# Aurinia Pharmaceuticals Inc. (AUPH) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from Aurinia Pharmaceuticals Inc.'s 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1600620/000160062025000011/auph-20241231.htm Accession: 0001600620-25-000011 Filing date: 2025-02-27 Report date: 2024-12-31 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/fy2023/ (FY 2023) Next year: /company/AUPH/mda/fy2025/ (FY 2025) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the notes thereto and other financial information included in this Annual Report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” set forth in this Annual Report for a discussion of important factors that could cause our actual results may differ materially from the results described or implied by the forward-looking statements contained in the following discussion and analysis. The following generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussion of 2022 and year-to-year comparisons between 2023 and 2022 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, 2023, filed with the SEC on February 15, 2024. Overview Aurinia is a biopharmaceutical company focused on delivering therapies to people living with autoimmune diseases with high unmet medical needs. In January 2021, the Company introduced LUPKYNIS® (voclosporin), the first FDA-approved oral therapy for the treatment of adult patients with active lupus nephritis (“LN”). Aurinia is also developing AUR200, a dual inhibitor of B cell activating factor (BAFF) and a proliferation inducing ligand (APRIL) for the potential treatment of autoimmune diseases. Results of Operations Comparison of the Years Ended December 31, 2024 and 2023 The following table sets forth our results of operations for the years ended December 31, 2024 and 2023 (in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2024","","2023","","Change"],["Revenue"],["Net product sales","$","216,186","","","$","158,533","","","$","57,653"],["License, collaboration and royalty revenue","18,947","","","16,980","","","1,967"],["Total revenue","235,133","","","175,513","","","59,620"],["Operating expenses"],["Cost of revenue","28,248","","","14,148","","","14,100"],["Selling, general and administrative","172,028","","","195,036","","","(23,008)"],["Research and development","20,785","","","49,641","","","(28,856)"],["Restructuring","23,106","","","\u2014","","","23,106"],["Other (income) expense, net","(4,347)","","","8,379","","","(12,726)"],["Total operating expenses","239,820","","","267,204","","","(27,384)"],["Loss from operations","(4,687)","","","(91,691)","","","87,004"],["Interest income","16,970","","","16,997","","","(27)"],["Interest expense","(4,835)","","","(2,775)","","","(2,060)"],["Net income (loss) before income taxes","7,448","","","(77,469)","","","84,917"],["Income tax expense","1,696","","","551","","","1,145"],["Net income (loss)","$","5,752","","","$","(78,020)","","","$","83,772"]] [[/GREPCENT_TABLE]] 28 Net Product Sales Aurinia sells LUPKYNIS to two specialty pharmacies and a specialty distributor in the U.S., and Aurinia sells LUPKYNIS inventory to its collaboration partner, Otsuka Pharmaceutical Co., Ltd. (“Otsuka”), for the European and Japanese market. The two specialty pharmacies, specialty distributor and Otsuka are considered our customers for accounting purposes. For the year ended December 31, 2024, net product sales were $216.2 million, up 36% from $158.5 million in 2023. The increase is primarily due to an increase in the number of LUPKYNIS cartons sold to specialty pharmacies, driven by further LN market penetration. License, Collaboration and Royalty Revenue License, collaboration and royalty revenue consists of revenue from a collaboration and licensing agreement with Otsuka to develop and commercialize oral voclosporin in Japan, the European Union (the “E.U.”), the United Kingdom (the “U.K.”), Switzerland, Russia, Norway, Belarus, Iceland, Liechtenstein and Ukraine (collectively, the “Otsuka Territories”) in exchange for: (i) a $50 million upfront cash payment; (ii) regulatory and commercial milestone payments; and (iii) royalties ranging from 10% to 20% on net sales in the Otsuka Territories. License, collaboration and royalty revenue also consists of revenue from a commercial supply agreement with Otsuka to provide manufacturing and other services, including sharing the capacity of a dedicated manufacturing facility at Lonza Ltd. (“Lonza”), Aurinia’s contract manufacturing partner for voclosporin. For the year ended December 31, 2024, license, collaboration and royalty revenue was $18.9 million, up 11% from $17.0 million in 2023. The increase is primarily due to an increase in manufacturing services provided to Otsuka for sharing the capacity of the Monoplant, which commenced in late 2023. Aurinia recognized revenue for a $10.0 million milestone in 2024 for the approval of LUPKYNIS for the treatment of LN in Japan by the Japanese Ministry of Health, Labour and Welfare and a $10.0 million milestone in 2023 for pricing and reimbursement approval in certain European jurisdictions. Cost of Revenue Cost of revenue consists primarily of expense associated with: (ii) amortization of the finance lease right-of-use asset recognized in connection with the Monoplant; (ii) manufacturing; and (iii) shipping, storage and distribution. In December 2020, Aurinia entered into a manufacturing services agreement with Lonza for the construction of a dedicated manufacturing facility for voclosporin (the “Monoplant”). The construction of the Monoplant began in January 2021 and manufacturing of voclosporin began in late June 2023. The Monoplant is equipped with state-of-the-art manufacturing equipment to provide cost and production efficiency for the manufacturing of voclosporin, while expanding existing capacity and providing supply security to meet future commercial demand. Aurinia pays a quarterly fixed facility fee of 3.6 million Swiss Francs (approximately $4.0 million) for the exclusive right to use the Monoplant through March 31, 2030. For the year ended December 31, 2024, cost of revenue was $28.2 million, compared to $14.1 million in 2023. The increase is primarily due to an increase in: (i) amortization of the finance lease right-of-use asset recognized in connection with the Monoplant, which was placed into service in late June 2023; (ii) Aurinia’s net sales of LUPKYNIS inventory to Otsuka; and (iii) Aurinia’s net sales of LUPKYNIS in the U.S. For the year ended December 31, 2024, gross margin was 88%, compared to 92% in 2023. Selling, General and Administrative Expense Selling, general and administrative (“SG&A”) expense consists of personnel and non-personnel expenses to support growing sales of LUPKYNIS. Personnel-related expense includes salaries, incentive pay, benefits and share-based compensation for personnel engaged in sales, finance and administrative functions. Non-personnel-related expense includes: (i) selling, patient 29 services, pharmacovigilance, marketing, advertising, travel, sponsorships and trade shows; and (ii) other general and administrative costs, including consulting, legal, patent, insurance, accounting, information technology and facilities. The following table summarizes our SG&A expense for the years ended December 31, 2024 and 2023 (in thousands): [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2024","","2023","","Change"],["Personnel-expense:"],["Salaries, incentive pay and benefits","","$","73,231","","","$","82,768","","","$","(9,537)"],["Share-based compensation","","31,641","","","36,511","","","(4,870)"],["Total personnel expense","","104,872","","","119,279","","","(14,407)"],["Non-personnel expense:"],["Professional fees and services","","33,809","","","32,874","","","935"],["Marketing and advertising","","14,094","","","18,287","","","(4,193)"],["Travel, sponsorships and trade shows","","8,605","","","11,281","","","(2,676)"],["Other","","10,648","","","13,315","","","(2,667)"],["Total non-personnel expense","","67,156","","","75,757","","","(8,601)"],["Total SG&A expense","","$","172,028","","","$","195,036","","","$","(23,008)"]] [[/GREPCENT_TABLE]] The decrease in SG&A personnel-expense and non-personnel expense were primarily a result of lower employee-related general and administrative costs, including share-based compensation, and overhead costs resulting from our strategic restructuring efforts in 2024. We expect our SG&A expense to decrease in 2025 as we realize the full benefits of our strategic restructuring efforts. Research and Development Expense Research and development (“R&D”) expense consists of personnel and non-personnel expenses. Personnel-related expense includes salaries, incentive pay, benefits and share-based compensation for personnel engaged in research and development functions. Non-personnel-related expense includes subcontractors and materials used for R&D activities, including development, clinical trials, clinical supply and distribution, and other professional services. The following table summarizes our R&D expense for the years ended December 31, 2024 and 2023 (in thousands): [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2024","","2023","","Change"],["Personnel expense:"],["Salaries, incentive pay and benefits","","$","6,461","","","$","14,546","","","$","(8,085)"],["Share-based compensation","","(1,329)","","","7,533","","","(8,862)"],["Total personnel expense","","5,132","","","22,079","","","(16,947)"],["Non-personnel expense:"],["Contract research organizations and developmental expenses","","12,526","","","17,858","","","(5,332)"],["Clinical supply and distribution","","2,530","","","9,104","","","(6,574)"],["Other","","597","","","600","","","(3)"],["Total non-personnel expense","","15,653","","","27,562","","","(11,909)"],["Total R&D expense","","$","20,785","","","$","49,641","","","$","(28,856)"]] [[/GREPCENT_TABLE]] The decrease in R&D personnel-expense was primarily a result of a reduction of headcount from our strategic restructuring efforts in 2024, including the reversal of non-cash, share-based compensation expense related to forfeited, unvested equity awards. The decrease in R&D non-personnel expense was primarily a result of discontinuing our AUR300 development program in February 2024, and the timing of development activities for our AUR200 program. 30 We expect our R&D expenses to increase for the foreseeable future as we advance AUR200 through clinical development and continue to meet our post-approval obligations with the FDA related to LUPKYNIS. Restructuring Expense Restructuring expense consists primarily of one-time termination benefits to affected employees, including severance and health care benefits, contract terminations and other costs related to our strategic restructuring efforts in 2024. On February 15, 2024, we announced a strategic restructuring that reduced headcount by approximately 25% and discontinued Aurinia’s AUR300 development program. On November 7, 2024, we announced another strategic restructuring that further reduced headcount by approximately 45% to sharpen the Company's focus on continued LUPKYNIS growth and the rapid development of AUR200. For the year ended December 31, 2024, restructuring expense was $23.1 million, compared to nil in 2023. Other (Income) Expense, Net For the year ended December 31, 2024, other (income) expense, net was $(4.3) million, compared to $8.4 million in 2023. The change is primarily due to: (i) changes in the foreign exchange remeasurement of the finance lease liability recognized in connection with the Monoplant, which commenced in late June 2023 and is denominated in Swiss Francs; (ii) changes in the fair value assumptions related to our deferred compensation liability; and (iii) a one-time expense in 2023 related to shareholder matters. Liquidity and Capital Resources As of December 31, 2024, Aurinia had cash, cash equivalents, restricted cash and investments of $358.5 million, compared to $350.7 million at December 31, 2023. For the year ended December 31, 2024, the Company repurchased 6.1 million of its common shares for $41.0 million. For the year ended December 31, 2024, cash flow provided by (used in) operating activities was $44.4 million, compared to $(33.5) million in 2023. Based on our current operating plans and projections, the Company expects to fund future operations with existing cash or cash generated from operations. The amount and timing of additional future funding needs, if any, will depend on many factors, including the success of our commercialization efforts for LUPKYNIS and our ability to control expenses. If necessary, we intend to raise additional capital through equity or debt financings. We can provide no assurance that additional financing will be available to us on favorable terms, or at all. Refer to the Notes to Consolidated Financial Statements, including Note 5, of Item 15 of this Annual Report for Aurinia’s material cash requirements from known contractual and other obligations as of December 31, 2024. Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these audited consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be 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. Actual results may differ materially from these estimates under different assumptions or conditions. Critical accounting estimates are those estimates made in accordance with U.S. GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. While our significant accounting policies are more fully described in the notes to our consolidated financial statements in Item 15 of this Annual Report, we believe that the following critical accounting policy and underlying estimates are most critical to understanding our reported financial results. Net Product Sales Revenue from product sales is recognized when the customer obtains control of our product, which typically occurs on delivery. Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of prompt-pay discounts, customer fees, government rebates, co-payment assistance, payor rebates and administration fees for which 31 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). Variable consideration is estimated using the expected-value amount method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. 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 that has not yet been dispensed. Actual amounts of consideration ultimately received may differ from our estimates. If actual results vary materially from our estimates, we adjust these estimates, which will affect net product sales and earnings in the period such estimates are adjusted. As of December 31, 2024, we did not have any material adjustments to variable consideration estimates based on actual results. Impact of Recently Issued Accounting Pronouncements We describe the impact of recently issued accounting pronouncements that apply to us in Note 2 of Item 15 of this Annual Report.