Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 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 (the “SEC”), our actual results could differ materially from the results, performance or achievements expressed in or implied by these forward-looking statements.
Overview
We are a commercial-stage 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), abiprubart, and mavrilimumab, is based on strong biologic rationale or validated mechanisms, targets a spectrum of underserved cardiovascular and autoimmune conditions, and offers the potential for differentiation.
ARCALYST is an interleukin-1α and interleukin-1β cytokine trap. In 2017, we licensed ARCALYST from Regeneron, which discovered and initially developed the drug. Our exclusive license to ARCALYST from Regeneron includes worldwide rights, excluding the Middle East and North Africa, for all applications other than those in oncology and local administration to the eye or ear. We received 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 United States prevalent population of approximately 40,000 patients seeking and receiving medical treatment. ARCALYST is commercially available across the United States through a network of distributors. ARCALYST is also approved in the United States for the treatment of CAPS, including FCAS 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.
Abiprubart is an investigational monoclonal antibody inhibitor of CD40-CD154 costimulatory interaction. In 2019, we acquired all of the outstanding securities of Primatope , the company that owned or controlled the intellectual property related to abiprubart. In connection with our acquisition of Primatope, we acquired an exclusive world-wide license to abiprubart 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 costimulatory interaction is an attractive approach to address multiple autoimmune disease pathologies. In December 2021, we initiated a Phase 2 clinical trial of abiprubart in RA, which is designed to evaluate pharmacokinetics, safety and efficacy with subcutaneous administration. In January 2024, we announced topline clinical data from Cohorts 1, 2 and 3 of the trial, and that the trial met its primary efficacy endpoint in Cohort 3 at the weekly dose level. We expect to announce data from Cohort 4 of the trial in the second quarter 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 currently evaluating potential partnership opportunities to advance mavrilimumab’s development. 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.
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
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Regeneron has achieved profitability, 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, 2023, we recognized net income of $14.1 million, as compared to net income of $183.4 million for the year ended December 31, 2022. As of December 31, 2023, we had an accumulated deficit of $478.0 million. We expect to incur operating losses for the foreseeable future as we advance our product candidates through preclinical and clinical development and, ultimately, seek regulatory approval. In addition, we expect to continue to incur significant expenses related to product manufacturing, including technology transfer costs, marketing, sales and distribution of ARCALYST. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates.
As of December 31, 2023, we had cash, cash equivalents and short-term investments of $206.4 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 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 is dependent on our ability to fund our operations through sales of ARCALYST and/or raise additional capital, such as through debt or equity offerings, as needed.
Components of Our Results of Operations
Product revenue, net
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 select network of specialty pharmacies (collectively, “customers”), which deliver the medication to patients by mail.
Net revenue from product sales is recognized at the transaction price when the customer 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.
License and collaboration revenue
License and collaboration revenue includes amounts recognized related to upfront payments, royalty revenue, milestone payments and products sold under collaboration agreements.
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
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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, 2023, and will recognize revenue as materials are shipped.
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. Additionally, in 2023, we received a total of $35.0 million in additional payments from Genentech related to delivery of certain drug material to Genentech and Genentech’s achievement of a development milestone. In the fourth quarter of 2023, following the achievement of a development milestone related to a second indication under the Genentech License Agreement, Genentech became obligated to make an additional cash payment of $10.0 million, which was received in the first quarter of 2024. We will be eligible to receive up to a total of approximately $600.0 million in contingent payments, including specified development, regulatory and sales-based milestones, of which approximately $575.0 million remain as of December 31, 2023, 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 have recognized $124.7 million of revenue of the $125.0 million transaction price under the Genentech License Agreement and will recognize the remaining revenue over the remaining duration of the in-progress Phase 2b clinical trial of vixarelimab in prurigo nodularis.
Operating Expenses
Cost of Goods Sold
Cost of goods sold includes production and distribution costs of ARCALYST, amortization of the $20.0 million payment we made to Regeneron in the first quarter of 2021 upon achievement of a regulatory milestone and other miscellaneous product costs associated with ARCALYST. Cost of goods sold also includes labor and overhead costs associated with the production of ARCALYST associated with supply chain, quality, and regulatory activities, and the technology transfer of the manufacturing process for the ARCALYST drug substance.
Collaboration expenses
Collaboration expenses consist of Regeneron’s share of the profit related to ARCALYST sales under the Regeneron Agreement and the cost of products sold under collaboration agreements. 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. With respect to the technology transfer of ARCALYST drug substance manufacturing initiated by Regeneron in March 2023, to the extent permitted by the Regeneron Agreement, the fully-burdened costs of each of us and Regeneron incurred in performing such technology transfer shall also be deducted from net sales of ARCALYST to determine profit. We also evenly split with Regeneron any proceeds received by us from any licensees, sublicensees and distributors in consideration for the sale, license or other disposition of rights with respect to ARCALYST, including upfront payments, milestone payments and royalties.
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Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the research and development of our product candidates. We expense research and development costs as incurred. These expenses may include:
● expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval;
● expenses incurred under agreements with CROs that are primarily engaged in the oversight and conduct of our clinical trials and CDMOs that are primarily engaged to provide preclinical and clinical drug substance and product for our research and development programs for our product candidates;
● other costs related to acquiring and manufacturing preclinical and clinical trial materials, including manufacturing validation batches, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;
● payments made in cash or equity securities under third party licensing, acquisition and other similar agreements;
● employee-related expenses, including salaries and benefits, travel and share-based compensation expense for employees engaged in research and development functions;
● costs related to compliance with regulatory requirements; and
● allocated facilities-related costs, which include rent and utilities, depreciation and other expenses.
We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.
Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants, CROs, CDMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees incurred under license, acquisition and other similar agreements. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to conduct our research and discovery activities as well as for managing our preclinical and clinical development, process development and manufacturing clinical and preclinical materials.
Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will be substantial over the next several years as we conduct our ongoing and/or planned clinical trials for our product candidates, as well as conduct other preclinical and clinical development, and make regulatory filings for our product candidates.
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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 revenue from the sale of our current or future product candidates. 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, including share based compensation expense for personnel in selling, marketing, medical, executive, business development, finance, human resources, legal and support personnel functions. Selling, general and administrative expenses also include external commercialization, marketing, and professional fees for legal, patent, and accounting services.
We have been commercializing ARCALYST since April 2021 and expect that our selling, general and administrative expenses will continue to increase in the future.
Other Income
Other income consists of interest income recognized from investments in money market funds, United States Treasury notes and other miscellaneous income offset by expenses related to investments.
Income Taxes
Because our parent company, Kiniksa Pharmaceutical, Ltd. (“Kiniksa Bermuda”) is an exempted company incorporated under the laws of Bermuda, we are principally subject to taxation in Bermuda. Under the current laws of Bermuda, there is no corporate income tax levied on an exempted company’s income, resulting in an effective zero percent tax rate. As a result, we have not recorded any income tax benefits from our losses incurred in Bermuda during each reporting period, and no net operating loss carryforwards are currently available to us for those losses. In December 2023, Bermuda passed legislation enacting a corporate income tax effective in 2025 on companies that meets certain requirements. If we meet those requirements, we could become subject to taxation in Bermuda in the future. Our wholly owned United States subsidiaries, Kiniksa US, and Primatope are subject to federal and state income taxes in the United States. Our wholly owned subsidiary Kiniksa UK, its Swiss branch office, and Kiniksa UK’s wholly owned subsidiaries, Kiniksa Pharmaceuticals (Germany) GmbH, Kiniksa Pharmaceuticals (France) SARL, and Kiniksa Pharmaceuticals, GmbH are subject to taxation in their respective countries.
In the first quarter of 2021, Kiniksa Bermuda transferred all rights, title and interest in, among other things, certain contracts, intellectual property rights, product filings and approvals and other information, plans and materials owned insofar as they related exclusively or primarily to ARCALYST to Kiniksa UK. In the first quarter of 2022, Kiniksa Bermuda transferred exclusive rights to develop and commercialize mavrilimumab in the Asia Pacific region, excluding Japan, to Kiniksa UK. In the third quarter of 2022, Kiniksa Bermuda transferred exclusive worldwide rights to develop and commercialize vixarelimab to Kiniksa UK. In the fourth quarter of 2023, all rights, title and interest in, among other things, certain contracts, intellectual property rights, product filings and approvals and other information, plans and inventory owned insofar as they related exclusively or primarily to ARCALYST were allocated by Kiniksa UK to its Swiss branch office. In connection with each of the foregoing transfers and /or allocations, we recognized a step-up in basis and did not incur any material tax liabilities.
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Results of Operations
Comparison of the Years Ended December 31, 2023, 2022 and 2021
The following table summarizes our results of operations for the years ended December 31, 2023, 2022 and 2021:
2023/2022
2022/2021
Years Ended
Comparison
Comparison
December 31,
Increase/(Decrease)
Increase/(Decrease)
2023
2022
2021
$
%
$
%
(in thousands)
(in thousands, except percentages)
Revenue:
Product revenue, net
$
233,176
$
122,524
$
38,544
$
110,652
90%
$
83,980
218%
License and collaboration revenue
37,083
97,656
—
(60,573)
(62)%
97,656
100%
Total revenue
270,259
220,180
38,544
50,079
23%
181,636
471%
Operating expenses:
Cost of goods sold
33,407
22,895
9,100
10,512
46%
13,795
152%
Collaboration expenses
56,524
24,071
835
32,453
135%
23,236
2783%
Research and development
76,097
65,490
99,297
10,607
16%
(33,807)
(34)%
Selling, general and administrative
129,427
97,951
85,948
31,476
32%
12,003
14%
Total operating expenses
295,455
210,407
195,180
85,048
40%
15,227
8%
Income (loss) from operations
(25,196)
9,773
(156,636)
(34,969)
(358)%
166,409
(106)%
Other income
8,544
1,253
97
7,291
582%
1,156
1192%
Income (loss) before income taxes
(16,652)
11,026
(156,539)
(27,678)
(251)%
167,565
(107)%
Benefit (provision) for income taxes
30,736
172,337
(1,385)
(141,601)
(82)%
173,722
(12,543)%
Net income (loss)
$
14,084
$
183,363
$
(157,924)
$
(169,279)
(92)%
$
341,287
(216)%
Product Revenue, Net
We recognized net revenue from the sale of ARCALYST of $233.2 million, $122.5 million and $38.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. The increase of $110.7 million in 2023 from 2022 was primarily driven by an increase in patients. The increase of $84.0 million in 2022 from 2021 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
We reported $37.1 million of license and collaboration revenue for the year ended December 31, 2023, related to the Genentech License Agreement primarily driven by the achievement of $25.0 million in development milestones related to two new indications, materials delivered and our ongoing recognition of the transaction price related to the in-progress Phase 2b clinical trial of vixarelimab in prurigo nodularis. We reported $97.7 million of license and collaboration revenue for the year ended December 31, 2022, which primarily consisted of $87.7 million for revenue related to the Genentech License Agreement and $10.0 million in revenue recognized upon the signing of the mavrilimumab Huadong Collaboration Agreement in February of 2022. 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.
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Cost of Goods Sold
We recognized cost of goods sold of $33.4 million, $22.9 million, and $9.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. The increase of $10.5 million in 2023 from 2022 related primarily to the increase in sales of ARCALYST and $3.3 million related to the initiation of the technology transfer of the manufacturing process offset by a decrease in average cost per unit resulting from favorable production variances. The increase of $13.8 million in 2022 from 2021 related primarily to the increase in sales and an increase in the average cost per unit. The increase in the average cost per unit was largely attributable to selling through repurposed clinical supply that was previously expensed through R&D and carried at zero-cost during 2021. We expect cost of goods sold to increase as we continue to conduct a technology transfer of the manufacturing process for ARCALYST drug substance.
Collaboration Expenses
We recognized collaboration expenses of $56.5 million, $24.1 million and $0.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. The increase of $32.5 million in 2023 from 2022 relates primarily to increased revenue from sales of ARCALYST and improved profitability under the Regeneron agreement. The increase of $23.2 million in 2022 from 2021 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.
Research and Development Expenses
2023/2022
2022/2021
Years Ended
Comparison
Comparison
December 31,
Increase/(Decrease)
Increase/(Decrease)
2023
2022
2021
$
%
$
%
(in thousands)
(in thousands, except percentages)
Direct research and development expenses by program:
Rilonacept
$
2,628
$
853
$
10,842
$
1,775
208%
$
(9,989)
(92)%
Abiprubart
28,388
11,563
5,316
16,825
146%
6,247
118%
Mavrilimumab
768
6,379
30,704
(5,611)
(88)%
(24,325)
(79)%
Vixarelimab
7,717
12,809
10,739
(5,092)
(40)%
2,070
19%
Unallocated research and development expenses:
Personnel related (including share-based compensation)
22,739
22,548
27,736
191
1%
(5,188)
(19)%
Other
13,857
11,338
13,960
2,519
22%
(2,622)
(19)%
Total research and development expenses
$
76,097
$
65,490
$
99,297
$
10,607
16%
$
(33,807)
(34)%
Research and development expenses were $76.1 million for the year ended December 31, 2023, compared to $65.5 million for the year ended December 31, 2022, or an increase of $10.6 million. Research and development expenses were $65.5 million for the year ended December 31, 2022, compared to $99.3 million for the year ended December 31, 2021, or a decrease of $33.8 million.
Direct costs for our rilonacept program were $2.6 million, $0.9 million and $10.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. During the year ended December 31, 2023, expenses primarily related to the purchase of supply to support life-cycle management. 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.
Direct costs for our abiprubart program were $28.4 million, $11.6 million and $5.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. During the year ended December 31, 2023, expenses incurred primarily related to the manufacturing of clinical material, the continuation of the first two cohorts of the Phase 2 clinical
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trial of abiprubart in RA and Cohorts 3 and 4 of such trial. During the year ended December 31, 2022, expenses incurred primarily related to the first two cohorts of our Phase 2 clinical trial of abiprubart 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 clinical trial of abiprubart in RA.
Direct costs of our mavrilimumab program were $0.8 million, $6.4 million and $30.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. During the year ended December 31, 2023, expenses related primarily to intellectual property maintenance. During the year ended December 31, 2022, expenses related primarily to the wind-down activities of the Phase 3 portion of our clinical trial of mavrilimumab 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.
Direct costs for our vixarelimab program were $7.7 million, $12.8 million and $10.7 million for the year ended December 31, 2023, 2022 and 2021, respectively. During the years ended December 31, 2023 and 2022, expenses incurred related primarily to our ongoing Phase 2b clinical trial of vixarelimab in prurigo nodularis. The decrease of $5.1 million in 2023 from 2022 was primarily related to a decrease in active participants in our ongoing Phase 2b clinical trial of vixarelimab in prurigo nodularis. During the year ended December 31, 2021, expenses incurred related primarily to the initiation of our Phase 2b clinical trial of vixarelimab in prurigo nodularis.
Unallocated research and development expenses were $36.6 million, $33.9 million and $41.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. The increase of $2.7 million in unallocated research and development expenses in 2023 from 2022 was primarily due to timing of raw material purchases to support internal development. 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. Personnel-related costs for the years ended December 31, 2023, 2022 and 2021 included share-based compensation of $5.5 million, $6.8 million and $8.5 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $129.4 million, $98.0 million and $85.9 million for the years ended December 31, 2023, 2022 and 2021. In 2022 and 2023 we expanded our ARCALYST salesforce to help drive further prescriber adoption and patient enrollments. The increase of $31.5 million in 2023 from 2022 was primarily due to an increase of $18.9 million in personnel-related costs and an increase in sales and marketing of $6.0 million largely attributable to the expansion of our salesforce. 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 our first full year of commercial operations of ARCALYST. Personnel-related costs for the years ended December 31, 2023, 2022 and 2021 included share-based compensation of $19.8 million, $17.7 million and $16.5 million, respectively.
Other Income
Other income was $8.5 million for the year ended December 31, 2023, compared to other income of $1.3 million for the year ended December 31, 2022. 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 $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.
Benefit (Provision) for Income Taxes
For the year ended December 31, 2023, we recorded an income tax benefit of $30.7 million relating to a non-cash deferred tax benefit of $33.8 million primarily associated with Kiniksa UK’s allocation of its ARCALYST assets to its Swiss branch office and the release of the valuation allowance on U.S. deferred tax assets offset by the establishment of a partial valuation allowance on our UK deferred tax assets. The net benefit in the net deferred tax asset was offset by
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current income tax expense of $3.1 million primarily associated with income earned in the UK and the United States. We expect that our reported income tax expense for future periods will be higher due to the utilization of our deferred tax assets.
For the year ended December 31, 2022, we recorded an income tax benefit of $172.3 million relating to a non-cash deferred tax benefit of $185.5 million primarily associated with 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.
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 FDII deduction and R&D Credits. As of December 31, 2021, we maintained a full valuation allowance against our deferred tax assets of $127.9 million.
Liquidity and Capital Resources
As of December 31, 2023, our principal source of liquidity was cash, cash equivalents and short-term investments, which totaled $206.4 million. Our net income (losses) were $14.1 million, $183.4 million and ($157.9) million for the years ended December 31, 2023, 2022 and 2021, respectively. We expect to incur significant operating losses for the foreseeable future.
Under various agreements with third parties, we have agreed to make milestone payments, pay royalties, pay annual maintenance fees and to meet due diligence requirements, each based upon specified events. Pursuant to the Regeneron Agreement, we have entered into a supply agreement with Regeneron to purchase both clinical and commercial product. We have committed to minimum payments to Regeneron of $24.9 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 $14.2 million, $3.0 million of which are due within one year. In connection with our ongoing technology transfer of ARCALYST drug substance manufacturing, we have entered into a manufacturing commitment with a CDMO to establish a new manufacturing site for ARCALYST drug substance. Such commitment, which includes the purchase of raw materials and related service fees, obligates us to minimum payments of $96.8 million, $19.9 million of which are due within one year. We have additionally entered into agreements with several CDMOs to provide the Company with preclinical and clinical trial materials for our non-ARCALYST assets, which obligate us to minimum payments of $6.5 million all of which are due within one year.
Under various agreements with third parties, we are entitled to receive upfront payments, milestone payments, and royalties, each based upon specified milestones. During the year ended December 31 2023; we received $20.0 million for the delivery of certain drug supplies as part of the Genentech License Agreement and $15.0 million following Genentech’s achievement of a development milestone related to a new indication under the Genentech License Agreement. In the fourth quarter of 2023, following Genentech’s achievement of a development milestone related to a second indication under the Genentech License Agreement, Genentech became obligated to pay a $10.0 million milestone, which was received in the first quarter of 2024.
These agreements impact our short-term and long-term liquidity and capital needs. As of December 31, 2023, we had cash, cash equivalents and short-term investments of $206.4 million.
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Cash Flows
The following table summarizes our cash flows for each of the periods presented:
Years Ended
December 31,
2023
2022
2021
(in thousands)
Net cash provided by (used in) operating activities
$
13,301
$
5,807
$
(126,298)
Net cash provided by (used in) investing activities
(29,557)
(8,078)
128,635
Net cash provided by financing activities
1,495
2,516
5,885
Net increase in cash and cash equivalents and restricted cash
$
(14,761)
$
245
$
8,222
Operating Activities
Net cash provided by operations was $13.3 million for the year ended December 31, 2023, compared to net cash provided by operating activities of $5.8 million for the year ended December 31, 2022. The increase in cash provided by operating activities is primarily due to an increase in net contribution from higher ARCALYST sales, offset by a decrease in cash received from licensing agreements of $67.0 million.
Net cash provided by operations was $5.8 million for the year ended December 31, 2022, compared to net cash used by operating activities of $126.3 million for the year ended December 31, 2021. The increase in cash provided by operating activities is primarily due to cash received from licensing agreements of $102 million and an increase in ARCALYST sales offset by increases in inventory and accounts receivable both related to increased sales of ARCALYST.
Investing Activities
Net cash used in investing activities was $29.6 million for the year ended December 31, 2023, compared to net cash used in investing activities of $8.1 million for the year ended December 31, 2022 as part of managing our cash and short-term investment portfolio mix.
Net cash used in investing activities was $8.1 million for the year ended December 31, 2022, compared to net cash provided by investing activities of $128.6 million for the year ended December 31, 2021 as we were able to fund our operations through operating cash flows in 2022 due to increased ARCALYST sales and cash received from out licensing activities, offset by a $20.0 million regulatory milestone incurred under the Regeneron Agreement in 2021.
Financing Activities
During the years ended December 31, 2023, 2022 and 2021, net cash provided by financing activities was $1.5 million, $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. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. As a result, we expect to incur additional expenses related to milestone, royalty and other payments payable to third parties with whom we have entered into license, acquisition and other similar agreements to acquire the rights to our product candidates. Additionally, we expect to continue to incur costs associated with operating as a public
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company, including significant legal, accounting, investor relations and other expenses. We expect to incur expenses as we:
● support our sales, marketing and distribution capabilities, infrastructure and organization to commercialize ARCALYST and any product candidates for which we may obtain marketing approval;
● conduct new and ongoing research and pre-clinical and clinical development of our product candidates, including our Phase 2 clinical trial for abiprubart ;
● manufacture our products and product candidates for clinical or commercial use, increase our manufacturing capabilities, add additional manufacturers or suppliers and perform activities related to our technology transfer of the process for manufacturing ARCALYST drug substance;
● seek regulatory and marketing approvals for our product candidates that successfully complete clinical trials, if any;
● make milestone or other payments under any current or future license, acquisition, collaboration or other strategic transaction agreement;
● seek to identify, assess and study new or expanded indications for our products or product candidates, new or alternative dosing levels and frequency for our products or product candidates, or new or alternative administration of our products or product candidates, including method, mode or delivery device;
● seek to identify, assess, acquire or develop additional product candidates;
● enter into licensing, acquisition, collaboration or other strategic transaction agreements;
● seek to maintain, protect and expand our intellectual property portfolio;
● seek to attract and retain skilled personnel;
● create additional infrastructure to support our product development and commercialization efforts; and
● experience delays or encounter issues with any of the above, including but not limited to failed trials, complex results, safety issues, regulatory challenges that require longer follow-up of existing trials, additional major trials, additional supportive trials in order to pursue marketing approval, a pandemic or other outbreak of disease, or the global economic slowdown and rising inflation.
We believe that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. The future viability of our company is dependent on our ability to fund our operations through sales of ARCALYST and/or raise additional capital, such as through debt or equity offerings, as needed. We anticipate that we may require additional capital if we choose to pursue in-licenses or acquisitions of other product candidates and technologies or their related businesses. We expect to continue to incur significant expenses related to product manufacturing, including technology transfer costs, sales, marketing and distribution of ARCALYST. In addition, if we obtain regulatory approval for any of our current or future product candidates, pursue additional indications or additional territories for our products or any of our current or future product candidates, we expect to incur significant expenses related to product development and manufacturing, sales, marketing and distribution, depending on where we choose to commercialize.
Because of the numerous risks and uncertainties associated with research, development and commercialization of biologic products, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements may be impacted by a number of factors, including those described in Part I, Item 1A. “ Risk Factors ” in this Annual Report.
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Until such time, if ever, as we can generate substantial and sustained product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, or other sources, including, licensing, collaboration, marketing, distribution or other strategic transactions or arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our shareholders’ ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect our shareholders’ rights as a common shareholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in fixed payment obligations.
If we raise funds through licensing, collaboration, marketing, distribution or other strategic transactions or arrangements with third parties, we may have to relinquish valuable rights to our technologies, product candidates or future revenue streams, or otherwise agree to terms that may not be favorable to us. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate some or all of our research and development programs for product candidates, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
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.
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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.
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 us as our 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.
As of December 31, 2023, 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
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
● vendors, including research laboratories, in connection with preclinical development activities;
● CROs and investigative sites in connection with preclinical studies and clinical trials;
● third parties in the connection with the achievement of milestones due under license acquisition and other similar agreements; and
● CDMOs in connection with drug substance and drug product formulation and manufacturing of materials.
We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. 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 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. Non-refundable prepayments or minimum balance requirements associated to clinical trials determined to not be used within one year are classified as other long-term assets. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services
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performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
As of December 31, 2023, we have accrued $7.9 million of estimated research and development expenses.
Income Taxes
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 benefit (provision) 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 recorded in our income tax benefit (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.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our annual consolidated financial statements included elsewhere in this Annual Report.
I TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. As of December 31, 2023, our cash, cash equivalents and short-term investments consisted of money market funds and United States Treasury notes. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of United States interest rates. Such interest rates have and in the future may be subject to significant volatility. However, because of the short-term nature of the instruments in our portfolio, an immediate 100 basis point 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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