DEFERRED REVENUE, REFUND LIABILITY AND LIABILITY RELATED TO SALE OF FUTURE ROYALTIES

3 Months Ended

Mar. 31, 2024

Other Liabilities Disclosure [Abstract]

DEFERRED REVENUE, REFUND LIABILITY AND LIABILITY RELATED TO SALE OF FUTURE ROYALTIES

The Company had the following deferred revenue balances as of March 31, 2024 (in thousands):


	March 31, 2024
Deferred Revenue:	Short-Term		Long-Term		Total
MTPC	$	695	$	—	$	695
CSL Vifor Agreement	—		43,296		43,296
Total	$	695	$	43,296	$	43,991

See Note 12, License, Collaboration and Other Revenue, for additional information on Mitsubishi Tanabe Pharma Corporation, or MTPC, deferred revenue.

CSL Vifor License Agreement

On February 18, 2022, the Company entered into a Second Amended and Restated License Agreement, or the Vifor Agreement, with CSL Vifor, which amended and restated the License Agreement dated May 12, 2017, or the Original License Agreement. The Vifor Agreement grants CSL Vifor an exclusive license to sell Vafseo to Fresenius Medical Care North America, or FMCNA, and its affiliates, including Fresenius Kidney Care Group LLC, to certain third-party dialysis organizations approved by the Company, to independent dialysis organizations that are members of certain group purchasing organizations and certain non-retail specialty pharmacies, collectively, the Supply Group, in the U.S., or Vifor Territory. The Company plans to market Vafseo in the U.S., including to the Supply Group, and sell Vafseo directly to organizations outside the Supply Group. CSL Vifor has agreed not to sell or otherwise supply Vafseo until CSL Vifor has entered a supply agreement with the applicable member of the Supply Group.

The Vifor Agreement is structured as a profit share arrangement between the Company and CSL Vifor in which the Company will receive approximately 66% of the profits, net of certain pre-specified costs. In addition, CSL Vifor made an upfront payment to the Company of $25.0 million in February 2022 in connection with the amendment and restatement of the Vifor Agreement, which was recorded as long-term deferred revenue in the accompanying condensed consolidated balance sheets.

Unless earlier terminated, the Vifor Agreement will expire upon the later of the expiration of all patents that claim or cover Vafseo or expiration of marketing or regulatory exclusivity for Vafseo in the Vifor Territory. CSL Vifor may terminate the Vifor Agreement in its entirety upon thirty months' prior written notice after the first anniversary of the receipt of regulatory approval from the FDA for Vafseo for dialysis-dependent CKD patients. The Company may terminate the Vifor Agreement in its entirety for convenience, following the earlier of a certain period of time elapsing or following certain specified regulatory events and upon six months’ prior written notice. If the Company so terminates for convenience, subject to specified exceptions, the Company will pay a termination fee to CSL Vifor. In addition, either party may, subject to a cure period, terminate the Vifor Agreement in the event of the other party’s uncured material breach or bankruptcy.

Investment Agreements

In connection with the Original License Agreement, in May 2017, the Company sold an aggregate of 3,571,429 shares of the Company’s common stock, or 2017 Shares, to CSL Vifor at a price per share of $14.00 for a total of $50.0 million.

In February 2022, in connection with the Vifor Agreement, the Company sold an aggregate of 4,000,000 shares of its common stock, or 2022 Shares, to CSL Vifor at a price per share of $5.00 for a total of $20.0 million.

The $18.3 million representing the premium over the closing stock price, or $4.7 million for the 2017 Shares and $13.6 million for the 2022 Shares, represents consideration related to the Vifor Agreement.

The 2017 Shares and 2022 Shares are subject to standstill agreement and are subject to voting agreements. The 2017 Shares and 2022 Shares have not been registered pursuant to the Securities Act of 1933, as amended, or the Securities Act, and were issued and sold in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder as the transaction did not involve any public offering within the meaning of Section 4(a)(2) of the Securities Act. See Note 8, Deferred Revenue, Refund Liability and Liability Related to the Sale of Future Royalties, of the Notes to the Consolidated Financial Statements in the 2023 Form 10-K for a more detailed description of the Vifor Agreement.

Deferred Revenue Recognition

The Company evaluated the elements of the Vifor Agreement in accordance with the provisions of ASC 606 and concluded that the contract counterparty, CSL Vifor, is a customer. The Company identified one performance obligation under the Vifor Agreement at inception which is the non-sublicensable, non-transferrable license under certain of the Company's intellectual property to (i) sell Vafseo solely to the Supply Group, (ii) sell Vafseo to Designated Wholesalers solely for resale to members of the Supply Group, (iii) conduct medical affairs with respect to Vafseo in the Vifor Territory in the field during the term of the Vifor Agreement and (iv) use the Akebia Trademark solely in connection with the sale of Vafseo.

The transaction price of $43.3 million is comprised of the up-front payment of $25.0 million and the premiums paid by CSL Vifor for the 2017 Shares and 2022 Shares of $4.7 million and $13.6 million, respectively. Under the Vifor Agreement, these payments from CSL Vifor are non-refundable and non-creditable against any other amount due to the Company. In addition, if the Centers for Medicare & Medicaid Services, or CMS, determines that Vafseo is excluded from the Transitional Drug Add-on Payment Adjustment, or TDAPA, the Company can terminate the Vifor Agreement and will be required to repay the up-front payment and the premiums paid by CSL Vifor on the 2017 Shares and the 2022 Shares. Given the previous uncertainty associated with a potential future approval of Vafseo by the FDA, and whether Vafseo would be included in certain reimbursement bundles by CMS, the Company constrained the entire transaction price at inception. Although Vafseo was approved by the FDA in March 2024, until it is included in TDAPA by CMS, and therefore the license is delivered, the transaction price of $43.3 million will remain in long-term deferred revenue in the accompanying condensed consolidated balance sheets.

Refund Liability to Customer/Working Capital Fund

Pursuant to the Vifor Agreement, CSL Vifor contributed $40.0 million to a working capital fund, or Working Capital Fund, established to fund approximately 50% of the Company’s costs of purchasing Vafseo from its contract manufacturers for the supply of Vafseo for the Vifor Territory already delivered or to be delivered to the Company through the end of 2023. The amount of the Working Capital Fund will be reviewed at specified intervals and is adjusted based on a number of factors including outstanding supply commitments for Vafseo and agreed upon Vafseo inventory levels held by the Company for the Vifor Territory.

The Company has determined the Working Capital Fund does not represent an obligation to transfer goods or services to CSL Vifor in the future and thus under ASC 606 was recorded as a refund liability. The refund liability is considered a debt

arrangement with zero coupon interest and the Company imputes interest on the refund liability at a rate of 15.0% per annum, which was determined based on certain factors, including the Company's credit rating, comparable securities yield and the expected repayment period. On March 18, 2022, when the $40.0 million was received from CSL Vifor, the Company recorded an initial discount on the refund liability and a corresponding deferred gain on the condensed consolidated balance sheet. The discount on the refund liability is being amortized to interest expense using the effective interest method over the expected term of the Vifor Agreement. The deferred gain is being amortized to interest income on a straight-line basis over the expected term of the Vifor Agreement. The amortization of the discount was $0.7 million and $0.8 million for the three months ended March 31, 2024 and 2023, respectively. The amortization of the deferred gain was $0.9 million and $1.0 million for the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the $39.9 million refund liability is classified as a long-term liability based on management's estimated timing of the repayment of the refund liability to Vifor exceeding one-year.

On May 3, 2024, the Company and CSL Vifor entered into Amendment #1 to the Vifor Agreement, or the Amendment, under which the parties agreed to modify the method of repayment of the Working Capital Fund such that the Working Capital Fund will be repaid through tiered royalties ranging from a high single-digit to low double-digit percentage of the Company’s sales of Vafseo to both CSL Vifor and to third parties outside of the Vifor Agreement. The Amendment also modified the terms of repayment of the Working Capital Fund upon termination of the Vifor Agreement. See Note 16, Subsequent Events, for further information.

Liability Related to Sale of Future Royalties

On February 25, 2021, the Company entered into a royalty interest acquisition agreement, or the Royalty Agreement, with HealthCare Royalty Partners IV, L.P., or HCR, pursuant to which the Company sold to HCR its right to receive royalties and sales milestones for Vafseo in Japan and certain other Asian countries, such countries collectively, the MTPC Territory, and such payments collectively the Royalty Interest Payments, in each case, payable to the Company under the MTPC Agreement. The Royalty Interest Payments are subject to an annual maximum “cap” of $13.0 million, after which the Company will receive 85% of the Royalty Interest Payments for the remainder of that year. The Royalty Interest Payments are also subject to an aggregate maximum “cap” of $150.0 million, after which the Royalty Interest Payments will revert back to the Company. The Company retains the right to receive all potential future regulatory milestones for Vafseo under the MTPC Agreement.

At the transaction date, the Company recorded the proceeds received from HCR of $44.8 million (net of certain transaction expenses) as a liability and is amortizing it using the effective interest method over the life of the arrangement. The liability related to sale of future royalties and the debt amortization are based on the Company’s current estimates of future royalties expected to be paid over the life of the arrangement. To the extent the Company’s estimates of future royalty payments are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, the Company will adjust the effective interest rate and recognize related non-cash interest expense on a prospective basis. In the event the Company's estimates of future royalties are less than the proceeds from the sale of future royalties, the Company will not recognize related non-cash interest expense. On a quarterly basis, the Company reassesses the effective interest rate and adjusts the rate prospectively as needed. The annual effective interest rate as of March 31, 2024 was 0% and, therefore the Company did not recognize any non-cash interest expense in the unaudited condensed consolidated statements of operations and comprehensive loss. As a result of its ongoing involvement in the cash flows related to the royalties and sales milestones in the MTPC Territory, the Company will continue to account for these royalties as non-cash royalty revenue which is reflected in license, collaboration and other revenue in the unaudited condensed consolidated statements of operations and comprehensive loss. A more detailed description of Royalty Agreement can be found in Note 8, Deferred Revenue, Refund Liability and Liability Related to Sale of Future Royalties, of the Notes to the Consolidated Financial Statements in the 2023 Form 10-K.

During each of the three months ended March 31, 2024 and 2023, the Company paid $0.4 million of royalties to HCR and as of March 31, 2024 and December 31, 2023 the balances were as follows (in thousands):


Liability related to sale of future royalties	March 31, 2024		December 31, 2023
Current portion (included in accrued expenses and other current liabilities)	$	1,994	$	2,048
Long-term portion	53,498		54,013
Total liability related to sale of future royalties	$	55,492	$	56,061