10-Q 1 knsa-20220930x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

OR

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

For the transition period from           to         

Commission file number: 001-38492

Kiniksa Pharmaceuticals, Ltd.

(Exact Name of Registrant as Specified in Its Charter)

Bermuda

98-1327726

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

Kiniksa Pharmaceuticals, Ltd.

Clarendon House

2 Church Street

Hamilton HM11, Bermuda

(808) 451-3453

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

Kiniksa Pharmaceuticals Corp.

100 Hayden Avenue

Lexington, MA, 02421

(781) 431-9100

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

N/A

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Shares

KNSA

The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

 

Accelerated Filer

  

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  

As of October 31, 2022, there were 69,531,762 common shares outstanding in aggregate, comprised of:

34,531,084 Class A common shares, par value $0.000273235 per share

1,813,457 Class B common shares, par value $0.000273235 per share

,

17,129,603 Class A1 common shares, par value $0.000273235 per share

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

Kiniksa Pharmaceuticals, Ltd.

FORM 10-Q

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022

TABLE OF CONTENTS

Page

PART I — FINANCIAL INFORMATION

7

Item 1. Financial Statements (unaudited)

7

Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

7

Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021

8

Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021

9

Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

10

Notes to Consolidated Financial Statements

11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk

45

Item 4. Controls and Procedures

45

PART II — OTHER INFORMATION

46

Item 1. Legal Proceedings

46

Item 1A. Risk Factors

46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

124

Item 3. Defaults Upon Senior Securities

124

Item 4. Mine Safety Disclosures

124

Item 5. Other Information

124

Item 6. Exhibits

125

SIGNATURES

126

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

our continued ability to commercialize ARCALYST (rilonacept) and to develop and commercialize our current and future product candidates, if approved;
our status as an early-commercial stage biopharmaceutical company and our expectation to incur losses in the future;
our future capital needs and our need to raise additional funds;
our ability to manufacture sufficient commercial stock of our products to meet patient and partner demand;
the market acceptance of our products and product candidates;
competitive and potentially competitive products and technologies;
prescriber awareness and adoption of our products and product candidates, if approved;
the size of the market for our products and product candidates, if approved;
our ability to meet the quality expectations of prescribers or patients;
the decision of third-party payors not to cover or maintain coverage of or to establish burdensome requirements prior to covering ARCALYST or any of our current or future product candidates, if approved,

3

or to require extensive or independently performed clinical trials prior to covering or maintaining coverage of our product candidates, if approved;
the lengthy and expensive clinical development process with its uncertain outcomes and potential for clinical failure or delay, including due to the COVID-19 pandemic and global political turmoil, including the ongoing war in Ukraine;
the decision by any applicable regulatory authority whether to clear our current or future product candidates for clinical development and, ultimately, whether to approve them for marketing and sale;
our ability to anticipate and prevent adverse events caused by our products and product candidates;
our ability to improve our product candidates;
our ability to identify, in-license, acquire, discover or develop additional product candidates;
our ability to undertake and execute on business combinations, collaborations or other strategic transactions;
our ability to have our products and product candidates manufactured in accordance with regulatory requirements and at acceptable cost and quality specifications;
our ability to successfully manage our growth;
our ability to avoid product liability claims and maintain adequate product liability insurance;
our ability to obtain regulatory exclusivity;
federal, state and foreign regulatory requirements applicable to our products and product candidates;
our ability to obtain, maintain, protect and enforce our intellectual property rights related to our products and product candidates;
the impact of the coronavirus disease 2019, or COVID-19, pandemic on our business, including our commercial operations and clinical trials;
ownership concentration of our executive officers, directors, certain members of senior management and affiliated shareholders may prevent our shareholders from influencing significant corporate decisions; and
our ability to attract and retain skilled personnel.

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

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

4

SUMMARY RISK FACTORS

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

we have only recently begun generating product revenue, have incurred significant operating losses in the past, expect to incur significant operating losses for the foreseeable future and may never achieve or maintain sustained corporate profitability;
we will require significant additional funding to develop our portfolio, commercialize our products and product candidates, if approved, and to identify, discover, develop or acquire additional product candidates, and if we are unable to secure financing on acceptable terms when needed, or at all, we could be forced to delay, reduce or cease one or more of our product development plans, research and development programs or other operations or commercialization efforts;
we depend heavily on the commercial success of ARCALYST, and have limited experience commercializing a therapeutic, supporting sales, marketing, and distribution activities and maintaining applicable infrastructure for these activities either directly and/or through agreements with third parties; as a result, we may not be able to sustain the commercialization of ARCALYST, or successfully commercialize any future approved product candidates;
we depend heavily on the success of one or more of our product candidates, which are in various stages of product development; such success is dependent upon us advancing our product candidates in clinical development, obtaining regulatory approval and ultimately commercializing one or more of our product candidates on a timely basis, if at all;
ARCALYST in recurrent pericarditis, as well as our current or future product candidates, if approved, may not gain sustained market acceptance by prescribers, patients, or third-party payors, in which case our ability to generate product revenues will be impaired;
successful commercialization of our products and product candidates, if approved, will depend in part on the extent to which third-party payors provide funding, establish favorable coverage and pricing policies, respond to price increases and set adequate reimbursement levels for our products and product candidates, if approved, and failure to obtain or maintain coverage and adequate reimbursement for our products and product candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue;
the incidence and prevalence for target patient populations of our products and product candidates have not been established with precision, and if the market opportunities for our products and product candidates, if approved, are smaller than we estimate, or if any approval that we obtain is based on a narrower definition of the patient population, our revenue and ability to achieve profitability may be materially adversely affected;
clinical development of our product candidates is a lengthy and expensive process with uncertain timelines, costs and outcomes;
we may encounter substantial delays in our current or planned preclinical and/or clinical trials, including as a result of delays in obtaining regulatory approvals for indications, site activation, enrollment, and conduct of the trials, which could delay or prevent our product development activities;
we rely on third parties, including contract research organizations, or CROs, to activate our sites, conduct or otherwise support our research activities, preclinical studies and clinical trials for our product candidates, and these third parties may not perform satisfactorily, which could delay, prevent or impair our product development activities;

5

we rely on third parties, including independent contract manufacturing organizations, or CMOs, to manufacture our product candidates for preclinical and clinical development, to manufacture our commercial supply of ARCALYST, and supply of drug substance and drug product for our products and product candidates; and if these third parties do not perform satisfactorily, including by producing insufficient commercial supply of ARCALYST to meet patient demand, or are impacted by delays or supply shortages, our product development activities, regulatory approval, and commercialization efforts may be delayed, prevented or impaired;
the ongoing COVID-19 pandemic, and related measures taken in response, including measures imposed or re-imposed in light of new variants of the virus, may have an adverse impact on our business and operations as well as those of our manufacturers, CROs and other third parties with whom we conduct business or otherwise engage, including regulatory authorities;
all of our products and product candidates have been licensed or acquired from other parties; if those parties did not adequately protect and we are unable to adequately protect such products and product candidates, or to secure and maintain freedom to operate, others could preclude us from commercializing our products and product candidates, if approved, or compete against us more directly;
we face significant competition from other biotechnology and pharmaceutical companies, which may result in others discovering, developing or commercializing drugs before or more successfully than us;
we may not successfully execute our growth strategy to identify, discover, develop, license or acquire additional product candidates or technologies, and our strategy may not deliver anticipated results or we may refine or otherwise alter our growth strategy;
we may seek to acquire businesses or undertake business combinations, collaborations or other strategic transactions which may not be successful or on favorable terms, if at all, and we may not realize the intended benefits of such transactions; and
concentration of ownership of the voting power of our common shares may prevent new investors from influencing significant corporate decisions and may have an adverse effect on the price of our Class A common shares.

Industry and other data

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

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

6

Part I — Financial Information

Item 1. Financial Statements (unaudited)

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

September 30, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Current assets:

 

 

  

Cash and cash equivalents

$

175,761

$

122,470

Short-term investments

24,963

59,731

Accounts receivable, net

11,159

3,985

Inventory

14,621

3,675

Prepaid expenses and other current assets

 

15,311

 

6,585

Total current assets

 

241,815

 

196,446

Property and equipment, net

 

1,995

 

2,834

Operating lease right-of-use assets

6,173

5,550

Other long-term assets

5,627

8,720

Intangible asset, net

18,500

19,250

Deferred tax assets

185,843

Total assets

$

459,953

$

232,800

Liabilities and Shareholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

1,469

$

1,868

Accrued expenses

 

30,868

 

38,031

Deferred revenue

12,092

Operating lease liabilities

3,274

3,381

Other current liabilities

8,789

1,544

Total current liabilities

 

56,492

 

44,824

Non-current liabilities:

 

  

 

  

Non-current deferred revenue

14,198

Non-current operating lease liabilities

3,435

2,669

Other long-term liabilities

 

1,820

270

Total liabilities

 

75,945

 

47,763

Commitments and contingencies (Note 14)

 

  

 

  

Shareholders’ equity:

 

 

Class A common shares, par value of $0.000273235 per share; 34,523,660 shares and 34,059,725 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

 

9

 

8

Class B common shares, par value of $0.000273235 per share; 1,813,457 shares issued and outstanding as of September 30, 2022 and December 31, 2021

 

1

 

1

Class A1 common shares, $0.000273235 par value; 17,129,603 shares issued and outstanding as of September 30, 2022 and December 31, 2021

 

5

 

5

Class B1 common shares, $0.000273235 par value; 16,057,618 shares issued and outstanding as of September 30, 2022 and December 31, 2021

 

4

 

4

Additional paid-in capital

 

880,554

 

860,482

Accumulated other comprehensive loss

(70)

(66)

Accumulated deficit

 

(496,495)

 

(675,397)

Total shareholders’ equity

 

384,008

 

185,037

Total liabilities and shareholders’ equity

$

459,953

$

232,800

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

7

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Revenue:

Product revenue, net

$

33,424

$

12,095

$

82,585

$

19,799

License and collaboration revenue

65,711

75,711

Total revenue

99,135

12,095

158,296

19,799

Costs and operating expenses:

    

  

  

    

  

Cost of goods sold

6,937

2,767

16,185

5,233

Collaboration expenses

4,623

16,549

Research and development

16,485

19,236

51,100

71,864

Selling, general and administrative

 

24,677

20,759

    

 

70,736

63,207

Total operating expenses

 

52,722

 

42,762

 

154,570

 

140,304

Income (loss) from operations

 

46,413

 

(30,667)

 

3,726

 

(120,505)

Interest income

 

322

5

 

459

20

Income (loss) before income taxes

 

46,735

 

(30,662)

 

4,185

 

(120,485)

Benefit (provision) for income taxes

 

177,358

118

 

174,717

(1,106)

Net income (loss)

$

224,093

$

(30,544)

$

178,902

$

(121,591)

Net income (loss) per share attributable to common shareholders—basic

$

3.23

$

(0.44)

$

2.58

$

(1.78)

Net income (loss) per share attributable to common shareholders—diluted

$

3.18

$

(0.44)

$

2.55

$

(1.78)

Weighted average common shares outstanding—basic

 

69,445,071

68,662,673

 

69,305,755

68,444,061

Weighted average common shares outstanding—diluted

70,552,018

68,662,673

70,286,444

68,444,061

Comprehensive income (loss):

Net income (loss)

$

224,093

$

(30,544)

$

178,902

$

(121,591)

Other comprehensive income (loss):

Unrealized gain (loss) on short-term investments and currency translation adjustments, net of tax

20

(72)

(4)

(11)

Total other comprehensive income (loss)

20

(72)

(4)

(11)

Total comprehensive income (loss)

$

224,113

$

(30,616)

$

178,898

$

(121,602)

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

8

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

Common Shares

Additional

Accumulated

Total

(Class A, B, A1 and B1)

Paid-In

Other Comprehensive

Accumulated

Shareholders'

  

 

Shares

  

Amount

  

Capital

  

Loss

  

Deficit

  

Equity

Balances at December 31, 2021

 

69,060,403

$

18

$

860,482

$

(66)

$

(675,397)

$

185,037

Issuance of Class A common shares under incentive award plans

 

 

210,720

1

422

 

423

Share-based compensation expense

 

 

6,031

 

6,031

Unrealized loss on short-term investments and currency translation adjustments

 

 

(37)

 

(37)

Net loss

 

 

(25,210)

 

(25,210)

Balances at March 31, 2022

69,271,123

$

19

$

866,935

$

(103)

$

(700,607)

$

166,244

Issuance of Class A common shares under incentive award plans

 

 

155,644

542

 

542

Share-based compensation expense

 

 

6,676

 

6,676

Unrealized gain on short-term investments and currency translation adjustments

 

 

13

 

13

Net loss

 

 

(19,981)

 

(19,981)

Balances at June 30, 2022

69,426,767

$

19

$

874,153

$

(90)

$

(720,588)

$

153,494

Issuance of Class A common shares under incentive award plans

 

 

97,571

360

 

360

Share-based compensation expense

 

 

6,041

 

6,041

Unrealized gain on short-term investments and currency translation adjustments

 

 

20

 

20

Net income

 

 

224,093

 

224,093

Balances at September 30, 2022

69,524,338

$

19

$

880,554

$

(70)

$

(496,495)

$

384,008

Common Shares

Additional

Accumulated

Total

(Class A, B, A1 and B1)

Paid-In

Other Comprehensive

Accumulated

Shareholders'

  

 

Shares

  

Amount

  

Capital

  

Income

  

Deficit

  

Equity

Balances at December 31, 2020

 

68,215,022

$

18

$

829,424

$

(34)

$

(517,473)

$

311,935

Issuance of Class A common shares under incentive award plans

115,012

1,106

1,106

Share-based compensation expense

 

7,126

7,126

Unrealized gain on short-term investments and currency translation adjustments

 

13

13

Net loss

 

(49,484)

(49,484)

Balances at March 31, 2021

 

68,330,034

$

18

$

837,656

$

(21)

$

(566,957)

$

270,696

Issuance of Class A common shares under incentive award plans

134,715

887

887

Share-based compensation expense

5,717

5,717

Unrealized gain on short-term investments and currency translation adjustments

48

48

Net loss

(41,563)

(41,563)

Balances at June 30, 2021

68,464,749

$

18

$

844,260

$

27

$

(608,520)

$

235,785

Issuance of Class A common shares under incentive award plans and employee share purchase plan

423,686

2,680

2,680

Share-based compensation expense

6,199

6,199

Unrealized gain on short-term investments and currency translation adjustments

(72)

(72)

Net loss

(30,544)

(30,544)

Balances at September 30, 2021

68,888,435

$

18

$

853,139

$

(45)

$

(639,064)

$

214,048

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

9

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Nine Months Ended

September 30, 

    

2022

2021

Cash flows from operating activities:

 

  

Net income (loss)

$

178,902

$

(121,591)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

Depreciation and amortization expense

 

1,800

 

1,687

Share-based compensation expense

 

18,748

 

19,042

Non-cash lease expense

 

2,253

 

1,895

Amortization of premiums and accretion of discounts on short-term investments

121

617

Loss on disposal of property and equipment

 

23

 

Deferred income taxes

(185,843)

Changes in operating assets and liabilities:

 

 

Prepaid expenses and other current assets

 

(8,726)

 

1,034

Accounts receivable, net

(7,174)

(3,224)

Inventory

(10,946)

(5,606)

Other long-term assets

2,919

(1,059)

Accounts payable

 

(399)

 

1,116

Accrued expenses and other current liabilities

 

82

 

295

Operating lease liabilities

(2,217)

(1,700)

Deferred revenue

26,290

Other long-term liabilities

 

1,550

80

Net cash provided (used) in operating activities

 

17,383

 

(107,414)

Cash flows from investing activities:

 

  

 

Proceeds from sale of property and equipment

81

Purchases of property and equipment

 

(137)

 

(164)

Purchases of short-term investments

(73,062)

(97,460)

Proceeds from the maturities of short-term investments

107,700

296,300

Intangible asset acquired

(20,000)

Net cash provided by investing activities

 

34,582

 

178,676

Cash flows from financing activities:

 

  

 

Proceeds from issuance of Class A common shares under incentive award plans and employee share purchase plan

 

2,127

4,673

Payments in connection with Common Stock tendered for employee tax obligations

(801)

Net cash provided by financing activities

 

1,326

 

4,673

Net increase in cash, cash equivalents and restricted cash

 

53,291

 

75,935

Cash, cash equivalents and restricted cash at beginning of period

 

122,470

114,248

Cash, cash equivalents and restricted cash at end of period

$

175,761

$

190,183

Supplemental information:

Cash paid for income taxes

$

4,608

$

859

Supplemental disclosure of non-cash investing and financing activities:

Right-of-use asset obtained in exchange for operating lease obligation

$

2,876

$

1,462

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

10

Table of Contents

KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

1.           Nature of the Business and Basis of Presentation

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

The Company is subject to risks and uncertainties common to early, commercial stage companies in the biopharmaceutical industry and global health, societal, economic and market conditions, including the Company’s dependence on third parties, including contract research organizations and contract manufacturing organizations, the Company’s limited experience obtaining regulatory approvals, the potential failure of the Company to successfully complete research and development of its current or future product candidates, the potential inability of the Company to adequately protect its technology, potential competition, the uncertainty that any current or future product candidates will obtain necessary government regulatory approval, that ARCALYST will continue to be commercially viable, whether any of the Company’s current or future product candidates, if approved, will be commercially viable, adverse impact from the coronavirus disease 2019 (“COVID-19”) pandemic and global and political turmoil, including the ongoing war in Ukraine. Such risks and uncertainties, especially those risks and uncertainties arising from the ongoing COVID-19 pandemic, may be subject to substantial and uncertain changes, which may cause significant disruption to the Company’s business and operations, preclinical studies and clinical trials, the business and operations of the third parties with whom the Company conducts business and the national and global economies, all of which may have material impacts on the Company’s business, financial condition and results of operations.

Principles of Consolidation

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

Use of Estimates

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

Unaudited Interim Consolidated Financial Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information. The accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year

11

Table of Contents

KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

ended December 31, 2021 (the “2021 Form 10-K”). The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in the Company’s 2021 Form 10-K and updated, as necessary, in this report. The accompanying year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2022 and the results of its operations for the three and nine months ended September 30, 2022 and 2021, the changes in its shareholders’ equity for the three and nine months ended September 30, 2022 and 2021 and its cash flows for the nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods or any future year or period.

Liquidity

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the consolidated financial statements are issued. As of September 30, 2022, the Company had an accumulated deficit of $496,495. During the nine months ended September 30, 2022, the Company reported net income of $178,902 and provided $17,383 cash in operating activities. As of September 30, 2022, the Company had cash, cash equivalents and short-term investments of $200,724.

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

2.           Summary of Significant Accounting Policies

Revenue Recognition

ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) outlines a five-step process for recognizing revenue from contracts with customers: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the separate performance obligations in the contract, and (v) recognize revenue associated with the performance obligations as they are satisfied.

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606, the Company determines the performance obligations that are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to each respective performance obligation when the performance obligation is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery of the product to the customer.

12

Table of Contents

KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

ASC 606 requires entities to record a contract asset when a performance obligation has been satisfied or partially satisfied, but the amount of consideration has not yet been received because the receipt of the consideration is conditioned on something other than the passage of time. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g., receivable), before the entity transfers a good or service to the customer.

Collaboration Revenue

The Company analyzes its collaboration arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of ASC Topic 808, Collaborative Arrangements (“Topic 808”). This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of Topic 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of Topic 808 and which elements of the collaboration are more reflective of a vendor-customer relationship and therefore within the scope of Topic 606.

For elements of collaboration arrangements that are accounted for pursuant to ASC 606, we identify the performance obligations and allocate the total consideration we expect to receive on a relative standalone selling price basis to each performance obligation. Variable consideration such as performance-based milestones will be included in the total consideration if we expect to receive such consideration and if it is probable that the inclusion of the variable consideration will not result in a significant reversal in the cumulative amount of revenue recognized under the arrangement. Our estimate of the total consideration we expect to receive under each collaboration arrangement is updated for each reporting period, and any adjustments to revenue are recorded on a cumulative catch-up basis. We exclude sales-based royalty and milestone payments from the total consideration we expect to receive until the underlying sales occur because the license to our intellectual property is deemed to be the predominant item to which the royalties or milestones relate as it is the primary driver of value in our collaboration arrangements.

Key assumptions to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. We recognize revenue associated with each performance obligation as the control over the promised goods or services transfer to our collaboration partner which occurs either at a point in time or over time. If control transfers over time, revenue is recognized by using a method of measuring progress that best depicts the transfer of goods or services. We evaluate the measure of progress and related inputs each reporting period and any resulting adjustments to revenue are recorded on a cumulative catch-up basis.

Consideration received that does not meet the requirements to satisfy ASC 808 or ASC 606 revenue recognition criteria is recorded as deferred revenue in the accompanying consolidated balance sheets, classified as either short-term (less than 12 months) or long-term (more than 12 months) deferred revenue based on our best estimate of when such revenue will be recognized.

There have been no other material changes to the significant accounting policies previously disclosed in the Company’s 2021 Form 10-K.

Recently Adopted Accounting Pronouncements

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

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KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

3.           Fair Value of Financial Assets and Liabilities

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

Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

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

Fair Value Measurements

as of September 30, 2022 Using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Cash equivalents — money market funds

$

39,533

$

$

$

39,533

Short-term investments — U.S. Treasury notes

24,963

24,963

$

39,533

$

24,963

$

$

64,496

Fair Value Measurements

as of December 31, 2021 Using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Cash equivalents — money market funds

$

94,324

$

$

$

94,324

Short-term investments — U.S. Treasury notes

59,731

59,731

$

94,324

$

59,731

$

$

154,055

During the nine months ended September 30, 2022 and the year ended December 31, 2021 there were no transfers between Level 1, Level 2 and Level 3. The money market funds were valued using quoted prices in active markets, which represent a Level 1 measurement in the fair value hierarchy. The Company’s cash equivalents and short-term investments as of September 30, 2022 and December 31, 2021 included U.S. Treasury notes, which are not traded on a daily basis and, therefore, represent a Level 2 measurement in the fair value hierarchy at each period end.

Gross

Gross

Amortized

Unrealized

Unrealized

Credit

Fair

Cost

Gains

Losses

Losses

Value

September 30, 2022

Short-term investments — U.S. Treasury notes

$

24,986

$

$

(23)

$

$

24,963

$

24,986

$

$

(23)

$

$

24,963

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KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Gross

Gross

Amortized

Unrealized

Unrealized

Credit

Fair

Cost

Gains

Losses

Losses

Value

December 31, 2021

Short-term investments — U.S. Treasury notes

$

59,745

$

1

$

(15)

$

$

59,731

$

59,745

$

1

$

(15)

$

$

59,731

As of September 30, 2022, the Company held 6 securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position was $22,466 at September 30, 2022. As of December 31, 2021, the Company held 11 securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position was $49,739 at December 31, 2021. As of September 30, 2022 and December 31, 2021, these securities were held by the Company in an unrealized loss position for less than 12 months. The Company determined that there was no material change in the credit risk of these securities. As a result, the Company determined it did not hold any investments with an other-than-temporary impairment as of September 30, 2022 and December 31, 2021.

4.           Product Revenue, Net

ARCALYST

Following the approval by the U.S. Food and Drug Administration (“FDA”) of ARCALYST on March 18, 2021, the Company began generating product revenue from sales of ARCALYST in April 2021.

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2022

2021

2022

2021

Product revenue, net

$

33,424

$

12,095

$

82,585

$

19,799

The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the nine months ended September 30, 2022:

Contractual

Government

Adjustments

Rebates

Returns

Total

Balance at December 31, 2021

$

515

$

719

$

101

$

1,335

Current provisions relating to sales in the current year

4,993

3,011

227

8,231

Payments/returns relating to sales in the current year

(3,797)

(1,659)

(5,456)

Payments/returns relating to sales in the prior years

(295)

(535)

(830)

Balance at September 30, 2022

$

1,416

$

1,536

$

328

$

3,280

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KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Total revenue-related reserves as of September 30, 2022 and December 31, 2021, included in our consolidated balance sheets, are summarized as follows:

September 30, 

December 31,

2022

2021

Reduction of accounts receivable

$

(157)

$

(50)

Components of other current liabilities

3,437

1385

Total revenue-related reserves

$

3,280

$

1,335

5.           Inventory

Inventory consisted of the following:

September 30, 

December 31,

    

2022

    

2021

Raw materials

$

$

Work-in-process

 

 

Finished Goods

14,621

3,675

$

14,621

$

3,675

6.           Property and Equipment, Net

Property and equipment, net consisted of the following:

September 30, 

December 31, 

    

2022

    

2021

Furniture, fixtures and vehicles

$

224

$

62

Computer hardware and software

 

345

 

341

Leasehold improvements

3,931

3,931

Lab equipment

4,068

4,249

Construction in progress

 

32

 

166

Total property and equipment

8,600

8,749

Less: Accumulated depreciation

 

(6,605)

 

(5,915)

Total property and equipment, net

$

1,995

$

2,834

Depreciation expense was $177 and $373 during the three months ended September 30, 2022 and 2021, respectively, and $885 and $1,079 during the nine months ended September 30, 2022 and 2021, respectively.