UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 40-F
_________________________________________________________
☐
☒
REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission File Number 001-36421
_________________________________________________________
AURINIA PHARMACEUTICALS INC.
(Exact name of Registrant as specified in its charter)
_________________________________________________________
Alberta, Canada
(Province or other jurisdiction of
incorporation or organization)
2834
(Primary standard industrial
classification code number,
if applicable)
Not Applicable
(I.R.S. employer identification
number, if applicable)
#1203-4464 Markham Street
Victoria, British Columbia
V8Z 7X8
(250) 708-4272
(Address and telephone number of registrant’s principal executive offices)
CT Corporation System
111 – 8th Avenue
New York, New York 10011
(212) 590-9331
(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)
_________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Shares, no par value
Common Shares, no par value
Name of each exchange on which registered:
The NASDAQ Stock Market LLC
Toronto Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information filed with this form:
☒ Annual Information Form
☒ Audited Annual Financial Statements
_________________________________________________________
Indicate the number of outstanding shares of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
84,051,758 Common Shares (as at December 31, 2017).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (s.232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the Registrant was required to submit and post such files).
Yes ☒ No ☐
Yes ☐ No ☐
PRINCIPAL DOCUMENTS
The following documents are filed as part of this Annual Report on Form 40-F:
A. Annual Information Form
For the Registrant’s Annual Information Form for the year ended December 31, 2017, see Exhibit 99.1 of this Annual Report on Form 40-F.
B. Audited Annual Financial Statements
For the Registrant’s Audited Consolidated Financial Statements for the year ended December 31, 2017, including the report of its Independent Auditor
with respect thereto, see Exhibit 99.2 of this Annual Report on Form 40-F.
C. Management’s Discussion and Analysis
For the Registrant’s Management’s Discussion and Analysis of the operating and financial results for the year ended December 31, 2017, see
Exhibit 99.3 of this Annual Report on Form 40-F.
CONTROLS AND PROCEDURES
A. Certifications
The required disclosure is included in Exhibits 99.5 and 99.6 of this Annual Report on Form 40-F.
B. Disclosure Controls and Procedures
As of the end of the Registrant’s year ended December 31, 2017, an internal evaluation was conducted under the supervision of and with the
participation of the Registrant’s management, including the Chairman and Chief Executive Officer and the Chief Financial Officer, of the effectiveness
of the design and operation of the Registrant’s “disclosure controls and procedures” as defined in Rule 13a-15(e) under Securities and Exchange Act of
1934, as amended (the “Exchange Act”). Based on that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer concluded
that the design and operation of the Registrant’s disclosure controls and procedures were effective in ensuring that the information required to be
disclosed in the reports that the Registrant files with or submits to the Securities and Exchange Commission (the “Commission”) is recorded, processed,
summarized and reported, within the required time periods.
It should be noted that while the Chairman and Chief Executive Officer and the Chief Financial Officer believe that the Registrant’s disclosure controls
and procedures provide a reasonable level of assurance that they are effective, they do not expect that the Registrant’s disclosure controls and
procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
C. Management’s Annual Report on Internal Control over Financial Reporting
The Registrant’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is a process designed by, or under the supervision of, the Chairman and Chief Executive Officer and the Chief Financial Officer and
effected by the Registrant’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by
the International Accounting Standards Board.
Management assessed the effectiveness of the registrant’s internal control over financial reporting as of December 31, 2017, based on the criteria set
forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that, as of December 31, 2017, the Registrant’s internal control over financial reporting was effective.
In addition, management determined that there were no material weaknesses in the Registrant’s internal control over financial reporting as of
December 31, 2017.
D. Attestation Report of the Registered Public Accounting firm
This annual report on Form 40-F does not include an attestation report of the Registrant’s independent registered public accounting firm due to an
exemption established by the JOBS Act for “emerging growth companies”.
E. Changes in Internal Control over Financial Reporting
During the year ended December 31, 2017, there were no changes in the Registrant’s internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
AUDIT COMMITTEE FINANCIAL EXPERT
The Registrant’s Board of Directors has determined that Mr. Lorin Jeffry Randall is an “audit committee financial expert” (as that term is defined in
paragraph 8(b) of General Instruction B to Form 40-F) serving on its audit committee and is “independent” (as defined by the New York Stock
Exchange corporate governance rules applicable to foreign private issuers). For a description of Mr. Randall’s relevant experience in financial matters,
see the biographical description for Mr. Lorin Jeffry Randall under “Directors and Officers” in the Registrant’s Annual Information Form for the year
ended December 31, 2017, which is filed as Exhibit 99.1 to this Annual Report on Form 40-F.
The SEC has indicated that the designation of Mr. Lorin Jeffry Randall as an audit committee financial expert does not make him an “expert” for any
purpose, impose any duties, obligations or liability on him that are greater than those imposed on members of the audit committee and board of
directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee.
CODE OF ETHICS
The Registrant has adopted a “code of ethics” (as that term is defined in paragraph 9(b) of General Instruction B to Form 40-F) (“Code of Ethics”),
which is applicable to the directors, officers, employees and consultants of the Registrant and its affiliates (including, its principal executive officer,
principal financial officer, principal accounting officer or controller, and persons performing similar functions). The Code of Ethics entitled “Code of
Ethics and Conduct” is available on the Registrant’s website at www.auriniapharma.com.
In the past fiscal year, the Registrant has not granted any waiver, including an implicit waiver, from any provision of its Code of Ethics.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The required disclosure is included under the heading “External Auditor Services Fees” on Schedule 1 – Audit Committee Information in the
Registrant’s Annual Information Form for the year ended December 31, 2017, filed as Exhibit 99.1 to this Annual Report on Form 40-F, and is
incorporated herein by reference.
OFF-BALANCE SHEET ARRANGEMENTS
The Registrant does not have any “off-balance sheet arrangements” (as that term is defined in paragraph 11(ii) of General Instruction B to Form 40-F)
that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that is material to investors. For a discussion of the Registrant’s other off-
balance sheet arrangements, see page 14 of the Registrant’s Management’s Discussion and Analysis for the fiscal year ended December 31, 2017,
attached as Exhibit 99.3.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The required disclosure is included under the heading “Contractual Obligations” in the Registrant’s Management’s Discussion and Analysis of the
operating and financial results for the year ended December 31, 2017, filed as Exhibit 99.3 to this Annual Report on Form 40-F, and is incorporated
herein by reference.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
See note 3 “Critical Accounting Estimates and Judgments” to the Audited Consolidated Financial Statements for the fiscal year ended December 31,
2017, filed as Exhibit 99.2 to this Annual Report on Form 40-F.
IDENTIFICATION OF THE AUDIT COMMITTEE
The Registrant has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The
Registrant’s Audit Committee members consist of Mr. Lorin Jeffry Randall, Mr. Benjamin Rovinski, and Dr. Hyuek Joon Lee. See “Directors and
Executive Officers” and “Audit Committee Information” in the Registrant’s Annual Information Form for the fiscal year ended December 31, 2017,
which is filed as Exhibit 99.1 to this Annual Report on Form 40-F.
DIFFERENCES IN NASDAQ AND CANADIAN CORPORATE GOVERNANCE REQUIREMENTS
The Registrant is a foreign private issuer and its common shares are listed on the NASDAQ Stock Market (“NASDAQ”).
NASDAQ Rule 5615(a)(3) permits a foreign private issuer to follow its home country practice in lieu of the requirements of the Rule 5600 Series, the
requirement to distribute annual and interim reports set forth in Rule 5250(d), and the Direct Registration Program requirement set forth in Rules
5210(c) and 5255; provided, however, that such a company shall comply with the Notification of Material Noncompliance requirement (Rule 5625), the
Voting Rights requirement (Rule 5640), have an audit committee that satisfies Rule 5605(c)(3), and ensure that such audit committee’s members meet
the independence requirement in Rule 5605(c)(2)(A)(ii).
The Registrant does not follow Rule 5620(c) (shareholder quorum) but instead follows its home country practice, as described below.
Shareholder Meeting Quorum Requirements: The NASDAQ minimum quorum requirement under Rule 5620(c) for a shareholder
meeting is 33-1/3% of the outstanding shares of common stock. In addition, a registrant listed on NASDAQ is required to state its quorum
requirement in its by-laws. The Registrant’s quorum requirement is set forth in its by-laws. A quorum for a meeting of shareholders of the
Registrant is shareholders or proxyholders holding ten percent of the issued and outstanding shares entitled to be voted at the meeting.
In addition, the Registrant does not follow Rule 5635, which establishes shareholder approval requirements prior to the issuance of securities in certain
circumstances. In lieu of following Rule 5635, the Registrant follows the rules of the Toronto Stock Exchange.
The foregoing is consistent with the laws, customs and practices in Canada.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 40-F are forward-looking statements within the meaning of Section 21E of the Exchange Act and
Section 27A of the Securities Act of 1933, as amended. Please see “Forward Looking Information” in the Annual Information Form of the Registrant
for the year ended December 31, 2017, filed as Exhibit 99.1 to this Annual Report on Form 40-F for a discussion of risks, uncertainties, and
assumptions that could cause actual results to vary from those forward-looking statements.
UNDERTAKING
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information relating to the securities in relation to which the obligation to file an
annual report on Form 40-F arises or transactions in said securities.
CONSENT TO SERVICE OF PROCESS
The Registrant has previously filed a Form F-X in connection with the class of securities in relation to which the obligation to file this report arises.
Any change to the name or address of the Registrant’s agent for service shall be communicated promptly to the Commission by amendment to Form F-
X referencing the file number of the Registrant.
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly
caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
SIGNATURES
Date: March 15, 2018
Aurinia Pharmaceuticals Inc.
By:
Name:
Title:
/s/ Dennis Bourgeault
Dennis Bourgeault
Chief Financial Officer
Form 40-F Table of Contents
Exhibit
No.
99.1
99.2
99.3
99.4
99.5
99.6
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Document
Annual Information Form of the Registrant for the fiscal year ended December 31, 2017.
Audited Consolidated Financial Statements of the Registrant for the year ended December 31, 2017 together with the Auditors’
Report thereon.
Management’s Discussion and Analysis of the operating and financial results of the Registrant for the year ended December 31,
2017.
Consent of PricewaterhouseCoopers LLP, Independent Auditor
Certifications of Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer)
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifications of Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer)
under Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL Instance Document.
XBRL Schema Linkbase Document.
XBRL Calculation Linkbase Document.
XBRL Definition Linkbase Document.
XBRL Extension Label Linkbase Document.
XBRL Presentation Linkbase Document.
Table of Contents
Exhibit 99.1
Table of Contents
TABLE OF CONTENTS
BASIS OF PRESENTATION
FORWARD-LOOKING STATEMENTS
OVERVIEW
THREE YEAR HISTORY
REGULATORY AND BUSINESS MATTERS
RISK FACTORS
DIVIDEND POLICY
CAPITAL STRUCTURE
TRADING PRICE AND VOLUME OF AURINIA SHARES
ESCROWED SECURITIES
PRIOR SALES
DIRECTORS AND EXECUTIVE OFFICERS
CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
CONFLICTS OF INTEREST
TRANSFER AGENT AND REGISTRAR
MATERIAL CONTRACTS
INTERESTS OF EXPERTS
ADDITIONAL INFORMATION
SCHEDULE 1 - AUDIT COMMITTEE INFORMATION
SCHEDULE 2 - AUDIT COMMITTEE CHARTER
SCHEDULE 3 - GLOSSARY OF TERMS AND DEFINITIONS
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Table of Contents
Unless otherwise stated, the information in this AIF is as of March 13, 2018.
BASIS OF PRESENTATION
In this AIF, unless stated otherwise or the context requires, all dollar amounts are expressed in U.S. dollars. All references to “$ or “US$” are to the
lawful currency of the United States and all references to “CDN$” are to the lawful currency of Canada.
On March 13, 2018 the exchange rate for conversion of US dollars into Canadian dollars was US$1.00 = CDN$1.2912. based upon the Bank of Canada
closing rate.
Market data and certain industry forecasts used in this AIF were obtained from market research, publicly available information and industry
publications. We believe that these sources are generally reliable, but the accuracy and completeness of this information is not guaranteed. We have not
independently verified such information, and we do not make any representation as to the accuracy of such information.
In this AIF, unless the context otherwise requires, references to “ we”, “us”, “our” or similar terms, as well as references to “ Aurinia” or the
“Company”, refer to Aurinia Pharmaceuticals Inc., together with our subsidiaries.
This AIF describes the Company and its operations, its prospects, risks and other factors that affect its business.
Capitalized terms that are not otherwise defined in this AIF have the meanings attributed thereto in Schedule 3 to this AIF.
FORWARD-LOOKING STATEMENTS
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” and “estimated”, or the negative of such 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 our product and the timing or magnitude of those events, as they are inherently risky and uncertain.
Securities laws encourage companies to disclose forward-looking information so that investors can get a better understanding our future prospects and
make informed investment decisions. These forward-looking statements made in this AIF may include, without limitation:
•
•
•
•
•
•
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•
•
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•
•
•
our belief that the AURA clinical trial had positive
results;
our belief that we have sufficient cash resources to adequately fund operations through the AURORA clinical trial results and regulatory
submission;
our belief that confirmatory data generated from the single AURORA clinical trial and the recently completed AURA clinical trial should
support regulatory submissions in the United States, Europe and Japan and the timing of such including the NDA submission in the United
States;
our belief that recently granted formulation patents regarding the delivery of voclosporin to the ocular surface for conditions such as dry eye
have the potential to be of therapeutic value;
our plans and expectations and the timing of commencement, enrollment, completion and release of results of clinical
trials;
our current forecast for the cost of the AURORA clinical trial and the continuation
study;
our intention to seek regulatory approvals in the United States, Europe and Japan for voclosporin and anticipated timing of receiving
approval;
our intention to demonstrate that voclosporin possesses pharmacologic properties with the potential to demonstrate best-in-class differentiation
with first-in-class status for the treatment of LN outside of Japan;
our belief in voclosporin being potentially a best-in-class CNI with robust intellectual property exclusivity and the benefits over existing
commercially available CNIs;
our belief that voclosporin has further potential to be effectively used across a range of therapeutic autoimmune areas including FSGS and
DES;
our intention to initiate a Phase II clinical trial for voclosporin in FSGS patients and the timing for commencement and for data availability for
the same;
our intention to commence a Phase IIa tolerability study of VOS and the timing for commencement and for data availability for the
same;
statements concerning the anticipated commercial potential of voclosporin for the treatment of LN, FSGS and
DES;
our belief that the expansion of the renal franchise could create significant value for
shareholders;
our intention to use the net proceeds from financings for various
purposes;
our belief that Aurinia’s current financial resources are sufficient to fund all existing programs, the new indication expansion and new product
development work and supporting operations into 2020;
our plans to generate future revenues from products licensed to pharmaceutical and biotechnology
companies;
statements concerning partnership activities and health
discussions;
statements
voclosporin;
our ability to take advantage of financing opportunities if and when needed;
our belief that VOS has the potential to compete in the multi-billion-dollar human prescription dry eye market;
potential market
concerning
regulatory
the
for
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•
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our intention to seek additional corporate alliances and collaborative agreements to support the commercialization and development of our
product; and
our belief that the annualized pricing for voclosporin could range between $45,000-$100,000 in the United
States.
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:
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the regulatory requirements and commitments will be
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 our clinical programs on a timely basis, including conducting the required AURORA
clinical trial and meet regulatory requirements for approval of marketing authorization applications and new drug approvals, as well as
favourable product labeling;
the assumption that the planned studies will achieve positive
results;
the assumptions regarding the costs and expenses associated with our clinical
trials;
the assumption
maintained;
the assumption that we will be able to meet GMP standards and manufacture and secure a sufficient supply of voclosporin on a timely basis to
successfully complete the development and commercialization of voclosporin;
the assumptions on the market value for the LN
program;
the assumption that our patent portfolio is sufficient and
valid;
the assumption that we will be able to extend our patents on terms acceptable to
us;
the
market;
the assumption that there is a potential commercial value for other indications for
voclosporin;
the assumption that market data and reports reviewed by us are
accurate;
the assumption that another company will not create a substantial competitive product for Aurinia’s LN business without violating Aurinia’s
intellectual property rights;
the assumptions on the burn rate of Aurinia’s cash for
operations;
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;
and/or
the assumptions relating to the capital required to fund operations through AURORA clinical trial results and regulatory submission.
assumptions
on
the
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;
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 depends 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;
we disclaim any intention and assume no obligation to update any forward-looking statements even if new information becomes available, as
a result of future events, new information, or for any other reason except as required by law.
The factors discussed below and other considerations discussed in the “Risk Factors” section of this AIF could cause our actual results to differ
significantly from those contained in any forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance,
or achievements to differ materially from any assumptions, further results, performance or achievements expressed or implied by such forward-
looking statements. Important factors that could cause such differences include, among other things, the following:
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the need for additional capital in the longer term to fund our development programs and the effect of capital market conditions and other
factors on capital availability;
competition;
difficulties, delays, or failures we may experience in the conduct of and reporting of results of our clinical trials for
voclosporin;
difficulties in meeting GMP standards and the manufacturing and securing of a sufficient supply of voclosporin on a timely basis to
successfully complete the development and commercialization of voclosporin;
difficulties, delays or failures in obtaining regulatory approvals for the initiation of clinical
•
•
•
trials;
difficulties in gaining alignment among the key regulatory jurisdictions, EMA, FDA and PMDA, which may require further clinical
activities;
difficulties, delays or failures in obtaining regulatory approvals to market voclosporin;
not being able
voclosporin;
to extend our patent portfolio for
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of
for
and
demand
obtaining
acceptance
difficulties we may experience in completing the development and commercialization of
voclosporin;
the market for the LN business may not be as we have
estimated;
insufficient
voclosporin;
difficulties obtaining adequate reimbursements from third party
payors;
difficulties
acceptance;
competitors may arise with similar products;
product liability, patent infringement and other civil litigation;
injunctions, court orders, regulatory and other 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 payers for voclosporin;
and/or
difficulties we may experience in identifying and successfully securing appropriate vendors to support the development and
commercialization of our product.
formulary
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. These forward-looking statements are made as of the date hereof.
For additional information on risks and uncertainties in respect of the Company and its business, please see the “Risks Factors” section of this AIF.
Although we believe that the expectations reflected in such forward-looking statements and information are reasonable, undue reliance should not be
placed on forward-looking statements or information because we can give no assurance that such expectations will prove to be correct.
Corporate structure
OVERVIEW
We are a clinical stage biopharmaceutical company with a head office at #1203-4464 Markham Street, Victoria, British Columbia V8Z 7X8. Our
registered office is located at #201, 17904-105 Avenue, Edmonton, Alberta T5S 2H5 where the finance function is performed.
We are organized under the Business Corporations Act (Alberta). The Common Shares are currently listed and traded on the NASDAQ under the
symbol “AUPH” and on the TSX under the symbol “AUP”. Our primary business is the development of a therapeutic drug to treat autoimmune
diseases, in particular LN.
We have the following wholly-owned subsidiaries: Aurinia Pharma U.S., Inc. (Delaware incorporated) and Aurinia Pharma Limited (UK incorporated).
Aurinia Pharma Corp. (British Columbia incorporated) was wound up into Aurinia Pharmaceuticals Inc. and dissolved on November 30, 2017.
Our By-Law No. 2 was amended at a shareholder’s meeting held on August 15, 2013 to include provisions requiring advance notice for any
nominations of directors by shareholders, which are described further in our most recent information circular.
Appointment of new board members
RECENT DEVELOPMENTS
On February 7, 2018 we appointed Joseph P. “Jay” Hagan to our Board. Mr. Hagan is currently the President and Chief Executive Officer of Regulus
Therapeutics Inc., having previously held the positions of Chief Operating Officer, Principal Financial Officer and Principal Accounting Officer.
On February 21, 2018 we appointed Michael Hayden, CM, OBC, MB, ChB, PhD, FRCP (C), FRSC to our Board. Dr. Hayden was most recently the
President of Global R&D and Chief Scientific Officer at Teva Pharmaceutical Industries Ltd. Dr. Hayden is the co-founder of three biotechnology
companies, including Aspreva, and currently sits on several boards. Dr. Hayden is a celebrated researcher, having focused his research primarily on
genetic diseases.
Preliminary Base Shelf Prospectus
On January 4, 2018, in order to replace our prior expired base shelf prospectus and corresponding shelf registration statement, we filed a Preliminary
Shelf Prospectus with the securities commissions in each of the provinces of Ontario, Alberta and British Columbia in Canada, and a corresponding
shelf registration statement on Form F-10 with the SEC under the U.S./Canada Multijurisdictional Disclosure System.
The Preliminary Shelf Prospectus and corresponding shelf registration statement, when made final or effective, will allow Aurinia to offer up to
US$250,000,000 of Common Shares, warrants, subscription receipts, debt securities or any combination thereof during the 25-month period that the
shelf prospectus (once made final) is effective. We have no immediate intention to undertake an offering. However, the shelf prospectus (once made
final) will enable Aurinia to potentially access new capital if and when needed. The amount and timing of any future offerings will be based on our
financial requirements and market conditions at the time.
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BUSINESS OF THE COMPANY
We are focused on the development of our novel therapeutic immunomodulating drug candidate, voclosporin, for the treatment of LN, FSGS and DES.
Voclosporin is a next generation CNI which has clinical data in over 2,400 patients across multiple indications. It has also been previously studied in
kidney rejection following transplantation, psoriasis and in various forms of uveitis (an ophthalmic disease).
Legacy CNIs have demonstrated efficacy for a number of conditions, including LN, transplant, DES and other autoimmune diseases; however, side
effects exist which can limit their long-term use and tolerability. Some clinical complications of legacy CNIs include hypertension, hyperlipidemia,
diabetes, and both acute and chronic nephrotoxicity.
Voclosporin is an immunosuppressant, with a synergistic and dual mechanism of action that has the potential to improve near- and long-term outcomes
in LN when added to MMF, although not approved for such, the current standard of care for LN. By inhibiting calcineurin, voclosporin reduces
cytokine activation and blocks interleukin IL-2 expression and T-cell mediated immune responses. Voclosporin also potentially stabilizes disease
modifying podocytes, which protects against proteinuria. Voclosporin is made by a modification of a single amino acid of the cyclosporine molecule
which has shown a more predictable pharmacokinetic and pharmacodynamic relationship, an increase in potency, an altered metabolic profile, and
easier dosing without the need for therapeutic drug monitoring. Clinical doses of voclosporin studied to date range from 13 - 70 mg BID. The
mechanism of action of voclosporin, a CNI, has been validated with certain first generation CNIs for the prevention of rejection in patients undergoing
solid organ transplants and in several autoimmune indications, including dermatitis, keratoconjunctivitis sicca, psoriasis, rheumatoid arthritis, and for
LN in Japan.
We believe that voclosporin possesses pharmacologic properties with the potential to demonstrate best-in-class differentiation with first-in-class
regulatory approval status for the treatment of LN outside of Japan.
Based on published data, we believe the key potential benefits of voclosporin in the treatment of LN are as follows:
•
•
•
•
increased potency compared to cyclosporine A, allowing lower dosing requirements and fewer off target
effects;
limited inter and intra patient variability, allowing for easier dosing without the need for therapeutic drug
monitoring;
less cholesterolemia and triglyceridemia than cyclosporine A;
and
limited incidence of glucose intolerance and diabetes at therapeutic doses compared to
tacrolimus.
Strategy
Our business strategy is to optimize the clinical and commercial value of voclosporin and become a global biopharma company with a focused renal
autoimmune franchise.
The key elements of our corporate strategy include:
•
•
•
•
Advancing voclosporin through a robust LN Phase III clinical trial (AURORA) with anticipated completion of this trial in the fourth
quarter of 2019;
Conduct a Phase II proof of concept trial for the additional renal indication of
FSGS;
Evaluate other voclosporin indications while deploying the majority of our operational and financial resources to develop voclosporin for
LN;
Conduct a Phase IIa tolerability study of VOS, and upon completion of this study look at all options to create value with our proprietary
nanomicellar ocular formulation of voclosporin in the human health field including, but not limited to, further development, out-licensing
or divestiture while remaining focused on our Nephrology efforts.
OUR LN PROGRAM
AURORA clinical trial
We achieved a significant milestone in the second quarter of 2017 with the initiation of patient randomization for the AURORA clinical trial.
We currently have 201 clinical trial sites activated and able to enroll patients around the globe. We are actively recruiting the clinical trial and our
clinical team is focused on initiating the remaining sites. An aggressive patient recruitment program for this trial is ongoing.
Based on an eighteen-month enrollment period, we believe AURORA is on track to complete enrollment in the fourth quarter of 2018. Topline data
from AURORA is expected in late 2019. We believe the totality of data from both the AURORA and AURA clinical trials can potentially serve as the
basis for a NDA submission following a successful completion of the AURORA clinical trial. Additionally, under voclosporin’s fast-track designation,
we intend to utilize a rolling NDA process. We are actively putting together a NDA and intend to submit the first module (the non-clinical module) in
the second half of 2018. We plan to submit the Chemistry, Manufacturing, and Controls module in the first half of 2019, and the clinical module in the
first half of 2020.
The AURORA clinical trial is a global 52-week double-blind, placebo-controlled study of approximately 320 patients to evaluate whether voclosporin
added to standard of care can increase overall renal response rates in the presence of low dose steroids.
Patients are randomized 1:1 to either of 23.7 mg voclosporin BID and MMF or MMF and placebo, with both arms receiving a rapid oral corticosteroid
taper. As in the AURA clinical trial, the study population in AURORA will be comprised of patients with biopsy proven active LN who will be
evaluated on the primary efficacy endpoint of complete remission, or renal response, at 52 weeks, a composite which includes:
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•
•
•
•
of
UPCR
≤0.5mg/mg;
normal, stable renal function (≥60 mL/min/1.73m2 or no confirmed decrease from baseline in eGFR of
>20%);
presence of sustained, low dose steroids (≤10mg prednisone from week 16-24);
and
no
medications.
administration
rescue
of
Our current forecast is that the AURORA clinical trial will cost approximately $80 million, which includes costs of $27 million incurred to December
31, 2017.
Patients completing the AURORA trial will then have the option to roll-over into a 104-week blinded continuation study. The data from the
continuation study will allow us to assess long-term outcomes in LN patients that will be valuable in a post-marketing setting in addition to future
interactions with various regulatory authorities. The current estimate of the clinical cost of the continuation study is in the range of $20 million to $25
million .
In order to complete the clinical dossier, we will also commence a confirmatory drug-drug interaction study between voclosporin and MMF in 2018. In
addition, we will conduct a pediatric study post-approval.
About LN
LN is an inflammation of the kidney caused by SLE and represents a serious manifestation of SLE. SLE is a chronic, complex and often disabling
disorder. SLE is highly heterogeneous, affecting a wide range of organs and tissue systems. Unlike SLE, LN has straightforward disease measures
(readily assessable and easily identified by specialty treaters) where an early response correlates with long-term outcomes, measured by proteinuria. In
patients with LN, renal damage results in proteinuria and/or hematuria and a decrease in renal function as evidenced by reduced eGFR, and increased
serum creatinine levels. eGFR is assessed through the Chronic Kidney Disease Epidemiology Collaboration equation. Rapid control and reduction of
proteinuria in LN patients measured at 6 months shows a reduction in the need for dialysis at 10 years (Chen et al., Clin J. Am Soc Neph., 2008 ). LN can
be debilitating and costly and if poorly controlled, can lead to permanent and irreversible tissue damage within the kidney. Recent literature suggests
severe LN progresses to ESRD, within 15 years of diagnosis in 10%-30% of patients, thus making LN a serious and potentially life-threatening
condition. SLE patients with renal damage have a 14-fold increased risk of premature death, while SLE patients with ESRD have a greater than 60-fold
increased risk of premature death. Mean annual cost for patients (both direct and indirect) with SLE (with no nephritis) have been estimated to exceed
$20,000 per patient, while the mean annual cost for patients (both direct and indirect) with LN who progress to intermittent ESRD have been estimated
to exceed $60,000 per patient (Carls et al., JOEM., Volume 51, No. 1, January 2009 ).
LN Standard of Care
While at Aspreva, certain members of Aurinia’s management team executed the ALMS study which established CellCept® as the current standard of
care for treating LN. The ALMS study was published in 2009 in the Journal of the American Society of Nephrology and in 2011 in the New England
Journal of Medicine.
The American College of Rheumatology recommends that intravenous cyclophosphamide or MMF/CellCept® be used as first-line immunosuppressive
therapy for LN. Despite their use, the ALMS study showed that the vast majority of patients failed to achieve CR, and almost half failed to have a renal
response at 24 weeks for both of these therapeutics. Based upon the results of the ALMS study, we believe that a better solution is needed to improve
renal response rates for LN.
Despite CellCept® being the current standard of care for the treatment of LN, it remains far from adequate with fewer than 20% of patients on therapy
actually achieving disease remission after six months of therapy. Data suggests that a LN patient who does not achieve rapid disease remission upon
treatment is more likely to experience renal failure or require dialysis at 10 years (Chen YE, Korbet SM, Katz RS, Schwartz MM, Lewis EJ; the
Collaborative Study Group. Value of a complete or partial remission in severe lupus nephritis. Clin J Am Soc Nephrol. 2008;3:46-53.). Therefore, it is
critically important to achieve disease remission as quickly and as effectively as possible.
Based on available data from the AURA clinical trial, we believe that voclosporin has the potential to address critical needs for LN by controlling active
disease rapidly, lowering the overall steroid burden, impacting extra-renal disease and doing so with a convenient oral twice-daily treatment regimen.
At the time of submission of this AIF, there are no drugs specifically approved by any regulatory agency as safe and effective for LN outside of Japan.
Market Potential and Commercial Considerations
Our target launch date for voclosporin as treatment for LN is late 2020 or early 2021.
The global immunology market which covers autoimmune conditions including SLE is set to rise from $57.7 billion in 2015 to $75.4 billion by 2022
according to GBI Research with the United States accounting for half of the market. The growth in the market is driven by continued increase in
prevalence and incidence of autoimmune conditions in addition to new market entrants that are targeting better outcomes. There is significant unmet
need for new therapies specifically in SLE and LN.
We have conducted market research including claims database reviews (where available) and physician-based research. Our physician research included
approximately 900 rheumatologists and nephrologists across the United States, Europe and Japan to better define the potential market size, estimated
pricing and treatment paradigms in those jurisdictions. Using the U.S. MarketScan® database (with approximately ~180,000,000 insured lives in the
United States) there were 445,000 SLE patients in the database (between January 2006 and June 2016) based on specific
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SLE diagnosis codes. The National Institute of Diabetes and Digestive and Kidney Diseases estimates that as many as 50% of people with SLE are
diagnosed with LN. The Lupus Foundation of America estimates that 60% of people with lupus may develop kidney problems. Using claims database
research and physician research, we believe the diagnosed range of LN patients to be approximately 125,000 to 200,000 in the United States and
150,000 to 215,000 for Europe and Japan combined. In the United States, Europe and Japan, one in five LN patients are thought to be undiagnosed due
to referring physicians being inefficient and inaccurate in diagnosing the condition according to our research.
Similar to other autoimmune disorders, LN is a flaring and remitting disease. The destructive disease cycle people with LN go through is depicted
below. The disease cycles from being in remission to being in flare, achieving partial remission and being 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 physician’s goals are to induce/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, dialysis, renal transplantation, and death. According to a
physician survey, the frequency of LN flares amongst treated patients was approximately every 14 months. The ability to get patients into remission
quickly correlates with better long-term kidney outcomes as noted above.
The population of people with LN will be in different stages of their disease at any one time. Physicians currently use existing LN standard of care
including immunosuppressants and high dose steroids to treat people with LN throughout the disease cycles including induction and maintenance
phases. By studying voclosporin on top of an existing standard of care we are not seeking to displace current accepted treatment patterns. We feel that
being additive to an existing standard of care in addition to the product being administered orally versus by an infusion or injection has the potential to
support a more rapid market adoption once approved.
Current annualized pricing (based on published wholesale acquisition cost) for the treatments of other more prevalent autoimmune conditions such as
Multiple Sclerosis, Crohn’s, Rheumatoid Arthritis and SLE ranges from $45,000-$100,000 in the United States. We have conducted pricing research
that studied a similar pricing range with payers and physicians and believe that pricing in this range can be achievable for voclosporin in the United
States. Pricing for other autoimmune conditions is lower in Europe and Japan than it is in the United States this is driven by the specific country pricing
and reimbursement processes. We believe the US will provide the largest market opportunity followed by Europe and Japan.
New Voclosporin Indications
FSGS
FSGS is a lesion characterized by persistent scarring identified by biopsy and proteinuria. FSGS is a cause of NS and is characterized by high
morbidity. NS is a collection of symptoms that indicate kidney damage, including: large amounts of protein in the urine; low levels of albumin and
higher than normal fat and cholesterol levels in the blood, and edema. Similar to LN, early clinical response and reduction of proteinuria is thought to be
critical to long-term kidney health and outcomes.
FSGS is likely the most common primary glomerulopathy and the most common primary glomerulopathy leading to ESRD. The incidence of FSGS and
ESRD due to FSGS are increasing as time goes on. Precise estimates of incidence and prevalence are difficult to determine. According to NephCure
Kidney International, more than 5400 patients are diagnosed with FSGS every year; however, this is considered an underestimate because a limited
number of biopsies are performed. The number of FSGS cases are rising more than any other cause of NS and the incidence of FSGS is increasing
through disease awareness and improved diagnosis. FSGS occurs more frequently in adults than in children and is most prevalent in adults 45 years or
older. FSGS is most common in people of African American and Asian descent. It has been shown that the control of proteinuria is important for long-
term dialysis-free survival of these patients. Currently, there are no approved therapies for FSGS in the United States and Europe.
Our clinical data in LN demonstrated that voclosporin decreased proteinuria, which is also an important disease marker for FSGS. Furthermore,
voclosporin appears to demonstrate a more predictable pharmacology and an improved lipid and metabolic profile over legacy calcineurin inhibitors,
which have shown efficacy in treating autoimmune disorders similar to those we are targeting. We plan to initiate a Phase II proof of concept clinical
trial for voclosporin in FSGS in the second quarter of 2018. Interim data readouts will depend on the rate of trial recruitment and could begin in late
2018/first half of 2019.
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DES
We plan to initiate a Phase IIa tolerability study of VOS versus the standard of care for the treatment of DES by the end of the second quarter of 2018,
with data available in the second half of 2018. A CNI in the form of RESTASIS® (Cyclosporine Ophthalmic Emulsion, .05%) is a mainstay for the
treatment for DES in the United States. The goal of this program is to prove that VOS has the potential to be a best-in-class CNI for the treatment of
DES.
VOS is an aqueous, preservative free nanomicellar solution containing 0.2% voclosporin intended for use in the treatment of DES. It has shown
evidence of efficacy in our partnered canine studies and in a small human Phase I study (n=35), this supports its development for the treatment of DES.
Animal safety toxicology studies were previously completed in rabbit and dog models, and additional animal safety toxicology studies are planned.
VOS has IP protection in the form of specific formulation patents until 2031.
DES, or keratoconjunctivitis sicca, is a chronic disease in which a lack of moisture and lubrication on the eye’s surface results in irritation and
inflammation of the eye. DES is a multifactorial, heterogeneous disease estimated to affect greater than 20 million people in the United States (Market
Scope, 2010 Comprehensive Report on The Global Dry Eye Products Market).
Voclosporin Background
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 processes 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 (Faul C, et al. The actin cytoskeleton of kidney podocytes is a direct
target of the antiproteinuric effect of cyclosporine A. Nat Med. 2008 Sep;14(9):931-8. doi: 10.1038/nm.1857). 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.
Potential voclosporin clinical benefits
We believe that voclosporin has shown a number of key potential clinical benefits over the existing commercially available CNIs (tacrolimus &
cyclosporine). Firstly, CNI assay results have indicated that voclosporin is approximately four times more potent than its parent molecule cyclosporine,
which would indicate an ability to give less drug and produce fewer potentially harmful metabolites. Secondly, cyclosporine inhibits the enterohepatic
recirculation of MPA, the active metabolite of MMF. The net effect of co-administration of CsA with MMF is reduced MPA systemic exposure by as
much as 50% (D. Cattaneo et al. American Journal of Transplantation, 2005:12(5);2937-2944. ). This drug interaction has not been observed with
voclosporin and it is not expected that MPA blood exposure levels will be reduced with voclosporin co-administration. This is an important fact to
consider as most patients being treated with voclosporin for LN will already be taking MMF. Furthermore, PK-PD analysis indicate lower PK-PD
variability for voclosporin versus tacrolimus or cyclosporine, to the extent that we believe flat-dosing can be achieved for voclosporin. The currently
available CNIs require extensive therapeutic drug monitoring which can often be costly, confusing and time consuming for treating physicians.
In a head-to-head study comparing voclosporin against cyclosporine in the treatment of psoriasis, cyclosporine was shown to cause significant increases
in lipid levels as compared to voclosporin. The difference was statistically significant. This is important considering most lupus patients die of
cardiovascular disease. In another study comparing voclosporin against tacrolimus in patients undergoing renal transplantation, the voclosporin group
experienced a statistically significantly lower incidence of glucose intolerance and diabetes than tacrolimus treated patients. Additionally, in the
Japanese tacrolimus study that led to the approval of this drug in Japan, almost 15% of tacrolimus patients experienced glucose intolerance (Miyasaka
N, Kawai S, Hashimoto H. Efficacy and safety of tacrolimus for lupus nephritis: a placebo-controlled double-blind multicenter study. Mod Rheumatol.
2009;19(6):606-15. Epub 2009 Aug 18). This is a major limitation for physicians wanting to use this agent in lupus and is a well described side effect of
tacrolimus.
We believe that voclosporin can be differentiated from the older CNIs and thus possess a unique position in the market as it relates to inducing remission
in patients suffering from LN.
Scientific Rationale for Treatment of LN with voclosporin
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 voclosporin in combination with the current standard of care for the treatment of LN provides a novel approach to treating this disease
(similar to the standard approach in preventing kidney transplant rejection). Voclosporin 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
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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 2,400 patients 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 therefore is well characterized. Phase II or later clinical studies that have been completed include
studies in the following indications:
Psoriasis: To date, two Phase III 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 III development.
Renal Transplantation: A Phase 2b clinical trial in de novo renal transplant recipients was completed. Study ISA05-01, the PROMISE Study (Busque
S, Cantarovich M, Mulgaonkar S, Gaston R, Gaber AO, Mayo PR, et al; PROMISE Investigators. The PROMISE study: a phase 2b multicenter study of
voclosporin (ISA247) versus tacrolimus in de novo kidney transplantation. Am J Transplant. 2011 Dec;11(12):2675-84 ) 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, but superior to tacrolimus with respect to the incidence of new onset diabetes after transplantation. In 2010, tacrolimus lost its
exclusivity in most world markets and as a result, the competitive pricing environment for voclosporin for this indication has come into question.
Additionally, the more expensive development timelines for this indication has made it a less attractive business proposition as compared to the LN
indication, even when considering the fact that a special protocol assessment has been agreed to by the FDA for this indication.
Uveitis: Multiple studies in various forms of non-infectious uveitis were completed by Lux, 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 successfully terminated our licensing agreement with Lux on February 27, 2014. In conjunction with this termination we have
retained a portfolio of additional patents that Lux had been prosecuting that are focused on delivering effective concentrations of voclosporin to various
ocular tissues. We will continue to evaluate these patents and make strategic recommendations on how they fit into our ongoing strategic directives.
Initiation of AURORA clinical trial
THREE YEAR HISTORY
We achieved a significant milestone in the second quarter of 2017 with the initiation of our single, AURORA clinical trial with patients randomized on
active treatment.
We believe the totality of data from both the AURORA and AURA clinical trials, if the AURORA results confirm the AURA data, can potentially serve
as the basis for a NDA submission following a successful completion of the AURORA clinical trial. We are actively recruiting the clinical trial and
expect an aggregate 18-month enrollment period.
AURA-LV 48-Week Results
On April 20, 2017, we presented in-depth 48-week results from our global AURA clinical trial in LN during the late-breaking session at National Kidney
Foundation 2017 Spring Clinical Meetings in Orlando, Florida. These were updated results from the top-line remission rate results announced on March
1, 2017 and are summarized in the table below. In addition to the trial meeting its CR and PR endpoints at 48 weeks, all pre-specified secondary
endpoints that had been analyzed to April 20, 2017 were also met at 48 weeks. These pre-specified endpoints included: time to CR and PR (speed of
remission); reduction in SLEDAI score; and reduction in UPCR over the 48-week treatment period.
Each arm of the trial included the current standard of care of MMF as background therapy and a rapid steroid taper to 5mg/day by week 8 and 2.5mg by
week 16. Both doses of voclosporin at 48 weeks demonstrated continued improvement over the control group across multiple dimensions. Notably, the
voclosporin groups demonstrated statistically significantly improved speed and rates of CR and PR. Of the patients that achieved CR at 24 weeks, in the
low-dose voclosporin group, 100% remained in CR at 48 weeks, which demonstrates durability of clinical response. Proteinuria levels and reduction in
SLEDAI scores, which include non-renal measures of lupus activity, also continued to significantly separate over time versus the control group.
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The 24 and 48-week efficacy results are summarized below:
Endpoint
Complete Remission (CR)
Partial Remission (PR)
Time to CR (TTCR) [median]
Time to PR (TTPR) [median]
SLEDAI Reduction (non-
renal lupus)
Reduction in UPCR
Treatment
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
24 weeks
33%
27%
19%
70%
66%
49%
19.7 weeks
23.4 weeks
NA
4.1 weeks
4.4 weeks
6.6 weeks
-6.3
-7.1
-4.5
-3.769 mg/mg
-2.792 mg/mg
-2.216 mg/mg
P-value*
p=.045
p=.204
NA
p=.007
p=.024
NA
p<.001
p=.001
NA
p=.002
P=.003
NA
p=.003
p=.003
NA
p<.001
p=.006
NA
48 weeks
49%
40%
24%
68%
72%
48%
19.7 weeks
23.4 weeks
NA
4.3 weeks
4.4 weeks
6.6 weeks
-7.9
-8.3
-5.3
-3.998 mg/mg
-2.993 mg/mg
-2.384 mg/mg
P-value*
p<.001
p=.026
NA
p=.007
p=.002
NA
p<.001
p<.001
NA
p=.005
p=.002
NA
p<.001
p<.001
NA
p<.001
p=.008
NA
The results of the AURA clinical trial at 48 weeks demonstrate the highest complete remission rate of any global LN study of which we are aware,
although we note that the criteria to measure remission differs among various studies. The below chart compares the results of the AURA clinical trial
vs. the other global LN studies of which we are aware.
Number of
weeks
Criteria to Measure Remission and Response
Rate
Results
Name of Global Study
Efficacy and Safety of
Ocrelizumab in Active
Proliferative Lupus
Nephritis
Mycophenolate Mofetil
versus
Cyclophosphamide for
Induction Treatment of
Lupus Nephritis
48 weeks
24 weeks
Efficacy and Safety of
Abatacept in Lupus
Nephritis
52 weeks
AURA-LV: Aurinia
Urine Protein Reduction
in Active Lupus
Nephritis Study
and
24
weeks
48
UP:CR(gm/gm) < .5
SCr ≤ 25% increase from baseline
Steroid taper (not enforced)
Control = 34.7%
LD OCR = 42.7% (NS)
HD OCR = 32.5% (NS)
UP:CR(gm/gm) ≤ .5
Normal eGFR
Normal Urinalysis
Steroid taper (not enforced)
UP:CR(gm/gm) ≤ .26
eGFR within 10% of screening/baseline
Normal Urinalysis
Criteria to be met on 2 successive visits
No mandated steroid taper
UP:CR(gm/gm) ≤ .5
No decrease in eGFR ≥ 20%
No use of rescue medications
Forced steroid taper
MMF = 8.6% (NS)
IVC = 8.1% (NS)
Control = 8.0%
LD ABT = 11.1% (NS)
HD ABT = 9.1% (NS)
24 weeks
Control = 19.3%
LD Voc=32.6%
(p=.045)
HD Voc = 27.3%
(NS)
48 weeks
Control = 23.9%
LD Voc = 49.4% (p<.001)
HD Voc = 39.8% (p=.026)
No new safety signals were observed with the use of voclosporin in LN patients, and voclosporin was well-tolerated over a 48-week period. The overall
safety profile is consistent with the expectations for the class of drug, the patient population and concomitant therapies. Thirteen (13) deaths were
reported during the AURA clinical trial, a pattern which is consistent with other global active LN studies. Eleven (11) of the thirteen (13) deaths
occurred at sites with compromised access to standard of care, and patients who died had a statistically different clinical baseline picture, demonstrating
a more severe form of LN, potential comorbid conditions, and poor nutrition. Furthermore, in the voclosporin arms, the renal function as measured by
corrected eGFR was stable and not significantly different from the control arm after 48 weeks of treatment. Mean blood pressure was also similar
between all treatment groups.
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A summary of TEAEs, study withdrawals and drug discontinuations are below, which are consistent with other clinical trials evaluating
immunosuppressive therapies.
TEAEs, Drug Discontinuation & Study
Withdrawals
Any TEAE
Any Serious TEAE
Any TEAE with Outcome of Death 1
Any Treatment-Related TEAE
Any Serious Treatment-Related TEAE
Any adverse event (AE) leading to study drug
discontinuation
Any AE leading to study drug discontinuation
(excluding deaths)
Study Withdrawals
Control
N=88
n (%)
78 (88.6)
17 (19.3)
4 (4.5)
15 (17.0)
1 (1.1)
9 (10.2)
8 (9.1)
18 (20)
VCS 23.7 mg BID
N=89
n (%)
82 (92.1)
25 (28.1)
VCS 39.5mg BID
N=88
n (%)
85 (96.6)
22 (25.0)
10 (11.2)
45 (50.6)
4 (4.5)
16 (18.0)
11 (12.4)
16 (18.0)
2 (2.3)
55 (62.5)
7 (8.0)
14 (15.9)
13 (14.8)
8 (9.1)
1. Data includes three placebo-randomized subjects that died post-study completion.
On June 4, 2017 and June 14, 2017, we presented additional data from the AURA trial in LN during ERA-EDTA 2017 and EULAR 2017.
As previously reported, treatment with low dose voclosporin showed statistically improved efficacy over the control arm at 24 and 48 weeks. The data
presented at ERA-EDTA demonstrated this improved efficacy was attained while maintaining stable serum magnesium, potassium and blood pressure
levels. Well-known side effects with other calcineurin inhibitors at their effective dose include hypomagnesemia and hyperkalemia, which are
associated with renal impairment and require monitoring or intervention.
The data presented at EULAR 2017 demonstrated that over the course of the 48-week trial, patients on voclosporin stayed in remission approximately
twice the amount of time as those in the control group.
The analysis of additional data after April 20, 2017 identified that two non-key secondary endpoints: urine sediment, which describes analysis of active
urinary sediment at each visit; and comparison of C3 and C4 levels between study arms, did not demonstrate statistical significance between arms. The
urine sediment endpoint was not statistically different as there was too few data to demonstrate a difference. C3 and C4 levels are non-specific markers
of general lupus disease activity. Rises in C3 and C4 were seen in all arms indicating disease improvement though no significant difference was
observed between treatment arms.
To summarize, in addition to the trial meeting its CR and PR endpoints at 48 weeks, all key pre-specified secondary endpoints were also met at 48
weeks.
AURORA to serve as basis for regulatory submissions in major markets-US, Europe, and Japan
On April 6, 2017, we announced the outcome of discussions with both the EMA and the PMDA in Japan regarding the development of voclosporin for
the treatment of active LN. Pursuant to these discussions, we believe that the confirmatory data that can be generated from the AURORA clinical trial
and the recently completed AURA clinical trial should support regulatory submissions in the US, Europe and Japan.
48-week data from open-label AURION clinical trial
On March 27, 2017, we presented the 48-week results from the open-label AURION clinical trial at the 12 th International Congress on Systemic Lupus
Erythematosus and the 7th Asian Congress on Autoimmunity jointly in Melbourne, Australia.
The trial successfully achieved its primary objective by demonstrating that early biomarker response in active LN patients can be a significant predictor
of renal response at 24 and 48 weeks. In the per protocol analysis at 48 weeks, 71% of subjects (n=5/7) on treatment remain in complete remission as
measured by a UPCR of ≤ 0.5mg/mg, eGFR within 20% of baseline and concomitant steroid dose of <5mg/day. A 25% reduction in UPCR at week
eight was found to be highly predictive of achieving renal response at 24 and 48 weeks. Conversely, if C3 and C4 do not normalize by week 8, then a
renal response at week 24 and 48 is highly unlikely. Anti-dsDNA was not found to be a useful biomarker in predicting long-term response in LN
patients.
No new safety signals were observed with the use of voclosporin in LN patients; voclosporin was well-tolerated, and the safety profile was consistent
with other immunomodulators. A total of three subjects were discontinued prior to 48 weeks due to lupus related complications or investigator
discretion.
Results from AURION demonstrated that an early UPCR reduction of 25% is the best predictor of renal response at 24 and 48 weeks. In addition, the
use of C3 or C4 improves the precision of predicting if a patient will achieve a clinical response. This exploratory study is supportive of the successful
AURA clinical trial.
Each arm of the trial included the current standard of care of MMF as background therapy and a forced steroid taper to 5mg/day by week 8 and 2.5mg
by week 16.
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Results from Japanese Phase I Ethnobridging Study for Voclosporin
On February 14, 2017, we announced the results of a supportive Phase I safety PK-PD study in healthy Japanese patients which supports further
development of voclosporin in this patient population. Based on evaluations comparing the Japanese ethno-bridging data vs. previous PK and PD
studies in non-Japanese patients, voclosporin demonstrated no statistically significant differences in exposure with respect to Area Under the Curve
measurements. Furthermore, the PK parameters in Japanese patients were generally consistent with previously evaluated PK parameters in non-
Japanese volunteers. There were no unusual or unexpected safety signals in the study.
March 20, 2017 Offering
CORPORATE AND OPERATIONAL DEVELOPMENTS IN 2017
On March 20, 2017, we completed an underwritten public offering of 25.64 million Common Shares, which included 3.35 million Common Shares
issued pursuant to the full exercise of the underwriters’ overallotment option to purchase additional Common Shares (the “March Offering”). The
Common Shares were sold at a public offering price of $6.75 per share. The gross proceeds from the March Offering were $173.10 million before
deducting the 6% underwriting commission and other offering expenses which totaled $10.78 million. Leerink Partners LLC and Cantor Fitzgerald &
Co. acted as joint book-running managers for the March Offering. The Offering was made pursuant to a U.S. registration statement on Form F-10,
declared effective by the United States Securities and Exchange Commission (the “SEC”) on November 5, 2015 (the “Registration Statement”), and the
Company’s existing Canadian short form base shelf prospectus (the “Base Shelf Prospectus”) dated October 16, 2015. The prospectus supplements
relating to the Offering (together with the Base Shelf Prospectus and the Registration Statement, the “Offering Documents”) were filed with the
securities commissions in the provinces of British Columbia, Alberta and Ontario in Canada, and with the SEC in the United States.
We intend to use the net proceeds of the March Offering for research and development activities, including the AURORA clinical trial activities,
commercialization activities and working capital purposes.
Changes to Board and Management
On February 6, 2017, we appointed Dr. Richard M. Glickman LLD (Hon), our founder and Chairman of the Board, as our Chairman and Chief
Executive Officer. The Board accepted the resignation of Charles Rowland as Chief Executive Officer and an executive member of the Board.
On May 9, 2017, we appointed George M. Milne Jr., PhD to the Board. Prior to his retirement, Dr. Milne served as Executive Vice President of Global
Research and Development and President of Worldwide Strategic and Operations Management at Pfizer. Dr. Milne serves on multiple corporate boards
including Charles River Laboratories where he is the lead director and Amylyx Pharmaceuticals and is a Venture Partner at Radius Ventures. On May 8,
2017, Dr. Gregory Ayers resigned from the Board.
On April 17, 2017, we hired Simrat Randhawa MD, MBA, as Head of Medical Affairs. Simrat brings over 20 years of experience to Aurinia across
clinical practice, medical affairs and business development. For the past 10 years, he has held a number of senior leadership roles in commercial and
medical affairs within large and small pharmaceutical companies. During this time, Simrat served as the medical lead for Novartis' Multiple Sclerosis
(MS) franchise, where he played an integral role in establishing Gilenya® as the first oral therapy for the treatment of Relapsing MS. Most recently he
was the global medical affairs lead at BioMarin Pharmaceuticals for MPS, Duchenne Muscular Dystrophy and Hemophilia
On July 3, 2017, we hired Erik Eglite, DPM, JD, MBA as Senior Vice President, General Counsel & Chief Corporate Compliance Officer. Prior to
joining Aurinia, Erik was Vice President, Chief Compliance Officer and Corporate Counsel for Marathon Pharmaceuticals and Vice President, Chief
Compliance Officer and Corporate Counsel for Lundbeck Pharmaceuticals. Prior to that, he was Vice President, Chief Compliance Officer and
Corporate Counsel for Ovation Pharmaceuticals and Global Chief Compliance Officer, Corporate Counsel for Aspreva Pharmaceuticals. Erik has been
involved with the clinical development, launch and commercialization of 12 drugs and drug programs. He is also a licensed podiatric physician and
surgeon.
Termination of Paladin Agreements
Effective December 28, 2017, we terminated the License Agreement dated June 18, 2009 between Paladin and the Company (as amended). Concurrent
with the termination of the License Agreement, under the terms of the R&D Agreement dated June 18, 2009, between Paladin and the Company (as
amended), the R&D Agreement also terminated effective December 28, 2017.
FDA End of Phase 2 Meeting and Plans for Single LN Phase 3 Clinical Trial
CORPORATE DEVELOPMENTS IN 2016
On November 2, 2016, we announced the FDA’s preference for a single LN Phase III clinical trial for voclosporin in the treatment of LN and our plans
and expectations for the AURORA clinical trial. A further description of the AURORA clinical trial is set out under the headings “Phase III AURORA
clinical trial” and “Initiation of Phase III AURORA clinical trial”.
AURION Clinical Trial Update
The AURION trial was a single-arm, twin center, exploratory study assessing the predictive value of an early reduction in proteinuria in subjects
receiving 23.7 mg of voclosporin BID with the current standard of care in patients with active LN. The primary objective of the AURION clinical trial
was to examine biomarkers of disease activity at eight weeks and their ability to predict response at 24 and 48 weeks.
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Study Design:
The primary analysis is the number of patients achieving each of the following biomarkers and the number of these patients who go on to achieve week
24 or week 48 remission.
Biomarkers:
•
•
•
•
25% reduction in UPCR at eight weeks;
C3 complement normalization at 8 weeks;
C4 complement normalization at 8 weeks;
and
Anti-dsDNA normalization
weeks.
eight
at
The secondary analysis includes the 24 and 48-week outcomes, markers of SLE and PK-PD of voclosporin.
On October 6, 2016, we announced 24-week data in all 10 patients from the AURION clinical trial, an open-label exploratory study to assess the short-
term predictors of response using voclosporin (23.7 mg BID) in combination with MMF and oral corticosteroids in patients with active LN. The data
was presented by Robert Huizinga, Vice President of Clinical Affairs at Aurinia Pharmaceuticals at the 10th Annual European Lupus Meeting in
Venice, Italy.
The primary objective of the trial is to examine biomarkers of disease activity at eight weeks and their ability to predict response at 24 and 48 weeks.
In this trial, 70% (7/10) of patients achieved CR at 24 weeks as measured by a UPCR of 0.5mg/mg, eGFR within 20% of baseline and concomitant
steroid dose of <5 mg/day. Of the 10 patients that achieved a reduction of UPCR of 25% at 8 weeks, 80% were responders (50% reduction in UPCR
over baseline) at 24 weeks and 70% were in CR at 24 weeks, proteinuria levels decreased by a mean of 61% from baseline through the first 24 weeks of
the study. In addition, inflammatory markers such as C3, C4 and Anti-dsDNA all continued to normalize to 24 weeks. Voclosporin was well-tolerated
with no unexpected safety signals observed. Renal function, as measured by eGFR, also remained stable over the 24 weeks. We believe that the results
of the AURION clinical trial supports the use of the 23.7 mg twice daily dose in further studies.
Details of the results are below:
Patient#
1
2
3
4
5
6
7
8
9
10
TOTALS:
Attained ≥25%
reduction in
UPCR at 8 weeks
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
100% (10/10)
Attained
PR*
at 8 weeks
Y
Y
Y
N
Y
Y
N
Y
N
Y
70% (7/10)
Attained
PR*
at 24 weeks
Y
Y
Y
N
Y
Y
N
Y
Y
Y
80% (8/10)
Attained
CR
at 8 weeks
Y
Y
N
N
Y
Y
N
Y
N
N
50% (5/10)
Attained
CR
at 24 weeks
Y
Y
N
N
Y
Y
N
Y
Y
Y
70% (7/10)
*
Retrospectively defined by ≥50% reduction in
UPCR
AURA - Positive Top-Line Results For 24 Week Data
On August 15, 2016, we announced positive top-line results from the AURA clinical trial in patients with active LN. The trial achieved its primary
endpoint, demonstrating statistically significantly greater CR at 24 weeks (and confirmed at 26 weeks) in patients treated with 23.7 mg of voclosporin
twice daily (p=0.045). This was the first global study of LN to meet its primary end point. Both treatment arms, 23.7 mg and 39.5 mg twice daily also
showed a statistically significant improvement in the rate of achieving PR at 24 weeks (p=0.007; p=0.024). Each arm of the trial included the current
standard of care of MMF as background therapy, and a forced steroid taper.
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AURA Trial Design
The AURA clinical trial compared the efficacy of voclosporin added to current standard of care of MMF, also known as CellCept®, against standard of
care with placebo in achieving CR in patients with active LN. It enrolled 265 patients at centers in 20 countries worldwide. On entry to the trial, patients
were required to have a diagnosis of LN according to established diagnostic criteria (American College of Rheumatology) and clinical and biopsy
features indicative of active LN.
Patients were randomized to one of two dosage groups of voclosporin (23.7 mg BID and 39.5 mg BID) or placebo, with all patients also receiving
MMF and oral corticosteroids as background therapy. All patients had an initial IV dose of steroids (500-1000 mg) and then were started on 20-25
mg/daily, which was tapered down to a low dose of 5 mg daily by week 8 and 2.5 mg daily by week 16.
The primary endpoint was a measure of the number of patients who achieved CR at 24 weeks which had to be confirmed at 26 weeks. CR required the
following four elements:
•
•
•
•
of
0.5
ratio
protein/creatinine
mg/mg;
normal stable renal function (eGFR 60 mL/min/1.73m2 or no confirmed decrease from baseline in eGFR of
20%);
Presence of sustained, low dose steroids (10mg/day of prednisone from week 16 - 24);
and
No administration of rescue medications throughout the treatment
period.
Summary of Results
The groups were generally well-balanced for age, gender and race, however, when considered together, the proteinuria and eGFR data suggest that
disease severity was greater for the low-dose voclosporin group.
Efficacy
•
•
•
•
Safety
The primary endpoint of CR was met for the low-dose voclosporin group in the ITT analysis (p=0.045). 32.6% of patients on low dose
achieved CR, compared to 27.3% on high dose and 19.3% in the control arm.
•
The odds ratio indicates that patients were twice as likely to achieve CR at 24 weeks compared to the control arm
(OR=2.03).
The primary endpoint was re-analyzed using the 24-hour urine data in place of First Morning Void collections, confirming the finding
that patients were twice as likely to achieve CR at 24 weeks compared to the control arm (p=0.047; OR=2.12).
•
Both voclosporin groups had a significantly faster time to CR (UPCR 0.5 mg/mg) than the control arm. Results of time to CR for co-variate
analyses were broadly consistent with overall efficacy rates in those sub-groups.
The secondary endpoint of PR (50% reduction in UPCR over baseline with no administration of rescue medication throughout the treatment
period) was met for both voclosporin groups in the ITT analysis with 69.7% of patients on low dose achieving PR (p=0.007) and 65.9% in the
high dose group (p=0.024). 49.4% of patients in the control arm achieved PR.
Time to PR was similar (4 weeks) in the two voclosporin groups and was shorter than what was observed in the control group (6.6
weeks).
•
•
•
•
The overall rate of AEs was similar across all
groups.
The overall rate of SAEs was higher in both voclosporin groups but the nature of SAEs is consistent with highly active
LN.
The overall pattern of AEs and SAEs was consistent with that observed in other LN studies.
There were 13 deaths across the trial: two in the high-dose voclosporin arm; 10 in the low-dose voclosporin arm; and one in the control arm,
with the majority of overall deaths (11/13) occurring in Asia. All deaths were assessed by the study investigator as being unrelated to study
treatment.
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Table of Contents
On September 29, 2016, we announced that in addition to voclosporin (23.7 mg BID) achieving its primary endpoint of CR at 24 weeks, both doses of
voclosporin when added to the current standard of care of MMF and a forced oral corticosteroid taper have met all 24-week pre-specified secondary
endpoints vs the control group. These pre-specified endpoints include: PR, which is measured by a 50% reduction in UPCR with no concomitant use of
rescue medication; time to CR and PR; reduction in SLEDAI score; and reduction in UPCR over the 24-week treatment period.
Pre-specified Secondary Endpoint
Time to CR [median]
PR (as measured by UPCR reduction of ≥ 50% from baseline)
Time to PR [median]
SLEDAI Reduction
Reduction in UPCR
Control
Not achieved
49%
6.6 weeks
-4.5
-2.216 mg/mg
Low Dose VCS
(23.7mg BID)
19.7 weeks
p<.001
70%
p=.007
4.1 weeks
p=.002
-6.3
p=.003
-3.769 mg/mg
p<.001
High Dose VCS
(39.5mg BID)
23.4 weeks
p=.001
66%
p=.024
4.4 weeks
p=.003
-7.1
p=.003
-2.792 mg/mg
p=.006
All p-values are vs control
On September 30, 2016, we presented detailed results on the AURA clinical trial. These included a number of pre-specified subset and co-variate
analyses and post-hoc analyses on the data, which show rapid proteinuria reduction and early remission. Based on recent literature suggesting that using
a UPCR of .7mg/mg has better predictive power regarding long-term renal outcomes in LN patients, we performed a post hoc analysis applying this
measure. In doing so, we saw both a greater treatment difference between the 23.7 mg BID voclosporin arm and the control arm, and better statistical
power, which improves from a p-value of .045 to less than .01.
Based on these data we believe:
•
•
•
•
voclosporin has shown statistically significant efficacy in multiple dimensions;
pre-specified and post-hoc analyses have provided valuable
insight;
the LN Phase 3 clinical trial will be de-risked based upon the AURA results; and
biomarker data suggest significant effect on the underlying immunologic process of the
disease.
We also released detailed safety data for the trial including an in-depth mortality assessment. The safety and tolerability of voclosporin has been well-
documented in numerous studies. In previous studies, over 2,000 patients have been treated with voclosporin across multiple indications with no
unexpected SAEs. Clinical doses of voclosporin studies to date range from 13-70 mg BID.
In comparing four global LN trials, AURA, ALMS, Ocrelizumab and Abatacept, it is evident that the AURA clinical trial enrolled the most severe
patients, as measured by proteinuria at baseline. The difference in UPCR and the eGFR in the low dose voclosporin arm at baseline indicates patients
had more severe disease.
No new safety signals were observed with the use of voclosporin in LN patients and voclosporin was well- tolerated. The overall safety profile of
voclosporin is consistent with other immunomodulators. The summary of AEs by SOC across arms in the trial is as follows:
SOC
Any AE
Control
N=88
74 (84.1)
Voclosporin 23.7mg BID
N=89
81 (91.0)
Voclosporin 39.5 mg BID
N=88
84 (95.5)
Thirteen deaths have been reported in the AURA clinical trial which is a pattern that is consistent with other global active LN studies. Eleven of thirteen
deaths occurred at sites with compromised access to standard of care; and patients who died in the trial had a statistically different clinical baseline
picture, indicating a more severe form of LN, potential comorbid conditions and poor nutrition. The last death in the trial occurred in February 2016.
Both the FDA and Data Safety Monitoring Board have reviewed in detail each death that occurred in the trial.
On November 15, 2016, at the American College of Rheumatology annual meeting, we presented speed of remission data from the AURA trial in a late-
breaking abstract titled “Speed of Remission with the Use of Voclosporin, MMF and Low Dose Steroids: Results of a Global Lupus Nephritis Study .” The
data presented are a post-hoc responder analysis (median time to CR for those who achieve CR), demonstrating 7.3 weeks to CR for voclosporin
23.7mg BID vs the control arm of 12 weeks.
On November 21, 2016, at the American Society of Nephrology Kidney Week 2016, we presented renal function data for the AURA trial in a late
breaking session titled “High Impact Clinical Trials ”. These data showed that in the voclosporin treatment arms, the renal function as measured by
eGFR was stable and not significantly different from the control arm during the course of the trial. Mean blood pressure was slightly reduced and was
similar between all treatment groups.
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Table of Contents
Financings
June 2016 Private Placement
On June 22, 2016, we completed a private placement of 3,000,000 units at US$2.36 per unit for aggregate gross proceeds of US$7,080,000. Each unit
consisted of one Common Share and a 0.35 of one Common Share purchase warrant exercisable for a period of two years from the date of issuance at
an exercise price of US$2.77.
July 2016 At-the-Market Facility
On July 22, 2016, we entered into a controlled equity offering sales agreement with Cantor Fitzgerald & Co. pursuant to which the Company was
authorized to sell, from time to time, through at-the-market offerings (the “July ATM ”) with Cantor Fitzgerald & Co. acting as sales agent, such
Common Shares as would have an aggregate offer price of up to US$10,000,000. We also filed a prospectus supplement with securities regulatory
authorities in Canada in the provinces of British Columbia, Alberta and Ontario, and with the United States Securities and Exchange Commission,
which supplemented our short form base shelf prospectus dated October 16, 2015, and our shelf registration statement on Form F-10 dated October 16,
2015, declared effective on November 5, 2015 (the “Shelf Prospectus”). Sales in the July ATM were only conducted in the United States through
NASDAQ at market prices. No sales were conducted in Canada or through the Toronto Stock Exchange.
As of October 3, 2016, sales pursuant to the July ATM were concluded. We issued 3,306,085 Common Shares, receiving gross proceeds in the
aggregate of US$8,000,000 ($6,142,000 in the third quarter of 2016 and $1,858,000 subsequent to the quarter end), being the maximum value
permissible in accordance with Canadian securities laws.
November 9, 2016 At-the-Market Facility
We entered into a Controlled Equity Offering S M Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. dated November 9, 2016
relating to the sale of our Common Shares having an aggregate offering price of up to $8.0 million (the “November ATM”). We also filed a prospectus
supplement on November 9, 2016 with securities regulatory authorities in Canada in the provinces of British Columbia, Alberta and Ontario, and with
the United States Securities and Exchange Commission, which supplemented our shelf prospectus. The prospectus supplement was amended, and an
amended and restated prospectus supplement was filed on February 24, 2017 to update changes to certain information.
The sales under the November ATM were only conducted in the United States through NASDAQ at market prices. No sales were conducted in Canada
or through the Toronto Stock Exchange.
As a result of completion of the March Offering, we determined that the November ATM facility was no longer required and as a result the Sales
Agreement was terminated effective May 8, 2017.
As at December 31, 2016, we had issued 138,986 Common Shares and received gross proceeds of $396,000. There were no sales under the November
ATM in 2017.
December 2016 Public Offering
On December 28, 2016, we closed our US$28.75 million financing (including US$3.75 million pursuant to an exercise of the underwriters’ over-
allotment option), for the sale of 12,777,775 units at a price of US$2.25 per unit. Each unit consisted of one Common Share and one half of one
Common Share purchase warrant (each whole warrant, a “December 2016 Warrant”). Each December 2016 Warrant entitles the holder to purchase
one common share at the exercise price of US$3.00 per common share for a period of five years after the closing of the offering. H.C. Wainwright &
Co., LLC acted as sole book-running manager, and Cormark Securities Inc., acted as co-manager. The underwriters received a fee of 7.0% of the gross
proceeds of the offering.
Filing of Base Shelf Prospectus - October 19, 2015
CORPORATE DEVELOPMENTS IN 2015
We received a final receipt from the British Columbia Securities Commission on October 19, 2015 for the Shelf Prospectus.
The Shelf Prospectus and corresponding shelf registration statement allowed Aurinia to offer Common Shares of Aurinia, warrants to purchase
Common Shares of Aurinia and subscription receipts that entitle the holder to receive upon satisfaction of certain release conditions, and for no
additional consideration, Common Shares of Aurinia or any combination thereof during the 25-month period that the Shelf Prospectus is effective, with
a total offering price, in the aggregate, of up to US$250 million. The Shelf Prospectus was intended to give Aurinia the capability to access new capital
from time to time. The amount and timing of any future offerings will be based on our financial requirements and market conditions at the time. The
Shelf Prospectus expired November 19, 2017.
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Table of Contents
REGULATORY REQUIREMENTS
REGULATORY AND BUSINESS MATTERS
The development, manufacturing and marketing of voclosporin 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 would require
regulatory approval in the United States, Europe and Japan where activities would be conducted by us or on our behalf. Depending upon the
circumstances surrounding the clinical evaluation of the product candidate, the Company itself may undertake clinical trials, contract clinical trial
activities to contract research organizations, or rely upon corporate partners for such development. 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 also intend to seek regulatory approval in other
jurisdictions in the future and will initiate clinical studies where appropriate.
United States
In the United States, all drugs are regulated under the Code of Federal Regulations and are enforced by the FDA. The regulations require that non-
clinical and clinical studies be conducted to demonstrate the safety and effectiveness of products before marketing, and that the manufacturing be
conducted according to certain GMP standards provided by the FDA.
Subsequent to the initial proof-of-concept and preliminary safety studies, the application submitted to the FDA prior to conducting human clinical trials
of new drugs is referred to as an IND application. This application contains information related to the safety, efficacy and quality of the drug, and the
FDA has 30 days in which to notify us if the application is unsatisfactory. If the application is deemed satisfactory, then we may proceed with the
clinical trials. Before a clinical trial can commence at each participating clinical trial site, the site’s IRB/IEC must approve the clinical protocol and other
related documents. The FDA or an IRB/IEC may place a hold on a clinical trial at any time.
After completing all required non-clinical and clinical trials, and prior to selling a novel drug in the United States, we must also comply with NDA
procedures required by the FDA. The NDA procedure includes the submission of a package to demonstrate safety and efficacy of the novel drug and
describe the manufacturing processes and controls. FDA approval of the submission, including agreement on labelling, is required prior to commercial
sale or commercial distribution of the product in the United States. Pre- and/or post-approval inspections of manufacturing and testing facilities are
necessary. The FDA may also conduct inspections of the clinical trial sites and the non-clinical laboratories conducting pivotal safety studies to ensure
compliance with good clinical practice and good laboratory practice requirements. The FDA has the authority to impose certain post-approval
requirements, such as post-market surveillance clinical trials. In addition, FDA approval can be withdrawn for failure to comply with any post-
marketing requirements or for other reasons, such as the discovery of significant adverse effects.
Europe
In Europe, the evaluation of new products is coordinated by the EMA. The regulations are similar to those in the United States and require that non-
clinical and clinical studies be conducted to demonstrate the safety and effectiveness of products before marketing, and that the manufacturing be
conducted according to good manufacturing practice.
Subsequent to the initial proof-of-concept and preliminary safety studies, and prior to conducting human clinical trials, a CTA must be submitted to the
competent authority in the country where the clinical trial will be conducted. This application contains similar information to United States IND. In
Europe, the clinical trials are regulated by the European Clinical Trial Directive (2001/20/EC). As in the United States, before a clinical trial can
commence at each participating clinical trial site, the site’s IRB/IEC must approve the clinical protocol and other related documents.
A major difference in Europe, when compared to the United States, is with the approval process. In Europe, there are different procedures that can be
used to gain marketing authorization in the EU. The first procedure is referred to as the centralized procedure and requires that a single application be
submitted to the EMA and, if approved, allows marketing in all countries of the EU. The centralized procedure is mandatory for certain types of
medicines and optional for others. The second procedure is referred to as national authorization and has two options; the first is referred to as the mutual
recognition procedure and requires that approval is gained from one member state, after which a request is made to the other member states to mutually
recognize the approval, whilst the second is referred to as the decentralised procedure which requires a member state to act as the reference member
state through a simultaneous application made to other member states.
Japan
Japan has a unique set of processes for the regulation of drugs. The PMDA is the main Regulatory Agency that oversees the review and approval of the
drugs as per the regulatory prerequisites in Japan.
Japan’s regulatory system requires the IND Application documents to be prepared in the Common Technical Document (CTD) format. Subsequent to
the application submission, PMDA evaluates the application with respect to the preclinical data, and protocols for clinical studies etc. It takes
approximately 30 days for initial IND and 14 days for subsequent IND filings. Once queries have been answered by the applicant, PMDA completes its
review and the IND application will be transferred to IRB for the review. IRB takes 1-4 weeks of time for the completion of the review. Once IRB
provides a favorable response, IND application will be approved after which, clinical trials can be initiated on human subjects in Japan.
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Table of Contents
Once the applicant files the J-NDA, PMDA reviews the application and schedules a face-to-face meeting with the applicant during which queries from
PMDA are discussed. Meanwhile, GMP investigation of manufacturing site will be carried out. After the face-to-face meeting, the PMDA reviewer
prepares a Review Report. If there are any major issues, PMDA organizes the Expert Discussion, which involves a discussion between the PMDA
reviewer and external expert on the proposed major issue(s). Subsequent to the discussions with the external expert, PMDA reviewer will prepare a
summary of the main issues and discuss with the applicant in another face-to-face review meeting (can be held 2 times).
Following this review meeting, PMDA may again hold another Expert Discussion (if necessary) and prepares the Review Report for final approval
within the Japanese government. The standard time for approval of an J-NDA is approximately 12 months.
DRUG DEVELOPMENT PROCESS
Clinical trials involve the administration of an investigational pharmaceutical product to individuals under the supervision of qualified medical
investigators. Clinical studies are conducted in accordance with protocols that detail the objectives of a study, the parameters to be used to monitor
safety, and the efficacy criteria to be evaluated. Each protocol is submitted to the appropriate regulatory body and to a relevant IRB/IEC prior to the
commencement of each clinical trial. Clinical studies are typically conducted in three sequential phases which may overlap in time-frame.
In summary, the following steps must be completed prior to obtaining approval for marketing in the United States and Europe:
1.
2.
3.
4.
Nonclinical Animal Studies - These studies evaluate the safety and potential efficacy of a therapeutic product and form part of the application
which must be reviewed by the appropriate regulatory authority prior to initiation of human clinical trials.
Phase 1 Clinical Trials - These trials test the product in a small number of healthy volunteers to determine toxicity (safety), maximum dose
tolerance, and pharmacokinetic properties.
Phase 2 Clinical Trials - These trials are conducted in the intended patient population and include a larger number of subjects than in Phase 1.
The primary goal is to determine the safety of a product in a larger number of patients and ultimately in the intended patient population. These
trials may also provide early information on the potential effectiveness of a product.
Phase 3 Clinical Trials - These trials are conducted in an expanded patient population at multiple sites to determine longer-term clinical safety
and efficacy of the product. It is from the data generated in these trials that the benefit/risk relationship of a product is established, and the final
drug labelling claims are defined.
In the course of conducting clinical trials for a drug candidate, a company may conduct more than one trial of a particular phase in order to evaluate the
drug against a variety of indications or in different patient populations. In such a case, industry practice is to differentiate these trials by way of
designations such as “Phase 2a” or “Phase 2b”.
A key factor influencing the rate of progression of clinical trials is the rate at which patients can be recruited to participate in the research program.
Patient recruitment is largely dependent upon the incidence and severity of the disease and the alternative treatments available.
Even after marketing approval for a drug has been obtained, further trials may be required (referred to as Phase 4 trials). Post-market trials may provide
additional data on safety and efficacy necessary to gain approval for the use of the product as a treatment for clinical indications other than those for
which the product was initially tested. These trials may also be used for marketing purposes.
Aurinia expects that it will be required to conduct additional studies for the LN clinical program in order to submit for marketing approval in the United
States, Europe and Japan. The costs and timing of the program will be dependent on a number of variables including the results of the AURA clinical
trial, and the number and size of the additional studies. The additional studies will be determined subsequent to the AURA primary endpoint data results
based on meetings with the regulators. The costs of conducting the additional studies are expected to be at least as much as those required for the current
AURA clinical trial.
MANUFACTURING, ENCAPSULATING AND PACKAGING OF VOCLOSPORIN
Drug supply costs are comprised of third party charges for manufacturing, encapsulating and packaging of voclosporin.
Voclosporin, requires a specialized manufacturing process. Lonza is currently our sole manufacturer of voclosporin and has manufactured the API for
our clinical trials since 2004. Pricing for clinical supply is determined through negotiations between Lonza and the Company and is based on the size of
specific API production runs and the cost of the raw materials used in the API manufacturing process. As at the date of this AIF, we have not
experienced any difficulty in obtaining the raw materials required with respect to the manufacturing of voclosporin.
Lonza Manufacturing Collaboration Agreement
In November 2016, we entered into a long-term manufacturing collaboration and services agreement with Lonza for the manufacture of our API. This
agreement follows a successful multi-year clinical manufacturing relationship where the Company and Lonza have been refining the process and
analytical methods to produce clinical and commercial supplies of voclosporin. Under the terms of the agreement, Lonza has agreed to produce cGMP-
grade voclosporin drug substance for use in our AURORA clinical trial and for future commercial use. The agreement also provides an option to have
Lonza exclusively supply API for up to 20 years. Lonza is the sole supplier for manufacture of our API.
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Encapsulating and Packaging of Voclosporin
We have contracted Catalent to encapsulate and package voclosporin for our AURORA clinical trial (we also used Catalent for our LN Phase 2b clinical
trial.). Catalent is currently the sole supplier for encapsulating and packaging our clinical drug supply. Pricing for these services is determined by
negotiations between Catalent and the Company and is based on the specific production run size. As at the date of this AIF, we have not experienced
any difficulty in obtaining the raw materials used in the encapsulating and packaging process.
It is our intention that Catalent will provide services with respect to encapsulating voclosporin required for our future commercial supply needs. We are
currently in the process of determining our packaging supplier for our commercial supply requirements.
INTELLECTUAL PROPERTY RIGHTS
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 are pursuing avenues to expand the voclosporin
patent portfolio, including a use patent strategy (which involves potential development of use patents driven by AURA Phase IIb data) and a
manufacturing patent strategy (which involves potential development of manufacturing patents based on our manufacturing know-how.)
As of December 31, 2017, we owned over 160 granted patents related to cyclosporine analogs, including granted United States patents, covering
voclosporin composition of matter, methods of use, formulations and synthesis, which expire between 2018 and 2024. The corresponding Canadian,
South African and Israeli patents are owned by Paladin Labs Inc. We anticipate that upon regulatory approval, 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 under the Hatch-Waxman Act in
the United States and comparable laws in other countries. (including the Supplementary Protection Certificate program in the European Union).
Opportunities will also be available to add an additional six months of exclusivity related to pediatric studies which are currently being planned. In
addition to patent rights, we also expect to receive NCE exclusivity for voclosporin in certain countries, which provides from five years in the United
States to up to ten years in Europe of data exclusivity beyond the date of regulatory approval.
We have licensed the development and distribution rights to voclosporin for China, Hong Kong and Taiwan to 3Sbio Inc. This license is royalty bearing
and we will also supply finished product to 3SBio Inc. on a cost-plus basis. We do not expect to receive any royalty revenue pursuant to this license in
the foreseeable future.
As of December 31, 2017, we also owned two granted United States patents related to ophthalmic formulations of calcineurin inhibitors or mTOR
inhibitors, including voclosporin, and one granted United States patent related to ophthalmic formulations of dexamethasone, which expire between
2028 and 2031. We also own 15 corresponding granted patents and three corresponding patent applications in other jurisdictions.
COMPETITIVE ENVIRONMENT
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. Many of these companies 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 preclinical 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. 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 institutions also compete with us in recruiting and retaining highly qualified scientific
personnel.
EMPLOYEES
Total Number of Employees
33
20
16
As at December 31,
2017
As at December 31,
2016
As at December 31,
2015
As at December 31, 2017 we employed 33 employees, 29 of whom held advanced degrees in science and business, including one with a Ph.D. degree,
two with a MD, one with a J.D. and two with MBA.
Of our total 33 employees as at December 31, 2017, 18 employees were engaged in, or directly support, clinical trial activities; and 15 employees were
engaged in corporate, administration and business development activities.
Our employees are not governed by a collective agreement. We have not experienced a work stoppage and believe our employee relations are
satisfactory given the current economic conditions.
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FACILITIES
We entered into an agreement, effective June 1, 2014, to sublease 4,418 square feet of office and storage space at our head office location in Victoria,
British Columbia. The sublease is for a term of five years. Effective September 1, 2017 the sublease was amended to increase the leased premises to
5,540 square feet. The estimated base rent plus operating costs on a monthly basis for the period September 1, 2017 to May 31, 2019 is approximately
$11,000 per month.
We entered into an agreement on November 14, 2014 to lease 1,247 square feet of office space for the Edmonton, Alberta registered office where our
finance group is located. The lease was for an original term of two years commencing on January 1, 2015 and has been extended to December 31, 2018
at a cost of approximately $1,400 per month.
RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider the following risks in addition to the other information included
in this AIF, our historical consolidated financial statements and related notes, before you decide to purchase our Common Shares. The risks and
uncertainties described below are those that we currently believe may materially affect the Company and are set out in no particular order. Additional
risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that materially and adversely
affect our business, financial condition and results of operations. If any of the following events were to actually occur, our business, operating results or
financial condition could be adversely affected in a material manner.
RISKS RELATING TO AURINIA'S BUSINESS
Clinical Trial Progress and Results - Heavy Dependence on Voclosporin
We have invested a significant portion of our time and financial resources in the development of voclosporin. Voclosporin is currently our only product
candidate. We anticipate that our ability to generate revenues and meet expectations will depend on the successful development and commercialization
of voclosporin. The successful development and commercialization of voclosporin will depend on several factors, including the following:
•
•
•
•
•
successful completion of clinical programs, and in particular, the underway AURORA clinical
trial;
receipt of marketing approvals from the FDA and other regulatory authorities with a commercially viable
label;
securing and maintaining sufficient expertise and resources to help in the continuing development and eventual commercialization of
voclosporin for autoimmune indications and/or transplant;
maintaining suitable manufacturing and supply agreements to ensure commercial quantities of the product through validated processes;
and
acceptance and adoption of the product by the medical community and third-party
payors.
It is possible that we may decide to discontinue the development of voclosporin at any time for commercial, scientific, or regulatory reasons. If
voclosporin is developed, but not marketed, we will have invested significant resources and our future operating results and financial conditions would
be significantly adversely affected. If we are not successful in commercializing voclosporin, or significantly delayed in doing so, our business will be
materially harmed, and we may need to curtail or cease operations.
We may not be able to obtain required regulatory approvals for our product candidate and there is no assurance of successful development
We have not completed the development of any therapeutic products and in particular, voclosporin, and therefore there can be no assurance that any
product will be successfully developed. Voclosporin has not received regulatory approval for our commercial use and sale for any indication, in any
jurisdiction. We cannot market a pharmaceutical product in any jurisdiction until it has completed thorough preclinical testing and clinical trials in
addition to that jurisdiction’s extensive regulatory approval process. In general, significant research and development and clinical studies are required to
demonstrate the safety and effectiveness of our product before submission of any regulatory applications. We may never obtain the required regulatory
approvals for our product in any indication. Product candidates require significant additional research and development efforts, including clinical trials,
prior to regulatory approval and potential commercialization, however, there can be no assurance that the results of all required clinical trials will
demonstrate that these product candidates are safe and effective or, even if the results of all required clinical trials do demonstrate that these product
candidates are safe and effective, or even if the results of the clinical trials are considered successful by us, that the regulatory authorities will not require
us to conduct additional clinical trials before they will consider approving product candidates for commercial use. The FDA and other regulators have
substantial discretion in the approval process.
Approval or consent by regulatory authorities to commence a clinical trial does not indicate that the device, drug, or treatment being studied can or will
be approved. Of the large number of drugs in development, only a small percentage result in the submission of an application to the FDA and even fewer
are approved for commercialization. The process of obtaining required approvals (such as, but not limited to, the approval of the FDA, the EMA,
PMDA and Health Canada) is complex, expensive, time intensive, entails significant uncertainty and there can be no assurance that future products will
be successfully developed, proven safe and effective in clinical trials or receive applicable regulatory approvals. Potential investors should be aware of
the risks, problems, delays, expenses and difficulties which may be encountered by us in view of the extensive regulatory environment which controls
our business. The regulatory review process typically varies in time, may take years to complete and approval is not guaranteed. Any approval might
also contain significant limitations which may affect our ability to successfully develop its product candidate. Also, any regulatory approval once
obtained, may be withdrawn. If regulatory approval is obtained in one jurisdiction, that
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does not necessarily mean that we will receive regulatory approval in all jurisdictions in which we may seek approval, or any regulatory approval
obtained may not be as broad as what was obtained in other jurisdictions. However, the failure to obtain approval for our product candidate in one or
more jurisdictions may negatively impact our ability to obtain approval in a different jurisdiction. If our development efforts for our product candidate
are not successful or regulatory approval is not obtained in a timely fashion, on acceptable terms or at all, it will have a material adverse effect on the
business, financial condition, and results of operations.
The results of our completed preclinical studies and clinical trials may not be indicative of future clinical trial results. A commitment of substantial
resources to conduct time-consuming research, preclinical studies, and clinical trials will be required if we are to complete the development of our
product.
There can be no assurance that unacceptable toxicities or adverse side effects will not occur at any time in the course of preclinical studies or human
clinical trials or, if any products are successfully developed and approved for marketing, during commercial use of our product. The appearance of any
such unacceptable toxicities or adverse side effects could interrupt, limit, delay, or abort the development of our product or, if previously approved,
necessitate its withdrawal from the market. Furthermore, there can be no assurance that disease resistance or other unforeseen factors will not limit the
effectiveness of our product. Any products resulting from our programs are not expected to be successfully developed or made commercially available in
the near term and may not be successfully developed or made commercially available at all. Should our product prove to have insufficient benefit and/or
have an unsafe profile, its development will likely be discontinued.
Our future performance will be impacted by a number of important factors, including, in the short-term, our ability to continue to generate cash flow
from financings, and in the longer term, our ability to generate royalty or other revenues from licensed technology and bring new products to the market.
Our future success will require efficacy and safety of our product and regulatory approval for the product. Future success of commercialization of any
product is also dependent on our ability to obtain patents, enforce such patents, avoid patent infringement, and obtain patent extensions where
applicable.
Government Regulation
The production and marketing of our product and our ongoing research and development activities are subject to regulation by numerous federal,
provincial, state and local governmental authorities in the United States and any other countries where we may test or market our product. These laws
require the approval of manufacturing facilities, including adhering to “good manufacturing” and/or “good laboratory” practices during production and
storage, the controlled research and testing of products, governmental review and approval of submissions requiring manufacturing, pre-clinical and
clinical data to establish the safety and efficacy of the product for each use sought in order to obtain marketing approval, and the control of marketing
activities, including advertising and labeling. Failure to adhere to these requirements could invalidate our data.
If we secure regulatory approval, we would continue to be subject to extensive ongoing regulatory requirements. Manufacturing of approved drug
products must comply with extensive regulations governing GMP. Manufacturers and their facilities are subject to continual review and periodic
inspections. As we may be dependent on third parties for manufacturing, we will have limited ability to ensure that any entity manufacturing products
on our behalf is doing so in compliance with applicable GMP requirements. Failure or delay by any manufacturer of our product to comply with GMP
regulations or to satisfy regulatory inspections could have a material adverse effect on us, including potentially preventing us from being able to supply
products for clinical trials or commercial sales. In addition, manufacturers may need to obtain approval from regulatory authorities for product,
manufacturing, or labeling changes, which requires time and money to obtain and can cause delays in product availability. 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. In addition, we are subject to regulations governing the import
and export of our products.
Sales and marketing of pharmaceutical products are subject to extensive federal and provincial or state laws governing on-label and off-label advertising,
scientific/educational grants, gifts, consulting and pricing and are also subject to consumer protection and unfair competition laws. Compliance with
extensive regulatory and enforcement requirements requires training and monitoring of the sales force and other field personnel, which could impose a
substantial cost on us. To the extent our product is marketed by collaborators, our ability to ensure their compliance with applicable regulations would be
limited. In addition, we are subject to regulations governing the design, testing, control, manufacturing, distribution, labeling, quality assurance,
packaging, storage, shipping, import and export of our product candidate.
There can be no assurance that we will be able to achieve or maintain regulatory compliance with respect to all or any part of our current or future
products or that we will be able to timely and profitably produce our product while complying with applicable regulatory requirements. If we fail to
maintain compliance, regulatory authorities may not allow the continuation of the drug development programs or require us to make substantial changes
to the drug. Any such actions could have a material adverse effect on the business, financial condition, and results of operations.
Product Development Goals and Time Frames
We set goals for, and make public statements regarding, timing of the accomplishment of objectives material to our success, such as the commencement
and completion of clinical trials, anticipated regulatory approval dates, and time of product launch. The actual timing of these events can vary
dramatically due to factors such as delays or failures in clinical trials, the uncertainties inherent in the regulatory approval process, and delays in
achieving product development, manufacturing, or marketing milestones necessary to commercialize our product. There can be no assurance that our
clinical trials will be completed, that regulatory submissions will be made or receive regulatory approvals as planned, or that we will be able to adhere to
the current schedule for the validation of manufacturing and launch of our product. If we fail to achieve one or more of these milestones as planned, the
price of the Common Shares could decline.
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We will have significant additional future capital needs in 2020 and beyond and there may be uncertainties as to our ability to raise additional
funding in the future to meet these needs.
We will require significant additional capital resources to expand our business, in particular the further development of our product candidate,
voclosporin, whether for LN or any other indication. Advancing our product candidate, marketing for our product, or acquisition and development of
any new products or product candidates will require considerable resources and additional access to capital markets. In addition, our future cash
requirements may vary materially from those now expected. For example, our future capital requirements may increase if:
•
•
•
•
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;
we experience scientific progress sooner than expected in our discovery, research and development projects, if we expand the magnitude and
scope of these activities, or if we modify our focus as a result of our discoveries;
we are required to perform additional pre-clinical studies and clinical trials; or
we elect to develop, acquire or license new technologies, products or
businesses.
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, which could have a material adverse effect on our business, financial condition, prospects or results of operations.
Patents and Proprietary Technology
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.
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 biopharmaceutical discoveries and related products and processes can be effectively
protected by patents. As a result, there can be no assurance that:
•
•
•
•
•
•
issued will provide adequate protection or any competitive
patent applications will result in the issuance of
patents;
additional proprietary products developed will be
patentable;
patents
advantages;
patents issued will not be successfully challenged by third
parties;
our products do not infringe the patents or intellectual property of others;
or
that we will be able to obtain any extensions of the patent
term.
A number of pharmaceutical, biotechnology, 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.
Further, there may be uncertainty as to whether we may be able to successfully defend any challenge to our patent portfolio. Moreover, we may have to
participate in interference proceedings in the various jurisdictions around the world. 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 products 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 our product.
Clinical trials for our product candidate are expensive and time-consuming, and their outcome is uncertain.
Before we can obtain regulatory approval for the commercial sale of any product candidate currently under development, we are required to complete
extensive clinical trials to demonstrate its safety and efficacy. Clinical trials are very expensive and difficult to design and implement. The clinical trial
process is also time-consuming. If we find a collaboration partner for the development of voclosporin (whether for LN or any other indication), the
clinical trials are expected to continue for several years, although costs associated with voclosporin may well be shared with our collaboration partner.
The timing of the commencement, continuation and completion of clinical trials may be subject to significant delays relating to various causes,
including:
•
•
•
•
•
our inability to find collaboration partners, if needed;
our inability to manufacture or obtain sufficient quantities of materials for use in clinical trials;
delays in obtaining regulatory approvals to commence a study, or government intervention to suspend or terminate a study;
delays, suspension, or termination of the clinical trials imposed by the IRB/IEC responsible for overseeing the study to protect research
subjects at a particular study site;
delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites;
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•
•
•
•
•
•
•
•
•
•
dosing
slower than expected rates of patient recruitment and enrollment;
uncertain
issues;
inability or unwillingness of medical investigators to follow our clinical
protocols;
variability in the number and types of subjects available for each study and resulting difficulties in identifying and enrolling subjects who meet
trial eligibility criteria;
scheduling conflicts with participating clinicians and clinical
institutions;
difficulty in maintaining contact with subjects after treatment, which results in incomplete data;
unforeseen
effects;
lack of efficacy during the clinical
trials;
our reliance on clinical research organizations to conduct clinical trials, which may not conduct those trials with good clinical or laboratory
practices; or
other
delays.
issues or
regulatory
safety
side
The results of pre-clinical studies and initial clinical trials are not necessarily predictive of future results, and our current product candidate may
not have favourable results in later trials or in the commercial setting.
Success in pre-clinical or animal studies and early clinical trials neither ensure that later large-scale efficacy trials will be successful, nor does it predict
final results. Pre-clinical tests and Phase 1 and Phase 2 clinical trials are primarily designed to test safety, to study pharmacokinetics and
pharmacodynamics and to understand the side effects of product candidates at various doses and schedules. Favourable results in early trials may not be
repeated in later trials.
A number of companies in the life sciences industry have suffered significant setbacks in advanced clinical trials, even after positive results in earlier
trials. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Negative or
inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be delayed, repeated or terminated. In addition, failure
to construct appropriate clinical trial protocols could result in the test or control group experiencing a disproportionate number of adverse events and
could cause a clinical trial to be repeated or terminated. Pre-clinical data and the clinical results we have obtained for voclosporin (for LN or any other
indication) may not predict results from studies in larger numbers of subjects drawn from more diverse populations or in a commercial setting, and also
may not predict the ability of our product to achieve its intended goals, or to do so safely.
We will be required to demonstrate in Phase 3 clinical trials that voclosporin is safe and effective for use in a diverse population before we can seek
regulatory approvals for its commercial sale. There is typically an extremely high rate of attrition from the failure of product candidates proceeding
through clinical and post-approval trials. If voclosporin fails to demonstrate sufficient safety and efficacy in ongoing or future clinical trials, we could
experience potentially significant delays in, or be required to abandon development of, our product candidate currently under development.
Our industry is subject to health and safety risks.
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 our product, 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.
Our product may not achieve or maintain expected levels of market acceptance, which could have a material adverse effect on our business,
financial condition and results of operations and could cause the market value of our Securities to decline.
Even if we are able to obtain regulatory approvals for our product, the success of the product is dependent upon achieving and maintaining market
acceptance. New product candidates that appear promising in development may fail to reach the market or may have only limited or no commercial
success. Levels of market acceptance for our product could be impacted by several factors, many of which are not within our control, including but not
limited to:
•
•
•
•
•
•
•
•
•
or
in,
excessive
safety, efficacy, convenience and cost-effectiveness of our product compared to products of our
competitors;
scope of approved uses and marketing
approval;
timing of market approvals and market entry;
difficulty
manufacture;
infringement or alleged infringement of the patents or intellectual property rights of
others;
availability
competitors;
formulary
status;
acceptance of the price of our product; and
ability to market our product effectively at the retail level.
alternative
placement
products
costs
from
and
our
of
to,
In addition, by the time any products are ready to be commercialized, what we believe to be the market for these products may have changed. Our
estimates of the number of patients who have received or might have been candidates to use a specific product may not accurately reflect the true
market or market prices for such products or the extent to which such products, if successfully developed, will actually be used by
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patients. Our failure to successfully introduce and market our products would have a material adverse effect on our business, financial condition, and
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, 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, would have a material adverse effect on 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 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 adversely affected.
We are exposed to risks relating to the write-down of intangible assets, which comprises a significant portion of our total assets.
A significant amount of our total assets relate to our intellectual property. As of September 30, 2017, the carrying value of our intangible assets was
approximately US$14.5 million. In accordance with IFRS, we are required to review the carrying value of its intangible assets for impairment
periodically or when certain triggers occur. Such impairment will result in a write-down of the intangible asset and the write-down is charged to income
during the period in which the impairment occurs. The write-down of any intangible assets could have a material adverse effect on our business,
financial condition, and results of operations.
If we were to lose our foreign private issuer status under U.S. federal securities laws, we would likely incur additional expenses associated with
compliance with the U.S. securities laws applicable to U.S. domestic issuers.
As a foreign private issuer, as defined in Rule 3b-4 under the Exchange Act, we are exempt from certain of the provisions of the U.S. federal securities
laws. For example, the U.S. proxy rules and the Section 16 reporting and “short swing” profit rules do not apply to foreign private issuers. However, if
we were to lose our status as a foreign private issuer, these regulations would immediately apply and we would also be required to commence reporting
on forms required of U.S. companies, such as Forms 10-K, 10-Q and 8-K, rather than the forms currently available to us, such as Forms 40-F and 6-K.
Compliance with these additional disclosure and timing requirements under these securities laws would likely result in increased expenses and would
require our management to devote substantial time and resources to comply with new regulatory requirements. Further, to the extent that we were to
offer or sell our Securities outside of the United States, we would have to comply with the more restrictive Regulation S requirements that apply to U.S.
companies, and we would no longer be able to utilize the multijurisdictional disclosure system forms for registered offerings by Canadian companies in
the United States, which could limit our ability to access the capital markets in the future.
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 of these uncertainties
are leading generally toward increasing insurance costs, which may adversely affect our business, results of operations and our ability to purchase any
such insurance, at acceptable rates or at all, in the future.
We rely on third parties for the supply and manufacture of voclosporin, which can be unpredictable in terms of quality, cost, timing and availability.
Our drug, voclosporin, requires a specialized manufacturing process. Lonza is currently the sole source manufacturer of voclosporin.
We have contracted Catalent to encapsulate and package voclosporin for our AURORA clinical trial program. Catalent is currently the sole supplier for
encapsulating and packaging our clinical drug supply.
It is our intention that Catalent will provide services with respect to encapsulating the voclosporin required for future clinical and commercial supply
needs, while the provider of packaging services for commercial supply is yet to be determined.
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The FDA and other regulatory authorities require that drugs be manufactured in accordance with the current good manufacturing practices regulations,
as established from time to time. Accordingly, in the event we receive marketing approvals for voclosporin, it may need to rely on a limited number of
third parties to manufacture and formulate voclosporin. We may not be able to arrange for our product to be manufactured on reasonable terms or in
sufficient quantities.
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 and foreign regulations. We rely on a limited number of third parties to manufacture and supply raw materials for
our product. The third parties we choose to manufacture and supply raw materials for our product 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 either 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 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 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 drugs, or cause delays, suspension or withdrawal of approvals, product seizures or
recalls, operating restrictions, facility closures and criminal prosecutions. Any of this will have a material adverse impact on our business, financial
condition, and results of operations.
Anticipated Revenues may be derived from Licensing Activities
We anticipate that 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:
•
•
•
•
changes in economic conditions;
changes in the regulatory environment, including governmental pricing controls affecting health care and health care
providers;
pricing
and
other
spending.
research and development
factors affecting
pressures;
Lack of Operating Profits
We have incurred losses and anticipate that our losses will increase as we continue the development of voclosporin and clinical trials and seek
regulatory approval for the sale of our therapeutic product. There can be no assurance that we will have earnings or positive cash flow in the future.
As at December 31, 2017, we had an accumulated deficit of $352 million. The net operating losses over the near-term and the next several years are
expected to continue as a result of initiating new clinical trials and activities necessary to support regulatory approval and commercialization of our
product. 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. We
expect to have quarter-to-quarter fluctuations in expenses, some of which could be significant, due to research, development, and clinical trial activities,
as well as regulatory and commercialization activities.
Negative Cash Flow
We had negative operating cash flow for the financial year ended December 31, 2017. We anticipate that we will continue to have negative cash flow as
we continue our development of voclosporin. 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 favourable or acceptable to us.
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. At any given time, we may be evaluating new acquisitions of companies, products or technologies or may be exploring new 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:
•
•
•
•
than anticipated acquisition costs and
exposure to unknown liabilities of acquired companies and the unknown issues with any associated technologies or
research;
higher
expenses;
the difficulty and expense of integrating operations, systems, and personnel of acquired
companies;
disruption
business;
ongoing
our
of
24
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•
•
•
inability to retain key customers, distributors, vendors and other business partners of the acquired
company;
diversion of management’s time and attention;
and
possible
shareholders.
dilution
to
We may not be able to successfully overcome these risks and other problems associated with acquisitions and this may adversely affect our business,
financial condition or results of operations.
Our business depends heavily on the use of information technologies.
Several key areas of our business depend on the use of information technologies, including production, manufacturing and logistics, as well as clinical
and regulatory matters. Despite our best 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 our product or our proprietary information on voclosporin. 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. 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 have a material adverse effect on our business, operating results and financial condition.
Competition and Technological Change
The industry in which we operate is highly competitive and we have numerous domestic and foreign competitors, including major pharmaceutical and
chemical companies, specialized biotechnology 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. 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 our product non-competitive or obsolete. There may
also be market resistance to the acceptance of our new product in any indication and a risk that the product, even though clinically effective, is not
economically viable in the commercial production stage.
Reliance on Partners
Our strategy and success for the research, development, and commercialization of voclosporin in China is dependent upon the activities of third parties
with rights to voclosporin in those jurisdictions. The amount and timing of resources such third parties will devote to these activities may not be within
our control. There can be no assurance that those third parties will perform as expected.
The license, research and development agreements with the third parties referenced above 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 as a result 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.
Reliance on Other Third Parties
We depend on third parties for the sourcing of components or for the product itself. Furthermore, as with other pharmaceutical companies, we rely on
medical institutions for testing and clinically validating our prospective product. We do not anticipate any difficulties in obtaining required components
or products or any difficulties in the validation and clinical testing of our product but there is no guarantee that they will be obtained.
We currently rely on CROs for the conduct of our clinical trials. These CROs operate in accordance with good clinical management practices mandated
by the regulatory authorities and are subject to regular audits by regulatory authorities and by us.
We also have arrangements for the encapsulation, packaging and labeling of voclosporin through third party suppliers. Contract manufacturers must
operate in compliance with regulatory requirements. Failure to do so could result in, among other things, the disruption of product supplies.
Marketing and Distribution
We have limited experience in the sales, marketing, and distribution of pharmaceutical products. There can be no assurance that we will be able to
establish sales, marketing, and distribution capabilities or make arrangements through collaborations, licensees, or others to perform such activities, or
that such efforts would be successful. If we decide to market our product directly, we must either acquire or internally develop a marketing and sales
force with technical expertise and provide supporting distribution capabilities. The acquisition or development of a sales and distribution infrastructure
would require substantial resources, which may divert the attention of management and key personnel and have a negative impact on product
development. If we contract with third parties for the sales and marketing of our product, our revenue will be dependent on the efforts of these third
parties, whose efforts may not be successful. If we fail to establish successful marketing and sales
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capabilities or to make arrangements with third parties, the business, financial condition and results of operations will be materially adversely affected.
Health Care Reimbursement
In both domestic and foreign markets, sales of our product, if any, will be dependent in part on the availability of reimbursement from third party payors,
such as government and private commercial insurance plans. Third party payors are increasingly challenging the prices charged for medical products
and services. There can be no assurance that our product will be considered cost effective by these third-party payors, that reimbursement will be
available or if available that the payor’s reimbursement policies will not adversely affect our ability to sell our product on a profitable basis.
Unauthorized Disclosure of Confidential 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 or other jurisdictions,
or could otherwise have a negative impact on our business, financial condition, results of operations, reputation and credibility.
Use of Hazardous Materials
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.
Liability and Insurance
The testing, marketing and sale of human pharmaceutical products involves unavoidable risks. If we succeed in developing new pharmaceutical
products, the sale of such products may expose us to potential liability resulting from the use of such products. Such liability might result from claims
made directly by consumers or by regulatory agencies, pharmaceutical companies or others. The obligation to pay any product liability claim in excess
of whatever insurance we are able to acquire, or the recall of any of our products, could have a material adverse effect on our business, financial
condition and future prospects.
We entered into indemnification agreements with our officers and directors. The maximum potential amount of future payments required under these
indemnification agreements is unlimited. However, we currently maintain director and officer liability insurance coverage of US$35 million to reduce
our exposure.
Financial instruments and Risks
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 have a material effect on 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 our cash reserves in US dollars and the majority of our expenses,
including clinical trial costs are also denominated in US dollars, which mitigates the risk of material foreign exchange fluctuations.
RISKS RELATED TO OUR SECURITIES
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 meet the listing requirements of the TSX or the NASDAQ or achieve listing on any other public listing exchange.
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Table of Contents
Raising additional capital may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to our technologies or
drug candidate.
In order to meet our future financing needs, we may issue a significant amount of additional Common Shares, Warrants, subscription receipts, debt
securities, Units, or other equity or debt securities. The precise terms of any future financing will be determined by us and potential investors and such
future financings may significantly dilute our shareholders’ percentage ownership. Additionally, if we raise additional funds through collaborations,
strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies,
future revenue streams, research programs or drug candidate or grant licenses on terms that may not be favourable to us and/or that may reduce the
value of the Common Shares.
Volatility of Share Price
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 Common 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 preclinical studies and clinical trials, as well as those of our collaborators, or our
competitors; other evidence of the safety or effectiveness of our products or those of our competitors; announcements of technological innovations or
new products by us or 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 our products; period-to-period fluctuations in operating
results; changes in estimates of our performance by securities analysts; market conditions for biotechnology stocks in general; and other factors not
within our control could have a significant adverse impact on 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.
There is no guarantee that an active trading market for the Common Shares will be maintained on the TSX and /or NASDAQ. Investors may not be able
to sell their Common Shares quickly or at the latest market price if the trading in the Common Shares is not active.
We expect to issue Common Shares in the future. Future issuances of Common Shares, or the perception that such issuances are likely to occur, could
affect the prevailing trading prices of the Common Shares. In addition, the existence of Warrants or debt securities with conversion features may
encourage short selling by market participants.
Sales of Common Shares could cause a decline in the market price of the Common Shares. One of our major shareholders (ILJIN SNT Co., Ltd. and its
affiliates) owns an aggregate of approximately 15.33% of our outstanding Common Shares as at March 13, 2018. Any sales of Common Shares by these
shareholders or other existing shareholders or holders of options may have an adverse effect on our ability to raise capital and may adversely affect the
market price of the 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 as a result of issuances of Securities 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 sell Common Shares at a
time and price that we deem appropriate. With an additional sale or issuance of Common Shares, investors will suffer dilution of their voting power and
may experience dilution in earnings per share.
We may have broad discretion in the use of the net proceeds of an offering of the Securities and may not use them to effectively manage our
business.
We may need to exercise broad discretion over the use of the net proceeds from a future offering of Common Shares. Because of the number and
variability of factors that will determine our use of such proceeds, our ultimate use might vary substantially from our planned use. Investors may not
agree with how we allocate or spend the proceeds from an offering of Common Shares. We may pursue acquisitions, collaborations or clinical trials that
do not result in an increase in the market value of the Common Shares, and may increase our losses.
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 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 may
consider appropriate in the circumstances.
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 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 2017. While we also do not believe we will be a PFIC for the current taxable
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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 ordinary shares as ordinary income, rather than as
capital gain, the loss of the preferential rate applicable to dividends received on our ordinary 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 laws of Alberta, Canada, it may be difficult to bring actions under U.S federal securities law against us. Most 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 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.
Adverse capital market conditions could affect out liquidity.
Adverse capital market conditions could affect our ability to meet our liquidity needs, as well as our access to capital and cost of capital. We need
additional funding to continue development of our internal pipeline and collaborations in the future. Our results of operations, financial condition, cash
flows and capital position could be materially affected by disruptions in the capital markets.
DIVIDEND POLICY
We have not paid dividends on our outstanding Common Shares in the past and have no established dividend policy for our Common Shares. We plan
to use future earnings, if any, to finance further research and development and the expansion of our business and do not anticipate paying out dividends
on our Common Shares in the foreseeable future. The payment of future dividends, if any, will be reviewed periodically by our Board 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 may consider appropriate in the circumstances.
CAPITAL STRUCTURE
The Company’s authorized share capital consists of an unlimited number of Common Shares, all without nominal or par value.
The holders of Common Shares are entitled to receive notice of and attend all meetings of shareholders, with each Common Share held entitling the
holder to vote on any resolution to be passed at such shareholder meetings. The holders of Common Shares are entitled to dividends if, as and when
declared by the Board. The Common Shares are entitled upon liquidation, dissolution or winding up of Aurinia, to receive the remaining assets of
Aurinia available for distribution to shareholders. There are no pre-emptive, redemption, purchase or conversion rights attached to our Common Shares.
As at March 13, 2018, we had 84,051,758 Common Shares issued and outstanding.
In addition, as of March 13, 2018 there were 7,691,690 Common Shares issuable upon the exercise of outstanding stock options and 2,996,331
Common Shares reserved for future grant or issuance under our stock option plan.
We also have 6,433,181 Warrants (exercisable into 6,433,181 Common Shares) outstanding as at March 13, 2018.
For additional information on stock options and warrants, please see note 11 to our annual consolidated financial statements for the year ended
December 31, 2017 which can be retrieved under the Company’s profile on either of the SEDAR or EDGAR websites.
TRADING PRICE AND VOLUME OF AURINIA SHARES
Our Common Shares are listed and posted for trading on the NASDAQ under the symbol “AUPH”, and on the TSX under the symbol “AUP”.
The following table sets forth, for the 12-month period ended December 31, 2017, the reported high and low prices (in United States dollars) and the
volume of shares traded for each month on NASDAQ.
28
Table of Contents
NASDAQ
Month
January 2017
February 2017
March 2017
April 2017
May 2017
June 2017
July, 2017
August 2017
September 2017
October 2017
November 2017
December 2017
Price Range (US$)
High
Low
Total Volume
3.55
3.98
10.54
7.86
8.19
6.87
7.68
6.62
7.08
7.60
5.92
5.36
2.09
2.95
3.58
6.42
5.74
5.89
6.17
5.66
6.10
5.54
4.68
4.41
46,784,657
32,636,244
421,107,989
102,463,110
74,595,039
34,543,620
35,665,295
21,374,588
19,202,130
39,120,821
17,378,314
21,669,860
The following table sets forth, for the 12-month period ended December 31, 2017, the reported high and low prices (in Canadian dollars) and the volume
of shares traded for each month on the TSX.
TSX
Month
January 2017
February 2017
March 2017
April 2017
May 2017
June 2017
July, 2017
August 2017
September 2017
October 2017
November 2017
December 2017
There are no securities of the Company subject to escrow.
ESCROWED SECURITIES
29
Price Range (CDN$)
High
Low
Total Volume
4.61
5.18
14.17
10.60
11.07
9.09
9.75
8.21
8.57
9.50
7.59
6.81
2.80
3.88
4.80
8.65
7.75
7.81
7.80
7.20
7.50
7.04
6.61
5.68
2,283,614
1,901,314
12,279,153
2,649,488
2,062,784
962,381
1,418,472
711,171
978,676
1,613,476
1,693,411
917,741
Table of Contents
PRIOR SALES
The following table summarizes the distribution of securities other than Common Shares that were issued during the most recently completed financial
year, identifying the type of security, the price per security, the number of securities issued, expiry date and the date on which the securities were issued.
Stock Options
Date
January 20, 2017
January 27, 2017
February 9, 2017
February 16, 2017
April 26, 2017
June 23, 2017
July 5, 2017
September 20, 2017
October 25, 2017
November 20, 2017
Total:
Type of Security
Price per
Security
(CDN$)
Number of
Securities
Expiry Date
Stock Options
Stock Options
Stock Options
Stock Options
Stock Options
Stock Options
Stock Options
Stock Options
Stock Options
Stock Options
3.65
3.96
4.21
4.73
9.45
8.48
8.10
7.59
7.30
6.56
10,000 January 20, 2027
25,000 January 27, 2027
1,885,500 February 9, 2027
50,000 February 16, 2027
333,000 April 26, 2027
50,000 June 23, 2027
280,000 July 5, 2027
60,000 September 20, 2027
5,000 October 25, 2027
30,000 November 20, 2027
2,728,500
DIRECTORS AND EXECUTIVE OFFICERS
Our directors are elected by the shareholders at each annual meeting and hold office until the next annual meeting, at which time they may be re-elected
or replaced, unless they resign earlier. The executive officers are appointed by the Board and hold office pursuant to individual contractual obligations.
As at March 13, 2018, the names and municipalities of residence of our directors and executive officers and their principal occupations within the five
preceding years are set forth below:
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Name, province or state,
and country of residence
Richard Glickman
Victoria, British Columbia
Canada
Dennis Bourgeault
Edmonton, Alberta
Canada
Michael R. Martin
Victoria, British Columbia
Canada
Neil Solomons
Victoria, British Columbia
Canada
Robert Huizinga
North Saanich, British Columbia
Canada
Erik Eglite
Lake Forest, Illinois
United States
Benjamin Rovinski
Toronto, Ontario
Canada
David R.W. Jayne
Cambridge
United Kingdom
Hyuek Joon Lee
Seoul
South Korea
Lorin J. ("Jeff") Randall
Kennett Square, Pennsylvania
United States
George M. Milne, Jr.
Boca Grande, Florida
United States
Joseph P, ("Jay") Hagan
La Jolla, California
United States
Michael Hayden
Vancouver, British Columbia
Canada
Position with the
Company
Director/Officer
since
Principal Occupation for Five Preceding Years
Director, Chairman of
the Board and CEO
August 2013
CEO of Aurinia since February 2017; Chairman of the
Board at Aurinia since August 2013;
May 1998
CFO of Aurinia since May 1998.
CFO
COO
CMO
Executive Vice
President, Corporate
Development
September, 2013
September 2013
August 2011
Senior Vice President,
General Counsel &
Chief Corporate
Compliance Officer
July 2017
Director, Chair of the
Compensation
Committee
September 2013
Director
May 2015
Director
May 2015
COO of Aurinia since September 2013; prior thereto
was CEO of privately-held Aurinia Pharmaceuticals
Inc.; Director, Global Business Development &
Licensing at Vifor Pharma, formerly Aspreva.
CMO of Aurinia since September 2013; prior thereto
was Vice President, Research and Development at
Vifor Pharma, formerly Aspreva.
Executive Vice President, Corporate Development of
Aurinia since May 2017; Vice President, Clinical
Affairs of Aurinia from August 2011 to May 2017.
Vice President, Chief Compliance Officer and
Corporate Counsel for Marathon Pharmaceuticals and
Vice President, Chief Compliance Officer and
Corporate Counsel for Lundbeck Pharmaceuticals.
Prior to that, he was Vice President, Chief Compliance
Officer and Corporate Counsel for Ovation
Pharmaceuticals and Global Chief Compliance Officer,
Corporate Counsel for Aspreva Pharmaceuticals.
Managing Director at Lumira Capital, a North
American health care and life science venture capital
firm.
Certified nephrologist, Director of the Vasculitis and
Lupus Clinic and Reader at The University of
Cambridge, UK.
Managing Director of Business Development for ILJIN
Group since December 2016; prior thereto, Director of
New Business Development for ILJIN Group, a Korean
industrial conglomerate;
Lead Director, Chair of
the Audit Committee
Director, Chair of the
Governance and
Nominating Committee
November 2016
Corporate director
May 2017
Corporate director
Director
February 2018
Director
February 2018
President and CEO of Regulus Therapeutics Inc., a
clinical stage biopharmaceutical company, since May
2017; CFO of Regulus from January 2016 to May
2017; prior thereto held various positions at Orexigen
Therapeutics, Inc. and Amgen.
Corporate director; previously President of Global
R&D and CSO at Teva Pharmaceutical Industries
Limited.
Directors and officers of the Company, as of March 13, 2018, beneficially own, directly or indirectly, 2,119,429 Common Shares in the aggregate,
representing 2.52% of the outstanding Common Shares of the Company.
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EXECUTIVE OFFICERS AND DIRECTORS
The following are brief biographies of our executive officers and directors.
Richard M. Glickman, LLD (Hon), CEO and Chairman of the Board
Dr. Glickman presently serves as the Company’s CEO and Chairman of the Board. In addition to being a founder of the company, he previously served
as the Interim Executive Chairman of the Company for the period September 20, 2013 to February 28, 2014 and as Acting Interim CEO for the period
October 22, 2013 to November 5, 2013. He was a co-founder, Chairman and CEO of Aspreva, playing an integral role in the development and
establishment of CellCept®, or MMF, as the current standard of care for LN. Aspreva was acquired by Swiss pharmaceutical company Galenica for
nearly $1.0 billion in 2008. He currently serves as founding Chairman of Essa Pharmaceuticals Inc., Chairman of the Board of Engene Corporation and
a Director of Cardiome Pharma. He is also a Partner at Lumira Capital, one of Canada’s most successful healthcare focused venture capital firms. Dr.
Glickman has served on numerous biotechnology and community boards, including member of the federal government’s National Biotechnology
Advisory Committee, Director of the Canadian Genetic Disease Network, Chairman of Life Sciences B.C. and a member of the British Columbia
Innovation Council. Dr. Glickman is the recipient of numerous awards including the Ernst and Young Entrepreneur of the Year, a recipient of both BC
and Canada’s Top 40 under 40 award, the BC Lifesciences Leadership Award and the Corporate Leadership Award from the Lupus Foundation of
America.
Dennis Bourgeault, CPA-CA, CFO
Dennis Bourgeault has been the CFO of the Company since 1998 and is responsible for the financial and administrative operations of the Company.
During his tenure, he contributed significantly to one of the largest Canadian biotechnology PIPE transactions, totaling $52 million US dollars and was
involved in the multi-million-dollar Roche licensing agreement of voclosporin in 2002. In addition, he played a crucial role in executing the merger of
Isotechnika and then privately held Aurinia Pharmaceuticals in September 2013. For six years prior to joining Isotechnika, he was the controller for a
private industrial distribution company and a Senior Manager in public accounting at KPMG. Mr. Bourgeault obtained his chartered accountant
designation in 1984.
Michael R. Martin, COO
Michael Martin is currently COO of Aurinia Pharmaceuticals Inc. He was formerly CEO, director and co-founder of the privately held Aurinia
Pharmaceuticals Inc., 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.
Prior to Vifor, Michael was a key member of the business development team that saw Aspreva sold to Galenica for $915M. 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.
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. 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.
Neil Solomons, MD, CMO
Dr. Neil Solomons co-founded privately-held Aurinia Pharmaceuticals in 2012. He is an experienced pharmaceutical physician with 19 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, 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 the ALMS study. 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 with a budget exceeding $15 million 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.
Robert B. Huizinga, RN NNC, MSc(Epi), CNeph(C), Executive Vice President, Corporate Development
Robert Huizinga has more than 24 years of clinical research experience. He has managed the global clinical development of voclosporin since 2002
when he was with Isotechnika Pharma Inc. prior to its merger with Aurinia in 2013. Before joining Isotechnika, Rob was an Investigator in nephrology
and transplantation clinical trials where he was involved in more than 60 clinical trials from Phase I through Phase IV and the successful development of
numerous compounds. He has acted as a consultant to nephrology and transplantation pharmaceutical companies and has lectured extensively. Over the
years, Rob has established and nurtured close relationships in the nephrology and transplant communities and has fostered strong connections with both
investigators and clinical trial sites. Rob has numerous articles published in leading medical journals, including the New England Journal of Medicine,
Lancet and the American Journal of Transplantation. He is a member of many professional societies related to nephrology, transplantation, and nursing
and has served on many nephrology and transplantation committees and is the
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founder of RenalPro, a moderated forum for renal professionals. Rob 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). He is completing his
doctorate in Organizational Leadership.
Erik Eglite, DPM, JD, MBA, Senior Vice President, General Counsel & Chief Corporate Compliance Officer
Prior to joining Aurinia, Erik was Vice President, Chief Compliance Officer and Corporate Counsel for Marathon Pharmaceuticals and Vice President,
Chief Compliance Officer and Corporate Counsel for Lundbeck Pharmaceuticals. Prior to that, he was Vice President, Chief Compliance Officer and
Corporate Counsel for Ovation Pharmaceuticals and Global Chief Compliance Officer, Corporate Counsel for Aspreva Pharmaceuticals. Erik has been
involved with the clinical development, launch and commercialization of 12 drugs and drug programs. He is a nationally recognized and frequent
speaker on pharmaceutical law. Before entering the pharmaceutical industry, Erik worked as Assistant General Counsel for the Department of Human
Services and as a medical malpractice, product liability defense litigation and intellectual property, patent attorney for Querry & Harrow in Chicago,
Illinois. He is a licensed podiatric physician and surgeon and is registered to practice before the United States Patent and Trademark Office, the United
States Court of Appeals for the Federal Circuit, the United States Court of Appeals for the District of Columbia Circuit and the United States Seventh
Circuit Court of Appeals. Erik has a M.B.A. from the University of Notre Dame, Mendoza College of Business. He also holds a B.S. in Biology, a
B.A. in History, M.Sc. Cand. in Chemistry, and a J.D. from Loyola University of Chicago. He graduated from Des Moines University Iowa Medical
School with a Doctorate in Podiatric Medicine and Surgery, after which he completed his residency training at Michigan Health Medical Center
Hospital. He also completed his medical/surgical externships at the University of Chicago, Department of Surgery, Division of Vascular Surgery and
Northwestern University Columbus Cabrini Hospital, Department of Orthopedic/Podiatric Surgery. He has a graduate certificate in Pharmaceutical &
Medical Device Law from Seton Hall School of Law, an Executive Certificate in Corporate Governance from Northwestern University Kellogg School
of Management and an Executive Certificate in Business Administration from the University of Notre Dame. Currently, he is completing his M.S. in
Regulatory Compliance at Northwestern University.
Lorin Jeffry (“Jeff”) Randall, MBA, Lead Director, Chairman of the Audit Committee
Jeff Randall has over 30 years of experience serving in financial and operating roles spanning biotechnology, pharmaceuticals and manufacturing. He
has led a number of companies through multi-million-dollar financings and mergers and acquisitions. In addition to his current board positions, Mr.
Randall served on the board of directors of Nanosphere, Inc. from 2008 to 2016, most recently as Chairman of the Board. From 2004 to 2006, Mr.
Randall, a financial consultant, was Senior Vice President and Chief Financial Officer of Eximias Pharmaceutical Corporation, a development-stage
drug development company. Mr. Randall holds a Bachelor of Science in Mathematics and Accounting from Pennsylvania State University and a
Master’s in Business Administration from Northeastern University.
Benjamin Rovinski, PhD, Director
Dr. Benjamin Rovinski has 27 years of investment, operational, managerial and research experience in the healthcare sector. Dr. Rovinski joined Lumira
Capital in 2001, where he is a Managing Director, with an investment focus on mid- to late-stage private and public life sciences companies. Prior to
joining Lumira Capital, he held several senior management positions in the biotechnology sector, including 13 years at Sanofi Pasteur where he was a
senior scientist and director of molecular virology. Dr. Rovinski led global R&D programs in the areas of HIV/AIDS and therapeutic cancer vaccines,
bringing several of them through to clinical-stage. Dr. Rovinski holds a Ph.D. in Biochemistry from McGill University in Montréal and did post-
doctoral studies in Molecular Oncology and Retrovirology at the Ontario Cancer Institute in Toronto. He obtained his undergraduate degree from Rice
University in Houston. His current and past board roles and investment responsibilities include several private and public companies, including GI
Therapeutics; Vascular Pharmaceuticals; KAI Pharmaceuticals (acquired by Amgen); Morphotek (acquired by Eisai); Cervelo Pharmaceuticals; Health
Hero Network (acquired by Bosch); Avalon Pharmaceuticals (NASDAQ: AVRX; acquired by Clinical Data, Inc.); Inovise Medical, Inc.; Protana;
Signature Biosciences; and SGX Pharmaceuticals (NASDAQ: SGXP; acquired by Eli Lilly). He also serves on the board of directors of Life Sciences
Ontario and the steering committee of the Toronto Regional Board of Trade’s Health Science Cluster initiative. Dr. Rovinski has published over 25
scientific articles and reviews and is the recipient of 31 issued patents.
David R.W. Jayne, MD, FRCP, FRCPE, FmedSci, Director
Dr. David Jayne is Professor of Clinical Autoimmunity in the Department of Medicine at the University of Cambridge, UK. Dr. Jayne received his B.S.
in Surgery and Medicine from Cambridge University, Cambridge, England. He received postgraduate training at several London hospitals and Harvard
University. He is a fellow of the Royal Colleges 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 250 peer-reviewed journal articles, book 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. Dr. Jayne’s research includes investigator-initiated international trials and the introduction of newer therapies in vasculitis and SLE with
collaborators on five continents.
Hyuek Joon Lee, PhD, Director
Dr. Joon Lee is the Managing Director of Business Development for ILJIN Group and is responsible for mergers and acquisitions, and managing
overseas investments, joint ventures and subsidiaries. As of October 2014, he joined the board of directors of Life Science Enterprises in Massachusetts,
a privately held company focusing on advanced biomaterials that promote bone repair. In October of 2017 Dr. Lee became a board member of Pin
Therapeutics, Inc., a private company based in San Francisco. Pin Therapeutics, Inc. is a start-up in the PROTAC space utilizing PROTAC-induced
(Proteolysis Targeting Chimera) protein degradation in drug discovery. Dr. Lee has more than 19 years of experience
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in consulting, management, business development and strategic planning in a number of industries including information technology, chemical and
media. Dr. Lee received his B.S. in Chemistry from Seoul National University, and his M.S.E. and Ph.D. in Chemical Engineering from the University
of Michigan, Ann Arbor.
George M. Milne, Jr., PhD, Director
Dr. Milne has over 30 years of experience in pharmaceutical research and product development. Dr. Milne currently serves on the boards of Amylyx
Pharmaceuticals, Inc. and Charles River Laboratories, Inc. where he is the lead director. He has retired from Pfizer where he served as Executive Vice
President of Global Research and Development and President, Worldwide Strategic and Operations Management. He joined Pfizer 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 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 with
global responsibility for human and veterinary medicine R&D. Dr. Milne has 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 MIT.
Joseph P. Hagan, MBA, Director
Joseph P. “Jay” Hagan is President and Chief Executive Officer of Regulus Therapeutics. Mr. Hagan joined Regulus 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. Mr.
Hagan’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. Mr. Hagan has led numerous strategic and financing
transactions including the acquisitions of Immunex and Tularik and the spinout of Novantrone and Relyspa, as well as many other business
development efforts totaling over $15 billion in value. Before joining Amgen, Mr. Hagan spent five years in the bioengineering labs at Genzyme and
Advanced Tissue Sciences. Mr. Hagan currently serves on the board of directors of Zosano Pharma, a publicly traded biotechnology company. He
received an M.B.A. from Northeastern University and a B.S. in Physiology and Neuroscience from the University of California, San Diego.
Michael Hayden, CM, OBC, MB, ChB, PhD, FRCP (C), FRSC, Director
Dr. Michael Hayden was most recently the President of Global R&D and Chief Scientific Officer at Teva. He is the co-founder of three biotechnology
companies: NeuroVir Therapeutics Inc., Xenon Pharmaceuticals Inc., and Aspreva Pharmaceuticals Corp. Dr. Hayden sits on different boards including
Xenon Pharmaceuticals and Lycera. Author of over 860 peer-reviewed publications and invited submissions, Dr. Hayden has focused his research
primarily on genetic diseases, including genetics of diabetes, lipoprotein disorders, Huntington disease, predictive and personalized medicine. Dr.
Hayden was inducted into the Canadian Medical Hall of Fame in 2017. He was named one of PharmaVoice’s “100 of the Most Inspiring People”
(2015); awarded an Honorary Doctor of Science by the University of Gottingen (2014); the Luminary award by the Personalized Medicine World
Conference (2014); and the Diamond Jubilee Medal (2012), on behalf of HRH Queen Elisabeth II, in recognition of his significant contributions and
achievements. Dr. Hayden has also been awarded the Order of Canada (2011), and the Order of British Columbia (2010). He was named Canada’s
Health Researcher of the Year by CIHR (NIH of Canada) in 2008, and he received the Prix Galien in 2007, which recognizes the outstanding
contribution of a researcher to Canadian pharmaceutical research. Dr. Hayden was recently named one of the 50 Canadians born in the 20th century
who have changed the world.
COMMITTEES OF THE BOARD
We have three standing committees: the Audit Committee, the Governance and Nomination Committee and the Compensation Committee. Current
members of these committees are identified in the following table:
Committee
Audit Committee (1)
Governance and Nomination Committee
Compensation Committee
Members
Lorin J. Randall (Chair)
Benjamin Rovinski
Hyuek Joon Lee
George M. Milne, Jr. (Chair)
David Jayne
Hyuek Joon Lee
Benjamin Rovinski (Chair)
Lorin J. Randall
Hyuek Joon Lee
(1)
Detailed information on the Audit Committee is attached as Schedule
1.
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CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS
No director or executive officer of the Company is, or has been within 10 years before the date of this AIF, a director, chief executive officer or chief
financial officer of any company, including Aurinia, that:
(a)
(b)
was subject to a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any
exemption under securities legislation, that was issued while the proposed director was acting in the capacity as a director, chief
executive officer or chief financial officer; or
was subject to a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any
exemption under securities legislation, that was issued after the director or executive officer ceased to be a director, chief executive
officer or chief financial officer and which resulted from an event that occurred while he was acting in the capacity of a director,
chief executive officer or chief financial officer.
No director or executive officer of the Company, or shareholder holding a sufficient number of securities of the Company to affect materially the control
of the Company:
(a)
(b)
is, or has been within 10 years before the date of this AIF, a director, chief executive officer or chief financial officer of any
company, including Aurinia, that while that person was acting in that capacity, or within a year of that person ceasing to act in that
capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or was subject to or
instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to
hold its assets; or
has, within 10 years before the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or
insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver,
receiver manager or trustee appointed to hold the assets of the director, chief executive officer or chief financial officer.
No director or executive officer of the Company, or shareholder holding a sufficient number of securities of the Company to affect materially the control
of the Company, has been subject to:
(a)
(b)
any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered
into a settlement agreement with a securities regulatory authority;
any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable
investor in making an investment decision.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
As of March 13, 2018, we are not aware of any legal proceedings against us that would involve a claim for damages that exceed ten per cent of our
current assets.
No penalties or sanctions have been imposed against us by a court relating to securities legislation or any securities regulatory authority during the
financial year ended December 31, 2017, nor have we entered into any settlement agreements with a court relating to securities legislation or with a
securities regulatory authority during such financial year. No other penalties or sanctions have been imposed by a court or regulatory body against us
which would likely be considered important to a reasonable investor in making an investment decision respecting the Company.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
None of our directors or executive officers, persons or companies that beneficially own, control, or direct more than 10% of our voting securities, or an
associate or affiliate of any of such directors, executive officers, persons or companies, had a material interest, directly or indirectly, in the transactions
conducted by the Company within the three most recently completed financial years or during the current financial year that has materially affected or is
reasonably expected to materially affect the Company.
CONFLICTS OF INTEREST
To our knowledge, and other than as disclosed herein, there is no known existing or potential material conflicts of interest among the Company, its
directors and officers, or a subsidiary of the Company or other members of management as a result of their outside business interests, except that certain
of its directors may serve as directors of other companies and therefore it is possible that a conflict may arise between their duties to the Company and
their duties as a director of such other companies. See “Risk Factors - The Company is dependent upon its key personnel to achieve its business
objectives”.
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TRANSFER AGENT AND REGISTRAR
Our co-transfer agents and co-registrars are Computershare Investor Services Inc. located at its principal offices in Calgary, Alberta and Toronto,
Ontario and Computershare Trust Company, N.A. located at its principal offices in Golden, Colorado.
We currently have the following material contracts:
MATERIAL CONTRACTS
1. Under the terms of an agreement dated February 14, 2014 between the Company and Dr. Robert Foster, whereby Dr. Robert Foster’s
employment as CSO was terminated by the Company, it was confirmed that effective March 8, 2012, Dr. Foster was entitled to receive 2% of
royalty licensing revenue for royalties received on the sale of voclosporin by licensees and/or 0.3% of net sales of voclosporin sold directly by
the Company, to be paid quarterly as that revenue is received by the Company. Should the Company sell substantially all of the assets of
voclosporin to a third party or transfer those assets to another party in a merger in a manner such that this payment obligation is no longer
operative, then Dr. Foster will be entitled to receive 0.3% of the value attributable to voclosporin in the transaction.
2.
The manufacturing collaboration and services agreement, dated November 22, 2016 between Lonza and the Company as described under the
heading “Manufacturing, Encapsulating and Packaging of Voclosporin - Lonza Manufacturing Collaboration Agreement”.
INTERESTS OF EXPERTS
PricewaterhouseCoopers LLP, the Company’s auditor, issued an auditor’s report dated March 13, 2018 in respect of our Consolidated Financial
Statements, which comprise the Consolidated Statements of Financial Position as at December 31, 2017 and December 31, 2016, and the Consolidated
Statements of Operations and Comprehensive Loss, Consolidated Statements of Changes in Shareholders’ Equity and Cash Flows for the years ended
December 31, 2017 and December 31, 2016, and the related notes. PricewaterhouseCoopers LLP has advised us that they are independent with respect
to the Company within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Alberta and the rules of the U.S.
Securities and Exchange Commission.
ADDITIONAL INFORMATION
Additional information with respect to the Company, including directors’ and officers’ remuneration and indebtedness, principal holders of our
Common Shares and securities authorized for issuance under equity compensation plans will be contained in the most recently filed management
information circular of the Company. Additional financial information is also available in our comparative audited consolidated financial statements,
together with the auditor’s report thereon, and the related Management Discussion and Analysis for its most recently completed fiscal year ended
December 31, 2017.
Additional information regarding the Company is available on the SEDAR website located at www.sedar.com, on EDGAR at www.sec.gov, or on the
Company’s corporate website located at www.auriniapharma.com,or upon request addressed to Michael Martin, COO, at 1203, 4464 Markham Street,
Victoria, British Columbia V8Z 7X8.
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1.
The Audit Committee’s
Charter
SCHEDULE 1 - AUDIT COMMITTEE INFORMATION
Our Audit Committee Charter is available in the governance section of our website at www.auriniapharma.com and is attached as Schedule 2 to this
AIF.
2. Composition and Relevant Education and Experience
The Audit Committee is comprised of three independent directors: Lorin J. Randall (Chair), Benjamin Rovinski and Hyuek Joon Lee. A description of
the education and experience of each Audit Committee member that is relevant to the performance of his responsibilities as an Audit Committee
member may be found above under the heading “Directors and Executive Officers”.
Under the SEC rules implementing the Sarbanes-Oxley Act of 2002 , Canadian issuers filing reports in the United States must disclose whether their
audit committees have at least one audit committee financial expert. The Board has determined that Lorin J. Randall qualifies as an audit committee
financial expert under such rules. In addition, all members of the Audit Committee are considered financially literate under applicable Canadian and
U.S. laws.
3. Pre-approval Policies and
Procedures
The Audit Committee is authorized by the Board to review the performance of our external auditor and approve in advance the provision of services
other than auditing and to consider the independence of the external auditor, including reviewing the range of services provided in the context of all
consulting services bought by us. Such advance approval authority may be delegated by the Audit Committee to the Chair of the Audit Committee who
is “independent” and “unrelated”.
All fees for audit and audit related services performed by the external auditor for the year ended December 31, 2017 were pre-approved by the Audit
Committee. All fees for non-audit related services performed by the external auditor for the year ended December 31, 2017 were pre-approved by the
Audit Committee and/or Audit Chair as delegated by the Audit Committee.
4. External Auditor Service Fees (By
Category)
The aggregate fees recorded for professional services rendered by the external auditor, PricewaterhouseCoopers LLP, for the Company and its
subsidiaries for the years ended December 31, 2017 and 2016, respectively are as follows:
Fiscal year ended
Audit fees (for audit of the Company’s annual financial statements and services
2017
% of Total
Fees
2016
% of Total
Fees
provided in connection with statutory and regulatory filings)(1)
$ 130,583
37,491
Audit related fees, including review of the Company’s quarterly financial statements (2) $
44,935
$
Tax fees (tax compliance, tax advice and planning) (3)
46,943
$
All other fees (4)
$ 259,952
Total fees
50.2% $
66,636
38,732
14.4% $
17.3% $
10,368
18.1% $
55,353
100 % $ 171,089
39%
22.6%
6.1 %
32.3%
100 %
(1) These fees include professional services provided by the external auditor for the statutory audits of the annual financial statements. The total for 2017 is
comprised of $61,688 related to interim billings for the 2017 audit and $68,895 related to fees for the 2016 audit billed in 2017. The total for 2016 is comprised of
$39,900 related to interim billings for the 2016 audit and $26,736 related to fees for the 2015 audit billed in 2016.
(2) These fees relate to performing review engagement services on the Company’s quarterly financial statements and other audit related services.
(3) These fees include professional services for tax compliance, tax advice, tax planning and various taxation matters.
(4) These fees for 2017 include professional services for assistance in filing prospectus supplements for the December 2016 bought deal financing and the March 20,
2017 public offering, and the new preliminary base shelf prospectus. For 2016 these fees include professional services for assistance in filing the ATM and the
December 2016 bought deal financing prospectus supplements in the amount of $49,305 and other advisory services in the amount of $6,048.
5. Reliance on Certain Exemptions
During the year ended December 31, 2017, the Company relied on the exemption set out in section 3.5 of NI 52-110 as a result of the resignation of Dr.
Gregory Ayers from the Audit Committee on May 8, 2017. Dr. Glickman was a member of the Audit Committee from May 8, 2017 to June 21, 2017.
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SCHEDULE 2 - AUDIT COMMITTEE CHARTER
AURINIA PHARMACEUTICALS INC.
AUDIT COMMITTEE CHARTER
JANUARY 1, 2016
PURPOSE
The purpose of the Audit Committee of the Board of Directors of Aurinia Pharmaceuticals Inc. (the “ Company”) shall be to assist the Board of
Directors of the Company (the “Board”) in its oversight of (i) the quality and integrity of the financial statements of the Company, (ii) the Company’s
compliance with legal and regulatory requirements, (iii) the accounting and financial management processes of the Company, and the effectiveness of
the Company’s internal controls over financial reporting, (iv) the quality and integrity of the annual audit of the Company’s financial statements,
including the independence and qualifications of the Company’s independent auditor.
1.
Composition
MEMBERSHIP
The Committee shall consist of no fewer than three (3) members. None of the members of the Committee shall be an officer or employee of the
Company or any of its subsidiaries, and each member of the Committee shall be an “independent director” (in accordance with the definition of
“independent director” established from time to time under the requirements or guidelines for audit committee service under applicable securities laws
and the rules of any stock exchange on which the Company’s shares are listed for trading).
2.
Appointment and Replacement of Committee
Members
Any member of the Committee may be removed or replaced at any time by the Board and shall automatically cease to be a member of the Committee
upon ceasing to be a director. The Board may fill vacancies on the Committee by election from among its members. The Board shall fill any vacancy if
the membership of the Committee is less than three directors. If and whenever a vacancy shall exist on the Committee, the remaining members may
exercise all its power so long as a quorum remains in office. Subject to the foregoing, the members of the Committee shall be elected by the Board
annually and each member of the Committee shall hold office as such until the next annual meeting of shareholders after his or her election or until his
or her successor shall be duly elected and qualified.
3.
Financial
literacy
All members of the Committee should be “financially literate” (as that term is interpreted by the Board in its reasonable judgment or as may be defined
from time to time under the requirements or guidelines for audit committee service under securities laws and the rules of any stock exchange on which
the Company’s shares are listed for trading) or must become financially literate within a reasonable period of time after his or her appointment to the
Committee.
In addition, at least one member must have past employment experience in finance or accounting, requisite professional certification in accounting or
any other comparable experience or background which results in the individual’s financial sophistication. Unless otherwise determined by the Board, at
least one member of the Audit Committee shall be an “audit committee financial expert”.
RESPONSIBILITIES AND DUTIES
The principal responsibilities and duties of the Committee in serving the purposes outlined above in this charter are set forth below. These duties are set
forth as a guide with the understanding that the Committee will carry them out in a manner that is appropriate given the Company’s needs and
circumstances. The Committee may supplement them as appropriate and may establish policies and procedures from time to time that it deems
necessary or advisable in fulfilling its responsibilities.
A.
INDEPENDENT
AUDITOR
1. Appointment and Oversight of Independent Auditor. The Committee appoints the independent auditor to examine the Company’s accounts, controls
and financial statements. The Committee has sole responsibility for the appointment, compensation, retention, oversight and, if necessary, termination of
any registered public accounting firm engaged (including resolution of disagreements between the Company’s management and the firm regarding
financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company, and the
independent auditor and each such registered public accounting firm will report directly to the Committee.
2. Auditor Independence and Qualifications
(a) The Committee is responsible for assessing the independent auditor’s qualifications, performance and independence annually, and for
taking, or recommending that the full board take, appropriate action to oversee the independence of the independent auditor. In
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connection therewith, the Committee will make sure it reviews, on an annual basis, all relationships between the independent auditor and the Company,
including those described in the formal written statement that the Committee obtains annually from the independent auditor under applicable
requirements of the Canadian generally accepted auditing standards (CAS) and since the Company is registered with the U.S. Securities Exchange
Commission, the Public Company Accounting Oversight Board (the “PCAOB”) related to the independent auditor’s communications with the
Committee concerning independence, and actively engaging in a dialogue with the independent auditor with respect to any disclosed relationships or
services that may impact the objectivity and independence of the independent auditor.
(b) The Committee will obtain and review, at least annually, a report from the independent auditor describing:
i. the firm’s internal quality-control procedures; and
ii. any material issues raised by the most recent internal quality-control review, peer review, Canadian Public Accountability Board
(CPAB) or PCAOB review of the firm, or by any governmental or professional authority in any inquiry or investigation, within the preceding five years,
regarding any independent audit carried out by the independent auditor, and any steps taken to address any such issues.
(c) The Committee is responsible for reviewing and evaluating the lead audit partner of the independent auditor and overseeing the rotation of
the lead audit partner as required by applicable law and the Commission Rules. In making its evaluation, the Committee should take into account the
opinions of management and the independent auditor.
(d) The Committee will set policies for the Company’s hiring of employees or former employees of the independent auditor.
3. Approval of Audit and Non-Audit Services
The Committee will review the independent auditor’s audit planning, scope and staffing.
The Committee must pre-approve all audit and non-audit related services provided to the Company by the independent auditor. The
Committee may establish pre-approval policies and procedures, as permitted by the Exchange Rules, Commission Rules and applicable law, for the
engagement of the independent auditor to render services to the Company, including without limitation policies that would allow the delegation of pre-
approval authority to one or more members of the Committee, provided that any pre-approval decision is reported to the Committee at its next scheduled
meeting.
4. Interaction with Independent Auditor
The Committee will, to the extent warranted, discuss with the independent auditor the above referenced reports and any other matters required
to be reviewed under applicable legal and regulatory requirements.
The Committee will periodically consult with the independent auditor, out of the presence of the Company’s management, about the
Company’s internal controls, the fullness and accuracy of the Company’s financial statements, the responsibilities, budget and staffing of the
Company’s finance function, and any other matters that the Committee or independent auditor believes should be discussed privately with the
Committee.
B.
FINANCIAL STATEMENTS AND
DISCLOSURES
1. Annual Financial Statements and Disclosures
(a) The Committee will meet to review and discuss with the independent auditor and the Company’s management the Company’s audited
consolidated financial statements and the notes and Managements’ Discussion and Analysis relating to such consolidated financial statements, the
annual report, the annual information form, the financial information of the Company contained in any prospectus or information circular or other
disclosure documents or regulatory filings of the Company, the recommendations for approval of each of the foregoing from each of the President and
Chief Executive Officer, and Chief Financial Officer of the Company and based on such recommendations provide, where applicable, its own
recommendations to the Board for their approval and release of each of the foregoing to the public.
(b) The Committee will discuss with the independent auditor and the Company’s management any items appropriate or required to be
discussed in accordance with applicable auditing and CPAB standards in connection with the preparation of the Company’s annual financial statements,
including any problems or difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required
information, and any significant disagreements with management and management’s response to such difficulties.
2. Quarterly Financial Statements and Disclosures
(a) The Committee will meet to review and discuss with the independent auditor and the Company’s management the Company’s interim
consolidated financial statements and the notes and Managements’ Discussion and Analysis relating to such consolidated financial statements, and
either, in the discretion of the Audit Committee, (A) approve and release each of the foregoing to the public, or (B) provide, where applicable, its own
recommendation to the Board for their approval and release of each of the foregoing to the public.
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(b) The Committee will discuss with the independent auditor and the Company’s management any items appropriate or required to be
discussed in accordance with applicable auditing and CPAB standards in connection with the preparation of the Company’s quarterly financial
statements.
3. Earnings Announcements and Guidance. The Committee will discuss generally with the Company’s management and the independent auditor, as
appropriate, the type of information to be disclosed and type of presentation to be made regarding the Company’s earnings press releases.
4. Ongoing Reviews. In connection with the foregoing, the Committee will review the Company’s financial reporting and accounting standards and
principles and financial statement presentations, significant changes in the selection of such standards or principles or in their application and the key
accounting decisions affecting the Company’s financial statements, including alternatives to, and the rationale for, the decisions made. As part of this
review, the Committee will discuss with the Company’s management and the independent auditor the reasonableness of judgments and estimates used
in the preparation of financial statements, and alternative accounting treatments, principles or practices that were considered or may be preferred by the
independent auditor, the Committee or the Company’s management.
C.
CONTROLS AND
PROCEDURES
1. Review of Processes, Systems, Controls and Procedures. The Committee will periodically review and meet separately with the independent auditor,
or other personnel primarily responsible for the internal control , and the Company’s management to discuss their periodic reviews of the integrity,
adequacy and effectiveness of the Company’s accounting and financial reporting processes, systems of internal control (including any significant
deficiencies and material weaknesses in their design or operation), and disclosure controls and procedures (and management’s reports thereon), as well
as any special audit steps adopted in light of material control deficiencies. The Audit Committee shall receive and review the required applicable annual
or quarterly CEO and CFO certification reports prior to these documents being filed as required by the regulators.
2. Legal Matters
(a) The Committee will periodically review with the Company’s management and the Company’s General Counsel, the nature and status of
significant legal matters.
(b) The Committee will review and monitor any significant pending or threatened litigation that could have a material impact on the
Company’s financial statements.
3. Risk Assessment and Risk Management. The Committee is responsible for overseeing the management of risks associated with the Company’s
financial reporting, accounting and auditing matters, reviewing as required the Company’s processes around the management and monitoring of such
risks, including but not limited to, review and assessment of the company investment policy and performance and review and assessment of the
company’s insurance policies. The Committee will discuss with the Company’s management the Company’s major financial, accounting and reporting
risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk
management policies and guidelines.
4. Whistleblower Procedures. The Committee is responsible for establishing and overseeing procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal accounting controls or auditing matters, the prompt internal reporting of violations
of the Code of Business Conduct and Ethics and for the confidential, anonymous submission by Company employees of concerns regarding
questionable accounting or auditing matters.
D.
OTHER DUTIES AND
RESPONSIBILITIES
1. Code of Conduct. The Committee will periodically review and recommend to the Board any changes to the Code of Conduct applicable to the
Company, including all of its directors, officers and employees. The Committee will also consider waivers of the Code of Conduct requested for
executive officers and directors and retain sole authority to grant any waivers for executive officers and directors (other than where the potential waiver
involves a member of the Committee, in which event such waiver shall be subject to the review of the Board). The Committee will also periodically
review and recommend to the Board any changes to the Company’s Insider Trading Policy and Anti-Bribery Policy, which are referenced in the
Company’s Code of Conduct.
2. Related Party Transactions. The Committee will review and, where appropriate, approve any transaction between the Company and any related
party (other than transactions that are subject to review by the Board as a whole or any other committee of the Board), as defined by applicable law, the
Commission Rules and the Exchange Rules, and will periodically review the business interests and activities of members of the Board and
management.
3. Review of Composition and Performance. The Committee will evaluate the Committee’s composition and performance on an annual basis and
submit a report to the Board.
4. Review of this Charter. The Committee will review and reassess the adequacy of this charter annually and recommend to the Board any changes the
Committee determines are appropriate.
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5. Other Actions. The Committee will perform any other activities required by applicable law, rules or regulations, including the Commission Rules and
the Exchange Rules, and take such other actions and perform and carry out any other responsibilities and duties delegated to it by the Board or as the
Committee deems necessary or appropriate consistent with its purpose.
STUDIES AND ADVISERS
In discharging its responsibilities, the Committee may conduct, direct, supervise or authorize studies of, or investigations into, any matter that the
Committee deems appropriate, with full and unrestricted access to all books, records, documents, facilities and personnel of the Company. The
Committee has the sole authority to retain and terminate independent legal counsel and other consultants, accountants, experts and advisers of its choice
to assist the Committee in connection with its functions, including any studies or investigations. The Committee will have the sole authority to approve
the fees and other retention terms of such advisers. The Company will also provide for appropriate funding, as determined by the Committee, for:
•
•
payment of compensation to the independent auditor and any legal and other consultants, accountants, experts and advisers retained by
the Committee; and
ordinary administrative expenses of the Committee that are necessary and appropriate in carrying out its
functions.
MEETINGS AND ACTIONS
Meetings of the Committee shall be held at least once each quarter or more frequently, as determined to be appropriate by the Committee. The Board
may appoint a member of the Committee to serve as the chairperson of the Committee (the “Chair”); if the Board does not appoint a Chair, the
Committee members may designate a Chair by their majority vote. The Chair, in consultation with the other members of the Committee, will set the
dates, time, places and agenda for Committee meetings. The Chair or any other member of the Committee may call meetings of the Committee by
notice and the Committee may act by unanimous written consent in lieu of a meeting in accordance with the Company’s Bylaws. A quorum of the
Committee for the transaction of business will be a majority of its members. Meetings may be held in person or via telephone or video conference. The
Committee also may act by unanimous written consent in lieu of a meeting in accordance with the Company’s Bylaws. Subject to the requirements of
this charter, applicable law, the Exchange Rules and the Commission Rules, the Committee and the Chair may invite any director, executive or
employee of the Company, or such other person, as it deems appropriate in order to carry out its responsibilities, to attend and participate (in a non-
voting capacity) in all or a portion of any Committee meeting. The Committee may meet in executive session at its discretion and may exclude from all
or a portion of its meetings any person it deems appropriate in order to carry out its responsibilities. The Chair will designate a secretary for each
meeting, who need not be a member of the Committee. The Company shall provide the Committee such staff support as it may require.
The Committee will maintain written minutes of its meetings and copies of its actions by written consent, and will cause such minutes and copies of
written consents to be filed with the minutes of the meetings of the Board. The Committee will report regularly to the Board with respect to its activities,
including on significant matters related to the Committee’s responsibilities and the Committee’s deliberations and actions. The minutes of the
Committee and actions by the unanimous written consent of the Committee members will be made available to the other members of the Board.
MINUTES AND REPORTS
The Committee may from time to time, as it deems appropriate and to the extent permitted under applicable law, the Exchange Rules and the
Commission Rules, and the Company’s Certificate of Incorporation and Bylaws, form and delegate authority to subcommittees.
DELEGATION OF AUTHORITY
Members of the Committee will receive such fees, if any, for their service as Committee members as may be determined by the Board, which may
include additional compensation for the Chair. Such fees may include retainers or per meeting fees and will be paid in such form of consideration as is
determined by the Board in accordance with applicable law, the Exchange Rules and the Commission Rules.
COMPENSATION
The Company shall make this charter freely available to stockholders on request and shall publish it on the Company’s web site.
PUBLICATION
This charter sets forth the authority and responsibility of the Committee in fulfilling the purposes described herein.
OVERSIGHT FUNCTION
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits or to
determine that the Company’s consolidated financial statements are complete and accurate or are in accordance with IFRS and applicable rules and
regulations. These are the responsibilities of Management and the Company’s external auditors. The Committee, its Chair and any Committee members
identified as having accounting or related financial expertise are members of the Board, appointed to the Committee to provide broad oversight of the
financial, risk and control related activities of the Company, and are specifically not accountable or responsible for the day-to-day operation or
performance of such activities. Although the designation of a Committee member as having
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accounting or related financial expertise for disclosure purposes or otherwise is based on that individual’s education and experience which that
individual will bring to bear in carrying out his or her duties on the Committee, such designation does not impose on such person any duties, obligations
or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Committee and Board in the absence of
such designation. Rather, the role of a Committee member who is identified as having accounting or related financial expertise, like the role of all
Committee members, is to oversee the process, not to certify or guarantee the internal or external audit of the Company’s financial information or public
disclosure.
In addition, the Company’s management is responsible for managing its risk function and for reporting on its processes and assessments with respect to
the Company’s management of risk. Each member of the Committee shall be entitled to rely on (a) the integrity of those persons and organizations
within and outside of the Company from which it receives information, (b) the accuracy of the financial and other information provided to the
Committee by such persons or organizations absent actual knowledge to the contrary (which shall be promptly reported to the Board) and
(c) representations made by management as to any audit and non-audit services provided by the independent auditor.
The Board has formed the Committee to assist the Board in directing the Company’s affairs and this charter has been adopted in furtherance of this
purpose. While this charter should be interpreted in the context of all applicable laws, regulations and listing requirements, as well as in the context of
the Company’s Certificate of Incorporation and Bylaws, it is not intended to establish by its own force any legally binding obligations.
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SCHEDULE 3 - GLOSSARY OF TERMS AND DEFINITIONS
In this annual information form, the following capitalized words and terms shall have the following meanings:
“AEs” means adverse events;
“AIF” means the Annual Information Form of the Company dated March 13, 2018 for the fiscal year ended December 31, 2017;
“ALMS” means the Aspreva Lupus Management Study;
“Anti-dsDNA” means double-stranded DNA;
“API” means active pharmaceutical ingredient;
“Aspreva” means Aspreva Pharmaceuticals Inc.;
“ATM’ means an At-the-Market Facility;
“AURA-LV (AURA)” means a Phase 2b clinical trial. The protocol is titled A Randomized, Controlled Double-blind Study Comparing the Efficacy
and Safety of Voclosporin (23.7 mg BID, or 39.5 mg BID) with Placebo in Achieving remission in Patients with Active Lupus Nephritis;
“AURION” means an open label exploratory study. The protocol is titled An Exploratory study assessing the Short term Predictors of Remission of
Voclosporin 23.7 mg BID in combination with standard of care in Patients with Active Lupus Nephritis.
“AURORA” means a single double-blind, randomized, placebo controlled Phase 3 clinical trial for voclosporin in the treatment of LN;
“BID” means administered twice a day;
“Board” means the board of directors of the Company;
“calcineurin” means a specific enzyme (phosphatase enzyme) that can have its activity inhibited by immunosuppressive (anti-organ rejection) drugs,
including, for example, cyclosporine;
“Catalent” means Catalent Pharma Solutions;
“CellCept®” means the brand name of MMF;
“CEO” means Chief Executive Officer;
“CFO” means Chief Financial Officer;
“CMO” means Chief Medical Officer;
“CNI” means calcineurin inhibitors, the cornerstone of therapy for the prevention of organ transplant rejection;
“Company” means Aurinia Pharmaceuticals Inc. and (unless the context specifies or implies otherwise) its subsidiaries;
“Common Shares” means common shares in the authorized share capital of the Company;
“COO” means Chief Operating Officer;
“CR” means complete remission;
“CRO” means Contract Research Organization;
“CsA” means cyclosporine A;
“CSO” means Chief Scientific Officer;
“CTA” means Clinical Trial Application;
“cyclosporine” means a drug that suppresses the immune system and is used to prevent rejection following organ transplantation;
“DES” means Dry Eye Syndrome;
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“December 2016 Warrants ” means the Common Share purchase warrants offered in connection with the $28.75 million financing (including $3.75
million pursuant to an exercise of the underwriters’ over-allotment option) for the sale of 12,777,775 units which closed on December 28, 2016.
“EDGAR” means the Electronic Data Gathering, Analysis and Retrieval System;
“eGFR” means estimated glomerular filtration rate;
“EMA” means the European Medicines Agency;
“ERA-EDTA” means the 54th European Renal Association-European Dialysis and Transplant Association Congress;
“ESRD” means end-stage renal disease;
“EU” means European Union;
“EULAR 2017” means the European Annual Congress of Rheumatology;
“FDA” means the Food and Drug Administration of the United States Government;
“FSGS” means focal segmental glomerulosclerosis;
“GMP” means good manufacturing practices;
“IEC” means Independent Ethics Committee;
“ILJIN” means ILJIN SNT Co., Ltd.;
“IND” means investigational new drug;
“IRB” means Institutional Review Board;
“ITT” means intent to treat;
“July ATM” means the at the market offering of Common Shares with an aggregate offer price of up to $10 million;
“LN” means Lupus Nephritis;
“Lonza” means Lonza Ltd. a Swiss-based contract drug manufacturer;
“Lux” means Lux BioSciences, Inc.;
“March Offering” means the underwritten public offering of 25.64 million Common Shares, which included 3.35 million Common Shares issued
pursuant to the full exercise of the underwriters’ overallotment option to purchase additional Common Shares;
“MMF” means mycophenolate mofetil;
“MPA” means mycophenolic acid, the active metabolite of MMF;
“MTT” means multi-targeted therapeutic;
“NASDAQ” means the NASDAQ Global Market Exchange;
“NCE” means new chemical entity;
“NDA” means New Drug Application made to a regulatory agency;
“November ATM” means the at the market offering of Common Shares having an aggregate offer price of up to $8.0 million;
“NS” means Nephrotic Syndrome;
“Paladin” means Paladin Labs Inc.;
“Pharmacokinetics” means the processes of drug absorption, distribution, metabolism and escretion in a living system (e.g., in humans);
“PFIC” means a passive foreign investment company;
“PK-PD” means pharmacokinetic and pharmacodynamics analysis;
“PMDA” means the Pharmaceutical and Medical Devices Agency. The PMDA is the main Regulatory Agency that oversees the review and approval of
drugs as per the regulatory prerequisites in Japan;
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“PR” means partial remission;
“Preliminary Shelf Prospectus” means the preliminary short form base shelf prospectus dated January 4, 2018 and filed with the securities
commissions in each of the provinces of Ontario, Alberta and British Columbia in Canada, and a corresponding shelf registration statement on Form F-
10 with the SEC under the U.S./Canada Multijurisdictional Disclosure System;
“SAE” means serious adverse events;
“Sales Agreement” means the Controlled Equity Offering SM Sales Agreement with Cantor Fitzgerald & Co. dated November 9, 2016 relating to the
November ATM;
“SEC” means the U.S. Securities and Exchange Commission;
“SEDAR” means the System for Electronic Document Analysis and Retrieval;
“Shelf Prospectus” means Aurinia’s short form base shelf prospectus dated October 16, 2015 and Aurinia’s shelf registration statement on Form F-10
dated October 16, 2015, declared effective on November 5, 2015;
“SLE” means systemic lupus erythematosus;
“SLEDAI” means Systemic Lupus Erythematosus Disease Activity Index;
“SOC” means system organ class;
“TEAF” means treatment emergent adverse events;
“TSX” means the Toronto Stock Exchange;
“UPCR” means Urinary/protein creatinine ratio;
“Vifor” means Vifor (International) AG;
“VOS” means voclosporin ophthalmic solution; and
“Warrants” means warrants to purchase Common Shares in the capital of the Company, with each whole warrant being exercisable to purchase one
common share.
45
Exhibit 99.2
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Aurinia Pharmaceuticals Inc. (the Company) are the responsibility of management.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board and reflect, where appropriate, management’s best estimates and judgments based on currently available information.
Management has prepared the financial information presented elsewhere in the Management’s Discussion and Analysis and has ensured it is consistent
with the consolidated financial statements.
The Company maintains systems of internal accounting and administrative controls. These systems are designed to provide reasonable assurance that
the financial information is relevant, reliable and accurate and that the Company’s assets are appropriately accounted for and adequately safeguarded.
The Board of Directors (the Board) exercises its responsibility over the consolidated financial statements and over financial reporting and internal
controls principally through the Company’s Audit Committee. The Board appoints the Audit Committee and its members are outside and unrelated
directors. The Audit Committee meets periodically with management to discuss internal controls over the financial reporting process and financial
reporting issues and to satisfy itself that each party is properly discharging its responsibilities. The Audit Committee reviews the annual consolidated
financial statements with both management and the independent auditors and reports its findings to the Board before such statements are approved by
the Board. The Audit Committee also considers, for review by the Board and approval by the shareholders, the engagement or reappointment of the
external auditors.
The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, the Company’s independent auditors, in accordance with
Canadian generally accepted auditing standards on behalf of the shareholders. Their report outlines the scope of their audit and gives their opinion on
the consolidated financial statements. PricewaterhouseCoopers LLP has full and free access to the Audit Committee.
(Signed) “Richard Glickman”
Chief Executive Officer
Victoria, British Columbia
March 13, 2018
(Signed) “Dennis Bourgeault”
Chief Financial Officer
March 13, 2018
Independent Auditor’s Report
To the Shareholders of
Aurinia Pharmaceuticals Inc.
We have audited the accompanying consolidated financial statements of Aurinia Pharmaceuticals Inc. and its subsidiaries, which comprise the
consolidated statements of financial position as at December 31, 2017 and December 31, 2016 and the consolidated statements of operations and
comprehensive loss, changes in shareholders’ equity (deficit) and cash flows for the years then ended, and the related notes, which comprise a summary
of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aurinia Pharmaceuticals Inc. and its
subsidiaries as at December 31, 2017 and December 31, 2016 and their financial performance and their cash flows for the years then ended in
accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
(Signed) "PricewaterhouseCoopers LLP"
Chartered Professional Accountants
"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Aurinia Pharmaceuticals Inc.
Consolidated Statements of Financial Position
As at December 31, 2017
(expressed in thousands of US dollars)
Assets
Current assets
Cash and cash equivalents
Short term investments (note 4)
Accounts receivable
Prepaid expenses and deposits
Clinical trial contract deposits
Property and equipment (note 5)
Acquired intellectual property and other intangible assets (note 6)
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 7)
Current portion of deferred revenue (note 8)
Contingent consideration (note 9)
Deferred revenue (note 8)
Contingent consideration (note 9)
Derivative warrant liabilities (note 10)
Shareholders’ Equity
Share capital
Common shares (note 11)
Warrants (note 11)
Contributed surplus
Accumulated other comprehensive loss
Deficit
Commitments and contingencies (note 19)
Subsequent event (note 22)
2017
$
165,629
7,833
109
1,681
175,252
448
31
14,116
189,847
7,959
118
73
8,150
442
3,719
11,793
24,104
499,200
906
18,360
(883)
(351,840)
165,743
189,847
2016
$
39,649
—
86
1,683
41,418
—
29
15,550
56,997
5,791
118
2,021
7,930
560
3,419
9,138
21,047
299,815
971
17,017
(805)
(281,048)
35,950
56,997
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
(signed) Lorin J. Randall
Director
(signed) Benjamin Rovinski
Director
Aurinia Pharmaceuticals Inc.
Consolidated Statements of Operations and Comprehensive Loss
For the years ended December 31, 2017 and December 31, 2016
(expressed in thousands of US dollars, except per share data)
Revenue (note 8)
Licensing revenue
Research and development revenue
Contract services
Expenses
Research and development (note 12)
Corporate, administration and business development (note 12)
Amortization of acquired intellectual property and other intangible assets (note 6)
Amortization of property and equipment
Contract services
Other expense (income) (note 13)
Net loss before change in estimated fair value of derivative warrant liabilities
Change in estimated fair value of derivative warrant liabilities (note 10)
Net loss for the year
Other comprehensive income (loss)
Item that may be reclassified subsequently to income (loss)
Net change in fair value of short term investments (note 4)
Net comprehensive loss for the year
Net loss per common share (note 15) (expressed in $ per share)
Basic and diluted loss per common share
The accompanying notes are an integral part of these consolidated financial statements.
2017
$
418
—
2
420
33,930
12,096
1,434
22
1
(195)
47,288
(46,868 )
(23,924 )
(70,792 )
(78 )
(70,870 )
2016
$
118
50
5
173
14,534
6,970
1,457
22
4
2,213
25,200
(25,027 )
1,732
(23,295 )
—
(23,295 )
(0.92 )
(0.66 )
Aurinia Pharmaceuticals Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
For the years ended December 31, 2017 and December 31, 2016
(expressed in thousands of US dollars)
Balance – January 1, 2017
Issue of common shares
Share issue costs
Exercise of warrants
Exercise of derivative warrants
Exercise of stock options
Stock-based compensation
Net loss and comprehensive loss for the
year
Balance - December 31, 2017
Balance – January 1, 2016
Issue of units pursuant to bought deal
Share issue costs
Issue of units pursuant to private placement
Share issue costs
Issue of common shares
Share issue costs
Exercise of warrants
Exercise of cashless warrants
Expiry of warrants
Exercise of stock options
Stock-based compensation
Net loss and comprehensive loss for the
year
Balance - December 31, 2016
Common
shares
$
299,815
173,104
(10,780 )
297
29,953
6,811
—
—
499,200
261,645
21,525
(1,951)
6,260
(389)
8,396
(575)
2,852
1,852
—
200
—
—
299,815
Warrants
Contributed
surplus
$
971
—
—
(65 )
—
—
—
—
906
1,297
—
—
820
(51 )
—
—
(947)
—
(148)
—
—
—
971
$
17,017
—
—
—
—
(2,899)
4,242
Deficit
$
(281,048)
—
—
—
—
—
—
—
18,360
(70,792 )
(351,840)
15,579
—
—
—
—
—
—
—
—
148
(93 )
1,383
(257,753)
—
—
—
—
—
—
—
—
—
—
—
—
17,017
(23,295 )
(281,048)
The accompanying notes are an integral part of these consolidated financial statements.
Accumulated
other
comprehensive
loss
$
(805)
—
—
—
—
—
—
(78 )
(883)
(805)
—
—
—
—
—
—
—
—
—
—
—
—
(805)
Shareholders’
equity (deficit)
$
35,950
173,104
(10,780 )
232
29,953
3,912
4,242
(70,870 )
165,743
19,963
21,525
(1,951)
7,080
(440)
8,396
(575)
1,905
1,852
—
107
1,383
(23,295 )
35,950
Aurinia Pharmaceuticals Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2017 and December 31, 2016
(expressed in thousands of US dollars)
Cash flow provided by (used in)
Operating activities
Net loss for the year
Adjustments for
Amortization of deferred revenue
Amortization of property and equipment
Amortization of acquired intellectual property and other intangible assets
Change in value of short term investments (note 17)
Revaluation of contingent consideration
Loss (gain) on disposal of equipment
Change in estimated fair value of derivative warrant liabilities
Stock-based compensation
Share issue costs allocated to derivative warrants
Change in provision for restructuring costs
Contingent consideration milestones paid
Net change in other operating assets and liabilities (note 17)
Net cash used in operating activities
Investing activities (note 17)
Purchase of short term investments
Proceeds on disposal/maturity of short term investments
Proceeds on disposal of equipment
Purchase of equipment
Capitalized patent costs
Net cash generated from (used in) investing activities
Financing activities (note 17)
Net proceeds from issuance of common shares
Net proceeds from issuance of bought deal units
Net proceeds from issuance of private placement units
Proceeds from exercise of derivative warrants
Proceeds from exercise of warrants
Proceeds from exercise of stock options
Net cash generated from financing activities
Increase in cash and cash equivalents during the year
Cash and cash equivalents – Beginning of year
Cash and cash equivalents – End of year
The accompanying notes are an integral part of these consolidated financial statements.
2017
$
2016
$
(70,792 )
(23,295 )
(118)
22
1,434
67
502
1
23,924
4,242
—
—
(40,718 )
(2,150)
1,699
(41,169 )
(97,996 )
90,018
—
(25 )
—
(8,003)
162,324
—
—
8,684
232
3,912
175,152
125,980
39,649
165,629
(168)
22
1,457
—
1,630
(19 )
(1,732)
1,383
655
(116)
(20,183 )
—
1,470
(18,713 )
(21,138 )
31,135
19
(15 )
(10 )
9,991
7,821
26,142
6,640
—
1,905
107
42,615
33,893
5,756
39,649
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
1
Corporate
information
Aurinia Pharmaceuticals Inc. or the Company is a clinical stage pharmaceutical company with its head office located at #1203-4464 Markham
Street, Victoria, British Columbia, V8Z 7X8 where clinical, regulatory and business development functions of the Company are conducted. The
Company has its registered office located at #201, 17904-105 Avenue, Edmonton, Alberta, T5S 2H5 where the finance function is performed.
Aurinia Pharmaceuticals Inc. 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. The Company’s primary business is the development of a therapeutic drug to treat autoimmune diseases, in particular lupus
nephritis (LN).
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Aurinia Pharma U.S., Inc.
(Delaware incorporated) and Aurinia Pharma Limited (UK incorporated). It's wholly owned subsidiary, Aurinia Pharma Corp. was wound up
into the parent company and dissolved on November 30, 2017.
2
Basis of
preparation
Statement of compliance
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements were authorized for issue by the Board of Directors on March 13, 2018.
Basis of measurement
The consolidated financial statements have been prepared on a going concern and historical cost basis, other than certain financial instruments
recognized at fair value.
Functional and presentation currency
These consolidated financial statements are presented in United States (US) dollars, which is the Company’s functional currency.
Summary of significant accounting policies and changes in accounting policies
Consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Subsidiaries are all entities over
which the Company has the power to govern the financial and operating policies. The Company has a 100% voting interest in all of its
subsidiaries.
Intercompany transactions, balances and unrealized gains on transactions between companies are eliminated.
Translation of foreign currencies
Each asset and liability, revenue or expense arising from a foreign currency transaction is recorded at average rates of exchange during the
period. The monetary assets and liabilities denominated in foreign currencies are translated into US dollars at rates of exchange in effect at the
end of 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 and comprehensive loss.
Revenue recognition
Payments received under collaboration agreements may include upfront payments, milestone payments, contract services, royalties and license
fees. Revenues for each unit of accounting are recorded as described below:
•
Licensing and research and development
revenues
The Company has agreements in specific regions with strategic partners. Licensing agreements usually include one-time payments
(upfront payments), payments for research and development services in the form of cost reimbursements, milestone payments and
royalty receipts. Revenues associated with those multiple-element arrangements are allocated to the various elements based on their
relative fair value.
(1)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
Agreements containing multiple elements are divided into separate units of accounting if certain criteria are met, including whether the
delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the
undelivered obligation(s). The consideration received is allocated among the separate units based on each unit’s fair value, and the
applicable revenue recognition criteria are applied to each of the separate units.
License fees representing a non-refundable payment received at the time of signature of a licensing agreement are recognized as
revenue when the Company has no significant future performance obligations and collectability of the fees is reasonably assured.
License fees received at the beginning of licensing agreements where significant future obligations exist are deferred and recognized
as revenue on a systematic basis over the period during which the related services are rendered and all obligations are performed.
Milestone
payments
Milestone payments, which are generally based on developmental or regulatory events, are recognized as revenue when the
milestones are achieved, collectability is assured, and when the Company has no significant future performance obligations in
connection with the milestones.
Contract
services
•
•
Revenues from contract services are recognized as services are rendered, the price is fixed or determinable and collection is reasonably
assured.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits held with banks and other short-term highly liquid investments with original
maturities of three months or less.
Short term investments
Held-to-maturity investments are recorded initially at fair value and subsequently at amortized cost using the effective interest method less any
provisions for impairment. Available for sale investments are recorded initially at fair value including direct and incremental transaction costs.
They are subsequently recorded at fair value. Gains or losses arising from changes in fair value are included as a separate component of equity
until sale, when the cumulative gain or loss is transferred to the consolidated statements of operations and comprehensive loss. Interest is
determined using the effective interest method and impairment losses, if any, on monetary items are recorded in the statement of operations and
comprehensive loss.
Property and equipment
Property and equipment are stated at cost less accumulated amortization and accumulated impairment losses. Cost includes expenditures that are
directly attributable to the acquisition of the asset. The carrying amount of a replaced asset is derecognized when replaced. Repair and
maintenance costs are charged to the consolidated statements of operations and comprehensive loss during the period in which they are
incurred.
The major categories of property and equipment are amortized on a straight-line basis as follows:
Leasehold improvements
Office equipment and furniture
Computer equipment and software
Acquired intellectual property and other intangible assets
term of the lease
5 years
3 years
External patent costs specifically associated with the preparation, filing and obtaining of 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 research and development expenses on the consolidated statements of operations and comprehensive loss as
incurred.
(2)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
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 favourable or unfavourable 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.
Impairment of non-financial assets
Property and equipment and acquired intellectual property and other intangible assets with a finite useful life are tested for impairment when
events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss is recognized for the amount by
which the asset’s carrying amount exceeds its recoverable amount. The Company evaluates impairment losses for potential reversals when
events or circumstances warrant such consideration.
Share capital
Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares are recognized as a deduction
from equity, net of any tax effects.
Proceeds from the issue of common share purchase warrants (warrants) treated as equity are recorded as a separate component of equity. Costs
incurred on the issue of warrants are netted against proceeds. Warrants issued with common shares are measured at fair value at the date of
issue using the Black-Scholes pricing model, which incorporates certain input assumptions including the warrant price, risk-free interest rate,
expected warrant life and expected share price volatility. The fair value is included as a component of equity and is transferred from warrants to
common shares on exercise.
Provisions
A provision is recognized when the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable an
outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expenditures expected
to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks
specific to the obligation.
Research and development
Research costs are expensed in the year incurred. Development costs are expensed as incurred except for those that meet the criteria for
capitalization, in which case they are capitalized and then amortized over the useful life. No development costs have been capitalized to date.
Stock-based compensation
The Company records stock-based compensation related to employee stock options granted using the estimated fair value of the options at the
date of grant. The estimated fair value is expensed as employee benefits over the period in which employees unconditionally become entitled to
the award. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service conditions are
expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related services
at the vesting date. The corresponding charge is to contributed surplus which is converted to share capital upon exercise. Any consideration
received by the company in connection with the exercise of stock options is credited to share capital.
Leases
Operating lease payments are recognized in net income (loss) on a straight-line basis over the term of the lease.
Income tax
Income tax comprises current and deferred tax. Income tax is recognized in the consolidated statements of operations and comprehensive loss
except to the extent that it relates to items recognized directly in shareholders’ equity (deficit), in which case the income tax is also recognized
directly in shareholders’ equity.
Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted at the end of the reporting period, and any
adjustments to tax payable in respect of previous years.
(3)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying
amounts in the consolidated financial statements. Deferred income tax is determined on a non-discounted basis using the tax rates and laws that
have been enacted or substantively enacted at the consolidated statements of financial position dates and are expected to apply when the
deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable the assets can be recovered.
Earnings (loss) per share
Basic earnings (loss) per share (EPS) is calculated by dividing the net income (loss) for the period attributable to equity owners of the Company
by the weighted average number of common shares outstanding during the period.
Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of
shares included with respect to options, warrants and similar instruments is computed using the treasury stock method. The Company’s
potentially dilutive common shares comprise stock options and warrants.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial
assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has
transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is
discharged, cancelled or expires.
A derivative is a financial instrument whose value changes in response to a specified variable, requires little or no net investment and is settled
at a future date.
At initial recognition, the Company classifies its financial instruments in the following categories:
i)
ii)
iii)
iv)
v)
Financial assets and liabilities at fair value through profit or loss: a financial asset or liability is classified in this category if acquired
principally for the purpose of selling or repurchasing in the short-term.
Financial instruments in this category are recognized initially and subsequently at fair value. Gains and losses arising from changes in
fair value are presented in the consolidated statements of operations and comprehensive loss within other expense (income) in the
period in which they arise.
Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market. The Company’s loans and receivables comprise accounts receivable and cash. Cash equivalents are also
included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be
received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are
measured at amortized cost using the effective interest rate method less a provision for impairment.
Available for sale financial assets: Available for sale assets are non-derivative financial assets and short term investments that are
designated as available for sale and are not categorized into any of the other categories described above. They are initially recognized
at fair value including direct and incremental transaction costs. They are subsequently recognized at fair value. Gains and losses
arising from changes in fair value are included as a separate component of equity until sale, when the cumulative gain or loss is
transferred to the consolidated statements of operations and comprehensive loss. Interest is determined using the effective interest
method, and impairment losses and translation differences on monetary items are recognized in the consolidated statements of
operations and comprehensive loss.
Financial liabilities at amortized cost: Financial liabilities at amortized cost are composed of accounts payable and accrued liabilities.
Trade payables and accrued liabilities are initially recognized at the amount required to be paid, less, when material, a discount to
reduce payables to fair value. Subsequently, accounts payables are measured at amortized cost using the effective interest method.
These are classified as current liabilities if payment is due within 12 months. Otherwise, they are presented as non-current liabilities.
Financial liabilities at fair value: Contingent consideration provided to ILJIN SNT Co., Ltd. (ILJIN) (see note 9) and derivative
warrant liabilities (see note 10) are financial liabilities recorded at fair value with subsequent changes in fair value recorded in the
consolidated statements of operations and comprehensive loss.
(4)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
Impairment of financial assets
•
Financial assets carried at amortized cost
At each statement of financial position date, the Company assesses whether there is objective evidence a financial asset or group of
financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if,
there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss
event), and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial
assets that can be reliably estimated.
The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future
cash flows (excluding future credit losses) discounted at the financial asset’s original effective interest rate. The asset’s carrying
amount is reduced and the amount of the loss is recognized in the consolidated statements of operations and comprehensive loss. If a
loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined
under the contract. For practical reasons, the Company may measure impairment on the basis of an instrument’s fair value using an
observable market price.
Recent changes in accounting standards
The Company has adopted the following new and revised standard, effective January 1, 2017.
International Accounting Standards (IAS) 7, Statement of cash flows
Effective for years beginning on or after January 1, 2017, IAS 7, Statement of cash flows, was amended to require disclosures about changes in
liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. Additional disclosures
regarding non-cash changes have been provided as applicable in note 17, supplementary cash flow information in these annual consolidated
financial statements.
New accounting standards and amendments not yet adopted
The following standards and amendments to standards and interpretations are effective for annual periods beginning on or after January 1, 2018
and have not been applied in preparing these annual consolidated financial statements.
IFRS 9 Financial instruments
In July, 2014, the IASB revised IFRS 9 Financial Instruments. IFRS 9 is a three-part standard to replace IAS 39 Financial Instruments:
Recognition and Measurement, addressing new requirements for (i) classification and measurement, (ii) impairment, (iii) hedge accounting. The
standard is effective for annual periods beginning on or after January 1, 2018. IFRS 9 is to be applied prospectively. We are currently finalizing
an evaluation of our financial assets and liabilities and are expecting the following from adoption of the new standard: (i) we do not expect the
new guidance to affect the classification and measurement of our financial assets and liabilities. (ii) we do not expect the new hedge accounting
requirements to affect us as we do not use any hedging instruments and; (iii) the new impairment model requires the recognition of impairment
provisions based on expected credit losses rather than only incurred credit losses as is the case under IAS 39. Based on the nominal amount of
our accounts receivable and the mix of our short-term investments and assessments undertaken to date, we do not expect the impact of this
requirement to be significant. The new standard also introduces expanded disclosure requirements and changes in presentation. These are
expected to minimally change the nature and extent of our disclosures about our financial instruments. Based on our evaluation to date, we
believe the adoption of this standard will not have a material impact on the Company’s consolidated financial statements.
IFRS 15 Revenue from contracts with customers
IFRS 15, Revenue from contracts with customers, was issued in May, 2014 by the IASB and replaces IAS 18, Revenue, IAS11 Construction
Contracts, and other interpretive guidance associated with revenue recognition. IFRS 15 provides a single model to determine how and when an
entity should recognize revenue, as well as requiring entities to provide more informative, relevant disclosures in respect of its revenue
recognition criteria. Entities can apply one of the two transition methods: retrospective or modified retrospective. Retrospective application
requires applying the new guidance to each prior reporting period presented whereas the modified retrospective approach results in the
cumulative effect, if any, of adoption being recognized at the date of initial application. The latest date of mandatory implementation of IFRS 15
is for annual reporting periods beginning on or after January 1, 2018. We will adopt this accounting standard on January 1, 2018 using the
modified retrospective approach.
(5)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
We currently have no product sales or significant sources of revenue. However, we have recorded revenue from licensing agreements which is
being amortized into revenue over time or recorded at a point of time depending on the nature of the agreement. Based on our analysis of the
criteria as set out in IFRS 15 and the terms of each licensing agreement, we believe that on the adoption of IFRS 15 there will be no significant
change in our business or on how we are recognizing this licensing revenue.
IFRS 2 Share based payments
In June, 2016, the IASB issued final amendments to IFRS 2, clarifying how to account for certain types of share-based payment transactions.
These amendments, which were developed through the IFRS Interpretations Committee, provide requirements on the accounting for: (i) the
effect of vesting and non-vesting conditions on the measurement of cash-settled share based payments; (ii) share-based payment transactions
with a net settlement feature for withholding tax obligations; and (iii) a modification to the terms and conditions of a share-based payment that
changes the classifications of the transaction from cash-settled to equity-settled. The amendments are effective for annual reporting periods
beginning on or after January 1, 2018. We are in the process of evaluating the impact that the amendment may have on our consolidated
financial statements. However, based on the analysis performed to date, we believe these amendments will have no material effect on our
consolidated financial statements.
IFRS 16 Leases
In January, 2016, the IASB issued IFRS 16 Leases, which will replace IAS 17 Leases. Under IFRS 16, a contract is, or contains, a lease if the
contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Under IAS 17, lessees were
required to make a distinction between a finance lease and an operating lease. IFRS 16 now requires lessees to recognise a lease liability
reflecting future lease payments and a right-of-use asset for virtually all lease contracts. There is an optional exemption for certain short-term
leases and leases of low-value assets; however, this exemption can only be applied by lessees. The standard is effective for annual periods
beginning on or after January 1, 2019, with earlier adoption if IFRS 15 is also applied. We have elected to adopt IFRS 16 effective January 1,
2019. We are still assessing the potential impact that the adoption of IFRS 16 will have on our consolidated financial statements.
3
Critical accounting estimates and
judgments
The preparation of consolidated financial statements in accordance with IFRS often requires management to make estimates about, and apply
assumptions or subjective judgment to, future events and other matters that affect the reported amounts of the Company’s assets, liabilities,
revenues, expenses and related disclosures. Assumptions, estimates and judgments are based on historical experience, expectations, current
trends and other factors that management believes to be relevant at the time at which the Company’s consolidated financial statements are
prepared. Management reviews, on a regular basis, the Company’s accounting policies, assumptions, estimates and judgments in order to ensure
the consolidated financial statements are presented fairly and in accordance with IFRS.
Critical accounting estimates and judgments are those that have a significant risk of causing material adjustment and are often applied to matters
or outcomes that are inherently uncertain and subject to change. As such, management cautions that future events often vary from forecasts and
expectations and that estimates routinely require adjustment.
Management considers the following areas to be those where critical accounting policies affect the significant judgments and estimates used in
the preparation of the Company’s consolidated financial statements.
Critical estimates in applying the Company’s accounting policies
•
Contingent
consideration
Contingent consideration is a financial liability recorded at fair value. The amount of contingent consideration to be paid is based on
the occurrence of future events, such as the achievement of certain development, regulatory and sales milestones. Accordingly, the
estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as
well as the discount rate used. Changes in fair value of the contingent consideration obligation result from changes to the assumptions
used to estimate the probability of success for each milestone, the anticipated timing of achieving the milestones and the discount
period and rate to be applied. A change in any of these assumptions could produce a different fair value, which could have a material
impact on the results from operations. The impact of changes in key assumptions is described in note 9.
(6)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
•
•
Derivative Warrant Liabilities
Warrants issued pursuant to equity offerings that are potentially exercisable in cash or on a cashless basis resulting in a variable
number of shares being issued are considered derivative liabilities and therefore measured at fair value.
The Company uses the Black-Scholes pricing model to estimate fair value at each exercise and period end date. The key assumptions
used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants. The
impact of changes in key assumptions is described in note 10.
Fair value of stock
options
Determining the fair value of stock options on the grant date, including performance based options, requires judgment related to the
choice of a pricing model, the estimation of stock price volatility and the expected term of the underlying instruments. Any changes in
the estimates or inputs utilized to determine fair value could result in a significant impact on the Company’s reported operating results,
liabilities or other components of shareholders’ equity. The key assumption used by management is the stock price volatility.
Critical judgments in applying the Company’s accounting policies
•
•
•
Revenue
recognition
Management’s assessments related to the recognition of revenues for arrangements containing multiple elements are based on
estimates and assumptions. Judgment is necessary to identify separate units of accounting and to allocate related consideration to each
separate unit of accounting. Where deferral of license fees is deemed appropriate, subsequent revenue recognition is often determined
based on certain assumptions and estimates, the Company’s continuing involvement in the arrangement, the benefits expected to be
derived by the customer and expected patent lives. To the extent that any of the key assumptions or estimates change, future operating
results could be affected.
Impairment of intangible
assets
The Company follows the guidance of IAS 36 to determine when impairment indicators exist for its intangible assets. When
impairment indicators exist, the Company is required to make a formal estimate of the recoverable amount of its intangible assets.
This determination requires significant judgment. In making this judgment, management evaluates external and internal factors, such
as significant adverse changes in the technological, market, economic or legal environment in which the Company operates as well as
the results of its ongoing development programs. Management also considers the carrying amount of the Company’s net assets in
relation to its market capitalization as a key indicator. In making a judgment as to whether impairment indicators exist as at
December 31, 2017, management concluded there were none.
Derivative warrant
liabilities
Management has determined that derivative warrant liabilities are classified as long term as these derivative warrant liabilities will
ultimately be settled for common shares and therefore the classification is not relevant.
4
Short term investments
Short term investments are comprised of available for sale investments as noted below:
Available for sale (fair value)
Canadian Government Bond
This investment is due February 27, 2019 with an initial cost of $3,945,000 and effective
interest rate of 1.22%
Bank of Nova Scotia Treasury Note
This note is due June 14, 2019 with an initial cost of $3,985,000 and effective interest rate of
1.49%.
2017
2016
3,887
3,945
7,833
—
—
—
Fair value is determined by using quoted market prices. The company recorded a net loss of $78,000 on the change in fair value of short term
investments through other comprehensive loss. This loss was attributable to the fair value adjustment of the outstanding short term investments
held at December 31, 2017. The average duration of the interest-bearing securities is 1.4 years and the average yield to maturity is 1.37%. Short
term investments held at fair value are classified as Level 2 in the fair value hierarchy.
(7)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
5
Property and
equipment
Leasehold
improvements
Office
equipment
and furniture
Computer
equipment
and software
Year ended December 31, 2017
As at January 1, 2017
Additions
Disposal
Amortization
Net book value
As at December 31, 2017
Cost
Accumulated amortization
Net book value
Year ended
Year ended December 31, 2016
As at January 1, 2016
Additions
Amortization
Net book value
As at December 31, 2016
Cost
Accumulated amortization
Net book value
6
Acquired intellectual property and other intangible
assets
Year ended December 31, 2017
Opening net book value
Amortization for the year
Closing net book value
As at December 31, 2017
Cost
Accumulated amortization
Net book value
Year ended December 31, 2016
Opening net book value
Additions
Amortization for the year
Closing net book value
As at December 31, 2016
Cost
Accumulated amortization
Net book value
$
5
—
—
(2)
3
41
(38 )
3
8
—
(3)
5
41
(36 )
5
$
19
25
(1)
(15 )
28
156
(128)
28
12
15
(8)
19
139
(120)
19
Acquired intellectual
property and
reacquired rights
$
14,628
(1,285)
13,343
19,075
(5,732)
13,343
15,913
—
(1,285)
14,628
19,075
(4,447)
14,628
Patents
$
922
(149)
773
2,171
(1,398)
773
1,084
10
(172)
922
2,195
(1,273)
922
$
5
—
—
(5)
—
34
(34 )
—
16
—
(11 )
5
34
(29 )
5
(8)
Total
$
29
25
(1)
(22 )
31
231
(200)
31
36
15
(22 )
29
214
(185)
29
Total
$
15,550
(1,434)
14,116
21,246
(7,130)
14,116
16,997
10
(1,457)
15,550
21,270
(5,720)
15,550
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
7
Accounts payable and accrued liabilities
Trade payables
Other accrued liabilities
Employee accruals
8
Licensing revenue and deferred
revenue
2017
$
3,773
2,149
2,037
7,959
2016
$
2,863
1,755
1,173
5,791
We recorded licensing revenue of $418,000 for the year ended December 31, 2017 compared to $118,000 for the year ended December 31,
2016.
The increase in licensing revenue was the result of receiving $300,000 from Merck Animal Health ("MAH") in 2017. MAH entered into an
agreement with us on April 17, 2017 whereby we granted them worldwide rights to develop and commercialize our patented nanomicellar
voclosporin ophthalmic solution (“VOS”) for the treatment of Dry Eye Syndrome in dogs. Under the terms of the agreement, we received a
Technology Access fee of $300,000.
We also recorded $118,000 in 2017 (2016-$118,000) as license revenue from the ongoing amortization of deferred revenue related to an upfront
license payment of $1,500,000 received in 2010 pursuant to the 3Sbio Inc. license agreement. On August 23, 2010, the Company and 3SBio,
Inc. (3SBio) completed a Development, Distribution and License Agreement for voclosporin for the territories of China, Hong Kong and
Taiwan. The transaction with 3SBio included a non-refundable licensing fee of $1,500,000, which was originally recorded as deferred revenue.
At December 31, 2017 deferred revenue remaining to be amortized was $560,000 of which $118,000 was allocated to the current portion and
$442,000 to the long-term portion. This deferred revenue is being amortized into licensing revenue on a straight line basis to 2022.
9
Contingent
consideration
The outstanding fair value of contingent consideration payable to ILJIN an affiliated shareholder and related party, is the result of an
Arrangement Agreement (the Agreement) completed on September 20, 2013 between the Company, Aurinia Pharma Corp. and ILJIN. Pursuant
to the Agreement, payments of up to $10,000,000 may be paid dependent on the achievement of pre-defined clinical and marketing milestones.
During 2017 the Company paid ILJIN $2,150,000 upon the achievement of two specific milestones.
At December 31, 2017, if all of the remaining milestones are met, the timing of these payments is estimated to occur as follows:
2018
2020
2021
$
100
2,625
5,125
7,850
The fair value estimates at December 31, 2017 were based on a discount rate of 10% (2016 - 10%) and a presumed payment range between
50% and 75% (2016- 50% and 95%). The 2016 range included probabilities of 95% that were related to the milestones paid out in 2017.The
fair value of this contingent consideration as at December 31, 2017 was estimated to be $3,792,000 (December 31, 2016 - $5,440,000) and was
determined by estimating the probability and timing of achieving the milestones and applying the income approach.
The change in the revaluation amounts in 2017 resulted primarily from the change in the passage of time and the achievement of two milestones.
The change in probability factors for the milestones and the passage of time resulted in a revaluation of contingent consideration expense of
$502,000 for the year ended December 31, 2017.
(9)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
In 2016 the Company achieved a positive 24-week primary endpoint result in the Phase 2b clinical LN trial. As such, while no milestone was
attached to this positive primary endpoint result, it was an event that triggered an adjustment of the probability of success of the milestones such
that the probability of success factors were increased for the milestones. As a result of the adjustments to the probability factors, the probability
adjusted payment ranges were increased from 50% to 95% as at December 31, 2016. The change in probability factors for the milestones and
the passage of time resulted in a revaluation of contingent consideration expense of $1,630,000 for the year ended December 31, 2016.
This is a Level 3 recurring fair value measurement. If the probability for success were to increase by a factor of 10% for each milestone, this
would increase the net present value (NPV) of the obligation by approximately $580,000 as at December 31, 2017. If the probability for success
were to decrease by a factor of 10% for each milestone, this would decrease the NPV of the obligation by approximately $579,000 as at
December 31, 2017. If the discount rate were to increase to 12%, this would decrease the NPV of the obligation by approximately $208,000. If
the discount rate were to decrease to 8%, this would increase the NPV of the obligation by approximately $226,000.
10
Derivative warrant
liabilities
In accordance with IFRS, a contract to issue a variable number of shares fails to meet the definition of equity and must instead be classified as a
derivative liability and measured at fair value with changes in fair value recognized in the consolidated statements of operations and
comprehensive loss at each period-end. The derivative liabilities will ultimately be converted into the Company’s equity (common shares) when
the warrants are exercised, or will be extinguished on the expiry of the outstanding warrants, and will not result in the outlay of any cash by the
Company. Immediately prior to exercise, the warrants are remeasured at their estimated fair value. Upon exercise, the intrinsic value is
transferred to share capital (the intrinsic value is the share price at the date the warrant is exercised less the exercise price of the warrant) . Any
remaining fair value is recorded through the statement of operations and comprehensive loss as part of the change in estimated fair value of
derivative warrant liabilities.
Balance at January 1, 2017
Conversion to equity (common shares) upon
exercise of warrants
Revaluation of derivative warrant liability
upon exercise of warrants
Revaluation of derivative warrant liability
Balance at December 31, 2017
Balance at January 1, 2016
Issuance of warrants pursuant to
December 28, 2016 financing
Conversion to equity (common shares) upon
exercise of warrants
Revaluation of derivative warrant liability
Balance at December 31, 2016
December 28, 2016
Warrants
February 14, 2014
Warrants
# of warrants
(in thousands)
6,388
$
7,405
# of warrants
(in thousands)
3,748
$
1,733
Total
# of warrants
(in thousands)
10,136
$
9,138
(2,865)
(12,421 )
(2,010)
(8,848)
(4,875) (21,269 )
—
—
3,523
(3,844)
17,808
8,948
—
(1,013)
— 10,973
2,845
1,738
—
(4,857)
— 28,781
5,261 11,793
—
—
4,548
5,499
4,548
5,499
6,388
7,223
—
—
6,388
7,223
—
—
6,388
—
182
7,405
(800)
—
3,748
(1,852)
(1,914)
1,733
(800)
—
10,136
(1,852)
(1,732)
9,138
Derivative warrant liability related to December 28, 2016 Bought Deal public offering
On December 28, 2016, the Company completed a $28,750,000 Bought Deal public offering (the Offering). Under the terms of the Offering, the
Company issued 12,778,000 units at a subscription price per Unit of $2.25, each Unit consisting of one common share and one-half ( 0.50) of a
common share purchase warrant (a Warrant), exercisable for a period of five years from the date of issuance at an exercise price of $3.00. The
holders of the Warrants issued pursuant to this offering may elect, if the Company does not have an effective registration statement registering
or the prospectus contained therein is not available for the issuance of the Warrant Shares to the holder, in lieu of exercising the Warrants for
cash, a cashless exercise option to receive common shares equal to the fair value of the Warrants. The fair value is determined by multiplying
the number of Warrants to be exercised by the weighted average market price less the exercise price with the difference divided by the weighted
average market price. If a Warrant holder exercises this option, there will be variability in the number of shares issued per Warrant.
(10)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
At initial recognition on December 28, 2016, the Company recorded a derivative warrant liability of $7,223,000 based on the estimated fair
value of the Warrants with allocated share issuance costs of $655,000 recognized as other expense.
In 2017, certain holders of warrants exercised at $3.00 per share for a gross proceeds of $8,596,000. These Warrants had an estimated fair
value of $16,266,000 on the dates of exercise, determined using the Black-Scholes warrant pricing model. Of this amount $12,421,000 was
transferred from derivative warrant liabilities to equity (common shares) and $3,844,000 was recorded through the statement of operations and
comprehensive loss as a part of the change in estimated fair value of derivative warrant liabilities. No warrants were exercised during the same
period in 2016.
The Company uses the Black-Scholes pricing model to estimate fair value. The Company considers expected volatility of its common shares in
estimating its future stock price volatility. The risk-free interest rate for the life of the Warrants was based on the yield available on government
benchmark bonds with an approximate equivalent remaining term at the time of issue. The life of warrant is based on the contractual term.
As at December 31, 2017, the Company revalued the remaining derivative warrants at an estimated fair value of $8,948,000 (December 31,
2016 – $7,405,000). The Company recorded an increase in the estimated fair value of the derivative warrant liability of $17,808,000 for the
year ended December 31, 2017 (2016 - $182,000).
The following assumptions were used to estimate the fair value of the derivative warrant liability on December 31, 2017 and December 31,
2016.
Annualized volatility
Risk-free interest rate
Life of warrants in years
Dividend rate
Market price
Fair value per Warrant
2017
55%
2.08%
3.99
0.0 %
4.53
2.54
2016
76%
1.92%
5.00
0.0 %
2.10
1.16
Derivative warrant liability related to February 14, 2014 private placement offering
On February 14, 2014, the Company completed a $52,000,000 private placement. Under the terms of the Offering, the Company issued
18,919,404 units at a subscription price per Unit of $2.7485, each Unit consisting of one common share and one-quarter ( 0.25) of a common
share purchase warrant (a Warrant), exercisable for a period of five years from the date of issuance at an exercise price of $3.2204. The holders
of the Warrants issued pursuant to the February 14, 2014 private placement may elect, in lieu of exercising the Warrants for cash, a cashless
exercise option to receive common shares equal to the fair value of the Warrants based on the number of Warrants to be exercised multiplied by
a five-day weighted average market price less the exercise price with the difference divided by the weighted average market price. If a Warrant
holder exercises this option, there will be variability in the number of shares issued per Warrant.
In 2017, certain holders of these Warrants elected this option and the Company issued 1,154,000 common shares on the cashless exercise of
1,983,000 Warrants. These Warrants had an estimated fair value of $9,861,000 at the dates of exercise, determined using the Black-Scholes
warrant pricing model. Of this amount, $8,848,000 was transferred from derivative warrant liabilities to equity (common shares) and
$1,013,000 was recorded through the statement of operations and comprehensive loss as part of the change in estimated fair value of derivative
warrant liabilities. One holder of 27,000 warrants exercised these warrants for cash and received 27,000 common shares. The Company
received cash proceeds of $88,000.
In 2016, certain holders of these Warrants elected the cashless exercise option and the Company issued 256,860 common shares on the exercise
of 800,432 Warrants with an estimated fair value of $1,852,000.
As at December 31, 2017, the Company revalued the remaining derivative warrant liability at an estimated fair value of $2,845,000 (December
31, 2016 – $1,733,000). The Company recorded an increase in the estimated fair value of the derivative warrant liability of $10,973,000 (2016 –
decrease in the estimated fair value of the derivative warrant liability $1,914,000).
The Company considers expected volatility of its common shares in estimating its future stock price volatility. The risk-free interest rate for the
expected life of the Warrants was based on the yield available on government benchmark bonds with an approximate equivalent remaining term
at the time of the grant. The expected life is based on the contractual term.
(11)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
The Company uses the Black-Scholes pricing model to estimate fair value. The following assumptions were used to estimate the fair value of the
derivative warrant liability on December 31, 2017 and December 31, 2016.
Annualized volatility
Risk-free interest rate
Life of warrants in years
Dividend rate
Market price
Fair value per Warrant
2017
48%
1.76%
1.12
0.0 %
4.53
1.64
2016
61%
1.21%
2.12
0.0 %
2.10
0.46
These derivative warrant liabilities are Level 3 recurring fair value measurements.
The key Level 3 inputs used by management to estimate the fair value are the market price and the expected volatility. If the market price were
to increase by a factor of 10%, this would increase the estimated fair value of the obligation by approximately $1,672,000 as at December 31,
2017. If the market price were to decrease by a factor of 10%, this would decrease the estimated fair value of the obligation by approximately
$1,945,000. If the volatility were to increase by 10%, this would increase the estimated fair value of the obligation by approximately $524,000.
If the volatility were to decrease by 10%, this would decrease estimated fair value of the obligation by approximately $523,000 as at
December 31, 2017.
11
Share capital
a)
Common
shares
Authorized
Unlimited common shares without par value
Issued
Balance as at January 1, 2017
Issued pursuant to Public Offering
Issued pursuant to exercise of warrants
Issued pursuant to exercise of derivative liability warrants (note 10)
Issued pursuant to exercise of stock options
Balance as at December 31, 2017
Balance as at January 1, 2016
Issued pursuant to Bought Deal public offering
Issued pursuant to ATM Facilities
Issued pursuant to June 22, 2016 private placement
Issued pursuant to exercise of warrants
Issued pursuant to exercise of derivative liability warrants (note 10)
Issued pursuant to exercise of stock options
Balance as at December 31, 2016
2017
March 20, 2017 public offering
Common shares
Number
(in thousands)
52,808
25,645
85
4,020
1,494
84,052
32,287
12,778
3,445
3,000
1,001
257
40
52,808
$
299,815
162,324
297
29,953
6,811
499,200
261,645
19,574
7,821
5,871
2,852
1,852
200
299,815
On March 20, 2017 the Company completed a public offering of 25,645,000 common shares at a price of $6.75 per share. The offering
included 3,345,000 common shares from the overallotment exercised by the underwriters. Gross proceeds from this Offering were
$173,104,000 and the share issue costs totaled $10,780,000 which included a 6% underwriting commission of $10,386,000 and other offering
expenses.
(12)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
2016
Bought Deal public offering
On December 28, 2016, the Company completed a Bought Deal public offering for gross proceeds of $28,750,000 as described in note 10.
Share issue costs were $2,606,000 and included a 7.0% cash commission of $2,012,000 paid to placement agents and filing, legal and other
professional fees of $594,000 directly related to the Offering. $655,000 of the share issue costs were allocated to the derivative warrant liability
and expensed in 2016 in other expense (income).
At the Market (ATM) Facilities
In 2016 the Company entered into two Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. (Cantor Fitzgerald) pursuant
to which the Company sold common shares, through ATM offerings with Cantor Fitzgerald acting as sales agent. Pursuant to Canadian
securities rules, the Company was limited to raising $8,000,000 under this specific ATM offering.
Pursuant to this agreement, the Company issued 3,306,000 common shares, receiving gross proceeds of $8,000,000. Share issue costs were
$471,000 and included a 3% commission of $240,000 paid to the agent and professional fees and filing fees of $231,000 directly related to the
ATM.
On November 9, 2016 the Company entered into a second Controlled Equity Offering Sales Agreement with Cantor Fitzgerald pursuant to
which the Company sold common shares, through ATM offerings with Cantor Fitzgerald acting as sales agent. Pursuant to Canadian securities
rules, the Company was limited to raising $8,000,000 under this specific ATM offering.
Pursuant to this agreement the Company issued 139,000 common shares in 2016, receiving gross proceeds of $396,000. Share issue costs were
$104,000 and included a 3% commission of $12,000 paid to the agent and professional fees and filing fees of $92,000 directly related to the
ATM.
Pursuant to the completion of the March 20, 2017 public offering the ATM facility was cancelled by the company.
Private placement
On June 22, 2016, the Company completed a private placement. Under the terms of the private placement, the Company issued 3,000,000 units
(the Units) at a price of $2.36 per Unit for a gross proceeds of $7,080,000. Each Unit consisted of one common share and 0.35 of a common
share purchase warrant (a Warrant), exercisable for a period of two years from the date of issuance at an exercise price of $2.77.
Share issue costs were $440,000 and included a cash commission of $250,000 paid to the agent and legal and filing fees of $190,000 directly
related to the private placement.
b)
Warrants
Issued
Balance as at January 1, 2017
Warrants exercised
Balance as at December 31, 2017
Balance as at January 1, 2016
Issued pursuant to June 22, 2016 private placement
Warrants exercised
Warrants expired
Balance as at December 31, 2016
Warrants
Number
(in thousands)
1,257
(85 )
1,172
1,368
1,050
(1,001)
(160)
1,257
$
971
(65 )
906
1,297
769
(947)
(148)
971
On June 22, 2016, pursuant to the private placement noted above, the Company issued 1,050,000 warrants to purchase common shares at a price
of $2.77 per common share. The warrants have a term of two years from the date of issuance. The fair value attributed to the warrants using the
Black-Scholes option pricing model was $769,000, net of share issue costs of $51,000.
(13)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
The following assumptions were used to estimate the fair value of the warrants issued pursuant to the June 22, 2016 private placement: expected
volatility of 50% a risk free interest rate of 0.75%. Expected life of the warrants was 2.0 years the dividend rate was 0.0%. The market price on
the date of issue of these warrants was $2.36 and the fair value per warrant using the Black-Scholes option pricing model was $0.78.
A summary of the outstanding warrants as at December 31, 2017 is presented below:
Expiry date
Exercisable in CA$
June 26, 2018 (CA$2.50)
December 31, 2018 (CA$2.00)
Exercisable in US$
June 22, 2018
February 14, 2019 (note 10)
December 28, 2021 (note 10)
Number
(in thousands)
Weighted average
exercise price
$
190
14
204
968
1,848
3,523
6,543
1.99
1.59
1.97
2.77
3.22
3.00
3.00
c)
Stock options and compensation expense
A summary of the stock options outstanding as at December 31, 2017 and 2016 and changes during the years ended on those dates is
presented below:
Outstanding – Beginning of year
Granted pursuant to Stock Option Plan
Granted pursuant to Section 613(c) of TSX manual
Exercised
Expired
Cancelled
Forfeited
Outstanding – End of year
Options exercisable – End of year
2017
2016
Weighted
average
exercise
price in
CA$
3.74
5.44
—
3.42
—
—
3.54
4.80
4.25
Weighted
average
exercise
price in
CA$
4.00
3.43
3.66
3.50
7.00
3.50
3.94
3.74
3.88
Number
2,713
1,470
200
(40 )
(70 )
(26 )
(195)
4,052
2,857
Number
4,052
2,729
—
(1,494)
—
—
(423)
4,864
2,834
On June 8, 2016, the Shareholders of the Company approved the amendment to the Stock Option Plan to increase the maximum number of
Common Shares reserved for issuance under the Stock Option Plan from 10% to 12.5% of the outstanding Common Shares of the Company at
the time of granting.
Therefore, the maximum number of Common Shares issuable under the Stock Option Plan is equal to 12.5% of the issued and outstanding
Common Shares at the time the Common Shares are reserved for issuance. As at December 31, 2017, there were 84,052,000 Common Shares
of the Company issued and outstanding, resulting in a maximum of 10,504,000 options available for issuance under the Stock Option Plan. An
aggregate total of 4,680,000 options are presently outstanding in the Stock Option Plan, representing 5.6% of the issued and outstanding
Common Shares of the Company.
In addition, 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 (CA$3.66). These options vest in equal amounts over 36 months and are exercisable for a term of five
years. In 2017, this employee exercised 16,000 of these options to hold 184,000. These options are recorded outside of the Company’s stock
option plan.
(14)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
The Stock Option Plan requires the exercise price of each option to be determined by the Board of Directors and not to be less than the closing
market price of the Company’s stock on the day immediately prior to the date of grant. Any options which expire may be re-granted. The Board
of Directors approves the vesting criteria and periods at its discretion. The options issued under the plan are accounted for as equity-settled
share-based payments.
A summary of the stock options granted pursuant to the Stock Option Plan for the years ended December 31, 2017 and 2016 is presented below:
Year ended December 31, 2017
Grant date
January 20, 2017 - New Director (3)
January 27, 2017 - Employee (4)
February 9, 2017 - Chief Executive Officer (6)
February 9, 2017 - Officers (4)
February 9, 2017 - Employees (4)
February 16, 2017 - Directors (3)
April 26, 2017 - Officer (5)
April 26, 2017 - Employees (5)
April 26, 2017 - Directors (5)
June 23, 2017 - New Director (3)
July 5, 2017 - New Officer (5)
September 20, 2017 - New Employees (5)
October 25, 2017 - New Employee (5)
November 20, 2017 - New Employees (5)
Grant Date
March 23, 2016 - Directors (1)
March 30, 2016 - Officers (1)
March 30, 2016 - Employees (1)
March 31, 2016 - Officers (1)
June 17, 2016 - Officer (2)
July 12, 2016 - Officer (2)
July 21, 2016 - Officer (2)
December 14, 2016 - New Director (3)
Grant price
US$
2.74
3.02
3.20
3.20
3.20
3.62
6.95
6.95
6.95
6.40
6.24
6.19
5.72
5.13
Year ended December 31, 2016
Grant price
US$
3.00
3.02
3.02
2.90
2.48
3.05
3.03
2.78
Grant price
CA$
3.65
3.96
4.21
4.21
4.21
4.73
9.45
9.45
9.45
8.48
8.10
7.59
7.30
6.56
Grant Price
CA$
3.96
3.91
3.91
3.76
3.20
4.00
3.95
3.65
Number
10
25
1,050
747
89
50
50
183
100
50
280
60
5
30
2,729
Number
60
180
40
40
1,000
100
40
10
1,470
1.
2.
3.
4.
5.
6.
These options vest in equal amounts over 12 months and are exercisable for a term of five years.
These options vest in equal amounts over 36 months and are exercisable for a term of five years.
These options vest in equal amounts over 12 months and are exercisable for a term of ten years.
These options vest in equal amounts over 36 months and are exercisable for a term of ten years.
These options vest 12/36 on the 12-month anniversary date and thereafter 1/36 per month over the next 24 months and are exercisable for a term of ten
years.
One quarter of the options vested immediately, with the remainder of the options vesting each month in equal amounts over a period of
exercisable for a term of ten years.
36 months and are
Application of the fair value method resulted in charges to stock-based compensation expense of $4,242,000 for the year ended December 31,
2017 (2016 – $1,383,000) with corresponding credits to contributed surplus. For the year ended December 31, 2017, stock compensation
expense has been allocated to research and development expense in the amount of $993,000 (2016 – $330,000) and corporate, administration
and business development expense in the amount of $3,249,000 (2016 – $1,053,000).
(15)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
If the stock price volatility was higher by a factor of 10% on the option grant dates in 2017, this would have increased annual stock
compensation expense by approximately $262,000. If the stock price volatility was lower by a factor of 10% on the grant date, this would have
decreased annual stock compensation expense by approximately $287,000.
The Company used the Black-Scholes option pricing model to estimate the fair value of the options granted in 2017 and 2016.
The Company considers historical volatility of its common shares in estimating its future stock price volatility. 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. The expected life is based upon the contractual term, taking into account expected employee exercise and expected
post-vesting employment termination behavior.
The following weighted average assumptions were used to estimate the fair value of the options granted during the year ended December 31:
Annualized volatility
Risk-free interest rate
Expected life of options in years
Estimated forfeiture rate
Dividend rate
Exercise price
Market price on date of grant
Fair value per common share option
2017
74%
1.31%
2016
74%
0.60%
6.6 years
4.0 years
25.5%
0.0 %
4.12
4.12
2.79
$
$
$
16.9%
0.0 %
2.68
2.68
1.47
$
$
$
The following table summarizes information on stock options outstanding as at December 31, 2017:
Range of
exercise prices
CA$
3.20 - 3.96
4.00 - 4.73
5.19 - 6.56
7.30 - 7.59
8.10 - 8.48
9.45
12
Nature of
expenses
Options outstanding
Number outstanding
(in thousands)
882
3,212
62
65
330
313
4,864
Weighted average
remaining contractual
life (years)
4.08
6.36
5.95
9.73
9.50
9.32
6.39
Options exercisable
Number outstanding
(in thousands)
741
1,983
32
—
25
53
2,834
Research and development
Contract research organizations (CROs) and other third party clinical trial expenses
Drug supply and distribution
Salaries, incentive pay and employee benefits
Travel, insurance, patent annuity fees, legal fees and other
Stock compensation expense
(16)
2017
$
21,634
7,124
3,065
1,114
993
33,930
2016
$
10,178
1,800
1,622
604
330
14,534
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
Corporate, administration and business development
Salaries, incentive pay, director fees and employee benefits
Professional and consulting fees
Stock compensation expense
Rent, insurance, information technology and other public company operating costs
Travel, tradeshows and sponsorships
13
Other expense
(income)
Finance income
Interest income
Loss on sale of short term investments
Other
Revaluation adjustment on contingent consideration (note 9)
Foreign exchange loss (gain) and other
Loss (gain) on disposal of equipment
Share issue costs allocated to derivative warrants (note 10)
2017
$
4,239
2,125
3,249
1,327
1,156
12,096
2017
$
(1,040)
338
(702)
502
4
1
—
507
(195)
2016
$
2,902
1,664
1,053
829
522
6,970
2016
$
(27 )
—
(27 )
1,630
(26 )
(19 )
655
2,240
2,213
14
Income
taxes
As at December 31, 2017, the Company has available Canadian non-capital losses in the amount of $117,232,000 (2016 – $73,002,000) to
reduce Canadian taxable income in future years. The Company has unclaimed investment tax credits of $1,409,000 (2016 – $1,158,000)
available to reduce future Canadian income taxes otherwise payable.
The losses and credits will expire as follows:
2029
2030
2031
2032
2033
2034
2035
2036
2037
Non-capital
losses carried
forward
$
3,294
2,341
1,777
7,224
5,546
13,036
18,753
22,142
44,119
Federal
investment
tax credits
$
30
50
280
184
75
131
203
206
250
(17)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
As at December 31, 2017 and December 31, 2016, temporary differences for which no deferred tax asset was recognized were as follows:
Deferred tax assets (liabilities)
Loss carry-forwards
Share issue costs
Deferred revenue and contingent consideration
Property and equipment
Intangible assets
Other
Potential tax assets not recognized
Net deferred tax assets
2017
$
31,700
3,364
1,175
2
1,507
159
37,907
(37,907 )
—
2016
$
19,347
1,425
868
2
606
76
22,324
(22,324 )
—
Given the Company’s past losses, management does not believe that it is more probable than not that the Company can realize its deferred tax
assets and therefore it has not recognized any amount in the consolidated statements of financial position.
The difference between the expected income tax recovery based on a 27.0% (2016 – 26.5%) Canadian statutory tax rate and the actual income
tax recovery is summarized as follows:
Expected recovery at the statutory rate
Non-taxable revaluation of warrant liabilities
Non-deductible expenses including stock compensation
Unrecognized deductible temporary differences
Total income tax recovery
15
Net loss per common
share
2017
$
(19,135 )
6,459
1,418
11,258
—
2016
$
(6,184)
(459)
589
6,054
—
Basic and diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding
for the year. In determining diluted net loss per common share, the weighted average number of common shares outstanding is adjusted for
stock options and warrants eligible for exercise where the average market price of common shares for the year ended December 31, 2017
exceeds the exercise price. Common shares that could potentially dilute basic net loss per common share in the future that could be issued from
the exercise of stock options and warrants were not included in the computation of the diluted loss per common share for the year ended
December 31, 2017 because to do so would be anti-dilutive.
The numerator and denominator used in the calculation of historical basic and diluted net loss amounts per common share are as follows:
Net loss for the year
Weighted average common shares outstanding
Net loss per common share (expressed in $ per share)
(18)
2017
$
(70,792 )
Number
76,918
$
(0.92 )
2016
$
(23,295 )
Number
35,285
$
(0.66 )
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
The outstanding number and type of securities that would potentially dilute basic loss per common share in the future and which were not
included in the computation of diluted loss per share, because to do so would have reduced the loss per common share (anti-dilutive) for the
years presented, are as follows:
Stock options
Warrants (derivative liabilities)
Warrants (equity)
16
Segment
disclosures
2017
1,222
2,415
632
4,269
2016
42
—
64
106
The Company’s operations comprise a single reporting segment engaged in the research, development and commercialization of therapeutic
drugs. As the operations comprise a single reporting segment, amounts disclosed in the consolidated financial statements represent those of the
single reporting unit. In addition, all of the Company’s long-lived assets are located in Canada.
The following geographic information reflects revenue based on customer location.
Revenue
United States
China
Switzerland
Canada
17
Supplementary cash flow
information
Net change in other operating assets and liabilities
Accounts receivable
Prepaid expenses and deposits
Clinical trial contract deposits
Accounts payable and accrued liabilities
Interest received
(19)
2017
$
300
118
2
—
420
2017
$
(23 )
2
(448)
2,168
1,699
973
2016
$
—
118
—
55
173
2016
$
(39 )
(949)
—
2,458
1,470
34
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
Cash flows from financing and investing activities:
Short term
investments
Contingent
consideration
Derivative
warrants
December
Derivative
warrants
February
Common
28, 2016
14, 2014
shares Warrants
Contributed
surplus
Balance at
January 1, 2017
Cash flow - Purchases
Cash flow - Disposals
Cash flow - Payments
made
Cash flow - Net proceeds
from public offering
Cash flow - Proceeds
from exercise derivative
warrants
Cash flow - Proceeds
from exercise warrants
Cash flow - Proceeds
from exercise options
Non-cash changes -
Conversion to Common
Shares
Non-cash changes - Fair
value adjustments
Non-cash changes -
Stock Based
Compensation
Non-cash changes -
Other
Balance at
December 31, 2017
—
97,996
(90,018 )
—
—
—
—
—
—
(78 )
—
(67 )
(5,440)
—
—
2,150
—
(7,405)
—
—
(1,733)
—
—
(299,815)
—
—
(971)
—
—
(17,017 )
—
—
—
—
—
—
—
(162,324)
—
8,596
88
(8,684)
—
—
—
—
—
(232)
—
(3,912)
—
3,825
8,760
(21,334 )
(502)
(17,808 )
(10,973 )
(2,899)
—
—
—
—
3,844
1,013
—
—
—
—
—
—
—
65
—
—
—
—
—
—
—
—
2,899
—
(4,242)
—
7,833
(3,792)
(8,948)
(2,845)
(499,200)
(906)
(18,360 )
18
Related
parties
Compensation of key management
Key management includes directors and officers of the Company. Compensation awarded to key management was composed of the following:
Salaries, short-term employee benefits
Bonuses accrued or paid
Severance costs
Director fees
Stock-based compensation
Other
2017
$
2,961
1,300
544
217
3,560
8,582
2016
$
2,077
623
572
265
1,215
4,752
Stephen P. Robertson, a partner at Borden Ladner Gervais (BLG) acts as the Company’s corporate secretary. The Company incurred legal fees
in the normal course of business to BLG of $255,000 for the year ended December 31, 2017 ($308,000 for the year ended December 31, 2016).
We have no ongoing contractual or other commitments as a result of engaging Mr. Robertson to act as our corporate secretary. Mr. Robertson
receives no additional compensation for acting as the corporate secretary beyond his standard hourly billing rate.
(20)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
The outstanding contingent consideration payable to ILJIN, an affiliated shareholder, is the result of an Arrangement Agreement (the
‘Arrangement Agreement) completed on September 20, 2013 between the Company, Aurinia Pharma Corp. and ILJIN. At December 31, 2017,
pursuant to the Arrangement Agreement, payments of up to $7.85 million may be payable and are based on the achievement of pre-defined
clinical and marketing milestones. The contingent consideration payable to ILJIN is more fully discussed in note 9 of the audited consolidated
financial statements for the year ended December 31, 2017.
19
Commitments and
contingencies
The Company entered into an agreement, effective June 1, 2014, to sublease 5,540 square feet of office and storage space at its head office
location in Victoria, British Columbia. The sublease is for a term of five years, with the Company having the right to terminate after the third
year at no cost. The estimated base rent plus operating costs on a monthly basis for the period from January 1,2018 to May 31, 2019 is
approximately $11,000 per month.
The Company entered into an agreement on November 14, 2014 to lease 1,247 square feet of office space for a term of two years commencing
on January 1, 2015 for the Edmonton, Alberta registered office where the Company’s finance group is located. The lease was extended for a
term of one year to December 31, 2017 and subsequently renewed for an additional term to December 31, 2018 at a cost of approximately
$1,400 per month on the same terms as the original lease.
The Company has entered into contractual obligations for services and materials required for its clinical trial program, drug manufacturing and
other operational activities.
Future minimum lease payments for its premises and the minimum amount to exit the Company’s contractual commitments are as follows:
2018
2019
Contingencies
Operating
leases
$
152
56
208
Purchase
obligations
$
3,198
2,716
5,914
i)
ii)
iii)
iv)
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 position of the Company.
The Company entered into indemnification agreements with its officers and directors. The maximum potential amount of future
payments required under these indemnification agreements is unlimited. However, the Company does maintain liability insurance to
limit the exposure of the Company.
The Company entered into an agreement dated February 14, 2014 whereby the Company is required to pay a third party a royalty
equivalent to 2% of royalties received on the sale of voclosporin by licensees and/or 0.3% of net sales of voclosporin sold directly
by the Company. Should the Company sell substantially all of the assets of voclosporin to a third party or transfer those assets to
another party in a merger in a manner such that this payment obligation is no longer operative, then the Company would be required
to pay 0.3% of the value attributable to voclosporin in the transaction.
The Company has entered into license and research and development agreements with third parties that include indemnification and
obligation provisions that are customary in the industry. These guarantees generally require the Company to compensate the other
party for certain damages and costs incurred as a result of third party claims or damages arising from these transactions. These
provisions may survive termination of the underlying agreement. The nature of the obligations prevents the Company from making a
reasonable estimate of the maximum potential amount it could be required to pay. Historically, the Company has not made any
payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements.
(21)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
20
Capital
management
The Company's objective in managing capital, consisting of shareholders' equity, with cash, cash equivalents and short term investments being
its primary components, is to ensure sufficient liquidity to fund research and development activities, corporate, administration and business
development expenses and working capital requirements.The capital management objective of the Company remains the same as that in the
previous period.
Over the past two years, the Company has raised capital via public and private equity offerings and drawdowns under two ATM facilities as its
primary sources of liquidity, as discussed in note 11 - Share capital.
As the Company's policy is to retain cash to keep funds available to finance the activities required to advance the Company's product
development it does not currently pay dividends. The Company is not subject to any capital requirements imposed by any regulators or by any
other external source.
21
Financial instruments and fair
values
As explained in note 2, financial assets and liabilities have been classified into categories that determine their basis of measurement and for
items measured at fair value, whether changes in fair value are recognized in the consolidated statements of operations and comprehensive loss.
Those categories are fair value through profit or loss; loans and receivables; and, for most liabilities, amortized cost.
In establishing fair value, the Company used a fair value hierarchy based on levels defined below:
•
•
•
Level 1 – defined as observable inputs such as quoted prices in active markets.
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable.
Level 3 – defined as inputs that are based on little or no observable market data, therefore requiring entities to develop their own
assumptions.
The Company has determined the carrying values of its short-term financial assets and financial liabilities, including cash and cash equivalents,
accounts receivable and accounts payable and accrued liabilities approximate their fair value because of the relatively short period to maturity
of the instruments. Information on the fair value of contingent consideration is included in note 9, and information on the fair value of
derivative warrant liability is included in note 10.
Financial risk factors
The Company’s activities can expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and other price risk),
credit risk and liquidity risk. Risk management is carried out by management under policies approved by the Board of Directors. Management
identifies and evaluates the financial risks. The Company’s overall risk management program seeks to minimize adverse effects on the
Company’s financial performance.
•
Liquidity
risk
Liquidity risk is the risk the Company will not be able to meet its financial obligations as they fall due. The Company manages its
liquidity risk through the management of its capital structure and financial leverage, as discussed in note 20. It also manages liquidity
risk by continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves the Company’s
budget, as well as any material transactions out of the ordinary course of business. The Company invests its cash equivalents in US
denominated term deposits with 30 to 90-day maturities, and short term investments consisting of bonds and treasury notes issued by
banks with maturities not exceeding two years to ensure the Company’s liquidity needs are met.
All of the Company’s financial liabilities are due within one year except for the contingent consideration, as described in note 9, and
the derivative warrant liability, as described in note 10.
(22)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
(expressed in US dollars, tabular amounts in thousands)
•
Interest rate
risk
Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
interest rates.
Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company’s
cash and cash equivalents are comprised of highly liquid investments that earn interest at market rates and the short term investments
are comprised of low risk bank bonds with a maturity of two years or less. Accounts receivable and accounts payable and accrued
liabilities bear no interest.
The Company manages its 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. The Company’s exposure to interest rate risk as at December 31, 2017 is
considered minimal as the majority of its financial resources are held as cash and cash equivalents.
•
Foreign currency risk
The Company is exposed to financial risk related to the fluctuation of foreign currency exchange rates. Foreign currency risk is the risk
variations in exchange rates between the US dollars and foreign currencies, primarily with the Canadian dollar, will affect the
Company’s operating and financial results.
The following table presents the Company’s exposure to the Canadian dollar:
Cash and cash equivalents
Accounts receivable
Accounts payable and accrued liabilities
Net exposure
CA$ – US$
2017
$
125
28
(1,657)
(1,504)
2016
$
103
8
(1,184)
(1,073)
Reporting date rate
2016
$
0.745
2017
$
0.797
Based on the Company’s foreign currency exposure noted above, varying the foreign exchange rates to reflect a ten percent strengthening of the
CA$ would have increased the net loss by $151,000 assuming all other variables remained constant. An assumed 10% weakening of the CA$
would have had an equal but opposite effect to the amounts shown above, on the basis all other variables remain constant.
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash
equivalents and short term investments which were held at three major Canadian banks. The Company regularly monitors the credit risk
exposure and takes steps to mitigate the likelihood of these exposures resulting in actual loss.
22
Subsequent
event
Grant of stock options
Subsequent to year-end, the Company granted 2,828,000 stock options to the officers, directors and employees of the Company at a weighted
average price of $5.27 (CA $6.51).
(23)
Exhibit 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 2017
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), unless the context otherwise requires,
references to “we”, “us”, “our” or similar terms, as well as references to “ Aurinia” or the “Company”, refer to Aurinia Pharmaceuticals Inc.,
together with our subsidiaries.
The following MD&A provides information on the activities of Aurinia on a consolidated basis and should be read in conjunction with our audited
consolidated financial statements and accompanying notes for the year ended December 31, 2017 and our annual MD&A and audited financial
statements for the year ended December 31, 2016. All amounts are expressed in United States (US) dollars unless otherwise stated. Dollar amounts in
tabular columns are expressed in thousands of US dollars. This document is current in all material respects as of March 13, 2018.
The financial information contained in this MD&A and in our audited consolidated financial statements has been prepared in accordance with
International Financial Reporting Standards or IFRS as issued by the International Accounting Standards Board or IASB. The audited consolidated
financial statements and MD&A have been reviewed and approved by our Audit Committee. This MD&A has been prepared with reference to National
Instrument 51-102 “Continuous Disclosure Obligations” of the Canadian Securities Administrators. Under the U.S./Canada Multijurisdictional
Disclosure System, Aurinia is permitted to prepare this MD&A in accordance with the disclosure requirements of Canada, which are different from
those in the United States.
FORWARD-LOOKING STATEMENTS
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” and “estimated”, or the negative of such 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 our product and the timing or magnitude of those events, as they are inherently risky and uncertain.
Securities laws encourage companies to disclose forward-looking information so that investors can get a better understanding our future prospects and
make informed investment decisions.
These forward-looking statements, made in this MD&A, may include, without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our belief that the Phase IIb lupus nephritis AURA- LV ("AURA") clinical trial had positive
results;
our belief that we have sufficient cash resources to adequately fund operations through Phase III lupus nephritis ("AURORA") clinical trial
results and regulatory submission;
our belief that confirmatory data generated from the single AURORA clinical trial and the recently completed AURA clinical trial should
support regulatory submissions in the United States, Europe and Japan and the timing of such, including the New Drug Application "NDA"
submission in the United States;
our belief that recently granted formulation patents regarding the delivery of voclosporin to the ocular surface for conditions such as dry eye
have the potential to be of therapeutic value;
our plans and expectations and the timing of commencement, enrollment, completion and release of results of clinical
trials;
our current forecast for the cost of the AURORA clinical trial and the continuation
study;
our intention to seek regulatory approvals in the United States, Europe and Japan for voclosporin and anticipated timing of receiving
approval;
our intention to demonstrate that voclosporin possesses pharmacologic properties with the potential to demonstrate best-in-class differentiation
with first-in-class status for the treatment of lupus nephritis ("LN") outside of Japan;
our belief in voclosporin being potentially a best-in-class CNI (as defined below) with robust intellectual property exclusivity and the benefits
over existing commercially available CNIs;
our belief that voclosporin has further potential to be effectively used across a range of therapeutic autoimmune areas including focal
segmental glomerulosclerosis ("FSGS"), and keratoconjunctivitis sicca ("Dry Eye Syndrome" or "DES");
our intention to initiate a Phase II clinical trial for voclosporin in FSGS patients and the timing for commencement and for data availability for
the same;
our intention to commence a Phase IIa tolerability study of voclosporin ophthalmic solution ("VOS") and the timing for commencement and
for data availability for the same;
statements concerning the anticipated commercial potential of voclosporin for the treatment of LN, FSGS and
DES;
our belief that the expansion of the renal franchise could create significant value for
shareholders;
our intention to use the net proceeds from financings for various
purposes;
our belief that Aurinia’s current financial resources are sufficient to fund all existing programs, the new indication expansion and new product
development work and supporting operations into 2020.
our plans to generate future revenues from products licensed to pharmaceutical and biotechnology
companies;
statements concerning partnership activities and health
discussions;
statements
voclosporin;
potential market
concerning
regulatory
the
for
1
•
•
•
our ability to take advantage of financing opportunities if and when needed;
our belief that VOS has the potential to compete in the multi-billion-dollar human prescription dry eye market;
and
our intention to seek additional corporate alliances and collaborative agreements to support the commercialization and development of our
product.
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 regulatory requirements and commitments will be
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 our clinical programs on a timely basis, including conducting the required AURORA
clinical trial and meet regulatory requirements for approval of marketing authorization applications and new drug approvals, as well as
favourable product labeling;
the assumption that the planned studies will achieve positive
results;
the assumptions regarding the costs and expenses associated with Aurinia’s clinical
trials;
the assumption
maintained;
the assumption that we will be able to meet Good Manufacturing Practice (“GMP”) standards and manufacture and secure a sufficient supply
of voclosporin on a timely basis to successfully complete the development and commercialization of voclosporin;
the assumptions on the market value for the LN
program;
the assumption that our patent portfolio is sufficient and
valid;
the assumption that we will be able to extend our patents on terms acceptable to
us;
the
market;
the assumption that there is a potential commercial value for other indications for
voclosporin;
the assumption that market data and reports reviewed by us are
accurate;
the assumption that another company will not create a substantial competitive product for Aurinia’s LN business without violating Aurinia’s
intellectual property rights;
the assumptions on the burn rate of Aurinia’s cash for
operations;
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
and/or
the assumptions relating to the capital required to fund operations through AURORA clinical trial results and regulatory submission.
assumptions
on
the
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.
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 depends 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 “Risk Factors” section of this Prospectus could cause our actual results to differ
significantly from those contained in any forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or
achievements to differ materially from any assumptions, further results, performance or achievements expressed or implied by such forward-looking
statements. Important factors that could cause such differences include, among other things, the following:
•
•
•
•
the need for additional capital in the longer term to fund our development programs and the effect of capital market conditions and other
factors on capital availability;
difficulties, delays, or failures we may experience in the conduct of and reporting of results of our clinical trials for
voclosporin;
difficulties in meeting GMP standards and the manufacturing and securing a sufficient supply of voclosporin on a timely basis to successfully
complete the development and commercialization of voclosporin;
difficulties, delays or failures in obtaining regulatory approvals for the initiation of clinical
trials;
•
•
•
•
difficulties in gaining alignment among the key regulatory jurisdictions, European Medicines Agency, Food and Drug Administration
("FDA") and Pharmaceutical and Medical Devices Agency, which may require further clinical activities;
difficulties, delays or failures in obtaining regulatory approvals to market voclosporin;
not being able
voclosporin;
difficulties we may experience in completing the development and commercialization of
voclosporin;
to extend our patent portfolio for
2
•
•
•
•
•
•
•
•
•
•
of
for
and
demand
formulary
obtaining
acceptance
the market for the LN business may not be as we have
estimated;
insufficient
voclosporin;
difficulties obtaining adequate reimbursements from third party
payors;
difficulties
acceptance;
competitors may arise with similar products;
product liability, patent infringement and other civil litigation;
injunctions, court orders, regulatory and other 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 payers for voclosporin;
and/or
difficulties we may experience in identifying and successfully securing appropriate vendors to support the development and
commercialization of our product.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. These forward-looking statements are made as of the date hereof and we disclaim any intention and have no
obligation or responsibility, except as require by law, to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
For additional information on risks and uncertainties in respect of the Company and our business, please see the "Risks and Uncertainties" section of
this MD&A. Although we believe that the expectations reflected in such forward-looking statements and information are reasonable, undue reliance
should not be placed on forward-looking statements or information because we can give no assurance that such expectations will prove to be correct.
Additional information related to Aurinia, including its most recent Annual Information Form ("AIF"), is available by accessing the Canadian Securities
Administrators’ System for Electronic Document Analysis and Retrieval ("SEDAR") website at www.sedar.com or the U.S. Securities and Exchange
Commission’s ("SEC") Electronic Document Gathering and Retrieval System ("EDGAR") website at www.sec.gov/edgar.
OVERVIEW
THE COMPANY
Corporate Structure
Name, Address and Incorporation
Aurinia is a clinical stage biopharmaceutical company with its head office located at #1203-4464 Markham Street, Victoria, British Columbia V8Z 7X8
where our clinical, regulatory and business development functions are conducted. Aurinia has its registered office located at #201, 17904-105 Avenue,
Edmonton, Alberta T5S 2H5 where the finance function is performed.
Aurinia Pharmaceuticals Inc. is organized under the Business Corporations Act (Alberta). Our 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". Our
primary business is the development of a therapeutic drug to treat autoimmune diseases, in particular LN.
We have the following wholly-owned subsidiaries: Aurinia Pharma U.S., Inc., (Delaware incorporated) and Aurinia Pharma Limited (UK incorporated).
Our wholly owned subsidiary, Aurinia Pharma Corp, was wound up into Aurinia Pharmaceuticals Inc. and dissolved on November 30, 2017.
BUSINESS OF THE COMPANY
We are focused on the development of our novel therapeutic immunomodulating drug candidate, voclosporin, for the treatment of LN, FSGS and DES.
Voclosporin is a next generation calcineurin inhibitor ("CNI") which has clinical data in over 2,400 patients across multiple indications. It has also been
previously studied in kidney rejection following transplantation, psoriasis and in various forms of uveitis (an ophthalmic disease).
Legacy CNIs have demonstrated efficacy for a number of conditions, including LN, transplant, DES and other autoimmune diseases; however, side
effects exist which can limit their long-term use and tolerability. Some clinical complications of legacy CNIs include hypertension, hyperlipidemia,
diabetes, and both acute and chronic nephrotoxicity.
Voclosporin is an immunosuppressant, with a synergistic and dual mechanism of action that has the potential to improve near and long-term outcomes in
LN when added to mycophenolate mofetil ("MMF"), although not approved for such, the current standard of care for LN. By inhibiting calcineurin,
voclosporin reduces cytokine activation and blocks interleukin IL-2 expression and T-cell mediated immune responses. Voclosporin also potentially
stabilizes disease modifying podocytes, which protects against proteinuria. Voclosporin is made by a modification of a single amino acid of the
cyclosporine molecule which has shown a more predictable pharmacokinetic and pharmacodynamic relationship, an increase in potency, an altered
metabolic profile, and easier dosing without the need for therapeutic drug monitoring. Clinical doses of voclosporin studied to date range from 13 - 70
mg BID. The mechanism of action of voclosporin, a CNI, has been validated with certain first
3
generation CNIs for the prevention of rejection in patients undergoing solid organ transplants and in several autoimmune indications, including
dermatitis, keratoconjunctivitis sicca, psoriasis, rheumatoid arthritis, and for LN in Japan. We believe that voclosporin possesses pharmacologic
properties with the potential to demonstrate best-in-class differentiation with first-in-class regulatory approval status for the treatment of LN outside of
Japan.
Based on published data, we believe the key potential benefits of voclosporin in the treatment of LN are as follows:
•
•
•
•
increased potency compared to cyclosporine A, allowing lower dosing requirements and fewer off target
effects;
limited inter and intra patient variability, allowing for easier dosing without the need for therapeutic drug
monitoring;
less cholesterolemia and triglyceridemia than cyclosporine A;
and
limited incidence of glucose intolerance and diabetes at therapeutic doses compared to
tacrolimus.
Our target launch date for voclosporin as a treatment for LN is late 2020 or early 2021.
Lupus Nephritis
LN is an inflammation of the kidney caused by systemic lupus erythematosus ("SLE") and represents a serious manifestation of SLE. SLE is a chronic,
complex and often disabling disorder. SLE is highly heterogeneous, affecting a wide range of organs and tissue systems. Unlike SLE, LN has
straightforward disease measures (readily assessable and easily identified by specialty treaters) where an early response correlates with long-term
outcomes, measured by proteinuria. In patients with LN, renal damage results in proteinuria and/or hematuria and a decrease in renal function as
evidenced by reduced estimated glomerular filtration rate ("eGFR"), and increased serum creatinine levels. eGFR is assessed through the Chronic
Kidney Disease Epidemiology Collaboration equation. Rapid control and reduction of proteinuria in LN patients measured at 6 months shows a
reduction in the need for dialysis at 10 years (Chen et al., Clin J. Am Soc Neph., 2008). LN can be debilitating and costly and if poorly controlled, can
lead to permanent and irreversible tissue damage within the kidney. Recent literature suggests severe LN progresses to end-stage renal disease
("ESRD"), within 15 years of diagnosis in 10%-30% of patients, thus making LN a serious and potentially life-threatening condition. SLE patients with
renal damage have a 14-fold increased risk of premature death, while SLE patients with ESRD have a greater than 60-fold increased risk of premature
death. Mean annual cost for patients (both direct and indirect) with SLE (with no nephritis) have been estimated to exceed $20,000 per patient, while
the mean annual cost for patients (both direct and indirect) with LN who progress to intermittent ESRD have been estimated to exceed $60,000 per
patient (Carls et al., JOEM., Volume 51, No. 1, January 2009).
FSGS
FSGS is a lesion characterized by persistent scarring identified by biopsy and proteinuria. FSGS is a cause of Nephrotic Syndrome ("NS") and is
characterized by high morbidity. NS is a collection of symptoms that indicate kidney damage, including: large amounts of protein in the urine; low
levels of albumin and higher than normal fat and cholesterol levels in the blood, and edema. Similar to LN, early clinical response and reduction of
proteinuria is thought to be critical to long-term kidney health and outcomes.
FSGS is likely the most common primary glomerulopathy and the most common primary glomerulopathy leading to ESRD. The incidence of FSGS and
ESRD due to FSGS are increasing as time goes on. Precise estimates of incidence and prevalence are difficult to determine. According to NephCure
Kidney International, more than 5400 patients are diagnosed with FSGS every year; however, this is considered an underestimate because a limited
number of biopsies are performed. The number of FSGS cases are rising more than any other cause of NS and the incidence of FSGS is increasing
through disease awareness and improved diagnosis. FSGS occurs more frequently in adults than in children and is most prevalent in adults 45 years or
older. FSGS is most common in people of African American and Asian descent. It has been shown that the control of proteinuria is important for long-
term dialysis-free survival of these patients. Currently, there are no approved therapies for FSGS in the United States and Europe.
DES
DES, or keratoconjunctivitis sicca, is a chronic disease in which a lack of moisture and lubrication on the eye’s surface results in irritation and
inflammation of the eye. DES is a multifactorial, heterogeneous disease estimated to affect greater than 20 million people in the United States (Market
Scope, 2010 Comprehensive Report on The Global Dry Eye Products Market).
4
STRATEGY
Our business strategy is to optimize the clinical and commercial value of voclosporin and become a global biopharma company with a focused renal
autoimmune franchise.
The key elements of our corporate strategy include:
•
•
•
•
Advancing voclosporin through a robust AURORA clinical trial with anticipated completion of this trial in the fourth quarter of
2019;
Initiating a Phase II proof of concept trial for the additional renal indication of
FSGS;
Evaluate other voclosporin indications - while we intend to deploy our majority of operational and financial resources to develop voclosporin for
LN; and
Upon completion of the Phase IIa tolerability study of VOS, we will look at all options to create value with our proprietary nanomicellar ocular
formulation of voclosporin in the human health field including, but not limited to, further development, out-licensing or divestiture while remaining
focused on our Nephrology efforts.
CORPORATE AND CLINICAL DEVELOPMENTS IN 2017
March 2017 Public offering
On March 20, 2017, we completed an underwritten public offering of 25.65 million common shares, which included 3.35 million common shares issued
pursuant to the full exercise of the underwriters’ overallotment option to purchase additional common shares (the "March Offering"). The common
shares were sold at a public offering price of $6.75 per share. The gross proceeds from the March Offering were $173.10 million before deducting the
6% underwriting commission and other offering expenses which totaled $10.78 million. Leerink Partners LLC and Cantor Fitzgerald & Co. acted as
joint book-running managers for the March Offering. The Offering was made pursuant to a U.S. registration statement on Form F-10, declared effective
by the United States Securities and Exchange Commission (the “SEC”) on November 5, 2015 (the “Registration Statement”), and the Company’s
existing Canadian short form base shelf prospectus (the “Base Shelf Prospectus”) dated October 16, 2015. The prospectus supplements relating to the
Offering (together with the Base Shelf Prospectus and the Registration Statement, the “Offering Documents”) were filed with the securities commissions
in the provinces of British Columbia, Alberta and Ontario in Canada, and with the SEC in the United States.
We intend to use the net proceeds of the March Offering for research and development ("R&D") activities, including the AURORA clinical trial
activities and working capital purposes.
AURORA Clinical Trial
We achieved a significant milestone in the second quarter of 2017 with the initiation of patient randomization for our AURORA clinical trial.
We currently have 201 clinical trial sites activated and able to enroll patients around the globe. We are actively recruiting the clinical trial and our
clinical team is focused on initiating the remaining sites. An aggressive patient recruitment program for this trial is ongoing. We are making the
necessary investments now to ensure the team has the tools to execute a successful clinical trial. Based on an eighteen-month enrollment period, we
believe AURORA is on track to complete enrollment in the fourth quarter of 2018. Topline data from AURORA is expected in late 2019. We believe
the totality of data from both the AURORA and AURA clinical trials can potentially serve as the basis for a NDA submission following a successful
completion of the AURORA clinical trial. Additionally, under voclosporin’s fast-track designation, we intend to utilize a rolling NDA process. We are
actively putting together a NDA and intend to submit the first module (the non-clinical module) in the second half of 2018. We plan to submit the
Chemistry, Manufacturing, and Controls module in the first half of 2019, and the clinical module in the first half of 2020.
The AURORA clinical trial is a global 52-week double-blind, placebo-controlled study of 324 patients to evaluate whether voclosporin added to
standard of care can increase overall renal response rates in the presence of low dose steroids.
Patients will be randomized 1:1 to either of 23.7 mg voclosporin administered twice a day ("BID") and mycophenolate mofetil ("MMF") or MMF and
placebo, with both arms receiving a rapid oral corticosteroid taper. As in the AURA clinical trial, the study population in AURORA will be comprised
of patients with biopsy proven active LN who will be evaluated on the primary efficacy endpoint of complete remission, or renal response, at 52 weeks,
a composite which includes:
•
•
•
•
of
ratio
(“UPCR”)
protein-creatinine
urine
≤0.5mg/mg;
normal, stable renal function (≥60 mL/min/1.73m2 or no confirmed decrease from baseline in eGFR of
>20%);
presence of sustained, low dose steroids (≤10mg prednisone from week 16-24)
and;
no
medications.
administration
rescue
of
Our current forecast is that the AURORA clinical trial will cost approximately $53 million to complete.
Patients completing the AURORA trial will then have the option to roll-over into a 104-week blinded continuation study. The data from the
continuation study will allow us to assess long-term outcomes in LN patients that will be valuable in a post-marketing setting in addition to future
interactions with various regulatory authorities. The current estimate of the clinical cost of the continuation study is in the range of $20
5
million to $25 million spread out over approximately the next three years. This continuation study is not required for NDA submission for voclosporin
in LN.
In order to complete the clinical dossier, we will also commence a confirmatory drug-drug interaction study ("DDI Study") between voclosporin and
MMF in 2018. In addition, we will conduct a pediatric study post-approval.
New Voclosporin Indications - FSGS and Dry Eye Syndrome
On October 20, 2017, we announced our plans to expand our voclosporin renal franchise to include FSGS and minimal change disease (“MCD”).
Additionally, we announced plans to evaluate our proprietary nanomicellar VOS for the treatment of DES. Following our pre-IND meeting that took
place with the U.S. Food & Drug Administration’s Division of Cardiovascular and Renal Products (DCaRP) in February 2018, it was decided that we
would pursue FSGS as a single indication for voclosporin rather than combining it with MCD. The advancement of these new indications, in addition to
LN, represents an expansion of our strategy, pipeline and commercial opportunities.
Our clinical data in LN demonstrated that voclosporin decreased proteinuria, which is also an important disease marker for FSGS. Furthermore,
voclosporin appears to demonstrate a more predictable pharmacology and an improved lipid and metabolic profile over legacy calcineurin inhibitors,
which have shown efficacy in treating autoimmune disorders similar to those we are targeting. We plan to initiate a Phase II proof of concept clinical
trial for voclosporin in FSGS in the second quarter of 2018. Interim data readouts will depend on the rate of trial recruitment and could begin in late
2018/first half of 2019.
Additionally, we plan to initiate a Phase IIa tolerability study of VOS versus the standard of care for the treatment of DES by the end of the second
quarter of 2018, with data available in the second half of 2018. CNIs are a mainstay in the treatment for DES, and the goal of this program is to develop
a best-in-class CNI for the treatment of DES.
The topical formulation, VOS, has shown evidence of efficacy in our partnered canine studies and in a small human Phase I study (n=35), supporting its
development for the treatment of DES. Animal safety toxicology studies were previously completed in rabbit and dog models, and additional animal
safety toxicology studies are planned.
Completed preclinical and human Phase Ib studies using our nanomicellar VOS formulation have shown encouraging results in terms of delivery of
active drug to the target tissues of the eye. The nanomicellar formulation enables high concentrations of voclosporin to be incorporated into a
preservative-free solution for local delivery to the ocular surface. This has been shown to potentially improve efficacy, dosing frequency and tolerability
versus the current treatments for DES. We therefore believe VOS has a differentiated product profile with long patent life that has the potential to
compete in the multi-billion-dollar human prescription dry eye market.
AURA-LV (Phase II) 48-Week Results
During the first half of 2017, we released and presented 48-week data for AURA-LV, our Phase II trial evaluating voclosporin for the treatment of LN.
At 48 weeks, the trial met its complete and partial remission ("CR"/"PR") endpoints and, key pre-specified secondary endpoints, including: time to CR
and PR (speed of remission); reduction in Systemic Lupus Erythematosus Disease Activity Index or SLEDAI score; and reduction in urine protein
creatinine ratio ("UPCR"). Notably, of the patients that achieved CR at 24 weeks, in the low-dose voclosporin group, 100% remained in CR at 48 weeks,
which demonstrates durability of clinical response and patients on voclosporin stayed in remission approximately twice the amount of time as those in
the control group. Additionally, this improved efficacy was attained while maintaining stable serum magnesium, potassium and blood pressure levels.
Well-known side effects with other calcineurin inhibitors at their effective dose include hypomagnesemia and hyperkalemia, which are associated with
renal impairment and require monitoring or intervention. Each arm of the trial included the current standard of care of MMF as background therapy and
a rapid steroid taper to 5mg/day by week 8 and 2.5mg by week 16.
6
The 24 and 48-week efficacy results are summarized below:
Endpoint
Complete Remission (CR)
Partial Remission (PR)
Time to CR (TTCR) [median]
Time to PR (TTPR) [median]
SLEDAI Reduction
renal lupus)
(non-
Reduction in UPCR
Treatment
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
23.7mg VCS BID
39.5mg VCS BID
Control Arm
24 weeks
33%
27%
19%
70%
66%
49%
19.7 weeks
23.4 weeks
NA
4.1 weeks
4.4 weeks
6.6 weeks
-6.3
-7.1
-4.5
-3.769 mg/mg
-2.792 mg/mg
-2.216 mg/mg
Note: “VCS” means voclosporin *All p-values are vs control
P-value*
p=.045
p=.204
NA
p=.007
p=.024
NA
p<.001
p=.001
NA
p=.002
P=.003
NA
p=.003
p=.003
NA
p<.001
p=.006
NA
48 weeks
49%
40%
24%
68%
72%
48%
19.7 weeks
23.4 weeks
NA
4.3 weeks
4.4 weeks
6.6 weeks
-7.9
-8.3
-5.3
-3.998 mg/mg
-2.993 mg/mg
-2.384 mg/mg
P-value*
p<.001
p=.026
NA
p=.007
p=.002
NA
p<.001
p<.001
NA
p=.005
p=.002
NA
p<.001
p<.001
NA
p<.001
p=.008
NA
The results of the AURA clinical trial at 48 weeks demonstrate the highest complete remission rate of any global LN study of which we are aware,
although we note that the criteria to measure remission differs among various studies. The below chart compares the results of the AURA clinical trial
vs. the other global LN studies of which we are aware.
Name of Global Study
Efficacy and Safety of
Ocrelizumab in Active
Proliferative Lupus
Nephritis
Number of
weeks
48 weeks
24 weeks
52 weeks
Criteria to Measure Remission and Response Rate Results
UP:CR(gm/gm) < .5
SCr ≤ 25% increase from baseline
Steroid taper (not enforced)
UP:CR(gm/gm) ≤ .5
Normal eGFR
Normal Urinalysis
Steroid taper (not enforced)
UP:CR(gm/gm) ≤ .26
eGFR within 10% of screening/baseline
Normal Urinalysis
Criteria to be met on 2 successive visits
No mandated steroid taper
Control = 34.7%
LD OCR = 42.7% (NS)
HD OCR = 32.5% (NS)
MMF = 8.6% (NS)
IVC = 8.1% (NS)
Control = 8.0%
LD ABT = 11.1% (NS)
HD ABT = 9.1% (NS)
24 weeks
Control = 19.3%
LD Voc=32.6%
(p=.045)
HD Voc = 27.3%
(NS)
48 weeks
Control = 23.9%
LD Voc = 49.4% (p<.001)
HD Voc = 39.8% (p=.026)
AURA-LV: Aurinia
Urine Protein Reduction
in Active Lupus
Nephritis Study
and
24
weeks
48
UP:CR(gm/gm) ≤ .5
No decrease in eGFR ≥ 20%
No use of rescue medications
Forced steroid taper
No new safety signals were observed with the use of voclosporin in LN patients, and voclosporin was well-tolerated over a 48-week period. The overall
safety profile is consistent with the expectations for the class of drug, the patient population and concomitant therapies. Thirteen (13) deaths were
reported during the AURA clinical trial, a pattern which is consistent with other global active LN studies. Eleven (11) of the thirteen (13) deaths
occurred at sites with compromised access to standard of care, and patients who died had a statistically different clinical baseline picture, demonstrating
a more severe form of LN, potential comorbid conditions, and poor nutrition. Furthermore, in the voclosporin arms, the
7
renal function as measured by corrected eGFR was stable and not significantly different from the control arm after 48 weeks of treatment. Mean blood
pressure was also similar between all treatment groups.
A summary of treatment emergent adverse events ("TEAEs"), study withdrawals and drug discontinuations are below, which are consistent with other
clinical trials evaluating immunosuppressive therapies.
TEAEs, Drug Discontinuation & Study
Withdrawals
Any TEAE
Any Serious TEAE
Any TEAE with Outcome of Death 1
Any Treatment-Related TEAE
Any Serious Treatment-Related TEAE
Any AE leading to study drug discontinuation
Any AE leading to study drug discontinuation
(excluding deaths)
Study Withdrawals
Control
N=88
n (%)
78 (88.6)
17 (19.3)
4 (4.5)
15 (17.0)
1 (1.1)
9 (10.2)
8 (9.1)
18 (20)
VCS 23.7 mg BID
N=89
n (%)
82 (92.1)
25 (28.1)
VCS 39.5mg BID
N=88
n (%)
85 (96.6)
22 (25.0)
10 (11.2)
45 (50.6)
4 (4.5)
16 (18.0)
11 (12.4)
16 (18.0)
2 (2.3)
55 (62.5)
7 (8.0)
14 (15.9)
13 (14.8)
8 (9.1)
1. Data includes three placebo-randomized subjects that died post-study completion.
On June 4, 2017 and June 14, 2017, we presented additional data from the AURA trial in LN during the 54th European Renal Association-European Dialysis and
Transplant Association Congress (ERA-EDTA 2017) and the European Annual Congress of Rheumatology (EULAR 2017).
As previously reported, treatment with low dose voclosporin showed statistically improved efficacy over the control arm at 24 and 48 weeks. The data
presented at ERA-EDTA 2017 demonstrated this improved efficacy was attained while maintaining stable serum magnesium, potassium and blood
pressure levels. Well-known side effects with other calcineurin inhibitors at their effective dose include hypomagnesemia and hyperkalemia, which are
associated with renal impairment and require monitoring or intervention.
The data presented at EULAR 2017 demonstrated that over the course of the 48-week trial, patients on voclosporin stayed in remission approximately
twice the amount of time as those in the control group.
The analysis of additional data after April 20, 2017 identified that two non-key secondary endpoints: urine sediment, which describes analysis of active
urinary sediment at each visit; and comparison of C3 and C4 levels between study arms, did not demonstrate statistical significance between arms. The
urine sediment endpoint was not statistically different as there was too few data to demonstrate a difference. C3 and C4 levels are non-specific markers
of general lupus disease activity. Rises in C3 and C4 were seen in all arms indicating disease improvement though no significant difference was
observed between treatment arms.
To summarize, in addition to the trial meeting its complete and partial remission ("CR"/"PR") endpoints at 48 weeks, all key pre-specified secondary
endpoints were also met at 48 weeks.
Merck Animal Health agreement for Nanomicellar Formulation of voclosporin for treatment of canine Dry Eye Syndrome
Throughout the past year, Merck Animal Health ("MAH") conducted proof of concept research in dogs suffering from DES. Based on this research,
MAH entered into an agreement with us on April 17, 2017 whereby we granted them worldwide rights to develop and commercialize our patented
nanomicellar VOS for the treatment of DES in dogs (the "MAH Agreement"). Under the terms of the agreement, we received a technology access fee of
$300,000 in 2017 and are eligible to receive further payments based on certain development and sales milestones, royalties based on Merck’s global
VOS product sales and drug product sales to MAH. We do not consider the MAH Agreement to be material to us or our operations.
Changes to Board and Management
On February 21, 2018 we appointed Michael Hayden, CM, OBC, MB, ChB, PhD, FRCP (C), FRSC to our board of directors (the "Board"). Dr. Hayden
was most recently the President of Global R&D and Chief Scientific Officer at Teva Pharmaceutical Industries Ltd. Dr. Hayden is the co-founder of
three biotechnology companies, including Aspreva, and currently sits on several boards. Dr. Hayden is a celebrated researcher, having focused his
research primarily on genetic diseases.
On February 7, 2018 we appointed Joseph P. "Jay" Hagan to our Board. Mr. Hagan is currently the President and Chief Executive Officer of Regulus
Therapeutics, having previously held the positions of Chief Operating Officer, Principal Financial Officer and Principal Accounting Officer.
On May 9, 2017, we appointed George M. Milne Jr., PhD to our Board. Prior to his retirement, Dr. Milne served as Executive Vice President of Global
Research and Development and President of Worldwide Strategic and Operations Management at Pfizer. Dr. Milne serves on multiple corporate boards
including Charles River Laboratories, where he is the lead director, and Amylyx Pharmaceuticals, and is a Venture Partner at Radius Ventures. On May
8, 2017, Dr. Gregory Ayers resigned from our Board.
8
On July 3, 2017, we hired Erik Eglite, DPM, JD, MBA as Senior Vice President, General Counsel & Chief Corporate Compliance Officer. Prior to
joining Aurinia, Erik was Vice President, Chief Compliance Officer and Corporate Counsel for Marathon Pharmaceuticals and Vice President, Chief
Compliance Officer and Corporate Counsel for Lundbeck Pharmaceuticals. Prior to that, he was Vice President, Chief Compliance Officer and
Corporate Counsel for Ovation Pharmaceuticals and Global Chief Compliance Officer, Corporate Counsel for Aspreva Pharmaceuticals. Erik has been
involved with the clinical development, launch and commercialization of 12 drugs and drug programs. He is also a licensed podiatric physician and
surgeon.
On April 17, 2017, we hired Simrat Randhawa MD, MBA, as Head of Medical Affairs. Simrat brings over 20 years of experience to Aurinia across
clinical practice, medical affairs and business development. For the past 10 years, he has held a number of senior leadership roles in commercial and
medical affairs within large and small pharmaceutical companies. During this time, Simrat served as the medical lead for Novartis' Multiple Sclerosis
(MS) franchise, where he played an integral role in establishing Gilenya® as the first oral therapy for the treatment of relapsing MS. Most recently he
was the global medical affairs lead at BioMarin Pharmaceuticals for MPS, Duchenne Muscular Dystrophy and Hemophilia.
On February 6, 2017, we appointed Dr. Richard M. Glickman LLD (Hon), our founder and Chairman of the Board, as our Chairman and Chief
Executive Officer. The Board accepted the resignation of Charles Rowland as Chief Executive Officer and an executive member of the Board.
RESULTS OF OPERATIONS
For the year ended December 31, 2017, we reported a consolidated net loss of $70.79 million or $0.92 loss per common share, as compared to a
consolidated net loss of $23.30 million or $0.66 loss per common share for the year ended December 31, 2016.
We recorded an increase in the estimated fair value of derivative warrant liabilities of $23.92 million in 2017 which increased the consolidated net loss
for the year ended December 31, 2017, whereas we had recorded a decrease in the estimated fair value of derivative warrant liabilities of $1.73 million
in 2016 which reduced the net loss in 2016.
After adjusting for the non-cash impact of the revaluation of the warrant liabilities, the net loss from operations for the year ended December 31, 2017
was $46.87 million compared to $25.03 million for the year ended December 31, 2016. The higher net loss before the increase in estimated fair value of
derivative warrant liabilities in 2017 was due primarily to increases in R&D and corporate, administration and business development expenses for the
year ended December 31, 2017. We experienced higher activity levels attributable to our AURORA clinical trial and our transition towards becoming a
commercialized global biopharma company.
Licensing Revenue
We recorded licensing revenue of $418,000 for the year ended December 31, 2017 compared to $118,000 for the year ended December 31, 2016. The
increase in licensing revenue was the result of receiving $300,000 from MAH in 2017. Under the terms of the MAH Agreement, we received an
Technology Access fee of $300,000. We also recorded $118,000 in 2017 (2016 - $118,000) as licensing revenue from the ongoing straight line
amortization of deferred revenue related to an upfront license payment of $1.5 million received in 2010 pursuant to the 3SBio, Inc. license agreement.
R&D expenses
R&D expenses increased to $33.93 million for the year ended December 31, 2017 compared to $14.53 million for the year ended December 31, 2016.
The increase in R&D expenses primarily reflected the commencement of and ramp up of the AURORA clinical trial and activities in 2017, whereas the
expenses in 2016 primarily reflected AURA Phase 2 clinical trial completion costs and planning costs for AURORA. Direct AURORA trial costs were
$24.15 million in 2017 compared to $3.05 million in 2016.
Clinical Research Organizations ("CRO"s) and other third party clinical trial expenses were $21.63 million for the year ended December 31, 2017
compared to $10.18 million for 2016. The increased costs primarily reflect CRO costs, including service fees and pass-through costs related to the
AURORA trial.
We incurred drug supply and distribution costs of $7.12 million for the year ended December 31, 2017 compared to $1.8 million for 2016. The increase
in these costs primarily reflected an expense of $3.17 million in 2017 to manufacture drug product (“API”). In addition, we incurred costs for
encapsulating, packaging and distribution of the drug supply for the AURORA trial, whereas the comparative figures for 2016 were primarily composed
of drug distribution costs for the AURA trial.
Salaries, incentive pay and employee benefits increased to $3.07 million for the year ended December 31, 2017 compared to $1.62 million for the year
ended December 31, 2016. The increase reflected the hiring of nine additional R&D employees required for the AURORA program, annual salary
increases for employees and higher incentive pay accruals based on the achievement of 2017 corporate and personal objectives at a higher rate in 2017
as compared to those achieved in 2016.
We recorded non-cash stock compensation expense of $993,000 for the year ended December 31, 2017 compared to $330,000 for 2016. See stock-
based compensation expense section below for more details.
9
Other expenses, which included items such as travel, clinical trial insurance, patent annuity and legal fees, phone and publications increased to $1.11
million for the year ended December 31, 2017 compared to $604,000 for the year ended December 31, 2016 respectively. The increase reflected higher
expenses, particularly for travel, related to the AURORA program.
Corporate, administration and business development expenses
Corporate, administration and business development expenses increased to $12.10 million for the year ended December 31, 2017 compared to
$6.97 million for 2016. The increase reflected higher activity levels in 2017.
Corporate, administration and business development expenses included non-cash stock-based compensation expense of $3.25 million for the year ended
December 31, 2017 compared to $1.05 million for 2016. See the section on stock-based compensation expense below for more details.
Salaries, incentive pay, director fees and employee benefits were $4.24 million for the year ended December 31, 2017 compared to $2.90 million for
2016. The increase for the year ended December 31, 2017 reflected the hiring of four additional corporate and administration employees in 2017, higher
incentive pay accruals in 2017 and salary increases for employees effective January 1, 2017.
Professional and consulting fees were $2.13 million for the year ended December 31, 2017 compared to $1.66 million in 2016. The increase in 2017
reflected higher investor and public relations consulting fees of $301,000, as we contracted the services of a public relations firm in 2017, and higher
audit and legal fees due to higher activity levels in 2017 compared to 2016.
Rent, insurance, information technology, communications and other public company operating costs increased to $1.33 million for the year ended
December 31, 2017 compared to $829,000 for the year ended December 31, 2016. The increases reflected overall higher activity levels, higher staff
numbers, and higher director and officer insurance costs commensurate with conducting a Phase III clinical trial.
Travel, tradeshows and sponsorships expense increased to $1.16 million for the year ended December 31, 2017 compared to $522,000 for the year
ended December 31, 2016. The increase in 2017 reflected an increase in tradeshows and sponsorship expense of $555,000 as we endeavored to increase
our visibility in the field of LN and with investors.
Stock-based compensation expense
For stock option plan information and outstanding stock option details refer to note 11(c) of the audited consolidated financial statements for the year
ended December 31, 2017.
We granted 2.73 million stock options for the year ended December 31, 2017 at a weighted average exercise price of $4.12 and 1.47 million stock
options at a weighted average exercise price $2.68 for the year ended December 31, 2016.
Application of the fair value method resulted in charges to stock-based compensation expense of $4.24 million for the year ended December 31, 2017
(2016 – $1.38 million) with corresponding credits to contributed surplus. For the year ended December 31, 2017, stock compensation expense has been
allocated to R&D expense in the amount of $993,000 (2016 – $330,000) and corporate, administration and business development expense in the amount
of $3.25 million (2016 – $1.05 million).
The increase in stock-based compensation expense in 2017 compared to 2016 related to the following:
•
•
an increase in the number of options granted in 2017 due in part to options granted to 13 new employees hired in 2017; and
an increase in the weighted average of the fair value of the stock options granted to $2.79 per common share in 2017 from $1.47 in 2016 due
to the increases, in 2017, in our share price and in the interest rate used in calculating the fair value.
Amortization of intangible assets
Amortization of intangible assets was consistent at $1.43 million for the year ended December 31, 2017 compared to $1.46 million recorded in 2016.
Other expense (income)
We recorded other income of $195,000 for the year ended December 31, 2017 compared to other expense of $2.21 million for the year ended December
31, 2016.
Other expense (income) included the following items:
Finance income of $702,000 for the year ended December 31, 2017 consisting of interest income of $1.04 million offset by a loss on sale of short term
investments of $338,000 compared to $27,000 of interest income of the year ended December 31, 2016. The increase in interest income reflected the
increase in our cash position as a result of completing the March 20, 2017 public offering.
Revaluation expense adjustments on long term contingent consideration to ILJIN of $502,000 for the year ended December 31, 2017 compared to $1.63
million for 2016. The contingent consideration is more fully discussed in note 9 to the audited consolidated financial statements for the year ended
December 31, 2017.
10
Foreign exchange and other gain of $4,000 for the year ended December 31, 2017 compared to a foreign exchange and other loss of $26,000 in 2016.
We recorded an expense of $655,000 in 2016 related to share issue costs, incurred to complete the December 28, 2016 bought deal public offering,
allocated to derivative warrants. There was no similar item in 2017.
Change in estimated fair value of derivative warrant liabilities
We recorded a non-cash increase in estimated fair value of derivative warrant liabilities of $23.92 million for the year ended December 31, 2017
compared to a non-cash decrease of $1.73 million for 2016. These revaluations fluctuate based primarily on the market price of our common shares.
Derivative warrant liabilities are more fully discussed in the section “Critical estimates in applying the Company’s accounting policies” and note 10 to
the consolidated financial statements for the year ended December 31, 2017.
In accordance with IFRS, a contract to issue a variable number of shares fails to meet the definition of equity and must instead be classified as a
derivative liability and measured at fair value with changes in fair value recognized in the consolidated statements of operations and comprehensive loss
at each period-end. To clarify, while we will settle these warrants only in shares in the future, accounting rules require that we show a liability because
of the potential variability in the number of shares which may be issued if the cashless exercise option is used by the holder of the warrants under the
specific situations discussed below.
The derivative warrant liabilities will ultimately be eliminated on the exercise or forfeiture of the warrants and will not result in any cash outlay by
Company.
On December 28, 2016, we completed a $28.75 million bought deal public offering (the "December Offering"). Under the terms of the December
Offering, we issued 12.78 million units at a subscription price per unit of $2.25, each unit consisting of one common share and one-half (0.50) of a
common share purchase warrant (a "Warrant"), exercisable for a period of five years from the date of issuance at an exercise price of $3.00. Therefore,
we issued 6.39 million Warrants. The holders of the Warrants issued pursuant to the December Offering may elect, if we do not have an effective
registration statement registering the common shares underlying the Warrants, or the prospectus contained therein is not available for the issuance of the
common shares underlying the Warrants to the holder, in lieu of exercising the Warrants for cash, a cashless exercise option to receive common shares
equal to the fair value of the Warrants. This calculation is based on the number of Warrants to be exercised multiplied by the weighted average market
price less the exercise price with the difference divided by the weighted average market price. If a Warrant holder exercises this option, there will be
variability in the number of shares issued per Warrant. There can be no certainty that we will have an effective registration statement in place over the
entire life of the Warrants and therefore, under IFRS we are required to record these Warrants as derivative warrant liabilities.
During 2017, we issued 2.87 million common shares upon the exercise of 2.87 million of these warrants receiving cash proceeds of $8.60 million. At
December 31, 2017, there were 3.52 million Warrants outstanding.
On February 14, 2014, we completed a $52 million private placement (the "Private Placement"). Under the terms of the Private Placement, we issued
18.92 million units at a subscription price per unit of $2.7485, each unit consisting of one common share and one-quarter (0.25) of a common share
purchase warrant (the "2014 Warrants"), exercisable for a period of five years from the date of issuance at an exercise price of $3.2204. The holders of
the 2014 Warrants issued pursuant to the Private Placement may elect, in lieu of exercising the 2014 Warrants for cash, a cashless exercise option to
receive common shares equal to the fair value of the 2014 Warrants based on the number of 2014 Warrants to be exercised multiplied by a five-day
weighted average market price less the exercise price with the difference divided by the weighted average market price. If a 2014 Warrant holder
exercises this option, there will be variability in the number of shares issued per Warrant.
We issued 1.15 million common shares upon the cashless exercise of 1.98 million 2014 Warrants in 2017 compared to 257,000 common shares upon the
cashless exercise of 800,000 Warrants. In addition, one holder of 27,000 warrants exercised these warrants for cash and received 27,000 common
shares and in return we received cash proceeds of $88,000.
At December 31, 2017, there were 1.74 million 2014 Warrants outstanding compared to 3.75 million Warrants outstanding as at December 31, 2016.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2017, we had cash and short term investments on hand of $173.5 million compared to $39.65 million at December 31, 2016.
The increase in cash and short term investments reflected the completion of our underwritten public offering for gross proceeds of $173.10 million on
March 20, 2017 as described in the Corporate and Clinical Developments section of this MD&A.
We are in the development stage and are devoting substantially all of our operational efforts and financial resources towards the clinical development of
our late stage drug, voclosporin, which includes the completion of the AURORA trial. As at December 31, 2017, we had net working capital of $167.10
million compared to $33.49 million as at December 31, 2016. For the year ended December 31, 2017, we reported a loss of $70.79 million (December
31, 2016 - $23.30 million) and a cash outflow from operating activities of $41.17 million (December 31, 2016 - $18.71 million). As at December 31,
2017, we had an accumulated deficit of $351.84 million (December 31, 2016 - $281.05 million).
We believe that our cash position is sufficient to fund our existing LN program, our planned Phase II studies in FSGS and DES, and supporting
operations into 2020. Our cash position provides funding to finish the AURORA trial with estimated costs to complete of approximately $53
11
million and complete the regulatory NDA submission with the FDA in early 2020 based on our current expected timelines. We will also be conducting
a two-year continuation study with an estimated cost of approximately $17 million for the period into 2020. In addition, our cash will allow us to
conduct our planned Phase II studies for voclosporin in FSGS and VOS for DES, and the drug-drug interaction study while also funding our supporting
corporate, administration and business development activities and working capital needs during this period.
Sources and Uses of Cash:
Cash used in operating activities
Cash provided by (used in) investing activities
Cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Year ended
December 31,
2017
(in thousands)
Year ended
December 31,
2016
(in thousands)
$
(41,169 )
(8,003)
175,152
125,980
$
(18,713 )
9,991
42,615
33,893
Increase
(Decrease)
(in thousands)
$
(22,456 )
(17,994 )
132,537
92,087
Net cash used in operating activities in fiscal 2017 was $41.17 million, an increase of $22.46 million, from cash used in operating activities of $18.71
million in 2016. Cash used in operating activities in 2017 and 2016 was composed of net loss, add-backs or adjustments not involving cash, such as
stock-based compensation and change in estimated fair value of derivative warrant liabilities and net change in other operating assets and liabilities
including prepaid expenses, deposits and other and accounts payable and accrued liabilities. Cash used in operating activities in 2017 also included
$2.15 million paid to ILJIN related to the contingent consideration liability as more fully discussed in note 9 to the audited consolidated financial
statements for the year ended December 31, 2017.
Cash used in investing activities for the year ended December 31, 2017 was $8.00 million compared to cash generated from investing activities of $9.99
million for the year ended December 31, 2016. The change in these amounts primarily related to movements within our short term investment portfolio
which was comprised of bonds and treasury notes.
Cash generated from financing activities for the year ended December 31, 2017 was $173.00 million compared to cash generated by financing activities
of $42.62 million for the year ended December 31, 2016. Cash generated from financing activities for the year ended December 31, 2017 included net
proceeds of $162.32 million from our March 20, 2017 financing.
We also received $8.92 million from the exercise of warrants and $3.91 million from the exercise of stock options for the year ended December 31,
2017 compared to $1.91 million for warrants and $107,000 for stock options in 2016.
Use of Financing Proceeds
2016 At-the-Market Facilities
In our fiscal year ended December 31, 2016, we received net proceeds of $7.82 million from two At-the-Market (“ATM”) facilities: the November
ATM ($292,000) (the “November ATM”) and under a Controlled Equity Offering Sales Agreement dated July 22, 2016 with Cantor Fitzgerald & Co.
($7.53 million) (the “July ATM” and together with the November ATM the “2016 ATM Facilities”). The net proceeds from the 2016 ATM Facilities are
to be used for working capital and corporate purposes.
December Offering
On December 28, 2016, we completed the December Offering for net proceeds of $26.14 million, the net proceeds of which are to be used to advance
the clinical and non-clinical development of our lead drug, voclosporin, as a therapy for LN, and for working capital and corporate purposes
12
March Offering
On March 20, 2017, we completed the March Offering for net proceeds of $162.32 million, which are to be used for R&D activities and for working
capital and corporate purposes.
A summary of the anticipated and actual use of net proceeds used to date from the above financings is set out in the table below.
Allocation of net proceeds
2016 ATM Facilities:
Corporate matters
December 28, 2016 Offering:
Clinical and non-clinical development of voclosporin
Working capital and corporate matters
Subtotal:
March 20, 2017 Offering:
R&D activities
Working capital and corporate matters
Subtotal:
Total:
Total net proceeds from
financings
(in thousands)
Net proceeds used to date
(in thousands)
$
7,821
21,700
4,442
26,142
123,400
38,924
162,324
196,287
$
7,821
21,700
1,028
22,728
8,390
—
8,390
38,939
To December 31, 2017, there have been no material variances from how we disclosed we were going to use the proceeds from the above noted
offerings and thus, no material impact on its ability to achieve our business objectives and milestones. As noted in the table above, we have yet to
deploy a significant amount of the funds raised in the March 20, 2017 offering as they are allocated mainly to ongoing costs associated with our Phase
III program, including the AURORA clinical trial, for voclosporin in LN.
We have the following contractual obligations as at December 31, 2017:
CONTRACTUAL OBLIGATIONS
Operating lease obligations (1)
Purchase obligations (2)
Accounts payable and accrued liabilities
Contingent consideration to ILJIN (3)
Total
Total
(in thousands)
Less than
one year
(in thousands)
One to three
years
(in thousands)
Four to five
years
(in thousands)
More than five
years
(in thousands)
$
208
5,914
7,959
3,792
17,873
$
152
3,198
7,959
73
11,382
$
56
2,716
—
1,365
4,137
$
—
—
—
2,354
2,354
$
—
—
—
—
—
(1) Operating lease obligations are comprised of the future minimum lease payments for our
premises.
(2) We have entered into contractual obligations for services and materials required for the AURORA clinical trial, drug supply other R&D projects activities. The purchase obligations presented represent
the minimum amount to exit our contractual commitments.
(3) Contingent consideration to ILJIN is described in note 9 to the consolidated audited financial statements for the year ended December 31,
2017.
As at December 31, 2017 we are party to agreements with CROs and a central laboratory and other third party service providers providing services to
us for the AURORA trial, drug supply and other R&D activities. Corresponding anticipated expenses over the next twelve months total approximately
$30 - $40 million.
13
RELATED PARTY TRANSACTIONS
Related parties
Compensation of key management
Key management includes directors and officers of the Company. Compensation awarded to key management was composed of the following:
Salaries, short-term employee benefits
Bonuses accrued or paid
Severance costs
Director fees
Stock-based compensation
Other
(in thousands)
2016
$
2,077
623
572
265
1,215
4,752
2017
$
2,961
1,300
544
217
3,560
8,582
Stephen P. Robertson, a partner at Borden Ladner Gervais ("BLG") acts as the Company’s corporate secretary. We incurred legal fees in the normal
course of business to BLG of $255,000 for the year ended December 31, 2017 ($308,000 for the year ended December 31, 2016).The amount charged
by BLG is based on standard hourly billing rates for the individuals working on our account. We have no ongoing contractual or other commitments as
a result of engaging Mr. Robertson to act as our corporate secretary. Mr. Robertson receives no additional compensation for acting as the corporate
secretary beyond his standard hourly billing rate.
The outstanding fair value of contingent consideration payable to ILJIN SNT Co., Ltd. ("ILJIN"), an affiliated shareholder and related party, is the result
of an Arrangement Agreement (the "Agreement") completed on September 20, 2013 between the Company, Aurinia Pharma Corp. and ILJIN. Pursuant
to the Agreement, an amount of $10 million in contingent consideration would be potentially payable based on the achievement of future pre-defined
clinical and marketing milestones.
During 2017, we paid ILJIN $2.15 million upon the achievement of two specific milestones pursuant to this contingent consideration. At December 31,
2017, there are $7.85 million of contingent consideration milestones remaining which we may pay out in the future dependent upon the achievement of
the specific pre-defined milestones being met.
The contingent consideration payable to ILJIN is more fully discussed in note 9 of the audited consolidated financial statements for the year ended
December 31, 2017.
OFF-BALANCE SHEET ARRANGEMENTS
We have no material undisclosed off-balance sheet arrangements that have or are reasonably likely to have, a current or future effect on our results of
operations or financial condition.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of consolidated financial statements in accordance with IFRS often requires management to make estimates about, and apply
assumptions or subjective judgment to, future events and other matters that affect the reported amounts of our assets, liabilities, revenues, expenses and
related disclosures. Assumptions, estimates and judgments are based on historical experience, expectations, current trends and other factors that
management believes to be relevant at the time at which our consolidated financial statements are prepared. Management reviews, on a regular basis, the
Company's accounting policies, assumptions, estimates and judgments in order to ensure the consolidated financial statements are presented fairly and
in accordance with IFRS.
Critical accounting estimates and judgments are those that have a significant risk of causing material adjustment and are often applied to matters or
outcomes that are inherently uncertain and subject to change. As such, management cautions that future events often vary from forecasts and
expectations and that estimates routinely require adjustment.
Management considers the following areas to be those where critical accounting policies affect the significant judgments and estimates used in the
preparation of the Company’s consolidated financial statements.
14
Critical estimates in applying the Company’s accounting policies
•
Contingent
consideration
Contingent consideration is a financial liability recorded at fair value. The amount of contingent consideration to be paid is based on the
occurrence of future events, such as the achievement of certain development, regulatory and sales milestones. Accordingly, the estimate of fair
value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as well as the discount rate
used. Changes in fair value of the contingent consideration obligation result from changes to the assumptions used to estimate the probability of
success for each milestone, the anticipated timing of achieving the milestones and the discount period and rate to be applied. A change in any of
these assumptions could produce a different fair value, which could have a material impact on the results from operations.
The fair value estimates at December 31, 2017 were based on a discount rate of 10% (2016 - 10%) and a presumed payment range between
50% and 75% (2016- 50% and 95%). The 2016 range included probabilities of 95% that were related to the milestones paid out in 2017.The
fair value of this contingent consideration as at December 31, 2017 was estimated to be $3.79 million (December 31, 2016 - $5.44 million) and
was determined by estimating the probability and timing of achieving the milestones and applying the income approach.
The change in the revaluation amounts in 2017 resulted primarily from the change in the passage of time and the achievement of two milestones.
The change in probability factors for the milestones and the passage of time resulted in a revaluation of contingent consideration expense of
$502,000 for the year ended December 31, 2017.
In 2016 we achieved a positive 24-week primary endpoint result in the Phase 2b clinical LN trial. As such, while no milestone was attached to
this positive primary endpoint result, it was an event that triggered an adjustment of the probability of success of the milestones such that the
probability of success factors were increased for the milestones. As a result of the adjustments to the probability factors, the probability adjusted
payment ranges were increased from 50% to 95% as at December 31, 2016. The change in probability factors for the milestones and the
passage of time resulted in a revaluation of contingent consideration expense of $1.63 million for the year ended December 31, 2016.
This is a Level 3 recurring fair value measurement. If the probability for success were to increase by a factor of 10% for each milestone, this
would increase the net present value (NPV) of the obligation by approximately $580,000 as at December 31, 2017. If the probability for success
were to decrease by a factor of 10% for each milestone, this would decrease the NPV of the obligation by approximately $579,000 as at
December 31, 2017. If the discount rate were to increase to 12%, this would decrease the NPV of the obligation by approximately $208,000. If
the discount rate were to decrease to 8%, this would increase the NPV of the obligation by approximately $226,000.
Derivative Warrant Liabilities
Warrants issued pursuant to equity offerings that are potentially exercisable in cash or on a cashless basis resulting in a variable number of
shares being issued are considered derivative liabilities and therefore measured at fair value.
We use the Black-Scholes pricing model to estimate fair value at each exercise and period end date. The key assumptions used in the model are
the expected future volatility in the price of our shares and the expected life of the warrants. The impact of changes in key assumptions are noted
below.
These derivative warrant liabilities are Level 3 recurring fair value measurements.
The key Level 3 inputs used by management to estimate the fair value are the market price and the expected volatility. If the market price were
to increase by a factor of 10%, this would increase the estimated fair value of the obligation by approximately $1.67 million as at December 31,
2017. If the market price were to decrease by a factor of 10%, this would decrease the estimated fair value of the obligation by approximately
$1.95 million. If the volatility were to increase by 10%, this would increase the estimated fair value of the obligation by approximately
$524,000. If the volatility were to decrease by 10%, this would decrease estimated fair value of the obligation by approximately $523,000 as at
December 31, 2017.
•
Fair value of stock
options
Determining the fair value of stock options on the grant date, including performance based options, requires judgment related to the choice of a
pricing model, the estimation of stock price volatility and the expected term of the underlying instruments. Any changes in the estimates or
inputs utilized to determine fair value could result in a significant impact on our reported operating results, liabilities or other components of
shareholders’ equity. The key assumption used by management is the stock price volatility.
If the stock price volatility was higher by a factor of 10% on the option grant dates in 2017, this would have increased annual stock
compensation expense by approximately $262,000. If the stock price volatility was lower by a factor of 10% on the grant date, this would have
decreased annual stock compensation expense by approximately $287,000.
We used the Black-Scholes option pricing model to estimate the fair value of the options granted in 2017 and 2016.
15
We consider historical volatility of our common shares in estimating its future stock price volatility. 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. The expected life is based upon the contractual term, taking into account expected employee exercise and expected post-vesting
employment termination behavior.
Critical judgments in applying the Company’s accounting policies
•
•
•
Revenue
recognition
Management’s assessments related to the recognition of revenues for arrangements containing multiple elements are based on estimates and
assumptions. Judgment is necessary to identify separate units of accounting and to allocate related consideration to each separate unit of
accounting. Where deferral of license fees is deemed appropriate, subsequent revenue recognition is often determined based on certain
assumptions and estimates, our continuing involvement in the arrangement, the benefits expected to be derived by the customer and expected
patent lives. To the extent that any of the key assumptions or estimates change, future operating results could be affected.
Impairment of intangible
assets
We follow the guidance of IAS 36 to determine when impairment indicators exist for its intangible assets. When impairment indicators exist, we
are required to make a formal estimate of the recoverable amount of its intangible assets. This determination requires significant judgment. In
making this judgment, management evaluates external and internal factors, such as significant adverse changes in the technological, market,
economic or legal environment in which we operate as well as the results of our ongoing development programs. Management also considers
the carrying amount of our net assets in relation to our market capitalization as a key indicator. In making a judgment as to whether impairment
indicators exist as at December 31, 2017, management concluded there were none.
Derivative warrant
liabilities
Management has determined that derivative warrant liabilities are classified as long term as these derivative warrant liabilities will ultimately be
settled for common shares and therefore the classification is not relevant.
NEW ACCOUNTING STANDARDS, AMENDMENTS AND INTERPRETATIONS
Recent changes in accounting standards
We have adopted the following new and revised standard, effective January 1, 2017.
International Accounting Standards (IAS) 7, Statement of cash flows
Effective for years beginning on or after January 1, 2017, IAS 7, Statement of cash flows, was amended to require disclosures about changes in
liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. Additional disclosures regarding non-
cash changes have been provided as applicable in note 17 to the audited consolidated financial statements for the year ended December 31, 2017,
supplementary cash flow information in these annual consolidated financial statements.
New accounting standards and amendments not yet adopted
The following standards and amendments to standards and interpretations are effective for annual periods beginning on or after January 1, 2018 and
have not been applied in preparing these annual consolidated financial statements.
IFRS 9 Financial instruments
In July 2014, the IASB revised IFRS 9 Financial Instruments. IFRS 9 is a three-part standard to replace IAS 39 Financial Instruments: Recognition and
Measurement, addressing new requirements for (i) classification and measurement, (ii) impairment, (iii) hedge accounting. The standard is effective for
annual periods beginning on or after January 1, 2018. IFRS 9 is to be applied prospectively. We are currently finalizing an evaluation of our financial
assets and liabilities and are expecting the following from adoption of the new standard: (i) we do not expect the new guidance to affect the
classification and measurement of our financial assets and liabilities. (ii) we do not expect the new hedge accounting requirements to affect us as we do
not use any hedging instruments and; (iii) the new impairment model requires the recognition of impairment provisions based on expected credit losses
rather than only incurred credit losses as is the case under IAS39. Based on the nominal amount of our accounts receivable and the mix of our short
term investments and assessments undertaken to date, we do not expect the impact of this requirement to be significant. The new standard also
introduces expanded disclosure requirements and changes in presentation. These are expected to minimally change the nature and extent of our
disclosures about our financial instruments. Based on our evaluation to date, we believe the adoption of this standard will not have a material impact on
our consolidated financial statements.
16
IFRS 15 Revenue from contracts with customers
IFRS 15, Revenue from contracts with customers, was issued in May 2014 by the IASB and replaces IAS 18, Revenue, IAS11 Construction Contracts,
and other interpretive guidance associated with revenue recognition. IFRS 15 provides a single model to determine how and when an entity should
recognize revenue, as well as requiring entities to provide more informative, relevant disclosures in respect of its revenue recognition criteria. Entities
can apply one of the two transition methods: retrospective or modified retrospective. Retrospective application requires applying the new guidance to
each prior reporting period presented whereas the modified retrospective approach results in the cumulative effect, if any, of adoption being recognized
at the date of initial application. The latest date of mandatory implementation of IFRS 15 is for annual reporting periods beginning on or after January 1,
2018. We will adopt this accounting standard on January 1, 2018 using the modified retrospective approach.
We currently have no product sales or significant sources of revenue. However, we have recorded revenue from licensing agreements which is being
amortized into revenue over time or recorded at a point of time depending on the nature of the agreement. Based on our analysis of the criteria as set out
in IFRS 15 and the terms of each licensing agreement, we believe that on the adoption of IFRS 15 there will be no significant change in our business or
on how we are recognizing this licensing revenue.
IFRS 2 Share based payments
In June 2016, the IASB issued final amendments to IFRS 2, clarifying how to account for certain types of share-based payment transactions. These
amendments, which were developed through the IFRS Interpretations Committee, provide requirements on the accounting for: (i) the effect of vesting
and non-vesting conditions on the measurement of cash-settled share based payments; (ii) share-based payment transactions with a net settlement
feature for withholding tax obligations; and (iii) a modification to the terms and conditions of a share-based payment that changes the classifications of
the transaction from cash-settled to equity-settled. The amendments are effective for annual reporting periods beginning on or after January 1, 2018. We
are in the process of evaluating the impact that the amendment may have on our consolidated financial statements. However, based on the analysis
performed to date, we believe these amendments will have no material effect on our consolidated financial statements.
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16 Leases, which will replace IAS 17 Leases. Under IFRS 16, a contract is, or contains, a lease if the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Under IAS 17, lessees were required to
make a distinction between a finance lease and an operating lease. IFRS 16 now requires lessees to recognize a lease liability reflecting future lease
payments and a right-of-use asset for virtually all lease contracts. There is an optional exemption for certain short-term leases and leases of low-value
assets; however, this exemption can only be applied by lessees. The standard is effective for annual periods beginning on or after January 1, 2019, with
earlier adoption if IFRS 15 is also applied. We have elected to adopt IFRS 16 effective January 1, 2019. We are still assessing the potential impact that
the adoption of IFRS 16 will have on our consolidated financial statements.
RISKS AND UNCERTAINTIES
We have invested a significant portion of our time and financial resources in the development of voclosporin. We anticipate that our ability to generate
revenues and meet expectations will depend primarily on the successful development, regulatory approval and commercialization of voclosporin.
The successful development and commercialization of voclosporin will depend on several factors, including the following:
•
•
•
•
•
•
Successful and timely completion of our clinical program in LN, including the AURORA trial which is anticipated to be completed in the
fourth quarter of 2019;
receipt of marketing approvals from the FDA and other regulatory authorities with a commercially viable
label;
securing and maintaining sufficient expertise and resources to help in the continuing development and eventual commercialization of
voclosporin;
maintaining suitable manufacturing and supply arrangements to ensure commercial quantities of the product through validated
processes;
acceptance and adoption of the product by the medical community and third-party payers;
and
our ability to raise future financial resources when required. Future additional sources of capital could include payments from equity
financings, debt financings, potential new licensing partners, and/or the monetization of our intangible assets.
A more detailed list of the risks and uncertainties affecting us can be found in our AIF which is filed on SEDAR and EDGAR.
Capital management
Our objective in managing capital, consisting of shareholders' equity, with cash, cash equivalents and short term investments being its primary
components, is to ensure sufficient liquidity to fund R&D activities, corporate, administration and business development expenses and working capital
requirements. This objective has remained the same from that of the previous year.
Over the past two years, we have raised capital via public and private equity offerings and drawdowns under two ATM facilities as its primary sources
of liquidity, as discussed in note 11 - Share capital.
17
As our policy is to retain cash to keep funds available to finance the activities required to advance our product development we do not currently pay
dividends.
We are not subject to any capital requirements imposed by any regulators or by any other external source.
Financial instruments and Risks
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, as the majority of our funds were held in cash or cash equivalents ($165.63
million at December 31, 2017). We also held $7.83 million in short term investments. The short term investments are comprised of two available for
sale interest bearing securities. Available for sale investments are recorded initially at fair value including direct and incremental transaction costs and
subsequently recorded at fair value at each period end. Gains or losses arising from changes in fair value are recorded through other comprehensive loss
until sale, when the cumulative gain or loss is transferred to the consolidated statements of operations and comprehensive loss. Fair value is determined
by using quoted market prices. We recorded a loss of $78,000 through comprehensive loss in 2017 on the change in fair value of short term investments
held at December 31, 2017. We recorded interest income and loss on sale of short term investments as other expense (income) in the consolidated
statements of operations and comprehensive loss as discussed in the "Results of Operations" section of this document.
Financial risk factors
Our activities can expose us to a variety of financial risks: market risk (including currency risk, interest rate risk and other price risk), credit risk and
liquidity risk. Risk management is carried out by management under policies approved by the Board of Directors. Management identifies and evaluates
the financial risks. Our overall risk management program seeks to minimize adverse effects on our financial performance.
Liquidity risk
Liquidity risk is the risk we will not be able to meet our financial obligations as they fall due. We manage our liquidity risk through the management of
our capital structure and financial leverage, as discussed above in "Capital Management". We also manage liquidity risk by continuously monitoring
actual and projected cash flows. The Board of Directors reviews and approves our budget, as well as any material transactions out of the ordinary course
of business. We invest our cash equivalents in US denominated term deposits with 30 to 90-day maturities, and US denominated short term investments
consisting of bonds and treasury notes issued by banks and/or United states or Canadian governments with maturities not exceeding two years to ensure
our liquidity needs are met.
All of our financial liabilities are due within one year except for the contingent consideration, as described in note 9 to the consolidated financial
statements for the year ended December 31, 2017 and the derivative warrant liabilities, as described in note 10 to the consolidated financial statements
for the year ended December 31, 2017.
Interest rate risk
Interest rate risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
Financial assets and financial liabilities with variable interest rates expose us to cash flow interest rate risk. Our cash and cash equivalents are comprised
of highly liquid investments that earn interest at market rates and the short term investments are comprised of bank or government bonds with a maturity
of two years or less. Accounts receivable, accounts payable and accrued liabilities bear no interest.
We manage our interest rate risk by maintaining the liquidity necessary to conduct operations on a day-to-day basis. Our exposure to interest rate risk as
at December 31, 2017 was considered minimal as the majority of our financial resources were held as cash and cash equivalents.
Credit risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash, cash equivalents and short term
investments which were held at three major Canadian banks. We regularly monitor the credit risk exposure and take steps to mitigate the likelihood of
these exposures resulting in actual loss.
Foreign currency risk
We are exposed to financial risk related to the fluctuation of foreign currency exchange rates. Foreign currency risk is the risk variations in exchange
rates between the US dollars and foreign currencies, primarily with the Canadian dollar, will affect our operating and financial results.
18
The following table presents our exposure to the Canadian dollar:
Cash and cash equivalents
Accounts receivable
Accounts payable and accrued liabilities
Net exposure
CA$ – US$
December 31,
2017
$
125
28
(1,657)
(1,504)
(in thousands)
December 31,
2016
$
103
8
(1,184)
(1,073)
December 31,
2017
$
0.797
Reporting
date rate
December 31,
2016
$
0.745
Based on our foreign currency exposure noted above, varying the foreign exchange rates to reflect a ten percent strengthening of the CA$ would have
increased the net loss by $151,000 assuming all other variables remained constant. An assumed 10% weakening of the CA$ would have had an equal
but opposite effect to the amounts shown above, on the basis all other variables remain constant.
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 are pursuing certain avenues to expand the
voclosporin patent portfolio, including a use patent strategy (which involves potential development of use patents driven by AURA Phase IIb data) and
a manufacturing patent strategy (which involves potential development of manufacturing patents based on our manufacturing know-how.)
As of December 31, 2017, we owned over 160 granted patents related to cyclosporine analogs, including granted United States patents, covering
voclosporin composition of matter, methods of use, formulations and synthesis, which expire between 2018 and 2024. The corresponding Canadian,
South African and Israeli patents are owned by Paladin Labs Inc. We anticipate that upon regulatory approval, 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 under the Hatch-Waxman Act in
the United States and comparable laws in other countries. (including the Supplementary Protection Certificate program in the European Union).
Opportunities will also be available to add an additional six months of exclusivity related to pediatric studies which are currently being planned. In
addition to patent rights, we also expect to receive "new chemical entity" exclusivity for voclosporin in certain countries, which provides from five
years in the United States to up to ten years in Europe of data exclusivity beyond the date of regulatory approval.
We have licensed the development and distribution rights to voclosporin for China, Hong Kong and Taiwan to 3SBio, Inc. This license is royalty
bearing and we will also supply finished product to 3SBio, Inc. on a cost-plus basis. We do not expect to receive any royalty revenue pursuant to this
license in the foreseeable future.
As of December 31, 2017, we also owned two granted United States patents related to ophthalmic formulations of calcineurin inhibitors or mTOR
inhibitors, including voclosporin, and one granted United States patent related to ophthalmic formulations of dexamethasone, which expire between
2028 and 2031. We also own 15 corresponding granted patents and three corresponding patent applications in other jurisdictions.
CONTINGENCIES
i)
ii)
iii)
iv)
We may, from time to time, be subject to claims and legal proceedings brought against us in the normal course of business. Such matters are
subject to many uncertainties. Management believes that the ultimate resolution of such contingencies will not have a material adverse effect
on our consolidated financial position.
We have entered into indemnification agreements with our officers and directors. The maximum potential amount of future payments required
under these indemnification agreements is unlimited. However, we do maintain liability insurance to limit our exposure.
We have entered into an agreement dated February 14, 2014 whereby we are required to pay a third party a royalty equivalent to 2% of
royalties received on the sale of voclosporin by licensees and/or 0.3% of net sales of voclosporin sold directly by the Company. Should we
sell substantially all of the assets of voclosporin to a third party or transfer those assets to another party in a merger in a manner such that this
payment obligation is no longer operative, then we would be required to pay 0.3% of the value attributable to voclosporin in the transaction.
We have entered into license and research and development agreements with third parties that include indemnification and obligation
provisions that are customary in the industry. These guarantees generally require us to compensate the other party for certain damages
19
and costs incurred as a result of third party claims or damages arising from these transactions. These provisions may survive termination of the
underlying agreement. The nature of the obligations prevents us from making a reasonable estimate of the maximum potential amount we could
be required to pay. Historically, we have not made any payments under such agreements and no amount has been accrued in the accompanying
consolidated financial statements.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Annual Report on Internal Control over Financial Reporting
Management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting, and has designed such internal control over financial reporting ("ICFR") to provide reasonable assurance regarding the
reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with IFRS.
We do not expect that our internal controls and procedures over financial reporting will prevent all error and all fraud. A control system provides only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitation in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgements in decision-making can be faulty, and that breakdowns can occur because of simple error
or mistake. Additionally, controls can be circumvented by the individual acts of some persons by collusion of two or more people or by management
override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and
there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Because of the inherent
limitations in a cost-effective control system, misstatements due to error fraud may occur and not be detected. 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.
Management evaluated the effectiveness of our ICFR as of December 31, 2017 based on the framework set forth in Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our ICFR was effective as of December 31, 2017.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures ("DC&P") as defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim
Filings, are designed to provide reasonable assurance that all material information required to be publicly disclosed in our annual, interim filings and
other reports filed or submitted by us under securities legislation is recorded, processed, summarized and reported within the time periods specified
under securities legislation and include controls and procedures designed to ensure that information required to be so disclosed is accumulated and
communicated to management including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions.
In designing and evaluating our DC&P, management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives, and, therefore, management is required to apply its judgment in evaluating
and implementing possible controls and procedures. The Chief Executive Officer and the Chief Financial Officer, after evaluating the effectiveness of
our DC&P as at December 31, 2017 have concluded that the DC&P were adequate and effective to provide reasonable assurance that material
information we are required to disclose on a continuous basis in interim and annual filings and other reports and news releases is recorded, processed,
summarized and reported or disclosed on a timely basis as necessary.
As at March 13, 2018, the following class of shares and equity securities potentially convertible into common shares were outstanding:
UPDATED SHARE INFORMATION
Common shares
Convertible equity securities
Derivative liability warrants
Other warrants
Stock options
84,052,000
5,261,000
1,172,000
7,692,000
Subsequent to the year-end we issued 2.83 million stock options at a weighted average price of $5.27 (CA $6.51) to our officers, directors and
employees.
20
Selected Annual Information (expressed in thousands of dollars, except per share data)
SUPPLEMENTAL INFORMATION
Statement of Operations
Revenues
Expenses, net
Change in estimated fair value of derivative warrant liabilities
Net loss for the year
Net loss per share
Weighted average number of common shares outstanding
Statement of Financial Position
Working capital
Total assets
Non-current contingent consideration
Shareholder’s equity
Common shares outstanding
Quarterly Information (expressed in thousands except per share data)
Set forth below is unaudited consolidated financial data for each of the last eight quarters:
2017
$
420
(47,288 )
(23,924 )
(70,792 )
(0.92 )
76,918
167,102
189,847
3,719
165,743
84,052
2016
$
173
(25,200 )
1,732
(23,295 )
(0.66 )
35,285
33,488
56,997
3,419
35,950
52,808
2017
Revenues
Expenses
R&D
Corporate, administration and business development
Amortization of tangible and intangible assets
Contract services
Other expense (income)
Total expenses
Change in estimated fair value of derivative warrant
liabilities
Net loss for the period
Per common share ($)
Net loss per common share – basic and diluted
Common Shares outstanding
Weighted average number of common shares outstanding
2016
Revenues
Expenses
R&D
Corporate, administration and business development
Amortization and impairment of tangible and intangible
assets
Contract services
Other expense (income)
Total expenses
Change in estimated fair value of derivative warrant
liabilities
Net loss for the period
Per common share ($)
Net loss per common share – basic and diluted
Common Shares outstanding
Weighted average number of common shares outstanding
Q2
$
329
7,107
2,901
370
—
(152)
10,226
7,498
(2,399)
(0.03 )
83,485
82,973
Q2
$
55
2,406
1,835
365
1
85
4,692
1,361
(3,276)
(0.10 )
35,287
32,551
Q3
$
29
10,807
2,650
362
—
(315)
13,504
355
(13,120 )
(0.16 )
83,973
83,608
Q3
$
31
3,342
1,716
362
1
1,078
6,499
(951)
(7,419)
(0.21 )
38,794
36,079
Q4
$
31
8,691
3,118
361
—
197
12,367
9,004
(3,332)
(0.04 )
84,052
84,038
Q4
$
30
5,462
2,227
365
1
966
9,021
658
(8,333)
(0.21 )
52,808
40,172
Q1
$
31
7,325
3,427
363
1
75
11,191
(40,781 )
(51,941 )
(0.92 )
82,101
56,680
Q1
$
57
3,324
1,192
387
1
84
4,988
664
(4,267)
(0.13 )
32,287
32,287
21
2015
$
235
(23,943 )
5,101
(18,607 )
(0.58 )
32,154
12,917
33,567
3,810
19,963
32,287
Annual
$
420
33,930
12,096
1,456
1
(195)
47,288
(23,924 )
(70,792 )
(0.92 )
84,052
76,918
Annual
$
173
14,534
6,970
1,479
4
2,213
25,200
1,732
(23,295 )
(0.66 )
52,808
35,285
Summary of Quarterly Results
The primary factors affecting the magnitude of our losses in the various quarters are noted below and include the timing of R&D costs associated with
the clinical development program, timing and amount of stock compensation expense and fluctuations in the non-cash change in estimated fair value of
derivative warrant liabilities.
The increase in R&D costs in 2017 primarily reflect expenses associated with the commencement and ramp up of our AURORA trial, including CRO
and drug supply expenses.
Corporate, administration and business development costs included non-cash stock-based compensation expense of $1.08 million for the three months
ended March 31, 2017, $718,000 for the three months ended June 30, 2017, $795,000 for the three months ended September 30, 2017 and $656,000 for
the three months ended December 31, 2017. The three months ended March 31, 2017 also included a provision amount of $519,000 related to the
departure of the former Chief Executive Officer (Charles Rowland) on February 6, 2017.
This compared to non-cash stock-based compensation expense of $261,000 for the three months ended March 31, 2016, $9,000 for the three months
ended June 30, 2016, $469,000 for the three months ended September 30, 2016 and $314,000 for the three months ended December 31, 2016. The
three months ended June 30, 2016 also included a provision amount of $572,000 related to the departure of a former Chief Executive Officer (Zaruby)
in April 2016,
Other expense (income) for the three months ended September 30, 2016 reflected a revaluation of the ILJIN contingent consideration of $1.15 million.
Other expense (income), in the fourth quarter ended December 31, 2016 included $655,000 of share issue costs allocated to the derivative warrants
issued pursuant to the December Offering and $358,000 on revaluation of the ILJIN contingent consideration.
We record non-cash adjustments each quarter resulting from the fair value revaluation of the derivative warrant liabilities. These revaluations fluctuate
based primarily on the market price of our common shares. An increase in the market price of our shares results in a loss on revaluation while a decrease
results in a gain on revaluation.
The change in the estimated fair value of derivative warrant liabilities of $40.78 million for the three months ended March 31, 2017 reflected the
significant increase in our share price from $2.10 per share at December 31, 2016 to $7.34 per share at March 31, 2017.
The change in the estimated fair value of the derivative warrant liabilities for the three months ended June 30, 2017 of $7.50 million primarily reflected
a decrease in our share price to $6.13 per share at June 30, 2017 compared to $7.34 per share at March 31, 2017.
The change in the estimated fair value of the derivative warrant liabilities for the three months ended December 31, 2017 of $9.01 million primarily
reflected a decrease in our share price to $4.53 per share at December 31, 2017 compared to $6.27 per share at September 30, 2017.
Fourth Quarter Analysis (See Quarterly Information above for the fourth quarter comparative information detail).
We recorded a consolidated net loss of $3.33 million or $0.04 per common share for the fourth quarter ended December 31, 2017, compared to a
consolidated net loss of $8.33 million or $0.21 per common share for the fourth quarter ended December 31, 2016.
The decrease of $5.00 million in the consolidated net loss was primarily attributable to the following items on a net basis:
•
•
•
•
The change in estimated fair value of derivative warrant liabilities increased by $8.35 million to $9.01 million in the fourth quarter ended
December 31, 2017 compared to a change in estimated fair value of derivative warrant liabilities of $658,000 in the fourth quarter of 2016;
An increase in R&D expenses of $3.23 million in the fourth quarter of 2017 as we were actively recruiting and treating patients for the
AURORA trial in the fourth quarter of 2017, whereas in the same period in 2016 we were at the planning stage for AURORA, while wrapping
up the AURA Phase II trial;
An increase in corporate, administration and business development expenses of $892,000 in the fourth quarter of 2017. The increase was
primarily the result of increases in professional fees, salaries and incentive pay accrual in the fourth quarter when compared to the same period
in 2016;
A decrease in other expense (income) of $769,000 in the fourth quarter of 2016 as we recorded $655,000 of share issue costs allocated to the
derivative warrants issued pursuant to the December 28, 2016 financing in the fourth quarter of 2016. There was no similar item in 2017.
22
Exhibit 99.4
Consent of Independent Auditor
We hereby consent to the inclusion on this Annual Report on Form 40-F for the year ended December 31, 2017 and of incorporation by reference in the
registration statements on Form S-8 (File No. 333-216447) and form F-10 (File No. 333-206994) of Aurinia Pharmaceuticals Inc. of our report dated
March 14, 2018, relating to the consolidated financial statements, which appears in the Annual Report.
We also consent to reference to us under the heading “Interests of Experts”, which appears in the Annual Information Form incorporated by reference in
this Annual Report on Form 40-F which is incorporated by reference in the registration statement referred to above.
(“Signed”) PricewaterhouseCoopers LLP
Chartered Professional Accountants
Edmonton, Alberta
March 13, 2018
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 99.5
I, Richard M. Glickman, certify that:
1.
2.
3.
4.
I have reviewed this annual report of Aurinia Pharmaceuticals Inc. on Form 40-
F;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the issuer as of, and for, the period presented in this report;
The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the issuer and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the issuer, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred
during the period covered by the annual report that has materially affected, or is reasonably likely to
materially affect, the issuer’s internal control over financial reporting; and
5.
The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the issuer’s internal control over financial reporting.
Dated: March 15, 2018
AURINIA PHARMACEUTICALS INC.
Name:
Title:
/s/ Richard M. Glickman
Richard M. Glickman
Chairman and Chief Executive Officer
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis Bourgeault, certify that:
1.
2.
3.
4.
I have reviewed this annual report of Aurinia Pharmaceuticals Inc. on Form 40-
F;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the issuer as of, and for, the period presented in this report;
The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the issuer and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the issuer, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred
during the period covered by the annual report that has materially affected, or is reasonably likely to
materially affect, the issuer’s internal control over financial reporting; and
5.
The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent
functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the issuer’s internal control over financial reporting.
Dated: March 15, 2018
AURINIA PHARMACEUTICALS INC.
Name:
Title:
/s/ Dennis Bourgeault
Dennis Bourgeault
Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 99.6
In connection with the Annual Report of Aurinia Pharmaceuticals Inc. (the “Company”) on Form 40-F for the fiscal year ended December 31,
2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard M. Glickman, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1.
2.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: March 15, 2018
AURINIA PHARMACEUTICALS INC.
Name:
Title:
/s/ Richard M. Glickman
Richard M. Glickman
Chairman and Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Aurinia Pharmaceuticals Inc. (the “Company”) on Form 40-F for the fiscal year ended December 31,
2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dennis Bourgeault, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1.
2.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: March 15, 2018
AURINIA PHARMACEUTICALS INC.
Name:
Title:
/s/ Dennis Bourgeault
Dennis Bourgeault
Chief Financial Officer