Kiniksa Pharmaceuticals, Ltd. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; financial amounts below are in millions of U.S. dollars unless stated otherwise.
Business context
Kiniksa is a commercial-stage biopharmaceutical company. Its marketed product is ARCALYST (rilonacept); its development portfolio includes KPL-404 and mavrilimumab. In September 2022, a license to develop and commercialize vixarelimab worldwide became effective with Genentech. Kiniksa retained responsibility for completing its ongoing Phase 2b prurigo nodularis trial.
Financial highlights
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Product revenue, net | $33.4 | $12.1 | $82.6 | $19.8 |
| License and collaboration revenue | $65.7 | — | $75.7 | — |
| Total revenue | $99.1 | $12.1 | $158.3 | $19.8 |
| Operating income (loss) | $46.4 | $(30.7) | $3.7 | $(120.5) |
| Income tax benefit (provision) | $177.4 | $0.1 | $174.7 | $(1.1) |
| Net income (loss) | $224.1 | $(30.5) | $178.9 | $(121.6) |
| Diluted EPS | $3.18 | $(0.44) | $2.55 | $(1.78) |
ARCALYST sales growth was attributed primarily to more patients. Approximate product gross margin, calculated as product revenue less reported cost of goods sold divided by product revenue, was 79% for Q3 and 80% for the nine-month period; this excludes Regeneron profit-sharing expense and other operating costs. Operating margin was approximately 47% for Q3 and 2% for nine months, but results include substantial out-license revenue and, especially, a large non-cash tax benefit.
- Cash and liquidity: Cash and cash equivalents were $175.8; short-term investments were $25.0, totaling $200.7. Current assets were $241.8 and current liabilities $56.5. Management expects existing cash, cash equivalents and short-term investments to fund operations and capital expenditures for at least 12 months from issuance of the statements.
- Cash flow: Nine-month operating cash flow was positive $17.4, versus negative $107.4 in 2021. Investing activities provided $34.6, mainly from investment maturities net of purchases; financing activities provided $1.3. Cash increased $53.3.
- Balance sheet and obligations: Total liabilities were $75.9, including $26.3 of deferred revenue. The balance sheet reports no borrowings; lease liabilities and other commitments remain. Accumulated deficit was $496.5. Commercial and clinical manufacturing commitments included $33.0 due within one year; MD&A separately describes $32.8 of minimum payments to Regeneron due within one year.
Material changes and unusual items
- Revenue increased substantially versus 2021, reflecting ARCALYST’s commercial ramp and new collaboration/license income. R&D expense fell to $51.1 for nine months from $71.9, mainly due to the wind-down of mavrilimumab’s COVID-19 ARDS program and lower ARCALYST trial costs; KPL-404 and vixarelimab spending increased. SG&A rose to $70.7 from $63.2, primarily due to ARCALYST sales and marketing.
- The company recognized a $174.7 income tax benefit for nine months, primarily from releasing the valuation allowance on UK deferred tax assets; the release generated a $185.8 benefit. Kiniksa maintained a full valuation allowance on U.S. deferred tax assets. This non-cash tax item drove reported net income well above operating income.
- Genentech paid an $80.0 upfront license fee for vixarelimab. Kiniksa recognized $65.7 of collaboration revenue in the financial statements and reported $14.3 of deferred revenue. A further $20.0 is tied to delivery of specified materials; the agreement also provides for up to approximately $600.0 in contingent payments and tiered royalties.
- Huadong paid $22.0 upfront for regional rights to rilonacept and mavrilimumab. Kiniksa recognized $10.0 for the mavrilimumab license and deferred $12.0 relating to rilonacept pending future supply deliveries. Potential milestone payments total up to approximately $646.0 across the two agreements, plus royalties, subject to terms and upstream obligations.
Outlook, commentary and risks
Management expects continued operating losses as it funds commercialization and advances clinical programs, notwithstanding nine-month reported net income. Kiniksa says cash resources cover at least 12 months, but longer-term funding depends on ARCALYST sales and/or access to additional capital. It expects commercialization expenses to continue and R&D spending to remain substantial. The company expected KPL-404 Phase 2 RA data in the first half of 2024; the filing does not provide specific financial guidance for future revenue, earnings or cash burn.
Key risks include dependence on ARCALYST and its market acceptance, payer coverage and reimbursement, competition, clinical and regulatory uncertainty, and reliance on third-party manufacturers and CROs. ARCALYST supply has previously faced manufacturing issues, and Regeneron is its sole manufacturer under the current arrangement; a possible technology transfer could add execution risk. The filing also discusses COVID-19, the war in Ukraine and related supply-chain, clinical-site and capital-market disruption. Kiniksa disclosed a July 2022 ARCALYST price increase and warned that a large private insurer planned to exclude ARCALYST for CAPS, potentially creating access hurdles. No material litigation was reported.
Important facts for investors to verify
- Reconcile the $65.7 collaboration revenue in the financial statements with MD&A narrative that describes $66.5 related to Genentech; confirm recognized, deferred and remaining contract consideration.
- Assess ARCALYST patient growth, net pricing, payer coverage—including the planned CAPS exclusion—and whether supply can meet demand.
- Evaluate the sustainability of operating performance excluding the one-time UK deferred-tax valuation-allowance release and episodic licensing payments.
- Track delivery obligations and recognition timing for Genentech and Huadong, including the $20.0 Genentech supply payment and the $12.0 Huadong deferred amount.
- Monitor cash use, manufacturing commitments and clinical milestones, particularly KPL-404 and Kiniksa’s remaining vixarelimab trial obligations.