UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)10-K
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| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20202021
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_____________ to ________________
Commission file number: 001-36421
Aurinia Pharmaceuticals Inc.
(Exact name of registrant as specified in its charter)
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| Alberta, Canada | Not applicable |
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification Number) |
#1203-4464 Markham Street Victoria, British Columbia V8Z 7X8 | 46-4129078 |
| (Address of principal executive offices) | |
Registrant’s telephone number, including area code:
250(250) 708-4272
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Symbol | Name of Each Exchange on Which Registered |
| Common shares, no par value | AUPH | The Nasdaq Global Market LLC |
Common shares, no par value | AUP | Toronto Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ☑ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the common shares held by non-affiliates of the registrant as of June 30, 2020 totaled approximately $1.31$1.66 billion based on the closing price for the registrant’s common shares on that day as reported by the Nasdaq Global Market.Market on June 30, 2021 (the last business day of the registrant’s second fiscal quarter). Such value excludes common shares held by executive officers and directors, asbut does not exclude shares held by organizations whose ownership exceeds 5% of June 30, 2020.the registrant's outstanding common shares that have represented that they are registered investment advisers or investment companies registered under section 8 of the Investment Company Act of 1940.
As of April 19, 2021,February 25, 2022, there were 128,120,927141,653,780 of the registrant’s common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None. | | | | | | | | |
| Document Description | | 10-K Part |
| Portions of the registrant’s definitive proxy statement to be filed with the U.S. Securities and Exchange Commission pursuant to Regulation 14A within 120 days after registrant’s fiscal year end of December 31, 2021 are incorporated by reference into Part III of this Annual Report on Form 10-K. | | III |
EXPLANATORY NOTETable of Contents
The registrant is filing
PART I
INTRODUCTION
Unless the context otherwise requires, references in this Amendment No. 1 to Annual Report on Form 10-K/A, or this Amendment (also referred to herein as this report), to amend the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (Commission File Number 001-36421),2021, or the 2020this Annual Report, on Form 10-K, as filed by the registrant with the Securities and Exchange Commission,to “we”, “us”, “our” or the SEC, on February 24, 2021. The purpose of this Amendment is to include in Part III the information that was to be incorporated by reference from the proxy statement for the registrant’s 2021 Annual General and Special Meeting of Shareholders,similar terms, as well as to update certain of the information included on the cover page of the 2020 Annual Report on Form 10-K and in the list of exhibits included in Item 15 and the Exhibit Index of this report. The Part III information was previously omitted from the 2020 Annual Report on Form 10-K in reliance on General Instruction G(3) to Form 10-K, which permits the information in Items 10 through 14 of Part III of Form 10-K to be incorporated in the Form 10-K by reference from the registrant’s definitive proxy statement if such statement is filed not later than 120 days after the registrant’s fiscal year-end. The registrant is filing this Form 10-K/A to include Part III information in the 2020 Annual Report on Form 10-K because the registrant will not file a definitive proxy statement containing such information within 120 days after the end of the fiscal year covered by the 2020 Annual Report on Form 10-K. This Amendment hereby amends the cover page, Part III, Items 10 through 14, and Part IV, Item 15 of the 2020 Annual Report on Form 10-K. In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, new certifications by the registrant’s principal executive officer and principal financial officer are filed as exhibits to this Amendment.
No attempt has been made in this Amendment to modify or update the other disclosures presented in the 2020 Annual Report on Form 10-K. This Amendment does not reflect events occurring after the filing of the 2020 Annual Report on Form 10-K (i.e., those events occurring after February 24, 2021) or modify or update those disclosures that may be affected by subsequent events. Accordingly, this Amendment should be read in conjunction with the 2020 Annual Report on Form 10-K and the registrant’s other filings with the SEC.
In this report, unless otherwise indicated or the context otherwise requires, all references to “Aurinia,” “the registrant,” “the company,” “we,” “us,” and “our”“Aurinia”, refer to Aurinia Pharmaceuticals Inc., together with itsour subsidiaries. The term “CAD” refers to Canadian
We maintain our books and records in U.S. dollars, and prepare our financial statements in accordance with accounting principles generally accepted in the lawful currency of Canada, andUnited States, or U.S. GAAP, as issued by the Financial Accounting Standards Board, or FASB.
The terms “dollar,” “U.S. dollar” or “$” refer to United States dollars, the lawful currency of the United States.States and the term “CA$,” refers to Canadian dollars, the lawful currency of the Canada. All references to “shares” or "Common Shares""common shares" in this reportAnnual Report refer to common shares of Aurinia, with no par value per share.
AURINIA PHARMACEUTICALS INC.
2020 ANNUAL REPORT ON FORM 10-K
AMENDMENT NO. 1
TABLE OF CONTENTS
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PART III. | | | | |
Item 10. | | | | |
Item 11. | | | | |
Item 12. | | | | |
Item 13. | | | | |
Item 14. | | | | |
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PART IV. | | | | |
Item 15. | | | | |
We have made rounding adjustments to some of the figures included in this Annual Report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This reportAnnual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections, as well as “forward-looking information” as defined in applicable Canadian securities laws. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identifyOur actual results could differ materially from those anticipated in these forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “propose,” “intend,” “continue,” “potential,” “possible,” “foreseeable,” “likely,” “unforeseen” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and othera result of various factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in greater detailincluding those set forth below under the headingPart I, Item 1A. “Risk Factors” in Part I, Item 1Athis Annual Report.
A statement is forward-looking when it uses what we know and expect today to make a statement about the future. Forward-looking statements may include words such as “anticipate”, “believe”, “intend”, “expect”, “goal”, “may”, “outlook”, “plan”, “seek”, “project”, “should”, “strive”, “target”, “could”, “continue”, “potential”, “estimated”, "would", and "will" or the negative of our 2020 Annual Report on Form 10-K, as filed with the SEC on February 24, 2021. Given these risks, uncertainties and other factors, yousuch terms or comparable terminology. You should not place undue reliance on the forward-looking statements, particularly those concerning anticipated events relating to the development, clinical trials, regulatory approval, and marketing of LUPKYNISTM (voclosporin) or any other aspect of our business and the timing or magnitude of those events, as they are inherently risky and uncertain.
These forward-looking statements include, but are not limited to, statements concerning the following:
◦our belief in the duration of patent exclusivity for voclosporin and that the patents owned by us are valid;
◦our belief in receiving extensions to patent life based on certain events or classifications;
◦our expectation that patent protection for voclosporin will be extended in the United States and certain other major markets, including Europe and Japan, until at least October 2027;
◦our plans and expectations and the timing of commencement, enrollment, completion and release of results of clinical trials;
◦our belief that voclosporin possesses pharmacologic properties with the potential to demonstrate best-in-class differentiation;
◦our belief of the key potential benefits of LUPKYNIS in the treatment of LN;
◦our strategy to optimize the clinical and commercial value of voclosporin and become a commercial biopharmaceutical company with a global product portfolio focused on rare kidney and autoimmune diseases with a high unmet need;
◦our strategy for the evaluation of voclosporin in novel formulations, as well as the addition of new pipeline assets that align with our core expertise;
◦our expectation to receive "new chemical entity" exclusivity for LUPKYNIS in certain countries, which provides this type of exclusivity for up to ten years in Europe;
◦our estimates as to the market potential for LUPKYNIS, including estimates as to the number of patients with systemic lupus erythematosus (SLE) that are diagnosed with LN;
◦our estimate, based on our patient-specific estimated glomular filtration rate (eGFR) dosing regimens, the average utilization in our clinical trials, and accounting for factors including mandatory rebates, channel discounts, and anticipated patient adherence, that we expect our average annualized net revenue per patient to be approximately $65,000;
◦our belief that we have enough inventory on hand and manufacturing capacity to meet forecasted demand;
◦our belief that we have built a world class commercial organization;
◦our intention to use the net proceeds from our financings;
◦our belief that we have sufficient cash resources to adequately fund our plans for at least the next few years, and our expectations in terms of go forward costs (including short and long term cash requirements) and revenues;
◦our belief that additional patents may be granted worldwide based on our filings under the Patent Cooperation Treaty (PCT);
◦our belief that patents corresponding to United States Patent No. 10,286,036 issued to us covering dosing protocol, which reads upon our U.S. Food and Drug Administration (FDA) approved label for LUPKYNIS in LN, could be granted with similar claims in all major global pharmaceutical markets;
◦our plan to evaluate LUPKYNIS in pediatric patients and additional patient populations diagnosed with LN;
◦management's estimates and assumptions made in conformity with U.S. GAAP that affect the reported amounts of assets and liabilities as discussed further in notes to the consolidated financial statements; and
◦the potential impact of COVID-19 on our business operations, nonclinical and clinical trials, regulatory timelines, supply chain, and potential commercialization; and
◦our belief that we will file Investigational New Drug Applications (INDs) for AUR200 and AUR300 in 2023.
Such statements reflect our current views with respect to future events and are subject to risks and uncertainties and are necessarily based on a number of estimates and assumptions that, while considered reasonable by management, as at the date of such statements, are inherently subject to significant business, economic, competitive, political, regulatory, legal, scientific and social uncertainties and contingencies, many of which, with respect to future events, are subject to change. The factors and assumptions used by management to develop such forward-looking statements include, but are not limited to:
◦the assumption that we will be able to obtain approval from regulatory agencies on executable development programs with parameters that are satisfactory to us;
◦the assumption that recruitment to clinical trials will occur as projected;
◦the assumption that we will successfully complete and enroll our clinical programs in compliance with good clinical practices (GCP) on a timely basis and meet regulatory requirements for approval of marketing authorization applications and new drug approvals, as well as favorable product labeling;
◦the assumption that the planned studies will achieve positive results;
◦the assumptions regarding the costs and expenses associated with our clinical trials and commercialization of LUPKYNIS;
◦the assumption that regulatory requirements and commitments will be maintained;
◦the assumption that we will be able to meet good manufacturing practice (GMP) standards and manufacture and secure a sufficient supply of LUPKYNIS on a timely basis to successfully complete the development and commercialization of LUPKYNIS;
◦the assumptions on the market value for the LN program;
◦the assumptions related to our estimated pricing for LUPKYNIS are accurate, including that the average utilization of LUPKYNIS in our clinical trials will remain applicable, the amount of mandatory rebates and degree of patient adherence;
◦the assumption that our patent portfolio is sufficient and valid;
◦the assumption that we will be able to extend our patents to the fullest extent allowed by law, on terms most beneficial to us;
◦the assumptions that our third party partners and suppliers will comply with their obligations under their agreements with us;
◦the assumptions about future market activity;
◦the assumption that there is a potential commercial value for LUPKYNIS and other indications for voclosporin;
◦the assumption that market data and reports reviewed by us are accurate;
◦the assumptions on the burn rate of our cash for operations;
◦the assumption that another company will not violate our intellectual property rights or regulatory exclusivity periods;
◦the assumption that our current good relationships with our suppliers, service providers and other third parties will be maintained;
◦the assumption that we will be able to attract and retain a sufficient amount of skilled staff;
◦the assumption that our third party service providers and partners will comply with their contractual obligations; and/or
◦the assumptions relating to the capital required to fund operations for the next few years.
It is important to know that:
◦actual results could be materially different from what we expect if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking statement will materialize and, accordingly, you are cautioned not to place undue reliance on these forward-looking statements; and
◦forward-looking statements do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made may have on our business. For example, they do not include the effect of mergers, acquisitions, other business combinations or transactions, dispositions, sales of assets, asset write-downs or other charges announced or occurring after the forward-looking statements are made. The financial impact of such transactions and non-recurring and other special items can be complex and necessarily depend on the facts particular to each of them. Accordingly, the expected impact cannot be meaningfully described in the abstract or presented in the same manner as known risks affecting our business.
The factors discussed below and other considerations discussed in the Item 1A "Risk Factors" section of this Annual Report could cause our actual results to differ significantly from those contained in any forward-looking statements. Also,We strongly encourage all investors to read Item 1A "Risk Factors" of this Annual Report in full.
If our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, representyou should not regard these statements as a representation or warranty by us or any other person that we will achieve our estimatesobjectives and assumptionsplans in any specified time frame or at all. Any forward-looking statement made by us in this Annual Report speaks only as of the date of this filing. Annual Report or as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the filing date of this Annual Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this reportAnnual Report and the documents that we reference in this Annual Report and have filed with the U.S. Securities and Exchange Commission as exhibits to this Annual Report completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify all of our forward-looking statements by ourthese cautionary statements. Except as required by law,
This Annual Report may contain market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information. While we assume no obligation to update our forward-looking statements publicly, or to updatebelieve the reasons that actual results could differ materially from those anticipatedmarket position, market opportunity and market size information included in these forward-looking statements, even if newthis Annual Report is generally reliable, such information becomes available in the future.is inherently imprecise.
RISK FACTOR SUMMARY
PART III.
Below is a summary of material factors that make an investment in our common shares speculative or risky. Importantly, this summary does not address all of the risks and uncertainties that we face. Additional discussion of the risks and uncertainties summarized in this risk factor summary, as well as other risks and uncertainties that we face, can be found under “Special Note Regarding Forward-Looking Statements” and Part I, Item 10. Directors, Executive Officers,1A. “Risk Factors” in this Annual Report. The below summary is qualified in its entirety by those more complete discussions of such risks and Corporate Governance
DIRECTORS OF THE COMPANYuncertainties. You should consider carefully the risks and uncertainties described under Part I, Item 1A. “Risk Factors” in this Annual Report as part of your evaluation of an investment in our common shares. Important factors that could cause such differences include, among other things, the following:
Set forth below are the names and other information pertaining to each person nominated to the Board:Business Risks
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Name, Province, State and Country of Residence | | Date First Elected / Appointed | | Age | | Present Principal Occupation | | Position Held With the Company |
Dr. George M. Milne, Jr.
Boca Grande, Florida
United States
| | May 8, 2017 | | 77 | | Venture Partner at Radius Ventures LLC, a venture capital firm; Lead Director at Charles River Laboratories, a pre-clinical and clinical laboratory services corporation; and Director of Amylyx Pharmaceuticals, Inc., a pharmaceutical company. | | Chairman of the Board |
Peter Greenleaf
Bethesda, Maryland
United States
| | April 29, 2019 | | 51 | | President and Chief Executive Officer ("CEO") of the Company | | Director, President and Chief Executive Officer |
Dr. David R. W. Jayne
Cambridge
United Kingdom
| | May 26, 2015 | | 64 | | Professor of Clinical Autoimmunity in the Department of Medicine at the University of Cambridge, UK; fellow of the Royal Colleges of Physicians of London and Edinburgh, and the Academy of Medical Science; certified nephrologist and an Honorary Consultant Physician at Addenbrooke’s Hospital, Cambridge UK; medical advisor to UK, U.S. and EU regulatory bodies, patient groups and professional organizations; elected the first President of the European Vasculitis Society in 2011; member of the ERA-EDTA immunopathology working group; co-chair of the EULAR/ERA-EDTA task force on lupus nephritis ("LN"). | | Director |
Joseph P. Hagan
La Jolla, California
United States
| | February 7. 2018 | | 52 | | President and CEO of Regulus Therapeutics Inc., a biopharmaceutical company. | | Director |
Dr. Daniel G. Billen
Mississauga, Ontario
Canada
| | April 29, 2019 | | 67 | | Retired, previously commercial GM/VP at Amgen Inc., a biotechnology company. | | Director |
R. Hector MacKay-Dunn
Vancouver, British Columbia
Canada
| | June 26, 2019 | | 70 | | Senior Partner, Farris LLP. | | Director |
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Jill Leversage
Vancouver, British Columbia
Canada
| | November 13, 2019 | | 64 | | Corporate Director | | Director |
Timothy P. Walbert
Park Ridge, Illinois
United States
| | April 20, 2020 | | 54 | | Chairman of the board, President and Chief Executive Officer of Horizon Therapeutics plc, a biopharmaceutical company, since creating the company in 2008; serves on the board of directors of several pharmaceutical and biotechnology companies and organizations. | | Director |
Dr. George M. Milne, Jr., PhD, ◦Director, Chairman of the Board
Dr. George Milne has over 30 years ofdifficulties we may experience in pharmaceutical research and product development. Dr. Milne currently serves oncompleting the boards of Amylyx Pharmaceuticals, Inc., a pharmaceutical company, and Charles River Laboratories, Inc., a laboratory services company, where he is the lead director. He retired from Pfizer Inc. in 2002 where he served as Executive Vice President of Global Research and Development and President, Worldwide Strategic and Operations Management. He joined Pfizer Inc. in 1970 and held a variety of positions conducting both chemistry and pharmacology research. Dr. Milne became director of the department of immunology and infectious diseases at Pfizer Inc. in 1981, was its executive director from 1984 to 1985, and was Vice President of research and development, from 1985 to 1988. He was appointed Senior Vice President in 1988. In 1993, he was appointed President of Pfizer Central Research and a Senior Vice President of Pfizer Inc. with global responsibility for human and veterinary medicine research and development. Dr. Milne has also previously served on multiple corporate boards including Mettler-Toledo, Inc. (a manufacturer of laboratory instruments), MedImmune, Athersys, Biostorage Technologies, Aspreva and Conor Medsystems. Dr. Milne received his B.Sc. in Chemistry from Yale University and his Ph.D. in Organic Chemistry from Massachusetts Institute of Technology. Our Board believes Dr. Milne’s background, corporate pharmaceutical experience, as well as the variety of skills identified in the table set out below under "Skills Matrix" qualifies him to serve on the Board.
Peter Greenleaf, MBA, Director, President and CEO
Peter Greenleaf currently serves as the President, Chief Executive Officer and member of the Board since April 29, 2019. From March 2018 to April 2019, Peter served as the Chief Executive Officer and a member of the board of directors of Cerecor, Inc. (NASDAQ: CERC). From March 2014 to February 2018, Peter served as CEO and Chairman of Sucampo Pharmaceuticals, Inc. (NASDAQ: SCMP), a company that focused on the developmentmarketing and commercialization of medicines to meet major unmet medical needs of patients worldwide until it was sold in February 2018 to U.K. pharmaceutical giant Mallinckrodt plc. Peter also served as Chief Executive Officer and a member of the board of directors of Histogenics Corporation, a regenerative medicine company. From 2006 to 2013, Peter was employed by Medlmmune LLC, the global biologics arm of AstraZeneca, where he most recently served as President. From January 2010 to June 2013, Peter also served as President of Medlmmune Ventures, a wholly owned venture capital fund within the AstraZeneca Group. Prior to serving as President of Medlmmune, Peter was Senior Vice President, Commercial Operations of MedImmune, responsible for its commercial, corporate development and strategy functions. Peter has also held senior commercial roles at Centocor, Inc. (now Janssen Biotechnology, Johnson & Johnson) from 1998 to 2006, and at Boehringer Mannheim (now Roche Holdings) from 1996 to 1998. He is also currently a member of the board of directors of Antares Pharmaceuticals, Inc (NASDAQ: ATRS), and is the Chairman of the board of directors of BioDelivery Sciences International, Inc (NASDAQ: BDSI). Peter earned an MBA degree from St. Joseph’s University and a BS degree from Western Connecticut State University. Our Board believes Mr. Greenleaf’s background, role with the Company, corporate pharmaceutical experience as well as the variety of skills identified in the table set out below under "Skills Matrix" qualifies him to serve on the Board.
Dr. David R.W. Jayne, MD FRCP FRCPE FMedSci, ◦Directorunknown impact and difficulties imposed by the ongoing COVID-19 pandemic on our business and operations including sales, marketing, operations, nonclinical and clinical and our supply chain;
Dr. David Jayne has been a Professor of Clinical Autoimmunity in the Department of Medicine at the University of Cambridge, UK since 2013. Dr. Jayne received his MBBChir in Surgery and Medicine◦difficulties obtaining adequate reimbursements from Cambridge University, Cambridge, England. He received postgraduate training at several London hospitals and Harvard University. He is a fellow of the Royal College of Physicians of London and Edinburgh, and the Academy of Medical Science. He is a certified nephrologist and an Honorary Consultant Physician at Addenbrooke’s Hospital, Cambridge UK. Dr. Jayne is a medical advisor to UK, U.S. and EU regulatory bodies, patient groups and professional organizations. He has published more than 400 peer-reviewed journal articles, bookthird party payors;
chapters and reviews. He was elected the first President of the European Vasculitis Society in 2011 and is a member of the ERA-EDTA immunopathology working group and he co-chairs the EULAR/ERA-EDTA task force on lupus nephritis. Dr. Jayne’s research includes investigator-initiated international trials and the introduction of newer therapies in vasculitis and SLE with collaborators on five continents. Our Board believes Dr. Jayne’s background and medical expertise in the nephrology area, as well as the variety of skills identified in the table set out below under "Skills Matrix" qualifies him to serve on the Board.
Joseph P. "Jay" Hagan, Director, ◦Chairwe are single sourced within parts of the Compensation Committeeour manufacturing supply chain, including key suppliers;
◦we rely on clinical and commercial partners who may not be able to comply with their contractual obligations with us; and
◦competitors may arise with similar products, or existing competition may be taken up and become more preferred as treatment for LN.
Joseph Hagan is President, Chief Executive Officer and a member of the board of directors of Regulus Therapeutics, Inc. (NASDAQ: RGLS). Jay joined Regulus Therapeutics, Inc.Business Growth Risks
◦difficulties in January 2016 as Chief Operating Officer, Principal Financial Officer and Principal Accounting Officer and was appointed to President and Chief Executive Officer in May 2017. Jay’s career includes roles as the Executive Vice President, Chief Financial Officer and Chief Business Officer of Orexigen Therapeutics, Inc., Managing Director of Amgen Ventures and head of corporate development for Amgen Inc. Jay has led numerous strategic and financing transactions including the acquisitions of Immunex and Tularikmeeting GMP standards and the spinoutmanufacturing and securing of Novantronea sufficient supply of voclosporin on a timely basis to successfully complete the development and Relyspa,commercialization of LUPKYNIS;
◦difficulties, delays or failures in obtaining necessary regulatory approvals;
◦not being able to extend our patent portfolio for LUPKYNIS;
◦our patent portfolio not covering all of our proposed or contemplated uses of LUPKYNIS;
◦the market for the LN business (or any other indication for LUPKYNIS) may not be as well as many otherwe have estimated;
◦insufficient acceptance of and demand for LUPKYNIS;
◦difficulties in identifying and completing the acquisition of, and successfully developing potential targets for expansion of our product portfolio; and
◦difficulty with executing business development, efforts totaling over $15 billion in value. Before joining Amgen, Jay spent five years in the bioengineering labs at Genzymeintegrating acquisitions and Advanced Tissue Sciences. Jay currently serves on the boardrecognizing benefits of directors of Zosano Pharma Corporation (NASDAQ: ZSAN), a publicly traded biotechnology company. He received an MBA from Northeastern University and a BS in Physiology and Neuroscience from the University of California, San Diego. Our Board believes Mr. Hagan’s background, corporate and financial pharmaceutical experience, as well as the variety of skills identified in the table set out below under "Skills Matrix" qualifies him to serve on the Board.
Dr. Daniel G. Billen, PhD, Directoracquired assets.
Dr. Daniel Billen has over 40 years ofUnderlying Business Risks
◦product liability, patent infringement and other civil litigation;
◦injunctions, court orders, regulatory and other compliance issues or enforcement actions;
◦we may have to pay unanticipated expenses, and/or estimated costs for clinical trials or operations may be underestimated, resulting in our having to make additional expenditures to achieve our current goals;
◦difficulties, restrictions, delays, or failures in obtaining appropriate reimbursement from payors for LUPKYNIS;
◦difficulties in retaining key personnel and attracting other qualified individuals;
◦our assets or business activities may be subject to disputes that may result in litigation or other legal claims;
◦difficulties, delays, or failures we may experience in the conduct of and reporting of results of our clinical trials for LUPKYNIS and other pipeline assets, including unfavorable results;
◦difficulties we may experience in identifying and successfully securing appropriate vendors to support the development and commercialization of pharmaceuticalLUPKYNIS;
◦our significant reliance on information technology and biotech products both in Europe and North America. He started with Janssen Pharmaceuticals in its Belgian headquarters in cardiovascular global marketing in 1979. Dr. Billen became headany failure, inadequacy, or security lapse of marketing and salesthat technology, including any cybersecurity incidents;
◦we are dependent upon key personnel to achieve our business objectives;
◦the potential need for Janssen Pharmaceutica’s newly formed affiliate in Canada in 1983 launching multiple products into the Canadian market. In 1991, Dr. Billen moved over to Amgen Inc. to lead its Canadian operations as their first General Manager. He moved to Amgen’s headquarters in California in 2011 where he led the U.S. Commercial Operations Business Unit and later the combined Nephrology and Inflammation business unit as their VP/GM. In 2017, Dr. Billen took on the role of VP of Global Commercial initiatives with focus on the evolving US payer landscape. Dr. Billen received his PhD in chemistry from the University of Louvain in Belgium. Our Board believes Dr. Billen’s background, corporate pharmaceutical experience, as well as the variety of skills identifiedadditional capital in the table set out below under "Skills Matrix" qualifies himfuture to servecontinue to fund our development programs and commercialization activities, and the effect of capital market conditions and other factors on the Board.
R. Hector MacKay-Dunn, J.D., Q.C., ◦Director, Chair of the Governance & Nomination Committeeour ability to raise future resources when required.
R. Hector MacKay-Dunn has over 30 years of practice experience providing legal advice to high growth public and private companies, many of which achieved valuations exceeding CAD$1 billion over
Item 1. Business
OVERVIEW
Aurinia is a broad range of industry sectors including life sciences, health, technology (including clean tech) and mining, advising on corporate domestic and cross-border public and private securities offerings, mergers and acquisitions and international partnering and licensing transactions, and boards of directors and independent board committees on corporate governance matters. Hector is recognized by Lexpert, as being among the Top 100 Canada/U.S. Cross-Border Corporate Lawyers in Canada, named among The Leading 500 Lawyers in Canada, and by Best Lawyers as Lawyer of the Year 2020 in biotech in Canada, and among Canada’s leading lawyers in mergers & acquisitions, technology, corporate and securities. Hector received the Queen’s Counsel designation upon recommendation by the Attorney General of British Columbia for exceptional merit and contribution to the legal profession, the “AV Preeminent Legal Ability" rating from Martindale-Hubbell and is regularly recognized as a leading lawyer nationally by Chambers Canada within the Life Sciences category. Hector has served as board member or officer with Aspreva Pharmaceuticals Corporation, Arbutus Biopharma Corp., XBiotech Inc., and QLT Inc., the BC (British Columbia) Tech Association, LifeSciences British Columbia, Genome British Columbia and Tennis Canada. He is currently a member of the board of directors of Copper Fox Metals Inc. (TSXV: CUU), acommercial-stage biopharmaceutical company focused on copper metals. Our Board believes his backgrounddeveloping and broad legal practicescommercializing therapies to treat targeted patient populations that are suffering from serious diseases with a high unmet medical need. We have commercially launched LUPKYNIS in the United States for the treatment of adult patients with active LN. We continue to conduct pre-clinical, clinical, and regulatory activities to support the voclosporin development program as well as the variety of skills identified in the table set out below under "Skills Matrix" qualifies him to serve on the Board.our other assets.
Jill Leversage, Director, ChairOn August 17, 2021, we announced the addition of two novel assets, AUR200 and AUR300. AUR200 is currently undergoing pre-clinical development with projected submission of an Investigational New Drug Application (IND) to the Audit Committee
Prior to Ms. Leversage’s retirementFDA in January 2016, she was a senior investment banker with over 30 years2023. It is anticipated that an IND for AUR300 will be submitted during the first half of experience in investment banking and private equity. Jill was a Managing Director, Corporate and Investment Banking for TD Securities Inc. from May 2002 to May 2011 and Former Managing Director at Highland West Capital Ltd. from June 2013 to January 2016. She currently serves on several public and private company boards, including MAG Silver Corp. (TSX/NYSE A: MAG) (a2023.
mining company)On December 9, 2021, we announced positive topline results from the AURORA 2 continuation study, evaluating the long-term safety and RE Royalties Ltd. (TSXV: RE) (a finance company specializingtolerability of LUPKYNIS.
LUPKYNIS is an orally administered CNI immunosuppressant, that has demonstrated improvement in renewable energy). Jillnear and long-term outcomes in LN when used in combination with a background immunosuppressive therapy regimen for the treatment of adult patients with active lupus nephritis. 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. Voclosporin, the active ingredient in LUPKYNIS, is made by a fellowmodification of a single amino acid of the Institutecyclosporine molecule. The mechanism of Chartered Professional Accountantsaction of British ColumbiaLUPKYNIS has been validated with certain earlier generation CNIs for the prevention of rejection in patients undergoing solid organ transplants and alsoin 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.
Earlier generation CNIs have demonstrated efficacy for a Chartered Business Valuator (ret.)number of conditions, including transplant and other autoimmune diseases; however, side effects exist which can limit their long-term use and tolerability. Some clinical complications of earlier generation CNIs include hypertension, hyperlipidemia, diabetes, and both acute and chronic nephrotoxicity.
Based on published data, we believe the Canadian Institutekey potential benefits of Chartered Business Valuators. LUPKYNIS in the treatment of adult patients with active LN versus marketed CNIs include:
•increased potency compared to cyclosporine A, allowing for lower dosing requirements and potentially fewer off-target effects;
•limited inter- and intra-patient variability, allowing for easier dosing without the need for monitoring blood levels for therapeutic drug monitoring;
•less cholesterolemia and triglyceridemia than cyclosporine A; and
•limited incidence of glucose intolerance and new onset diabetes at therapeutic doses compared to tacrolimus.
STRATEGY
Our Board believes her background, financial experiencebusiness strategy is to optimize the clinical and qualificationscommercial value of LUPKYNIS and become a commercial biopharmaceutical company with a global product portfolio focused on rare kidney and autoimmune diseases with high unmet medical needs. This includes the evaluation of LUPKYNIS in novel formulations, as well as the varietyaddition of skills identifiednew pipeline assets that align with our core expertise.
We have developed a strategic plan to execute on our commercialization of LUPKYNIS as a treatment of adult patients with active LN. The key tactics to achieve our corporate strategy:
•conducting post-commercial activities including build out of the organization to efficiently and effectively market LUPKYNIS as a treatment of adult patients with active LN;
•engaging Otsuka Pharmaceutical Co., Ltd. (Otsuka) as a collaboration partner for development and commercialization of LUPKYNIS in Europe and Japan; as part of this, a marketing authorization application (MAA) was filed with the European Medicines Agency (EMA) in the table set out below under "Skills Matrix" qualifies herfirst half of 2021, an MAA was filed with the Swiss Agency for Therapeutic Products (Swissmedic) in the second half of 2021, and Otsuka plans to serve onseek regulatory approval in other territories including the Board.
Timothy P. Walbert, •Directorconducting various studies to thoroughly characterize the clinical profile of LUPKYNIS, including post-marketing studies as agreed with regulatory agencies as part of product approval;
Timothy P. Walbert has been President•conducting our planned R&D activities to further the advancement of our existing pipeline (AUR200 and Chief Executive OfficerAUR300); and
•evaluating external assets with the potential to be synergistic and complementary to our clinical, regulatory and therapeutic areas of Horizon Therapeutics plc (NASDAQ: HZNP) since 2008 and has served as Chairman of its board of directors since 2010. Prior to joining Horizon, he served as President, Chief Executive Officer and Director of IDM Pharma, Inc., a public biopharmaceutical company which was acquired by Takeda in 2009. From 2006 to 2007, Mr. Walbert served as Executive Vice President, commercial operations at NeoPharm, Inc., a public biopharmaceutical company. From 2001 to 2005, he served as divisional Vice President and General Manager, immunology, where he led the global development and launch of the multi-indication biologic HUMIRA and divisional Vice President, global cardiovascular strategy at Abbott, now AbbVie. From 1998 to 2001, Mr. Walbert served as Director, CELEBREX North America and arthritis team leader, Asia Pacific, Latin America and Canada at G.D. Searle & Company, now Pfizer. From 1991 to 1998, he also held sales and marketing roles with increasing responsibility at G.D. Searle, Merck & Co., Inc. and Wyeth, now Pfizer. He serves as Chairman of the board of directors of Exicure (NASDAQ: XCUR), a public biotechnology company, Co-Chairman of the board of MATTER, a health technology incubator in Chicago, Il, and serves on the board of directors of the Illinois Biotechnology Innovation Organization, the Biotechnology Innovation Organization, World Business Chicago and the Greater Chicago Arthritis Foundation. He is a member of the Illinois Innovation Council, the National Organization for Rare Disorders Advisory Board and serves on the Board of Trustees of Muhlenberg College. Mr. Walbert received his Bachelor of Arts in Business from Muhlenberg College, in Allentown, Pennsylvania. Our Board believes Mr. Walbert’s background and corporate pharmaceutical experience as well as the variety of skills identified in the table set out below under "Skills Matrix" qualifies him to serve on the Board.
Mr. Walbert was a director of Assertio Therapeutics, Inc. (formerly named Zyla Life Sciences ("Zyla")) from March 2014 to December 2020. On October 30, 2018, Zyla, formerly named Egalet Corporation (“Egalet”), entered into an asset purchase agreement with Iroko Pharmaceuticals Inc. (“Iroko”) pursuant to which Egalet acquired certain marketed products of Iroko (collectively, the “Iroko Acquisition”). The Iroko Acquisition was effectuated pursuant to the occurrence of a joint plan of reorganization related to the voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code filed by Egalet and its wholly-owned subsidiaries in the United States Bankruptcy Court for the District of Delaware on October 30, 2018. On January 14, 2019, the Court entered an order confirming the joint plan of reorganization, as modified under Chapter 11 of the Bankruptcy Code. The Iroko Acquisition was consummated, and the joint plan of reorganization became effective, on January 31, 2019.
DEVELOPMENTS
Skills MatrixRegulatory/Commercial
•On January 22, 2021, the FDA approved LUPKYNIS in combination with a background immunosuppressive therapy regimen to treat adult patients with active LN. As a condition of approval, we are required and are on track to conduct two pediatric studies (with reports due in 2025 and 2031), a milk only lactation study (with a report due in 2026), a drug-drug interaction study (with a report due in 2023) and submit a final study report on our AURORA 2 continuation study (by March 2022).
•On June 25, 2021, our licensing partner, Otsuka, filed an initial MAA with the EMA seeking approval for the use of voclosporinfor the treatment of adult patients with active LN in the European Union, as well as Norway, Iceland and Liechtenstein. Upon approval by the EMA, we would be eligible for up to an additional $30 million as an approval related milestones, in addition to low double-digit royalties on sales and revenues for the supply of product to Otsuka under a cost-plus arrangement.
•On August 17, 2021, we announced the addition of two novel pipeline assets AUR200 and AUR300. AUR200 is an Fc protein targeting BAFF/APRIL (B-cell Activating Factor, known as BAFF, and A Proliferation-Inducing Ligand known as APRIL). AUR200 is currently undergoing pre-clinical development with projected submission of an IND to the FDA in 2023. AUR300 is a novel peptide therapeutic that modulates M2 macrophages (a type of white blood cells) via the macrophage mannose receptor CD206. Dysregulation of M2 macrophages drives fibrosis. AUR300 acts to reduce M2 dysregulation and decrease inflammatory cytokines, and therefore may have significant clinical applications for autoimmune and fibrotic diseases. AUR300 IND filing is expected during the first half of 2023.
•On October 1, 2021, Aurinia’s licensing partner, Otsuka Pharmaceutical Co., Ltd., filed an initial MAA with the Swiss Agency for Therapeutic Products (Swissmedic) seeking approval for the use of voclosporin for the treatment of adult patients with active LN. The Swissmedic filing was based on the June 25, 2021 MAA submission to the EMA.
Corporate
•On June 7, 2021, our shareholders adopted and approved the Amended and Restated Equity Incentive Plan (the Plan), which allows for the issuance of up to an aggregate of 23,815,115 common shares (inclusive of the number of common shares subject to awards outstanding under the Plan). The purpose of the Plan is to advance the interests of the Company by encouraging equity participation in the Company through the acquisition of common shares. Also in June 2021, our shareholders adopted and approved the 2021 Employee Stock Purchase Plan (ESPP), which allows for the issuance of up to 2.5 million shares. The purpose of the ESPP is to provide eligible employees with opportunities to purchase common shares at a discounted price.
•On June 14, 2021, we appointed Dr. Brinda Balakrishnan, M.D., Ph.D., to our Board of Directors. Dr. Balakrishnan is Group Vice President, Corporate and Business Development of BioMarin Pharmaceutical Inc.
•On July 16, 2021, we announced we would voluntarily delist the common shares from the Toronto Stock Exchange (TSX) effective as of the close of trading on July 30, 2021.
Study Milestones and Publications
•On March 15, 2021, we announced a favorable assessment regarding the cost-effectiveness and value of LUPKYNIS, based on an independent analysis issued by the Institute for Clinical and Economic Review (ICER) in a revised Evidence Report issued on March 12, 2021. The ICER report finds that LUPKYNIS represents an important new treatment option for patients living with LN and, at the estimated net price, determined the therapy to be priced in alignment with ICER’s recommended health-benefit price benchmark ranges.
•On May 10, 2021, The Lancet, an international, peer-reviewed medical journal, published the results of the Company’s Phase 3 AURORA 1 study evaluating LUPKYNIS in adults with LN.
•On December 9, 2021, we announced positive topline results from AURORA 2, a 2-year continuation study evaluating the long-term safety and tolerability of LUPKYNIS.
Market Potential and Commercial Considerations
We have conducted extensive market research and analyses of peer reviewed publications to assess market potential and commercial opportunity. Our physician research included more than 1,100 rheumatologists and nephrologists across the United States, Europe and Japan to assess the potential market for adoption of LUPKYNIS and estimate pricing and treatment paradigms. The National Institute of Diabetes and Digestive and Kidney Diseases estimates that up to 50% of adults with SLE are diagnosed with LN at some point in their journey with lupus. Using the research and publication analyses, we estimate the number of SLE patients diagnosed with LN to be about 80,000 to 120,000 in the United States.
Similar to other autoimmune disorders, LN is a flaring and remitting disease. The disease can cycle from being in remission to being in an active flare, to achieving partial response and potentially to achieving a complete response and therefore back in
remission. Treatment objectives between LN and other autoimmune diseases are remarkably similar. In other autoimmune conditions such as multiple sclerosis, Crohn’s, rheumatoid arthritis and SLE, physicians’ goals are to induce and maintain a remission of disease, decrease frequency of hospital or ambulatory care visits and limit long term disability. In LN specifically, physicians are trying to avoid further kidney damage, kidney failure, dialysis, kidney transplantation, and death. The ability to get patients into remission quickly correlates with better long-term kidney outcomes as noted above. Achieving a complete response, and most importantly, rapidly reducing the level of urine protein, is also believed to be an important factor in delaying and/or reducing the rate of progression to kidney failure and need for replacement therapy. Kidney failure is associated with extremely poor health outcomes as a life-long, costly state in which patients are dependent upon dialysis or the availability of a kidney transplant.
The Company’s director nominees bringpopulation of people with LN will be in different cycles of their disease at any one time. Prior to the approval of LUPKYNIS, physicians would generally use a combination of MMF and steroids to treat people with LN throughout the disease cycles. The clinical data generated in our Phase 2 AURA-LV and our Phase 3 AURORA studies has demonstrated that LUPKYNIS can achieve a more than two times higher rate of complete response than when given in combination with a MMF and steroids. The clinical data generated in our AURORA 2 continuation study demonstrated a continuation of these results over an aggregate of a three year period for the patients that enrolled, with no unexpected safety signals.
The price of LUPKYNIS is based on one unit of 60 capsules we refer to as a “wallet”. The wholesale acquisition cost (WAC) of a LUPKYNIS wallet is currently $4,226.50. Based on our patient-specific eGFR dosing regimens, the average utilization in our clinical trials, and accounting for factors including mandatory rebates, channel discounts, and anticipated patient adherence and compliance, we expect the average annualized net revenue per patient for us to be approximately $65,000. When determining the price of LUPKYNIS, we considered the burden of LN disease in the context of value that this innovative product offers to patients and the US healthcare system.
Voclosporin Mechanism of Action
Voclosporin reversibly inhibits immunocompetent lymphocytes, particularly T-Lymphocytes in the G0 and G1 phase of the cell-cycle, and also reversibly inhibits the production and release of lymphokines. Through a number of skillsprocesses voclosporin inhibits and prevents the activation of various transcription factors necessary for the induction of cytokine genes during T-cell activation. It is believed that the inhibition of activation of T-cells will have a positive modulatory effect in the treatment of LN. In addition to these immunologic impacts, recent data suggests that CNIs have another subtle but important impact on the structural integrity of the podocytes. This data suggests that inhibition of calcineurin in patients with autoimmune kidney diseases helps stabilize the cellular actin-cytoskeleton of the podocytes thus having a structural impact on the podocyte and the subsequent leakage of protein into the urine, which is a key marker of patients suffering from LN.
Scientific Rationale for Treatment of LN with LUPKYNIS
While SLE is a highly heterogeneous autoimmune disease (often with multiple organ and immune system involvement), LN has straightforward disease outcomes. T-cell mediated immune response is an important feature of the pathogenesis of LN while the podocyte injury that occurs in conjunction with the ongoing immune insult in the kidney is an important factor in the clinical presentation of the disease. An early response in LN correlates with long-term outcomes and is clearly measured by proteinuria.
The use of LUPKYNIS in combination with MMF and steroids for the treatment of adult patients with active LN provides a novel approach to treating this disease. LUPKYNIS has shown to have potent effects on T-cell activation leading to its immunomodulatory effects. Additionally, recent evidence suggests that inhibition of calcineurin has direct physical impacts on the podocytes within the kidney. Inhibition of calcineurin within the podocytes can prevent the dephosphorylation of synaptopodin which in turn inhibits the degradation of the actin cytoskeleton within the podocyte. This process is expected to have a direct impact on the levels of protein in the urine which is a key marker of LN disease activity.
Voclosporin Development History
More than 2,600 subjects have been dosed with voclosporin in clinical trials including studies where voclosporin was compared to placebo or active control. The safety and tolerability profile of the drug has been well characterized. Phase 2 or later clinical studies that have been completed include studies in the following indications:
Psoriasis: Two Phase 3 clinical studies in patients with moderate to severe psoriasis have been completed. The primary efficacy endpoint in both studies was a reduction in Psoriasis Area and Severity Index, which is a common measure of psoriasis disease severity. The first study treatment with voclosporin resulted in statistically significantly greater success rates than treatment with placebo by the twelfth week. In a second study comparing voclosporin against cyclosporine, the drug was not shown to be
statistically non-inferior to cyclosporine in terms of efficacy; however, voclosporin proved superior in terms of limiting elevations in hyperlipidemia. Due to the evolving psoriasis market dynamics and the changing standard of care for the treatment of this disease, we have decided not to pursue further Phase 3 development.
Kidney Transplantation: A Phase 2b clinical trial in de novo kidney transplant recipients was completed. Study ISA05-01, the PROMISE Study was a six-month study with a six-month extension comparing voclosporin directly against tacrolimus on a background of MMF and corticosteroids. Voclosporin was shown to be equivalent in efficacy (prevention of acute rejection of the transplanted kidney), but superior to tacrolimus with respect to the incidence of new onset diabetes after transplantation. Due to the ongoing evolution of the commercial market in kidney transplantation, including tacrolimus losing patent exclusivity in most world markets, combined with the cost and timeline that would have been associated with additional clinical trials, we have chosen not to pursue further internal clinical development in kidney transplantation.
Uveitis: Multiple studies in various forms of non-infectious uveitis were completed by Lux Biosciences, Inc., one of our former licensees, indicating mixed efficacy. In all but one of the studies, completed by the licensee, an impact on disease activity was shown in the voclosporin group. However, achievement of the primary end-points in multiple studies could not be shown. Uveitis is a notoriously difficult disease to study due to the heterogeneity of the patient population and the lack of validated clinical end-points. However, in all of the uveitis studies completed, the safety results were consistent, and the drug was well tolerated. We retained a portfolio of additional patents that Lux Biosciences, Inc. had been prosecuting that are focused on delivering effective concentrations of voclosporin to various ocular tissues following the termination of our licensing agreement in 2014.
Dry eye syndrome (DES): We completed a Phase 2 head to head study for the treatment of DES versus Restasis®, with results reported in January 2019. Both drugs were shown to be well tolerated and there was no statistical difference for the primary endpoint. However, on key pre-specified secondary endpoints of Schirmer Tear Test and fluorescein corneal staining, voclosporin showed rapid and statistically significant improvements over Restasis®. As a result, we followed up with a Phase 2/3 study which reported results in November 2020. That study did not achieve statistical significance on its primary endpoint compared to vehicle. As a result, we suspended the development of voclosporin for DES in 2020.
FDA Approval and Commercial Launch of LUPKYNIS
On January 22, 2021, the FDA approved LUPKYNIS in combination with a background immunosuppressive therapy regimen to treat adult patients with active LN. As a condition of approval, we will be required to conduct two pediatric studies (with reports due in 2025 and 2031), a milk only lactation study (with a report due in 2026), a drug-drug interaction study (with a
report due in 2023) and submit a final study report on our AURORA-2 continuation study (by March 2022). These post-approval conditions all remain in progress within the expected timelines.
Completion of AURORA 2 Continuation Study
On December 9, 2021, we announced positive topline results from the AURORA 2 2-year continuation study evaluating the long-term safety and tolerability of LUPKYNIS. AURORA 2 (NCT03597464) was a Phase 3 randomized, double-blind, placebo-controlled clinical trial to assess the long-term safety and tolerability of voclosporin, in addition to MMF and steroids. Patients who completed 12 months of treatment in the Phase 3 AURORA 1 study were eligible to enroll in the AURORA 2 continuation study with the same randomized treatment of voclosporin at 23.7 mg twice daily or placebo, in combination with MMF at 1 g twice daily with low-dose oral steroids, for up to an additional 24 months. A total of 216 LN patients out of 357 who were enrolled in the AURORA 1 study continued into AURORA 2, with 116 patients in the voclosporin group and 100 patients in the control group. 90 and 78 patients, respectively, received 36 months of total treatment at the completion of the study. Compared to the active control group, the voclosporin-treated group showed an increase from baseline eGFR at the end of the studies of +2.7 mL/min. The study demonstrated a favorable risk/benefit profile over a three-year period, with safety comparable to AURORA 1, and sustained efficacy.
Investigator-Initiated Trial to Evaluate Antiviral Activity of LUPKYNIS in Kidney Transplant Recipients with COVID-19 (VOCOVID)
On October 27, 2020 we announced the funding and initiation of an open-label exploratory trial evaluating the antiviral effects of voclosporin in kidney transplant recipients (KTRs) with COVID-19 (SARS-CoV-2) or the VOCOVID study. The single-center, investigator-initiated trial (IIT) is being conducted by Drs. Aiko P.J. de Vries and Y.K. Onno Teng at the Leiden University Medical Center (LUMC) in the Netherlands and will compare voclosporin against tacrolimus.
Organ transplant recipients who contract COVID-19 are at greater risk for complications due to the requirement of daily immunosuppressive medications to prevent organ rejection. CNIs, like voclosporin, have been shown in prior in vitro studies to inhibit viral replication. The team at LUMC demonstrated that voclosporin inhibited viral replication of COVID-19 at an 8-fold lower concentration than tacrolimus in vitro, while maintaining cell viability of infected cells. In contrast to voclosporin, tacrolimus did not show antiviral activity against COVID-19 in vitro at clinically relevant concentrations. Therefore,given its potency and dosing advantages, voclosporin is a potentially attractive CNI for COVID-19 infected transplant patients who are already using legacy CNIs as part of their chronic immunosuppressive therapy.
This 56-day open-label IIT is designed to evaluate the antiviral effects of voclosporin compared to tacrolimus in stable KTRs who contracted COVID-19. At study entry, 20 KTRs testing positive for COVID-19 and currently on dual immunosuppressives of prednisone and tacrolimus were randomized 1:1 to remain on tacrolimus or be switched to voclosporin. The primary endpoint is the reduction in COVID-19 viral load over 56 days, as measured by reverse transcription polymerase chain reaction. The study will also assess predefined endpoints as surrogate markers of improved viral clearance including time to 3-log reduction in viral load concentration, time to clinical recovery – defined as free of symptoms for five days or more, and safety and tolerability. As of December 31, 2021, the data collection is ongoing.
INTELLECTUAL PROPERTY
Patents and other proprietary rights are essential to our business. Our policy has been to file patent applications to protect technology, inventions and improvements to our inventions that are considered important to the development of our business.
We have an extensive granted patent portfolio covering voclosporin, including granted United States patents, for composition of matter, methods of use, formulations and synthesis, and the rights to certain corresponding Canadian, South African and Israeli patents are owned by Paladin Labs Inc. We anticipate that patent protection for voclosporin will be extended in the United States (Patent Term Extension) and certain other major markets, including Europe and Japan, until at least October 2027 under the Hatch-Waxman Act in the United States and comparable patent extension laws in other countries (including the Supplementary Protection Certificate program in Europe). We have applied for the Patent Term Extension, and are awaiting confirmation from the U.S. Patent and Trademark Office (USPTO). If the Patent Term Extension is not granted prior to the expiry of our patent term, we intend to file an interim patent term extension until the USPTO completes its review of the Patent Term Extension. Opportunities may also be available to add an additional six months of exclusivity related to our planned pediatric studies. In addition to patent rights, we have received "new chemical entity" exclusivity for LUPKYNIS in the United States, which provides for exclusivity until January 22, 2026, and we expect to receive “new chemical entity” exclusivity for voclosporin in certain other countries, which provides exclusivity for up to ten years in Europe.
In May 2019, we were granted U.S. Patent No. 10,286,036 with a term extending to December 2037, with claims directed at our LUPKYNIS dosing protocol for LN used in our clinical trials. This dosing protocol is reflected on the prescribing information approved by the FDA for LUPKYNIS. Notably, the allowed claims cover a method of modifying the dose of LUPKYNIS in patients with LN based on patient specific pharmacodynamic parameters. On February 24, 2022, Sun Pharmaceuticals Inc. petitioned for an inter partes review by the USPTO in respect of this patent. We are currently reviewing the petition and considering our response and next steps. We have also filed for protection of this subject matter under the Patent Cooperation Treaty and are applying for similar protection in the member countries thereof. This may lead to the granting of similar claims in other major global pharmaceutical markets.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by rapidly evolving technology and intense competition. Many companies, including major pharmaceutical as well as specialized biotechnology companies, are engaged in activities focused on medical conditions that are the same as, or similar to, those targeted by us. In particular, another treatment was approved by the FDA for LN approximately one month before we received approval for LUPKYNIS, and physicians have and continue to treat LN in the United States using other drugs with off-label prescribing, such as a combination of MMF and steroids or tacrolimus. Many of biotechnology companies that could or do compete with us or our products have substantially greater financial and other resources, larger research and development staff, and more extensive marketing and manufacturing organization than we do. Many of these companies have significant experience in pre-clinical testing, human clinical trials, product manufacturing, marketing and distribution, and other regulatory approval procedures. In addition, colleges, universities, government agencies, and other public and private research organizations conduct research and may market commercial products on their own or through collaborative agreements and these institutions are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technology that they have developed. These companies, institutions, and organizations also compete with us in recruiting and retaining highly qualified scientific personnel, as well as other personnel needed for our business. Certain products may also be available at prices that are substantially lower than the cost of LUPKYNIS, whether or not studied in, or receiving approval for use by the FDA for, LN.
We believe key competitive factors that will affect the development and commercial success of LUPKYNIS and future potential product candidates include, but are not limited to, efficacy, safety and tolerability profile, reliability, convenience of dosing, pricing, the level of generic competition and reimbursement.As we and our competitors introduce new products and offerings, and as existing products evolve, we expect that we may become subject to additional competition.
REGULATORY
We worked with Otsuka to prepare an MAA filing with the EMA that was filed during the first half of 2021 and an MAA filing with Swissmedic that was filed during the second half of 2021. Otsuka has also taken on customary obligations to use commercially reasonable efforts to prepare and submit filings for regulatory approvals in the other territories in which we have granted them rights, including Japan and selected other European countries.
Regulatory Requirements
The development, manufacturing and marketing of LUPKYNIS is subject to regulations relating to the demonstration of safety and efficacy of the products as established by the government or regulatory authorities in those jurisdictions where this product is to be marketed. We, or our licensees, are required to seek and obtain regulatory approvals in the United States, Europe and Japan in order to commercialize LUPKYNIS in these jurisdictions. Depending upon the circumstances surrounding the clinical evaluation of LUPKYNIS, we may undertake clinical trials, contract clinical trial activities to contract research organizations, or rely upon corporate partners for such development. As noted above, we have obtained the requisite approvals for LUPKYNIS to treat active LN in adult patients in the United States. We believe this approach will allow us to make cost effective developmental decisions in a timely fashion. We cannot predict or give any assurances as to whether regulatory approvals will be received or how long the process of seeking regulatory approvals will take.
Although only the jurisdictions of the United States, Europe and Japan are discussed in this section, we may also seek regulatory approval in other jurisdictions in the future and may initiate other clinical studies if and where appropriate.
Government Regulation
Our worldwide business activities are subject to various laws, rules, and regulations of the United States as well as of foreign governments. Compliance with these laws, rules, and regulations has not had a material effect upon our capital expenditures,
results of operations, or competitive position, and we do not currently anticipate material capital expenditures for environmental control facilities. Nevertheless, compliance with existing or future governmental regulations, including, but not limited to, those pertaining to product development and approval, business acquisitions, healthcare, consumer and data protection, employee health and safety, and taxes, could have a material impact on our business in subsequent periods. Refer to Part I, Item 1A. “Risk Factors” for a discussion of these potential impacts.
United States—FDA Process
The research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of drug products are extensively regulated by governmental authorities in the United States and other countries. In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (FDCA), and its implementing regulations. Failure to comply with the applicable U.S. requirements may subject us to administrative or judicial sanctions, such as FDA refusal to approve pending NDAs, warning letters, fines, civil penalties, product recalls, product seizures, total or partial suspension of production or distribution, injunctions and/or criminal prosecution.
Drug Approval Process. No drug product candidates may be marketed in the United States until the drug has received FDA approval. The steps required before a drug may be marketed in the United States generally include the following:
•completion of extensive pre-clinical laboratory tests, animal studies, and formulation studies in accordance with the FDA’s GLP requirements and other applicable regulations;
•submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials may begin;
•approval by an independent institutional review board (IRB) or ethics committee at each clinical site before each trial may be initiated;
•performance of adequate and well-controlled human clinical trials in accordance with GCP requirements to establish the safety and efficacy of the drug for each proposed indication;
•submission to the FDA of an NDA after completion of all pivotal clinical trials;
•satisfactory completion of an FDA advisory committee review, if applicable;
•satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the drug substance and finished drug product are produced and tested to assess compliance with current GMPs; and
•FDA review and approval of the NDA prior to any commercial marketing or sale of the drug in the United States.
Pre-clinical tests include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies. The conduct of the pre-clinical tests and formulation of the compounds for testing must comply with federal regulations and requirements. The results of the pre-clinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about the conduct of the trial, such as whether human research subjects will be exposed to an unreasonable health risk. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. We cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin.
Clinical trials involve administration of the investigational drug to human subjects under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be provided to the FDA as part of a separate submission to the IND. Further, an IRB for each medical center proposing to conduct the clinical trial must review and approve the study protocol and informed consent information for study subjects for any clinical trial before it commences at that center, and the IRB must monitor the study until it is completed. There are also requirements governing reporting of ongoing clinical trials and clinical trial results to public registries. Study subjects must sign an informed consent form before participating in a clinical trial.
Clinical trials necessary for product approval typically are conducted in three sequential phases, but the phases may overlap. Phase 1 usually involves the initial introduction of the investigational drug into a limited population, typically healthy humans, to evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics and pharmacologic actions, and, if possible, to gain an early indication of its effectiveness. Phase 2 usually involves trials in a limited patient population to (i) evaluate dosage tolerance and appropriate dosage; (ii) identify possible adverse effects and safety risks; and (iii) evaluate preliminarily the efficacy of the drug for specific targeted indications. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials. Phase 3 trials, commonly referred to as pivotal studies, are undertaken in an expanded patient population at multiple, geographically dispersed clinical trial centers to further evaluate clinical efficacy and test further for safety by using the drug in its final form. Post-approval trials, sometimes referred
to as Phase 4 studies, may be conducted after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of approval of an NDA.
Furthermore, the sponsor, the FDA or an IRB may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution, such as in the circumstances where the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected harm to patients. In addition, some clinical trials are overseen by an independent group of qualified experts organized by the sponsor, known as a data safety monitoring board or committee. Depending on its charter, this group may determine whether a trial may move forward at designated check points based on access to certain data from the trial.
During the development of a new drug, sponsors are given an opportunity to meet with the FDA at certain points. These points may be prior to submission of an IND, at the end of Phase 2 clinical testing, and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date, for the FDA to provide advice, and for the sponsor and the FDA to reach consensus on the next phase of development. Sponsors typically use the end of Phase 2 meeting to discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trial that they believe will support submission of an NDA.
Concurrent with clinical trials, companies usually complete additional animal safety studies and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in accordance with GMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and the manufacturer must develop methods for testing the quality, purity and potency of the final drugs. Additionally, appropriate packaging must be selected and tested, and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.
Assuming successful completion of the required clinical testing, the results of pre-clinical studies and of clinical trials, together with other detailed information, including information on the manufacture and composition of the drug, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or more indications. An NDA must be accompanied by a significant user fee.
The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is GMP-compliant to assure and preserve the product’s identity, strength, quality and purity. Under the Prescription Drug User Fee Act (PDUFA) guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has approximately two months to make a “filing” decision after it the application is submitted. The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to a filing review before the FDA accepts it for filing and substantive review.
The FDA also may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Before approving an NDA, the FDA may inspect the facility or the facilities at which the drug and/or its drug substance is manufactured and may withhold approval of the product if the manufacturing is not in compliance with GMPs and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCPs. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
After the FDA evaluates an NDA, it will issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the drug for specific indications. A complete response letter indicates that the review cycle of the application is complete and the application will not be approved in its present form. A complete response letter usually describes the specific deficiencies in the NDA identified by the FDA and may require additional clinical data and/or additional
pivotal Phase 3 clinical trial(s), and/or other significant, expensive and time-consuming requirements related to clinical trials, pre-clinical studies or manufacturing. Even if such additional information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval.
If regulatory approval of a product is granted, such approval will be granted for particular indications and may entail limitations on the indicated uses for which such product may be marketed. For example, the FDA could approve the NDA with a Risk Evaluation and Mitigation Strategy to mitigate risks of the drug, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries or other risk minimization tools. Once the FDA approves a drug, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing, including Phase 4 clinical trials, and surveillance programs to monitor the safety effects of approved products that have been commercialized. The FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs or other information. In addition, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could impact the timeline for regulatory approval or otherwise impact ongoing development programs.
Expedited Review and Approval. The FDA has various programs, including fast track designation, priority review, accelerated approval, and breakthrough therapy designation, which are intended to expedite or simplify the process for reviewing certain drugs and in the case of accelerated approval, provide for approval on the basis of surrogate or intermediate endpoints. Even if a drug qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets the conditions for qualification or that the time period for FDA review or approval will not be shortened. Generally, drugs that may be eligible for these programs are those for serious or life-threatening diseases or conditions, those with the potential to address unmet medical needs, and those that offer meaningful benefits over existing treatments. Fast track designation, breakthrough therapy designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.
For example, fast track designation is designed to facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases or conditions and which demonstrate the potential to address an unmet medical need for such diseases or conditions. With regard to a fast track-designated product, the FDA may consider for review sections of the NDA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA. Any product submitted to the FDA for approval, including a product with a fast track designation, may also be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. A product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review. The FDA endeavors to review applications with priority review designations within six months of the filing date as compared to ten months for review of new molecular entity NDAs under its current PDUFA review goals.
Drug products intended for serious or life threatening conditions may be eligible for accelerated approval upon a determination that the product has an effect on a surrogate endpoint, which is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome, or an effect on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality and that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform post-marketing clinical trials. In addition, the FDA currently requires pre-approval of promotional materials as a condition for accelerated approval.
The Food and Drug Administration Safety and Innovation Act established a category of drugs referred to as “breakthrough therapies” that may be eligible to receive breakthrough therapy designation. A sponsor may seek FDA designation of a product candidate as a “breakthrough therapy” if the product is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies receive all the benefits of a fast track designation, as well as intensive guidance on efficient drug development and organizational commitment involving senior managers in the FDA.
Post-Approval Requirements. After a drug has been approved by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including the conduct of additional clinical studies. In addition, certain changes to an approved product, such as adding new indications, making certain manufacturing changes, or making certain additional labeling claims, are subject to further FDA review and approval. Before a company can market products for additional indications, it must obtain additional approvals from the FDA. Obtaining approval for a new indication generally requires that additional clinical studies be conducted. A company cannot be sure that any additional approval for new indications for any product candidate will be approved on a timely basis, or at all.
If post-approval conditions are not satisfied, the FDA may withdraw its approval of the drug. In addition, holders of an approved NDA are required to (i) report certain adverse reactions to the FDA and maintain pharmacovigilance programs to proactively look for these adverse events; (ii) comply with certain requirements concerning advertising and promotional labeling for their products; and (iii) continue to have quality control and manufacturing procedures conform to GMPs after approval. The FDA periodically inspects the sponsor’s records related to safety reporting and/or manufacturing facilities; this latter effort includes assessment of ongoing compliance with GMPs. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain GMP compliance. We use third-party manufacturers to produce our products in clinical and commercial quantities, and future FDA inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of problems with a product after approval may result in restrictions on a product, manufacturer or holder of an approved NDA, including, among other things:
•restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
•fines, warning letters or holds on post-approval clinical trials;
•refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of existing product approvals;
•product seizure or detention, or refusal to permit the import or export of products; or
•injunctions or the imposition of civil or criminal penalties.
Patent Term Restoration and Marketing Exclusivity. Depending upon the timing, duration and specifics of FDA approval of the use of our drugs, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the extension must be requested prior to expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. We have filed for a patent term extension for one of our U.S. patents, which is being considered by the USPTO. Only one U.S. patent is permitted to be extended for the currently approved drug product and its uses.
Data and market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five year period of non-patent data exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or an NDA submitted under section 505(b)(2) of the FDCA by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or noninfringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for drugs containing the original active agent or from accepting and reviewing an application referencing the approved drug’s application. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct, or obtain a right of reference to all of the pre-clinical studies and clinical trials necessary to demonstrate safety and effectiveness.
Foreign Regulation
In addition to regulations in the United States, we may become subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of LUPKYNIS or other potential future products. In many cases, we must obtain approval of the country’s regulatory authorities in order to conduct clinical trials or market products, although in selected countries there are regulations that permit marketing a product on the basis of an approval that has been received in the US, EU, or elsewhere. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.
As an example, in the European Economic Area (EEA), which is comprised of the Member States of the EU plus Norway, Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing Authorization (MA). There are two types of MAs:
•Community MAs – These are issued by the European Commission through the centralized procedure, based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the EMA, and are valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal products indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, autoimmune and viral diseases. The centralized procedure is optional for products containing a new active substance not yet authorized in the EEA; for products that constitute a significant therapeutic, scientific or technical innovation; or for products that are in the interest of public health in the EU.
•National MAs – These are issued by the competent authorities of the member states of the EEA and only cover their respective territory and are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a member state of the EEA, this national MA can be recognized in another member state through the mutual recognition procedure. If the product has not received a national MA in any member state at the time of application, it can be approved simultaneously in various member states through the decentralized procedure. Under the decentralized procedure, an identical dossier is submitted to the competent authorities of each of the member states in which the MA is sought, one of which is selected by the applicant as the reference member state. The competent authority of the reference member state prepares a draft assessment report, a draft summary of the product characteristics, or SmPC, and a draft of the labeling and package leaflet, which are sent to the other member states (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to public health, to the assessment, SmPC, labeling or packaging proposed by the reference member state, the product is subsequently granted a national MA in all the member states, i.e., in the reference member state and the member states concerned.
Under the above described procedures, before granting the MA, the EMA or the competent authorities of the member states of the EEA assess the risk benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.
As in the United States, it may be possible in foreign countries to obtain a period of market and/or data exclusivity that would have the effect of postponing the entry into the marketplace of a competitor’s generic product. For example, if any of our products receive marketing approval in the EEA, we expect they will benefit from eight years of data exclusivity and 10 years of marketing exclusivity. An additional non-cumulative one-year period of marketing exclusivity is possible if during the data exclusivity period (the first eight years of the 10-year marketing exclusivity period), we (or our licensee or partner) obtain an authorization for one or more new therapeutic indications that are deemed to bring a significant clinical benefit compared to existing therapies. The data exclusivity period begins on the date of the product’s first marketing authorization in the EEA and prevents generics from relying on the marketing authorization holder’s pharmacological, toxicological and clinical data for a period of eight years. After eight years, a generic product application may be submitted, and generic companies may rely on the marketing authorization holder’s data. However, a generic cannot launch until two years later (or a total of 10 years after the first marketing authorization in the EU of the innovator product), or three years later (or a total of 11 years after the first marketing authorization in the EU of the innovator product) if the marketing authorization holder obtains marketing authorization for a new indication with significant clinical benefit within the eight-year data exclusivity period.
When conducting clinical trials in the EU, we must adhere to the provisions of the European Union Clinical Trials Directive (Directive 2001/20/EC) and the laws and regulations of the EU Member States implementing them. These provisions require, among other things, that the prior authorization of an Ethics Committee and the competent Member State authority is obtained before commencing the clinical trial. In April 2014, the EU passed the Clinical Trials Regulation (Regulation 536/2014), which will replace the current Clinical Trials Directive. To ensure that the rules for clinical trials are identical throughout the European Union, the EU Clinical Trials Regulation was passed as a regulation that is directly applicable in all EU member states. All clinical trials performed in the European Union are required to be conducted in accordance with the Clinical Trials Directive
until the Clinical Trials Regulation becomes applicable. According to the current plans of the EMA, the Clinical Trials Regulation is expected to become applicable in December 2021.
Japan Regulatory Process
In Japan, the Pharmaceutical and Medical Devices Agency (PMDA) is the main regulatory agency that oversees the review and approval of the drugs in Japan. There is the potential for PMDA to require additional clinical trials to be conducted to generate data in a Japanese population.
Japan’s regulatory system requires the Japanese New Drug Application (J-NDA) documents to be prepared in the common technical document format. Once the applicant files the J-NDA, PMDA reviews the application and may carry out a GMP investigation of manufacturing site. If there are any major issues, PMDA reviewer will prepare a summary of the main issues, discuss with the applicant and may organize an expert discussion, which involves a discussion between the PMDA reviewer and external expert on the proposed major issue(s).
Following this review meeting, PMDA may again hold another expert discussion (if necessary) and prepares a review report for final approval within the Japanese government. The standard time for approval of a J-NDA is approximately 12 months. In Japan, our products may be eligible for eight years of data exclusivity. There can be no assurance that we will qualify for such regulatory exclusivity, or that such exclusivity will prevent competitors from seeking approval solely on the basis of their own studies.
Coverage and Reimbursement
In the United States and internationally, sales of LUPKYNIS and any other products that we market in the future, and our ability to generate revenues on such sales, are dependent, in significant part, on the availability of adequate coverage and reimbursement from third-party payors, such as state and federal governments, managed care providers and private insurance plans. These organizations routinely implement cost-cutting and reimbursement initiatives that have the ability, or potential, to impact a patient’s overall access to our product. Examples of these initiatives include, but are not limited to, establishing formularies that govern the drugs and biologics that are eligible for reimbursement and the out-of-pocket obligations of member patients for such products.
In addition, particularly in the United States and increasingly in other countries, we are required to provide discounts, rebates and/or other price concessions to state and federal governments and agencies in connection with purchases of our products that are reimbursed by such entities. It is possible that future legislation in the United States and other jurisdictions could be enacted to potentially impact reimbursement rates for the products we are developing and may develop in the future and could further impact the levels of discounts and rebates paid to federal and state government entities. Any legislation that impacts these areas could impact, in a significant way, our ability to generate revenues from sales of products in which we have a commercial interest.
Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental changes. There have been, and we expect there will continue to be, legislative and regulatory proposals to change the healthcare system in ways that could significantly affect our future business. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the ACA) enacted in March 2010, substantially changed the way healthcare is financed by both governmental and private insurers. Among other cost containment measures, the ACA established:
•an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents;
•a Medicare Part D coverage gap discount program, in which pharmaceutical manufacturers who wish to have their drugs covered under Part D must offer discounts for eligible beneficiaries during their coverage gap period, often referred to as the donut hole; and
•a formula that increases the rebates a manufacturer must pay under the Medicaid Drug Rebate Program.
Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Recently, there has also been heightened governmental (federal and state) scrutiny over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing,
review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products.
Similar political, economic and regulatory developments are occurring in the EU and may affect the ability of pharmaceutical companies to profitably commercialize their products. In addition to continuing pressure on prices and cost containment measures, legislative developments at the EU or member state level may result in significant additional requirements or obstacles. The delivery of healthcare in the EU, including the establishment and operation of health services and the pricing and reimbursement of medicines, is almost exclusively a matter for national, rather than EU, law and policy. National governments and health service providers have different priorities and approaches to the delivery of health care and the pricing and reimbursement of products in that context. In general, however, the healthcare budgetary constraints in most EU member states have resulted in restrictions on the pricing and reimbursement of medicines by relevant health service providers. Coupled with ever-increasing EU and national regulatory burdens on those wishing to develop and market products, this could restrict or regulate post-approval activities and affect the ability of pharmaceutical companies to commercialize their products. In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies.
In the future, there may continue to be additional proposals relating to the reform of the U.S. healthcare system and international healthcare systems. Future legislation, or regulatory actions implementing recent or future legislation may have a significant effect on our business. Our ability to successfully commercialize products depends in part on the extent to which reimbursement for the costs of our products and related treatments will be available in the United States and worldwide from government health administration authorities, private health insurers and other organizations. The adoption of certain proposals could limit the prices we are able to charge for our products, the amounts of reimbursement available for our products, and limit the acceptance and availability of our products. Therefore, substantial uncertainty exists as to the reimbursement status of newly approved health care products by third-party payors.
MANUFACTURING AND SUPPLY CHAIN
In order to supply commercial inventory for LUPKYNIS, we have established relationships with contract manufacturing organizations or CMOs, coupled with supply agreements, for the manufacturing of active pharmaceutical ingredient or drug substance, encapsulation of voclosporin 7.9 mg capsules as well as packaging of LUPKYNIS commercial cartons.
Manufacturing of Drug Substance
Voclosporin requires a specialized drug substance manufacturing process and is manufactured by Lonza, our sole supplier for drug substance. Pricing for supply is determined through supply agreements between us and Lonza and is based on the kilograms produced and the cost of the raw materials used in the drug substance manufacturing process. As at the date of this Annual Report, we have not experienced any difficulty in obtaining the raw materials required with respect to the manufacturing of voclosporin. We believe we have enough inventory on hand and manufacturing capacity to meet forecasted demand.
We have entered into a collaborative agreement with Lonza to build a dedicated manufacturing capacity within Lonza’s existing small molecule facility in Visp, Switzerland. The dedicated facility (also referred to as monoplant) will be equipped with state-of-the-art manufacturing equipment to provide cost and production efficiencies for the manufacture of voclosporin, while expanding existing capacity and providing supply security to meet future commercial demand. Upon completion of the monoplant, we will have the right to maintain unobstructed use of the monoplant by paying a quarterly fixed facility fee.
Encapsulation
Catalent Pharma Solutions (Catalent) is currently the sole supplier for the preparation of our voclosporin 7.9 mg capsules. Pricing for these services is determined by a supply agreement between Catalent and us. We expect that Catalent will continue to provide contract manufacturing services with respect to encapsulating voclosporin in order to manufacture voclosporin 7.9 mg capsules that are required for our future commercial and clinical supply needs.
Packaging
We currently use a sole supplier for the packaging of LUPKYNIS commercial cartons. Pricing for these services is determined by a supply agreement between us and our supplier. We expect that our supplier will continue to provide contract manufacturing services with respect to the packaging of LUPKYNIS commercial cartons for the U.S. market.
Marketing, Sales and Distribution
We have built a world class commercial organization with deep expertise and a focus on rheumatology and nephrology to support the commercialization of LUPKYNIS. The commercial team consists of sales, marketing, commercial operations, commercial supply chain, patient services, market access, and professional and advocacy relations.
HUMAN CAPITAL MANAGEMENT
As of December 31, 2021, we employed approximately 300 employees across the United States, Canada and the United Kingdom, all of whom are expected to be guided by our vision and values and by an underlying set of ethical principles. We are committed to treating each of our employees fairly, and to maintaining employment practices based on equal opportunity for all employees. We respect each other’s privacy and treat each other with dignity and respect irrespective of age, race, color, sex, sexual preference, nationality, or physical condition. We are committed to providing safe and healthy working conditions and an atmosphere of open communication for all of our employees.
While the compensation committee of our board of directors has the primary responsibility of overseeing our human capital management activities (including assessing the effectiveness of employee programs and advising management with regard to establishing our strategic goals and overall human resource strategies), other committees also have responsibilities that impact our human capital management as outlined in their respective charters. Within management, our human resources function has global management responsibility for advising and assisting the business on human resource matters and executing our overall human capital management strategies.
We strive to engage and retain our employees throughout the employment life-cycle with effective recruiting and onboarding; competitive pay, benefits and other total rewards; programs for professional development and career advancement; compliance training; succession planning; and a safe, healthy and respectful workplace.
In response to the COVID-19 pandemic, we quickly implemented safety and health standards and protocols for our employees while continuing to offer a safe environment as an essential service to our customers. We have been responsive to local guidelines in respect of the COVID-19 pandemic, which included in 2021 shutting our offices for part of the year and having our employees work from home, re-opening in deliberate fashion following local guidelines, and installing COVID-19 plans and policies to be followed at our offices (including mask protocols, and limitations on attendance in common spaces). Our offices are provided with personal protective equipment, other equipment and enhanced cleaning supplies, and are required to adhere to appropriate protocols for social distancing, limiting density, reporting and documenting exposures and wearing masks at all times, all as recommended by the Centers for Disease Control or mandated by local regulations.
We have no collective bargaining agreements with our employees, and we have not experienced any work stoppages.
All of our employees are required to observe high standards of business and personal ethics in the conduct of their duties and responsibilities. It is the responsibility of all of our employees to comply with our Code of Conduct and to report any actual or suspected misconduct, illegal activities or fraud. To that end, employees are encouraged to report any such activities to their supervisor or our Chief Compliance Officer. We also maintain a whistleblower hotline that is available to all of our employees to report (anonymously if desired) any matter of concern. Communications to the hotline (which is facilitated by an independent third party) are routed to our General Counsel (or, if the General Counsel is the subject of the communication, to the Chair of our Audit Committee) for investigation and resolution. We also maintain a policy of no retaliation, where employees who report any misconduct are to be free of any harassment, retaliation or adverse employment consequence.
CORPORATE INFORMATION
Aurinia is organized under the Business Corporations Act (Alberta). We have two wholly-owned subsidiaries: Aurinia Pharma U.S., Inc., (Delaware incorporated) and Aurinia Pharma Limited (United Kingdom incorporated). Our principal executive office is located at #1203-4464 Markham Street, Victoria, British Columbia, V8Z 7X8, Canada and our phone number is +1 (250) 744-2487. Our registered office is located at #201, 17873 -106A Avenue, Edmonton, Alberta, Canada and our US commercial office is located at 77 Upper Rock Circle, Suite 700, Rockville, Maryland 20850.
Our website address is www.auriniapharma.com and our investor relations website is located at https://ir.auriniapharma.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are filed with the SEC and are available at the SEC's website at www.sec.gov. Such reports and other information are also available free of charge on our investor relations website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The
information posted on, or that can be accessed through, our website and investor relations website is not incorporated into this Annual Report and the contents of these websites are not intended to be incorporated by reference into any report or document we file with, or furnish to, the SEC. Our documents are also filed with securities regulators in Canada and are available under our profile at the website www.sedar.com.
Item 1A. Risk Factors
Our business is subject to numerous risks. You should carefully consider the following risks and all other information contained in or incorporated by reference in this Annual Report, as well as general economic and business risks, together with any other documents we file with the SEC. The risks set out below are not the only risks we face; risks and uncertainties not currently known to use or that we currently deem to be immaterial may also harm our business, operating results and financial condition. If any of the following events occur or risks materialize, it could harm our business, operating results and financial condition and cause the trading price of our common shares to decline.
Risks Related to the COVID-19 Pandemic
Our business, results of operations, and future growth prospects could be materially and adversely affected by the COVID-19 pandemic.
Due to the evolving and uncertain impacts of the COVID-19 pandemic (including the various mutations and variants of COVID-19 that have emerged), and the fact that we have just completed our first year of commercial operations (which commenced in the midst of the COVID-19 pandemic), we cannot precisely determine or quantify the impact this pandemic will have on our business operations going forward. Periodically throughout the year, in response to the spread of COVID-19, we have closed our offices to only essential staff where needed. We have implemented policies and procedures in alignment with local (provincial and state) COVID guidelines, including appropriate distancing requirements, limitations on number of persons in common spaces (such as boardrooms and lunch rooms), and requirements to wear masks in the office. We have also adapted from a standard marketing routine, as LUPKYNIS was launched in the middle of a pandemic, where our sales force would have the option of meeting with physicians virtually or in-person. As a result of the COVID-19 pandemic, we have and may continue to experience disruptions that severely impact our business, commercialization, pre-clinical studies, and clinical trials, including:
a.delays or difficulties in enrolling patients in our clinical trials;
b.delays or difficulties in building out and maintaining commercial infrastructure;
c.delays in recruiting for key positions;
d.delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
e.interruption of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by federal, provincial or state governments, employers, and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;
f.interruption or delays in the operations of applicable regulatory authorities, which could impact the ability to obtain applicable regulatory approvals, and could impact on ability to commercialize internationally or receive milestone payments from licensees;
g.interruption or delays in receiving supplies of LUPKYNIS from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages, and disruptions in delivery systems;
h.limitations on employee resources that would otherwise be focused on the conduct of our commercial and promotional activities, pre-clinical studies and clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;
i.limited ability to access accounts and healthcare professionals, in person or at all, to provide medical information to promote our drug;
j.staffing shortages at healthcare professionals' offices that may limit the ability to administratively process prescriptions; and
k.reductions in patient visits to physicians and new patients might have limited access to prescribers.
The pandemic has significantly impacted economies worldwide, which could result in harm to our business and operations. The COVID-19 pandemic continues to evolve, and impacts various geographic regions in which we operate at varying levels at varying times. In addition, government and health authority intervention varies greatly in the various geographic regions in which we operate. The extent to which the pandemic may impact our business, commercialization, pre-clinical studies, and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease and its new strains, the duration of the outbreak, travel restrictions, vaccination rates and social distancing in Canada, the United States and other countries, business closures or business disruptions and the
effectiveness of vaccinations and actions taken in the Canada, the United States and other countries to contain and treat the disease. To the extent there is an impact from the COVID-19 pandemic on our business, it has not had, and we anticipate that it will continue to not have, a steady impact but instead an uneven impact on various aspects of our business and operations as the variants of the virus infect different parts of the geographic regions in which we operate at different times and to different degrees. While we are not able to compare our operational results to prior years to verify, as our sole commercial product was only approved for sale in January 2021, we believe that the COVID-19 pandemic has harmed our business and operations, in particular in relation to our ability to connect with, and promote LUPKYNIS to, health care professionals, which as a result has limited prescribing opportunities for LUPKYNIS.
To the extent the COVID-19 pandemic harms our business and financial results, it may also have the effect of heightening many of the other risks described in this Annual Report. Because of the highly uncertain and dynamic nature of events relating to the COVID-19 pandemic, it is not currently possible to estimate the impact of COVID-19 on our business. However, these effects could harm our operations, and we will monitor and respond to the COVID-19 situation as it continues to evolve.
Risks Related to Commercialization
Our success depends on our ability to commercialize LUPKYNIS. We are currently a single approved product company with limited commercial sales experience and if we are not able to achieve our financial targets related to commercializing LUPKYNIS, then we may need to curtail or cease operations.
We have invested a significant portion of our efforts and financial resources in the development and commercialization of LUPKYNIS, and we expect LUPKYNIS to constitute our only product revenue for the foreseeable future. Our success depends on our ability to commercialize LUPKYNIS successfully. Successful commercialization of LUPKYNIS is subject to many risks. There are numerous examples of unsuccessful product launches and failures to meet high expectations of market potential, including by pharmaceutical companies with more experience and resources than we have.
We have limited experience commercializing pharmaceutical products as an organization. In order to market LUPKYNIS successfully, we must continue to build our sales, marketing, managerial, compliance, and related capabilities or make arrangements with third parties to perform these services. If we are unable to establish and maintain adequate sales, marketing, and distribution capabilities, whether independently or with third parties, we may not be able to commercialize LUPKYNIS appropriately and may not become profitable.
Part of our strategy to commercialize LUPKYNIS in the United States is to maintain a direct sales force. These efforts have been and will continue to be expensive and time-consuming, and we cannot be certain that we will be able to successfully develop and maintain this capability. LUPKYNIS has only been a marketed product since January 2021 and, therefore, none of the members of our sales force had ever promoted LUPKYNIS prior to its commercial launch. In addition, prior to December 2020, there were no FDA approved treatments for LN.If we are unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers our efforts to commercialize successfully could be harmed, which would negatively impact our ability to generate product revenue.
Our ability to successfully commercialize LUPKYNIS will depend on effectively deploying the sales force we have established and maintaining marketing, manufacturing, and distribution capabilities or relationships.
Our ability to generate revenues and meet expectations will be contingent on the successful commercialization of LUPKYNIS. A successful commercialization will depend on our ability to, amongst other things:
•achieve and maintain compliance with regulatory requirements;
•create and sustain market demand for and achieve market acceptance of LUPKYNIS through our marketing and sales activities and other arrangements established for the promotion of LUPKYNIS;
•educate physicians and patients about the benefits, administration and use of LUPKYNIS;
•train, deploy, and support a qualified sales force;
•ensure that our third-party manufacturers manufacture LUPKYNIS in sufficient quantities, in compliance with requirements of the FDA, and at acceptable quality and pricing levels in order to meet commercial demand;
•ensure that our third-party manufacturers develop, validate and maintain commercially viable manufacturing processes that are compliant with GMP regulations;
•implement and maintain agreements with wholesalers, special pharmacy partners, distributors, and group purchasing organizations on commercially reasonable terms;
•ensure that our entire supply chain efficiently and consistently delivers LUPKYNIS to our customers;
•receive adequate levels of coverage and reimbursement for LUPKYNIS from commercial health plans and governmental health programs;
•provide co-pay assistance to help qualified patients with out-of-pocket costs associated with their LUPKYNIS prescription and/or other programs to ensure patient access to our product;
•obtain acceptance of LUPKYNIS as safe and effective by patients and the medical community;
•influence the nature of publicity related to LUPKYNIS relative to the publicity related to our competitors’ products; and
•maintain and defend our patent protection and regulatory exclusivity for LUPKYNIS.
Many of these factors are beyond our control and if we are not successful in commercializing LUPKYNIS, or are significantly delayed in doing so, our business will be harmed, and we may need to curtail or cease operations.
We depend on a limited number of customers and an estimated number of patients for a significant amount of our total revenue, and if we lose any of our significant customers, or if our estimates as to the number of potential patients is wrong, our business could be harmed.
Most of our revenue will come from a limited number of direct customers. The loss by us of any of these customers, or a material reduction in their purchases, could harm our business and prospects. In addition, if any of these customers were to fail to pay us in a timely manner, it could negatively impact our cash flow from operations.
Our estimates of the number of patients who have received or might have been candidates to use LUPKYNIS may not accurately reflect the true market for LUPKYNIS or the extent to which it will actually be used by patients. Our failure to forecast and successfully introduce and market LUPKYNIS could harm our business, as it could reduce our market potential.
LUPKYNIS may not achieve or maintain expected levels of market acceptance among physicians, patients, the medical community, and third-party payors, which could harm our business, financial condition and results of operations and could cause the market value of our Securities to decline.
The commercial success of LUPKYNISis dependent upon achieving and maintaining market acceptance among physicians, patients, and the medical community. Levels of market acceptance for LUPKYNIS could be impacted by several factors, many of which are not within our control, including but not limited to:
•the COVID-19 pandemic;
•limitations or warnings contained in the approved labeling;
•changes in the standard of care for the targeted indication;
•limitations in the approved clinical indication;
•demonstrated clinical safety and efficacy compared to other products;
•potential for significant adverse side effects;
•sales, marketing, and distribution support;
•availability and extent of reimbursement from managed care plans and other third-party payors;
•timing of market introduction
•the degree of cost-effectiveness;
•availability of alternative therapies at similar or lower cost, including generic and over-the-counter products;
•whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy;
•adverse publicity about our product or favorable publicity about competitive products;
•convenience and ease of administration of our products; and
•potential product liability claims.
If LUPKYNIS does not achieve an adequate level of acceptance by physicians, patients, and the medical community, we may not generate sufficient revenue, and we may not become or remain profitable. Efforts to educate the medical community and third-party payors on the benefits of LUPKYNIS may require significant resources and may never be successful.
LUPKYNIS may become subject to unfavorable pricing regulations or third-party coverage and reimbursement policies, which would harm our business.
Price controls and price pressure may be imposed in foreign and U.S. markets, which may adversely affect our future profitability. LUPKYNIS may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which could harm our business. In addition, reimbursement may be limited or unavailable in
certain market segments which could make it difficult for us to sell LUPKYNIS profitably. Adverse pricing limitations might hinder our ability to recoup our investment in LUPKYNIS.
Our ability to commercialize LUPKYNIS successfully will also depend in part on the extent to which coverage and reimbursement for LUPKYNIS will be available from government authorities, private health insurers and other organizations. In the United States and markets in other countries, patients generally rely on third-party reimbursement for all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors is critical to market acceptance of our products. Our ability to successfully commercialize LUPKYNIS will depend in part on the extent to which coverage and adequate reimbursement of LUPKYNIS will be available from government health administration authorities, private health insurers and other organizations. Government authorities and other third-party payors such as private health insurers and health maintenance organizations, decide which medication they will pay for and establish reimbursement levels, which for the product, is beyond our control.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular products. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for products. We cannot be certain that coverage will be available for LUPKYNIS and, if available, the level of reimbursement. Reimbursement will impact the demand for, or the price of, our approved product. If reimbursement is limited or not available, we might not be able to successfully commercialize LUPKYNIS.
There may be delays in obtaining reimbursement for recently approved products and eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, patient services, sale, and distribution. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors. Private third-party payors often rely on Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government funded and private payors for our approved product could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize LUPKYNIS and on our overall financial condition.
If we fail to comply with our reporting and payment obligations under the Medicaid Drug Rebate Program or other governmental pricing programs in the United States, we could be subject to additional reimbursement requirements, penalties, sanctions and fines, which could have a material adverse effect on our business, results of operations and financial condition.
We participate in the Medicaid Drug Rebate Program, as administered by Centers for Medicare and Medicaid Services, and other federal and state government pricing programs in the United States, and we may participate in additional government pricing programs in the future. These programs generally require us to pay rebates or otherwise provide discounts to government payors in connection with products, including LUPKYNIS, that are dispensed to beneficiaries of these programs. In some cases, such as with the Medicaid Drug Rebate Program, the rebates are based on pricing and rebate calculations that we report on a monthly and quarterly basis to the government agencies that administer the programs.
Pricing and rebate calculations are complex, vary among products and programs, and are often subject to interpretation by governmental or regulatory agencies and the courts. The terms, scope and complexity of these government pricing programs change frequently. Responding to current and future changes may increase our costs and the complexity of compliance will be time consuming. In addition, there is increased focus by the Office of Inspector General on the methodologies used by manufacturers to calculate Average Manufacturer Price (AMP), and best price (BP), to assess our compliance with reporting requirements under the Medicaid Drug Rebate Program. We are liable for errors associated with our submission of pricing data and for any overcharging of government payors. For example, failure to submit monthly/quarterly AMP and BP data on a timely basis could result in a civil monetary penalty per day for each day the submission is late beyond the due date. Failure to make necessary disclosures and/or to identify overpayments could result in allegations against us under the Federal False Claims Act and other laws and regulations. Any required refunds to the U.S. government or responding to a government investigation or enforcement action would be expensive and time consuming and could have a material adverse effect on our business, results of operations and financial condition. If Centers for Medicare and Medicaid Services were to terminate our rebate agreement, no federal payments would be available under Medicaid or Medicare for our covered outpatient products, which would harm our business.
Risks Related to Patents and Proprietary Technology
Our proprietary rights may not adequately protect our intellectual property and product, and if we cannot obtain adequate protection of our intellectual property and product, we may not be able to successfully market our product.
Patents and other proprietary rights are essential to our business. Our practice has been to file patent applications to protect technology, inventions, and improvements to our inventions that are considered important to the development of our business.
Our success will depend in part on our ability to obtain patents, defend patents, maintain trade secret protection, and operate without infringing on the proprietary rights of others. Interpretation and evaluation of pharmaceutical patent claims present complex and often novel legal and factual questions. Accordingly, there is some question as to the extent to which pharmaceutical discoveries and related products and processes can be effectively protected by patents. As a result, there can be no assurance that:
•patent applications will result in the issuance of patents;
•additional proprietary products developed will be patentable;
•patents issued will provide adequate protection or any competitive advantages;
•patents issued will not be successfully challenged and invalidated by third parties;
•our products, including LUPKYNIS, do not infringe the patents or intellectual property of others; or
•that we will be able to obtain any extensions of the applicable patent terms.
Several pharmaceutical, biotechnology, and medical device companies and research and academic institutions have developed technologies, filed patent applications, or received patents on various technologies that may be related to our business. Some of these technologies, applications or patents may conflict with or adversely affect our technologies or intellectual property rights. Any conflicts with the intellectual property of others could limit the scope of the patents, if any, that we may be able to obtain or result in the denial of patent applications altogether. Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment, and other imposed by government patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
We may need to license certain intellectual property from third parties, and such licenses may not be available on commercially reasonable terms.
An unfavorable outcome in an interference or opposition proceeding or a conflict with the intellectual property of others could preclude us or our collaborators or licensees from making, using or selling product using the technology, or require us to obtain license rights from third parties. It is not known whether any prevailing party would offer a license on commercially acceptable terms, if at all. Further, any such license could require the expenditure of substantial time and resources and could harm our business. If such licenses are not available, we could encounter delays or prohibition of the development or introduction of LUPKYNIS.
We may need to enter into license agreements in the future. As part of discovery and development activities, we routinely evaluate in-licenses from academic and research organizations. Future license agreements might impose various diligence, milestone payment, royalty, and other obligations on us. If there is any conflict, dispute, disagreement or issue of non-performance between us and our licensing partners (such as Otsuka) regarding our rights or obligations under the licensing agreement, we may owe damages, our licensor may have a right to terminate the affected license, and our and our partner’s ability to utilize the affected intellectual property in our drug discovery and development efforts, and our ability to ensure into collaboration or marketing agreements for an affected product, may be adversely affected.
We may become involved in lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time-consuming, and unsuccessful.
Competitors or commercial supply companies or others may infringe our patents and other intellectual property rights. To counter such infringement, we may advise such companies of our intellectual property rights, including, in some cases, intellectual property rights that provide protection for our product, and demand that they stop infringing those rights. Such demand may provide such companies the opportunity to challenge the validity of certain of our intellectual property rights, or the opportunity to seek a finding that their activities do not infringe our intellectual property rights. We may also be required to file infringement actions, which can be expensive and time-consuming. In an infringement proceeding, a defendant may assert, and a court may agree with a defendant, that a patent of ours is invalid or unenforceable or may refuse to stop the other party from using the intellectual property at issue. An adverse result in any litigation could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could impact the price of our common shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could harm our ability to compete in the marketplace.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, and defending our intellectual property rights in all countries throughout the world would be prohibitively expensive, time consuming, distract our personnel from their normal responsibilities and might be unsuccessful.
Our intellectual property rights in some countries outside of the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Further, licensing partners (such as Otsuka) may not prosecute patents in certain jurisdictions in which we may obtain commercial rights, thereby precluding the possibility of later obtaining patent protection in these countries. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing product made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products (including LUPKYNIS), and our intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our intellectual property rights or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our proprietary rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our proprietary rights at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Changes in patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our products (including LUPKYNIS).
As is the case with other pharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the pharmaceutical industry involve both technological and legal complexity and is therefore costly, time-consuming and inherently uncertain. Patent reform legislation in the United States and other countries could increase those uncertainties and costs.
The first-to-file provisions of the current United States patent system only became effective on March 16, 2013. Accordingly, it is not yet clear what, if any, impact those provisions will have on the operation of our business. The implementation and interpretation of new patent laws could make it more difficult to obtain patent protection for our inventions and increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could harm our business, results of operations and financial condition.
The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition, there have been recent proposals for additional changes to the patent laws of the U.S. and other countries that, if adopted, could impact our ability to obtain patent protection for our proprietary technology or our ability to enforce our proprietary technology. Depending on future actions by the U.S. Congress, the United States courts, the USPTO and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Not all of our trademarks are registered. Failure to secure those registrations could adversely affect our business.
If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would, which could adversely affect our business. During trademark registration proceedings in the United States and foreign jurisdictions, we may receive rejections. We will be given an opportunity to respond to those rejections, but we may not be able to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets or other proprietary information.
There may be an unauthorized disclosure of the significant amount of confidential information under our control. We maintain and manage confidential information relating to our technology, research and development, production, marketing, and business operations and those of our collaborators, in various forms. Although we have implemented controls to protect the confidentiality of such information, there can be no assurance that such controls will be effective. Unauthorized disclosures of such information could subject us to complaints or lawsuits for damages, in Canada, the United States or other jurisdictions, or could otherwise have a negative impact on our business, financial condition, results of operations, reputation and credibility.
Risks Related to Financial Position and Need for Additional Capital
We expect to continue to have negative cash flow and we may never achieve or maintain profitability.
We had negative operating cash flow for multiple years including the financial year ended December 31, 2021. To the extent that we have negative operating cash flow in future periods, we will likely need to allocate a portion of our cash reserves to fund such negative cash flow. We may also be required to raise additional funds through the issuance of equity or debt securities. There can be no assurance that we will be able to generate a positive cash flow from our operations, that additional capital or other types of financing will be available when needed or that these financings will be on terms favorable or acceptable to us.
We have incurred losses and anticipate that our losses may increase as we continue to expand and develop our business and commercialize LUPKYNIS. As of December 31, 2021, we had an accumulated deficit of $756.1 million. Although we received FDA approval and commenced commercialization of LUPKYNIS in the United States in January 2021, we may continue to incur losses and there can be no assurance that we will be able to generate sufficient product revenue to become profitable at all or on a sustained basis.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or cause any guidance we may provide to be inaccurate.
Our operating results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. Due to the recent FDA approval of LUPKYNIS and the absence of historical sales data, our revenue from product sales will be difficult to predict. We also expect to have quarter-to-quarter fluctuations in expenses, some of which could be significant, due to research, development, clinical trial activities, regulatory activities, commercialization activities and business development.
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. Therefore, comparing our operating results on a period to period basis may not be meaningful. Our past results will not be a reliable indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors, or below any forecast we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts and investors, the price of our common shares could decline significantly. Such decline could occur even when we meet any previously publicly stated revenue or earnings guidance we may provide.
Legislative actions, potential new accounting pronouncements, and higher insurance costs are likely to impact our future financial position or results of operations.
Future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with greater frequency and are expected to occur in the future. Compliance with changing regulations of corporate governance and public disclosure may result in additional expenses. All these uncertainties are leading generally toward increasing insurance costs, which may harm our business, results of operations, and our ability to purchase any such insurance, at acceptable rates or at all, in the future.
We are exposed to credit risks and market risks related to changes in interest rates and foreign currency exchange, each of which could affect the value of our current assets and liabilities.
We invest our cash reserves in U.S. dollar denominated, fixed rate, highly liquid and highly rated financial instruments such as treasury notes, banker acceptances, bank bonds, and term deposits. We do not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to our investment portfolio, due to the short-term nature of the investments and our current ability to hold these investments to maturity.
We are exposed to financial risk related to the fluctuation of foreign currency exchange rates which could harm our future operating results or cash flows. Foreign currency risk is the risk that variations in exchange rates between the United States dollar and foreign currencies, primarily with the Canadian dollar, will affect our operating and financial results. We hold the majority of our cash reserves in U.S. dollars and the majority of our revenues and expenses, including clinical trial costs are also denominated in U.S. dollars, which mitigates the risk of material foreign exchange fluctuations.
We may not realize the anticipated benefits of acquisitions or product licenses and integration of these acquisitions and any products acquired or licensed may disrupt our business and management.
As part of our business strategy, we may acquire additional companies, products or technologies principally related to, or complementary to, our current operations (as we did with our acquisitions of AUR200 and AUR300). At any given time, we may be evaluating acquisitions of companies, products or technologies or may be exploring licensing opportunities, and may have entered into confidentiality agreements, non-binding letters of intent or may be in the process of conducting due diligence with respect to such opportunities. Any such acquisitions will be accompanied by certain risks including, but not limited to:
a.exposure to unknown liabilities of acquired companies and the unknown issues with any associated technologies or research;
b.higher than anticipated acquisition costs and expenses;
c.the difficulty and expense of integrating operations, systems, and personnel of acquired companies;
d.disruption of our ongoing business;
e.inability to retain key customers, distributors, vendors and other business partners of the acquired company;
f.diversion of management’s time and attention; and
g.possible dilution to shareholders.
We may never be able to efficiently execute on business development activities, properly integrate acquired assets (including any human capital associated with the acquired assets), or bring management's expectation of benefit from the acquired assets to fruition. We may not be able to successfully overcome these risks and other problems associated with acquisitions and this may harm our business, financial condition, or results of operations.
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Our activities to date have been limited to, among other things, organizing and staffing our company, business planning, business development, raising capital, developing, manufacturing, and, more recently, marketing and commercializing LUPKYNIS. In addition to undertaking nonclinical studies, and conducting clinical trials and business development. We have limited history demonstrating our ability to manufacture a product at commercial scale or conduct sales, marketing, and distribution activities necessary for successful product commercialization. Consequently, any predictions you make about our future success or viability may not be as reliable as they could be if we had a longer and more established operating history.
In addition, we may encounter unforeseen expenses, difficulties, complications, delays, and other known and unknown factors. We may need to expand our capabilities to support future activities related to the commercialization of LUPKYNIS. We may be unsuccessful in adding such capabilities.
Anticipated revenues may not be derived from licensing activities.
Our future performance may be impacted by our ability to generate royalty or other revenues from licenses (such as the license granted to Otsuka) and the successful commercialization of LUPKYNIS or other products we may develop or acquired. We anticipate that some of our revenues in the future may be derived from products licensed to pharmaceutical and biotechnology companies. Accordingly, these revenues will depend, in large part, upon the success of these companies, and our operating results may fluctuate substantially due to reductions and delays in their research, development, and marketing expenditures. These reductions and delays may result from factors that are not within our control, including:
a.changes in economic conditions;
b.changes in the regulatory environment, including governmental pricing controls affecting health care and health care providers;
c.pricing pressures;
d.other factors affecting research and development spending; and
e.change in strategy of our business partners
The failure of Otsuka or future licensing partners could harm our business or results of operations and the global reputation of LUPKYNIS.
Our portfolio of marketable securities is subject to market, interest and credit risk that may reduce its value.
We maintain a portfolio of marketable securities for investment of our cash. Changes in the value of our portfolio of marketable securities could adversely affect our earnings. In particular, the value of our investments may decline due to increases in interest rates, downgrades of the bonds and other securities included in our portfolio, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, declines in the value of collateral underlying the securities included in our portfolio and other factors. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for less than our acquisition cost. Although we attempt to mitigate these risks through diversification of our investments and continuous monitoring of our portfolio's overall risk profile, the value of our investments may nevertheless decline.
We may require additional financing to achieve our goals, and failure to obtain such when required could force us to delay, reduce or terminate our commercialization efforts.
We may require additional capital resources to expand and develop our business. Advancing LUPKYNIS inside and outside the United States, marketing for LUPKYNIS, or acquisition and development of any other products will require considerable resources and additional access to capital markets. In addition, our future cash requirements may vary materially from those now expected. Our future capital requirements may increase if for example:
a.we experience unexpected or increased costs relating to preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, or other lawsuits, brought by either us or our competition;
b.we elect to develop, acquire or license new technologies, products or businesses;
c.we are required to perform additional pre-clinical studies and clinical trials; or
d.we have a change in commercial strategy which could result in increase in headcount, direct to consumer marketing campaigns, and advertising.
We could potentially seek additional funding through corporate collaborations and licensing arrangements or through public or private equity or debt financing. However, if capital market conditions in general, or with respect to life sciences companies such as ours, are unfavorable, our ability to obtain significant additional funding on acceptable terms, if at all, will be negatively affected. Additional financing that we may pursue may involve the sale of common shares which could result in significant dilution to our shareholders. If sufficient capital is not available, we may be required to delay our research and development projects, halt commercialization, relinquish rights to our technologies or products on terms unfavorable to us, which could harm our business, financial condition, prospects or results of operations.
Risks Related to Drug Development and Regulatory Approval
Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be made more difficult or rendered impossible by multiple factors outside of our control.
We may encounter delays in enrolling, or be unable to enroll, a sufficient number of patients to complete any of our clinical trials, and even once enrolled we may be unable to retain a sufficient number of patients to complete any of our clinical trials. Patient enrollment and retention in clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, the existing body of safety and efficacy data with respect to the studied product, the number and
nature of competing treatments and ongoing clinical trials of competing products for the same indication, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. Furthermore, any negative results we may report in clinical trials of our product may make it difficult or impossible to recruit and retain patients in other clinical trials of the same product. Delays or failures in planned patient enrollment and/or retention may result in increased costs, program delays or both, which could make us subject to regulatory penalties or fines due to non-fulfillment of our post-marketing requirements and post-marketing commitments with the FDA.
We may not be successful in our efforts to build out a pipeline of product candidates.
We may not be able to continue to identify or develop new products (including AUR200 and AUR300). Even if we are successful in building our pipeline, the potential product candidates that we identify may not be suitable for clinical development or commercialization. If we do not successfully identify, develop, and commercialize new products based upon our approach, we will not be able to diversify our portfolio which could result in harm to our financial position and impact the trading price of our common shares.
Even though the FDA has approved LUPKYNIS, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, LUPKYNIS could be subject to restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with LUPKYNIS.
The FDA and other agencies, including the U.S. Department of Justice (DOJ) closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA and DOJ impose stringent restrictions on manufacturers’ communications regarding off-label use. If we market LUPKYNIS in a manner inconsistent with our approved labeling and indication, we may be subject to enforcement action for off-label marketing. Violations of the federal FDCA and other statutes, including the False Claims Act (FCA), relating to the promotion and advertising of prescription drugs may lead to investigations and enforcement actions alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws, which violations may result in the imposition of significant administrative, civil and criminal penalties.
The manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, and recordkeeping for LUPKYNIS will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with GMP and GCP for clinical trials that we conduct post-approval.
Discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
•restrictions on the marketing or manufacturing of our product, withdrawal of the product from the market, or voluntary or mandatory product recalls;
•fines, warning letters or holds on clinical trials;
•product seizure or detention, or refusal to permit the import or export of products; and
•injunctions or the imposition of civil or criminal penalties.
There can be no assurance that we will be able to adapt to changes in existing requirements, adopt new requirements or policies, or maintain regulatory compliance. If we fail to maintain compliance, we may lose marketing approval, which would harm our business, prospects, and ability to achieve or sustain profitability.
LUPKYNIS may have undesirable side effects which may require it to be taken off the market, include additional safety warnings or otherwise limit sales.
LUPKYNIS has undergone safety testing, however, not all adverse effects can be predicted or anticipated. Unforeseen side effects from LUPKYNIS could arise after the approved product has been marketed. Ongoing or future trials of our product may not support the conclusion that LUPKYNIS has an acceptable safety profile or the FDA may disagree with our or clinical trials investigators’ interpretation of data from clinical trials or post marketing surveillance in determining if adverse or unacceptable side effects are related to LUPKYNIS. There can be no assurance that discovery of previously unknown adverse events or other problems with LUPKYNIS, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, will not occur at any time during commercial and future use of LUPKYNIS. Furthermore, there can be no assurance that disease resistance or other unforeseen factors will not limit the effectiveness of LUPKYNIS. The most common adverse reactions to
LUPKYNIS demonstrated in our Phase 3 AURORA study were glomerular filtration rate decrease, hypertension, diarrhea, headache, anemia, cough, urinary tract infection, abdominal pain upper, dyspepsia, alopecia, renal impairment, abdominal pain, mouth ulceration, fatigue, tremor, acute kidney injury, and decreased appetite. These common adverse reactions were also repeated in our AURORA 2 continuation study. Any adverse discoveries may yield various results, including:
a.regulatory authorities may require us to take LUPKYNIS off the market;
b.regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
c.we may be required to change the way LUPKYNIS is administered, impose other risk-management measures, conduct additional clinical trials or change the labeling of LUPKYNIS;
d.we may be subject to limitations on how we may promote LUPKYNIS;
e.sales of LUPKYNIS may decrease significantly;
f.refusal to approve pending applications or supplements to approve application that we submit;
g.recall of products;
h.refusal to permit the import or export of LUPKYNIS; and
i.we may be subject to litigation or product liability claims.
Any of these events could prevent us, our collaborators (including Otsuka) or our potential future partners from achieving or maintaining market acceptance of LUPKYNIS or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from the sale of LUPKYNIS. It would harm our business, reputation, prospects and ability to achieve or sustain profitability.
We or our partners (including Otsuka) may never obtain approval or commercialize LUPKYNIS outside of the United States, which would limit our ability to realize their full market potential.
To market any products outside of the United States, we and Otsuka or other potential future partners must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary among countries and may require additional pre-clinical studies, clinical trials, or additional administrative review periods, which could result in significant delays, difficulties, and costs for us.
In addition, our failure to obtain regulatory approval in any country may delay or have negative effects on the process for regulatory approval in other countries. If regulatory approval is obtained it may not be as broad as what was obtained in other jurisdictions. We do not have experience in obtaining regulatory approval in international markets. If we or our current or future partners fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, our target market will be reduced and our ability to realize the full market potential of LUPKYNIS could be harmed.
If product liability lawsuits are brought against us, we may incur substantial liabilities and we may be required to limit commercialization of LUPKYNIS.
We face an inherent risk of product liability exposure related to the testing of product candidates in human clinical trials, and an even greater risk in connection with our commercialization of LUPKYNIS. If we cannot successfully defend ourselves against claims that LUPKYNIS causes injuries, then we could incur substantial liabilities. Regardless of merit of eventual outcome, liability claims may result in:
a.decreased demand for LUPKYNIS;
b.injury to our reputation and significant negative media attention;
c.withdrawal of clinical trial participants;
d.significant costs to defend the related litigation;
e.substantial monetary awards to trial participants or patients;
f.loss of revenue; and
g.the inability to commercialize any approved product.
Although we maintain product liability insurance coverage, it may not be adequate to cover all liabilities that we may incur. The obligation to pay any product liability claim in excess of whatever insurance we can acquire, or the recall of LUPKYNIS, could harm our business, financial condition, and future prospects.
Compliance with ongoing post-marketing obligations for LUPKYNIS may uncover new safety information that could give rise to a product recall, updated warnings, or other regulatory actions that could have an adverse impact on our business.
After the FDA approves a drug or biologic for marketing, the product’s sponsor must comply with several post-marketing obligations that continue until the product is discontinued. These post-marketing obligations include the reporting of adverse events to the agency within specified timeframes, the submission of product-specific annual reports that include changes in the distribution, manufacturing, and labeling information, and notification when a drug product is found to have significant deviations from its approved manufacturing specifications (among others). Our ongoing compliance with these types of mandatory reporting requirements could result in additional requests for information from the FDA and, depending on the scope of a potential product issue that the FDA may decide to pursue, could potentially also result in a request from the agency to conduct a product recall or to strengthen warnings and/or revise other label information about the product. FDA may also require or request the withdrawal of the product from the market. Any of these post-marketing regulatory actions could materially affect our sales and, therefore, have the potential to adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to Our Reliance on Third Parties and Partners
We are dependent on international third-party licensees for the development and commercialization of LUPKYNIS in several countries outside the United States. The failure of these licensees to meet their contractual, regulatory, or other obligations could adversely affect our business.
We have entered into an exclusive license agreement with Otsuka that provides the licensee exclusive rights to the development and commercialization of LUPKYNIS in various specified regions outside of the United States. As a result, we are entirely dependent on this third party to achieve regulatory approval of LUPKYNIS for marketing in these regions and for the commercialization of LUPKYNIS, if approved. The timing and amount of any milestone and royalty payments we may receive under this agreement, as well as the commercial success of LUPKYNIS in those regions outside of the United States, will depend on, among other things, the efforts, allocation of resources, and successful commercialization of LUPKYNIS by the licensee. We also depend on Otsuka to comply with all applicable laws relative to the development and commercialization of LUPKYNIS in those countries. We do not control the individual efforts of this licensee and have limited ability to terminate this agreement if the licensee does not perform as anticipated. The failure of the licensee to devote sufficient time and effort to the development and commercialization of LUPKYNIS, or the failure of this licensee to meet their obligations to us, including for future royalty and milestone payments; to adequately deploy business continuity plans in the event of a crisis; and/or satisfactorily resolve significant disagreements with us or address other factors, could harm our financial results and operations.
If Otsuka violates, or is alleged to have violated, any laws or regulations during the performance of their obligations for us, it is possible that we could suffer financial and reputational harm, or other negative outcomes, including possible legal consequences. Any termination, breach, or expiration of any of this license agreement could have a material adverse effect on our financial position by reducing or eliminating the potential for us to receive milestone payments and royalties. In such an event, we may be required to devote additional efforts and to incur additional costs associated with pursuing regulatory approval and commercialization of LUPKYNIS. Alternatively, we may attempt to identify and transact with a new licensee, but there can be no assurance that we would be able to identify a suitable licensee or transact at all, or on terms that are favorable to us.
In addition, license, research, and development agreements with third parties include indemnification and obligation provisions that are customary in the industry. These guarantees generally require us to compensate the other party for certain damages and costs incurred because of third-party claims or damages arising from these transactions. These provisions may survive termination of the underlying agreement. The nature of the potential obligations prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay.
We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties in compliance with regulations or meet expected deadlines, we might be subject to regulatory penalties or fines due to non-compliance with our post-marketing approval requirements.
We depend upon independent investigators and collaborators, such as contract research organizations or CROs, universities and medical institutions, to conduct clinical trials under agreements with us. These collaborators are not our employees and we cannot control the amount or timing of resources that they devote to our programs. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with regulatory requirements, including GCP requirements, and the applicable protocol. If we, or any of our CROs or third party contractors, fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with product produced under current GMP regulations. Our failure to comply with these regulations
may require us to repeat clinical trials or make us subject to fines or regulatory penalties, which would materially adversely affect our business.
We have limited experience in drug formulation or manufacturing and rely exclusively on third parties, in many cases as sole to formulate and manufacture LUPKYNIS, and any disruption or loss of these relationships could delay our development and commercialization efforts.
We have no experience in drug formulation or manufacturing and do not intend to establish our own manufacturing facilities. For example, we are using the following third parties for manufacturing and encapsulation:
•Lonza is currently the sole source manufacturer of our drug substance; and
•Catalent is solely providing services with respect to encapsulating LUPKYNIS for our commercial and clinical supply, clinical labeling and global distribution for clinical trial purposes.
If we are unable to continue our relationships with one or more of our third-party contractors, in particular where those third-party contracts are one of our sole providers, we could experience delays in commercialization and development efforts as we locate and qualify new contractors. Our reliance on a limited number of third-party manufacturers exposes us to the following risks:
•We may be unable to identify third-party manufacturers on acceptable terms or at all because the number of potential manufacturers is limited, and the FDA must approve any replacement manufacturer. This approval could require new testing and compliance inspections. In addition, a new third-party manufacturer would have to be educated in, or develop substantially equivalent processes for, production of LUPKYNIS after receipt of FDA approval.
•Our third-party manufacturers might be unable to formulate and manufacture LUPKYNIS in the volume and of the quality required to meet our clinical and/or commercial needs.
•Our third-party manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store, and distribute LUPKYNIS for commercialization, as applicable.
•The facilities used by our third-party manufacturers to manufacture LUPKYNIS must be approved by the FDA.
•If any third-party manufacturer makes improvements in the manufacturing process for LUPKYNIS, we may not own, or may have to share, the intellectual property rights to the innovation. Each of these risks could delay the commercialization of LUPKYNIS, or result in higher costs or deprive us of potential product revenue.
Any disruption or loss of these relationships could delay our development and commercialization efforts and our business could be harmed.
We rely on third parties for the supply and manufacture of LUPKYNIS, which can be unpredictable in terms of quality, cost, timing, and availability. If we encounter any suchdifficulties, our ability to supply LUPKYNIS for commercial sale could be delayed or halted entirely.
Manufacturers of pharmaceutical products often encounter difficulties in production, especially in scaling up initial production. These problems include difficulties with production costs and yields, stability, quality control and assurance, and shortages of qualified personnel, as well as compliance with strictly enforced federal, provincial, state, and foreign regulations. We rely on a limited number of third parties to manufacture and supply raw materials for LUPKYNIS. The third parties we choose to manufacture and supply raw materials for LUPKYNIS are not under our control and may not perform as agreed or may terminate their agreements with us, and we may not be able to find other third parties to manufacture and supply raw materials on commercially reasonable terms, or at all. If any of these events were to occur, our operating results and financial condition would be adversely affected.
In addition, drug and chemical manufacturers are subject to GMP regulations and various regulatory inspections, including those conducted by the FDA, to ensure strict compliance with GMP and other government regulations. While we are obligated to audit the performance of our third-party contractors, we do not have complete control over their compliance. We could be adversely impacted if our third-party manufacturers or distributors do not comply with these standards and regulations. For non-compliance, the regulatory authority may levy penalties and sanctions, including fines, injunctions, civil penalties, failure of the government to grant review of submissions or market approval of products, or cause delays, suspension or withdrawal of approvals, product seizures or recalls, operating restrictions, facility closures and criminal prosecutions. Any of this will have an impact on our business, financial condition, and results of operations.
The process of manufacturing LUPKYNIS is susceptible to product loss due to a variety of factors, including but not limited to contamination, equipment failure or improper installation or operation of equipment, vendor or operator error, contamination and inconsistency in yields, variability in product characteristics, and difficulties in scaling the production process. Even minor
deviations from manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our product or in the manufacturing facilities in which our product are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Any adverse developments affecting manufacturing operations for our product may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts, or seek more costly manufacturing alternatives.
While we attempt to mitigate against this risk by ordering additional quantities and maintaining a safety stock of our product, we may not estimate the required amounts sufficiently and even this may not provide sufficient mitigation.
If our third-party manufacturers are unable to produce the required commercial quantities of LUPKYNIS to meet demand on a timely basis or at all, or if they fail to comply with applicable laws for the manufacturing, we will suffer damage to our reputation and commercial prospects and we will lose potential revenue.
If we are unable to establish and maintain our agreements with third parties to sell and distribute LUPKYNIS to patients, our results of operations and business could be adversely affected.
We rely on third parties to commercially sell and distribute LUPKYNIS to patients. For example, we have contracted with a limited number of specialty pharmacies and specialty distributors to sell and distribute LUPKYNIS. The use of specialty pharmacies and specialty distributors involves certain risks, including, but not limited to, risks that these organizations will:
•not provide us accurate or timely information regarding their inventories, the number of patients who are using LUPKYNISor serious adverse reactions, events and/or product complaints regarding LUPKYNIS;
•not effectively sell or support LUPKYNIS or communicate publicly concerning LUPKYNIS in a manner that is contrary to FDA rules and regulations;
•reduce their efforts or discontinue to sell or support or otherwise not effectively sell or support LUPKYNIS;
•not devote the resources necessary to sell LUPKYNIS in the volumes and within the time frames that we expect;
•be unable to satisfy financial obligations to us or others; or
•cease operations.
Any such events may result in decreased product sales and lower product revenue, which would harm our results of operations and business.
We are also required to comply with good distribution practices such as maintenance of storage and shipping conditions, as well as security of products, in order to ensure product quality determined by GMP is maintained throughout the distribution network. While we are obligated to audit the performance of our third-party contractors, we do not have complete control over their compliance. We could be harmed if our third-party distributors do not comply with these standards and regulations.
Risks Related to Government Regulation
Our relationships with customers, healthcare providers, and third-party payors are subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, exclusion from government healthcare programs, contractual damages, reputational harm and diminished profits on future earnings.
We are subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of LUPKYNIS. Our future arrangements with third-party payors and customers will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell, and distribute LUPKYNIS. Restrictions under applicable federal and state healthcare laws and regulations include, but are not limited to, the following:
•the U.S. federal Anti-Kickback Statute which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
•the FCA imposes civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay
money to the federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. We can be held liable under the FCA even when we do not submit claims directly to government payors if we are deemed to “cause” the submission of false or fraudulent claims;
•the U.S. federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program regardless of the payor (e.g., public or private), or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
•the U.S. federal physician payment transparency requirements, sometimes referred to as the “Sunshine Act” under the ACA require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report to the Department of Health and Human Services information related to covered health care provider payments and other transfers of value and the ownership and investment interests of such healthcare providers (as defined by the statute) and their immediate family members.
•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and its implementing regulations, which also imposes obligations on certain covered entity healthcare providers, health plans, and healthcare clearinghouses as well as their business associates that perform certain services involving the use or disclosure of individually identifiable health information, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions;
•the federal false statements statute, which prohibits knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items, or services (similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation);
•consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
•the U.S. federal Civil Monetary Penalties law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier; and
•analogous state laws and regulations, such as state anti-kickback and false claims laws that may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by nongovernmental third-party payors, including private insurers; and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not pre-empted by HIPAA, thus complicating compliance efforts.
In the United States, to help patients who have no or inadequate insurance access to LUPKYNIS, we have a patient support program that we administer in conjunction with our patient support program vendor. If we or our vendors are deemed to fail to comply with relevant laws, regulations, or evolving government guidance in the operation of these programs, we could be subject to damages, fines, penalties or other criminal, civil or administrative sanctions or enforcement actions. We cannot ensure that our compliance controls, policies, and procedures will be sufficient to protect against acts of our employees, business partners, or vendors that may violate the laws or regulations of the jurisdictions in which we operate.
Regardless of whether we have complied with the law, a government investigation could impact our business practices, harm our reputation, divert the attention of management, increase our expenses, and reduce the availability of assistance to our patients. Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations.
If our operations, including anticipated activities to be conducted by our sales team, were to be found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and
administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Enhanced governmental and private scrutiny over, or investigations or litigation involving, pharmaceutical manufacturer donations to patient assistance programs offered by charitable foundations may require us to modify our patient support programs and could negatively impact our business practices, harm our reputation, divert the attention of management and increase our expenses.
To help patients afford LUPKYNIS, we have implemented a patient support program. These types of programs, designed to assist patients in affording pharmaceuticals, have become the subject of scrutiny. In recent years, some pharmaceutical manufacturers were named in class action lawsuits challenging the legality of their patient support programs and their support of independent charitable patient support foundations in connection with such programs under a variety of federal and state laws. Our patient support program could become the target of similar litigation. In addition, certain state and federal enforcement authorities and members of Congress have initiated inquiries about co-pay assistance programs. Some state legislatures have also been considering proposals that would restrict or ban co-pay coupons. In addition, there has been regulatory review and enhanced government scrutiny of donations by pharmaceutical manufacturers to patient assistance programs operated by charitable foundations. For example, the Office of Inspector General of the U.S. Department of Health & Human Services, or OIG, has established specific guidelines permitting pharmaceutical manufacturers to make donations to charitable organizations which provide co-pay assistance to Medicare patients, provided that such organizations are bona fide charities, are entirely independent of and not in any way controlled or influenced by the manufacturer, provide aid to applicants on a first-come basis according to consistent financial criteria, and do not link aid to use of a donor’s product. If we establish a program to donate to independent charitable patient support foundations and our vendors or donation recipients are deemed to fail to comply with laws or regulations in the operation of these programs, we could be subject to damages, fines, penalties or other criminal, civil or administrative sanctions or enforcement actions. Further, numerous organizations, including pharmaceutical manufacturers, have received subpoenas from the U.S. Department of Justice, or DOJ, and other enforcement authorities seeking information related to their patient assistance programs and support, and certain of these organizations have entered into, or have otherwise agreed to, significant civil settlements with applicable enforcement authorities. In connection with these civil settlements, the U.S. government has and may in the future require the affected companies to enter into complex corporate integrity agreements that impose significant reporting and other requirements on those companies. We cannot ensure that our compliance controls, policies and procedures will be sufficient to protect against acts of our employees, business partners or vendors that may potentially violate the laws or regulations of the jurisdictions in which we operate. Regardless of whether we have complied with the law, a government investigation could negatively impact our business practices, harm our reputation, divert the attention of management and increase our expenses.
The failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws, including the FCPA and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.
We are subject to the FCPA regulations of the U.S. Office of Foreign Assets Control, and other anti-corruption, anti-bribery and anti-money laundering laws around the world where we conduct activities, including, if approved in such countries, the sale of LUPKYNIS. We face significant risks and liability if we fail to comply with the FCPA and other anti-corruption and anti-bribery laws that prohibit companies and their employees and third-party business partners, such as distributors or resellers, from authorizing, offering or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties or candidates, employees of public international organizations including healthcare professionals, or private-sector recipients for the corrupt purpose of obtaining or retaining business, directing business to any person, or securing any advantage.
We rely on various third parties for certain services outside the United States, including continued development of LUPKYNIS and the commercialization of LUPKYNIS. We may be held liable for the corrupt or other illegal activities of these third parties and intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. Any violation of the FCPA, other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could harm our reputation, business, operating results and prospects. In addition, responding to any enforcement action or related investigation may result in a diversion of management’s attention and resources and significant defense costs and other professional fees.
Compliance with governmental regulation and other legal obligations related to privacy, data protection and information security could result in additional costs and liabilities to us or inhibit our ability to collect and process data, and the failure to comply with such requirements could have a material adverse effect on our business, financial condition or results of operations.
Privacy and data security have become significant issues in the United States, Europe, and in many other jurisdictions where we or our licensing partners may in the future conduct our operations. As we receive, collect, process, use and store personal and confidential data, we are subject to diverse laws and regulations relating to data privacy and security. Compliance with these privacy laws, data breach notification laws, and data security requirements is rigorous and time-intensive and may increase our cost of doing business, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation and reputational harm, which could materially and adversely affect our business, financial condition and results of operations.
In addition, the regulatory framework for the receipt, collection, processing, use, safeguarding, sharing and transfer of personal and confidential data is rapidly evolving and is likely to remain uncertain for the foreseeable future as new global privacy rules are being enacted and existing ones are being updated and strengthened.
Risks Related to Human Capital, Information Technology and Managing Growth
Our employees, principal investigators, CROs and consultants may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.
We are exposed to the risk that our employees, principal investigators, CROs and consultants may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate the regulations of the FDA and other regulatory authorities, including those laws requiring the reporting of true, complete and accurate information to such authorities; healthcare fraud and abuse laws and regulations in the United States and abroad; or laws that require the reporting of financial information or data accurately.
In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commissions, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials or creating fraudulent data in our pre-clinical studies or clinical trials, which could result in regulatory sanctions and cause harm to our reputation. We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations.
In addition, we are subject to the risk that a person could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could harm our ability to operate our business and our results of operations.
We are dependent upon key personnel to achieve our business objectives.
Our ability to retain key personnel and attract other qualified individuals is critical to our success. As a technology-driven company, intellectual input from key management and personnel is critical to achieve our business objectives. The loss of the services of key individuals might significantly delay or prevent achievement of our business objectives. In addition, because of a relative scarcity of individuals with experience and the high degree of education and scientific achievement required for our business, competition among life sciences companies for qualified employees is intense and the recent move by companies to offer a remote or hybrid work environment may increase the competition for such employees from employers outside of our traditional office locations, as a result, we may not be able to attract and retain such individuals on acceptable terms, or at all. In addition, because we do not maintain “key person” life insurance on any of our officers, employees, or consultants, any delay in replacing such persons, or an inability to replace them with persons of similar expertise, could harm our business, financial condition, and results of operations.
We also have relationships with scientific collaborators at academic and other institutions, some of whom conduct research at our request or assist us in formulating our research and development strategies. These scientific collaborators are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, even though our collaborators are required to sign confidentiality agreements prior to working with us, they may have arrangements with other companies to assist such other companies in developing technologies that may prove competitive to us.
Incentive provisions for our key executives include the granting of stock options that vest over time, designed to encourage such individuals to stay with us. However, a low share price, whether as a result of lower than expected revenues from LUPKYNIS, disappointing progress in our development programs or as a result of market conditions generally, could render such agreements of little value to our key executives. In such event, our key executives could be susceptible to being hired away by our competitors who could offer a better compensation package. If we are unable to attract and retain key personnel, our business, financial conditions and results of operations may be harmed.
We may not successfully manage our growth. Our success will depend upon the expansion of our operations and our ability to successfully manage our growth.
Our future growth, if any, may place a significant strain on our management and on our administrative, operational, and financial resources. Our ability to manage our growth effectively will require us to implement and improve our operational, financial and management systems and to expand, train, manage and motivate our employees. These demands may require the hiring of additional management personnel and the development of additional expertise by management. Any increase in resources devoted to research, commercialization, and product development without a corresponding increase in our operational, financial and management systems could harm our business, financial condition and results of operations.
As our operations expand, we expect that we will need to manage additional relationships with various strategic partners, suppliers and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to commercialize LUPKYNIS and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development and commercialization efforts and clinical trials effectively and hire, train and integrate additional management, administrative and, if necessary, sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.
We rely significantly on information technology and any failure, inadequacy, or security lapse of that technology, including any cybersecurity incidents, could harm us.
We believe that companies have been increasingly subject to a wide variety of security incidents, cyberattacks and other attempts to gain unauthorized access. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to a state-sponsored attack. Cyber threats may be generic, or they may be custom-crafted against our information systems. Over the past few years, cyber-attacks have become more prevalent and much harder to detect and defend against.
Several key areas of our business depend on the use of information technologies, including production, manufacturing, marketing, and logistics, as well as clinical and regulatory matters. Despite our efforts to prevent such behavior, third parties may nonetheless attempt to hack into our systems and obtain data relating to our pre-clinical studies, clinical trials, patients using LUPKYNIS or our proprietary information on LUPKYNISor other information relating to us or our business. If we fail to maintain or protect our information systems and data integrity effectively, we could have problems in determining product cost estimates and establishing appropriate pricing, have difficulty preventing, detecting, and controlling fraud, have disputes with physicians, and other health care professionals, have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences and reputational damages. While we have invested in the protection of data and information technology, there can be no assurance that our efforts or those of our third-party collaborators, if any, or manufacturers, to implement adequate security and quality measures for data processing would be sufficient to protect against data deterioration or loss in the event of a system malfunction, or to prevent data from being stolen or corrupted in the event of a security breach. Any such loss or breach could harm our business, operating results, and financial condition.
Interruptions in the availability of server systems or communications with Internet or cloud-based services, or failure to maintain the security, confidentiality, accessibility, or integrity of data stored on such systems, could harm our business.
We rely upon a variety of Internet service providers, third-party hosting facilities and cloud computing platform providers to support our business. With our offices intermittently closed, due to the COVID-19 pandemic, many of our employees are currently working from home and therefore we are highly reliant on these services for our operations. Failure to maintain the security, confidentiality, accessibility or integrity of data stored on such systems could damage our reputation in the market, cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs, subject us to liability for damages and/or fines and divert our resources from other tasks, any one of which could materially adversely affect our business, financial condition, results of operations and prospects. Any damage to, or failure of, such systems, or communications to and between such systems, could result in interruptions in our operations. If our security measures or those of our third-party data center hosting facilities, cloud computing platform providers, or third-party service partners, are breached, and unauthorized access is obtained to our data or our information technology systems, we may incur significant legal and financial exposure and liabilities. We do not have control over the operations of the facilities of our cloud service providers and our third party providers may be vulnerable to damage or interruption from natural disasters, the effect of climate change (such as drought, flooding, wildfires, increased storm severity, and sea level rise), cybersecurity attacks, terrorist attacks, power outages and similar events or acts of misconduct. In addition, any changes in our cloud service providers service levels may harm our ability to meet our requirements and operate our business.
Our business is exposed to the risks associated with litigation, investigations and regulatory proceedings.
Litigation and regulatory proceedings are inherently uncertain, and adverse rulings could occur, including monetary damages, or an injunction stopping us from manufacturing or selling certain products, engaging in certain business practices, or requiring other remedies. We may be subject to allegations through press, social media, the courts or other mediums that may or may not be founded. We may be required to respond to or defend against these claims and/or allegations, which will divert resources away from our principal business. There can be no assurance that our defense of such claims and/or allegations would be successful, and we may be required to make material settlements. An unfavorable outcome or settlement may harm our business, products and product candidates, results of operations, financial condition, and corporate reputation. In addition, regardless of outcome, investigations, allegations of wrongdoing, and litigation can be costly, time-consuming, and disruptive to our business and operations.
Risks Related to Our Industry
Unstable markets and economic conditions may have harmful consequences to business, financial condition, and trading price of our common shares.
Our results of operations could be harmed by general conditions in the global economy and financial markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including, weakened demand for our approved product and our ability to raise additional capital when needed on acceptable terms, if at all. Weak global economic conditions could decrease the number of clinical trials sites available to us and hinder our ability to conduct trials required by the FDA. A weak or declining economy could also strain our supplies, partners or third-parties, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
Actual or anticipated changes to the laws and regulations governing the health care system may have a negative impact on cost and access to health insurance coverage and reimbursement of healthcare items and services.
The United States and several foreign jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell LUPKYNIS profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the U.S, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives, including the ACA. While it is difficult to assess the impact of the ACA in isolation, either in general or on our business specifically, it is widely thought that the ACA increases downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of, and the price we may charge for, LUPKYNIS. Further, the U.S. and foreign governments regularly consider reform measures that affect healthcare coverage and costs. Such reforms may include changes to the coverage and reimbursement of healthcare services and products. In particular, there have been recent judicial and Congressional challenges to the ACA, which could have an impact on coverage and reimbursement for healthcare services covered by plans authorized by the ACA, and we expect there will be additional challenges and amendments to the ACA in the future. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA. As a result, there have been delays in the implementation of, and action taken to repeal or replace, certain aspects of the ACA. Most
recently, the U.S. Tax Cuts and Jobs Act was enacted, which, among other things, removes the penalties for not complying with the ACA’s individual mandate to carry health insurance. On January 28, 2021, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. The ACA has also been the subject of numerous court challenges on the basis of, among other things, constitutionality. While the Supreme Court of the United States ruled in summer 2021 that the ACA was constitutional in respect to one such challenge, this does not mean that there will not be future challenges launched, which may or may not be successful. It is unclear how these decisions, subsequent appeals, if any, and other efforts to challenge, repeal or replace the ACA will impact the ACA and our business. We cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.
In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, the U.S. Budget Control Act of 2011 resulted in aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will remain in effect through 2029 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012, among other things, also reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Recently, there has been heightened governmental scrutiny over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. For example, the Biden administration has indicated that lowering prescription drug prices is a priority, but we do not yet know what steps the administration will take, whether or to what degree they may impact us or our products, or whether such steps will be successful. We cannot predict all of the ways in which future federal or state legislative or administrative changes relating to healthcare reform will affect our business.
Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs.
We anticipate that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receive for LUPKYNIS, and could harm our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize LUPKYNIS.
We may face substantial competition, which may result in others discovering, developing, or commercializing products before, or more successfully than we do.
The industry in which we operate is highly competitive and we have numerous potential domestic and foreign competitors, including major pharmaceutical and chemical companies, universities, academic institutions, government agencies, public and private research organizations and large, fully-integrated pharmaceutical companies which have extensive resources and experience in research and development, process development, clinical evaluation, manufacturing, regulatory affairs, distribution and marketing. In particular, over the course of the past year we are aware that a number of companies have announced that they are commencing clinical trials for different treatment options for LN. Many of our potential competitors possess substantially greater research and development skills, financial, technical and marketing expertise and human resources than we do, and may be better equipped to develop, manufacture and market products. There is a risk that new products and technologies may be developed which may be more effective or commercially viable than the product being developed or marketed by us, thus making LUPKYNIS non-competitive or obsolete. There may also be market resistance to the Board. acceptance of our new product in any indication and a risk that LUPKYNIS, even though clinically effective, is not economically viable.
Use of hazardous materials might expose us to risk in the form of damages.
Drug manufacturing processes involve the controlled use of hazardous materials. We and our third-party manufacturing contractors are subject to regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that our third-party manufacturers have the required safety procedures for handling and disposing of such materials and comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and such liability could exceed our resources.
Health and safety risks associated with producing a product for human ingestion cannot be eliminated and might expose us to substantial risk.
While we take substantial precautions such as laboratory and clinical testing, toxicology studies, quality control and assurance testing and controlled production methods, the health and safety risks associated with producing a product for human ingestion cannot be eliminated. Products produced by us may be found to be, or to contain substances that are harmful to the health of our patients and customers and which, in extreme cases, may cause serious health conditions or death. This sort of finding may expose us to substantial risk of litigation and liability. Further, we would be forced to discontinue production of LUPKYNIS, which would harm our profitability. We maintain product liability insurance coverage; however, there is no guarantee that our current coverage will be sufficient or that we can secure insurance coverage in the future at commercially viable rates or with the appropriate limits.
Risks Related to Our Common Shares
There is no assurance of a sufficient liquid trading market for our common shares in the future.
Our shareholders may be unable to sell significant quantities of common shares into the public trading markets without a significant reduction in the price of their common shares, or at all. There can be no assurance that there will be sufficient liquidity of our common shares on the trading market, and that we will continue to be listed on Nasdaq or achieve listing on any other public listing exchange.
The image below gives a snapshotprice of our common shares could be subject to volatility related or unrelated to our operations.
The market prices for the securities of biotechnology companies, including ours, have historically been volatile. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of any particular company.
The trading price of the top skillscommon shares could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including the results and adequacy of our pre-clinical studies and clinical trials, as well as those of our collaborators, or our competitors; the results of our operations, such as quarterly or annual sales figures; other evidence of the safety or effectiveness of LUPKYNIS or those of our competitors; announcements of technological innovations or new products by our competitors; governmental regulatory actions; developments with collaborators; developments (including litigation) concerning our patent or other proprietary rights of competitors; concern as to the safety of LUPKYNIS; period-to-period fluctuations in operating results; changes in estimates of our performance by securities analysts; market conditions for biotechnology stocks in general; global or local political, economic, social and health crises; market rumors; and other factors not within our control could impact the market price of the common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.
We may be a passive foreign investment company for U.S. tax purposes, which may result in adverse tax consequences for U.S. investors.
If we are characterized as a passive foreign investment company (PFIC), there may be adverse tax consequences for U.S. investors. Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets are held for the production of, or produce, passive income, we would be characterized as a PFIC for U.S. federal income tax purposes. Based on the nature of our income and the value and composition of our assets, we do not believe we were a PFIC during 2021. While we also do not believe we will be a PFIC for the current taxable year, because PFIC status is determined on an annual basis and generally cannot be determined until the end of the taxable year, there can be no assurance that we will not be a PFIC for the current or future taxable years. If we are characterized as a PFIC, our shareholders who are U.S. holders may suffer adverse tax consequences, including the treatment of gains realized on the sale of our common shares as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends
received on our common shares by individuals who are U.S. holders, and the addition of interest charges to the tax on such gains and certain distributions. A U.S. shareholder of a PFIC generally may mitigate these adverse U.S. federal income tax consequences by making a “qualified electing fund” election, or, to a lesser extent, a “mark to market” election.
You may be unable to enforce actions against us, or certain of our directors and officers under U.S. federal securities laws.
As a corporation organized under the provincial laws of Alberta, Canada, it may be difficult to bring actions under U.S. federal securities law against us. Some of our directors and officers reside principally in Canada or outside of the United States. Because all or a substantial portion of our assets and the assets of these persons are located outside of the United States, it may not be possible for investors to effect service of process within the United States upon us or those persons. Furthermore, it may not be possible for investors to enforce against us, or those persons not in the United States, judgments obtained in U.S. courts based upon the civil liability provisions of the U.S. federal securities laws or other laws of the United States. There is doubt as to the enforceability, in original actions in Canadian courts, of liabilities based upon U.S. federal securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws. Therefore, it may not be possible to enforce those actions against us or certain of our directors and officers.
If securities or industry analysts do not publish, or cease publishing, research reports about us, our business, or our market, or if they change their recommendations regarding our common shares adversely, the trading price and trading volume of our common shares could decline.
The trading market for our common shares is and will be influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain analyst coverage in the future. Any analysts who do cover us may make adverse recommendations regarding our common shares, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors. If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose visibility in the financial markets, which in turn could cause the trading price of our common shares or trading volume to decline.
Securities litigation or other litigation could result in substantial damages and may divert management’s time and attention from our business.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant share price volatility in recent years. We may become the target of securities litigation in the future. The outcome of litigation is necessarily uncertain, and we could be forced to expend significant resources in the defense of such suits, and we may not prevail. Monitoring and defending against legal actions is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, we may incur substantial legal fees and costs in connection with any such litigation. We have not established any reserves for any potential liability relating to any such potential lawsuits. It is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary damages. We currently maintain insurance coverage for some of these potential liabilities. Other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may not be enough to cover damages awarded. In addition, certain types of damages may not be covered by insurance, and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. A decision adverse to our interests on one or more legal matters or litigation could result in the payment of substantial damages, or possibly fines, and could have a material adverse effect on our reputation, financial condition and results of operations.
Our ability to use our net operating loss carryforwards and tax credit carryforwards to offset future taxable income may be subject to certain limitations. We may also be subject to other potential tax consequences.
Under the provisions of the applicable tax legislation, our net operating loss and tax credit carryforwards are subject to review and possible adjustment by applicable tax regulatory authorities. In addition, proposed or actual changes to applicable tax legislation may significantly impact our ability to utilize our net operating losses to offset taxable income in the future. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of a company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. We may not be able to use some or all of our net operating loss and tax credit carryforwards, even if we attain profitability.Additionally, should an event occur that causes or
is deemed to cause a change in the residency of Aurinia Pharmaceuticals Inc. from Canada to the United States, for example, we may be subject to certain tax rules that could cause a deemed disposition of our assets for tax purposes. Should that occur, we may be subject to a material amount of tax owing, without corresponding revenue from any actual disposition of our assets. Our common shares could fall or may not increase.
General Business Risks
If the estimates we make, or the assumptions on which we rely, in preparing our consolidated financial statements are incorrect, our actual results may vary from those reflected in our projections and accruals.
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statement requires us to make estimates and judgements that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We cannot promise that our estimates or their underlying assumptions will be correct. Actual results may differ materially from those estimated amounts used in the preparation of our consolidated financial statements if these results differ from our historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us.
We are subject to the rules and regulations of the SEC, including those rules and regulations mandated by the Sarbanes-Oxley Act, as well as the rules and regulations imposed by Canadian securities regulatory authorities. Securities legislation requires public companies to include in their annual report a statement of management’s responsibilities for establishing and maintaining adequate internal control over financial reporting, together with an assessment of the effectiveness of those internal controls. Section 404 of the Sarbanes-Oxley Act also requires the independent auditors of certain public companies to attest to, and report on, this management assessment. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Our failure to maintain the effectiveness of our internal controls in accordance with the requirements of applicable securities legislation could have harm on our business. We could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the price of our common shares. In addition, if our efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
An investment in our common shares may result in the loss of an investor’s entire investment.
An investment in our common shares is speculative and may result in the loss of an investor’s entire investment. Only potential investors who are experienced in high risk investments and who can afford to lose their entire investment should consider an investment in our common shares.
Future issuances of equity securities by us or sales by our existing shareholders may cause the price of the common shares to fall.
The market price of the common shares could decline because of issuances by us of additional common shares (whether for financing or acquisition purposes or otherwise) or sales by our existing shareholders in the market, or the perception that these sales could occur. Sales of common shares by shareholders might also make it more difficult for us to issue common shares at a time and price that we deem appropriate. With an additional sale or issuance by us of common shares, investors will suffer dilution of their voting power and may experience dilution in earnings per share.
We do not intend to pay dividends in the foreseeable future.
We have never declared or paid any dividends on the common shares. We intend, for the foreseeable future, to retain our future earnings, if any, to finance our commercial activities and further research and the expansion of our business. As a result, the return on an investment in common shares will likely depend upon any future appreciation in value, if any, and on a shareholder’s ability to sell common shares. The payment of future dividends, if any, will be reviewed periodically by our board of directors and will depend upon, among other things, conditions then existing including earnings, financial conditions, cash
on hand, financial requirements to fund our commercial activities, development and growth, and other factors that our board of directors may consider appropriate in the circumstances.
We have broad discretion in the use of our cash and cash equivalents and may not use them effectively.
Our management has broad discretion to use our cash and cash equivalents to fund our operations and could spend these funds in ways that do not improve our results of operations or enhance the value of our common shares. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the trading price of our common shares to decline and delay commercialization of our product. Pending their use to fund our operations, we may invest our cash and cash equivalents in a manner that does not produce income or that loses value.
We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives and corporate governance practices.
As a public company, we incur significant legal, accounting, and other expenses. In addition, the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC, Canadian securities regulators, and the Nasdaq have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly.
Applicable securities legislation requires us, on an annual basis, to review and evaluate our internal controls. To maintain compliance with Section 404 of the Sarbanes-Oxley Act of 2002, for example, we are required to document and evaluate our internal control over financial reporting, which has been both costly and challenging. We will need to continue to dedicate internal resources, continue to engage outside consultants and follow a detailed work plan to continue to assess and document the adequacy of internal control over financial reporting, continue to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. There is a risk that in the future neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Sales of our common shares by our employees, including our executive officers, could cause the trading price of our common shares to fall or prevent it from increasing for numerous reasons, and sales by such persons could be viewed negatively by other investors.
In accordance with the guidelines specified under Rule 10b5-1 under the Exchange Act, as amended, equivalent legislation in applicable jurisdictions, and our policies regarding equity transactions, a number of our employees, including executive officers, may adopt share trading plans pursuant to which they have arranged to sell common shares from time to time in the future. Generally, sales of common shares, including sales under such plans, by our executive officers and directors require public filings. Sales of our common shares by such persons could cause the price of our common shares to fall or prevent it from increasing. If sales by employees, executive officers, or directors cause a substantial number of our common shares to become available for purchase in the public market, the price of our common shares could fall or may not increase. Also, sales by such personnel could be viewed negatively by holders and potential purchasers of our common shares.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease approximately 13,206 square foot facility in Victoria, British Columbia, which is used primarily as our headquarters as well as for research and development and administrative purposes. We lease approximately 2,248 square feet of space in Edmonton, Alberta, which is used for general and administrative purposes. We lease approximately 30,531 square feet of space in Rockville, Maryland, which serves as our commercial office and is used for marketing as well as general and administrative purposes. We believe that our existing facilities are adequate to meet our current needs, and that suitable additional or alternative spaces will be available in the future on commercially reasonable terms.
Item 3. Legal Proceedings
Information pertaining to legal proceedings can be found under in Note 14 "Commitments and Contingencies" to our consolidated financial statements included in "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are traded on The Nasdaq Global Market under the symbol "AUPH" and were traded on the TSX under the symbol "AUP" until July 30, 2021. As of July 30, 2021, our common shares no longer trade on the TSX following our voluntary delisting and are solely traded on the Nasdaq Global Market.
Holders of Record
As of February 22, 2022 there were approximately 38 registered holders of record of our common shares.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our equity compensation plans are incorporated by reference to Item 12 of Part III of this Annual Report.
Recent Sales of Unregistered Securities
During the year ended December 31, 2021, we did not issue or sell any unregistered securities not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
We did not repurchase any securities during the year ended December 31, 2021.
Dividends
We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business and operations, including the commercialization of LUPKYNIS and further advancement of our pipeline, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other facts our board of directors may deem relevant.
Performance Graph
The following graph shows the value of an investment of $100 from December 31, 2016 through December 31, 2021, in our common shares, the Nasdaq Biotechnology Index, and Nasdaq Composite Index. The historical share price performance of our common shares shown in the performance graph is not necessarily indicative of future share price performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Total Return Date Ended |
| 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| Aurinia Pharmaceuticals | $100.00 | | $215.71 | | $324.76 | | $964.76 | | $658.57 | | $1,089.05 |
| Nasdaq Biotechnology Index | $100.00 | | $121.06 | | $109.77 | | $136.56 | | $171.64 | | $170.55 |
| Nasdaq Composite Index | $100.00 | | $128.24 | | $123.26 | | $166.68 | | $239.42 | | $290.63 |
The Performance Graph is not deemed to be “soliciting material” or “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act, or to the liabilities of Section 18 of the Exchange Act, and is not to be incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date of this Annual Report and irrespective of any general incorporation language in those filings.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
None.
Item 6. Reserved.
Not required.
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 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussion of historical items and year-to-year comparisons between 2020 and 2019 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, 2020, filed with the SEC on February 24, 2021 and such comparisons are incorporated herein by reference.
Overview
Aurinia is a commercial-stage biopharmaceutical company focused on developing and commercializing therapies to treat targeted patient populations that are suffering from serious diseases with a high unmet medical need. In 2021, we commercially launched LUPKYNIS in the United States for the treatment of adult patients with active LN. We continue to conduct pre-clinical, clinical, and regulatory activities to support the voclosporin development program as well as our other assets.
On January 22, 2021, the FDA approved LUPKYNIS in combination with a background immunosuppressive therapy regimen to treat adult patients with active LN.
On August 17, 2021, we announced the acquisition of two novel assets, AUR200 and AUR300. AUR200 is currently undergoing pre-clinical development with projected submission of an Investigational New Drug Application (IND) to the FDA in 2023. It is anticipated that an IND for AUR300 will be submitted during the first half of 2023.
On December 9, 2021, we announced positive topline results from the AURORA 2 continuation study evaluating the long-term safety and tolerability of LUPKYNIS.
Our net product revenue in 2021 increased to $45.5 million due to FDA approval of LUPKYNIS on January 22, 2021. We did not have any products approved for sale before 2021. We expect our net product revenue to continue to increase as we continue to execute on our post approval commercialization strategy for LUPKYNIS.
Our total expenses increased in 2021 to $226.3 million, primarily as a result of additional efforts related to the commercialization of LUPKYNIS, along with an increase in and cost of sales recognized for product sales. We anticipate continuing to spend more in R&D to support our continued development programs for LUPKYNIS and in respect of our two additional assets, AUR200 and AUR300 and our post approval commitments to the FDA.
We ended 2021 with $466.1 million in cash, cash equivalents and short-term investments, which we believe to be sufficient to fund our current business plans.
LUPKYNIS is an orally administered CNI, immunosuppressant, that has the potential 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. 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.
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 accounting principles generally accepted in the United States, or 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 resell our products 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 director nominee. You can read about each nomineereporting period as additional information becomes available. 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 director nominee profiles above.period of adjustment. We use a data aggregator and historical claims to estimate variable consideration for inventory sold to its customers that has not yet been dispensed. As of December 31, 2021, we did not have any material adjustments to estimates based on actual results.
License, Collaboration and Other Revenues
We enter into out-licensing agreements that are within the scope of ASC 606, under which we license certain rights to our product candidates 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 manufacturing supply services we provide through our contract manufacturers, and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues. We recorded $50.0 million for upfront, non-refundable license revenue in 2020 related to the Otsuka agreement. The upfront fee of $50.0 million was fixed consideration for the transfer of the license and was recognized upon transfer of the license in December 2020 and we have not recorded any material amounts of revenue related to its license agreements in 2021.
Research and Development (R&D)Costs: R&D costs are accounted for in accordance with ASC Topic 730, Research and Development, (ASC 730) and are expensed as incurred. R&D costs consist primarily of the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits, subcontractors and materials used for R&D activities, including nonclinical studies, clinical trials, manufacturing costs and professional services and in process R&D costs associated with acquired or licensed assets that do not have alternative uses and therefore no separate economic value. The costs of services performed by others in connection with the R&D activities, including R&D conducted by others on behalf of us, shall be included in R&D costs and expensed as the contracted work is performed.
We accrue the costs incurred under our agreements with these third parties based on actual work completed in accordance with agreements established with these third parties. We determine the accruals for R&D costs through monitoring invoices received and discussions with internal personnel and external service providers as to the progress or stage of completion of the clinical studies and the agreed-upon fee to be paid for such services. Where contingent milestone payments are due to third parties under R&D arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are probable to be achieved.
Deferred Compensation Arrangements: We have recorded deferred compensation arrangements in liabilities for estimated future employee benefits relating to applicable historical employment arrangements. The deferred compensation arrangements were approved by a resolution of the Board of Directors of the Company on March 8, 2012. Pursuant to ASC Topic 710, 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.
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
The following table sets forth our results of operations for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | |
| (in thousands) | 2021 | | 2020 | | Change |
| Revenue: | | | | | |
| Product revenue, net | $ | 45,488 | | | $ | — | | | $ | 45,488 | |
| License and contract revenue | 117 | | | 50,118 | | | (50,001) | |
| Total revenue, net | 45,605 | | | 50,118 | | | (4,513) | |
| Operating expenses: | | | | | |
| Cost of sales | 1,091 | | | — | | | 1,091 | |
| Selling, general and administrative | 171,438 | | | 95,983 | | | 75,455 | |
| Research and development | 51,139 | | | 50,327 | | | 812 | |
| Amortization of intangible assets | 2,098 | | | 1,289 | | | 809 | |
| Other expense, net | 574 | | | 6,809 | | | (6,235) | |
| Total cost of sales and operating expenses | 226,340 | | | 154,408 | | | 71,932 | |
| Loss from operations | (180,735) | | | (104,290) | | | (76,445) | |
| Interest income | 529 | | | 1,516 | | | (987) | |
| Net loss before income taxes | (180,206) | | | (102,774) | | | (77,432) | |
| Income tax expense (benefit) | 760 | | | (94) | | | 854 | |
| Net loss | $ | (180,966) | | | $ | (102,680) | | | $ | (78,286) | |
Revenues
Total revenues were $45.6 million and $50.1 million for the years ended December 31, 2021 and 2020, respectively. Our total revenues during 2021 primarily consisted of product revenues, net of adjustments, for LUPKYNIS following FDA approval in January 2021. Total revenues during 2020 were primarily due to the upfront payment from Otsuka of $50.0 million recorded as licensing revenue. In 2020, we did not have any drugs approved for commercial sale.
Cost of Sales
Cost of sales were $1.1 million and nil for the years ended December 31, 2021 and 2020, respectively. The increase was primarily the result of commercial sales of LUPKYNIS. In 2020, we did not have any drugs approved for commercial sale and the upfront payment from Otsuka did not have cost of sales. Gross margin for the year ended December 31, 2021 was approximately 98%.
Selling, General and Administrative Expenses
SG&A expenses increased to $171.4 million for the year ended December 31, 2021 compared to $96.0 million for the year ended December 31, 2020. SG&A expenses consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change |
| (in thousands) | | 2021 | | 2020 | | |
| Salaries, incentive pay and employee benefits | | $ | 78,991 | | | $ | 40,137 | | | $ | 38,854 | |
| Professional fees and services | | 45,551 | | | 30,601 | | | 14,950 | |
| Share-based compensation expense | | 26,432 | | | 13,615 | | | 12,817 | |
| Other public company costs, facility costs, insurance, information technology, depreciation of property and equipment | | 12,635 | | | 9,583 | | | 3,052 | |
| Travel, trade shows and sponsorships | | 7,829 | | | 2,047 | | | 5,782 | |
| | $ | 171,438 | | | $ | 95,983 | | | $ | 75,455 | |
We expense all SG&A costs in the periods in which they are incurred. We expect our SG&A expenses to continue to grow as we continue to build out the commercial and administrative functions to further support the commercialization of LUPKYNIS.
The primary drivers for the increase of $75.5 million in SG&A were due to an increase of $38.9 million in salaries and incentive pay including sales commissions and performance bonuses and employee benefits, and a $12.8 million increase in share-based compensation expense related to the expansion of the commercial and administrative functions to support the launch and commercialization of LUPKYNIS. Also contributing was an increase of $15.0 million in professional fees and services for activities such as patient assistance programs, consulting, recruiting, legal, market research and marketing. Following FDA approval, approximately $7.5 million of salaries and expenses that were previously allocated to R&D have been allocated to SG&A expense related to post approval support of LUPKYNIS. We anticipate continuing to incur significant expenses in SG&A to support the commercialization of LUPKYNIS.
Research and Development Expenses
R&D expenses increased slightly to $51.1 million for the year ended December 31, 2021 compared to $50.3 million for the year ended December 31, 2020. R&D expenses consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change |
| (in thousands) | | 2021 | | 2020 | | |
| Contract research organizations (CRO) and developmental expenses | | $ | 31,098 | | | $ | 23,534 | | | $ | 7,564 | |
| Clinical supply and distribution | | 4,180 | | | 7,954 | | | (3,774) | |
| Salaries, incentive pay and employee benefits | | 11,008 | | | 11,094 | | | (86) | |
| Share-based compensation expense | | 4,442 | | | 3,729 | | | 713 | |
| Travel, insurance, legal fees and other | | 411 | | | 4,016 | | | (3,605) | |
| | $ | 51,139 | | | $ | 50,327 | | | $ | 812 | |
The primary drivers for the slight increase of $0.8 million in R&D were due to the upfront license and accrued milestone expense totaling $10.0 million related to our recently acquired developmental programs, AUR200 and AUR300 included in the CRO and developmental expenses line item and higher clinical research organization expenses related to our new clinical programs offset by a $3.8 million decrease in clinical supply and distribution costs following the approval of LUPKYNIS, including a reduction in new drug application preparation costs and termination of the dry eye trial during the fourth quarter of 2020. Following FDA approval, approximately $7.5 million of salaries and expenses that were previously allocated to R&D have been allocated to SG&A expense related to post approval support of LUPKYNIS.
We expect our R&D expenses will increase as we continue to develop our pipeline assets. We expect our R&D expenses will increase in future periods as we continue to meet our post approval obligations related to LUPKYNIS with the FDA, to invest in R&D activities related to developing voclosporin and product candidates, and as programs advance into later stages of development and we begin to conduct larger clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and R&D is highly uncertain. As a result, we are unable to determine the
duration and completion costs of our R&D projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
Amortization of Acquired Intellectual Property and Other Intangible Assets
Amortization of acquired intellectual property and other intangible assets increased to $2.1 million for the year ended December 31, 2021 compared to $1.3 million for the year ended December 31, 2020 mainly due to implementations of internal-use software in 2020 and 2021.
Other Expenses (Income), Net
Other expenses were $0.6 million for the year ended December 31, 2021 compared to $6.8 million for the year ended December 31, 2020. The primary driver for the decrease of $6.2 million in other expenses during 2021 was the revaluation of deferred compensation in 2020 based on changes in estimates.
Interest Income
Interest income was $0.5 million for the year ended December 31, 2021 compared to $1.5 million for the year ended December 31, 2020. The decrease was mainly due to a lower return, as a result of lower interest rates on our 2021 investments, in comparison to 2020.
Liquidity and Capital Resources
As of December 31, 2021, we had cash and cash equivalents of $231.9 million and short-term investments of $234.2 million compared to cash and cash equivalents of $272.4 million and short-term investments of $126.0 million at December 31, 2020. Cash and cash equivalents and our investments are primarily held in U.S. dollars. As of December 31, 2021 and 2020, we had working capital of $472.7 million and $387.4 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. We are also expending efforts towards our newly acquired assets AUR200 and AUR300. Taking into consideration the cash and cash equivalents and investments as of December 31, 2021, we believe that our cash position is sufficient to fund our current plans which include funding commercial activities, including our FDA related post approval commitments, manufacturing commercial drug supply, funding our supporting commercial infrastructure, conducting our planned R&D programs, investing in our pipeline and funding our supporting corporate and working capital for at least the next few years.
The following table summarizes our cash flows forDecember 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Net cash (used in) provided by: | | | | | |
| Operating activities | $ | (157,692) | | | $ | (69,858) | | | $ | (63,585) | |
| Investing activities | (103,870) | | | (158,186) | | | 7,783 | |
| Financing activities | 221,112 | | | 194,375 | | | 243,854 | |
| Net change in cash and cash equivalents | $ | (40,450) | | | $ | (33,669) | | | $ | 188,052 | |
Cash Flows from Operating Activities
Cash used in operating activities in December 31, 2021 was $157.7 million, compared to $69.9 million, for the year ended December 31, 2020. The increase is primarily due to the commercial infrastructure spend to support the launch and commercialization of LUPKYNIS, payments for inventory, payments to help advance our clinical programs and one-time payments to a related party upon achievement of specific milestones partially offset by an increase in cash receipts. In the prior year, the Company was still in the development phase of LUPKYNIS.
Cash used in operating activities in December 31, 2020 was $69.9 million, compared to cash used in operating activities of $63.6 million for the year ended December 31, 2019. While we had a net loss of $102.7 million in 2020, non-cash components mainly included $17.5 million of share-based compensation. Operating cash flows included a net increase in working capital of
$4.5 million. Net change in working capital during 2020 was largely impacted by changes in inventory, prepaid expenses and deposits, accounts payable and accrued liabilities and changes in our non-current assets and liabilities.
Cash Flows from Investing Activities
Cash used in investing activities for the year ended December 31, 2021 was $103.9 million compared to cash used in investing activities of $158.2 million for the year ended December 31, 2020. Investing activities during 2021 consisted primarily of $439.0 million for purchases of investments of commercial paper and corporate bonds as discussed in Note 4 of the audited consolidated financial statements for the year ended December 31, 2021.
Cash used in investing activities for the year ended December 31, 2020 was $158.2 million compared to cash provided by investing activities of $7.8 million for the year ended December 31, 2019. Investing activities in 2020 consisted primarily of $203.0 million for purchases of investments of commercial paper and corporate bonds as discussed in Note 4 of the audited consolidated financial statements for the year ended December 31, 2020.
Cash Flows from Financing Activities
Cash provided by financing activities for the year ended December 31, 2021 was $221.1 million compared to cash provided by financing activities of $194.4 million for the year ended December 31, 2020. Cash provided by financing activities for the year ended December 31, 2021 increased primarily due to the net proceeds of $196.7 million from our November 2021 ATM facility and $24.0 million of proceeds from the exercise of stock options.
Cash provided by financing activities for the year ended December 31, 2020 of $194.4 million compared to cash provided by financing activities of $243.9 million for the year ended December 31, 2019 decreased mainly due to the net proceeds of $187.7 million from our public offering of common shares compared to 2019, which included $223.1 million net proceeds from public offerings of common shares in 2019.
November 2021 ATM facility
In November 2021, we entered into an Open Market Sale Agreement, or the Sale Agreement, under which we issued 10.2 million common shares, resulting in net proceeds of $196.7 million through December 31, 2021. There have been no sales subsequent to December 31, 2021.
We intend to use the net proceeds to fund our operations, which includes, but is not limited to, clinical development and commercial production of voclosporin (whether for LN or other indications), advance our pipeline, regulatory, additional clinical trials, business development opportunities, capital expenditures and working capital.
In February 2022 we terminated the Sale Agreement and no further sales will occur under the Sale Agreement.
Material cash requirements
As of December 31, 2021, our material short-term cash requirements are approximately $117.3 million. We anticipate our long-term cash requirements to be approximately $163.3 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 $92.9 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);
•Government payor rebates and co-payment programs;
•Corporate insurance premiums;
•Cash requirements related to R&D projects, clinical trials, milestone expenses and post-approval related studies and support;
•Short-term and long-term lease liabilities included on our consolidated balance sheet or Note 16, Leases for further details;
•Deferred compensation arrangements included on our consolidated balance sheet or Note 15, Deferred Compensation and Other Non-Current Liabilities for further details; 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 14, 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 and potential future drug candidates;
•the scope, rate of progress, results and costs of our clinical trials, preclinical studies 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 number and characteristics of the R&D assets we seek to develop or commercialize;
•the expenses needed to attract and retain skilled personnel as well as any other personnel changes that we may implement; 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Our activities can expose us to market risks which include interest rate risk, foreign currency risk, inflation risk and credit risk. Risk management is carried out by management under policies approved by our Board of Directors. Our overall risk management program seeks to minimize adverse effects on our financial performance.
Interest Rate Risk
Financial assets and financial liabilities with variable interest rates expose us to cash flow interest rate risk. We manage our interest rate risk by maximizing the interest income earned on excess funds while maintaining the liquidity necessary to conduct operations on a day-to-day basis. As of December 31, 2021 our investment portfolio includes cash and cash equivalents and investments of $466.1 million that earn interest at market rates. Our investment portfolio is maintained in accordance with its investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. Our investments held during the year were comprised of instruments such as certificates of deposits, money market instruments, obligations issued by the U.S. government and U.S government agencies as well as corporate debt securities. As of December 31, 2021, these instruments have a maturity of one year or less.
As of December 31, 2021 a decrease of 100 basis points on our interest rates of our investments would result in a $0.4 million loss on the fair market value of our portfolio and would be realized at the maturity of our investments.
Accounts receivable, accounts payable and accrued liabilities bear no interest. We do not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates relative to our investment portfolio.
Foreign Currency Risk
We are exposed to financial risk related to the fluctuation of foreign currency exchange rates. Foreign currency risk for the Company is the risk variations in exchange rates between the U.S. dollar and foreign currencies, primarily with the Canadian dollar, Swiss Franc, Great British Pound and Japanese Yen, which could affect our operating and financial results.
As of December 31, 2021, a 10% increase of the Canadian dollar would have increased the net loss by $0.9 million assuming all other variables remained constant. An assumed 10% weakening of the Canadian dollar would have had an equal but opposite effect to the amounts shown above, on the basis all other variables remain constant.
Inflation Risk
Inflation may generally affect us by increasing our cost of labor, commercial support and clinical trial expenditures. Inflation has not had a material effect on our business, financial condition or results of operations during the years ended December 31, 2021 and 2020.
Credit Risk
Our exposure to credit risk generally consists of cash and cash equivalents, investments and accounts receivable. We place our cash and cash equivalents with what we believe to be highly rated financial institutions and invest the excess cash in highly rated investments. Our investment policy limits investments to certain types of debt and money market instruments issued by
institutions primarily with investment grade credit ratings and places restriction on maturities and concentrations by asset class and issuer.
We are subject to credit risk in connection with our accounts receivable due from our two customers which accounted for 99% of our net trade accounts receivable balances as of December 31, 2021. We monitor economic conditions, the creditworthiness of our customers and government regulations and funding, both domestically and abroad. We regularly communicate with our customers regarding the status of receivable balances, including their payment plans and obtain positive confirmation of the validity of the receivables. In 2021, we did not recognize any allowance for doubtful accounts receivable related to credit risk for our customers.
ITEM 8. Financial Statements and Supplementary Data
The information required by this Item 8 is contained on pages F-1 through F-34 of this report and is incorporated herein
by reference.
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| Dr. George M. Milne, Jr. | Peter Greenleaf | Jill Leversage | Dr. David R.W. Jayne | Joseph P. Hagan | Dr. Daniel G. Billen | R. Hector MacKay-Dunn | Timothy P. WalbertPage |
Management/operations | √ | √ | √ | √ | √ | √ | | √ |
CEO/CFO/COO experience | | √ | √ | | √ | | | √ |
Industry experience | √ | √ | | √ | √ | √ | √F-
| √5 |
Commercialization | | √ | | | √ | √ | | √ |
Manufacturing/supply chain | √ | √ | | | √ | | | √ |
Government relations | | √ | | | | √ | √F-
| √ |
Finance/financial industry | | √ | √ | | √ | √ | | √ |
Accounting/auditing | √ | √ | √ | | √ | | | |
Risk management | √ | | | | √ | √ | | √ |
Strategy development | √ | √ | | | √ | √ | √8 | √ |
Mergers & acquisitions | √ | √ | √ | | √ | √ | √ | √ |
Legal/regulatory | | √ | | | | | √ | √ |
Corporate governance | √ | √ | √ | | | √ | √ | √ |
Capital markets | | √ | √ | | √ | | √ | √ |
Executive compensation | √ | √ | √ | | √ | √ | √ | √ |
Information technology | | √ | | | | | | √ |
Research/development | √ | √ | | √ | | √ | | √ |
Clinical development | √ | √ | | √ | √ | | | √ |
Business development | √ | √ | √ | | √ | √ | √ | √ |
CORPORATE GOVERNANCE
Committee Composition
The following table provides our current committee membership for each of the committees of our Board
.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Director | | Audit | | Compensation | | Research | | Governance and Nomination |
Dr. David R.W. Jayne | | | | | | X | | X |
Dr. George M. Milne, Jr. | | X | | | | | | X |
Joseph P. Hagan | | X | | X* | | | | |
Dr. Michael Hayden | | | | X | | X* | | |
Dr. Daniel Billen | | | | | | X | | |
R. Hector MacKay-Dunn | | | | X | | | | X* |
Jill Leversage | | X* | | | | | | |
Timothy P. Walbert | | | | X | | X | | |
* Committee Chairperson
Other Board MembershipItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The following table identifies the directorsNone.
Item 9A. Controls and nominees for election as directors who also act as directors for other reporting issuers.Procedures
| | | | | | | | | | | | | | |
Name | | Name of Issuer | | Name of Exchange of Market |
Peter Greenleaf | | Antares Pharma, Inc.
BioDelivery Sciences International, Inc. | | NASDAQ:ATRS
NASDAQ:BDSI |
Dr. George Milne, Jr. | | Charles River Laboratories International, Inc. | | NYSE:CRL |
Joseph P. Hagan | | Zosano Pharma Corporation
Regulus Therapeutics Inc. | | NASDAQ:ZSAN
NASDAQ:RGLS |
R. Hector MacKay-Dunn | | Copper Fox Metals Inc. | | TSXV:CUU |
Jill Leversage | | Mag Silver Corp.
RE Royalties Ltd. | | TSX/NYSE A:MAG
TSXV:RE |
Timothy P. Walbert | | Exicure, Inc.
Horizon Therapeutics plc | | NASDAQ:XCUR
NASDAQ GS:HZNP |
Audit Committee
Our Audit Committee consistsmanagement, with the participation of Jill Leversage, Joseph P. Haganour chief executive and Dr. George M. Milne, Jr. Jill Leversage servesfinancial officers (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures, as chairpersondefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the Audit Committee. All membersend of the period covered by this Annual Report on Form 10-K. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our Audit Committee meet the requirementsdisclosure controls and procedures as of December 31, 2021, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial literacy under the applicable rules and regulations of the SEC and the Nasdaq Stock Market. Our Board has determined that Jill Leversage is an audit committee financial expert as such term is defined by the SEC rules and has the requisite financial experience as defined by the applicable Nasdaq Rules and applicable Canadian securities laws. Each of the members of our Audit Committee is “independent”reporting, as such term is defined in Rule 10A-3(b)(1)13a-15(f) under the Exchange ActAct. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and satisfies the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Management has assessed the effectiveness of our internal control over financial reporting based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2021.
The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP (PwC) an independent director requirements underregistered public accounting firm, as stated in their attestation report herein, which appears in the Nasdaq Rules."Index to Consolidated Financial Statements" in Part IV.
Inherent Limitations of Internal Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
During the quarter ended December 31, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Ethical Business ConductItem 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this Item and not set forth below will be set forth in the section headed “—Election of Directors” and “Information Regarding the Board of Directors and Corporate Governance” in our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders (or amended Annual Report on Form 10-K) to be filed with the SEC by April 28, 2022 (our Proxy Statement) and is incorporated in this Annual Report by reference.
We have adopted a code of ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees, known as the Corporate Code of Ethics and Conduct, (the "CodeConduct. The Corporate Code of Conduct") applicable to all of our employees, executive officersEthics and directors. The Code of Conduct is available on our website at www.auriniapharma.com. The Code of Conduct is available on our website at http://www.auriniapharma.com under the Corporate Governance section of our Investors page. The Audit Committee is responsible for monitoring the implementation of the Code of Conduct and must approve any material changes to or waivers of the Code of Conduct regarding our directors or executive officers, and disclosures made in the Company’s annual report in such regard. In addition, we intend to post on our website all disclosures that are required by law or the listing standards of the applicable stock exchange concerning any amendments to, or waivers from, any provision of the Code of Conduct.
The Code of Conduct is part of our commitment to adhere to the highest levels of ethical, compliance and legal standards. Detailed information on other aspects of our corporate governance policies and programs are available on our website at www.auriniapharma.com. In addition to these corporate governance policies, we also maintain written policies and procedures that are established to ensure all of our interactions with health care practitioners are ethical and in line with ever evolving laws and guidance in the United States. Each of these are reviewed on a regular basis to ensure they are up to date, and all applicable members of our team are trained on them.
To help foster this culture, we have a Board that is comprised of accomplished leaders from various backgrounds and a breadth of experience in scientific and corporate matters. They set our goals and make determinations on material business initiatives and decisions, as well as set the direction for our business. They also act as an oversight function for our management team. You can see the skills that each of our directors brings earlier under the heading "Skills Matrix".
We will promptly disclose on our website (i) the nature of any amendment to the policy that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of the policy that is granted to one of these specified individuals, the name of such person who is granted the waiver and the date of the waiver. Shareholders may request a free copy of the Corporate Code of Ethics and Conduct from c/o Aurinia Pharmaceuticals Inc., #1203-4464 Markham St., Victoria, BC, V8Z 7X8, Attn: Corporate Secretary.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information concerning our executive officers, including their ages, as of the date of this report.
| | | | | | | | | | | | | | |
Name of Executive Officer | | Age | | Position(s) |
Peter Greenleaf | | 51 | | President, Chief Executive Officer and Director |
Joe Miller | | 47 | | Chief Financial Officer |
Massimiliano ("Max") Colao | | 56 | | Chief Commercial Officer |
Matthew ("Max") Donley | | 52 | | Executive Vice President, Operations and Strategy |
Robert Huizinga, PhD RN, CNeph(C) | | 56 | | Executive Vice President, Research |
Michael Martin | | 49 | | Chief Business Officer |
Stephen P. Robertson | | 39 | | Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer |
Neil Solomons, M.D. | | 53 | | Chief Medical Officer |
The brief biographies below include information, as of the date of this report, regarding the specific and particular experience, qualifications, attributes or skills of each executive officer of our Company.
Peter Greenleaf, MBA, Chief Executive Officer
Refer above to the director biographies section for Peter Greenleaf's biography.
Joe Miller, Chief Financial Officer
Joe Miller has served as Chief Financial Officer of the Company since April 27, 2020. Joe is responsible for developing and leading the Company’s financial operations. Joe has over two decades of experience as a senior executive managing financial operations and supporting enterprise growth in companies across the health sciences, biotech and pharmaceutical sectors. Most recently, he served as Chief Financial Officer, Principal Executive Officer, and Corporate Secretary at Cerecor, Inc from July 2018 to April 2020. At Cerecor, he completed the acquisition of Ichorion Therapeutics, Inc., the purchase of Aevi Genomic Medicine, and facilitated a strategic transformation of the organization by leading the divestiture of the company’s commercial portfolio in a transaction with Aytu BioScience, Inc. in 2019. Joe currently serves as a director on Cerecor’s board. Prior to Cerecor, Joe was the Vice President of Finance at Sucampo Pharmaceuticals, Inc. from October 2015 to April 2018, where he was responsible for building out the finance organization to effectively support the company’s rapid growth, ultimately leading to the $1.2B merger with Mallinckrodt in early 2018 to U.K. pharmaceutical giant Mallinckrodt PLC. Prior to Sucampo Pharmaceuticals, Inc. he served in various progressive finance and management roles at QIAGEN, Eppendorf and KPMG LLP. Joe received his B.S. in accounting from Villanova University and is a Certified Public Accountant.
Massimiliano ("Max") Colao, Chief Commercial Officer
Max Colao has served as Chief Commercial Officer of the Company since February 2020. Mr. Colao has nearly 30 years of commercial operations experience. Mr. Colao led U.S. commercial operations at Alexion Pharmaceuticals Inc. from May 2014 to May 2018 and launched multiple rare disease therapies. Prior to joining Alexion, Max spent nearly 20 years at Amgen Inc., holding roles of increasing responsibility on various marketing and sales teams, most notably leading U.S. launches, commercialization, and pricing strategy in the areas of rheumatology, dermatology, and autoimmune disorders for Enbrel®, Prolia®, and Nplate®. Most recently, he was Chief Commercial Officer and Head of Business Development at Abeona Therapeutics Inc. from June 2018 to February 2020, where he led the company’s commercialization and business development efforts of autologous cell therapy and AAV9-based gene therapy for rare diseases. Max received his B.S. in applied mathematics and economics from the University of California, Los Angeles and his MBA from the University of Southern California.
Matthew ("Max") Donley, MBA, Executive Vice President, Operations and Strategy
Max Donley has served as Executive Vice President, Operations and Strategy of the Company since July 2019. He most recently led Human Resources, Information Technology and Facilities at Senseonics from December 2018 to May 2019. Prior to that, Max was Executive Vice President of Global Human Resources, Information Technology, and Corporate Strategy at
Sucampo Pharmaceuticals until its acquisition in February 2018 to U.K. pharmaceutical company Mallinckrodt PLC. Max also served as Executive Vice President, Human Resources and Corporate Affairs at MedImmune from July 2000 to May 2013 where he provided business-integrated leadership and delivered professional tools, programs and services to optimize MedImmune’s human capital investments worldwide. Max received his B.A. from University of Michigan and his M.B.A from George Mason University.
Michael R. Martin, Chief Business Officer
Michael Martin has served as Chief Business Officer of the Company since June 2020, previously Chief Operating Officer since September 2013. In this role he oversees all Business Development, Licensing and Partner Management activities along with overall management of the Company's intellectual property portfolio. He was formerly CEO, director and co-founder of the privately held Aurinia Pharmaceuticals Inc. starting in May 2012, which merged in 2013 with the former Isotechnika Pharma Inc. Michael is a biotech/pharmaceutical executive with over 20 years of industry experience. Michael joined Aurinia from Vifor Pharma where he held the position of Director, Global Business Development & Licensing from September 2006 to June 2012. Prior to Vifor, Michael was a key member of the business development team that saw Aspreva sold to Galenica for $915M in 2007. Upon joining Aspreva in 2004, Michael initiated the strategic launch planning process for CellCept® in “less-common” autoimmune diseases. These included such indications as pemphigus vulgaris, myasthenia gravis, and LN. Prior to this, Michael held a variety of progressively senior commercial positions at Schering-Plough (now Merck). Most recently, he was responsible for the Rheumatology business unit for Remicade® in France. In this role, he had full profit and loss responsibilities and had direct responsibility for the sales team, the marketing team and the infusion access team. In addition, while at Schering-Plough, Michael was the brand manager responsible for the Canadian launch of Remicade (infliximab), which ultimately became the most successful product launch in Canadian history and the largest selling biologic ever. Michael started his career in the industry in the sales organization of Schering-Plough where he received multiple awards and recognition while rapidly progressing towards the prior mentioned roles. Michael received his B.Sc. (Biochemistry) from the University of Victoria.
Robert B. Huizinga, PhD RN, CNeph(C), Executive Vice President, Research
Robert Huizinga has served as Executive Vice President, Research of the Company since June 2020. Mr. Huizinga has more than 25 years of clinical research experience. He has managed the global clinical development of voclosporin since 2002 when he was with the Company prior to its merger with Aurinia Pharma Corp. (a private company predecessor to the Company) in September 2013. Before joining the Company, Rob was an Investigator in nephrology and transplantation clinical trials where he was involved in more than 60 clinical trials from Phase 1 through Phase 4 and the successful development of numerous compounds including CellCept®, Neoral®, Prograf®, Aranesp® and Simulect®. He has acted as a consultant to nephrology and transplantation pharmaceutical companies, has lectured extensively and is recognized as an expert in immunosuppression drug development. Rob has numerous articles published in leading medical journals, including the Lancet, Kidney International and the American Journal of Transplantation. He is a member of many professional societies related to nephrology, transplantation, and nursing, has served on many nephrology and transplantation committees and is the founder of RenalPro, a moderated forum for renal professionals. Rob has a PhD (Organizational Leadership) from Regent University, is a Registered Nurse in British Columbia, holds his certification in Nephrology, a M.Sc. in Medicine (Epidemiology) from the University of Alberta, and a member of Sigma Theta Tau (Honor Society of Nursing).
Stephen Robertson, Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer
Stephen Robertson has served as Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer of the Company since November 2020. Stephen is responsible for all legal matters related to Aurinia, its investigational drug voclosporin and potential future in-licensing and out-licensing agreements. Stephen brings more than 13 years of corporate law experience across various roles with the law firm Borden Ladner Gervais LLP, where he had been a Partner since 2014. He has focused on advising clients on securities, corporate and commercial legal matters, including extensive experience with mergers and acquisitions and commercial agreements. Stephen has served as Corporate Secretary for Aurinia since 2014. Stephen received his Bachelor of Laws degree from the University of Manitoba. He has been recognized with a number of awards and honors, including being included in the 2020 edition of the Best Lawyers in Canada for Securities Law.
Neil Solomons, MD, Chief Medical Officer
Dr. Neil Solomons has served as Chief Medical Officer of the Company since September 2013. Dr. Solomons co-founded privately-held Aurinia Pharmaceuticals in 2012. He is an experienced pharmaceutical physician with over 20 years of clinical development and medical affairs experience in both large pharma and biotech. He is a recognized expert in rare-disease drug
development and is widely published in this field. Neil joined Aurinia from Vifor Pharma, formerly Aspreva Pharmaceuticals (Nasdaq:ASPV) where he held the position of Vice President, Research and Development from January 2008 to May 2013, being the lead clinician in the development of CellCept® in rare diseases. Neil led the CellCept® Clinical Development teams of over 50 people that saw the completion, reporting, and publication of studies in pemphigus vulgaris and myasthenia gravis (both industry firsts), and the successful landmark LN study called ALMS. He was responsible for all clinical development activities from Phases 1 to 3, as well as participating in the formulation of R&D strategy, portfolio management, and due diligence efforts. Prior to Vifor & Aspreva, Neil held a variety of positions at Roche in both Global Clinical Development and Medical Affairs in transplantation, virology, and auto-immune diseases. While at Roche, Dr. Solomons led a diverse team in the development and implementation of post-marketing studies for its transplantation (CellCept® and Zenapax®) and virology (Cytovene®) franchises. Neil qualified in medicine in 1991 receiving his MB BS (MD) at Guys Hospital Medical School, London. He subsequently worked as a physician in London UK, completing specialist training in anesthesia and intensive care. His research interests included sepsis and chronic pain.
Item 11. Executive Compensation
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis (“CD&A”) contained ininformation required by this report. Based on this review and discussion, the Compensation Committee has recommended to the Board that the CD&A be included in this report.
Joseph P. Hagan, Chair
Dr. Michael Hayden
R. Hector MacKay-Dunn
Timothy P. Walbert
EXECUTIVE COMPENSATION
Overview
This Compensation Discussion and Analysis discusses our executive compensation policies and how and why our Compensation Committee arrived at specific compensation decisions for the year ended December 31, 2020. It provides qualitative information on the factors relevant to these decisions and the manner in which compensation is awarded to our NEOs for the fiscal year ended December 31, 2020, which consist of our principal executive officer, our principal financial officer and former principal financial officer during the year ended December 31, 2020, and our three other most highly compensated executive officers as of December 31, 2020. Our NEOs for 2020 were:
| | | | | | | | |
Name | | Position(s) |
Peter Greenleaf | | Chief Executive Officer and Director |
Joe Miller | | Chief Financial Officer |
Dennis Bourgeault | | Former Chief Financial Officer |
Max Colao | | Chief Commercial Officer |
Max Donley | | Executive Vice President, Operations and Strategy |
Stephen Robertson | | Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer |
Information about the compensation awarded to the NEOs can be found in the "Summary Compensation Table" and related compensation tables below.
Executive Summary
The important features of our executive compensation program include the following:
•A substantial portion of executive pay is tied to performance. We structure a significant portion of our NEOs’ compensation to be variable, at risk and tied directly to our measurable performance.
•Our executive bonuses are dependent on the Company and the officer achieving annually determined goals and objectives. Our annual performance-based bonus opportunities for all of our NEOs are determined by the Compensation Committee in its sole discretion based upon the Company’s and the officer’s achievement of goals and objectives determined on an annual basis by our Board of Directors on the recommendation of the Compensation Committee.
•We emphasize long-term equity incentives. Equity awards are an integral part of our executive compensation program and comprise the primary “at-risk” portion of our NEOs compensation package. For example, during 2020, we granted our executive officers options to purchase our common shares and performance awards (PAs). These awards strongly align our executive officers’ interests with those of our shareholders by providing a continuing financial incentive to maximize long-term value for our shareholders and by encouraging our executive officers to remain in our long-term employ.
•We do not provide our executive officers with any excise tax gross ups.
•We generally do not provide executive fringe benefits or perquisites to our executives, such as car allowances.
•Our Compensation Committee has retained an independent third-party compensation consultant for guidance in making compensation decisions. The compensation consultant advises the Compensation Committee on market practices, including identifying a peer group of companies and their compensation practices, so that our Compensation Committee can regularly assess the Company’s individual and total compensation programs against these peer companies, the general marketplace and other industry data points.
Objectives, Philosophy and Elements of Executive Compensation
The Company’s executive compensation program and strategy is designed to:
•assist the Company in attracting and retaining talented executives;
•provide a strong incentive for executives and key employees to work toward achievement of the Company’s goals and strategic objectives;
•align management’s interests with those of our shareholders and other stakeholders;
•motivate executives towards the enhancement of long-term shareholder value; and
•be competitive with other companies of similar size and business.
To further these objectives, the Compensation Committee designs pay and performance programs that reflect the level of job responsibility with specific considerations while aligning the Company’s compensation programs with those of pharmaceutical companies of similar size and clinical stage. It also aligns the annual cash incentive (bonus) program to the achievement of objectives that will drive future success and enhance shareholder value by linking a significant portion of the bonus program to overall corporate performance and attainment of specific value enhancing goals and milestones. The Compensation Committee assesses the performance of the Company’s CEO in accordance with these objectives and makes recommendations to the Board, and the Board approves all decisions regarding his compensation.
Annually, specific and measurable performance objectives are defined for each executive officer.
For 2020, the objectives, against which the executive officers were evaluated, included clinical and regulatory objectives and milestones, financing to support launch and commercialization, and pre-commercial and business development targets.
The Company’s compensation program and strategy for its executive officers consists primarily of three main elements: base salary, an annual cash incentive (bonus), and equity-based compensation consisting of the grants of stock options and PAs.
| | | | | | | | | | | | | | |
Element of
Compensation
| | Objectives | | Key Features |
Base Salary
(fixed cash)
| | Provides a base compensation that reflects the executive’s experience and responsibilities, and which is competitive with salaries of executives with similar responsibilities and experience at comparable companies. | | •Reviewed annually
•Determined based on a number of factors (including individual performance and the overall performance of our Company) and by reference, in part, to market data provided by our independent compensation consultant.
|
Performance Bonus
(at-risk cash)
| | Motivates executive officers to work toward achievement of the Company’s goals and strategic objectives. Underscores pay for performance philosophy. | | •Reviewed annually
•Target bonus amounts are determined based on a combination of internal equity and external market competitiveness.
•Bonus payouts are dependent upon achievement of specific corporate performance objectives consistent with our long-term strategic plan and individual performance objectives.
|
Long-Term Incentive
(at-risk equity)
| | Aligns the compensation of the CEO, other executive officers and key employees with the long-term interests of the shareholders and rewards the achievement of the long-term strategic goals and objectives of the Company. Underscores pay for performance philosophy. Attracts highly qualified executives and encourages their continued employment over the long-term. | | •Reviewed annually
•Equity awarded by the Compensation Committee (other than to the CEO, which are awarded by the Board, on recommendation from the Compensation Committee).
•Individual awards are determined based on a number of factors, to include internal equity and external market competitiveness, individual and/or company performance, input from independent executive compensation consultant, contractual requirements and/or other inputs considered.
|
We focus on providing a competitive compensation package to our executive officers which provides significant short and long-term incentives for the achievement of measurable Company and executive officer goals and objectives. We believe that this approach provides an appropriate blend of short-term and long-term incentives to maximize shareholder value.
We do not have any formal policies for allocating compensation among salary, performance bonus awards and equity grants, short-term and long-term compensation or among cash and non-cash compensation. Instead, the Compensation Committee uses its judgment to establish a total compensation program for each named executive officer that is a mix of current, short-term and long-term incentive compensation, and cash and non-cash compensation, that it believes appropriate to achieve the goals of our executive compensation program and our corporate objectives. However, historically we have structured a significant portion of the named executive officers’ total target compensation so that it is comprised of performance-based bonus opportunities and long-term equity awards, in order to align the executive officers’ incentives with the interests of our shareholders and our corporate goals.
2020 Say-on-Pay Results
We submitted our approach to compensation to an advisory say on pay vote at our annual general shareholder meeting in 2020. Of the common shares voted at that meeting, 98.5% of shareholders voted in favor of the approach to compensation detailed in
the proxy statement for that meeting. While the vote was advisory and non-binding, our Board and Compensation Committee appreciated the strong show of support from our shareholders to our approach to executive compensation.
How We Determine Executive Compensation
Role of our Compensation Committee, Management and the Board
The Compensation Committee is appointed by the Board and has responsibilities related to the compensation of the Company’s directors, officers, and employees and the development and administration of the Company’s compensation plans. For details on the Compensation Committee’s oversight of the executive compensation program, see the section titled “Compensation Committee” of this report. Our Compensation Committee consists solely of independent members of the Board.
The Compensation Committee meets periodically throughout the year to manage and evaluate our executive compensation program, and generally determines the principal components of compensation (base salary, performance bonus and equity awards) for our executive officers on an annual basis; however, decisions may occur at other times for new hires, promotions or other special circumstances as our Compensation Committee determines appropriate. The Compensation Committee does not delegate authority to approve executive officer compensation. The Compensation Committee does not maintain a formal policy regarding the timing of equity awards to our executive officers.
Role of Executive Officers in Compensation Decisions
The Compensation Committee assesses the performance of the Company’s CEO and makes recommendations to the Board, and the Board approves all decisions regarding the CEO's compensation. The Compensation Committee consults with and receives input and recommendations from the CEO regarding the performance, assessment and compensation of all the other executive officers and determines the compensation of such executives. From time to time, various other members of management and other employees as well as outside advisors or consultants may be invited by the Compensation Committee to make presentations, provide financial or other background information or advice or otherwise participate in the Compensation Committee meetings. Although the Compensation Committee generally considers recommendations from the CEO, decisions regarding the compensation of the Company’s executive officers are made by the Compensation Committee and may reflect factors and consideration other than information and recommendations provided by the CEO.
Role of Compensation Consultant
The Compensation Committee has the sole authority to retain compensation consultants to assist in its evaluation of executive compensation, including the authority to approve the consultant’s reasonable fees and other retention terms. The Compensation Committee has retained Willis Towers Watson US LLC ("WTW") as its compensation consultant. A representative of WTW generally attends meetings of the Compensation Committee. In addition, WTW supports the selection of companies included in our compensation peer group, provides competitive market assessments of the compensation of our executive officers and non-employee director compensation programs, reviews the CD&A section of our proxy statements, and provides support on other matters as requested by the Compensation Committee.
The Compensation Committee has analyzed whether the work of WTW as compensation consultant raises any conflict of interest, taking into account relevant factors in accordance with SEC guidelines. Based on its analysis, our Compensation Committee determined that the work of WTW and the individual compensation advisors employed by WTW does not create any conflict of interest pursuant to the SEC rules and Nasdaq listing standards.
Factors Used in Determining Executive Compensation
Our Compensation Committee sets the compensation of our executive officers at levels they determine to be competitive and appropriate for each NEO, using their professional experience and judgment. Pay decisions are not made by use of a formulaic approach or benchmark; the Compensation Committee believes that executive pay decisions require consideration of a multitude of relevant factors which may vary from year to year. In making executive compensation decisions, the Compensation Committee generally takes into consideration the factors listed below.
•Company performance and existing business needs;
•Each named executive officer’s individual performance, scope of job function and the critical skill set of the named executive officer to the company’s future performance;
•The need to attract new talent to our executive team and retain existing talent in a highly competitive industry;
•A range of market data reference points, as described above under “Use of Competitive Market Compensation Data”; and
•Recommendations from consultants on compensation policy determinations for the executive officer group.
Setting Executive Compensation
Performance goals are determined early in the year for each executive officer and relate to milestones and/or achievements, which aim to facilitate the Company’s overall goals and objectives. These performance goals are assessed by the Compensation Committee. The Board makes the final determination in respect of setting the Company’s goals each year, based on the recommendation of the Compensation Committee. These objectives can be altered at the discretion of the Board if appropriate due to changes in business factors or conditions.
The Company annually determines the corporate objectives for purposes of the annual cash incentive bonus program. Following the end of the year, the Compensation Committee assesses the achievement of such objectives with input from the CEO and based on such assessment, determines an aggregate cash incentive bonus for each executive officer. The Compensation Committee approves the cash incentive bonus for the Company’s executive officers (other than the CEO), and recommends the cash incentive bonus for the CEO to the Board for approval.
The awarding of equity-based compensation is subject to the judgment of the Compensation Committee and Board, exercised annually based on the consideration of a variety of factors, and is not subject to any minimum amount.
As part of its review of management compensation and incentive programs, the Compensation Committee retains external independent consultants to review and provide benchmark data of a comparable group of companies. The Compensation Committee believes that it is important when making its compensation decisions to be informed as to the current practices of comparable public companies with which we compete for top talent.
During 2020, the Compensation Committee engaged WTW to assist in updating the benchmarking data and provide advice on the total direct compensation (base salary, annual short and long-term incentives) for the NEOs (and the Company’s other officers) for the 2020 fiscal year. The Compensation Committee must pre-approve any additional services that WTW would provide to the Company at the request of management of the Company.
As part of its 2020 benchmarking and review process, WTW (in consultation with the Compensation Committee) developed a 2020 comparator group, comprising 19 Canadian and U.S.-listed companies (the "2020 Peer Group"). The 2020 Peer Group includes multiple entities from the peer group selected for the 2019 compensation review but has removed and added various entities that are more comparable to the Company's size and status of operations. Selection for the 2020 Peer Group included industry classification, revenue, market capitalization, trailing 12-month market capitalization, employee base, research and development expenses, and business focus. The Company’s market capitalization at the time fell into the middle of the market cap range. The equity data used by WTW was obtained from public proxy filings and Radford’s 2019 Global Life Sciences survey (mid-size public company data used for equity benchmarking). The 2020 Peer Group consisted of the following 19 public companies:
| | | | | | | | |
Aimmune Therapeutics, Inc. | Akebia Therapeutics, Inc. | Apellis Pharmaceuticals, Inc. |
Chemocentryx, Inc. | Epizyme, Inc. | Halozyme Therapeutics, Inc. |
Insmed Incorporated | Karyopharm Therapeutics Inc. | Knight Therapeutics Inc. |
MacroGenics, Inc. | Nektar Therapeutics | Reata Pharmaceuticals, Inc. |
Regenxbio Inc. | Revance Therapeutics, Inc. | Sorrento Therapeutics, Inc. |
TG Therapeutics, Inc. | Viela Bios, Inc. | Xencor, Inc. |
Zymeworks Inc. | | |
WTW provided the Compensation Committee with its assessment of competitive market practice with respect to NEO total direct compensation based on the benchmarking work it performed. The Compensation Committee considered the competitive market data provided by WTW where appropriate and in conjunction with its own assessment of competitive compensation requirements as well as management recommendations.
The elements of compensation are targeted at ensuring that the compensation paid by the Company to its executive officers remains in a reasonably competitive range as compared to its comparator group. The compensation philosophy at a minimum is to focus on 50th percentile positioning for comparable roles in the comparator group with upside or downside based on performance, market demand and recognition of other inputs.
As a supplement to the peer group research completed in 2020, the Compensation Committee also requested specific compensation data when finalizing pay for our Chief Financial Officer, Chief Commercial Officer and Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer, each of whom was hired during 2020. External market data was gathered in a manner consistent with the benchmarking and review process described above.
Max Colao, Joe Miller and Stephen Robertson were hired in 2020 and as such, their compensation was based on different factors than the other NEOs.
The determination of Max, Joe and Stephen's base salaries were the result of negotiations between the Company and such executive officer and based on a number of factors including their existing salary at their respective prior places of employment, review of salaries against the comparator group and compensation of other executive officers. Their potential annual bonus is identical to the annual bonus potential of the Company's other executive officers. As part of their hiring process, each was granted initial incentive option grants. It is anticipated that future awards granted to these individualsItem will be more in line with annual grants made by the Company.
2020 Executive Compensation Program
Base Salary
The base salaries of our executive officers are designed to compensate them for day-to-day services rendered during the fiscal year. Appropriate base salaries are used to recognize the experience, skills, knowledge and responsibilities required of each executive officer and to allow us to attract and retain individuals capable of leading us to achieve our business goals in competitive market conditions.
The base salaries of our executive officers are reviewed at least annually by our Compensation Committee and adjustments are made to reflect Company and individual performance, as well as competitive market practices. Our Compensation Committee also takes into account subjective performance criteria, such as an executive officer’s ability to lead, organize and motivate others, develop the skills necessary to mature with us, set realistic goals to be achieved in his or her respective area, and recognize and pursue new business opportunities that enhance our growth and success. Our Compensation Committee does not apply specific formulas to determine increases, but instead makes an evaluation of each executive officer’s contribution to our long-term success. Annual adjustments to base salaries are effective as of January 1 of each year, with mid-year adjustments to base salaries made under special circumstances, such as promotions or increased responsibilities, or to align certain base salaries with those of individuals in comparable positions at the companies in our compensation peer group.
The 2020 and 2021 base salaries for our executive officers were as follows:
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| Executive | | 2020 Base Salary | | Percentage Increase in Base Salary from December 2019 | | 2021 Base Salary | | Percentage Increase in Base Salary from December 2020 |
| Peter Greenleaf | | $673,400 | | 3.6% | | $723,905 | | 7.5% |
Joe Miller(2) | | $410,000 | | — | | $437,675 | | 6.8% |
Dennis Bourgeault(1) | | $291,759 | | 3.1% | | $— | | —% |
Max Colao(2) | | $425,000 | | — | | $459,000 | | 8.0% |
| Max Donley | | $383,320 | | 3.6% | | $448,986 | | 17.1% |
Stephen Robertson(2)(3) | | $425,000 | | — | | $446,453 | | 5.0% |
(1)Dennis Bourgeault's full year salary was translated from Canadian dollars to U.S. Dollars using the 2020 year end foreign exchange rate from the Bank of Canada.
(2)The salaries listed for Joe Miller, Max Colao and Stephen Robertson represent their full year salary per their employment agreement, and do not reflect actual salaries earned in 2020.
(3)Stephen Robertson's 2021 salary was translated from Canadian dollars to U.S. Dollars using the 2020 year end foreign exchange rate from the Bank of Canada.
Annual Performance Bonus
Our NEOs are eligible to receive performance-based cash bonuses, which are designed to provide appropriate incentives to our executive officers to achieve defined annual corporate goals and to reward them for individual performance towards these goals. The annual performance-based bonus each current named executive officer is eligible to receive is generally based on the extent to which we achieve the corporate goals and objectives that the Board, on recommendation of the Compensation Committee, establishes each year. At the end of the year, the Compensation Committee reviews our performance and recommends to the Board the extent to which we achieved each of these corporate goals. The Board determines the final extent to which we achieved each of these corporate goals. Generally, the Compensation Committee will assess each named executive officer’s individual contributions towards reaching our annual corporate goals and objectives but does not typically establish specific individual goals for our named executive officers. Individual goals for all of our named executive officers (except our CEO) are determined by the CEO. There are no individual goals for the CEO, as his goals are based on the overall corporate goals. For the other NEOs, the weighting for corporate goals is 75% and personal goals is 25% (as determined by the Compensation Committee in March 2020).
The table below sets forth the targets for our NEOs for 2020, as provided for in their respective employment agreements. The target percentage is paid as a percentage of such executive officer’s base salary. In February 2021, the Compensation Committee approved an adjustment to the target percentage of the Company's executive officers (other than Peter Greenleaf) from 40% to 50%, which is reflected in the table below.
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| Executive Officer | | 2020 Target Percentage of Base Salary | | 2021 Target Percentage of Base Salary |
| Peter Greenleaf | | 70% | | 70% |
| Joe Miller | | 40% | | 50% |
Dennis Bourgeault(1) | | —% | | —% |
| Max Colao | | 40% | | 50% |
| Max Donley | | 40% | | 50% |
| Stephen Robertson | | 40% | | 50% |
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(1) Dennis Bourgeault retired on April 27, 2020 and as a result, was not eligible for a 2020 annual performance bonus.
In the first quarter of 2020, the Board, on recommendation of the Compensation Committee, established the corporate goals described below. Our objective is for our corporate goals to be directly aligned with our specific strategic goals, including advancing our development programs, our research function, our clinical activities, commercialization activities and certain corporate and financial goals, which we believe will create long-term value for shareholders. The maximum possible corporate achievement for 2020 was 200% of our 2020 corporate goals. In January 2021, the Board and the Compensation Committee evaluated the accomplishments and performance of the Company against such corporate goals. After its consideration of the Company’s performance, as more specifically described below, the Compensation Committee rated our 2020 corporate achievement at 150%.
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Corporate Goal – Core | | Weighting | | Corporate
Achievement
|
Deliver pipeline - successfully navigate FDA process and drive additional LN research | | 55% | | Exceeded |
Evolve Aurinia organization - out license another territory, hire key personnel, launch brand strategy and build out commercial infrastructure | | 30% | | Exceeded |
Deliver financials and diversify pipeline | | 15% | | Exceeded |
In December 2020, after making these determinations regarding level of corporate performance achieved against the pre-established performance goals, the Compensation Committee (for NEOs other than the CEO) and the Board (for the CEO and
without the CEO being present for deliberations and approval) reviewed and approved corporate cash incentives as set forth in the table below. The Compensation Committee and the Board may, in their sole discretion, eliminate any individual cash incentive or reduce or increase the amount of compensation payable with respect to any individual cash incentive.
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| | 2020 Target Annual Cash Incentive | | 2020 Actual Annual Cash Incentive Paid |
| Named Executive Officer | | % of Base Salary | | $ | | % of Target Annual Cash Incentive | | $ |
| Peter Greenleaf | | 70% | | $ | 471,380 | | | 150% | | $ | 707,070 | |
Joe Miller (1) | | 40% | | 111,818 | | | 150% | | 230,625 | |
Dennis Bourgeault (2) | | 40% | | 116,704 | | | —% | | — | |
Max Colao (3) | | 40% | | 141,667 | | | 150% | | 265,625 | |
| Max Donley | | 40% | | 153,328 | | | 150% | | 239,575 | |
Stephen Robertson (4) | | 40% | | $ | 28,832 | | | 150% | | $ | 118,933 | |
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(1)Joe Miller's cash incentive paid was pro-rated based on tenure with the Company, which was increased from 68% to 90% of total target based on a resolution by the Compensation Committee in December 2020.
(2)Dennis Bourgeault's cash incentive was translated to USD from CAD using the year end exchange rate from Bank of Canada. He did not receive any payout in 2020 due to retirement in April 27, 2020.
(3)Max Colao's cash incentive paid was pro-rated based on tenure with the Company, which was increased to 100% of total based on a resolution by the Compensation Committee in December 2020.
(4)Stephen Robertson's cash incentive paid was pro-rated based on tenure with the Company, which was increased from 18% to 50% of total target based on a resolution by the Compensation Committee in December 2020.
Long-term Incentive Grants
In 2020, the Compensation Committee approved the following grants of options to purchase our common shares and PAs to our NEOs.
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| Executive | | Share Option Grant (# shares)(1)(6) | | Performance Awards (# shares) (7) |
| Peter Greenleaf | | 1,229,800 | | 141,500 |
Joe Miller(2) | | 453,050 | | 42,500 |
| Dennis Bourgeault | | 69,700 | | — |
Max Colao(3) | | 672,637 | | 42,500 |
Max Donley(4) | | 363,452 | | 42,500 |
Stephen Robertson(5) | | 443,408 | | 42,500 |
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(1)All options granted in 2020 (with the exception of Max Donley's January 28, 2020 grant, which are described in footnote 4 below) vest with respect to 33.33% of the shares underlying the options on the one-year anniversary of the vesting commencement date, with the balance vesting in equal monthly installments thereafter over the next two years.
(2)Joe Miller's 2020 grants included a one-time new hire grant of 132,440 on April 28, 2020 and a supplemental new hire grant of 50,000 on May 21, 2020.
(3)Max Colao's 2020 grants included a one-time new hire grant of 336,057 on March 10, 2020.
(4)The options granted to Max Donley with respect to the January 28, 2020 grant vest in equal monthly installments over the next three years.
(5)Stephen Robertson's 2020 grants included a one-time new hire grant of 298,924 on November 16, 2020.
(6)The option grants in early 2020 for Peter Greenleaf (412,776 on February 5, 2020) and Max Donley (126,500 on January 28, 2020) were awarded for 2019 performance. The option grants in late 2020 for all NEOs were awarded for 2020 performance. There have been no additional grants for 2020 performance awarded in 2021.
(7)The performance conditions for the PAs granted to the officers of the company did not have performance metrics pertaining to the 2020 financial year. Performance conditions for the PAs relate to revenue, covered commercial lives, new patients, and revenue generating patient figures for 2021.
The annual equity grants to our named executive officers are evaluated and approved by the Compensation Committee in the context of each named executive officer’s total compensation and take into account the market data provided by compensation consultants in addition to the individual officer’s responsibilities and performance. The Compensation Committee also takes into account the recommendations of the Chief Executive Officer with respect to appropriate grants and any particular individual circumstances.
Other Features of Our Executive Compensation Program
Agreements with Our Named Executive Officers
We have entered into written employment agreements with each of our NEOs. Each of these employment agreements sets forth the initial compensation arrangements for the NEO, including an initial base salary, an annual cash opportunity, and an equity award recommendation. These agreements and the proprietary information and invention assignment agreements each NEO executes upon commencing employment at the Company also set forth the rights and responsibilities of each party and include, among other rights and responsibilities, the prohibition on the executive officer from engaging directly or indirectly in competition with us, soliciting any of our employees, or disclosing our confidential information.
Below are descriptions of our employment agreements with our NEOs including a discussion of the severance payments and other benefits to be provided in connection with an involuntary termination of employment, and a change in control of the Company under the arrangements with our NEOs.
Peter Greenleaf, President and CEO
On April 11, 2019, Peter Greenleaf entered into an employment agreement with the Company for the position of President and CEO commencing on April 29, 2019. The agreement provides that he devote his sole skill and efforts to discharging his duties to the Company on a full-time and exclusive basis and that he will serve as a member of the Board. In addition to his base salary of $650,000, he received a signing bonus of $250,000 conditional upon his remaining employed by the Company for a period of 12 months from April 29, 2019. He is eligible to receive a performance bonus with a target payment of 70% of his base salary if the Board, on the recommendation of the Compensation Committee, in its sole discretion, determines that the Company’s performance had met certain short-term and long-term business performance objectives established from time to time by the Board, on the recommendation of the Compensation Committee, subject to any rules the Company may develop regarding the bonus scheme. In addition, he is entitled to participate in the Company’s benefit program and to vacation of 30 business days per year. The base salary is reviewed annually by the Board, on the recommendation of the Compensation Committee.
Peter Greenleaf’s base salary was approved by the Board based on the recommendation of the Compensation Committee at the time. In determining recommendations for his total compensation as the new CEO, the Compensation Committee considered his experience and expertise, the needs of the Company, the compensation of the previous CEO, and CEO compensation with pharmaceutical companies of a similar size and nature.
Pursuant to Peter Greenleaf’s employment agreement, as modified by resolution of the Board, termination and change of control benefits are as follows:
1.In the event that Peter Greenleaf’s employment is terminated by the Company without cause, he is entitled to receive continuing payments of severance pay for a period of 18 months equal to his then current base salary, plus such other sums, if granted, pursuant to the performance bonus section of the employment agreement. In addition, to the extent permitted by law and subject to the terms and conditions of any benefit plans in effect from time to time, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement for the duration of the severance period. Any options forming part of the initial option grant that are unvested as of the termination date, but would have vested during the severance period, would immediately vest upon termination.
2.In the event that Peter Greenleaf’s employment is terminated by the Company without cause or by the executive for "good reason" within 12 months following a change in control of the Company, he is entitled to receive a lump sum payment equal to 24 months of his then current base salary, and if awarded and payable, the target bonus for the year
of termination. In addition, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement during the 12-month period following the termination date. All of his unexercised stock options will immediately vest upon the termination of his employment and shall be fully exercisable in accordance with the terms and conditions under which the stock options were granted, subject to the prior expiry of his stock options in accordance with their terms.
Matthew ("Max") Donley, Executive Vice President, Operations and Strategy
On July 15, 2019, Max Donley entered into an employment agreement with the Company for the position of Executive Vice President, Internal Operations and Strategy. The agreement provides that he will devote his sole skill and efforts to discharging his duties to the Company on a full-time and exclusive basis. In addition to his base salary, which is reviewed annually by the Compensation Committee in conjunction with the CEO, He is eligible to receive a cash bonus with a target payment of 50% of his base salary if the Board, on recommendation of the Compensation Committee in their sole discretion, determines that the Company’s performance has met certain short-term and long-term business performance objectives established from time to time by the Board and CEO, subject to any rules the Company may develop regarding the bonus scheme. In addition, He is entitled to participate in the Company’s benefits program and to paid vacation of 20 business days per year. He agreed to non-competition, non-solicitation, non-disclosure and assignment of intellectual property provisions in favor of the Company.
Pursuant to Max Donley's employment agreement, as modified by resolution of the Compensation Committee, termination and change of control benefits are as follows:
1.In the event that Max Donley’s employment is terminated by the Company without cause, he is entitled to receive continuing payments of severance pay for a period of 12 months, equal to his then current base salary, plus such other sums, if granted, pursuant to the performance bonus section of the employment agreement. In addition, to the extent permitted by law and subject to the terms and conditions of any benefit plans in effect from time to time, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement for the duration of the severance period. Any options forming part of the initial option grant that are unvested as of the termination date, but would have vested during the severance period, would immediately vest upon termination.
2.In the event that Max Donley’s employment is terminated by the Company without cause or by the executive for "good reason" within 12 months following a change in control of the Company, he is entitled to receive a lump sum payment equal to 18 months of his then current base salary, and if awarded and payable, the target bonus for the year of termination. In addition, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement during the 12-month period following the termination date. All stock options outstanding at the time of termination, which stock options have not yet vested, will immediately vest upon the termination of his employment and shall be fully exercisable in accordance with the terms and conditions under which the stock options were granted, subject to the prior expiry of his stock options in accordance with their terms.
Max Colao, Chief Commercial Officer
On February 10, 2020, Max Colao entered into an employment agreement with the Company for the position of Chief Commercial Officer. The agreement provides that he will devote his sole skill and efforts to discharging his duties to the Company on a full-time and exclusive basis. In addition to his base salary, which is reviewed annually by the Compensation Committee in conjunction with the CEO, he is eligible to receive a cash bonus with a target payment of 50% of his base salary if the Company, if the Board, on recommendation of the Compensation Committee, in their sole discretion, determines that the Company’s performance has met certain short-term and long-term business performance objectives established from time to time by the Board and the CEO, subject to any rules the Company may develop regarding the bonus scheme. In addition, he is entitled to participate in the Company’s benefits program and to paid vacation of 20 business days per year. He agreed to non-competition, non-solicitation, non-disclosure and assignment of intellectual property provisions in favor of the Company.
Pursuant to Max Colao's employment agreement, as modified by resolution of the Compensation Committee, termination and change of control benefits are as follows:
1.In the event that Max Colao’s employment is terminated by the Company without cause, he is entitled to receive continuing payments of severance pay for a period of 12 months, equal to his then current base salary, plus such other sums, if granted, pursuant to the performance bonus section of the employment agreement. In addition, to the extent permitted by law and subject to the terms and conditions of any benefit plans in effect from time to time, the Company
is to maintain health and medical benefits pursuant to the benefits section of the employment agreement for the duration of the severance period.
2.In the event that Max Colao’s employment is terminated by the Company with a change of control, within 12 months following a change in control of the Company, he is entitled to receive a lump sum payment equal to 18 months of his then current base salary, and if awarded and payable, the target bonus for the year of termination. In addition, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement during the 12-month period following the termination date. All stock options outstanding or other equity-based awards at the time of termination, which stock options have not yet vested, will immediately vest upon the termination of his employment and shall be fully exercisable in accordance with the terms and conditions under which the stock options were granted, subject to the prior expiry of his stock options in accordance with their terms.
Joe Miller, Chief Financial Officer
On April 8, 2020, Joe Miller entered into an employment agreement with the Company for the position of Chief Financial Officer. The agreement provides that he will devote his sole skill and efforts to discharging his duties to the Company on a full-time and exclusive basis. In addition to his base salary, which is reviewed annually by the Compensation Committee in conjunction with the CEO, he is eligible to receive a cash bonus with a target payment of 50% of his base salary if the Board, on recommendation of the Compensation Committee, in their sole discretion, determines that the Company’s performance has met certain short-term and long-term business performance objectives established from time to time by the Board, subject to any rules the Company may develop regarding the bonus scheme. In addition, he is entitled to participate in the Company’s benefits program and to paid vacation of 20 business days per year. He agreed to non-competition, non-solicitation, non-disclosure and assignment of intellectual property provisions in favor of the Company.
Pursuant to Joe Miller's employment agreement, as modified by resolution of the Compensation Committee, termination and change of control benefits are as follows:
1.In the event that Joe Miller’s employment is terminated by the Company without cause, he is entitled to receive continuing payments of severance pay for a period of 12 months, equal to his then current base salary, plus such other sums, if granted, pursuant to the performance bonus section of the employment agreement. In addition, to the extent permitted by law and subject to the terms and conditions of any benefit plans in effect from time to time, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement for the duration of the severance period. Any options forming part of the initial option grant that are unvested as of the termination date, but would have vested during the severance period, would immediately vest upon termination.
2.In the event that Joe Miller’s employment is terminated by the Company without cause or resignation for good reason in connection with a change of control within 12 months following a change in control of the Company, he is entitled to receive a lump sum payment equal to 18 months of his then current base salary, and if awarded and payable, the target bonus for the year of termination. In addition, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement during the 12-month period following the termination date. All stock options and equity-based awards granted and outstanding at the time of termination, which have not yet vested, will immediately vest upon the termination of his employment and shall be fully exercisable in accordance with the terms and conditions under which the stock options were granted, subject to the prior expiry of his stock options in accordance with their terms.
Stephen Robertson, Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer
On September 29, 2020, Stephen Robertson entered into an employment agreement with the Company for the position of Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer. The agreement provides that he will devote his sole skill and efforts to discharging his duties to the Company on a full-time and exclusive basis. In addition to his base salary, which is reviewed annually by the Compensation Committee in conjunction with the CEO, he is eligible to receive a cash bonus with a target payment of 50% of his base salary if the Board, on recommendation of the Compensation Committee, in their sole discretion, determines that the Company’s performance has met certain short-term and long-term business performance objectives established from time to time by the Board, subject to any rules the Company may develop regarding the bonus scheme. In addition, he is entitled to participate in the Company’s benefits program and to paid vacation of 20 business days per year. He agreed to non-competition, non-solicitation, non-disclosure and assignment of intellectual property provisions in favor of the Company.
Pursuant to Stephen Robertson's employment agreement, termination and change of control benefits are as follows:
1.In the event that Stephen Robertson’s employment is terminated by the Company without cause, he is entitled to receive continuing payments of severance pay for a period of 12 months, plus one additional month for each full year of employment, up to a maximum of 18 months in the aggregate, equal to his then current base salary, plus such other sums, if granted, pursuant to the performance bonus section of the employment agreement. In addition, to the extent permitted by law and subject to the terms and conditions of any benefit plans in effect from time to time, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement for the duration of the severance period.
2.In the event that Stephen Robertson's employment is terminated by the Company upon Change of Control or by the executive for "good reason" within 12 months following a change in control of the Company, he is entitled to receive a continuance payment equal to 18 months of his then current base salary, and if awarded and payable, the target bonus for the year of termination. In addition, the Company is to maintain health and medical benefits pursuant to the benefits section of the employment agreement during the 12-month period following the termination date. All stock options outstanding and awards granted at the time of termination, which have not yet vested, will immediately vest upon the termination of his employment and shall be fully exercisable in accordance with the terms and conditions under which the stock options were granted, subject to the prior expiry of his stock options in accordance with their terms.
Dennis Bourgeault, Former Chief Financial Officer
Dennis Bourgeault, our former Chief Financial Officer, was subject to an employment agreement with the Company dated October 1, 2018. Pursuant to the terms of his employment agreement, upon his retirement April 27, 2020, Dennis was paid the pro-rated portion of his base salary, plus such other sums accrued and owed in respect of salary or vacation. No severance payments were made. On April 28, 2020, we entered into a one year consulting agreement with Dennis, which automatically terminates on April 27, 2021. The term may be extended for further periods upon the written agreement of both parties. Per the terms of the agreement, Dennis will be paid a service fee of CAD $190 per hour for services provided, reimbursement for reasonable and necessary out-of-pocket expenses and any stock options to which he was entitled to as at April 27, 2020 will continue to be valid and will continue to vest pursuant to the terms and conditions of the applicable stock option agreements and the Equity Compensation Plan.
Other Benefits
Our named executive officers are eligible to participateheaded “Executive Compensation” in our employee benefit plans, including our medical, dental, vision, group life, disabilityProxy Statement and accidental death and dismemberment insurance plans, in each case on the same basis as all of our other employees. We provided a 401(k) plan to all of our U.S. employees and a Registered Retirement Savings Plan ("RRSP") matching program to all of our Canadian employees, including our named executive officers. We do not generally provide perquisites or personal benefits to our named executive officers. We do, however, pay the premiums for term life insurance and disability insurance for all of our employees, including our named executive officers.
Tax and Accounting Implications
Under Financial Accounting Standard Board ASC Topic 718 ("ASC 718"), we are required to estimate and record an expense for each award of equity compensation over the vesting period of the award. We record share-based compensation expense on an ongoing basis according to ASC 718.
Section 162(m) of the Code has historically limited public companies to a deduction for federal income tax purposes of not more than $1 million of compensation paid to certain executive officers in a calendar year, subject to certain limited exceptions. Due to the effects of tax reform, only certain historical arrangements may be exempted from the limitation. The Company will continue to review related guidance from the Internal Revenue Service as it becomes available, including the final regulations released by the Internal Revenue Service in late 2020. In determining the form and amount of compensation for our named executive officers, our Compensation Committee may continue to consider various aspects of the cost of such compensation. While the Compensation Committee considers the deductibility of awards as one factor in determining executive compensation, the Compensation Committee may also look at other factors in making its decisions and retains the flexibility to award compensation that it determines to be consistent with the goals of our executive compensation program even if the compensation is not deductible by us for tax purposes.
Clawbacks
As a public company, if we are required to restate our financial results due to our material noncompliance with any financial reporting requirements under the federal securities laws as a result of misconduct, the Chief Executive Officer and Chief Financial Officer may be legally required to reimburse our Company for any bonus or other incentive-based or equity-based compensation they receive in accordance with the provisions of section 304 of the Sarbanes-Oxley Act of 2002.
Compensation Committee Interlocks and Insider Participation
None of our directors who serve as a member of our Compensation Committee is, or has at any time during the past year been, one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving on our Board or Compensation Committee.
Risk Analysis of Our Compensation Policies and Practices
The Compensation Committee has reviewed the Company’s compensation policies and practices, in consultation with WTW, to assess whether they encourage employees to take inappropriate risks. After reviewing and assessing the Company’s compensation philosophy, terms and practices, including the mix of fixed and variable, short and long-term incentives and overall pay, incentive plan structures, and the checks and balances built into, and oversight of, each plan and practice, the Compensation Committee determined that any risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on our Company as a whole. The Compensation Committee believes that the mix and design of the elements of executive compensation do not encourage management to assume excessive risks; the mix of short-term compensation (in the form of salary and annual bonus, if any, which is based on a variety of performance factors), and long-term compensation (in the form of options to purchase our common shares and performance awards) prevents undue focus on short-term results and helps align the interests of the Company’s executive officers with the interests of our shareholders.
2020 Summary Compensation Table
The following table sets forth all of the compensation awarded to, earned by or paid to our NEOs during the fiscal years ended December 31, 2020, December 31, 2019, and December 31, 2018.
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| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) (1) | | Stock Awards ($) (2) | | Option Awards ($) (3) | | Non-Equity Incentive Plan Compensation ($) (4) | | All Other Compensation ($) (5) | | Total ($)(12) |
| Peter Greenleaf | | 2020 | | 673,400 | | — | | 1,534,992 | | 7,753,906 | | 707,070 | | 9,500 | | 10,678,868 |
Chief Executive Officer (6) | | 2019 | | 438,258 | | 250,000 | | — | | 4,176,172 | | 368,137 | | 4,063 | | 5,236,630 |
| | 2018 | | — | | — | | — | | — | | — | | — | | — |
| Joe Miller | | 2020 | | 279,545 | | 162,898 | | 461,040 | | 2,639,722 | | 167,727 | | 4,100 | | 3,715,032 |
Chief Financial Officer (7) | | 2019 | | — | | — | | — | | — | | — | | — | | — |
| | 2018 | | — | | — | | — | | — | | — | | — | | — |
| Dennis Bourgeault | | 2020 | | 88,426 | | — | | — | | 399,825 | | 121,992 | | 93,472 | | 703,715 |
Former Chief Financial Officer (8) | | 2019 | | 270,145 | | — | | — | | 180,784 | | 126,205 | | 3,713 | | 580,847 |
| 2018 | | 242,969 | | — | | — | | 351,432 | | 86,220 | | — | | 680,621 |
| Max Colao | | 2020 | | 354,167 | | 153,125 | | 461,040 | | 3,664,488 | | 212,500 | | — | | 4,845,320 |
Chief Commercial Officer (9) | | 2019 | | — | | — | | — | | — | | — | | — | | — |
| | 2018 | | — | | — | | — | | — | | — | | — | | — |
| Max Donley | | 2020 | | 383,320 | | | | 461,040 | | 2,249,253 | | 239,575 | | 4,615 | | 3,337,803 |
EVP, Operations and Strategy (10) | | 2019 | | 168,299 | | | | — | | 598,154 | | 177,600 | | 1,850 | | 945,903 |
| 2018 | | — | | — | | — | | — | | — | | — | | — |
| Stephen Robertson | | 2020 | | 72,081 | | 75,684 | | 461,040 | | 2,907,909 | | 43,249 | | 2,416 | | 3,562,379 |
EVP, General Counsel, Corporate Secretary and Chief Compliance Officer (11) | | 2019 | | — | | — | | — | | — | | — | | — | | — |
| 2018 | | — | | — | | — | | — | | — | | — | | — |
(1)The amounts reportedincorporated in this column represent sign on bonuses for Peter Greenleaf, Joe Miller and Max Colao; and the increase in pro-ration approved by the Compensation Committee for the annual non-equity incentive plan compensation for Joe Miller, Max Colao and Stephen Robertson.
(2)The performance conditions for the PAs granted to the officers of the Company did not have performance metrics pertaining to the 2020 financial year. Amounts reported are based on the grant price of $13.56, set on the grant date March 18, 2021, in accordance with ASC 718, the date on which the performance metrics were set and formally communicated multiplied by the number of awards reported in the table and probable outcomes for each of the performance metrics as of the grant date. Assuming the highest level of performance conditions are achieved, Peter's awards would have a value of $1,918,740 and all other NEOs' awards would have a value of $576,300.
(3)Represents the aggregate grant-date fair value of the stock options awarded to the Named Executive Officer for the applicable year, calculated in accordance with ASC Topic 718, and does not take into account estimated forfeitures related to service-based conditions. The assumptions used in the calculation of these amounts are included in our 2020 Annual Report on Form 10-K. The options granted based on a CAD fair value were converted to USD using the foreign exchange rate on the grant date from Bank of Canada (for more details see the 2020 grants of plan-based awards table below).by reference.
(4)The amounts reported in this column represent annual performance-based bonuses earned for 2018, 2019 and 2020. For more information, see “—Annual Performance Bonus”.
(5)The amounts reported in this column represent the following: for Peter Greenleaf and Joe Miller, employer contributions to 401K; for Dennis Bourgeault, for 2020, $3,565 related to employer contributions to RRSP, $319 life benefit and $89,588 payout of accrued vacation, for 2019, $2,071 related to employer contributions to RRSP and $1,642 related to life benefit; for Max Donley, employer contributions to 401K and for Stephen Robertson, employer contributions to RRSP and medical services plan.
(6)Peter Greenleaf has served as our Chief Executive Officer since April 29, 2019.
(7)Joe Miller was appointed as our Chief Financial Officer on April 27, 2020.
(8)Dennis Bourgeault retired as our Chief Financial Officer on April 27, 2020. Dennis Bourgeault's salary, bonus and other non-equity compensation was translated to USD using an average quarterly exchange rate from Bank of Canada. (See note 3 for equity translation information).
(9)Max Colao was appointed as our Chief Commercial Officer on February 25, 2020.
(10)Max Donley has served as our Executive Vice President Operations and Strategy since July 18, 2019.
(11)Stephen Robertson was appointed as our Executive Vice President, General Counsel, Corporate Secretary and Chief Commercial Officer on November 2, 2020. Stephen Robertson's salary, bonus and other non-equity compensation were translated to USD using an average quarterly exchange rate from Bank of Canada. (See note 3 for equity translation information).
(12)The aggregate (cash and non-cash) remuneration paid to the five highest earning officers and employees of the Company, other than directors, in 2020 was $27,068,295.
2020 Grants of Plan-Based Awards Table
The following table sets forth information relating to the grant of plan-based incentive awards to our NEOs in 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Future Payouts Under Non-Equity Incentive Plan Awards (2) | Estimated Future Payouts Under Non-Equity Incentive Plan Awards (3) | Number of Securities Underlying Options (#) | Exercise Price of Option Awards ($/Sh)(5) | Grant Date Fair Value of Stock And Option Awards($)(4)(6) |
| Name | Grant Date(1) | Threshold
($) | Target
($) | Maximum
($) | Threshold
($) | Target
($) | Maximum
($) |
| Peter Greenleaf | | | | | | | | | | |
| Stock option award | 2/5/2020 | — | — | — | — | — | — | 412,776 | 19.41 | 2,500,442 |
| Stock option award | 12/21/2020 | — | — | — | — | — | — | 817,024 | 13.03 | 5,253,464 |
| Performance share award | 10/20/2020 | — | — | — | 70,750 | 106,125 | 141,500 | — | — | 1,534,992 |
| Annual Bonus | — | — | 471,380 | 942,760 | — | — | — | — | — | — |
| Joe Miller | | | | | | | | | | |
| Stock option award | 4/28/2020 | — | — | — | — | — | — | 132,440 | 16.38 | 649,968 |
| Stock option award | 5/21/2020 | — | — | — | — | — | — | 50,000 | 17.07 | 249,732 |
| Stock option award | 12/21/2020 | — | — | — | — | — | — | 270,610 | 13.03 | 1,740,022 |
| Performance share award | 10/20/2020 | — | — | — | 21,250 | 31,875 | 42,500 | — | — | 461,040 |
| Annual Bonus | — | — | 205,000 | 410,000 | — | — | — | — | — | — |
| Dennis Bourgeault | | | | | | | | | | |
| Stock option award | 1/28/2020 | — | — | — | — | — | — | 69,700 | 18.38 | 399,825 |
| Max Colao | | | | | | | | | | |
| Stock option award | 3/10/2020 | — | — | — | — | — | — | 336,057 | 15.38 | 1,500,278 |
| Stock option award | 12/21/2020 | — | — | — | — | — | — | 336,580 | 13.03 | 2,164,209 |
| Performance share award | 10/20/2020 | — | — | — | 21,250 | 31,875 | 42,500 | — | — | 461,040 |
| Annual Bonus | | — | 212,500 | 425,000 | — | — | — | — | — | — |
| Max Donley | | | | | | | | | | |
| Stock option award | 1/28/2020 | — | — | — | — | — | — | 126,500 | 18.38 | 725,652 |
| Stock option award | 12/21/2020 | — | — | — | — | — | — | 236,952 | 13.03 | 1,523,601 |
| Performance share award | 10/20/2020 | — | — | — | 21,250 | 31,875 | 42,500 | — | — | 461,040 |
| Annual Bonus | — | — | 191,660 | 383,320 | — | — | — | — | — | — |
| Stephen Robertson | | | | | | | | | | |
| Stock option award | 11/16/2020 | — | — | — | — | — | — | 298,924 | 13.40 | 1,978,877 |
| Stock option award | 12/21/2020 | — | — | — | — | — | — | 144,484 | 13.03 | 929,032 |
| Performance share award | 10/20/2020 | — | — | — | 21,250 | 31,875 | 42,500 | — | — | 461,040 |
| Annual Bonus | — | — | 212,500 | 425,000 | — | — | — | — | — | — |
(1)All options to purchase common shares and PAs were granted under the Equity Incentive Plan.
(2)These amounts represent target performance-based bonus payments for each named executive officer for 2020. There were no threshold amounts and maximum bonus amounts were set at 200%.
(3)Amounts in this column represent grants of PAs. The PA vest date is December 31, 2021 subject to the achievement of performance conditions.
(4)Amounts reported are based on the grant price of $13.56, set on the grant date March 18, 2021, per ASC 718, the date on which the performance metrics were set and formally communicated multiplied by the number of awards reported in the table and probable outcomes for each of the performance metrics as of the grant date.
(5)All options issued through May 2020 were issued with a CAD exercise price and were translated to USD using the Bank of Canada foreign exchange rate on the date of grant. All options issued in May 2020 and thereafter were issued in USD.
(6)All options issued through May 2020 were issued with a CAD fair value and were translated to USD using the Bank of Canada foreign exchange rate on the date of grant. All options issued in May 2020 and thereafter were issued in USD.
2020 Outstanding Equity Awards At Fiscal Year End Table
The following table shows for the fiscal year ended December 31, 2020, certain information regarding outstanding equity awards at fiscal year-end for our named executive officers. The options to purchase our common shares were granted with a per share exercise price equal to the fair market value of one common share on the date of grant, as determined in good faith by the Compensation Committee (for NEOs other than the CEO) and the Board, on recommendation of the Compensation Committee (for our CEO and without the CEO being present for deliberations and approval). All of the equity awards were granted under our Equity Incentive Plan.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Awards(1) | | Stock Awards |
| Name | | Grant Date | | Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable | | Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable | | Option
Exercise
Price ($) | | Option
Expiration
Date | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(3) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(4) |
| Peter Greenleaf | | 4/29/2019(2) | | 666,667 | | 933,333 | | 6.28 | | 4/29/2029 | | — | | — |
| | 2/5/2020 | | — | | 412,776 | | 19.41 | | 2/5/2030 | | — | | — |
| | 10/20/2020 | | — | | — | | — | | — | | 141,500 | | 1,534,992 |
| | 12/21/2020 | | — | | 817,024 | | 13.03 | | 12/21/2030 | | — | | — |
| Joe Miller | | 4/28/2020 | | — | | 132,440 | | 16.38 | | 4/28/2030 | | — | | — |
| | 5/21/2020 | | — | | 50,000 | | 17.07 | | 5/21/2030 | | — | | — |
| | 10/20/2020 | | — | | — | | — | | — | | 42,500 | | 461,040 |
| | 12/21/2020 | | — | | 270,610 | | 13.03 | | 12/21/2030 | | — | | — |
| Dennis Bourgeault | | 2/1/2018 | | 66,667 | | 8,333 | | 5.31 | | 2/1/2028 | | — | | — |
| | 1/29/2019 | | 67,083 | | 2,917 | | 6.06 | | 1/29/2029 | | — | | — |
| | 1/28/2020 | | 21,297 | | 48,403 | | 18.38 | | 1/28/2030 | | — | | — |
| Max Colao | | 5/10/2020 | | — | | 336,057 | | 15.38 | | 5/10/2030 | | — | | — |
| | 10/20/2020 | | — | | — | | — | | — | | 42,500 | | 461,040 |
| | 12/21/2020 | | — | | 336,580 | | 13.03 | | 12/21/2030 | | — | | — |
| Max Donley | | 8/19/2019 | | 111,111 | | 138,889 | | 5.90 | | 8/19/2029 | | — | | — |
| | 1/28/2020 | | 38,653 | | 87,847 | | 18.38 | | 1/28/2030 | | — | | — |
| | 10/20/2020 | | — | | — | | — | | — | | 42,500 | | 461,040 |
| | 12/21/2020 | | — | | 236,952 | | 13.03 | | 12/21/2030 | | — | | — |
| Stephen Robertson | | 10/20/2020 | | — | | — | | — | | — | | 42,500 | | 461,040 |
| | 11/16/2020 | | — | | 298,924(5) | | 13.40 | | 11/16/2030 | | — | | — |
| | 12/21/2020 | | | | 144,484 | | 13.03 | | 12/21/2030 | | — | | — |
(1)All options above except as noted in (2) below vest as follows: 33.333% of the shares subject to the options vest on the 12-month anniversary of the vesting commencement date, and the remaining shares subject to the options vest in equal monthly installments over the next two years. All options with a grant date before May 2020 were translated from CAD to USD using the Bank of Canada exchange rate on the date of grant.
(2)25% of the shares subject to the options vest on the 12-month anniversary of the vesting commencement date, and the remaining shares subject to the options vest in equal monthly installments over the next three years.
(3)PAs held at fiscal-year end vest on December 31, 2021 to a degree dependent on the achievement of the performance metrics for such PAs.
(4)Amounts reported are based on the grant price of $13.56 set on the grant date March 18, 2021, per ASC 718 the date on which the award metrics were set and formally communicated, multiplied by the number of unvested awards reported in the table and probable outcomes for achieving the metrics.
(5)This award was granted outside of the Company's Equity Incentive Plan as an inducement material to the new employee entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). For the purposes of TSX approval, the Company relied on the exemption set forth in Section 602.1 of the TSX Company Manual, which provides that the TSX will not apply its standards to certain transactions involving eligible inter-listed issuers on a recognized exchange, such as Nasdaq.
2020 Option Exercises and Share Vested Table
The following table provides information on options to purchase our common shares that were exercised, including the number of common shares acquired upon exercise and the value realized, determined as described below, for our NEOs in the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| Name | | Number of Shares Acquired on Exercise | | Value Realized on Exercise ($) (1) | | Number of Shares Acquired on Vesting (#) | | Value Realized on Vesting ($) |
| Peter Greenleaf | | — | | — | | — | | — |
| Joe Miller | | — | | — | | — | | — |
Dennis Bourgeault(2) | | 383,337 | | 5,809,758 | | — | | — |
| Max Colao | | — | | — | | — | | — |
| Max Donley | | — | | — | | — | | — |
| Stephen Robertson | | — | | — | | — | | — |
(1)The value realized on exercise is based on the difference between the closing market price of our common shares on the date of exercise and the exercise price of the applicable options and does not represent actual amounts received by the named executive officers as a result of the option exercises.
(2)The value realized was translated from CAD to USD using the December 31, 2020 exchange rate from the Bank of Canada.
Potential Payments Upon Termination or Change-in-Control
We maintain certain agreements, plans, and programs that require us to provide compensation to our NEOs in the event of a termination of employment or a change in control. For more information, see “Other Features of Our Executive Compensation Program—Agreements with Our Named Executive Officers” .
The following table discloses the potential payments upon termination of employment or change in control with respect to each NEO, other than Mr. Bourgeault (since his employment ended prior to the end of 2020), pursuant to their respective employment agreements with the Company.
| | | | | | | | | | | | | | | | | | | | |
| Name | | Benefit | | Termination Not in Connection with a Change in Control ($) | | Termination in Connection with a Change in Control ($) |
| Peter Greenleaf | | Cash Severance Payment | | $1,010,100 | | $1,346,800 |
| | Lump Sum Target Bonus Payment(2) | | | | 471,380 |
| | Health Insurance Premiums | | 20,559 | | 20,559 |
| | Vesting Acceleration(1)(4) | | 5,033,336 | | 14,690,564 |
| | Benefit Total | | 6,063,995 | | 16,529,303 |
| Joe Miller | | Cash Severance Payment | | 410,000 | | 615,000 |
| | Lump Sum Target Bonus Payment(2) | | | | 205,000 |
| | Health Insurance Premiums | | 32,580 | | 32,580 |
| | Vesting Acceleration(1)(4) | | — | | 857,039 |
| | Benefit Total | | 442,580 | | 1,709,619 |
| Max Colao | | Cash Severance Payment | | 425,000 | | 637,500 |
| | Lump Sum Target Bonus Payment(2) | | | | 212,500 |
| | Health Insurance Premiums | | 32,580 | | 32,580 |
| | Vesting Acceleration(1)(4) | | — | | 857,039 |
| | Benefit Total | | 457,580 | | 1,739,619 |
| Max Donley | | Cash Severance Payment | | 383,320 | | 574,980 |
| | Lump Sum Target Bonus Payment(2) | | | | 191,660 |
| | Health Insurance Premiums | | 32,580 | | 32,580 |
| | Vesting Acceleration(1)(4) | | 881,110 | | 2,759,837 |
| | Benefit Total | | 1,297,010 | | 3,559,057 |
| Stephen Robertson | | Cash Severance Payment | | 425,000 | | 637,500 |
| | Lump Sum Target Bonus Payment(2) | | | | 212,500 |
| | Health Insurance Premiums | | 3,532 | | 3,532 |
| | Vesting Acceleration(1)(4) | | — | | 831,900 |
| | Benefit Total | | $428,532 | | $1,685,432 |
(1)The value of stock option vesting acceleration is based on the closing price of $13.83 per common share on December 31, 2020, minus the exercise price of the unvested stock options subject to acceleration.
(2)The assumption used for lump sum target bonus payment is full year payment at 100% of target.
(3)The assumption used for the health insurance premiums is 12 months of coverage.
(4)The assumption used for vesting acceleration not in connection with a change in control is a change in control as of December 31, 2020. Therefore, only options vested through December 31, 2020 are included in the calculation.
Pay Ratio Disclosure
Under the SEC rules adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are required to disclose the ratio of the annual total compensation of our CEO, Peter Greenleaf, to the median of the annual total compensation of all of our employees other than Peter Greenleaf (the "CEO Pay Ratio").
For fiscal year 2020, the median of the annual total compensation of all employees of the Company (other than the CEO) was $220,000 and the annual total compensation of the CEO, as reported in the Summary Compensation Table included in this report, was $9,143,876. Based on this information, the ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 41 to 1.
To identify our median employee, we used the following methodology:
•To determine our total population of employees, we included all employees other than our CEO as of December 31, 2020 (whether employed on a full-time, part-time, seasonal, or temporary basis).
•To identify our median employee from our employee population, we chose as our consistently applied compensation measure the aggregate amount of each employee’s annual base salary and cash bonuses earned during fiscal 2020 and the grant date fair value of equity awards granted in fiscal 2020 determined in accordance with FASB ASC Topic 718.
•In making this determination, we annualized the compensation of employees who were employed by us for less than the entire fiscal year as we hired over 200 employees throughout the fiscal year but we did not make any cost-of-living adjustments.
•We did not exclude any non-U.S. employees under the de minimis or other exceptions set forth in Item 402(u) of Regulation S-K.
•Compensation paid in foreign currencies was converted to U.S. dollars based on the average exchange rate for the year ended December 31, 2020 and equity grants were converted based on exchange rate on date of grant from Bank of Canada.
Once the median employee was identified, we calculated the median employee’s total annual compensation in accordance with the requirements of the Summary Compensation Table.
This pay ratio is a reasonable estimate calculated in a manner consistent with the SEC's rules and regulations, based on our records and the methodology described above. The SEC’s rules and regulations for identifying the median employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies and to use reasonable estimates and assumptions based on their own facts and circumstances.
DIRECTOR COMPENSATION
Non-Employee Director Compensation
The following table sets forth in summary form information concerning the compensation of our non-employee directors for the year ended December 31, 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Earned Fees ($) (1) | | Stock Awards ($) | | Option Awards ($) (2) | | Non-Equity Incentive Plan Compensation ($) | | Pension Value ($) | | All Other Compensation ($) (3) | | Total ($) (5) |
| Dr. George M. Milne, Jr. | | 82,500 | | — | | 138,300 | | — | | — | | — | | 220,800 |
| Dr. Daniel Billen | | 47,500 | | — | | 138,300 | | — | | — | | 44,343 | | 230,143 |
| Joseph Hagan | | 63,125 | | — | | 138,300 | | — | | — | | — | | 201,425 |
| Dr. Michael Hayden | | 62,500 | | — | | 138,300 | | — | | — | | — | | 200,800 |
| Dr. David Jayne | | 52,500 | | — | | 138,300 | | — | | — | | — | | 190,800 |
| Jill Leversage | | 54,375 | | — | | 138,300 | | — | | — | | — | | 192,675 |
| R. Hector MacKay-Dunn | | 55,000 | | — | | 138,300 | | — | | — | | — | | 193,300 |
Timothy P. Walbert (4) | | 36,750 | | — | | 364,129 | | — | | — | | — | | 400,879 |
(1)Earned Fees includes the annual Board of Directors retainer and any applicable additional retainers for service as a member or Chair of a committee during 2020.
(2)The Company granted 30,000 stock options on June 2, 2020 with a fair value of $4.61 to each of the then non-management directors. The amounts reported represents the aggregate grant-date fair value of the stock options awarded to the non-employee directors for the applicable year, calculated in accordance with ASC Topic 718 and does not take into account estimated forfeitures related to service-based conditions. The assumptions used in the calculation of these amounts are included and described under the caption "Share-based compensation" in Note 2 to our consolidated financial statements included in our 2020 Annual Report on Form 10-K. The options granted based on a CAD fair value were converted to USD using the foreign exchange rate on the grant date from the Bank of Canada.
(3)Represents fees for consulting services provided to the Company during 2020.
(4)On April 14, 2020, the Company granted Timothy P. Walbert 50,000 stock options at a price of CAD$6.28 related to his appointment as a new Board member in 2020. The amount reported represents the aggregate grant-date fair value of the stock options awarded to the non-employee directors for the applicable year, calculated in accordance with ASC Topic 718 and does not take into account estimated forfeitures related to service-based conditions. The assumptions used in the calculation of these amounts are included and described under the caption "Share-based compensation" in Note 2 to our consolidated financial statements included in our 2020 Annual Report on Form 10-K. The options granted were based on a CAD fair value and converted to USD using the foreign exchange rate on the grant date from the Bank of Canada.
(5)The aggregate remuneration paid to the directors of the Company in 2020 was $1,830,822.
Director Equity Outstanding at 2020 Fiscal Year-End
The following table summarizes the equity awards that were outstanding as of December 31, 2020, for each of the non-employee directors serving during 2020.
| | | | | | | | |
| | Option Awards(1)
|
Name | | Number of Securities Underlying Unexercised Options (#) |
Dr. George M. Milne, Jr. | | 165,000 |
Dr. Daniel Billen | | 95,000 |
Joseph Hagan | | 125,000 |
Dr. Michael Hayden | | 125,000 |
Dr. David Jayne | | 135,000 |
Jill Leversage | | 80,000 |
R. Hector MacKay-Dunn | | 80,000 |
Timothy P. Walbert | | 80,000 |
(1)All option awards were granted to our non-employee directors with a 10-year term of which 748,333 were fully vested and exercisable and 136,667 were unvested as of December 31, 2020.
Non-Employee Director Compensation Policy
Compensation for the directors in such role is determined by the Board upon recommendation of the Compensation Committee. The Compensation Committee has sought advice from third party advisors in respect to the compensation of the directors, most recently WTW in 2020. During 2020, non-management directors (other than the Chairman of the Board) earned an annual retainer fee of $40,000 for serving as a Board member. Dr. George M. Milne, Jr. was the Chairman of the Board during 2020. The Chairman of the Board earned an annual retainer fee of $65,000. Directors were paid in U.S. dollars at the end of each quarter. Annual committee compensation for 2020 was as follows:
•Compensation Committee Chair Retainer: $15,000
Compensation Committee Member Retainer: $7,500 (was $5,000 from January 1 to June 1, 2020)
•Audit Committee Chair Retainer: $20,000 (was $15,000 from January 1 to June 1, 2020)
Audit Committee Member Retainer: $10,000 (was $7,500 from January 1 to June 1, 2020)
•Governance Committee Chair Retainer: $10,000
Governance Committee Member Retainer: $5,000
•Research Committee Chair Retainer: $15,000
Research Committee Member Retainer: $7,500
In addition to the cash retainers set out above, directors are entitled to an annual grant of 30,000 stock options to non-management Board members and the grant of 50,000 stock options upon the election or appointment of a new Board member.
The changes to retainers that were made on June 1, 2020 noted above were made by the Board upon the recommendation of the Compensation Committee following consultation with WTW (including a review of compensation paid to the directors in the Company’s peer group). These increases were determined to be appropriate based on a review of market practices for the Company's peers in terms of compensation for directors as a whole, and on recognition of the increased commitment related to the applicable committees relating to the changes to the Company's status as a domestic filer in the United States.
All of the director options are exercisable for ten years and vest in equal amounts over 12 months.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY INCENTIVE PLANSThe information required by this Item will be set forth in the section headed “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement and is incorporated in this Annual Report by reference.
The following table summarizesInformation regarding our compensation plans under which our equity securities are authorized for issuance at December 31, 2020:
| | | | | | | | | | | | | | | | | | | | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | | 11,971,068(1) | | 11.62(2) | | 3,869,545(4) |
| Equity compensation plans not approved by security holders | | 2,514,924(3) | | $9.22 | | __ (5) |
| Total | | 14,485,992 | | | | 3,869,545 |
(1)Includes stock options and PAs.
(2)The PAs do not have an exercise price, and as such this relates to the exercise price for the options granted under the equity compensation plans approved by security holders only.
(3)These inducement awards were granted outside the Equity Incentive Plan as inducements material to the new employee entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). For the purposes of TSX approval, the Company relied on the exemptionwill be set forth in Section 602.1 of the TSX Company Manual, which provides that the TSX will not apply its standards to certain transactions involving eligible inter-listed issuers on a recognized exchange, such as Nasdaq. These awards were granted with a per share exercise price equal to the fair market value of one common share on the date immediately preceding the date of grant. All options provide for the following vesting schedule: 33.333% of the shares subject to the option vest on the 12-month anniversary of the vesting commencement date,section headed “Executive Compensation” in our Proxy Statement and the remaining shares subject to the options vest in equal monthly installments over the next two years. All of the awards are exercisable for ten years from the date of grant.
(4)Represents common shares reserved for future issuance under our Equity Incentive Plan. The Equity Incentive Plan currently is an evergreen plan, with 12.5% of common shares outstanding at the time of award grant being eligible for grant under the Equity Incentive Plan.
(5)Our Board has not established any specific number of shares that could be issued without shareholder approval. Inducement grants to new employees are determined on a case-by-case basis. Other than possible inducement grants, we expect all equity awards will be made under shareholder-approved plans.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information relating to the beneficial ownership of our common shares as of April 19, 2021, by:
•each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding common shares based on statements filed with the SEC pursuant to Section 13(d) or 13(g) of the Exchange Act;
•each of our directors and each nominee for director;
•each of our named executive officers; and
•all of our directors and executive officers as a group.
Beneficial ownership is based upon 128,120,927 common shares issued and outstanding as of April 19, 2021 and determined in accordance with the rules of the SEC and includes any shares over which a person or group exercises sole or shared voting or investment power plus any shares which such person or group has the right to acquire beneficial ownership of within 60 days of April 19, 2021, whether through the exercise of options or otherwise. Unless otherwise indicated, we believe that the persons or entities identifiedincorporated in this table have sole voting and investment power with respect to all shares shown beneficially ownedAnnual Report by them. Common shares issuable upon vesting of outstanding equity awards that are exercisable or subject to vesting within 60 days after April 19, 2021 are deemed beneficially owned and such shares are used in computing the percentage ownership of the person holding the awards but are not deemed outstanding for the purpose of computing the percentage ownership of any other person.reference.
Unless otherwise noted below, the address of each director and executive officer is c/o Aurinia Pharmaceuticals Inc.., #1203 - 4464 Markham Street, Victoria, BC V8Z 7X8 Canada.
| | | | | | | | | | | | | | |
| | Beneficial Ownership (1) |
| Name of Beneficial Owner | | Number of Shares | | Percent of Total |
| Greater than 5% shareholders | | | | |
HealthCor Management, L.P. (2) | | 6,937,448 | | | 5.4% |
ILJIN (3) | | 8,995,439 | | | 7.0% |
| | | | |
| Directors and Named Executive Officers | | | | |
Peter Greenleaf (4) | | 1,025,117 | | | * |
Max Colao (5) | | 148,224 | | | * |
Max Donley (6) | | 209,000 | | | * |
Joseph Miller (7) | | 64,493 | | | * |
Dennis Bourgeault (8) | | 668,928 | | | * |
Stephen Robertson (9) | | 2,720 | | | * |
Dr. George M. Milne (10) | | 205,000 | | | * |
Dr. David R. W. Jayne (11) | | 165,000 | | | * |
Joseph P. Hagan (12) | | 128,500 | | | * |
Dr. Michael Hayden (13) | | 125,000 | | | * |
Dr. Daniel G. Billen (14) | | 115,000 | | | * |
Jill Leversage (15) | | 83,000 | | | * |
R. Hector MacKay-Dunn (16) | | 81,500 | | | * |
Timothy P. Walbert (17) | | 80,000 | | | * |
All current directors and executive officers as a group (16 persons) (18) | | 3,966,285 | | | 3.1% |
*Indicates beneficial ownership of less than 1% of the total common shares outstanding.
(1)This table is based upon information supplied by officers, directors and principal shareholders and Schedules 13D and 13G filed with the SEC.
(2)This information is based solely on the Schedule 13G/A filed on February 12, 2021 collectively by HealthCor Management, L.P., HealthCor Offshore GP, LLC, HealthCor Offshore II GP, LLC, HealthCor Therapeutics HP, LLC, HealthCor Associates, LLC, HealthCor Group, LLC, Joseph Healey, and Arthur Cohen. Collectively, HealthCor Offshore Master Fund, L.P., HealthCor Market Therapeutics Fund, L.P. and HealthCor Sanatate Offshore Master Fund, L.P. (each a "Fund" and together, the "Funds") are the beneficial owners of a total of 3,070,330 of our common shares. In addition, HealthCor Management, L.P. manages separately managed accounts that collectively hold a total of 3,867,118 of our common shares. HealthCor Offshore GP, LLC is the general partner of HealthCor Offshore Master Fund, L.P. Accordingly, HealthCor Offshore GP, LLC may be deemed to beneficially own the common shares that are beneficially owned by HealthCor Offshore Master Fund, L.P. HealthCor Group, LLC is the managing member of HealthCor Offshore GP, LLC and, therefore, may be deemed to beneficially own the common shares that are beneficially owned by HealthCor Offshore Master Fund, L.P. HealthCor Offshore II GP, LLC is the general partner of HealthCor Sanatate Offshore Master Fund, L.P. Accordingly, HealthCor Offshore II GP, LLC may be deemed to beneficially own the common shares that are beneficially owned by HealthCor Sanatate Offshore Master Fund, L.P.
HealthCor Group, LLC is the managing member of HealthCor Offshore II GP, LLC and, therefore, may be deemed to beneficially own the common shares that are beneficially owned by HealthCor Sanatate Offshore Master Fund, L.P. HealthCor Therapeutics GP, LLC is the general partner of HealthCor Therapeutics Master Fund, L.P. Accordingly, HealthCor Therapeutics GP, LLC may be deemed to beneficially own the common shares that are beneficially owned by HealthCor Therapeutics Fund, L.P. HealthCor Group, LLC is the managing member of HealthCor Therapeutics GP, LLC and, therefore, may be deemed to beneficially own the common shares that are beneficially owned by HealthCor Therapeutics Master Fund, L.P. By virtue of its position as the investment manager of the Funds, HealthCor Management, L.P. may be deemed a beneficial owner of all the common shares owned by the Funds, as well as those it manages through separately managed accounts. HealthCor Associates, LLC is the general partner of HealthCor Management, L.P. and thus may also be deemed to beneficially own the common shares that are beneficially owned by the Funds or managed through such accounts. As the Managers of HealthCor Associates, LLC, Arthur Cohen and Joseph Healey exercise both voting and investment power with respect to the common shares reported herein, and therefore each may be deemed a beneficial owner of such common stock. In such filing, HealthCor Management, L.P., HealthCor Associates, LLC, HealthCor Offshore Master Fund, L.P., HealthCor Offshore GP, LLC, HealthCor Group, LLC, HealthCor Sanatate Offshore Master Fund, L.P., HealthCor Offshore II GP, LLC, HealthCor Therapeutics Master Fund, L.P., HealthCor Therapeutics GP, LLC and Joseph Healey list their address as 55 Hudson Yards, 28th Floor, New York, NY 10001. The address of Arthur Cohen is listed as 12 South Main Street #203, Norwalk, CT 06854.
(3)This information is based solely on the Schedule 13D/A filed on January 27, 2021 collectively by ILJIN SNT Co., Ltd. (“ILJIN SNT”), ILJIN Semiconductor Co., Ltd., ILJIN Steel Co., Ltd. (“ILJIN Steel”), ILJIN C&S Co., Ltd., Sae Kyoung Huh, and Chin Kyu Huh The aggregate amount beneficially owned by each reporting person consists of: (i) 1,711,700 common shares held by Mr. Huh, (ii) 4,995,802 common shares held by ILJIN SNT, (iii) 666,666 common shares issuable to ILJIN SNT upon the exercise of presently-exercisable warrants and (iv) 1,621,271 common shares held by ILJIN Steel. The address for the investors is listed as (Dohwa-dong), 45 Maop-daero, Mapo-gu, Seoul, Korea 121-716, Attention: Young Hwa Kim.
(4)Consists of 1,016,789 options vesting or exercisable within 60 days of April 19, 2021 and 8,328 common shares owned outright.
(5)Consists of 140,024 options vesting or exercisable within 60 days of April 19, 2021 and 8,200 common shares owned outright.
(6)Consists of 209,000 options vesting or exercisable within 60 days of April 19, 2021.
(7)Consists of 64,493 options vesting or exercisable within 60 days of April 19, 2021.
(8)Consists of 30,978 options vesting and exercisable within 60 days of April 19, 2021 and 70,891 common shares owned outright.
(9)Consists of nil options vesting or exercisable within 60 days of April 19, 2021 and 2,720 common shares owned outright.
(10)Consists of 165,000 options vesting or exercisable within 60 days of April 19, 2021 and 40,000 common shares owned outright.
(11)Consists of 135,000 options vesting or exercisable within 60 days of April 19, 2021 and 30,000 common shares owned outright.
(12)Consists of 125,000 options vesting or exercisable within 60 days of April 19, 2021 and 3,500 common shares owned outright.
(13)Consists of 30,000 options vesting or exercisable within 60 days of April 19, 2021 and 95,000 common shares owned outright.
(14)Consists of 95,000 options vesting or exercisable within 60 days of April 19, 2021 and 20,000 common shares owned outright.
(15)Consists of 80,000 options vesting or exercisable within 60 days of April 19, 2021 and 3,000 common shares owned outright.
(16)Consists of 80,000 options vesting or exercisable within 60 days of April 19, 2021 and 1,500 common shares owned outright.
(17)Consists of 80,000 options vesting or exercisable within 60 days of April 19, 2021.
(18)Includes shares beneficially owned by all of our current executive officers and directors as a group. Consists of 3,436,262 options vesting or exercisable within 60 days of April 19, 2021 and 530,023 common shares owned outright.
Item 13. Certain Relationships and Related Transactions and Director Independence
CERTAIN RELATED-PERSON TRANSACTIONS
Described below are all transactions occurring since January 1, 2020 to which we were a party and in which (i) the amounts involved exceeded or will exceed $120,000, and (ii) a director, executive officer, holder of more than 5% of our outstanding common shares, or any member of such person’s immediate family had or will have a direct or indirect material interest, other than the equity and other compensation agreements that are described under “Executive Compensation” and “Director Compensation.” We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions with unrelated third parties.
INDEMNIFICATION AGREEMENTS
Our constating documents permit us to exculpate, indemnify and insure each of our directors and executive officers to the fullest extent permitted by the Business Corporations Act (Alberta). We have entered into indemnification agreements with each of our directors and executive officers, undertaking to indemnify them to the fullest extent permitted by law, to the extent that these liabilities are not covered by insurance. We have also obtained Directors and Officers insurance for each of our executive officers and directors.
POLICIES AND PROCEDURES FOR TRANSACTIONS WITH RELATED PERSONS
We adopted a written related person transaction policy that sets forth our procedures for the identification, review, consideration and approval or ratification of related person transactions. For purposes of our policy only, a “related person transaction” is a transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we and any related person are, were or will be participants in which the amount involved exceeds $120,000. Transactions involving compensation for services provided to us as an employee or director are not coveredThe information required by this policy. A “related person” is any executive officer, director or beneficial owner of more than 5% of any class of our voting securities, including any of their immediate family members and any entity owned or controlled by such persons.
Under the policy, if a transaction has been identified as a related person transaction, including any transaction that was not a related person transaction when originally consummated or any transaction that was not initially identified as a related person transaction prior to consummation, our management must present information regarding the related person transaction to our Audit Committee or, if Audit Committee approval wouldItem will be inappropriate, to another independent body of our Board, for review, consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, interests, direct and indirect, of the related persons, benefits to us of the transaction and whether the transaction is on terms that are comparable to the terms available to or from, as the case may be, an unrelated third party or to or from employees generally. Under the policy, we will collect information that we deem reasonably necessary from each director, executive officer and, to the extent feasible, significant shareholder to enable us to identify any existing or potential related-person transactions and to effectuate the terms of the policy. In addition, under our Code of Conduct, our employees and directors have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest. In considering related person transactions, our Audit Committee, or other independent body of our Board, is required to take into account the relevant available facts and circumstances including, but not limited to:
•the risks, costs and benefits to us;
•the impact on a director’s independence in the event that the related person is a director, immediate family member of a director or an entity with which a director is affiliated;
•the availability of other sources for comparable services or products; and
•the terms available to or from, as the case may be, unrelated third parties or to or from employees generally.
The policy requires that, in determining whether to approve, ratify or reject a related person transaction, our Audit Committee, or other independent body of our Board, must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of our shareholders, as our Audit Committee, or other independent body of our Board, determines in the good faith exercise of its discretion.
INDEPENDENCE OF THE BOARD OF DIRECTORS
Applicable Nasdaq rules require a majority of a listed company’s board of directors to be comprised of independent directors. In addition, Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act. The Nasdaq independence definition includes a series of objective tests, such as that the directorsection headed “Transactions With Related Persons” in our Proxy Statement and is not, and has not been for at least three years, one of our employees, that neither the director nor any of his family members has engagedincorporated in various types of business dealings with us and that the director is not associated with the holders of more than 5% of our common shares. In addition, under applicable Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.this Annual Report by reference.
Our Board has determined that all of our directors, except Peter Greenleaf, are independent directors, as defined under applicable Nasdaq rules. In making such determination, our Board considered the relationships that each such non-employee director has with our company and all other facts and circumstances that our Board deemed relevant in determining his or her independence, including the beneficial ownership of our capital stock by each non-employee director. Peter is considered to have a material relationship with the Company by virtue of being the President and CEO of the Company.
Pursuant to applicable Canadian securities laws, our Board has determined that all of our directors, except Peter Greenleaf and Dr. Billen, are independent directors. Peter is considered to have a material relationship with the Company by virtue of being the President and CEO of the Company. Dr. Billen is considered to not be independent by virtue of being a consultant to the Company and the amount of compensation he received as a consultant to the Company. Dr. Billen's compensation as a consultant was below the allowable threshold for directors under applicable Nasdaq rules, but above the threshold under applicable Canadian securities laws.
There are no family relationships among any of our directors or executive officers.
Item 14. Principal Accountant Fees and Services
The following table represents aggregate fees billed to us forinformation required by this Item will be set forth in the years ended December 31, 2020section headed “—Ratification of Selection of Independent Registered Public Accounting Firm” in our Proxy Statement and 2019,is incorporated in this Annual Report by PwC.
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
Audit fees(1) | | $437,953 | | $233,183 |
Audit-related fees(2) | | 80,882 | | 89,223 |
Tax fees (3) | | 248,099 | | 117,194 |
| Other fees | | — | | — |
| Total fees | | $766,934 | | $439,600 |
(1)For the years ended December 31, 2020 and 2019, these fees include professional services provided by the external auditor for the statutory audits of the annual consolidated financial statements and performing review engagement services on the Company’s quarterly financial statements. For the year ended December 31, 2020, the fees also included audit of internal controls over financial reporting.
(2)These fees relate to other audit related services including professional services for assistance in filing the prospectus supplement related to the July 2020 public offering. The 2019 fees include the December 2019 public offering and the September 2019 at-the-market prospectus supplement, and various other audit related advisory services.
(3)These fees include professional services for tax compliance, transfer pricing assistance, tax advice and tax planning for various taxation and business development matters.
Our Audit Committee has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by our independent registered public accounting firm. These policies and procedures generally provide that we will not engage our independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the Audit Committee.
All fees for services provided by PwC during 2020 and 2019 were pre-approved by the Audit Committee in accordance with the pre-approval policy and procedures described above.reference.
PART IV.IV
Item 15. Exhibits and Financial Statement Schedules and Exhibits
a.We have filed the following documents as part of the 2020this Annual Report on Form 10-K filed with the SEC on February 24, 2021:Report:
1.Consolidated Financial Statements.
The following financial statements wereare filed as part of the 2020 Annual Report on Form 10-K:this report:
Our consolidated financial statements are listed under Part II, Item 8. "Index to Consolidated Financial Statements" in the 2020this Annual Report on Form 10-K.Report.
2.Financial Statement Schedules
All financial statement schedules werehave been omitted because they are not applicable, not material or the required information is shown under Part II, Item 8. “Index to Consolidated Financial Statements” in the 2020this Annual Report on Form 10-K.Report.
3.Exhibits
The following exhibits, as required by Item 601 of Regulation S-K, which are incorporated herein by reference, are filed or furnished with this Amendment,Annual Report, in each case as indicated therein.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporation by Reference |
Exhibit
Number | | Description | | Form | | SEC File No. | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| 3.1 | | | | 10-K | | 001-36421 | | 3.1 | | 02/24/2021 |
| | | | | | | | | | | |
| 3.2 | | | | 8-K | | 001-36421 | | 3.2 | | 04/27/2021 |
| | | | | | | | | | | |
| 4.1 | | | | 10-K | | 001-36421 | | 4.1 | | 02/24/2021 |
| | | | | | | | | | | |
| 4.2 | | Reference is made to Exhibits 3.1 and 3.2 | | | | | | | | |
| | | | | | | | | | | |
| 4.3 | | | | 10-K | | 001-36421 | | 4.3 | | 02/24/2021 |
| | | | | | | | | | | |
| 10.1+ | | | | 10-K | | 001-36421 | | 10.1 | | 02/24/2021 |
| | | | | | | | | | |
| 10.2+ | | | | S-8 | | 333-216447 | | 99.2 | | 03/03/2017 |
| | | | | | | | | | | |
| 10.3+ | | | | S-8 | | 333-239048 | | 99.1 | | 06/09/2020 |
| | | | | | | | | | |
| 10.4# | | | | 6-K | | 001-36421 | | 99.2 | | 12/30/2020 |
| | | | | | | | | | | |
| 10.5# | | | | 10-K | | 001-36421 | | 10.5 | | 02/24/2021 |
| | | | | | | | | | | |
| 10.6# | | | | 10-K | | 001-36421 | | 10.6 | | 02/24/2021 |
| | | | | | | | | | | |
| 10.7# | | | | 10-K | | 001-36421 | | 10.7 | | 02/24/2021 |
| | | | | | | | | | |
| 10.8# | | | | 10-K | | 001-36421 | | 10.8 | | 02/24/2021 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporation by Reference |
Exhibit
Number | | Description | | Form | | SEC File No. | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| 3.1 | | | | 10-K | | 001-36421 | | 3.1 | | 02/24/21 |
| | | | | | | | | | | |
| 3.2 | | | | 8-K | | 001-36421 | | 3.2 | | 04/27/21 |
| | | | | | | | | | | |
| 4.1 | | | | 10-K | | 001-36421 | | 4.1 | | 02/24/21 |
| | | | | | | | | | | |
| 4.2 | | Reference is made to Exhibits 3.1 and 3.2 | | | | | | | | |
| | | | | | | | | | | |
| 4.3 | | | | 10-K | | 001-36421 | | 4.3 | | 02/24/21 |
| | | | | | | | | | | |
| 10.1+ | | | | 10-K | | 001-36421 | | 10.1 | | 02/24/21 |
| | | | | | | | | | |
| 10.2+ | | | | S-8 | | 333-216447 | | 99.2 | | 03/03/2017 |
| | | | | | | | | | | |
| 10.3+ | | | | S-8 | | 333-257424 | | 10.1 | | 06/25/21 |
| | | | | | | | | | |
| 10.4+ | | | | S-8 | | 333-257424 | | 10.2 | | 06/25/21 |
| | | | | | | | | | |
| 10.45**# | | | | 6-K | | 001-36421 | | 99.2 | | 12/30/20 |
| | | | | | | | | | | |
| 10.6# | | | | 10-K | | 001-36421 | | 10.5 | | 02/24/21 |
| | | | | | | | | | | |
| 10.7# | | | | 8-K | | 001-36421 | | 99.1 | | 08/17/21 |
| | | | | | | | | | |
| 10.8# | | | | 10-K | | 001-36421 | | 10.6 | | 02/24/21 |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.9# | | | | 10-K | | 001-36421 | | 10.9 | | 02/24/2021 |
| | | | | | | | | | |
| 10.10 | | | | 10-K | | 001-36421 | | 10.10 | | 02/24/2021 |
| | | | | | | | | | |
| 10.11+# | | | | 10-K | | 001-36421 | | 10.11 | | 02/24/2021 |
| | | | | | | | | | |
| 10.12+# | | | | 10-K | | 001-36421 | | 10.12 | | 02/24/2021 |
| | | | | | | | | | |
| 10.13+# | | | | 10-K | | 001-36421 | | 10.13 | | 02/24/2021 |
| | | | | | | | | | |
| 10.14+# | | | | 10-K | | 001-36421 | | 10.14 | | 02/24/2021 |
| | | | | | | | | | |
| 10.15+# | | | | 10-K | | 001-36421 | | 10.15 | | 02/24/2021 |
| | | | | | | | | | |
| 10.16+# | | | | 10-K | | 001-36421 | | 10.16 | | 02/24/2021 |
| | | | | | | | | | |
| 10.17+# | | | | 10-K | | 001-36421 | | 10.17 | | 02/24/2021 |
| | | | | | | | | | |
| 10.18+# | | | | 10-K | | 001-36421 | | 10.18 | | 02/24/2021 |
| | | | | | | | | | |
| 10.19+# | | | | 10-K | | 001-36421 | | 10.19 | | 02/24/2021 |
| | | | | | | | | | |
| 10.20+ | | | | 10-K | | 001-36421 | | 10.20 | | 02/24/2021 |
| | | | | | | | | | |
| 21.1 | | | | 10-K | | 001-36421 | | 21.1 | | 02/24/2021 |
| | | | | | | | | | |
| 23.1 | | | | 10-K | | 001-36421 | | 23.1 | | 02/24/2021 |
| | | | | | | | | | |
| 24.1 | | | | 10-K | | 001-36421 | | 24.1 | | 02/24/2021 |
| | | | | | | | | | |
| 31.1 | | | | 10-K | | 001-36421 | | 31.1 | | 02/24/2021 |
| | | | | | | | | | |
| 31.2* | | | | | | | | | | |
| | | | | | | | | | |
| 31.3* | | | | | | | | | | |
| | | | | | | | | | |
| 32.1** | | | | 10-K | | 001-36421 | | 32.1 | | 02/24/2021 |
| | | | | | | | | | |
| 101.INS | | | | 10-K | | 001-36421 | | 101.INS | | 02/24/2021 |
| | | | | | | | | | |
| 101.SCH | | | | 10-K | | 001-36421 | | 101.SCH | | 02/24/2021 |
| | | | | | | | | | |
| 101.CAL | | | | 10-K | | 001-36421 | | 101.CAL | | 02/24/2021 |
| | | | | | | | | | |
| 101.DEF | | | | 10-K | | 001-36421 | | 101.DEF | | 02/24/2021 |
| | | | | | | | | | |
| 101.LAB | | | | 10-K | | 001-36421 | | 101.LAB | | 02/24/2021 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.9# | | | | 10-K | | 001-36421 | | 10.7 | | 02/24/21 |
| | | | | | | | | | |
| 10.10# | | | | 10-K | | 001-36421 | | 10.8 | | 02/24/21 |
| | | | | | | | | | |
| 10.11# | | | | 10-K | | 001-36421 | | 10.9 | | 02/24/21 |
| | | | | | | | | | |
| 10.12 | | | | 10-K | | 001-36421 | | 10.10 | | 02/24/21 |
| | | | | | | | | | |
| 10.13+# | | | | 10-K | | 001-36421 | | 10.11 | | 02/24/21 |
| | | | | | | | | | |
| 10.14+# | | | | 10-K | | 001-36421 | | 10.12 | | 02/24/21 |
| | | | | | | | | | |
| 10.15+# | | | | 10-K | | 001-36421 | | 10.13 | | 02/24/21 |
| | | | | | | | | | |
| 10.16+# | | | | 10-K | | 001-36421 | | 10.14 | | 02/24/21 |
| | | | | | | | | | |
| 10.17+# | | | | 10-K | | 001-36421 | | 10.15 | | 02/24/21 |
| | | | | | | | | | |
| 10.18+# | | | | 10-K | | 001-36421 | | 10.16 | | 02/24/21 |
| | | | | | | | | | |
| 10.19+# | | | | 10-K | | 001-36421 | | 10.17 | | 02/24/21 |
| | | | | | | | | | |
| 10.20+# | | | | 10-K | | 001-36421 | | 10.18 | | 02/24/21 |
| | | | | | | | | | |
| 10.21+ | | | | 10-K | | 001-36421 | | 10.20 | | 02/24/21 |
| | | | | | | | | | |
| 21.1* | | | | | | | | | | |
| | | | | | | | | | |
| 23.1* | | | | | | | | | | |
| | | | | | | | | | |
| 24.1* | | Power of Attorney (contained in signature page of this report) | | | | | | | | |
| | | | | | | | | | |
| 31.1* | | | | | | | | | | |
| | | | | | | | | | |
| 31.2* | | | | | | | | | | |
| | | | | | | | | | |
| 32.1** | | | | | | | | | | |
| | | | | | | | | | |
| 32.2** | | | | | | | | | | |
| | | | | | | | | | |
| 101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | |
| | | | | | | | | | |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | |
| | | | | | | | | | |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
| | | | | | | | | | |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
| | | | | | | | | | |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
| | | | | | | | | | |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 101.PRE | | | | 10-K | | 001-36421 | | 101.PRE | | 02/24/2021 |
| | | | | | | | | | |
| 104.1 | | | | 10-K | | 001-36421 | | 104.1 | | 02/24/2021 |
| | | | | | | | | | |
| 104.2* | | Cover Page Interactive Data File for this Amendment (formatted as Inline XBRL) | | | | | | | | |
| * | | Filed herewith. | | | | | | | | |
| ** | | Exhibit 32.1 is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing. |
| + | | Indicates a management contract or compensatory plan. | | | | | | | | |
| # | | Certain portions have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | |
| | | | | | | | | | |
| * | | Filed herewith. | | | | | | | | |
| ** | | Furnished herewith. Exhibit 32.1 and Exhibit 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing. |
| + | | Indicates a management contract or compensatory plan. | | | | | | | | |
| # | | Certain portions of this exhibit (indicated by asterisks) have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because they are not material and are the type that Aurinia treats as private or confidential. |
| | | | | | | | | | |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Amendment No. 1 to its Annual Report on Form 10-K/Areport to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| AURINIA PHARMACEUTICALS INC. |
| |
| February 28, 2022 | By: | /s/ Peter Greenleaf |
| | Peter Greenleaf |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
SIGNATURES AND POWER OF ATTORNEY
We, the undersigned directors and officers of Aurinia Pharmaceuticals Inc., hereby severally constitute and appoint Peter Greenleaf and Joseph Miller, and each of them singly, our true and lawful attorneys, with full power to them, and to each of them singly, to sign for us and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of us might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
| | | | |
| /s/ Peter Greenleaf | | Chief Executive Officer, Director | | February 28, 2022 |
| Peter Greenleaf | | (Principal Executive Officer) | | |
| | | | |
| /s/ Joseph Miller | | Chief Financial Officer | | February 28, 2022 |
| Joseph Miller | | (Principal Financial and Accounting Officer) | | |
| | | | |
| /s/ Brinda Balakrishnan | | Director | | February 28, 2022 |
| Brinda Balakrishnan, M.D., Ph.D. | | | | |
| | | | |
| /s/ Daniel Billen | | Director | | February 28, 2022 |
| Daniel Billen, Ph.D. | | | | |
| | | | |
| /s/ Joseph P. Hagan | | Director | | February 28, 2022 |
| Joseph P. Hagan | | | | |
| | | | |
| /s/ David R.W. Jayne | | Director | | February 28, 2022 |
| David R.W. Jayne, M.D., FRCP, FRCPE, FMedSci | | | | |
| | | | |
| /s/ Jill Leversage | | Director | | February 28, 2022 |
| Jill Leversage | | | | |
| | | | |
| /s/ R. Hector MacKay-Dunn | | Director | | February 28, 2022 |
| R. Hector MacKay-Dunn, J.D., Q.C. | | | | |
| | | | |
| /s/ George M. Milne, Jr. | | Chairman | | February 28, 2022 |
| George M. Milne, Jr., Ph.D. | | | | |
| | | | |
| /s/ Timothy P. Walbert | | Director | | February 28, 2022 |
| Timothy P. Walbert | | | | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Aurinia Pharmaceuticals Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Aurinia Pharmaceuticals Inc. and its subsidiaries (together, the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Measurement of deferred compensation liability
As described in Notes 2 and 15 to the consolidated financial statements, the Company recorded deferred compensation and other non-current liabilities of $16 million as of December 31, 2021 which primarily included the deferred compensation liability. The deferred compensation arrangements are the result of a resolution of the board of directors of the Company dated March 8, 2012 whereby certain executive officers at that time were provided with future potential employee benefit obligations for remaining with the Company, for a certain period of time, and these obligations were also contingent on the occurrence of uncertain future events. The Company recognizes future benefits provided by employee retention arrangements as deferred compensation liability when the Company determines that it is probable to make future payments. The deferred compensation liability, which is based on the income approach, is the present value of the future payments to be made to the individuals (the model). These future payments are based on royalty rates applied to estimated future net revenues of voclosporin (estimated future net revenues). The royalty rates applied to the estimated future net revenues are dependent on the type of net revenue earned. Significant judgments and estimates are used in determining the deferred compensation liability which include the determination of assumptions related to estimated future net revenues and the discount rate. The estimated future net revenues for the United States includes assumptions related to the number of patients being treated, dosing adjustments, duration of treatment, timing of generics and competitors entering the market, market penetration and potential future use in new indications which management developed with the assistance of an internal scientific team and third party consultants (management’s specialists).
The principal considerations for our determination that performing procedures relating to measurement of the deferred compensation liability is a critical audit matter are (i) the significant judgment by management, including the use of management’s specialists, when developing the assumptions to determine the deferred compensation liability, which in turn led to; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures related to the assumptions used by management and management’s specialists including the estimated future net revenues for the United States and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the measurement of the deferred compensation liability, including controls over management’s development of the number of patients being treated, dosing adjustments, duration of treatment, timing of generics and competitors entering the market, market penetration, potential future use in new indications and discount rate assumptions utilized in the measurement of the deferred compensation liability. These procedures also included, among others (i) evaluating and testing management’s process for determining the deferred compensation liability; (ii) evaluating the appropriateness of the model used; and (iii) testing the completeness and accuracy of underlying data used in the determination of the deferred compensation liability. The work of management’s specialists was used in performing the procedures to evaluate the estimated future net revenues which included evaluating the reasonableness of the assumptions relating to the number of patients being treated, dosing adjustments, duration of treatment, timing of generics and competitors entering the market, market penetration and potential future use in new indications. As a basis for using this work, the qualifications of management’s specialists were understood and the Company’s relationship with management’s specialists was assessed. The procedures performed also included evaluation of the model and assumptions used by management’s specialists, tests of the data used by management’s specialists, and an evaluation of the findings of management’s specialists. The evaluation of the
number of patients being treated, dosing adjustments, duration of treatment, timing of generics and competitors entering the market, market penetration and potential future use in new indications included considering available
industry and third party data, including scientific and market studies, that management’s specialists used. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discount rate assumption.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants
Edmonton, Canada
February 25, 2022
We have served as the Company's auditor since at least 1997. We have not been able to determine the specific year we began serving as auditor of the Company.
We have served as the Company's auditor since at least 1997. We have not been able to determine the specific year we began serving as auditor of the Company.
| | |
AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS |
| | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| (in thousands) | Note | | 2021 | | 2020 |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash, cash equivalents and restricted cash | (2) | | $ | 231,900 | | | $ | 272,350 | |
| Short-term investments | (4) | | 234,178 | | | 125,979 | |
| Accounts receivable, net | (2) | | 15,414 | | | — | |
| Inventories, net | (6) | | 19,326 | | | 13,927 | |
| Prepaid expenses and other current assets | (7) | | 12,506 | | | 7,171 | |
| Total current assets | | | 513,324 | | | 419,427 | |
| | | | | |
| Non-current assets: | | | | | |
| Long-term investments | (4) | | — | | | 24,380 | |
| Other non-current assets | (16) | | 11,838 | | | 247 | |
| Property and equipment, net | (8) | | 4,418 | | | 4,786 | |
| Acquired intellectual property and other intangible assets, net | (9) | | 8,404 | | | 9,332 | |
| Right-of-use assets | (16) | | 5,383 | | | 5,489 | |
| Total assets | | | $ | 543,367 | | | $ | 463,661 | |
| | | | | |
| Liabilities and Shareholders' Equity | | | | | |
| | | | | |
| Current liabilities: | | | | | |
| Accounts payable and accrued liabilities | (10) | | 34,947 | | | 24,797 | |
| Other current liabilities (of which $6,000 due to related party in 2020) | (15) | | 4,640 | | | 6,412 | |
| Operating lease liabilities | (16) | | 1,059 | | | 788 | |
| Total current liabilities | | | 40,646 | | | 31,997 | |
| | | | | |
| Non-current liabilities: | | | | | |
| Deferred compensation and other non-current liabilities | (15) | | 15,950 | | | 16,295 | |
| Operating lease liabilities | (16) | | 7,680 | | | 7,619 | |
| Total liabilities | | | 64,276 | | | 55,911 | |
| | | | | |
| Commitments and Contingencies | (14) | | 0 | | 0 |
| | | | | |
| Shareholders’ Equity: | | | | | |
| Common shares - no par value, unlimited shares authorized, 141,600 and 126,725 shares issued and outstanding at December 31, 2021 and 2020, respectively | (17) | | 1,177,051 | | | 944,328 | |
| Additional paid-in capital | (18) | | 59,014 | | | 39,383 | |
| Accumulated other comprehensive loss | | | (852) | | | (805) | |
| Accumulated deficit | | | (756,122) | | | (575,156) | |
| Total shareholders' equity | | | 479,091 | | | 407,750 | |
| | | | | |
| Total liabilities and shareholders' equity | | | $ | 543,367 | | | $ | 463,661 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| (in thousands, except per share data) | Note | | 2021 | | 2020 | | 2019 |
| Revenue: | | | | | | | |
| Product revenue, net | (2) | | $ | 45,488 | | | $ | — | | | $ | — | |
| License and contract revenue | (11) | | 117 | | | 50,118 | | | 318 | |
| Total revenue, net | | | 45,605 | | | 50,118 | | | 318 | |
| Operating expenses: | | | | | | | |
| Cost of sales | (2) | | 1,091 | | | — | | | — | |
| Selling, general and administrative | (2) | | 171,438 | | | 95,983 | | | 22,338 | |
| Research and development | (2) | | 51,139 | | | 50,327 | | | 52,866 | |
| Amortization of intangible assets | (9) | | 2,098 | | | 1,289 | | | 1,138 | |
| Other expense, net | | | 574 | | | 6,809 | | | 14,919 | |
| Total cost of sales and operating expenses | | | 226,340 | | | 154,408 | | | 91,261 | |
| Loss from operations | | | (180,735) | | | (104,290) | | | (90,943) | |
| Interest income | | | 529 | | | 1,516 | | | 2,702 | |
| Net loss before income taxes | | | (180,206) | | | (102,774) | | | (88,241) | |
| Income tax expense (benefit) | (13) | | 760 | | | (94) | | | 144 | |
| Net loss | | | (180,966) | | | (102,680) | | | (88,385) | |
| Other comprehensive loss: | | | | | | | |
| Unrealized (loss) gain on available-for-sale securities, net of tax of nil | | | (47) | | | — | | | — | |
| Comprehensive loss | | | $ | (181,013) | | | $ | (102,680) | | | $ | (88,385) | |
| Basic and diluted loss per common share | (19) | | $ | (1.40) | | | $ | (0.87) | | | $ | (0.95) | |
| Weighted-average common shares outstanding used in computation of basic and diluted loss per share | (19) | | 129,369 | | | 118,473 | | | 93,024 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Note | | Common Shares | | Additional Paid-In Capital | | Accumulated
other
comprehensive
loss | | Accumulated Deficit | | Total Shareholders' Deficit |
| | | Shares | | Amount | | | | | | | | |
| Balance - January 1, 2019 | | | 85,500 | | | $ | 488,744 | | | $ | 31,869 | | | $ | (805) | | | $ | (384,091) | | | $ | 135,717 | |
| Issue of common shares upon public offerings, net of issuance costs | | | 19,735 | | | 223,118 | | | — | | | — | | | — | | | 223,118 | |
| Exercise of warrants | (17) | | 2,983 | | | 12,428 | | | (5,440) | | | — | | | — | | | 6,988 | |
| Exercise of stock options | (17) | | 3,580 | | | 22,197 | | | (8,449) | | | — | | | — | | | 13,748 | |
| Share-based compensation | (18) | | — | | | — | | | 7,414 | | | — | | | — | | | 7,414 | |
| | | | | | | | | | | | | |
| Net loss | | | — | | | — | | | — | | | — | | | (88,385) | | | (88,385) | |
| Balance at December 31, 2019 | | | 111,798 | | | $ | 746,487 | | | $ | 25,394 | | | $ | (805) | | | $ | (472,476) | | | $ | 298,600 | |
| Issue of common shares upon public offerings, net of issuance costs | (17) | | 13,333 | | | 187,732 | | | — | | | — | | | — | | | 187,732 | |
| Exercise of warrants | (17) | | 1 | | | 2 | | | (1) | | | — | | | — | | | 1 | |
| Exercise of stock options | (17) | | 1,593 | | | 10,107 | | | (3,464) | | | — | | | — | | | 6,643 | |
| Share-based compensation | (18) | | — | | | — | | | 17,454 | | | — | | | — | | | 17,454 | |
| | | | | | | | | | | | | |
| Net loss | | | — | | | — | | | — | | | — | | | (102,680) | | | (102,680) | |
| Balance at December 31, 2020 | | | 126,725 | | | $ | 944,328 | | | $ | 39,383 | | | $ | (805) | | | $ | (575,156) | | | $ | 407,750 | |
| Issuance of common shares upon public offerings, net of issuance costs | (17) | | 10,166 | | | 196,740 | | | — | | | — | | | — | | | 196,740 | |
| Exercise of warrants | (17) | | 1,434 | | | 2,102 | | | (1,737) | | | — | | | — | | | 365 | |
| Exercise of stock options | (17) | | 3,238 | | | 33,073 | | | (9,652) | | | — | | | — | | | 23,421 | |
| Issuance of common shares in conjunction with ESPP program | (18) | | 37 | | | 808 | | | (223) | | | — | | | — | | | 585 | |
| Share-based compensation | (18) | | — | | | — | | | 31,243 | | | — | | | — | | | 31,243 | |
| Other comprehensive income | | | — | | | — | | | — | | | (47) | | | — | | | (47) | |
| Net loss | | | — | | | — | | | — | | | — | | | (180,966) | | | (180,966) | |
| Balance at December 31, 2021 | | | 141,600 | | | $ | 1,177,051 | | | $ | 59,014 | | | (852) | | | $ | (756,122) | | | $ | 479,091 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| (in thousands) | Note | | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | | | |
| Net loss | | | $ | (180,966) | | | $ | (102,680) | | | $ | (88,385) | |
| Adjustments to reconcile consolidated net loss to net cash used in operating activities: | | | | | | | |
| Depreciation of property and equipment | (8) | | 663 | | | 82 | | | 33 | |
| Amortization of intangible assets | (9) | | 2,098 | | | 1,289 | | | 1,138 | |
| Upfront license and milestone expense | (11) | | 10,000 | | | — | | | — | |
| Share-based compensation | (18) | | 31,243 | | | 17,454 | | | 7,414 | |
| Other, net | | | 903 | | | 9,477 | | | 14,186 | |
| Net changes in operating assets and liabilities: | | | | | | | |
| Accounts receivable, net | | | (15,415) | | | (650) | | | (151) | |
| Inventories, net | (6) | | (5,644) | | | (13,927) | | | — | |
| Prepaid expenses and other current assets | | | (5,335) | | | 2,559 | | | (1,826) | |
| Non-current assets | | | 247 | | | — | | | — | |
| Right of use assets | (16) | | 106 | | | (5,489) | | | — | |
| Accounts payable and accrued liabilities | (10) | | 4,076 | | | 13,620 | | | 4,006 | |
| Lease liabilities | (16) | | 332 | | | 8,407 | | | — | |
| Net cash used in operating activities | | | (157,692) | | | (69,858) | | | (63,585) | |
| Cash flows from investing activities: | | | | | | | |
| Proceeds on investments | (4) | | 354,427 | | | 52,108 | | | 7,884 | |
| Purchase of investments | (4) | | (438,958) | | | (202,951) | | | — | |
| Upfront lease payment | (16) | | (11,838) | | | — | | | — | |
| Upfront license payment | (11) | | (6,000) | | | — | | | — | |
| Purchase of long-lived assets | | | (297) | | | (5,584) | | | (85) | |
| Additions to internal use-software implementation costs | | | (1,198) | | | (1,675) | | | — | |
| Capitalized patent costs | | | (6) | | | (84) | | | (16) | |
| Net cash used in investing activities | | | (103,870) | | | (158,186) | | | 7,783 | |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from issuance of common shares pursuant to Public Offering, net of issuance costs | (17) | | 196,740 | | | 187,732 | | | 223,118 | |
| Proceeds from exercise of share options and employee share purchase plan | (17) | | 24,007 | | | 6,642 | | | 13,748 | |
| Proceeds from exercise of warrants | (17) | | 365 | | | 1 | | | 6,988 | |
| Net cash provided by financing activities | | | 221,112 | | | 194,375 | | | 243,854 | |
| Net (decrease) increase in cash and cash equivalents during the year | | | (40,450) | | | (33,669) | | | 188,052 | |
| Cash and cash equivalents, beginning of the year | | | 272,350 | | | 306,019 | | | 117,967 | |
| Cash, cash equivalents and restricted cash, end of the year | | | $ | 231,900 | | | $ | 272,350 | | | $ | 306,019 | |
| | | | | | | |
| Supplemental cash flow information: | | | | | | | |
| Cash paid for legal settlement | | | $ | — | | | $ | — | | | $ | (100) | |
| Cash received for interest | | | $ | 749 | | | $ | 1,884 | | | $ | 2,619 | |
| Cash paid for taxes | | | $ | (257) | | | $ | (261) | | | $ | (59) | |
| | | | | | | |
| Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets | | | | | | | |
| Cash, cash equivalents | | | $ | 231,643 | | | $ | 272,350 | | | $ | 306,019 | |
| Restricted cash | | | 257 | | | — | | | — | |
| Total cash, cash equivalents and restricted cash | | | $ | 231,900 | | | $ | 272,350 | | | $ | 306,019 | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| | |
AURINIA PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
1. Organization and Description of Business
Aurinia Pharmaceuticals Inc. (Aurinia) or the Company is a commercial-stage biopharmaceutical company focused on developing and commercializing therapies to treat targeted patient populations that are suffering from serious diseases with a high unmet medical need. The Company has commercially launched LUPKYNIS in the United States for the treatment of adult patients with active LN, and continues to conduct pre-clinical, clinical, and regulatory activities to support the voclosporin development program
On January 22, 2021, the U.S. Food and Drug Administration (FDA) approved LUPKYNIS in combination with a background
immunosuppressive therapy regimen to treat adult patients with active LN.
On August 17, 2021, the Company announced the addition of two novel assets AUR200 and AUR300. AUR200 is currently undergoing pre-clinical development with projected submission of an Investigational New Drug Application (IND) to the FDA in 2023. The Company anticipates that an IND for AUR300 will be submitted during the first half of 2023.
Aurinia's head office is located at #1203-4464 Markham Street, Victoria, British Columbia, Canada and its registered office is located at #201, 17873-106 A Avenue, Edmonton, Alberta. Aurinia also has a U.S. Commercial office located at 77 Upper Rock Circle, Rockville, Maryland, United States.
Aurinia is incorporated pursuant to the Business Corporations Act (Alberta). The Company’s common shares are currently listed and traded on the Nasdaq Global Market (Nasdaq) under the symbol AUPH and on the Toronto Stock Exchange (TSX) under the symbol AUP until July 30, 2021. As of July 30, 2021, the Company's common shares no longer trade on the TSX following the voluntary delisting by the Company and are solely traded on the Nasdaq.
2. Summary of Significant Accounting Policies
Basis of presentation: The Company follows accounting standards established by the Financial Accounting Standards Board (FASB) to ensure consistent reporting of financial condition, results of operations, and cash flows. References to generally accepted accounting principles (GAAP) or U.S. GAAP in these footnotes are to the FASB Accounting Standards Codification (ASC or the Codification). At the end of the second quarter of 2020, the Company determined that it no longer qualified as a Foreign Private Issuer under the SEC rules. As a result, beginning January 1, 2021 the Company is required to report with the SEC on domestic forms and comply with domestic company rules in the United States.
Principles of consolidation: These financial statements present the consolidated financial position of the Company and its wholly owned subsidiaries, Aurinia Pharma U.S., Inc. (Delaware incorporated) and Aurinia Pharma Limited (UK incorporated). as of December 31, 2021 and 2020, and the results of operations and cash flows for the three years ended December 31, 2021, 2020 and 2019. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates: The preparation of the accompanying financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from those estimates.
Segment information: The Company operates in 1 operating segment engaged in the research, development and commercialization of therapeutic drugs in which revenues are derived from product, license, and contract revenues. Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker (CODM), the chief executive officer, in deciding how to allocate resources and assessing performance. The Company's CODM allocates resources and assesses performance based upon discrete financial information at the consolidated level.
Functional currency: The functional currency for the Company and all of its foreign subsidiaries is determined to be the U.S. dollar, therefore there is no currency translation adjustment upon consolidation as the remeasurement of gains or losses are
recorded in the consolidated statement of operations. All assets and liabilities denominated in a foreign currency are remeasured into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are remeasured at the average exchange rate during the period. Foreign exchange gains and losses arising on translation or settlement of a foreign currency denominated monetary item are included in the consolidated statements of operations.
Fair value measurements: The Company's financial instruments consist primarily of cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable and accrued liabilities. The Company has determined the carrying values of these financial instruments approximate their fair value because of the relatively short period to maturity of the instruments.
Financial assets and liabilities are categorized based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Concentration of credit risk: Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents and short term investments. The Company attempts to minimize the risks related to cash and cash equivalents and investments by investing in a range of financial instruments. The Company established guidelines related to credit ratings and maturities intended to safeguard principal balances, earn a return on investments and to maintain liquidity. The Company's investment portfolio is maintained in accordance with its investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. The Company does not enter into any investment transaction for trading or speculative purposes.
The Company’s investment policy limits investments to certain types of instruments such as certificates of deposit, money market instruments, obligations issued by the U.S. government and U.S. government agencies as well as high quality corporate debt securities, and places restrictions on maturities and concentration by type and issuer. The Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance Corporation and Canada Deposit Insurance Corporation and concentrated within a limited number of financial institutions. The accounts are monitored by management to mitigate the risk.
The Company is exposed to financial risk related to the fluctuation of foreign currency exchange rates which could have a material effect on its future operating results or cash flows. Foreign currency risk is the risk that variations in exchange rates between the U.S. dollar and foreign currencies, primarily with the Canadian dollar, Swiss France, Great British Pound and Japanese Yen will affect the Company's operating and financial results. The Company holds the majority of its cash and cash equivalents in U.S. dollars and the majority of its expenses, including commercial and clinical trial costs are also denominated in U.S. dollars, which mitigates the risk of material foreign exchange fluctuations.
Major customers: The Company currently has three main customers for the U.S. commercial sales of LUPKYNIS and one customer for sales of voclosporin in the European Union, Japan, as well as United Kingdom, Russia, Switzerland, Norway, Belarus, Iceland, Liechtenstein and Ukraine. Revenues from two customers accounted for approximately 56% and 43% of the Company's total revenues for the year ending December 31, 2021. Two individual customers accounted for 99% of the Company’s net trade accounts receivable balances as of December 31, 2021.The Companymonitors economic conditions, the creditworthiness of customers and government regulations and funding, both domestically and abroad. The Company regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables.
COVID-19: U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the annual consolidated financial statements and accompanying notes. The annual consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of results for these interim periods. The full extent to which the novel coronavirus (COVID-19) pandemic will directly or indirectly impact the Company’s financial statements related to items such as investments (Note 4), inventories (Note 6), income taxes (Note 13), leases (Note 16), share-based compensation (Note 18) or results of operations will depend on future developments that are uncertain at this time. As events continue to evolve and additional information becomes available, the Company’s estimates may change materially in future periods.
Cash and cash equivalents: The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of operating accounts, money market funds and bank money market accounts which are recorded at fair value. Cash and cash equivalents totaled $231.9 million as of December 31, 2021. The Company has invested its cash reserves in short term U.S. dollar denominated, fixed rate, highly liquid and highly rated financial instruments such as treasury notes, banker acceptances, bank bonds, and term deposits.
Restricted cash: Restricted cash consists of the 2021 Employee Share Purchase Plan (ESPP) deposits of $0.3 million and nil as of December 31, 2021 and December 31, 2020, respectively.
Investments: The Company classifies its debt securities as either held to maturity or available-for-sale in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320, Investments — Debt Securities. Investments classified as held to maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income/loss within shareholders’ equity. Realized gains and losses on held to maturity and available-for-sale securities are recorded in other income (expense), net. Interest income (expense) is recorded separately on the consolidated statements of operations.The cost of securities sold is based on the specific-identification method.
Accounts receivable, net: Accounts receivables are stated at their net realizable value less an allowance for doubtful accounts. As of December 31, 2021, accounts receivable, net are $15.4 million. We estimate the allowance for doubtful accounts using current expected credit loss model, or CECL model. Under the CECL model, the allowance for doubtful accounts reflects the net amount expected to be collected from the account receivables. We evaluate the collectability of these cash flows based on the asset’s amortized cost, the risk of loss even when that risk is remote, losses over an asset’s contractual life, and other relevant information available to us. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected. Given the nature of our accounts receivable, we determined that an allowance for doubtful accounts was nil at December 31, 2021.
Accounts receivables are recorded net of estimates of variable consideration for which reserves are established and which result from discounts that are offered within contracts between us and two specialty pharmacies and one specialty distributor in the United States. These reserves are recorded as a reduction of accounts receivable.
Intangible assets: Intangible assets are amortized over their useful lives using methods that correlate to the pattern in which the economic benefits are expected to be realized. All intangible assets are amortized on a straight-line basis. The Company evaluates the estimated remaining useful life of its intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Refer to the long-lived assets section below for impairment considerations.
Acquired intellectual property and patents
External patent costs specifically associated with preparing, filing, obtaining and protecting patents are capitalized and amortized straight-line over the shorter of the estimated useful life and the patent life, commencing in the year of the grant of the patent. Other intellectual property expenditures are recorded as R&D expenses on the consolidated statements of operations as incurred. Patents do not contain the option to extend or renew.
Separately acquired intellectual property is shown at historical cost. The initial recognition of a reacquired right is recognized as an intangible asset measured on the basis of the remaining contractual term of the related contract. If the terms of the contract giving rise to a reacquired right are favorable relative to the terms of current market transactions for the same or similar items, the difference is recognized as a gain or loss in the consolidated statements of operations and comprehensive loss. Purchased intellectual property and reacquired rights are capitalized and amortized on a straight-line basis in the consolidated statements of operations and comprehensive loss over periods ranging from 10 to 20 years.
Property, plant and equipment: Property, plant and equipment are recorded at cost and is depreciated using the straight-line method. Expenditures for additions are capitalized and leasehold improvements are amortized over the lesser of the expected lease term or the estimated useful life of the improvement. Expenditures for maintenance and repairs are charged to expense as incurred; however, maintenance and repairs that improve or extend the life of existing assets are capitalized. The carrying
amount of assets disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains or losses from property and equipment disposals are recognized in the year of disposal.
Recoverability and impairment of long-lived assets: ASC Topic 360 requires long-lived assets, including definite-lived intangible assets, to be evaluated for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The judgments made related to the expected useful lives of long-lived assets, definitions of lease terms and the Company’s ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, changes in usage or operating performance and other factors. If indicators are present, assets are grouped to the lowest level for which identifiable cash flows are largely independent of other asset groups and cash flows are estimated for each asset group over the remaining estimated life of each asset group. If the undiscounted cash flows estimated to be generated by the asset group are less than the asset’s carrying amount, impairment is recognized in the amount of excess of the carrying value over the fair value. The Company recorded no asset impairment charges during the years ended December 31, 2021, 2020 and 2019.
Leases: The Company assesses all contracts at inception to determine whether a lease exists. The Company’s leases are all classified either as operating or finance leases per ASC 842. Certain leases have lease and non-lease components, which are accounted for as a single lease component.
The Company leases office space under operating leases that typically provide for the payment of minimum annual rentals and may include scheduled rent increases. The Company also entered into a manufacturing agreement that contained an embedded lease of a dedicated manufacturing facility that will be accounted for as a financing lease once lease commencement begins (see Note 16).
The Company adopted ASC Topic 842 on January 1, 2019, which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset (ROU asset), which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASC 842 also requires lessees to classify leases as either finance or operating leases based on whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification is used to evaluate whether the lease expense should be recognized based on an effective interest method or on a straight-line basis over the term of the lease.
The Company elected, for all asset classes, the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Leases with an initial term of 12 months or less are not recorded on the Company's consolidated balance sheet, and fixed costs associated with these arrangements are disclosed in Note 16 of the financial statements.
The Company has elected to recognize lease incentives, such as tenant improvement allowances, at the lease commencement date as a reduction of the ROU asset and lease liability until paid to the Company by the lessor, to the extent that the lease provides a specified fixed or maximum level of reimbursement, and the Company is reasonably certain to incur reimbursable costs at least equaling such amounts.
Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company used the incremental borrowing rate for all of its leases, as the implicit interest rate was not readily determinable. In determining the Company’s incremental borrowing rate of each lease, the Company considered recent rates on secured borrowings, observable risk-free interest rates and credit spreads correlating to the Company's creditworthiness, the impact of collateralization and the term of each of the Company's lease agreements. The lease terms range from 12 to 128 months.
The table in Note 16 provides supplemental balance sheet information related to the operating lease ROU assets and lease liabilities.
Deferred Compensation Arrangements: The Company has recorded deferred compensation arrangements in liabilities for estimated future employee benefits relating to applicable historical employment arrangements. The deferred compensation arrangements are part of the resolution of the board of directors of the company dated March 8, 2012. Pursuant to ASC Topic 710, the Company recognizes future benefits provided by employee retention arrangements, as deferred compensation, which is
recognized when the Company determines 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.
The Company is required to use judgment to determine the most appropriate model to use to measure the deferred compensation liability and is required to use significant judgment and estimates in determining the inputs into the model. The royalty rates applied to the net revenue are dependent on the type of net revenue earned, which includes product sales and royalty revenue. There are multiple unobservable and inherently uncertain inputs. The determination of this deferred compensation is subject to significant judgments and estimates in determining the assumptions related to future net revenues and the determination of the discount rate for the net present value calculation. The net revenue estimate for the United States includes assumptions related to the number of patients being treated (including patients who initially start taking the product but subsequently discontinue), dosing adjustments, duration of treatment, timing of generics and competitors entering the market, market penetration and potential future use in new indications. Additional variables for ex-US geographies include timing of approval in ex-US territories, escalating royalty rates, net pricing, government payor coverage of the product, and market penetration. In determining the estimate for ex-US revenues, the Company relies heavily on forecasts provided by its collaboration partner.
Management developed the model and inputs in conjunction with their internal scientific team and utilized third party scientific studies, information provided by third party consultants engaged by the Company, information from medical and pharmacy claims databases and research papers as sources to develop their inputs; application and usage of these inputs is also informed by product sales and distribution data, ongoing market research fielded by the company and third parties, and our continually evolving understanding of the market as our US launch progresses. Management believes the liability is based on reasonable assumptions; however, these assumptions may be incomplete or inaccurate and unanticipated events and circumstances may occur. There are numerous significant inputs into the model all of which individually or in combination may result in a material change to the obligation.
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 met by the Company or changes in assumptions are recognized in the consolidated statement of operations.
Contingencies:In the normal course of business, the Company may be subject to loss contingencies, such as legal proceedings, amounts arising from contractual arrangements and claims arising out of the Company’s business that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with ASC Topic 450, Accounting for Contingencies, (ASC 450), the Company records accruals for such loss contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company, in accordance with this guidance, does not recognize gain contingencies until realized.
Common Shares: The Company’s shares have no par value and therefore, upon issuance of shares, all amounts related to the shares are credited to common shares on the balance sheet. The value of common shares includes cash amounts received for the shares and the fair value of equity awards and warrants. Amounts for common shares are offset by share issue costs associated with equity offerings.
Inventories: Inventories are valued under a standard costing methodology on a first-in, first-out basis and are stated at the lower of cost or net realizable value. The Company capitalizes inventory costs related to products to be sold in the ordinary course of business. The Company makes a determination of capitalizing inventory costs for a product based on, among other factors, status of regulatory approval, information regarding safety, efficacy and expectations relating to commercial sales and recoverability of costs. Capitalized costs of inventories mainly include third party manufacturing costs, transportation, storage, insurance, depreciation and allocated internal labor. The Company assesses recoverability of inventory each reporting period to determine any write down to net realizable value resulting from excess or obsolete inventories.
Revenue Recognition: Pursuant to Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606), the Company recognizes revenue when a customer obtains control of promised goods or services. The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. Revenue is recognized through a five-step process: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations
in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations. Revenue is recognized for the applicable performance element when each distinct performance obligation is satisfied.
Product Revenues
In the United States (and territories), the Company sells LUPKYNIS primarily to specialty pharmacies and specialty distributors. These customers subsequently resell the Company's products to health care providers and patients. Revenues from product sales are recognized when the customer obtains control of our product, which typically occurs 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). The Company's estimates of reserves 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. Actual amounts may ultimately differ from the Company's estimates. If actual results vary, the Company adjust these estimates, which could have an effect on earnings in the period of adjustment.
More specifically, these adjustments include the following:
Prompt Pay Discounts: The Company generally provides invoice discounts on product sales to its customers for prompt payment. The Company estimates that its customers will earn these discounts and fees, and deducts the full amount of these discounts and fees from its gross product revenues and accounts receivable at the time such revenues are recognized.
Customer Fees: The Company pays certain customer fees, such as fees for certain data that customers provide to the Company. The Company records fees paid to its customers as a reduction of revenue, unless the payment is for a distinct good or service from the customer and the Company can reasonably estimate the fair value of the goods or services received. If both conditions are met, the Company records the consideration paid to the customer as SG&A expense.
Government Rebates: The Company estimates its government rebates, primarily Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability that is included in accrued expenses on the consolidated balance sheet.
Medicaid rebates relate to the Company's estimated obligations to states under established reimbursement arrangements. Rebate accruals are recorded in the same period that the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability, which is included in other current liabilities. The Company's liability for Medicaid rebates consists of estimates for claims that a state will make for the current quarter, claims for prior quarters that have been estimated for which an invoice has not been received, invoices received for claims from the prior quarters that have not been paid and an estimate of potential claims that will be made for inventory that exists in the distribution channel at period end.
For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period.
Co-payment Assistance: Co-payment assistance represents financial assistance to qualified patients, assisting them with prescription drug co-payments required by insurance. The program is administered by the specialty pharmacies. The calculation
of the accrual for co-payment assistance is based on the co-payments administered on the Company's behalf by the specialty pharmacies.
License, Collaboration and Other Revenues
The Company enters into out-licensing agreements that are within the scope of ASC 606, under which it licenses certain rights to its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments, payments for manufacturing supply services the Company provides through its contract manufacturers, and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.
Licenses of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the licensee exercises these options, any additional payments are recorded in license, collaboration and other revenues when the licensee obtains control of the goods, which is typically upon delivery.
Milestone Payments: At the inception of each arrangement that includes development or commercial sales milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment. Any consideration related to sales-based royalties (and sales-based milestones) will be recognized when the related sales occur.
Research, Development and/or Manufacturing Services: The Company’s agreements may include R&D or manufacturing services to be performed by the Company on behalf of the counterparty. If these services are determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes the transaction price allocated to these services as revenue over time based on an appropriate measure of progress when the performance by the Company does not create an asset with an alternative use and the Company has an enforceable right to payment for the performance completed to date. If these services are determined not to be distinct from the other promises or performance
obligations identified in the arrangement, the Company recognizes the transaction price allocated to the combined performance obligation as the related performance obligations are satisfied.
Costs to obtain a contract: As the majority of our contracts are short-term in nature, sales commissions are generally expensed when incurred as the amortization period would have been less than one year. There costs are recorded within SG&A. For contracts that extend beyond one year, the incremental expense recognition matches the recognition of related revenue,
Cost of sales: Cost of sales consist primarily of cost of inventories for LUPKYNIS, which mainly includes third party manufacturing costs, transportation, storage, insurance and allocated internal labor and depreciation.
Research and development costs: R&D costs are accounted for in accordance with ASC Topic 730, Research and Development, (ASC 730) and are expensed as incurred. R&D costs consist primarily of the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits, subcontractors and materials used for R&D activities, including nonclinical studies, clinical trials, manufacturing costs and professional services. The costs of services performed by others in connection with the R&D activities of the Company, including R&D conducted by others on behalf of the Company, shall be included in R&D costs and expensed as the contracted work is performed.
We accrue the costs incurred under our agreements with these third parties based on actual work completed in accordance with agreements established with these third parties. We determine the accruals for R&D costs through monitoring invoices received and discussions with internal personnel and external service providers as to the progress or stage of completion of the clinical studies and the agreed-upon fee to be paid for such services. Where contingent milestone payments are due to third parties under R&D arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are probable to be achieved.
R&D expenses for the years ended December 31, 2021, 2020 and 2019 were $51.1 million, $50.3 million and $52.9 million, respectively, and are included in total cost of sales and operating expenses on the accompanying consolidated statements of operations.
Selling, general and administrative expenses: The Company's SG&A expenses include commercial and allocated administrative personnel, corporate facility and external costs required to support the marketing and sales of LUPKYNIS. These
SG&A costs include corporate facility operating expenses and allocated depreciation; commercial, marketing, pharmacovigilance, publications, tradeshows, advisory boards, samples and operations in support of LUPKYNIS; patient assistance program costs; human resources; finance, legal, information technology and support personnel expenses; and other corporate costs such as telecommunications, insurance, audit and government affairs. We expense SG&A expenses as they are incurred.
The Company uses a third-party logistics provider to perform a full order to cash service, which includes warehousing and shipping directly to two specialty pharmacies and receiving orders from a specialty distributor for shipping to hospitals, on our behalf. As such, since these costs are not integral to bringing the inventories to a salable condition, we elected not to treat shipping and handling costs as a fulfillment activity. Shipping and handling costs related to order fulfillment are recorded in SG&A expenses.
SG&A expenses for the years ended December 31, 2021, 2020 and 2019 were $171.4 million, $96.0 million and $22.3 million, respectively, and are included in total cost of sales and operating expenses on the accompanying consolidated statements of operations.
Shared-based compensation: The Company follows ASC Topic 718, Compensation - Stock Compensation (ASC 718), which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards made to employees and directors. The Company records compensation expense based on the fair value on the grant date for all share-based payments related to stock options, performance awards, restricted stock units and purchases under the Company's ESPP. The estimated fair value of service-based awards is determined using option pricing models that use unobservable inputs and is generally amortized on a straight-line basis over the requisite service period and is recognized based on the proportionate amount of the requisite service period that has been rendered during each reporting period. The estimated fair value of performance-based awards is measured on the grant date and is recognized when it is determined that it is probable that the
performance condition will be achieved. The Company has elected a policy to estimate forfeitures based on historical forfeiture experience.
Income taxes:The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740, Income Taxes (ASC 740). Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that such tax rate changes are enacted. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. Financial statement recognition of a tax position taken or expected to be taken in a tax return is determined based on a more-likely-than-not threshold of that position being sustained. If the tax position meets this threshold, the benefit to be recognized is measured as the largest amount that is more likely than not to be realized upon ultimate settlement. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense.
3. Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard requiresthat credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishesadditional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, these standards now require allowances tobe recorded instead of reducing the amortized cost of the investment. These standards limit the amount of credit losses to be recognized foravailable-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized creditlosses if fair value increases. The adoption of the standard as of January 1, 2020 did not have a material impact on the Company’s consolidated financialstatements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement. Topic 820 requires to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities. For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when the restrictions from redemptions might lapse only if the investee has communicated the timing to the entity or announced the timing publicly. The new standard also amends that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The new standard is effective for fiscal years beginning after December 15, 2019. The standard should be applied retrospectively to the date of initial application of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company elected to adopt the amendment as of January 1, 2020, which did not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)-Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. ASU 2018-15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company adopted ASU 2018-15 effective January 1, 2020 and applied the standard prospectively to implementation costs incurred in its cloud computing arrangements, resulting in capitalized costs of $1.7 million in 2020.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangement (Topic 808): Clarifying the Integration between Topic 808 and Topic 606. The new standard clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. Further, the new standard adds unit-of-account guidance to Topic 808 to align with the guidance in Topic 606 when an entity is assessing whether the collaborative arrangement or part of the arrangement is within the scope of Topic 606. The new standard requires that in transactions with a collaborative arrangement participant that is not directly related to sales to third parties, presenting under Topic 606 is precluded if the collaborative arrangement participant is
not a customer. The new standard is effective for fiscal years beginning after December 15, 2019. The standard should be applied retrospectively to the date of initial application of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company elected to adopt the amendment as of January 1, 2020, which did not have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which clarifies and simplifies certain aspects of the accounting for income taxes. The standard is effective for years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2020. The Company adopted the ASU effective January 1, 2021 with no material impact on the consolidated financial statements.
New Accounting Standards Not Yet Adopted
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities to make annual disclosures about transactions with a government (including government assistance) by analogizing to a grant or contribution accounting model. The required disclosures include the nature of the transaction, the entity's related accounting policy, the financial statement line items affected and the amounts reflected in the current period financial statements, as well as any significant terms and conditions. The guidance is effective for financial statements issued for annual periods beginning after 15 December 2021. For the period ended December 31, 2021, the new standard would not have a material impact on our financial statements.
4. Investments
At December 31, 2021 the Company had $234.2 million and nil of short and long term investments, respectively, consisting mainly of commercial paper and corporate bonds. As of December 31, 2021, $19.2 million are held to maturity debt securities which are carried at amortized cost and are approximately equal to fair market value. As of December 31, 2021, $214.9 million are available-for-sale debt securities which are carried at fair market value and are approximately equal to amortized cost. As of December 31, 2020, $150.4 million were classified as held to maturity and nil were available-for-sale.
| | | | | | | | | | | | | | |
| (in thousands) | | December 31, 2021 | | December 31, 2020 |
| Cashable Guaranteed Investment Certificate | | $ | 3,140 | | | $ | 2,000 | |
| Corporate Bond | | 21,820 | | | 40,372 | |
| Commercial Paper | | 206,724 | | | 67,747 | |
| Treasury Bill | | 2,494 | | | 7,999 | |
| Treasury Bond | | — | | | 5,045 | |
| Yankee Bond | | — | | | 2,816 | |
| Total short term investments | | 234,178 | | | 125,979 | |
| Corporate Bonds - total long term investments | | — | | | 24,380 | |
| Total investments | | $ | 234,178 | | | $ | 150,359 | |
Currently, the Company does not intend to sell investments that are classified as held-to-maturity and has the ability and intent to hold these investments until maturity in order to collect interest payments over the life of the investments. As of December 31, 2021 and December 31, 2020, accrued interest receivable from the investments were $0.1 million and $0.5 million, respectively recorded as part of prepaid and other current assets on the consolidated balance sheets. During the year ended December 31, 2021, the Company had $47 thousand of unrealized losses on available-for-sale securities, net of tax and nil for the years ended December 31, 2020 and 2019, which are included as a component of comprehensive loss on the consolidated statements of operations. The Company's investments as of December 31, 2021 mature at various dates through November 2022.
5. Fair Value Measurement
The Company's financial instruments consist primarily of cash and cash equivalents, investments, accounts receivable, accounts payable and accrued liabilities. The carrying value of accounts receivable, accounts payable and accrued liabilities approximate their fair values because of their short-term nature. Estimated fair values of held to maturity and available-for-sale debt securities are generally based on prices obtained from commercial pricing services.
In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to minimize the use of unobservable inputs (the Company’s assumptions about how market participants would price assets and liabilities). As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:
•Level 1 - Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3 - Unobservable inputs that reflect the reporting entity’s own assumptions.
The Company's Level 1 instruments include deposits held with banks and short-term investments that are valued using quoted market prices. Level 2 instruments include the Company's short and long-term investments that are valued through third-party pricing services that use verifiable observable market data. The Company had no Level 3 instruments as of December 31, 2021 and December 31, 2020.
The following tables summarizes the Company's financial assets measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Cash and cash equivalents: | | | | | | | | |
| Deposits held with banks | | $ | 214,702 | | | $ | — | | | $ | — | | | $ | 214,702 | |
| Short-term highly liquid investments | | 17,198 | | | — | | | — | | | 17,198 | |
| Investments | | 206,724 | | | 27,454 | | | 0 | | 234,178 | |
| Total | | $ | 438,624 | | | $ | 27,454 | | | $ | — | | | $ | 466,078 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Cash and cash equivalents: | | | | | | | | |
| Deposits held with banks | | $ | 130,807 | | | $ | — | | | $ | — | | | $ | 130,807 | |
| Short-term highly liquid investments | | 141,543 | | | — | | | — | | | 141,543 | |
| Investments | | 69,746 | | | 80,613 | | | — | | | 150,359 | |
| Total | | $ | 342,096 | | | $ | 80,613 | | | $ | — | | | $ | 422,709 | |
Refer to Note 4, “Investments,” for the carrying amount and related unrealized gains (losses) by type of investment.
6. Inventories
Inventories are valued under a standard costing methodology on a first-in, first-out basis and are stated at the lower of cost or net realizable value. The Company capitalizes inventory costs related to products to be sold in the ordinary course of business.
The Company makes a determination of capitalizing inventory costs for a product based on, among other factors, status of regulatory approval, information regarding safety, efficacy and expectations relating to commercial sales and recoverability of costs. For our product LUPKYNIS, the Company commenced capitalization of inventory once FDA approval was deemed to be probable, which occurred during the third quarter of 2020. Capitalized costs of inventories for LUPKYNIS mainly include third party manufacturing costs, transportation, storage, insurance, depreciation and allocated internal labor.
The Company assesses recoverability of inventory each reporting period to determine any write down to net realizable value resulting from excess or obsolete inventories.
The components of inventory are as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | December 31, 2021 | | December 31, 2020 |
| Raw materials | | $ | 2,217 | | | $ | — | |
| Work in process | | 12,566 | | | 13,927 | |
| Finished goods | | 4,543 | | | — | |
| Total inventories, net | | $ | 19,326 | | | $ | 13,927 | |
As of December 31, 2020, $13.9 million of pre-launch inventory recognized on the consolidated balance sheet was classified as work in process. In addition, as of December 31, 2021 we have inventory deposits of $3.9 million that are primarily related to the purchase of drug substance that are currently recorded under prepaid expenses and other current assets.
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | December 31, 2021 | | December 31, 2020 |
| Prepaid assets | | $ | 5,316 | | | $ | 3,701 | |
| Prepaid insurance | | 1,632 | | | 2,054 | |
| Prepaid deposits | | 4,762 | | | 398 | |
| Other current assets | | 796 | | | 1,018 | |
| Total prepaid expenses and other current assets | | $ | 12,506 | | | $ | 7,171 | |
8. Property, Plant and Equipment
Property, plant and equipment are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Estimated Useful Life
(in years) | | December 31, 2021 | | December 31, 2020 |
| Construction in progress | | — | | $ | 393 | | | $ | 4,467 | |
| Leasehold improvements | | Shorter of term of the lease or estimated useful life | | 2,978 | | | 34 | |
| Office equipment | | 5 | | 645 | | | 83 | |
| Furniture | | 7 | | 976 | | | — | |
| Computer equipment | | 3 | | 262 | | | 381 | |
| | | | 5,254 | | | 4,965 | |
| Less accumulated depreciation | | | | (836) | | | (179) | |
| Property and equipment, net | | | | $ | 4,418 | | | $ | 4,786 | |
Construction in progress assets during 2021 relate primarily to the design of the proposed new corporate headquarters in Victoria, British Columbia. Construction in progress assets during 2020 were related to leasehold improvements and office equipment and furniture for the Company's Rockville, MD office, which were placed into service upon occupancy in January 2021. Depreciation expense for the years ended December 31, 2021, 2020 and 2019, was $663 thousand, $82 thousand and $33 thousand, respectively, which is included in SG&A expenses on the consolidated statements of operations.
9. Intangible Assets
Intangible assets are amortized over their useful lives on a straight-line basis. The Company’s intangible assets, net of accumulated amortization are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (in thousands) | | Weighted Average
Life (in years) | | Gross Carrying
Value | | Accumulated
Amortization | | Net Carrying
Amount |
| Patents | | 12 | | $ | 1,471 | | | $ | (1,176) | | | $ | 295 | |
| Acquired intellectual property and reacquired rights | | 12 | | 15,126 | | | (8,804) | | | 6,322 | |
| Internal-use software implementation costs | | 3 | | 2,873 | | | (1,086) | | | 1,787 | |
| | | | $ | 19,470 | | | $ | (11,066) | | | $ | 8,404 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| (in thousands) | | Weighted Average
Life (in years) | | Gross Carrying
Value | | Accumulated
Amortization | | Net Carrying
Amount |
| Patents | | 12 | | $ | 1,651 | | | $ | (1,203) | | | $ | 448 | |
| Acquired intellectual property and reacquired rights | | 12 | | 15,126 | | | (7,770) | | | 7,356 | |
| Internal-use software implementation costs | | 3 | | 1,675 | | | (147) | | | 1,528 | |
| | | | $ | 18,452 | | | $ | (9,120) | | | $ | 9,332 | |
Amortization expense recognized by the Company related to intangible assets was $2.1 million, $1.3 million and $1.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. Amortization expense as it relates to the amortization of acquired intellectual property and other intangible assets resides within amortization on the consolidated statements of
operations. The estimated aggregate amortization expense for intangible assets over the next five fiscal years ending December 31, 2022 through December 31, 2026 is approximately $6.7 million.
10. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities are as follows:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Trade payables | | $ | 3,879 | | | $ | 2,635 | |
| Other accrued liabilities | | 8,443 | | | 6,616 | |
| Accrued R&D projects | | 4,383 | | | 4,185 | |
| Employee accruals | | 18,242 | | | 11,361 | |
| Total accounts payable and accrued liabilities | | $ | 34,947 | | | $ | 24,797 | |
11. License and Collaboration Agreements
Riptide License
As discussed in Note 1, on August 17, 2021, AUR300 (M2 macrophage modulation via CD206 binding) was secured through a global licensing and research agreement with Riptide Bioscience, Inc. (Riptide), a private company. As part of the agreement, the Company paid Riptide an upfront license fee of $6.0 million and accrued for a milestone payment deemed probable which were expensed as R&D on the consolidated statement of operations. Additional milestone payments are due upon certain development, clinical and regulatory milestones, and royalties will be payable upon commercialization which will be accrued when deemed probable. It is anticipated that clinical development for AUR300 will commence during the first half of 2023.
Thunderbolt
In 2020, Aurinia made an aggregate upfront payment of $750 thousand to the shareholders of Thunderbolt and will be responsible for future regulatory milestones upon investigational new drug (IND) acceptance by the United States’ Food and Drug Administration (FDA) or any equivalent authority. Additionally, Thunderbolt shareholders will receive low single digit royalties on any future net sales. AUR200, a recombinant Fc fusion protein designed to specifically block B-cell Activating Factor, known as BAFF, and A Proliferation-Inducing Ligand, known as APRIL, is currently undergoing pre-clinical development with projected submission of an IND to the FDA in 2023.
Otsuka Contract
On December 17, 2020, the Company entered into a collaboration and license agreement with Otsuka Pharmaceutical Co., Ltd. (Otsuka) for the development and commercialization of oral LUPKYNIS for the treatment of adult patients with active LN in the European Union (EU), Japan, as well as the United Kingdom, Russia, Switzerland, Norway, Belarus, Iceland, Liechtenstein and Ukraine.
As part of the agreement, Aurinia received in 2020 an upfront cash payment of $50.0 million for the license agreement, and has the potential to receive up to $50.0 million in additional regulatory and reimbursement milestones. Aurinia will receive tiered royalties on future sales ranging from 10 to 20 percent (dependent on achievement of sale milestones) on net sales upon commercialization, along with additional milestone payments based on the attainment of certain annual sales by Otsuka. In addition, we are currently negotiating a supply agreement.
The Company evaluated the Otsuka Agreement under ASC 606. Based on that evaluation, the license transferred was determined to be functional intellectual property (IP) that has significant standalone functionality. That is, the treatment of LN and other diseases provides significant benefit to Otsuka at the point of transfer, and it is not expected that the utility of the IP
will substantively change as a result of any remaining clinical trials or ongoing activities of Aurinia. The Company determined the upfront fee of $50.0 million is fixed consideration for the transfer of the license and is recognized as revenue upon transfer of the license in December 2020.
The remaining forms of consideration are variable because they are dependent on achieving milestones or are based on aggregate future net sales for the regions. None of the regulatory, reimbursement, or sales-based milestones have been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considers numerous factors, including the magnitude of a potential reversal of revenue, uncertainty about if or when the milestone related performance obligations might be achieved and that receipt of the milestones are outside the control of the Company since they are dependent on efforts to be undertaken by Otsuka and regulatory approval by various foreign government agencies. Any consideration related to sales-based royalties (and sales-based milestones) will be recognized as license revenue when the related sales occur.
As of December 31, 2021, there has been no additional consideration earned or received since the upfront payment of $50.0 million during the fourth quarter of 2020.
12. Segment Information and Geographic Data
As the operations comprise a single reporting segment, amounts disclosed in the consolidated financial statements represent those of the single reporting unit. Revenues and accounts receivable, net from two customers accounted for approximately 56% and 43% for the year ending December 31, 2021. There was one customer and two customers that accounted for all of the revenues during 2020 and 2019, respectively.
Revenues by Geographic Location
The following geographic information reflects revenue, net of adjustments, based on customer location:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Revenue | | | | | | |
| Japan | | $ | — | | | $ | 50,000 | | | $ | — | |
| Other | | 117 | | | 118 | | | 118 | |
| United States | | 45,488 | | | — | | | 200 | |
| Total | | $ | 45,605 | | | $ | 50,118 | | | $ | 318 | |
Long-lived Assets by Location
Long-lived assets by location consist of property plant and equipment:
| | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 |
| Long-lived assets | | | | |
| Canada | | 454 | | | $ | 298 | |
| United States | | 3,964 | | | 4,488 | |
| Total | | $ | 4,418 | | | $ | 4,786 | |
13. Income Taxes
The components of pre-tax (losses) income before income taxes for the years ended December 31, 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Canada | $ | (180,374) | | | $ | (61,024) | | | $ | (88,694) | |
| Foreign | 168 | | | (41,750) | | | 453 | |
| $ | (180,206) | | | $ | (102,774) | | | $ | (88,241) | |
Income tax expense (benefit) for the years ended December 31, 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| Canada | $ | — | | | $ | — | | | $ | — | |
| Foreign | 760 | | | (94) | | | 144 | |
| 760 | | | (94) | | | 144 | |
| Deferred: | | | | | |
| Canada | — | | | — | | | — | |
| Foreign | — | | | — | | | — | |
| Total deferred | — | | | — | | | — | |
| Income tax expense (benefit) | $ | 760 | | | $ | (94) | | | $ | 144 | |
The Company's parent entity is located in Canada and therefore the Canadian statutory rate is utilized. The provision for income taxes varied from the income taxes provided based on the Canadian statutory rate of 26.8%, 26.8%, and 25.4% for the years ending December 31, 2021, 2020 and 2019, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | | 2019 |
| Canada statutory income tax benefit | | 26.8 | % | | 26.8 | % | | | 25.4 | % |
| Effect of tax rates on foreign jurisdictions | | — | | | (2.4) | | | | — | |
| Impact of future rates and tax rate changes | | (0.1) | | | 6.1 | | | | (0.9) | |
| Non-deductible share-based compensation | | (4.5) | | | (4.5) | | | | (2.1) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Change in valuation allowance | | (21.8) | | | (26.0) | | | | (22.3) | |
| | | | | | | |
| Other | | (0.8) | | | 0.1 | | | | (0.3) | |
| Effective tax rate | | (0.4) | % | | 0.1 | % | | | (0.2) | % |
The tax effects of the temporary differences giving rise to the Company's net deferred tax assets as of December 31, 2021 and 2020 are summarized as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 |
| Deferred tax assets: | | | | |
| Loss carry-forwards | | $ | 120,274 | | | $ | 80,087 | |
| Share issue costs | | 6,016 | | | 6,295 | |
| | | | |
| Intangible assets | | 1,086 | | | 2,718 | |
| SRED (Scientific Research and Experimental Development) | | 6,059 | | | 4,808 | |
| | | | |
| Deferred compensation | | 3,980 | | | 4,006 | |
| Other | | 6,126 | | | 5,243 | |
| Total deferred tax assets | | 143,541 | | | 103,157 | |
| Valuation allowance | | (141,348) | | | (101,792) | |
| Net deferred tax assets | | 2,193 | | | 1,365 | |
| Deferred tax liabilities: | | | | |
| Other | | (1,356) | | | (1,173) | |
| Property and equipment and intangible assets | | (837) | | | (192) | |
| | | | |
| Deferred tax liabilities | | (2,193) | | | (1,365) | |
| Net deferred tax assets (liabilities) | | $ | — | | | $ | — | |
The Company’s valuation allowance increased by $39.6 million in 2021 as compared to 2020 as a result of the additional pre-tax book losses.
As of December 31, 2021, the Company has $429.8 million of Canada gross net operating loss (NOL) carryforwards with an expiration period of 2029 through 2040. As of December 31, 2021, the Company has approximately $4.8 million of Canada Investment Tax Credits and British Columbia Scientific Research and Experimental Development (SRED) with an expiration period of 2029-2040. As of December 31, 2021 the Company has approximately $31.4 million of U.S. federal gross NOL carryforwards that carryforward indefinitely.
Uncertain Tax Positions
The Company is under examination by the Canadian Revenue Agency for years 2017 and 2018. The Company is subject to examination in the U.S., UK, Canada and tax periods remain open in the range of 2015 through 2020.
14. Commitments and Contingencies
The Company may, from time to time, be subject to claims and legal proceedings brought against it in the normal course of business. Such matters are subject to many uncertainties. Management believes the ultimate resolution of such contingencies will not have a material adverse effect on the consolidated financial statements.
On December 18, 2020, the Company commenced an action in the United States District Court for the District of New Jersey against Sun Pharmaceutical Industries, Inc., Sun Pharmaceutical Industries, Ltd., and Sun Pharma Global FZE (collectively, "Sun"). The action is a claim for patent infringement under the patent laws of the United States arising from Sun's commercial manufacture, use, offer to sell, or sales within the United States, and/or importation into the United States of Sun's CEQUATM product, a CNI immunosuppressant ophthalmic solution, prior to the expiration of our United States Patent Nos. 10,265,375 and 10,973871. In our action, we request relief in the form of an order confirming Sun has infringed our patent, an injunction preventing Sun from manufacturing, using or selling CEQUATM, and monetary relief (including costs). Sun responded by denying infringement and/or asserting that the patents at issue are invalid. The parties have exchanged initial pleadings and patent disclosures, and are in the process of claim construction proceedings. Trial is scheduled to commence on or around March 2023.
Manufacturing Commitments
The Company has various manufacturing agreements to support our commercial and clinical product supply requirements.
We rely on Lonza, a third party manufacturer, to produce a portion of commercial and clinical quantities of our commercial and clinical drug substance requirements. We have firm orders with Lonza for future purchases of drug substance, with remaining total non-cancellable future commitments of approximately $26.4 million through 2023 of which $3.5 million was paid during the second quarter of 2021. If we terminate certain firm orders with Lonza without cause, we will be required to pay for drug substance scheduled for manufacture under our arrangement.
15. Deferred Compensation and Other Non-current Liabilities
The Company recorded other non-current liabilities of $16.0 million and $16.3 million as of December 31, 2021 and December 31, 2020, respectively. The balance as of December 31, 2021 and December 31, 2020 primarily included deferred compensation arrangements that are the result of a resolution of the board of directors of the Company dated March 8, 2012 whereby certain executive officers at that time were provided with future potential employee benefit obligations for remaining with the Company, for a certain period of time. These obligations were also contingent on the occurrence of uncertain future events. The other non-current liabilities also include milestone payments deemed probable to be paid in the future.
16. Leases
The Company has the following lease obligations:
Victoria, British Columbia
During the fourth quarter of 2020, the Company entered into facility and furniture leases for its head office located in Victoria, British Columbia for a total of 13,206 square feet of office space. The lease terms commenced on January 1, 2021 for the facility and furniture leases. As of December 31, 2021, the Company had $0.2 million right-of-use assets (ROU assets) and $0.2 million lease liabilities related to the leases. The Company recognized operating lease costs that are included in SG&A expense in the consolidated statement of operations. The incremental borrowing rate applied to the lease liabilities on January 1, 2021 was 4.08% based on financial position of the Company, geographical region and terms of leases.
During August 2020, the Company signed a lease for commercial office space in Victoria, British Columbia. The lease term is expected to begin in 2022. The present value of the minimum lease payments for this lease are $2.3 million. As of December 31, 2021, the lease has not commenced and as a result there has been no accounting recognition associated with the lease.
Rockville, Maryland
During March 2020, the Company entered into a lease for its U.S. commercial office in Rockville, Maryland for a total of 30,531 square feet of office space. The lease has a remaining term of approximately 11 years and has an option to extend for 2 five-year periods after the 11 years has elapsed and has an option to terminate after seven years. As of December 31, 2021, the Company had a right-of-use asset of $5.2 million and lease liability of $8.6 million included in the consolidated balance sheets. As of December 31, 2020, the Company had a right of use asset of $5.5 million and lease liability of $8.4 million included in the consolidated balance sheets. During 2020, the Company received reimbursements for tenant leasehold improvements by the landlord in the amount of $2.3 million for the Maryland lease. The Company recorded these leasehold improvement incentives as additions to the lease liability. The lease term commenced on March 12, 2020. When measuring the lease liability, the Company discounted lease payments using its incremental borrowing rate at March 12, 2020. The incremental borrowing rate applied to the lease liability on March 12, 2020 was 5.2% based on the financial position of the Company, geographical region and terms of lease.
Edmonton, Alberta
During the fourth quarter of 2020, the Company entered into an agreement to lease office space in Edmonton, Alberta, commencing on October 1, 2020 and ending September 30, 2021. During the third quarter of 2021, the lease was extended until September 30, 2022. The Company recognizes short-term leases on a straight-line basis and did not record a related lease asset or liability for the Edmonton lease. The Company recognized short-term rent expense for this lease, which is included in SG&A expense in the consolidated statement of operations.
Supplemental balance sheet information related to the operating lease ROU asset and lease liabilities as of December 31, 2021 and December 31, 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Balance Sheet Classification | | 2021 | | 2020 |
| Assets | | | | | | |
| Operating lease right of-use assets | | Non-current assets | | $ | 5,383 | | $ | 5,489 | |
| | | | | | |
| Liabilities | | | | | | |
| Current operating lease liabilities | | Current operating lease liabilities | | 1,059 | | 788 | |
| Non-current operating lease liabilities | | Non-current operating lease liabilities | | 7,680 | | 7,619 | |
| Total lease liabilities | | | | $ | 8,739 | | $ | 8,407 | |
Beginning January 1, 2021, the Company began to incur variable lease costs under the existing Victoria and Rockville leases. These costs include operation and maintenance costs and are recorded under rent expense in SG&A. A summary of the components of leasing costs and rent for the years ended December 31, 2021 and December 31, 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Consolidated Statement of Operations | | 2021 | | 2020 | | 2019 |
| Operating lease costs | | | | | | | | |
| Operating lease costs | | Selling, general and administrative | | $ | 1,045 | | | $ | 653 | | | $ | 229 | |
| | | | | | | | |
| Short-term lease costs | | | | | | | | |
| Office Building | | Selling, general and administrative | | 27 | | | 288 | | | 68 | |
| | | | | | | | |
| Variable lease costs | | | | | | | | |
| Office building | | Selling, general and administrative | | 167 | | | 3 | | | — | |
| Total rent expense | | | | $ | 1,239 | | | $ | 944 | | | $ | 297 | |
The weighted-average remaining lease term and discount rate for the years ended December 31, 2021 and December 31, 2020 are as follows:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Weighted average remaining lease term (in years) | | 9.49 | | 10.67 |
| Weighted average discount rate | | 5.2% | | 5.2% |
Supplemental cash flow information related to operating leases for the years ended December 31, 2021, December 31, 2020 and December 31, 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities | | $ | 646 | | | $ | 267 | | | $ | 182 | |
| Initial recognition of operating lease right-of-use asset | | $ | 419 | | | $ | 5,804 | | | $ | — | |
Future maturities of operating lease liabilities as of December 31, 2021 are as follows:
| | | | | | | | |
| (in thousands) | | Operating Lease Payments |
| 2022 | | $ | 1,143 | |
| 2023 | | 1,061 | |
| 2024 | | 1,085 | |
| 2025 | | 1,109 | |
| 2026 | | 1,135 | |
| Thereafter | | 5,638 | |
| Total lease payments | | 11,171 | |
| Less: imputed interest | | (2,432) | |
| Total | | $ | 8,739 | |
On December 15, 2020, the Company entered into a collaborative agreement with Lonza to build a dedicated manufacturing capacity within Lonza’s existing small molecule facility in Visp, Switzerland. The dedicated facility (also referred to as "monoplant") will be equipped with state-of-the-art manufacturing equipment to provide cost and production efficiency for the manufacture of voclosporin, while expanding existing capacity and providing supply security to meet future commercial demand.
Following U.S. regulatory approval of voclosporin in January 2021, the Company has commenced a capital expenditure payment program totaling approximately CHF 21.0 million. The first capital expenditure payment of $11.8 million was made in February 2021 and was treated as an upfront lease payment and recorded under other non-current assets on the consolidated balance sheets. The second payment is not due until the facility fulfills the required operational qualifications which is estimated to be during 2023. Upon completion of the monoplant, the Company will have the right to maintain sole dedicated use of the monoplant by paying a quarterly fixed facility fee.
The Company expects to account for the arrangement as a finance lease under ASC 842. The present value of the minimum lease payments total approximately $79.0 million, beginning April 2023 and expiring in 2030, and are not included in the above table.
17. Shareholders' Equity
Common shares: The Company has authorized an unlimited number of common shares with no par value. As of December 31, 2021, 2020 and 2019, 141.6 million, 126.7 million and 111.8 million Common Shares, respectively, were issued and outstanding. Each common share entitles the holder to one vote on all matters submitted to a vote of the Company’s shareholders. Common shareholders are not entitled to receive dividends unless declared by the Company’s Board of Directors.
The common share activity for 2021, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | |
| | Common Shares |
| | Number of shares
(in thousands) | | Amount
(in thousands) |
| Balance at December 31, 2018 | | 85,500 | | | $ | 488,744 | |
| Issued pursuant to Public Offering | | 12,782 | | | 191,737 | |
| Issued pursuant to At-the-Market (ATM) Facilities | | 6,953 | | | 45,010 | |
| Share issue costs | | — | | | (13,629) | |
| Issued pursuant to exercise of warrants | | 2,983 | | | 12,428 | |
| Issued pursuant to exercise of stock options | | 3,580 | | | 22,197 | |
| Balance at December 31, 2019 | | 111,798 | | | 746,487 | |
| Issued pursuant to Public Offering | | 13,333 | | | 200,000 | |
| Share issue costs | | — | | | (12,268) | |
| Issued pursuant to exercise of warrants | | 1 | | | 2 | |
| Issued pursuant to exercise of stock options | | 1,593 | | | 10,107 | |
| Balance at December 31, 2020 | | 126,725 | | | 944,328 | |
| Issued pursuant to ATM Facilities | | 10,166 | | | 202,356 | |
| Share issue costs | | — | | | (5,616) | |
| Issued pursuant to exercise of warrants | | 1,434 | | | 2,102 | |
| Issued pursuant to exercise of stock options | | 3,238 | | | 33,073 | |
| Issued pursuant to ESPP | | 37 | | | 808 | |
| Balance at December 31, 2021 | | 141,600 | | | $ | 1,177,051 | |
As discussed below from time to time, we intend to use the net proceeds from the sale of securities to fund our operations, which includes, but is not limited to, clinical development and commercial production of voclosporin (whether for LN or other indications), advancing our pipeline, regulatory, additional clinical trials, business development opportunities, capital expenditures and working capital.
November 19, 2021 ATM facility
On November 19, 2021 the Company entered into an Open Market Sale Agreement (the "Sale Agreement") with Cantor Fitzgerald & Co. pursuant to which the Company may from time to time sell, through ATM offerings, common shares that would have an aggregate offering price of up to $250.0 million. Pursuant to this agreement the Company issued 10.2 million common shares at a weighted average price of $19.90 resulting in gross proceeds of $202.4 million as of December 31, 2021. The Company incurred share issue costs of approximately $5.6 million which included up to a 3% underwriting commission of $5.3 million and professional fees of $0.3 million directly related to the ATM.
On February 25, 2022, the Company gave notice to Cantor Fitzgerald & Co. to terminate the Sale Agreement. No further sales will occur under the Sale Agreement dated November 19, 2021.
July 27, 2020 public offering
On July 27, 2020 the Company completed a public offering of 13.3 million common shares at a price of $15.00 per share. Gross proceeds from this offering were $200.0 million and the share issue costs totaled an estimated $12.3 million which included a 6% underwriting commission of $12.0 million and professional fees of $0.3 million.
December 12, 2019 public offering
On December 12, 2019 the Company completed a public offering of 12.8 million common shares at a price of $15.00 per share. Gross proceeds from this offering were $191.7 million and the share issue costs totaled $11.8 million which included a 6% underwriting commission of $11.5 million and professional fees of $0.3 million.
September 13, 2019 ATM facility
On September 13, 2019 the Company entered into an Open Market Sale Agreement (the "Sale Agreement") with Jefferies pursuant to which the Company may from time to time sell, through ATM offerings, common shares that would have an aggregate offering price of up to $40.0 million. Pursuant to this agreement the Company issued 2.3 million common shares at a weighted average price of $6.40 resulting in gross proceeds of $15.0 million. The Company incurred share issue costs of $640 thousand including a 3% commission of $450 thousand paid to the agent and professional fees of $190 thousand directly related to the ATM. On December 9, 2019, the Company terminated the September 13, 2019 Sale Agreement with Jefferies LLC related to the 2019 ATM.
Warrants:
Warrant related to February 14, 2014 private placement offering:On February 14, 2014, the Company completed a $52.0 million private placement (2014 Private Offering). Under the terms of the 2014 Private Offering, a Unit consisted of 1 common share and one-quarter (0.25) of a common share purchase price warrant (2014 Warrant). The Company issued 18.9 million Units at a subscription price per Unit of $2.7485, exercisable for a period of five years from the date of issuance, at an exercise price of $3.2204. These February 2014 Warrants meet the scope exceptions provided in ASC 815, Derivatives and Hedging, as they are indexed to the Company’s own shares, and therefore are accounted for under ASC 505, Equity.
In 2019, certain holders of these 2014 Warrants elected the cashless exercise option and the Company issued 0.7 million common shares in lieu of 1.3 million 2014 Warrants, which was recorded through an increase in equity (common shares) and decrease in additional paid-in capital. One holder of 464,000 2014 Warrants exercised these 2014 Warrants for cash and received 464,000 common shares. The Company received cash proceeds of $1.5 million and recorded an increase in cash and additional paid in capital. In 2018, no holders of the 2014 Warrants elected the cashless exercise option. As a result, the Warrants related to the February 14, 2014 private placement offering have been extinguished upon the exercise of the aforementioned warrants, at December 31, 2019.
Warrant related to December 28, 2016 bought deal public offering:On December 28, 2016, the Company completed a $28.8 million Bought Deal public offering (2016 Public Offering). Under the terms of 2016 Public Offering, each Unit consists of 1 common share and one-half (0.50) of a common share purchase warrant (December 2016 Warrant). The Company issued 12.8 million Units at a subscription price per Unit of $2.25, exercisable for a period of five years from the date of issuance at an exercise price of $3.00. These December 2016 Warrants also meet the scope exceptions provided in ASC 815, Derivatives and Hedging, as they are indexed to the Company’s own shares, and therefore are accounted for under ASC 505, Equity.
At initial recognition on December 28, 2016, the Company recorded a warrant in the amount of $7.2 million based on the estimated fair value of the December 2016 Warrants with allocated share issuance costs of $655 thousand recognized as a reduction of equity.
During 2019, certain holders of these Warrants exercised at $3.00 per share for gross proceeds of $5.5 million. During 2020, a holder exercised 500 Warrants at $3.00 per share for gross proceeds of $2 thousand. During 2021, 1.7 million warrants have been exercised at $3.00 per share for gross proceeds of $0.3 million. Of these 1.7 million warrants, the Company issued 1.3 million common shares in lieu of 1.6 million warrants. All gross proceeds were recorded as an increase in cash and equity. The remaining 6,000 warrants expired as of December 31, 2021.
The warrant activity for 2021 and 2020 is as follows:
| | | | | |
| AURINIA PHARMACEUTICALS INC.Number of warrants
(in thousands) |
| Balance at December 31, 2019 | 1,691 | |
April 30,Warrants exercised | (1) | |
| Balance at December 31, 2020 | 1,690 | |
| Warrants exercised | (1,684) | |
| Warrants expired | (6) | |
| Balance at December 31, 2021 | By:— | /s/ Peter Greenleaf |
| | Peter Greenleaf |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
18. Shared-Based Compensation
The Company's Amended and Restated Equity Incentive Plan (the Plan), which was adopted and approved by the Company's shareholders in June 2021, allows for an issuance of up to an aggregate of 23.8 million shares (inclusive of outstanding awards). Also in June 2021, the Company's shareholders adopted and approved the Company's Employee Stock Purchase Plan (2021 ESPP), which allows for the issuance of up to 2.5 million shares of which 37 thousand were purchased during 2021. The 2021 ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code (the “Code”) but also permits the Company to include the employees, including non-United States employees, in offerings not intended to qualify under Section 423. The purpose of the 2021 ESPP is to provide eligible employees with opportunities to purchase the Company’s common shares at a discounted price.
As of December 31, 2021 and 2020, 141.6 million and 126.7 million, common shares were issued and outstanding.
Stock Options
The Plan requires the exercise price of each option not to be less than the closing market price of the Company’s common shares on the day immediately prior to the date of grant. The board of directors approves the vesting criteria and periods at its discretion. The options issued under the plan are accounted for as equity-settled share-based payments.
The following table summarizes the number of options outstanding under the Plan and inducement grants outside of the Plan for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares
(in thousands) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value
(in thousands) |
| | | | | | | | |
| Balance as of December 31, 2018 | | 7,591 | | | $ | 4.44 | | | | | |
| Granted | | 2,520 | | | $ | 6.00 | | | | | |
| Grant inducement | | 1,600 | | | $ | 6.28 | | | | | |
| Exercised/released | | (3,578) | | | $ | 4.03 | | | | | |
| Cancelled/forfeited | | (311) | | | $ | 5.40 | | | | | |
| Outstanding at December 31, 2019 | | 7,822 | | | $ | 5.47 | | | 6.64 | | $ | 115,655 | |
| Granted | | 7,129 | | | $ | 15.61 | | | | | |
| Granted inducement | | 925 | | | $ | 14.36 | | | | | |
| Exercised/released | | (1,593) | | | $ | 4.39 | | | | | |
| Cancelled/forfeited | | (236) | | | $ | 11.82 | | | | | |
| Outstanding at December 31, 2020 | | 14,047 | | | $ | 11.35 | | | 7.51 | | $ | 35,891 | |
| Granted | | 2,277 | | | $ | 14.44 | | | | | |
| Exercised/released | | (3,238) | | | $ | 7.21 | | | | | |
| Cancelled/forfeited | | (1,012) | | | $ | 13.84 | | | | | |
| Outstanding at December 31, 2021 | | 12,074 | | | $ | 12.84 | | | 7.86 | | $ | 121,141 | |
| | | | | | | | |
| Vested and exercisable options at December 31, 2021 | | 5,849 | | | $ | 11.87 | | | | | |
The weighted average grant date fair value of stock options granted during the years ended December 31, 2021, 2020 and 2019 was $7.34, $5.58 and $2.56, respectively. The total fair value of options vested during the years ended December 31, 2021, 2020 and 2019 was $24.9 million, $14.9 million and $8.5 million, respectively.
Total intrinsic value of options exercised was $50.3 million, $13.1 million and $63.3 million for years ended December 31, 2021, 2020 and 2019, respectively.
On November 20, 2020, the Company’s Compensation Committee granted the newly appointed Executive Vice President, General Counsel, Corporate Secretary & Chief Compliance Officer, a non-qualified stock option to purchase an aggregate of 298,924 common shares on November 16, 2020. The option has a per share exercise price of $13.40, the closing trading price on November 13, 2020. One-third of the shares underlying the option vest in November 2021, and the balance of the shares vest in a series of 24 equal monthly installments thereafter.
On October 2, 2020, the Company’s Compensation Committee granted 9 new employees non-qualified stock options to purchase an aggregate of 96,000 common shares, at a per share exercise price of $14.73, the closing trading price on September 30, 2020. One-third of the options vest in October 2021, and the balance of the options vests in a series of 24 equal monthly installments thereafter.
On September 4, 2020 the Company granted 105 new employees non-qualified stock options to purchase an aggregate of 530,000 common shares, at a per share exercise price of $14.83, the closing trading price on August 31, 2020. One-third of the options vest in September 2021, and the balance of the options vests in a series of 24 equal monthly installments thereafter.
On April 29, 2019, the Company granted 1.6 million inducement stock options to the new Chief Executive Officer pursuant to Section 613(c) of the TSX Company Manual at a price of $6.28. The first 25% of these options vest on the one year anniversary of the grant, and the remaining 75% vest in equal amounts over 36 months following the one year anniversary date and are exercisable for a term of ten years.
On May 2, 2016, the Company granted 200,000 inducement stock options to a new employee pursuant to Section 613(c) of the TSX Company Manual at a price of $2.92. These options vest in equal amounts over 36 months and are exercisable for a term
of five years. The employee had exercised 150,000 of these options as of December 31, 2019. There are zero options remaining at December 31, 2020.
The inducement options noted above were granted as an inducement material to the new employees entering into employment with Aurinia in accordance with Nasdaq Listing Rule 5635(c)(4). The inducement stock options also have a ten-year term and are subject to the terms and conditions of the stock option agreement pursuant to which the option was granted. The inducement options are recorded outside of the Plan.
In determining the fair value of the options granted, the Company uses the Black-Scholes option pricing model and reviews the following assumptions each reporting period:
Expected Term - Expected term (in years) is based upon the contractual term, taking into account expected employee exercise and expected post-vesting employment termination behavior. Based on the Company's historical expected lives data and the growth during 2021, the expected life extends further into the contractual life increasing the expected life. The increase of the expected life in 2021 is in line with historic data and what management expects in the future.
Volatility - The Company considers historical volatility of its common shares in estimating its future stock price volatility. The expected life is used to determine market volatility of the underlying stock. The change in the volatility from 52% in 2020 to 66% in 2021 was due to the Company's stock being more volatile throughout 2021 than in the prior year. Given the growth of the Company, the expected life used to determine previous market volatility and comparable peer group of 66% reflects an appropriate estimate of future volatility.
Risk-free interest rate - The risk-free interest rate for the expected life of the options was based on the yield available on government benchmark bonds with an approximate equivalent remaining term at the time of the grant.
Dividend yield - The Company has never paid dividends on its common shares and has no plans to pay dividends on our common shares in the near future. Therefore, the Company dividend yield is zero.
The following weighted average assumptions were used to estimate the fair value of the options granted during the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Expected term (in years) | | 4 years | | 3 years | | 4 years |
| Volatility | | 66 | % | | 52 | % | | 52 | % |
| Risk-free interest rate | | 0.46 | % | | 0.55 | % | | 1.61 | % |
| Dividend yield | | 0.0 | % | | 0.0 | % | | 0.0 | % |
Performance Awards and Restricted Stock Units
On October 23, 2020, the Company issued 439,000 performance awards (PAs) to executive management of the Company whose vesting is contingent upon meeting specific performance metrics based on the results for the year ended December 31, 2021. Each PA which vests entitles the participant to receive common shares on the basis of the performance metrics set. On March 18, 2021 performance metrics were set and formally communicated. Therefore, March 18, 2021 was the grant date and the fair value on the grant date was $13.56. As of December 31, 2021, approximately 88,000 PAs vested based on performance metrics achieved and 351,000 were cancelled as performance metrics were not met.
On August 6, 2021, the Company granted approximately 418,000 PAs and 201,000 restricted stock units (RSUs). The grant date for the PAs and RSUs was August 6, 2021 and the fair value on the grant date was $14.42 as this was the date performance measures were set and communicated to employees. The PAs vest on the employee's first anniversary of the grant date and the employee must achieve at least one of the performance metrics to obtain the portion of the award associated with the metric. The RSUs have no performance metrics and will vest on the one year anniversary of the grant. As of December 31, 2021, none of the August 6, 2021 PAs and RSUs have vested.
The Company recorded approximately $2.7 million of share-based compensation expense related to PAs and RSUs during the year ended December 31, 2021.
Compensation Expense
Share-based compensation expense for the years ended December 31, 2021, 2020 and 2019 totaled approximately $31.2 million, $17.5 million and $7.4 million, respectively, as shown in the table below.
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Research and development | | $ | 4,442 | | | $ | 3,730 | | | $ | 2,693 | |
| Selling, general and administrative | | 26,432 | | | 13,615 | | | 4,721 | |
| Capitalized under inventories | | 369 | | | 109 | | | — | |
| Share-based compensation expense | | $ | 31,243 | | | $ | 17,454 | | | $ | 7,414 | |
Unrecognized Share-Based Compensation Expense and Weighted Average Remaining Amortization Period
As of December 31, 2021, the unrecognized share-based cost, and the estimated weighted-average amortization period, using the straight-line attribution method, was as follows (in thousands, except amortization period):
| | | | | | | | | | | | | | |
| | Unrecognized share-based compensation expense | | Weighted average remaining amortization period (in years) |
| Stock Options | | $ | 13,563 | | | 1.2 |
| Restricted Stock Units | | 2,197 | | | 0.6 |
| ESPP | | 3,296 | | | 1.1 |
| Total unrecognized share-based compensation expense | | $ | 19,056 | | | 1.1 |
19. Net Loss Per Common Share
Basic and diluted net loss per Common Share is computed by dividing net loss by the weighted average number of common shares outstanding. The numerator and denominator used in the calculation of basic and diluted net loss amounts per Common Share are as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Net loss for the year | $ | (180,966) | | | $ | (102,680) | | | $ | (88,385) | |
| | | | | |
| Weighted average number of common shares outstanding | 129,369 | | 118,473 | | 93,024 |
| | | | | |
| Net loss per Common Share (expressed in $ per share) | $ | (1.40) | | | $ | (0.87) | | | $ | (0.95) | |
The Company did not include the securities in the following table in the computation of the net loss per common share because the effect would have been anti-dilutive during each period:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Outstanding stock options | 12,074 | | | 14,047 | | | 7,822 | |
| Unvested performance awards | 64 | | | — | | | — | |
| Unvested restricted units | 191 | | | — | | | — | |
| Warrants | — | | | 1,690 | | | 1,691 | |
| 12,329 | | | 15,737 | | | 9,513 | |
20. Related-Party Transactions
ILJIN SNT Co., Ltd (ILJIN) was considered to be a related party due to their equity ownership of over 5% as per their public filings. The outstanding related party amount payable to ILJIN was the result of a settlement completed on September 20, 2013 between ILJIN and the Company. During 2021, Aurinia paid $6.0 million upon achievement of specific milestones. The amount payable to ILJIN was nil and $6.0 million as of December 31, 2021 and December 31, 2020 which was recorded in other current liabilities.
Stephen P. Robertson, a partner at Borden Ladner Gervais (BLG) acted as our corporate secretary through October 2020. We incurred legal fees in the normal course of business to BLG of $392 thousand for the year ended December 31, 2020 compared to $473 thousand for the same period in 2019. For the year ended December 31, 2020, we had no ongoing contractual or other commitments as a result of engaging Mr. Robertson to act as our corporate secretary and Mr. Robertson received no additional compensation for acting as the corporate secretary. On November 2, 2020 we announced the appointment of Stephen Robertson as our Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer.
21. Selected Quarterly Financial Information (unaudited)
The following condensed quarterly financial information is for the years December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share data) | | March 31, 2021 | | June 30, 2021 | | September 30, 2021 | | December 31, 2021 |
| Total revenue, net | | $ | 914 | | | $ | 6,620 | | | $ | 14,667 | | | $ | 23,404 | |
| Cost of sales and operating expenses | | 51,457 | | | 53,754 | | | 65,020 | | | 56,109 | |
| Loss from operations | | (50,543) | | | (47,134) | | | (50,353) | | | (32,705) | |
| Net loss | | (50,379) | | | (47,010) | | | (50,255) | | | (33,322) | |
| Basic and diluted loss per common share | | $ | (0.40) | | | $ | (0.37) | | | $ | (0.39) | | | $ | (0.25) | |
| | | | | | | | |
| | March 31, 2020 | | June 30, 2020 | | September 30, 2020 | | December 31, 2020 |
| Total revenue | | $ | 30 | | | $ | 29 | | | $ | 29 | | | $ | 50,030 | |
| Operating expenses | | 27,090 | | | 26,892 | | | 42,344 | | | 58,082 | |
| Loss from operations | | (27,060) | | | (26,863) | | | (42,315) | | | (8,052) | |
| Net loss | | (25,932) | | | (26,544) | | | (42,130) | | | (8,074) | |
| Basic and diluted loss per common share | | $ | (0.23) | | | $ | (0.24) | | | $ | (0.34) | | | $ | (0.06) | |
22. Subsequent Events
On February 25, 2022, the Company gave notice to Cantor Fitzgerald & Co. to terminate the Sale Agreement. No further sales will occur under the Sale Agreement dated November 19, 2021.
