Aurinia Pharmaceuticals(AUPH) - 2022 Q4 - Annual Report

PART I Business Aurinia is a biopharmaceutical company focused on commercializing its primary product, LUPKYNIS®, for lupus nephritis while advancing its R&D pipeline Overview and Strategy The company's strategy centers on maximizing the commercial value of its main product LUPKYNIS® through market education and strategic partnerships - Aurinia is a fully integrated biopharmaceutical company focused on therapies for autoimmune, kidney, and rare diseases with high unmet medical needs[22] - The company's primary product, LUPKYNIS (voclosporin), is the first FDA-approved oral therapy for adult patients with active lupus nephritis (LN), launched in January 2021[22] - Aurinia has a collaboration agreement with Otsuka Pharmaceutical Co, Ltd for the development and commercialization of LUPKYNIS in the European Union, Japan, and other territories[22] - The company's strategy includes educating physicians and patients about LN, ensuring adequate supply of LUPKYNIS, advancing its R&D pipeline (including AUR200 and AUR300), and evaluating external assets for acquisition[26][27] Recent Developments The company achieved key regulatory milestones in Europe, settled patent litigation, and secured a new method-of-use patent for LUPKYNIS® - On September 15, 2022, the European Commission (EC) granted marketing authorization for LUPKYNIS in the EU, triggering a $30.0 million milestone payment from Otsuka[28][30] - On November 29, 2022, the UK's MHRA granted marketing authorization for LUPKYNIS in Great Britain[30] - In January 2023, Aurinia settled patent litigation with Sun Pharmaceuticals regarding U.S Patent No 10,286,036 and Sun's CEQUA® product[31] - In January 2023, the USPTO allowed a new method-of-use patent application for LUPKYNIS's unique dosing regimen, which could provide patent protection up to 2037[31] Market Potential and Commercialization The company targets a significant U.S market for lupus nephritis, with an estimated average annualized net revenue of $65,000 per patient - The company estimates there are 80,000 to 120,000 SLE patients diagnosed with LN in the United States[32] - The wholesale acquisition cost (WAC) of a LUPKYNIS 'wallet' (60 capsules) is $4,561 as of February 28, 2023[36] - Aurinia expects the average annualized net revenue per patient to be approximately $65,000, after accounting for rebates, discounts, and patient adherence[36] Clinical and Regulatory LUPKYNIS received FDA approval in January 2021, and ongoing studies demonstrate a favorable long-term safety and efficacy profile - LUPKYNIS was approved by the FDA on January 22, 2021, in combination with a background immunosuppressive therapy regimen for adult patients with active LN[40] - The AURORA 2 continuation study showed a favorable risk/benefit profile over three years, with sustained efficacy and safety comparable to the initial AURORA 1 study[41] - The company initiated the ENLIGHT-LN registry to obtain long-term, real-world data on LUPKYNIS, with 42 sites activated towards a goal of 75[34] Intellectual Property Voclosporin's intellectual property is protected by a patent portfolio extending to at least 2027 for composition and 2037 for method-of-use - Patent protection for the composition of matter of voclosporin is anticipated to extend until at least October 2027 in the U.S, Europe, and Japan[46] - U.S Patent No 10,286,036, with a term extending to December 2037, covers the specific LUPKYNIS dosing protocol for LN[47] - A newly allowed patent application in January 2023 further refines the method of using LUPKYNIS and has the potential to provide an additional layer of patent protection up to 2037[48] Manufacturing and Supply Chain Aurinia relies on sole-source contract manufacturing organizations, including Lonza and Catalent, for its LUPKYNIS supply chain - The company uses contract manufacturing organizations (CMOs) for the manufacturing of LUPKYNIS[97] - Lonza is the sole supplier for the voclosporin drug substance A dedicated manufacturing facility (monoplant) is being built with Lonza in Switzerland, expected to be completed in 2023[98][99] - Catalent Pharma Solutions is the sole supplier for the encapsulation of voclosporin 7.9 mg capsules[100] Human Capital and Corporate Information The company employed approximately 300 people as of year-end 2022 and is preparing its first ESG report for 2023 - As of December 31, 2022, the company employed approximately 300 employees in the United States, Canada, and the United Kingdom[104] - The company is preparing its first Environmental, Social and Governance (ESG) report, which is expected to be made public in 2023[111] - Aurinia is organized under the Business Corporations Act (Alberta) with its principal executive office in Victoria, British Columbia, and a U.S commercial office in Rockville, Maryland[112] Risk Factors The company faces significant risks related to its dependence on a single product, commercialization challenges, intellectual property, and third-party manufacturing - The company's success is highly dependent on its ability to successfully commercialize its single approved product, LUPKYNIS, and it has limited commercial sales experience[115] - Aurinia relies on a limited number of customers, with two main customers accounting for approximately 45% and 35% of total revenues in 2022[120] - The business is exposed to risks from unfavorable pricing regulations, third-party coverage, and reimbursement policies, which could be impacted by healthcare reform initiatives like the Inflation Reduction Act[128][93] - The company relies exclusively on third-party manufacturers, including Lonza as the sole source for drug substance and Catalent for encapsulation, exposing it to supply chain risks[194][195] - Aurinia is dependent on its partner, Otsuka, for the development and commercialization of LUPKYNIS in several key territories outside the United States[188] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[265] Properties Aurinia leases its principal R&D, administrative, and commercial office facilities in Canada and the United States - The company's headquarters is a leased 13,206 sq ft facility in Victoria, British Columbia, which is on a month-to-month lease as of December 31, 2022[266] - The U.S commercial office is a leased 30,531 sq ft space in Rockville, Maryland[266] Legal Proceedings The company is involved in patent litigation and a shareholder class action lawsuit - In January 2023, the company settled a patent infringement lawsuit with Sun Pharmaceuticals concerning Sun's CEQUA product[489] - A shareholder class action complaint was filed against the company in April 2022, alleging violations of federal securities laws The company intends to vigorously defend against this action[491] Mine Safety Disclosures This section is not applicable to the company's biopharmaceutical operations - Not applicable[267] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common shares trade on Nasdaq under 'AUPH', and it does not anticipate paying cash dividends - The company's common shares trade on The Nasdaq Global Market under the symbol 'AUPH'[270] - The company does not anticipate paying any cash dividends in the foreseeable future, retaining funds for business development and commercialization of LUPKYNIS[276] - No securities were repurchased during the three months ended December 31, 2022[275] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew significantly in 2022 driven by LUPKYNIS® sales and a milestone payment, leading to a reduced net loss despite higher operating expenses Results of Operations Total net revenue increased to $134.0 million in 2022, driven by LUPKYNIS® sales and a milestone payment, narrowing the net loss to $108.2 million Comparison of Results of Operations (Years Ended Dec 31) | Financial Metric (in thousands) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total revenue, net | $134,030 | $45,605 | $88,425 | | Product revenue, net | $103,468 | $45,488 | $57,980 | | License and collaboration revenue | $30,562 | $117 | $30,445 | | Total cost of sales and operating expenses | $245,500 | $226,340 | $19,160 | | Cost of sales | $5,664 | $1,091 | $4,573 | | Selling, general and administrative | $196,371 | $173,536 | $22,835 | | Research and development | $44,988 | $51,139 | $(6,151) | | Net loss | $(108,180) | $(180,966) | $72,786 | - The increase in total net revenue was driven by higher LUPKYNIS sales and a $30.0 million milestone payment from Otsuka following EC marketing authorization[295] - The decrease in R&D expenses was primarily due to a $10.0 million upfront license and milestone expense for AUR300 in 2021 that did not recur in 2022[301] Liquidity and Capital Resources The company ended 2022 with $389.4 million in cash and investments, which is considered sufficient to fund operations for the next few years Cash and Investments (as of Dec 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash | $94,172 | $231,900 | | Short-term investments | $295,218 | $234,178 | | Total | $389,390 | $466,078 | Summary of Cash Flows (Years Ended Dec 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(79,529) | $(157,692) | | Net cash used in investing activities | $(60,632) | $(103,870) | | Net cash provided by financing activities | $2,433 | $221,112 | - The company believes its cash position as of December 31, 2022, is sufficient to fund its current business plans for at least the next few years[306] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks including interest rate, foreign currency, inflation, and credit risk - A hypothetical 100 basis point change in interest rates would result in a $3.0 million fluctuation in annual interest income from the company's investment portfolio[319] - Foreign currency risk is primarily from the Canadian dollar, Swiss Franc, and Great British Pound, but is considered low as the majority of cash and expenses are denominated in U.S dollars[320] - Inflation affects the company by increasing costs for labor, manufacturing, and clinical trials[321] - Credit risk is concentrated with two main customers, but the company has not experienced any issues with collectability[323] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and supplementary data for the fiscal year ended December 31, 2022 Consolidated Balance Sheets Total assets decreased to $470.9 million in 2022, primarily due to a reduction in cash, while total shareholders' equity fell to $405.4 million Consolidated Balance Sheet Data (as of Dec 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $442,539 | $513,324 | | Cash, cash equivalents and restricted cash | $94,172 | $231,900 | | Short-term investments | $295,218 | $234,178 | | Inventories, net | $24,752 | $19,326 | | Total Assets | $470,860 | $543,367 | | Total Liabilities | $65,425 | $64,276 | | Total Shareholders' Equity | $405,435 | $479,091 | Consolidated Statements of Operations and Comprehensive Loss The company's net loss improved significantly to $108.2 million in 2022 from $181.0 million in 2021, driven by strong revenue growth Consolidated Statement of Operations Data (Years Ended Dec 31) | (in thousands, except per share data) | 2022 | 2021 | | :--- | :--- | :--- | | Total revenue, net | $134,030 | $45,605 | | Total cost of sales and operating expenses | $245,500 | $226,340 | | Loss from operations | $(111,470) | $(180,735) | | Net loss | $(108,180) | $(180,966) | | Basic and diluted loss per common share | $(0.76) | $(1.40) | Notes to Consolidated Financial Statements Key disclosures include revenue concentration, significant manufacturing commitments with Lonza, and details on a future finance lease for a new facility - Revenues from the two main U.S customers accounted for approximately 45% and 35% of total revenues for 2022 The collaboration partner, Otsuka, accounted for approximately 20%[394] - The company has non-cancellable future manufacturing commitments of approximately $29.3 million with Lonza through 2024[492] - A future finance lease for a dedicated manufacturing facility (monoplant) with Lonza is expected to commence in 2023, with minimum lease payments totaling approximately $85.0 million through 2030[503] - As of Dec 31, 2022, the company has $518.1 million of Canadian net operating loss (NOL) carryforwards and $10.1 million of U.S federal NOL carryforwards[486] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[328] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[329] - No changes in internal control over financial reporting occurred during the quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[332] PART III Directors, Executive Compensation, Security Ownership, and Accountant Fees Required disclosures are incorporated by reference from the company's forthcoming 2023 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships, and Principal Accountant Fees and Services is incorporated by reference from the registrant's definitive proxy statement to be filed within 120 days of the fiscal year end[3][336][338] PART IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements and exhibits filed as part of the annual report - This section contains the list of consolidated financial statements and exhibits filed with the Form 10-K[342][343] Form 10-K Summary The company has elected not to provide a summary for its Form 10-K - None[349]