AURINIA PHARMACEUTICALS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report. The information in this discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act, which are subject to the "safe harbor" created by those sections, as well as "forward-looking information" as defined in applicable Canadian securities laws. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans; objectives of management; the key potential benefits of LUPKYNIS; our belief that we have sufficient financial resources to fund our current plans for at least the next 12 months; and our potential to receive certain payments and royalties under our agreement with Otsuka. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "propose," "intend," "continue," "potential," "possible," "foreseeable," "likely," "unforeseen" and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We have made numerous assumptions about the forward-looking statements and information contained herein, including among other things, assumptions about: the accuracy of reported data from third party studies and reports; that our IP rights are valid and do not infringe the IP rights of third parties; our assumptions relating to the capital required to fund operations for the next 12 months; the assumption that our current good relationships with our suppliers, service providers and other third parties will be maintained; assumptions relating to the burn rate of our cash for operations; that our third party service providers will comply with their contractual obligations. Even though management believes that the assumptions made, and the expectations represented by such statements or information are reasonable, there can be no assurance that the forward-looking information will prove to be accurate. We discuss many of these risks, uncertainties and other factors in greater detail under the heading "Risk Factors" in Part I, Item 1A of our 2020 Annual Report on Form 10-K, as filed with theU.S. Securities and Exchange Commission onFebruary 24, 2021 and with applicable Canadian securities regulatory authorities. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this discussion completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we assume no obligation to update our forward-looking statements publicly, or to update the reasons that actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Overview Aurinia is a commercial-stage biopharmaceutical company focused on developing and commercializing therapies to treat targeted patient populations that are suffering from serious diseases with a high unmet medical need. We have commercially launched LUPKYNIS inthe United States for the treatment of adult patients with active LN, and continue to conduct pre-clinical, clinical, and regulatory activities to support the voclosporin development program. LUPKYNIS is a calcineurin inhibitor (CNI) immunosuppressant, that improves near and long-term outcomes in LN when used in combination with mycophenolate mofetil and steroids, the current standard of care for LN (although not currently approved as such). By inhibiting calcineurin, LUPKYNIS reduces cytokine activation and blocks interleukin IL-2 expression and T-cell mediated immune responses. LUPKYNIS also potentially stabilizes podocytes, which can reduce proteinuria. Voclosporin, the active ingredient in LUPKYNIS, is made by a modification of a single amino acid of the cyclosporine molecule. The mechanism of action of LUPKYNIS has been validated with certain earlier generation CNIs for the prevention of rejection in patients undergoing solid organ transplants and in several autoimmune indications, including uveitis, keratoconjunctivitis sicca, psoriasis, rheumatoid arthritis, and for LN inJapan . We believe that LUPKYNIS possesses pharmacologic properties with the potential to demonstrate best-in-class differentiation. Earlier generation CNIs have demonstrated efficacy for a number of conditions, including transplant and other autoimmune diseases; however, side effects exist which can limit their long-term use and tolerability. Some clinical complications of earlier generation CNIs include hypertension, hyperlipidemia, diabetes, and both acute and chronic nephrotoxicity. Based on published data, we believe the key potential benefits of LUPKYNIS in the treatment of adult patients with active LN versus marketed CNIs include: •increased potency compared to cyclosporine A, allowing for lower dosing requirements and potentially fewer off 21 -------------------------------------------------------------------------------- target effects; •limited inter and intra patient variability, allowing for easier dosing without the need for monitoring blood levels for therapeutic drug monitoring; •less cholesterolemia and triglyceridemia than cyclosporine A; and •limited incidence of glucose intolerance and diabetes at therapeutic doses compared to tacrolimus. Developments •OnJanuary 22, 2021 , the FDA approved LUPKYNIS in combination with a background immunosuppressive therapy regimen to treat adult patients with active LN. As a condition of approval, we are required and are on track to conduct two pediatric studies (with reports due in 2025 and 2031), a milk only lactation study (with a report due in 2026), a drug-drug interaction study (with a report due in 2023) and submit a final study report on our AURORA-2 continuation study (byMarch 2022 ). •OnMay 10, 2021 ,The Lancet , an international, peer-reviewed medical journal, published the results of the Company's Phase 3 AURORA 1 study evaluating LUPKYNIS (voclosporin) in adults with LN. •OnMay 20, 2021 , we announced that the interim analysis of the AURORA 2 continuation study showed that subjects in the LUPKYNIS treatment arm sustained meaningful reductions in proteinuria, with no change in mean estimated glomerular filtration rate (eGFR) at 104 weeks of treatment. •OnJune 7, 2021 , our shareholders adopted and approved the Plan, which allows for the issuance of up to an additional 11.5 million shares. The purpose of the Plan is to advance the interests of the Company by encouraging equity participation in the Company through the acquisition of common shares. Also inJune 2021 , our shareholders adopted and approved the 2021 ESPP, which allows for the issuance of up to 2.5 million shares. The purpose of the 2021 ESPP is to provide eligible employees with opportunities to purchase the Company's common shares at a discounted price. •OnJune 14, 2021 , we appointed Dr.Brinda Balakrishnan , M.D., Ph.D., to our Board of Directors effectiveJune 14, 2021 .Dr. Balakrishnan is Group Vice President, Corporate and Business Development of BioMarin Pharmaceutical Inc. •OnJune 25, 2021 , our licensing partner, Otsuka, filed an initial marketing authorization application with theEuropean Medicines Agency seeking approval for the use of voclosporin for the treatment of adult patients with active LN in theEuropean Union , as well asNorway ,Iceland andLiechtenstein . Upon approval we would be eligible for up to an additional$30 million USD in approval related milestones, low double-digit royalties on sales, and additional revenues for the supply of product to Otsuka under a cost-plus arrangement. •OnJuly 16, 2021 , we announced we will voluntarily delist the common shares from the TSX effective as of the close of trading onJuly 30, 2021 . Our common shares will no longer be traded on the TSX but will continue to trade on the Nasdaq under the symbol AUPH. •OnAugust 17, 2021 , we announced the addition of two novel pipeline assets AUR200 and AUR300. AUR200 is a Fc protein targeting BAFF/APRIL (B-cell Activating Factor, known as BAFF, and A Proliferation-Inducing Ligand known as APRIL). AUR200 is currently undergoing pre-clinical development with projected submission of an IND to the FDA by the end of 2022. AUR300 is a novel peptide therapeutic that modulates M2 macrophages (a type of white blood cells) via the macrophage mannose receptor CD206. Dysregulation of M2 macrophages drives fibrosis. AUR300 acts to reduce M2 dysregulation and decrease inflammatory cytokines, and therefore may have significant clinical applications for autoimmune and fibrotic diseases. AUR300 IND filing is expected during the first half of 2023. •OnOctober 1, 2021 , Aurinia's licensing partner,Otsuka Pharmaceutical Co., Ltd. , filed an initial marketing authorization application (MAA) with theSwiss Agency for Therapeutic Products (Swissmedic ) seeking approval for the use of voclosporin for the treatment of adult patients with active LN. The Swiss filing was based on theJune 24, 2021 MAA submission to theEuropean Medicines Agency (EMA). •Regulatory review of the EMA MAA remains on track with a CHMP opinion expected around mid-2022 followed by an EMA decision expected sometime in the third quarter of 2022. Additionally, Otsuka continues to work to finalize the timeline for the JNDA regulatory filing with PMDA to seek approval of voclosporin for the treatment of LN inJapan . Impact of COVID-19 Pandemic In the event of a prolonged disruption related to the COVID-19 pandemic, there could be detrimental impact to our ongoing and future clinical trials, our ongoing commercial launch and future commercialization activities for LUPKYNIS, and our ability to access capital markets. For further information, refer to Item 1A. Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 22 -------------------------------------------------------------------------------- Critical Accounting Policies and Significant Judgments and Estimates The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in Note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year endedDecember 31, 2020 and any updates in Item 1. Note 3 from our Summary of Significant Accounting Policies. There have been no material changes to our critical accounting policies and estimates as compared to those disclosed in our Annual Report. We believe that of our critical accounting policies, the most significant areas involving critical estimates, judgments and assumptions used in the preparation of our consolidated financial statements are as follows: •Revenue recognition; •Cost of sales; •Inventory; •Royalty obligation; •Contingent accruals; •Clinical trial expenditures; •Share-based compensation; •Intangible assets; •Leases; and •Income taxes. 23
-------------------------------------------------------------------------------- Results of Operations Three and Nine Month Periods endedSeptember 30, 2021 compared to Three and Nine Month Periods endedSeptember 30, 2020 The following table sets forth our results of operations for the three and nine month periods endedSeptember 30, 2021 andSeptember 30, 2020 . Three months ended September 30, Nine Months Ended September 30, 2021 2020 Change 2021 2020 Change (in thousands) (in thousands) Revenue Product revenue, net$ 14,638 $ -$ 14,638 $ 22,113 $ -$ 22,113 License revenue 29 29 - 88 88 - Total revenue 14,667 29 14,638 22,201 88 22,113 Operating expenses: - - Cost of sales 254 - 254 610 - 610 Selling, general and administrative 44,128 30,702 13,426 127,196 57,204 69,992 Research and development 20,066 12,243 7,823 39,990 37,154 2,836 Amortization of intangible assets 517 316 201 1,576 902 674 Other (income) expense, net 55 (917) 972 859 1,066 (207) Total cost of sales and operating expenses 65,020 42,344 22,676 170,231 96,326 73,905 Loss from operations (50,353) (42,315) (8,038) (148,030) (96,238) (51,792) Interest income 106 170 (64) 420 1,381 (961) Net loss before income taxes (50,247) (42,145) (8,102) (147,610) (94,857) (52,753) Income tax expense (benefit) 8 (15) 23 34 (251) 285 Net loss$ (50,255) $ (42,130) $ (8,125) $ (147,644) $ (94,606) $ (53,038) Revenues Total revenue was$14.7 million and$29 thousand for the three months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. Total revenue was$22.2 million and$88 thousand for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. Our revenues primarily consisted product revenue, net of adjustments, for LUPKYNIS following FDA approval inJanuary 2021 . Cost of Sales Cost of sales were$254 thousand and $nil for the three months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. Cost of sales were$610 thousand and $nil for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. The increase was primarily the result of commercial sales of LUPKYNIS. Gross margin for the three and nine months endedSeptember 30, 2021 was approximately 98% and 97% respectively. 24 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses
SG&A expenses increased to
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Salaries, incentive pay and employee
benefits $ 19,981 $ 13,795 $ 58,723 $ 22,375
Professional fees and services 13,110 8,668 34,536 18,229
Share-based compensation expense 6,000 3,750 19,189 9,151
Other public company costs, facility
costs, insurance, information technology,
amortization of property and equipment 3,304 4,030 9,579 6,548
Travel, trade shows and sponsorships 1,733 459 5,169 901
$ 44,128 $ 30,702 $ 127,196 $ 57,204
The primary drivers for the increase for the three and nine months ended
September 30, 2021 as compared to the same periods ended 2020 were an increase
in salaries, incentive pay and employee benefits and share-based compensation
expense related to the expansion of the commercial and administrative functions
to support the launch of LUPKYNIS which ramped up during the third quarter of
2020. Also contributing was an increase in professional fees for activities such
as patient assistance programs, consulting, recruiting, legal, market research
and marketing.
Research and Development Expenses
R&D expenses were $20.1 million and $12.2 million for the three months ended
September 30, 2021 and September 30, 2020 , respectively. For the nine months
ended September 30, 2021 and September 30, 2020 , R&D expenses were $40.0 million
and $37.2 million , respectively. R&D expenses consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Contract research organizations (CRO) and
developmental expenses $ 15,873 $ 5,581 $ 25,579 $ 18,928
Clinical supply and distribution 872 2,502 3,242 6,882
Salaries, incentive pay and employee benefits 2,070 2,976 7,807 7,351
Share-based compensation expense 1,038 814 3,201 3,111
Travel, insurance, patent annuity fees, legal
fees and other 213 370 161 882
$ 20,066 $ 12,243 $ 39,990 $ 37,154
The primary driver for the increase for the three months ended September 30,
2021 as compared to the same period of 2020 was due to an upfront license and
accrued milestone expense related to our recently acquired developmental
programs AUR200 and AUR300. In accordance with U.S. GAAP, these transactions did
not meet the definition of a business combination and therefore, were recorded
as asset acquisitions. The Company expensed the cost of the assets as R&D
expense at the acquisition dates. The increase was partially offset by a
decrease in clinical supply and distribution costs due to our new drug
application and voclosporin related clinical trial expenditures in 2020 not
recurring in 2021. Also contributing was a decrease in salaries, incentive pay
and employee benefits due to the allocation of costs related to post approval
support of LUPKYNIS to SG&A.
The primary drivers for the increase for the nine months ended September 30,
2021 as compared to the same period of 2020 were due to the upfront license and
accrued milestone expense related to our recently acquired developmental
programs, AUR200 and AUR300 and higher CRO expenses related to our new clinical
programs offset by a decrease in clinical supply and distribution costs
following the approval of LUPKYNIS, including a reduction in new drug
application preparation costs and termination of the dry eye trial during the
fourth quarter of 2020.
25
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Liquidity and Capital Resources
As of September 30, 2021 , we had cash and cash equivalents and investments of
$286.4 million compared to cash and cash equivalents and investments of $422.7
million at December 31, 2020 . The decrease is primarily related to the
commercial infrastructure spend to support the launch of LUPKYNIS, payments for
inventory, an upfront payment made as part of a collaborative agreement with
Lonza to build a dedicated manufacturing capability (or monoplant) and an
upfront license payment related to our recently acquired developmental program.
Cash and cash equivalents and investments are primarily held in U.S. dollars. As
of September 30, 2021 and December 31, 2020 , we had working capital of $291.7
million and $387.4 million , respectively.
We are devoting the majority of our operational efforts and financial resources
towards the commercialization and post approval commitments of our approved
drug, LUPKYNIS. We are also expending efforts towards our newly acquired assets
AUR200 and AUR300. Taking into consideration the cash and cash equivalents and
investments as of September 30, 2021 , we believe that our cash position is
sufficient to fund our current plans which include funding commercial
activities, including our FDA related post approval commitments, manufacturing
commercial drug supply, funding our supporting commercial infrastructure,
conducting our planned R&D programs, investing in our pipeline and funding our
supporting corporate and working capital for at least the next 12 months.
Cash Flow Summary
The following table summarizes our cash flows for the nine months ended
Nine months ended September 30,
(in thousands) 2021 2020
Net cash (used in) provided by:
Operating activities $ (131,770) $ (73,062)
Investing activities (98,383) (177,332)
Financing activities 15,390 193,133
Net decrease in cash and cash equivalents $
(214,763)
Net cash used in operating activities was$131.8 million for the nine months endedSeptember 30, 2021 compared to$73.1 million for the nine months endedSeptember 30, 2020 . The increase is primarily due to the commercial infrastructure spend to support the launch of LUPKYNIS, payments for inventory, and a one-time payment to a related party upon achievement of specific milestones partially offset by an increase in cash receipts. In the prior year, the Company was still in the development phase of LUPKYNIS. Cash used in investing activities during the nine months endedSeptember 30, 2021 was$98.4 million compared to cash used in investing activities of$177.3 million during the nine months endedSeptember 30, 2020 . Investing activities during the nine months endedSeptember 30, 2021 consisted primarily of$342.8 million for purchases of investments,$11.8 million for an upfront lease payment and$6.0 million for an upfront license payment which was offset by$263.8 million of proceeds of maturities of investments. Cash used in investing activities of$177.3 million for the nine months endedSeptember 30, 2020 was primarily attributable to purchases of short-term investments. Cash provided by financing activities during the nine months endedSeptember 30, 2021 was$15.4 million compared to cash provided by financing activities of$193.1 million during the nine months endedSeptember 30, 2020 . The decrease was primarily due to the public offering during the third quarter of 2020. OffBalance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any offbalance sheet arrangements as such term is defined in Item 303(a)(4)(ii) of Regulation S-K under the Securities Act. Contractual Obligations 26 -------------------------------------------------------------------------------- There have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Item 3. Quantitative and Qualitative Disclosures About Market Risks Our activities can expose us to market risks which include interest rate risk, foreign currency risk, inflation risk and credit risk. Risk management is carried out by management under policies approved by our board of directors. Our overall risk management program seeks to minimize adverse effects on our financial performance. Interest rate risk Financial assets and financial liabilities with variable interest rates expose us to cash flow interest rate risk. We manage our interest rate risk by maximizing the interest income earned on excess funds while maintaining the liquidity necessary to conduct operations on a day-to-day basis. Our investment portfolio includes cash and cash equivalents and investments that earn interest at market rates. Our investments held during the year were comprised of instruments such as certificates of deposit, money market instruments, obligations issued by theU.S. government andU.S. government agencies as well as corporate debt securities, and places restrictions on maturities and concentration by type and issuer. As ofSeptember 30, 2021 , these instruments have a maturity of one year or less. Accounts receivable, accounts payable and accrued liabilities bear no interest. We do not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to our investment portfolio. Foreign currency risk We are exposed to financial risk related to the fluctuation of foreign currency exchange rates. Foreign currency risk for the Company is the risk variations in exchange rates between theU.S. dollar and foreign currencies, primarily with the Canadian dollar and Swiss franc, which could affect our operating and financial results. A 10% increase or decrease of theU.S. dollar would have no material effect assuming all other variables remained constant. Inflation Risk Inflation may generally affect us by increasing our cost of labor, commercial support and clinical trial expenditures. Inflation has not had a material effect on our business, financial condition or results of operations during the three and nine months endedSeptember 30, 2021 and 2020. Credit risk Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents, investments and accounts receivable. The Company attempts to minimize the risks related to cash and cash equivalents and investments by investing in a broad and diverse range of financial instruments. The Company established guidelines related to credit ratings and maturities intended to safeguard principal balances, earn a return on investments and to maintain liquidity. The Company's investment portfolio is maintained in accordance with its investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. The Company does not enter into any investment transaction for trading or speculative purposes. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as ofSeptember 30, 2021 , have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of theSEC , and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting 27 -------------------------------------------------------------------------------- There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter endedSeptember 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 28
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