KALA Pharmaceuticals, Inc. (KALA) — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results for the three and nine months ended September 30, 2019. The company develops and commercializes eye-disease therapies using its AMPPLIFY mucus-penetrating particle technology. INVELTYS, its first approved product, launched in the U.S. in January 2019. EYSUVIS remains a development-stage candidate for dry eye disease.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net product revenue | $1.451 million | None | $4.894 million | None |
| Cost of product revenue | $0.668 million | None | $1.261 million | None |
| Operating loss | $21.567 million | $15.496 million | $68.027 million | $41.153 million |
| Net loss | $23.176 million | $15.603 million | $72.389 million | $41.519 million |
| Net loss per share | $0.68 | $0.63 | $2.13 | $1.69 |
| Operating cash used | Not provided for quarter | Not provided for quarter | $74.508 million | $38.132 million |
- Product gross profit was approximately $0.783 million in Q3 and $3.633 million for the nine-month period, corresponding to gross margins of approximately 54% and 74%, respectively. Q3 cost of product revenue included a $0.2 million write-off of damaged INVELTYS inventory.
- At September 30, cash was $97.556 million; restricted cash was $12.580 million. Total assets were $161.013 million, current liabilities $17.996 million, and stockholders’ equity $43.056 million.
- Debt principal outstanding was $75.0 million under the Athyrium facility; its carrying value, net of discounts and issuance costs, was $70.935 million. The loan bears fixed interest of 9.875%, with quarterly interest-only payments until the fourth anniversary and principal amortization thereafter. It is secured by substantially all company assets and includes a $10 million minimum-cash covenant.
- Cash and restricted cash decreased $72.968 million over the first nine months of 2019. Financing activities provided $2.687 million, including $2.130 million net proceeds from ATM stock sales. The company had $42.9 million remaining under its ATM program and approximately $128.8 million of securities capacity outside the ATM under its shelf registration.
Changes versus prior comparable periods
- Revenue began with the INVELTYS launch; there were no product sales in the 2018 comparison periods. Q3 2019 revenue included a $0.6 million reduction to prior-quarter estimates after updated prescription data changed the estimated payor mix.
- Q3 selling, general and administrative expense rose $6.8 million to $15.3 million, primarily from commercial sales-force staffing, launch activities and facility costs. For nine months, SG&A increased $29.4 million to $50.5 million, chiefly from employee and sales-and-marketing costs.
- Nine-month research and development expense increased $1.1 million to $21.1 million; Q3 R&D was broadly flat at $7.1 million. Higher facility-related costs were partly offset by lower development and employee costs.
- Interest expense increased to $6.3 million for nine months from $1.2 million, mainly reflecting replacement of the former $20 million debt facility with the $75 million Athyrium loan in October 2018.
Outlook, commentary and risks
- The FDA issued a complete response letter for the EYSUVIS NDA on August 8, 2019, requiring efficacy data from an additional clinical trial before resubmission. Management expected STRIDE 3 to support its response and targeted topline results for Q1 2020. Enrollment delays shifted the expected readout from year-end 2019.
- Management said cash on hand at September 30, together with projected INVELTYS revenue, was expected to fund operations for 18 months from the Form 10-Q date. The financial-statement note separately says existing cash was expected to fund planned costs for at least 12 months from issuance; both estimates depend on assumptions and could prove shorter.
- Management expects continued significant expenses and operating losses; future costs may rise with commercialization, clinical trials, manufacturing scale-up and staffing. The company cautioned that INVELTYS uptake, reimbursement and revenue are uncertain and profitability may be years away, if achieved.
- Risks include EYSUVIS trial and approval uncertainty, commercialization and reimbursement challenges, reliance on third-party manufacturers and clinical contractors, substantial cash burn, debt service and covenants, potential dilution from future financing, and dependence on licensed intellectual property. No material legal proceedings or material subsequent events were reported. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- STRIDE 3 enrollment, topline results and whether the data meet FDA requirements for an EYSUVIS NDA resubmission.
- INVELTYS prescription growth, payer coverage, net revenue quality and changes in sales reserves, particularly given the $0.6 million estimate adjustment.
- Actual cash burn and runway versus management’s 12- and 18-month estimates, including restricted cash and the $10 million covenant minimum.
- Inventory condition and demand, including the damaged-product write-off and the build-up of current and long-term inventory.
- Ability to meet Athyrium debt terms and any conditions or deadlines for accessing the additional $35 million Term Loan B.