upon the completion of contracted work.

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4. Net income (loss) per share

Basic net income (loss) per share, is calculated by dividing the net income (loss) attributable to holders of common stock by the weighted average number of shares of common stock outstanding. When the Company is in a net loss position, diluted net loss per share is calculated by dividing the net loss attributable to holders of common stock by the weighted average number of shares of common stock outstanding. When the Company is in a net income position, diluted net income per share would be calculated by dividing the net income attributable to holders of common stock by the weighted-average number of shares of common stock plus dilutive common stock equivalents outstanding.

The following table sets forth the computation of Basic and Diluted net income (loss) per share (in thousands, except for share and per share data):

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

    

Basic and Diluted net loss per share:

Numerator

Net income (loss)

$

57,086

  

$

(30,743)

$

(23,068)

  

$

(82,834)

Denominator

 

 

 

 

Weighted average number of shares outstanding

Number of shares used for basic EPS computation

 

19,258,905

 

15,704,293

 

19,197,536

 

14,942,213

Effect of dilutive securities

Dilutive options

380,934

Dilutive stock units

11,404

Number of shares used for diluted EPS computation

19,651,243

15,704,293

19,197,536

14,942,213

Basic net income (loss) per share

$

2.96

$

(1.96)

$

(1.20)

$

(5.54)

Diluted net income (loss) per share

$

2.90

  

$

(1.96)

$

(1.20)

  

$

(5.54)

For purposes of a dilutive net loss per share calculation, stock options, RSUs and warrants are considered to be common stock equivalents but are excluded from the calculation of diluted net loss per share in the periods where the Company has incurred a net loss, as their effect would be anti-dilutive given the Company’s net loss. Common stock equivalents may also be excluded from the calculation of diluted net income per share if the exercise prices exceed the average market price for the reporting period.

The following outstanding common stock equivalents were excluded from the computation of Diluted net income (loss) per share for the three and nine months ended September 30, 2021 and 2020 because including them would have been anti-dilutive:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

    

Options to purchase common stock, RSUs and warrants

2,779,257

2,403,090

3,171,596

2,403,090

5. Income taxes

The Company recorded a tax provision of $3.8 million for the three and nine months ended September 30, 2021, related to the sale of the PRV as it was considered a discrete event pursuant to ASC 740-270, offset by a tax benefit from the Company's ordinary losses. The Company expects to have sufficient tax losses in the current year to offset the

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income from the sale and thus no current year liability is expected. The Company expects to maintain a full valuation allowance against its net deferred tax assets for the year.

6. Inventory

Inventory consists of the following: