KINIKSA PHARMACEUTICALS, LTD. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, or Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve risks and uncertainties. As a result of many factors, including those factors set forth in the risks identified in Part I-Item 1A "Risk Factors" section of this Annual Report and our other filings with theSecurities and Exchange Commission (the "SEC"), our actual results could differ materially from the results, performance or achievements expressed in or implied by these forward-looking statements.
Overview
We are a biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutic medicines for patients suffering from debilitating diseases with significant unmet medical need. Our portfolio of immune-modulating assets, ARCALYST® (rilonacept), KPL-404 and mavrilimumab, are based on strong biologic rationale or validated mechanisms, target a spectrum of underserved cardiovascular and autoimmune conditions, and offer the potential for differentiation. ARCALYST is an interleukin-1? and interleukin-1? cytokine trap. In 2017, we licensed ARCALYST from Regeneron, who discovered and initially developed the drug. Our exclusive license to ARCALYST from Regeneron includes worldwide rights, excluding theMiddle East andNorth Africa , for all applications other than those in oncology and local administration to the eye or ear. We received FDA approval of ARCALYST for the treatment of recurrent pericarditis and reduction in risk of recurrence in adults and children 12 years and older inMarch 2021 . Recurrent pericarditis is a painful inflammatory cardiovascular disease with an estimatedU.S. prevalent population of approximately 40,000 patients seeking and receiving medical treatment. ARCALYST is commercially available acrossthe United States through a network of distributors. ARCALYST is also approved inthe United States for the treatment of CAPS, specifically Familial Cold Autoinflammatory Syndrome and Muckle-Wells Syndrome in adults and children 12 years and older, and the maintenance of remission in DIRA in adults and children weighing 10 kg or more. We are responsible for sales and distribution of ARCALYST in all approved indications inthe United States , and evenly split profits on sales as well as third-party proceeds with Regeneron. InFebruary 2022 , we granted Huadong exclusive rights to develop and commercialize ARCALYST in theAsia Pacific region, excludingJapan . KPL-404 is an investigational monoclonal antibody inhibitor of CD40-CD154 interaction. In 2019, we acquired all of the outstanding securities of Primatope, the company that owned or controlled the intellectual property related to KPL-404. In connection with our acquisition of Primatope, we acquired an exclusive world-wide license to KPL-404 from BIDMC. The CD40-CD154 interaction is a key T-cell co-stimulatory signal critical for B-cell maturation, immunoglobulin class switching and Type 1 immune response. We believe disrupting the CD40-CD154 interaction is an attractive approach to address multiple autoimmune disease pathologies such as RA, Sjogren's syndrome, Graves' disease and systemic lupus erythematosus. InMay 2021 , we announced positive final data from our Phase 1 single-ascending-dose clinical trial of KPL-404 in healthy volunteers, which evaluated safety and pharmacokinetics, as well as receptor occupancy and T-cell dependent antibody response. InDecember 2021 , we initiated a Phase 2 clinical trial of KPL-404 in RA, which is designed to evaluate pharmacokinetics, safety and efficacy with subcutaneous administration. InJanuary 2023 , we announced that we had completed enrollment of the second and final cohort of the multiple ascending dose portion of such trial. Following completion of this portion of the trial, the proof-of-concept portion will begin. We expect data from the trial in the first half of 2024. Mavrilimumab is an investigational monoclonal antibody inhibitor targeting GM-CSFR?. In 2017, we licensed exclusive worldwide rights in all indications to mavrilimumab from MedImmune. We are pursuing collaborative study agreements to evaluate the potential of mavrilimumab in rare cardiovascular diseases where the GM-CSF mechanism has been implicated. We previously evaluated mavrilimumab in GCA, a chronic inflammatory disease of the medium-to-large arteries, and COVID-19-related ARDS. InFebruary 2022 , we granted Huadong exclusive rights to develop and commercialize mavrilimumab in theAsia Pacific region, excludingJapan . 125 Table of Contents Vixarelimab is an investigational monoclonal antibody inhibitor of signaling through OSMR?, which was previously part of our portfolio of immune-modulating assets. InSeptember 2022 , we closed an agreement grantingGenentech an exclusive worldwide license to develop and commercialize vixarelimab. Pursuant to such agreement, we have agreed to complete our in-progress Phase 2b dose-ranging clinical trial of vixarelimab for the treatment of prurigo nodularis, a chronic inflammatory skin condition. Our ability to generate product revenue sufficient to achieve sustained corporate profitability will depend heavily on the continued commercialization of ARCALYST and the development and eventual commercialization of one or more of our current or future product candidates, if approved. While our ARCALYST collaboration with Regeneron has achieved profitability, such profits remain small compared to our total net losses and there is no guarantee that our ARCALYST collaboration with Regeneron will remain profitable in the future. In addition, payments and royalties arising from out-licensing, collaboration or other similar agreements, though potentially substantial, are often isolated events and cannot be relied upon to generate significant and sustained revenue. For the twelve months endedDecember 31, 2022 , we recognized net income of$183.4 million , primarily as a result of out-licensing activities and the release of our deferred tax asset valuation allowance, as compared to net losses of$157.9 million for the year endedDecember 31, 2021 . As ofDecember 31, 2022 , we had an accumulated deficit of$492.0 million . We expect to incur operating losses for the foreseeable future as we advance our product candidates through preclinical and clinical development and, ultimately, seek regulatory approval. In addition, we expect to continue to incur significant expenses related to product manufacturing, including potential technology transfer costs as early asMarch 2023 , marketing, sales and distribution of ARCALYST. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. As ofDecember 31, 2022 , we had cash, cash equivalents and short-term investments of$190.6 million . We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance of the audited consolidated financial statements included in this Annual Report. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "- Liquidity and Capital Resources." Our future viability is dependent on our ability to fund our operations through sales of ARCALYST and/or raise additional capital, such as through debt or equity offerings, as needed.
Components of Our Results of Operations
Product revenue, net
We have been generating product revenue from sales of ARCALYST sinceApril 2021 . ARCALYST is sold through a third party logistics provider that distributes primarily through a network of authorized specialty pharmacies and specialty distributors (collectively, "customers"), which deliver the medication to patients by mail. Net revenue from product sales is recognized at the transaction price when the specialty pharmacy or specialty distributors obtains control of our product, which occurs at a point in time, typically upon shipment of the product from the third party logistics provider. Our net revenues represent total revenues adjusted for discounts and allowances, including estimated cash discounts, chargebacks, rebates, returns, copay assistance, and specialty pharmacy and distributor fees. These adjustments represent variable consideration under ASC 606 and are estimated using the expected value method and are recorded when revenue is recognized on the sale of the product. These adjustments are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Adjustments for variable consideration are determined based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products.
License and collaboration revenue
License and collaboration revenue includes amounts recognized related to upfront payments, royalty revenue, and milestone payments.
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InFebruary 2022 , we entered into the Huadong Collaboration Agreements, pursuant to which we granted Huadong exclusive rights to develop and commercialize the Huadong Licensed Products in the Huadong Territory. We otherwise retained our current rights to the Huadong Licensed Products outside the Huadong Territory. For more information, see "Business -License and Acquisition Agreements-Out-Licensing Agreements-Huadong Collaboration Agreements". Under the Huadong Collaboration Agreements, we received a total upfront cash payment of$22.0 million , which includes$12.0 million for the Huadong Territory license of rilonacept and$10.0 million for the Huadong Territory license of mavrilimumab. In addition, we will be eligible to receive contingent payments, including specified development, regulatory and sales-based milestones. Huadong will also be obligated to pay us tiered percentage royalties on a Huadong Licensed Product-by-Huadong Licensed Product basis ranging from the low-teens to low-twenties on annual net sales of each Huadong Licensed Product in the Huadong Territory, subject to certain reductions tied to rilonacept manufacturing costs and certain other customary reductions, with an aggregate minimum floor. Royalties will be payable on a Huadong Licensed Product-by-Huadong Licensed Product and country-by-country or region-by-region basis until the later of (i) 12 years after the first commercial sale of the applicable Huadong Licensed Product in such country or region in the Huadong Territory, (ii) the date of expiration of the last valid patent claim of our patent rights or any joint collaboration patent rights that covers the applicable Huadong Licensed Product in such country or region in the Huadong Territory, and (iii) the expiration of the last regulatory exclusivity for the applicable Huadong Licensed Product in such country or region in the Huadong Territory. We recognized the$10.0 million related to the mavrilimumab license during the year endedDecember 31, 2022 . We deferred the$12.0 million related to the rilonacept license agreement as ofDecember 31, 2022 , as no materials were shipped during the year endedDecember 31, 2022 . InAugust 2022 , we entered into the Genentech License Agreement, pursuant to which we grantedGenentech exclusive worldwide rights to develop and commercialize the Genentech Licensed Products. For more information, see "Business -License and Acquisition Agreements-Out-Licensing Agreements-Genentech License Agreement". Under the Genentech License Agreement, we received an upfront payment of$80.0 million for the license. In the first quarter of 2023, following our last delivery of certain drug supplies toGenentech ,Genentech became obligated to make an additional cash payment of$20.0 million . We will be eligible to receive up to approximately$600.0 million in contingent payments, including specified development, regulatory and sales-based milestones as well as royalties in the low double digits to mid-teens on annual net sales, in each case before fulfilling our upstream financial obligations. We recognized a portion of the$80.0 million upfront payment and the$20.0 million near-term payment related to the delivery of certain materials in the year endedDecember 31, 2022 for the exclusive vixarelimab license, drug supply delivered and the completed portion of the in-progress Phase 2b prurigo nodularis clinical trial. We will recognize the remaining revenue associated with the transaction price over the remaining duration of the in-progress Phase 2b prurigo nodularis clinical trial and remaining deliveries of certain drug supply.
Operating Expenses
Cost of Goods Sold
Cost of goods sold includes production and distribution costs of ARCALYST, and amortization of the regulatory milestone, and other miscellaneous product costs associated with ARCALYST. Cost of goods sold also includes the allocations for the labor and overhead costs associated with the production of ARCALYST.
Collaboration expenses
Collaboration expenses consists of Regeneron's share of the profit related to
ARCALYST sales under the Regeneron Agreement. We evenly split profits on sales
of ARCALYST with Regeneron, where profits are determined after deducting from
net sales of ARCALYST certain costs related to the manufacturing and
commercialization of ARCALYST. Such costs include but are not limited to (i) our
cost of goods sold for product used, sold or otherwise distributed for patient
use by us; (ii) customary commercialization expenses, including the cost of our
field force, and (iii) our cost to market, advertise and otherwise promote
ARCALYST, with such costs identified in subsection (iii)
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subject to specified limits. In addition, should there be a transfer of
technology related to the manufacture of ARCALYST, then, to the extent permitted
in accordance with the Regeneron Agreement, the fully-burdened costs of each of
us and Regeneron incurred in performing (or having performed) such technology
transfer shall also be deducted from net sales of ARCALYST to determine
profit. We also evenly split with Regeneron any proceeds received by us from any
licensees, sublicensees and distributors in consideration for the sale, license
or other disposition of rights with respect to ARCALYST, including upfront
payments, milestone payments and royalties.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the research and development of our product candidates. We expense research and development costs as incurred. These expenses may include:
?expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval;
?expenses incurred under agreements with CROs that are primarily engaged in the oversight and conduct of our clinical trials and CMOs that are primarily engaged to provide preclinical and clinical drug substance and product for our research and development programs for our product candidates;
?other costs related to acquiring and manufacturing preclinical and clinical trial materials, including manufacturing validation batches, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;
?payments made in cash or equity securities under third-party licensing, acquisition and other similar agreements;
?employee-related expenses, including salaries and benefits, travel and share-based compensation expense for employees engaged in research and development functions;
?costs related to compliance with regulatory requirements; and
?allocated facilities-related costs, which include rent and utilities, depreciation and other expenses.
We recognize external development costs based on an evaluation of the progress
to completion of specific tasks using information provided to us by our service
providers. This process involves reviewing open contracts and purchase orders,
communicating with our personnel to identify services that have been performed
on our behalf and estimating the level of service performed and the associated
cost incurred for the service when we have not yet been invoiced or otherwise
notified of actual costs. Nonrefundable advance payments for goods or services
to be received in the future for use in research and development activities are
recorded as prepaid expenses. Such amounts are recognized as an expense as the
goods are delivered or the related services are performed, or until it is no
longer expected that the goods will be delivered or the services rendered.
Our direct research and development expenses are tracked on a program-by-program
basis for our product candidates and consist primarily of external costs, such
as fees paid to outside consultants, CROs, CMOs and research laboratories in
connection with our preclinical development, process development, manufacturing
and clinical development activities. Our direct research and development
expenses by program also include fees incurred under license, acquisition and
other similar agreements. We do not allocate employee costs or facility
expenses, including depreciation or other indirect costs, to specific programs
because these costs are deployed across multiple programs and, as such, are not
separately classified. We use internal resources primarily to conduct our
research and discovery activities as well as for managing our preclinical and
clinical development, process development and manufacturing activities.
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Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will be substantial over the next several years as we conduct our ongoing and/or planned clinical trials for our product candidates as well as conduct other preclinical and clinical development, and make regulatory filings for our product candidates. We also expect to incur additional expenses related to milestone and royalty payments payable to third parties with whom we have entered into license, acquisition and other similar agreements to acquire the rights to our product candidates. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of our current or future product candidates or when, if ever, we will realize significant revenue from product sales or be profitable. This uncertainty is due to the numerous risks and uncertainties, including those described in Part I, Item 1A. "Risk Factors" in this Annual Report.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and benefits, travel and share based compensation expense for personnel in selling, marketing, medical, executive, business development, finance, human resources, legal and support personnel functions. Selling, general and administrative expenses also include external commercialization, marketing, and professional fees for legal, patent, and accounting services.
We have been commercializing ARCALYST since
Other Income
Other income consists of interest income recognized from investments in money market funds andU.S. Treasury notes and other miscellaneous income offset by expenses related to investments.
Income Taxes
As an exempted company incorporated under the laws ofBermuda , we are principally subject to taxation inBermuda . Under the current laws ofBermuda , there is no corporate income tax levied on an exempted company's income, resulting in an effective zero percent tax rate. As a result, we have not recorded any income tax benefits from our losses incurred inBermuda during each reporting period, and no net operating loss carryforwards are currently available to us for those losses, while our assets remain inBermuda . Our wholly ownedU.S. subsidiaries, Kiniksa US, and Primatope are subject to federal and state income taxes inthe United States . Our wholly owned subsidiary KiniksaUK , and its wholly owned subsidiaries,Kiniksa Pharmaceuticals (Germany) GmbH ,Kiniksa Pharmaceuticals (France ) SARL, andKiniksa Pharmaceuticals GmbH are subject to taxation in their respective countries. Our income tax benefit relates mainly to the release of the valuation allowance on ourUK deferred tax assets partially offset by provision for income taxes relating toU.S. and
UK taxable income. 129 Table of Contents Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
2022/2021 2021/2020
Years Ended Comparison Comparison
December 31, Increase/(Decrease) Increase/(Decrease)
2022 2021 2020 $ % $ %
(in thousands) (in thousands, except percentages)
Revenue:
Product revenue, net $ 122,524 $ 38,544 $ - $ 83,980 218% $ 38,544 100%
License and
collaboration revenue 97,656 - - 97,656 100% - 0%
Total revenue 220,180 38,544 - 181,636 471% 38,544 100%
Operating expenses:
Cost of goods sold 22,895 9,100 - 13,795 152% 9,100 100%
Collaboration expenses 24,071 835 - 23,236 2783% 835 100%
Research and
development 65,490 99,297 112,042 (33,807) (34)% (12,745) (11)%
Selling, general and
administrative 97,951 85,948 45,321 12,003 14% 40,627 90%
Total operating
expenses 210,407 195,180 157,363 15,227 8% 37,817 24%
Income (loss) from
operations 9,773 (156,636) (157,363) 166,409 (106)% 727 0%
Other income 1,253 97 1,134 1,156 1192% (1,037) (91)%
Income (loss) before
income taxes 11,026 (156,539) (156,229) 167,565 (107)% (310) 0%
Benefit (provision)
for income taxes 172,337 (1,385) (5,152) 173,722 (12,543)% 3,767 (73)%
Net income (loss) $ 183,363 $ (157,924) $ (161,381) $ 341,287 (216)% $ 3,457 (2)%
Product Revenue, Net
We recognized net revenue from the sale of ARCALYST of $122.5 million for the
year ended December 31, 2022 , compared to $38.5 million for the year ended
December 31, 2021 , an increase of $84.0 million . The increase in product revenue
was primarily driven by an increase in patients as 2022 was our first full year
of sales following our commercial launch of ARCALYST in April 2021 .
License and Collaboration Revenue
License and collaboration revenue for the year endedDecember 31, 2022 was$97.7 million . The license and collaboration revenue for the year endedDecember 31, 2022 primarily consisted of$10.0 million in revenue recognized upon the signing of the mavrilimumab Huadong Collaboration Agreement in February of 2022 and$87.7 million for revenue related to the Genentech License Agreement. We expect to recognize$12.0 million of deferred revenue related to the rilonacept Huadong Collaboration Agreement over the life of the agreement as materials are delivered and the remaining$12.3 million of the transaction price still to be recognized related to the Genentech License Agreement over the life of the in-progress Phase 2b prurigo nodularis clinical trial, and material deliveries. 130 Table of Contents Cost of Goods Sold Upon the first sale commencing inApril 2021 , we began generating cost of goods sold associated with the sales of ARCALYST. We recognized cost of goods sold from the sale of ARCALYST of$22.9 million for the year endedDecember 31, 2022 , compared to$9.1 million for the year endedDecember 31, 2021 , an increase of$13.8 million . The cost of goods sold for the years endedDecember 31, 2022 and 2021 each include$1.0 and$0.8 million for the amortization of the payment we made to Regeneron in the first quarter of 2021 upon the achievement of a regulatory milestone, respectively. The increase in cost of goods sold relates primarily to the increase in sales and an increase in the average cost per unit. The increase in the average cost per unit is largely attributable to selling through repurposed clinical supply that was previously expensed through R&D and carried at zero-cost during 2021.
Collaboration Expenses
Our collaboration with Regeneron continued to be profitable for the year endedDecember 31, 2022 after first achieving profitability in the fourth quarter of 2021. Collaboration expenses were$24.1 million for year endedDecember 31, 2022 , compared to$0.8 million for the year endedDecember 31, 2021 , an increase of$23.2 million . The increase in collaboration expenses relates primarily to an increase in revenue from the sales of ARCALYST and to a$6.0 million payment due to Regeneron related to the rilonacept Huadong Collaboration Agreement. We expect to continue to incur collaboration expenses associated with sales of ARCALYST.
Research and Development Expenses
2022/2021 2021/2020
Years Ended Comparison Comparison
December 31, Increase/(Decrease) Increase/(Decrease)
2022 2021 2020 $ % $ %
(in thousands) (in thousands, except percentages)
Direct research and
development expenses by
program:
Rilonacept $ 853 $ 10,842 $ 25,729 $ (9,989) (92)% $ (14,887) (58)%
KPL-404 11,563 5,316 3,738 6,247 118% 1,578 42%
Mavrilimumab 6,379 30,704 25,862 (24,325) (79)% 4,842 19%
Vixarelimab 12,809 10,739 8,796 2,070 19% 1,943 22%
Unallocated research and
development expenses:
Personnel related
(including share-based
compensation) 22,548 27,736 33,489 (5,188) (19)% (5,753) (17)%
Other 11,338 13,960 14,428 (2,622) (19)% (468) (3)%
Total research and
development expenses $ 65,490 $ 99,297 $ 112,042 $ (33,807) (34)% $ (12,745) (11)%
Research and development expenses were $65.5 million for the year ended December
31, 2022 , compared to $99.3 million for the year ended December 31, 2021 , or a
decrease of $33.8 million . Research and development expenses were $99.3 million
for the year ended December 31, 2021 , compared to $112.0 million for the year
ended December 31, 2020 , or a decrease of $12.7 million .
Direct costs for our rilonacept program were $0.9 million , $10.8 million and
$25.7 million for the years ended December 31, 2022 , 2021 and 2020,
respectively. During the year ended December 31, 2022 , expenses primarily
related to close-out activities of our RHAPSODY trial, our global, pivotal Phase
3 clinical trial in recurrent pericarditis. During the year ended December 31,
2021 , expenses primarily related to the completion of RHAPSODY and the
transition to the long-term extension portion of the trial. During the year
ended December 31, 2020 , expenses incurred primarily related to conducting
RHAPSODY, a milestone payment of $7.5 million for the achievement of a specified
regulatory milestone event under the Regeneron Agreement, and supply chain
costs.
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Direct costs for our KPL-404 program were $11.6 million , $5.3 million and $3.7
million for the years ended December 31, 2022 , 2021 and 2020, respectively.
During the year ended December 31, 2022 , expenses incurred primarily related to
the first two cohorts of our Phase 2 trial in RA, which was initiated in
December 2021 . During the year ended December 31, 2021 , expenses incurred
primarily related to manufacturing of drug product supply and other start up
activities for our anticipated Phase 2 trial in RA. During the year ended
December 31, 2020 , expenses incurred primarily related to preclinical and
clinical trial for our Phase 1 trial of KPL-404 in healthy volunteers, including
toxicology costs.
Direct costs of our mavrilimumab program were $6.4 million , $30.7 million and
$25.9 million for the years ended December 31, 2022 , 2021 and 2020,
respectively. During the year ended December 31, 2022 , expenses related
primarily to the wind-down activities of the Phase 3 portion of our clinical
trial in COVID-19 related ARDS. During the year ended December 31, 2021 ,
expenses primarily related to our Phase 2/3 clinical trial in COVID-19 related
ARDS. During the year ended December 31, 2020 , expenses incurred primarily
related to conducting our global Phase 2 clinical trial in GCA, including
manufacturing costs for our clinical drug supply, and initiation of our Phase
2/3 clinical trial in COVID-19 related ARDS.
Direct costs for our vixarelimab program were $12.8 million , $10.7 million and
$8.8 million for the year ended December 31, 2022 , 2021 and 2020, respectively.
During the year ended December 31, 2022 , expenses incurred related primarily to
our ongoing Phase 2b clinical trial in prurigo nodularis. During the year ended
December 31, 2021 , expenses incurred related primarily to the initiation of our
Phase 2b clinical trial in prurigo nodularis. During the year ended December 31,
2020 , expenses incurred related primarily to conducting our Phase 2a clinical
trial in prurigo nodularis and our exploratory Phase 2 clinical trial in
diseases characterized by chronic pruritus, which concluded earlier in the year.
Unallocated research and development expenses were $33.9 million , $41.7 million
and $47.9 million for the years ended December 31, 2022 , 2021 and 2020,
respectively. The decrease of $7.8 million in unallocated research and
development expenses in 2022 from 2021 was primarily due a reduction in
resources required to support a lower level of late stage clinical trial
activity, as well as a full year of supply chain and quality related costs
associated with our commercial ARCALYST program, which are now included as cost
of goods sold, resulting in lower overall unallocated research and development
expenses. The decrease of $6.2 million in unallocated research and development
expense in 2021 from 2020 was due to a decrease in cost associated with ARCALYST
including quality control and supply chain of $4.9 million included in costs of
goods sold beginning with the approval of ARCALYST. Personnel-related costs for
the years ended December 31, 2022 , 2021 and 2020 included share-based
compensation of $6.8 million , $8.5 million and $8.9 million , respectively.Selling, General and Administrative Expenses
Selling, general and administrative expenses were$98.0 million ,$85.9 million and$45.3 million for the years endedDecember 31, 2022 , 2021 and 2020. The increase of$12.0 million in 2022 from 2021 was primarily due to an increase of$8.8 million in sales and marketing associated with the commercial operations of ARCALYST. The increase of$40.6 million in 2021 from 2020 was primarily due to an increase of$22.0 million in personnel-related costs related to the build out of our commercial function, including hiring of a sales force and$8.9 million in marketing expenses associated with the commercial launch of ARCALYST. Personnel-related costs for the years endedDecember 31, 2022 , 2021 and 2020 included share-based compensation of$17.7 million ,$16.5 million and$12.0 million , respectively.
Other Income
Other income was$1.3 million for the year endedDecember 31, 2022 , compared to other income of$0.1 million for the year endedDecember 31, 2021 . The increase was due primarily to higher interest rates onU.S. Treasury notes and a higher average balance in short term investments. Other income was$0.1 million for the year endedDecember 31, 2021 , compared to other income of$1.1 million for the year endedDecember 31, 2020 . The decrease was due primarily to lower interest rates onU.S. Treasury notes and a lower average balance in short term investments. 132
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Benefit (Provision) for Income Taxes
For the year endedDecember 31, 2022 , we recorded an income tax benefit of$172.3 million relating primarily to the release of the valuation allowance on ourUK deferred tax assets. OurUK deferred tax asset consists primarily of the tax basis of the intangible assets that were transferred to our wholly-ownedUK subsidiary in 2021 and 2022. As a result of releasing the valuation allowance on ourUK deferred tax assets in 2022, we expect that our reported income tax expense (current plus deferred) for future periods will be higher than that recorded in prior periods. While we still maintain a full valuation allowance on our US deferred tax assets as ofDecember 31, 2022 , based on current US forecasted income, we may release our valuation allowance on US deferred tax assets in the future. For the year endedDecember 31, 2021 , we recorded a provision for income taxes of$1.4 million relating primarily toU.S. current taxes from the cost-plus arrangement less amounts related to the impact of Foreign Derived Intangible Income ("FDII") deduction andU.S. federal and state research credits. As ofDecember 31, 2021 , we maintained a full valuation allowance against our deferred tax assets of$127.9 million because we believed we would not be able to benefit from those tax deductions in the future. For the year endedDecember 31, 2020 , we recorded a provision for income taxes of$5.2 million relating primarily to the recognition of the valuation allowance and the current year tax expense.
Liquidity and Capital Resources
As ofDecember 31, 2022 , our principle source of liquidity was cash, cash equivalents and short-term investments, which totaled$190.6 million . Our net income (losses) were$183.4 million ,($157.9) million and($161.4) million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. We expect to incur operating losses for the foreseeable future as we advance our product candidates through preclinical and clinical development and, ultimately, seek regulatory approval. In addition, we expect to continue to incur significant expenses related to product manufacturing, including potential technology transfer costs as early asMarch 2023 , marketing, sales and distribution of ARCALYST. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. OnMay 18, 2020 , we completed a follow-on offering of 2,760,000 Class A common shares, inclusive of the exercise of the underwriters' overallotment option at a public offering price of$18.25 per share and a concurrent private placement of 1,600,000 Class A1 common shares at an offering price of$18.25 per share for aggregate gross proceeds of$79.6 million . The aggregate net proceeds to us from the follow-on offering and concurrent private placement, inclusive of the option exercise, was$74.5 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs. OnJuly 24, 2020 , we completed a follow-on offering of 5,952,381 Class A common shares, at a public offering price of$21.00 and a concurrent private placement of 1,428,572 Class A1 common shares at an offering price of$21.00 per share for aggregate gross proceeds of$155.0 million . The estimated aggregate net proceeds to us from the follow-on offering and concurrent private placement was$146.0 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs. Under various agreements with third parties, we have agreed to make milestone payments, pay royalties, annual maintenance fees and to meet due diligence requirements based upon specified milestones. Under our license agreement with Regeneron, we have entered into supply agreements to provide both clinical and commercial product. We have committed to minimum payments to Regeneron of$20.1 million , all of which are due within one year. We have entered into lease agreements for office and laboratory space, and vehicles, with total future lease payments of$6.2 million , of which$3.5 million are due within one year. These agreements impact our short-term and long-term liquidity and capital needs.
As of
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Cash Flows
The following table summarizes our cash flows for each of the periods presented:
Years Ended
December 31,
2022 2021 2020
(in thousands)
Net cash provided by (used in) operating activities $ 5,807 $ (126,298) $ (136,532)
Net cash provided by (used in) investing activities (8,078) 128,635 (23,444)
Net cash provided by financing activities 2,516 5,885 227,086
Net increase in cash and cash equivalents and
restricted cash $ 245 $ 8,222 $ 67,110
Operating Activities
During the year endedDecember 31, 2022 , operating activities provided$5.8 million of cash which primarily consisted of our net income of$183.4 million , adjusted for non-cash items of$155.0 million and working capital decreases of$22.6 million . Non-cash items were comprised primarily of an increase to deferred income tax assets of$185.5 million , driven by the release of the valuation allowance for theUK deferred tax assets, offset by$25.1 million of stock based compensation. Working capital decreased primarily due to a$17.9 million increase in inventory and a$8.7 million increase in accounts receivable both related to increased sales of ARCALYST. During the year endedDecember 31, 2021 , operating activities used$126.3 million of cash, primarily resulting from our net loss of$157.9 million , partially offset by non-cash charges of$30.9 million . Net cash used in our operating assets and liabilities for the year endedDecember 31, 2021 consisted of a$10.3 million increase in accrued expenses and other liabilities primarily due to increases in the accrued costs for our clinical trials and accrual of the 2021 employee bonus, a$3.9 million increase in accounts receivable due to the start of sales for ARCALYST, and a$3.7 million increase in inventory. During the year endedDecember 31, 2020 , operating activities used$136.5 million of cash, primarily resulting from our net loss of$161.4 million and net cash used in our operating assets and liabilities of$4.3 million , partially offset by non-cash charges of$29.2 million . Net cash used in our operating assets and liabilities for the year endedDecember 31, 2020 consisted of a$5.0 million decrease in accounts payable primarily due to the timing of vendor invoicing and payments, a$8.8 million increase in accrued expenses and other liabilities primarily due to increases in the accrued costs for our clinical trials and pre-commercialization activities for ARCALYST, a$0.5 million increase in other long-term liabilities, a$1.7 million decrease in operating lease liabilities due to monthly payments for our right-of-use assets, a$5.6 million increase in other long-term assets due to payments associated with minimum balance requirements of our clinical trials which are not expected to be completed within a year, and$1.3 million increase in prepaid expenses and
other current assets. Investing Activities During the year endedDecember 31, 2022 , investing activities used$8.1 million of cash, consisting of$135.9 million of purchases of short-term investments, partially offset by$127.8 million from proceeds of maturities of short-term investments. 134 Table of Contents During the year endedDecember 31, 2021 , investing activities provided$128.6 million of cash, consisting of$306.3 million from proceeds of maturities of short-term investments, offset by$157.3 million of purchases of short-term investments and$20.0 million related to the payment of a regulatory milestone incurred under the Regeneron Agreement. During the year endedDecember 31, 2020 , investing activities used$23.4 million of cash, consisting of$430.2 million of purchases of short-term investments and$0.3 million of purchases of property and equipment, partially offset by$407.1 million from proceeds of maturities of short-term investments.
Financing Activities
During the years endedDecember 31, 2022 and 2021, net cash provided by financing activities was$2.5 million and$5.9 million , respectively, consisting of proceeds from the exercise of employee share options and our 2018 Employee Share Purchase Plan (the "2018 ESPP"). During the year endedDecember 31, 2020 , net cash provided by financing activities was$227.1 million , consisting of net proceeds of$220.5 million in aggregate from our issuance and sale of Class A common shares in two follow-on public offerings, inclusive of the exercise of the underwriters' option to purchase additional Class A common shares, as applicable, and the concurrent issuances and sales of Class A1 common shares in two private placements, after the deduction of underwriting discounts and commissions, placement agent fees and other offering costs, and$6.6 million of proceeds primarily from the exercise of share options and our 2018 ESPP.
Funding Requirements
We expect to incur significant expenses in connection with our ongoing and planned activities as we continue to commercialize ARCALYST and advance our current and future product candidates through preclinical and clinical development, seek regulatory approval and commercialize one or more of our current or future product candidates, if approved. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. As a result, we expect to incur additional expenses related to milestone, royalty and other payments payable to third parties with whom we have entered into license, acquisition and other similar agreements to acquire the rights to our product candidates. Additionally, we expect to continue to incur costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses. We expect to incur expenses as we:
? conduct our current and planned clinical trials for our current and future
product candidates;
increase clinical and commercial manufacturing capabilities or make
? arrangements with additional third party manufacturers to successfully
manufacture our products and product candidates;
? develop and timely deliver clinical grade and commercial grade product
formulations that can be used in our clinical trials and for commercial sale;
? seek regulatory approvals for any product candidates that successfully complete
clinical trials;
maintain, establish, and/or expand a sales, marketing, medical affairs and
? distribution infrastructure to commercialize ARCALYST or any of our current or
future product candidates for which we may obtain marketing approval and intend
to commercialize on our own;
? launch commercial sales of any of our current or future product candidates, if
and when approved, whether alone or in collaboration with others;
? make milestone or other payments under any current or future license,
acquisition, collaboration or other strategic transaction agreements;
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expand our operational, financial and management systems and increase personnel
? globally to support our clinical development, manufacturing and
commercialization efforts and our operations as a public company;
? maintain, expand and protect our intellectual property portfolio; and
? in-license or acquire other product candidates and technologies or their
related businesses, if we determine to do so.
We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. The future viability of the Company is dependent on its ability to fund its operations through sales of ARCALYST and/or raise additional capital, such as through debt or equity offerings, as needed. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We anticipate that we may require additional capital if we choose to pursue in-licenses or acquisitions of other product candidates and technologies or their related businesses. We expect to continue to incur significant expenses related to product manufacturing, sales, marketing and distribution of ARCALYST. In addition, if we obtain regulatory approval for any of our current or future product candidates, pursue additional indications for our products or any of our current or future product candidates, we expect to incur significant expenses related to product development and manufacturing, sales, marketing and distribution, depending on where we choose to commercialize.
Because of the numerous risks and uncertainties associated with research, development and commercialization of biologic products, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements may be impacted by a number of factors, including those described in Part I, Item 1A. "Risk Factors" in this Annual Report.
Until such time, if ever, as we can generate substantial and sustained product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, or other sources, including, licensing, collaboration, marketing, distribution or other strategic transactions or arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders' ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect our shareholders' rights as a common shareholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in fixed payment obligations. If we raise funds through licensing, collaboration, marketing, distribution or other strategic transactions or arrangements with third parties, we may have to relinquish valuable rights to our technologies, product candidates or future revenue streams, or otherwise agree to terms that may not be favorable to us. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate some or all of our research and development programs for product candidates, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. 136
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While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
ASC 606 outlines a five-step process for recognizing revenue from contracts with customers: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the separate performance obligations in the contract, and (v) recognize revenue associated with the performance obligations as they are satisfied. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. Once a contract is determined to be within the scope of ASC 606, we determine the performance obligations that are distinct. We recognize as revenues the amount of the transaction price that is allocated to each respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon receipt of the product by the customer. ASC 606 requires entities to record a contract asset when a performance obligation has been satisfied or partially satisfied, but the amount of consideration has not yet been received because the receipt of the consideration is conditioned on something other than the passage of time. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer.
Product Revenue, Net
Net revenue from product sales is recognized at the transaction price when the specialty pharmacy or specialty distributors obtains control of our products, which occurs at a point in time, typically upon shipment of the product from the third party logistics provider. Our net revenues represent total revenues adjusted for discounts and allowances, including estimated cash discounts, chargebacks, rebates, returns, copay assistance, and specialty pharmacy and distributor fees. These adjustments represent variable consideration under ASC 606 and are estimated using the expected value method and are recorded when revenue is recognized on the sale of the product. These adjustments are established by us as our best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Adjustments for variable consideration are determined based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products.
As of
As part of the process of preparing our consolidated financial statements, we
are required to estimate our accrued research and development expenses. This
process involves reviewing open contracts and purchase orders, communicating
with our personnel to identify services that have been performed on our behalf
and estimating the level of service performed and the associated cost incurred
for the service when we have not yet been invoiced or otherwise notified of
actual costs. The majority of our service providers invoice us in arrears for
services performed, on a pre-determined schedule or when contractual milestones
are met; however, some require advanced payments. We make estimates of our
accrued expenses as of each balance sheet date in the consolidated financial
statements based on facts and circumstances known to us at that time. We
periodically confirm the accuracy of these estimates with the service providers
and make adjustments if necessary. Examples of estimated accrued research and
development expenses include fees paid to:
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? vendors, including research laboratories, in connection with preclinical
development activities;
? CROs and investigative sites in connection with preclinical studies and
clinical trials;
? third parties in the connection with the achievement of milestones due under
license acquisition and other similar agreements; and
? CMOs in connection with drug substance and drug product formulation and
manufacturing of materials.
We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of participants and the completion of clinical trial milestones. Non-refundable prepayments determined to be used within one year for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Non-refundable prepayments or minimum balance requirements associated to clinical trials determined to not be used within one year are classified as other long-term assets. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
As of
Income Taxes We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in our tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the (provision) benefit for income taxes. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe, based upon the weighting of both positive and negative evidence available, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected, cumulative recent earnings and considering prudent and feasible tax planning strategies. Significant judgment is required in assessing both positive and negative evidence available and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal. We believe our estimates for the valuation allowances against certain deferred tax assets recognized in our financial statements are appropriate based upon our assessment of the factors mentioned above. We released a valuation allowance of$185.5 million during the year-endedDecember 31, 2022 .
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our annual consolidated financial statements included elsewhere in this
Annual Report.
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