KNSA - Kiniksa Pharmaceuticals: Arcalyst's Growth Picks Up

2023-07-27 10:57:33 ET

Summary

• Shares of Kiniksa Pharmaceuticals surged after the company reported strong Q2 results and raised the full-year net sales guidance for Arcalyst.
• The strong growth and improved outlook were driven by the recent sales force expansion.
• I see Arcalyst as a $600 million to $700 million drug by 2026.
• Collaboration revenues added $17 million to the top line in the second quarter and this includes a $15 million milestone from Roche for a new indication for vixarelimab.
• Kiniksa is well-positioned to drive shareholder value, driven primarily by Arcalyst in the medium term and by the pipeline long term.

Shares of Kiniksa Pharmaceuticals ( KNSA ) surged after the company reported strong second quarter results and raised the full-year net sales guidance for Arcalyst. The company also recognized $17 million in collaboration revenue that includes a $15 million milestone from partner Roche (RHHBY) for a new indication for vixarelimab. There were no other new pipeline updates and, overall, while I did reduce my position this week after a strong post-earnings reaction (having added Kiniksa to the portfolio in March 2022), it was a great update that puts Kiniksa in a good position for continued growth in the following years.

Sales force expansion is starting to pay off

Arcalyst saw only modest sequential growth in the first quarter due to the usual seasonal headwinds at the start of the year, but that did not stop Kiniksa from raising the guidance range at the time by $10 million at the mid-point as the company saw early signs of improved growth driven by the sales force expansion in late 2022.

The sales force expansion really started to pay off in the second quarter and we saw the greatest absolute sequential increase in net sales since launch ($11.8 million versus the previous best of $6.6 million) and the highest sequential growth rate since Q4 2021 of 27.6%. Granted, the sequential growth rate is flattered by the seasonally weak Q1, but last year’s growth during the same period was nowhere near the numbers we saw this week.

The other metrics continue to look similarly good to past quarters or have improved. Total prescribers grew from 1,000 in Q1 to 1,250, another record improvement in absolute numbers. Previous improvements in Q4 2022 and Q1 2023 were 150 and 200 new prescribers, respectively.

Repeat prescribers were flat at 23% but indicate acceleration due to the increase in total prescriber count. The average total duration of treatment was 14 months and that number does not include treatment restarts and 45% of patients who stop Arcalyst resume treatment. If restarts are included, the average goes up to 20 months.

The full-year guidance has improved quite a bit since the start of the year. It was initially $190-$205 million when the company reported Q4 2022 results and it was raised to $200-$215 million after the Q1 2023 report. The new guidance is $220-$230 million, a $20 million improvement at the low end of the range and a $15 million improvement at the high end of the range. It appears management learned from last year’s ambitious initial goal as the company was only able to deliver at the mid-point of the initial revenue guidance range in 2022.

What remains remarkable is the profitability of the Arcalyst franchise. As a reminder, Kiniksa splits the profits with partner Regeneron ( REGN ), but operating profit was $28 million in the second quarter for an operating margin of 51.4% which means Kiniksa’s share of the profit has already reached $14 million.

This is still not enough for the company to reach cash flow breakeven as other SG&A and R&D costs are still above those $14 million, but the progress was enough for the company to further increase the cash runway guidance from at least into 2026 to at least into 2027.

I see Arcalyst as a $600 million to $700 million drug for Kiniksa by the end of 2026. This is the same as before (prior coverage available to Growth Stock Forum subscribers) and the improved outlook puts it closer to the mid-point of that range, assuming a steady, linear growth trajectory in the following years.

The pipeline remains on track, Roche adds a new indication for vixarelimab

What made the Kiniksa story less appealing in the near and medium term is its relatively thin pipeline calendar. KPL-404 is a potential pipeline in a drug but with no immediate catalysts. The dose-ranging trial in rheumatoid arthritis (‘RA’) patients is on track to report results in the first half of 2024, but this trial's real purpose is to find the appropriate dose for other indications where there is less competition and more pricing power. Nonetheless, it will be important to confirm KPL-404’s previously observed PK/PD and safety profile and its potential to be administered subcutaneously.

Kiniksa also recorded $17 million in collaboration revenue in Q2, $15 million of which are due to Roche selecting another indication for vixarelimab. Vixarelimab is of limited value to Kiniksa as it has downstream obligations to partners that take away considerably from its potential future royalties on net sales.

Mavrilimumab remains sidelined as the company continues to pursue collaborative study agreements for further development in rare cardiovascular diseases. To me, this speaks to the company’s lack of enthusiasm for this asset as it does not want to spend much of its resources on this program. As such, my enthusiasm for mavrilimumab remains at very low levels.

Conclusion

Kiniksa delivered excellent second quarter results that put the company in an even better position to deliver long-term growth. Arcalyst remains the key value driver in the medium term while the pipeline will start to attract more attention in 2024 with phase 2 results of KPL-404 in rheumatoid arthritis. With $185 million in cash and equivalents at the end of Q2 and with growing Arcalyst revenues and additional potential milestones, the company has increased its cash runway guidance from at least into 2026 to at least into 2027.

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