AERIE PHARMACEUTICALS, INC. The following management's discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear elsewhere in this report and with our audited financial statements and related notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , as filed with theSEC onFebruary 25, 2022 ("2021 Form 10-K"). This management's discussion and analysis contains forward-looking statements that involve risks and uncertainties. Please see "Special Note Regarding Forward-Looking Statements" for additional factors relating to such statements and see "Risk Factors" in our 2021 Form 10-K and other documents we have filed or furnished with theSEC for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Past operating results are not necessarily indicative of operating results in any future periods.
Overview
We are a pharmaceutical company focused on the discovery, development, and commercialization of first-in-class ophthalmic therapies for the treatment of patients with eye diseases and conditions including open-angle glaucoma, dry eye, DME, and wet AMD.
Our strategy is to grow the market share of our FDA approved glaucoma franchise products, Rocklatan® and Rhopressa® inthe United States . Both Rocklatan® and Rhopressa® are being sold to national and regionalU.S. pharmaceutical distributors, and patients have access to them through pharmacies acrossthe United States . We have obtained broad formulary coverage for Rocklatan® and Rhopressa® for the lives covered under commercial plans and Medicare Part D plans. Our commercial team responsible for sales of Rocklatan® and Rhopressa® is targeting select eye-care professionalswho treat glaucoma throughoutthe United States .
In
Rocklatan® is a once-daily fixed-dose combination of Rhopressa® and
latanoprost, a commonly prescribed drug for the treatment of
patients with open-angle glaucoma or ocular hypertension. Rocklatan®
is taken in the evening, and similar to Rhopressa®, has shown in
preclinical and clinical trials to be highly effective in reducing
IOP, with a favorable safety profile.
[[Image Removed: aeri-20220930_g1.jpg]]
Based on our clinical data in which Rocklatan® demonstrated
statistically superior IOP reduction over its components,
latanoprost and netarsudil, at every measured time point, we believe
that Rocklatan® has the potential to provide a greater IOP-reducing
effect than any glaucoma medication currently marketed in the United
States.
Rhopressa® is a once-daily eye drop designed to reduce elevated IOP
in patients with open-angle glaucoma or ocular hypertension.
Rhopressa® is taken in the evening and has shown in preclinical and
clinical trials to be effective in reducing IOP, with a favorable
safety profile.
[[Image Removed: aeri-20220930_g2.jpg]] The active ingredient in Rhopressa®, netarsudil, is an Aerie-owned
Rho kinase ("ROCK") inhibitor. Rhopressa® increases the outflow of
aqueous humor through the trabecular meshwork ("TM"), which accounts
for approximately 80% of fluid drainage from the healthy eye and is
the diseased tissue responsible for elevated IOP in glaucoma. Using
this mechanism of action ("MOA"), we believe that Rhopressa®
represents the first of a new drug class for reducing IOP in
patients with glaucoma in over 20 years.
Efforts Outside the United States
In addition to growing the market share of Rocklatan® and Rhopressa® inthe United States , our strategy also includes developing business opportunities outside ofthe United States and we continue to make progress in our efforts to commercialize Rocklatan® and Rhopressa® inEurope ,Japan , and other regions of the world. 22 -------------------------------------------------------------------------------- Table of Contents We have partnered and have collaboration agreements in place withSanten to develop and commercialize our products inJapan ,East Asia , as well asEurope ,China ,India , theMiddle East , CIS,Africa , parts ofLatin America , and theOceania countries. The First Santen Agreement was executed inOctober 2020 to advance our clinical development and ultimately commercialize Rocklatan® and Rhopressa® inJapan andEast Asia . The Second Santen Agreement was executed inDecember 2021 to develop and commercialize Rocklatan® and Rhopressa® inEurope ,China ,India , theMiddle East , CIS,Africa , parts ofLatin America , and theOceania countries. InEurope , Rocklatan® and Rhopressa® will be marketed under the names Roclanda® and Rhokiinsa®, respectively. Roclanda® and Rhokiinsa® were granted a Centralised MA by the EC inJanuary 2021 andNovember 2019 , respectively. InApril 2021 , Roclanda® received marketing authorisation from the MHRA inGreat Britain . InJapan , we reported positive topline results for our Phase 3 clinical trial of netarsudil ophthalmic solution 0.02% inOctober 2021 , the first of three expected Phase 3 clinical trials inJapan . The results evaluated netarsudil 0.02% versus ripasudil hydrochloride hydrate ophthalmic solution 0.4% ("ripasudil 0.4%") and showed that netarsudil 0.02% once-daily was superior to ripasudil 0.4% twice-daily in lowering IOP after four weeks (p<0.0001), the primary endpoint of the study. The medications were safe and well tolerated. The most common treatment emergent adverse event was conjunctival hyperemia, which is treatable. InMarch 2022 ,Santen made a$6.0 million developmental milestone payment in connection with the conclusion of this Phase 3 clinical trial. A second, confirmatory Phase 3 study, required for approval inJapan , is currently underway.Santen is taking the lead on next steps in preparation for registration inJapan under the terms of the First Santen Agreement. Clinical trials for Rocklatan® have not yet begun.
Glaucoma Product Manufacturing
We have a sterile fill production facility in Athlone,Ireland , for the production of our FDA and EMA approved products and clinical supplies, with the intent of having the Athlone plant supply our ophthalmic products in all markets for which we received regulatory approval and are commercialized. The Athlone plant began manufacturing commercial supplies of Rocklatan® in the first quarter of 2020 and Rhopressa® in the third quarter of 2020 for distribution tothe United States . Shipments of commercial supply of both Rocklatan® and Rhopressa® from the Athlone plant tothe United States commenced in the second half of 2020. In addition, the Athlone plant has manufactured clinical supplies of Rhopressa® for the Phase 3 clinical trials inJapan as well as registration batches to support product approval inJapan . We currently expect to commence shipments of Roclanda® toSanten pursuant to the Second Santen Agreement in the fourth quarter of 2022. As the Athlone plant commenced operations in early 2020, it has not reached full capacity. We expect that the Athlone plant will have adequate capacity to produce for the markets included in the Santen Agreements, as needed, which includeEurope ,Japan ,East Asia , and certain other regions of the world, if approved for commercial distribution in those markets. The Athlone plant manufactures most of our ongoing needs for Rocklatan® and Rhopressa® inthe United States . We may continue to use contract manufacturers to produce commercial supplies of Rocklatan® and Rhopressa® for distribution inthe United States , but at reduced levels as a result of the Athlone plant commencing manufacturing operations.
Product Candidates in Development
Our strategy includes enhancing our longer-term commercial potential by identifying and advancing additional product candidates through our internal discovery efforts, our entry into potential research collaborations or in-licensing arrangements or our acquisition of additional ophthalmic products, technologies or product candidates that complement our current product portfolio. Dry Eye Program We are developing AR-15512 ophthalmic solution for the treatment of patients with dry eye disease. InSeptember 2021 , we reported topline results of our Phase 2b clinical study, named COMET-1, for AR-15512. We completed a dose ranging study evaluating two concentrations of AR-15512 (0.0014% and 0.003%) in a 90-day trial with 369 subjects. The COMET-1 clinical study achieved statistical significance for multiple pre-specified and validated signs and symptoms. The greatest efficacy was demonstrated with the higher concentration 0.003% formulation, which we have advanced to Phase 3 studies. The study did not achieve statistical significance at the pre-determined primary endpoints at Day 28. We gained alignment with the FDA in the first quarter of 2022 on the results of the Phase 2b clinical study and confirmed the design of the Phase 3 registrational trials, which was based on the endpoints that achieved statistical significance in the COMET-1 study. We initiated the Phase 3 registrational trials in the second quarter of 2022, with the first Phase 3 registrational trial, named COMET-2, commencing inMay 2022 with the enrollment of the first participant. The second Phase 3 registrational trial, named COMET-3, commenced inAugust 2022 with the enrollment of the first participant. Both COMET-2 and COMET-3 are multi-center, vehicle-controlled, double-masked, randomized clinical studies designed to evaluate a single concentration of AR-15512 (0.003%) compared to the AR-15512 vehicle, administered twice-daily for 90 days. COMET-2 and COMET-3 are each expected to enroll about 460 23 -------------------------------------------------------------------------------- Table of Contents participants at approximately 20 sites inthe United States . The last of the Phase 3 registrational trials, a 12-month safety study named COMET-4, commenced inNovember 2022 with the enrollment of the first participant. Assuming the Phase 3 registrational trials are successful, we anticipate filing a New Drug Application in 2024. Retina Program Furthermore, we are currently developing two sustained-release implants focused on retinal diseases, AR-1105 and AR-14034 SR. For AR-1105, we completed a Phase 2 clinical trial for patients with macular edema due to RVO inJuly 2020 and reported topline results indicating sustained efficacy of up to six months. We have received advice from regulatory agencies in bothEurope andthe United States regarding clinical and regulatory pathways for Phase 3 clinical trials. We are currently evaluating Phase 3 development options. In addition, we are also working to advance our preclinical sustained-release retinal implant, AR-14034 SR, for which we anticipate filing an Investigational New Drug Application ("IND") with the FDA in the fourth quarter of 2022.
Pipeline
We own over 4,000 ROCK inhibitor molecules that provide a basis for further research and development opportunities. We discovered and developed the active ingredient in Rocklatan® and Rhopressa®, netarsudil, through a rational drug design approach that coupled medicinal chemistry with high content screening of compounds in proprietary cell-based assays. We selected and formulated netarsudil for preclinical in vivo testing following a detailed characterization of over 3,000 synthesized ROCK inhibitors, a number that has since grown to approximately 4,000. We evaluate this library on an ongoing basis for additional development opportunities. Early-stage evaluations of these molecules are underway for other ophthalmic indications. We continue to evaluate external business development opportunities to provide access to technologies developed outside of Aerie to complement our internal research and development efforts.
Impact of the COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the coronavirus ("COVID-19") outbreak a pandemic. As the COVID-19 pandemic continues to evolve, we considered this in our critical and significant accounting estimates as future developments continue to be uncertain, including as a result of new information that may emerge concerning COVID-19 and its variants and the actions taken to contain or treat it, as well as the economic impact on eye-care professionals, patients, third parties, and markets. Actual results could differ from our estimates. The health and safety of our employees, patients, prescribers, and community are of utmost importance during this time. We are complying with all requirements and mandates from various agencies and governments, and we continue to monitor applicable federal and state regulations, including with respect to vaccination mandates. We have taken precautionary measures to protect our employees and our stakeholders, and adapted company policy to maintain the continuity of our business. We have continued to operate effectively as most of our manufacturing plant personnel are working at the manufacturing plant with precautionary measures in place, and the balance of our workforce has returned to the office on a hybrid schedule in accordance with state and local mandates. We may take further actions as government authorities require or recommend or as we determine to be in the best interest of our employees.
Proposed Merger
OnAugust 22, 2022 , we entered into the Merger Agreement with Alcon and Merger Sub. The Merger Agreement provides, among other things, and subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into Aerie, with Aerie surviving as a wholly owned subsidiary of Alcon. At the Effective Time, each share of Aerie's common stock, par value$0.001 per share, then outstanding (other than shares held (i) by Aerie or held in Aerie's treasury or (ii) by Alcon, Merger Sub or any direct or indirect wholly owned Subsidiary (as defined in the Merger Agreement) of Alcon or Aerie, which, in each case, will be cancelled and retired and will cease to exist) will be converted into the right to receive$15.25 per share in cash, without interest and subject to any withholding of taxes. As a result of the Merger, Aerie's common stock will no longer be publicly traded, and will be delisted from Nasdaq. Our Board of Directors unanimously approved the Merger Agreement and transactions contemplated thereby, including the Merger, and directed that a proposal to adopt the Merger Agreement be submitted to a vote at a meeting of the Aerie stockholders. The consummation of the Merger is subject to certain conditions, including, but not limited to, (i) the approval and adoption of the Merger Agreement and the Merger by the affirmative vote of the holders of a majority of the issued and outstanding shares of common stock of Aerie as of the close of business onOctober 4, 2022 at the stockholder meeting onNovember 17, 2022 , (ii) 24 -------------------------------------------------------------------------------- Table of Contents the absence of any temporary restraining order, preliminary or permanent injunction or final judgment, or law, regulation, or order promulgated, enacted, issued or deemed applicable to the Merger, by any governmental entity in any jurisdiction in which Alcon or Aerie has material business operations that prohibits or otherwise makes illegal the consummation of the Merger, and (iii) the expiration or termination of any waiting period (or any extension thereof) applicable to the Merger under the HSR Act, and the rules and regulations promulgated thereunder. We expect the transaction to close during the fourth quarter of 2022 following the receipt of all required regulatory and antitrust approvals and the satisfaction or waiver of the other closing conditions. The waiting period applicable to the Merger under the HSR Act expired inOctober 2022 . Financial Overview Our cash, cash equivalents, and investments totaled$172.5 million as ofSeptember 30, 2022 . We believe that our cash, cash equivalents, and investments and projected cash flows from revenues will provide sufficient resources for our current ongoing needs through at least the next twelve months from the date of this filing, without giving effect to the proposed Merger and assuming we remain a standalone entity. There may be need for additional financing activity as we continue to grow, including repurchasing, repaying, or otherwise refinancing our aggregate principal amount of$316.25 million of Convertible Notes, which are scheduled to mature onOctober 1, 2024 , unless earlier repurchased, redeemed or converted. We continue to evaluate our product candidates in development for collaboration and licensing opportunities. See "-Liquidity and Capital Resources" below and Note 10 to our condensed consolidated financial statements included in this report for further discussion. We have incurred net losses since our inception inJune 2005 . Until 2018, when we commenced commercial operations, our business activities were primarily limited to developing product candidates, raising capital, and performing research and development activities. As ofSeptember 30, 2022 , we had an accumulated deficit of$1,188.0 million and recognized a net loss of$26.8 million and$82.1 million for the three and nine months endedSeptember 30, 2022 , respectively. For the three and nine months endedSeptember 30, 2021 , we recognized a net loss of$39.7 million and$120.3 million , respectively. Our capital resources and business efforts are largely focused on activities relating to the commercialization of Rocklatan® and Rhopressa®, advancing our product candidates in development, international expansion, and operating our Athlone plant. We expect to incur operating losses until such a time when Rocklatan® or Rhopressa® or any current or future product candidates, if approved, or proceeds in connection with collaboration and licensing arrangements, generate sufficient cash flows for us to achieve profitability. Accordingly, we may be required to obtain further funding through debt or equity offerings or other sources. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on acceptable terms, we may be forced to delay, reduce or eliminate our research and development programs or commercialization or manufacturing efforts, particularly if the proposed Merger is not completed within the expected timeframe or at all. In addition, even if we do not have an immediate need for additional capital, we may seek to access the public or private capital markets whenever conditions are favorable. Product Revenues, Net Rocklatan® and Rhopressa®, our glaucoma franchise products, were launched inthe United States inMay 2019 andApril 2018 , respectively. We commenced generating product revenues from sales of Rocklatan® and Rhopressa® during the second quarter of 2019 and 2018, respectively. Product affordability for the patient drives consumer acceptance, and this is generally managed through coverage by third-party payers, such as government or private healthcare insurers and pharmacy benefit managers ("Third-party Payers") and such product may be subject to rebates and discounts payable directly to those Third-party Payers. Our product revenues are recorded net of provisions relating to estimates for (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates to Third-party Payers, estimated payments for Medicare Part D prescription drug program coverage gap (commonly called the "donut hole"), patient co-pay program coupon utilization, chargebacks and other discount programs, and (iii) reserves for expected product returns. These estimates reflect current contractual and statutory requirements, known market events and trends, industry data, forecasted customer mix, and lagged claims. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which may have an impact on earnings in the period of adjustment. We will not generate any revenues from any product candidates or future product candidates unless and until we obtain regulatory approval and commercialize such products. Cost of Goods Sold Cost of goods sold consists of direct and indirect costs to procure and manufacture product sold, including third-party manufacturing costs. Production costs related to underutilized capacity at the Athlone plant, are not included in the cost of inventory but are charged directly to cost of goods sold in the condensed consolidated statements of operations and 25 -------------------------------------------------------------------------------- Table of Contents comprehensive loss in the period incurred. We expect cost of goods sold for the remainder of 2022 to continue to be unfavorably impacted by production costs due to the underutilization at the Athlone plant as a result of the Athlone plant having become operational in early 2020 and having not yet reached full capacity. We expect the underutilization to continue to have an unfavorable impact on cost of goods sold that will decrease over time as the manufacturing plant reaches full capacity.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses consist primarily of employee-related expenses, including salaries, benefits, and stock-based compensation for all officers and employees in general management, sales and marketing, finance, and administration. Other significant expenses include selling and marketing expenses, facilities expenses, shipping and handling costs, and professional fees for audit, tax, legal, Merger-related costs, and other services.
Research and Development Expenses
We expense research and development costs to operations as incurred. Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical candidates, which include:
•employee-related expenses, including salaries, benefits, travel, and stock-based compensation expense for research and development personnel;
•expenses incurred under agreements with CROs, contract manufacturing organizations, and service providers that assist in conducting clinical trials and preclinical studies;
•costs associated with any collaboration arrangements, licenses or acquisitions of preclinical molecules, product candidates or technologies;
•costs associated with preclinical activities and development activities;
•costs associated with regulatory operations; and
•depreciation expense for assets used in research and development activities.
Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with research institutions, consultants and CROs that assist in conducting and managing clinical trials. We accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If future timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis. Historically, such modifications have not been material.
Other Expense, Net
Other expense, net primarily includes interest expense, interest income, foreign exchange gains and losses, and other income and expense. Interest expense consists of interest expense under the Convertible Notes, including the amortization of debt discounts and issuance costs incurred. Interest income primarily consists of interest earned on our cash, cash equivalents, and investments. See "-Liquidity and Capital Resources" below and Note 10 to our condensed consolidated financial statements included in this report for further discussion. Foreign exchange gains and losses are primarily due to the remeasurement of our lease liabilities, which are denominated in a foreign currency and held by a subsidiary with aU.S. dollar functional currency. Also included in other income and expense are changes in the fair value of equity securities (sold during the nine months endedSeptember 30, 2021 ), and research and development tax credit refunds.
Income Tax Expense
Income tax expense primarily includes branch taxes of our non-U.S. subsidiaries and withholding taxes related to the$6.0 million developmental milestone made bySanten pursuant to the First Santen Agreement during the nine months endedSeptember 30, 2022 .
Critical Accounting Policies and Use of Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses, and related disclosures. We evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of revenue 26 -------------------------------------------------------------------------------- Table of Contents recognition, leases, acquisitions, stock-based compensation, and fair value measurements. We base our estimates on 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. Our critical accounting policies and significant estimates have not materially changed since the date we filed our 2021 Form 10-K. For more information on our critical accounting policies and estimates, refer to our 2021 Form 10-K.
Results of Operations
Comparison of the Three Months Ended
The following table summarizes the results of our operations for the three
months ended
THREE MONTHS ENDED
SEPTEMBER 30, $ %
2022 2021 CHANGE CHANGE
(in thousands, except percentages)
Product revenues, net $ 36,129 $ 29,313 $ 6,816 23 %
Total revenues, net 36,129 29,313 6,816 23 %
Costs and expenses:
Cost of goods sold 6,929 7,899 (970) (12) %
Selling, general, and administrative expenses 33,878 34,656 (778) (2) %
Research and development expenses 21,994 19,132 2,862 15 % Total costs and expenses 62,801 61,687 1,114 2 % Loss from operations (26,672) (32,374) 5,702 (18) % Other expense, net (59) (7,259) 7,200 (99) % Loss before income taxes$ (26,731) $ (39,633) $ 12,902 (33) % Product revenues, net Product revenues, net were$36.1 million and$29.3 million for the three months endedSeptember 30, 2022 and 2021, respectively, and related to sales of ourU.S. glaucoma franchise products, Rocklatan® or Rhopressa®. The year-over-year revenue increase is primarily due to an increase in the number of units shipped to wholesalers and improved margins per bottle.
Cost of goods sold
Cost of goods sold was$6.9 million and$7.9 million for the three months endedSeptember 30, 2022 and 2021, respectively. Our gross margin percentage was 80.8% and 73.1% for the three months endedSeptember 30, 2022 and 2021, respectively. The increase in the gross margin percentage was driven by the increase in product revenues, net as discussed above as well as$1.3 million of lower production costs associated with underutilized capacity at the Athlone plant due to increased commercial production during the three months endedSeptember 30, 2022 . The increased commercial production resulted in a higher level of costs capitalized into inventory. Our cost of goods sold and gross margin percentage for the three months endedSeptember 30, 2022 and 2021 were unfavorably impacted by costs due to underutilized capacity at the Athlone plant, which increased the cost of goods sold by$4.1 million and$5.4 million and lowered the gross margin percentage by 11.3% and 18.6%, respectively. We expect the underutilization to continue to have an unfavorable impact on cost of goods sold that will decrease over time as the Athlone plant reaches full capacity.
Selling, general, and administrative expenses
Selling, general, and administrative expenses were$33.9 million and$34.7 million for the three months endedSeptember 30, 2022 and 2021, respectively. Selling, general, and administrative expenses decreased by$0.8 million primarily due to lower sales and marketing, employee-related and stock-based compensation expenses. Partially offsetting the decrease in selling, general, and administrative expenses were costs related to the Merger, which totaled$10.1 million for the three months endedSeptember 30, 2022 . 27
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Research and development expenses
Our direct research and development expenses are tracked on a program-by-program
basis and consist primarily of costs incurred for the research and development
of our preclinical and clinical product candidates, which include but are not
limited to: (1) expenses incurred under agreements with contract research
organizations, contract manufacturing organizations and service providers that
assist in conducting clinical and preclinical studies; (2) costs associated with
any collaboration arrangements, licenses or acquisitions of preclinical
molecules, product candidates or technologies; and (3) costs associated with our
preclinical activities, development activities, and regulatory operations. We do
not allocate employee-related expenses, stock-based compensation or facility
expenses, including depreciation or other indirect costs, to specific programs
because these costs are deployed across multiple programs.
THREE MONTHS ENDED
SEPTEMBER 30, $ %
2022 2021 CHANGE CHANGE
(in thousands, except percentages)
Direct research and development expenses by
program:
Rhopressa® $ 497 $ 1,828 $ (1,331) (73) %
Rocklatan® 2 114 (112) (98) %
AR-15512 10,348 2,090 8,258 *
Retina programs (1) 263 936 (673) (72) %
Other direct research and development program
costs (2) 61 594 (533) (90) %
Total direct research and development program
costs 11,171 5,562 5,609 *
Employee-related costs 5,376 6,664 (1,288) (19) %
Stock-based compensation 1,012 1,941 (929) (48) %
Other indirect costs (3) 4,435 4,965 (530) (11) %
Research and development expenses $ 21,994 $ 19,132 $ 2,862 15 %
*Percentage not meaningful
(1) Consists of AR-1105, AR-13503 SR, and AR-14034 SR in 2021 and 2022.
(2) Other direct research development program costs primarily include AR-6121.
(3) Consists primarily of other indirect costs incurred for the research and development of preclinical and clinical product candidates, including expenses associated with our research facilities such as lab supplies, depreciation, and other research facility related costs. Research and development expenses were$22.0 million and$19.1 million for the three months endedSeptember 30, 2022 and 2021, respectively. Research and development expenses increased by$2.9 million primarily due to an increase of$8.3 million in expenses associated with AR-15512. InSeptember 2021 , we reported topline results on safety and efficacy for COMET-1, a Phase 2b clinical trial in which we completed a dose ranging study evaluating two concentrations of AR-15512 (0.0014% and 0.003%). In May andAugust 2022 , we initiated COMET-2 and COMET-3, respectively, the first two of three Phase 3 clinical trials for AR-15512, and the last of the Phase 3 clinical trials, a safety study named COMET-4, commenced inNovember 2022 with the enrollment of the first participant, and therefore we expect an increase in these costs through the end of the year. The increase described above was partially offset by a$1.3 million decrease in expenses for Rhopressa®, a$1.3 million decrease in employee-related costs, and a$0.9 decrease in stock-based compensation for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . Furthermore, expenses for Rhopressa® during the three months endedSeptember 30, 2021 consisted of costs for the Rhopressa® Phase 3 clinical trial inJapan .Santen's portion of shared costs related to conducting the first Rhopressa® Phase 3 clinical trial inJapan were recorded as deferred revenue, non-current on the condensed consolidated balance sheets. We reported positive topline results for our Phase 3 clinical trial of netarsudil 0.02% inOctober 2021 .Santen is taking the lead on next steps in preparation for registration inJapan under the terms of the First Santen Agreement.
Costs related to the development of our retina programs decreased by
28
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AR-1105 and AR-13503 projects as we focus our ongoing retina program activities
to advance our preclinical sustained-release retinal implant, AR-14034 SR, for
which we anticipate filing an IND with the FDA in the fourth quarter of 2022.
Other expense, net
Other expense, net consists of the following:
THREE MONTHS ENDED
SEPTEMBER 30, $
2022 2021 CHANGE
(in thousands)
Interest income $ 542 $ 25 $ 517
Interest expense (1,650) (7,358) 5,708
Other income (expense) 1,049 74 975
Other expense, net $ (59) $ (7,259) $ 7,200
Other expense, net decreased by $7.2 million for the three months ended
September 30, 2022 compared to the three months ended September 30, 2021 . This
decrease was primarily due to a decrease of $5.7 million in interest expense due
to the impact of adopting ASU 2020-06 on January 1, 2022 which accounts for
convertible debt instruments, such as the Convertible Notes, as a single
liability measured at its amortized cost, as well as by a change of $1.0 million
in other income (expense) primarily due to an increase in research and
development tax credit refunds, and $0.5 million in interest income during the
three months ended September 30, 2022 as compared to the three months ended
September 30, 2021 . See Notes 2 and 10 to our condensed consolidated financial
statements for additional information on the Convertible Notes.
Comparison of the Nine Months Ended
The following table summarizes the results of our operations for the nine months
ended
NINE MONTHS ENDED
SEPTEMBER 30, $ %
2022 2021 CHANGE CHANGE
(in thousands, except percentages)
Product revenues, net $ 99,275 $ 79,468 $ 19,807 25 %
Total revenues, net 99,275 79,468 19,807 25 %
Costs and expenses:
Cost of goods sold 17,450 20,776 (3,326) (16) %
Selling, general, and administrative expenses 93,551 101,796 (8,245) (8) %
Research and development expenses 66,726 54,990 11,736 21 % Total costs and expenses 177,727 177,562 165 - % Loss from operations (78,452) (98,094) 19,642 (20) % Other expense, net (2,800) (22,142) 19,342 (87) % Loss before income taxes$ (81,252) $ (120,236) $ 38,984 (32) % Product revenues, net Product revenues, net were$99.3 million and$79.5 million for the nine months endedSeptember 30, 2022 and 2021, respectively, and related to sales of ourU.S. glaucoma franchise products, Rocklatan® or Rhopressa®. The year-over-year revenue increase is primarily due to an increase in the number of units shipped to wholesalers and improved margins per bottle.
Cost of goods sold
Cost of goods sold was$17.5 million and$20.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Our gross margin percentage was 82.4% and 73.9% for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in the gross margin percentage was driven by the increase in product revenues, net as discussed above as well as$4.7 million of lower production costs associated with underutilized capacity at the Athlone plant due to increased commercial production during the nine months endedSeptember 30, 2022 . The increased commercial production resulted in a higher level of costs capitalized into inventory. Our cost of goods sold and gross margin percentage for the nine months ended 29 -------------------------------------------------------------------------------- Table of ContentsSeptember 30, 2022 and 2021 were unfavorably impacted by costs due to underutilized capacity at the Athlone plant, which increased the cost of goods sold by$9.0 million and$13.7 million and lowered the gross margin percentage by 9.1% and 17.2%, respectively. We expect the underutilization to continue to have an unfavorable impact on cost of goods sold that will decrease over time as the Athlone plant reaches full capacity.
Selling, general, and administrative expenses
Selling, general, and administrative expenses were$93.6 million and$101.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Selling, general, and administrative expenses decreased by$8.2 million primarily due to lower stock-based compensation, employee-related and sales and marketing expenses. Partially offsetting the decrease in selling, general, and administrative expenses were costs related to the Merger, which totaled$10.4 million for the nine months endedSeptember 30, 2022 .
Research and development expenses
NINE MONTHS ENDED
SEPTEMBER 30, $ %
2022 2021 CHANGE CHANGE
(in thousands, except percentages)
Direct research and development expenses by
program:
Rhopressa® $ 790 $ 5,446 $ (4,656) (85) %
Rocklatan® 135 275 (140) *
AR-15512 27,490 8,605 18,885 *
Retina programs (1) 2,083 1,421 662 47 %
Other direct research and development program
costs (2) 732 863 (131) (15) %
Total direct research and development program
costs 31,230 16,610 14,620 88 %
Employee-related costs 18,518 19,136 (618) (3) %
Stock-based compensation 3,600 5,896 (2,296) (39) %
Other indirect costs (3) 13,378 13,348 30 - %
Research and development expenses $ 66,726 $ 54,990 $ 11,736 21 %
*Percentage not meaningful
(1) Consists of AR-1105, AR-13503 SR, and AR-14034 SR in 2021 and 2022.
(2) Other direct research development program costs primarily include AR-6121.
(3) Consists primarily of other indirect costs incurred for the research and development of preclinical and clinical product candidates, including expenses associated with our research facilities such as lab supplies, depreciation, and other research facility related costs. Research and development expenses were$66.7 million and$55.0 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Research and development expenses increased by$11.7 million primarily due to an increase of$18.9 million in expenses associated with AR-15512. InSeptember 2021 , we reported topline results on safety and efficacy for COMET-1, a Phase 2b clinical trial in which we completed a dose ranging study evaluating two concentrations of AR-15512 (0.0014% and 0.003%). InJanuary 2022 , the Company gained alignment with the FDA on the results of its Phase 2b clinical trial and confirmed the design of the Phase 3 trials. This resulted in the achievement of a regulatory milestone in which the Company paid the former shareholders of Avizorex$8.0 million during the three months endedMarch 31, 2022 . In May andAugust 2022 , we initiated COMET-2 and COMET-3, respectively, the first two of three Phase 3 clinical trials for AR-15512, and the last of the Phase 3 clinical trials, a safety study named COMET-4, commenced inNovember 2022 with the enrollment of the first participant, and therefore we expect an increase in these costs through the end of the year. The increase described above was partially offset by a$4.7 million decrease in expenses for Rhopressa®, a$2.3 million decrease in stock-based compensation, and a$0.6 million decrease in employee-related expenses for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Furthermore, expenses for Rhopressa® in the nine months endedSeptember 30, 2021 consisted of costs for the Rhopressa® Phase 3 clinical trial inJapan .Santen's portion of 30 -------------------------------------------------------------------------------- Table of Contents shared costs related to conducting the first Rhopressa® Phase 3 clinical trial inJapan were recorded as deferred revenue, non-current on the condensed consolidated balance sheets. We reported positive topline results for our Phase 3 clinical trial of netarsudil 0.02% inOctober 2021 .Santen is taking the lead on next steps in preparation for registration inJapan under the terms of the First Santen Agreement. Costs related to the development of our retina programs increased by$0.7 million during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The increase is primarily related to our ongoing activities to advance our preclinical sustained-release retinal implant, AR-14034 SR, for which we anticipate filing an IND with the FDA in the fourth quarter of 2022. Other expense, net
Other expense, net consists of the following:
NINE MONTHS ENDED
SEPTEMBER 30, $
2022 2021 CHANGE
(in thousands)
Interest income $ 854 109 $ 745
Interest expense (4,921) (21,381) 16,460
Other income (expense) 1,267 (870) 2,137
Other expense, net $ (2,800) $ (22,142) $ 19,342
Other expense, net decreased by $19.3 million for the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 . This
decrease was primarily due to a decrease of $16.5 million in interest expense
due to the impact of adopting ASU 2020-06 on January 1, 2022 which accounts for
convertible debt instruments, such as the Convertible Notes, as a single
liability measured at its amortized cost, partially offset by a change of $2.1
million in other income (expense) and $0.7 million in interest income during the
nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021 . The change in other income (expense) primarily consists of
$1.0 million in realized loss on equity securities in the prior period as well
as an increase in research and development tax credit refunds. See Notes 2 and
10 to our condensed consolidated financial statements for additional information
on the Convertible Notes.
Liquidity and Capital Resources
Since our inception, we have funded operations primarily through the sale of equity securities and the issuance of convertible notes. In addition, we generate cash flows from product revenues related to sales of Rocklatan® and Rhopressa® inthe United States . Further, we entered into the Second Santen Agreement inDecember 2021 which included the Second Santen Agreement Upfront Payment, consisting of (a)$88.0 million which we received inJanuary 2022 and (b) a supplemental upfront payment of$2.0 million . This expanded the scope of the First Santen Agreement pursuant to whichSanten made an upfront payment of$50.0 million in the fourth quarter of 2020. We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses until such a time when our current products and any future products, if commercialized, generate adequate revenues to render us profitable. We will not generate any revenue from any product candidates or future product candidates unless and until we obtain regulatory approval and commercialize such products. Pursuant to the Merger Agreement, we are subject to a variety of operational restrictions. Unless we obtain Alcon's prior written consent, we may not, among other things and subject to certain exceptions and aggregate limitations, incur additional indebtedness, issue additional shares of common stock, repurchase common stock, pay dividends, acquire assets, or enter into material contracts. We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs, or capital expenditure requirements.
Sources of Liquidity
Our product revenues, net amounted to$99.3 million for the nine months endedSeptember 30, 2022 , which relate to sales of our glaucoma franchise products, Rocklatan® and Rhopressa®. Accounts receivable, net amounted to$73.9 million as ofSeptember 30, 2022 . 31 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2022 , our principal sources of liquidity were our cash, cash equivalents and investments, which totaled approximately$172.5 million . InJanuary 2022 , we received an aggregate$90.0 million associated with the Second Santen Agreement Upfront Payment. See Note 3 to our condensed consolidated financial statements included in this report for additional information. We believe that our cash, cash equivalents, and investments and projected cash flows from revenues will provide sufficient resources for our current ongoing needs through at least the next twelve months. See "-Operating Capital Requirements."
Cash Flows
The following table summarizes our sources and uses of cash:
NINE MONTHS ENDED
SEPTEMBER 30,
2022 2021
(in thousands)
Net cash provided by (used in):
Operating activities $ 37,277 $ (69,044)
Investing activities (20,368) (20,264)
Financing activities (3) (415)
Net change in cash and cash equivalents
Operating Activities
During the nine months endedSeptember 30, 2022 , net cash provided by operating activities of$37.3 million related to a net cash inflow of$97.3 million , primarily driven by the increase in licensing receivables and adjustments for non-cash items of$22.1 million related to stock-based compensation expense, amortization and accretion, and depreciation. These were offset by a net loss of$82.1 million . During the nine months endedSeptember 30, 2021 , net cash used in operating activities of$69.0 million related to a net loss of$120.3 million , adjusted for non-cash items of$52.3 million primarily related to stock-based compensation expense, amortization and accretion, and depreciation, offset by a net cash outflow of$1.0 million related to changes in operating assets and liabilities. The increase in net cash provided by operating activities during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 was primarily due to theJanuary 2022 receipt of the$90.0 million Second Santen Agreement Upfront Payment fromSanten in connection with the Second Santen Agreement, theMarch 2022 receipt of a$6.0 million developmental milestone payment fromSanten in connection with the First Santen Agreement, and higher net cash collections generated from product revenues.
Investing Activities
During the nine months endedSeptember 30, 2022 , net cash used in investing activities of$20.4 million related to purchases of available-for-sale investments of$145.7 million and purchases of property, plant, and equipment of$3.8 million primarily related to the Athlone plant, partially offset by sales and maturities of available-for-sale investments of$129.1 million . During the nine months endedSeptember 30, 2021 , net cash used in investing activities of$20.3 million related to purchases of available-for-sale investments of$112.4 million and purchases of property, plant, and equipment of$2.5 million primarily related to the Athlone plant, partially offset by sales and maturities of available-for-sale investments of$94.7 million .
Financing Activities
During the nine months endedSeptember 30, 2022 , net cash used in financing activities was immaterial. During the nine months endedSeptember 30, 2021 , net cash used in financing activities was$0.4 million and primarily related to tax payments made on employees' behalf through withholding of shares on restricted stock grants, partially offset by proceeds from issuance of common stock upon exercise of stock purchase rights and stock options.
Operating Capital Requirements
We expect to incur ongoing operating losses until such a time when Rocklatan®,
Rhopressa®, Roclanda® or Rhokiinsa®, or any product candidates or future product
candidates, if approved, generate sufficient cash flows for Aerie to achieve
profitability.
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Our principal liquidity requirements are for: working capital; operating
expenses, including for commercialization and manufacturing activities; expenses
associated with developing our pipeline opportunities, including pursuing
strategic growth opportunities; costs associated with executing our global
expansion strategy, including clinical and potential commercialization
activities outside the United States ; contractual obligations; and capital
expenditures.
We believe that our cash, cash equivalents, and investments and projected cash
flows from revenues, will provide sufficient resources to support our
operations, including interest payments for our Convertible Notes, through at
least the next twelve months, without giving effect to the proposed Merger and
assuming we remain a standalone entity.
Our future funding requirements will depend on many factors, including, but not limited to the following:
•consummation of the Merger;
•commercial performance of Rocklatan®, Rhopressa®, Roclanda® or Rhokiinsa®, or any current or future product candidates, if approved;
•costs of commercialization activities for Rocklatan®, Rhopressa®, Roclanda® or Rhokiinsa®, and any current or future product candidates, if approved;
•costs of building inventory to support sales growth and other associated working capital needs;
•costs, timing, and outcome of seeking regulatory approval;
•timing and costs of our ongoing and future clinical trials and preclinical studies including those related to our global expansion;
•costs of any follow-on development or products, including the exploration and/or development of any additional indications or additional opportunities for new ophthalmic product candidates, delivery alternatives, and new therapeutic areas;
•terms and timing of any acquisitions, collaborations, or other arrangements;
•costs related to the Convertible Notes, particularly if the proposed Merger is not completed, including repurchasing, repaying, or otherwise refinancing our Convertible Notes, unless earlier repurchased, redeemed or converted, including in connection with the consummation of the Merger; and •costs related to filing and prosecuting patent applications, maintaining and protecting our intellectual property rights, and defending against intellectual property related claims, including defending against any ANDA filings that contain a Paragraph IV Certification. We based our projections, without giving effect to the proposed Merger, on assumptions that may prove to be incorrect or unreliable or may change due to circumstances beyond our control, and as a result, we may consume our available capital resources earlier than we originally projected, particularly if the proposed Merger is not completed and if we are required to pay a termination fee to Alcon. Accordingly, we may be required to obtain further funding through debt or equity offerings or other sources. If such funding is required, we cannot guarantee that it will be available to us on favorable terms, if at all.
Outstanding Indebtedness
In
The Convertible Notes are senior, unsecured obligations with interest payable semi-annually in cash in arrears at a rate of 1.50% per annum onApril 1 andOctober 1 of each year, which began onApril 1, 2020 . The Convertible Notes will mature onOctober 1, 2024 unless they are redeemed, repurchased or converted prior to such date. If consummated, the Merger is expected to constitute a fundamental change under the indenture governing the Convertible Notes. Prior toApril 1, 2024 , the Convertible Notes will be convertible at the option of holders only during certain periods and upon satisfaction of certain conditions, including upon consummation of the Merger, as discussed further below. On and afterApril 1, 2024 , the Convertible Notes will be convertible at the option of the holders any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the Convertible Notes may be settled in shares of our common stock, cash or a combination, thereof, at our election. We intend to pay cash upon conversion of the Convertible Notes, without giving effect to the proposed Merger and assuming we remain a standalone entity. See Note 2 for additional information. In connection with the Closing of the Merger, each holder will be entitled to convert such holder's Convertible Notes into the right to receive the Merger Consideration in respect of each share of common stock into which the Convertible Notes would have been convertible pursuant to the applicable conversion rate under the indenture.
See Notes 1 and 10 to our condensed consolidated financial statements included in this report for additional information.
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Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commitments as included in our 2021 Form 10-K.
Off-Balance Sheet Arrangements
None.
Recent Accounting Pronouncements
For a discussion of recently issued accounting standards, see Note 2 to our condensed consolidated financial statements included in this report.
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