Aurinia Pharmaceuticals Inc. (NASDAQ:AUPH) Q4 2023 Earnings Call Transcript
Aurinia Pharmaceuticals Inc. (NASDAQ:AUPH) Q4 2023 Earnings Call Transcript February 15, 2024
Aurinia Pharmaceuticals Inc. misses on earnings expectations. Reported EPS is $-0.19 EPS, expectations were $-0.18. AUPH isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to Aurinia Pharmaceuticals' Full Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrea Christopher, Head of Corporate Communications and Investor Relations for Aurinia Pharmaceuticals. Thank you. You may begin.
Andrea Christopher: Thank you, operator and thank you to everyone for joining today’s call and webcast. Joining me on the call this morning are Peter Greenleaf, Aurinia's Chief Executive Officer; and Joe Miller, our Chief Financial Officer. Today we will review and discuss Aurinia's 2023 fourth quarter and year-end financial and operational results as well as an update on our strategic review as communicated in the company's press release issued this morning. The company also filed its annual financial statements on Form 10-K this morning. For more information, please refer to Aurinia's filings with the US Securities and Exchange Commission and applicable Canadian Securities authorities, which are also available on Aurinia's website at auriniapharma.com.
During today's call, Aurinia may make forward-looking statements based on current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and actual results may differ materially. For a discussion of factors that could affect Aurinia's future financial results and business, please refer to the disclosures in Aurinia's press release and its annual report on Form 10-K and all of its recent filings with the US Securities and Exchange Commission and Canadian Securities authorities. Please note that all statements made today during today's call are current as of today, Thursday, February 15th, 2024, unless otherwise noted and are based upon information currently available to us. Except as required by law, Aurinia assumes no obligation to update any such statements.
Now, let me turn the call over to Aurinia’s President and CEO, Peter Greenleaf. Peter?
Peter Greenleaf: Thanks Andrea, and good morning everyone. I want to thank everybody for joining us on today's call. As you may have noted, we issued preliminary unaudited fourth quarter and year-end numbers in early January. On today's call, we will provide you with the final audited results for the fourth quarter and the year-end 2023. We'll also provide an update on our commercial activities, including key commercial metrics and significant highlights for up LUPKYNIS. We will then provide an update with the company's previously announced strategic review and our business strategy moving forward. This includes our near-term plan to restructure the company and the initiation of a share repurchase program. We believe this plan allows for immediate enhancement of shareholder value and has the ability to strengthen the company's long-term financial picture.
After walking you through these details, I will then turn the call over to Joe Miller, our CFO, to provide additional details on our financial results. So, now let me dive into the overall business performance. For the full year 2023, Aurinia achieved $175.5 million in total net revenue, which represented an increase of approximately 31% over the prior year. We achieved $158.5 million in net product revenue, representing an increase of 53% over 2022. For the fourth quarter of 2023, we achieved a total revenue of $45.1 million and a total net rev product revenue of $42.3 million, which represented an increase of 59% and 49% over the same period in 2022. Moving to more detail behind our financial results. During the fourth quarter, Aurinia added 438 patient start forms or PSF, compared to 406 PSFs in the fourth quarter of 2022, and 436 in the third quarter of 2023.
In addition to the 438 PSFs added in the fourth quarter, the company also added approximately 101 new additional patients. This includes restarts defined as patients coming back on to therapy who do not require a PSF and an estimate of new patients beginning therapy in the hospital channel. The addition of patient restarts and patients coming through the hospital channel are newly reported in the fourth quarter since they've achieved a numerical significance for the first time. Hospital and restart numbers are both new indicators of growth for us. We know that restart patients have been off therapy for a considerable amount of time before restarting. Restarts represent a strong indicator for the brand, because they demonstrate that physicians are comfortable using LUPKYNIS as a first-line therapy, and they likely indicate the importance of maintaining LUPKYNIS for a sustained period of time.
It's important to note that treating flares is not aligned with the most recent treatment guidelines. These guidelines out there call for patients to remain on therapy for three to five years. I'll talk more about our commercial strategy in a moment, but this is why we continue to encourage physicians to follow the guidelines and treat lupus nephritis more aggressively. Regarding our hospital numbers, we ship wallets to hospital pharmacies with little to no visibility into how these hospitals are dispensing the drug to actual patients. Therefore, we estimate how many patients come from those wallets based on average wallet utilization across all patients. As previously discussed, the hospital market was completely closed off to us for the first two years of the launch due to the global pandemic.
Now that we have a broader hospital access, we're looking closely at how we approach these institutions and addressing some of the complexities that are inherent in the hospital systems and integrated healthcare networks. We're beginning to see the impact of our execution in this space with the wallet shipments and patients beginning to pull through. For the full year, we added a total of 1,791 PSFs, an increase of approximately 9% year-over-year. And from January 1, 2024, through February 9th at the same year, we added approximately 191 PFS. Adding to the PSF number, we have approximately 40 new patients from both restarts and the hospital channel. In addition, I'm pleased to report that our conversion rates continue to improve with approximately 85% of PSFs converted to therapy.
We're also improving the time it takes to get patients on therapy. Throughout 2023, we increased our processing speed at all time periods, 30, 60 and 90 days with 63% of our patients starting therapy in 20 days or less. I'd like to point out that this is a meaningful improvement year-over-year. Our 12-month persistency continues to improve and is now approximately 55%, we are encouraged to see almost 45% of patients who remain on therapy at 18 months with that number holding steady out to 24 months. And consistent with prior periods, adherence to LUPKYNIS treatment remains strong at approximately 86% at year-end. The increase in patients on therapy in the quarter was driven predominantly by improvements in new PSFs, patient restarts, hospital fills, conversion rates, and processing speeds, and overall improvements in persistency.
Exiting 2023, a total of 2,066 patients were on therapy. This represents an increase of over 35% over 2022. It's focused on three key areas. The first, educating healthcare providers on the need to screen and treat more aggressively. Second, activating the patient to proactively discuss screening and treatment with their physicians. And lastly, continuing to clinically differentiate LUPKYNIS and position it as part of the foundation therapy in the treatment of lupus nephritis. To address the first, we continue to increase our focus on healthcare professionals and key opinion leaders by leveraging our long-term clinical data and the updated EULAR and KDIGO guidelines. Our messaging is focused on encouraging physicians to recognize that all SLE patients may be at risk for lupus nephritis, and that active screening for in routinely monitoring lupus nephritis patients are critical, prioritizing early diagnosis with every SLE patient, treating to target goals and reducing protein levels to minimize steroid use.
Start treatment with an effective combination therapy and leverage combination therapies with the goal of increased renal response. And lastly, continuing to treat for at least three to five years following a complete renal response. We're already seeing meaningful impact from these clinical developments, and we will continue to reinforce this messaging through our robust marketing and sales efforts. In terms of patient activation, we focus our efforts on educating SLE and lupus nephritis patients and driving them to have provocative and proactive conversations with their physicians about screening and treatment. Our messaging reinforces the importance of routine urine screening, the seriousness of the threat of lupus nephritis progressing, and the critical need to start and stay on treatment.
We deliver these messages through a mix of highly targeted social and digital initiatives as well as in-person advocacy events. Finally, our customer-facing teams are focused on clinical differentiation and delivering the LUPKYNIS clinical story targeted towards the highest potential writers. Our activities against these targets have steadily increased throughout 2023. And in the fourth quarter, we further increased the depth of prescribing in our current base of customers, and in addition, expanded new customers and new writers. Building on the momentum, we established in the fourth quarter, we now have over 5,000 PSFs since launch. And based on everything we've discussed today, we're reaffirming our 2024 net product revenue guidance range of $200 million to $220 million.
Shifting gears, I'd like to now discuss the conclusion of our strategic review and provide additional context. Please note that you will find further details of the review located within our recently issued annual report on Form 10-K and related press release. To remind everyone how we got here, in connection with our Annual General Meeting held May 17th of 2023, certain shareholders express their desire for the company to undergo a strategic review process. At the 2023 AGM, two of the company's most senior and experienced nominees for directors did not receive requisite majority under the company's majority voting policy and accordingly submitted their resignations to the Board. Those resigning members were replaced with two new directors, both with significant pharma and business development backgrounds.
And additionally, in connection with the collaboration agreement that we entered into with one shareholder, we agreed to appoint Dr. Robert Foster, the inventor of voclosporin to our Board. Given the results of the AGM, as well as the desires expressed by certain shareholders on June 29, 2023, the company announced that it had initiated exploration of strategic alternatives. It was noted that the process would consider a wide range of options for the company, including, but not limited to, a potential sale, merger or other strategic transactions. The company retained JPMorgan as its financial adviser to lead the strategic review. Following the announcement of the process, JPMorgan and Aurinia put together a comprehensive data room, a corporate presentation and materials to support the overall review process.
JPMorgan then engaged with more than 60 parties, that engagement led to 11 nondisclosure agreements being signed with potentially interested parties. Aurinia also conducted multiple meetings and presented to multiple parties, including some that did not sign non-disclosure agreements on a non-confidential basis. The data room itself was extensive containing over 200,000 pages of materials across 4,300 files. Despite significant effort put into the exploration of strategic alternatives from Aurinia's board, its management and our advisers, only one party submitted a preliminary non-binding expression of interest, which remains subject to customary conditions, including a formal due diligence. After a review of that expression of interest, Aurinia's Board elected to allow that party into a detailed formal diligence process.
At the conclusion of its diligence process, the counterparty elected not to submit a formal offer. In addition to exploring the sale of the company, Aurinia also explored multiple alternatives including the potential for acquiring, merging or licensing other entities or assets. The Board ultimately determined that none of the other alternatives explored and that were available to it to pursue, we're in the best interest of the company and the shareholders. Based on the outcome of this extensive strategic review, the Board believes that the best path forward is for management to streamline its operations as announced today, and focus on the company's commercial execution. We expect this to provide us with financial firepower to generate meaningful cash flow, which we intend to redeploy in the short term to repurchase shares and over time, continue to build balance sheet strength.
We believe this strength will provide us with the financial flexibility to consider a wide range of alternatives over the next few years. This could include diversifying our portfolio through the addition of new pipeline assets or creating scale through the acquisition of commercial assets or other strategies that we believe will allow the company to continue to grow and drive towards its mission. For even more context, in 2018, the company under previous management and at the Board's direction, engaged a leading investment bank and conducted a confidential strategic review process. After extensive outreach, the company received only one non-binding expression of interest, which included a due diligence process, but in the end, did not result in a formal offer.
And outside of these two expressions of interest, the company has never received any offer of any kind. The Board management, though, remain open to exploring opportunities that are in the best interest of the company and are open to considering any bonafide offers that the company receives. In addition, following the conclusion of the strategic review, the company is reaffirming its commitment to the value enhancement by driving loop kindness growth, while maintaining a sharp focus on operating efficiencies and maximizing cash flows. As a result, the company is ceasing further development of both AUR200 and AUR300. Correspondingly, the company expects to take a restructuring charge of approximately $11 million to $15 million in the first quarter of 2024.
This charge will primarily be made up of severance costs, contract termination costs and other costs associated with terminating these programs. We anticipate reducing employee headcount by at least 25% by the end of the first quarter of 2024. There is no planned reduction in headcount and commercial or commercial supporting roles. The company expects to recognize annual cost savings of approximately $50 million to $55 million on a go-forward basis with no impact on our commercial investment. In addition, the Board has approved a share repurchase program of up to $150 million of the company's common shares, the maximum amount of which is subject to receipt of regulatory approval in Canada. This reflects confidence in Aurinia's growth prospects and a continued commitment to enhancing both short- and long-term value for shareholders and other stakeholders.
While we know there will be questions about timing and details of this near-term strategic shift, I can tell you that we will execute quickly and decisively to maximize the benefits. I'd now like to turn the call over to Joe to provide additional details of the share repurchase program that we announced today, as well as more detailed review of our financial results. I will then return at the end of the call for a quick recap and to open up the line for your questions. With that, Joe.
Joe Miller: Thank you, Peter, and good morning, everyone. As Peter previewed, the Board has approved the share repurchase program of up to $150 million in common shares of the company, of which the maximum amount is subject to receipt of exemptive relief in Canada. If granted, it would permit Aurinia to purchase up to 15% of the issued and outstanding common shares of the company in any 12-month period over 36 months. There is no assurance that exemptive relief will be granted. If the exemptive relief is not granted, the maximum the company may purchase under the share repurchase program is 5% of our current issued and outstanding common shares, being 7,230,888 common shares. We plan to begin opportunistic discretionary purchases of shares on the open market beginning on or around February 21, 2024.
The company expects to fund the share repurchases from cash flows from operations and cash currently on hand. Further details can be found in our recently issued press release in Form 10-K. I want to emphasize that this repurchase program truly reflects our confidence in Aurinia's growth prospects. Now, let's take a few moments and go into detail regarding our financial results for the fourth quarter and 12 months ended December 31, 2023. As of December 31, 2023, Aurinia had cash, cash equivalents, and restricted cash in investments of $350.7 million compared to $389.4 million at December 31, 2022. The decrease is primarily related to the continued investment in commercialization activities and post-approval commitments of our approved drug LUPKYNIS, inventory purchases, advancement of our pipeline, and mono plant payments, partially offset by an increase in cash receipts from sales of LUPKYNIS.
Total net revenue increased 59% to $45.1 million for the fourth quarter compared to the prior year period of $28.4 million. Total net revenue for the year was $175.5 million, an increase of over 31% over the prior year period of $134 million. Total net product revenue increased 49% to $42.3 million for the fourth quarter compared to the prior year period of $28.4 million. Total net product revenue was $158.5 million and $103.5 million for the years ended December 31, 2023 and 2022. The increase in both periods is primarily due to an increase from our two main customers for LUPKYNIS sales, driven predominantly by further penetration of the LN market. License, collaboration, and royalty revenue was $2.8 million for the fourth quarter compared to the prior year period of $109,000.
License, collaboration, and royalty revenue was $17 million and $30.6 million for the years ended December 31, 2023, and 2022 respectively. For the years ended December 31, 2023, license, collaboration, and royalty revenue included a $10 million pricing and reimbursement milestone and additional collaboration and manufacturing service revenue from Otsuka. For the year ended December 31, 2022, license, collaboration, and royalty revenue was primarily due to the recognition of a $30 million regulatory milestone for Otsuka following the EC marketing authorization of LUPKYNIS in September of 2022. Cost of sales and operating expenses for the fourth quarter ended December 31, 2023 and December 31, 2022 were $74.8 million and $56.5 million. Total cost of sales and operating expenses were $267.2 million and $245.5 million for the years ended December 31, 2023 and December 31, 2022.
Let me now give you a further breakdown of operating expenses, drivers, and fluctuations. Cost of sales were $5.4 million and $1.4 million for the quarters ended December 31, 2023 and December 31, 2022. Cost of sales for the year ended December 31, 2023 were $14.1 million and $5.7 million for the year ended December 31, 2022. The increase in both periods was primarily due to increased sales of LUPKYNIS, coupled with the amortization of the mono plant finance lease right-of-use asset, which was placed into service in late June 2023. Gross margin for the quarter ended December 31, 2023 and December 31, 2022 was approximately 88% and 95%. Gross margins for the year ended December 31, 2023 and December 31, 2022 was approximately 92% and 96%. Selling, general, and administrative expenses, inclusive of share-based compensation expense were $50.1 million and $47.5 million for the fourth quarters 2023 and 2022, respectively.
The increase in total SG&A was primarily due to an increase in share-based compensation expense. For the years ended December 31, 2023, SG&A expenses, inclusive of share-based compensation expense was $195 million. For the year ended December 31, 2022, SG&A expenses, inclusive of share-based compensation was $196.4 million. The decrease was primarily due to a reduction in expenses associated with corporate legal matters and insurance. Non-cash SG&A share-based compensation expense was $9.5 million and $7 million for the quarters ended December 31, 2023 and December 31, 2022. Non-cash SG&A share-based compensation expense was $36.5 million and $28.4 million for the years ended December 31, 2023 and December 31, 2022. Research and development expenses, inclusive of share-based compensation expense were $10.2 million and $9.9 million for the quarters ended December 31, 2023, and December 31, 2022.
R&D expenses, inclusive of share-based compensation expense were $49.6 million and $45 million for the years ended December 31, 2023, December 31, 2022. The primary driver for the increase in R&D expenses for both periods was due to an increase in share-based compensation expense. For the quarter ended December 31, 2023, non-cash R&D share-based compensation expense was $1.9 million. For the quarter ended December 31, 2022, non-cash R&D shared-based compensation was income of $260,000. Non-cash R&D share-based compensation expense was $7.5 million and $3.3 million for the years ended December 31, 2023, and December 31, 2022. Other expense was $9.1 million versus other income of $2.2 million for the quarters ended December 31, 2023, and December 31, 2022, respectively.
Other expense was $8.4 million versus other income of $1.5 million for the years ended December 31, 2023, and December 31, 2022. The increase in expense for both periods is primarily the increase of the foreign exchange loss related to the revaluation of the mono plant finance lease liability, which commenced in June 2023 and is denominated in CHS. Interest income was $4.6 million for the quarter ended December 31, 2023, and $2.9 million for the quarter ended December 31, 2022. Interest income was $17 million and $5.1 million for the years ended December 31, 2023, and December 31, 2022. Increase for the quarter and full year was primarily due to higher yields on our investment as a result of higher interest rates year-over-year. For the quarter ended December 31, 2023, Aurinia had recorded a net loss of $26.9 million or $0.19 net loss per common share as compared to a net loss of $26 million or $0.18 net loss per common share for the quarter ended December 31, 2022.
For the year ended December 31, 2023, Aurinia recorded a net loss of $78 million or $0.54 net loss per common share as compared to a net loss of $108.2 million or $0.76 net loss per common share for the previous period. With that, I'd like to hand the call back over to Peter for some closing remarks. Peter?
Peter Greenleaf: Thanks, Joe. I want to close by saying that we've built a strong foundation for Aurinia's growth. This near-term shift will make us financially stronger. In the years to come, it will allow us more financial flexibility to continue to explore a range of strategic initiatives. We have a deeply experienced management team that's dedicated and committed to driving commercial success of LUPKYNIS and improving the lives of people suffering from lupus nephritis. We're looking forward to a continued strong performance carried through in 2024, and I want to thank you all for joining us and giving us your time today. I'll now open the lines for any questions. Operator?
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