Clinical Development - The company is focused on developing therapies for rare diseases, with multiple late clinical-stage programs targeting significant unmet medical needs [20]. - Sparsentan is currently in two pivotal Phase 3 clinical studies for FSGS and IgAN, with approximately 300 patients enrolled in the DUPLEX Study and 280 patients in the PROTECT Study [24][25]. - The interim analysis of the DUPLEX Study is expected to provide top-line data in the first half of 2021, while the PROTECT Study's primary endpoint data is anticipated in the first half of 2022 [24][25]. - Chenodal is being evaluated in a Phase 3 clinical trial for CTX, with the RESTORE study aimed at supporting an NDA submission in the U.S. [29]. - The company has discontinued the development of fosmetpantotenate for PKAN and the L-UDCA program, resulting in impairments of $15.0 million and $25.5 million respectively [33][36]. - The company is developing sparsentan in Phase 3 clinical trials for treating FSGS and IgAN, both rare diseases, but may face challenges in patient enrollment due to competition for eligible participants [157]. - The company initiated the RESTORE study in January 2020 to evaluate Chenodal for CTX, which has been the standard of care for over three decades but requires FDA approval for marketing [158]. - The DUPLEX Study and PROTECT Study for sparsentan are being conducted under the Subpart H pathway for potential accelerated approval in the U.S. and Conditional Marketing Authorization in Europe, based on changes in proteinuria [164]. - The company has received feedback from the FDA indicating openness to accept substantial treatment effects on proteinuria for accelerated approval, but there is no guarantee that the data will be sufficient for an NDA filing [165]. - The company acknowledges that success in early clinical trials does not guarantee success in later trials, as demonstrated by the Phase 3 FORT Study not meeting its primary endpoint [161]. - The company may need to conduct additional clinical trials or testing if initial results are not positive, which could lead to increased development costs and delays [157]. Product Pipeline and Market Exclusivity - Cholbam, approved in March 2015, is the first FDA-approved treatment for bile acid synthesis disorders, with an estimated 200 to 300 patients currently eligible for therapy [30]. - Thiola and Thiola EC are approved for treating cystinuria, with an estimated 10,000 to 12,000 individuals affected in the U.S., and the new formulation offers improved administration options [32]. - Chenodal received orphan drug designation in the U.S. in 2010, potentially granting seven years of marketing exclusivity upon FDA approval [67]. - Cholbam is expected to have marketing exclusivity in the U.S. until March 2022 due to its orphan drug designation [68]. - The company expects to rely on orphan drug status for sparsentan, which provides seven years of marketing exclusivity in the U.S. and up to ten years in Europe [216]. - The company has obtained orphan drug designation for Cholbam/Kolbam, which provides a period of marketing exclusivity, but this could be challenged by competitive products [191]. Commercialization Strategy - The company aims to build a sustainable pipeline by selectively acquiring orphan drug candidates and employing rigorous decision criteria for development [42]. - The company plans to evaluate commercialization strategies on a product-by-product basis to maximize value, including potential joint marketing partnerships and out-licensing [42]. - The commercial success of Chenodal, Cholbam, and Thiola depends on their perceived effectiveness and advantages over competing therapies, as well as third-party payer coverage and reimbursement policies [175]. - The company is currently facing generic competition for its products, particularly Thiola, which is subject to immediate competition from compounded and generic entrants due to the lack of patent exclusivity [177]. - Recent regulatory initiatives, such as the CREATES Act, aim to encourage generic competition, potentially impacting the company's sales and profitability if generic versions of its products are approved [178]. - The company is defending a lawsuit from Spring Pharmaceuticals alleging refusal to sell samples of Thiola for bioequivalence studies, which could lead to reputational harm and additional costs [179]. Regulatory Environment - The FDA review process for standard review drug products typically takes about 10 months, while priority review drugs are reviewed within eight months [96]. - The FDA may grant orphan drug designation for drugs intended to treat rare diseases, providing a seven-year exclusive marketing period for the first approved applicant [103]. - Fast Track designation facilitates the development of drugs for serious conditions, allowing for early and frequent communication with the FDA [104][105]. - Accelerated Approval may be granted for drugs providing meaningful therapeutic benefits based on surrogate endpoints [106]. - Regulatory compliance requires substantial time and financial resources, impacting product development and marketing [86]. - The company is subject to post-approval requirements including adverse event reporting and periodic reports following FDA approval of an NDA [115]. - The company must comply with stringent FDA regulations regarding marketing and promotion of drugs post-approval [114]. - The company is subject to various federal and state healthcare regulations, including the anti-kickback statute and the False Claims Act, which could lead to significant penalties if violated [130][136]. - The company must comply with the federal Physician Payments Sunshine Act, requiring annual reporting of certain payments to physicians and teaching hospitals [134]. - The company is subject to foreign regulations governing clinical trials and product marketing, which vary significantly by country [138]. - The centralized procedure for marketing authorization in the EU allows for approval across all 27 EU member states, with a maximum evaluation timeframe of 210 days [141]. - Data exclusivity in Europe lasts for 8 years from the first authorization, with an additional 2 years of market exclusivity for certain products [143]. - The company is required to provide rebates and discounts for drugs covered under government programs like Medicaid and Medicare [117]. - The company may be impacted by future legislation that could affect coverage and reimbursement rates for its products [120]. - The company is required to implement compliance programs and adhere to marketing codes as mandated by various state regulations [135]. - The company is subject to periodic unannounced inspections by the FDA to ensure compliance with cGMPs [115]. - The company may face restrictions on marketing or manufacturing if unknown problems with a product are discovered post-approval [116]. Financial Considerations - The competitive landscape for orphan drugs is intense, with significant resources invested by larger pharmaceutical companies [38]. - The average Medicaid drug rebate has increased from 15.1% to 23.1% of the average manufacturer price due to the PPACA [121]. - The company faces potential downward pressure on product pricing due to increasing legislative and regulatory scrutiny on drug pricing practices [125]. - The company must navigate complex reimbursement processes from third-party payers, which can vary significantly and impact product acceptance [118]. - Changes in reimbursement practices by third-party payers may adversely affect demand and pricing for the company's products, impacting overall sales and profitability [184]. - The company relies on third-party manufacturers for its products, which poses risks to timely delivery and compliance with regulatory standards, potentially affecting revenues [186]. - The company has no in-house distribution channels and depends on a third-party distributor, which could lead to disruptions in product distribution and lost revenues if issues arise [187]. - The company is subject to unfavorable pricing regulations and third-party reimbursement practices due to healthcare reforms, which could harm its business [218]. Intellectual Property - The patent portfolio for sparsentan includes two U.S. patents and a European patent, expected to expire in March 2030 [59]. - The company has exclusive licenses for U.S. Patents No. 6,638,937, 9,662,312, and 9,993,461, covering the use of sparsentan for treating glomerulosclerosis and IgA nephropathy, with expiration dates in 2019 and 2030 [210]. - The company expects to obtain five to seven years of regulatory exclusivity for new chemical entities under the FDC Act, along with potential patent term extensions [211]. - The company has negotiated a license agreement with Ligand Pharmaceuticals for sparsentan, which subjects it to various commercialization and reporting obligations [212]. - The company has obtained U.S. and European patents for sparsentan but faces uncertainty regarding the ability to enforce these patents against competitors [213]. - The company may face patent infringement claims that could hinder the commercialization of its products [214]. - The company does not currently have patent protection for its commercial products, which could adversely affect the value of its technology and products [205]. - The company may face challenges in obtaining and maintaining intellectual property protection, which is critical for its competitive position in the market [208]. Workforce and Operations - The company had 221 employees as of January 31, 2020 [148]. - The company relies on independent clinical investigators and contract research organizations to conduct clinical trials, and their performance is critical to the timely approval of FDA applications [174].

[PART I – FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2019, detailing balance sheets, operations, cash flows, and notes on accounting policies and program discontinuations [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $65,188 | $102,873 | | Marketable securities | $341,835 | $368,668 | | Total current assets | $439,718 | $495,678 | | Total assets | $613,816 | $709,160 | | **Liabilities & Equity** | | | | Total current liabilities | $88,017 | $104,621 | | Total liabilities | $367,859 | $390,907 | | Total stockholders' equity | $245,957 | $318,253 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net product sales | $44,373 | $40,706 | $128,651 | $120,475 | | Total operating expenses | $78,810 | $76,289 | $237,844 | $195,530 | | Operating loss | $(34,437) | $(35,583) | $(109,193) | $(75,055) | | Net loss | $(36,490) | $(54,516) | $(116,168) | $(95,223) | | Net loss per share (basic & diluted) | $(0.85) | $(1.34) | $(2.76) | $(2.37) | - The company recorded a **$15.0 million impairment** of a long-term investment in Q3 2019. For the nine-month period, significant expenses included a **$25.5 million impairment** of an IPR&D intangible asset and a **$15.0 million investment impairment**, partially offset by an **$18.0 million write-off** of related contingent consideration[18](index=18&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary for the Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(53,722) | $(21,393) | | Net cash provided by (used in) investing activities | $18,283 | $(154,489) | | Net cash (used in) provided by financing activities | $(2,172) | $231,338 | | **Net change in cash and cash equivalents** | **$(37,685)** | **$55,426** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes detail accounting policies, financial results, and key events including the discontinuation of three development programs (fosmetpantotenate, CNSA-001, L-UDCA) and related impairment charges - In August 2019, the Phase 3 FORT Study for **fosmetpantotenate** in PKAN failed to meet its primary and secondary endpoints, leading to the discontinuation of the program[27](index=27&type=chunk) - The company declined its option to acquire Censa Pharmaceuticals in August 2019 and discontinued the **CNSA-001** program, resulting in a **$15 million impairment** of its long-term investment[28](index=28&type=chunk)[53](index=53&type=chunk)[104](index=104&type=chunk) - In Q1 2019, the company discontinued the **L-UDCA** program, leading to a **$25.5 million impairment** of the intangible asset and the reversal of an **$18.0 million contingent liability**, resulting in a net **$7.5 million non-cash charge**[29](index=29&type=chunk)[103](index=103&type=chunk) Net Product Revenues (in thousands) | Product Category | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Bile acid products | $19,938 | $18,052 | $59,258 | $55,153 | | Tiopronin products | $24,435 | $22,654 | $69,393 | $65,322 | | **Total** | **$44,373** | **$40,706** | **$128,651** | **$120,475** | - In May 2019, the remaining **$22.6 million principal amount** of the **4.50% senior convertible notes due 2019** was converted by holders into approximately **1.3 million shares** of common stock[84](index=84&type=chunk)[147](index=147&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, noting increased net product sales, rising operating expenses due to R&D and SG&A, strategic program discontinuations, and analysis of liquidity and capital resources [Overview](index=22&type=section&id=Overview) - The company's key investigational product candidate, **sparsentan**, is being evaluated in two pivotal Phase 3 studies: the **DUPLEX Study for FSGS** and the **PROTECT Study for IgAN**[109](index=109&type=chunk) - Top-line data from the interim analysis of the **DUPLEX Study** (sparsentan in FSGS) are expected in the **first half of 2021** and may support an accelerated approval submission[110](index=110&type=chunk) - Top-line data from the primary endpoint of the **PROTECT Study** (sparsentan in IgAN) are expected in the **first half of 2022** and may also support an accelerated approval submission[111](index=111&type=chunk) - In June 2019, the FDA approved **THIOLA EC**, a new enteric-coated formulation of tiopronin for cystinuria, which became available to patients in July 2019[118](index=118&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) Operating Expense Changes (in thousands) | Expense Category | 9 Months 2019 | 9 Months 2018 | Change | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Research and development | $104,597 | $91,544 | $13,053 | Increased clinical trial expenses for sparsentan studies | | Selling, general and administrative | $101,418 | $77,675 | $23,743 | Increased compensation and legal expenses | | Change in fair value of contingent consideration | $5,820 | $22,387 | $(16,567) | Changes in projected revenues and passage of time | [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) - Management believes that available cash and short-term investments will be sufficient to fund operations for at least the **next 12 months**[136](index=136&type=chunk)[151](index=151&type=chunk) Financial Position (in thousands) | Metric | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash & Cash Equivalents | $65,188 | $102,873 | | Marketable securities | $341,835 | $368,668 | | Net Working Capital | $351,701 | $391,057 | - Cash used in operating activities increased to **$53.7 million** for the nine months ended September 30, 2019, compared to **$21.4 million** for the same period in 2018, primarily due to higher R&D and legal expenses[148](index=148&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate changes affecting marketable securities, with a hypothetical **1% adverse change** potentially decreasing their value by **$1.8 million** - The company invests excess cash in investment-grade securities with maturities not exceeding **two years** and does not use derivative instruments[157](index=157&type=chunk) - A hypothetical **1% adverse move** in interest rates would decrease the value of the company's available-for-sale marketable securities by approximately **$1.8 million**[157](index=157&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2019, with no significant changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of **September 30, 2019**[159](index=159&type=chunk) - No significant changes to internal control over financial reporting were identified during the quarter ended **September 30, 2019**[160](index=160&type=chunk) [PART II – OTHER INFORMATION](index=29&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) [Legal Proceedings](index=29&type=section&id=Item%201.%20Legal%20Proceedings) This section incorporates legal proceedings information from Note 12, including a lawsuit from Spring Pharmaceuticals regarding alleged antitrust violations related to Thiola® sales - Information regarding legal proceedings is incorporated by reference from Note 12 to the Unaudited Condensed Consolidated Financial Statements[161](index=161&type=chunk) [Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) This section details significant risks, including potential clinical trial failures for sparsentan, regulatory approval uncertainty, generic competition, reliance on third-party manufacturers, pricing pressures, and convertible debt risks - The company's clinical trials for product candidates like **sparsentan** may fail to demonstrate safety and efficacy, potentially preventing or significantly delaying regulatory approval[163](index=163&type=chunk) - The company faces immediate generic competition for products like **Thiola** and is involved in a lawsuit with **Spring Pharmaceuticals**, also receiving a civil investigative demand from the FTC regarding this matter[187](index=187&type=chunk)[189](index=189&type=chunk) - The company relies on third-party sole source suppliers for manufacturing its products, posing risks related to supply chain disruption, regulatory compliance, and cost[195](index=195&type=chunk)[232](index=232&type=chunk) - The company's outstanding **$276 million** in **2.50% Convertible Senior Notes due 2025** could adversely affect its financial condition by requiring significant cash flow for debt service and potentially limiting financial flexibility[295](index=295&type=chunk)[296](index=296&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the reporting period - None[304](index=304&type=chunk) [Defaults Upon Senior Securities](index=49&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon its senior securities - None[305](index=305&type=chunk) [Mine Safety Disclosures](index=49&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[306](index=306&type=chunk) [Other Information](index=49&type=section&id=Item%205.%20Other%20Information) The company reported no other information required to be disclosed under this item - None[307](index=307&type=chunk) [Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate documents, debt indentures, and CEO/CFO certifications required by Sarbanes-Oxley Act - The report includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[309](index=309&type=chunk)

[PART I – FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) [Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) Net product sales increased to $84.3 million, but net loss widened to $79.7 million due to higher R&D and SG&A expenses and a program discontinuation charge [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Q2 2019 net sales grew to $44.7 million, but increased expenses led to a $38.7 million net loss, with a $25.5 million H1 impairment charge Financial Performance (Three Months Ended June 30) | Financial Metric | Q2 2019 | Q2 2018 | Change | | :--- | :--- | :--- | :--- | | Net Product Sales | $44.7M | $41.3M | +8.1% | | R&D Expenses | $37.9M | $34.5M | +9.8% | | SG&A Expenses | $39.0M | $25.1M | +55.4% | | Operating Loss | ($36.5M) | ($21.6M) | +69.4% | | Net Loss | ($38.7M) | ($22.3M) | +73.5% | | Net Loss Per Share | ($0.92) | ($0.56) | +64.3% | Financial Performance (Six Months Ended June 30) | Financial Metric | H1 2019 | H1 2018 | Change | | :--- | :--- | :--- | :--- | | Net Product Sales | $84.3M | $79.8M | +5.6% | | R&D Expenses | $71.4M | $59.1M | +20.8% | | SG&A Expenses | $71.6M | $51.6M | +38.8% | | Operating Loss | ($74.8M) | ($39.5M) | +89.4% | | Net Loss | ($79.7M) | ($40.7M) | +95.8% | | Net Loss Per Share | ($1.91) | ($1.03) | +85.4% | - In the first half of 2019, the company recorded a **$25.5 million impairment charge** for the L-UDCA IPR&D intangible asset and a corresponding **$18.0 million write-off** of the related contingent consideration, resulting in a net non-cash charge of **$7.5 million**[18](index=18&type=chunk)[105](index=105&type=chunk) [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to $647.6 million by June 30, 2019, due to reduced cash and marketable securities; liabilities decreased to $370.5 million from debt conversion Key Balance Sheet Items (in thousands) | Account | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $75,657 | $102,873 | | Marketable securities | $350,243 | $368,668 | | Total Assets | $647,574 | $709,160 | | Total Liabilities | $370,485 | $390,907 | | Total Stockholders' Equity | $277,089 | $318,253 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities increased to $39.6 million for H1 2019, reducing cash and equivalents to $75.7 million by period-end Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($39,601) | ($17,494) | | Net Cash Provided by Investing Activities | $13,818 | $7,056 | | Net Cash (Used in) Provided by Financing Activities | ($1,434) | $383 | | **Net Change in Cash** | **($27,216)** | **($10,089)** | | **Cash at End of Period** | **$75,657** | **$89,305** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail program discontinuations, 2019 convertible note conversion, CEO settlement, and ongoing Thiola litigation - The company's three commercial products are **Chenodal**, **Cholbam**, and **Thiola**; key pipeline candidates are **fosmetpantotenate** for **PKAN** and **sparsentan** for **FSGS** and **IgAN**[25](index=25&type=chunk)[26](index=26&type=chunk)[29](index=29&type=chunk) - In May 2019, the remaining **$22.6 million** principal of the 4.50% Senior Convertible Notes due 2019 was converted by holders into approximately **1.3 million shares** of common stock[84](index=84&type=chunk) - The company discontinued the L-UDCA program in Q1 2019, resulting in a **$25.5 million** intangible asset write-off and the reversal of **$18.0 million** in associated contingent consideration[105](index=105&type=chunk) - In August 2019, the company decided not to exercise its option to acquire Censa Pharmaceuticals and will discontinue the joint development of CNSA-001, expecting to impair its **$15 million** investment in Q3 2019[106](index=106&type=chunk)[53](index=53&type=chunk) - The company is involved in a lawsuit with Spring Pharmaceuticals, which alleges the company refused to sell samples of **Thiola** for generic bioequivalence testing[92](index=92&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=22&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) MD&A highlights 5.6% revenue growth, increased operating expenses from Phase 3 trials and legal costs, and portfolio adjustments including program discontinuations [Overview of Business and Pipeline](index=23&type=section&id=Overview%20of%20Business%20and%20Pipeline) The company focuses on rare disease therapies, with pipeline updates including expected Phase 3 data, THIOLA® EC approval, and program discontinuations - Top-line data from the pivotal **Phase 3 FORT Study** of **fosmetpantotenate** in **PKAN** is expected in the **third quarter of 2019**[114](index=114&type=chunk) - Top-line data from the interim analysis of the **Phase 3 DUPLEX study** of **sparsentan** in **FSGS** are expected in the **first half of 2021**[116](index=116&type=chunk) - Top-line data from the primary endpoint of the **Phase 3 PROTECT study** of **sparsentan** in **IgAN** are expected in the **first half of 2022**[116](index=116&type=chunk) - The FDA approved **THIOLA® EC**, a new enteric-coated formulation of tiopronin, in **June 2019**, which became available to patients in **July 2019**[128](index=128&type=chunk) - The company discontinued the **L-UDCA program** in **Q1 2019** and decided in **August 2019** to discontinue the **CNSA-001 program** and decline its option to acquire Censa Pharmaceuticals[129](index=129&type=chunk)[130](index=130&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) H1 2019 net sales increased by $4.5 million (5.6%), R&D expenses rose by $12.3 million (20.8%), and SG&A by $20.1 million (39.0%) due to trials, compensation, and legal costs Net Product Sales (in thousands) | Product | H1 2019 | H1 2018 | Change | | :--- | :--- | :--- | :--- | | Bile acid products | $39,319 | $37,102 | +$2,217 | | Thiola | $44,958 | $42,667 | +$2,291 | | **Total** | **$84,277** | **$79,769** | **+$4,508** | Operating Expense Changes (H1 2019 vs H1 2018, in thousands) | Expense Category | H1 2019 | H1 2018 | Change | | :--- | :--- | :--- | :--- | | Research and development | $71,377 | $59,096 | +$12,281 | | Selling, general and administrative | $71,639 | $51,568 | +$20,071 | - The increase in **R&D expenses** was due to increased clinical trial costs for the three ongoing **Phase 3 studies**: **fosmetpantotenate** in **PKAN** and **sparsentan** in **FSGS** and **IgAN**[136](index=136&type=chunk) - The increase in **SG&A expenses** was due to higher compensation costs from a larger employee base and increased legal expenses[138](index=138&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2019, the company held $75.7 million in cash and $350.2 million in marketable securities, with net working capital of $366.4 million, sufficient for 12 months of operations Liquidity Position (in thousands) | Metric | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash & Cash Equivalents | $75,657 | $102,873 | | Marketable securities | $350,243 | $368,668 | | Net Working Capital | $366,428 | $391,057 | - In May 2019, the remaining **$22.6 million** of 2019 Notes were converted into approximately **1.3 million shares** of common stock[155](index=155&type=chunk) - The company's primary debt is **$276.0 million** in **2.50% Convertible Senior Notes due 2025**, issued in September 2018[146](index=146&type=chunk) - Cash used in operating activities increased to **$39.6 million** in H1 2019 from **$17.5 million** in H1 2018, attributed to higher R&D and legal expenses[156](index=156&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Primary market risk is interest rate exposure on investments, with a hypothetical 1% adverse change impacting marketable securities by $2.8 million - The company's main market risk is **interest rate risk** on its investment portfolio of cash and marketable securities[166](index=166&type=chunk) - A hypothetical **1%** adverse move in interest rates would result in an approximate **$2.8 million** decrease in the value of the company's available-for-sale marketable securities[166](index=166&type=chunk) [Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of June 30, 2019, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of the end of the quarter[168](index=168&type=chunk) - **No material changes** to the company's internal control over financial reporting were identified during the quarter[169](index=169&type=chunk) [PART II – OTHER INFORMATION](index=30&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) [Legal Proceedings](index=30&type=section&id=Item%201.%20Legal%20Proceedings) The company settled disputes with former CEO Martin Shkreli in June 2019 and is defending an antitrust lawsuit from Spring Pharmaceuticals regarding Thiola® samples - The company and former CEO Martin Shkreli reached a **comprehensive settlement** in **June 2019**, dismissing all pending claims and counterclaims with prejudice[91](index=91&type=chunk) - **Spring Pharmaceuticals** filed a lawsuit in **October 2018** alleging the company violated antitrust laws by refusing to sell samples of **Thiola®** for generic testing[92](index=92&type=chunk) [Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including clinical trial failures, regulatory uncertainty, generic competition, pricing pressures, supply chain reliance, funding needs, litigation, and extensive government regulation [Risks Related to Product Development and Commercialization](index=30&type=section&id=Risks%20Related%20to%20Product%20Development%20and%20Commercialization) Product development and commercialization risks include clinical trial failures, uncertain regulatory approval, generic competition, pricing pressures, and reliance on sole-source manufacturers - Clinical trials may **fail to demonstrate safety and efficacy**, which could **prevent or delay regulatory approval** for product candidates like fosmetpantotenate and sparsentan[172](index=172&type=chunk) - The company is subject to **generic competition**; it is currently in **litigation with Spring Pharmaceuticals** over access to Thiola samples and has received a **civil investigative demand from the FTC** regarding its marketing and pricing practices[198](index=198&type=chunk)[200](index=200&type=chunk) - The company relies on **sole-source third-party manufacturers** for its products and a **single third-party distributor**, creating **significant supply chain and commercialization risk**[206](index=206&type=chunk)[207](index=207&type=chunk) - The **Special Protocol Assessment (SPA)** for the fosmetpantotenate Phase 3 trial and the potential for **accelerated approval (Subpart H)** for sparsentan studies **do not guarantee a favorable regulatory outcome**[183](index=183&type=chunk)[184](index=184&type=chunk) [Risks Related to Business Operations and Financial Condition](index=39&type=section&id=Risks%20Related%20to%20Business%20Operations%20and%20Financial%20Condition) Business operations and financial risks include fluctuating results, uncertain profitability, need for additional funding, product liability, litigation, extensive government regulation, and potential limitations on NOL carryforwards - The company expects **significant fluctuations in operating results** and may need to **raise substantial additional funding** to support its development and commercialization efforts[255](index=255&type=chunk)[260](index=260&type=chunk) - The company is subject to extensive and complex government regulations, including the **Anti-Kickback statute**, **False Claims Act**, and data privacy laws like **HIPAA** and the **California Consumer Privacy Act (CCPA)**[277](index=277&type=chunk)[278](index=278&type=chunk)[287](index=287&type=chunk) - The ability to use **$36.5 million** in federal NOL carryforwards to offset future taxable income may be subject to limitations under Section 382 of the Internal Revenue Code due to ownership changes[300](index=300&type=chunk) - The company faces potential **product liability exposure** and is involved in **litigation matters** that could result in substantial costs and divert management attention[237](index=237&type=chunk)[272](index=272&type=chunk) [Risks Related to Indebtedness](index=49&type=section&id=Risks%20Related%20to%20Indebtedness) The company's $276 million outstanding debt, primarily 2025 Convertible Notes, poses risks including cash flow impact, default risk, and potential dilution of existing stockholders upon conversion - As of June 30, 2019, the company had approximately **$276 million** of total debt outstanding, primarily related to its **2.50% Convertible Senior Notes due 2025**[304](index=304&type=chunk) - The company may not have sufficient funds to repurchase the **2025 Notes** for cash if required after a 'fundamental change' event, which would constitute a default[306](index=306&type=chunk)[307](index=307&type=chunk) - Conversion of the **2025 Notes** into common stock will **dilute the ownership interests** of existing stockholders[312](index=312&type=chunk)[313](index=313&type=chunk) [Other Information (Items 2, 3, 4, 5)](index=50&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered equity sales, no defaults on senior securities, and no other material disclosures for the period - There were **no unregistered sales of equity securities** or **no defaults upon senior securities** during the quarter[314](index=314&type=chunk)[315](index=315&type=chunk)

RETROPHIN, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________________ FORM 10-Q _________________________________ þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 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: 001-36257 (Exact name of registran ...

Drug Development and Clinical Trials - The company is focused on developing therapies for rare diseases, with multiple late clinical-stage programs targeting significant unmet medical needs[21]. - Fosmetpantotenate (RE-024) is in Phase 3 clinical study for treating pantothenate kinase-associated neurodegeneration (PKAN), which affects up to 5,000 patients worldwide[22][32]. - Sparsentan (RE-021) is being evaluated in two pivotal Phase 3 studies for focal segmental glomerulosclerosis (FSGS) and immunoglobulin A nephropathy (IgAN), with an estimated 40,000 FSGS patients in the U.S.[23][43]. - CNSA-001 is in a Phase 2 proof-of-concept study for phenylketonuria (PKU), with top-line data expected in Q2 2019[24][40]. - The pivotal Phase 3 DUPLEX Study for sparsentan in FSGS includes an interim analysis expected in the second half of 2020[43]. - The PROTECT Study for sparsentan in IgAN is a global Phase 3 trial with approximately 280 patients, with top-line data expected in the first half of 2022[43]. - The company is working to obtain FDA approval for Chenodal for the treatment of CTX, a rare disease with a prevalence of 1 in 70,000[46]. - The company initiated Phase 3 clinical trials for sparsentan, targeting FSGS and IgAN, with plans for NDA and MAA filings[186]. - The company expects to un-blind data from the ongoing pivotal Phase 3 trial of fosmetpantotenate in Q3 2019, with potential significant impacts on stock price depending on results[185]. - The PROTECT Study began in December 2018, but there is uncertainty regarding its progress and whether it will support an NDA filing for accelerated approval[188]. - Both the DUPLEX and PROTECT Studies evaluate the same compound for chronic kidney diseases, which may correlate their success or failure[189]. - The FDA has indicated openness to accepting substantial treatment effects on proteinuria from the DUPLEX Study for accelerated approval, but there is no guarantee that the data will suffice for an NDA filing[187]. - The company must demonstrate the safety and efficacy of its product candidates through extensive preclinical and clinical testing before obtaining regulatory approval[172]. Regulatory and Compliance - Regulatory approval is required for all products, which involves substantial time and financial resources[108]. - The FDA requires a 30-day waiting period after the submission of each IND before clinical testing in humans can commence[115]. - Clinical trials typically involve three phases, with Phase 3 requiring two adequate and well-controlled trials to demonstrate drug efficacy[118]. - The FDA has performance goals to review standard NDAs within 10 months and priority NDAs within 8 months of filing[122]. - Orphan drug designation provides a 7-year exclusive marketing period for drugs treating rare diseases affecting fewer than 200,000 individuals in the U.S.[127]. - Fast Track designation allows for more frequent communication with the FDA and eligibility for Accelerated Approval and Priority Review[129]. - Drugs approved under Accelerated Approval are subject to rigorous post-marketing compliance requirements, including Phase 4 trials[133]. - The ANDA application must certify regarding any patents listed for the approved product, impacting the approval timeline[135]. - Post-approval requirements include adverse event reporting and compliance with cGMPs, with ongoing inspections by the FDA[139]. - The cost of preparing and submitting an NDA is substantial, including application user fees that typically increase annually[121]. - The FDA may issue a complete response letter outlining deficiencies in an NDA submission, requiring additional testing or information[124]. - The company faces risks related to regulatory compliance, which could result in significant penalties and operational impacts[164]. - The approval process for clinical trials and product marketing varies greatly by region, affecting timelines and requirements[165]. Market and Competitive Landscape - The competitive landscape for orphan drugs is intense, with significant investment in research and development from major pharmaceutical companies[51]. - The commercial success of products like Chenodal, Cholbam, and Thiola depends on their perceived effectiveness and advantages over competing therapies[196]. - Market acceptance of products will depend on factors such as side effects, efficacy, pricing, and marketing efforts[216]. - The market opportunities for current and future product candidates may be smaller than anticipated, affecting revenue generation[218]. - Estimates of the prevalence of diseases like PKAN and FSGS may not accurately reflect the broader population, impacting market opportunities[219]. Financial and Business Operations - The company aims to develop a sustainable pipeline by acquiring orphan drug candidates and employing rigorous decision criteria for in-licensing[28]. - The company has an exclusive option to purchase Censa for $65 million, with an upfront payment structure of 20% in cash and 80% in stock, valued at $21.40 per share[65]. - The license agreement with Ligand Pharmaceuticals includes milestone payments totaling up to $114.1 million and an escalating annual royalty of 15% to 17% on net sales of licensed products[69]. - The company has made milestone payments of $7.2 million to Ligand through 2018 under the license agreement[69]. - The license agreement for Thiola includes guaranteed minimum royalties of $2.0 million or 20% of net sales in the U.S. and Canada, with an upfront fee of $3.0 million[72]. - The company relies significantly on third-party payers for coverage and adequate reimbursement, which is critical for product acceptance[143]. - The mandated Medicaid rebate has increased from 15.1% to 23.1% of the average manufacturer price due to the PPACA[146]. - The company faces potential reductions in Medicare payments to providers of up to 2% per fiscal year, effective since April 1, 2013, continuing through 2027 unless further Congressional action is taken[150]. - Legislative changes may result in more rigorous coverage criteria and downward pressure on product pricing, potentially harming future revenues[153]. - The company is subject to federal and state laws regulating business practices in the pharmaceutical industry, including anti-kickback and false claims laws[154]. - The number of suits under the False Claims Act has increased dramatically, impacting pharmaceutical companies for allegedly inflating drug prices[158]. - The company must comply with data privacy and security regulations, including HIPAA and HITECH, which impose requirements on the handling of health information[161]. - The company implemented compliance with the federal Physician Payments Sunshine Act starting with the reporting year 2014[162]. - As of January 31, 2019, the company had 214 full-time employees[169]. Manufacturing and Production - The company plans to utilize third-party manufacturers for the commercial production of its products post-approval[99]. - The company relies on third-party manufacturers for production, which poses risks to timely delivery and compliance with regulatory requirements[207]. - The entry of generic versions of products like Chenodal and Thiola could significantly impact sales and profitability due to the lack of patent protection[203]. - Changes in reimbursement practices by third-party payers could adversely affect demand and pricing for the company's products[205]. - Adverse events reported in connection with products could lead to additional regulatory controls and negatively impact commercial success[197]. - The discovery of significant problems with similar products could adversely affect sales of the affected products[213]. - Current products, including fosmetpantotenate, sparsentan, CNSA-001, and L-UDCA, may not gain market acceptance, impacting potential revenue and profitability[214].