Aurinia Pharmaceuticals Inc. (AUPH) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the notes thereto included in this Annual Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this Annual Report. Our actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

The following generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussion of historical items and year-to-year comparisons between 2020 and 2019 that are not included in this discussion can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-

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K for the fiscal year ended December 31, 2020, filed with the SEC on February 24, 2021 and such comparisons are incorporated herein by reference.

Overview

Aurinia is a commercial-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. In 2021, we commercially launched LUPKYNIS in the United States for the treatment of adult patients with active LN. We continue to conduct pre-clinical, clinical, and regulatory activities to support the voclosporin development program as well as our other assets.

On January 22, 2021, the FDA approved LUPKYNIS in combination with a background immunosuppressive therapy regimen to treat adult patients with active LN.

On August 17, 2021, we announced the acquisition of two novel assets, AUR200 and AUR300. AUR200 is currently undergoing pre-clinical development with projected submission of an Investigational New Drug Application (IND) to the FDA in 2023. It is anticipated that an IND for AUR300 will be submitted during the first half of 2023.

On December 9, 2021, we announced positive topline results from the AURORA 2 continuation study evaluating the long-term safety and tolerability of LUPKYNIS.

Our net product revenue in 2021 increased to $45.5 million due to FDA approval of LUPKYNIS on January 22, 2021. We did not have any products approved for sale before 2021. We expect our net product revenue to continue to increase as we continue to execute on our post approval commercialization strategy for LUPKYNIS.

Our total expenses increased in 2021 to $226.3 million, primarily as a result of additional efforts related to the commercialization of LUPKYNIS, along with an increase in and cost of sales recognized for product sales. We anticipate continuing to spend more in R&D to support our continued development programs for LUPKYNIS and in respect of our two additional assets, AUR200 and AUR300 and our post approval commitments to the FDA.

We ended 2021 with $466.1 million in cash, cash equivalents and short-term investments, which we believe to be sufficient to fund our current business plans.

LUPKYNIS is an orally administered CNI, immunosuppressant, that has the potential to improve near and long-term outcomes in LN when used in combination with MMF (although MMF is not currently approved as such) and steroids. By inhibiting calcineurin, LUPKYNIS reduces cytokine activation and blocks interleukin IL-2 expression and T-cell mediated immune responses. LUPKYNIS also potentially stabilizes podocytes, which can protect against proteinuria. Voclosporin, the active ingredient in LUPKYNIS, is made by a modification of a single amino acid of the cyclosporine molecule. The mechanism of action of LUPKYNIS has been validated with certain earlier generation CNIs for the prevention of rejection in patients undergoing solid organ transplants and in several autoimmune indications, including uveitis, keratoconjunctivitis sicca, psoriasis, rheumatoid arthritis, and for LN in Japan. We believe that LUPKYNIS possesses pharmacologic properties with the potential to demonstrate best-in-class differentiation.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, are reflected in our financial statements prospectively from the date of the change in estimate.

We define our critical accounting policies as those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. While our

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significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this Annual Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.

Product Revenues

In the United States (and territories), we sell LUPKYNIS primarily to specialty pharmacies and specialty distributors. These customers subsequently resell our products to health care providers and patients. Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, typically upon delivery to the customer.

Reserves for discounts and allowances: Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer).

Our estimates established for variable consideration are calculated based upon utilizing the expected value method. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Amounts related to such items are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment. We use a data aggregator and historical claims to estimate variable consideration for inventory sold to its customers that has not yet been dispensed. As of December 31, 2021, we did not have any material adjustments to estimates based on actual results.

License, Collaboration and Other Revenues

We enter into out-licensing agreements that are within the scope of ASC 606, under which we license certain rights to our product candidates to third parties. The terms of these arrangements typically include payment to us of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments, payments for manufacturing supply services we provide through our contract manufacturers, and royalties on net sales of licensed products. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues. We recorded $50.0 million for upfront, non-refundable license revenue in 2020 related to the Otsuka agreement. The upfront fee of $50.0 million was fixed consideration for the transfer of the license and was recognized upon transfer of the license in December 2020 and we have not recorded any material amounts of revenue related to its license agreements in 2021.

Research and Development (R&D)Costs: R&D costs are accounted for in accordance with ASC Topic 730, Research and Development, (ASC 730) and are expensed as incurred. R&D costs consist primarily of the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits, subcontractors and materials used for R&D activities, including nonclinical studies, clinical trials, manufacturing costs and professional services and in process R&D costs associated with acquired or licensed assets that do not have alternative uses and therefore no separate economic value. The costs of services performed by others in connection with the R&D activities, including R&D conducted by others on behalf of us, shall be included in R&D costs and expensed as the contracted work is performed.

We accrue the costs incurred under our agreements with these third parties based on actual work completed in accordance with agreements established with these third parties. We determine the accruals for R&D costs through monitoring invoices received and discussions with internal personnel and external service providers as to the progress or stage of completion of the clinical studies and the agreed-upon fee to be paid for such services. Where contingent milestone payments are due to third parties under R&D arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are probable to be achieved.

Deferred Compensation Arrangements: We have recorded deferred compensation arrangements in liabilities for estimated future employee benefits relating to applicable historical employment arrangements. The deferred compensation arrangements were approved by a resolution of the Board of Directors of the Company on March 8, 2012. Pursuant to ASC Topic 710, we recognize future benefits provided by employee retention arrangements, as deferred compensation, which is recognized when we determine that it is probable to make future payments. The deferred compensation is based on an income approach for the estimated future net revenues of voclosporin using an internal risk-adjusted net present value of the future payments to be made to the individuals.

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Initially, these obligations are measured at the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting periods. Subsequent re-measurements as a result of performance obligations we meet or changes in assumptions are recognized in the consolidated statement of operations. There have been no material historical adjustments to amounts recorded in the consolidated statement of operations in prior periods.

Impact of Recently Issued Accounting Pronouncements

For information of recent accounting pronouncements and their impact on our consolidated financial statements or disclosures, see Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in "Financial Statements and Supplementary Data" in this Annual Report.

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

The following table sets forth our results of operations for the years ended December 31, 2021 and 2020:

Revenues

Total revenues were $45.6 million and $50.1 million for the years ended December 31, 2021 and 2020, respectively. Our total revenues during 2021 primarily consisted of product revenues, net of adjustments, for LUPKYNIS following FDA approval in January 2021. Total revenues during 2020 were primarily due to the upfront payment from Otsuka of $50.0 million recorded as licensing revenue. In 2020, we did not have any drugs approved for commercial sale.

Cost of Sales

Cost of sales were $1.1 million and nil for the years ended December 31, 2021 and 2020, respectively. The increase was primarily the result of commercial sales of LUPKYNIS. In 2020, we did not have any drugs approved for commercial sale and the upfront payment from Otsuka did not have cost of sales. Gross margin for the year ended December 31, 2021 was approximately 98%.

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Selling, General and Administrative Expenses

SG&A expenses increased to $171.4 million for the year ended December 31, 2021 compared to $96.0 million for the year ended December 31, 2020. SG&A expenses consisted of the following:

We expense all SG&A costs in the periods in which they are incurred. We expect our SG&A expenses to continue to grow as we continue to build out the commercial and administrative functions to further support the commercialization of LUPKYNIS.

The primary drivers for the increase of $75.5 million in SG&A were due to an increase of $38.9 million in salaries and incentive pay including sales commissions and performance bonuses and employee benefits, and a $12.8 million increase in share-based compensation expense related to the expansion of the commercial and administrative functions to support the launch and commercialization of LUPKYNIS. Also contributing was an increase of $15.0 million in professional fees and services for activities such as patient assistance programs, consulting, recruiting, legal, market research and marketing. Following FDA approval, approximately $7.5 million of salaries and expenses that were previously allocated to R&D have been allocated to SG&A expense related to post approval support of LUPKYNIS. We anticipate continuing to incur significant expenses in SG&A to support the commercialization of LUPKYNIS.

Research and Development Expenses

R&D expenses increased slightly to $51.1 million for the year ended December 31, 2021 compared to $50.3 million for the year ended December 31, 2020. R&D expenses consisted of the following:

The primary drivers for the slight increase of $0.8 million in R&D were due to the upfront license and accrued milestone expense totaling $10.0 million related to our recently acquired developmental programs, AUR200 and AUR300 included in the CRO and developmental expenses line item and higher clinical research organization expenses related to our new clinical programs offset by a $3.8 million decrease in clinical supply and distribution costs following the approval of LUPKYNIS, including a reduction in new drug application preparation costs and termination of the dry eye trial during the fourth quarter of 2020. Following FDA approval, approximately $7.5 million of salaries and expenses that were previously allocated to R&D have been allocated to SG&A expense related to post approval support of LUPKYNIS.

We expect our R&D expenses will increase as we continue to develop our pipeline assets. We expect our R&D expenses will increase in future periods as we continue to meet our post approval obligations related to LUPKYNIS with the FDA, to invest in R&D activities related to developing voclosporin and product candidates, and as programs advance into later stages of development and we begin to conduct larger clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and R&D is highly uncertain. As a result, we are unable to determine the

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duration and completion costs of our R&D projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

Amortization of Acquired Intellectual Property and Other Intangible Assets

Amortization of acquired intellectual property and other intangible assets increased to $2.1 million for the year ended December 31, 2021 compared to $1.3 million for the year ended December 31, 2020 mainly due to implementations of internal-use software in 2020 and 2021.

Other Expenses (Income), Net

Other expenses were $0.6 million for the year ended December 31, 2021 compared to $6.8 million for the year ended December 31, 2020. The primary driver for the decrease of $6.2 million in other expenses during 2021 was the revaluation of deferred compensation in 2020 based on changes in estimates.

Interest Income

Interest income was $0.5 million for the year ended December 31, 2021 compared to $1.5 million for the year ended December 31, 2020. The decrease was mainly due to a lower return, as a result of lower interest rates on our 2021 investments, in comparison to 2020.

Liquidity and Capital Resources

As of December 31, 2021, we had cash and cash equivalents of $231.9 million and short-term investments of $234.2 million compared to cash and cash equivalents of $272.4 million and short-term investments of $126.0 million at December 31, 2020. Cash and cash equivalents and our investments are primarily held in U.S. dollars. As of December 31, 2021 and 2020, we had working capital of $472.7 million and $387.4 million, respectively.

We are devoting the majority of our operational efforts and financial resources towards the commercialization and post approval commitments of our approved drug, LUPKYNIS. We are also expending efforts towards our newly acquired assets AUR200 and AUR300. Taking into consideration the cash and cash equivalents and investments as of December 31, 2021, we believe that our cash position is sufficient to fund our current plans which include funding commercial activities, including our FDA related post approval commitments, manufacturing commercial drug supply, funding our supporting commercial infrastructure, conducting our planned R&D programs, investing in our pipeline and funding our supporting corporate and working capital for at least the next few years.

The following table summarizes our cash flows for December 31, 2021, 2020 and 2019:

Cash Flows from Operating Activities

Cash used in operating activities in December 31, 2021 was $157.7 million, compared to $69.9 million, for the year ended December 31, 2020. The increase is primarily due to the commercial infrastructure spend to support the launch and commercialization of LUPKYNIS, payments for inventory, payments to help advance our clinical programs and one-time payments to a related party upon achievement of specific milestones partially offset by an increase in cash receipts. In the prior year, the Company was still in the development phase of LUPKYNIS.

Cash used in operating activities in December 31, 2020 was $69.9 million, compared to cash used in operating activities of $63.6 million for the year ended December 31, 2019. While we had a net loss of $102.7 million in 2020, non-cash components mainly included $17.5 million of share-based compensation. Operating cash flows included a net increase in working capital of

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$4.5 million. Net change in working capital during 2020 was largely impacted by changes in inventory, prepaid expenses and deposits, accounts payable and accrued liabilities and changes in our non-current assets and liabilities.

Cash Flows from Investing Activities

Cash used in investing activities for the year ended December 31, 2021 was $103.9 million compared to cash used in investing activities of $158.2 million for the year ended December 31, 2020. Investing activities during 2021 consisted primarily of $439.0 million for purchases of investments of commercial paper and corporate bonds as discussed in Note 4 of the audited consolidated financial statements for the year ended December 31, 2021.

Cash used in investing activities for the year ended December 31, 2020 was $158.2 million compared to cash provided by investing activities of $7.8 million for the year ended December 31, 2019. Investing activities in 2020 consisted primarily of $203.0 million for purchases of investments of commercial paper and corporate bonds as discussed in Note 4 of the audited consolidated financial statements for the year ended December 31, 2020.

Cash Flows from Financing Activities

Cash provided by financing activities for the year ended December 31, 2021 was $221.1 million compared to cash provided by financing activities of $194.4 million for the year ended December 31, 2020. Cash provided by financing activities for the year ended December 31, 2021 increased primarily due to the net proceeds of $196.7 million from our November 2021 ATM facility and $24.0 million of proceeds from the exercise of stock options.

Cash provided by financing activities for the year ended December 31, 2020 of $194.4 million compared to cash provided by financing activities of $243.9 million for the year ended December 31, 2019 decreased mainly due to the net proceeds of $187.7 million from our public offering of common shares compared to 2019, which included $223.1 million net proceeds from public offerings of common shares in 2019.

November 2021 ATM facility

In November 2021, we entered into an Open Market Sale Agreement, or the Sale Agreement, under which we issued 10.2 million common shares, resulting in net proceeds of $196.7 million through December 31, 2021. There have been no sales subsequent to December 31, 2021.

We intend to use the net proceeds to fund our operations, which includes, but is not limited to, clinical development and commercial production of voclosporin (whether for LN or other indications), advance our pipeline, regulatory, additional clinical trials, business development opportunities, capital expenditures and working capital.

In February 2022 we terminated the Sale Agreement and no further sales will occur under the Sale Agreement.

Material cash requirements

As of December 31, 2021, our material short-term cash requirements are approximately $117.3 million. We anticipate our long-term cash requirements to be approximately $163.3 million, which does not include per annum requirements related to human capital, insurance and government payor rebates, each of which we anticipate to fluctuate based on future requirements (those per annum amounts, calculated on a short-term cash requirement basis, amount to approximately $92.9 million). These short and long-term cash requirement estimates are all based on our current operating plans and strategies, and could fluctuate if our plans were to change.

Our material cash requirements include the following:

•Short-term per annum expenses for human capital (which includes estimates for personnel headcount, performance bonuses, salaries, benefits and commissions);

•Government payor rebates and co-payment programs;

•Corporate insurance premiums;

•Cash requirements related to R&D projects, clinical trials, milestone expenses and post-approval related studies and support;

•Short-term and long-term lease liabilities included on our consolidated balance sheet or Note 16, Leases for further details;

•Deferred compensation arrangements included on our consolidated balance sheet or Note 15, Deferred Compensation and Other Non-Current Liabilities for further details; and

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•Purchases for inventory and production costs to support our commercial and clinical product supply requirements, as well as capital expenditures. For further details see Note 14, Commitments and Contingencies.

There are several factors that we believe could impact our future cash requirements, including:

•the amount of revenue received from commercial sales of LUPKYNIS and potential future drug candidates;

•the scope, rate of progress, results and costs of our clinical trials, preclinical studies and other related regulatory requirements and activities;

•our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

•the number and characteristics of the R&D assets we seek to develop or commercialize;

•the expenses needed to attract and retain skilled personnel as well as any other personnel changes that we may implement; and

•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing possible patent claims, including litigation costs and the outcome of any such litigation.