Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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
 RETROPHIN, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
27-4842691
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
3721 Valley Centre Drive, Suite 200,
San Diego, CA 92130
 
 
(Address of Principal Executive Offices)
 
 
(760) 260-8600
 
 
(Registrant’s Telephone number including area code)
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ  No    ¨
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  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
þ
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 þ
 The number of shares of outstanding common stock, par value $0.0001 per share, of the Registrant as of August 8, 2017 was 38,385,466.
 


Table of Contents

RETROPHIN, INC.
Form 10-Q
For the Fiscal Quarter Ended June 30, 2017
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 

1

Table of Contents

FORWARD LOOKING STATEMENTS 
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the fiscal year ended December 31, 2016, and in this Form 10-Q and information contained in other reports that we file with the Securities and Exchange Commission (the “SEC”). You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

2

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
June 30, 2017
 
December 31, 2016
Assets
(unaudited)
 
 

Current assets:
 

 
 

Cash and cash equivalents
$
89,265

 
$
41,002

Marketable securities
206,716

 
214,871

Accounts receivable, net
13,321

 
18,510

Inventory, net
4,369

 
2,826

Prepaid expenses and other current assets
2,343

 
4,831

Prepaid taxes
3,644

 
3,463

Note receivable, current

 
46,849

Total current assets
319,658

 
332,352

Property and equipment, net
2,540

 
2,587

Other assets
3,628

 
7,364

Intangible assets, net
180,368

 
182,043

Goodwill
936

 
936

Total assets
$
507,130

 
$
525,282

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
9,076

 
$
7,522

Accrued expenses
27,597

 
33,308

Guaranteed minimum royalty
2,000

 
2,000

Other current liabilities
1,593

 
1,842

Business combination-related contingent consideration
16,900

 
16,150

Derivative financial instruments, warrants
22,460

 
22,440

Total current liabilities
79,626

 
83,262

Convertible debt
44,747

 
44,422

Other non-current liabilities
3,851

 
4,010

Guaranteed minimum royalty, less current portion
7,624

 
8,068

Business combination-related contingent consideration, less current portion
74,267

 
71,328

Deferred income tax liability, net
1,186

 
6,425

Total liabilities
211,301

 
217,515

Stockholders' Equity:
 

 
 

Preferred stock $0.001 par value; 20,000,000 shares authorized; 0 issued and outstanding as of June 30, 2017 and December 31, 2016

 

Common stock $0.0001 par value; 100,000,000 shares authorized; 38,290,876 and 37,906,669 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
4

 
4

Additional paid-in capital
438,644

 
421,309

Accumulated deficit
(142,243
)
 
(113,056
)
Accumulated other comprehensive loss
(576
)
 
(490
)
Total stockholders' equity
295,829

 
307,767

Total liabilities and stockholders' equity
$
507,130

 
$
525,282

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net product sales
$
38,800

 
$
33,311

 
$
72,420

 
$
62,319

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Cost of goods sold
797

 
1,021

 
1,506

 
1,778

Research and development
19,482

 
17,675

 
40,342

 
32,347

Selling, general and administrative
28,835

 
23,205

 
51,950

 
42,330

Change in fair value of contingent consideration
3,284

 
2,789

 
6,628

 
5,485

Total operating expenses
52,398

 
44,690

 
100,426

 
81,940

 
 
 
 
 
 
 
 
Operating loss
(13,598
)
 
(11,379
)
 
(28,006
)
 
(19,621
)
 
 
 
 
 
 
 
 
Other income (expenses), net:
 

 
 

 
 

 
 

Other income (expense), net
382

 
(206
)
 
508

 
4

Interest expense, net
(658
)
 
(147
)
 
(790
)
 
(309
)
Change in fair value of derivative instruments
(1,280
)
 
(9,063
)
 
(20
)
 
5,277

Total other income (expense), net
(1,556
)
 
(9,416
)
 
(302
)
 
4,972

 
 
 
 
 
 
 
 
Loss before provision for income taxes
(15,154
)
 
(20,795
)
 
(28,308
)
 
(14,649
)
 
 
 
 
 
 
 
 
Income tax benefit
1,925

 
7,392

 
3,989

 
12,462

 
 
 
 
 
 
 
 
Net loss
$
(13,229
)
 
$
(13,403
)
 
$
(24,319
)
 
$
(2,187
)
 
 
 
 
 
 
 
 
Net loss per common share:











Basic
$
(0.34
)

$
(0.37
)

$
(0.63
)

$
(0.06
)
Diluted
$
(0.34
)

$
(0.37
)

$
(0.63
)

$
(0.20
)
Weighted average common shares outstanding:











Basic
39,041,145


36,683,429


38,545,982


36,601,807

Diluted
39,041,145


36,683,429


38,545,982


38,063,285

 
 
 
 
 
 
 
 
Comprehensive loss:
 

 
 

 
 

 
 

Net loss
$
(13,229
)
 
$
(13,403
)
 
$
(24,319
)
 
$
(2,187
)
Foreign currency translation
(183
)
 
71

 
(259
)
 
2

Unrealized gain (loss) on marketable securities
27

 
(157
)
 
173

 
(706
)
Comprehensive loss
$
(13,385
)
 
$
(13,489
)
 
$
(24,405
)
 
$
(2,891
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
For the Six Months Ended June 30,
 
2017
 
2016
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(24,319
)
 
$
(2,187
)
Adjustments to reconcile net income to net cash used in operating activities:
 

 
 

Depreciation and amortization
8,721

 
7,858

Deferred income tax benefit
(5,420
)
 
(12,286
)
Interest income from notes receivable
(651
)
 
(1,285
)
Legal fee settlement

 
(2,967
)
Non-cash interest expense
1,325

 
1,179

Amortization of premiums on marketable securities
602

 
666

Amortization of debt discount and deferred financing costs
305

 
326

Share based compensation
14,332

 
14,286

Change in fair value of liability classified warrants
20

 
(5,277
)
Change in fair value of contingent consideration
6,628

 
5,485

Payments related to change in fair value of contingent consideration
(553
)
 
(550
)
Provision for doubtful accounts
410

 
49

Other
260

 

Changes in operating assets and liabilities, net of business acquisitions:
 

 
 

Accounts receivable
4,685

 
(4,153
)
Inventory
(212
)
 
(174
)
Other current and non-current operating assets
(12
)
 
(1,197
)
Accounts payable and accrued expenses
(3,458
)
 
650

Other current and non-current operating liabilities
(45
)
 

Net cash provided by operating activities
2,618

 
423

Cash Flows From Investing Activities:
 

 
 

Purchase of fixed assets
(1,056
)
 
(24
)
Cash paid for intangible assets
(6,278
)
 
(4,881
)
Proceeds from the sale/maturity of marketable securities
43,940

 
59,874

Purchase of marketable securities
(36,213
)
 
(68,517
)
Proceeds from maturity of note receivable
47,500

 

Cash paid upon acquisition, net of cash acquired

 
(500
)
Net cash provided by (used in) investing activities
47,893

 
(14,048
)
Cash Flows From Financing Activities:
 

 
 

Payment of acquisition-related contingent consideration
(3,254
)
 
(2,769
)
Payment of guaranteed minimum royalty
(1,000
)
 
(1,000
)
Payment of other liability
(500
)
 
(500
)
Proceeds from exercise of stock options
3,003

 
1,572

Other

 
(146
)
Net cash used in financing activities
(1,751
)
 
(2,843
)
Effect of exchange rate changes on cash
(497
)
 
(182
)
Net change in cash
48,263

 
(16,650
)
Cash, beginning of year
41,002

 
37,805

Cash, end of period
$
89,265

 
$
21,155

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

RETROPHIN, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATMENTS
NOTE 1.  DESCRIPTION OF BUSINESS
Organization and Description of Business
In this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms “we”, “our”, “us”, “Retrophin” and the “Company” refer to Retrophin, Inc., a Delaware corporation, as well as our direct and indirect subsidiaries. Retrophin is a fully integrated biopharmaceutical company headquartered in San Diego, California focused on the development, acquisition and commercialization of therapies for the treatment of serious or rare diseases. We regularly evaluate and, where appropriate, act on opportunities to expand our product pipeline through licenses and acquisitions of products in areas that will serve patients with serious or rare diseases and that we believe offer attractive growth characteristics.
Research and Development Programs:
Fosmetpantotenate, also known as RE-024, a novel small molecule, is being developed as a potential treatment for pantothenate kinase-associated neurodegeneration (“PKAN”). PKAN is a genetic neurodegenerative disorder that is typically diagnosed in the first decade of life. Consequences of PKAN include parkinsonism, dystonia, and other severe systemic manifestations. Fosmetpantotenate (RE-024) is a phosphopantothenate replacement therapy that aims to restore levels of this key substrate in PKAN patients. Certain international health regulators have approved the initiation of dosing fosmetpantotenate (RE-024) in PKAN patients under physician-initiated studies in accordance with local regulations in their respective countries. The Company filed a U.S. Investigational New Drug ("IND") for fosmetpantotenate (RE-024) with the FDA in the first quarter of 2015 to support the commencement of a Company-sponsored Phase 1 study, which was successfully completed during 2015. The FDA granted fosmetpantotenate (RE-024) orphan drug designation in May 2015 and fast track designation in June 2015. In February 2016, the Company announced fosmetpantotenate (RE-024) was granted orphan drug designation by the European Commission. In November 2016, the Company announced that it had reached an agreement with the FDA under the Special Protocol Assessment (SPA) process for a Phase 3 clinical trial evaluating fosmetpantotenate (RE-024) for PKAN. The Company has reviewed the study design with the European Medicines Agency ("EMA") and we expect it to support registration in Europe. In July 2017, we announced that the first patient had been dosed in the FORT (FOsmetpantotenate Replacement Therapy) Study.
Sparsentan, also known as RE-021, is an investigational therapeutic agent which acts as both a potent angiotensin receptor blocker (“ARB”), as well as a selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A. The Company has secured a license to sparsentan from Ligand Pharmaceuticals, Inc. and Bristol-Myers Squibb Company (who referred to it as DARA). The Company is developing sparsentan as a treatment for focal segmental glomerulosclerosis ("FSGS"), which is a leading cause of end-stage renal disease and nephrotic syndrome (“NS”). Sparsentan was granted orphan drug designation in the United States and the European Union in January 2015 and November 2015, respectively. In the third quarter of 2016, the Company announced positive top-line data from the Phase 2 DUET study of sparsentan for the treatment of FSGS. In early 2017, we had an End of Phase 2 meeting with the U.S. Food and Drug Administration (the "FDA") regarding the regulatory pathway for sparsentan as a treatment for FSGS.  Following the meeting and our receipt of confirmatory meeting minutes, we announced our plans to initiate a single Phase 3 clinical trial to serve as the basis of a New Drug Application ("NDA") filing for sparsentan for the treatment of FSGS. We have completed the protocol design for the study and expect to gain alignment with the FDA in the second half of 2017 and initiate the trial thereafter.
Liquid ursodeoxycholic acid ("L-UDCA") is a liquid formulation of ursodeoxycholic acid being developed for the treatment of a rare liver disease called primary biliary cholangitis ("PBC"). We obtained rights to L-UDCA during 2016 with the intention of making L-UDCA commercially available to the subset of PBC patients who have difficulty swallowing.
NGLY1 Deficiency Discovery Efforts
We have entered into a research collaboration aimed at the discovery of a novel therapeutic for patients with NGLY1 deficiency, a rare genetic disorder. NGLY1 deficiency is believed to be caused by a deficiency in an enzyme called N-glycanase-1, which is encoded by the gene NGLY1. The condition is characterized by a variety of symptoms, including global developmental delay, movement disorder, seizures, and ocular abnormalities.
Products on the Market:
Chenodal® (chenodiol) is approved in the United States for the treatment of patients suffering from gallstones in whom surgery poses an unacceptable health risk due to disease or advanced age. Chenodal has been the standard of care for cerebrotendinous xanthomatosis ("CTX") patients for more than three decades and the Company is currently pursuing adding this indication to the label.
Cholbam® (cholic acid) is approved in the United States for the treatment of bile acid synthesis disorders due to single enzyme defects and is further indicated for adjunctive treatment of patients with peroxisomal disorders.
Thiola® (tiopronin) is approved in the United States for the prevention of cystine (kidney) stone formation in patients with severe homozygous cystinuria.

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NOTE 2.  BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2017. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying condensed consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any future periods. The December 31, 2016 balance sheet information was derived from the audited financial statements as of that date. 
NOTE 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of the accompanying condensed consolidated financial statements follows:
Principles of Consolidation
The unaudited condensed consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries in conformity with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
Adoption of New Accounting Standards
In October 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance changes the accounting for income tax effects of intra-entity transfers of assets other than inventory. Under the new guidance, the selling (transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon receipt of the asset. The new guidance will be effective for the Company starting in fiscal year 2018 on a modified retrospective basis. The Company has elected to early adopt this guidance as of January 1, 2017, and has reversed the recorded prepaid tax asset of $4.9 million related to an intra-entity transfer as a charge to accumulated deficit.
In April 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that were tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with GAAP) or account for forfeitures when they occur. The Company adopted this guidance as of January 1, 2017, and as a result the tax effects related to share-based payments at settlement (or expiration) will be recorded through the statement of operations. For the three and six months ended June 30, 2017 the Company recorded tax expense of $0.1 million and $0.4 million, respectively, net of valuation allowance released, related to the stock compensation short falls. In addition the Company adopted accounting for forfeitures at actual rates in the period they occur.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration for which the entity expects to be entitled for that specific good or service. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption of ASU 2014-09 is permitted but not before the original effective date (annual periods beginning after December 15, 2016). The Company does not expect the new standard to change the timing for recognition of revenue from product sales, but is continuing its review of the standard and its effects on disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years

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beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements and related disclosures; however, based on the Company's current operating leases, it is expected to have a material impact to the consolidated balance sheet by increasing assets and liabilities.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As of June 30, 2017, the Company held $206.7 million in available for sale debt securities that are affected by this ASU. If adopted as of June 30, 2017, Topic 326 would not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance dictates that, when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, it should be treated as an acquisition or disposal of an asset. The guidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year (early adoption is permitted). The Company is currently evaluating the potential effect of the guidance on its consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. These amendments simplify the accounting for certain financial instruments with down round features.The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity. The Company is currently evaluating the whether derivative instruments held by the Company would be effected by this ASU.
NOTE 4.  INCOME TAXES
The following table summarizes our effective tax rate and income tax benefit for the three and six months ended June 30, 2017 and 2016 (in millions except for percentages):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Effective tax rate
12.7
%
 
35.6
%
 
14.1
%
 
85.1
%
Income tax benefit
$
1.9

 
$
7.4

 
$
4.0

 
$
12.5

For the three and six months ended June 30, 2017, we recognized an income tax benefit of $1.9 million and $4.0 million, respectively, representing an effective tax rate of 12.7% and 14.1%, respectively. Under GAAP, quarterly effective tax rates may vary significantly depending on the actual operating results in the various tax jurisdictions, and significant transactions, as well as changes in the valuation allowance related to the expected recovery of deferred tax assets.
The difference between the expected statutory federal tax benefit of 35% and the effective tax benefit for three and six months ended June 30, 2017, was primarily attributable to the increase in valuation allowance against our deferred tax assets.
For the three and six months ended June 30, 2017, when compared to the same period in 2016, the decrease in the tax benefit and decrease in the effective income tax rate was primarily attributable to the increase of the U.S. federal valuation allowance in 2017.
At June 30, 2017 and December 31, 2016, we had gross unrecognized tax benefits of $1.5 million. If recognized, none of the unrecognized tax benefits would affect the Company’s effective tax rate.  We did not recognize any interest or penalties related to unrecognized tax benefits during the three months ended June 30, 2017.
In April 2017 the Internal Revenue Service concluded its audit of the 2014 tax year with no change.

8

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NOTE 5. BUSINESS COMBINATION
Acquisition of Liquid Ursodeoxycholic Acid (L-UDCA)
On June 20, 2016, the Company announced the signing of a definitive agreement to purchase the rights, titles, and ownership of L-UDCA from Asklepion Pharmaceuticals, LLC ("Asklepion").
The purchase was accounted for under the acquisition method of accounting in accordance with Accounting Standard Codification ("ASC") 805. The fair value of assets acquired and liabilities assumed was based upon a valuation and the Company’s estimates. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from acquired product rights for L-UDCA, licenses, trade names and developed technologies, present value and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
The purchase included $25.5 million for an intangible asset with a definite life related to product rights for the U.S. The useful life related to the acquired product rights is expected to be approximately 17 years from the date that the Company's NDA for L-UDCA is approved by the FDA.
The contingent consideration of $25.0 million (present value) recorded during the period ended June 30, 2016, is related to an agreement to pay an additional cash amount in the form of milestones and sales royalties through 2035. The accrued contingent consideration was recorded as a liability at acquisition-date fair value using the income approach with an assumed discount rate of 12.0% over the applicable term.
The purchase price allocation of $25.5 million as of the acquisition completion date of June 16, 2016 is as follows (in thousands):
Cash paid upon consummation
$
500

Present value of contingent consideration
25,000

Total purchase price
$
25,500

 
 
Fair Value of Assets Acquired and Liabilities Assumed
 
Acquired product rights: L-UDCA (intangible  asset)
$
25,500

Total purchase price
$
25,500

NOTE 6. MARKETABLE SECURITIES
 The Company's marketable securities as of June 30, 2017 and December 31, 2016 were comprised of available-for-sale marketable securities which are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income or expense. Interest and dividends on securities classified as available-for-sale are included in interest income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income. During the six months ended June 30, 2017, investment activity for the Company included $43.9 million in maturities, all relating to debt based marketable securities.
Marketable securities consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
Marketable other than equity securities:
 
 
 
Commercial paper
$
18,970

 
$
30,303

Corporate debt securities
142,949

 
134,570

Securities of government sponsored entities
44,797

 
49,998

Total marketable securities:
$
206,716

 
$
214,871



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The following is a summary of short-term marketable securities classified as available-for-sale as of June 30, 2017 (in thousands):
 
Remaining Contractual Maturity
(in years)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Estimated Fair Value
Marketable other than equity securities:
 
 
 
 
 
 
 
 
 
Commercial paper
Less than 1
 
$
18,972

 
$

 
$
(2
)
 
$
18,970

Corporate debt securities
Less than 1
 
88,018

 

 
(168
)
 
87,850

Securities of government-sponsored entities
Less than 1
 
27,618

 
5

 
(36
)
 
27,587

Total maturity less than 1 year
 
 
134,608

 
5

 
(206
)
 
134,407

Corporate debt securities
1 to 2
 
55,238

 

 
(139
)
 
55,099

Securities of government-sponsored entities
1 to 2
 
17,240

 
13

 
(43
)
 
17,210

Total maturity 1 to 2 years
 
 
72,478

 
13

 
(182
)
 
72,309

Total available-for-sale securities
 
 
$
207,086

 
$
18

 
$
(388
)
 
$
206,716

The following is a summary of short-term marketable securities classified as available-for-sale as of December 31, 2016 (in thousands):
 
Remaining Contractual Maturity
(in years)
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Aggregate Estimated Fair Value
Marketable Other than Equity Securities:
 
 
 
 
 
 
 
 
 
Commercial paper
Less than 1
 
$
30,330

 
$

 
$
(27
)
 
$
30,303

Corporate debt securities
Less than 1
 
64,794

 
7

 
(91
)
 
64,710

Securities of government-sponsored entities
Less than 1
 
19,500

 

 
(10
)
 
19,490

Total maturity less than 1 year
 
 
114,624

 
7

 
(128
)
 
114,503

Corporate debt securities
1 to 2
 
70,207

 

 
(347
)
 
69,860

Securities of government-sponsored entities
1 to 2
 
30,583

 

 
(75
)
 
30,508

Total maturity 1 to 2 years
 
 
100,790

 

 
(422
)
 
100,368

Total available-for-sale securities
 
 
$
215,414

 
$
7

 
$
(550
)
 
$
214,871

The primary objective of the Company’s investment portfolio is to enhance overall returns while preserving capital and liquidity. The Company’s investment policy limits interest-bearing security investments to certain types of instruments issued by institutions with primarily investment grade credit ratings and places restrictions on maturities and concentration by asset class and issuer.
The Company reviews the available-for-sale investments for other-than-temporary declines in fair value below cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security, and the intent to sell, or whether the Company will more likely than not be required to sell the security before recovery of its amortized cost basis. The assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. As of June 30, 2017 and December 31, 2016, the Company believed the cost basis for available-for-sale investments was recoverable in all material respects.
NOTE 7.  DERIVATIVE FINANCIAL INSTRUMENTS
Since 2013, the Company has issued five tranches of common stock purchase warrants to secure financing, remediate covenant violations and provide consideration for amendments with respect to a credit facility extinguished in 2015.
The Company accounts for derivative financial instruments in accordance with FASB ASC 815-40, Derivative and Hedging – Contracts in Entity’s Own Equity, pursuant to which instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company’s warrants are classified as liability instruments due to an anti-dilution provision that provides for a reduction to the exercise price of the warrants if the Company issues additional equity or equity linked instruments in the future at an effective price per share less than the exercise price then in effect.
The warrants are re-measured at each balance sheet date based on estimated fair value. Changes in estimated fair value are recorded as non-cash adjustments within other income (expenses), net, in the Company’s accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.  The Company recorded a loss on the change in the estimated fair value of warrants of $1.3 million and $0.02 million for the three and six months ended June 30, 2017, respectively, and a loss on the change in the estimated fair value of warrants of $9.1 million and a gain on the change in the estimated fair value of warrants of $5.3 million for the three and six months ended June 30, 2016, respectively.

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The Company calculated the fair value of the warrants using the Black-Scholes Model as of June 30, 2017 and the Monte Carlo Simulation as of December 31, 2016, using the following assumptions:
 
June 30, 2017
 
December 31, 2016
Fair value of common stock
$
19.39

 
$
18.93

Remaining life of the warrants (in years)
.6 - 2.5 years

 
1.2 - 3.0 years

Risk-free interest rate
1.2% - 1.5%

 
.89 - 1.48%

Expected volatility
34% - 56%

 
55 - 75%

Dividend yield
%
 
%
Expected volatility is based on an analysis of the Company’s volatility. The risk free interest rate is based on the U.S. Treasury security rates for the remaining term of the warrants at the measurement date.
NOTE 8.  FAIR VALUE MEASUREMENTS
Financial Instruments and Fair Value
The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are described below:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The valuation techniques used to measure the fair value of the Company’s marketable securities and all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data. Based on the fair value hierarchy, the Company classified marketable securities within Level 2.
In estimating the fair value of the Company’s derivative liabilities, the Company used the Black Scholes Model as of June 30, 2017 and the Monte Carlo Simulation as of December 31, 2016. Based on the fair value hierarchy, the Company classified the derivative liability within Level 3.
In estimating the fair value of the Company’s contingent consideration, the Company used the comparable uncontrolled transaction (“CUT”) method for royalty payments based on projected revenues. Based on the fair value hierarchy, the Company classified contingent consideration within Level 3 because valuation inputs are based on projected revenues discounted to a present value.
Financial instruments with carrying values approximating fair value include cash and cash equivalents, accounts receivable, notes receivable, and accounts payable, due to their short term nature. As of June 30, 2017, the estimated fair value of convertible debt was $61.2 million, considering factors such as market conditions, prepayment and make-whole provisions, variability in pricing from multiple lenders and the term of the debt.
The following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy as of June 30, 2017 (in thousands):

As of June 30, 2017

Total carrying and estimated fair value
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Marketable securities, available-for-sale
206,716

 

 
206,716

 

Total
$
206,716

 
$

 
$
206,716

 
$

Liabilities:
 
 
 
 
 
 
 
Derivative liability related to warrants
$
22,460

 
$

 
$

 
$
22,460

Business combination-related contingent consideration
91,167

 

 

 
91,167

Total
$
113,627

 
$

 
$

 
$
113,627


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The following table presents the Company’s assets and liabilities, measured and recognized at fair value on a recurring basis, classified under the appropriate level of the fair value hierarchy as of December 31, 2016 (in thousands):
 
As of December 31, 2016
 
Total carrying and estimated fair value
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
41,002

 
$
39,929

 
$
1,073

 
$

Marketable securities, available-for-sale
214,871

 

 
214,871

 

Total
$
255,873

 
$
39,929

 
$
215,944

 
$

Liabilities:
 
 
 
 
 
 
 
Derivative liability related to warrants
$
22,440

 
$

 
$

 
$
22,440

Business combination-related contingent consideration
87,478

 

 

 
87,478

Total
$
109,918

 
$

 
$

 
$
109,918

The following table sets forth a summary of changes in the estimated fair value of the Company’s derivative financial instrument-warrants liability for the six months ended June 30, 2017 (in thousands):

Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)
Balance at January 1, 2017
$
22,440

Change in estimated fair value of liability classified warrants
20

Balance at June 30, 2017
$
22,460

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  At each reporting period, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820. See Note 7 for further discussion of derivative financial instruments relating to warrants.
The following table sets forth a summary of changes in the estimated fair value of the Company's business combination-related contingent consideration for the six months ended June 30, 2017 (in thousands):
 
Fair Value Measurements of Acquisition-Related Contingent Consideration
(Level 3)
Balance at January 1, 2017
$
87,478

Increase from revaluation of contingent consideration
6,628

Contractual payments accrued at June 30, 2017
(1,478
)
Contractual payments
(1,808
)
Foreign currency impact
347

Balance at June 30, 2017
$
91,167

The fair value of contingent consideration liabilities was determined by applying a form of the income approach (a level 3 input), based upon the probability-weighted projected payment amounts discounted to present value at a rate appropriate for the risk of achieving the performance targets. The key assumptions included in the calculations were the earn-out period payment probabilities, projected revenues, discount rate and the timing of payments. The present value of the expected payments considers the time at which the obligations are expected to be settled and a discount rate that reflects the risk associated with the performance payments.
During the three and six months ended June 30, 2017, the Company incurred charges of $3.3 million and $6.6 million, respectively, in operating expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the revaluation of the contingent consideration liabilities. For the six months ended June 30, 2017, $2.8 million, $2.2 million and $1.6 million of the charges were related to the increase in contingent consideration liabilities for the products Chenodal, Cholbam and product candidate L-UDCA, respectively. In each case, the value increased due to changes in the estimated timing of payments. During the three and six months ended June 30, 2016, the Company incurred charges of $2.8 million and $5.5 million, respectively, in operating expenses on the Condensed Consolidated Statement of Operations and Comprehensive Loss. For the six months ended June 30, 2016, $2.9 million and $2.6 million of the charges were related to the increase in contingent consideration liabilities for the products Chenodal and Cholbam, respectively.

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NOTE 9. INTANGIBLE ASSETS
As of June 30, 2017, the net book value of amortizable intangible assets was approximately $180.4 million.
The following table sets forth amortizable intangible assets as of June 30, 2017 and December 31, 2016 (in thousands):

June 30, 2017
 
December 31, 2016
Finite-lived intangible assets
$
222,482

 
$
215,540

Less: accumulated amortization
(42,114
)
 
(33,497
)
Net carrying value
$
180,368

 
$
182,043

The following table summarizes amortization expense for the three and six months ended June 30, 2017 and 2016 (in thousands):

Three Months Ended June 30,
 
Six Months Ended June 30,

2017
 
2016
 
2017
 
2016
Research and development
$
81

 
$
81

 
$
162

 
$
163

Selling, general and administrative
4,238

 
3,829

 
8,328

 
7,632

Total amortization expense
$
4,319

 
$
3,910

 
$
8,490

 
$
7,795

NOTE 10.  CONVERTIBLE NOTES PAYABLE
On May 29, 2014, the Company entered into a Note Purchase Agreement relating to a private placement by the Company of $46.0 million aggregate principal senior convertible notes due in 2019 (the “Notes”) which are convertible into shares of the Company’s common stock at an initial conversion price of $17.41 per share. The conversion price is subject to customary anti-dilution protection. The Notes bear interest at a rate of 4.5% per annum, payable semiannually in arrears on May 15 and November 15 of each year. The Notes mature on May 30, 2019 unless earlier converted or repurchased in accordance with their terms, and there are no contractual payments due prior to that date. At June 30, 2017 and December 31, 2016, the aggregate carrying value of the Notes was $44.7 million and $44.4 million, respectively.
NOTE 11. ACCRUED EXPENSES
Accrued expenses at June 30, 2017 and December 31, 2016 consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
Government rebates payable
$
4,832

 
$
6,967

Compensation related costs
5,303

 
7,441

Accrued royalties and contingent consideration
5,922

 
5,766

Research and development
5,744

 
7,311

Selling, general and administrative
3,174

 
3,333

Miscellaneous accrued
2,622

 
2,490

Total accrued expenses
$
27,597

 
$
33,308

NOTE 12.  LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. The Company’s potentially dilutive shares, which include outstanding stock options, restricted stock units, warrants, and shares issuable upon conversion of the Notes, are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
Basic and diluted net loss per share is calculated as follows (net loss amounts are stated in thousands):
 
Three Months Ended
 
June 30, 2017
 
June 30, 2016
 
Shares
 
Net Loss
 
EPS
 
Shares
 
Net Loss
 
EPS
Basic loss per share
39,041,145

 
$
(13,229
)
 
$
(0.34
)
 
36,683,429

 
$
(13,403
)
 
$
(0.37
)
Dilutive loss per share
39,041,145

 
$
(13,229
)
 
$
(0.34
)
 
36,683,429

 
$
(13,403
)
 
$
(0.37
)

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Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
Shares
 
Net Loss
 
EPS
 
Shares
 
Net Loss
 
EPS
Basic loss per share
38,545,982

 
$
(24,319
)
 
$
(0.63
)
 
36,601,807

 
$
(2,187
)
 
$
(0.06
)
Change in fair value of derivative instruments

 

 
 
 

 
(5,277
)
 
 
Dilutive shares related to warrants

 

 
 
 
1,461,478

 

 
 
Dilutive loss per share
38,545,982

 
$
(24,319
)
 
$
(0.63
)
 
38,063,285

 
$
(7,464
)
 
$
(0.20
)
For the three and six months ended June 30, 2017 and 2016, the following shares were excluded because they were anti-dilutive (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Restricted stock units
200

 
300

 
200

 
300

Convertible debt
2,600

 
2,600

 
2,600

 
2,600

Options
7,000

 
6,100

 
6,700

 
5,900

Warrants
1,800

 
2,700

 
1,800

 

Total anti-dilutive shares
11,600

 
11,700

 
11,300

 
8,800

NOTE 13.  COMMITMENTS AND CONTINGENCIES
Leases and Sublease Agreements
Facilities
 
Annual Base Rent
 
Lease Expiration
 
Comments
Occupied Locations
 
 
 
 
 
 
Corporate Headquarters
San Diego CA
 
$1.1 million
 
July 2024
 
Occupied in December 2016
Cambridge MA
 
 
 
January 2018
 
Subleased space for less than one year
Vacated Locations
 
 
 
 
 
 
San Diego CA
 
$0.5 million
 
December 2017
 
Available for sublease
New York NY
 
$0.5 million
 
November 2018
 
Sublet through expiration
Research Collaboration and Licensing Agreements
As part of the Company's research and development efforts, the Company enters into research collaboration and licensing agreements with unrelated companies, scientific collaborators, universities, and consultants. These agreements contain varying terms and provisions which include fees and milestones to be paid by the Company, services to be provided, and ownership rights to certain proprietary technology developed under the agreements. Some of these agreements contain provisions which require the Company to pay royalties, in the event the Company sells or licenses any proprietary products developed under the respective agreements.
Contractual Commitments
The following table summarizes our principal contractual commitments, excluding open orders that support normal operations, as of June 30, 2017 (in thousands):
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Operating leases
$
10,154

 
$
2,208

 
$
2,620

 
$
4,520

 
$
806

Guaranteed minimum royalty
14,000

 
2,000

 
4,000

 
4,000

 
4,000

Convertible note payable, including contractual interest
49,967

 
2,070

 
47,897

 

 

Sales support services
2,845

 
416

 
833

 
833

 
763

Product supply contracts
2,505

 
2,088

 
417

 

 

Purchase order commitments
681

 
368

 
313

 

 

 
$
80,152

 
$
9,150

 
$
56,080

 
$
9,353

 
$
5,569


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Table of Contents

Legal Proceedings
In January 2015, the Company received a subpoena relating to a criminal investigation by the U.S. Attorney for the Eastern District of New York. The subpoena requested information regarding, among other things, the Company’s relationship with Martin Shkreli, the Company’s former Chief Executive Officer, and individuals or entities that had been investors in investment funds previously managed by Mr. Shkreli. The Company was informed that it is not a target of the U.S. Attorney’s investigation, and cooperated with the investigation. On December 17, 2015, an indictment against Mr. Shkreli and the Company’s former outside counsel, Evan Greebel, was unsealed in the United States District Court for the Eastern District of New York. A superseding indictment reflecting additional charges was filed on June 3, 2016. The Company also cooperated with a parallel investigation by the U.S. Securities and Exchange Commission (the “SEC”). On December 17, 2015, the SEC filed a civil complaint against Mr. Shkreli, Mr. Greebel, MSMB Capital Management LLC, and MSMB Healthcare Management LLC in the United States District Court for the Eastern District of New York. In connection with these proceedings, Mr. Shkreli, as well as a number of other current and former directors, officers, and employees, sought advancement of their legal fees from the Company. Mr. Shkreli, in particular, claimed that the Company owes him in excess $5 million in legal fees that he has incurred defending these actions. The Company disputed its obligation to pay the amount in full. In November 2016, the Company and Mr. Shkreli entered into a binding term sheet with respect to a settlement under which the Company would advance $2.8 million in legal fees to Mr. Shkreli’s counsel, representing a portion of the existing legal fees related to these proceedings that Mr. Shkreli claims should be advanced. The Company also undertook an obligation to advance an additional $2 million in future legal fees in the event the matter proceeded to trial. In June 2017, Mr. Shkreli’s trial commenced in the United States District Court for the Eastern District of New York. In August 2017, the trial was concluded with a conviction on several counts. Mr. Shkreli may appeal his conviction and request further advancement of legal fees in connection with the appeal. The Company has now advanced $2.8 million ($1.8 million of which occurred in 2016) in pre-trial fees to Mr. Shkreli's counsel, as well as the $2 million in trial fees. At present, the Company has been reimbursed approximately $0.7 million of this amount from its directors’ and officers’ insurance carriers, and expects to receive payments for a portion of the remaining amount. The total amount it will receive from the insurance carriers is not currently estimable. In addition, the legal fees the Company has advanced will be subject to reimbursement by Mr. Shkreli under Delaware law in the event it is ultimately determined that Mr. Shkreli is not entitled to be indemnified by the Company in these proceedings.
On August 17, 2015, the Company filed a lawsuit in federal district court for the Southern District of New York against Mr. Shkreli, asserting that he breached his fiduciary duty of loyalty during his tenure as the Company’s Chief Executive Officer and a member of its Board of Directors (Retrophin, Inc. v. Shkreli, 15-CV-06451(NRB)). On August 19, 2015, Mr. Shkreli served a demand for JAMS arbitration on Retrophin, claiming that Retrophin had breached his December 2013 employment agreement. In response to Mr. Shkreli’s arbitration demand, the Company asserted counterclaims in the arbitration that are substantially similar to the claims it previously asserted in the federal lawsuit against Mr. Shkreli. The parties have selected an arbitration panel. On Mr. Shkreli’s application, and with the Company’s consent, the federal Court granted a stay of the federal lawsuit pending a determination by the arbitration panel whether the Company’s counterclaims would be litigated in the arbitration, as the Company is seeking. On April 22, 2016, the arbitration panel granted the parties’ request for a stay of the proceedings pending settlement discussions. In connection with these proceedings, Mr. Shkreli sought advancement of his legal fees from the Company relating to his defense of the Company’s claims against him. Mr. Shkreli claimed that he has to date incurred in excess of $2.8 million in fees, including fees incurred in negotiating with the Company over advancement. The Company disputed its obligation to pay the amount in full. In November 2016, the Company and Mr. Shkreli entered into a binding term sheet with respect to a settlement under which the significant majority of the existing legal fees related to these proceedings that Mr. Shkreli claimed should be advanced would be offset and satisfied by the $2.025 million judgment against Mr. Shkreli in the Donoghue v. Retrophin, Inc. case. The Company would also advance $0.4 million in legal fees to Mr. Shkreli’s counsel, a portion of which represented additional legal fees related to these proceedings that Mr. Shkreli claims should be advanced. In accordance with the Term Sheet, the Donoghue settlement was offset, and the Company paid the $0.4 million to Mr. Shkreli's counsel. The legal fees the Company has advanced will be subject to reimbursement by Mr. Shkreli under Delaware law in the event it is ultimately determined that Mr. Shkreli is not entitled to be indemnified by the Company in these proceedings.
The Company will also be subject to additional obligations when the litigation resumes, as well as advancement obligations in the interim.
In 2016, the Company recorded $5.2 million in expenses and paid $2.3 million under the settlement. For the three and six months ended June 30, 2017, the Company paid $2.0 million and $3.0 million, respectively. under the settlement. In April 2017, the Company expensed and advanced an additional $2.0 million in trial fees in accordance with the settlement. The Company received $0.7 million in total reimbursement from directors’ and officers’ insurance carriers which is recorded as a gain in selling, general and administrative expenses within the Consolidated Statement of Operations and Comprehensive Income (Loss) during 2016. The Company expects to receive additional payment from its insurance carriers for a portion of the legal fees advanced, however the Company has not yet recorded any amounts for such payments as the amount it will receive from the insurance carriers is not currently estimable.
From time to time the Company is involved in legal proceedings arising in the ordinary course of business. The Company believes there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition.

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NOTE 14.  SHARE BASED COMPENSATION
Restricted Shares
Service and Performance Based Restricted Stock Units
The following table summarizes the Company’s restricted stock activity during the six months ended June 30, 2017:
 
Number of Restricted Stock Units
 
Weighted Average Grant Date Fair Value
Unvested December 31, 2016
407,746

 
$
19.88

Granted
157,750

 
18.32

Vested
(118,334
)
 
15.91

Forfeited/canceled
(3,500
)
 
23.85

Unvested June 30, 2017
443,662

 
$
20.35

At June 30, 2017, unamortized stock compensation for restricted stock units was $4.5 million, with a weighted-average recognition period of 1.2 years.
Performance Based Restricted Stock Units
During the three and six months ended June 30, 2017, the Company granted 78,500 and 108,500 performance based restricted stock units, respectively, which are included in the restricted stock activity table above.
Stock Options
The following table summarizes stock option activity during the six months ended June 30, 2017:
 
Shares Underlying Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life (years)
 
Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016
6,430,570

 
$
16.91

 
7.64
 
30,088

Granted
1,738,800

 
17.78

 
 
 
 
Exercised
(265,873
)
 
11.30

 
 
 
 
Forfeited/canceled
(321,543
)
 
25.12

 
 
 
 
Outstanding at June 30, 2017
7,581,954

 
$
16.96

 
7.76
 
$
32,554

At June 30, 2017, unamortized stock compensation for stock options was $38.0 million, with a weighted-average recognition period of 2.7 years.
At June 30, 2017, outstanding options to purchase 4.2 million shares of common stock were exercisable with a weighted-average exercise price per share of $15.24.
Share Based Compensation
The following table sets forth total non-cash stock-based compensation by operating statement classification for the three and six months ended June 30, 2017 and 2016 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Research and development
$
2,459

 
$
2,641

 
$
5,115

 
$
5,127

Selling, general & administrative
4,780

 
4,852

 
9,217

 
9,159

Total
$
7,239

 
$
7,493

 
$
14,332

 
$
14,286

Exercise of Warrants
During the six months ended June 30, 2017, there were no warrant exercises. At each of June 30, 2017 and December 31, 2016, warrants to purchase 1,766,905 shares of common stock were outstanding.

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NOTE 15. INVENTORY
Inventory, net of reserves, consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
 
June 30, 2017
 
December 31, 2016
Raw materials
$
2,938

 
$
1,336

Finished goods
1,431

 
1,490

Total inventory
$
4,369

 
$
2,826

The inventory reserve was $0.5 million and $0.6 million at June 30, 2017 and December 31, 2016, respectively.
NOTE 16. RECEIVABLES
Accounts Receivables
Accounts receivable, net of reserves for prompt pay discounts and doubtful accounts, was $13.3 million and $18.5 million at June 30, 2017 and December 31, 2016, respectively. The total reserves for both periods were immaterial.
Notes Receivables
The notes receivable arose from the Company's sale of a Pediatric Priority Review Voucher in July 2015 to Sanofi for $245.0 million. $150.0 million was received upon closing, and $47.5 million was due on each of the first and second anniversaries of the closing. In accordance with GAAP, the Company recorded the future short term and long term notes receivable at their present value of $46.2 million and $44.9 million, respectively, at the date of the sale using a discount rate of 2.8%. The accretion on the notes receivable totaled $0.6 million for the six months ended June 30, 2017, and is recorded in interest expense, net, in the Consolidated Statements of Operations and Comprehensive Loss.
The first anniversary payment was received on July 2, 2016. The second anniversary payment was received on June 30, 2017. The note receivable balances as of June 30, 2017 and December 31, 2016 were zero and $46.8 million, respectively.
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (SEC) on March 1, 2017. Past operating results are not necessarily indicative of results that may occur in future periods.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item IA, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
Overview
We are a fully integrated biopharmaceutical company headquartered in San Diego, California dedicated to delivering life-changing therapies to people living with rare diseases who have few, if any, treatment options.

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Our Product Candidates and Products on the Market
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11741094&doc=12
**Acquired rights in 2016; activities underway with the intention of making the liquid formulation commercially available in the United States.
Research and Development Programs:
Fosmetpantotenate (RE-024)
We are developing fosmetpantotenate (RE-024), a novel small molecule, as a potential treatment for pantothenate kinase-associated neurodegeneration (“PKAN”). PKAN is a genetic neurodegenerative disorder that is typically diagnosed in the first decade of life. Consequences of PKAN include dystonia, dysarthria, rigidity, retinal degeneration, and severe digestive problems. PKAN is estimated to affect up to 5,000 patients worldwide. There are currently no viable treatment options for patients with PKAN. Fosmetpantotenate (RE-024) is a phosphopantothenate replacement therapy that aims to restore levels of this key substrate in PKAN patients. Certain international health regulators have approved the initiation of dosing fosmetpantotenate (RE-024) in PKAN patients under physician-initiated studies in accordance with local regulations in their respective countries. We filed a U.S. Investigational New Drug ("IND") for fosmetpantotenate (RE-024) with the FDA in the first quarter of 2015 to support the commencement of a company-sponsored Phase 1 study, which was successfully completed during 2015. The FDA granted fosmetpantotenate (RE-024) orphan drug designation in May 2015 and fast track designation in June 2015. In February 2016, we announced fosmetpantotenate (RE-024) was granted orphan drug designation by the European Commission. In November 2016, we announced that we had reached an agreement with the FDA under the Special Protocol Assessment (SPA) process for a Phase 3 clinical trial evaluating fosmetpantotenate (RE-024) for PKAN. We have reviewed the study design with the European Medicines Agency ("EMA") and we expect it to support registration in Europe. In July 2017, we announced that the first patient had been dosed in the FORT (FOsmetpantotenate Replacement Therapy) Study.
Sparsentan (RE-021)
Sparsentan is an investigational therapeutic agent which acts as both a potent angiotensin receptor blocker (“ARB”), as well as a selective endothelin receptor antagonist (“ERA”), with in vitro selectivity toward endothelin receptor type A. We have secured a license to sparsentan from Ligand Pharmaceuticals, Inc. and Bristol-Myers Squibb Company (who referred to it as DARA). We are developing sparsentan as a treatment for focal segmental glomerulosclerosis ("FSGS"), which is a leading cause of end-stage renal disease and nephrotic syndrome (“NS”). There are no U.S. Food and Drug Administration ( "FDA") approved pharmacological treatments for FSGS and the off-label armamentarium is limited to ACE/ARBs, steroids, and immunosuppressant agents, which are effective in only a subset of patients. Every year approximately 5,400 patients are diagnosed with FSGS and we estimate that there are up to 40,000 FSGS patients in the United States with approximately half them being candidates for sparsentan. Sparsentan was granted orphan drug designation in the United States and the European Union in January 2015 and

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November 2015, respectively. In the third quarter of 2016, we announced positive top-line data from our Phase 2 DUET study of sparsentan for the treatment of FSGS.
In early 2017, we had an End of Phase 2 meeting with the FDA regarding the regulatory pathway for sparsentan as a treatment for FSGS.  Following the meeting and our receipt of confirmatory meeting minutes, we announced our plans to initiate a single Phase 3 clinical trial to serve as the basis of a New Drug Application ("NDA") filing for sparsentan for the treatment of FSGS.  We expect that the trial will include an interim analysis of proteinuria as a surrogate endpoint and that if this interim analysis shows a substantial effect on proteinuria reduction, that the data could serve as a basis for applying for accelerated approval of sparsentan for the treatment of FSGS pursuant to Subpart H of the FDA regulations. The confirmatory endpoint of the study is expected to compare changes from baseline of estimated glomerular filtration rate, or eGFR. We have completed the protocol design for the study and expect to gain alignment with the FDA in the second half of 2017 and initiate the trial thereafter.
NGLY1 Deficiency Discovery Efforts
We have entered into a research collaboration aimed at the discovery of a novel therapeutic for patients with NGLY1 deficiency, a rare genetic disorder. NGLY1 deficiency is believed to be caused by a deficiency in an enzyme called N-glycanase-1, which is encoded by the gene NGLY1. The condition is characterized by a variety of symptoms, including global developmental delay, movement disorder, seizures, and ocular abnormalities.
Liquid Ursodeoxycholic Acid
Liquid ursodeoxycholic acid ("L-UDCA") is a liquid formulation of ursodeoxycholic acid being developed for the treatment of a rare liver disease called primary biliary cholangitis ("PBC"). We obtained rights to L-UDCA during 2016 with the intention of making L-UDCA commercially available to the subset of PBC patients who have difficulty swallowing. There are no liquid formulations of ursodeoxycholic acid currently approved by the FDA.
Products on the Market:
Chenodal® (chenodiol)
Chenodal is a synthetic oral form of chenodeoxycholic acid, a naturally occurring primary bile acid synthesized from cholesterol in the liver, indicated for the treatment of radiolucent stones in well-opacifying gallbladders in patients in whom selective surgery would be undertaken except for the presence of increased surgical risk due to systemic disease or age.
Chenodal has been used as the standard of care for the treatment of cerebrotendinous xanthomatosis ("CTX"), a rare autosomal recessive lipid storage disease for over three decades. In 2010, Chenodal received orphan drug designation for the treatment of CTX and we are working to obtain FDA approval for the treatment of CTX.
Cholbam® (cholic acid)
In March 2015, we announced that the FDA approved Cholbam capsules, the first FDA approved treatment for pediatric and adult patients with bile acid synthesis disorders due to single enzyme defects, and for adjunctive treatment of patients with peroxisomal disorders (including Zellweger spectrum disorders).  The effectiveness of Cholbam has been demonstrated in clinical trials for bile acid synthesis disorders and the adjunctive treatment of peroxisomal disorders.
Thiola® (tiopronin)
Thiola is approved by the FDA for the treatment of cystinuria, a rare genetic cystine transport disorder that causes high cystine levels in the urine and the formation of recurring kidney stones. The resulting long-term damage can cause loss of kidney function in addition to substantial pain and loss of productivity associated with renal colic and stone passage. The prevalence of cystinuria in the United States is estimated to be 10,000 to 12,000, indicating that there may be as many as 4,000 to 5,000 affected individuals with cystinuria in the United States that would be candidates for Thiola. We are currently working on a new formulation of Thiola.
Results of Operations
Results of operations for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016.
Net Product Sales:
The following table provides information regarding net product sales (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Net product sales
$
38,800

 
$
33,311

 
$
5,489

 
$
72,420

 
$
62,319

 
$
10,101

The increase in sales for the three and six months ended June 30, 2017 over the prior year is due to increased patient counts for Chenodal, Cholbam and Thiola.

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Operating Expenses:
The following table provides information regarding operating expenses (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Cost of goods sold
$
797

 
$
1,021

 
$
(224
)
 
$
1,506

 
$
1,778

 
$
(272
)
Research and development
19,482

 
17,675

 
1,807

 
40,342

 
32,347

 
7,995

Selling, general and administrative
28,835

 
23,205

 
5,630

 
51,950

 
42,330

 
9,620

Change in fair value of contingent consideration
3,284

 
2,789

 
495

 
6,628

 
5,485

 
1,143

 
$
52,398

 
$
44,690

 
$
7,708

 
$
100,426

 
$
81,940

 
$
18,486

Research and development expenses
We make significant investments in research and development in support of our development programs. Research and development costs are expensed as incurred and include salaries and bonuses, benefits, non-cash share based compensation, license fees, costs paid to third-party contractors to perform research, conduct clinical trials, and develop drug materials and delivery devices, and associated overhead expenses and facilities costs.
For the three months ended June 30, 2017 as compared to the three months ended June 30, 2016, the Company increased its research and development expenses by $1.8 million which is primarily due to increased support of on-going clinical and non-clinical efforts for our late stage product candidates and to the consolidation of facilities.
For the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, the Company increased its research and development expenses by $8.0 million, which is primarily due to increased support of on-going clinical and non-clinical efforts for next generation and late stage product candidates of $6.7 million and facilities consolidation of $1.3 million.
Selling, general and administrative expenses
Selling, general and administrative expenses include salaries and bonuses, benefits, non-cash share based compensation, professional fees, rent, depreciation and amortization, travel, insurance, business development, sales and marketing programs, and other operating expenses.
For the three and six months ended June 30, 2017 as compared to the same periods ended June 30, 2016, the Company increased its selling, general and administrative expenses by $5.6 million and $9.6 million, respectively, which reflects the Company's activities to support commercial and research and development programs. In addition the Company reached a settlement regarding open accounts payable with our former outside legal counsel during March 2016 of $3.0 million.
Change in the valuation of contingent consideration
For the three and six months ended June 30, 2017 as compared to June 30, 2016, the increase in the change in fair value of contingent consideration of $0.5 million and $1.1 million, respectively, is due to the acquisition of L-UDCA in the second quarter of 2016 and changes in the timing of payments for Chenodal and Cholbam (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Chenodal
$
1,368

 
$
1,462

 
$
(94
)
 
$
2,808

 
$
2,850

 
$
(42
)
Cholbam
1,116

 
1,327

 
(211
)
 
2,220

 
2,635

 
(415
)
L-UDCA
800

 

 
800

 
1,600

 

 
1,600

 
$
3,284

 
$
2,789

 
$
495

 
$
6,628

 
$
5,485

 
$
1,143

Other Income/Expenses:
The following table provides information regarding other income (loss), net (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Other income, net
$
382

 
$
(206
)
 
$
588

 
$
508

 
$
4

 
$
504

Interest expense, net
(658
)
 
(147
)
 
(511
)
 
(790
)
 
(309
)
 
(481
)
Change in fair value of derivative instruments
(1,280
)
 
(9,063
)
 
7,783

 
(20
)
 
5,277

 
(5,297
)
 
$
(1,556
)
 
$
(9,416
)
 
$
7,860

 
$
(302
)
 
$
4,972

 
$
(5,274
)
For the three and six months ended June 30, 2017, the Company recognized a loss of $1.6 million and $0.3 million, respectively. The change in both periods is primarily due to changes in the fair value of derivative instruments related to warrants. For the three and six months ended June 30, 2016, the Company recognized a loss of $9.4 million and a gain of $5.0 million, respectively. The variance in the fair value of derivative instruments is driven by volatility in the Company's stock price in the comparable period.

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Income Tax Benefit:
In the second quarter of 2017, the Company recorded a tax benefit of $1.9 million, primarily relating to the benefit of the current year loss, partially offset by an increase in the valuation allowance.
Liquidity and Capital Resources
We believe that our available cash and short-term investments as of the date of this filing will be sufficient to fund our anticipated level of operations for at least the next 12 months. Management believes that our operating results will vary from quarter to quarter and year to year depending upon various factors including revenues, general and administrative expenses, and research and development expenses.
The Company had the following financial performance at June 30, 2017 and December 31, 2016 (in thousands):
 
June 30, 2017
 
December 31, 2016
Cash & Cash Equivalents
$
89,265

 
$
41,002

Marketable securities
206,716

 
214,871

Accumulated Deficit
(142,243
)
 
(113,056
)
Stockholders' Equity
295,829

 
307,767

 
 
 
 
Net Working Capital*
$
240,032

 
$
249,090

Net Working Capital Ratio**
4.01

 
3.99

* Current assets less current liabilities.
**Current assets divided by current liabilities.
Convertible Notes Payable
On May 29, 2014, the Company entered into a Note Purchase Agreement relating to a private placement by the Company of $46.0 million aggregate principal senior convertible notes due in 2019 (the "Notes") which are convertible into shares of the Company’s common stock at an initial conversion price of $17.41 per share. The conversion price is subject to customary anti-dilution protection. The Notes bear interest at a rate of 4.5% per annum, payable semiannually in arrears on May 15 and November 15 of each year. The Notes mature on May 30, 2019 unless earlier converted or repurchased in accordance with the terms. The aggregate carrying value of the Notes was $44.7 million and $44.4 million at June 30, 2017 and December 31, 2016, respectively.
Cash Flows from Operating Activities
Cash provided by operating activities was $2.6 million and $0.4 million for the six months ended June 30, 2017 and 2016, respectively. After disregarding non-cash changes such as derivative liability fluctuations, share based compensation, contingent consideration charges and deferred tax asset reserves, the increase of $2.2 million was primarily due to an increase in cash provided by operating assets and liabilities offset by an increase in operating expenses that exceeded increase in revenue growth.
Cash Flows from Investing Activities
Cash provided by investing activities for the six months ended June 30, 2017 was $47.9 million compared to $14.0 million used in investing activities for the six months ended June 30, 2016. The change was due to collection of the second anniversary payment on June 30, 2017 for the sale of the Pediatric Pediatric Review Voucher to Sanofi, offset by the timing of marketable securities maturities and purchases.
Cash Flows from Financing Activities
For the six months ended June 30, 2017 and 2016, cash used by financing activities was $1.8 million and $2.8 million, respectively, with the decrease primarily due to increased proceeds from stock option exercises, offset by increases in payments for contingent consideration.
Funding Requirements
We believe that our available cash and short-term investments as of the date of this filing will be sufficient to fund our anticipated level of operations for at least the next 12 months. This belief is based on many factors, some of which are beyond our control. Factors that may affect financing requirements include, but are not limited to:
revenue growth of our marketed products;
the rate of progress and cost of our clinical trials, preclinical studies and other discovery and research and development activities;
the timing of, and costs involved in, seeking and obtaining marketing approvals for our products, and in maintaining quality systems standards for our products;
our ability to manufacture sufficient quantities of our products to meet expected demand;

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the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, litigation costs and the results of litigation;
our ability to enter into collaboration, licensing or distribution arrangements and the terms and timing of these arrangements;
the potential need to expand our business, resulting in additional payroll and other overhead expenses;
the potential acquisition or in-licensing of other products or technologies; and
the emergence of competing technologies or other adverse market or technological developments.
Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies.
Other Matters
Adoption of New Accounting Standards
See Note 3 to our unaudited Condensed Consolidated Financial Statements in this report for a discussion of adoption of new accounting standards.
Recently Issued Accounting Pronouncements
See Note 3 to our unaudited Condensed Consolidated Financial Statements in this report for a discussion of recently issued accounting pronouncements.
Off Balance Sheet Arrangements
None.
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
We invest our excess cash and marketable securities primarily in United States government backed securities, asset-backed securities, and debt instruments of financial institutions and corporations with investment-grade credit ratings. These instruments have various short and long-term maturities, not exceeding two years. We do not utilize derivative financial instruments, derivative commodity instruments, or other market risk sensitive instruments, positions or transactions. Accordingly, we believe that, while the instruments held are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive investments. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would decrease our available for sale marketable securities by approximately $1.6 million if the Company were to sell the securities.
Item 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports required by the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the timelines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any change to our internal control over financial reporting that occurred during the quarter covered by this report and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our evaluation did not identify significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION 

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Item 1.  Legal Proceedings
The information required by this Item is incorporated herein by reference to the Notes to the Unaudited Condensed Consolidated Financial Statements--Note 13 Commitments and Contingencies: Legal Proceedings in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
The following risk factors do not reflect any material changes to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, other than the revisions to the risk factors set forth below with an asterisk (*) next to the title. The following information sets forth risk factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q and those we may make from time to time. If any of the following risks actually occur, our business, operating results, prospects or financial condition could be harmed. Additional risks not presently known to us, or that we currently deem immaterial, may also affect our business operations.
Risks Related to the Commercialization of Our Products
The commercial success of Chenodal, Cholbam and Thiola depends on them being considered to be effective drugs with advantages over other therapies.
The commercial success of our products Chenodal, Cholbam and Thiola depends on them being considered to be effective drugs with certain advantages over other therapies. A number of factors, as discussed in greater detail below, may adversely impact the degree of acceptance of these products, including their efficacy, safety, price and benefits over competing therapies, as well as the reimbursement policies of third-party payers, such as government and private insurance plans.
If unexpected adverse events are reported in connection with the use of any of these products, physician and patient acceptance of the product could deteriorate and the commercial success of such product could be adversely affected. We are required to report to the FDA events associated with our products relating to death or injury. Adverse events could result in additional regulatory controls, such as a requirement for costly post-approval clinical studies or revisions to our approved labeling which could limit the indications or patient population for a product or could even lead to the withdrawal of a product from the market.
If physicians, patients and third-party payers do not accept our products, we may be unable to generate significant revenues.
Our drugs may not gain or maintain market acceptance among physicians and patients. Effectively marketing our products and any of our drug candidates, if approved, requires substantial efforts, both prior to launch and after approval. Physicians may elect not to prescribe our drugs, and patients may elect not to request or take them, for a variety of reasons including:
lower demonstrated efficacy, safety and/or tolerability compared to other drugs;
prevalence and severity of adverse side-effects;
lack of cost-effectiveness;
lack of coverage and adequate reimbursement availability from third-party payers;
a decision to wait for the approval of other therapies in development that have significant perceived advantages over our drug;
convenience and ease of administration;
other potential advantages of alternative treatment methods; and
ineffective marketing and/or distribution support.
If our drugs fail to achieve or maintain market acceptance, we will not be able to generate significant revenues.
Changes in reimbursement practices of third-party payers could affect the demand for our products and the prices at which they are sold.
The business and financial condition of healthcare-related businesses will continue to be affected by efforts of governments and third-party payers to contain or reduce the cost of healthcare through various means. In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for sparsentan, fosmetpantotenate (RE-024) and L-UDCA, or any other product candidate that we develop, restrict or regulate post-approval activities and affect our ability to profitably sell sparsentan, fosmetpantotenate (RE-024) and L-UDCA or any other product candidate for which we obtain marketing approval.
Our products are sold to patients whose healthcare costs are met by third-party payers, such as government programs, private insurance plans and managed-care programs. These third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for medical products and services. Levels of reimbursement, if any, may be decreased in the future, and future healthcare reform legislation, regulations or changes to reimbursement policies of third party payers may otherwise adversely affect the demand for and price levels of our products, which could have a material adverse effect on our sales and profitability.

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Economic, social, and congressional pressure may result in individuals and government entities increasingly seeking to achieve cost savings through mechanisms that limit coverage or payment for our products. For example, state Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and requiring prior authorization for use of drugs. Managed care organizations continue to seek price discounts and, in some cases, to impose restrictions on the coverage of particular drugs. Government efforts to reduce Medicaid expenses may lead to increased use of managed care organizations by Medicaid programs. This may result in managed care organizations influencing prescription decisions for a larger segment of the population and a corresponding constraint on prices and reimbursement for our products.
We may not be able to rely on orphan drug exclusivity for Cholbam/Kolbam or any of our products.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. We have obtained orphan designation for Cholbam/Kolbam in the United States and the European Union. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, that product is entitled to a period of marketing exclusivity, which precludes the applicable regulatory authority from approving another marketing application for the same drug for the same indication for that time period. The applicable period is seven years in the United States and ten years in Europe. Even though we have been awarded orphan drug exclusivity for Cholbam in the United States, we may not be able to maintain it. For example, if a competitive product that contains the same active moiety and treats the same disease as our product is shown to be clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product and we may effectively lose orphan drug exclusivity. Similarly, if a competitive product that contains the same active moiety and treats the same disease as our product candidate is approved for orphan drug exclusivity before our product candidate, we may not be able to obtain approval for our product candidate until the expiration of the competitive product’s orphan drug exclusivity unless our product candidate is shown to be clinically superior to the competitive product.
Additional competitors could enter the market, including with generic versions of our products, and sales of our affected products may decline materially.
Under the Hatch-Waxman Amendments of the Federal Food, Drug, and Cosmetic Act (the "FDC Act"), a pharmaceutical manufacturer may file an ANDA, seeking approval of a generic copy of an approved innovator product or an NDA under Section 505(b)(2) that relies on the FDA’s prior findings of safety and effectiveness in approving the innovator product. A Section 505(b)(2) NDA may be for a new or improved version of the original innovator product. The Hatch-Waxman Amendments also provide for certain periods of regulatory exclusivity, which preclude FDA approval (or in some circumstances, FDA acceptance) of an ANDA or Section 505(b)(2) NDA. In addition, the FDC Act provides, subject to certain exceptions, a period during which an FDA-approved drug may be afforded orphan drug exclusivity. In addition to the benefits of regulatory exclusivity, an innovator NDA holder may have patents claiming the active ingredient, product formulation or an approved use of the drug, which would be listed with the product in the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” known as the “Orange Book.” If there are patents listed in the Orange Book, a generic or Section 505(b)(2) applicant that seeks to market its product before expiration of the patents must include in the ANDA what is known as a “Paragraph IV certification,” challenging the validity or enforceability of, or claiming non-infringement of, the listed patent or patents. Notice of the certification must be given to the innovator, too, and if within 45 days of receiving notice the innovator sues to enforce its patents, approval of the ANDA is stayed for 30 months, or as lengthened or shortened by the court.
Chenodal and Thiola are subject to immediate competition from compounded and generic entrants, as the ANDA and NDA for these drug products have no remaining patent or nonpatent exclusivity. If a generic version is approved, sales of our product would be negatively impacted, which could have a material adverse impact on our sales and profitability.
We are dependent on third parties to manufacture and distribute our pharmaceutical products who may not fulfill their obligations.
We have no manufacturing capabilities and rely on third party manufacturers who are sole source suppliers for manufacturing of Chenodal, Thiola, and Cholbam. The facilities used by our third party manufacturers must be approved by the FDA, or in the case of Kolbam in the European Union, the European Medicines Agency. Our dependence on third parties for the manufacture of our products may harm our profit margin on the sale of products and our ability to deliver products on a timely and competitive basis. If our third party manufacturers are unable to manufacture to specifications or in compliance with applicable regulatory requirements, our ability to commercialize our products will be adversely impacted and could affect our ability to gain market acceptance for our products and negatively impact our revenues.
We currently have no in-house distribution channels for Chenodal, Thiola or Cholbam and we are dependent on a third-party distributor, Dohmen Life Sciences Services, to distribute such products. We rely on this distributor for all of our proceeds from sales of Chenodal, Thiola and Cholbam in the United States. The outsourcing of our distribution function is complex, and we may experience difficulties that could reduce, delay or stop shipments of such products. If we encounter such distribution problems, and we are unable to quickly enter into a similar agreement with another distributor on substantially similar terms, distribution of Chenodal, Thiola and/or Cholbam could become disrupted, resulting in lost revenues, provider dissatisfaction, and/or patient dissatisfaction.
Governments outside the United States tend to impose strict price controls and reimbursement approval policies, which may adversely affect our prospects for generating revenue.
In some countries, particularly European Union countries, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time (6 to 12 months or longer) after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or

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amount, or if pricing is set at unsatisfactory levels, our prospects for generating revenue outside of the United States, if any, could be adversely affected and our business may suffer.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate product revenue outside of the United States.
Risks Related to the Development of our Product Candidates
*Our clinical trials may fail to demonstrate the safety and efficacy of our product candidates which could prevent or significantly delay their regulatory approval.
Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and initial results from a clinical trial do not necessarily predict final results. There can be no assurance that the positive results from the DUET study of sparsentan will be repeated in the Phase 3 clinical trial or that the favorable responses we have seen with the physician-initiated treatment of RE-024 in PKAN patients outside the United States will translate to positive data in the Phase 3 clinical trial of RE-024. We cannot assure that any future clinical trials of sparsentan and/or RE-024 will ultimately be successful.
Before obtaining regulatory approval to conduct clinical trials of our product candidates, we must conduct extensive preclinical tests to demonstrate the safety of our product candidates in animals. Preclinical testing is expensive, difficult to design and implement, and can take many years to complete. A failure of one or more of our preclinical studies can occur at any stage of testing.
We will only obtain regulatory approval to commercialize a product candidate if we can demonstrate to the satisfaction of the FDA, and in the case of foreign commercialization, to the applicable foreign regulatory authorities, in well-designed and conducted clinical trials, that our product candidates are safe and effective and otherwise meet the appropriate standards required for approval for a particular indication.
We recently announced plans to initiate a single Phase 3 clinical trial to serve as the basis for an NDA filing for sparsentan for the treatment of FSGS. Although we received feedback from the FDA at an End of Phase 2 meeting during which the FDA communicated that it was open to accepting a substantial treatment effect on proteinuria in this trial as a basis for accelerated approval pursuant to Subpart H of the FDA regulations, there can be no guarantee that the data generated from such interim analysis will be sufficient to serve as the basis for an NDA filing or accelerated approval. In addition, as part of the protocol design for the trial, we will need to conduct sufficient statistical modeling on, and reach agreement with the FDA regarding, the magnitude of proteinuria reduction that would need to be shown to ensure we are able to verify the anticipated benefit (preservation of eGFR) in the post-marketing confirmatory portion of the trial. There is no guarantee that we will be able to reach agreement with the FDA on these matters. Furthermore, even if sparsentan is granted accelerated approval under Subpart H, there can be no assurance that the post-marketing confirmatory portion of the trial will support full approval of sparsentan as a treatment for FSGS.
Although we have obtained a Special Protocol Assessment ("SPA") from the FDA for a planned Phase 3 clinical trial of RE-024 for the treatment of PKAN, this agreement does not guarantee any particular outcome from regulatory review. The SPA is intended to provide assurance that if the agreed upon clinical trial protocols are followed and the clinical trial endpoints are achieved, the data may serve as the primary basis for an efficacy claim in support of an NDA. However, a SPA is not a guarantee of an approval of a product candidate or any permissible claims about the product candidate. In particular, a SPA agreement is not binding on the FDA if previously unrecognized public health concerns arise during the performance of the clinical trial, if other new scientific concerns regarding product candidate safety or efficacy arise or if the sponsoring company fails to comply with the agreed upon clinical trial protocols. Moreover, a SPA does not address all of the variables and details that may go into planning for or conducting a clinical trial, and changes in the protocol for a clinical trial can invalidate a SPA or require that the FDA agree in writing to the modified protocol. In addition, while a SPA addresses the requirements for submission of an NDA, the results of the related clinical trial may not support FDA approval. There can be no assurance that the planned Phase 3 clinical trial for RE-024 will demonstrate that RE-024 is safe and effective for treating PKAN or that the data obtained from any such clinical trials will support an application for approval by the FDA.
Clinical trials can be lengthy, complex and extremely expensive processes with uncertain results. Our product candidates are intended to treat FSGS and PKAN, each of which is a rare disease. Given that these development candidates are still undergoing required testing, we may not be able to initiate or continue clinical trials if we are unable to locate a sufficient number of eligible patients willing and able to participate in the clinical trials required by the FDA or foreign regulatory agencies. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.
We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to obtain regulatory approval or commercialize our product candidates, including:
our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or we may abandon projects that we expect to be promising;
regulators may require us to conduct studies of the long-term effects associated with the use of our product candidates;
regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;
the FDA or any non-United States regulatory authority may impose conditions on us regarding the scope or design of our clinical trials or may require us to resubmit our clinical trial protocols to institutional review boards for re-inspection due to changes in the regulatory environment;

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the number of patients required for our clinical trials may be larger than we anticipate or participants may drop out of our clinical trials at a higher rate than we anticipate;
our third-party contractors or clinical investigators may fail to comply with regulatory requirements or fail to meet their contractual obligations to us in a timely manner;
we might have to suspend or terminate one or more of our clinical trials if we, regulators or institutional review boards determine that the participants are being exposed to unacceptable health risks;
regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
the cost of our clinical trials may be greater than we anticipate;
the supply or quality of our product candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate or we may not be able to reach agreements on acceptable terms with prospective clinical research organizations; and
the effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected characteristics.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
be delayed in obtaining, or may not be able to obtain, marketing approval for one or more of our product candidates;
obtain approval for indications that are not as broad as intended or entirely different than those indications for which we sought approval; and
have the product removed from the market after obtaining marketing approval.
Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will be initiated as planned, will need to be restructured or will be completed on schedule, if at all. Significant preclinical or clinical trial delays also could shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates. Such delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates.
In addition, we depend on independent clinical investigators and contract research organizations (“CROs”) to conduct our clinical trials under agreements with us. The CROs play a significant role in the conduct of our clinical trials. Failure of the CROs to meet their obligations could adversely affect clinical development of our product candidates. The independent clinical investigators are not our employees and we cannot control the timing or amount of resources they devote to our studies. If their performance is substandard, it could delay or prevent approval of our FDA applications.
FDA approval for a product requires substantial or extensive preclinical and clinical data and supporting documentation. The approval process may take years and may involve on-going requirements as well as post marketing obligations. For example, we have certain post marketing requirements and commitments associated with Cholbam. FDA approval once obtained, may be withdrawn. If the regulatory approval for Thiola, Chenodal and/or Cholbam are withdrawn for any reason, it would have a material adverse impact on our sales and profitability. Further, we face risks relating to the post marketing obligations and commercial acceptance of Cholbam, which was approved by the FDA on March 17, 2015.
We face substantial risks related to the commercialization of our product candidates.
We have invested a significant portion of our efforts and financial resources in the development and acquisition of our most advanced product candidates, sparsentan, fosmetpantotenate (RE-024) and L-UDCA. Our ability to generate product revenue from these development stage compounds, which we do not expect will occur for at least the next several years, if ever, may depend heavily on the successful development and commercialization of these product candidates. The successful commercialization of our future product candidates will depend on several factors, including the following:
obtaining supplies of sparsentan, fosmetpantotenate (RE-024) and subsequent product candidates for completion of our clinical trials on a timely basis;
successful completion of pre-clinical and clinical studies;
with respect to L-UDCA, our ability to complete the activities necessary to submit an NDA;
obtaining marketing approvals from the FDA and similar regulatory authorities outside the United States;
establishing commercial-scale manufacturing arrangements with third-party manufacturers whose manufacturing facilities are operated in compliance with cGMP regulations;
launching commercial sales of the product, whether alone or in collaboration with others;
acceptance of the product by patients, the medical community and third-party payers;

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reimbursement from medical, medicaid or private payers;
competition from other companies;
successful protection of our intellectual property rights from competing products in the United States and abroad; and
a continued acceptable safety and efficacy profile of our product candidates following approval.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval or commercialization.
Undesirable side effects caused by our product candidates could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications, and in turn prevent us from commercializing our product candidates and generating revenues from their sale.
In addition, if any of our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product:
regulatory authorities may require the addition of restrictive labeling statements;
regulatory authorities may withdraw their approval of the product; and
we may be required to change the way the product is administered or conduct additional clinical trials.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product candidate, which in turn could delay or prevent us from generating significant revenues from its sale or adversely affect our reputation.
We may not be able to obtain orphan drug exclusivity for our product candidates. If our competitors are able to obtain orphan drug exclusivity for their products that are the same drug as our product candidates, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Although we have obtained orphan designation for sparsentan and fosmetpantotenate (RE-024), there can be no assurance that there will be any benefits associated with such designation.
Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, that product is entitled to a period of marketing exclusivity, which precludes the applicable regulatory authority from approving another marketing application for the same drug for the same indication for that time period. The applicable period is seven years in the United States and ten years in Europe. Even if we have orphan drug exclusivity, we may not be able to maintain it. For example, if a competitive product that contains the same active moiety and treats the same disease as our product candidate is shown to be clinically superior to our product candidate, any orphan drug exclusivity we have obtained will not block the approval of such competitive product and we may effectively lose what had previously been orphan drug exclusivity. Similarly, if a competitive product that contains the same active moiety and treats the same disease as our product candidate is approved before our product candidate is approved, we may not be able to obtain approval for our product candidate until the expiration of the competitive product’s orphan drug exclusivity unless our product candidate is shown to be clinically superior to the competitive product.
Risks Related to our Products and Product Candidates
Our products may not achieve or maintain expected levels of market acceptance or commercial success.
The success of our products is dependent upon achieving and maintaining market acceptance. Commercializing products is time consuming, expensive and unpredictable. There can be no assurance that we will be able to, either by ourselves or in collaboration with our partners or through our licensees, successfully commercialize new products or current products or gain market acceptance for such products. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial success.
Further, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products could have an adverse effect on sales of the affected products. Accordingly, new data about our products, or products similar to our products, could negatively impact demand for our products due to real or perceived side effects or uncertainty regarding efficacy and, in some cases, could result in product withdrawal.
Our current products and any products that we bring to the market, including sparsentan, fosmetpantotenate (RE-024) and L-UDCA if they receive marketing approval,may not gain market acceptance by physicians, patients, third-party payers, and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:
the prevalence and severity of any side effects, including any limitations or warnings contained in a product’s approved labeling;
the efficacy and potential advantages over alternative treatments;
the pricing of our product candidates;

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relative convenience and ease of administration;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the strength of marketing and distribution support and timing of market introduction of competitive products;
publicity concerning our products or competing products and treatments; and
sufficient third-party insurance coverage or reimbursement.
Even if a potential or current product displays a favorable efficacy and safety profile in preclinical and clinical trials, market acceptance of the product will not be known until after it is launched. Our efforts to educate patients, the medical community, and third-party payers on the benefits of our product may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by the conventional marketing technologies employed by our competitors.
If the market opportunities for our products and product candidates are smaller than we believe they are, our revenues may be adversely affected and our business may suffer.
Certain of the diseases that our current and future product candidates are being developed to address, such as FSGS and PKAN, are relatively rare. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, may not be accurate.
Currently, most reported estimates of the prevalence of FSGS and PKAN are based on studies of small subsets of the population of specific geographic areas, which are then extrapolated to estimate the prevalence of the diseases in the broader world population. As new studies are performed the estimated prevalence of these diseases may change. There can be no assurance that the prevalence of FSGS and PKAN in the study populations accurately reflect the prevalence of these diseases in the broader world population. If our estimates of the prevalence of FSGS or PKAN or of the number of patients who may benefit from treatment with sparsentan and fosmetpantotenate (RE-024) prove to be incorrect, the market opportunities for our product candidates may be smaller than we believe they are, our prospects for generating revenue may be adversely affected and our business may suffer.
*We do not currently have patent protection for certain of our products and product candidates. If we are unable to obtain and maintain protection for the intellectual property relating to our technology and products, the value of our technology and products will be adversely affected.
Our success will depend in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering, or incorporated into, our technology and products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal, technical, scientific and factual questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents issued to us or our licensors may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from marketing similar products or reduce the term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Fosmetpantotenate (RE-024) is covered by our U.S. Patent No. 8,673,883, which was granted in 2014 and expires in 2033. In addition, our U.S. Patent No. 9,181,286, which was granted on November 10, 2015 and expires in 2033, covers the use of fosmetpantotenate (RE-024) for the treatment of PKAN. Sparsentan is covered by U.S. Patent No. 6,638,937, which expires in 2019 and to which we have an exclusive license. In addition, our U.S. Patent No. 9,662,312, which was granted on May 30, 2017 and expires in 2030, covers the use of sparsentan for treating glomerulosclerosis, including FSGS. Our RE-034 formulation is covered by a PCT patent application we filed in February 2016, which claims priority to a U.S. provisional patent application we filed in February 2015.
For products we develop based on a new chemical entity not previously approved by the FDA, we expect that in addition to the protection afforded by our patent filings that we will be able to obtain either five years regulatory exclusivity via the provisions of the FDC Act or seven years regulatory exclusivity via the orphan drug provisions of the FDC Act. In addition, we may be able to obtain up to five years patent term extension (to compensate for regulatory approval delay) for a patent covering such a product.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
we or our licensors were the first to make the inventions covered by each of our pending patent applications;
we or our licensors were the first to file patent applications for these inventions;
others will not independently develop similar or alternative technologies or duplicate any of our technologies;
any patents issued to us or our licensors that provide a basis for commercially viable products will provide us with any competitive advantages or will not be challenged by third parties;
we will develop additional proprietary technologies that are patentable;
we will file patent applications for new proprietary technologies promptly or at all;
the claims we make in our patents will be upheld by patent offices in the United States and elsewhere;
our patents will not expire prior to or shortly after commencing commercialization of a product; and

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the patents of others will not have a negative effect on our ability to do business.
We have negotiated a license agreement with Ligand Pharmaceuticals for the rights to sparsentan which we are initially developing for the treatment of FSGS. This license subjects us to various commercialization, reporting and other obligations. If we were to default on our obligations, we could lose our rights to sparsentan. We have obtained a U.S. and European patent covering the use of sparsentan for treating glomerulosclerosis, including FSGS. However, we cannot be certain that we will be able to obtain patent protection for various other potential indications for sparsentan, or whether, if granted,we would be able to enforce such patents.
Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind the actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications. If a third party has also filed a United States patent application prior to the effective date of the relevant provisions of the America Invents Act (i.e. before March 16, 2013) covering our product candidates or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our United States patent position.
We cannot assure you that third parties will not assert patent or other intellectual property infringement claims against us with respect to technologies used in our products. If patent infringement suits were brought against us, we may be unable to commercialize some of our products which could severely harm our business. Litigation proceedings, even if not successful, could result in substantial costs and harm our business.
We expect to rely on orphan drug status to develop and commercialize certain of our product candidates, but our orphan drug designations may not confer marketing exclusivity or other expected commercial benefits.
We expect to rely on orphan drug exclusivity for sparsentan and fosmetpantotenate (RE-024) and potential future product candidates that we may develop. Orphan drug status currently confers seven years of marketing exclusivity in the United States under the FDC Act, and up to ten years of marketing exclusivity in Europe for a particular product in a specified indication. The FDA and EMA have granted orphan designation for sparsentan and fosmetpantotenate (RE-024) for the treatment of FSGS and PKAN, respectively. While we have been granted these orphan designations, we will not be able to rely on these designations to exclude other companies from manufacturing or selling these molecules for the same indication beyond these time frames. Furthermore, any marketing exclusivity in Europe can be reduced from ten years to six years if the initial designation criteria have significantly changed since the market authorization of the orphan product.
For any product candidate for which we have been granted orphan drug designation in a particular indication, it is possible that another company also holding orphan drug designation for the same product candidate will receive marketing approval for the same indication before we do. If that were to happen, our applications for that indication may not be approved until the competing company's period of exclusivity expires. Even if we are the first to obtain marketing authorization for an orphan drug indication in the United States, there are circumstances under which a competing product may be approved for the same indication during the seven-year period of marketing exclusivity, such as if the later product is shown to be clinically superior to our orphan product, or if the later product is deemed a different product than ours. Further, the seven-year marketing exclusivity would not prevent competitors from obtaining approval of the same product candidate as ours for indications other than those in which we have been granted orphan drug designation, or for the use of other types of products in the same indications as our orphan product.
Any drugs we develop may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, thereby harming our business.
In March 2010, President Obama signed the PPACA, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The PPACA revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the law imposes a significant annual fee on companies that manufacture or import certain branded prescription drug products. It is likely the PPACA, or a replacement of it under the current administration, will continue to put pressure on pharmaceutical pricing.
If we are unable to obtain coverage and adequate reimbursement from governments or third-party payers for any products that we may develop or if we are unable to obtain acceptable prices for those products, our prospects for generating revenue and achieving profitability will suffer.
Our prospects for generating revenue and achieving profitability will depend heavily upon the availability of coverage and adequate reimbursement for the use of our approved product candidates from governmental and other third-party payers, both in the United States and in other markets. Reimbursement by a third-party payer may depend upon a number of factors, including the third-party payer’s determination that use of a product is:
a covered benefit under its health plan;
safe, effective and medically necessary;
appropriate for the specific patient;
cost-effective; and
neither experimental nor investigational.

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Obtaining reimbursement approval for a product from each government or other third-party payer is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our products to each payer. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement or we might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness of any future products to such payers’ satisfaction. Such studies might require us to commit a significant amount of management time and financial and other resources. Even when a payer determines that a product is eligible for reimbursement, the payer may impose coverage limitations that preclude payment for some uses that are approved by the FDA or non-United States regulatory authorities. Also prior authorization for a product may be required. In addition, there is a risk that full reimbursement may not be available for high-priced products. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. A primary trend in the United States healthcare industry and elsewhere is toward cost containment. We expect recent changes in the Medicare program and increasing emphasis on managed care to continue to put pressure on pharmaceutical product pricing.
Further, there has been increasing legislative and enforcement interest in the United States with respect to drug pricing practices, including several recent United States Congressional inquiries and proposed bills at both the state and federal levels designed to, among other things, increase drug pricing transparency, expedite generic competition, review relationships between pricing and manufacturer patient assistance programs, and reform government program drug reimbursement methodologies. Any reduction in reimbursement from Medicare, Medicaid or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our drugs. Additionally, we are currently unable to predict what additional legislation or regulation, if any, relating to the healthcare industry may be enacted in the future or what effect recently enacted federal legislation or any such additional legislation or regulation would have on our business.
We face potential product liability exposure far in excess of our limited insurance coverage.
The use of any of our potential products in clinical trials, and the sale of any approved products, may expose us to liability claims. These claims might be made directly by consumers, health care providers, pharmaceutical companies or others selling our products. We have obtained limited product liability insurance coverage for our clinical trials in the amount of $10 million per occurrence and $10 million in the aggregate. However, our insurance may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall.
We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do. Our operating results will suffer if we fail to compete effectively.
Several of our competitors have substantially greater financial, research and development, distribution, manufacturing and marketing experience and resources than we do and represent substantial long-term competition for us. Other companies may succeed in developing and marketing products that are more effective and/or less costly than any products that may be developed and marketed by us, or that are commercially accepted before any of our products. Factors affecting competition in the pharmaceutical and drug industries vary, depending on the extent to which a competitor is able to achieve a competitive advantage based on its proprietary technology and ability to market and sell drugs. The industry in which we compete is characterized by extensive research and development efforts and rapid technological progress. Although we believe that our orphan drug status for Cholbam and proprietary position with respect to sparsentan and fosmetpantotenate (RE-024) may give us a competitive advantage, new developments are expected to continue and there can be no assurance that discoveries by others will not render such potential products noncompetitive.
Our competitive position also depends on our ability to enter into strategic alliances with one or more large pharmaceutical and contract manufacturing companies, attract and retain qualified personnel, develop effective proprietary products, implement development and marketing plans, obtain patent protection, secure adequate capital resources and successfully sell and market our approved products. There can be no assurance that we will be able to successfully achieve all of the foregoing objectives.
Use of third parties to manufacture and distribute our products and product candidates may increase the risk that we will not have sufficient quantities of our product and product candidates or such quantities at an acceptable cost, and clinical development and commercialization of our product and product candidates could be delayed, prevented or impaired.
We do not own or operate manufacturing facilities for clinical or commercial production of our products. We have limited personnel with experience in drug manufacturing and we lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. We outsource all manufacturing and packaging of our preclinical, clinical, and commercial products to third parties. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production and in maintaining required quality control. These problems include difficulties with production costs and yields and quality control, including stability of the product candidate.
We do not currently have any agreements with third-party manufacturers for the long-term commercial supply of any of our development stage product candidates. We may be unable to enter into agreements for commercial supply with third-party manufacturers, or may be unable to do so on

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acceptable terms. Even if we enter into these agreements, the manufacturers of each product candidate will be single source suppliers to us for a significant period of time. Reliance on third-party manufacturers entails risks to which we may not be subject if we manufactured our product candidates or products ourselves, including:
reliance on the third party for regulatory compliance and quality assurance;
limitations on supply availability resulting from capacity and scheduling constraints of the third parties;
impact on our reputation in the marketplace if manufacturers of our products fail to meet the demands of our customers;
the possible breach of the manufacturing agreement by the third party because of factors beyond our control; and
the possible termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.
The failure of any of our contract manufacturers to maintain high manufacturing standards could result in injury or death of clinical trial participants or patients using products. Such failure could also result in product liability claims, product recalls, product seizures or withdrawals, delays or failures in testing or delivery, cost overruns or other problems that could seriously harm our business or profitability.
Our contract manufacturers will be required to adhere to FDA regulations setting forth cGMP. These regulations cover all aspects of the manufacturing, testing, quality control and recordkeeping relating to our product candidates and any products that we may commercialize. Our manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the United States. Our manufacturers are subject to unannounced inspections by the FDA, state regulators and similar regulators outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect regulatory approval and supplies of our product candidates.
Our product and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and willing to do so. If the third parties that we engage to manufacture products for our developmental or commercial products should cease to continue to do so for any reason, we likely would experience interruptions in cash flows and/or delays in advancing our clinical trials while we identify and qualify replacement suppliers, and we may be unable to obtain replacement supplies on terms that are favorable to us. Later relocation to another manufacturer will also require notification, review and other regulatory approvals from the FDA and other regulators and will subject our production to further cost and instability in the availability of our product candidates. In addition, if we are not able to obtain adequate supplies of our product candidates, or the drug substances used to manufacture them, it will be more difficult for us to sell our products and to develop our product candidates. This could greatly reduce our competiveness.
Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that obtain regulatory approval on a timely and competitive basis.
Materials necessary to manufacture our products and product candidates may not be available on commercially reasonable terms, or at all, which may delay the development and commercialization of our products and product candidates.
We rely on the manufacturers of our products and product candidates to purchase from third-party suppliers the materials necessary to produce the compounds for our preclinical and clinical studies and rely on these other manufacturers for commercial distribution if we obtain marketing approval for any of our product candidates. Suppliers may not sell these materials to our manufacturers at the time we need them or on commercially reasonable terms and all such prices are susceptible to fluctuations in price and availability due to transportation costs, government regulations, price controls, and changes in economic climate or other foreseen circumstances. We do not have any control over the process or timing of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these materials. If our manufacturers are unable to obtain these materials for our preclinical and clinical studies, product testing and potential regulatory approval of our product candidates would be delayed, significantly impacting our ability to develop our product candidates. If our manufacturers or we are unable to purchase these materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would materially affect our ability to generate revenues from the sale of our product candidates.
Risks Related to Our Business
*Our limited operating history makes it difficult to evaluate our future prospects, and our profitability in the future is uncertain.
We face the problems, expenses, difficulties, complications and delays, many of which are beyond our control, associated with any business in its early stages and have a limited operating history on which an evaluation of our prospects can be made. Such prospects should be considered in light of the risks, expenses and difficulties frequently encountered in the establishment of a business in a new industry, characterized by a number of market entrants and intense competition, and in the shift from development to commercialization of new products based on innovative technologies.
We have experienced significant growth over the past three years in the number of our employees and the scope of our operations. We have added sales and marketing, compliance and legal functions in addition to expansion of all functions to support a commercial organization. To manage our

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anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability on the part of our management to manage growth could delay the execution of our business plans or disrupt our operations.
Factors that may inhibit our efforts to commercialize our products without strategic partners or licensees include:
our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
the inability of sales personnel to obtain access to or educate adequate numbers of physicians to prescribe our products;
the lack of complementary products to be offered by our sales personnel, which may put us at a competitive disadvantage against companies with broader product lines;
unforeseen costs associated with expanding our own sales and marketing team for new products or with entering into a partnering agreement with an independent sales and marketing organization; and
efforts by our competitors to commercialize competitive products.
Moreover, though we generate revenues from product sales arrangements, we may incur significant operating losses over the next several years. Our ability to achieve profitable operations in the future will depend in large part upon successful in-licensing of products approved by the FDA, selling and manufacturing these products, completing development of our products, obtaining regulatory approvals for these products, and bringing these products to market. The likelihood of the long-term success of our company must be considered in light of the expenses, difficulties and delays frequently encountered in the development and commercialization of new drug products, competitive factors in the marketplace, as well as the regulatory environment in which we operate.
In addition, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors.
We will likely experience fluctuations in operating results and could incur substantial losses.
We expect that our operating results will vary significantly from quarter-to-quarter and year-to-year as a result of investments in research and development, specifically our clinical and preclinical development activities. We have not completed development of any drugs and we anticipate that our expenses will increase substantially as we:
continue the open label portion of DUET and conduct the planned Phase 3 trial of sparsentan;
continue our ongoing clinical development of fosmetpantotenate (RE-024) for the treatment of PKAN;
complete requirements necessary for an NDA filing of L-UDCA;
continue the research and development of additional product candidates;
expand our sales and marketing infrastructure to commercialize our current products and any new products for which we may obtain regulatory approval; and
expand operational, financial, and management information systems and personnel, including personnel to support product development efforts and our obligations as a public company.
To attain and sustain profitability, we must succeed in developing and commercializing drugs with significant market potential. This will require us to be successful in a range of challenging activities, including the discovery of product candidates, successful completion of preclinical testing and clinical trials of our product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of these activities. We may not be successful enough in these activities to generate revenues that are substantial enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become or remain profitable could depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the market price of our common stock may also cause a loss of a part or all of your investment.
Negative publicity regarding any of our products could impair our ability to market any such product and may require us to spend time and money to address these issues.
If any of our products or any similar products distributed by other companies prove to be, or are asserted to be, harmful to consumers and/or subject to FDA enforcement action, our ability to successfully market and sell our products could be impaired. Because of our dependence on patient and physician perceptions, any adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products or any similar products distributed by other companies could limit the commercial potential of our products and expose us to potential liabilities.
We may not have sufficient insurance to cover our liability in any current or future litigation claims either due to coverage limits or as a result of insurance carriers seeking to deny coverage of such claims.
We face a variety of litigation-related liability risks.  Our certificate of incorporation, bylaws, other applicable agreements, and/or Delaware law require us to indemnify (and advance expenses to) our current and past directors and officers and employees from reasonable expenses related to

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the defense of any action arising from their service to us, including circumstances under which indemnification is otherwise discretionary. While our directors and officers are included in a director and officer liability insurance policy, which covers all our directors and officers in some circumstances, our insurance coverage does not cover all of our indemnification obligations and may not be adequate to cover any indemnification or other claims against us. In addition, the underwriters of our present coverage may seek to avoid coverage in certain circumstances based upon the terms of the respective policies. If we incur liabilities that exceed our coverage under our directors and officers insurance policy or incur liabilities not covered by our insurance, we would have to self-fund any indemnification amounts owed to our directors and officers and employees in which case our results of operations and financial condition could be materially adversely affected.  Further, if D&O insurance becomes prohibitively expensive to maintain in the future, we may be unable to renew such insurance on economic terms or unable renew such insurance at all. The lack of D&O insurance may make it difficult for us to retain and attract talented and skilled directors and officers to serve our company, which could adversely affect our business
We may need substantial funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.
We expect our general and research and development expenses to increase in connection with our ongoing and planned activities, particularly as we conduct Phase 3 clinical trials of sparsentan and RE-024, complete requirements for filings of L-UDCA, and conduct any other later-stage clinical trials of our product candidates. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales and marketing, securing commercial quantities of product from our manufacturers, and product distribution. We currently have no additional commitments or arrangements for any additional financing to fund the research and development and commercial launch of our product candidates.
Management believes our ability to continue our operations depends on our ability to sustain and grow revenue, results of operations and our ability to access capital markets when necessary to accomplish our strategic objectives. Management believes that we may incur losses in the immediate future. For the twelve months ended December 31, 2016, we generated a positive cash flow from operations; however, we expect that our operating results will vary significantly from quarter-to-quarter and year-to-year as a result of investments in research and development, specifically our clinical and preclinical development activities. We expect to finance our cash needs from cash on hand and results of operations, and depending on results of operations we may either need additional equity or debt financing, or need to enter into strategic alliances on products in development to continue our operations until we can achieve sustained profitability and positive cash flows from operating activities. Additional funds may not be available to us when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to reduce or eliminate research development programs or commercial efforts.
Our future capital requirements will depend on many factors, including:
the progress and results of our pre-clinical and clinical studies of sparsentan and fosmetpantotenate (RE-024) and other drug candidates;
the costs, timing and outcome of regulatory review of our product candidates;
the number and development requirements of other product candidates that we pursue;
the costs of commercialization activities, including product marketing, sales and distribution;
the emergence of competing technologies and other adverse market developments;
the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property related claims;
the extent to which we acquire or invest in businesses, products and technologies; and
our ability to establish collaborations and obtain milestone, royalty or other payments from any such collaborators.
The market price for shares of our common stock may be volatile and purchasers of our common stock could incur substantial losses.
The price of our stock is likely to be volatile. The stock market in general, and the market for biotechnology companies in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:
results of clinical trials of our product candidates or those of our competitors;
our entry into or the loss of a significant collaboration;
regulatory or legal developments in the United States and other countries, including changes in the health care payment systems;
our ability to obtain and maintain marketing approvals from the FDA or similar regulatory authorities outside the United States;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in the structure of healthcare payment systems;
market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;
general economic, industry and market conditions;

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results of clinical trials conducted by others on drugs that would compete with our product candidates;
developments or disputes concerning patents or other proprietary rights;
public concern over our product candidates or any products approved in the future;
litigation;
communications from government officials regarding health care costs or pharmaceutical pricing;
future sales or anticipated sales of our common stock by us or our stockholders; and
the other factors described in this “Risk Factors” section.
In addition, the stock markets, and in particular, the NASDAQ Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many pharmaceutical companies. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors” could have a dramatic and material adverse impact on the market price of our common stock.
We may be unable to successfully integrate new products or businesses we may acquire.
We intend to expand our product pipeline by pursuing acquisition of pharmaceutical products. If an acquisition is consummated, the integration of the acquired business, product or other assets into our company may also be complex and time- consuming and, if such businesses, products and assets are not successfully integrated, we may not achieve the anticipated benefits, cost-savings or growth opportunities. Potential difficulties that may be encountered in the integration process include the following:
integrating personnel, operations and systems, while maintaining focus on producing and delivering consistent, high quality products;
coordinating geographically dispersed organizations;
distracting employees from operations;
retaining existing customers and attracting new customers; and
managing inefficiencies associated with integrating the operations of the Company.
Furthermore, these acquisitions and other arrangements, even if successfully integrated, may fail to further our business strategy as anticipated, expose us to increased competition or challenges with respect to our products or geographic markets, and expose us to additional liabilities associated with an acquired business, product, technology or other asset or arrangement. Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions or arrangements after we have expended resources on them.
If we are unable to maintain an effective and specialized sales force, we will not be able to commercialize our products successfully.
In order to successfully commercialize our products, we have built a specialized sales force. Factors that may hinder our ability to successfully market and commercially distribute our products include:
inability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe our products;
inability to recruit, retain and effectively manage adequate numbers of effective sales personnel;
lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies that have more extensive product lines; and
unforeseen delays, costs and expenses associated with maintaining our sales organization.
If we are unable to maintain our sales force for our products, we may not be able to generate sufficient product revenue.
We will need to continue to expend significant time and resources to train our sales forces to be credible, persuasive and compliant in discussing our products with the specialists treating the patients indicated under the product’s label. In addition, if we are unable to effectively train our sales force and equip them with effective marketing materials our ability to successfully commercialize our products could be diminished, which would have a material adverse effect on our business, results of operations and financial condition.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
Our business exposes us to potential liability risks inherent in the research, development, manufacturing and marketing of pharmaceutical products. If any of our product candidates in clinical trials or marketed products harm people we may be subject to costly and damaging product liability claims. We have clinical trial insurance and commercial product liability coverage. However, this insurance may not be adequate to cover all claims. We may be exposed to product liability claims and product recalls, including those which may arise from misuse or malfunction of, or design flaws in, such products, whether or not such problems directly relate to the products and services we have provided. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

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decreased demand for any product candidates or products that we may develop;
damage to our reputation;
regulatory investigations that could require costly recalls or product modifications;
withdrawal of clinical trial participants;