# Aurinia Pharmaceuticals Inc. (AUPH) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Aurinia Pharmaceuticals Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1600620/000160062024000012/auph-20231231.htm
Accession: 0001600620-24-000012
Filing date: 2024-02-15
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AUPH/
All MD&A years: /company/AUPH/mda/
Previous year: /company/AUPH/mda/fy2022/ (FY 2022)
Next year: /company/AUPH/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the notes thereto included in this Annual Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this Annual Report. Our actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

The following generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussion of historical items and year-to-year comparisons between 2022 and 2021 that are not included in this discussion can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 28, 2023 and such comparisons are incorporated herein by reference.

Overview

Aurinia is a fully integrated biopharmaceutical company focused on delivering therapies to people living with autoimmune diseases with high unmet medical needs. In January 2021, we introduced LUPKYNIS (voclosporin), the first FDA-approved oral therapy for the treatment of adult patients with active LN. We continue to conduct clinical and regulatory activities to support the LUPKYNIS development program. We contracted with Otsuka as a collaboration partner for development and commercialization of LUPKYNIS in the Otsuka Territories.

Effective February 14, 2024, the Company's Board of Directors elected to conclude its strategic review process and determined that it was in the best interest of the Company and its shareholders to undergo a restructuring. In principal, the corporate restructuring will involve the Company reaffirming its commitment to enhancing value and driving LUPKYNIS growth, while maintaining a sharp focus on operating efficiencies and maximizing cash flows. As a result, the Company is ceasing future development efforts on AUR200 and its pre-clinical asset AUR300.

LUPKYNIS is an orally administered CNI immunosuppressant that has been demonstrated to improve near and long-term outcomes in LN when used in combination with MMF (although MMF is not currently approved as such) and steroids. By inhibiting calcineurin, LUPKYNIS reduces cytokine activation and blocks interleukin IL-2 expression and T-cell mediated immune responses. LUPKYNIS also potentially stabilizes podocytes, which can protect against proteinuria.

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Voclosporin, the active ingredient in LUPKYNIS, is made by a modification of a single amino acid of the cyclosporine molecule. The mechanism of action of LUPKYNIS has been validated with certain earlier generation CNIs for the prevention of rejection in patients undergoing solid organ transplants and in several autoimmune indications, including uveitis, keratoconjunctivitis sicca, psoriasis, rheumatoid arthritis, and for LN in Japan. We believe that LUPKYNIS possesses pharmacologic properties with the potential to demonstrate best-in-class differentiation.

On September 15, 2022, the EC granted marketing authorization of LUPKYNIS. The centralized marketing authorization is valid in all EU member states as well as in Iceland, Liechtenstein, Norway and Northern Ireland. The approval triggered a $30.0 million milestone payment to us, which was recognized as collaboration revenue for the year ended December 31, 2022. On November 29, 2022 the Medicines and Healthcare products Regulatory Agency (MHRA) had granted marketing authorization of LUPKYNIS in Great Britain. On April 24, 2023, LUPKYNIS received regulatory approval in Switzerland. During the third quarter of 2023, the Company received notification that the pricing and reimbursement milestone was secured. As a result, this triggered a $10.0 million milestone which was recognized as collaboration revenue for the year ended December 31, 2023. On November 13, 2023, Otsuka filed a new drug application (NDA) for voclosporin for the treatment of lupus nephritis (LN) with the Japanese Ministry of Health, Labour, and Welfare for the manufacture and sale in Japan of voclosporin.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, are reflected in our financial statements prospectively from the date of the change in estimate.

We define our critical accounting policies as those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. While our significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this Annual Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.

Product Revenues

In the United States (and territories), we sell LUPKYNIS primarily to specialty pharmacies and specialty distributors. These customers subsequently dispense LUPKYNIS to health care providers and patients. Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, typically upon delivery to the customer.

Reserves for discounts and allowances: Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer).

Our estimates established for variable consideration are calculated based upon utilizing the expected value method. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Amounts related to such items are estimated at contract inception and updated at the end of each reporting period as additional information becomes available.

Significant judgment is required in estimating variable consideration. In making these estimates, we consider historical data, including patient mix and inventory sold to our customers that has not yet been dispensed. We use a data aggregator and historical claims to estimate variable consideration for inventory sold to our customers, including specialty pharmacies and specialty distributors, that has not yet been dispensed. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment. As of December 31, 2023, we did not have any material adjustments to variable consideration estimates based on actual results.

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License, Collaboration and Royalty Revenues

We enter into out-licensing agreements in which we license certain rights to LUPKYNIS to third parties. The terms of these arrangements typically include payment to us of one or more of the following: non-refundable, up-front license fees, development, regulatory and commercial milestone payments, payments for collaboration services we provide through our contract manufacturers, payments for manufacturing services and royalties on net sales of licensed products. Each of these payments results in license, collaboration and royalty revenues. Our main collaboration partnership is with Otsuka. In 2023 and 2022, we recognized $16.0 million and $30.6 million, respectively, in license, collaboration and royalty revenue from Otsuka.

Manufacturing Services Revenue: Our agreements may include manufacturing services to be performed by us on behalf of the counterparty. If these services are determined to be distinct from the other promises or performance obligations identified in the arrangement, we recognize the transaction price allocated to these services as revenue either over time based on an appropriate measure of progress when the performance by us does not create an asset with an alternative use and we have an enforceable right to payment for the performance completed to date or at a point in time as the related performance obligations are satisfied. Certain agreements may include terms where we can partially bill for manufacturing services before the serves are provided, resulting in a deferred revenue which is to be recognized once the performance obligation is satisfied.

Deferred Compensation Arrangements

We have recorded deferred compensation arrangements in liabilities for estimated future employee benefits relating to applicable historical employment arrangements. In 2012, deferred compensation arrangements were approved by a resolution of the board of directors. Pursuant to ASC Topic 710 – Compensation, we recognize future benefits provided by employee retention arrangements, as deferred compensation, which is recognized when we determine that it is probable to make future payments. The deferred compensation is based on an income approach for the estimated future net revenues of voclosporin using an internal risk-adjusted net present value of the future payments to be made to the individuals.

Initially, these obligations are measured at the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting periods. Subsequent re-measurements as a result of performance obligations we meet or changes in assumptions are recognized in the consolidated statement of operations. There have been no material historical adjustments to amounts recorded in the consolidated statement of operations in prior periods.

Impact of Recently Issued Accounting Pronouncements

For information of recent accounting pronouncements and their impact on our consolidated financial statements or disclosures, see Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in "Financial Statements and Supplementary Data" in this Annual Report.

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Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

The following table sets forth our results of operations for the years ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(in thousands)","2023","","2022","","Change"],["Revenue:"],["Product revenue, net","$","158,533","","","$","103,468","","","$","55,065"],["License, collaboration and royalty revenue","16,980","","","30,562","","","(13,582)"],["Total revenue, net","175,513","","","134,030","","","41,483"],["Operating expenses"],["Cost of sales","14,148","","","5,664","","","8,484"],["Selling, general and administrative","195,036","","","196,371","","","(1,335)"],["Research and development","49,641","","","44,988","","","4,653"],["Other expense (income), net","8,379","","","(1,523)","","","9,902"],["Total cost of sales and operating expenses","267,204","","","245,500","","","21,704"],["Loss from operations","(91,691)","","","(111,470)","","","19,779"],["Interest expense","(2,775)","","","\u2014","","","(2,775)"],["Interest income","16,997","","","5,118","","","11,879"],["Net loss before income taxes","(77,469)","","","(106,352)","","","28,883"],["Income tax expense","551","","","1,828","","","(1,277)"],["Net loss","$","(78,020)","","","$","(108,180)","","","$","30,160"]]
[[/GREPCENT_TABLE]]

Total Revenue, net

Total net revenue was $175.5 million and $134.0 million for the years ended December 31, 2023 and 2022, respectively.

The Company currently has two main customers for U.S. commercial sales of LUPKYNIS and a collaboration partnership with Otsuka for sales of semi-finished product and license, collaboration and royalty revenue in Otsuka Territories. The percentage of total revenues, net from our main customers were as follows:

[[GREPCENT_TABLE]]
[["","","2023","","2022","","2021"],["U.S. main commercial customers","","91%","","80%","","100%"],["Collaboration partnership","","8%","","20%","","\u2014%"]]
[[/GREPCENT_TABLE]]

Product Revenue, net

Product Revenue, net was $158.5 million and $103.5 million for the years ended December 31, 2023 and 2022, respectively. The increase is primarily due to an increase of LUPKYNIS sales to our two main customers, driven predominantly by further penetration of the LN market.

The market penetration can be demonstrated, in part, by 1,791 additional prescriptions (which we generally refer to as patient start forms (PSFs)) received during the year ended December 31, 2023 compared to 1,650 PSFs received during the year ended December 31, 2022. Additionally, during the fourth quarter of 2023, the Company added approximately 101 new patients, which includes, restarts (patients coming back onto therapy who do not require PSF) and an estimate of new patients beginning therapy in the hospital channel. Patient restarts and estimated patients coming through the hospital channel are newly reported in the fourth quarter since they have achieved numerical significance for the first time. Lastly, our 12-month persistency rate has increased from approximately 50% at December 31, 2022 to approximately 55% at December 31, 2023. These factors have

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contributed to an increase in our patients on therapy with approximately 2,066 patients on LUPKYNIS therapy at December 31, 2023, compared with 1,525 at December 31, 2022.

License, Collaboration and Royalty Revenue

License, collaboration and royalty revenue was $17.0 million and $30.6 million for the years ended December 31, 2023 and 2022, respectively. For the year ended December 31, 2023, license, collaboration and royalty revenue included a $10.0 million pricing and reimbursement milestone in September 2023 and additional collaboration and manufacturing services revenue from Otsuka. For the year ended December 31, 2022, license, collaboration and royalty revenue was primarily due to the recognition of a $30.0 million regulatory milestone from Otsuka following the EC marketing authorization of LUPKYNIS in September 2022.

Cost of Sales

Cost of sales were $14.1 million and $5.7 million for the years ended December 31, 2023 and 2022, respectively. The increase is primarily due to an increase in sales of LUPKYNIS, coupled with the amortization of the monoplant finance right-of-use asset, which was placed into service in late June 2023.

Gross margin for the years ended December 31, 2023 and 2022 was approximately 92% and 96%, respectively.

Selling, General and Administrative Expenses

SG&A expenses decreased to $195.0 million for the year ended December 31, 2023 compared to $196.4 million for the year ended December 31, 2022. SG&A expenses consisted of the following:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["(in thousands)","","2023","","2022","","Change"],["Salaries, incentive pay and employee benefits","","$","82,768","","","$","82,129","","","$","639"],["Professional fees and services","","51,161","","","58,759","","","(7,598)"],["Share-based compensation expense","","36,511","","","28,438","","","8,073"],["Other public company costs, facility costs, insurance, information technology, amortization of property and equipment","","13,315","","","15,826","","","(2,511)"],["Travel, trade shows and sponsorships","","11,281","","","11,219","","","62"],["","","$","195,036","","","$","196,371","","","$","(1,335)"]]
[[/GREPCENT_TABLE]]

The primary drivers for the decrease in SG&A were a decrease of professional fees and services due to a reduction in expenses associated with corporate legal matters and insurance partially offset by an increase in share-based compensation expense.

We expense SG&A costs in the periods in which they are incurred. We anticipate continuing to incur significant expenses in SG&A to support the commercialization of LUPKYNIS.

Research and Development Expenses

R&D expenses increased to $49.6 million for the year ended December 31, 2023 compared to $45.0 million for the year ended December 31, 2022. R&D expenses consisted of the following:

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[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["(in thousands)","","2023","","2022","","Change"],["Contract research organizations (CRO) and developmental expenses","","$","17,858","","","$","18,451","","","$","(593)"],["Clinical supply and distribution","","9,104","","","8,614","","","490"],["Salaries, incentive pay and employee benefits","","14,546","","","14,034","","","512"],["Share-based compensation expense","","7,533","","","3,271","","","4,262"],["Travel, insurance, patent annuity fees, legal fees and other","","600","","","618","","","(18)"],["","","$","49,641","","","$","44,988","","","$","4,653"]]
[[/GREPCENT_TABLE]]

The primary driver for the increase in R&D expenses was due to the increase in share-based compensation expense.

We spent approximately $17.4 million and $13.5 million on early stage pre-clinical research programs in the years ended December 31, 2023 and 2022, respectively. The spend does not include internal resource expenses as we currently do not track these for early stage research programs, prior to IND. The increase in spend on our pre-clinical research programs was offset by a decrease in spend associated with clinical voclosporin associated studies.

We expect our R&D expenses will decrease going forward as we cease future development on AUR200 and AUR300 and focus our efforts on the development of voclosporin and our FDA post-approval obligations for LUPKYNIS. We are unable to determine the duration and completion costs of our R&D projects.

Other Expense (Income), Net

Other expense (income), net was $8.4 million for the year ended December 31, 2023 compared to other income of $(1.5) million for the year ended December 31, 2022. The primary drivers for other expense for the year ended 2023 were expenses related to shareholder matters and the foreign exchange loss related to the revaluation of the monoplant finance lease liability, which commenced in June 2023 and is denominated in CHF.

Interest Income

Interest income was $17.0 million for the year ended December 31, 2023 compared to $5.1 million for the year ended December 31, 2022. The increase was mainly due to higher yields on our investments as a result of higher interest rates.

Liquidity and Capital Resources

As of December 31, 2023, we had cash, cash equivalents and restricted cash of $48.9 million and investments of $301.8 million compared to cash, cash equivalents and restricted cash of $94.2 million and short-term investments of $295.2 million at December 31, 2022. Cash, cash equivalents and restricted cash and investments are primarily held in U.S. dollars. As of December 31, 2023 and 2022, we had working capital of $347.6 million and $396.4 million, respectively.

We are devoting the majority of our operational efforts and financial resources towards the commercialization and post approval commitments of our approved drug, LUPKYNIS. Taking into consideration the cash, cash equivalents and restricted cash and investments as of December 31, 2023, we believe that our cash position is sufficient to fund our current plans which include funding commercial activities, such as our FDA related post-approval commitments, manufacturing and packaging commercial drug supply, funding our supporting commercial infrastructure, advancing our LUPKYNIS (voclosporin) related R&D programs and funding our working capital obligations for at least the next few years.

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The following table summarizes our cash flows for December 31, 2023, 2022 and 2021:

[[GREPCENT_TABLE]]
[["(in thousands)","2023","","2022","","2021"],["Net cash (used in) provided by:"],["Operating activities","$","(33,461)","","","$","(79,529)","","","$","(157,692)"],["Investing activities","(6,706)","","","(60,632)","","","(103,870)"],["Financing activities","(5,130)","","","2,433","","","221,112"],["Net change in cash and cash equivalents","$","(45,297)","","","$","(137,728)","","","$","(40,450)"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Net cash used in operating activities for the year ended December 31, 2023 was $33.5 million, compared to $79.5 million, for the year ended December 31, 2022. The decrease is primarily due to an increase in cash receipts from sales of LUPKYNIS. See "Total Revenue, net" above for further discussion regarding our increased sales of LUPKYNIS.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2023 was $6.7 million compared to $60.6 million for the year ended December 31, 2022. The decrease was primarily due to the timing of purchases of investments and capital payment for the monoplant, offset by proceeds of maturities of investments.

Cash Flows from Financing Activities

Cash used in financing activities for the year ended December 31, 2023 was $5.1 million compared to cash provided by financing activities of $2.4 million for the year ended December 31, 2022. The change is primarily due to the quarterly lease payments for our monoplant finance lease, which commenced during the second quarter of 2023.

A discussion of changes in our cash flow from the year ended December 31, 2021 to the year ended December 31, 2022 can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of the 2022 Form 10-K.

November 2021 ATM facility

In November 2021, we entered into an Open Market Sale Agreement under which we issued 10.2 million common shares, resulting in net proceeds of $196.7 million through December 31, 2021. There were no sales subsequent to December 31, 2021. In February 2022, we terminated the Open Market Sale Agreement and no further sales occurred.

We intend to use the net proceeds to fund our operations, which include, but are not limited to, commercial activities, including our FDA related post approval commitments, manufacturing and packaging commercial drug supply, funding our supporting commercial infrastructure, advancing our R&D programs and funding our working capital obligations.

Material Cash Requirements

As of December 31, 2023, our material short-term cash requirements are approximately $170.0 million. We anticipate our long-term cash requirements to be approximately $134.0 million, which does not include per annum requirements related to human capital, insurance and government payor rebates, each of which we anticipate to fluctuate based on future requirements (those per annum amounts, calculated on a short-term cash requirement basis, amount to approximately $116.0 million). These short and long-term cash requirement estimates are all based on our current operating plans and strategies, and could fluctuate if our plans were to change.

Our material cash requirements include the following:

•short-term per annum expenses for human capital (which includes estimates for personnel headcount, performance bonuses, salaries, benefits and commissions);

•payor and government rebates and co-payment programs;

•marketing and promotional services;

•corporate insurance premiums;

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•cash requirements related to R&D projects, clinical trials and post-approval related studies and support;

•short-term and long-term lease liabilities included on our consolidated balance sheet or Note 15, Leases for further details;

•deferred compensation arrangements included on our consolidated balance sheet or Note 14, Deferred Compensation and Other Non-Current Liabilities for further details;

•severance costs and potential contract termination costs related to our restructuring program; and

•purchases for inventory and production costs to support our commercial and clinical product supply requirements, as well as capital expenditures. For further details see Note 13, Commitments and Contingencies.

There are several factors that we believe could impact our future cash requirements, including:

•the amount of revenue received from commercial sales of LUPKYNIS, from our licensing partners;

•the scope, rate of progress, results and costs of our clinical trials and other related regulatory requirements and activities;

•our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

•the expenses needed to attract and retain skilled personnel as well as any other personnel changes that we may implement;

•the timing of our restructuring program and our ability to execute successfully on the restructuring; and

•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing possible patent claims, including litigation costs and the outcome of any such litigation.

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