Aurinia Pharmaceuticals(AUPH) - 2020 Q4 - Annual Report

Part I Business Aurinia is a commercial-stage biopharmaceutical company with FDA-approved LUPKYNIS for lupus nephritis, focusing on U.S. launch and global expansion - On January 22, 2021, the FDA approved LUPKYNIS in combination with background immunosuppressive therapy for adult patients with active lupus nephritis (LN)[26] - The estimated U.S. market for LN is 80,000 to 120,000 patients[31] - Expected average annualized net revenue per patient for LUPKYNIS is approximately $65,000, with a WAC of $3,950 per 'wallet' (60 capsules)[34] - A collaboration and licensing agreement with Otsuka Pharmaceutical Co., Ltd. for LUPKYNIS in EU/Japan included a $50 million upfront payment[46] - A collaborative agreement with Lonza Ltd. was established to build a dedicated manufacturing facility in Switzerland for voclosporin supply[47] Strategy and Market Potential The company's strategy focuses on optimizing LUPKYNIS value, expanding its label, and adding new pipeline assets through U.S. commercialization and global partnerships - Corporate strategy focuses on optimizing LUPKYNIS's value, expanding its label for other kidney indications, and adding new pipeline assets[29] - Key tactics include U.S. commercial launch, collaboration with Otsuka for EU/Japan, securing supply with Lonza, and evaluating external assets[30] - The estimated U.S. market for LN is 80,000 to 120,000 patients[31] - The wholesale acquisition cost (WAC) for a LUPKYNIS 'wallet' (60 capsules) is $3,950, with an expected average annualized net revenue per patient of approximately $65,000[34] Voclosporin Development History and Other Programs Voclosporin's development history includes discontinued programs for psoriasis, kidney transplantation, and dry eye syndrome, with an ongoing exploratory study for COVID-19 - Development of voclosporin for psoriasis and kidney transplantation was discontinued due to market dynamics and costs, despite some positive clinical data[40][41] - The development program for voclosporin ophthalmic solution (VOS) for Dry Eye Syndrome was suspended after the Phase 2/3 AUDREY trial did not meet its primary endpoint in November 2020[49] - An exploratory study for Focal Segmentation Glomerulosclerosis (FSGS) was suspended due to difficulty in enrolling patients[52] - An investigator-initiated trial (VOCOVID) was initiated to evaluate the antiviral effects of voclosporin in kidney transplant recipients with COVID-19, based on in-vitro data showing it inhibited viral replication at lower concentrations than tacrolimus[53][54] Intellectual Property Aurinia holds an extensive patent portfolio for voclosporin, with protection expected until at least October 2027 in key markets, including a U.S. patent for the LUPKYNIS dosing protocol extending to 2037 - The company expects patent protection for voclosporin to be extended until at least October 2027 in the U.S., Europe, and Japan[62] - U.S. Patent No. 10,286,036, with a term extending to December 2037, was granted for the LUPKYNIS dosing protocol for LN, which is part of the FDA-approved prescribing information[63] - The company expects to receive five years of 'new chemical entity' exclusivity in the U.S. and up to ten years in Europe[62] Regulatory Environment The company operates in a highly regulated environment, having secured FDA approval for LUPKYNIS and planning an EMA filing, with sales highly dependent on third-party payor coverage and reimbursement - LUPKYNIS was granted Priority Review and Fast Track designation by the FDA, leading to an expedited six-month review and approval on January 22, 2021[56] - The company, with its partner Otsuka, plans to file a Marketing Authorization Application (MAA) with the European Medicines Agency (EMA) in the first half of 2021[66] - Sales of LUPKYNIS are highly dependent on adequate coverage and reimbursement from third-party payors, including government programs and private insurers, who are implementing increasing cost-containment measures[106] - Healthcare reforms, such as the ACA, and other legislative proposals could significantly affect reimbursement rates and the company's ability to generate revenue[108][109] Manufacturing, Sales, and Human Capital Aurinia relies on sole contract manufacturers Lonza and Catalent for its supply chain and has established a commercial organization to support the LUPKYNIS launch, employing 294 people as of December 31, 2020 - The company relies on Lonza as the sole source manufacturer for voclosporin API and Catalent as the sole supplier for encapsulation and packaging[114][115] - A commercial organization with expertise in rheumatology and nephrology has been established to support the marketing, sales, and distribution of LUPKYNIS[116] - As of December 31, 2020, the company had 294 employees across the U.S., Canada, and the U.K[117] Risk Factors The company faces significant risks including COVID-19 impacts, single-product dependency, reimbursement challenges, intellectual property issues, capital needs, reliance on third-party manufacturers and partners, and complex regulatory compliance - The COVID-19 pandemic could materially affect business operations, including sales, marketing, clinical trials, and supply chain[124][125] - As a single-product company with limited commercial experience, success is highly dependent on the successful commercialization of LUPKYNIS[129] - The company's ability to generate revenue is contingent on obtaining and maintaining adequate coverage and reimbursement from government and private payors, which is subject to pricing pressures and healthcare reform[137][139] - The company relies exclusively on third parties like Lonza (API) and Catalent (encapsulation) for manufacturing, and any disruption could delay commercialization efforts[203][204] - The company is dependent on its partner, Otsuka, for the development and commercialization of LUPKYNIS in key territories outside the U.S., and failure by the licensee to perform could adversely affect business[197][198] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[277] Properties The company leases all its facilities, including headquarters in Victoria, BC, an administrative office in Edmonton, AB, and a commercial office in Rockville, MD, which are deemed adequate for current needs - The company leases its primary headquarters in Victoria, BC (13,206 sq. ft.), an administrative office in Edmonton, AB (2,248 sq. ft.), and its U.S. commercial office in Rockville, MD (30,531 sq. ft.)[278] Legal Proceedings The company has initiated a patent infringement lawsuit against Sun Pharmaceutical Industries regarding its CEQUA product, alleging infringement of U.S. Patent No. 10,265,375 and seeking injunctive and monetary relief - On December 18, 2020, Aurinia filed a patent infringement lawsuit against Sun Pharmaceutical Industries concerning Sun's CEQUA product, alleging infringement of U.S. Patent No. 10,265,375[500] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[279] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Aurinia's common shares trade on Nasdaq and TSX, with no anticipated cash dividends as earnings will be retained for business development and LUPKYNIS commercialization - Common shares are traded on the Nasdaq Global Market (AUPH) and the Toronto Stock Exchange (AUP)[282] - The company does not anticipate paying cash dividends in the foreseeable future, retaining funds for business development and commercialization[284] Selected Financial Data For 2020, total revenues reached $50.1 million, primarily from a licensing agreement, resulting in a net loss of $102.7 million, while total assets grew to $463.7 million Selected Consolidated Statements of Operations Data (in thousands, except per share data) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $50,118 | $318 | $463 | $418 | $173 | | Research and development | $50,327 | $52,866 | $41,382 | $33,930 | $14,534 | | General and administrative | $95,983 | $22,338 | $13,694 | $12,118 | $6,992 | | Loss from operations | $(104,290) | $(90,943) | $(55,240) | $(46,817) | $(25,499) | | Net loss | $(102,680) | $(88,385) | $(53,079) | $(46,115) | $(25,472) | | Basic and diluted loss per common share | $(0.87) | $(0.95) | $(0.63) | $(0.60) | $(0.72) | Selected Balance Sheet Data (in thousands) | | As of Dec 31, 2020 | As of Dec 31, 2019 | | :--- | :--- | :--- | | Cash, equivalents, & short-term investments | $398,329 | $306,019 | | Working capital | $387,430 | $303,842 | | Total assets | $463,661 | $324,301 | | Total liabilities | $55,911 | $25,701 | | Total shareholders' equity | $407,750 | $298,600 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A details the company's financial performance, highlighting a surge in 2020 revenue due to a $50 million Otsuka payment, increased G&A expenses for pre-commercialization, and a strong liquidity position from a public offering Results of Operations For 2020, revenue increased to $50.1 million due to the Otsuka licensing agreement, while R&D expenses slightly decreased, and G&A expenses significantly rose due to pre-commercial activities, leading to a net loss of $102.7 million Comparison of Operations (in thousands) | | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Licensing revenue | $50,118 | $318 | $49,800 | | Research and development | $50,327 | $52,866 | $(2,539) | | General and administrative | $95,983 | $22,338 | $73,645 | | Net loss | $(102,680) | $(88,385) | $(14,295) | - The $49.8 million increase in revenue in 2020 was primarily due to the $50.0 million upfront payment from the Otsuka licensing agreement[297] - The $73.6 million increase in G&A expenses in 2020 was driven by a $32.8 million increase in salaries, $8.9 million in share compensation, and $24.1 million in professional fees for pre-commercial activities[300][301] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgments for revenue recognition, R&D costs, pre-launch inventory capitalization, royalty obligations, and share-based compensation - Revenue from licensing agreements is recognized when the customer obtains control; the $50 million upfront fee from Otsuka was recognized upon transfer of the license in December 2020[312][482] - A royalty obligation to former executives is recorded as a liability, measured using a risk-adjusted net present value model based on significant assumptions like future net pricing, patient numbers, and a discount rate (10.3% at Dec 31, 2020)[322][323][504] - Pre-launch inventory is capitalized when regulatory approval is highly probable; as of Dec 31, 2020, $13.9 million of pre-launch inventory was recognized[320][453] Liquidity and Capital Resources As of December 31, 2020, the company maintained a strong liquidity position with $398.4 million in cash and investments, bolstered by a $187.7 million public offering, sufficient to fund operations for at least the next 12 months Cash and Liquidity (in millions) | | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash, Cash Equivalents & Short Term Investments | $398.4 | $306.0 | | Working Capital | $387.4 | $303.8 | | Accumulated Deficit | $(575.2) | $(472.5) | Summary of Cash Flows (in millions) | | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(69.9) | $(63.6) | | Net cash (used in) provided by investing activities | $(158.2) | $7.8 | | Net cash provided by financing activities | $194.4 | $243.9 | - In July 2020, the company completed a public offering of common shares, raising net proceeds of $187.7 million[335] - Management believes that the cash position as of Dec 31, 2020 is sufficient to fund current plans for at least the next 12 months[329] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to foreign currency risk, primarily between the U.S. and Canadian dollars, and manages interest rate and credit risks through investment policies - The company is exposed to foreign currency risk, primarily between the U.S. and Canadian dollars; a 10% strengthening of the Canadian dollar would have increased the net loss by $0.5 million[347] - Interest rate risk is considered low due to the short-term nature of the investment portfolio[346] - Credit risk is managed through an investment policy that diversifies holdings and limits investments to high-quality, investment-grade instruments[348] Financial Statements and Supplementary Data This item serves as an index to the company's audited consolidated financial statements, located starting on page F-1 of the Annual Report - This item provides an index to the company's audited consolidated financial statements, which are located starting on page F-1 of the Annual Report[349][350] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[352] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with independent auditor attestation - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[354] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, and this assessment was audited by PricewaterhouseCoopers LLP[355][356] Other Information The company reports no other information for this item - None[358] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2021 Proxy Statement, and a Corporate Code of Ethics and Conduct is available online - Required information is incorporated by reference from the definitive Proxy Statement to be filed by April 30, 2021[359] - The company has adopted a Corporate Code of Ethics and Conduct, available on its website[360] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2021 Proxy Statement - Required information is incorporated by reference from the company's 2021 Proxy Statement[361] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by beneficial owners and management, along with equity compensation plans, is incorporated by reference from the company's 2021 Proxy Statement - Required information is incorporated by reference from the company's 2021 Proxy Statement[361] Certain Relationships and Related Transactions and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2021 Proxy Statement - Required information is incorporated by reference from the company's 2021 Proxy Statement[362] Principal Accountant Fees and Services Information regarding fees paid to the principal accountant and services rendered is incorporated by reference from the company's 2021 Proxy Statement - Required information is incorporated by reference from the company's 2021 Proxy Statement[363] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Annual Report, including consolidated financial statements, material contracts, and SEC certifications, noting the omission of inapplicable financial statement schedules - This item lists all exhibits filed with the Form 10-K, including material contracts such as the Collaboration and Licensing Agreement with Otsuka and the Manufacturing Services Agreement with Lonza[369][370] Form 10-K Summary The company reports no summary for this item - None[373] Financial Statements and Notes Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting, identifying the measurement of royalty obligation as a Critical Audit Matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[382] - A Critical Audit Matter was identified related to the 'Measurement of the royalty obligation' due to the significant judgment and complex assumptions required by management, particularly regarding net pricing, patient numbers, and the discount rate[388][389][391] Consolidated Financial Statements The consolidated financial statements show total assets of $463.7 million and a net loss of $102.7 million for 2020, reflecting the transition to U.S. GAAP Consolidated Balance Sheet Highlights (in thousands) | | As of Dec 31, 2020 | As of Dec 31, 2019 | | :--- | :--- | :--- | | Total current assets | $419,427 | $315,137 | | Total assets | $463,661 | $324,301 | | Total current liabilities | $31,997 | $11,295 | | Total liabilities | $55,911 | $25,701 | | Total shareholders' equity | $407,750 | $298,600 | Consolidated Statement of Operations Highlights (in thousands) | | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Total revenues | $50,118 | $318 | | Total operating expenses | $154,408 | $91,261 | | Loss from operations | $(104,290) | $(90,943) | | Net loss | $(102,680) | $(88,385) | Notes to Consolidated Financial Statements The notes detail the retrospective transition to U.S. GAAP, the $50 million Otsuka licensing revenue, the $15 million royalty obligation, a new $94 million finance lease with Lonza, and the subsequent FDA approval of LUPKYNIS - The company retrospectively transitioned its financial statements from IFRS to U.S. GAAP, as it no longer qualified as a Foreign Private Issuer as of Q2 2020[410] - The $50 million upfront payment from the Otsuka agreement was recognized as licensing revenue in December 2020, as the functional IP was transferred at that time[481][482] - The royalty obligation to former executives increased to $15.0 million at year-end 2020 from $8.2 million in 2019, primarily due to a lower discount rate and the passage of time[502][504] - The company entered into an agreement with Lonza for a dedicated manufacturing facility, which is expected to be accounted for as a finance lease with minimum lease payments of approximately $94 million beginning in 2021[516][517] - A key subsequent event was the FDA approval of LUPKYNIS on January 22, 2021[557]