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Item 7. Management’s Discussion and Analysis

2023-03-02 compared with 2022-02-24 · 131 added, 158 removed, 223 unchanged (56% of the section changed)

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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 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.

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 (the “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 suffering from debilitating diseases with significant unmet medical need.

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

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

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

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

In 2017, we licensed ARCALYST from Regeneron, who discovered and initially developed the drug.

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

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

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.

ARCALYST is commercially available across the United States through a network of distributors.

ARCALYST is also approved in the United States for the treatment of CAPS, specifically Familial Cold Autoinflammatory Syndrome and Muckle-Wells Syndrome 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 as well as third-party proceeds with Regeneron.

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.

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.

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.

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

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

We believe disrupting the CD40-CD154 interaction is an attractive approach to address multiple autoimmune disease pathologies such as 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 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.

In May 2021, we announced positive final data from our Phase 1 single-ascending-dose clinical trial of KPL-404 in healthy volunteers, which evaluated safety and pharmacokinetics, as well as receptor occupancy and T-cell dependent antibody response.

In December 2021, we initiated a Phase 2 clinical trial of KPL-404 in RA, which is designed to evaluate pharmacokinetics, safety and efficacy with subcutaneous administration.

In January 2023, we announced that we had completed enrollment of the second and final cohort of the multiple ascending dose portion of such trial.

Following completion of this portion of the trial, the proof-of-concept portion will begin.

We expect data from the trial in the first half of 2024.

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 are pursuing collaborative study agreements to evaluate the potential of mavrilimumab in rare cardiovascular diseases where the GM-CSF mechanism has been implicated.

We previously evaluated mavrilimumab in GCA, a chronic inflammatory disease of the medium-to-large arteries, and COVID-19-related ARDS.

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, which was previously part of our portfolio of immune-modulating assets.

In September 2022, we closed an agreement granting Genentech an exclusive worldwide license to develop and commercialize vixarelimab.

Pursuant to such agreement, we have agreed to complete our in-progress Phase 2b dose-ranging clinical trial of vixarelimab for the treatment of prurigo nodularis, a chronic inflammatory skin condition.

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

While our ARCALYST collaboration with Regeneron has achieved profitability, such profits remain small compared to our total net losses and there is no guarantee that our ARCALYST collaboration with Regeneron will remain profitable in the future.

In addition, payments and royalties arising from out-licensing, collaboration or other similar agreements, though potentially substantial, are often isolated events and cannot be relied upon to generate significant and sustained revenue.

For the twelve months ended December 31, 2022, we recognized net income of $183.4 million, primarily as a result of out-licensing activities and the release of our deferred tax asset valuation allowance, as compared to net losses of $157.9 million for the year ended December 31, 2021.

As of December 31, 2022, we had an accumulated deficit of $492.0 million.

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 expect to incur operating losses for the foreseeable future as we advance our product candidates through preclinical and clinical development and, ultimately, seek regulatory approval.

In addition, we expect to continue to incur significant expenses related to product manufacturing, including potential technology transfer costs as early as March 2023, 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 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 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.

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 corporate profitability.

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, 2022, we had cash, cash equivalents and short-term investments of $190.6 million.

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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 have been generating product revenue from sales of ARCALYST since 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.

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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.

License and collaboration revenue

License and collaboration revenue includes amounts recognized related to upfront payments, royalty revenue, and milestone payments.

In February 2022, we entered into the Huadong Collaboration Agreements, pursuant to which we granted Huadong exclusive rights to develop and commercialize the Huadong Licensed Products in the Huadong Territory.

We otherwise retained our current rights to the Huadong Licensed Products outside the Huadong Territory.

For more information, see “ Business –License and Acquisition Agreements—Out-Licensing Agreements—Huadong Collaboration Agreements ”.

Under the Huadong Collaboration Agreements, we received a total upfront cash payment of $22.0 million, which includes $12.0 million for the Huadong Territory license of rilonacept and $10.0 million for the Huadong Territory license of mavrilimumab.

In addition, we will be eligible to receive contingent payments, including specified development, regulatory and sales-based milestones.

Huadong will also be obligated to pay us tiered percentage royalties on a Huadong Licensed Product-by-Huadong Licensed Product basis ranging from the low-teens to low-twenties on annual net sales of each Huadong Licensed Product in the Huadong Territory, subject to certain reductions tied to rilonacept manufacturing costs and certain other customary reductions, with an aggregate minimum floor.

Royalties will be payable on a Huadong Licensed Product-by-Huadong Licensed Product and country-by-country or region-by-region basis until the later of (i) 12 years after the first commercial sale of the applicable Huadong Licensed Product in such country or region in the Huadong Territory, (ii) the date of expiration of the last valid patent claim of our patent rights or any joint collaboration patent rights that covers the applicable Huadong Licensed Product in such country or region in the Huadong Territory, and (iii) the expiration of the last regulatory exclusivity for the applicable Huadong Licensed Product in such country or region in the Huadong Territory.

We recognized the $10.0 million related to the mavrilimumab license during the year ended December 31, 2022.

We deferred the $12.0 million related to the rilonacept license agreement as of December 31, 2022, as no materials were shipped during the year ended December 31, 2022.

In August 2022, we entered into the Genentech License Agreement, pursuant to which we granted Genentech exclusive worldwide rights to develop and commercialize the Genentech Licensed Products.

For more information, see “ Business –License and Acquisition Agreements—Out-Licensing Agreements—Genentech License Agreement ”.

Under the Genentech License Agreement, we received an upfront payment of $80.0 million for the license.

In the first quarter of 2023, following our last delivery of certain drug supplies to Genentech, Genentech became obligated to make an additional cash payment of $20.0 million.

We will be eligible to receive up to approximately $600.0 million in contingent payments, including specified development, regulatory and sales-based milestones as well as royalties in the low double digits to mid-teens on annual net sales, in each case before fulfilling our upstream financial obligations.

We recognized a portion of the $80.0 million upfront payment and the $20.0 million near-term payment related to the delivery of certain materials in the year ended December 31, 2022 for the exclusive vixarelimab license, drug supply delivered and the completed portion of the in-progress Phase 2b prurigo nodularis clinical trial.

We will recognize the remaining revenue associated with the transaction price over the remaining duration of the in-progress Phase 2b prurigo nodularis clinical trial and remaining deliveries of certain drug supply.

Operating Expenses

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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.

Cost of goods sold also includes the allocations for the labor and overhead costs associated with the production of ARCALYST.

Collaboration expenses

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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.

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.

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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.

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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 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 offset by expenses related to investments.

Selling, general and administrative expenses also include external commercialization, marketing, and professional fees for legal, patent, and accounting services.

We have been commercializing ARCALYST since April 2021 and expect that our selling, general and administrative expenses will continue to increase in the future as we continue to perform commercialization and sales activities.

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

Treasury notes and other miscellaneous income offset by expenses related to investments.

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

Under the current laws of Bermuda, tax on a company’s income is assessed at a zero percent tax rate.

Under the current laws of Bermuda, there is no corporate income tax levied on an exempted company’s income, resulting in an effective zero percent tax rate.

As a result, we have not recorded any income tax benefits from our losses incurred in Bermuda during each reporting period, and no net operating loss carryforwards are currently available to us for those losses, while our assets remain in Bermuda.

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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.

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, 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.

Our income tax benefit relates mainly to the release of the valuation allowance on our UK deferred tax assets partially offset by provision for income taxes relating to U.S.

and UK taxable income.

Results of Operations

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Product revenue, net

License and collaboration revenue

Total revenue

Operating expenses:

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Total operating expenses

Loss from operations

Interest income

Loss before (provision) benefit for income taxes

(Provision) benefit for income taxes

Income (loss) from operations

Income (loss) before income taxes

Benefit (provision) for income taxes

Net income (loss)

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.

We recognized net revenue from the sale of ARCALYST of $122.5 million for the year ended December 31, 2022, compared to $38.5 million for the year ended December 31, 2021, an increase of $84.0 million.

The increase in product revenue was primarily driven by an increase in patients as 2022 was our first full year of sales following our commercial launch of ARCALYST in April 2021.

License and Collaboration Revenue

License and collaboration revenue for the year ended December 31, 2022 was $97.7 million.

The license and collaboration revenue for the year ended December 31, 2022 primarily consisted of $10.0 million in revenue recognized upon the signing of the mavrilimumab Huadong Collaboration Agreement in February of 2022 and $87.7 million for revenue related to the Genentech License Agreement.

We expect to recognize $12.0 million of deferred revenue related to the rilonacept Huadong Collaboration Agreement over the life of the agreement as materials are delivered and the remaining $12.3 million of the transaction price still to be recognized related to the Genentech License Agreement over the life of the in-progress Phase 2b prurigo nodularis clinical trial, and material deliveries.

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.

We recognized cost of goods sold from the sale of ARCALYST of $22.9 million for the year ended December 31, 2022, compared to $9.1 million for the year ended December 31, 2021, an increase of $13.8 million.

The cost of goods sold for the years ended December 31, 2022 and 2021 each include $1.0 and $0.8 million for the amortization of the payment we made to Regeneron in the first quarter of 2021 upon the achievement of a regulatory milestone, respectively.

The increase in cost of goods sold relates primarily to the increase in sales and an increase in the average cost per unit.

The increase in the average cost per unit is largely attributable to selling through repurposed clinical supply that was previously expensed through R&D and carried at zero-cost during 2021.

Collaboration Expenses

Our collaboration with Regeneron continued to be profitable for the year ended December 31, 2022 after first achieving profitability in the fourth quarter of 2021.

Collaboration expenses were $24.1 million for year ended December 31, 2022, compared to $0.8 million for the year ended December 31, 2021, an increase of $23.2 million.

The increase in collaboration expenses relates primarily to an increase in revenue from the sales of ARCALYST and to a $6.0 million payment due to Regeneron related to the rilonacept Huadong Collaboration Agreement.

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

Research and Development Expenses

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Increase/(Decrease)

(in thousands)

(in thousands, except percentages)

Direct research and development expenses by program:

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Direct costs for our rilonacept program were $0.9 million, $10.8 million and $25.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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, 2022, expenses primarily related to close-out activities of our RHAPSODY trial, our global, pivotal Phase 3 clinical trial in recurrent pericarditis.

During the year ended December 31, 2021, expenses primarily related to the completion of RHAPSODY and the transition to the long-term extension portion of the trial.

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 for our KPL-404 program were $11.6 million, $5.3 million and $3.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

During the year ended December 31, 2022, expenses incurred primarily related to the first two cohorts of our Phase 2 trial in RA, which was initiated in December 2021.

During the year ended December 31, 2021, expenses incurred primarily related to manufacturing of drug product supply and other start up activities for our anticipated Phase 2 trial in RA.

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

Direct costs of our mavrilimumab program were $6.4 million, $30.7 million and $25.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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, 2022, expenses related primarily to the wind-down activities of the Phase 3 portion of our clinical trial in COVID-19 related ARDS.

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, 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 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.

Direct costs for our vixarelimab program were $12.8 million, $10.7 million and $8.8 million for the year ended December 31, 2022, 2021 and 2020, respectively.

During the year ended December 31, 2022, expenses incurred related primarily to our ongoing Phase 2b clinical trial in prurigo nodularis.

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 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 because the acquired technology represented in-process research and development and had no alternative future use.

Unallocated research and development expenses were $33.9 million, $41.7 million and $47.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The decrease of $7.8 million in unallocated research and development expenses in 2022 from 2021 was primarily due a reduction in resources required to support a lower level of late stage clinical trial activity, as well as a full year of supply chain and quality related costs associated with our commercial ARCALYST program, which are now included as cost of goods sold, resulting in lower overall unallocated research and development expenses.

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 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.

Personnel-related costs for the years ended December 31, 2022, 2021 and 2020 included share-based compensation of $6.8 million, $8.5 million and $8.9 million, respectively.

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Selling, general and administrative expenses were $98.0 million, $85.9 million and $45.3 million for the years ended December 31, 2022, 2021 and 2020.

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.

The increase of $12.0 million in 2022 from 2021 was primarily due to an increase of $8.8 million in sales and marketing associated with the commercial operations of ARCALYST.

The increase of $40.6 million in 2021 from 2020 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.

Personnel-related costs for the years ended December 31, 2022, 2021 and 2020 included share-based compensation of $17.7 million, $16.5 million and $12.0 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.

Other income was $1.3 million for the year ended December 31, 2022, compared to other income of $0.1 million for the year ended December 31, 2021.

The increase was due primarily to higher interest rates on U.S.

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

Other income was $0.1 million for the year ended December 31, 2021, compared to other 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.

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

Treasury notes.

(Provision) Benefit for Income Taxes

Benefit (Provision) for Income Taxes

For the year ended December 31, 2022, we recorded an income tax benefit of $172.3 million relating primarily to the release of the valuation allowance on our UK deferred tax assets.

Our UK deferred tax asset consists primarily of the tax basis of the intangible assets that were transferred to our wholly-owned UK subsidiary in 2021 and 2022.

As a result of releasing the valuation allowance on our UK deferred tax assets in 2022, we expect that our reported income tax expense (current plus deferred) for future periods will be higher than that recorded in prior periods.

While we still maintain a full valuation allowance on our US deferred tax assets as of December 31, 2022, based on current US forecasted income, we may release our valuation allowance on US deferred tax assets in the future.

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.

current taxes from the cost-plus arrangement less amounts related to the impact of Foreign Derived Intangible Income (“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.

As of December 31, 2021, we maintained a full valuation allowance against our deferred tax assets of $127.9 million because we believed we would not be able to benefit from those tax deductions in the future.

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.

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.

Liquidity and Capital Resources

As of December 31, 2022, our principle source of liquidity was cash, cash equivalents and short-term investments, which totaled $190.6 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.

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 a public offering price of $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.

Our net income (losses) were $183.4 million, ($157.9) million and ($161.4) million for the years ended December 31, 2022, 2021 and 2020, respectively.

We expect to incur operating losses for the foreseeable future as we advance our product candidates through preclinical and clinical development and, ultimately, seek regulatory approval.

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

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.

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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 committed to minimum payments to Regeneron of $20.1 million, all of which are due within one year.

We have entered into lease agreements for office and laboratory space, and vehicles, with total future lease payments of $6.2 million, of which $3.5 million are due within one year.

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(in thousands)

Net cash used in operating activities

Net cash (used in) provided by investing activities

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents and restricted cash

Net increase in cash and cash equivalents and restricted cash

Operating Activities

During the year ended December 31, 2022, operating activities provided $5.8 million of cash which primarily consisted of our net income of $183.4 million, adjusted for non-cash items of $155.0 million and working capital decreases of $22.6 million.

Non-cash items were comprised primarily of an increase to deferred income tax assets of $185.5 million, driven by the release of the valuation allowance for the UK deferred tax assets, offset by $25.1 million of stock based compensation.

Working capital decreased primarily due to a $17.9 million increase in inventory and a $8.7 million increase in accounts receivable both related to increased sales of ARCALYST.

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.

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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.

Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2019, consisted of a $15.0 million decrease in accrued milestones, a $4.7 million decrease in accounts payable, and a $1.3 million decrease in operating lease liabilities partially offset by a $1.0 million increase in prepaid expenses and other current assets, a $0.3 million increase in other long-term liabilities and a $4.6 million increase in accrued expenses.

The decrease in accrued milestones resulted from the payment of outstanding milestones for which the expense was recognized in prior years.

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

Investing Activities

During the year ended December 31, 2022, investing activities used $8.1 million of cash, consisting of $135.9 million of purchases of short-term investments, partially offset by $127.8 million from proceeds of maturities of short-term investments.

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.

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 years ended December 31, 2022 and 2021, net cash provided by financing activities was $2.5 million and $5.9 million, respectively, consisting of proceeds from the exercise of employee share options and our 2018 Employee Share Purchase Plan (the “2018 ESPP”).

Funding Requirements

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

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

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

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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.

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.

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There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense.

Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.

Payments under some of these contracts depend on factors such as the successful enrollment of participants and the completion of clinical trial milestones.

Non-refundable prepayments determined to be used within one year for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses.

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As of December 31, 2022, we have accrued $8.4 million of estimated research and development expenses.

Share-Based Compensation

We measure all share-based awards granted to employees and directors based on their fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period.

Forfeitures are accounted for as they occur.

We issue share-based awards with both service-based vesting conditions and performance-based vesting conditions.

Expense for awards with service-based vesting is recorded using the straight-line method, and expense for awards with performance-based vesting conditions is recognized using the accelerated-attribution method.

For share-based awards granted to consultants and non-employees, compensation expense is recognized over the vesting period of the awards, which is generally the period during which services are rendered by such consultants and non-employees until completed.

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 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 11 to in our annual consolidated financial statements included elsewhere in this annual report).

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 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.

The expected term of share options granted to non-employees is equal to the contractual term of the share option award.

The risk-free interest rate is determined by reference to the U.S.

Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.

Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.

The fair value of each restricted share unit award is based on the closing price of our Class A common shares on the date of grant.

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.

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in our tax returns.

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Changes in deferred tax assets and liabilities are recorded in the (provision) benefit for income taxes.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe, based upon the weighting of both positive and negative evidence available, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense.

Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected, cumulative recent earnings and considering prudent and feasible tax planning strategies.

Significant judgment is required in assessing both positive and negative evidence available and, to the extent that a reversal of any portion of our valuation allowance against our deferred tax assets is deemed appropriate, a tax benefit will be recognized against our income tax provision in the period of such reversal.

We believe our estimates for the valuation allowances against certain deferred tax assets recognized in our financial statements are appropriate based upon our assessment of the factors mentioned above.

We released a valuation allowance of $185.5 million during the year-ended December 31, 2022.

Recently Issued Accounting Pronouncements

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Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S.

interest rates.

Further, the COVID-19 pandemic has adversely impacted the U.S.

and global economy and financial markets, and any prolonged impact may have an impact on market interest rates.

interest rates, which increased substantially over the course of 2022.

Further, events like the COVID-19 pandemic and global political turmoil, including the ongoing war in Ukraine, have adversely impacted the U.S.

and global economy and financial markets, and may have a long-term effect on market interest rates.

However, because of the short-term nature of the instruments in our portfolio, an immediate 10% change in market interest rates would not have a material impact on the fair market value of our investment portfolio or on our financial position or results of operations.

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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