SEC Filing | Kiniksa Pharmaceuticals

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐ 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: 001-38492

Kiniksa Pharmaceuticals, Ltd.

(Exact Name of Registrant as Specified in Its Charter)

Bermuda		98-1327726
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

Kiniksa Pharmaceuticals, Ltd.

Clarendon House

2 Church Street

Hamilton HM11, Bermuda

(808) 451-3453

(Address, zip code and telephone number, including area code of principal executive offices)

Kiniksa Pharmaceuticals Corp.

100 Hayden Avenue

Lexington, MA, 02421

(781) 431-9100

(Address, zip code and telephone number, including area code of agent for service)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Shares	KNSA	The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

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.



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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 28, 2023, there were 70,167,898 common shares outstanding in aggregate, comprised of:

35,238,254 Class A common shares, par value $0.000273235 per share

1,795,158 Class B common shares, par value $0.000273235 per share

17,075,868 Class A1 common shares, par value $0.000273235 per share

16,057,618 Class B1 common shares, par value $0.000273235 per share

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Kiniksa Pharmaceuticals, Ltd.

FORM 10-Q

FOR THE THREE MONTHS ENDED JUNE 30, 2023

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	Page
PART I — FINANCIAL INFORMATION	7
Item 1. Financial Statements (unaudited)	7
Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022	7
Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022	8
Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2023 and 2022	9
Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	10
Notes to Consolidated Financial Statements	11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	41

PART II — OTHER INFORMATION	42
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	119
Item 3. Defaults Upon Senior Securities	119
Item 4. Mine Safety Disclosures	119
Item 5. Other Information	119
Item 6. Exhibits	120

SIGNATURES	121

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”), contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report including statements regarding our products’ commercial sales, future results of anticipated products, future results of operations and financial position, expected timeline for our cash, cash equivalents and short-term investments, business strategy, product development, prospective products and product candidates, their expected properties, performance, market opportunity and competition, supply of drug products at acceptable cost and quality, collaborators, license and other strategic arrangements, the expected timeline for achievement of our clinical milestones, the timing of, and potential results from, clinical and other trials, potential marketing authorization from the FDA or regulatory authorities in other jurisdictions, potential and ongoing coverage and reimbursement for our products and product candidates, if approved, clinical and commercial activities, research and development costs, timing of regulatory filings and feedback, timing and likelihood of success and plans and objectives of management for future operations and funding requirements, are forward-looking statements.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “goal,” “design,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these identifying words. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described under the sections in this Quarterly Report entitled “Summary Risk Factors,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report. These forward-looking statements are subject to numerous risks and uncertainties, including, without limitation, the following:

●

our continued ability to commercialize ARCALYST® (rilonacept) and to develop and commercialize our current and future product candidates, if approved;

●

our status as a small commercial stage biopharmaceutical company and our expectation to incur losses for the foreseeable future;

●

our future capital needs and our need to raise additional funds;

●

our ability to manufacture sufficient quantities of our products and product candidates to meet patient and partner demand;

●

our ability to successfully complete the technology transfer of the manufacturing process for ARCALYST drug substance;

●

the market acceptance of our products and product candidates;

●

competitive and potentially competitive products and technologies;

●

prescriber awareness and adoption of our products and product candidates, if approved;

●

the size of the market for our products and product candidates, if approved;

●

our ability to meet the quality expectations of prescribers or patients;

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●

the decision of third party payors not to cover or maintain coverage of or to establish burdensome requirements prior to covering ARCALYST or any of our current or future product candidates, if approved, or to require extensive or independently performed clinical trials prior to covering or maintaining coverage of our product candidates, if approved;

●

the lengthy and expensive clinical development process with its uncertain outcomes and potential for clinical failure or delay;

●

the decision by any applicable regulatory authority to clear our current or future product candidates for clinical development and, ultimately, to approve them for marketing and sale;

●

our ability to anticipate and prevent adverse events caused by our products and product candidates;

●

our ability to improve our product candidates;

●

our ability to identify, in-license, acquire, discover or develop additional product candidates;

●

our ability to undertake and execute on business combinations, out-licensing activities, collaborations or other strategic transactions and our ability to realize value therefrom;

●

our ability to have our products and product candidates manufactured in accordance with regulatory requirements and at acceptable cost and quality specifications;

●

our ability to successfully manage our growth;

●

our ability to avoid product liability claims and maintain adequate product liability insurance;

●

our ability to obtain regulatory exclusivity;

●

federal, state and foreign regulatory requirements applicable to our products and product candidates;

●

our ability to obtain, maintain, protect and enforce our intellectual property rights related to our products and product candidates;

●

ownership concentration of our executive officers, directors, certain members of senior management and affiliated shareholders may prevent our shareholders from influencing significant corporate decisions; and

●

our ability to attract and retain skilled personnel.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report. You should carefully consider these risks and uncertainties when investing in our Class A common shares. The principal risks and uncertainties affecting our business include the following:

●

we began generating product revenue in 2021, have incurred operating losses in the past, expect to incur operating losses for the foreseeable future and may never achieve corporate profitability on a sustained basis;

●

we depend heavily on the commercial success of ARCALYST and may be unsuccessful in our efforts to commercialize ARCALYST on a sustained basis, support our sales, marketing, and distribution activities and maintain applicable infrastructure for these activities either directly and/or through agreements with third parties;

●

our success depends heavily on the sustained commercial execution of ARCALYST and the future success of one or more of our product candidates, which are in various stages of development; for ARCALYST, our success is dependent on growing and sustaining market acceptance by prescribers, patients and payors; for our product candidates, for our product candidates in clinical development, our success is dependent upon us obtaining regulatory approval and ultimately commercializing one or more of our product candidates on a timely basis;

●

successful commercialization of our products and product candidates, if approved, will depend in part on the extent to which third party payors provide funding, establish favorable coverage and pricing policies, respond to price increases and set adequate reimbursement levels for our products and product candidates, if approved, and failure to obtain or maintain coverage and adequate reimbursement for our products and product candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue;

●

the market opportunities for our products and product candidates, if approved, may be smaller than we estimate, or any approval that we obtain may be based on a narrower definition of our targeted patient population, either of which may materially adversely affect our revenue and ability to achieve profitability;

●

we may require significant additional funding to develop our portfolio, commercialize our products and product candidates, if approved, and to identify, discover, develop or acquire additional product candidates; if we are unable to secure financing on acceptable terms when needed, or at all, we could be forced to delay, reduce or cease one or more of our product development plans, research and development programs or other operations or commercialization efforts;

●

clinical development of our product candidates is a lengthy and expensive process with uncertain timelines, costs and outcomes;

●

we may encounter substantial delays in our current or planned preclinical studies and/or clinical trials, including as a result of delays in obtaining regulatory approvals to conduct clinical trials, activating sites, enrolling participants, and conducting trials, which could delay or prevent our product development activities;

●

we rely on third parties, including contract research organizations (“CROs”) to activate our clinical trial sites and conduct or otherwise support our research activities, preclinical studies and clinical trials for our product candidates, and these third parties may not perform satisfactorily, which could delay, prevent or impair our product development activities;

●

we rely on third parties, including independent contract development and manufacturing organizations (“CDMOs”) to manufacture our product candidates for preclinical and clinical development, to manufacture our commercial supply of ARCALYST, and supply of drug substance and drug product for

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ARCALYST and our product candidates; and if these third parties do not have sufficient manufacturing capacity at our desired times or otherwise fail to perform satisfactorily, including by producing insufficient supply of commercial and clinical stock to meet patient demand or clinical trial requirements, or are impacted by delays or supply shortages, our product development activities, regulatory approval, and commercialization efforts may be delayed, prevented or impaired;

●

we are conducting a technology transfer of the manufacturing process for ARCALYST drug substance from Regeneron Pharmaceuticals, Inc. (“Regeneron”) to a new CDMO, and the process to complete the technology transfer and qualify a new CDMO may be subject to significant risks and uncertainties;

●

for our products and product candidates that have been licensed or acquired from other parties, if those parties did not adequately protect and we are unable to adequately protect such products and product candidates, or to secure and maintain freedom to operate, others could preclude us from commercializing such products and product candidates, if approved, or compete against us more directly;

●

we face significant competition from other biotechnology and pharmaceutical companies, which may result in others discovering, developing or commercializing drugs before or more successfully than us;

●

we may not successfully execute our growth strategy to identify, discover, develop, license or acquire additional product candidates or technologies, and our strategy may not deliver anticipated results or we may refine or otherwise alter our growth strategy;

●

we may seek to acquire businesses or undertake business combinations, collaborations or other strategic transactions which may not be successful or on favorable terms, if at all, and we may not realize the intended benefits of such transactions;

●

we have entered into and may seek to enter into collaboration, licensing or other transactions to further develop, commercialize or otherwise realize value from one or more of our product candidates, and the expected value we hope to realize, including through milestone, royalty or other payments, may be less than we expect; and

●

concentration of ownership of the voting power of our common shares may prevent new investors from influencing significant corporate decisions and may have an adverse effect on the price of our Class A common shares.

Industry and other data

Unless otherwise indicated, certain industry data and market data included in this Quarterly Report were obtained from independent third party surveys, market research, publicly available information, reports of governmental agencies and industry publications and surveys. All of the market data used in this Quarterly Report involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information from these industry publications and surveys included in this Quarterly Report is reliable.

ARCALYST is a registered trademark of Regeneron. Solely for convenience, trademarks, service marks, and trade names referred to in this Quarterly Report may be listed without identifying symbols.

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Part I — Financial Information

Item 1. Financial Statements (unaudited)

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	June 30,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	112,567	$	122,715
Short-term investments		72,425		67,893
Accounts receivable, net		24,650		12,660
Contract asset		—		7,656
Inventory		23,958		21,599
Prepaid expenses and other current assets		12,440		10,537
Total current assets		246,040		243,060
Property and equipment, net		1,136		1,658
Operating lease right-of-use assets		13,191		5,385
Other long-term assets		2,353		5,824
Intangible asset, net		17,750		18,250
Deferred tax assets		203,862		185,495
Total assets	$	484,332	$	459,672

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	648	$	7,899
Accrued expenses		35,316		30,112
Deferred revenue		4,674		—
Operating lease liabilities		2,238		3,301
Other current liabilities		4,596		5,754
Total current liabilities		47,472		47,066
Non-current liabilities:
Non-current deferred revenue		12,006		12,000
Non-current operating lease liabilities		11,283		2,618
Other long-term liabilities		1,915		1,839
Total liabilities		72,676		63,523
Commitments and contingencies (Note 14)
Shareholders’ equity:
Class A common shares, par value of $0.000273235 per share; 35,074,019 shares and 34,750,560 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		9		9
Class B common shares, par value of $0.000273235 per share; 1,795,158 shares and 1,813,457 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		1		1
Class A1 common shares, $0.000273235 par value; 17,075,868 shares issued and outstanding as of June 30, 2023 and December 31, 2022		5		5
Class B1 common shares, $0.000273235 par value; 16,057,618 shares issued and outstanding as of June 30, 2023 and December 31, 2022		4		4
Additional paid-in capital		900,956		888,120
Accumulated other comprehensive income		13		44
Accumulated deficit		(489,332)		(492,034)
Total shareholders’ equity		411,656		396,149
Total liabilities and shareholders’ equity	$	484,332	$	459,672

The accompanying notes are an integral part of these consolidated financial statements.

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KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Revenue:
Product revenue, net	$	54,495	$	26,972	$	97,154	$	49,161
License and collaboration revenue		16,978		—		22,664		10,000
Total revenue		71,473		26,972		119,818		59,161
Costs and operating expenses:
Cost of goods sold		7,699		5,029		14,735		9,248
Collaboration expenses		13,986		3,672		22,274		11,926
Research and development		23,767		13,798		38,939		34,615
Selling, general and administrative		29,175		23,841		58,220		46,059
Total operating expenses		74,627		46,340		134,168		101,848
Loss from operations		(3,154)		(19,368)		(14,350)		(42,687)
Other income		1,915		103		3,747		137
Loss before income taxes		(1,239)		(19,265)		(10,603)		(42,550)
Benefit (provision) for income taxes		16,211		(716)		13,305		(2,641)
Net income (loss)	$	14,972	$	(19,981)	$	2,702	$	(45,191)
Net income (loss) per share attributable to common shareholders—basic	$	0.21	$	(0.29)	$	0.04	$	(0.65)
Net income (loss) per share attributable to common shareholders—diluted	$	0.21	$	(0.29)	$	0.04	$	(0.65)
Weighted average common shares outstanding—basic		69,918,287		69,289,972		69,835,452		69,213,860
Weighted average common shares outstanding—diluted		71,634,729		69,289,972		71,420,026		69,213,860
Comprehensive income (loss):
Net income (loss)	$	14,972	$	(19,981)	$	2,702	$	(45,191)
Other comprehensive income (loss):
Unrealized gain (loss) on short-term investments and currency translation adjustments, net of tax		(42)		13		(31)		(24)
Total other comprehensive income (loss)		(42)		13		(31)		(24)
Total comprehensive income (loss)	$	14,930	$	(19,968)	$	2,671	$	(45,215)

The accompanying notes are an integral part of these consolidated financial statements.

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KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)


	Common Shares			Additional		Accumulated				Total
	(Class A, B, A1 and B1)			Paid-In		Other Comprehensive		Accumulated		Shareholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balances at December 31, 2022	69,697,503	$	19	$	888,120	$	44	$	(492,034)	$	396,149
Issuance of Class A common shares under incentive award plans	135,576		—		90		—		—		90
Share-based compensation expense	—		—		6,115		—		—		6,115
Unrealized gain on short-term investments and currency translation adjustments	—		—		—		11		—		11
Net loss	—		—		—		—		(12,270)		(12,270)
Balances at March 31, 2023	69,833,079	$	19	$	894,325	$	55	$	(504,304)	$	390,095
Issuance of Class A common shares under incentive award plans	169,584		—		158		—		—		158
Share-based compensation expense	—		—		6,473		—		—		6,473
Unrealized loss on short-term investments and currency translation adjustments	—		—		—		(42)		—		(42)
Net Income	—		—		—		—		14,972		14,972
Balances at June 30, 2023	70,002,663	$	19	$	900,956	$	13	$	(489,332)	$	411,656

	Common Shares			Additional		Accumulated				Total
	(Class A, B, A1 and B1)			Paid-In		Other Comprehensive		Accumulated		Shareholders'
	Shares	Amount		Capital		Loss		Deficit		Equity
Balances at December 31, 2021	69,060,403	$	18	$	860,482	$	(66)	$	(675,397)	$	185,037
Issuance of Class A common shares under incentive award plans	210,720		1		422		—		—		423
Share-based compensation expense	—		—		6,031		—		—		6,031
Unrealized loss on short-term investments and currency translation adjustments	—		—		—		(37)		—		(37)
Net loss	—		—		—		—		(25,210)		(25,210)
Balances at March 31, 2022	69,271,123	$	19	$	866,935	$	(103)	$	(700,607)	$	166,244
Issuance of Class A common shares under incentive award plans	155,644		—		542		—		—		542
Share-based compensation expense	—		—		6,676		—		—		6,676
Unrealized gain on short-term investments and currency translation adjustments	—		—		—		13		—		13
Net loss	—		—		—		—		(19,981)		(19,981)
Balances at June 30, 2022	69,426,767	$	19	$	874,153	$	(90)	$	(720,588)	$	153,494

The accompanying notes are an integral part of these consolidated financial statements.

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KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	2,702	$	(45,191)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization expense		1,198		1,307
Share-based compensation expense		12,588		12,707
Non-cash lease expense		1,610		1,481
Amortization of premiums and accretion of discounts on short-term investments		(2,213)		240
Loss on disposal of property and equipment		175		34
Deferred income taxes		(18,367)		—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(1,925)		(7,421)
Accounts receivable, net		(11,990)		(3,823)
Inventory		(2,359)		(16,241)
Contract asset		7,656		—
Other long-term assets		3,178		2,918
Accounts payable		(7,251)		654
Accrued expenses and other current liabilities		4,046		(1,889)
Operating lease liabilities		(1,814)		(1,436)
Deferred revenue		4,680		12,000
Other long-term liabilities		76		(10)
Net cash used in operating activities		(8,010)		(44,670)
Cash flows from investing activities:
Proceeds from sale of property and equipment		—		91
Purchases of property and equipment		(58)		(115)
Purchases of short-term investments		(91,028)		(55,734)
Proceeds from the maturities of short-term investments		88,700		71,300
Net cash provided (used) in investing activities		(2,386)		15,542
Cash flows from financing activities:
Proceeds from issuance of Class A common shares under incentive award plans and employee share purchase plan		1,087		1,558
Payments in connection with Common Stock tendered for employee tax obligations		(839)		(593)
Net cash provided by financing activities		248		965
Net decrease in cash and cash equivalents		(10,148)		(28,163)
Cash and cash equivalents at beginning of period		122,715		122,470
Cash and cash equivalents at end of period	$	112,567	$	94,307

Supplemental information:
Cash paid for income taxes	$	6,716	$	3,293

Supplemental disclosure of non-cash investing and financing activities:
Change in right-of-use asset as a result of new, modified, and terminated leases	$	9,416	$	—

The accompanying notes are an integral part of these consolidated financial statements.

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KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

1. Nature of the Business and Basis of Presentation

Kiniksa Pharmaceuticals, Ltd. (the “Company”) is a biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutic medicines for patients suffering from debilitating diseases with significant unmet medical need. The Company’s immune-modulating assets, ARCALYST, KPL-404 and mavrilimumab, are based on strong biologic rationale or validated mechanisms, target a spectrum of underserved cardiovascular and autoimmune conditions and offer the potential for differentiation.

The Company is subject to risks and uncertainties common to small commercial stage companies in the biopharmaceutical industry and global health, societal, economic and market conditions, including the Company’s dependence on third parties, including contract research organizations and contract manufacturing organizations, the Company’s limited experience obtaining regulatory approvals, the potential failure of the Company to successfully complete research and development of its current or future product candidates, the potential inability of the Company to adequately protect its technology, potential competition, the uncertainty that any current or future product candidates will obtain necessary government regulatory approval, that ARCALYST will continue to be commercially viable and whether any of the Company’s current or future product candidates, if approved, will be commercially viable. Such risks and uncertainties may be subject to substantial and uncertain changes, which may cause significant disruption to the Company’s business and operations, preclinical studies and clinical trials, the business and operations of the third parties with whom the Company conducts business and the national and global economies, all of which may have material impacts on the Company’s business, financial condition and results of operations.

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries, Kiniksa Pharmaceuticals Corp. (“Kiniksa US”), Primatope Therapeutics, Inc. (“Primatope”) and Kiniksa Pharmaceuticals (UK), Ltd. (“Kiniksa UK”) as well as the subsidiaries of Kiniksa UK, Kiniksa Pharmaceuticals (Germany) GmbH (“Kiniksa Germany”), Kiniksa Pharmaceuticals (France) SARL (“Kiniksa France”), and Kiniksa Pharmaceuticals GmbH (“Kiniksa Switzerland”), after elimination of all significant intercompany accounts and transactions.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make 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 expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the recognition of revenue, the accrual for research and development expenses, the valuation of our deferred tax assets and the valuation of share-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Unaudited Interim Consolidated Financial Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information. The accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). The Company’s accounting policies are described in the Notes to

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KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

Consolidated Financial Statements included in the Company’s 2022 Form 10-K and updated, as necessary, in this report. The accompanying year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2023 and the results of its operations for the three and six months ended June 30, 2023 and 2022, the changes in its shareholders’ equity for the three and six months ended June 30, 2023 and 2022 and its cash flows for the six months ended June 30, 2023 and 2022. The results for the three and six months ended June 30, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods or any future year or period.

Liquidity

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the consolidated financial statements are issued. As of June 30, 2023, the Company had an accumulated deficit of $489,332. During the six months ended June 30, 2023, the Company reported net income of $2,702 and used $8,010 cash in operating activities. As of June 30, 2023, the Company had cash, cash equivalents and short-term investments of $184,992.

Based on its current operating plan, the Company expects that its cash, cash equivalents and short-term investments will be sufficient to fund its operations and capital expenditure requirements for at least twelve months from the issuance date of these consolidated financial statements. The future viability of the Company beyond that point is dependent on its ability to fund its operations through sales of ARCALYST and/or raise additional capital, as needed. If the Company is unable to grow or sustain ARCALYST commercial revenue in future periods, the Company would need to seek additional financing through public or private securities offerings, debt financings, or other sources, which may include licensing, collaborations or other strategic transactions or arrangements. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its commercialization efforts, research and development programs for product candidates or product portfolio expansion, which could adversely affect its business prospects, or the Company may be unable to continue operations.

Recently Adopted Accounting Pronouncements

Accounting standards that have been issued by the Financial Accounting Standards Board or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

2. Fair Value of Financial Assets and Liabilities

Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

●

Level 1—Quoted prices in active markets for identical assets or liabilities.

●

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

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KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

●

Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The following tables present information about the Company’s financial instruments measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:


	Fair Value Measurements
	as of June 30, 2023 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents — money market funds	$	60,746	$	—	$	—	$	60,746
Cash equivalents — U.S. Treasury notes		—		16,245		—		16,245
Short-term investments — U.S. Treasury notes		—		72,425		—		72,425
	$	60,746	$	88,670	$	—	$	149,416


	Fair Value Measurements
	as of December 31, 2022 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents — money market funds	$	20,929	$	—	$	—	$	20,929
Cash equivalents — U.S. Treasury notes		—		15,009		—		15,009
Short-term investments — U.S. Treasury notes		—		67,893		—		67,893
	$	20,929	$	82,902	$	—	$	103,831

During the six months ended June 30, 2023 and the year ended December 31, 2022, there were no transfers between Level 1, Level 2 and Level 3. The money market funds were valued using quoted prices in active markets, which represent a Level 1 measurement in the fair value hierarchy. The Company’s cash equivalents and short-term investments as of June 30, 2023 and December 31, 2022 included U.S. Treasury notes, which are not traded on a daily basis and, therefore, represent a Level 2 measurement in the fair value hierarchy at each period end.


			Gross		Gross
	Amortized		Unrealized		Unrealized		Credit		Fair
	Cost		Gains		Losses		Losses		Value
June 30, 2023
Cash equivalents — U.S. Treasury notes	$	16,241	$	4	$	—	$	—	$	16,245
Short-term investments — U.S. Treasury notes		72,433		7		(15)		—		72,425
	$	88,674	$	11	$	(15)	$	—	$	88,670


			Gross		Gross
	Amortized		Unrealized		Unrealized		Credit		Fair
	Cost		Gains		Losses		Losses		Value
December 31, 2022
Cash equivalents — U.S. Treasury notes	$	15,006	$	3	$	—	$	—	$	15,009
Short-term investments — U.S. Treasury notes		67,891		6		(4)		—		67,893
	$	82,897	$	9	$	(4)	$	—	$	82,902

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KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

As of June 30, 2023, we consider the unrealized losses in our investment portfolio to be temporary in nature and not due to credit losses. We have the ability to hold such investments until recovery of the fair value. We utilize the specific identification method in computing realized gains and losses. We had no realized gains and losses on our available-for-sale securities for the three and six months ended June 30, 2023 or 2022.

3. Product Revenue, Net

Product revenue, net, from sales of ARCALYST was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Product revenue, net	$	54,495	$	26,972	$	97,154	$	49,161

The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the six months ended June 30, 2023:


	Contractual		Government
	Adjustments		Rebates		Returns		Total
Balance at December 31, 2022	$	1,464	$	2,084	$	351	$	3,899
Current provisions relating to sales in the current year		7,247		3,891		163		11,301
Adjustments relating to prior years		(72)		(32)		(78)		(182)
Payments/returns relating to sales in the current year		(6,043)		(1,666)		—		(7,709)
Payments/returns relating to sales in the prior years		(1,392)		(1,987)		(39)		(3,418)
Balance at June 30, 2023	$	1,204	$	2,290	$	397	$	3,891

Total revenue-related reserves as of June 30, 2023 and December 31, 2022, included in our consolidated balance sheets, are summarized as follows:


	June 30,		December 31,
	2023		2022
Components of accounts receivable	$	(290)	$	(304)
Components of other current liabilities		4,181		4,203
Total revenue-related reserves	$	3,891	$	3,899

Primarily all of the Company’s trade accounts receivable arise from product revenue in the United States due from the Company’s third party logistics provider.

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KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

4. Inventory

Inventory consisted of the following:


	June 30,		December 31,
	2023		2022
Raw materials	$	—	$	—
Work-in-process		6,623		6,312
Finished Goods		17,335		15,287
	$	23,958	$	21,599

5. Property and Equipment, Net

Property and equipment, net consisted of the following:


	June 30,		December 31,
	2023		2022
Furniture, fixtures and vehicles	$	224	$	224
Computer hardware and software		345		345
Leasehold improvements		3,931		3,931
Lab equipment		4,076		4,017
Construction in progress		—		—
Total property and equipment		8,576		8,517
Less: Accumulated depreciation		(7,440)		(6,859)
Total property and equipment, net	$	1,136	$	1,658

Depreciation expense was $292 and $350 during the three months ended June 30, 2023 and 2022, respectively, and $581 and $709 during the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023 and December 31, 2022, $170 and $226, respectively, of our property and equipment, net was in the United Kingdom.

6. Leases

Kiniksa US and Kiniksa UK leases office and laboratory space under operating leases. Additionally, Kiniksa US leases vehicles under an operating lease. In May 2023, the Company entered into a lease amendment to extend the term of the Lexington, Massachusetts headquarters lease by forty-eighty months to August 31, 2028. The Company accounted for the lease amendment as a modification and recorded increases in the right-of-use-assets and lease liability of $8,515.

The components of lease cost for three and six months ended June 30, 2023 and 2022:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Operating lease cost	$	871	$	806	$	1,748	$	1,612
Variable lease cost		177		90		397		170
Total lease cost	$	1,048	$	896	$	2,145	$	1,782

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KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)


	June 30,
	2023
Weighted-average remaining lease term (years)		3.97
Weighted-average discount rate		6.50%

Maturities of operating leases liabilities were as follows:


As of June 30, 2023
2023 (remaining six months)	$	1,871
2024		2,866
2025		3,098
2026		2,954
2027		2,996
2028 and thereafter		2,037
Total future minimum lease payments	$	15,822
Less imputed interest		(2,301)
Present value of lease liabilities	$	13,521

7. Intangible Assets

Intangible assets, net of accumulated amortization as of June 30, 2023 and December 31, 2022 are summarized in the following table.

As of June 30, 2023

As of December 31, 2022

Estimated

Accumulated

life

Cost

Amortization

Net

Cost

Amortization

Net

Regulatory milestone

20 years

20,000