Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
You should read the following
discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the
related notes included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2025 (this “Annual Report”).
This discussion contains forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives,
expectations, intentions, hopes, beliefs, strategies or projections regarding the future of its pipeline and business and words such as
“may,” “will,”, “should,” “could,” “would,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “project,” “potential,” “seek,”
“target,” “goal,” “intend” and variations of such words and any statements that refer to projections,
forecasts or other characterizations of future events or circumstances, including any underlying assumptions, and similar expressions
are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. These forward-looking
statements are based on current expectations and beliefs concerning future developments and their potential effects. There can be no assurance
that future developments affecting us will be those that have been anticipated. These forward-looking statements involve a number of risks,
uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially
different from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section of this Annual Report entitled “Risk Factors” and elsewhere
in this Annual Report. These and many other factors could affect our future financial and operating results. We undertake no obligation
to update any forward-looking statement to reflect events after the date of this Annual Report. As used in this Annual Report, unless
the context suggests otherwise, “we,” “us,” “our,” “the Company,” “Oruka Therapeutics,
Inc.,” “Oruka,” “ARCA biopharma, Inc.,” “ARCA,” refers to Oruka Therapeutics, Inc. and its consolidated
subsidiary, Oruka Therapeutics Operating Company LLC, taken as a whole.
Overview
We are a clinical-stage biopharmaceutical
company focused on developing novel monoclonal antibody therapeutics for psoriasis (“PsO”) and other inflammatory and immunology
(“I&I”) indications. Our name is derived from or, for “skin,” and arukah, for “restoration,” and
reflects our mission to deliver therapies for chronic skin diseases that provide patients the most possible freedom from their condition.
Our strategy is to apply antibody engineering and format innovations to validated modes of action, which we believe will enable us to
improve meaningfully upon the efficacy and dosing regimens of standard-of-care medicines while significantly reducing technical and biological
risk. Our programs aim to treat and potentially modify disease by targeting mechanisms with proven efficacy and safety involved in disease
pathology and the activity of pathogenic tissue-resident memory T cells (“TRMs”).
Our lead program, ORKA-001, is designed to target the p19 subunit of
interleukin-23 (“IL-23p19”) for the treatment of PsO. Our co-lead program, ORKA-002, is designed to target interleukin-17A
and interleukin-17F (“IL-17A/F”) for the treatment of PsO, hidradenitis suppurativa (“HS”), psoriatic arthritis
(“PsA”), and other conditions. These programs each bind their respective targets at high affinity and incorporate half-life
extension technology with the aim to increase exposure and decrease dosing frequency. We believe that our focused strategy, differentiated
portfolio, and deep expertise position us to set a new treatment standard in large I&I markets with continued unmet need.
Since our inception in February
2024, we have devoted substantially all of our resources to raising capital, organizing and staffing our company, business and scientific
planning, conducting discovery and research activities, establishing and protecting our intellectual property portfolio, establishing
arrangements with third parties for the manufacture of our programs and component materials, developing and progressing our pipeline,
and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated
any revenue from product sales. To date, we have funded our operations primarily with proceeds from the issuance of convertible preferred
stock, common stock, a convertible note, pre-funded warrants, and the proceeds from the reverse recapitalization and merger, our Pre-Closing
Financing and subsequent PIPE Financings (as defined and further described below).
Since our inception, we have incurred significant losses and negative
cash flows from our operations. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the
successful development and eventual commercialization of any programs we may develop. As of December 31, 2025, we had an accumulated deficit
of $189.2 million. For the year ended December 31, 2025, we had net losses of $105.4 million, and we used net cash of $88.2 million for
our operating activities.
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We had cash, cash equivalents, and marketable securities of $479.6
million as of December 31, 2025. We expect that our existing cash, cash equivalents, and marketable securities will be sufficient to fund
our operating plans for at least twelve months from the date of the filing of this Annual Report. We expect to continue to incur substantial
losses for the foreseeable future, and our transition to profitability will depend upon successful development, approval and commercialization
of our product candidates and upon achievement of sufficient revenues to support our cost structure.
Our Portfolio and Development
Plans
ORKA-001
ORKA-001 is a high affinity,
extended half-life monoclonal antibody (“mAb”) designed to target IL-23p19. IL-23 is a pro-inflammatory cytokine that plays
a critical role in the proliferation and development of T helper 17 (“Th17”) cells, which are the primary drivers of several
autoimmune and inflammatory disorders, including PsO. IL-23 is composed of two subunits: a p40 subunit that is shared with IL-12 and a
p19 subunit that is specific to IL-23. First-generation IL-23 antibodies bound p40 and inhibited both IL-12 and IL-23 signaling, while
more recent IL-23 antibodies targeting the p19 subunit have shown improved efficacy and safety. Based on clinical evidence, we believe
that ORKA-001 could achieve higher response rates than established therapies in PsO while requiring less frequent dosing and maintaining
the favorable safety profile of therapies targeting IL-23p19.
ORKA-001 is engineered with YTE half-life extension technology, a specific
three amino acid change in the fragment crystallizable (“Fc”) domain to modify the pH-dependent binding to the neonatal Fc
receptor (“FcRn”). As a result, it has a pharmacokinetic profile designed to support a subcutaneous (“SQ”) injection
as infrequently as once or twice per year. In addition, emerging evidence suggests that IL-23 blockade can modify the disease biology
of PsO, possibly leading to durable remissions and preventing the development of PsA. We believe that the expected characteristics of
ORKA-001 increase its potential to deliver these disease-modifying benefits.
We initiated a Phase 1 trial
of ORKA-001 in the fourth quarter of 2024 and in September 2025, we announced interim results at the European Academy of Dermatology and
Venereology (EADV) Congress. The data showed that ORKA-001 has a human half-life of approximately 100 days. Single doses of ORKA-001 demonstrated
complete and sustained inhibition of STAT3 signaling, a downstream marker of IL-23 activity, in an ex vivo assay through 24 weeks. In
addition, ORKA-001 was well tolerated at all dose levels, with a favorable safety profile consistent with the anti-IL-23 class.
In the third quarter of 2025, we commenced dosing in a Phase 2a clinical trial of ORKA-001 in patients with moderate-to-severe PsO (also
known as “EVERLAST-A”). We expect to share Week 16 data for all patients in the second quarter of 2026. In addition, we plan
to share longer-term data, including Week 28 for all patients and 52-week follow-up for a portion of the cohort in the second half of
2026. EVERLAST-A enrolled 84 patients randomized 3:1 to receive 600 mg of ORKA-001 at Weeks 0 and 4 or matching placebo. The primary endpoint
is PASI 100, a 100% reduction from baseline in the Psoriasis Area and Severity Index (“PASI”), at Week 16. At Week 28, patients
who have achieved PASI 100 will be randomized 2:1 to an arm where either (1) they do not receive another dose until disease recurrence
(to evaluate the possibility of both yearly dosing and extended off-treatment remissions) or (2) they receive 300 mg ORKA-001 every six
months.
Additionally, the first patients were dosed in EVERLAST-B in December
2025. EVERLAST-B is designed to enroll approximately 160 patients into a dose-ranging Phase 2b trial of ORKA-001 in patients with moderate-to-severe
PsO and will evaluate three dose levels of ORKA-001: 37.5 mg at Week 0, 300 mg at Weeks 0 and 4, and 600 mg at Weeks 0 and 4, versus placebo.
The primary endpoint is PASI 100 at Week 16. At Week 28, patients who have achieved PASI 100 will be re-randomized 1:1 to either a 600
mg dose once-yearly or placebo. Patients who have not achieved PASI 100 at Week 28 will receive a 300 mg dose every six months. Building
on EVERLAST-A, this design will further test the potential for ORKA-001 to achieve yearly dosing, higher efficacy and extended off-treatment
remissions. Data from EVERLAST-B is anticipated in 2027.
Based
on recent precedent in PsO, we anticipate that the overall development program, from first-in-human studies through biologics license
application (“BLA”) submission, could take as little as six to seven years, based on averages observed for recently approved
medicines. However, we have no control over the duration of the United States Food and Drug Administration (“FDA”) review
process, and the actual timeline may vary.
ORKA-002
ORKA-002 is a high affinity, extended half-life mAb designed to target
IL-17A and IL-17F (“IL-17A/F”). IL-17 inhibition has become central to the treatment of psoriatic diseases, including PsO
and PsA, and has also shown efficacy in other I&I indications, such as HS and axial spondyloarthritis (“axSpA”). More
recently, the importance of inhibiting the IL-17F isoform along with IL-17A has become appreciated, and dual blockade with the recently
approved therapy Bimzelx (bimekizumab) has led to higher response rates in patients than blockade of IL-17A alone. ORKA-002 is designed
to bind IL-17A/F at similar epitopes, or binding sites, and affinity ranges as bimekizumab, but incorporates half-life extension technology
that could enable more convenient dosing intervals.
In January 2026, we
announced interim findings from the Phase 1 trial of ORKA-002 in healthy volunteers. The results showed that ORKA-002 has a
half-life of approximately 75-80 days, which supports the potential for twice-yearly maintenance dosing in PsO and quarterly
maintenance dosing in HS. Single doses of ORKA-002 demonstrated potent and sustained inhibition of IL-17 signaling in an ex vivo
assay through 24 weeks. ORKA-002 was well tolerated at all dose levels, with a favorable safety profile consistent with
the anti-IL-17 class. The trial remains blinded, and as of January 6, 2026, which was the data cutoff date, all subjects remained on trial.
Based on these Phase 1
results, we initiated ORCA-SURGE, a Phase 2 trial of ORKA-002 in patients with moderate-to-severe PsO, in February 2026. ORCA-SURGE
is designed to enroll approximately 160 patients randomized 1:1:1:1 to receive 40 mg, 160 mg or 320 mg of ORKA-002 at Weeks 0 and 4,
or matching placebo. The primary endpoint is PASI 100 at Week 16. Maintenance dosing will evaluate the potential for twice-yearly
dosing with ORKA-002. Data from ORCA-SURGE is anticipated in 2027. Moreover, we also expect to initiate a Phase 2 trial of ORKA-002
in patients with HS in the second half of 2026.
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Additional Pipeline Program
We have a third program, ORKA-003, designed to target an undisclosed
pathway. Our strategy as a company is to remain highly focused on I&I diseases, and specifically on inflammatory dermatology
conditions. Our third program provides the potential for indication expansion beyond PsO and may create combination opportunities with
our more advanced programs.
Acquisition of Pre-Merger Oruka
On August 29, 2024 (the “Closing”),
we completed the acquisition (the “Merger”) of the private company, Oruka Therapeutics, Inc. (“Pre-Merger Oruka”),
a pre-clinical stage biotechnology company that was incorporated on February 6, 2024 for the purposes of holding rights to certain intellectual
property being developed by Paragon Therapeutics, Inc. (“Paragon”). On August 29, 2024, we changed our name from “ARCA
biopharma, Inc.” to “Oruka Therapeutics, Inc.” and our Nasdaq ticker symbol from “ABIO” to “ORKA”.
Following consummation of the Merger, we effected a 1-for-12 reverse stock split (the “Reverse Stock Split”) of our common
stock, par value $0.001 per share, of the Company (“Company Common Stock”). The Company Common Stock commenced trading on
a post-Reverse Stock Split, post-Merger basis at the opening of trading on September 3, 2024. All references to common stock, options
to purchase common stock, outstanding common stock warrants, common stock share data, per share data, Company Common Stock, and related
information contained in the consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse
Stock Split for all periods presented, unless otherwise specifically indicated or the context otherwise requires.
Pre-Closing Financing and Closing
Immediately prior to the execution and delivery of the Merger Agreement,
certain new and existing investors of Pre-Merger Oruka entered into a subscription agreement with Pre-Merger Oruka (that was subsequently
amended and restated in July 2024, the “Subscription Agreement”), pursuant to which, and on the terms and subject to the conditions
of which, immediately prior to the Closing, those investors purchased shares of common stock of Pre-Merger Oruka (“Pre-Merger Oruka
Common Stock”) and Pre-Merger Oruka pre-funded warrants for gross proceeds of approximately $275.0 million (which includes $25.0
million of proceeds previously received from the issuance of the Convertible Note (as defined in Note 9 to the consolidated financial
statement) and accrued interest on such note which converted to shares of Pre-Merger Oruka Common Stock) (the “Pre-Closing Financing”).
We incurred transaction costs of $20.5 million which were recorded as a reduction to additional paid-in capital in the consolidated financial
statements.
In connection with the Closing, the shares of Pre-Merger Oruka Common
Stock and Pre-Merger Oruka pre-funded warrants issued pursuant to the Subscription Agreement were converted into shares of Company Common
Stock and pre-funded warrants to purchase Company Common Stock in accordance with the Exchange Ratio (as defined below and determined
by the terms of the Merger Agreement). Moreover, as part of the Closing of the Merger, (i) then-issued and outstanding shares of
Pre-Merger Oruka Common Stock (including outstanding and unvested Pre-Merger Oruka restricted stock and shares of Pre-Merger Oruka Common
Stock issued in connection with the Subscription Agreement) were converted into the right to receive a number of shares of Company Common
Stock, equal to the exchange ratio of 6.8569 shares of Company Common Stock (the “Exchange Ratio”), which were subject to
the same vesting provisions as those immediately prior to the Merger; (ii) each share of Pre-Merger Oruka Series A convertible preferred
stock, par value $0.0001 (“Pre-Merger Oruka Series A Preferred Stock”) was converted into the right to receive a number of
shares of ARCA Series B non-voting convertible preferred stock, par value $0.001 per share (“Company Series B Preferred Stock”),
which are convertible into shares of Company Common Stock at a conversion ratio of approximately 83.3332:1 after the Reverse Stock Split,
(iii) each outstanding option to purchase Pre-Merger Oruka Common Stock was converted into an option to purchase shares of Company Common
Stock, and (iv) each outstanding warrant to purchase shares of Pre-Merger Oruka Common Stock was converted into a warrant to purchase
shares of Company Common Stock.
The Merger was accounted
for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Pre-Merger Oruka was deemed to be the
accounting acquirer for financial reporting purposes. This determination was primarily based on the fact that, immediately following
the Merger: (i) Pre-Merger Oruka stockholders owned a substantial majority of the voting rights in the combined company; (ii) Pre-Merger
Oruka’s largest stockholders retained the largest interest in the combined company; (iii) Pre-Merger Oruka designated a majority
of the initial members of the board of directors of the combined company; and (iv) Pre-Merger Oruka’s executive management team
became the management team of the combined company. Accordingly, for accounting purposes: (a) the Merger was treated as the equivalent
of Pre-Merger Oruka issuing stock to acquire the net assets of ARCA, and (b) the reported historical operating results of the combined
company prior to the Merger are those of Pre-Merger Oruka. As part of the reverse recapitalization, the Company acquired a cash balance
of $4.94 million from ARCA.
Additional information
regarding the Merger is included in Note 3 to the consolidated financial statements included in Part II – Item 8 of this Annual
Report.
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PIPE Financings
On September 11, 2024, we
entered into a Securities Purchase Agreement (the “2024 Securities Purchase Agreement”) for a private placement (the “2024
PIPE Financing”) with certain institutional and accredited investors. The closing of the 2024 PIPE Financing occurred on September
13, 2024.
Pursuant to the 2024 Securities
Purchase Agreement, the investors purchased an aggregate of 5,600,000 shares of Company Common Stock at a purchase price of $23.00 per
share, an aggregate of 2,439 shares of our Series A non-voting convertible preferred stock, par value $0.001 per share (“Company
Series A Preferred Stock”), at a purchase price of $23,000.00 per share (each Company Series A Preferred Stock is convertible into
1,000 shares of Company Common Stock), and pre-funded warrants to purchase an aggregate of 680,000 shares of Company Common Stock at a
purchase price of $22.999 per pre-funded warrant, for aggregate net proceeds of approximately $188.7 million (net of issuance costs of
$11.9 million).
On September 17, 2025, we
entered into a Securities Purchase Agreement (the “2025 Securities Purchase Agreement”) for a private placement (the “2025
PIPE Financing”) with certain institutional and accredited investors. The closing of the 2025 PIPE Financing occurred on September
19, 2025.
Pursuant to the 2025 Securities
Purchase Agreement, the investors purchased an aggregate of 10,933,405 shares of Company Common Stock at a purchase price of $15.00 per
share, and pre-funded warrants to purchase an aggregate of 1,066,666 shares of Company Common Stock at a purchase price of $14.999 per
pre-funded warrant, for aggregate net proceeds of approximately $169.6 million (net of issuance costs of $10.4 million).
Paragon Therapeutics - Option and License Agreements
Option Agreements –
Paragon Therapeutics
In March 2024, we entered into two antibody discovery and option
agreements (the “Option Agreements”) with Paragon Therapeutics, Inc. (“Paragon”) and Paruka Holdings LLC (“Paruka”).
Under the terms of each agreement, Paragon identifies, evaluates, and develops antibodies directed against certain mutually agreed therapeutic
targets of interest to us. From time to time, we can choose to add additional targets to the collaboration upon agreement with Paragon
and Paruka. Under the Option Agreements, we have the exclusive option to, on a research program-by-research program basis, be granted
an exclusive, worldwide license to all of Paragon’s rights, titles, and interest in and to the intellectual property resulting from
the applicable research program to develop, manufacture, and commercialize the antibodies and products directed to the selected target(s)
(each, an “Option”). We have initiated certain research programs with Paragon that generally focus on discovering, generating,
identifying and/or characterizing antibodies directed to a particular target (each, a “Research Program”), including for IL-23
and IL-17A/F for ORKA-001 and ORKA-002, respectively. The exclusive option with respect to each Research Program is exercisable at our
sole discretion at such time as specified in the Option Agreements (the “Option Period”). There is no payment due upon exercise
of an Option pursuant to the Option Agreements.
In December 2025, we entered into an additional option agreement for
an antibody with Paragon and Paruka to enter into a license agreement, which we exercised in December 2025. For the year ended December
31, 2025 we incurred $1.5 million related to this additional option agreement which was recognized as research and development expense.
Per the terms of this option agreement, once we enter into the corresponding license agreement, we will be required to make non-refundable
milestone payments to Paragon of up to $12.0 million under the agreement upon the achievement of certain clinical development milestones,
up to $10.0 million under the agreement upon the achievement of certain regulatory milestones, as well as a low single-digit percentage
royalty for antibody products beginning on the first commercial sale. As of December 31, 2025, we have not entered into a license agreement
with Paragon and Paruka related to this additional option agreement.
As
part of the Option Agreements and the additional option agreement mentioned above, on December 31, 2024, we settled our 2024 obligations
under the Paruka Warrant Obligation by issuing Paruka a warrant to purchase 596,930 shares of Company Common Stock at an exercise price
of $19.39 per share, and on December 12, 2025, we settled our 2025 obligations under the Paruka Warrant Obligation by issuing Paruka
a warrant to purchase 375,000 shares of Company Common Stock at an exercise price of $30.18 per share.
License Agreements – Paragon Therapeutics
In September 2024, we exercised
our exclusive option to acquire certain rights to ORKA-001, and in December 2024, we entered into a corresponding license agreement with
Paragon (the “ORKA-001 License Agreement”), pursuant to which Paragon granted us a royalty-bearing, world-wide, exclusive
license to develop, manufacture, commercialize, or otherwise exploit certain antibodies and products targeting IL-23 in all fields other
than the field of inflammatory bowel disease (“ORKA-001 Field”). In December 2024, we exercised our exclusive option to acquire
certain rights to ORKA-002, and in February 2025, we entered into the corresponding license agreement with Paragon (the “ORKA-002
License Agreement” and together with the ORKA-001 License Agreement, the “License Agreements”), pursuant to which Paragon
granted us a royalty-bearing, world-wide, exclusive license to develop, manufacture, commercialize, or otherwise exploit certain antibodies
and products targeting IL-17A/F in all fields (“ORKA-002 Field” and together with the ORKA-001 Field, the “Fields”).
Pursuant to each of the two License Agreements, Paragon has agreed not to conduct any new campaigns that generate anti-IL-23 monospecific
antibodies or anti-IL-17A/F monospecific antibodies in the respective agreed-upon fields.
The License Agreements provide
us with exclusive licenses in the Fields to Paragon’s patent applications covering the related antibodies, their method of use and
their method of manufacture and Paragon has agreed not to conduct any new campaigns that generate anti-IL-23 monospecific antibodies or
anti-IL-17A/F monospecific antibodies for the ORKA-001 Field or the ORKA-002 Field, respectively, for at least five years. Each of the
License Agreements may be terminated on 60 days’ notice to Paragon, on material breach without cure, and on a party’s insolvency
or bankruptcy to the extent permitted by law.
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Pursuant to the terms of
each of the License Agreements, we are obligated to pay Paragon non-refundable milestone payments of up to $12.0 million under each respective
agreement upon the achievement of certain clinical development milestones and up to $10.0 million under each respective agreement upon
the achievement of certain regulatory milestones. In addition, we are obligated to pay Paragon a low single-digit percentage royalty
for antibody products for each of ORKA-001 and ORKA-002. For each of the License Agreements, the royalty term ends on the later of (i)
the last-to-expire licensed patent or our patent directed to the manufacture, use or sale of a licensed antibody in the country at issue
or (ii) 12 years from the date of first sale of a Company product. There is also a royalty step-down if there is no Paragon patent in
effect during the royalty term for each program. Each of the License Agreements may be terminated on 60 days’ notice to Paragon,
on material breach without cure, and on a party’s insolvency or bankruptcy to the extent permitted by law. As of December 31, 2025,
we have incurred and expensed milestone payments of $7.0 million and $4.0 million in connection with the ORKA-001 License Agreement and
the ORKA-002 License Agreement, respectively.
Pursuant to the Option Agreements
and License Agreements, on a research program-by-research program basis following the finalization of the research plan for each respective
research program, we were required to pay certain initiation fees, development costs and milestone payments to Paragon.
For the ORKA-001 program,
we recognized research and development expenses related to the following milestones during the period from February 6, 2024 (inception)
to December 31, 2024: a one-time, nonrefundable research initiation fee of $0.8 million; $1.5 million related to exercising our Option
and achievement of development candidate; and $2.5 million related to completing the first dosing of a human subject in a Phase 1 trial.
We were responsible for 50% of the development costs incurred through the completion of the IL-23 selection process, which was completed
in June 2024. An amount of $13.5 million was incurred during the period from February 6, 2024 (inception) to December 31, 2024 for research
and development expenses for the ORKA-001 program.
For the ORKA-002 program, we recognized research and development expenses
related to the following milestones during the period from February 6, 2024 (inception) to December 31, 2024: a one-time, nonrefundable
research initiation fee of $0.8 million and $1.5 million related to exercising our Option and achievement of development candidate. We
were responsible for the development costs incurred through the completion of the IL-23 selection process, which was completed in December
2024. An amount of $11.1 million was incurred during the period from February 6, 2024 (inception) to December 31, 2024 for research and
development expenses for the ORKA-002 program.
Pursuant to the Option Agreements
and License Agreements, for year ended December 31, 2025, our share of research and development expenses for the ORKA-001 program was
nil. We recognized a milestone payment of $3.0 million related to completing the first dosing of a human patient in a Phase 2 trial for
the ORKA-001 program during the year ended December 31, 2025. These costs were recorded as research and development expenses. As of December
31, 2025 and 2024, nil and $2.8 million, respectively, related to ORKA-001 were included in related party accounts payable and other
current liabilities.
Pursuant to the Option Agreements
and License Agreements, for the year ended December 31, 2025, our share of research and development expense for the ORKA-002 program was
$0.1 million. We recognized a milestone payment of $2.5 million related to completing the first dosing of a human subject in a Phase 1
trial for the ORKA-002 program during the year ended December 31, 2025. These costs were recorded as research and development expenses.
As of December 31, 2025 and 2024, nil and $2.7 million, respectively, related to ORKA-002 were included in related party accounts payable
and other current liabilities.
We expense the service fees
as the associated costs are incurred when the underlying services are rendered. Such amounts are classified within research and development
expenses in the accompanying consolidated statements of operations.
We concluded that the rights
obtained under the Option Agreements represent an asset acquisition whereby the underlying assets comprise in-process research and development
assets with no alternative future use. The Option Agreements did not qualify as a business combination because substantially all of the
fair value of the assets acquired was concentrated in the exclusive license options, which represent a group of similar identifiable
assets. The research initiation fee represents a one-time cost on a research program-by-research program basis for accessing research
services or resources with benefits that are expected to be consumed in the near term, therefore the amounts paid are expensed as part
of research and development costs immediately. Amounts paid as reimbursements of ongoing development cost, monthly development cost fee
and additional development expenses incurred by Paragon due to work completed for selected targets prior to the effective date of the
Option Agreements that is associated with services being rendered under the related Research Programs are recognized as research and
development expense when incurred.
Components of Results of Operations
Revenue
To date, we have not generated
revenue from any sources, including product sales, and do not expect to generate any revenue from the sale of products in the foreseeable
future. 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 or payments from future collaboration or license agreements that we may enter into with third parties,
or any combination thereof. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale
of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.
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Operating Expenses
Research and Development
Research and development
expenses consist primarily of costs incurred in connection with the development and research of our programs. These expenses include:
● costs incurred, and milestone payments under license and option agreements;
We expense research and development costs as incurred. Non-refundable
advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded
as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed, or when it is
no longer expected that the goods will be delivered or the services rendered. Our primary focus since inception has been the identification
and development of our pipeline programs. Our research and development expenses primarily consist of external costs. See “Contractual
Obligations and Commitments” below for further details.
We expect our research and
development expenses will increase substantially for the foreseeable future as we continue to invest in research and development activities
related to the continued development of our programs, developing any future programs, including investments in manufacturing, as we advance
any program we may identify and continue to conduct clinical trials. The success of programs we may identify and develop will depend on
many factors, including the following:
● timely and successful completion of preclinical studies and clinical trials;
● successful enrollment and completion of clinical trials;
● receipt of marketing approvals from applicable regulatory authorities;
Any changes in the outcome
of any of these variables with respect to the development of programs that we may identify could mean a significant change in the costs
and possible delays in timing associated with the development of such programs. For example, if the FDA or another regulatory authority
were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical
development of a program, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we
would be required to expend significant additional financial resources and time on the completion of clinical development. We may never
obtain regulatory approval for any of our programs.
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General and Administrative
General and administrative
expenses consist primarily of personnel-related expenses, including salaries, bonuses, employee benefits, travel, and stock-based compensation,
for our executive and other administrative personnel. Other significant general and administrative expenses include legal services, including
intellectual property and corporate matters; professional fees for accounting, auditing, tax, insurance, and allocated human resource
costs, information technology costs, and facility-related costs, including rent, utilities, maintenance, and depreciation for our leased
office space.
We expect our general and
administrative expenses will increase substantially for the foreseeable future as we anticipate an increase in our personnel headcount
to support the expansion of research and development activities, as well as to support our operations generally. We also expect to continue
to incur significant expenses associated with being a public company, including costs related to accounting, audit, legal, regulatory,
and tax-related services associated with maintaining compliance with applicable Nasdaq and SEC requirements; director and officer
insurance costs; and investor and public relations costs. We also expect to incur additional intellectual property-related expenses as
we file patent applications to protect innovations arising from our research and development activities.
Other Income (Expense), Net
Total other income (expense),
net consists of interest earned on our cash, cash equivalents, and marketable securities; interest expense on the convertible note from
a related party (see discussion herein); and foreign currency transactions gains and losses. Interest expense relates to a convertible
note (the “Convertible Note”) issued to Fairmount Healthcare Fund II, L.P. (“Fairmount”), a related party,
in March 2024. At the effective time of the Merger, the Convertible Note, along with the accrued interest, was automatically converted
into Company Common Stock.
Income Taxes
No provision for income taxes
was recorded for the year ended December 31, 2025 and for the period from February 6, 2024 (inception) to December 31, 2024. Deferred
tax assets generated from our net operating losses have been fully offset by the valuation allowance as we believe it is not more likely
than not that the benefit will be realized due to our cumulative losses generated to date.
Results of Operations
Comparison of the Year Ended December 31, 2025 and the period
from February 6, 2024 (inception) to December 31, 2024
The following table summarizes
our results of operations for the periods presented (in thousands):
Operating expenses
Other income (expense)
Other income (expense), net (12 ) 4 (16 ) *
* Percentage not meaningful
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Research and Development Expenses
The following table summarizes our research and
development expenses for the periods presented (in thousands):
Other research and development expenses:
Personnel-related (excluding stock-based compensation) 14,957 3,959 10,998 *
* Percentage not meaningful
Research and development
expenses increased by $25.6 million from $75.1 million for the period from February 6, 2024 (inception) to December 31, 2024
to $100.6 million for the year ended December 31, 2025.
External research and development
expenses, including CROs, CMOs, and other third-party preclinical studies and clinical trials expenses, increased by $6.7 million, from
$57.7 million for the period from February 6, 2024 (inception) to December 31, 2024 to $64.4 million for the year ended December 31, 2025.
The increase is primarily related to increased CMO product development and manufacturing expenses, an increase in our CRO expenses related
to our ongoing clinical trials and toxicology studies, partially offset by a reduction of research expenses incurred by Paragon.
Personnel-related expenses
increased by $11.0 million, from $4.0 million for the period from February 6, 2024 (inception) to December 31, 2024 to $15.0 million for
the year ended December 31, 2025, as we continue hiring employees in our research and development organization. Stock-based compensation
expense increased by $5.0 million, from $12.0 million for the period from February 6, 2024 (inception) to December 31, 2024 to $17.0 million
for the year ended December 31, 2025. Stock-based compensation expense increased due to the increase in employee awards.
Other research and development
expenses increased by $2.9 million, from $1.4 million for the period from February 6, 2024 (inception) to December 31, 2024 to $4.3 million
for the year ended December 31, 2025, primarily due to higher share of allocated overhead expenses for facilities and information technology
due to an increase in our research and development employee count.
General and Administrative Expenses
The following table summarizes our general and
administrative expenses for the periods presented (in thousands):
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General and administrative
expenses increased by $8.3 million from $13.1 million for the period from February 6, 2024 (inception) to December 31, 2024 to $21.4
million for the year ended December 31, 2025.
Personnel-related expenses
increased by $7.0 million, from $8.0 million for the period from February 6, 2024 (inception) to December 31, 2024 to $15.0 million
for the year ended December 31, 2025, as a result of continued hiring of executives and administrative employees. Stock-based compensation
expenses were $2.9 million and $7.2 million for the period from February 6, 2024 (inception) to December 31, 2024 and for the year ended
December 31, 2025, respectively.
Professional and consulting
services expenses increased by $0.9 million, from $4.6 million for the period from February 6, 2024 (inception) to December 31, 2024
to $5.5 million for the year ended December 31, 2025, due to higher spending on legal and other professional services.
Other general and administrative expenses increased by $0.4 million,
from $0.5 million for the period from February 6, 2024 (inception) to December 31, 2024 to $0.9 million for the year ended December 31,
2025, primarily due to increase in facilities and information technology services expenses, partially offset by a higher allocation of
overhead expenses to research and development expenses as a result of an increase in our research and development employee count.
Total Other Income, Net
Interest income from cash
equivalents and marketable securities increased by $10.8 million, from $5.9 million for the period from February 6, 2024 (inception) to
December 31, 2024 to $16.6 million for the year ended December 31, 2025. The increase was primarily due to higher invested balances.
No interest expense was recorded
during the year ended December 31, 2025. Interest expense was $1.5 million for the period from February 6, 2024 (inception) to December
31, 2024 relating to the Convertible Note from Fairmount.
Liquidity and Capital Resources
As of December 31, 2025,
we had $479.6 million of cash, cash equivalents, and marketable securities.
Since our inception, we have
incurred significant operating losses and negative cash flow from operations. We expect to incur significant expenses and operating losses
for the foreseeable future as we continue the pre-clinical and clinical development of our programs and our early-stage research activities.
We have not yet commercialized any products, and we do not expect to generate revenue from sales of products for several years, if
at all. Through December 31, 2025, we had funded our operations primarily with proceeds from issuances of convertible preferred stock,
common stock, a convertible note, and pre-funded warrants.
In October 2025, we entered into a Sales Agreement with TD Securities
(USA) LLC (the “Sales Agreement”), as our sales agent, pursuant to which we may issue and sell, from time to time, shares
of our common stock for aggregate gross proceeds of up to $200.0 million under an at-the-market equity offering program. We are not obligated
to make any sales of shares under the Sales Agreement. As of December 31, 2025, no sales had been made under our at-the-market equity
offering program.
Our primary use of cash is
to fund the development of our product candidates and advance our pipeline. This includes both the research and development costs and
the general and administrative expenses required to support those operations. Since we are a clinical stage biopharmaceutical company,
we have incurred significant operating losses since our inception and we anticipate such losses, in absolute dollar terms, to increase
as we continue to pursue clinical development of our product candidates, prepare for the potential commercialization of our product candidates,
and expand our development efforts in our pipeline of nonclinical candidates. We expect that our existing cash, cash equivalents, and
marketable securities will be sufficient to fund our operating plans for at least twelve months from the date of filing of this Annual
Report. We will need to secure additional financing in the future to fund additional research and development, and before a commercial
drug can be produced, marketed, and sold. If we are unable to obtain additional financing or generate license or product revenue, the
lack of liquidity could have a material adverse effect on our company.
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Cash Flows
The following table summarizes
our cash flows for the periods presented (in thousands):
Net cash used in operating activities $ (88,210 ) $ (57,837 )
Net cash used in investing activities (96,745 ) (330,127 )
Net (decrease) increase in cash and cash equivalents $ (14,640 ) $ 61,575
Operating Activities
For the year ended December 31, 2025, net cash used in operating activities
was $88.2 million, which was primarily attributable to a net loss of $105.4 million and net cash used by changes in our operating assets
and liabilities of $2.6 million, partially offset by net non-cash charges of $19.8 million. Net cash used by changes in our operating
assets and liabilities was primarily comprised of a decrease of $6.0 million in related party accounts payable and other current liabilities,
an increase of $4.0 million in prepaid expenses and other current assets, partly offset by an increase of $7.2 million in accrued expenses
and other current liabilities, and an increase of $0.7 million in accounts payable balances. Net non-cash charges primarily comprised
of $24.2 million in stock-based compensation expense (includes $10.1 million from the Paruka Warrant Obligation, as defined in Note 11
to the consolidated financial statements), partially offset by $5.0 million in net accretion of premiums and discounts on marketable securities.
The decrease in amounts due to related parties was primarily due to lower research expenses incurred with Paragon. The increase in balances
for accrued expenses and other current liabilities, and accounts payable was primarily due to an increase in our business activity, as
well as vendor invoicing and payments. The increase in prepaid expenses and other current assets was primarily due to prepaid research
and development expenses with our contract research organization.
From February 6, 2024
(inception) to December 31, 2024, net cash used in operating activities was $57.8 million, which was primarily attributable to a net loss
of $83.7 million, offset by net non-cash charges of $14.3 million and net changes in operating activities of $11.6 million. Non-cash charges
primarily consisted of $14.9 million in stock-based compensation expense (including $10.4 million related to the Paruka Warrant Obligation)
and $1.5 million of non-cash interest expense, partially offset by net accretion of premiums and discounts on marketable securities of
$2.2 million. Net changes in our operating activities primarily consisted of a $3.5 million increase in accounts payable, a $3.3 million
increase in accrued expenses and other current liabilities, a $6.0 million increase in related parties accounts payable and other current
liabilities, partially offset by a $1.1 million increase in prepaid expenses and other current assets. The increase in amounts due to
related parties, accounts payable, and accrued expenses and other current liabilities was primarily due to an increase in our business
activity, as well as vendor invoicing and payments. The increase in prepaid expenses and other current assets was primarily due to prepaid
research and development expenses with our contract research organization.
Investing Activities
For the year ended
December 31, 2025, net cash used in investing activities was $96.7 million, which included $521.0 million in purchases of marketable
securities and $0.2 million in purchases of property and equipment, partially offset by $424.4 million in proceeds from maturities
of marketable securities.
From February 6, 2024
(inception) to December 31, 2024, net cash used in investing activities was $330.1 million, which was primarily attributable to purchases
of marketable securities.
Financing Activities
For the year ended December 31, 2025, net cash provided by financing
activities was $170.3 million, consisting of $169.6 million of net proceeds from the 2025 PIPE Financing and $0.7 million proceeds from
the issuance of common stock upon exercise of stock options and employee warrants and purchases under our Employee Stock Purchase Plan.
From February 6, 2024 (inception) to December 31, 2024, net cash
provided by financing activities was $449.5 million, consisting of $228.0 million of net proceeds from the Pre-Closing Financing, $188.7
million of net proceeds from the 2024 PIPE Financing, $25.0 million of net proceeds from the issuance of notes payable to related parties,
$4.9 million of cash acquired in connection with the reverse recapitalization and $2.9 million of net proceeds from issuance of the Pre-Merger
Oruka Series A Preferred Stock.
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Contractual Obligations and Commitments
We enter into contracts in
the normal course of business with CROs, CMOs and with other vendors for preclinical research studies, clinical trials, manufacturing,
and other services and products for operating purposes. These contracts generally provide for termination on notice or may have a
potential termination fee if a purchase order is cancelled within a specified time, and therefore, are cancelable contracts. We do not
expect any such contract terminations and did not have any non-cancellable obligations under these agreements as of December 31, 2025.
Cell Line License Agreement
In March 2024, we entered
into the Cell Line License Agreement (the “Cell Line License Agreement”) with WuXi Biologics Ireland Limited (“WuXi
Biologics”). Under the Cell Line License Agreement, we received a non-exclusive, worldwide, sublicensable license to certain of
WuXi Biologics’ know-how, cell line, biological materials (the “WuXi Biologics Licensed Technology”) and media and feeds
to make, have made, use, sell and import certain therapeutic products produced through the use of the cell line licensed by WuXi Biologics
under the Cell Line License Agreement (the “WuXi Biologics Licensed Products”). Specifically, the WuXi Biologics Licensed
Technology is used in certain manufacturing activities in support of the ORKA-001 and ORKA-002 programs.
In consideration for the
license, we agreed to pay WuXi Biologics a non-refundable license fee of $150,000, which was recognized as a research and development
expense during the period from February 6, 2024 (inception) to December 31, 2024. Additionally, to the extent that we manufacture
our commercial supplies of bulk drug product with a manufacturer other than WuXi Biologics or its affiliates, we are required to make
royalty payments to WuXi Biologics at a rate of less than one percent of net sales of WuXi Biologics Licensed Products manufactured by
the third-party manufacturer. Pursuant to an amendment to the Cell Line License Agreement effective in November 2024, a provision was
added that permits the royalties owed under the agreement to be bought out on a product-by-product basis for a lump-sum payment.
The Cell Line License Agreement
will continue indefinitely unless terminated (i) by us upon six months’ prior written notice and our payment of all undisputed amounts
due to WuXi Biologics through the effective date of termination, (ii) by WuXi Biologics for a material breach by us that remains uncured
for 60 days after written notice, (iii) by WuXi Biologics if we fail to make a payment and such failure continues for 30 days after receiving
notice of such failure, or (iv) by either party upon the other party’s bankruptcy.
Lease Agreement
Our contractual obligations include minimum lease payments under our
operating lease obligation for our headquarters in Menlo Park, California and our office in Waltham, Massachusetts. See Note 15 to the
consolidated financial statements for additional information.
Option Agreements and License Agreements
– Paragon Therapeutics
Our contractual obligations
include milestones and royalties payable to Paragon. See Note 14 to the consolidated financial statements for additional information.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion
and analysis of its financial condition and results of operations is based on its financial statements, which have been prepared in accordance
with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements,
as well as the reported revenues recognized and expenses incurred during the reporting periods. Our estimates are based on our historical
experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. 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 the consolidated financial statements, we believe the following accounting policies used in the preparation of our financial
statements require the most significant judgments and estimates.
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Research and Development Expenses
Research and development
costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities,
including salaries and bonuses, overhead costs, contract services and other related costs. The value of goods and services received from
contract research organizations and contract manufacturing organizations in the reporting period are estimated based on the level of services
performed, and progress in the period in cases when we have not received an invoice from the supplier. In circumstances where amounts
have been paid in excess of costs incurred, we record a prepaid expense. When billing terms under these contracts do not coincide with
the timing of when the work is performed, we are required to make estimates of outstanding obligations to those third parties as of period
end. Any accrual estimates are based on a number of factors, including our knowledge of the progress towards completion of the specific
tasks to be performed, invoicing to date under the contracts, communication from the vendors 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 may be made in determining
the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by us.
Stock-Based Compensation
We measure stock options
granted to employees and non-employees based on the estimated fair values of the awards as of the grant date using the Black-Scholes option-pricing
model. The model requires management to make a number of assumptions, including common stock fair value, expected volatility, expected
term, risk-free interest rate and expected dividend yield. For restricted stock awards and restricted stock units, the estimated fair
value is the fair market value of the underlying stock on the grant date. We expense the fair value of our equity-based compensation awards
on a straight-line basis over the requisite service period, which is the period in which the related services are received. We account
for award forfeitures as they occur. The expense for stock-based awards with performance conditions is recognized when it is probable
that a performance condition is met during the vesting period.
Determination of Fair Value of Common Stock
A public trading market for
Company Common Stock has been established in connection with the completion of the Merger. As such, it is no longer necessary for our
board of directors to estimate the fair value of our stock-based awards in connection with its accounting for granted stock-based awards
or other such awards we may grant, as the fair value of Company Common Stock and share-based awards is determined based on the quoted
market price of Company Common Stock.
Prior to the merger, Pre-Merger
Oruka’s common stock valuations were prepared using a hybrid method, including an option pricing method (“OPM”). The
OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the
value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common
stock has value only if the funds available for distribution to stockholders exceed the value of the preferred stock liquidation preferences
at the time of the liquidity event, such as a strategic sale or a merger. The hybrid method is a probability-weighted expected return
method (“PWERM”), where the equity value in one or more of the scenarios is calculated using an OPM. The PWERM is a scenario-based
methodology that estimates the fair value of common stock based upon an analysis of future values for the Company, assuming various outcomes.
The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the
possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted
back to the valuation date at an appropriate risk-adjusted discount rate and probability weighted to arrive at an indication of value
for the common stock. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for
the common stock.
The assumptions underlying
these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s
judgment. As a result, if Pre-Merger Oruka had used significantly different assumptions or estimates, the fair value of Pre-Merger Oruka’s
incentive shares and its stock-based compensation expense could have been materially different.
Recently Issued Accounting Pronouncements
See Note 2 to the consolidated
financial statements included in Part II - Item 8 of this Annual Report for more information regarding recently issued accounting pronouncements.
Off-Balance Sheet Arrangements
As of December 31, 2025,
we did not have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
We are a smaller reporting
company, as defined by Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in Item
10(f)(1) of Regulation S-K, and are not required to provide the information under this item.
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Item 8. Financial Statements and Supplementary
Data.
ORUKA THERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 80
Consolidated Balance Sheets 81
Consolidated Statements of Operations 82
Consolidated Statements of Comprehensive Loss 83