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, 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 global biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutic medicines for patients suffering from debilitating diseases with significant unmet medical need. Our portfolio of assets, ARCALYST® (rilonacept), mavrilimumab, vixarelimab and KPL-404, are based on strong biologic rationale or validated mechanisms, target underserved conditions, and offer the potential for differentiation. These assets are designed to modulate immunological pathways across a spectrum of diseases.
ARCALYST is an interleukin-1α and interleukin-1β cytokine trap. Cytokines are small proteins that play a role in cell signaling. We licensed ARCALYST from Regeneron, who discovered and initially developed the drug, in 2017. Our exclusive license to ARCALYST from Regeneron includes worldwide rights, excluding the Middle East and North Africa, for all applications other than those in oncology and local administration to the eye or ear. We received FDA approval of ARCALYST for the treatment of recurrent pericarditis and reduction in risk of recurrence in adults and children 12 years and older in March 2021. Recurrent pericarditis is a painful inflammatory cardiovascular disease with an estimated U.S. prevalent population of approximately 40,000 patients seeking and receiving medical treatment. ARCALYST is commercially available through a distribution network of specialty pharmacies, which provide access across the United States. ARCALYST is also approved in the United States for the treatment of CAPS in adults and children 12 years and older, and the maintenance of remission in DIRA in adults and children weighing 10 kg or more. We are responsible for sales and distribution of ARCALYST in all approved indications in the United States, and evenly split profits on sales with Regeneron. In the fourth quarter of 2021, our ARCALYST franchise achieved profitability after three quarters of commercial availability for recurrent pericarditis. In February 2022, we granted Huadong exclusive rights to develop and commercialize ARCALYST in the Asia Pacific region, excluding Japan.
Mavrilimumab is an investigational monoclonal antibody inhibitor targeting GM-CSFRα. In 2017, we licensed exclusive worldwide rights in all indications to mavrilimumab from MedImmune. We plan to focus mavrilimumab development on cardiovascular diseases where the GM-CSF mechanism has been implicated and that have synergies with our existing commercial infrastructure. In parallel, we may also explore the use of mavrilimumab through research collaborations in other development areas. We have also been evaluating mavrilimumab in COVID-19-related ARDS. In December 2021, we announced that the Phase 3 portion of the global double-blind, placebo-controlled Phase 2/3 clinical trial did not meet its primary efficacy endpoint. We subsequently decided to not progress mavrilimumab in the COVID-19-related ARDS indication, although we are continuing the Phase 3 portion of the clinical trial through its completion date. We previously evaluated mavrilimumab in 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. In October 2020, we announced that our Phase 2 proof-of-concept clinical trial for the study of mavrilimumab in GCA achieved both its primary and secondary efficacy endpoints with statistical significance. In September 2020, the FDA granted Orphan Drug designation for mavrilimumab for the treatment of GCA. In February 2022, we announced that we do not plan to initiate a Phase 3 trial of mavrilimumab in GCA. In February 2022, we granted Huadong exclusive rights to develop and commercialize mavrilimumab in the Asia Pacific region, excluding Japan.
Vixarelimab is an investigational monoclonal antibody inhibitor of signaling through OSMRβ. We acquired worldwide rights to vixarelimab in all indications from Biogen in 2016. We are evaluating vixarelimab for the potential
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treatment of prurigo nodularis, a chronic inflammatory skin condition with an estimated U.S. prevalence of approximately 300,000 patients. In April 2020, we announced that our Phase 2a trial of vixarelimab in prurigo nodularis achieved its primary and secondary efficacy endpoints. In November 2020, the FDA granted Breakthrough Therapy designation for vixarelimab for the treatment of pruritus associated with prurigo nodularis. We are conducting a global, randomized, double-blind, placebo-controlled Phase 2b dose-ranging clinical trial of vixarelimab in prurigo nodularis. This trial is designed to investigate efficacy, safety and pharmacokinetics. We expect to report top-line data from this trial in the second half of 2022.
KPL-404 is an investigational monoclonal antibody inhibitor of CD40-CD154 interaction. In 2019, we acquired all of the outstanding securities of Primatope, the company that owned or controlled the intellectual property related to KPL-404. In connection with our acquisition of Primatope, we acquired an exclusive world-wide license to KPL-404 from BIMDC. The CD40-CD154 interaction is a key T-cell co-stimulatory signal critical for B-cell maturation, immunoglobulin class switching and Type 1 immune response. We believe disrupting the CD40-CD154 interaction is an attractive approach to address multiple autoimmune disease pathologies such as RA, Sjogren’s syndrome, Graves’ disease, systemic lupus erythematosus and solid organ transplant graft rejection. In May 2021, we announced positive final data from our Phase 1 clinical trial of KPL-404 in healthy volunteers, which evaluated safety and pharmacokinetics, as well as RO and TDAR. In December 2021, we initiated a Phase 2 proof-of-concept clinical trial of KPL-404 in rheumatoid arthritis, which is designed to enable its potential development in a spectrum of autoimmune diseases believed to be mediated by the CD40-CD154 co-stimulatory interaction. The trial will evaluate pharmacokinetics, safety and efficacy of KPL-404 with subcutaneous administration. In January 2022, we provided KPL-404 to the University of Maryland School of Medicine, as part of an experimental immunosuppressive regimen in connection with a transplant of a genetically-modified pig heart into an adult human with end-stage heart disease who was not eligible for a standard allogeneic heart transplant.
Our future success is dependent on our ability to continue to commercialize ARCALYST and to develop, obtain regulatory approval for and successfully commercialize one or more of our current or future product candidates. Upon approval from the FDA of the commercial marketing of ARCALYST in the United States for the treatment of recurrent pericarditis and reduction in risk of recurrence in adults and children 12 years and older in March 2021, we assumed the sales and distribution of ARCALYST for the previously approved indications in the United States and will evenly split profits on ARCALYST sales with Regeneron. However, as a company we have limited experience obtaining marketing approval for product candidates, commercializing a therapeutic, supporting sales, marketing, and distribution activities and maintaining applicable infrastructure for these activities either directly and/or through agreements with third parties; as a result we may not be able to continue to commercialize ARCALYST or successfully commercialize any future approved product candidates, if any, thus potentially impairing the commercial potential of ARCALYST and our other product candidates.
We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve corporate profitability will depend heavily on the continued commercialization of ARCALYST and the development and eventual commercialization of one or more of our current or future product candidates, if approved. In the fourth quarter of 2021, our ARCALYST franchise achieved profitability, though such profits remain small compared to our total net losses. Our net losses were $157.9 million and $161.4 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $675.4 million. We expect to continue to incur significant operating losses as we advance our product candidates through preclinical and clinical development and, ultimately, seek regulatory approval. In addition, we expect to continue to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution of ARCALYST. 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 and sustained revenue from product sales of ARCALYST and one or more of our current or future approved product candidates, if ever, we expect to finance our operations through a combination of sales of ARCALYST, raising additional capital such as through debt or equity offerings or through other sources, which may include licensing, collaborations or other strategic transactions or arrangements. 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 of one or more of our
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current or future product candidates, delay our pursuit of potential in-licenses or acquisitions or scale back on commercialization activities for ARCALYST.
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 corporate profitability. Even if we are able to continue to commercialize ARCALYST and generate product sales from one or more of our current or future product candidates, if approved, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
As of December 31, 2021, we had cash, cash equivalents and short-term investments of $182.2 million. We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance of the audited consolidated financial statements included in this Annual Report. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “— Liquidity and Capital Resources.” Our future viability is dependent on our ability to fund our operations through sales of ARCALYST and/or raise additional capital, such as through debt or equity offerings, as needed.
Components of Our Results of Operations
Product revenue, net
Following the FDA approval of ARCALYST in March 2021, we began generating product revenue from sales of ARCALYST in April 2021. ARCALYST is sold through a third party logistics provider that distributes primarily through a network of authorized specialty pharmacies and specialty distributors (collectively, “customers”), which deliver the medication to patients by mail.
Net revenue from product sales is recognized at the transaction price when the specialty pharmacy or specialty distributors obtains control of our product, which occurs at a point in time, typically upon shipment of the product from the third party logistics provider.
Our net revenues represent total revenues adjusted for discounts and allowances, including estimated cash discounts, chargebacks, rebates, returns, copay assistance, and specialty pharmacy and distributor fees. These adjustments represent variable consideration under ASC 606 and are estimated using the expected value method and are recorded when revenue is recognized on the sale of the product. These adjustments are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Adjustments for variable consideration are determined based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products.
Operating Expenses
Cost of Goods Sold
Cost of goods sold includes production and distribution costs of ARCALYST, and amortization of the regulatory milestone, and other miscellaneous product costs associated with ARCALYST. Cost of goods sold also includes the allocations for the labor and overhead costs associated with the production of ARCALYST associated with quality control, quality assurance, and supply chain activities.
Collaboration expenses
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Collaboration expenses consists of Regeneron’s share of the profit related to ARCALYST sales under the Regeneron Agreement. We evenly split profits on sales of ARCALYST with Regeneron, where profits are determined after deducting from net sales of ARCALYST certain costs related to the manufacturing and commercialization of ARCALYST. Such costs include but are not limited to (i) our cost of goods sold for product used, sold or otherwise distributed for patient use by us; (ii) customary commercialization expenses, including the cost of our field force, and (iii) our cost to market, advertise and otherwise promote ARCALYST, with such costs identified in subsection (iii) subject to specified limits. In addition, should there be a transfer of technology related to the manufacture of ARCALYST, then, to the extent permitted in accordance with the Regeneron Agreement, the fully-burdened costs of each of us and Regeneron incurred in performing (or having performed) such technology transfer shall also be deducted from net sales of ARCALYST to determine profit. We also evenly split with Regeneron any proceeds received by us from any licensees, sublicensees and distributors in consideration for the sale, license or other disposition of rights with respect to ARCALYST, including upfront payments, milestone payments and royalties.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the research and development of our product candidates. We expense research and development costs as incurred. These expenses may include:
●expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval;
●expenses incurred under agreements with CROs that are primarily engaged in the oversight and conduct of our clinical trials and CMOs that are primarily engaged to provide preclinical and clinical drug substance and product for our research and development programs for our product candidates;
●other costs related to acquiring and manufacturing preclinical and clinical trial materials, including manufacturing validation batches, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;
●payments made in cash or equity securities under third-party licensing, acquisition and other similar agreements;
●employee-related expenses, including salaries and benefits, travel and share-based compensation expense for employees engaged in research and development functions;
●costs related to compliance with regulatory requirements; and
●allocated facilities-related costs, which include rent and utilities, depreciation and other expenses.
We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.
Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees incurred under
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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.
Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will be substantial over the next several years as we conduct our ongoing and/or planned clinical trials for our product candidates as well as conduct other preclinical and clinical development, and make regulatory filings for our product candidates. We also expect to incur additional expenses related to milestone and royalty payments payable to third parties with whom we have entered into license, acquisition and other similar agreements to acquire the rights to our product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of our current or future product candidates or when, if ever, we will realize significant revenue from product sales or be profitable. This uncertainty is due to the numerous risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in this Annual Report.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and benefits, travel and share based compensation expense for personnel in selling, marketing, medical, executive, business development, finance, human resources, legal and support personnel functions. Selling, general and administrative expenses also include insurance and professional fees for legal, patent, consulting, accounting and audit services.
Upon approval from the FDA of the commercial marketing of ARCALYST in the United States for the treatment of recurrent pericarditis and reduction in risk of recurrence in adults and children 12 years and older in March 2021, we assumed the sales and distribution of ARCALYST for the previously approved indications in the United States. We expect that our selling, general and administrative expenses will continue to increase in the future as we continue to perform commercialization and sales activities. We also anticipate that we will continue to incur significant costs, 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 as the company continues to expand.
Interest Income
Interest income consists of income recognized from investments in money market funds and U.S. Treasury notes offset by expenses related to investments.
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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 US, and Primatope are subject to federal and state income taxes in the United States. Our wholly owned subsidiary Kiniksa UK, 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. 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 ARCALYST 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, 2021 and 2020, we had federal research and development tax credit carryforwards of approximately $1.5 million and $1.4 million respectively, available to reduce future tax liabilities, which begin to expire in 2041. As of December 31, 2021 and 2020, we had state research and development tax credit carryforwards of approximately $0.3 million and $0.8 million respectively, available to reduce future tax liabilities.
Results of Operations
Comparison of the Years Ended December 31, 2021, 2020 and 2019
The following table summarizes our results of operations for the years ended December 31, 2021, 2020 and 2019:
Years Ended Comparison Comparison
December 31, Increase/(Decrease) Increase/(Decrease)
(in thousands) (in thousands, except percentages)
Revenue:
Product revenue, net $ 38,544 $ — $ — $ 38,544 100% $ — 0%
Operating expenses:
Cost of goods sold 9,100 — — 9,100 100% — 0%
Collaboration expenses 835 — — 835 100% — 0%
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Product Revenue, Net
Following the FDA approval of ARCALYST in March 2021, we began generating product revenue from sales of ARCALYST in April 2021. We recognize product revenue, net of ARCALYST at the transaction price when the specialty pharmacy or specialty distributors obtains control of our products, which typically occurs upon shipment of the product from the third party logistics provider. We recognized net revenue from the sale of ARCALYST of $38.5 million for the year ended December 31, 2021.
Cost of goods sold
Upon the first sale commencing in April 2021, we began generating cost of goods sold associated with the sales of ARCALYST. We recognized cost of goods sold from the sale of ARCALYST of $9.1 million for the year ended December 31, 2021, which includes $0.8 million for the amortization of the regulatory milestone. During the year ended December 31, 2021, we sold the remaining relabeled ARCALYST product previously acquired to support the clinical trials which carried zero cost.
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 $99.3 million for the year ended December 31, 2021, compared to $112.0 million for the year ended December 31, 2020, or a decrease of $12.7 million. 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.
Direct costs for our rilonacept program were $10.8 million, $25.7 million and $25.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. During the year ended December 31, 2021, the decrease in expenses incurred related primarily to the completion of RHAPSODY, our global, pivotal Phase 3 clinical trial in recurrent pericarditis, and transition to the long-term extension. During the year ended December 31, 2020, expenses incurred primarily related to conducting RHAPSODY, a milestone payment of $7.5 million for the achievement of a specified regulatory milestone event under the Regeneron Agreement, and supply chain costs. 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 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.
Direct costs of our mavrilimumab program were $30.7 million, $25.9 million and $13.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. During the year ended December 31, 2021, expenses primarily
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related to our Phase 2/3 clinical trial in COVID-19 related ARDS. During the year ended December 31, 2020, expenses incurred primarily related to conducting our global Phase 2 clinical trial in GCA, including manufacturing costs for our clinical drug supply, and initiation of our Phase 2/3 clinical trial in COVID-19 related ARDS. During the year ended December 31, 2019, expenses incurred primarily related to costs related to our global Phase 2 clinical trial in GCA.
Direct costs for our vixarelimab program were $10.7 million, $8.8 million and $28.8 million for the year ended December 31, 2021, 2020 and 2019, respectively. During the year ended December 31, 2021, expenses incurred related primarily to the initiation of our Phase 2b clinical trial in prurigo nodularis. During the year ended December 31, 2020, expenses incurred related primarily to conducting our Phase 2a clinical trial in prurigo nodularis and our exploratory Phase 2 clinical trial in diseases characterized by chronic pruritus, which concluded earlier in the year. 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, and approximately $2.1 million of manufacturing and development costs for our clinical drug supply.
Direct costs for our KPL-404 program were $5.3 million, $3.7 million and $22.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. During the year ended December 31, 2021, expenses incurred primarily related to manufacturing of drug product supply for our anticipated Phase 2 trial in rheumatoid arthritis. 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 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 because the acquired technology represented in-process research and development and had no alternative future use.
Unallocated research and development expenses were $41.7 million, $47.9 million and $43.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. The decrease of $6.2 million in unallocated research and development expense in 2021 from 2020 was due to a decrease in cost associated with ARCALYST including quality control and supply chain of $4.9 million included in costs of goods sold beginning with the approval of ARCALYST. 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 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, 2021, 2020 and 2019 included share-based compensation of $8.5 million, $8.9 million and $5.7 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $85.9 million, $45.3 million and $35.0 million for the years ended December 31, 2021, 2020 and 2019. The increase of $40.6 million was primarily due to an increase of $22.0 million in personnel-related costs related to the build out of our commercial function, including hiring of a sales force and $8.9 million in marketing expenses associated with the commercial launch of ARCALYST. 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 activities to support our future launch of ARCALYST 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. Personnel-related costs for the years ended December 30, 2021, 2020 and 2019 included share-based compensation of $16.5 million, $12.0 million and $9.3 million, respectively.
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Collaboration Expenses
Collaboration expenses was $0.8 million for the year ended December 31, 2021. Our collaboration with Regeneron achieved profitability in the fourth quarter of 2021, following three quarters of commercial availability for recurrent pericarditis. We expect to continue to incur collaboration expenses associated with sales of ARCALYST.
Interest Income
Interest income was $0.1 million for the year ended December 31, 2021,compared to interest income of $1.1 million for the year ended December 31, 2020. The decrease was due primarily to lower interest rates on U.S. Treasury notes and a lower average balance in short term investments.
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.
(Provision) Benefit for Income Taxes
For the year ended December 31, 2021, we recorded a provision for income taxes of $1.4 million relating primarily to U.S. current taxes from the cost-plus arrangement less amounts related to the impact of Foreign Derived Intangible Income, or FDII deduction and U.S. federal and state research credits. As of December 31, 2021 we maintained a full valuation allowance against our deferred tax assets of $127.9 million because we believe, more likely than not, it is not realizable. 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. 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.
Liquidity and Capital Resources
As of December 31, 2021, our principle source of liquidity was cash, cash equivalents and short-term investments, which totaled $182.2 million. Our net losses were $157.9 million, $161.4 million and $161.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. We expect to incur operating losses for the foreseeable future.
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 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.
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Under various agreements with third parties, we have agreed to make milestone payments, pay royalties, annual maintenance fees and to meet due diligence requirements based upon specified milestones. Under our license agreement with Regeneron, we have entered into supply agreements to provide both clinical and commercial product. We have committed to minimum payments to Regeneron of $43.6 million, of which $30.6 million are due within one year. We have entered into lease agreements for office and laboratory space, and vehicles, with total future lease payments of $6.3 million, of which $3.6 million are due within one year. These agreements impact our short-term and long-term liquidity and capital needs.
As of December 31, 2021, we had cash, cash equivalents and short-term investments of $182.2 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, 2021, operating activities used $126.3 million of cash, primarily resulting from our net loss of $157.9 million, partially offset by non-cash charges of $30.9 million. Net cash used in our operating assets and liabilities for the year ended December 31, 2021 consisted of a $10.3 million increase in accrued expenses and other liabilities primarily due to increases in the accrued costs for our clinical trials and accrual of the 2021 employee bonus, a $3.9 million increase in accounts receivable due to the start of sales for ARCALYST, and a $3.7 million increase in inventory.
During the year 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 ARCALYST, a $0.5 million increase in other long-term liabilities, a $1.7 million decrease in operating lease liabilities due to monthly payments for our right-of-use assets, a $5.6 million increase in other long term assets due to payments associated with minimum balance requirements of our clinical trials which are not expected to be completed within a year, and $1.3 million increase in prepaid expenses and other current assets.
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
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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.
Investing Activities
During the year ended December 31, 2021, investing activities provided $128.6 million of cash, consisting of $306.3 million from proceeds of maturities of short-term investments, offset by $157.3 million of purchases of short-term investments and $20.0 million related to the payment of a regulatory milestone incurred under the Regeneron Agreement.
During the year 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.
Financing Activities
During the year ended December 31, 2021, net cash provided by financing activities was $5.9 million, consisting of proceeds from the exercise of employee share options and our ESPP.
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.
Funding Requirements
We expect to incur significant expenses in connection with our ongoing and planned activities as we continue to commercialize ARCALYST and advance our current and future product candidates through preclinical and clinical development, seek regulatory approval and commercialize one or more of our current or future product candidates, if approved. In addition, if we obtain marketing approval for any of our current or future product candidates, we expect to incur significant additional commercialization expenses related to such activities. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. As a result, we expect to incur additional expenses related to milestone, royalty and other payments payable to third parties with whom we have entered into license, acquisition and other similar agreements to acquire the rights to our product candidates. Additionally, we expect to continue to incur costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses. We expect to incur expenses as we:
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● 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. The future viability of the Company is dependent on its ability to fund its operations through sales of ARCALYST and/or raise additional capital, such as through debt or equity offerings, as needed. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We anticipate that we may require additional capital if we choose to pursue in-licenses or acquisitions of other product candidates and technologies or their related businesses. We expect to continue to incur significant expenses related to product manufacturing, sales, marketing and distribution of ARCALYST. In addition, if we obtain regulatory approval for any of our current or future product candidates, pursue additional indications for our products or any of our current or future product candidates, we expect to incur significant expenses related to product development and manufacturing, sales, marketing and distribution, depending on where we choose to commercialize.
Because of the numerous risks and uncertainties associated with research, development and commercialization of biologic products, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements may be impacted by a number of factors, including those described in Part I, Item 1A. “Risk Factors” in this Annual Report.
Until such time, if ever, as we can generate substantial and sustained product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, or other sources, including, licensing, collaboration, marketing, distribution or other strategic transactions or arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect our shareholders’ rights as a common shareholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in fixed payment obligations.
If we raise funds through licensing, collaboration, marketing, distribution or other strategic transactions or arrangements with third parties, we may have to relinquish valuable rights to our technologies, product candidates or
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future revenue streams, or otherwise agree to terms that may not be favorable to us. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate some or all of our research and development programs for product candidates, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles 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.
Revenue Recognition
ASC 606 outlines a five-step process for recognizing revenue from contracts with customers: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the separate performance obligations in the contract, and (v) recognize revenue associated with the performance obligations as they are satisfied.
We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. Once a contract is determined to be within the scope of ASC 606, we determine the performance obligations that are distinct. We recognize as revenues the amount of the transaction price that is allocated to each respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon receipt of the product by the customer.
ASC 606 requires entities to record a contract asset when a performance obligation has been satisfied or partially satisfied, but the amount of consideration has not yet been received because the receipt of the consideration is conditioned on something other than the passage of time. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer.
Product Revenue, Net
Net revenue from product sales is recognized at the transaction price when the specialty pharmacy or specialty distributors obtains control of our products, which occurs at a point in time, typically upon shipment of the product from the third party logistics provider.
Our net revenues represent total revenues adjusted for discounts and allowances, including estimated cash discounts, chargebacks, rebates, returns, copay assistance, and specialty pharmacy and distributor fees. These adjustments represent variable consideration under ASC 606 and are estimated using the expected value method and are recorded when revenue is recognized on the sale of the product. These adjustments are established by us as our best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances. Adjustments for variable consideration are determined based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products.
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As of December 31, 2021 a 10% change in our product revenue allowance and reserve would not result in a material change in our net revenue.
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. Non-refundable prepayments or minimum balance requirements associated to clinical trials determined to not be used within one year are classified as other long-term assets. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
As of December 31, 2021 we have accrued $25.0 million of estimated 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.
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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 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 11 to in our annual consolidated financial statements included elsewhere in this annual report). 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 a blend of our historical volatility and 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.
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, 2021, 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.
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None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and 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 Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2021.
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, 2021.
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.
Based on this assessment, our management concluded that, as of December 31, 2021, our internal control over financial reporting was effective.
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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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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 2022 Annual Meeting to be filed with the SEC within 120 days of December 31, 2021, 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” 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 2022 Annual Meeting to be filed with the SEC within 120 days of December 31, 2021, 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 2022 Annual Meeting to be filed with the SEC within 120 days of December 31, 2021, 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 2022 Annual Meeting to be filed with the SEC within 120 days of December 31, 2021, 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 2022 Annual Meeting to be filed with the SEC within 120 days of December 31, 2021, 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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101.INS Inline XBRL Instance Document ***
101.SCH Inline XBRL Taxonomy Extension Schema Document ***
101.LAB Inline XBRL Taxonomy Label Linkbase Document ***
* Filed herewith
** Furnished herewith
*** Submitted electronically herewith
# Indicates management contract or compensatory plan
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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 24, 2022 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 24, 2022
Felix J. Baker
/s/ Stephen R. Biggar Director February 24, 2022
Stephen R. Biggar
/s/ G. Bradley Cole Director February 24, 2022
G. Bradley Cole
/s/ Richard S. Levy Director February 24, 2022
Richard S. Levy
/s/ Thomas R. Malley Director February 24, 2022
Thomas R. Malley
/s/ Tracey L. McCain Director February 24, 2022
Tracey L. McCain
/s/ Kimberly J. Popovits Director February 24, 2022
Kimberly J. Popovits
/s/ Barry D. Quart Director February 24, 2022
Barry D. Quart
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) F-2
Consolidated Balance Sheets F-4
Consolidated Statements of Operations and Comprehensive Loss F-5
Consolidated Statements of Shareholders’ Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
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Report of Independent Registered Public Accounting Firm
TotheBoard of Directors and Shareholders of Kiniksa Pharmaceuticals, Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidatedbalance sheets of Kiniksa Pharmaceuticals, Ltd.and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidatedfinancial statements”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Companyas ofDecember 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements 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 of these consolidated financial statements 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits 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 consolidated financial 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. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
As discussed in Note 1 to the consolidated financial statements, the Company is dependent on its ability to fund operations through sales of Arcalyst and/or raise additional capital, as needed. Management’s evaluation of the events and conditions and Management’s plans in regards to this matter is also described in Note 1.
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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 9 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 $25.0 million as of December 31, 2021, 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.
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, 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 24, 2022
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
Accounts receivable, net 3,985 —
Inventory 3,675 —
Prepaid expenses and other current assets 6,585 9,557
Property and equipment, net 2,834 4,051
Operating lease right-of-use assets 5,550 6,566
Other long-term assets 8,720 5,588
Intangible asset, net 19,250 —
Deferred tax assets — 10
Liabilities and Shareholders’ Equity
Current liabilities:
Operating lease liabilities 3,381 2,107
Other current liabilities 1,544 37
Non-current liabilities:
Non-current operating lease liabilities 2,669 4,878
Other long-term liabilities 270 805
Commitments and contingencies (Note 15)
Shareholders’ equity:
Accumulated other comprehensive loss (66) (34)
Total liabilities and shareholders’ equity $ 232,800 $ 349,464
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,
Revenue:
Product revenue, net $ 38,544 $ — $ —
Operating expenses:
Cost of goods sold 9,100 — —
Collaboration expenses 835 — —
(Provision) benefit for income taxes (1,385) (5,152) 2,047
Comprehensive loss:
Other comprehensive income (loss):
Total other comprehensive income (loss) (32) (67) 37
The accompanying notes are an integral part of these consolidated financial statements.
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KINIKSA PHARMACEUTICALS, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share amounts)
Common Shares Additional Accumulated Total
Shares Amount Capital Income (Loss) Deficit Equity
Share-based compensation expense — — 15,080 — — 15,080
Share-based compensation expense — — 20,875 — — 20,875
Share-based compensation expense — — 25,173 — — 25,173
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:
Depreciation and amortization expense 2,355 2,405 2,068
Loss on disposal of property and equipment 103 — 21
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 2,941 (1,334) (1,020)
Accounts receivable, net (3,910) — —
Inventory (3,675) — —
Other long-term assets (3,284) (5,588) —
Accrued expenses and other current liabilities 10,339 8,797 4,638
Accrued milestones — — (15,000)
Operating lease liabilities (2,553) (1,699) (1,264)
Other long-term liabilities (535) 478 326
Cash flows from investing activities:
Purchases of property and equipment (415) (283) (3,203)
Intangible assets acquired (20,000) — —
Cash flows from financing activities:
Payments of offering costs — (1,136) (118)
Supplemental information:
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 global 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 portfolio of assets is based on strong biologic rationale or validated mechanisms, target underserved conditions and offer the potential for differentiation.
The Company is subject to risks and uncertainties common to early, commercial 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, the Company’s limited experience obtaining regulatory approvals, the potential failure by the Company to successfully complete research and development of its current or future product candidates, potential inability to adequately protect its technology, that any current or future product candidates will obtain necessary government regulatory approval, that ARCALYST will continue to be commercially viable, that any of the Company’s current or future product candidates, if approved, will be commercially viable, potential competition, and the Company’s dependence on third parties.
Risks and Uncertainties Related to COVID-19
In addition to risks and uncertainties common to the Company’s industry, the Company is subject to global societal, healthcare, economic and market conditions, including from the impact of the COVID-19 pandemic. The COVID-19 pandemic, and measures undertaken in response to the pandemic, or the easing of any of such measures, may cause significant disruptions in the Company’s business or operations as well as in the business and operations of third parties with whom the Company conducts business or otherwise engages now or in the future. The COVID-19 pandemic may also adversely impact the Company’s preclinical studies and clinical trials, which could impede, delay, limit or prevent the clinical development of the Company’s product candidates and ultimately lead to the delay or denial of regulatory approval of its product candidates, which would materially adversely affect the Company’s business and operations, including its ability to generate revenue. Moreover, the COVID-19 pandemic is impacting the global economy, and the U.S. economy in particular, with the potential for an economic downturn to be severe and prolonged. A severe or prolonged economic downturn could result in continued disruptions in the financial markets, which could adversely impact the Company’s ability to raise additional capital when needed or on acceptable terms, if at all.
In response to the COVID-19 pandemic and measures introduced by federal and state governments in the United States, the Company implemented workplace protocols in the jurisdictions where it has facilities. While the majority of the Company’s employees are able to carry out their responsibilities working outside of the Company’s physical locations, for the Company’s essential workers and those choosing to return to the Company’s offices to carry out their responsibilities, the Company implemented additional safety measures, including occupancy limits, restricting business travel, providing and requiring the use of personal protective equipment, self-screening prior to accessing the Company’s facilities, among other things. While the Company continuously looks to identify business-critical activities and to develop contingencies and mitigation strategies for those activities to potentially minimize the impact of the COVID-19 pandemic on its business and operations, there can be no assurance that it will be able to identify all such activities or that any identified contingencies and mitigation strategies will be effective. Further, the COVID-19 pandemic, and measures undertaken in response to the pandemic continue to rapidly evolve. There is uncertainty relating to the potential effect of the pandemic on the Company’s business and operations. The extent of the impact on the Company’s business and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate spread of the disease, duration of the pandemic, business and travel restrictions and social distancing measures, and the effectiveness of these and other actions taken to contain and treat the disease as well as the impact of the easement of any such restrictions, measures and actions.
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KINIKSA PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands, except share and per share amounts)
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries, Kiniksa Pharmaceuticals Corp. (“Kiniksa US”), Primatope Therapeutics, Inc. (“Primatope”) and Kiniksa Pharmaceuticals (UK), Ltd. (“Kiniksa UK”) as well as the subsidiaries of Kiniksa UK, Kiniksa Pharmaceuticals (Germany) GmbH (“Kiniksa Germany”), Kiniksa Pharmaceuticals (France) SARL (“Kiniksa France”), and Kiniksa Pharmaceuticals GmbH (“Kiniksa Switzerland”), after elimination of all significant intercompany accounts and transactions.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the recognition of revenue, the capitalization of inventory, the accrual for research and development expenses and the valuation of share-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Reporting and Functional Currency
The financial results of the Company's global activities are reported in U.S. dollars (“USD”) and its foreign subsidiaries other than Kiniksa UK generally utilize their respective local currency to be their functional currency.
Transactions in other currencies are recorded in the functional currency at the rate of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are re-measured into the functional currency at the rate of exchange in effect at the balance sheet date. Exchange rate gains and losses arising from re-measurement of foreign currency-denominated monetary assets and liabilities are included in income or losses in the period in which they occur.
For the Company’s foreign subsidiaries where the local currency is the functional currency, assets and liabilities denominated in local currencies are translated into USD at end-of-period exchange rates and the resulting translation adjustments are reported as a component of accumulated other comprehensive gain (loss) within shareholders' equity.
Follow-on Offerings and Private Placements
On February 4, 2019, the Company completed a follow-on offering of 2,654,984 Class A common shares at a public offering price of $18.26 and a 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 $85,000. In addition, on March 1, 2019, the Company 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 over-allotment option to purchase additional shares at a public offering price of $18.26 per share for gross proceeds of $2,942. The aggregate net proceeds to the Company from the follow-on offering and concurrent private placement, inclusive of the over-allotment option exercise, was $82,988 after deducting underwriting discounts and commissions, placement agent fees and other offering costs.
On May 18, 2020, the Company 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 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
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KINIKSA PHARMACEUTICALS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)