KALA BIO, Inc. quarterly report, Q1 FY2021

Business context and reporting period

Kala Pharmaceuticals, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2021. The company commercializes EYSUVIS, approved for short-term treatment of dry eye disease, and INVELTYS, for inflammation and pain following ocular surgery. EYSUVIS shipments began in late December 2020 and its full promotional launch began in January 2021. The company also has early-stage preclinical eye-disease programs.

Unless otherwise noted, financial amounts below are in millions of dollars; the statements report amounts in thousands.

Financial results and condition

Q1 2021 revenue comprised $1.64 million from EYSUVIS and $1.63 million from INVELTYS. Cash and cash equivalents were $128.0 million and short-term investments were $28.0 million at March 31, 2021, totaling approximately $156.0 million. The company reported $140.5 million of cash, cash equivalents and restricted cash, including $12.5 million restricted cash. Current assets were $179.1 million and current liabilities $20.0 million.

Long-term debt had a $75.0 million principal balance and $72.5 million carrying value, net of discounts and costs. The Athyrium facility carried a fixed 9.875% rate; interest expense was $2.1 million for the quarter. Total liabilities were $120.0 million. The company raised $34.7 million net through its at-the-market equity offering in the quarter; shares outstanding rose from 58.9 million at year-end to 63.8 million at March 31.

Material changes versus the prior comparable period

• Revenue increased $2.2 million, chiefly reflecting EYSUVIS sales after launch and higher INVELTYS sales.
• SG&A increased $12.3 million, including $5.5 million of higher external sales and marketing costs, $4.2 million of higher employee-related costs and $1.8 million of higher stock-based compensation.
• R&D fell $2.3 million, primarily due to reduced EYSUVIS Phase 3 trial spending and lower employee-related costs.
• Net loss widened by $8.5 million. Operating cash use increased by $12.8 million, driven by working-capital timing and higher loss adjusted for non-cash items.
• Investing cash inflow of $48.0 million mainly reflected maturities or sales of short-term investments, not operating cash generation. Financing cash inflow was $35.3 million, principally from ATM share sales.

Outlook, risks and unusual items

• Management expects continued significant expenses and operating losses. It anticipates higher commercial spending as it promotes both products and planned sales-force expansion, and expects R&D spending to decline in 2021 versus 2020 following completion of the EYSUVIS Phase 3 trial, while potentially increasing as preclinical programs advance. No specific revenue or earnings guidance was provided.
• The filing gives two different liquidity outlooks: the financial-statement note says available cash, cash equivalents and short-term investments plus anticipated product revenue are expected to fund needs for at least 12 months from issuance; MD&A says at least two years. Both estimates depend on assumptions and could prove inaccurate.
• On May 4, 2021, after quarter-end, the company borrowed $80 million under a new Oxford Finance facility of up to $125 million. Additional $20 million and $25 million tranches are contingent on specified trailing six-month revenue milestones. The new facility has a floating rate of the greater of 30-day LIBOR or 0.11%, plus 7.89%, and is secured by substantially all company assets, including intellectual property. The company used substantially all initial proceeds to repay the $75 million Athyrium principal and paid a $2.25 million prepayment premium and $0.75 million exit fee. The new borrowing therefore represents a refinancing, not an equivalent increase in available cash.
• COVID-19 could constrain physician access and EYSUVIS promotion, disrupt supply or research, and reduce INVELTYS demand if elective eye surgeries are curtailed. Management says in-person sales interactions had resumed substantially, but future effects remain uncertain.
• Key risks include continued losses and cash burn, uncertain product uptake and payer coverage, competition and generic alternatives, reliance on third-party manufacturers, early-stage pipeline uncertainty, and debt covenants and interest-rate exposure. The company disclosed $48.0 million of minimum manufacturing purchase commitments. It reported no material legal proceedings.
• Management stated disclosure controls and procedures were effective as of March 31, 2021, and that no material change in internal control over financial reporting occurred during the quarter.

Important facts for investors to verify

1. Reconcile the stated 12-month versus two-year liquidity runway and confirm the assumptions underlying each estimate.
2. Track EYSUVIS and INVELTYS prescription growth, net revenue, channel inventory, rebates, returns and payer coverage; revenue estimates depend partly on third-party data and management estimates.
3. Review cash burn and the effect of commercial expansion on SG&A, inventory and operating cash flow.
4. Review the full Oxford loan terms, contingent tranche requirements, floating-rate exposure, fees, collateral and covenants, alongside the completed Athyrium repayment.
5. Monitor dilution from ATM issuance and other equity compensation; the filing reports 64.6 million shares outstanding as of May 4, 2021.
6. Assess ongoing COVID-19 effects, manufacturing commitments and supply continuity, and progress and funding needs for the preclinical pipeline.