The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited consolidated
financial statements and related notes included elsewhere in this Quarterly
Report, and our audited consolidated financial statements and related notes for
the year ended December 31, 2022 included in our Annual Report on Form 10-K (our
"Annual Report"). Some of the information contained in this discussion and
analysis or set forth elsewhere in this Quarterly Report, including information
with respect to our plans and strategy for our business, includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. As a result of many factors,
including those factors set forth in the risks identified in
Part II-Item 1A "Risk Factors" section of this Quarterly Report and our other
filings with the Securities and Exchange Commission (the "SEC") our actual
results could differ materially from the results, performance or achievements
expressed in or implied by these forward-looking statements.
Overview
We are a biopharmaceutical company focused on discovering, acquiring, developing
and commercializing therapeutic medicines for patients suffering from
debilitating diseases with significant unmet medical need. Our immune-modulating
assets, ARCALYST, KPL-404 and mavrilimumab, are based on strong biologic
rationale or validated mechanisms, target a spectrum of underserved
cardiovascular and autoimmune conditions, and offer the potential for
differentiation.
ARCALYST is an interleukin-1? and interleukin-1? cytokine trap. In 2017, we
licensed ARCALYST from Regeneron, who discovered and initially developed the
drug. Our exclusive license to ARCALYST from Regeneron includes worldwide
rights, excluding the Middle East and North Africa, for all applications other
than those in oncology and local administration to the eye or ear. We received
U.S. Food and Drug Administration ("FDA"), approval of ARCALYST for the
treatment of recurrent pericarditis and reduction in risk of recurrence in
adults and children 12 years and older in March 2021. Recurrent pericarditis is
a painful inflammatory cardiovascular disease with an estimated U.S. prevalent
population of approximately 40,000 patients seeking and receiving medical
treatment. ARCALYST is commercially available across the United States through a
network of distributors. ARCALYST is also approved in the United States for the
treatment of Cryopyrin-Associated Periodic Syndromes ("CAPS") specifically
Familial Cold Autoinflammatory Syndrome and Muckle-Wells Syndrome in adults and
children 12 years and older, and the maintenance of remission in Deficiency of
Interleukin-1 Receptor Antagonist ("DIRA") in adults and children weighing 10 kg
or more. We are responsible for sales and distribution of ARCALYST in all
approved indications in the United States, and evenly split profits on sales, as
well as third party proceeds, with Regeneron. In March 2023, Regeneron initiated
a technology transfer of the manufacturing process for ARCALYST drug substance
and we are working with Regeneron to identify and qualify a new CDMO.
KPL-404 is an investigational monoclonal antibody inhibitor of CD40-CD154
interaction. In 2019, we acquired all of the outstanding securities of Primatope
Therapeutics, Inc. ("Primatope"), the company that owned or controlled the
intellectual property related to KPL-404. In connection with our acquisition of
Primatope, we acquired an exclusive world-wide license to KPL-404 from Beth
Israel Deaconess Medical Center, Inc. ("BIDMC"). The CD40-CD154 interaction is a
key T-cell co-stimulatory signal critical for B-cell maturation, immunoglobulin
class switching and Type 1 immune response. We believe disrupting the CD40-CD154
interaction is an attractive approach to address multiple autoimmune disease
pathologies such as rheumatoid arthritis ("RA"), Sjogren's syndrome, Graves'
disease and systemic lupus erythematosus. In May 2021, we announced positive
final data from our Phase 1 single-ascending-dose clinical trial of KPL-404 in
healthy volunteers, which evaluated safety and pharmacokinetics, as well as
receptor occupancy and T-cell dependent antibody response. In December 2021, we
initiated a Phase 2 clinical trial of KPL-404 in RA, which is designed to
evaluate pharmacokinetics, safety and efficacy with subcutaneous administration.
In January 2023, we announced that we had completed enrollment of the
multiple-ascending-dose portion of such trial. We are currently enrolling the
proof-of-concept portion of the trial. We expect data from the trial in the
first half of 2024.
Mavrilimumab is an investigational monoclonal antibody inhibitor targeting
granulocyte-macrophage colony stimulating factor receptor alpha ("GM-CSFR?"). In
2017, we licensed exclusive worldwide rights in all indications to mavrilimumab
from MedImmune, Limited ("MedImmune"). We are pursuing collaborative study
agreements to evaluate the potential of mavrilimumab in rare cardiovascular
diseases where the GM-CSF mechanism has been
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implicated. We previously evaluated mavrilimumab in giant cell arteritis
("GCA"), a chronic inflammatory disease of the medium-to-large arteries, and
COVID-19-related acute respiratory distress syndrome ("ARDS").
Vixarelimab is an investigational monoclonal antibody inhibitor of signaling
through oncostatin M receptor beta ("OSMR?"), which was previously part of our
portfolio of immune-modulating assets. In September 2022, we closed an agreement
granting Genentech, Inc. and F. Hoffmann-La Roche Ltd (collectively,
"Genentech") an exclusive worldwide license to develop and commercialize
vixarelimab. Pursuant to such agreement, we have agreed to complete our
in-progress Phase 2b dose-ranging clinical trial of vixarelimab for the
treatment of prurigo nodularis, a chronic inflammatory skin condition.
Our ability to generate product revenue sufficient to achieve sustained
corporate profitability will depend heavily on the continued commercialization
of ARCALYST and the development and eventual commercialization of one or more of
our current or future product candidates, if approved. While our ARCALYST
collaboration with Regeneron has achieved profitability, such profits remain
small compared to our total net losses and there is no guarantee that our
ARCALYST collaboration with Regeneron will remain profitable in the future. In
addition, payments and royalties arising from out-licensing, collaboration or
other similar agreements, though potentially substantial, are often isolated
events and cannot be relied upon to generate significant and sustained revenue.
For the three months ended March 31, 2023, our net losses were $12.3 million. As
of March 31, 2023, we had an accumulated deficit of $504.3 million. We expect to
incur operating losses for the foreseeable future as we advance our product
candidates through preclinical and clinical development and, ultimately, seek
regulatory approval. In addition, we expect to continue to incur significant
expenses related to product manufacturing, including technology transfer costs,
marketing, sales and distribution of ARCALYST. We may also incur expenses in
connection with the in-licensing or acquisition of additional product
candidates.
As of March 31, 2023, we had cash, cash equivalents and short-term investments
of $187.5 million. We believe that our existing cash, cash equivalents and
short-term investments will enable us to fund our operating expenses and capital
expenditure requirements for at least the next 12 months from the date of
issuance of the unaudited consolidated financial statements included in this
Quarterly Report. We have based this estimate on assumptions that may prove to
be wrong, and we could exhaust our available capital resources sooner than we
expect. See "- Liquidity and Capital Resources." Our future viability is
dependent on our ability to fund our operations through sales of ARCALYST and/or
raise additional capital, such as through debt or equity offerings, as needed.
Components of Our Results of Operations
Product revenue, net
Following the FDA approval of ARCALYST in March 2021 for recurrent pericarditis,
we began generating product revenue from sales of ARCALYST in April 2021.
ARCALYST is sold through a third party logistics provider that distributes
primarily through a network of authorized specialty pharmacies and specialty
distributors, collectively, the customers, which deliver the medication to
patients by mail.
Net revenue from product sales is recognized at the transaction price when the
customers obtain control of our product, which occurs at a point in time,
typically upon shipment of the product from the third party logistics provider.
Our net revenues represent total revenues adjusted for discounts and allowances,
including estimated cash discounts, chargebacks, rebates, returns, copay
assistance, and specialty pharmacy and distributor fees. These adjustments
represent variable consideration under ASC Topic 606, Revenue from Contracts
with Customers, and are estimated using the expected value method and are
recorded when revenue is recognized on the sale of the product. These
adjustments are established by management as its best estimate based on
available information and will be adjusted to reflect known changes in the
factors that impact such allowances. Adjustments for variable consideration are
determined based on the contractual terms with customers, historical trends,
communications with customers and the levels of inventory remaining in the
distribution channel, as well as expectations about the market for the product
and anticipated introduction of competitive products.
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License and collaboration revenue
License and collaboration revenue includes amounts recognized related to upfront
payments, royalty revenue, and milestone payments.
In February 2022, we entered into two collaboration and license agreements (the
"Collaboration Agreements"), with Hangzhou Zhongmei Huadong Pharmaceutical Co.,
Ltd. ("Huadong"), pursuant to which we granted Huadong exclusive rights to
develop and commercialize rilonacept and mavrilimumab, referred to as the
Licensed Products, in the Asia Pacific region excluding Japan, or the Territory.
We otherwise retained our current rights to the Licensed Products outside the
Territory.
Under the Collaboration Agreements, we received a total upfront cash payment of
$22.0 million, which includes $12.0 million for the Territory license of
rilonacept and $10.0 million for the Territory license of mavrilimumab. In
addition, we will be eligible to receive contingent payments, including
specified development, regulatory and sales-based milestones. Huadong will also
be obligated to pay us tiered percentage royalties on a Licensed
Product-by-Licensed Product basis ranging from the low-teens to low-twenties on
annual net sales of each Licensed Product in the Territory, subject to certain
reductions tied to rilonacept manufacturing costs and certain other customary
reductions, with an aggregate minimum floor. Royalties will be payable on a
Licensed Product-by-Licensed Product and country-by-country or region-by-region
basis until the later of (i) 12 years after the first commercial sale of the
applicable Licensed Product in such country or region in the Territory, (ii) the
date of expiration of the last valid patent claim of our patent rights or any
joint collaboration patent rights that covers the applicable Licensed Product in
such country or region in the Territory, and (iii) the expiration of the last
regulatory exclusivity for the applicable Licensed Product in such country or
region in the Territory. We recognized the $10.0 million related to the
mavrilimumab license during the year ended December 31, 2022. We deferred the
$12.0 million related to the rilonacept license agreement as of March 31, 2023,
and will recognize revenue as materials are shipped.
In August 2022, we entered into a license agreement (the "Genentech License
Agreement") with Genentech, pursuant to which we granted Genentech exclusive
worldwide rights to develop and commercialize vixarelimab and related
antibodies.
Under the Genentech License Agreement, we received an upfront payment of $80.0
million for the license. In the first quarter of 2023, following our last
delivery of certain drug supplies to Genentech, we received an additional $20.0
million payment. We will be eligible to receive up to approximately $600.0
million in contingent payments, including specified development, regulatory and
sales-based milestones as well as royalties in the low double digits to
mid-teens on annual net sales, in each case before fulfilling our upstream
financial obligations. We recognized a portion of the $80.0 million upfront
payment and the $20.0 million payment related to the delivery of certain
materials in the three months ended March 31, 2023 for the drug supply delivered
and the completed portion of the in-progress Phase 2b prurigo nodularis clinical
trial. We will recognize the remaining revenue associated with the transaction
price over the remaining duration of the in-progress Phase 2b prurigo nodularis
clinical trial.
Operating Expenses
Cost of Goods Sold
Cost of goods sold includes production and distribution costs of ARCALYST, and
amortization of the $20.0 million payment we made to Regeneron and other
miscellaneous product costs associated with ARCALYST. Cost of goods sold also
includes labor and overhead costs associated with the production of ARCALYST
associated with quality control, quality assurance, and supply chain activities.
Collaboration expenses
Collaboration expenses consist of Regeneron's share of the profit related to
ARCALYST sales under the license agreement with Regeneron (the "Regeneron
Agreement"). We evenly split profits on sales of ARCALYST with Regeneron, where
profits are determined after deducting from net sales of ARCALYST certain costs
related to the
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manufacturing and commercialization of ARCALYST. Such costs include but are not
limited to (i) our cost of goods sold for product used, sold or otherwise
distributed for patient use by us; (ii) customary commercialization expenses,
including the cost of our field force, and (iii) our cost to market, advertise
and otherwise promote ARCALYST, with such costs identified in subsection (iii)
subject to specified limits. With respect to technology transfer of the
manufacturing process for ARCALYST drug substance initiated by Regeneron in
March 2023, to the extent permitted by the Regeneron Agreement, the
fully-burdened costs of each of us and Regeneron incurred in performing such
technology transfer shall also be deducted from net sales of ARCALYST to
determine profit. We also evenly split with Regeneron any proceeds received by
us from any licensees, sublicensees and distributors in consideration for the
sale, license or other disposition of rights with respect to ARCALYST, including
upfront payments, milestone payments and royalties.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in
connection with the research and development of our product candidates. We
expense research and development costs as incurred. These expenses may include:
?expenses incurred to conduct the necessary preclinical studies and clinical
trials required to obtain regulatory approval;
?expenses incurred under agreements with CROs that are primarily engaged in the
oversight and conduct of our clinical trials and CMOs that are primarily engaged
to provide preclinical and clinical drug substance and product for our research
and development programs for our product candidates;
?other costs related to acquiring and manufacturing preclinical and clinical
trial materials, including manufacturing validation batches, as well as
investigative sites and consultants that conduct our clinical trials,
preclinical studies and other scientific development services;
?payments made in cash or equity securities under third party licensing,
acquisition and other similar agreements;
?employee-related expenses, including salaries and benefits, travel and
share-based compensation expense for employees engaged in research and
development functions;
?costs related to compliance with regulatory requirements; and
?allocated facilities-related costs, which include rent and utilities,
depreciation and other expenses.
We recognize external development costs based on an evaluation of the progress
to completion of specific tasks using information provided to us by our service
providers. This process involves reviewing open contracts and purchase orders,
communicating with our personnel to identify services that have been performed
on our behalf and estimating the level of service performed and the associated
cost incurred for the service when we have not yet been invoiced or otherwise
notified of actual costs. Nonrefundable advance payments for goods or services
to be received in the future for use in research and development activities are
recorded as prepaid expenses. Such amounts are recognized as an expense as the
goods are delivered or the related services are performed, or until it is no
longer expected that the goods will be delivered or the services rendered.
Our direct research and development expenses are tracked on a program-by-program
basis for our product candidates and consist primarily of external costs, such
as fees paid to outside consultants, CROs, CMOs and research laboratories in
connection with our preclinical development, process development, manufacturing
and clinical development activities. Our direct research and development
expenses by program also include fees incurred under license, acquisition and
other similar agreements. We do not allocate employee costs or facility
expenses, including depreciation or other indirect costs, to specific programs
because these costs are deployed across multiple programs and, as such, are not
separately classified. We use internal resources primarily to conduct our
research and discovery
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activities as well as for managing our preclinical and clinical development,
process development and manufacturing clinical and preclinical materials.
Research and development activities are central to our business. Product
candidates in later stages of clinical development generally have higher costs
than those in earlier stages of clinical development, primarily due to the
increased size and duration of later-stage clinical trials. As a result, we
expect that our research and development expenses will be substantial over the
next several years as we conduct our ongoing and/or planned clinical trials for
our product candidates, as well as conduct other preclinical and clinical
development, and make regulatory filings for our product candidates. We also
expect to incur additional expenses related to milestone and royalty payments
payable to third parties with whom we have entered into license, acquisition and
other similar agreements to acquire the rights to our product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and costs
of the efforts that will be necessary to complete the clinical development of
our current or future product candidates or when, if ever, we will realize
significant revenue from product sales or be profitable. This uncertainty is due
to the numerous risks and uncertainties, including those described in Part II,
Item 1A. "Risk Factors" in this Quarterly Report.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries and
benefits, travel and share based compensation expense for personnel in selling,
marketing, medical, executive, business development, finance, human resources,
legal and support personnel functions. Selling, general and administrative
expenses also include external commercialization, marketing, and professional
fees for legal, patent, and accounting services.
We have been commercializing ARCALYST since April 2021 and expect that our
selling, general and administrative expenses will continue to increase in the
future as we continue to perform commercialization and sales activities.
Other Income
Other income consists of interest income recognized from investments in money
market funds, U.S. Treasury notes and other miscellaneous income offset by
expenses related to investments.
Income Taxes
As an exempted company incorporated under the laws of Bermuda, we are
principally subject to taxation in Bermuda. Under the current laws of Bermuda,
there is no corporate income tax levied on an exempted company's income,
resulting in an effective zero percent tax rate. As a result, we have not
recorded any income tax benefits from our losses incurred in Bermuda during each
reporting period, and no net operating loss carryforwards are currently
available to us for those losses, while our assets remain in Bermuda. Our wholly
owned U.S. subsidiaries, Kiniksa US, and Primatope are subject to federal and
state income taxes in the United States. Our wholly owned subsidiary Kiniksa UK,
and its wholly owned subsidiaries, Kiniksa Pharmaceuticals (Germany) GmbH,
Kiniksa Pharmaceuticals (France) SARL, and Kiniksa Pharmaceuticals GmbH are
subject to taxation in their respective countries. Our income tax provision is
primarily driven by income earned in the UK and U.S. offset in part by tax
benefits from the Foreign Derived Intangible Income ("FDII") deduction and U.S.
federal and state research and development credits ("R&D Credits").
In the first quarter of 2022, we transferred exclusive rights to develop and
commercialize mavrilimumab in the Asia Pacific region, excluding Japan, to
Kiniksa UK.
In the third quarter of 2022, we transferred exclusive worldwide rights to
develop and commercialize vixarelimab to Kiniksa UK.
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Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table summarizes our results of operations for the three months
ended March 31, 2023 and 2022:
Three Months Ended
March 31,
2023 2022 Change
(in thousands)
Revenue:
Product revenue, net $ 42,659 $ 22,189 $ 20,470
License and collaboration revenue 5,686 10,000 (4,314)
Total revenue 48,345 32,189 16,156
Costs and Operating expenses:
Cost of goods sold 7,036 4,219 2,817
Collaboration expenses 8,288 8,254 34
Research and development 15,172 20,817 (5,645)
Selling, general and administrative 29,045 22,218 6,827
Total operating expenses 59,541 55,508 4,033
Loss from operations (11,196) (23,319) 12,123
Other income 1,832 34 1,798
Loss before income taxes (9,364) (23,285) 13,921
Provision for income taxes (2,906) (1,925) (981)
Net loss $ (12,270) $ (25,210) $ 12,940
Product Revenue, Net
We recognized net revenue from the sale of ARCALYST of $42.7 million for the
three months ended March 31, 2023, compared to $22.2 million for the three
months ended March 31, 2022, an increase of $20.5 million. The increase in
product revenue was primarily driven by an increase in patients.
License and Collaboration Revenue
We reported $5.7 million of license and collaboration revenue for the three
months ended March 31, 2023, related to the Genentech License Agreement,
compared to $10.0 million for the three months ended March 31, 2022, a decrease
of $4.3 million. This decrease in license and collaboration revenue was
primarily driven by the $10.0 million upfront payment recognized during the
three months ended March 31, 2022 upon the signing of the mavrilimumab
Collaboration Agreement in February of 2022 offset by the revenue recognized
during the three months ended March 31, 2023, related to the Genentech License
Agreement. We expect to recognize $12.0 million of deferred revenue related to
the rilonacept Huadong Collaboration Agreement over the life of the agreement as
materials are delivered and the remaining $6.7 million of the transaction price
still to be recognized related to the Genentech License Agreement over the life
of the in-progress Phase 2b prurigo nodularis clinical trial.
Cost of Goods Sold
We recognized cost of goods sold from the sale of ARCALYST of $7.0 million for
the three months ended March 31, 2023, compared to $4.2 million for the three
months ended March 31, 2022, an increase of $2.8 million. The increase in cost
of goods sold relates primarily to the increase in sales of ARCALYST. We expect
cost of goods sold to increase as we initiate and conduct a technology transfer
of the manufacturing process for ARCALYST drug substance.
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Collaboration Expenses
Collaboration expenses were $8.3 million for the three months ended
March 31, 2023 and 2022. Collaboration expenses increased due to increased
revenue from sales of ARCALYST offset by a $6.0 million expense related to the
rilonacept Huadong Collaboration Agreement recognized during the three months
ended March 31, 2022. We expect to continue to incur collaboration expenses
associated with sales of ARCALYST.
Research and Development Expenses
Three Months Ended
March 31,
2023 2022 Change
(in thousands)
Rilonacept (ARCALYST) $ 558 $ 1,857 $ (1,299)
KPL-404 3,446 2,205 1,241
Mavrilimumab (272) 3,512 (3,784)
Vixarelimab 2,047 2,805 (758)
Unallocated research and development expenses:
Personnel related (including share-based compensation) 6,413 6,970 (557)
Other
2,980 3,468 (488)
Total research and development expenses $ 15,172 $ 20,817 $ (5,645)
Research and development expenses were $15.2 million for the three months ended
March 31, 2023, compared to $20.8 million for the three months ended
March 31, 2022, a decrease of $5.6 million.
The direct costs for our ARCALYST program were $0.6 million during the
three months ended March 31, 2023, compared to $1.9 million during the three
months ended March 31, 2022, a decrease of $1.3 million. The expense reduction
for the three months ended March 31, 2023, is due to the limited remaining
close-out costs of the RHAPSODY trial, our global, pivotal Phase 3 clinical
trial in recurrent pericarditis. The expenses for the three months ended
March 31, 2022, related primarily to the long-term extension portion of the
RHAPSODY trial.
The direct costs for our KPL-404 program were $3.4 million during the three
months ended March 31, 2023, compared to $2.2 million during the three months
ended March 31, 2022, an increase of $1.2 million. The increase in expenses
incurred primarily related to the initiation cost of cohort three and
continuation of the first two cohorts of our Phase 2 trial in RA during the
three months ended March 31, 2023, as compared to initial cost of the first two
cohorts of our Phase 2 trial in RA, for the three months ended March 31, 2022.
The direct costs (credits) for our mavrilimumab program were ($0.3) million
during the three months ended March 31, 2023, compared to $3.5 million during
the three months ended March 31, 2022, or a decrease of $3.8 million. The
decrease in expenses incurred is primarily related to trial cost reductions
identified by our CRO in our Phase 3 clinical trial in COVID-19 related ARDS
during close-out reconciliations during the three months ended March 31, 2023,
compared to the wind-down activities of the Phase 3 clinical trial in COVID-19
related ARDS during the three months ended March 31, 2022.
The direct costs for our vixarelimab program were $2.0 million during the three
months ended March 31, 2023, compared to $2.8 million during the three months
ended March 31, 2022, a decrease of $0.8 million. Expenses incurred during the
three months ended March 31, 2023, were primarily related to our ongoing Phase
2b clinical trial in prurigo nodularis while during the three months ended
March 31, 2022, expenses were primarily related to the initiation of our Phase
2b clinical trial in prurigo nodularis.
Unallocated research and development expenses were $9.4 million for the three
months ended March 31, 2023, compared to $10.4 million for the three months
ended March 31, 2022, a decrease of $1.0 million. The decrease of $1.0 million
in unallocated research and development expenses was primarily due to a
reduction in late stage clinical trial
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activity. Personnel-related costs for the three months ended March 31, 2023 and
2022, included share-based compensation of $1.4 million and $2.0 million,
respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $29.0 million for the three
months ended March 31, 2023, compared to $22.2 million for the three months
ended March 31, 2022. The increase of $6.8 million was primarily due to an
increase of $4.5 million in personnel-related costs and $1.7 million in sales
and marketing costs related to the expansion of the salesforce.
Personnel-related costs for the three months ended March 31, 2023 and 2022,
included share-based compensation of $4.4 million and $3.9 million,
respectively.
Other Income
Other income was $1.8 million for the three months ended March 31, 2023 compared
to other income of less than $0.1 million for the three months ended March 31,
2022. The increase was primarily due to higher interest rates on U.S. Treasury
notes and a larger average balance in short term investments.
Provision for Income Taxes
For the three months ended March 31, 2023, we recorded an income tax provision
of $2.9 million relating primarily to income earned in the UK and the U.S., net
of the FDII deduction and R&D Credits utilized. For the three months ended March
31, 2022, we recorded an income tax provision of $1.9 million relating primarily
to the current tax expense due to income from our cost plus arrangements in the
United States, net of R&D Credits utilized. During the three months ended March
31, 2022, there was no UK tax provision because Kiniksa UK was in a net loss
position and had a full valuation allowance against its deferred tax asset. We
expect our UK current tax provision to be partially reduced by net operating
losses to the extent available. While we still maintain a full valuation
allowance on the U.S. deferred tax assets as of March 31, 2023, based on current
U.S. forecasted income, it is reasonably possible that the Company will release
its valuation allowance on its U.S. deferred tax assets within one year.
Liquidity and Capital Resources
As of March 31, 2023, our principal source of liquidity was cash, cash
equivalents and short-term investments, which totaled $187.5 million. Net loss
was $12.3 million and $25.2 million for the three months ended March 31, 2023
and 2022, respectively. We expect to incur operating losses for the foreseeable
future.
Under various agreements with third parties, we have agreed to make milestone
payments, pay royalties, annual maintenance fees and to meet due diligence
requirements, each based upon specified milestones. Under our license agreement
with Regeneron, we have entered into supply agreements to provide both clinical
and commercial product. We have committed to minimum payments to Regeneron of
$7.6 million, all of which are due within one year. We have entered into lease
agreements for office and laboratory space, and vehicles, with total future
lease payments of $5.9 million, of which $3.7 million are due within one year.
We expect to incur additional cash commitments as we conduct a technology
transfer of the manufacturing process for ARCALYST, drug substance.
Under various agreements with third parties, we are entitled to receive upfront
payments, milestone payments, and royalties, each based upon specified
milestones. In the first quarter of 2023, we received $20.0 million for delivery
of certain drug supplies as part of the Genentech License Agreement.
These agreements impact our short-term and long-term liquidity and capital
needs.
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Cash Flows
The following table summarizes our cash flows for each of the periods presented:
Three Months Ended
March 31,
2023 2022
(in thousands)
Net cash used in operating activities $ (4,267) $ (36,846)
Net cash used in investing activities (37,920) (22,723)
Net cash provided by financing activities
90 423
Net decrease in cash and cash equivalents $ (42,097) $ (59,146)
Operating Activities
During the three months ended March 31, 2023, operating activities used $4.3
million of cash which primarily consisted of our net loss of $12.3 million,
adjusted for non-cash items of $7.7 million and working capital decrease of $0.3
million. Non-cash items were comprised primarily of $6.1 million of stock based
compensation, offset by $1.1 million of amortization of premiums and accretion
of discounts on short-term investments. Working capital decreased primarily due
to a $7.7 million decrease in contract assets, a $6.7 million increase in
deferred revenue both related to the $20.0 million received as part of the
Genentech License Agreement and a $5.2 million decrease in accounts receivable,
offset by a $10.6 million decrease in accrued expenses attributable to a lower
level of late stage clinical trials and $6.5 million decrease in accounts
payable attributable to timing of inventory purchases.
During the three months ended March 31, 2022, operating activities used $36.8
million of cash, primarily resulting from our net loss of $25.2 million as well
as net cash used by our operating assets and liabilities of $19.2 million offset
by non-cash charges of $7.6 million. Net cash used by our operating assets and
liabilities for the three months ended March 31, 2022, consisted primarily of a
$25.5 million increase in account receivable primarily due to the Huadong
Collaboration Agreements, a $9.5 million increase in inventory and a $3.9
million increase in prepaid expenses and other current assets, offset by an
increase of $12.0 million in deferred revenue as a result of the Rilonacept
Huadong Collaboration Agreement, and a $4.1 million increase in accrued expenses
and other current liabilities as a result of the upfront payment profit share of
the Huadong Collaboration Agreement with Regeneron.
Investing Activities
During the three months ended March 31, 2023, investing activities used $37.9
million of cash, primarily consisting of $52.9 million of purchases of
short-term investments, offset by $15.0 million of maturities of short-term
investments.
During the three months ended March 31, 2022, investing activities used $22.7
million of cash, consisting of $30.2 million of purchases of short-term
investments, offset by $7.5 million of maturities of short-term investments.
Financing Activities
During the three months ended March 31, 2023 and 2022, net cash provided by
financing activities was $0.1 million and $0.4 million, respectively, consisting
of proceeds from the exercise of share options.
Funding Requirements
We expect to incur significant expenses in connection with our ongoing and
planned activities as we continue to commercialize ARCALYST and advance our
current and future product candidates through preclinical and clinical
development, seek regulatory approval and commercialize one or more of our
current or future product candidates, if approved. In addition, if we obtain
marketing approval for any of our current or future product candidates, we
expect to incur significant additional commercialization expenses related to
such activities. We may also incur expenses in
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connection with the in-licensing or acquisition of additional product
candidates. As a result, we expect to incur additional expenses related to
milestone, royalty and other payments payable to third parties with whom we have
entered into license, acquisition and other similar agreements to acquire the
rights to our product candidates. Additionally, we expect to continue to incur
costs associated with operating as a public company, including significant
legal, accounting, investor relations and other expenses. We expect to incur
expenses as we:
? conduct our current and planned clinical trials for our current and future
product candidates;
increase clinical and commercial manufacturing capabilities, make arrangements
? with additional third party manufacturers to successfully manufacture our
products and product candidates and perform activities related to our
technology transfer of the manufacturing process for ARCALYST drug substance;
? develop and timely deliver clinical grade and commercial grade product
formulations that can be used in our clinical trials and for commercial sale;
? seek regulatory approvals for any product candidates that successfully complete
clinical trials;
maintain, establish, and/or expand a sales, marketing, medical affairs and
? distribution infrastructure to commercialize ARCALYST or any of our current or
future product candidates for which we may obtain marketing approval and intend
to commercialize on our own;
? launch commercial sales of any of our current or future product candidates, if
and when approved, whether alone or in collaboration with others;
? make milestone or other payments under any current or future license,
acquisition, collaboration or other strategic transaction agreements;
expand our operational, financial and management systems and increase personnel
? globally to support our clinical development, manufacturing and
commercialization efforts and our operations as a public company;
? maintain, expand and protect our intellectual property portfolio; and
? in-license or acquire other product candidates and technologies or their
related businesses if we determine to do so.
We believe that our existing cash, cash equivalents and short-term investments
will enable us to fund our operating expenses and capital expenditure
requirements for at least the next 12 months. The future viability of our
company is dependent on our ability to fund our operations through sales of
ARCALYST and/or raise additional capital, such as through debt or equity
offerings, as needed. We anticipate that we may require additional capital if we
choose to pursue in-licenses or acquisitions of other product candidates and
technologies or their related businesses. We expect to continue to incur
significant expenses related to product manufacturing, sales, marketing and
distribution of ARCALYST. In addition, if we obtain regulatory approval for any
of our current or future product candidates, pursue additional indications or
additional territories for our products or any of our current or future product
candidates, we expect to incur significant expenses related to product
development and manufacturing, sales, marketing and distribution, depending on
where we choose to commercialize.
Because of the numerous risks and uncertainties associated with research,
development and commercialization of biologic products, we are unable to
estimate the exact amount of our working capital requirements. Our future
funding requirements may be impacted by a number of factors, including those
described in Part II, Item 1A. "Risk Factors" in this Quarterly Report.
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Until such time, if ever, as we can generate substantial and sustained product
revenue, we expect to finance our cash needs through a combination of public or
private equity offerings, debt financings, or other sources, including,
licensing, collaboration, marketing, distribution or other strategic
transactions or arrangements with third parties. To the extent that we raise
additional capital through the sale of equity or convertible debt securities,
our shareholders' ownership interest may be materially diluted, and the terms of
such securities could include liquidation or other preferences that adversely
affect our shareholders' rights as a common shareholder. Debt financing and
preferred equity financing, if available, may involve agreements that include
restrictive covenants that limit our ability to take specified actions, such as
incurring additional debt, making capital expenditures or declaring dividends.
In addition, debt financing would result in fixed payment obligations.
If we raise funds through licensing, collaboration, marketing, distribution or
other strategic transactions or arrangements with third parties, we may have to
relinquish valuable rights to our technologies, product candidates or future
revenue streams, or otherwise agree to terms that may not be favorable to us. If
we are unable to obtain funding, we could be forced to delay, reduce or
eliminate some or all of our research and development programs for product
candidates, product portfolio expansion or commercialization efforts, which
could adversely affect our business prospects, or we may be unable to continue
operations.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States. The preparation of our
consolidated financial statements and related disclosures requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue, costs and expenses, and the disclosure of contingent assets and
liabilities in our financial statements. We base our estimates on historical
experience, known trends and events and various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. We evaluate our estimates and
assumptions on an ongoing basis. Our actual results may differ from these
estimates under different assumptions or conditions.
Our critical accounting policies are described under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Significant Judgments and Estimates"
in the Annual Report and the notes to the consolidated financial statements
included in Item 1, "Financial Statements (Unaudited)" included in this
Quarterly Report. We believe that of our critical accounting policies, the
following accounting policies involve the most judgment and complexity:
? accrued research and development expenses;
? revenue recognition; and
? realizability of deferred tax assets.
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