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, 2018
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:
85,500,228 Common Shares (as at December 31, 2018).
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 every Interactive Data File required to be submitted 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 such
files).
Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act. Emerging growth
company
Yes ☒ No ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of
the Exchange Act.
Yes ☐ No ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
The following documents are filed as part of this Annual Report on Form 40-F:
A. Annual Information Form
PRINCIPAL DOCUMENTS
For the Registrant’s Annual Information Form for the year ended December 31, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018.
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, 2018, 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, 2018, 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, 2018, 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, 2018,
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, 2018, 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 4 “Critical Accounting Estimates and Judgments” to the Audited Consolidated Financial Statements for the fiscal year ended December 31,
2018, 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, 2018,
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, 2018, 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.
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.
UNDERTAKING
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 19, 2019
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, 2018.
Audited Consolidated Financial Statements of the Registrant for the year ended December 31, 2018 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,
2018.
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
selectedyeaifcover2018draft2.jpg
Exhibit 99.1
Table of Contents
Table of Contents
TABLE OF CONTENTS
BASIS OF PRESENTATION
FORWARD-LOOKING STATEMENTS
OVERVIEW
BUSINESS OF THE COMPANY
RECENT DEVELOPMENTS
THREE YEAR HISTORY
REGULATORY
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 15, 2019.
BASIS OF PRESENTATION
In this AIF, unless stated otherwise or the context requires, 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 15, 2019 the exchange rate for conversion of US dollars into Canadian dollars was US$1.00 = CDN$1.3342 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 products 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 of our future prospects
and make informed investment decisions. These statements made in this AIF may include, without limitation:
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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;
our belief that the totality of data from both the AURORA and AURA clinical trials can potentially serve as the basis for a NDA submission
with the FDA following a successful completion of the AURORA clinical trial;
our belief that confirmatory data generated from the single AURORA clinical trial and the 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 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 belief in the duration of patent exclusivity for voclosporin and that the patents owned by us are
valid;
our belief in receiving extensions to patent life based on certain events or
classifications;
our 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 AURORA 2 extension
trial;
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 of the key potential benefits of voclosporin in the treatment of LN and other
podocytopathies;
our target launch date for voclosporin as a treatment for LN in early
2021;
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 CNI's are a mainstay of treatment or
DES;
our belief that voclosporin has further potential to be effectively used across a range of therapeutic autoimmune areas including DES and
FSGS;
the timing for completion of enrollment and for data availability for our Phase 2 clinical study for voclosporin in FSGS patients;
statements concerning the anticipated commercial potential of voclosporin for the treatment of LN, DES and
FSGS;
our plan to expand voclosporin renal franchise to include
FSGS;
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 our current financial resources are sufficient to fund our existing LN program including the AURORA trial and the NDA
submission to the FDA, conduct the current Phase 2 study for FSGS, commence additional studies for DES, and fund operations into mid-
2020;
our plans to generate future revenues from products licensed to pharmaceutical and biotechnology
companies;
statements concerning partnership activities and health
regulatory
•
discussions;
statements
voclosporin;
concerning
the
potential market
for
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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;
our intention to seek additional corporate alliances and collaborative agreements to support the commercialization and development of our
products;
our belief that the USPTO will issue a new patent covering the dosing protocol for voclosporin in LN, with a patent term extending to
2037;
our belief that additional patents may be granted worldwide based on our filings under the Patent Cooperation
Treaty;
our strategy to become a global biopharmaceutical
company;
our plan to conduct a confirmatory drug-drug interaction
study;
our plan to conduct a study with pediatric patients;
and
our belief that the annualized pricing for voclosporin for LN could range between US$45,000 and
US$100,000.
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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that 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 the USPTO will issue a new patent for its dosing protocol once applicable steps have been followed and fees
paid;
the assumption that we will be able to extend our patents to the fullest extent allowed by law, on terms most beneficial to
us;
the
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 depend on the facts particular to each of them. Accordingly, the expected impact cannot be meaningfully described in the abstract
or presented in the same manner as known risks affecting our business.
The factors discussed below and other considerations discussed in the “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:
•
•
the need for additional capital in the future to continue to fund our development programs and commercialization activities, and the effect of
capital market conditions and other factors on capital availability;
competition;
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to extend our patent portfolio for
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;
our patent portfolio not covering all of our proposed uses of
voclosporin;
the uncertainty that the FDA will approve the use of voclosporin for LN and that the label for such use will follow the dosing protocol pursuant
to the Notice of Allowance;
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 payors for voclosporin;
and/or
difficulties we may experience in identifying and successfully securing appropriate vendors to support the development and
commercialization of our product.
acceptance
obtaining
formulary
demand
and
for
of
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
Aurinia is a late clinical stage biopharmaceutical company focused on developing and commercializing therapies to treat targeted patient populations
that are suffering from serious diseases with a high unmet medical need. We are currently developing voclosporin, an investigational drug, for the
potential treatment of LN, DES and FSGS.
Our head office is located at #1203-4464 Markham Street, Victoria, British Columbia V8Z 7X8. 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 under the symbol "AUPH" and on the TSX under the symbol "AUP".
We have two wholly-owned subsidiaries: Aurinia Pharma U.S., Inc., (Delaware incorporated) and Aurinia Pharma Limited (United Kingdom
incorporated).
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.
BUSINESS OF THE COMPANY
We are currently developing voclosporin, an investigational drug, for the potential treatment of LN, DES and FSGS. 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).
The topical formulation of voclosporin, VOS, is an aqueous, preservative free nanomicellar solution intended for use in the treatment of DES. Studies
have been completed in rabbit and dog models. A single Phase 1 study and a Phase 2a head-to head study have also been completed in healthy
volunteers and patients with DES. VOS has IP protection until 2031.
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Legacy CNIs have demonstrated efficacy for a number of conditions, including 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.
This modification may result in 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 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 and other podocytopathies are as follows:
•
•
•
•
increased potency compared to CsA, 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 CsA;
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 early 2021.
STRATEGY
Our business strategy is to optimize the clinical and commercial value of voclosporin and become a global biopharma company with a focused renal
and autoimmune franchise. This includes the expansion of a potential renal franchise with additional renal indications and the exploitation of
voclosporin in novel formulations for treatment of autoimmune related disorders.
We have strategically developed a plan to expand our voclosporin renal franchise to include FSGS. Additionally, we are also furthering development of
VOS for the treatment of DES. The advancement of these new indications, in addition to LN, represents an expansion of our pipeline and commercial
opportunities.
The key elements of our corporate strategy include:
•
•
•
advancing voclosporin through the AURORA Phase 3 clinical trial with anticipated completion of this trial in the fourth quarter of
2019;
conducting a Phase 2 proof of concept study for the additional renal indication of FSGS;
and
conducting additional studies of VOS, while assessing mechanisms to maximize shareholder value through both clinical and business
development initiatives.
LUPUS NEPHRITIS
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 six 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
US$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 US$60,000 per patient (Carls et al., JOEM., Volume 51, No. 1, January 2009 ).
DES
DES, or dry eye disease, or keratoconjunctivitis sicca, is characterized by irritation and inflammation that occurs when the eye’s tear film is
compromised by reduced tear production, imbalanced tear composition, or excessive tear evaporation. The impact of DES ranges from subtle, yet
constant eye irritation to significant inflammation and scarring of the eye’s surface. Discomfort and pain resulting from DES can reduce quality of life
and cause difficulty reading, driving, using computers and performing daily activities. DES is a chronic disease. There are currently two FDA approved
therapies for the treatment of dry eye; however, there is opportunity for potential improvement in the effectiveness by
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enhancing tolerability and onset of action and alleviating the need for repetitive dosing. The disease is estimated to affect greater than 20 million people
in the United States (Market Scope, 2010 Comprehensive Report on The Global Dry Eye Products Market ).
FSGS
FSGS is a rare disease that attacks the kidney’s filtering units (glomeruli) causing serious scarring which leads to permanent kidney damage and even
renal failure. FSGS is one of the leading causes of NS and is identified by biopsy and proteinuria. NS is a collection of signs and symptoms that indicate
kidney damage, including: large amounts of protein in urine; low levels of albumin and higher than normal fat and cholesterol levels in the blood, and
edema. Similar to LN, early clinical response which can be measured by reduction of proteinuria in addition to maintaining podocyte structural and
functional integrity, is thought to be critical to long-term kidney health in patients with FSGS.
FSGS is likely 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 5,400 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 or the EU.
In June 2018, we initiated a Phase 2 proof-of-concept study in FSGS, which is an open-label study of approximately 20 treatment-naive patients. The
primary outcome measure for the study is the proportion of subjects achieving complete or PR at six months. Complete remission is defined as UPCR of
£0.3 mg/mg, and PR is defined as 50% reduction in UPCR. This study is ongoing.
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, and doing so with a convenient oral twice-daily treatment regimen. Currently, there are no
approved therapies for LN in the United States or the European Union.
MARKET POTENTIAL AND COMMERCIAL CONSIDERATIONS
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 SLE diagnosis codes. The
National Institute of Diabetes and Digestive and Kidney Diseases estimates that up to 50% of adults with SLE are diagnosed with kidney disease at
some point in their journey with lupus. Using claims database research and physician research, we believe the diagnosed range of LN patients to be
approximately 125,000 to 180,000 in the United States and 150,000 to 215,000 for Europe and Japan combined. According to our research, 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.
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 PR 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,
physicians’ 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 across the United States and Europe. The ability to get patients into
remission quickly correlates with better long-term kidney outcomes as noted above.
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image1a02.jpg
The population of people with LN will be in different cycles 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 via infusion or injection can support a more
rapid market adoption if approved.
Current annualized pricing (based on wholesale acquisition costs published by AnalySource® Reprinted with permission by First Databank, Inc.
reserved. © 2018) for the treatments of other more prevalent autoimmune conditions such as Multiple Sclerosis, Crohn’s, Rheumatoid Arthritis and SLE ranges
from US$45,000 to US$100,000 in the United States. Wholesale acquisition cost is the manufacturer’s published catalog or list price for a drug product
to wholesalers and may not reflect actual prices paid after any rebates/ discounts. We have conducted pricing research that studied a similar pricing
range with payers and physicians and believe that pricing in this range may be achievable for voclosporin in the United States. Pricing for other
autoimmune conditions are lower in Europe and Japan than they are in the United States driven by the specific country’s pricing and reimbursement
processes. We expect that will be the case for voclosporin.
(All rights
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 CsA. 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 & CsA).
Firstly, CNI assay results have indicated that voclosporin is approximately four times more potent than its parent molecule CsA, which would indicate
an ability to give less drug and produce fewer potentially harmful metabolites. Secondly, CsA 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
CsA, 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 CsA in the treatment of psoriasis, CsA 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.
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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 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 2 or later clinical studies that have been completed include
studies in the following indications:
Psoriasis: Two Phase 3 clinical studies in patients with moderate to severe psoriasis have been completed. The primary efficacy endpoint in both studies
was a reduction in Psoriasis Area and Severity Index, which is a common measure of psoriasis disease severity. The first study treatment with
voclosporin resulted in statistically significantly greater success rates than treatment with placebo by the twelfth week. In a second study comparing
voclosporin against cyclosporine, the drug was not shown to be statistically non-inferior to cyclosporine in terms of efficacy; however, voclosporin
proved superior in terms of limiting elevations in hyperlipidemia. Due to the evolving psoriasis market dynamics and the changing standard of care for
the treatment of this disease, we have decided not to pursue further Phase 3 development.
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.
PATENT NOTICE OF ALLOWANCE
RECENT DEVELOPMENTS
On February 25, 2019, we announced that we had received a Notice of Allowance from the USPTO for claims directed at our novel voclosporin dosing
protocol for LN (U.S. patent application 15/835,219, entitled "PROTOCOL FOR TREATMENT OF LUPUS NEPHRITIS”).
The allowed claims broadly cover the novel voclosporin individualized flat-dosed pharmacodynamic treatment protocol adhered to and required in both
the previously reported Phase 2 AURA-LV trial and our ongoing Phase 3 confirmatory AURORA trial. Notably, the allowed claims cover a method of
modifying the dose of voclosporin in patients with LN based on patient specific pharmacodynamic parameters.
This Notice of Allowance concludes a substantive examination of the patent application at the USPTO, and after administrative processes are
completed and fees are paid, is expected to result in the issuance of a U.S. patent with a term extending to December 2037. If the FDA approves the use
of voclosporin for LN and the label for such use follows the dosing protocol under the Notice of Allowance, the issuance of this patent will expand the
scope of intellectual property protection for voclosporin, which already includes robust manufacturing, formulation, synthesis and composition of matter
patents.
We have also filed for protection of this subject matter under the PCT and have the option of applying for similar protection in the member countries
thereof. This may lead to the granting of corresponding claims in the treaty countries which include all the major global pharmaceutical markets.
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DES
On January 22, 2019 we released results for our exploratory Phase 2a head-to-head study evaluating the efficacy, safety and tolerability of VOS versus
Restasis® (cyclosporine ophthalmic emulsion) 0.05% for the treatment of DES. The study was initiated in July of 2018 and full enrollment was
achieved in the fourth quarter of 2018. We believe CNIs are a mainstay of treatment for DES. The goal of this program is to develop a best-in class
treatment option.
In this exploratory Phase 2a study:
•
▪
▪
VOS showed statistical superiority to Restasis® on FDA-accepted objective signs of DES
42.9% of VOS subjects vs 18.4% of Restasis® subjects (p=.0055) demonstrated ≥ 10mm improvement in STT at Week
4
Primary endpoint of drop discomfort at 1-minute on Day 1 showed no statistical difference between VOS and Restasis®, as both exhibited low
drop discomfort scores, and both drugs were well-tolerated.
On the key pre-specified secondary endpoints of Schirmer Tear Test/STT (an objective measure of tear production), and Fluorescein Corneal
Staining/FCS (an objective measure of structural damage to the cornea), which are FDA-accepted efficacy endpoints, VOS showed rapid and statistically
significant improvements over Restasis® at Week 4 (STT: p=.0051; FCS: p=.0003).
This 100-patient, double-masked, head-to-head study was designed to evaluate the efficacy, safety and tolerability of VOS versus Restasis® in subjects
with DES. Both arms of the study received either VOS or Restasis® (1:1) administered twice daily, in both eyes, for 28 days. Key pre-specified
secondary endpoints, which are FDA-accepted endpoints, include STT, FCS, and assessments of dry eye symptoms. Improvements in STT and FCS are
considered by regulators to be two of the most clinically meaningful measures of efficacy in this disease.
4-Week Pre-Specified Efficacy Endpoints (Signs)*
VOS
Restasis®
p-value vs.
Restasis®
Schirmer Tear Test (STT)
(mm LS mean increase from baseline)
% of subjects showing ≥ 10mm improvement in STT
(basis of FDA approval for other CNIs and an improvement is
considered to be clinically significant)
Fluorescein Corneal Staining (FCS)
(reduction in staining is clinically significant)
* worst eye
8.6
3.3
.0051
42.9%
18.4%
.0055
-2.2
-0.2
.0003
Both treatment arms also demonstrated substantial and statistically significant improvements on the Symptom Assessment in Dry Eye (SANDE) score
from baseline to Week 4.
No serious adverse events (SAE) were reported in the study, and there were no unexpected safety signals. All adverse events (AEs) were mild to
moderate and the majority of patients had no AEs. There were five more patients with mild to moderate AEs in the VOS vs Restasis arm which were
typical of complaints from DES patients.
Based on this data, we plan to aggressively advance VOS for the treatment of DES. Our pursuit of further development of VOS provides the Company
with an enhanced pipeline that further capitalizes on the differentiating features of voclosporin and positions us for substantial growth and measured
diversification.
VOS, had previously shown evidence of efficacy in our partnered canine studies and in a small human Phase 1 study (n=35), supporting its development
for the treatment of DES. Completed preclinical and human Phase 1b 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.
Animal safety toxicology studies were previously completed in rabbit and dog models, and additional animal safety toxicology studies are either being
currently conducted or in the planning stage for 2019.
NOVEMBER 2018 ATM
On November 30, 2018 we entered into an open market sale agreement with Jefferies LLC pursuant to which Aurinia would be able to, from time to
time, sell, through at-the-market (“ATM”) offerings, Common Shares that would have an aggregate offering price of up to US$30 million. Aurinia 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 Aurinia’s short form base shelf prospectus dated March 26, 2018, and Aurinia’s shelf
registration statement on Form F-10 dated March 26, 2018, declared effective on March 29, 2018.
Subsequent to year-end, we sold 4.61 million Common Shares and received gross proceeds of US$30 million at a weighted average price of US$6.55
pursuant this agreement. We incurred share issue costs of US$1.17 million including a 3% commission of US$900,000 and professional and filing fees
of US$270,000 directly related to the ATM offering. Sales in the ATM offering were only conducted in the United States through NASDAQ at market
prices.
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THREE YEAR HISTORY
AURORA clinical trial
CLINICAL AND CORPORATE DEVELOPMENTS IN 2018
We achieved a significant milestone on September 25, 2018 with the completion of enrollment for our AURORA Phase 3 clinical trial. The target
enrollment of 324 patients was surpassed due to high patient demand with 358 LN patients randomized in sites across 27 countries. AURORA is a 56-
week trial (52-week primary endpoint and a four-week follow-up period). We expect to have top-line data for this trial 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 with the FDA
following a successful completion of the AURORA clinical trial. Under voclosporin’s fast-track designation we intend to utilize a rolling NDA process
which will allow us to begin the submission process following a positive pre-NDA meeting with the FDA, which we anticipate will occur in the first
quarter of 2020. To that end we are actively preparing the non-clinical and Chemistry, Manufacturing and Controls modules required for the NDA
submission. Our current plan is to complete the NDA submission, including the clinical module, in the second quarter of 2020 and therefore we do not
expect any delay in our originally planned regulatory timelines.
The AURORA clinical trial is a global double-blind, placebo-controlled study, (designed with target enrollment of 324 patients) to evaluate whether
voclosporin added to background therapy of CellCept®/MMF can increase overall renal response rates in the presence of low dose steroids.
Patients were randomized 1:1 to either of: (i) 23.7 mg voclosporin BID and MMF, or (ii) MMF and placebo, with both arms receiving a rapid oral
corticosteroid taper. As in the AURA clinical trial, the study population in AURORA is comprised of patients with biopsy proven active LN who will be
evaluated on the primary efficacy endpoint of CR, or renal response, at 52 weeks, a composite which includes:
•
•
•
•
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 44-52)
and;
no
medications.
administration
rescue
of
Patients completing the AURORA trial have the option to roll over into a 104-week blinded extension trial (the "AURORA 2 extension trial"). During
the second quarter ended June 30, 2018, the first patients commenced rolling over into the AURORA 2 extension trial. Enrollment in this study
continues to increase as additional patients complete AURORA. The data from the AURORA 2 extension trial will allow us to assess the long-term
benefit/risk of voclosporin in LN patients, however, this study is not a requirement for potential regulatory approval for voclosporin. Data from the
AURORA 2 extension trial assessing long-term outcomes in LN patients should be valuable in a post-marketing setting and for future interactions with
various regulatory authorities.
In order to enhance and complete the clinical dossier, we commenced a confirmatory drug-drug interaction study between voclosporin and MMF in the
second half of 2018. Legacy CNIs, CsA, impact MMF concentrations, and our goal with this short study is to confirm the insignificant impact of
voclosporin upon MMF concentrations that were previously seen in a renal transplant study. We are conducting the drug-drug interaction study with
SLE patients and are currently in the process of enrolling patients with the study expected to be completed in 2019. In this study, patients will be
monitored for a period of two weeks. We believe the results of this study will add to our knowledge of voclosporin in a MMT approach and should have
no impact on our submission time-line or the potential approval of voclosporin.
We also plan to evaluate voclosporin in pediatric patients after a potential FDA approval of an indication for adults with LN.
New Voclosporin Indication - FSGS
Similar to LN, integrity of the podocyte is a key feature of disease progression in FSGS. The disease has straightforward disease outcomes where an
early clinical response correlates with long-term outcomes, measured by proteinuria. Based on our clinical data in LN which demonstrated that
voclosporin decreased proteinuria, we believe voclosporin has the potential to benefit patients with FSGS. Our clinical data in LN demonstrated that
voclosporin decreased proteinuria. 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 submitted our IND to the FDA in the first quarter of 2018. We received agreement from the FDA with regards to the guidance we provided on this
study and the IND is now active. Our Phase 2 proof-of-concept study in FSGS which is an open-label study of approximately 20 treatment-naive
patients was initiated in June 2018. As we are essentially enrolling newly diagnosed patients and this is a rare disease, enrollment is slower than
originally expected. We believe enrollment could take up to an additional twelve months from the current date, however, we plan to have interim data
readouts throughout the course of the study, once sufficient patients are enrolled. As we have been focused on LN, expanding our scope to include other
proteinuric renal diseases is synergistic with our current strategy and long-term vision.
Corporate Developments
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 CSO at Teva Pharmaceutical Industries Ltd. Dr. Hayden is the co-founder of three biotechnology companies,
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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 CEO of Regulus Therapeutics, having
previously held the positions of COO, Principal Financial Officer and Principal Accounting Officer.
We announced on November 8, 2018 that Richard M. Glickman, Aurinia's Chairman and CEO, intends to retire from his position once a suitable
replacement is identified and appointed. The Board has retained an executive search firm and initiated a search for his successor. Under his direction,
the Company has delivered on its key milestones and evolved into a patient-centric, late-stage clinical company with investigational drugs addressing
multiple indications across the global immunology market.
CLINICAL AND CORPORATE DEVELOPMENTS IN 2017
Initiation of AURORA clinical trial
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.
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/day 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.
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
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
Control Arm
-2.216 mg/mg
10
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
Table of Contents
The results of the AURA clinical trial at 48 weeks demonstrate the highest CR 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
48 weeks
Criteria to Measure Remission and Response
Rate
UP:CR(gm/gm) < .5
SCr ≤ 25% increase from baseline
Steroid taper (not enforced)
Results
Control = 34.7%
LD OCR = 42.7% (NS)
HD OCR = 32.5% (NS)
Name of Global Study
Efficacy and Safety of
Ocrelizumab in Active
Proliferative LN
Mycophenolate Mofetil
versus
Cyclophosphamide for
Induction Treatment of
LN
24 weeks
UP:CR(gm/gm) ≤ .5
Normal eGFR
Normal Urinalysis
Steroid taper (not enforced)
Efficacy and Safety of
Abatacept in LN
52 weeks
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
AURA-LV: Aurinia
Urine Protein Reduction
in Active LN Study
and
24
weeks
48
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.
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 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.
11
Table of Contents
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 CR 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/day by week 16.
Results from Japanese Phase 1 Ethno-bridging Study for Voclosporin
On February 14, 2017, we announced the results of a supportive Phase 1 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
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 US$6.75 per share. The gross proceeds from the March Offering were US$173.10 million before
deducting the 6% underwriting commission and other offering expenses which totaled US$10.78 million. Leerink Partners LLC and Cantor Fitzgerald
& Co. acted as joint book-running managers for the March Offering. The March Offering was made pursuant to a U.S. registration statement on Form
F-10, declared effective by the SEC on November 5, 2015 (the "Registration Statement"), and the Company’s existing Canadian short form base shelf
prospectus (the "2015 Base Shelf Prospectus") dated October 16, 2015. The prospectus supplements relating to the Offering (together with the 2015
Base Shelf Prospectus and the Registration Statement) 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.
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 CEO. The
Board accepted the resignation of Charles Rowland as CEO 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.
12
Table of Contents
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.
CLINICAL AND CORPORATE DEVELOPMENTS IN 2016
FDA End of Phase 2 Meeting and Plans for Single LN Phase 3 Clinical Trial
On November 2, 2016, we announced the FDA’s preference for a single LN Phase 3 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 "Three Year History -
Clinical and Corporate Developments in 2018 - AURORA clinical trial" and "Three Year History - Clinical and Corporate Developments in 2017 -
Initiation of 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.
Study Design:
screeningimage2a03.jpg
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
13
Table of Contents
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.
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.
auraimage1a03.jpg
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.
14
Table of Contents
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.
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.
15
Table of Contents
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.
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.
2016 Financings
June 2016 Private Placement
On June 22, 2016, we completed a private placement of 3 million units at US$2.36 per unit for aggregate gross proceeds of US$7.08 million. 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 ATM
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 with Cantor Fitzgerald & Co. acting as sales agent, such Common Shares as would
have an aggregate offer price of up to US$10 million. We also filed a prospectus supplement with securities regulatory authorities in Canada in the
provinces of British Columbia, Alberta and Ontario, and with the SEC, which supplemented our 2015 Base Shelf Prospectus and our Registration
Statement. Sales in the July 2016 ATM were only conducted in the United States through NASDAQ at market prices. No sales were conducted in
Canada or through the TSX.
As of October 3, 2016, sales pursuant to the July 2016 ATM were concluded. We issued 3.31 million Common Shares, receiving gross proceeds in the
aggregate of US$8 million (US$6.14 million in the third quarter of 2016 and US$1.86 million subsequent to the quarter end), being the maximum value
permissible in accordance with Canadian securities laws.
November 9, 2016 ATM
We entered into a controlled equity offering 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 US$8.0 million. 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 2016 ATM were only conducted in the United States through NASDAQ at market prices. No sales were conducted in
Canada or through the TSX.
As a result of completion of the March Offering, we determined that the November 2016 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 139,000 Common Shares and received gross proceeds of US$396,000. There were no sales under the
November 2016 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 12.78 million 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 December 2016 Warrant entitles the holder to purchase one common share at the exercise
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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.
REGULATORY
Aurinia intends to submit for marketing approval in the United States, Europe and Japan based on the data from AURORA and the results of the AURA
clinical trial.
REGULATORY REQUIREMENTS
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 may also seek regulatory approval in other
jurisdictions in the future and may initiate other clinical studies if and 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.
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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 one to four 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.
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 a J-NDA is approximately 12 months.
BUSINESS MATTERS
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.
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.
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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 clinical trials 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.
Encapsulating and Packaging of Voclosporin
We have contracted Catalent to encapsulate and package voclosporin for our LN and FSGS clinical studies. Catalent is currently the sole supplier for
encapsulating and packaging our voclosporin 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.
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.
VOS
We have contracted Unither to manufacture VOS for our DES clinical studies. Sharp Clinical packages VOS for our clinical DES studies. Pricing for
these services is determined by negotiations between Unither and Sharp Clinical, respectively, and the Company and is based on the specific production
run size.
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 certain avenues to expand the
voclosporin intellectual property portfolio, including a use patent strategy (which involves potential development of use patents driven by AURA Phase
2b data) and a potential manufacturing patent and trade secret strategy.
The Company has an extensive granted patent portfolio related to cyclosporine analogs, including granted United States patents, covering voclosporin
composition of matter, methods of use, formulations and synthesis. 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 (Patent Term
Extension) and certain other major markets, including Europe and Japan, until at least October 2027 under the Hatch-Waxman Act in the United States
and comparable patent extension laws in other countries (including the Supplementary Protection Certificate program in Europe). Opportunities may
also be available to add an additional six months of exclusivity related to pediatric studies which are currently in the planning process. 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 and up to ten years in Europe.
Further, pursuant to a Notice of Allowance from the USPTO for claims directed at our novel voclosporin dosing protocol for LN as more fully discussed
in the Recent Developments section of this AIF, after administrative processes are completed and fees are paid, we expect the issuance of a U.S. patent
with a term extending to December 2037. If the FDA approves the use of voclosporin for LN and the label for such use follows the dosing protocol
under the Notice of Allowance, the issuance of this patent will expand the scope of intellectual property protection for voclosporin, which already
includes robust manufacturing, formulation, synthesis and composition of matter patents. We have also filed for protection of this subject matter under
the PCT and have the option of applying for similar protection in the member countries thereof. This may lead to the granting of corresponding claims in
the treaty countries which include all the major global pharmaceutical markets.
We have licensed the development and distribution rights to voclosporin for China, Hong Kong and Taiwan to 3SBio. This license is royalty bearing
and we will also supply finished product to 3SBio on a cost-plus basis. We do not expect to receive any royalty revenue pursuant to this license in the
foreseeable future.
We have patent protection for VOS as we own two granted United States patents and 14 patents in other jurisdictions related to ophthalmic
formulations of calcineurin inhibitors or mTOR inhibitors, including voclosporin. We also have one granted United States patent and 10 patents in other
jurisdictions related to topical drug delivery system for ophthalmic use. These patents expire between 2028 and 2031.
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.
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EMPLOYEES
Total Number of Employees
39
33
20
As at December 31,
2018
As at December 31,
2017
As at December 31,
2016
As at December 31, 2018 we employed 39 employees, 34 of whom held advanced degrees in science and business, including two with a Ph.D. degree,
two with a MD, one with a J.D. and seven with a Masters degree.
Of our total 39 employees as at December 31, 2018, 20 employees were engaged in, or directly support, clinical trial activities; and 19 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.
FACILITIES
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 for a term of five years. On December 6, 2018 the Company signed a commitment letter and entered into a new sublease on
January 28, 2019 to rent 9,406 square feet of office and storage space at the existing location effective June 1, 2019. The new sublease is for a term of
three years, however, the Company has the ability to cancel upon 12 months' notice. The estimated base rent plus operating costs on a monthly basis for
the period from January 1, 2019 to May 31, 2019 is approximately US$11,000 per month increasing to approximately US$21,000 per month for the
period of June 1, 2019 to May 31, 2022.
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 subsequently renewed until
December 31, 2019 at a cost of approximately US$1,400 per month on the same terms as the original lease.
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. 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 programs in LN and DES, including the AURORA trial which is anticipated to be
completed in late 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.
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.
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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 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.
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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.
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.
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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.
We received a Notice of Allowance from the USPTO for claims directed at our novel voclosporin dosing protocol for LN (U.S. patent application
15/835,219, entitled "PROTOCOL FOR TREATMENT OF LUPUS NEPHRITIS”) which concluded a substantive examination of the patent
application at the USPTO, and after administrative processes are completed and fees are paid, is expected to result in the issuance of a U.S. patent with a
term extending to December 2037. For this patent to be useful, it will require that the FDA approve the use of voclosporin for LN and that the label for
such use will follows the dosing protocol under the Notice of Allowance claims.
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, DES 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
dosing
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;
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 AEs 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.
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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 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 December 31, 2018, the carrying value of our intangible assets was
approximately US$12.62 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.
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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.
We have contracted Unither to manufacture VOS for our DES clinical studies, and we have contracted Sharp Clinical to package VOS for our clinical
DES studies.
The FDA and other regulatory authorities require that drugs be manufactured in accordance with the current GMP 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:
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•
•
•
•
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, 2018, we had an accumulated deficit of US$415.96 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, 2018. 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;
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
ongoing
our
of
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
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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 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.
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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 be listed on the TSX or the NASDAQ or achieve listing on any other public listing exchange.
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 either the TSX 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.
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Sales of Common Shares could cause a decline in the market price of the Common Shares. One of our major shareholders (ILJIN and its affiliates) owns
an aggregate of approximately 14.97% of our outstanding Common Shares as at March 15, 2019. 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 PFIC 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 2018. While we also do not believe we will be a PFIC for the current taxable year, because PFIC status is
determined on an annual basis and generally cannot be determined until the end of the taxable year, there can be no assurance that we will not be a PFIC
for the current or future taxable years. If we are characterized as a PFIC, our shareholders who are U.S. holders may suffer adverse tax consequences,
including the treatment of gains realized on the sale of our 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
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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 15, 2019, we had 91.64 million Common Shares issued and outstanding.
In addition, as of March 15, 2019 there were 8.35 million Common Shares issuable upon the exercise of outstanding stock options and 3.27 million
Common Shares reserved for future grant or issuance under our stock option plan.
We also have 3.52 million Warrants (exercisable into Common Shares) outstanding as at March 15, 2019.
For additional information on stock options and Warrants, please see notes 11 and 12 to our annual consolidated financial statements for the year ended
December 31, 2018 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, 2018, the reported high and low prices (in United States dollars) and the
volume of shares traded for each month on NASDAQ.
NASDAQ
Month
January 2018
February 2018
March 2018
April 2018
May 2018
June 2018
July, 2018
August 2018
September 2018
October 2018
November 2018
December 2018
Price Range (US$)
High
Low
Total Volume
6.11
5.77
5.99
5.65
6.69
6.35
6.09
5.90
6.68
6.65
6.15
7.24
4.52
4.76
5.05
5.01
5.11
5.33
5.25
5.22
5.33
5.06
5.10
5.50
22,658,500
12,473,400
14,842,415
9,900,016
15,540,613
9,998,308
8,032,718
8,509,820
11,880,623
12,674,871
9,753,900
16,517,000
The following table sets forth, for the 12-month period ended December 31, 2018, the reported high and low prices (in Canadian dollars) and the volume
of shares traded for each month on the TSX.
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TSX
Month
January 2018
February 2018
March 2018
April 2018
May 2018
June 2018
July, 2018
August 2018
September 2018
October 2018
November 2018
December 2018
Price Range (CDN$)
High
Low
Total Volume
7.58
7.32
7.82
7.14
8.55
8.35
8.01
7.64
8.65
8.60
8.15
9.87
5.70
5.98
6.49
6.44
6.58
7.02
6.83
6.81
6.99
6.61
6.69
7.41
1,344,258
854,513
973,583
535,379
1,012,726
652,433
464,882
433,588
677,331
908,262
839,112
1,328,591
There are no securities of the Company subject to escrow.
ESCROWED SECURITIES
The following table summarizes the distribution of securities other than Common Shares that were issued during the most recently completed financial
year, identifying the type of security, the price per security, the number of securities issued, expiry date and the date on which the securities were issued.
PRIOR SALES
STOCK OPTIONS
Date
February 1, 2018
February 5, 2018
February 9, 2018
February 22, 2018
March 21, 2018
October 17, 2018
Total:
Type of Security
Stock Options
Stock Options
Stock Options
Stock Options
Stock Options
Stock Options
Price per
Security
(CDN$)
Number of
Securities
Expiry Date
6.52
6.42
6.40
6.92
7.06
7.70
2,178,000 February 1, 2028
550,000 February 5, 2028
50,000 February 9, 2028
50,000 February 22, 2028
150,000 March 21, 2028
25,000 October 17, 2028
3,003,000
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 15, 2019, 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
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.
CFO
COO
CMO
May 1998
CFO of Aurinia since May 1998.
September, 2013
COO of Aurinia since September 2013.
September 2013
CMO of Aurinia since September 2013.
Executive Vice
President, Corporate
Development
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
Executive Vice President, Corporate Development of
Aurinia since May 2017; Vice President, Clinical
Affairs of Aurinia from August 2011 to May 2017.
Senior Vice President, General Counsel & Chief
Corporate Compliance Officer of Aurinia since July
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, 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 to that, 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
Michael Hayden
Vancouver, British Columbia
Canada
Director, Chair of the
Standing Research
Committee
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 executive officers of the Company, as of March 15, 2019, beneficially own, directly or indirectly, 1,913,202 Common Shares in the
aggregate, representing 2.09% 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 US$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 Correvio 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 2018 Leadership Award and the 2017 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 US$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. In this role he oversees all Business Development, Licensing and Partner
Management activities along with overall management of the Company's intellectual property portfolio. Additionally, Michael is responsible for the
executive leadership of Aurinia's ocular program. Michael 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 US$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 lupus nephritis. Prior to this, Michael held a variety of progressively senior commercial positions at
Schering-Plough (now Merck). Most recently, he was responsible for the Rheumatology business unit for Remicade® in France. In this role, he had full
profit and loss responsibilities and had direct responsibility for the sales team, the marketing team and the infusion access team. In addition, while at
Schering-Plough, Michael was the brand manager responsible for the Canadian launch of Remicade (infliximab), which ultimately became the most
successful product launch in Canadian history and the largest selling biologic ever. Michael started his career in the industry in the sales organization of
Schering-Plough where he received multiple awards and recognition while rapidly progressing towards the prior mentioned roles.
Neil Solomons, MD, CMO
Dr. Neil Solomons co-founded privately-held Aurinia Pharmaceuticals in 2012. He is an experienced pharmaceutical physician with over 20 years of
clinical development and medical affairs experience in both large pharma and biotech. He is a recognized expert in rare-disease drug development and
is widely published in this field. Neil joined Aurinia from Vifor Pharma, formerly Aspreva Pharmaceuticals (NASDAQ:ASPV) where he held the
position of Vice President, Research and Development, 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 lupus nephritis study called ALMS. He was responsible for all clinical
development activities from Phases 1 to 3, as well as participating in the formulation of R&D strategy, portfolio management, and due diligence efforts.
Prior to Vifor & Aspreva, Neil held a variety of positions at Roche in both Global Clinical Development and Medical Affairs in transplantation,
virology, and auto-immune diseases. While at Roche, Dr. Solomons led a diverse team in the development and implementation of post-marketing
studies for its transplantation (CellCept® and Zenapax®) and virology (Cytovene®) franchises. Neil qualified in medicine in 1991 receiving his MB
BS (MD) at Guys Hospital Medical School, London. He subsequently worked as a physician in London UK, completing specialist training in anesthesia
and intensive care. His research interests included sepsis and chronic pain.
Robert B. Huizinga, PhD RN, CNeph(C), Executive Vice President, Corporate Development
Robert Huizinga has more than 25 years of clinical research experience. He has managed the global clinical development of voclosporin since 2002
when he was with 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 1 through Phase 4 and the successful development of
numerous compounds including CellCept®, Neoral®, Prograf®, Aranesp ® and Simulect®. He has acted as a consultant to nephrology and transplantation
pharmaceutical companies, has lectured extensively and is recognized as an expert in immunosuppression drug development. Rob has numerous articles
published in leading medical journals, including the Lancet, Kidney International and the American
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Journal of Transplantation. He is a member of many professional societies related to nephrology, transplantation, and nursing, has served on many
nephrology and transplantation committees and is the founder of RenalPro, a moderated forum for renal professionals. Rob has a PhD (Organizational
Leadership) from Regent University, is a Registered Nurse in British Columbia, holds his certification in Nephrology, a M.Sc. in Medicine
(Epidemiology) from the University of Alberta, and a member of Sigma Theta Tau (Honor Society of Nursing).
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 15 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 USPTO, 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. 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 Randall, MBA, Lead Director, Chair of the Audit Committee
Mr. 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 CFO 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, Chair of the Compensation Committee
Dr. Benjamin Rovinski has 30 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 early- 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 Antios
Therapeutics; Antiva Biosciences; GI Therapeutics (NASDAQ:GTHX); 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, Ontario Genomics, 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 MB
BChir 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 400 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 and he co-chairs the EULAR/ERA-EDTA task force on lupus nephritis. Dr. Jayne’s research includes investigator-initiated international
trials and the introduction of newer therapies in vasculitis and SLE with collaborators on five continents.
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. Dr. Lee has over 20 years of experience in consulting,
management, business development and strategic planning in a number of industries including information technology, chemical
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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, Chair of the Governance & Nomination Committee
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 Inc.
with global responsibility for human and veterinary medicine research and development. 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
Mr. Hagan is President and CEO of Regulus Therapeutics. Mr. Hagan joined Regulus in January 2016 as COO, Principal Financial Officer and Principal
Accounting Officer and was appointed to President and CEO in May 2017. Mr. Hagan’s career includes roles as the Executive Vice President, CFO 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 US$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, Chair of the Standing Research Committee
Dr. Michael Hayden was recently named one of the 50 Canadians born in the 20th century who have changed the world. He is the co-founder of five
biotechnology companies: Prilenia Therapeutics, 89Bio, NeuroVir Therapeutics Inc., Xenon Pharmaceuticals Inc., and Aspreva Pharmaceuticals Corp.
Dr. Hayden sits on different boards including Xenon Pharmaceuticals and Ionis Pharmaceuticals. 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.
COMMITTEES OF THE BOARD
We have four standing committees: the Audit Committee, the Governance and Nomination Committee, the Compensation Committee, and Standing
Research Committee. Current members of these committees are identified in the following table:
Committee
Audit Committee (1)
Governance and Nomination Committee
Compensation Committee
Standing Research 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
Michael Hayden (Chair)
David Jayne
(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, except as noted below, 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.
Mr. Lorin J. Randall was a director of Tengion, Inc. when it filed for Chapter 7 Liquidation in December of 2015 pursuant to the United States
Bankrupcy Code.
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 15, 2019, 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, 2018, 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.
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
CONFLICTS OF INTEREST
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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”.
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.
TRANSFER AGENT AND REGISTRAR
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 15, 2019 in respect of our Consolidated Financial
Statements, which comprise the Consolidated Statements of Financial Position as at December 31, 2018 and December 31, 2017, 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, 2018 and December 31, 2017, 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
SEC.
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, 2018.
Additional information regarding the Company is available on the SEDAR website located at www.sedar.com, on EDGAR at www.sec.gov/edgar, 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, 2018 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, 2018 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, 2018 and 2017, respectively are as follows:
Fiscal year ended
Audit fees (for audit of the Company’s annual financial statements and services
2018
% of Total
Fees
2017
% of Total
Fees
provided in connection with statutory and regulatory filings)(1)
$
Audit related fees, including review of the Company’s quarterly financial statements (2) $
Tax fees (tax compliance, tax advice and planning) (3)
All other fees (4)
Total fees
95,124
40,825
$ 110,496
55,647
$
$ 302,092
31.5% $ 130,583
37,491
13.5% $
36.6% $
44,935
18.4% $
46,943
100.0 % $ 259,952
50.2%
14.4%
17.3%
18.1%
100.0 %
(1) These fees include professional services provided by the external auditor for the statutory audits of the annual financial statements. The total for 2018 is
comprised of US$56,910 related to interim billings for the 2018 audit and US$38,214 related to fees for the 2017 audit billed in 2018. The total for 2017 is
comprised of US$61,688 related to interim billings for the 2017 audit and US$68,895 related to fees for the 2016 audit billed in 2017.
(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 transfer pricing, tax compliance, tax advice, tax planning and various taxation matters.
(4) These fees for 2018 include professional services for assistance in filing the new base shelf prospectus, prospectus supplement related to the re-sale of common
shares, the November 2018 ATM prospectus supplement, and various other advisory services. 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.
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SCHEDULE 2 - AUDIT COMMITTEE CHARTER
AURINIA PHARMACEUTICALS INC.
AUDIT COMMITTEE CHARTER
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” and “independent” established from time to time under the requirements or guidelines for audit committee service under
applicable securities laws (“Securities Laws”) and the rules of any stock exchange (“ Exchange Rules”) on which the Company’s shares are listed for
trading).
2.
Appointment
Members
and Replacement
of Committee
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 may be defined from time to time under the requirements or guidelines for
audit committee service under applicable Securities Laws and the Exchange Rules) 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
Appointment and Oversight of Independent Auditor . The Committee recommends to the Board for nomination the independent auditor to
1.
examine the Company’s accounts, controls and financial statements. The Committee has sole responsibility for the compensation, retention, oversight
and, if necessary, termination of any independent auditor (including resolution of disagreements between the Company’s management and the
independent auditor 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 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.
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In connection therewith, the Committee will:
(i)
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 the Public Company Accounting Oversight Board
(the “PCAOB”) related to the independent auditor’s communications with the Committee concerning independence; and
(ii)
impact the objectivity and independence of the independent auditor.
actively engage in a dialogue with the independent auditor with respect to any disclosed relationships or services that may
(b)
The Committee will obtain and review, at least annually, a report from the independent auditor describing:
(i)
the independent auditor’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 independent auditor, 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. In
making its evaluation, the Committee should take into account the opinions of management and the independent auditor.
(d)
independent auditor.
The Committee will set policies for the Company’s hiring of employees or former employees of the present and former
3.
Approval of Audit and Non-Audit Services
(a)
The Committee will review the independent auditor’s audit planning, scope and staffing.
(b)
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, Securities Laws 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
(a)
The Committee will, to the extent warranted, discuss with the independent auditor the reports referenced in section 2(b) and any
other matters required to be reviewed under applicable legal and regulatory requirements.
(b)
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 out of the presence
of management.
B.
1.
FINANCIAL STATEMENTS AND
DISCLOSURES
Annual Financial Statements and Disclosures
(a)
Before public disclosure, 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.
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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
before public disclosure, 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.
(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.
auditor, as appropriate, the type of information to be disclosed and type of presentation to be made regarding the Company’s earnings press releases.
Earnings Announcements and Guidance. The Committee will discuss generally with the Company’s management and the independent
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
PROCEDURES
AND
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 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 legal 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
RESPONSIBILITIES
DUTIES
AND
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
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by applicable law, Securities Laws and the Exchange Rules, and will periodically review the business interests and activities of members of the Board
and management.
3.
and submit a report to the Board.
Review of Composition and Performance. The Committee will evaluate the Committee’s composition and performance on an annual basis
4.
changes the Committee determines are appropriate.
Review of this Charter. The Committee will review and reassess the adequacy of this charter annually and recommend to the Board any
5.
Other Actions. The Committee will perform any other activities required by applicable law, rules or regulations, including Securities Laws
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.
E.
STUDIES
ADVISERS
AND
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.
F.
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, Securities Laws 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.
G.
MINUTES
REPORTS
AND
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.
H.
DELEGATION
AUTHORITY
OF
The Committee may from time to time, as it deems appropriate and to the extent permitted under applicable law, Securities Laws and the Commission
Rules, the Company’s articles of incorporation and Bylaws, form and delegate authority to subcommittees.
I.
COMPENSATION
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, Securities Laws and the Commission Rules.
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J.
PUBLICATION
The Company shall make this charter freely available to stockholders on request and shall publish it on the Company’s web site.
K.
OVERSIGHT
FUNCTION
This charter sets forth the authority and responsibility of the Committee in fulfilling the purposes described herein.
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 International Financial Reporting
Standards (“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 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 articles 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:
"2015 Base Shelf Prospectus" means Aurinia's short form base shelf prospectus dated October 16, 2015;
"AEs" means adverse events;
"AIF" means the Annual Information Form of the Company dated March 15, 2019 for the fiscal year ended December 31, 2018;
"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";
"Aurinia" means Aurinia Pharmaceuticals Inc.;
"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;
"AURORA 2 extension trial" means a 104-week blinded extension trial;
"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;
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"DES" means Dry Eye Syndrome;
"December 2016 Warrants" means the Common Share purchase warrants offered in connection with the US$28.75 million financing (including
US$3.75 million pursuant to an exercise of the underwriters’ over-allotment option) for the sale of 12,778,000 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;
"Exchange Rules" means the rules of any stock exchange on which the Company's shares are listed for trading;
"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;
"IFRS" means International Financial Reporting Standards;
"ILJIN" means ILJIN SNT Co., Ltd.;
"IND" means investigational new drug;
"IRB" means Institutional Review Board;
"ITT" means intent to treat;
"July 2016 ATM" means the at the market offering of Common Shares with an aggregate offer price of up to US$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;
"Notice of Allowance " means the notice of allowance received from the USPTO for claims directed at our novel voclosporin dosing protocol for LN
(U.S. patent application 15/835,219, entitled "PROTOCOL FOR TREATMENT OF LUPUS NEPHRITIS”);
"November 2016 ATM" means the at the market offering of Common Shares having an aggregate offer price of up to US$8.0 million;
"NS" means Nephrotic Syndrome;
"Paladin" means Paladin Labs Inc.;
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"PCT" means the Patent Cooperation Treaty, an international patent law treaty. It provides a unified procedure for filing patent applications to protect
inventions in each of its contracting states;
"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;
"PR" means partial remission;
"Registration Statement" means Aurinia's shelf registration statement on Form F-10 dated October 16, 2015, declared effective on November 5,
2015;
"SAE" means serious adverse events;
"SEC" means the U.S. Securities and Exchange Commission;
"SEDAR" means the System for Electronic Document Analysis and Retrieval;
"Sharp Clinical" means Sharp Clinical Services Inc.;
"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;
"Unither" means Laboratoire Unither;
"UPCR" means Urinary/protein creatinine ratio;
"USPTO" means United States Patent and Trademark Office;
"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.
46
yeconsolidatedfscover2018.jpg
Exhibit 99.2
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying audited 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 the
standards of the Public Company Accounting Oversight Board (United States) (PCAOB) 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 15, 2019
(Signed) “Dennis Bourgeault”
Chief Financial Officer
pwclogoa01.jpg
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Aurinia Pharmaceuticals Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Aurinia Pharmaceuticals Inc. and its subsidiaries (together, the
Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, changes in shareholders'
equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and
2017, and their financial performance and their cash flows for the years then ended in conformity with International Financial Reporting Standards as
issued by the International Accounting Standards Board (IFRS).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
“/s/PricewaterhouseCoopers LLP”
Chartered Professional Accountants
Edmonton, Canada
March 15, 2019
We have served as the Company's auditor since at least 1997. We have not been able to determine the specific year we
began serving as auditor of the Company.
pwcsignaturea03.jpg
Aurinia Pharmaceuticals Inc.
Consolidated Statements of Financial Position
As at December 31, 2018
(expressed in thousands of US dollars)
Assets
Current assets
Cash and cash equivalents
Short term investments (note 5)
Accounts receivable and accrued interest receivable
Prepaid expenses, deposits and other
Clinical trial contract deposits
Property and equipment (note 6)
Acquired intellectual property and other intangible assets (note 7)
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 8)
Current portion of deferred revenue (note 9)
Contingent consideration (note 10)
Deferred revenue (note 9)
Contingent consideration (note 10)
Derivative warrant liabilities (notes 11 and 23)
Shareholders’ Equity
Share capital
Common shares (note 12)
Warrants (note 12)
Contributed surplus
Accumulated other comprehensive loss
Deficit
Commitments and contingencies (note 20)
Subsequent events (note 23)
2018
$
117,967
7,889
217
6,775
132,848
358
41
12,616
145,863
7,071
118
72
7,261
324
3,956
21,747
33,288
504,650
—
24,690
(805)
(415,960)
112,575
145,863
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
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, 2018 and December 31, 2017
(expressed in thousands of US dollars, except per share data)
Revenue (note 9)
Licensing revenue
Contract revenue
Expenses
Research and development (note 13)
Corporate, administration and business development (note 13)
Amortization of acquired intellectual property and other intangible assets (note 7)
Amortization of property and equipment
Other expense (income) (note 14)
Net loss before change in estimated fair value of derivative warrant liabilities
Change in estimated fair value of derivative warrant liabilities (note 11)
Loss before income taxes
Income tax expense (note 15)
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 3)
Net comprehensive loss for the year
Net loss per common share (note 16) (expressed in $ per share)
Basic and diluted loss per common share
The accompanying notes are an integral part of these consolidated financial statements.
2018
$
118
345
463
41,382
13,674
1,545
20
(2,065)
54,556
(54,093 )
(9,954)
(64,047 )
73
(64,120 )
—
(64,120 )
2017
$
418
—
418
33,930
12,096
1,434
22
(196)
47,286
(46,868 )
(23,924 )
(70,792 )
—
(70,792 )
(78 )
(70,870 )
(0.76 )
(0.92 )
Aurinia Pharmaceuticals Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2018 and December 31, 2017
(expressed in thousands of US dollars)
Balance – January 1, 2018
Opening adjustment on change in
accounting policy (note 3)
Restated equity at the beginning of the year
Exercise of warrants
Exercise of stock options
Stock-based compensation
Net loss and comprehensive loss for the
year
Balance - December 31, 2018
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
Common
shares
$
499,200
—
499,200
3,977
1,473
—
—
504,650
299,815
173,104
(10,780 )
297
29,953
6,811
—
—
499,200
Warrants
Contributed
surplus
$
906
—
906
(906)
—
—
—
—
971
—
—
(65 )
—
—
—
—
906
$
18,360
—
18,360
—
(530)
6,860
Deficit
$
(351,840)
—
(351,840)
—
—
—
—
24,690
(64,120 )
(415,960)
17,017
—
—
—
—
(2,899)
4,242
(281,048)
—
—
—
—
—
—
—
18,360
(70,792 )
(351,840)
The accompanying notes are an integral part of these consolidated financial statements.
Accumulated
other
comprehensive
loss
$
(883)
78
(805)
—
—
—
—
(805)
(805)
—
—
—
—
—
—
(78 )
(883)
Shareholders’
equity
$
165,743
78
165,821
3,071
943
6,860
(64,120 )
112,575
35,950
173,104
(10,780 )
232
29,953
3,912
4,242
(70,870 )
165,743
Aurinia Pharmaceuticals Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2018 and December 31, 2017
(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 and amortization of short term investments discount (premium) (note 18)
Revaluation of contingent consideration
Loss on disposal of equipment
Change in estimated fair value of derivative warrant liabilities
Stock-based compensation
Contingent consideration milestones paid
Net change in other operating assets and liabilities (note 18)
Net cash used in operating activities
Investing activities (note 18)
Purchase of short term investments
Proceeds on disposal/maturity of short term investments
Purchase of equipment
Capitalized patent costs
Net cash used in investing activities
Financing activities (note 18)
Net proceeds from issuance of common shares
Proceeds from exercise of derivative warrants
Proceeds from exercise of warrants
Proceeds from exercise of stock options
Net cash generated from financing activities
(Decrease) 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.
2018
$
2017
$
(64,120 )
(70,792 )
(118)
20
1,545
13
236
—
9,954
6,860
(45,610 )
—
(6,000)
(51,610 )
(36,084 )
36,093
(30 )
(45 )
(66 )
—
—
3,071
943
4,014
(47,662 )
165,629
117,967
(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
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
1
Corporate
information
Aurinia Pharmaceuticals Inc. or the Company is a late clinical stage biopharmaceutical company, focused on developing and commercializing
therapies to treat targeted patient populations that are suffering from serious diseases with a high unmet medical need. The Company is currently
developing voclosporin, an investigational drug, for the treatment of lupus nephritis (LN), focal segmental glomerulosclerosis (FSGS), and Dry
Eye Syndrome (DES).
Aurinia's head office is located at #1203-4464 Markham Street, Victoria, British Columbia, V8Z 7X8. 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.
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).
2
Basis of
preparation
Statement of compliance
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board (IASB) (IFRS).
The consolidated financial statements were authorized for issue by the Board of Directors on March 15, 2019.
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.
All references to CA$ are to the lawful currency of Canada.
Revenue recognition
IFRS 15 replaces IAS 18, Revenue, IAS 11 Construction Contracts, and other interpretive guidance associated with revenue recognition and
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.
The Company's accounting policy commencing January 1, 2018 is described below.
The Company has agreements in specific regions with strategic partners. These agreements may include one-time payments (upfront payments),
payments in the form of cost reimbursements, milestone payments, royalties and license fees.
(1)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
Once the Company determines that a contract exists and the contract is with a customer, it identifies the performance obligations within the
contract. A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services and is the unit of
account for recognizing revenue.
Next the Company determines the transaction price. The transaction price reflects the amount of consideration to which the Company expects to
be entitled in exchange for the goods or services transferred. Management takes into account consideration that is variable and only includes
variable consideration to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not
occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price is then allocated to the various performance obligations based on the relative standalone selling prices of the goods or
services being provided.
Revenue is recognized when or as performance obligations are satisfied by transferring control of a promised good or service to a partner at a
point in time or over time.
Where the period between the transfer of goods or services to the customer and payment exceeds one year the transaction prices are adjusted for
the time value of money.
Revenues for each unit of accounting are recorded as described below:
•
•
•
•
Licensing
revenues
License revenues represent non-refundable payments received at the time of signature of license agreements. The licensing
agreement can represent a right to access, that transfers over time or a right to use, that transfers at a point in time.
The promise is to provide a right to access when the contract requires, or the customer reasonably expects, that the Company
will undertake activities that significantly affect the intellectual property to which the customer has rights, when the rights granted by
the license directly expose the customer to any positive or negative effects of the Company’s activities that may significantly affect the
intellectual property and those activities do not result in the transfer of a good or service to the customer as those significant activities
occur. If these criteria are met, the Company recognizes the revenue on a systematic basis over the period which the related services
and activities are rendered and all obligations are performed.
If these criteria are not met, it is a right to use a license, and the revenue is recognized when the license is granted to the
customer at a point in time.
Contract
revenue
Contract revenue includes any other contracts service or sale agreements entered into outside of licensing arrangements. These
contracts include non-refundable payments received in milestones or royalty payments which are recognized according to the
milestone payments and royalty payments following.
Milestone
payments
Milestone payments can be part of both licensing arrangements and other service or sale contracts. These are generally based on
developmental or regulatory events, are forms of variable consideration and are only included in the transaction price and recognized
as revenue when it is highly probable that a significant reversal will not occur when the uncertainty associated with the milestone is
subsequently resolved.
Royalty
payments
Royalty payments can be part of both licensing arrangements and other service or sale contracts. Royalty payments are recognized
only when the later of the subsequent sale occurs and the performance obligation to which some or all of the royalty has been
allocated has been satisfied or partially satisfied.
Up to December 31, 2017, payments received under collaboration agreements, which may have included upfront payments, milestone
payments, contract services, royalties and license fees were recorded as follows:
•
Licensing
revenues
and
research
and development
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 were allocated to the various elements based on their
relative fair value.
(2)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
Agreements containing multiple elements were divided into separate units of accounting if certain criteria were met, including whether
the delivered element had stand-alone value to the customer and whether there was objective and reliable evidence of the fair value of
the undelivered obligation(s). The consideration received was allocated among the separate units based on each unit’s fair value, and
the applicable revenue recognition criteria were applied to each of the separate units.
License fees representing non-refundable payment received at the time of signature of a licensing agreements were recognized as
revenue when the Company had no significant future performance obligations and collectability of the fees was reasonably assured.
License fees received at the beginning of licensing agreements were significant future obligations exist were deferred and recognized
as revenue on a systematic basis over the period during which the related services are rendered and all obligations were performed.
•
Milestone
payments
Milestone payments, which were generally based on developmental or regulatory events, were recognized when the milestones were
achieved, collectability was assured, and when the Company had no significant future performance obligations in connection with the
milestones.
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. Cash equivalents are readily converted into known amounts of cash, and are subject to an insignificant risk of
change in value.
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:
Computer equipment and software
Office equipment and furniture
Leasehold improvements
Acquired intellectual property and other intangible assets
3 years
5 years
term of the lease
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.
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 upon initial recognition. 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. Transaction costs might be incurred in anticipation of an issuance of equity instruments and across reporting
periods. As such the costs are deferred on the balance sheet until the equity instrument is recognized. Deferred costs are subsequently
reclassified as a deduction from equity when the equity instruments are recognized. If the equity instruments are not subsequently issued, the
transaction costs are recognized as an expense.
(3)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
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, including, among other criteria obtaining final market approval by the regulatory authority, 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 the consolidated statements of operations and comprehensive 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, 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.
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
(4)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
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.
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial
liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.
From January 1, 2018 financial assets and liabilities are classified into three categories: amortized cost, fair value through profit or loss
(“FVPL”) and fair value through other comprehensive income (“FVOCI”). The classification of financial assets is determined by their context
in the Company's business model and by characteristics of the financial assets contractual cash flows.
Financial assets and financial liabilities are measured at fair value on initial recognition, which is typically the transaction price unless a
financial instrument contains a significant financing component. Subsequent measurement is dependent on the financial instrument's
classification. At initial recognition, the Company classifies its financial instruments in the following categories:
i)
ii)
iii)
Amortized cost: Cash and cash equivalents, short term investments, accounts receivable and accrued interest receivable and accounts
payable and accrued liabilities are measured at amortized cost. The contractual cash flows received from the financial assets are
solely payments of principal and interest and are held within a business model whose objective is to collect the contractual cash
flows. The financial assets and financial liabilities are subsequently measured at amortized cost using the effective interest method.
FVPL: The Contingent consideration provided to ILJIN SNT Co., Ltd. (ILJIN) (see note 10) and the derivatives warrant liabilities
(see note 11) are measured initially at FVPL and are subsequently measured at fair value with changes in fair value immediately
charged to the consolidated statements of operations.
FVOCI: Financial assets measured at FVOCI are subsequently measured at fair value with changes in fair value being recognized in
OCI net of tax. Transaction costs related to the purchase of financial assets are measured at FVOCI. Interest impairment and foreign
exchange gains or losses are recognized in the statement of operations while all other gains or losses are recognized in OCI. The
Company has not classified any equity instruments at FVOCI.
Until December 31, 2017 the Company classified its financial instruments in the following categories:
i)
ii)
iii)
iv)
Financial assets and liabilities at fair value through profit or loss: a financial asset or liability was classified in this category if
acquired principally for the purpose of selling or repurchasing in the short-term.
Financial instruments in this category were recognized initially and subsequently at fair value. Gains and losses arising from changes
in fair value were presented in the consolidated statements of operations and comprehensive loss within other expense (income) in the
period in which they arose.
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 comprised accounts receivable and cash. Cash equivalents were
also included in current assets due to their short-term nature. Loans and receivables were 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 were
designated as available for sale and are not categorized into any of the other categories described above. They were initially
recognized at fair value including direct and incremental transaction costs. They were subsequently recognized at fair value. Gains
and losses arising from changes in fair value were 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 was determined using the effective
interest method, and impairment losses and translation differences on monetary items were 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 were initially recognized at the amount required to be paid, less, when material, a discount to
reduce payables to fair value. Subsequently, accounts payables were measured at amortized cost using
(5)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
the effective interest method. These were classified as current liabilities if payment is due within 12 months. Otherwise, they were
presented as non-current liabilities.
v)
Financial liabilities at fair value: Contingent consideration provided to ILJIN SNT Co., Ltd. (ILJIN) (see note 10) and derivative
warrant liabilities (see note 11) were financial liabilities recorded at fair value with subsequent changes in fair value recorded in the
consolidated statements of operations and comprehensive loss.
Impairment of financial assets
From January 1, 2018 the Company uses a forward-looking expected credit loss model (“ECL”). The new impairment model will apply to
financial assets measured at amortized cost or FVOCI, except for investments in equity instruments, and to contract assets. Under IFRS 9, loss
allowances will be measured on either of the following bases: i. 12-month ECLs which are ECLs that result from possible default events within
12 months after the reporting date; and ii. lifetime ECLs which ware ECLs that result from all possible default events over the expected life of a
financial instruments.
For receivables, the Company applies the simplified, forward-looking approach permitted by IFRS 9 to measuring ECLs which allows a
lifetime expected loss allowance for all trade receivables to be recognized from initial recognition of the receivables. Impairment losses on
financial assets carried at amortized cost or FVOCI are reversed in subsequent years if the amount of the loss decreases and the decrease can be
related objectively to an event occurring after the impairment was recognized. For debt instruments carried at amortized cost , the Company
uses a ECL model which depends on whether there has been a significant increase in the credit risk.
Until December 31, 2017 at each statement of financial position date, the Company assessed whether there was objective evidence a financial
asset or group of financial assets was impaired. A financial asset or group of financial assets is impaired and impairment losses were 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
could be reliably estimated. If such evidence existed, the Company recognized an impairment loss.
The amount of the loss was 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 was reduced and
the amount of the loss was recognized in the consolidated statements of operations and comprehensive loss. If a loan had a variable interest rate,
the discount rate for measuring any impairment loss was the current effective interest rate determined under the contract. For practical reasons,
the Company measured impairment on the basis of an instrument’s fair value using an observable market price.
3
Recent Changes in Accounting
Standards
New accounting standards adopted in the year
The Company has adopted three new and revised standards, effective January 1, 2018. This note explains the impact of the adoption of IFRS 9
Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 2 Share based payment on the Company’s financial
statements that have been applied from January 1, 2018, where they are different to those applied in the prior period.
•
IFRS 9 Financial
Instruments
The adoption of IFRS 9 Financial Instruments using the modified retrospective approach on January 1, 2018 (the date of initial
application of IFRS 9) results in a change in accounting policy. In accordance with the transitional provisions in IFRS 9, comparative
figures have not been restated. The reclassification of financial assets have therefore been recognized in the opening balance sheet on
January 1, 2018. The new standard introduces expanded disclosure requirements and changes in presentation, these have minimally
impacted the nature and extent of the Company's disclosures. 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, and (iii) hedge
accounting.
Classification and measurement
On January 1, 2018 the Company has assessed which business models apply to the financial assets held by the Company and has
classified its financial instruments into the appropriate IFRS 9 categories. There was no impact to the financial liabilities held by the
Company.
Cash and cash equivalents, short term investments and accounts receivable are recorded initially at fair value and subsequently at
amortized cost using the effective interest method less any provisions for impairment.
(6)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
The impact to short term investments due to the classification of these assets in accordance with IFRS 9 is outlined below:
Balance at December 31, 2017 – IAS 39
Reclassify investments from available-for-sale to amortized
cost
Balance at January 1, 2018 – IFRS 9
Short term
investments
7,833
Accumulated other
comprehensive loss
883
78
7,911
(78 )
805
The investments held at December 31, 2017 were reclassified from available for sale to amortized cost. At January 1, 2018, the date
of initial application, the Company's business model is to hold investments for collection of contractual cash flows, and the cash flows
represent solely payments of principal and interest on the principal amount. The fair value loss of $78,000 would have otherwise been
recognized in other comprehensive income (OCI) had the short term investments not been reclassified to amortized cost.
There was no impact to cash and cash equivalents and accounts receivable resulting from the adoption of IFRS 9.
Impairment of financial assets
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. The Company has a nominal amount of accounts receivable, therefore, the change
in impairment methodology due to the new standard does not have a significant impact on the financial statements. The Company's
cash and cash equivalents and short term investments are also subject to the impairment requirements of IFRS 9, the identified
impairment loss is not material.
Hedge Accounting
The Company had not entered into any hedges as at December 31, 2017 and has not undertaken hedging activities in the year ended
December 31, 2018 therefore the hedge accounting section standard is not applicable to the Company at this time and does not have
an impact on the financial statements.
IFRS 15 Revenues from Contracts with
Customers
The adoption of IFRS 15 Revenue from Contracts with customers using the modified retrospective and the completed contract
practical expedient approaches on January 1, 2018 (the date of initial application of IFRS 15) does result in a change in accounting
policy. However, the adoption did not have a material impact on the financial statements, and as a result the 2017 comparatives are
not required to be restated. The new standard replaces IAS 18, Revenue, IAS 11 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.
The modified retrospective approach results in the cumulative effect, if any, of adoption being recognized at the date of initial
application. The Company currently has no product sales or significant sources of revenue, therefore there is no effect upon initial
application.
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
Company has evaluated the impact of these amendments and as a result have determined that there is no required change to the
Company's accounting policy related to Share based payments, and therefore no changes to the consolidated financial statements are
required.
New accounting standard not yet adopted
The following standard is effective for annual periods beginning on or after January 1, 2019 and has not been applied in preparing these annual
consolidated financial statements.
(7)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
•
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. Aurinia has elected to adopt IFRS 16 effective January 1,
2019.
At the date of adoption of IFRS 16, Aurinia will recognize a lease liability and right-of-use asset. The lease liability will be measured at the
present value of the future lease payments during the lease term which is estimated to be an average of three years at the date of adoption,
discounted using incremental borrowing rates which, in most instances, will be an average interest rate on borrowings for companies
comparable to the Company. The right-of-use asset will be initially calculated at an amount equal to the initial value of the lease liability
adjusted as required under the standard for specific items. The right-of-use asset is expected to be amortized using the straight-line method from
the date of adoption to the end of the lease term. Interest on the lease liability will be calculated using the effective interest method with rent
payments reducing the liability. As a result of these changes, there will be a increase in 2019 to interest expense and amortization, and a
reduction in Corporate, administration and business development expenses (note 13) on the Statement of Operations and Comprehensive Loss
due to the decrease in rent expense. To date, management has identified two facility lease agreements that will have an impact on the
consolidated financial statements. As at the reporting date, the non-cancelable commitment related to these two leases is $800,000 (note 20).
Management is assessing and quantifying the potential financial impact that the adoption will have on the Company's consolidated financial
statements. Management is also currently reviewing Aurinia's non-facility related contracts and agreements to determine whether any of the
agreements will impact the Company's consolidated financial statements. The company will be ready to report under IFRS 16 in its first quarter
financial statements in 2019.
4
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 10.
(8)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(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 11.
Fair value of stock
options
Determining the fair value of stock options on the grant date, 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 term of the underlying instrument.
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 performance obligations and to allocate related consideration to
each separate performance obligation. 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. The estimate of variable consideration requires significant judgment
and an assessment of their potential reversal. Management also uses judgement in assessing if a license is a right to use or a right to
access intellectual property. Factors that are considered include whether the customer reasonably expects (arising from the entity's
customary business practices) that the entity will undertake activities that will significantly affect the intellectual property, the rights
granted by the license directly expose the customer to any positive or negative effects of the entity's activities and whether those
activities transfer a separate good or service to the customer. 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, 2018, 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.
5
Short term investments
Upon adoption of IFRS 9, the Company determined that its business model for managing short term investments is to hold the investments for
cash flow collection and this is congruent with the classification of financial assets held at amortized cost outlined in IFRS 9. As a result, on
January 1, 2018, the Company has reclassified short term investments originally held as available for sale at December 31, 2017 to short term
investments held at amortized cost without restating comparative information. For further information regarding the adoption of IFRS 9 see note
3.
(9)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
The Company's classification of short term investments is as noted below:
Amortized cost
Canadian Government Bond
Bank of Nova Scotia Treasury Note
Available for sale (fair value)
Canadian Government Bond
Bank of Nova Scotia Treasury Note
Amortized Cost
2018
$
Fair Value
2018
$
Fair Value
2017
$
3,912
3,977
—
—
7,889
3,902
3,955
—
—
7,856
—
—
3,888
3,945
7,833
The average duration of the interest-bearing securities is 1.69 years and the average yield to maturity is 1.64%.
For the year ended December 31, 2017 short term investments held at fair value were classified as Level 2 in the fair value hierarchy and the
fair value was determined by using quoted market prices.
6
Property and
equipment
Computer
equipment
and software
Office
equipment
and furniture
Leasehold
improvements
Year ended December 31, 2018
As at January 1, 2018
Additions
Amortization
Net book value
As at December 31, 2018
Cost
Accumulated amortization
Net book value
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
$
3
—
(1)
2
41
(39 )
2
5
—
—
(2)
3
41
(38 )
3
$
—
—
—
—
34
(34 )
—
5
—
—
(5)
—
34
(34 )
—
$
28
30
(19 )
39
94
(55 )
39
19
25
(1)
(15 )
28
156
(128)
28
(10)
Total
$
31
30
(20 )
41
169
(128)
41
29
25
(1)
(22 )
31
231
(200)
31
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
7
Acquired intellectual property and other intangible
assets
Year ended December 31, 2018
Opening net book value
Additions
Amortization for the year
Closing net book value
As at December 31, 2018
Cost
Accumulated amortization
Net book value
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
Acquired intellectual
property and
reacquired rights
$
13,343
—
(1,285)
12,058
19,075
(7,017)
12,058
14,628
(1,285)
13,343
19,075
(5,732)
13,343
Patents
$
773
45
(260)
558
1,551
(993)
558
922
(149)
773
2,171
(1,398)
773
Total
$
14,116
45
(1,545)
12,616
20,626
(8,010)
12,616
15,550
(1,434)
14,116
21,246
(7,130)
14,116
The remaining amortization period of the intangible assets calculated using the weighted average of the useful life is 9.59 years.
8
Accounts payable and accrued liabilities
Trade payables
Other accrued liabilities
Employee accruals
9
Licensing revenue, contract revenue and deferred
revenue
Licensing Revenue
2018
$
2,951
1,849
2,271
7,071
2017
$
3,773
2,149
2,037
7,959
The Company recorded licensing revenue of $118,000 (2017 - $118,000) related to the upfront license payment of $1,500,000 received in 2010
pursuant to the 3SBio Inc. license agreement. Under the agreement, the primary substantive obligations of the Company are to grant the license
and transfer intellectual knowledge to 3SBio. Under the agreement, the Company is also required to maintain the patent portfolio in China,
Taiwan and Hong Kong, and to provide further support and cooperation to 3SBio over the life of the agreement, which coincides with the life of
the patents. Any additional assistance which may be provided to 3SBio will be performed on a full cost recovery basis. The deferred licensing
fee revenue is recognized on a straight-line basis as the Company satisfies the performance obligations over the life of the patents and the
benefit to the customer transfers ratably throughout the patent live, which expires in 2022. As at December 31, 2018, $442,000 (2017 -
$560,000) of deferred revenue remains relating to this payment. The Company will provide commercial supply to 3SBio on a cost-plus basis
and will receive ongoing royalties based on sales of voclosporin by 3SBio.
On April 17, 2017, the Company entered into an agreement with Merck Animal Health (“MAH”) whereby the Company granted them
worldwide rights to develop and commercialize its patented nanomicellar voclosporin ophthalmic solution (“VOS”) for the treatment of Dry
Eye Syndrome in dogs. Under the terms of the agreement, the Company received a Technology Access fee of $300,000. This agreement
provided MAH with a right to use intellectual property. MAH was able to direct the use of and obtain substantially all of the benefits from the
license at the time that control of the rights were transferred and therefore, the $300,000 Technology Access fee was recognized as revenue in
the year ended December 31, 2017. The Company is eligible to receive further payments based on certain development and sales milestones
and receive royalties based on global product sales.
(11)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
Contract Revenue
The Company earned a contract milestone of $345,000 (CA$450,000) pursuant to a purchase and sale agreement dated February 14, 2014
between Ciclofilin Pharmaceuticals Corp. (now Contravir Pharmaceuticals, Inc.) and Aurinia Pharmaceuticals Inc. under which the Company
sold the Non-Immunosuppressive Cyclosporine Analogue Molecules (NICAMs) early stage research and development asset to Ciclofilin. The
Company is eligible to receive further payments based on certain development and sales milestones and to receive royalties based on global
product sales. The Company has no obligations under this agreement.
10
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 2018 no payments were made to ILJIN. In 2017 the Company paid ILJIN $2,150,000 upon the achievement of two specific milestones.
At December 31, 2018, if all of the remaining milestones are met, the timing of these payments is estimated to occur as follows:
2019
2020
2021
$
100
625
7,125
7,850
The fair value estimates at December 31, 2018 were based on a discount rate of 10% (2017 - 10%) and a presumed payment range between
50% and 74% (2017- 50% and 75%). The fair value of this contingent consideration as at December 31, 2018 was estimated to be $4,028,000
(December 31, 2017 - $3,792,000) and was determined by estimating the probability and timing of achieving the milestones and applying the
income approach.
The change in the revaluation amount in 2018 resulted primarily from the change in the expected timing of milestone payments and the passage
of time. The passage of time resulted in a revaluation of contingent consideration expense of $236,000 for the year ended December 31, 2018.
The change in probability factors for the milestones achieved and the passage of time resulted in a revaluation of contingent consideration
expense of $502,000 for the year ended December 31, 2017.
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 $622,000 as at December 31, 2018. 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 $620,000 as at
December 31, 2018. If the discount rate were to increase to 12%, this would decrease the NPV of the obligation by approximately $172,000. If
the discount rate were to decrease to 8%, this would increase the NPV of the obligation by approximately $185,000.
11
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.
(12)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
Balance at January 1, 2018
Revaluation of derivative warrant liability
Balance at December 31, 2018
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
December 28, 2016
Warrants
February 14, 2014
Warrants
Total
# of warrants
(in thousands)
3,523
—
3,523
$
8,948
6,527
15,475
# of warrants
(in thousands)
1,738
—
1,738
$
2,845
3,427
6,272
# of warrants
(in thousands)
$
5,261 11,793
9,954
5,261 21,747
—
6,388
7,405
3,748
1,733
10,136
9,138
(2,865)
(12,421 )
(2,010)
(8,848)
(4,875) (21,269 )
—
—
3,523
(3,844)
17,808
8,948
—
—
1,738
(1,013)
10,973
2,845
—
(4,857)
— 28,781
5,261 11,793
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.
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.
There were no warrant exercises in 2018. In 2017, certain holders of Warrants exercised 2,865,000 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.
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, 2018, the Company revalued the remaining derivative warrants at an estimated fair value of $15,475,000 (December 31,
2017 – $8,948,000). The Company recorded an increase in the estimated fair value of the derivative warrant liability of $6,527,000 for the year
ended December 31, 2018 (2017 - $17,808,000).
The following assumptions were used to estimate the fair value of the derivative warrant liability on December 31, 2018 and December 31,
2017.
Annualized volatility
Risk-free interest rate
Life of warrants in years
Dividend rate
Market price
Fair value per Warrant
(13)
2018
55%
2.45%
2.99
0.0 %
6.82
4.39
2017
55%
2.08%
3.99
0.0 %
4.53
2.54
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
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.
There were no warrant exercises in 2018. 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 w
arrants exercised these warrants for cash and received 27,000 common shares. The Company received cash proceeds of $88,000.
As at December 31, 2018, the Company revalued the remaining derivative warrant liability at an estimated fair value of $6,272,000 (December
31, 2017 – $2,845,000). The Company recorded an increase in the estimated fair value of the derivative warrant liability of $3,427,000 for the
year ended December 31, 2018 (2017 – $10,973,000).
The remaining Warrants were fully exercised subsequent to year end, more information related to these exercises can be found in note 23 -
subsequent events.
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.
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, 2018 and December 31, 2017.
Annualized volatility
Risk-free interest rate
Life of warrants in years
Dividend rate
Market price
Fair value per Warrant
2018
45%
2.56%
0.12
0.0 %
6.82
3.61
2017
48%
1.76%
1.12
0.0 %
4.53
1.64
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 $3,407,000 as at December 31,
2018. If the market price were to decrease by a factor of 10%, this would decrease the estimated fair value of the obligation by approximately
$3,370,000. If the volatility were to increase by 10%, this would increase the estimated fair value of the obligation by approximately $344,000.
If the volatility were to decrease by 10%, this would decrease estimated fair value of the obligation by approximately $322,000 as at
December 31, 2018.
(14)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
12
Share capital
a)
Common
shares
Authorized
Unlimited common shares without par value
Issued
Balance as at January 1, 2018
Issued pursuant to exercise of warrants
Issued pursuant to exercise of stock options
Balance as at December 31, 2018
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
2018
November 30, 2018 ATM facility
Common shares
Number
(in thousands)
84,052
1,172
276
85,500
52,808
25,645
85
4,020
1,494
84,052
$
499,200
3,977
1,473
504,650
299,815
162,324
297
29,953
6,811
499,200
On November 30, 2018 the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) with Jefferies LLC (“Jefferies”)
pursuant to which the Company may from time to time sell, through at-the-market (“ATM”) offerings, common shares that would have an
aggregate offering price of up to US$30,000,000. Aurinia 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 supplements
Aurinia’s short form base shelf prospectus dated March 26, 2018, and Aurinia’s shelf registration statement on Form F-10 dated March 26,
2018, declared effective on March 29, 2018. The listing of any shares sold pursuant to the ATM offering is subject to the approval of the
Toronto Stock Exchange and NASDAQ. Jefferies, at Aurinia’s discretion and instruction, were to use its commercially reasonable efforts to sell
the Common Shares at market prices from time to time. Sales in the ATM offering would only be conducted in the United States through
NASDAQ or another exchange at market prices. No sales were to be conducted in Canada or through the Toronto Stock Exchange.
There were no sales through this ATM Facility in 2018. Subsequent to the year end, this ATM facility was fully utilized as more fully described
in Note 23.
2017
March 20, 2017 public offering
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.
(15)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
b)
Warrants
Issued
Balance as at January 1, 2018
Warrants exercised
Balance as at December 31, 2018
Balance as at January 1, 2017
Warrants exercised
Balance as at December 31, 2017
A summary of the outstanding warrants as at December 31, 2018 is presented below:
Expiry date
February 14, 2019 (notes 11 and 23)
December 28, 2021 (note 11)
c)
Stock options and compensation expense
Warrants
Number
(in thousands)
1,172
(1,172)
—
1,257
(85 )
1,172
$
906
(906)
—
971
(65 )
906
Number
(in thousands)
1,738
3,523
5,261
Weighted average
exercise price
$
3.22
3.00
3.07
A summary of the stock options outstanding as at December 31, 2018 and 2017 and changes during the years ended on those dates is
presented below:
Outstanding – Beginning of year
Granted pursuant to Stock Option Plan
Exercised
Forfeited
Outstanding – End of year
Options exercisable – End of year
2018
2017
Weighted
average
exercise
price in
CA$
4.80
6.54
4.40
—
5.51
5.03
Weighted
average
exercise
price in
CA$
3.74
5.44
3.42
3.54
4.80
4.25
Number
4,052
2,729
(1,494)
(423)
4,864
2,834
Number
4,864
3,003
(276)
—
7,591
4,510
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, 2018, there were 85,500,000 Common Shares
of the Company issued and outstanding, resulting in a maximum of 10,688,000 options available for issuance under the Stock Option Plan. An
aggregate total of 7,427,000 options are presently outstanding in the Stock Option Plan, representing 8.7% 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$3.66). These options vest in equal amounts over 36 months and are exercisable for a term of five
years. In 2018 this employee exercised 20,000 (2017 - 16,000) of these options to hold 164,000. These options are recorded outside of the
Company’s stock option plan.
(16)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
The Stock Option Plan requires the exercise price of each option to be determined by the Board of Directors and not to be less than the closing
market price of the Company’s stock on the day immediately prior to the date of grant. Any options which expire may be re-granted. The Board
of Directors approves the vesting criteria and periods at its discretion. The options issued under the plan are accounted for as equity-settled
share-based payments.
A summary of the stock options granted pursuant to the Stock Option Plan for the years ended December 31, 2018 and 2017 is presented
below:
Year ended December 31, 2018
Grant date
February 1, 2018 - Employees (2)
February 1, 2018 - Officers (2)
February 5, 2018 - Chief Executive Officer (2)
February 5, 2018 - Directors (1)
February 9, 2018 - Director (1)
February 22, 2018 - Director (1)
March 21, 2018 - Officer (3)
October 17, 2018 - New Employees (3)
Grant date
January 20, 2017 - New Director (1)
January 27, 2017 - Employee (2)
February 9, 2017 - Chief Executive Officer (4)
February 9, 2017 - Officers (2)
February 9, 2017 - Employees (2)
February 16, 2017 - Directors (1)
April 26, 2017 - Officer (5)
April 26, 2017 - Employees (3)
April 26, 2017 - Directors (3)
June 23, 2017 - New Director (3)
July 5, 2017 - New Officer (3)
September 20, 2017 - New Employees (3)
October 25, 2017 - New Employee (3)
November 20, 2017 - New Employees (3)
Grant price(5)
US$
5.30
5.30
5.19
5.19
5.09
5.46
5.40
5.93
Year ended December 31, 2017
Grant price(5)
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
Grant price(5)
CA$
6.52
6.52
6.42
6.42
6.40
6.92
7.06
7.70
Grant price(5)
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
Number
503
1,675
400
150
50
50
150
25
3,003
Number
10
25
1,050
747
89
50
50
183
100
50
280
60
5
30
2,729
1.
2.
3.
4.
5.
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
and are exercisable for a term of ten years.
Stock options are granted at a Canadian Dollar (CA$) exercise price, and converted to US Dollars (US$) based on the exchange rate when these
stock options are granted.
36 months
Application of the fair value method resulted in charges to stock-based compensation expense of $6,860,000 for the year ended December 31,
2018 (2017 – $4,242,000) with corresponding credits to contributed surplus. For the year ended December 31, 2018, stock compensation
expense has been allocated to research and development expense in the amount of $2,697,000 (2017 – $993,000) and corporate, administration
and business development expense in the amount of $4,163,000 (2017 – $3,249,000).
(17)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(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 2018, this would have increased annual stock
compensation expense by approximately $308,000. 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 $265,000.
The Company used the Black-Scholes option pricing model to estimate the fair value of the options granted in 2018 and 2017.
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
2018
55%
2.04%
2017
74%
1.31%
4 years
6.6 years
22.4%
0.0 %
5.29
5.29
2.89
$
$
$
25.5%
0.0 %
4.12
4.12
2.79
$
$
$
The following table summarizes information on stock options outstanding as at December 31, 2018:
Options outstanding
Number outstanding
(in thousands)
828
3,075
2,805
883
7,591
Weighted average
remaining contractual
life (years)
3.37
5.42
9.09
8.61
6.92
Options exercisable
Number outstanding
(in thousands)
764
2,446
882
418
4,510
Range of
exercise prices
CA$
3.39 - 4.00
4.21 - 5.19
6.40 - 6.92
7.06 - 9.45
13
Nature of
expenses
Research and development
Contract research organizations (CROs) and other third party clinical trial expenses
Drug supply and distribution
Salaries, incentive pay and employee benefits
Stock compensation expense
Travel, insurance, patent annuity fees, legal fees and other
(18)
2018
$
27,923
4,893
4,260
2,697
1,609
41,382
2017
$
21,634
7,124
3,065
993
1,114
33,930
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
Corporate, administration and business development
Salaries, incentive pay, director fees and employee benefits
Stock compensation expense
Professional and consulting fees
Rent, insurance, information technology and other public company operating costs
Travel, tradeshows and sponsorships
14
Other expense
(income)
Finance income
Interest income
Loss on sale of short term investments
Other
Revaluation adjustment on contingent consideration (note 10)
Foreign exchange loss (gain) and other
Loss on disposal of equipment
2018
$
4,600
4,163
2,307
1,704
900
13,674
2018
$
(2,234)
—
(2,234)
236
(67 )
—
169
(2,065)
2017
$
4,239
3,249
2,125
1,327
1,156
12,096
2017
$
(1,040)
338
(702)
502
3
1
506
(196)
15
Income
taxes
As at December 31, 2018, the Company has available Canadian non-capital losses in the amount of $163,144,000 (2017 – $117,232,000) and
scientific research and experimental development expenditures (SRED) in the amount of $3,732,000 (2017 – nil) to reduce Canadian taxable
income in future years. The Company has unclaimed investment tax credits of $1,926,000 (2017 – $1,409,000) available to reduce future
Canadian income taxes otherwise payable.
The SRED expenditures do not expire. The losses and credits will expire as follows:
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
Non-capital
losses carried
forward
$
3,294
2,341
1,786
7,425
5,325
13,032
18,749
21,140
42,316
47,736
Federal
investment
tax credits
$
30
50
280
184
75
131
203
206
353
414
(19)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
As at December 31, 2018 and December 31, 2017, 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
SRED
Other
Potential tax assets not recognized
Net deferred tax assets
2018
$
44,264
2,433
1,207
—
1,248
991
231
50,374
(50,374 )
—
2017
$
31,700
3,364
1,175
2
1,507
—
159
37,907
(37,907 )
—
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% (2017 – 27.0%) Canadian statutory tax rate and the actual income
tax expense recorded 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
Income taxes related to foreign subsidiaries
Total income tax expense
16
Net loss per common
share
2018
$
(17,312 )
2,688
2,157
12,467
73
73
2017
$
(19,135 )
6,459
1,418
11,258
—
—
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, 2018
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, 2018 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)
(20)
2018
$
(64,120 )
Number
84,782
$
(0.76 )
2017
$
(70,792 )
Number
76,918
$
(0.92 )
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(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)
17
Segment
disclosures
2018
1,567
2,420
—
3,987
2017
1,222
2,415
632
4,269
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
18
Supplementary cash flow
information
Net change in other operating assets and liabilities
Accounts receivable and accrued interest receivable
Prepaid expenses, deposits and other
Clinical trial contract deposits
Accounts payable and accrued liabilities
Interest received
(21)
2018
$
345
118
463
2018
$
(108)
(5,094)
90
(888)
(6,000)
2,148
2017
$
300
118
418
2017
$
(23 )
2
(448)
2,168
1,699
973
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
Cash flows from financing and investing activities:
Short term
investments
Contingent
consideration
Derivative
warrants
December
28, 2016
Derivative
warrants
February
14, 2014
Common
shares Warrants
Contributed
surplus
Balance at
January 1, 2018
Cash flow - Purchases
Cash flow - Proceeds from
short term investment
Cash flow - Proceeds from
exercise of warrants
Cash flow - Proceeds from
exercise of options
Non-cash changes - Conversion
to common shares
Non-cash changes - Fair value
adjustments
Non-cash changes - Stock
based compensation
Non-cash changes - Opening
adjustment on change in
accounting policy
Non-cash changes - Other
Balance at
December 31, 2018
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
7,833
36,084
(36,093 )
—
—
—
—
—
78
(13 )
(3,792)
—
(8,948)
—
(2,845) (499,200)
—
—
(906)
—
(18,360 )
—
—
—
—
—
—
—
—
—
—
—
—
(3,071)
—
(943)
—
—
—
—
(1,436)
906
(236)
(6,527)
(3,427)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
530
—
(6,860)
—
—
(24,690 )
—
—
—
—
—
7,889
(4,028)
(15,475 )
(6,272) (504,650)
—
97,996
(90,018 )
—
(5,440)
—
—
2,150
(7,405)
—
—
—
(1,733) (299,815)
—
—
—
—
—
—
(971)
—
—
—
(17,017 )
—
—
—
—
—
—
—
—
(78 )
—
(67 )
—
—
—
—
—
—
— (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 )
(22)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
19
Related
parties
Compensation of key management
Compensation awarded to key management was composed of the following:
Salaries and short-term employee benefits
Bonuses accrued or paid
Severance costs
Director fees
Stock-based compensation
2018
$
2,042
879
—
446
4,971
8,338
2017
$
2,961
1,300
544
217
3,560
8,582
In 2018 the Company defined key management as Directors and executive officers whereas in 2017 the Company's key management was
defined as all Directors and officers. This change in definition is a result of the Company's continued growth and the hiring of additional
personnel, requiring a narrower focus on the definition of key management. In 2017, compensation for Directors and executive officers was
$6,812,000.
Other
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 $152,000 for the year ended December 31, 2018 ($255,000 for the year ended December 31, 2017).
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 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 10 of the audited consolidated
financial statements for the year ended December 31, 2018.
20
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. On December 6, 2018 the Company signed a commitment letter
and entered into a new sublease on January 28, 2019 to rent 9,406 square feet of office and storage space at the existing location effective June
1, 2019. The new sublease is for a term of three years, the Company has the ability to cancel upon twelve months notice. The estimated base
rent plus operating costs for the period from January 1, 2019 to May 31, 2019 is approximately $11,000 per month increasing to approximately
$21,000 per month for the period of June 1, 2019 to May 31, 2022.
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 subsequently
renewed until December 31, 2019 at a cost of approximately $1,400 per month on the same terms as the original lease.
The Company incurred rent expense, including base rent and operating costs of $168,000 for the year ended December 31, 2018 and $143,000
for the year ended December 31, 2017.
The Company has entered into contractual obligations for services and materials required for its clinical trial program, drug manufacturing and
other operational activities.
(23)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
Future minimum lease payments for its premises and the minimum amount to exit the Company’s contractual commitments are as follows:
2019
2020
2021
2022
Contingencies
Operating
leases
$
208
241
246
105
800
Purchase
obligations
$
12,568
6,051
71
8
18,698
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
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 a public offering, the exercise of warrants and stock options and draw-downs
subsequent to year end under our November 30, 2018 ATM facility as its primary sources of liquidity, as discussed in note 12 - 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.
22
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; FVOCI; and, assets and liabilities at amortized cost.
In establishing fair value, the Company used a fair value hierarchy based on levels defined below:
(24)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
•
•
•
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,
short term investments, accounts receivable, accrued receivables 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
10, and information on the fair value of derivative warrant liability is included in note 11.
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 21. 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 10, and
the derivative warrant liabilities, as described in note 11.
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, 2018 is
considered minimal as the majority of its financial resources are held as cash and cash equivalents.
(25)
Aurinia Pharmaceuticals Inc.
Notes to Consolidated Financial Statements
December 31, 2018 and December 31, 2017
(expressed in US dollars, tabular amounts in thousands)
•
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 and accrued interest receivable
Accounts payable and accrued liabilities
Net exposure
CA$ – US$
2018
$
364
24
(1,677)
(1,289)
2017
$
125
28
(1,657)
(1,504)
Reporting date rate
2017
$
0.797
2018
$
0.733
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 $128,000 assuming all other variables remained constant. An assumed 10% weakening of the CA$
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 expected loss.
23
Subsequent
events
ATM Facility
Subsequent to year-end the ATM Facility as described in Note 12a was fully utilized resulting in gross proceeds of $30,000,000 upon the
issuance of 4,608,000 common shares at a weighted average price of $6.55. The Company incurred share issue costs of $1,170,000 including a
3% commission of $900,000 paid to the agent and professional and filing fees of $270,000 directly related to the ATM.
Stock Options
Subsequent to year-end, the Company issued 377,000 common shares upon the exercise of 377,000 stock options for proceeds of $1,304,000
and granted 1,365,000 stock options to the officers, directors and employees of the Company at a weighted average price of $6.06 (CA $8.04).
In addition, 234,000 stock options were forfeited.
Exercise of derivative warrants related to February 14, 2014 private placement offering
Subsequent to year end, the 1,738,000 derivative warrants outstanding at December 31, 2018 related to the February 14, 2014 private placement
offering, were exercised. Certain holders of these Warrants elected the cashless exercise option and the Company issued 687,000 common
shares on the cashless exercise of 1,274,000 Warrants. The remaining 464,000 warrants were exercised for cash, at a price of $3.2204 and the
Company received cash proceeds of $1,494,000 upon the issuance of 464,000 common shares.
Pursuant to the exercise of these warrants, the Company will transfer $5,919,000 from derivative warrant liabilities to equity (common shares)
and record an adjustment of $352,000 through the statement of operations and comprehensive loss related to the change in estimated fair value
of derivative warrant liabilities in the first quarter ended March 31, 2019. As a result, the derivative warrant liability of $6,271,000 at December
31, 2018 related to the February 14, 2014 private placement offering has been extinguished upon the exercise of the aforementioned warrants.
(26)
yeconsolidatedmdacover2018.jpg
Exhibit 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 2018
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, 2018 and our annual MD&A and audited financial
statements for the year ended December 31, 2017. 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 15, 2019.
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 ("IFRS") as issued by the International Accounting Standards Board (" 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 products 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 of our future prospects
and make informed investment decisions. These statements, made in this MD&A, may include, without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our belief that the Phase 2b lupus nephritis (" LN") AURA- LV (" AURA") clinical trial had positive
results;
our belief that we have sufficient cash resources to adequately fund
operations;
our belief that the totality of data from both the single double-blind, randomized, placebo controlled Phase 3 clinical trial for voclosporin in the
treatment of LN ("AURORA") and AURA clinical trials can potentially serve as the basis for a New Drug Application (an " NDA") with the
Food and Drug Administration of the United States Government (the "FDA") following a successful completion of the AURORA clinical
trial;
our belief that confirmatory data generated from the single AURORA clinical trial and the 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 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 belief in the duration of patent exclusivity for voclosporin and that the patents owned by us are
valid;
our belief in receiving extensions to patent life based on certain events or
classifications;
our 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 AURORA 2 extension
trial;
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 of the key potential benefits of voclosporin in the treatment of LN and other
podocytopathies;
our target launch date for voclosporin as a treatment for LN for early
2021;
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 CNIs are a mainstay of treatment for
DES;
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");
the timing for completion of enrollment and for data availability for our Phase 2 study for voclosporin in FSGS patients;
statements concerning the anticipated commercial potential of voclosporin for the treatment of LN, FSGS and
DES;
our plan to expand voclosporin renal franchise to include
FSGS;
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;
1
•
•
•
•
•
•
•
•
•
•
•
•
for
the
regulatory
concerning
potential market
our belief that our current financial resources are sufficient to fund our existing LN program including the AURORA trial and the NDA
submission to the FDA, conduct the current Phase 2 study for FSGS, commence additional studies for DES and fund operations into mid-
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 voclosporin ophthalmic solution ("VOS") has the potential to compete in the multi-billion-dollar human prescription dry eye
market;
our intention to seek additional corporate alliances and collaborative agreements to support the commercialization and development of our
products;
our belief that the United States Patent and Trademark Office (the "USPTO") will issue a new patent covering the dosing protocol for
voclosporin in LN, with a patent term extending to 2037;
our belief that additional patents may be granted worldwide based on our filings under the Patent Cooperation Treaty
("PCT");
our strategy to become a global biopharmaceutical
company;
our plan to conduct a confirmatory drug-drug interaction study;
and
our plan to conduct a study with pediatric
patients.
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
that 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 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 the USPTO will issue a new patent for its dosing protocol once applicable steps have been followed and fees
paid;
the assumption that we will be able to extend our patents to the fullest extent allowed by law, on terms most beneficial to
us;
the
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 depend on the facts particular to each of them. Accordingly, the expected impact cannot be meaningfully described in the abstract
or presented in the same manner as known risks affecting our business.
The factors discussed below and other considerations discussed in the “Risk Factors” section of this MD&A 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,
2
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
to extend our patent portfolio for
the need for additional capital in the future to continue to fund our development programs and commercialization activities, 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, European Medicines Agency, 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;
our patent portfolio not covering all of our proposed uses of
voclosporin;
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 payors for
voclosporin;
difficulties we may experience in identifying and successfully securing appropriate vendors to support the development and
commercialization of our product; and/or
uncertainty that the FDA will agree to a label that will follow the dosing protocol under the Notice of Allowance for claims directed at our
novel voclosporin dosing protocol for LN (U.S. patent application 15/835,219).
acceptance
obtaining
formulary
demand
and
for
of
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 its 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
Aurinia is a late clinical stage biopharmaceutical company focused on developing and commercializing therapies to treat targeted patient populations
that are suffering from serious diseases with a high unmet medical need. We are currently developing voclosporin, an investigational drug, for the
potential treatment of LN, DES and FSGS.
Our head office is located at #1203-4464 Markham Street, Victoria, British Columbia V8Z 7X8. 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 (the "Common Shares") are currently
listed and traded on the NASDAQ Global Market ("NASDAQ") under the symbol "AUPH" and on the Toronto Stock Exchange under the symbol
"AUP".
We have two wholly-owned subsidiaries: Aurinia Pharma U.S., Inc., (Delaware incorporated) and Aurinia Pharma Limited (United Kingdom
incorporated).
3
BUSINESS OF THE COMPANY
We are currently developing voclosporin, an investigational drug, for the potential treatment of LN, DES and FSGS. 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).
The topical formulation of voclosporin, VOS, is an aqueous, preservative free nanomicellar solution intended for use in the treatment of DES. Studies
have been completed in rabbit and dog models. A single Phase 1 study and a Phase 2a head-to-head study have also been completed in healthy
volunteers and patients with DES. VOS has IP protection until 2031.
Legacy CNIs have demonstrated efficacy for a number of conditions, including 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. This modification may result in 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 administered twice a day ("BID"). The mechanism of action of voclosporin 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 and other podocytopathies 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 early 2021.
LN
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 six 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 ).
DES
DES or dry eye disease or keratoconjuctivitis sicca, is characterized by irritation and inflammation that occurs when the eye’s tear film is compromised
by reduced tear production, imbalanced tear composition, or excessive tear evaporation. The impact of DES ranges from subtle, yet constant eye
irritation to significant inflammation and scarring of the eye’s surface. Discomfort and pain resulting from DES can reduce quality of life and cause
difficulty reading, driving, using computers and performing daily activities. DES is a chronic disease. There are currently two FDA approved therapies
for the treatment of dry eye; however, there is opportunity for potential improvement in the effectiveness by enhancing tolerability and onset of action
and alleviating the need for repetitive dosing. The disease is estimated to affect greater than 20 million people in the United States (Market Scope, 2010
Comprehensive Report on The Global Dry Eye Products Market).
FSGS
FSGS is a rare disease that attacks the kidney’s filtering units (glomeruli) causing serious scarring which leads to permanent kidney damage and even
renal failure. FSGS is one of the leading causes of Nephrotic Syndrome ("NS") and is identified by biopsy and proteinuria. NS is a collection of signs
and symptoms that indicate kidney damage, including: large amounts of protein in urine; low levels of albumin and higher than normal
4
fat and cholesterol levels in the blood, and edema. Similar to LN, early clinical response which can be measured by reduction of proteinuria in addition
to maintaining podocyte structural and functional integrity, is thought to be critical to long-term kidney health in patients with FSGS.
FSGS is likely 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 5,400 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 or the European Union.
STRATEGY
Our business strategy is to optimize the clinical and commercial value of voclosporin and become a global biopharma company with a focused renal
and autoimmune franchise. This includes the expansion of a potential renal franchise with additional renal indications and the exploitation of
voclosporin in novel formulations for treatment of autoimmune related disorders.
We have strategically developed a plan to expand our voclosporin renal franchise to include FSGS. Additionally, we are also furthering development of
VOS for the treatment of DES. The advancement of these new indications, in addition to LN, represents an expansion of our pipeline and commercial
opportunities.
The key elements of our corporate strategy include:
•
•
•
advancing voclosporin through the AURORA Phase 3 clinical trial with anticipated completion of this trial in the fourth quarter of
2019;
conducting a Phase 2 proof of concept study for the additional renal indication of FSGS;
and
conducting additional studies of VOS, while assessing mechanisms to maximize shareholder value through both clinical and business
development initiatives.
PATENT NOTICE OF ALLOWANCE
RECENT DEVELOPMENTS
On February 25, 2019, we announced that we had received a notice of allowance (the " Notice of Allowance") from the USPTO for claims directed at
our novel voclosporin dosing protocol for LN (U.S. patent application 15/835,219, entitled "PROTOCOL FOR TREATMENT OF LUPUS
NEPHRITIS”).
The allowed claims broadly cover the novel voclosporin individualized flat-dosed pharmacodynamic treatment protocol adhered to and required in both
the previously reported Phase 2 AURA-LV trial and our ongoing Phase 3 confirmatory AURORA trial. Notably, the allowed claims cover a method of
modifying the dose of voclosporin in patients with LN based on patient specific pharmacodynamic parameters.
This Notice of Allowance concludes a substantive examination of the patent application at the USPTO, and after administrative processes are
completed and fees are paid, is expected to result in the issuance of a U.S. patent with a term extending to December 2037. If the FDA approves the use
of voclosporin for LN and the label for such use follows the dosing protocol under the Notice of Allowance, the issuance of this patent will expand the
scope of intellectual property protection for voclosporin, which already includes robust manufacturing, formulation, synthesis and composition of matter
patents.
We have also filed for protection of this subject matter under the PCT and have the option of applying for similar protection in the member countries
thereof. This may lead to the granting of corresponding claims in the treaty countries which include all the major global pharmaceutical markets.
DES
On January 22, 2019 we released results for our exploratory Phase 2a head-to-head study evaluating the efficacy, safety and tolerability of VOS versus
Restasis® (cyclosporine ophthalmic emulsion) 0.05% for the treatment of DES. The study was initiated in July of 2018 and full enrollment was
achieved in the fourth quarter of 2018. We believe CNI's are a mainstay of treatment for DES. The goal of this program is to develop a best-in class
treatment option.
In this exploratory Phase 2a study:
▪
▪
▪
VOS showed statistical superiority to Restasis® on FDA-accepted objective signs of DES.
42.9% of VOS subjects vs 18.4% of Restasis® subjects (p=.0055) demonstrated ≥ 10mm improvement in Schirmer Tear Test (" STT") at
Week 4.
Primary endpoint of drop discomfort at 1-minute on Day 1 showed no statistical difference between VOS and Restasis®, as both exhibited low
drop discomfort scores, and both drugs were well-tolerated.
5
On the key pre-specified secondary endpoints of STT (an objective measure of tear production), and Fluorescein Corneal Staining (" FCS") (an objective
measure of structural damage to the cornea), which are FDA-accepted efficacy endpoints, VOS showed rapid and statistically significant improvements
over Restasis® at Week 4 (STT: p=.0051; FCS: p=.0003).
This 100-patient, double-masked, head-to-head study was designed to evaluate the efficacy, safety and tolerability of VOS versus Restasis® in subjects
with DES. Both arms of the study received either VOS or Restasis® (1:1) administered twice daily, in both eyes, for 28 days. Key pre-specified
secondary endpoints, which are FDA-accepted endpoints, include STT, FCS, and assessments of dry eye symptoms. Improvements in STT and FCS are
considered by regulators to be two of the most clinically meaningful measures of efficacy in this disease.
4-Week Pre-Specified Efficacy Endpoints (Signs)*
VOS
Restasis®
p-value vs.
Restasis®
Schirmer Tear Test (STT)
(mm LS mean increase from baseline)
% of subjects showing ≥ 10mm improvement in STT
(basis of FDA approval for other CNIs and an improvement is
considered to be clinically significant)
Fluorescein Corneal Staining (FCS)
(reduction in staining is clinically significant)
*worst eye
8.6
3.3
.0051
42.9%
18.4%
.0055
-2.2
-0.2
.0003
Both treatment arms also demonstrated substantial and statistically significant improvements on the Symptom Assessment in Dry Eye score from
baseline to Week 4.
No serious adverse events (SAE) were reported in the study, and there were no unexpected safety signals. All adverse events (AEs) were mild to
moderate and the majority of patients had no AEs. There were five more patients with mild to moderate AEs in the VOS vs Restasis arm which were
typical of complaints from DES patients.
Based on this data, we plan to aggressively advance VOS for the treatment of DES. Our pursuit of further development of VOS provides the Company
with an enhanced pipeline that further capitalizes on the differentiating features of voclosporin and positions us for substantial growth and measured
diversification.
VOS had previously shown evidence of efficacy in our partnered canine studies and in a small human Phase 1 study (n=35), supporting its development
for the treatment of DES. Completed preclinical and human Phase 1b 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.
Animal safety toxicology studies were previously completed in rabbit and dog models, and additional animal safety toxicology studies are either being
currently conducted or in the planning stage for 2019.
ATM Offering
On November 30, 2018 we entered into an open market sale agreement with Jefferies LLC pursuant to which Aurinia would be able to, from time to
time, sell, through at-the-market (“ATM”) offerings, Common Shares that would have an aggregate offering price of up to $30 million. Aurinia 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 Aurinia’s short form base shelf prospectus dated March 26, 2018, and Aurinia’s shelf
registration statement on Form F-10 dated March 26, 2018, declared effective on March 29, 2018.
Subsequent to year-end, we sold 4.61 million Common Shares and received gross proceeds of $30 million at a weighted average price of $6.55 pursuant
this agreement. We incurred share issue costs of $1.17 million including a 3% commission of $900,000 and professional and filing fees of $270,000
directly related to the ATM offering. Sales in the ATM offering were only conducted in the United States through NASDAQ at market prices.
6
CLINICAL AND CORPORATE DEVELOPMENTS IN 2018
AURORA Phase 3 Clinical Trial in LN
We achieved a significant milestone on September 25, 2018 with the completion of enrollment for our AURORA Phase 3 clinical trial. The target
enrollment of 324 patients was surpassed due to high patient demand with 358 LN patients randomized in sites across 27 countries. AURORA is a 56-
week trial (52-week primary endpoint and a four-week follow-up period). Therefore, we expect to have top-line data for this trial in late 2019.
We believe the totality of data from both the AURORA and AURA clinical trials can potentially serve as the basis for an NDA submission with the
FDA following a successful completion of the AURORA clinical trial. Under voclosporin’s fast-track designation we intend to utilize a rolling NDA
process which will allow us to begin the submission process following a positive pre-NDA meeting with the FDA, which we anticipate will occur in the
first quarter of 2020. To that end we are actively preparing the non-clinical and chemistry, manufacturing and controls modules required for the NDA
submission. Our current plan is to complete the NDA, including the clinical module, in the second quarter of 2020.
The AURORA clinical trial is a global double-blind, placebo-controlled study, (designed with target enrollment of 324 patients) to evaluate whether
voclosporin added to background therapy of CellCept®/MMF can increase overall renal response rates in the presence of low dose steroids.
Patients were randomized 1:1 to either of: (i) 23.7 mg voclosporin BID and MMF, or (ii) MMF and placebo, with both arms receiving a rapid oral
corticosteroid taper. As in the AURA clinical trial, the study population in AURORA is 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
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 44-52)
and;
no
medications.
administration
rescue
of
Patients completing the AURORA trial have the option to roll over into a 104-week blinded extension trial (the " AURORA 2 extension trial"). During
the second quarter ended June 30, 2018, the first patients commenced rolling over into the AURORA 2 extension trial. Enrollment in this study
continues to increase as additional patients complete AURORA. The data from the AURORA 2 extension trial will allow us to assess the long-term
benefit/risk of voclosporin in LN patients, however, this study is not a requirement for potential regulatory approval for voclosporin. Data from the
AURORA 2 extension trial assessing long-term outcomes in LN patients should be valuable in a post-marketing setting and for future interactions with
various regulatory authorities.
In order to enhance and complete the clinical dossier, we commenced a confirmatory drug-drug interaction study (a " DDI study") between voclosporin
and MMF in the second half of 2018. Legacy CNIs, such as cyclosporin A, impact MMF concentrations, and our goal with this short study is to confirm
the insignificant impact of voclosporin upon MMF concentrations that were previously seen in a renal transplant study. We are conducting the study
with SLE patients and are currently in the process of enrolling patients with the study expected to be completed in 2019. In this study, patients will be
monitored for a period of two weeks. We believe the results of this study will add to our knowledge of voclosporin in a multi-targeted therapeutic
approach and should have no impact on our submission time-line or the potential approval of voclosporin.
We also plan to evaluate voclosporin in pediatric patients after a potential FDA approval of an indication for adults with LN.
New Voclosporin Indication - FSGS
Similar to LN, integrity of the podocyte is a key feature of disease progression in FSGS. The disease has straightforward disease outcomes where an
early clinical response correlates with long-term outcomes, measured by proteinuria. Based on our clinical data in LN which demonstrated that
voclosporin decreased proteinuria, we believe voclosporin has the potential to benefit patients with FSGS. Our clinical data in LN demonstrated that
voclosporin decreased proteinuria. 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 submitted our IND to the FDA in the first quarter of 2018. We received agreement from the FDA with regards to the guidance we provided on this
study and the IND is now active. Our Phase 2 proof-of-concept study in FSGS which is an open-label study of approximately 20 treatment-naive
patients was initiated in June 2018. As we are essentially enrolling newly diagnosed patients and this is a rare disease, enrollment is slower than
originally expected. We believe enrollment could take up to additional twelve months from the current date, however, we plan to have interim data
readouts throughout the course of the study, once sufficient patients are enrolled. As we have been focused on LN, expanding our scope to include other
proteinuric renal diseases is synergistic with our current strategy and long-term vision.
Corporate Development
We announced on November 8, 2018 that Richard M. Glickman, Aurinia's Chairman and Chief Executive Officer, intends to retire from his position
once a suitable replacement is identified and appointed. The board of directors (the "Board") has retained an executive search firm and has initiated a
search for his successor. This process is ongoing. Under his direction, the Company has delivered on its key milestones and
7
evolved into a patient-centric, late-stage clinical company with investigational drugs addressing multiple indications across the global immunology
market.
RESULTS OF OPERATIONS
For the year ended December 31, 2018, we reported a consolidated net loss of $64.12 million or $0.76 loss per common share, as compared to a
consolidated net loss of $70.79 million or $0.92 loss per common share for the year ended December 31, 2017.
We recorded an increase in the estimated fair value of derivative warrant liabilities of $9.95 million for the year ended December 31, 2018 compared to
$23.92 million for the previous year. These increases, which are non-cash in nature, increased the consolidated net loss for each of the years
respectively.
After adjusting for the non-cash impact of the revaluation of the warrant liabilities, the net loss before change in estimated fair value of derivative
warrant liabilities for the year ended December 31, 2018 was $54.09 million compared to $46.87 million for the year ended December 31, 2017. The
higher net loss before the increase in estimated fair value of derivative warrant liabilities in 2018 was primarily due to an increase in research and
development ("R&D") expenses for the year ended December 31, 2018.
Licensing revenue, contract revenue and deferred revenue
Licensing Revenue
We recorded licensing revenue of $118,000 (2017 - $118,000) related to the upfront license payment of $1.5 million received in 2010 pursuant to the
3SBio Inc. license agreement. Under the agreement, the primary substantive obligations of the Company are to grant the license and transfer intellectual
knowledge to 3SBio. Under the agreement, we are also required to maintain the patent portfolio in China, Taiwan and Hong Kong, and to provide
further support and cooperation to 3SBio over the life of the agreement, which coincides with the life of the patents. Any additional assistance which
may be provided to 3SBio will be performed on a full cost recovery basis. The deferred licensing fee revenue is recognized on a straight-line basis we
satisfy the performance obligations over the life of the patents and the benefit to the customer transfers ratably throughout the patent live, which expires
in 2022. As at December 31, 2018, $442,000 (2017 - $560,000) of deferred revenue remains relating to this payment. We will provide commercial
supply to 3SBio on a cost-plus basis and will receive ongoing royalties based on sales of voclosporin by 3SBio.
On April 17, 2017, we entered into an agreement with Merck Animal Health (“MAH”) whereby the Company granted them worldwide rights to
develop and commercialize its 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. This agreement provided MAH with a right to use intellectual property.
MAH was able to direct the use of and obtain substantially all of the benefits from the license at the time that control of the rights were transferred and
therefore, the $300,000 Technology Access fee was recognized as revenue in the year ended December 31, 2017. We are eligible to receive further
payments based on certain development and sales milestones and receive royalties based on global product sales.
Contract Revenue
We earned a contract milestone of $345,000 (CA$450,000) pursuant to a purchase and sale agreement dated February 14, 2014 between Ciclofilin
Pharmaceuticals Corp. (now Contravir Pharmaceuticals, Inc.) and Aurinia Pharmaceuticals Inc. under which the Company sold the Non-
Immunosuppressive Cyclosporine Analogue Molecules (NICAMs) early stage research and development asset to Ciclofilin. We are eligible to receive
further payments based on certain development and sales milestones and to receive royalties based on global product sales. We have no obligations
under this agreement
Research and Development expenses
R&D expenses increased to $41.38 million for the year ended December 31, 2018 compared to $33.93 million for the year ended December 31, 2017.
The increase in R&D expenses in 2018 primarily reflected costs incurred for the AURORA 2 extension trial, the DDI study and the DES and FSGS
Phase 2 studies, which were newly enrolled studies in 2018.
The most significant portion of R&D expenses related to the AURORA trial. AURORA trial costs were $23.56 million for the year ended December 31,
2018 compared to $24.15 million for the year ended December 31, 2017.
Clinical Research Organization ("CRO") and other third party clinical trial expenses were $27.92 million for the year ended December 31, 2018
compared to $21.63 million for the year ended December 31, 2017. The increased costs primarily reflected higher CRO costs, including service fees and
pass-through costs related to the AURORA trial, the AURORA 2 extension trial, the DES study, the DDI study and commencement costs for the Phase
2 FSGS.
We incurred drug supply and distribution costs of $4.89 million for the year ended December 31, 2018 compared to $7.12 million for 2017. Costs
incurred in 2018 were primarily for encapsulating, packaging and distribution of the drug supply for the AURORA trial and manufacturing and
packaging drug supply for VOS, whereas the drug costs for 2017 also included an expense of $3.17 million to manufacture voclosporin drug product.
8
Salaries, annual incentive pay accruals and employee benefits (excluding non-cash stock compensation expense noted below) increased to $4.26 million
for the year ended December 31, 2018 compared to $3.07 million for the same period in 2017. The increase reflected the hiring of fifteen additional
R&D employees since January 1, 2017, annual salary increases, and a higher incentive pay accrual resulting from the additional personnel numbers.
We also recorded non-cash stock compensation expense of $2.70 million for the year ended December 31, 2018 compared to $993,000 for 2017. See
stock-based compensation expense section below for more details.
Other expenses, which included items such as travel, clinical trial insurance, patent annuity and legal fees, phone and publications increased to $1.61
million for the year ended December 31, 2018 compared to $1.11 million in 2017. The increase reflected higher expenses, particularly for travel, related
to the clinical trial programs conducted in 2018.
Corporate, administration and business development expenses
Corporate, administration and business development expenses increased to $13.67 million for the year ended December 31, 2018 compared to
$12.10 million for 2017. The increase reflected higher activity levels in 2018.
Corporate, administration and business development expenses included non-cash stock-based compensation expense of $4.16 million for the year ended
December 31, 2018 compared to $3.25 million for 2017. See the section on stock-based compensation expense below for more details.
Salaries, director fees, payroll accruals and employee benefits (excluding stock compensation expense noted above) were $4.60 million for the year
ended December 31, 2018 compared to $4.24 million in 2017. The increases reflected payroll costs in 2018 for seven additional employees hired since
January 1, 2017, higher incentive pay accruals recorded in 2018, annual salary increases for employees and higher director fees.
Professional and consulting fee expense was consistent at $2.31 million for the year ended December 31, 2018 compared to $2.13 million in 2017.
Rent, insurance, information technology, communications and other public company operating costs increased to $1.70 million for the year ended
December 31, 2018 compared to $1.33 million for the year ended December 31, 2017. The increased costs reflected overall higher activity levels,
higher staff numbers, and higher director and officer insurance costs commensurate with conducting a Phase 3 clinical trial.
Travel, tradeshows and sponsorships expense decreased slightly to $900,000 for the year ended December 31, 2018 compared to $1.16 million for the
year ended December 31, 2017.
Stock-based compensation expense
For stock option plan information and outstanding stock option details refer to note 12(c) of the audited consolidated financial statements for the year
ended December 31, 2018.
We granted 3.0 million stock options for the year ended December 31, 2018 at a weighted average exercise price of $5.29 compared to 2.73 million
stock options at a weighted average exercise price of $4.12 for the year ended December 31, 2017.
Application of the fair value method resulted in charges to stock-based compensation expense of $6.86 million for the year ended December 31, 2018
(2017 – $4.24 million) with corresponding credits to contributed surplus. For the year ended December 31, 2018, stock compensation expense has been
allocated to R&D expense in the amount of $2.70 million (2017 – $993,000) and corporate, administration and business development expense in the
amount of $4.16 million (2017 – $3.25 million).
The increase in stock-based compensation expense in 2018 compared to 2017 related to the following: an increase in the number of options granted in
2018; an increase in the weighted average of the fair value of the stock options granted to $2.89 per common share in 2018 from $2.79 in 2017 due to
increases in 2018, in our share price and in the interest rate used in calculating the fair value; and a change in the vesting periods for employee options to
36 months in 2017 and 2018 compared to 2016, where the majority of granted options vested over 12 months.
Amortization of acquired intellectual property and other intangible assets
Amortization of acquired intellectual property and other intangible assets increased slightly to $1.55 million for the year ended December 31, 2018
compared to $1.43 million recorded in 2017.
Other expense (income)
We recorded other income of $2.07 million for the year ended December 31, 2018 compared to other income of $196,000 for the year ended December
31, 2017.
Other expense (income) included the following items:
Finance income of $2.23 million for the year ended December 31, 2018 consisting of interest income of $2.23 million compared to 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. The increase in interest income primarily reflected increases in United States interest rates in 2018 compared to 2017.
9
Revaluation expense adjustments on long term contingent consideration to ILJIN SNT Co., Ltd. (" ILJIN") of $236,000 for the year ended December
31, 2018 compared to $502,000 for 2017. The contingent consideration is more fully discussed in note 10 to the audited consolidated financial
statements for the year ended December 31, 2018.
Foreign exchange gain of $67,000 for the year ended December 31, 2018 compared to a foreign exchange loss of $4,000 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 $9.95 million for the year ended December 31, 2018
compared to a non-cash increase of $23.92 million for 2017. 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 4
(Critical accounting estimates and judgements) to the audited consolidated financial statements for the year ended December 31, 2018.
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.
Derivative warrant liability related to December 31, 2016 Bought Deal public offering
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.
There were no warrant exercises in 2018.
At each of December 31, 2018 and December 31, 2017, there were 3.52 million of the December 28, 2016 Warrants outstanding at an exercise price of
$3.00.
Derivative warrant liability related to February 14, 2014 private placement offering
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.
There were no warrant exercises in 2018.
At each of December 31, 2018 and December 31, 2017, there were 1.74 million of the 2014 Warrants outstanding.
Subsequent to December 31, 2018, the 2014 Warrants outstanding at December 31, 2018 were exercised. Certain holders of the 2014 Warrants elected
the cashless exercise option and we issued 687,000 Common Shares on the cashless exercise of 1.27 million 2014 Warrants. The remaining 464,000
warrants were exercised for cash, at a price of $3.2204, and as a result we received cash proceeds of $1.49 million upon the issuance of 464,000
Common Shares. Pursuant to the exercise of the 2014 Warrants, we transferred $5.92 million from derivative warrant liability to equity (Common
Shares) and recorded an adjustment of $352,000 through the statement of operations and comprehensive loss related to the change in estimated fair
value of derivative warrant liabilities in the first quarter ended March 31, 2019. As a result, the derivative warrant liability of $6.27 million at December
31, 2018 related to the Private Placement has been extinguished upon the exercise of the 2014 Warrants.
10
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2018, we had cash, cash equivalents, and short term investments on hand of $125.86 million compared to $173.46 million at
December 31, 2017.
Subsequent to December 31, 2018 we received gross proceeds of $30 million from the ATM facility (as discussed in the Recent Developments section),
proceeds of $1.49 million from the cash exercise of 464,000 2014 Warrants and proceeds of $1.30 million from the exercise of 377,000 stock options.
We are in the development stage and are devoting the majority of our operational efforts and financial resources towards the clinical development and
potential commercialization of our late stage drug, voclosporin, which includes the completion of the AURORA trial. For the year ended December 31,
2018, we reported a loss of $64.12 million (December 31, 2017 - $70.79 million) and a cash outflow from operating activities of $51.61 million
(December 31, 2017 - $41.17 million). As at December 31, 2018, we had an accumulated deficit of $415.96 million (December 31, 2017 - $351.84
million).
We believe that our cash position is sufficient to fund our existing LN program, our ongoing Phase 2 study in FSGS, commence further studies for DES,
and supporting operations until mid-2020.
More specifically, our cash position provides funding to finish the AURORA trial with estimated costs to complete of approximately $22 million and
complete the regulatory NDA submission with the FDA in early 2020 based on our current expected time-lines. We are also conducting the AURORA 2
extension trial which will be completed towards the end of 2021 with estimated costs still be incurred of approximately $30 million. In addition, our
cash will allow us to conduct our current FSGS study, complete the current DDI study, commence further studies for DES 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 used in investing activities
Cash generated from financing activities
Net increase (decrease) in cash and cash equivalents
Year ended
December 31,
2018
(in thousands)
Year ended
December 31,
2017
(in thousands)
$
(51,610)
(66)
4,014
(47,662 )
$
(41,169 )
(8,003)
175,152
125,980
Increase
(Decrease)
(in thousands)
$
(10,441 )
7,937
(171,138)
(173,642)
Net cash used in operating activities in fiscal 2018 was $51.61 million, an increase of $10.44 million, from cash used in operating activities of $41.17
million in 2017. Cash used in operating activities in 2018 and 2017 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. Prepaid expenses, deposits and other increased to $6.78
million for the year ended December 31, 2018 from $1.68 million for the year ended December 31,2017. This increase primarily reflected a deposit for
the manufacture of API in the amount of $3.29 million and increase of $1.09 million in advances and deposits with our CROs that are conducting our
clinical trials and studies. Cash used in operating activities in 2017 included $2.15 million paid to ILJIN related to the contingent consideration liability.
Cash used in investing activities for the year ended December 31, 2018 was $66,000 compared to cash used in investing activities of $8.00 million for
the year ended December 31, 2017. 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, 2018 was $4.01 million compared to cash generated by financing activities of
$175.15 million for the year ended December 31, 2017. 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 received $3.07 million from the exercise of warrants and $943,000 from the exercise of stock options for the year ended December 31, 2018
compared to $8.92 million for warrants and $3.91 million for stock options in 2017.
Use of Financing Proceeds
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.
11
March Offering
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, for net proceeds of $162.32
million (the "March Offering"), 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
December 28, 2016 Offering:
Clinical and non-clinical development of voclosporin
Working capital and corporate purposes
Subtotal:
March 20, 2017 Offering:
R&D activities
Working capital and corporate purposes
Subtotal:
Proceeds from ATM Sales in 2019:
Total:
Total net proceeds from
financings
(in thousands)
Net proceeds used to date
(in thousands)
$
21,700
4,442
26,142
123,400
38,924
162,324
28,829
217,295
$
21,700
4,442
26,142
47,044
6,169
53,213
—
79,355
To December 31, 2018, 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.
We have the following contractual obligations as at December 31, 2018:
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)
$
800
18,698
7,071
4,028
30,597
$
208
12,568
7,071
72
19,919
$
487
6,122
—
3,956
10,565
$
105
8
—
—
113
$
—
—
—
—
—
(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 10 to the consolidated audited financial statements for the year ended December 31,
2018.
As at December 31, 2018 we are party to agreements with CROs and a central laboratory and other third party service providers providing services to
us for our clinical trials and studies and other research and development activities and for drug supply. Corresponding anticipated expenses over the
next twelve months, are estimated to be in the range of $30-$35 million.
12
RELATED PARTY TRANSACTIONS
Related parties
Compensation of Key Management
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
(in thousands)
2017
$
2,961
1,300
544
217
3,560
8,582
2018
$
2,042
879
—
446
4,971
8,338
In 2018, we defined key management as Directors and executive officers whereas in 2017 our key management was defined as all Directors and
Officers. This change in definition is a result of our continued growth and the hiring of additional personnel, requiring a narrower focus on the definition
of Key Management. In 2017, compensation for Directors and executive officers was $6,812,000.
Other
Stephen P. Robertson, a partner at Borden Ladner Gervais (" BLG") acts as our corporate secretary. We incurred legal fees in the normal course of
business to BLG of $152,000 for the year ended December 31, 2018 compared to $255,000 for the year ended December 31, 2017. 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, an affiliated shareholder and related party, is the result of an Arrangement
Agreement (the "ILJIN Agreement") completed on September 20, 2013 between the Company, Aurinia Pharma Corp. and ILJIN.
Pursuant to the terms of the ILJIN Agreement, $10 million in contingent consideration would potentially be owed to ILJIN based on the achievement of
future pre-defined clinical and marketing milestones. During 2017, we paid ILJIN $2.15 million of the $10 million upon the achievement of two specific
milestones pursuant to this contingent consideration. As such, at December 31, 2018, 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 10 of the audited consolidated financial statements for the year ended
December 31, 2018.
OFF-BALANCE SHEET ARRANGEMENTS
Other than as described in the "Contractual Obligations" and "Contingencies" sections of this MD&A, there are 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, our
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 our consolidated financial statements.
13
Critical estimates in applying Aurinia'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, 2018 were based on a discount rate of 10% (2017 - 10%) and a presumed payment range between
50% and 74% (2017- 50% and 75%). The fair value of this contingent consideration as at December 31, 2018 was estimated to be $4.03 million
(December 31, 2017 - $3.79 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 2018 resulted primarily from the change in the expected timing of milestone payments and the passage
of time. The change in probability factors for the milestones and the passage of time resulted in a revaluation of contingent consideration
expense of $236,000 for the year ended December 31, 2018.
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 $622,000 as at December 31, 2018. 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 $620,000 as at
December 31, 2018. If the discount rate were to increase to 12%, this would decrease the NPV of the obligation by approximately $172,000. If
the discount rate were to decrease to 8%, this would increase the NPV of the obligation by approximately $185,000.
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 $3.41 million as at December 31,
2018. If the market price were to decrease by a factor of 10%, this would decrease the estimated fair value of the obligation by approximately
$3.37 million. If the volatility were to increase by 10%, this would increase the estimated fair value of the obligation by approximately
$344,000. If the volatility were to decrease by 10%, this would decrease estimated fair value of the obligation by approximately $322,000 as at
December 31, 2018.
•
Fair value of stock
options
Determining the fair value of stock options on the grant date 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
assumptions 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 2018, this would have increased annual stock
compensation expense by approximately $308,000. 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 $265,000.
We used the Black-Scholes option pricing model to estimate the fair value of the options granted in 2018 and 2017.
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.
14
Critical judgments in applying Aurinia's accounting policies
•
•
•
Revenue
recognition
Our assessments related to the recognition of revenues for arrangements containing multiple elements are based on estimates and assumptions.
Judgment is necessary to identify separate performance obligations and to allocate related consideration to each separate performance
obligation. 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. The estimate of variable consideration requires significant judgment and an assessment of their potential reversal. We also use
judgement in assessing if a license is a right to use or a right to access intellectual property. Factors that are considered include whether the
customer reasonably expects (arising from the entity's customary business practices) that the entity will undertake activities that will
significantly affect the intellectual property, the rights granted by the license directly expose the customer to any positive or negative effects of
the entity's activities and whether those activities transfer a separate good or service to the customer. 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, 2018, 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.
RECENT CHANGES IN ACCOUNTING STANDARDS
New accounting standards adopted in the year
We adopted three new and revised standards, effective January 1, 2018. The information below explains the impact of the adoption of IFRS 9
Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 2 Share based payment on our financial statements that have
been applied from January 1, 2018, where they are different to those applied in the prior period.
•
IFRS 9 Financial
Instruments
The adoption of IFRS 9 Financial Instruments using the modified retrospective approach on January 1, 2018 (the date of initial
application of IFRS 9) results in a change in accounting policy. In accordance with the transitional provisions in IFRS 9, comparative
figures have not been restated. The reclassification of financial assets have therefore been recognized in the opening balance sheet on
January 1, 2018. The new standard introduces expanded disclosure requirements and changes in presentation, these have minimally
impacted the nature and extent of the Company's disclosures. 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, and (iii) hedge
accounting.
Classification and measurement
On January 1, 2018 we assessed which business models apply to the financial assets held by the Company and have classified our
financial instruments into the appropriate IFRS 9 categories. There was no impact to the financial liabilities held by the Company.
Cash and cash equivalents, short term investments and accounts receivable are recorded initially at fair value and subsequently at
amortized cost using the effective interest method less any provisions for impairment.
The impact to short term investments due to the classification of these assets in accordance with IFRS 9 is outlined below:
Balance at December 31, 2017 – IAS 39
Reclassify investments from available-for-sale to amortized
cost
Balance at January 1, 2018 – IFRS 9
Short term
investments
7,833
Accumulated other
comprehensive loss
883
78
7,911
(78 )
805
The investments held at December 31, 2017 were reclassified from available for sale to amortized cost. At January 1, 2018, the date
of initial application, our business model is to hold investments for collection of contractual cash flows, and the
15
cash flows represent solely payments of principal and interest on the principal amount. The fair value loss of $78,000 would have
otherwise been recognized in other comprehensive income (OCI) had the short term investments not been reclassified to amortized
cost.
There was no impact to cash and cash equivalents and accounts receivable resulting from the adoption of IFRS 9.
Impairment of financial assets
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. We have nominal amount of accounts receivable, therefore, the change in
impairment methodology due to the new standard does not have a significant impact on the financial statements. Our cash and cash
equivalents and short term investments are also subject to the impairment requirements of IFRS 9, the identified impairment loss is not
material.
Hedge Accounting
We had not entered into any hedges as at December 31, 2017 and has not undertaken hedging activities in the year ended December
31, 2018 therefore the hedge accounting section standard is not applicable to the Company at this time and does not have an impact
on the financial statements.
•
IFRS 15 Revenues from Contracts with
Customers
The adoption of IFRS 15 Revenue from Contracts with customers using the modified retrospective and the completed contract
practical expedient approaches on January 1, 2018 (the date of initial application of IFRS 15) does result in a change in accounting
policy. However, the adoption did not have a material impact on the financial statements, and as a result the 2017 comparatives are
not required to be restated. The new standard replaces IAS 18, Revenue, IAS 11 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.
The modified retrospective approach results in the cumulative effect, if any, of adoption being recognized at the date of initial
application. We currently have no product sales or significant sources of revenue, therefore there is no effect upon initial application.
•
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. We
have evaluated the impact of these amendments and as a result have determined that there is no required change to our accounting
policy related to Share based payments, and therefore no changes to the consolidated financial statements were required.
New accounting standard not yet adopted
The following standard is effective for annual periods beginning on or after January 1, 2019 and has not been applied in preparing these annual
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. Aurinia
has elected to adopt IFRS 16 effective January 1, 2019.
At the date of adoption of IFRS 16, we will recognize a lease liability and right-of-use asset. The lease liability will be measured at
the present value of the future lease payments during the lease term which is estimated to be an average of three years at the date of
adoption, discounted using incremental borrowing rates which, in most instances, will be an average interest rate on borrowings for
companies comparable to us. The right-of-use asset will be initially calculated at an amount equal to the initial value of the lease
liability adjusted as required under the standard for specific items. The right-of-use asset is expected to be amortized using the
straight-line method from the date of adoption to the end of the lease term. Interest on the lease liability will be calculated using the
effective interest method with rent payments reducing the liability. As a
16
result of these changes, there will be a increase in 2019 to interest expense and amortization, and a reduction in Corporate,
administration and business development expenses (note 13) on the Statement of Operations and Comprehensive Loss due to the
decrease in rent expense. To date, we have identified two facility lease agreements that will have an impact on the consolidated
financial statements. As at the reporting date, the non-cancelable commitment related to these two leases is $800,000 (note 20). We are
assessing and quantifying the potential financial impact that the adoption will have on our consolidated financial statements. We are
also currently reviewing Aurinia's non-facility related contracts and agreements to determine whether any of the agreements will
impact our consolidated financial statements. We will be ready to report under IFRS 16 in its first quarter financial statements in 2019.
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 a public offering, the exercise of warrants and stock options and draw-downs subsequent to year end
under our November 30, 2018 ATM facility, as our primary sources of liquidity, as discussed in note 12 - Share Capital.
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 ($117.97
million at December 31, 2018). We also held $7.89 million in short term investments. The short term investments are comprised of two held to maturity
interest bearing securities, which each mature in 2019.
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 reviews and approves our budget, as well as any material transactions out of the ordinary
17
course of business. We invest our cash equivalents in U.S. denominated term deposits with 30 to 90-day maturities, and U.S. 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 10 to the audited consolidated
financial statements for the year ended December 31, 2018 and the derivative warrant liabilities, as described in note 11 to the audited consolidated
financial statements for the year ended December 31, 2018.
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, 2018 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 expected 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.
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,
2018
$
364
24
(1,677)
(1,289)
(in thousands)
December 31,
2017
$
125
28
(1,657)
(1,504)
December 31,
2018
$
0.733
Reporting
date rate
December 31,
2017
$
0.797
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 $128,000 assuming all other variables remained constant. An assumed 10% weakening of the CA$ 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 intellectual property portfolio, including a use patent strategy (which involves potential development of use patents driven by AURA Phase
2b data) and a potential manufacturing patent and trade secret strategy.
The Company has an extensive granted patent portfolio related to cyclosporine analogs, including granted United States patents, covering voclosporin
composition of matter, methods of use, formulations and synthesis. 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 (Patent Term
Extension) and certain other major markets, including Europe and Japan, until at least October 2027 under the Hatch-Waxman Act in the United States
and comparable patent extension laws in other countries (including the Supplementary Protection Certificate program in Europe). Opportunities may
also be available to add an additional six months of exclusivity related to pediatric studies which are currently
18
in the planning process. 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 and up to ten years in Europe.
Further, pursuant to a Notice of Allowance from the USPTO for claims directed at our novel voclosporin dosing protocol for LN as more fully discussed
in the Recent Developments section of this MD&A, after administrative processes are completed and fees are paid, we expect the issuance of a U.S.
patent with a term extending to December 2037. If the FDA approves the use of voclosporin for LN and the label for such use follows the dosing
protocol under the Notice of Allowance, the issuance of this patent will expand the scope of intellectual property protection for voclosporin, which
already includes robust manufacturing, formulation, synthesis and composition of matter patents. We have also filed for protection of this subject matter
under the PCT and have the option of applying for similar protection in the member countries thereof. This may lead to the granting of corresponding
claims in the treaty countries which include all the major global pharmaceutical markets.
We have licensed the development and distribution rights to voclosporin for China, Hong Kong and Taiwan to 3SBio. This license is royalty bearing
and we will also supply finished product to 3SBio on a cost-plus basis. We do not expect to receive any royalty revenue pursuant to this license in the
foreseeable future.
We have patent protection for VOS as we own two granted United States patents and 14 patents in other jurisdictions related to ophthalmic
formulations of calcineurin inhibitors or mTOR inhibitors, including voclosporin. We also have one granted United States patent and 10 patents in other
jurisdictions related to topical drug delivery system for ophthalmic use. These patents expire between 2028 and 2031.
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 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 audited 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 ("ICFR"), and has designed such 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, 2018 based on the framework set forth in Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our ICFR was effective as of December 31, 2018.
19
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, 2018 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 15, 2019, 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
Stock options
(in thousands)
91,636
3,523
8,345
Subsequent to year-end we issued 4.61 million Common Shares and received gross proceeds of $30 million pursuant to our ATM facility as more fully
discussed in the Recent Developments section of this document,
Subsequent to year end, the 1.74 million derivative warrants outstanding at December 31, 2018 related to the February 14, 2014 private placement
offering, were fully exercised. Certain holders of these warrants elected the cashless exercise option and we issued 687,000 Common Shares on the
cashless exercise of 1.27 million warrants. The remaining 464,000 warrants were exercised for cash, at a price of $3.2204 and we received cash
proceeds of $1.49 million upon the issuance of 464,000 Common Shares.
Subsequent to the year-end we granted 1.37 million stock options at a weighted average price of $6.05 (CA $8.04) to our officers, directors and
employees and we issued 377,000 Common Shares for proceeds of $1.30 million upon the exercise of 377,000 stock options. In addition, 234,000
stock options were forfeited.
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
Income tax expense
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:
2018
$
463
(54,556 )
(9,954)
(73 )
(64,120 )
(0.76 )
84,782
125,587
145,863
3,956
112,575
85,500
2017
$
418
(47,286 )
(23,924 )
—
(70,792 )
(0.92 )
76,918
167,102
189,847
3,719
165,743
84,052
2018
Revenues
Expenses
R&D
Corporate, administration and business development
Amortization of tangible and intangible assets
Other expense (income)
Total expenses
Net loss before change in estimated fair value of derivative
warrant liabilities
Change in estimated fair value of derivative warrant
liabilities
Income tax expense
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
Q1
$
30
8,887
3,791
399
(200)
12,877
Q2
$
29
10,504
3,462
403
(566)
13,803
Q3
$
375
11,152
2,923
408
(563)
13,920
Q4
$
29
10,839
3,498
355
(736)
13,956
(12,847 )
(13,774 )
(13,545 )
(13,927 )
(54,093 )
(1,933)
—
(15,707 )
(0.19 )
85,321
84,350
(4,797)
—
(18,342 )
(0.21 )
85,323
85,321
(593)
(73 )
(14,593 )
(0.17 )
85,500
85,384
(9,954)
(73 )
(64,120 )
(0.76 )
85,500
84,782
(2,631)
—
(15,478 )
(0.18 )
84,052
84,052
21
2016
$
173
(25,200 )
1,732
—
(23,295 )
(0.66 )
35,285
33,488
56,997
3,419
35,950
52,808
Annual
$
463
41,382
13,674
1,565
(2,065)
54,556
2017
Revenues
Expenses
R&D
Corporate, administration and business development
Amortization and impairment of tangible and intangible
assets
Other expense (income)
Total expenses
Net loss before change in estimated fair value of derivative
warrant liabilities
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
Summary of Quarterly Results
Q1
$
30
7,325
3,427
363
75
11,190
Q2
$
329
7,107
2,901
370
(152)
10,226
Q3
$
29
10,807
2,650
362
(315)
13,504
Q4
$
30
8,691
3,118
361
196
12,366
Annual
$
418
33,930
12,096
1,456
(196)
47,286
(11,160 )
(9,897)
(13,475 )
(12,336 )
(46,868 )
(40,781 )
(51,941 )
(0.92 )
82,101
56,680
7,498
(2,399)
(0.03 )
83,485
82,973
355
(13,120 )
(0.16 )
83,973
83,608
9,004
(3,332)
(0.04 )
84,052
84,038
(23,924 )
(70,792 )
(0.92 )
84,052
76,918
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 for the three months ended September 30, 2018 and June 30, 2018 was due to the ramp up in AURORA trial costs, and
startup costs for AURORA 2 extension trial and the Phase 2 DES and FSGS studies. The increase in R&D costs for the three months ended March 31,
2018, December 31, 2017 and September 30, 2017 primarily reflect expenses associated with our AURORA trial, including CRO and drug supply
expenses.
Corporate, administration and business development costs included non-cash stock-based compensation expense of $686,000 for the three months
ended December 31, 2018, $887,000 for the three months ended September 30, 2018, $1.26 million for the three months ended June 30, 2018, $1.33
million for the three months ended March 31, 2018, $656,000 for the three months ended December 31, 2017, $795,000 for the three months ended
September 30, 2017, $718,000 for the three months ended June 30, 2017, and $1.08 million for the three months ended March 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.
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 Common Shares results in a loss on revaluation
while a decrease results in a gain on revaluation.
The change in the estimated fair value of the derivative warrant liabilities for the three months ended December 31, 2018 of $ 593,000 primarily
reflected an increase in our share price to $6.82 per share at December 31, 2018 compared to $6.64 per share at September 30, 2018 while the change in
the estimated fair value of the derivative warrant liabilities for the three months ended September 30, 2018 of $4.80 million primarily reflected an
increase in our share price to $6.64 per share at September 30, 2018 compared to $5.63 per share at June 30, 2018. The change in the estimated fair
value of the derivative warrant liabilities for the three months ended June 30, 2018 of $1.93 million primarily reflected an increase in our share price to
$5.63 per share at June 30, 2018 compared to $5.19 per share at March 31, 2018. The change in the estimated fair value of the derivative warrant
liabilities for the three months ended March 31, 2018 of $2.63 million primarily reflected an increase in our share price to $5.19 per share at March 31,
2018 compared to $4.53 per share at December 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 common share at December 31, 2017 compared to $6.27 per share at September 30, 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 common share at June 30, 2017 compared to $7.34 per common share at March 31, 2017. 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 common share at December 31, 2016 to $7.34 per common share at March 31, 2017.
Fourth Quarter Analysis (See Quarterly Information above for the fourth quarter comparative information detail).
We recorded a consolidated net loss of $14.59 million or $0.17 per common share for the fourth quarter ended December 31, 2018, compared to a
consolidated net loss of $3.33 million or $0.04 per common share for the fourth quarter ended December 31, 2017.
22
The increase of $11.26 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 was $9.95 million as we recorded an increase of $593,000 in the estimated
fair value of derivative warrant liabilities for the fourth quarter ended December 31, 2018 compared to decrease in the estimated fair value of
derivative warrant liabilities of $9.00 million for the fourth quarter of 2017.
An increase in R&D expenses of $2.15 million in the fourth quarter of 2018 primarily attributable to costs incurred for the AURORA 2
extension trial, the DDI study and the FSGS and DES Phase 2 studies which were newly enrolled studies in 2018;
Other expense (income) reflected income of $736,000 for the fourth quarter of 2018 compared to a net expense of $196,000 for the fourth
quarter of 2017. This change was primarily due to a net change in finance income of $862,000 between the two periods.
23
Exhibit 99.4
pwclogoa01.jpg
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in this Annual Report on Form 40-F for the year ended December 31, 2018 of Aurinia
Pharmaceuticals Inc. of our report dated March 15, 2019, relating to the consolidated financial statements, which appears in this Annual Report.
We also consent to the incorporation by reference in the Registration Statements on Form F-10 A (No. 333-222413) , Form S-8 (No. 333-225538) and
Form S-8 (No. 333-216447) of Aurnia Pharmaceuticals Inc. of our report dated March 15, 2019 referred to above. We also consent to reference to us
under the heading “Interests of Experts,” which appears in the Annual Information Form included in the Exhibit incorporated by reference in this
Annual Report on Form 40-F, which is incorporated by reference in such Registration Statements.
“/s/PricewaterhouseCoopers LLP”
Chartered Professional Accountants
Edmonton, Alberta
Canada
March 19, 2019
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 19, 2019
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 19, 2019
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,
2018, 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 19, 2019
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,
2018, 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 19, 2019
AURINIA PHARMACEUTICALS INC.
Name:
Title:
/s/ Dennis Bourgeault
Dennis Bourgeault
Chief Financial Officer