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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 186 added, 242 removed, 195 unchanged (69% of the section changed)

1 unchanged sentence

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, or Annual Report.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve risks and uncertainties.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve risks and uncertainties.

As a result of many factors, including those factors set forth in the risks identified in Part I-Item 1A “Risk Factors” section of this Annual Report and our other filings with the Securities and Exchange Commission, or SEC, our actual results could differ materially from the results, performance or achievements expressed in or implied by these forward-looking statements.

We are a biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutic medicines for patients with significant unmet medical need.

Our product candidates, rilonacept, mavrilimumab, vixarelimab and KPL-404, are based on strong biologic rationale or validated mechanisms, target underserved conditions and offer the potential for differentiation.

This pipeline of product candidates are designed to modulate immunological pathways across a spectrum of diseases.

Rilonacept is a protein cytokine trap for inhibiting interleukin-1alpha, or IL-1α, and interleukin-1beta, or IL-1β.

We are a global biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutic medicines for patients suffering from debilitating diseases with significant unmet medical need.

Our portfolio of assets, ARCALYST® (rilonacept), mavrilimumab, vixarelimab and KPL-404, are based on strong biologic rationale or validated mechanisms, target underserved conditions, and offer the potential for differentiation.

These assets are designed to modulate immunological pathways across a spectrum of diseases.

ARCALYST is an interleukin-1α and interleukin-1β cytokine trap.

Cytokines are small proteins that play a role in cell signaling.

Rilonacept was discovered and developed by Regeneron Pharmaceuticals, Inc., or Regeneron, and is approved by the U.S.

Food and Drug Administration, or FDA, under the brand name ARCALYST for the treatment of CAPS, specifically familial cold autoinflammatory syndrome and muckle-wells syndrome, and for the treatment of deficiency of IL-1 receptor antagonist, or DIRA.

We licensed rilonacept from Regeneron in 2017.

We are initially developing rilonacept for the potential treatment of recurrent pericarditis, a painful inflammatory cardiovascular disease with an estimated U.S.

We licensed ARCALYST from Regeneron, who discovered and initially developed the drug, in 2017.

Our exclusive license to ARCALYST from Regeneron includes worldwide rights, excluding the Middle East and North Africa, for all applications other than those in oncology and local administration to the eye or ear.

We received FDA approval of ARCALYST for the treatment of recurrent pericarditis and reduction in risk of recurrence in adults and children 12 years and older in March 2021.

Recurrent pericarditis is a painful inflammatory cardiovascular disease with an estimated U.S.

prevalent population of approximately 40,000 patients seeking and receiving medical treatment.

Currently there is no FDA-approved therapy for the treatment of recurrent pericarditis.

We received Breakthrough Therapy designation from the FDA for rilonacept for the treatment of recurrent pericarditis in 2019 and Orphan Drug designation from the FDA for rilonacept for the treatment of pericarditis, which includes the treatment of recurrent pericarditis, in 2020.

In June 2020, we reported final results from RHAPSODY, our global, double-blind, placebo-controlled, randomized-withdrawal design, pivotal Phase 3 clinical trial of rilonacept in subjects with recurrent pericarditis.

RHAPSODY met its prescribed primary and all major secondary efficacy endpoints with statistical significance, showing that rilonacept improved clinically meaningful outcomes associated with unmet medical need in recurrent pericarditis.

RHAPSODY data were also published in The New England Journal of Medicine simultaneously with a late-breaking scientific presentation at the American Heart Association’s Scientific Sessions 2020.

The FDA accepted the supplemental Biologics License Application, or sBLA, for rilonacept in recurrent pericarditis and assigned a Prescription Drug User Fee Act, or PDUFA, goal date of March 21, 2021 with priority review.

If approved by the FDA for recurrent pericarditis, we expect the potential commercial launch of rilonacept in recurrent pericarditis in the first half of 2021 and consequently would take responsibility for sales and distribution of rilonacept for all approved indications in the United States and evenly split profits on sales with Regeneron, after deducting certain commercialization expenses subject to specified limits.

Mavrilimumab is a fully-human monoclonal antibody that antagonizes granulocyte-macrophage colony stimulating factor, or GM-CSF.

We licensed mavrilimumab from MedImmune Limited, or MedImmune, in 2017.

We are evaluating mavrilimumab for the potential treatment of giant cell arteritis, or GCA, a chronic inflammatory disease of the medium-to-large arteries with an estimated U.S.

ARCALYST is commercially available through a distribution network of specialty pharmacies, which provide access across the United States.

ARCALYST is also approved in the United States for the treatment of CAPS in adults and children 12 years and older, and the maintenance of remission in DIRA in adults and children weighing 10 kg or more.

We are responsible for sales and distribution of ARCALYST in all approved indications in the United States, and evenly split profits on sales with Regeneron.

In the fourth quarter of 2021, our ARCALYST franchise achieved profitability after three quarters of commercial availability for recurrent pericarditis.

In February 2022, we granted Huadong exclusive rights to develop and commercialize ARCALYST in the Asia Pacific region, excluding Japan.

Mavrilimumab is an investigational monoclonal antibody inhibitor targeting GM-CSFRα.

In 2017, we licensed exclusive worldwide rights in all indications to mavrilimumab from MedImmune.

We plan to focus mavrilimumab development on cardiovascular diseases where the GM-CSF mechanism has been implicated and that have synergies with our existing commercial infrastructure.

In parallel, we may also explore the use of mavrilimumab through research collaborations in other development areas.

We have also been evaluating mavrilimumab in COVID-19-related ARDS.

In December 2021, we announced that the Phase 3 portion of the global double-blind, placebo-controlled Phase 2/3 clinical trial did not meet its primary efficacy endpoint.

We subsequently decided to not progress mavrilimumab in the COVID-19-related ARDS indication, although we are continuing the Phase 3 portion of the clinical trial through its completion date.

We previously evaluated mavrilimumab in GCA, a chronic inflammatory disease of the medium-to-large arteries with an estimated U.S.

prevalence of approximately 75,000 to 150,000 patients.

There is only one FDA-approved therapy for GCA, which is an adjunct to corticosteroid therapy, and

we believe that an unmet need persists.

We received Orphan Drug designation from the FDA for mavrilimumab for the treatment of GCA in 2020.

In November 2020, we presented results from our randomized, double-blind, placebo-controlled, global Phase 2 proof-of-concept trial of mavrilimumab in subjects with GCA at the late-breaking abstracts session during the American College of Rheumatology Convergence 2020.

The Phase 2 trial met both its prescribed primary and secondary efficacy endpoints with statistical significance.

In addition, while the trial was not powered for individual disease cohorts, there was a consistent trend of efficacy across the new onset and relapsing/refractory cohorts.

Mavrilimumab was well-tolerated in the Phase 2 trial;

there were no drug-related serious adverse events, and the rates of drug-related treatment-emergent adverse events between mavrilimumab recipients and placebo recipients were similar.

Data from the Phase 2a trial were presented at the European Academy of Dermatology and Venereology Virtual Congress in 2020.

We are also evaluating mavrilimumab for the potential treatment of severe coronavirus 2019 disease, or COVID-19, pneumonia and hyperinflammation.

In June 2020, we announced 28-day clinical outcomes from an open-label investigator-initiated treatment protocol with mavrilimumab conducted in Italy in 13 non-mechanically ventilated patients with severe COVID-19 pneumonia and hyperinflammation.

Mavrilimumab-treated patients experienced earlier and improved clinical outcomes compared to control-group patients, including earlier weaning from supplemental oxygen, shorter hospitalizations, and no deaths.

These data were published in The Lancet Rheumatology.

In December 2020, we reported results from a randomized, double-blind, placebo-controlled investigator-initiated study in the same patient population across a consortium of academic sites in the United States showing encouraging trends of reduced mortality and duration of mechanical ventilation in patients treated with mavrilimumab on top of standard of care therapy.

There was no difference in serious adverse events between the mavrilimumab arm and the placebo arm in the investigator-initiated study.

We are conducting a global, randomized, double-blind, placebo-controlled Phase 2/3 clinical trial of mavrilimumab in severe COVID-19 pneumonia and hyperinflammation.

We expect to provide data from the Phase 2 portion of the trial in the first half of 2021.

We expect to provide next steps for mavrilimumab, including in GCA, in the first half of 2021.

Vixarelimab is a fully-human monoclonal antibody that simultaneously inhibits the signaling of the cytokines interleukin 31 and oncostatin M by targeting their common receptor subunit, oncostatin M receptor beta.

We believe vixarelimab is the only monoclonal antibody in development that simultaneously targets both pathways.

We licensed vixarelimab from Biogen MA, Inc., or Biogen, in 2016.

We are evaluating vixarelimab for the potential treatment of prurigo nodularis, a chronic inflammatory skin condition with an estimated U.S.

In October 2020, we announced that our Phase 2 proof-of-concept clinical trial for the study of mavrilimumab in GCA achieved both its primary and secondary efficacy endpoints with statistical significance.

In September 2020, the FDA granted Orphan Drug designation for mavrilimumab for the treatment of GCA.

In February 2022, we announced that we do not plan to initiate a Phase 3 trial of mavrilimumab in GCA.

In February 2022, we granted Huadong exclusive rights to develop and commercialize mavrilimumab in the Asia Pacific region, excluding Japan.

Vixarelimab is an investigational monoclonal antibody inhibitor of signaling through OSMRβ.

We acquired worldwide rights to vixarelimab in all indications from Biogen in 2016.

We are evaluating vixarelimab for the potential

treatment of prurigo nodularis, a chronic inflammatory skin condition with an estimated U.S.

prevalence of approximately 300,000 patients.

We received Breakthrough Therapy designation for vixarelimab for the treatment of pruritus associated with prurigo nodularis in 2020.

In April 2020, we reported results from our randomized, double-blind, placebo-controlled Phase 2a trial of vixarelimab in prurigo nodularis.

The Phase 2a trial met its primary efficacy endpoint, as there was a statistically significant reduction in weekly-average Worst-Itch Numeric Rating Scale, or WI-NRS, from baseline at Week 8 in vixarelimab recipients compared to placebo recipients.

In addition, the majority of vixarelimab recipients showed a clinically meaningful greater-than-or-equal-to 4-point weekly-average WI-NRS reduction at Week 8 and a statistically significant percentage of vixarelimab recipients achieved a prurigo nodularis-investigator’s global assessment score of 0/1 at Week 8 compared to placebo recipients.

We are conducting a randomized, double-blind, placebo-controlled Phase 2b dose ranging study designed to investigate the efficacy, safety, and pharmacokinetics of vixarelimab in patients with prurigo nodularis.

KPL-404 is a humanized monoclonal antibody that is designed to inhibit the CD40-CD40 ligand, or CD40L, interaction, a central control node of T-cell-dependent, B-cell-mediated humoral adaptive immunity.

We believe that disrupting the CD40-CD40L interaction is an attractive approach for multiple autoimmune disease pathologies such as rheumatoid arthritis, Sjogren’s syndrome, Graves’ disease, systemic lupus erythematosus and solid organ transplant graft rejection.

We acquired all of the outstanding securities of Primatope Therapeutics, Inc., or Primatope, the company that owned or controlled the intellectual property related to KPL-404 in 2019.

We are conducting a randomized, double-blind, placebo-controlled single-ascending-dose Phase 1 clinical trial of KPL-404 in healthy volunteers to evaluate the safety and tolerability of KPL-404 as well as to pharmacokinetics, CD40 receptor occupancy, the immune response to the novel test antigen keyhole limpet hemocyanin, or KLH, in clinically relevant dose cohorts, and T-cell dependent antibody response, or TDAR, in these subjects.

divided into two parts:

a single dose of KPL-404 0.03 mg/kg, 0.3 mg/kg, 1 mg/kg, 3 mg/kg or 10 mg/kg intravenously, or IV, and a single dose of KPL-404 1 mg/kg or 5 mg/kg subcutaneously, or SC.

In November 2020, we reported preliminary data from the Phase 1 trial.

All dose escalations occurred as per protocol with no dose limiting safety findings.

All 6 subjects dosed with KPL-404 3 mg/kg IV showed full receptor occupancy through Day 29, which corresponded with complete suppression of TDAR to KLH through Day 29.

Consistent dose relatedness was shown in the lower dose level cohorts, including 0.03 mg/kg, 0.3 mg/kg, 1 mg/kg IV and 1 mg/kg SC.

We believe that these data support subsequent study in patients, including potential IV or SC monthly administration.

Further, we expect final data and safety follow-up from all cohorts of the Phase 1 trial in the first half of 2021.

Our future success is dependent on our ability to develop, obtain regulatory approval for and successfully commercialize one or more of our product candidates.

The FDA accepted the sBLA for rilonacept in recurrent pericarditis with priority review and assigned a PDUFA goal date of March 21, 2021.

Upon approval from the FDA, if any, of the commercial marketing of rilonacept in the United States for recurrent pericarditis, we will assume the sales and distribution of rilonacept for the approved indications in the United States and would evenly split profits on sales with Regeneron, after deducting certain commercialization expenses subject to specified limits.

However, we have not yet demonstrated our ability to successfully obtain regulatory approvals, manufacture a commercial scale drug, or conduct sales and marketing activities.

We currently generate no revenue from sales of any products, and we may never be able to develop or commercialize a marketable product.

On February 4, 2019, we completed a follow-on offering of 2,654,984 Class A common shares and concurrent private placement of 2,000,000 Class A1 common shares, both at $18.26 per share for aggregate gross proceeds of $85.0 million.

In addition, on March 1, 2019, we completed the sale of 161,126 Class A common shares to the underwriters of the follow-on offering following the exercise in part of their option to purchase additional shares at $18.26 per share for gross proceeds of $2.9 million.

The aggregate net proceeds to us from the follow-on offering and concurrent private placement, inclusive of the option exercise, was $83.0 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs.

On May 18, 2020, we completed a follow-on offering of 2,760,000 Class A common shares, inclusive of the exercise of the underwriters’ option to purchase additional shares at a public offering price of $18.25 and a concurrent private placement of 1,600,000 Class A1 common shares at an offering price of $18.25 per share for aggregate gross proceeds of $79.6 million.

The aggregate net proceeds to us from the follow-on offering and concurrent private placement, inclusive of the option exercise, was $74.5 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs.

On July 24, 2020, we completed a follow-on offering of 5,952,381 Class A common shares, at a public offering price of $21.00 and a concurrent private placement of 1,428,572 Class A1 common shares at an offering price of $21.00 per share for aggregate gross proceeds of $155.0 million.

The aggregate net proceeds to us from the follow-on offering and concurrent private placement was $146.0 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs.

In April 2020, we announced that our Phase 2a trial of vixarelimab in prurigo nodularis achieved its primary and secondary efficacy endpoints.

In November 2020, the FDA granted Breakthrough Therapy designation for vixarelimab for the treatment of pruritus associated with prurigo nodularis.

We are conducting a global, randomized, double-blind, placebo-controlled Phase 2b dose-ranging clinical trial of vixarelimab in prurigo nodularis.

This trial is designed to investigate efficacy, safety and pharmacokinetics.

We expect to report top-line data from this trial in the second half of 2022.

KPL-404 is an investigational monoclonal antibody inhibitor of CD40-CD154 interaction.

In 2019, we acquired all of the outstanding securities of Primatope, the company that owned or controlled the intellectual property related to KPL-404.

In connection with our acquisition of Primatope, we acquired an exclusive world-wide license to KPL-404 from BIMDC.

The CD40-CD154 interaction is a key T-cell co-stimulatory signal critical for B-cell maturation, immunoglobulin class switching and Type 1 immune response.

We believe disrupting the CD40-CD154 interaction is an attractive approach to address multiple autoimmune disease pathologies such as RA, Sjogren’s syndrome, Graves’ disease, systemic lupus erythematosus and solid organ transplant graft rejection.

In May 2021, we announced positive final data from our Phase 1 clinical trial of KPL-404 in healthy volunteers, which evaluated safety and pharmacokinetics, as well as RO and TDAR.

In December 2021, we initiated a Phase 2 proof-of-concept clinical trial of KPL-404 in rheumatoid arthritis, which is designed to enable its potential development in a spectrum of autoimmune diseases believed to be mediated by the CD40-CD154 co-stimulatory interaction.

The trial will evaluate pharmacokinetics, safety and efficacy of KPL-404 with subcutaneous administration.

In January 2022, we provided KPL-404 to the University of Maryland School of Medicine, as part of an experimental immunosuppressive regimen in connection with a transplant of a genetically-modified pig heart into an adult human with end-stage heart disease who was not eligible for a standard allogeneic heart transplant.

Our future success is dependent on our ability to continue to commercialize ARCALYST and to develop, obtain regulatory approval for and successfully commercialize one or more of our current or future product candidates.

Upon approval from the FDA of the commercial marketing of ARCALYST in the United States for the treatment of recurrent pericarditis and reduction in risk of recurrence in adults and children 12 years and older in March 2021, we assumed the sales and distribution of ARCALYST for the previously approved indications in the United States and will evenly split profits on ARCALYST sales with Regeneron.

However, as a company we have limited experience obtaining marketing approval for product candidates, commercializing a therapeutic, supporting sales, marketing, and distribution activities and maintaining applicable infrastructure for these activities either directly and/or through agreements with third parties;

as a result we may not be able to continue to commercialize ARCALYST or successfully commercialize any future approved product candidates, if any, thus potentially impairing the commercial potential of ARCALYST and our other product candidates.

We have incurred significant operating losses since inception.

Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates.

Our ability to generate product revenue sufficient to achieve corporate profitability will depend heavily on the continued commercialization of ARCALYST and the development and eventual commercialization of one or more of our current or future product candidates, if approved.

In the fourth quarter of 2021, our ARCALYST franchise achieved profitability, though such profits remain small compared to our total net losses.

Our net losses were $157.9 million and $161.4 million for the years ended December 31, 2021 and 2020, respectively.

As of December 31, 2021, we had an accumulated deficit of $675.4 million.

We expect to continue to incur significant operating losses for at least the next several years as we advance our product candidates through preclinical and clinical development, manufacture our product candidates for clinical or commercial use, and, ultimately, seek regulatory approval.

In addition, if we obtain marketing approval for any of our product candidates, including rilonacept, we expect to continue to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution.

We expect to continue to incur significant operating losses as we advance our product candidates through preclinical and clinical development and, ultimately, seek regulatory approval.

In addition, we expect to continue to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution of ARCALYST.

We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates.

As a result, until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through public or private securities offerings, debt financings or other sources, which may include licensing, collaborations or other strategic transactions or arrangements, and a lesser extent through projected revenue

from rilonacept if approved in recurrent pericarditis or any of our other product candidates .

As a result, until such time as we can generate significant and sustained revenue from product sales of ARCALYST and one or more of our current or future approved product candidates, if ever, we expect to finance our operations through a combination of sales of ARCALYST, raising additional capital such as through debt or equity offerings or through other sources, which may include licensing, collaborations or other strategic transactions or arrangements.

We may be unable to raise additional funds or enter into such other transactions or arrangements when needed on favorable terms, or at all.

If we fail to raise capital or enter into such transactions or arrangements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk.

Typically, it takes many years to develop one new product from the time it is discovered to when it is available for treating patients, and development may cease for a number of reasons.

Because of the numerous risks and uncertainties associated with product development, including any impact from the COVID-19 pandemic, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability.

Even if we are able to generate product sales, we may not become profitable.

If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

If we fail to raise capital or enter into such transactions or arrangements as and when needed, we may have to significantly delay, scale back or discontinue the development of one or more of our

current or future product candidates, delay our pursuit of potential in-licenses or acquisitions or scale back on commercialization activities for ARCALYST.

Even if we are able to continue to commercialize ARCALYST and generate product sales from one or more of our current or future product candidates, if approved, we may not become profitable.

If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of December 31, 2021, we had cash, cash equivalents and short-term investments of $182.2 million.

We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance of the consolidated financial statements included in this Annual Report.

We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance of the audited consolidated financial statements included in this Annual Report.

We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

See “— Liquidity and Capital Resources.” Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations.

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

To date, we have not generated any revenue from any products, and may never be able to develop and commercialize a marketable product.

If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales.

The FDA accepted the sBLA for rilonacept in recurrent pericarditis with priority review and assigned a PDUFA goal date of March 21, 2021.

Upon approval from the FDA, if any, of the sBLA, we will assume the sales and distribution of rilonacept for the approved indications in the United States and would evenly split profits on sales with Regeneron, after deducting certain commercialization expenses subject to specified limits.

Product revenue, net

Following the FDA approval of ARCALYST in March 2021, we began generating product revenue from sales of ARCALYST in April 2021.

ARCALYST is sold through a third party logistics provider that distributes primarily through a network of authorized specialty pharmacies and specialty distributors (collectively, “customers”), which deliver the medication to patients by mail.

Net revenue from product sales is recognized at the transaction price when the specialty pharmacy or specialty distributors obtains control of our product, which occurs at a point in time, typically upon shipment of the product from the third party logistics provider.

Our net revenues represent total revenues adjusted for discounts and allowances, including estimated cash discounts, chargebacks, rebates, returns, copay assistance, and specialty pharmacy and distributor fees.

These adjustments represent variable consideration under ASC 606 and are estimated using the expected value method and are recorded when revenue is recognized on the sale of the product.

These adjustments are established by management as its best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances.

Adjustments for variable consideration are determined based on the contractual terms with customers, historical trends, communications with customers and the levels of inventory remaining in the distribution channel, as well as expectations about the market for the product and anticipated introduction of competitive products.

Operating Expenses

Cost of Goods Sold

Cost of goods sold includes production and distribution costs of ARCALYST, and amortization of the regulatory milestone, and other miscellaneous product costs associated with ARCALYST.

Cost of goods sold also includes the allocations for the labor and overhead costs associated with the production of ARCALYST associated with quality control, quality assurance, and supply chain activities.

Collaboration expenses

Collaboration expenses consists of Regeneron’s share of the profit related to ARCALYST sales under the Regeneron Agreement.

We evenly split profits on sales of ARCALYST with Regeneron, where profits are determined after deducting from net sales of ARCALYST certain costs related to the manufacturing and commercialization of ARCALYST.

Such costs include but are not limited to (i) our cost of goods sold for product used, sold or otherwise distributed for patient use by us;

(ii) customary commercialization expenses, including the cost of our field force, and (iii) our cost to market, advertise and otherwise promote ARCALYST, with such costs identified in subsection (iii) subject to specified limits.

In addition, should there be a transfer of technology related to the manufacture of ARCALYST, then, to the extent permitted in accordance with the Regeneron Agreement, the fully-burdened costs of each of us and Regeneron incurred in performing (or having performed) such technology transfer shall also be deducted from net sales of ARCALYST to determine profit.

We also evenly split with Regeneron any proceeds received by us from any licensees, sublicensees and distributors in consideration for the sale, license or other disposition of rights with respect to ARCALYST, including upfront payments, milestone payments and royalties.

Research and Development Expenses

3 unchanged sentences

● expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval;

● expenses incurred under agreements with contract research organizations, or CROs, that are primarily engaged in the oversight and conduct of our clinical trials and contract manufacturing organizations, or CMOs, that are primarily engaged to provide preclinical and clinical drug substance and product for our research and development programs for our product candidates;

● 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;

2 unchanged sentences

● costs related to compliance with regulatory requirements;

● allocated facilities-related costs, depreciation and other expenses, which include rent and utilities.

● 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.

3 unchanged sentences

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.

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 activities as well as for managing our preclinical and clinical development, process development and manufacturing activities.

The table below summarizes our research and development expenses incurred by program:

Increase/(Decrease)

(in thousands)

(in thousands, except percentages)

Rilonacept (1)

Mavrilimumab (2)

Vixarelimab (3)

Unallocated research and development expenses

Total research and development expenses

The amount for the year ended December 31, 2020 includes $7.5 million related to a milestone payment for the achievement of a specified regulatory milestone event due under the Regeneron License Agreement.

The amount for the year ended December 31, 2018 includes $5.0 million related to a pass-through payment due upon the achievement of a specified clinical milestone event due under our license agreement with MedImmune.

The amount for the year ended December 31, 2019 includes expense of $10.0 million related to an accrued milestone under our asset purchase agreement with Biogen associated with the achievement of a specified clinical milestone event .

The amount for the year ended December 31, 2019 includes expense of $18.0 million related to our acquisition of outstanding securities of Primatope and milestone achievements, paid in a combination of cash and Class A common shares (inclusive of escrow and holdback share amounts) in accordance with the stock purchase option agreement with Primatope, or the Primatope Agreement.

The amount for the year ended December 31, 2018 includes expense of $0.8 million related to the extension of the option period under the Primatope Agreement.

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 rilonacept, mavrilimumab, vixarelimab and KPL-404, as well as conduct other preclinical and clinical development, and make regulatory filings for our product candidates.

As a result, our related personnel costs will increase, including costs associated with share-based compensation.

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.

The FDA accepted the sBLA for rilonacept in recurrent pericarditis with priority review and assigned a PDUFA goal date of March 21, 2021.

However, we have not yet demonstrated our ability to successfully obtain regulatory approvals, manufacture a commercial scale drug, or conduct sales and marketing activities.

As such, the successful development and commercialization of rilonacept and our other product candidates is highly uncertain.

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 our product candidates or when, if ever, material net cash inflows may commence from any of our product candidates, including rilonacept if approved.

This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

● the potential impact of the COVID-19 pandemic on our business, including our preclinical studies, clinical trials, regulatory actions, commercials launch activities and operations;

● the scope, progress, outcome and costs of our research and preclinical development activities, clinical trials and other development activities;

● establishing an appropriate safety and efficacy profile with IND enabling and clinical studies;

● the successful enrollment and initiation, performance and completion of preclinical studies and clinical trials;

● the timing, receipt and terms of any marketing approvals from applicable regulatory authorities, including the FDA;

● the extent of any required post-marketing approval commitments to applicable regulatory authorities;

● increasing clinical and commercial manufacturing capabilities or making arrangements with additional third-party manufacturers to successfully manufacture our product candidates;

● development and timely delivery of clinical-grade and commercial-grade drug formulations that can be used in our clinical trials and for commercial launch;

● establishing a sales, marketing and distribution infrastructure to commercialize products for which we may obtain marketing approval;

● launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others;

● making milestone or other payments under any current or future license, acquisition, collaboration or other strategic transaction agreements;

● obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

● significant and changing government regulation;

● maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates.

At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of our current or future product candidates or when, if ever, we will realize significant revenue from product sales or be profitable.

This uncertainty is due to the numerous risks and uncertainties, including those described in Part I, Item 1A.

“Risk Factors” in this Annual Report.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and benefits, travel and share-based compensation expense for personnel in executive, business development, finance, human resources, legal, pre-commercial and support personnel functions.

Selling, general and administrative expenses consist primarily of salaries and benefits, travel and share based compensation expense for personnel in selling, marketing, medical, executive, business development, finance, human resources, legal and support personnel functions.

Selling, general and administrative expenses also include insurance and professional fees for legal, patent, consulting, accounting and audit services.

We expect that our selling, general and administrative expenses will continue to increase in the future as we continue to prepare for potential commercialization activities and increase our headcount to support our business objectives.

We also anticipate that we will continue to incur significant costs associated with being a public company, including accounting, audit, legal, compliance and director and officer insurance costs as well as investor and public relations expenses, and that such costs will increase over time especially as we are a large accelerated filer and are no longer permitted to rely on exemptions from certain requirements that are applicable to public companies that are not emerging growth companies or smaller reporting companies.

We expect that our selling, general and administrative expenses will continue to increase in the future as we continue to perform commercialization and sales activities.

We also anticipate that we will continue to incur significant costs, including accounting, audit, legal, compliance and director and officer insurance costs as well as investor and public relations expenses, and that such costs will increase over time as the company continues to expand.

Interest Income

Interest income consists of income recognized from investments in money market funds and U.S.

Treasury notes.

Treasury notes offset by expenses related to investments.

As an exempted company incorporated under the laws of Bermuda, we are principally subject to taxation in Bermuda.

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Our wholly owned U.S.

subsidiaries, Kiniksa Pharmaceuticals Corp., or Kiniksa U.S., and Primatope are subject to federal and state income taxes in the United States.

Our wholly owned subsidiary Kiniksa Pharmaceuticals (UK), Ltd., 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.

subsidiaries, Kiniksa US, and Primatope are subject to federal and state income taxes in the United States.

Our wholly owned subsidiary Kiniksa UK, and its wholly owned subsidiaries, Kiniksa Pharmaceuticals (Germany) GmbH, Kiniksa Pharmaceuticals (France) SARL, and Kiniksa Pharmaceuticals GmbH are subject to taxation in their respective countries.

Our provision for income taxes relates mainly to U.S.

taxable income, generated by our wholly owned subsidiary Kiniksa US.

If rilonacept is approved by the FDA for the treatment of recurrent pericarditis in the United States, the commercial launch will be made out of Kiniksa UK.

In connection with its launch readiness activities, the Company transferred all of its rights, title and interest in, among other things, certain contracts (including the Regeneron Agreement), intellectual property rights, product filings and approvals and other information, plans and materials owned or controlled by the Company insofar as they related exclusively or primarily to rilonacept to Kiniksa UK in January 2021 pursuant to an asset transfer agreement between the Company and Kiniksa UK for the consideration described therein.

The Company transferred all of its rights, title and interest in, among other things, certain contracts (including the Regeneron Agreement), intellectual property rights, product filings and approvals and other information, plans and materials owned or controlled by the Company insofar as they related exclusively or primarily to ARCALYST to Kiniksa UK in January 2021 pursuant to an asset transfer agreement between the Company and Kiniksa UK for the consideration described therein.

As of December 31, 2021 and 2020, we had federal research and development tax credit carryforwards of approximately $1.5 million and $1.4 million respectively, available to reduce future tax liabilities, which begin to expire in 2041.

As of December 31, 2020 and 2019, we had state research and development tax credit carryforwards of approximately $0.8 million and $0.3 million respectively, available to reduce future tax liabilities, which begin to expire in 2035.

As of December 31, 2021 and 2020, we had state research and development tax credit carryforwards of approximately $0.3 million and $0.8 million respectively, available to reduce future tax liabilities.

Results of Operations

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(in thousands, except percentages)

Product revenue, net

Operating expenses:

Cost of goods sold

Collaboration expenses

Research and development

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(Provision) benefit for income taxes

Product Revenue, Net

Following the FDA approval of ARCALYST in March 2021, we began generating product revenue from sales of ARCALYST in April 2021.

We recognize product revenue, net of ARCALYST at the transaction price when the specialty pharmacy or specialty distributors obtains control of our products, which typically occurs upon shipment of the product from the third party logistics provider.

We recognized net revenue from the sale of ARCALYST of $38.5 million for the year ended December 31, 2021.

Cost of goods sold

Upon the first sale commencing in April 2021, we began generating cost of goods sold associated with the sales of ARCALYST.

We recognized cost of goods sold from the sale of ARCALYST of $9.1 million for the year ended December 31, 2021, which includes $0.8 million for the amortization of the regulatory milestone.

During the year ended December 31, 2021, we sold the remaining relabeled ARCALYST product previously acquired to support the clinical trials which carried zero cost.

Research and Development Expenses

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Research and development expenses were $99.3 million for the year ended December 31, 2021, compared to $112.0 million for the year ended December 31, 2020, or a decrease of $12.7 million.

During the year ended December 31, 2020, the research and development expenses incurred related to external spend with respect to our product candidates of $64.1 million, including $32.4 million of costs related to our clinical trials, $15.6 million of costs related to the manufacturing of our clinical drug supply, and $7.5 million for the achievement of a specified regulatory milestone event under the Regeneron Agreement which was achieved in the fourth quarter of 2020.

In addition, we incurred unallocated research and development expenses of $47.9 million, including $33.5 million of personnel costs and $14.4 million of other operating costs including costs associated with our laboratory including costs related to preclinical and discovery research.

During the year ended December 31, 2019, expenses incurred related to the acquisition of all of the outstanding securities of Primatope for aggregate upfront and contingent payments of $18.0 million, paid in a combination of cash and Class A common shares (inclusive of escrow and holdback share amounts) in accordance with the Primatope Agreement, $10.0 million for an accrued milestone under the Biogen Agreement, associated with the achievement of a specified clinical milestone event, and expenses for external spend with respect to our product candidates of $63.2 million, including $34.1 million of costs related to our clinical trials and $19.2 million of costs related to the manufacturing of our clinical drug supply.

In addition, we incurred unallocated research and development expenses of $43.9 million, including, $29.0 million of personnel costs and $14.8 million of other operating costs including costs associated with our laboratory and other facility costs including costs related to preclinical and discovery research.

During the year ended December 31, 2018, the research and development expenses incurred related to external spend with respect to our product candidates of $60.2 million, including $26.7 million of costs related to our preclinical and clinical trials and $20.7 million of costs related to manufacturing of our clinical drug supply.

In addition, we incurred unallocated research and development expenses of $26.4 million, including $15.0 million of personnel costs and $11.3 million of other operating costs including costs associated with the first year of operations of our laboratory and costs related to preclinical studies and discovery research.

Research and development expenses were $112.0 million for the year ended December 31, 2020, compared to $135.0 million for the year ended December 31, 2019, or a decrease of $23.0 million.

Direct costs for our rilonacept program were $10.8 million, $25.7 million and $25.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.

During the year ended December 31, 2020, expenses incurred primarily related to conducting RHAPSODY, our global, pivotal Phase 3 clinical trial in recurrent pericarditis, including the long-term extension, a milestone payment of $7.5 million for the achievement of a specified regulatory milestone event under the Regeneron Agreement, and supply chain costs.

During the year ended December 31, 2019, expenses incurred primarily related to our clinical research and development for RHAPSODY, including $6.6 million related to

purchases of drug materials under our clinical supply agreement with Regeneron, as well as for our open-label Phase 2 proof-of-concept clinical trial.

During the year ended December 31, 2018, expenses incurred primarily related to clinical research and development for our Phase 2 open-label clinical trial and the initiation of RHAPSODY.

During the year ended December 31, 2021, the decrease in expenses incurred related primarily to the completion of RHAPSODY, our global, pivotal Phase 3 clinical trial in recurrent pericarditis, and transition to the long-term extension.

During the year ended December 31, 2020, expenses incurred primarily related to conducting RHAPSODY, a milestone payment of $7.5 million for the achievement of a specified regulatory milestone event under the Regeneron Agreement, and supply chain costs.

During the year ended December 31, 2019, expenses incurred primarily related to our clinical research and development for RHAPSODY, including $6.6 million related to purchases of drug materials under our clinical supply agreement with Regeneron, as well as for our open-label Phase 2 proof-of-concept clinical trial.

Direct costs of our mavrilimumab program were $30.7 million, $25.9 million and $13.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.

During the year ended December 31, 2020, expenses incurred primarily related to conducting our global Phase 2 clinical trial in GCA, including manufacturing costs for our clinical drug supply, and initiation of our Phase 2/3 clinical trial in COVID-19 pneumonia and hyperinflammation.

During the year ended December 31, 2021, expenses primarily

related to our Phase 2/3 clinical trial in COVID-19 related ARDS.

During the year ended December 31, 2019, expenses incurred primarily related to costs related to our global Phase 2 clinical trial in GCA.

During the year ended December 31, 2018, expenses incurred primarily related to a $5.0 million pass-through payment due upon the achievement of a specified clinical milestone event due under our license agreement with MedImmune as well as expenses related to preparation for our planned global Phase 2 clinical trial in GCA and manufacturing process development expenses.

Direct costs for our vixarelimab program were $10.7 million, $8.8 million and $28.8 million for the year ended December 31, 2021, 2020 and 2019, respectively.

During the year ended December 31, 2020, expenses incurred related primarily related to conducting our Phase 2a clinical trial in prurigo nodularis and our exploratory Phase 2 clinical trial in diseases characterized by chronic pruritus, which concluded earlier in the year.

During the year ended December 31, 2019, expenses incurred primarily related to a milestone payment of $10.0 million under the Biogen Agreement associated with the achievement of a specified clinical milestone event as well as expenses incurred for our Phase 2a clinical trial in prurigo nodularis, our exploratory Phase 2 clinical trial in diseases characterized by chronic pruritus and our Phase 1b clinical trial, as well as approximately $2.1 million of manufacturing and development costs for our clinical drug supply.

During the year ended December 31, 2018 expenses incurred related to manufacturing and development costs for our clinical drug supply, our Phase 1a/1b clinical trial, and our LOTUS-PN observational study.

During the year ended December 31, 2021, expenses incurred related primarily to the initiation of our Phase 2b clinical trial in prurigo nodularis.

During the year ended December 31, 2020, expenses incurred related primarily to conducting our Phase 2a clinical trial in prurigo nodularis and our exploratory Phase 2 clinical trial in diseases characterized by chronic pruritus, which concluded earlier in the year.

During the year ended December 31, 2019, expenses incurred primarily related to a milestone payment of $10.0 million under the Biogen Agreement associated with the achievement of a specified clinical milestone event as well as expenses incurred for our Phase 2a clinical trial in prurigo nodularis, our exploratory Phase 2 clinical trial in diseases characterized by chronic pruritus and our Phase 1b clinical trial, and approximately $2.1 million of manufacturing and development costs for our clinical drug supply.

Direct costs for our KPL-404 program were $5.3 million, $3.7 million and $22.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.

During the year ended December 31, 2021, expenses incurred primarily related to manufacturing of drug product supply for our anticipated Phase 2 trial in rheumatoid arthritis.

During the year ended December 31, 2020, expenses incurred primarily related to preclinical and clinical trial costs for our Phase 1 trial of KPL-404 in healthy volunteers, including toxicology costs.

During the year ended December 31, 2019, expenses incurred primarily related to the acquisition of all of the outstanding securities of Primatope for aggregate upfront and contingent payments of $18.0 million paid in a combination of cash and Class A common shares (inclusive of escrow and holdback share amounts) in accordance with the Primatope Agreement.

The Primatope acquisition was accounted for as an asset acquisition in 2019 as it did not meet the definition of a business.

We recorded the upfront payment, milestone payments and the accrued milestone as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology represented in-process research and development and had no alternative future use.

During the year ended December 31, 2018, expenses incurred primarily related to pre-clinical research and development, including manufacturing development costs as well as $0.8 million related to the extension of the option period under our stock purchase option agreement with Primatope.

We recorded the upfront payment, milestone payments and the accrued milestone as research and development expense because the acquired technology represented in-process research and development and had no alternative future use.

Unallocated research and development expenses were $41.7 million, $47.9 million and $43.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The decrease of $6.2 million in unallocated research and development expense in 2021 from 2020 was due to a decrease in cost associated with ARCALYST including quality control and supply chain of $4.9 million included in costs of goods sold beginning with the approval of ARCALYST.

The increase of $4.0 million in unallocated research and development expenses in 2020 from 2019 was due to increases of $2.9 million in operating costs of our laboratory and $4.5 million in personnel-related costs primarily related to share-based compensation and additional personnel in our research and development functions to support our ongoing clinical trials, partially offset by decreases of $2.0 million related to the cessation of our development of a pre-clinical product candidate and $1.4 million in other operating expenses including costs related to our internal lab and costs related to preclinical studies and discovery research.

The increase of $17.5 million in unallocated research and development expenses in 2019 from 2018 was due to an increase of $13.9 million in personnel-related costs, including share-based compensation, and an increase of $3.5 million in other operating expenses, including costs related to our laboratory and to preclinical studies and discovery research.

The increase in personnel-related costs was primarily due to additional personnel in our research and development functions to support our ongoing clinical trials, including development and manufacture of clinical supply and regulatory filings.

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Selling, general and administrative expenses were $85.9 million, $45.3 million and $35.0 million for the years ended December 31, 2021, 2020 and 2019.

The increase of $10.3 million in 2020 from 2019 was primarily due to increases of $5.2 million in personnel-related costs and $6.7 million in marketing costs associated with the pre-commercialization of our rilonacept program partially offset by a decrease $1.6 million of other expenses primarily due to a decrease in travel costs due to the travel restrictions associated with the COVID-19 pandemic and other miscellaneous professional fees.

The increase of $13.4 million in 2019 from 2018 was primarily due to increases of $11.7 million in personnel-related costs and $2.1 million in professional fees, partially offset by a decrease of $0.4 million in other general expenses.

The increase in personnel-related costs was due to additional personnel, primarily in our commercial and corporate departments, including legal, finance and human resources.

In 2019, expenses related to professional fees increased due to costs related to commercial preparations, including market research as well as legal costs incurred in connection with maintaining and registering worldwide patents and costs associated with our ongoing business operations, as well as expenses for higher recruiting, accounting and other costs incurred as a public company for a full fiscal year.

The increase of $40.6 million was primarily due to an increase of $22.0 million in personnel-related costs related to the build out of our commercial function, including hiring of a sales force and $8.9 million in marketing expenses associated with the commercial launch of ARCALYST.

The increase of $10.3 million in 2020 from 2019 was primarily due to increases of $5.2 million in personnel-related costs and $6.7 million in marketing costs associated with the pre-commercialization activities to support our future launch of ARCALYST partially offset by a decrease $1.6 million of other expenses primarily due to a decrease in travel costs due to the travel restrictions associated with the COVID-19 pandemic and other miscellaneous professional fees.

Personnel-related costs for the years ended December 30, 2021, 2020 and 2019 included share-based compensation of $16.5 million, $12.0 million and $9.3 million, respectively.

Collaboration Expenses

Collaboration expenses was $0.8 million for the year ended December 31, 2021.

Our collaboration with Regeneron achieved profitability in the fourth quarter of 2021, following three quarters of commercial availability for recurrent pericarditis.

We expect to continue to incur collaboration expenses associated with sales of ARCALYST.

Interest Income

Interest income was $0.1 million for the year ended December 31, 2021, compared to interest income of $1.1 million for the year ended December 31, 2020.

The decrease was due primarily to lower interest rates on U.S.

Treasury notes and a lower average balance in short term investments.

Interest income was $1.1 million for the year ended December 31, 2020, compared to $6.0 million for the year ended December 31, 2019.

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Treasury notes.

Interest income was $6.0 million for the year ended December 31, 2019 compared to $4.7 million for the year ended December 31, 2018.

The increase was largely due to higher average invested balances during the year ended December 31, 2019.

(Provision) Benefit for Income Taxes

For the year ended December 31, 2021, we recorded a provision for income taxes of $1.4 million relating primarily to U.S.

current taxes from the cost-plus arrangement less amounts related to the impact of Foreign Derived Intangible Income, or FDII deduction and U.S.

federal and state research credits.

As of December 31, 2021 we maintained a full valuation allowance against our deferred tax assets of $127.9 million because we believe, more likely than not, it is not realizable.

For the year ended December 31, 2020, we recorded a provision for income taxes of $5.2 million relating primarily to the recognition of the valuation allowance and the current year tax expense.

The current year expense is reduced by the favorable impact of the Foreign Derived Intangible Income, or FDII, deduction, equity compensation and U.S.

federal and state research and development tax credit utilization.

For the year ended December 31, 2019, we recorded a $2.0 million benefit for income taxes relating primarily to the impact of the FDII deduction, and U.S.

federal and state research and development tax credits.

For the year ended December 31, 2018, we recorded an insignificant benefit for income taxes.

Liquidity and Capital Resources

Since our inception, we have not generated any revenue from any sources, including from product sales, and have incurred significant operating losses and negative cash flows from our operations.

As of December 31, 2021, our principle source of liquidity was cash, cash equivalents and short-term investments, which totaled $182.2 million.

Our net losses were $157.9 million, $161.4 million and $161.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.

We expect to incur operating losses for the foreseeable future.

On February 4, 2019, we completed a follow-on offering of 2,654,984 Class A common shares at a public offering price of $18.26 per share and concurrent private placement of 2,000,000 Class A1 common shares at an offering price of $18.26 per share for aggregate gross proceeds of $85.0 million.

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On May 18, 2020, we completed a follow-on offering of 2,760,000 Class A common shares, inclusive of the exercise of the underwriters’ overallotment option at a public offering price of $18.25 per share and a concurrent private placement of 1,600,000 Class A1 common shares at an offering price of $18.25 per share for aggregate gross proceeds of $79.6 million.

The aggregate net proceeds to us from the follow-on offering and concurrent private placement, inclusive

of the option exercise, was $74.5 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs.

The estimated aggregate net proceeds to us from the follow-on offering and concurrent private placement was $146.0 million after deducting underwriting discounts and commissions, placement agent fees and other offering costs.

Under various agreements with third parties, we have agreed to make milestone payments, pay royalties, annual maintenance fees and to meet due diligence requirements based upon specified milestones.

Under our license agreement with Regeneron, we have entered into supply agreements to provide both clinical and commercial product.

We have committed to minimum payments to Regeneron of $43.6 million, of which $30.6 million are due within one year.

We have entered into lease agreements for office and laboratory space, and vehicles, with total future lease payments of $6.3 million, of which $3.6 million are due within one year.

These agreements impact our short-term and long-term liquidity and capital needs.

As of December 31, 2021, we had cash, cash equivalents and short-term investments of $182.2 million.

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Operating Activities

During the year ended December 31, 2021, operating activities used $126.3 million of cash, primarily resulting from our net loss of $157.9 million, partially offset by non-cash charges of $30.9 million.

Net cash used in our operating assets and liabilities for the year ended December 31, 2021 consisted of a $10.3 million increase in accrued expenses and other liabilities primarily due to increases in the accrued costs for our clinical trials and accrual of the 2021 employee bonus, a $3.9 million increase in accounts receivable due to the start of sales for ARCALYST, and a $3.7 million increase in inventory.

During the year ended December 31, 2020, operating activities used $136.5 million of cash, primarily resulting from our net loss of $161.4 million and net cash used in our operating assets and liabilities of $4.3 million, partially offset by non-cash charges of $29.2 million.

Net cash used in our operating assets and liabilities for the year ended December 31, 2020 consisted of a $5.0 million decrease in accounts payable primarily due to the timing of vendor invoicing and payments, a $8.8 million increase in accrued expenses and other liabilities primarily due to increases in the accrued costs for our clinical trials and pre-commercialization activities for our rilonacept program, a $0.5 million increase in other long-term liabilities, a $1.7 million decrease in operating lease liabilities due to monthly payments for our right-of-use assets, a $5.6 million increase in other long term assets due to payments associated with minimum balance requirements of our clinical trials which are not expected to be completed within a year, and $1.3 million increase in prepaid expenses and other current assets.

Net cash used in our operating assets and liabilities for the year ended December 31, 2020 consisted of a $5.0 million decrease in accounts payable primarily due to the timing of vendor invoicing and payments, a $8.8 million increase in accrued expenses and other liabilities primarily due to increases in the accrued costs for our clinical trials and pre-commercialization activities for ARCALYST, a $0.5 million increase in other long-term liabilities, a $1.7 million decrease in operating lease liabilities due to monthly payments for our right-of-use assets, a $5.6 million increase in other long term assets due to payments associated with minimum balance requirements of our clinical trials which are not expected to be completed within a year, and $1.3 million increase in prepaid expenses and other current assets.

During the year ended December 31, 2019, operating activities used $158.4 million of cash, primarily resulting from our net loss of $161.9 million and net cash used by changes in our operating assets and liabilities of $17.0 million partially offset by non-cash charges of $20.5 million.

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The decrease in accounts payable was primarily due to the timing of vendor invoicing and payments.

The increase in prepaid expenses and other current assets was due to increases in prepaid insurance expenses and prepaid expenses to CROs related to our clinical trials.

The increase in prepaid expenses and other current assets was due to increases in

prepaid insurance expenses and prepaid expenses to CROs related to our clinical trials.

The decrease in operating lease liabilities is due to monthly payments for our right-of-use assets.

During the year ended December 31, 2018, operating activities used $81.0 million of cash, primarily resulting from our net loss of $103.2 million, partially offset by net non-cash charges of $3.9 million and net cash provided by changes in our operating assets and liabilities of $18.3 million.

Net cash provided by changes in our operating assets and liabilities for the year ended December 31, 2018 consisted of a $14.3 million increase in accrued expenses and other

liabilities and a $8.8 million increase in accounts payable, partially offset by a $4.8 million increase in prepaid expenses and other current assets.

The increase in accrued expenses was primarily due to our increased level of operating activities and the timing of vendor invoicing and payments, an increase in accrued milestones as well as an increase in accrued employee compensation expense.

The increase in accounts payable was primarily due to increased operating activities as well as the timing of vendor invoicing and payments.

The increase in prepaid expenses and other current assets was due to increases in prepaid insurance expenses, interest receivable and prepaid expenses to CMOs related to manufacturing development and CROs related to our clinical trials.

Investing Activities

During the year ended December 31, 2021, investing activities provided $128.6 million of cash, consisting of $306.3 million from proceeds of maturities of short-term investments, offset by $157.3 million of purchases of short-term investments and $20.0 million related to the payment of a regulatory milestone incurred under the Regeneron Agreement.

During the year ended December 31, 2020, investing activities used $23.4 million of cash, consisting of $430.2 million of purchases of short-term investments and $0.3 million of purchases of property and equipment, partially offset by $407.1 million from proceeds of maturities of short-term investments.

During the year ended December 31, 2019, investing activities provided $49.2 million of cash, consisting of $541.2 million from proceeds of maturities of short-term investments partially offset by $488.8 million of purchases of short-term investments and $3.2 million of purchases of property and equipment.

During the year ended December 31, 2018, investing activities used $239.2 million of cash, consisting of $5.3 million of purchases of property and equipment and $402.0 million of purchases of short-term investments partially offset by $168.1 million from proceeds of maturities of short-term investments.

Financing Activities

During the year ended December 31, 2021, net cash provided by financing activities was $5.9 million, consisting of proceeds from the exercise of employee share options and our ESPP.

During the year ended December 31, 2020, net cash provided by financing activities was $227.1 million, consisting of net proceeds of $220.5 million in aggregate from our issuance and sale of Class A common shares in two follow-on public offerings, inclusive of the exercise of the underwriters’ option to purchase additional Class A common shares, as applicable, and the concurrent issuances and sales of Class A1 common shares in two private placements, after the deduction of underwriting discounts and commissions, placement agent fees and other offering costs, and $6.6 million of proceeds primarily from the exercise of share options and our employee share purchase plan.

During the year ended December 31, 2019, net cash provided by financing activities was $84.1 million, consisting of net proceeds of $83.0 million from our issuance and sale of Class A common shares in a follow-on public offering, inclusive of the concurrent issuance and sale of Class A1 common shares in a private placement, and exercise in part of the underwriters’ option to purchase additional Class A common shares after the deduction of underwriting discounts and commissions, placement agent fees and other offering costs.

During the year ended December 31, 2018, net cash provided by financing activities was $346.7 million, primarily consisting of net proceeds of $159.2 million from our issuance and sale of Class A common shares, after the deduction of underwriting discounts and commissions , inclusive of the over-allotment option exercise, and $190.8 million in net proceeds from our issuance and sale of Series C preferred shares, partially offset by $3.7 million of payments of other offering costs associated with our IPO.

Funding Requirements

We expect to incur significant expenses in connection with our ongoing and planned activities as we advance our product candidates through preclinical and clinical development, seek regulatory approval and prepare for commercial operations.

We expect to incur significant expenses in connection with our ongoing and planned activities as we continue to commercialize ARCALYST and advance our current and future product candidates through preclinical and clinical development, seek regulatory approval and commercialize one or more of our current or future product candidates, if approved.

In addition, if we obtain marketing approval for any of our current or future product candidates, we expect to incur significant additional commercialization expenses related to such activities.

We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates.

As a result, our related personnel costs will increase, including costs associated with share-based compensation.

For example, under the Regeneron Agreement, we are obligated to make payments to

Regeneron of $20.0 million upon the achievement of a specified regulatory milestone which may be met in the first quarter of 2021.

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 mavrilimumab, vixarelimab and KPL-404, as applicable;

● increase clinical and commercial manufacturing capabilities or make arrangements with additional third party manufacturers to successfully manufacture our product candidates;

● develop and timely deliver clinical grade and commercial grade product formulations that can be used in our clinical trials and for commercial launch;

● conduct our current and planned clinical trials for our current and future product candidates;

● increase clinical and commercial manufacturing capabilities or make arrangements with additional third party manufacturers to successfully manufacture our products and product candidates;

● 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;

● establish and expand a sales, marketing, medical affairs and distribution capabilities and infrastructure to commercialize any product candidates, including rilonacept, for which we may obtain marketing approval and intend to commercialize on our own;

● launch commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others;

● 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;

● hire additional sales, marketing, clinical, quality and research and development personnel;

● 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;

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We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months.

The future viability of the Company is dependent on its ability to fund its operations through sales of ARCALYST and/or raise additional capital, such as through debt or equity offerings, as needed.

We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

We anticipate that we may require additional capital if we choose to pursue in-licenses or acquisitions of other product candidates and technologies or their related businesses.

If we receive regulatory approval for rilonacept or our other product candidates or pursue additional indications for our existing product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize.

We expect to continue to incur significant expenses related to product manufacturing, sales, marketing and distribution of ARCALYST.

In addition, if we obtain regulatory approval for any of our current or future product candidates, pursue additional indications for our products or any of our current or future product candidates, we expect to incur significant expenses related to product development and manufacturing, sales, marketing and distribution, depending on where we choose to commercialize.

Because of the numerous risks and uncertainties associated with research, development and commercialization of biologic products, we are unable to estimate the exact amount of our working capital requirements.

Our future funding requirements will depend on and could increase significantly as a result of many factors, including:

● any impact of the COVID-19 pandemic on our business, including our preclinical studies and clinical trials, regulatory actions, commercials launch activities and operations;

● the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials;

● the costs, timing and outcome of regulatory review of our product candidates;

● the costs, timing and ability to manufacture our product candidates to supply our clinical and preclinical development efforts and our clinical trials;

● the costs of future activities, including product sales, medical affairs, marketing, manufacturing, pricing and reimbursement, distribution and compliance, for any of our product candidates for which we receive marketing approval;

● the costs of manufacturing commercial-grade product and necessary inventory to support commercial launch;

● the ability to receive additional non-dilutive funding;

● the revenue, if any, received from commercial sale of our products, should any of our product candidates receive marketing approval;

● the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

● our ability to establish and maintain licensing, collaboration or other strategic transactions and arrangements on favorable terms, if at all;

● the extent to which we acquire or in-license other product candidates, technologies and their related businesses;

● the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any.

Until such time, if ever, as we can generate substantial 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 and to a lesser extent through projected revenue from rilonacept if approved in recurrent pericarditis or any of our other product candidates.

Our future funding requirements may be impacted by a number of factors, including those described in Part I, Item 1A.

“Risk Factors” in this Annual Report.

Until such time, if ever, as we can generate substantial and sustained product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, or other sources, including, licensing, collaboration, marketing, distribution or other strategic transactions or arrangements with third parties.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect our shareholders’ rights as a common shareholder.

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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.

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.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

Payments Due by Period

(in thousands)

Manufacturing commitments (1)

Operating lease commitments (2)

Rilonacept long-term incentive plan (3)

Amounts in the table reflect commitments for costs associated with our external CMOs, which we have engaged to manufacture clinical trial materials and forecasted purchases under the Regeneron clinical supply agreement.

Manufacturing commitments include agreements that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased;

fixed, minimum or variable price provisions;

and the approximate timing of the transaction.

For obligations with cancellation provisions, the amounts included in the preceding table are limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee.

Amounts in the table reflect minimum payments due under operating lease agreements entered into by our wholly owned U.S.

subsidiary Kiniksa US for office and laboratory space in Lexington, Massachusetts, which expires in 2023, office space in San Diego, California, which expires in 2022, and office space in London UK, which expires in 2025 with an option to terminate in 2023.

Amounts in the table reflect the cash awards granted to employees under the Rilonacept Long-Term Incentive Plan, or RLTIP, which become payable in such amounts if the performance goals defined in the RLTIP are achieved at target.

Our contracts with CMOs, CROs and other third parties for the manufacture of our product candidates and to support clinical trials and preclinical research studies and testing are generally cancelable by us upon prior notice.

Payments due upon cancellation consisting only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation are not included in the preceding table as the amount and timing of such payments are not known.

Under various agreements with third parties, we have agreed to make milestone payments, pay royalties, annual maintenance fees and to meet due diligence requirements based upon specified milestones.

We generally have not included any contingent payment obligations, such as milestones, royalties or due diligence, in the table above as the amount, timing and likelihood of such payments are not known.

We have not included any of the annual maintenance fee payments in the above table, as although the amount and timing are known, we cannot currently determine the final termination dates of the agreements and, as a result, we cannot determine the total amounts of such payments we will be required to make under the agreements.

Under our license agreement with Regeneron, we are obligated to make future regulatory milestone payments of $20.0 million which may be met in the first quarter of 2021.

Upon approval from the FDA, if any, of rilonacept in recurrent pericarditis, we will assume the sales and distribution of rilonacept for the approved indications in the United States and, under the license agreement, we have agreed to evenly split profits on our sales of rilonacept with Regeneron after deducting certain commercialization expenses subject to specified limits.

Under our license agreement with MedImmune, we are obligated to make future clinical, regulatory and initial sales milestone payments of up to $57.5 million in aggregate for the first two indications we develop.

In addition, we are obligated to make clinical and regulatory milestone payments of up to $15.0 million in the aggregate for each subsequent indication.

In third quarter of 2020, we entered into an amendment to the MedImmune Agreement to establish a new coronavirus field and defer the payment of certain development and regulatory milestones as applied to the new coronavirus field.

We are also obligated to make milestone payments to MedImmune of up to $85.0 million upon the achievement of annual net sales thresholds of up to, but excluding, $1.0 billion in annual net sales as well as additional milestone payments aggregating up to $1.1 billion upon the achievement of additional specified annual net sales thresholds starting at $1.0 billion and higher.

Commencing on the first commercial sale of licensed products, we are obligated to pay tiered royalties on escalating tiers of annual net sales of licensed products starting in the low double-digit percentages and ending at twenty percent.

We must pay such royalties on a product-by-product and

country-by-country basis until the latest to occur of the expiration of licensed patents, the expiration of regulatory exclusivity or the tenth anniversary of the first commercial sale of such product in such country.

Under our asset purchase agreement with Biogen, we are obligated to make future milestone payments of up to $315.0 million upon the achievement of specified clinical and regulatory milestones as well as upon the achievement of annual net sales thresholds.

We have also agreed to pay certain obligations under third-party contracts retained by Biogen that relate to vixarelimab.

Additionally, we are obligated to pay tiered royalties on escalating tiers of annual net sales of licensed products starting in the high single-digit percentages and ending below the teens.

Critical Accounting Policies and Significant Judgments and Estimates

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While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements included elsewhere in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

ASC 606 outlines a five-step process for recognizing revenue from contracts with customers:

(i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the separate performance obligations in the contract, and (v) recognize revenue associated with the performance obligations as they are satisfied.

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

Once a contract is determined to be within the scope of ASC 606, we determine the performance obligations that are distinct.

We recognize as revenues the amount of the transaction price that is allocated to each respective performance obligation when the performance obligation is satisfied or as it is satisfied.

Generally, our performance obligations are transferred to customers at a point in time, typically upon receipt of the product by the customer.

ASC 606 requires entities to record a contract asset when a performance obligation has been satisfied or partially satisfied, but the amount of consideration has not yet been received because the receipt of the consideration is conditioned on something other than the passage of time.

ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g.

receivable), before the entity transfers a good or service to the customer.

Product Revenue, Net

Net revenue from product sales is recognized at the transaction price when the specialty pharmacy or specialty distributors obtains control of our products, which occurs at a point in time, typically upon shipment of the product from the third party logistics provider.

These adjustments represent variable consideration under ASC 606 and are estimated using the expected value method and are recorded when revenue is recognized on the sale of the product.

These adjustments are established by us as our best estimate based on available information and will be adjusted to reflect known changes in the factors that impact such allowances.

As of December 31, 2021 a 10% change in our product revenue allowance and reserve would not result in a material change in our net revenue.

Accrued Research and Development Expenses

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To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

As of December 31, 2021 we have accrued $25.0 million of estimated research and development expenses.

Share-Based Compensation

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We classified share-based compensation expense in the consolidated statements of operations and comprehensive loss in the same manner in which the award recipient's payroll costs are classified or in which the award recipient's service payments are classified.

The fair value of each restricted share award was estimated on the date of grant based on the fair value of the Company’s Class A common shares or Class B common shares on that same date.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected share price volatility, the expected term of the award, the risk-free interest rate, and expected dividends (see Note 9).

The fair value of each restricted share award was estimated on the date of grant based on the fair value of the Company’s Class A common shares on that same date.

Prior to May 2018, we were a private company and, accordingly, lacked company-specific historical and implied volatility information.

Therefore, we estimate our expected share price volatility based on the historical volatility of publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded share price.

Therefore, we estimate our expected share price volatility based on a blend of our historical volatility and the historical volatility of publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded share price.

The expected term of our share options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” share options.

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Restricted share unit awards with an associated performance condition are evaluated on a regular basis for probability of achievement, to determine the timing of recording share-based compensation expense to include in our consolidated statements of operations and comprehensive loss.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis