ITEM 7.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 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 of 1933, as amended, or 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 the Securities and Exchange Commission, or 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 with significant unmet medical need. Our product candidates, rilonacept, mavrilimumab, vixarelimab and KPL-404, are based on strong biologic rationale or validated mechanisms, target underserved conditions and offer the potential for differentiation. This pipeline of product candidates are designed to modulate immunological pathways across a spectrum of diseases.
Rilonacept is a protein cytokine trap for inhibiting interleukin-1alpha, or IL-1α, and interleukin-1beta, or IL-1β. Cytokines are small proteins that play a role in cell signaling. Rilonacept was discovered and developed by Regeneron Pharmaceuticals, Inc., or Regeneron, and is approved by the U.S. Food and Drug Administration, or FDA, under the brand name ARCALYST for the treatment of CAPS, specifically familial cold autoinflammatory syndrome and muckle-wells syndrome, and for the treatment of deficiency of IL-1 receptor antagonist, or DIRA. We licensed rilonacept from Regeneron in 2017.
We are initially developing rilonacept for the potential treatment of recurrent pericarditis, a painful inflammatory cardiovascular disease with an estimated U.S. prevalent population of approximately 40,000 patients seeking and receiving medical treatment. Currently there is no FDA-approved therapy for the treatment of recurrent pericarditis. We received Breakthrough Therapy designation from the FDA for rilonacept for the treatment of recurrent pericarditis in 2019 and Orphan Drug designation from the FDA for rilonacept for the treatment of pericarditis, which includes the treatment of recurrent pericarditis, in 2020. In June 2020, we reported final results from RHAPSODY, our global, double-blind, placebo-controlled, randomized-withdrawal design, pivotal Phase 3 clinical trial of rilonacept in subjects with recurrent pericarditis. RHAPSODY met its prescribed primary and all major secondary efficacy endpoints with statistical significance, showing that rilonacept improved clinically meaningful outcomes associated with unmet medical need in recurrent pericarditis. RHAPSODY data were also published in The New England Journal of Medicine simultaneously with a late-breaking scientific presentation at the American Heart Association’s Scientific Sessions 2020.
The FDA accepted the supplemental Biologics License Application, or sBLA, for rilonacept in recurrent pericarditis and assigned a Prescription Drug User Fee Act, or PDUFA, goal date of March 21, 2021 with priority review. If approved by the FDA for recurrent pericarditis, we expect the potential commercial launch of rilonacept in recurrent pericarditis in the first half of 2021 and consequently would take responsibility for sales and distribution of rilonacept for all approved indications in the United States and evenly split profits on sales with Regeneron, after deducting certain commercialization expenses subject to specified limits.
Mavrilimumab is a fully-human monoclonal antibody that antagonizes granulocyte-macrophage colony stimulating factor, or GM-CSF. We licensed mavrilimumab from MedImmune Limited, or MedImmune, in 2017.
We are evaluating mavrilimumab for the potential treatment of giant cell arteritis, or GCA, a chronic inflammatory disease of the medium-to-large arteries with an estimated U.S. prevalence of approximately 75,000 to 150,000 patients. There is only one FDA-approved therapy for GCA, which is an adjunct to corticosteroid therapy, and
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we believe that an unmet need persists. We received Orphan Drug designation from the FDA for mavrilimumab for the treatment of GCA in 2020. In November 2020, we presented results from our randomized, double-blind, placebo-controlled, global Phase 2 proof-of-concept trial of mavrilimumab in subjects with GCA at the late-breaking abstracts session during the American College of Rheumatology Convergence 2020. The Phase 2 trial met both its prescribed primary and secondary efficacy endpoints with statistical significance. In addition, while the trial was not powered for individual disease cohorts, there was a consistent trend of efficacy across the new onset and relapsing/refractory cohorts. Mavrilimumab was well-tolerated in the Phase 2 trial; there were no drug-related serious adverse events, and the rates of drug-related treatment-emergent adverse events between mavrilimumab recipients and placebo recipients were similar. Data from the Phase 2a trial were presented at the European Academy of Dermatology and Venereology Virtual Congress in 2020.
We are also evaluating mavrilimumab for the potential treatment of severe coronavirus 2019 disease, or COVID-19, pneumonia and hyperinflammation. In June 2020, we announced 28-day clinical outcomes from an open-label investigator-initiated treatment protocol with mavrilimumab conducted in Italy in 13 non-mechanically ventilated patients with severe COVID-19 pneumonia and hyperinflammation. Mavrilimumab-treated patients experienced earlier and improved clinical outcomes compared to control-group patients, including earlier weaning from supplemental oxygen, shorter hospitalizations, and no deaths. These data were published in The Lancet Rheumatology. In December 2020, we reported results from a randomized, double-blind, placebo-controlled investigator-initiated study in the same patient population across a consortium of academic sites in the United States showing encouraging trends of reduced mortality and duration of mechanical ventilation in patients treated with mavrilimumab on top of standard of care therapy. There was no difference in serious adverse events between the mavrilimumab arm and the placebo arm in the investigator-initiated study. We are conducting a global, randomized, double-blind, placebo-controlled Phase 2/3 clinical trial of mavrilimumab in severe COVID-19 pneumonia and hyperinflammation. We expect to provide data from the Phase 2 portion of the trial in the first half of 2021. We expect to provide next steps for mavrilimumab, including in GCA, in the first half of 2021.
Vixarelimab is a fully-human monoclonal antibody that simultaneously inhibits the signaling of the cytokines interleukin 31 and oncostatin M by targeting their common receptor subunit, oncostatin M receptor beta. We believe vixarelimab is the only monoclonal antibody in development that simultaneously targets both pathways. We licensed vixarelimab from Biogen MA, Inc., or Biogen, in 2016.
We are evaluating vixarelimab for the potential treatment of prurigo nodularis, a chronic inflammatory skin condition with an estimated U.S. prevalence of approximately 300,000 patients. We received Breakthrough Therapy designation for vixarelimab for the treatment of pruritus associated with prurigo nodularis in 2020. In April 2020, we reported results from our randomized, double-blind, placebo-controlled Phase 2a trial of vixarelimab in prurigo nodularis. The Phase 2a trial met its primary efficacy endpoint, as there was a statistically significant reduction in weekly-average Worst-Itch Numeric Rating Scale, or WI-NRS, from baseline at Week 8 in vixarelimab recipients compared to placebo recipients. In addition, the majority of vixarelimab recipients showed a clinically meaningful greater-than-or-equal-to 4-point weekly-average WI-NRS reduction at Week 8 and a statistically significant percentage of vixarelimab recipients achieved a prurigo nodularis-investigator’s global assessment score of 0/1 at Week 8 compared to placebo recipients. We are conducting a randomized, double-blind, placebo-controlled Phase 2b dose ranging study designed to investigate the efficacy, safety, and pharmacokinetics of vixarelimab in patients with prurigo nodularis.
KPL-404 is a humanized monoclonal antibody that is designed to inhibit the CD40-CD40 ligand, or CD40L, interaction, a central control node of T-cell-dependent, B-cell-mediated humoral adaptive immunity. We believe that disrupting the CD40-CD40L interaction is an attractive approach for multiple autoimmune disease pathologies such as rheumatoid arthritis, Sjogren’s syndrome, Graves’ disease, systemic lupus erythematosus and solid organ transplant graft rejection. We acquired all of the outstanding securities of Primatope Therapeutics, Inc., or Primatope, the company that owned or controlled the intellectual property related to KPL-404 in 2019.
We are conducting a randomized, double-blind, placebo-controlled single-ascending-dose Phase 1 clinical trial of KPL-404 in healthy volunteers to evaluate the safety and tolerability of KPL-404 as well as to pharmacokinetics, CD40 receptor occupancy, the immune response to the novel test antigen keyhole limpet hemocyanin, or KLH, in clinically relevant dose cohorts, and T-cell dependent antibody response, or TDAR, in these subjects. The study is
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divided into two parts: a single dose of KPL-404 0.03 mg/kg, 0.3 mg/kg, 1 mg/kg, 3 mg/kg or 10 mg/kg intravenously, or IV, and a single dose of KPL-404 1 mg/kg or 5 mg/kg subcutaneously, or SC. In November 2020, we reported preliminary data from the Phase 1 trial. All dose escalations occurred as per protocol with no dose limiting safety findings. All 6 subjects dosed with KPL-404 3 mg/kg IV showed full receptor occupancy through Day 29, which corresponded with complete suppression of TDAR to KLH through Day 29. Consistent dose relatedness was shown in the lower dose level cohorts, including 0.03 mg/kg, 0.3 mg/kg, 1 mg/kg IV and 1 mg/kg SC. We believe that these data support subsequent study in patients, including potential IV or SC monthly administration. Further, we expect final data and safety follow-up from all cohorts of the Phase 1 trial in the first half of 2021.
Our future success is dependent on our ability to develop, obtain regulatory approval for and successfully commercialize one or more of our product candidates. The FDA accepted the sBLA for rilonacept in recurrent pericarditis with priority review and assigned a PDUFA goal date of March 21, 2021. Upon approval from the FDA, if any, of the commercial marketing of rilonacept in the United States for recurrent pericarditis, we will assume the sales and distribution of rilonacept for the approved indications in the United States and would evenly split profits on sales with Regeneron, after deducting certain commercialization expenses subject to specified limits. However, we have not yet demonstrated our ability to successfully obtain regulatory approvals, manufacture a commercial scale drug, or conduct sales and marketing activities. We currently generate no revenue from sales of any products, and we may never be able to develop or commercialize a marketable product.
On February 4, 2019, we completed a follow-on offering of 2,654,984 Class A common shares and concurrent private placement of 2,000,000 Class A1 common shares, both at $18.26 per share for aggregate gross proceeds of $85.0 million. In addition, on March 1, 2019, we completed the sale of 161,126 Class A common shares to the underwriters of the follow-on offering following the exercise in part of their option to purchase additional shares at $18.26 per share for gross proceeds of $2.9 million. The aggregate net proceeds to us from the follow-on offering and concurrent private placement, inclusive of the option exercise, was $83.0 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs.
On May 18, 2020, we completed a follow-on offering of 2,760,000 Class A common shares, inclusive of the exercise of the underwriters’ option to purchase additional shares at a public offering price of $18.25 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.
On July 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 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.
We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $161.4 million and $161.9 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $517.5 million. We expect to continue to incur significant operating losses for at least the next several years as we advance our product candidates through preclinical and clinical development, manufacture our product candidates for clinical or commercial use, and, ultimately, seek regulatory approval. In addition, if we obtain marketing approval for any of our product candidates, including rilonacept, we expect to continue to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates.
As a result, until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through public or private securities offerings, debt financings or other sources, which may include licensing, collaborations or other strategic transactions or arrangements, and a lesser extent through projected revenue
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from rilonacept if approved in recurrent pericarditis or any of our other product candidates . We may be unable to raise additional funds or enter into such other transactions or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such transactions or arrangements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.
Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Typically, it takes many years to develop one new product from the time it is discovered to when it is available for treating patients, and development may cease for a number of reasons. Because of the numerous risks and uncertainties associated with product development, including any impact from the COVID-19 pandemic, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
As of December 31, 2020, we had cash, cash equivalents and short-term investments of $323.5 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 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 beyond that point is dependent on our ability to raise additional capital to finance our operations.
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue from any products, and may never be able to develop and commercialize a marketable product. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. The FDA accepted the sBLA for rilonacept in recurrent pericarditis with priority review and assigned a PDUFA goal date of March 21, 2021. Upon approval from the FDA, if any, of the sBLA, we will assume the sales and distribution of rilonacept for the approved indications in the United States and would evenly split profits on sales with Regeneron, after deducting certain commercialization expenses subject to specified limits.
Operating Expenses
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 contract research organizations, or CROs, that are primarily engaged in the oversight and conduct of our clinical trials and contract manufacturing organizations, or 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;
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●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, depreciation and other expenses, which include rent and utilities.
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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The table below summarizes our research and development expenses incurred by program:
Years Ended Comparison Comparison
December 31, Increase/(Decrease) Increase/(Decrease)
(in thousands) (in thousands, except percentages)
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 rilonacept, mavrilimumab, vixarelimab and KPL-404, as well as conduct other preclinical and clinical development, and make regulatory filings for our product candidates. As a result, our related personnel costs will increase, including costs associated with share-based compensation. 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.
The FDA accepted the sBLA for rilonacept in recurrent pericarditis with priority review and assigned a PDUFA goal date of March 21, 2021. Upon approval from the FDA, if any, of the sBLA, we will assume the sales and distribution of rilonacept for the approved indications in the United States and would evenly split profits on sales with Regeneron, after deducting certain commercialization expenses subject to specified limits. However, we have not yet demonstrated our ability to successfully obtain regulatory approvals, manufacture a commercial scale drug, or conduct sales and marketing activities. As such, the successful development and commercialization of rilonacept and our other product candidates is highly uncertain. 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 our product candidates or when, if ever, material net cash inflows may commence from any of our product candidates, including rilonacept if approved. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:
●the potential impact of the COVID-19 pandemic on our business, including our preclinical studies, clinical trials, regulatory actions, commercials launch activities and operations;
●the scope, progress, outcome and costs of our research and preclinical development activities, clinical trials and other development activities;
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●establishing an appropriate safety and efficacy profile with IND enabling and clinical studies;
●the successful enrollment and initiation, performance and completion of preclinical studies and clinical trials;
●the timing, receipt and terms of any marketing approvals from applicable regulatory authorities, including the FDA;
●the extent of any required post-marketing approval commitments to applicable regulatory authorities;
●increasing clinical and commercial manufacturing capabilities or making arrangements with additional third-party manufacturers to successfully manufacture our product candidates;
●development and timely delivery of clinical-grade and commercial-grade drug formulations that can be used in our clinical trials and for commercial launch;
●establishing a sales, marketing and distribution infrastructure to commercialize products for which we may obtain marketing approval;
●launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others;
●making milestone or other payments under any current or future license, acquisition, collaboration or other strategic transaction agreements;
●obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;
●significant and changing government regulation; and
●maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates.
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 executive, business development, finance, human resources, legal, pre-commercial and support personnel functions. Selling, general and administrative expenses also include insurance and professional fees for legal, patent, consulting, accounting and audit services.
We expect that our selling, general and administrative expenses will continue to increase in the future as we continue to prepare for potential commercialization activities and increase our headcount to support our business objectives. We also anticipate that we will continue to incur significant costs associated with being a public company, including accounting, audit, legal, compliance and director and officer insurance costs as well as investor and public relations expenses, and that such costs will increase over time especially as we are a large accelerated filer and are no longer permitted to rely on exemptions from certain requirements that are applicable to public companies that are not emerging growth companies or smaller reporting companies.
Interest Income
Interest income consists of income recognized from investments in money market funds and U.S. Treasury notes.
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Income Taxes
As an exempted company incorporated under the laws of Bermuda, we are principally subject to taxation in Bermuda. Under the current laws of Bermuda, tax on a company’s income is assessed at a zero percent tax rate. As a result, we have not recorded any income tax benefits from our losses incurred in Bermuda during each reporting period, and no net operating loss carryforwards are currently available to us for those losses, while our assets remain in Bermuda. Our wholly owned U.S. subsidiaries, Kiniksa Pharmaceuticals Corp., or Kiniksa U.S., and Primatope are subject to federal and state income taxes in the United States. Our wholly owned subsidiary Kiniksa Pharmaceuticals (UK), Ltd., and its wholly owned subsidiaries, Kiniksa Pharmaceuticals (Germany) GmbH, Kiniksa Pharmaceuticals (France) SARL, and Kiniksa Pharmaceuticals GmbH are subject to taxation in their respective countries. Our provision for income taxes relates mainly to U.S. taxable income, generated by our wholly owned subsidiary Kiniksa US. If rilonacept is approved by the FDA for the treatment of recurrent pericarditis in the United States, the commercial launch will be made out of Kiniksa UK. In connection with its launch readiness activities, the Company transferred all of its rights, title and interest in, among other things, certain contracts (including the Regeneron Agreement), intellectual property rights, product filings and approvals and other information, plans and materials owned or controlled by the Company insofar as they related exclusively or primarily to rilonacept to Kiniksa UK in January 2021 pursuant to an asset transfer agreement between the Company and Kiniksa UK for the consideration described therein.
As of December 31, 2020 and 2019, we had federal research and development tax credit carryforwards of approximately $1.4 million and $0.2 million respectively, available to reduce future tax liabilities, which begin to expire in 2040. As of December 31, 2020 and 2019, we had state research and development tax credit carryforwards of approximately $0.8 million and $0.3 million respectively, available to reduce future tax liabilities, which begin to expire in 2035.
Results of Operations
Comparison of the Years Ended December 31, 2020, 2019 and 2018
The following table summarizes our results of operations for the years ended December 31, 2020, 2019 and 2018:
Years Ended Comparison Comparison
December 31, Increase/(Decrease) Increase/(Decrease)
(in thousands) (in thousands, except percentages)
Operating expenses:
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Research and Development Expenses
Years Ended Comparison Comparison
December 31, Increase/(Decrease) Increase/(Decrease)
Direct research and development expenses by program:
Unallocated research and development expenses:
Research and development expenses were $112.0 million for the year ended December 31, 2020, compared to $135.0 million for the year ended December 31, 2019, or a decrease of $23.0 million.
During the year ended December 31, 2020, the research and development expenses incurred related to external spend with respect to our product candidates of $64.1 million, including $32.4 million of costs related to our clinical trials, $15.6 million of costs related to the manufacturing of our clinical drug supply, and $7.5 million for the achievement of a specified regulatory milestone event under the Regeneron Agreement which was achieved in the fourth quarter of 2020. In addition, we incurred unallocated research and development expenses of $47.9 million, including $33.5 million of personnel costs and $14.4 million of other operating costs including costs associated with our laboratory including costs related to preclinical and discovery research.
During the year ended December 31, 2019, expenses incurred related to the acquisition of all of the outstanding securities of Primatope for aggregate upfront and contingent payments of $18.0 million, paid in a combination of cash and Class A common shares (inclusive of escrow and holdback share amounts) in accordance with the Primatope Agreement, $10.0 million for an accrued milestone under the Biogen Agreement, associated with the achievement of a specified clinical milestone event, and expenses for external spend with respect to our product candidates of $63.2 million, including $34.1 million of costs related to our clinical trials and $19.2 million of costs related to the manufacturing of our clinical drug supply. In addition, we incurred unallocated research and development expenses of $43.9 million, including, $29.0 million of personnel costs and $14.8 million of other operating costs including costs associated with our laboratory and other facility costs including costs related to preclinical and discovery research.
During the year ended December 31, 2018, the research and development expenses incurred related to external spend with respect to our product candidates of $60.2 million, including $26.7 million of costs related to our preclinical and clinical trials and $20.7 million of costs related to manufacturing of our clinical drug supply. In addition, we incurred unallocated research and development expenses of $26.4 million, including $15.0 million of personnel costs and $11.3 million of other operating costs including costs associated with the first year of operations of our laboratory and costs related to preclinical studies and discovery research.
Direct costs for our rilonacept program were $25.7 million, $25.7 million and $13.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. During the year ended December 31, 2020, expenses incurred primarily related to conducting RHAPSODY, our global, pivotal Phase 3 clinical trial in recurrent pericarditis, including the long-term extension, a milestone payment of $7.5 million for the achievement of a specified regulatory milestone event under the Regeneron Agreement, and supply chain costs. During the year ended December 31, 2019, expenses incurred primarily related to our clinical research and development for RHAPSODY, including $6.6 million related to
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purchases of drug materials under our clinical supply agreement with Regeneron, as well as for our open-label Phase 2 proof-of-concept clinical trial. During the year ended December 31, 2018, expenses incurred primarily related to clinical research and development for our Phase 2 open-label clinical trial and the initiation of RHAPSODY.
Direct costs of our mavrilimumab program were $25.9 million, $13.8 million and $15.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. 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 pneumonia and hyperinflammation. During the year ended December 31, 2019, expenses incurred primarily related to costs related to our global Phase 2 clinical trial in GCA. During the year ended December 31, 2018, expenses incurred primarily related to a $5.0 million pass-through payment due upon the achievement of a specified clinical milestone event due under our license agreement with MedImmune as well as expenses related to preparation for our planned global Phase 2 clinical trial in GCA and manufacturing process development expenses.
Direct costs for our vixarelimab program were $8.8 million, $28.8 million and $25.6 million for the year ended December 31, 2020, 2019 and 2018, respectively. During the year ended December 31, 2020, expenses incurred related primarily related 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. During the year ended December 31, 2019, expenses incurred primarily related to a milestone payment of $10.0 million under the Biogen Agreement associated with the achievement of a specified clinical milestone event as well as expenses incurred for our Phase 2a clinical trial in prurigo nodularis, our exploratory Phase 2 clinical trial in diseases characterized by chronic pruritus and our Phase 1b clinical trial, as well as approximately $2.1 million of manufacturing and development costs for our clinical drug supply. During the year ended December 31, 2018 expenses incurred related to manufacturing and development costs for our clinical drug supply, our Phase 1a/1b clinical trial, and our LOTUS-PN observational study.
Direct costs for our KPL-404 program were $3.7 million, $22.8 million and $6.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. During the year ended December 31, 2020, expenses incurred primarily related to preclinical and clinical trial costs for our Phase 1 trial of KPL-404 in healthy volunteers, including toxicology costs. During the year ended December 31, 2019, expenses incurred primarily related to the acquisition of all of the outstanding securities of Primatope for aggregate upfront and contingent payments of $18.0 million paid in a combination of cash and Class A common shares (inclusive of escrow and holdback share amounts) in accordance with the Primatope Agreement. The Primatope acquisition was accounted for as an asset acquisition in 2019 as it did not meet the definition of a business. We recorded the upfront payment, milestone payments and the accrued milestone as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology represented in-process research and development and had no alternative future use. During the year ended December 31, 2018, expenses incurred primarily related to pre-clinical research and development, including manufacturing development costs as well as $0.8 million related to the extension of the option period under our stock purchase option agreement with Primatope.
Unallocated research and development expenses were $47.9 million, $43.9 million and $26.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The increase of $4.0 million in unallocated research and development expenses in 2020 from 2019 was due to increases of $2.9 million in operating costs of our laboratory and $4.5 million in personnel-related costs primarily related to share-based compensation and additional personnel in our research and development functions to support our ongoing clinical trials, partially offset by decreases of $2.0 million related to the cessation of our development of a pre-clinical product candidate and $1.4 million in other operating expenses including costs related to our internal lab and costs related to preclinical studies and discovery research. The increase of $17.5 million in unallocated research and development expenses in 2019 from 2018 was due to an increase of $13.9 million in personnel-related costs, including share-based compensation, and an increase of $3.5 million in other operating expenses, including costs related to our laboratory and to preclinical studies and discovery research. The increase in personnel-related costs was primarily due to additional personnel in our research and development functions to support our ongoing clinical trials, including development and manufacture of clinical supply and regulatory filings. Personnel-related costs for the years ended December 31, 2020, 2019 and 2018 included share-based compensation of $8.9 million, $5.7 million and $2.3 million, respectively.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses were $45.3 million, $35.0 million and $21.6 million for the years ended December 31, 2020, 2019 and 2018. The increase of $10.3 million in 2020 from 2019 was primarily due to increases of $5.2 million in personnel-related costs and $6.7 million in marketing costs associated with the pre-commercialization of our rilonacept program partially offset by a decrease $1.6 million of other expenses primarily due to a decrease in travel costs due to the travel restrictions associated with the COVID-19 pandemic and other miscellaneous professional fees. The increase of $13.4 million in 2019 from 2018 was primarily due to increases of $11.7 million in personnel-related costs and $2.1 million in professional fees, partially offset by a decrease of $0.4 million in other general expenses. The increase in personnel-related costs was due to additional personnel, primarily in our commercial and corporate departments, including legal, finance and human resources. In 2019, expenses related to professional fees increased due to costs related to commercial preparations, including market research as well as legal costs incurred in connection with maintaining and registering worldwide patents and costs associated with our ongoing business operations, as well as expenses for higher recruiting, accounting and other costs incurred as a public company for a full fiscal year. Personnel-related costs for the years ended December 30, 2020, 2019 and 2018 included share-based compensation of $12.0 million, $9.3 million and $3.4 million, respectively.
Interest Income
Interest income was $1.1 million for the year ended December 31, 2020 compared to $6.0 million for the year ended December 31, 2019. The decrease was primarily due to lower interest rates on U.S. Treasury notes.
Interest income was $6.0 million for the year ended December 31, 2019 compared to $4.7 million for the year ended December 31, 2018. The increase was largely due to higher average invested balances during the year ended December 31, 2019.
(Provision) Benefit for Income Taxes
For the year ended December 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. The current year expense is reduced by the favorable impact of the Foreign Derived Intangible Income, or FDII, deduction, equity compensation and U.S. federal and state research and development tax credit utilization. For the year ended December 31, 2019, we recorded a $2.0 million benefit for income taxes relating primarily to the impact of the FDII deduction, and U.S. federal and state research and development tax credits. For the year ended December 31, 2018, we recorded an insignificant benefit for income taxes.
Liquidity and Capital Resources
Since our inception, we have not generated any revenue from any sources, including from product sales, and have incurred significant operating losses and negative cash flows from our operations.
On February 4, 2019, we completed a follow-on offering of 2,654,984 Class A common shares at a public offering price of $18.26 per share and concurrent private placement of 2,000,000 Class A1 common shares at an offering price of $18.26 per share for aggregate gross proceeds of $85.0 million. In addition, on March 1, 2019, we completed the sale of 161,126 Class A common shares to the underwriters of the follow-on offering following the exercise in part of their option to purchase additional shares at a public offering price of $18.26 per share for gross proceeds of $2.9 million. The aggregate net proceeds to us from the follow-on offering and concurrent private placement, inclusive of the option exercise, was $83.0 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs.
On May 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
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of the option exercise, was $74.5 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs.
On July 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.
As of December 31, 2020, we had cash, cash equivalents and short-term investments of $323.5 million.
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
Years Ended
December 31,
(in thousands)
Operating Activities
During the year ended December 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 ended December 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 our rilonacept program, 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.
During the year ended December 31, 2019, operating activities used $158.4 million of cash, primarily resulting from our net loss of $161.9 million and net cash used by changes in our operating assets and liabilities of $17.0 million partially offset by non-cash charges of $20.5 million. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2019 consisted of a $15.0 million decrease in accrued milestones, a $4.7 million decrease in accounts payable, and a $1.3 million decrease in operating lease liabilities partially offset by a $1.0 million increase in prepaid expenses and other current assets, a $0.3 million increase in other long-term liabilities and a $4.6 million increase in accrued expenses. The decrease in accrued milestones resulted from the payment of outstanding milestones for which the expense was recognized in prior years. The decrease in accounts payable was primarily due to the timing of vendor invoicing and payments. The increase in prepaid expenses and other current assets was due to increases in prepaid insurance expenses and prepaid expenses to CROs related to our clinical trials. The decrease in operating lease liabilities is due to monthly payments for our right-of-use assets.
During the year ended December 31, 2018, operating activities used $81.0 million of cash, primarily resulting from our net loss of $103.2 million, partially offset by net non-cash charges of $3.9 million and net cash provided by changes in our operating assets and liabilities of $18.3 million. Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2018 consisted of a $14.3 million increase in accrued expenses and other
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liabilities and a $8.8 million increase in accounts payable, partially offset by a $4.8 million increase in prepaid expenses and other current assets. The increase in accrued expenses was primarily due to our increased level of operating activities and the timing of vendor invoicing and payments, an increase in accrued milestones as well as an increase in accrued employee compensation expense. The increase in accounts payable was primarily due to increased operating activities as well as the timing of vendor invoicing and payments. The increase in prepaid expenses and other current assets was due to increases in prepaid insurance expenses, interest receivable and prepaid expenses to CMOs related to manufacturing development and CROs related to our clinical trials.
Investing Activities
During the year ended December 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.
During the year ended December 31, 2019, investing activities provided $49.2 million of cash, consisting of $541.2 million from proceeds of maturities of short-term investments partially offset by $488.8 million of purchases of short-term investments and $3.2 million of purchases of property and equipment.
During the year ended December 31, 2018, investing activities used $239.2 million of cash, consisting of $5.3 million of purchases of property and equipment and $402.0 million of purchases of short-term investments partially offset by $168.1 million from proceeds of maturities of short-term investments.
Financing Activities
During the year ended December 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 employee share purchase plan.
During the year ended December 31, 2019, net cash provided by financing activities was $84.1 million, consisting of net proceeds of $83.0 million from our issuance and sale of Class A common shares in a follow-on public offering, inclusive of the concurrent issuance and sale of Class A1 common shares in a private placement, and exercise in part of the underwriters’ option to purchase additional Class A common shares after the deduction of underwriting discounts and commissions, placement agent fees and other offering costs.
During the year ended December 31, 2018, net cash provided by financing activities was $346.7 million, primarily consisting of net proceeds of $159.2 million from our issuance and sale of Class A common shares, after the deduction of underwriting discounts and commissions , inclusive of the over-allotment option exercise, and $190.8 million in net proceeds from our issuance and sale of Series C preferred shares, partially offset by $3.7 million of payments of other offering costs associated with our IPO.
Funding Requirements
We expect to incur significant expenses in connection with our ongoing and planned activities as we advance our product candidates through preclinical and clinical development, seek regulatory approval and prepare for commercial operations. In addition, if we obtain marketing approval for any of our product candidates, including rilonacept, we expect to continue to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. As a result, our related personnel costs will increase, including costs associated with share-based compensation. 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. For example, under the Regeneron Agreement, we are obligated to make payments to
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Regeneron of $20.0 million upon the achievement of a specified regulatory milestone which may be met in the first quarter of 2021. 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:
● maintain, expand and protect our intellectual property portfolio; and
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. 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. If we receive regulatory approval for rilonacept or our other product candidates or pursue additional indications for our existing product candidates, we expect to incur significant commercialization expenses related to product 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 will depend on and could increase significantly as a result of many factors, including:
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● the costs, timing and outcome of regulatory review of our product candidates;
● the ability to receive additional non-dilutive funding;
Until such time, if ever, as we can generate substantial 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 and to a lesser extent through projected revenue from rilonacept if approved in recurrent pericarditis or any of our other product candidates. 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.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:
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Payments Due by Period
Less than 1 to 3 4 to 5 More than Total
1 year years years 5 years
(in thousands)
Manufacturing commitments (1) $ 16,178 $ — $ — $ — $ 16,178
Rilonacept long-term incentive plan (3) 2,013 — — — 2,013
Our contracts with CMOs, CROs and other third parties for the manufacture of our product candidates and to support clinical trials and preclinical research studies and testing are generally cancelable by us upon prior notice. Payments due upon cancellation consisting only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation are not included in the preceding table as the amount and timing of such payments are not known.
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. We generally have not included any contingent payment obligations, such as milestones, royalties or due diligence, in the table above as the amount, timing and likelihood of such payments are not known. We have not included any of the annual maintenance fee payments in the above table, as although the amount and timing are known, we cannot currently determine the final termination dates of the agreements and, as a result, we cannot determine the total amounts of such payments we will be required to make under the agreements.
Under our license agreement with Regeneron, we are obligated to make future regulatory milestone payments of $20.0 million which may be met in the first quarter of 2021. Upon approval from the FDA, if any, of rilonacept in recurrent pericarditis, we will assume the sales and distribution of rilonacept for the approved indications in the United States and, under the license agreement, we have agreed to evenly split profits on our sales of rilonacept with Regeneron after deducting certain commercialization expenses subject to specified limits.
Under our license agreement with MedImmune, we are obligated to make future clinical, regulatory and initial sales milestone payments of up to $57.5 million in aggregate for the first two indications we develop. In addition, we are obligated to make clinical and regulatory milestone payments of up to $15.0 million in the aggregate for each subsequent indication. In third quarter of 2020, we entered into an amendment to the MedImmune Agreement to establish a new coronavirus field and defer the payment of certain development and regulatory milestones as applied to the new coronavirus field. We are also obligated to make milestone payments to MedImmune of up to $85.0 million upon the achievement of annual net sales thresholds of up to, but excluding, $1.0 billion in annual net sales as well as additional milestone payments aggregating up to $1.1 billion upon the achievement of additional specified annual net sales thresholds starting at $1.0 billion and higher. Commencing on the first commercial sale of licensed products, we are obligated to pay tiered royalties on escalating tiers of annual net sales of licensed products starting in the low double-digit percentages and ending at twenty percent. We must pay such royalties on a product-by-product and
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country-by-country basis until the latest to occur of the expiration of licensed patents, the expiration of regulatory exclusivity or the tenth anniversary of the first commercial sale of such product in such country.
Under our asset purchase agreement with Biogen, we are obligated to make future milestone payments of up to $315.0 million upon the achievement of specified clinical and regulatory milestones as well as upon the achievement of annual net sales thresholds. We have also agreed to pay certain obligations under third-party contracts retained by Biogen that relate to vixarelimab. Additionally, we are obligated to pay tiered royalties on escalating tiers of annual net sales of licensed products starting in the high single-digit percentages and ending below the teens.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the 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.
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.
Accrued Research and Development Expenses
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:
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 patients 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.
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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.
Share-Based Compensation
We measure all share-based awards granted to employees and directors based on their fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period. Forfeitures are accounted for as they occur. We issue share-based awards with both service-based vesting conditions and performance-based vesting conditions. Expense for awards with service-based vesting is recorded using the straight-line method, and expense for awards with performance-based vesting conditions is recognized using the accelerated-attribution method.
For share-based awards granted to consultants and non-employees, compensation expense is recognized over the vesting period of the awards, which is generally the period during which services are rendered by such consultants and non-employees until completed.
We classified share-based compensation expense in the consolidated statements of operations and comprehensive loss in the same manner in which the award recipient's payroll costs are classified or in which the award recipient's service payments are classified.
The fair value of each restricted share award was estimated on the date of grant based on the fair value of the Company’s Class A common shares or Class B common shares on that same date.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected share price volatility, the expected term of the award, the risk-free interest rate, and expected dividends (see Note 9). Prior to May 2018, we were a private company and, accordingly, lacked company-specific historical and implied volatility information. Therefore, we estimate our expected share price volatility based on the historical volatility of publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded share price. The expected term of our share options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” share options. The expected term of share options granted to non-employees is equal to the contractual term of the share option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.
The fair value of each restricted share unit award is based on the closing price of our Class A common shares on the date of grant. Restricted share unit awards with an associated performance condition are evaluated on a regular basis for probability of achievement, to determine the timing of recording share-based compensation expense to include in our consolidated statements of operations and comprehensive loss.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
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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.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. As of December 31, 2020, our cash, cash equivalents and short-term investments consisted of money market funds and U.S. Treasury notes. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. Further, the COVID-19 pandemic has adversely impacted the U.S. and global economy and financial markets, and any prolonged impact may have an impact on market interest rates. However, because of the short-term nature of the instruments in our portfolio, an immediate 10% change in market interest rates would not have a material impact on the fair market value of our investment portfolio or on our financial position or results of operations.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, evaluated, as of the end of the period covered by this Annual Report, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2020.
In designing and evaluating our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Management’s Report on Internal Control over Financial Reporting for the Fiscal Year Ended December 31, 2020.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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Based on this assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Item 15 in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of the year ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Item 15 in this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION.
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Except to the extent provided below, the information required to be disclosed by this Item will be set forth in our proxy statement for our 2021 Annual Meeting to be filed with the SEC within 120 days of December 31, 2020, and is incorporated into this Annual Report by reference.
We have adopted a written code of business conduct and ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. Our code of business conduct and ethics is available in the “Investors & Media” section of our website at www.kiniksa.comunder “Corporate Governance”. We intend to post on our website all disclosures that are required by law or the Nasdaq rules concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this Annual Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be disclosed by this Item will be set forth in our proxy statement for our 2021 Annual Meeting to be filed with the SEC within 120 days of December 31, 2020, and is incorporated into this Annual Report by reference.
The information required to be disclosed by this Item will be set forth in our proxy statement for our 2021 Annual Meeting to be filed with the SEC within 120 days of December 31, 2020, and is incorporated into this Annual Report by reference.
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The information required to be disclosed by this Item will be set forth in our proxy statement for our 2021 Annual Meeting to be filed with the SEC within 120 days of December 31, 2020, and is incorporated into this Annual Report by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required to be disclosed by this Item will be set forth in our proxy statement for our 2021 Annual Meeting to be filed with the SEC within 120 days of December 31, 2020, and is incorporated into this Annual Report by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements.
See the “Index to Consolidated Financial Statements” on page F-1 below for the list of financial statements filed as part of this report.
(a)(2) Financial Statement Schedules.
All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto set forth below beginning on page F-1.
(a)(3) Exhibits. See Exhibit Index.
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EXHIBIT INDEX
Incorporated by Reference
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21.1 Subsidiaries of the Registrant *
101.INS Inline XBRL Instance Document ***
101.SCH Inline XBRL Taxonomy Extension Schema Document ***
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101.LAB Inline XBRL Taxonomy Label Linkbase Document ***
* Filed herewith
** Furnished herewith
*** Submitted electronically herewith
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ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KINIKSA PHARMACEUTICALS, LTD.
Date: February 25, 2021 By: /s/ Sanj K. Patel
Sanj K. Patel
Chief Executive Officer and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
Sanj K. Patel
Mark Ragosa
Michael R. Megna
/s/ Felix J. Baker Lead Independent Director February 25, 2021
Felix J. Baker
/s/ Stephen R. Biggar Director February 25, 2021
Stephen R. Biggar
/s/ G. Bradley Cole Director February 25, 2021
G. Bradley Cole
/s/ Richard S. Levy Director February 25, 2021
Richard S. Levy
/s/ Thomas R. Malley Director February 25, 2021
Thomas R. Malley
/s/ Tracey L. McCain Director February 25, 2021
Tracey L. McCain
/s/ Kimberly J. Popovits Director February 25, 2021
Kimberly J. Popovits
/s/ Barry D. Quart Director February 25, 2021
Barry D. Quart
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-5
Consolidated Statements of Operations and Comprehensive Loss F-6
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
F-1
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Kiniksa Pharmaceuticals, Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kiniksa Pharmaceuticals, Ltd. and its subsidiaries(the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, of convertible preferred shares and shareholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2020in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reportingappearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Emphasis of Matter
As discussed in Note 1 to the consolidated financial statements, the Company will require additional financing to fund future operations. Management’s evaluation of the events and conditions and management’s plans to mitigate this matter is also described in Note 1.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accrued Research and Development Costs
As described in Notes 2 and 6 to the consolidated financial statements, the Company has entered into various research and development contracts with companies both inside and outside of the United States. When billing terms under these contracts do not coincide with the timing of when the work is performed, management is required to make estimates of outstanding obligations to those third parties as of the end of the reporting period. Within accrued expenses, total accrued research and development expenses amounted to $16.9 million as of December 31, 2020, which include accruals for these estimated research and development obligations. Accrual estimates are based on a number of factors, including management’s assessment of progress towards completion of the research and development activities, invoicing to date under the contracts, communication from the research institution or other companies of any actual costs incurred during the period that have not yet been invoiced, and the costs included in the contracts. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period.
The principal considerations for our determination that performing procedures relating to accrued research and development costs is a critical audit matter are (i) the significant judgment by management in determining the accrued costs, which in turn led to (ii) significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence for these accrued costs and the factors related to management’s assessment of progress towards completion of the research and development activities, invoicing to date under the contracts and communication from the research institution or other companies of any actual costs incurred during the period that have not yet been invoiced.
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Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to accrued research and development costs, including controls over the review of contracts, accumulating information on actual costs incurred during the period, and assessment of progress towards completion of the research and development activities. These procedures also included, among others (i) testing management’s process for estimating accrued research and development costs, (ii) evaluating the appropriateness of the methodology used by management to determine the estimate, (iii) evaluating the reasonableness of the factors related to management’s assessment of progress towards completion of the research and development activities, invoicing to date under the contracts and communication from the research institution or other companies of any actual costs incurred during the period that have not yet been invoiced by testing specific tasks and the associated cost incurred for services the Company has not yet been invoiced for or otherwise notified of the actual cost at period end, and (iv) testing the completeness and accuracy of the data inputs to the estimate, including total costs included within executed contracts and actual billed expenses under these contracts.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 25, 2021
We have served as the Company’s auditor since 2016.
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KINIKSA PHARMACEUTICALS, LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, December 31,
Assets
Current assets:
Restricted cash 210 —
Prepaid expenses and other current assets 9,557 8,247
Property and equipment, net 4,051 6,398
Operating lease right-of-use assets 6,566 1,927
Non-current restricted cash — 210
Other long-term assets 5,588 —
Deferred tax assets 10 4,372
Liabilities and Shareholders’ Equity
Current liabilities:
Operating lease liabilities 2,107 1,697
Other current liabilities 37 25
Non-current liabilities:
Non-current operating lease liabilities 4,878 955
Other long-term liabilities 805 326
Commitments and contingencies (Note 13)
Shareholders’ equity:
Accumulated other comprehensive income (loss) (34) 33
Total liabilities and shareholders’ equity $ 349,464 $ 254,534
The accompanying notes are an integral part of these consolidated financial statements.
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KINIKSA PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
Years Ended
December 31,
Operating expenses:
(Provision) benefit for income taxes (5,152) 2,047 214
Comprehensive loss:
Other comprehensive income (loss):
Total other comprehensive income (loss) (67) 37 (4)
The accompanying notes are an integral part of these consolidated financial statements.
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KINIKSA PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
Shares Amount Shares Amount Capital Income (Loss) Deficit Equity (Deficit)
Net loss — — — — — — (103,227) (103,227)
Net loss — — — — — — (161,867) (161,867)
Net loss — — — — — — (161,381) (161,381)
The accompanying notes are an integral part of these consolidated financial statements.
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KINIKSA PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
December 31,
Cash flows from operating activities:
Loss on disposal of property and equipment — 21 66
Other — — 235
Non-cash lease expense 1,400 1,211 —
Changes in operating assets and liabilities:
Prepaid expenses and other short-term assets (1,334) (1,020) (4,791)
Other long-term assets (5,588) — —
Accrued expenses and other short-term liabilities 8,797 4,638 9,296
Operating lease liabilities (1,699) (1,264) —
Other long-term liabilities 478 326 —
Cash flows from investing activities:
Purchases of property and equipment (283) (3,203) (5,290)
Cash flows from financing activities:
Payments of offering costs (1,136) (118) (3,657)
Supplemental information:
Cash paid for income taxes $ 482 1,724 $ 383
The accompanying notes are an integral part of these consolidated financial statements.
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KINIKSA PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
1. Nature of the Business and Basis of Presentation
Kiniksa Pharmaceuticals, Ltd. (the “Company”) is a biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutic medicines for patients suffering from debilitating diseases with significant unmet medical need. The Company was incorporated in July 2015 as a Bermuda exempted company. The Company’s pipeline of product candidates are designed to modulate immunological signaling pathways that are implicated across a spectrum of diseases.
The Company is subject to risks and uncertainties common to early-stage companies in the biopharmaceutical industry and global health, societal, economic and market conditions, including from the impact from the coronavirus disease 2019 (“COVID-19”) pandemic. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any products developed will obtain necessary government regulatory approval or that any products, if approved, will be commercially viable. For example, while the U.S. Food and Drug Administration (the “FDA”), accepted the supplemental Biologics License Application (“sBLA”) for rilonacept in recurrent pericarditis with priority review and assigned a Prescription Drug User Fee Act (“PDUFA”) goal date of March 21, 2021, the Company has not yet demonstrated its ability to obtain regulatory approvals. The Company does not currently generate revenue from sales of any products, and it may never be able to develop or commercialize a marketable product. Upon approval from the FDA , if any, of rilonacept for recurrent pericarditis, the Company will assume the sales and distribution of rilonacept for the approved indications for the treatment of cryopyrin-associated periodic syndrome (“CAPS”), specifically familial cold autoinflammatory syndrome and muckle-wells syndrome, and for the treatment of deficiency of IL-1 receptor antagonist (“DIRA”) in the United States and would evenly split profits on sales with Regeneron, after deducting certain commercialization expenses subject to specified limits. The Company has never obtained any regulatory approvals, manufactured a commercial-scale drug, or conducted sales and marketing activities. The Company operates in an environment of rapid technological innovation and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and other third parties, including contract research organizations (“CROs”), and contract manufacturing organizations (“CMOs”). Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
Risk and Uncertainties Related to COVID-19