Aurinia Pharmaceuticals Inc

Greetings and welcome to the ARENIA Pharmaceuticals, Inc., third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Wolfert, Investor Relations for ARENIA Pharmaceuticals. Thank you. You may begin.

Thank you, Melissa, and thank you all for joining today's call and webcast to discuss ARENIA's third quarter 2022 results. Joining me this morning to lead the call are Peter Greenleaf, President and Chief Executive Officer, and Joe Miller, Chief Financial Officer. This morning, ARENIA issued a press release announcing its financial results and recent operational highlights and filed its quarterly report on Form 10-Q. For more information, please refer to ARENIA's filings with the U.S. Securities and Exchange Commission, which are also available on ARENIA's website at ARENIApharma.com. During this call, ARENIA may make forward-looking statements based on current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and actual results may differ materially. For discussion of factors that could affect ARENIA's future financial results in business, please refer to the disclosures in ARENIA's press release and its quarterly report on Form 10-Q, along with ARENIA's 10-K, and all of its recent filings with U.S. Securities and Exchange Commission and Canadian Securities Authorities. Please note that all statements made during today's call are current as of today, November 3, 2022, unless otherwise noted, and are based upon information currently available to us at this time. Except as required by law, ARENI assumes no obligation to update any such statements. Let me now turn the call over to ARENI's President and CEO, Peter Veenlich. Peter? Thanks, John, and good morning, everyone, and thank you for joining us. On today's call, we'll provide you with a review of our commercial business, including LoopKind's performance in the third quarter and year-to-date. We will then provide our updated expectations for the remainder of this year. And since we now have three-quarters of results for 2022, we will also provide a preliminary review for 2023. In addition to commercial performance, we will cover ongoing medical affairs and clinical work to reinforce Lufthansa's basic benefits for patients. We'll then move on to providing an update on our global expansion efforts, R&D activities, and an update on our intellectual property. I'll then turn the call over to Joe Miller to provide more details on the third quarter and year-to-date financial results and our overall strong financial position. So let's get started with our third quarter business performance. Total net revenue for the quarter amounted to $55.8 million, which included a recognition of a one-time $30 million milestone payment for Matasuka to the achievement of the European Commission approval of Lucanus. Total net product revenues for Lucanus were $25.5 million for the quarter, bringing the year-to-date total for Lucanus net product revenues to $75.1 million. Total reported revenue for the 2022 fiscal year through September 30th was $105.6 million. Moving to more detail behind the financial results, total patients on therapy grew to 1,354 by the end of Q3, up from 1,274 at the end of Q2. The increase in patients on therapy this quarter was driven predominantly by improvements in prescription or patient SART form conversion rates and processing speed alongside of new patient SART forms. Our patient conversion rates on the drug at 20 and 30 days continue to improve quarter over a quarter. As of today, overall conversion rates at 60 days remain consistent with prior periods at approximately 84%. Consistent with prior periods, adherence remains strong at approximately 80% at quarter end. Looking at our patient start forms, we saw a slight decrease quarter over quarter, moving from 409 in Q2 to 374 in Q3. Looking at our most recent data for October 31st, PSS year-to-date were 1,357. These trends are clearly something we have been watching closely and have tactical actions to address. Our net realizable revenue per patient for Lufthansa's employer remains higher than our initial guidance of $65,000 per year. But as we discussed previously, we expect to approach this figure on an annualized basis as more patients go on and stay on therapy over time and as persistency, dosing, and payer mix evolve. What we have seen from our internal analysis of claims data is that several leading market indicators, including patient visits, new lupus nephritis diagnosis, and the number of patient renal biopsies declined from Q2 to Q1. Excuse me, from decline in Q2 versus Q1. These lower numbers foreshadowed a potential slowdown in the summer. For visits that did happen, we also saw a lower amount of proteinuria testing, which declined approximately 15% in Q3 versus Q2. These numbers, coupled with both doctor and patient summer vacations, resulted in an overall lower office volume and impacted our performance during the summer months in both rheumatology and nephrology offices. Our internal analysis leads us to believe that these market events are temporary, seasonal, or event-driven in nature. While we are currently digging deeper to better understand what impact this will have on a going forward basis, in the interim, we are driving tactical activity to power through these external market dynamics, which I'll now walk you through. First, let's look at our selling focus and healthcare provider-driven efforts. What we have learned throughout the launch from our highest prescribing physicians is that high-frequency engagement is required to adequately deliver the LUCONIS clinical message and gain solid clinical adoption. As a result, we're actively increasing our focus and frequency on high-potential decile 7 through 10 rheumatology and nephrology offices. We're setting clear expectations, tracking activity closely, and even increasing our incentive targets for our field team in these areas. We also know that physicians adopt at a greater rate when they see a sales representative frequently when they do that in combination with other program offerings. As a result, we are prioritizing peer-to-peer programs with an emphasis on smaller, more personalized engagements because we feel this better meets the needs of busy physicians and aides in advancing their understanding of the overall clinical advantages of lupkinase. We recently launched a new campaign directed at high-volume lupus nephritis offices late in June 3rd. This campaign features a new core message and powerful graphics centered on underserved patient populations. Based on early feedback, this campaign resonates strongly with our healthcare professionals. The campaign is currently in the hands of our sales force, and we will be updating our media and web properties as we move through the next couple of months and weeks. The campaign will also be a key feature alongside of our selling and medical efforts at these upcoming conferences, ASN and ACR, in the next few months. In addition to our current full execution, our medical affairs efforts related to Lucanus are crucial to driving growth. Over the past few quarters, we have generated significant visibility with healthcare providers with a substantial in-person presence at the major medical conference. We continue to submit new data from Aurora 1 and Aurora 2 for presentations at the conferences coming up, which include 14 abstracts accepted at Lupus, ACR, and ASN this year. While much of our marketing approach is designed to increase the depth and frequency of prescribing among our existing base, we also want to ensure that first-time prescribers have a meaningful experience with our product and through our Ready Alliance patient support team We continue to make seamless first-patient experiences with loop kinase a key priority. We can see direct evidence of our impact here in increased PSF approval rates as well as time to receipt of drug following initial prescription. Along with our sales and support team focus and intensity, we've also increased our focus on the patient. We've recently made enhancements to our brand website, loopkindness.com, to provide additional information for patients and healthcare professionals. In addition, we've enhanced and increased our focus directly and through online social media channels. In September, we began a new campaign with the Lupus Foundation of America directed towards lupus nephritis naive patients with a series of lupus walks across the country. The full campaign launched just last week and we plan to continue to grow this campaign as we move into 2023. While our existing anchor programs have always centered around patient, our efforts in advocacy and education, all of these continue. We, in addition, have a number of new programs that will launch over the next few months to help increase diagnosis, urgency of treatment, adherence and persistency all moving directly to the patient. Lastly, as we reported on previous calls, our payer access and approval rates are high. However, some payers still include administrative hurdles for patients initiating therapy. So just last week, we actually signed a contract with one of the largest national payers that will remove certain access hurdles to lessen the administrative work on our offices. It will also shorten the average time to first commercial fill and further enhance the prescribing experience for physicians and patients. Where we can drive the right motivation under the right terms, we will remain open to partnering with payers to ease access and also to speed conversion. Based on the third quarter revenue results and the PSF trend moments, as you saw in our press release, we're updating our 2022 Book Kindness Net Revenue Guidance to 100 to 105 million for 2022. In addition, with more than three-quarters of results for 22 now available, we are also providing preliminary loop guidance net revenue guidance for 2023 in the range of $120 to $140 million. This represents a 17 to 37 percent growth over the midpoint of our revised estimated guidance for 2022. In order to achieve this growth, This growth is expected to be driven by an increase in the number of quarterly PSFs, improvements in conversion time, solid persistency curves, and continued strong adherence. Moving now to our globalization efforts for Leukinus. In mid-September, in collaboration with our partner at SUCA, we achieved an important milestone as the European Commission granted marketing authorization of Leukinus to treat adults with active leucosnephritis. The authorization is valid in all EU member states, as well as Iceland, Liechtenstein, Norway, and Northern Ireland. Upon approval, we received a $30 million milestone from Atsuka and are eligible to receive additional regulatory and reimbursement milestones and low-definition royalties on net sales once launched. In the quarter, we began to recognize revenues for supply of product to Atsuka. which is reflected as product sales, as well as collaboration revenues for CMC and R&D support, both under a cost-plus arrangement. As a reminder, our updated 2022 GITNET product guidance, revenue guidance, of $100 million to $105 million does not include this milestone payment, any loyalty payments, or any collaboration revenue related to our agreement with ATSU for the market loop guidance in the European Union and Japan. Marketing authorization applications have been submitted in Great Britain and Switzerland, with approvals expected in the first half of 2023. As a reminder, pricing and reimbursement approval in three of the five major countries in the European market will trigger a $10 million milestone to Iridium. In addition, our work in Japan remains untracked. Upon approval, we would be eligible for an additional $10 million milestone related to and along with our double-digit royalties on net sales once launched. The ongoing clinical updates to Lucanus include the advancement of both the vocal pediatric study and the EnlightLN registry. With the registry, which we have just initiated at the beginning of the year, we now have 38 active sites towards our goal of having 17 total sites. As a reminder, we plan to leverage real-world data collected from this study to gain further knowledge about patients taking loop kinase and to help clinicians and payers improve patient care and ensure access to therapy. We remain on track to meet our post-approval FDA commitments. Moving on to our research pipeline, we continue to advance IND enabling work on both AUR 200 and AUR 300, and we continue to work towards submitting INDs for both compounds by the end of 2023. These are important next steps in the advancement of our pipeline, as well as to build long-term sustainable growth to the company. And finally, I'd like to provide you an update on our ongoing IPR inter-par case review relating to our methods use path. Since the VTAP instituted the IPR in July 26, we've been diligently working on our postal defense to the IPR. And this December, we and Sun mutually agreed to a two and a half week extension to each of our upcoming filing deadlines. With that extension, our FOLSA defense is due to be filed after market tomorrow. The defense will be substantively dispute all challenges raised by Sun in the IPR. The defense will be publicly available once filed, and we are confident the arguments that we are planning on presenting in that defense. There are a number of future steps to be taken in the IPR proceeding, including further filings and oral arguments, culminating in a decision from the PDAB being expected on or before July 26 of 2023. In the meantime, our patent infringement lawsuit against Sun Pharmaceuticals, in which we allege the infringement by Sun Pharmaceuticals of our patent related to Bacchus corn and not the Mountain Pathetic solution, remains ongoing. I want to emphasize that we remain focused on taking all initiatives to protect and strengthen our IT position as a company, including other patent applications relating to Lucanus that are filed and underway, which, if granted, could add and grant us additional patent protection for Lucanus. Before I turn the call over to Joe, as a reminder, inclusive of the Exupa milestone cash receipt, which was received on October 31st of 2022, we now have approximately $400 million in cash on our balance sheet. This means that we are well capitalized, and we have a great drug that we believe in will eventually become a profitable franchise. In line with this updated outlook, we intend to prioritize our spend to drive sales of Gluconis and to allow the company to further invest in its current and future pipelines. I'd now like to turn the call over to Joe Miller for a more detailed review of our financial results, and then I'll return at the end of the call for a quick recap and to open up to any questions you might have.

Joe? Thank you, Peter, and hello, everyone. At September 30, 2022, we had cash, cash equivalents, and restricted cash investments of $376.6 million compared to $466.1 million at December 31, 2021. As Peter said, this does not include the cash receipt of the $30 million milestone payment from Otsuka related to EC approval that was recognized as revenue in the third quarter. The company received this payment on October 31, 2022, bringing cash, cash equivalents, and restricted cash and investments at October 31, 2022, inclusive of the milestone, to approximately $400 million. We believe that we have sufficient financial resources to fund our current operations. which include funding commercial activities, including FDA-related post-approval commitments, manufacturing, and packaging of commercial drug supply, funding our supporting commercial infrastructure, advancing our research and development programs, and funding our working capital obligations for at least the next few years. Total net revenue was $55.8 million and $14.7 million for the quarters ended September 30, 2022 and September 30, 2021, respectively. an increase of 280% period over period. Total net revenue for the nine months ended September 30th, 2022 was 105.6 million and 22.2 million for the nine months ended September 30th, 2021. This represents an increase in excess of 375% year over year. Revenue growth for both periods is primarily due to the recognition of a $30 million regulatory milestone for Matsuoka following the EC approval of Loop Kindness in September of 2022 coupled with an increase in product sales for Loopkindness, which was driven predominantly by further penetration in the lupus nephritis market. Total cost of sales and operating expenses for the quarters ended September 30, 2022 and September 30, 2021 were $65.3 million and $65 million, respectively. Total cost of sales and operating expense for the nine months ended September 30, 2022 were $189 million, in comparison to $172.2 million for the nine months ended September 30, 2021. Cost of sales were $2.4 million and $254,000 for the quarters ended September 30, 2022 and September 30, 2021, respectively. Cost of sales were $4.3 million and $610,000 for the nine months ended September 30, 2022 and 2021. The increase for both periods is primarily due to an increase in product-related revenue A low margin contribution for collaboration activities with our partner Otsuka, coupled with an increase in our safety stock inventory reserves. Gross margins for the three months ended September 30th, 2022 and September 30th, 2021 was approximately 96% and 98%. Gross margin for the nine months ended September 30th, 2022 and September 30th, 2021 was approximately 96% and 97% respectively. Selling general and administration or SG&A expenses inclusive of our share-based compensations was $52.2 million or $44.6 million for the quarters ended September 30, 2022 and September 30, 2021 respectively. SG&A expenses inclusive of our share-based compensation expense were $148.9 million and $128.8 million for the nine months ended September 30, 2022 and September 30, 2021. The increase for the three months ended September 30th, 2022 was primarily due to an increase in professional fees related to corporate legal matters, an increase in travel costs now that COVID has normalized, and an increase in sponsorship and programs to support the commercialization of Loop Kindness. For the nine months ended September 30th, 2022, the increase also included higher salaries, incentive pay, and employee benefits. Non-cash SG&A share-based compensation expense for the quarters ended September 30, 2022 and September 30, 2021 was $6.6 million and $6 million. Non-cash SG&A share-based expense for the nine months ended September 30, 2022 and September 30, 2021 was $21.5 million and $19.2 million, respectively. R&D expenses inclusive of share-based comp expense were $11 million and $20 million for the three months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and September 30, 2021, R&D expenses inclusive of share-based comp expense were $35.1 million and $40 million. The primary driver for the decrease for both periods was that in prior year, the company expensed a $10 million upfront license and accrued milestone obligation related to its AUR 300 program, which was partially offset by additional development expenses related to the AUR 200 and AUR 300 programs for the current year, period ending September 30, 2022. Non-cash R&D share-based compensation expense for the quarters ended September 30, 2022 and September 30, 2021 was $1.5 million and $1 million respectively. Non-cash R&D share-based comp expense for the nine months ended September 30, 2022 and 2021 was $3.5 million and $3.2 million, respectively. Interest income was $1.5 million and $106,000 for the three months ended September 30, 2022 and September 30, 2021. Interest income was $2.2 million and $420,000 for the nine months ended September 30, 2022 and September 30, 2021, respectively. The increase in both periods is due to higher yields in our investment as a result of increasing interest rates. For the quarters ended September 30, 2022, ARENIA recorded a net loss of $9 million or $0.06 net loss per common share as compared to a net loss of $50.3 million or $0.39 net loss per common share for the quarter ended September 30, 2021. For the nine months ended September 30, 2022, ARENIA recorded a net loss of $82.1 million or $0.58 net loss per common share as compared to a net loss of $147.6 million, or $1.15 net loss per common share for the nine months ended September 30, 2021. With that, I'd like to hand the call back over to Peter for some closing remarks. Peter?