KALA Pharmaceuticals, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The filing is for Kala Pharmaceuticals, Inc. (the company identified in the request as KALA BIO, Inc.). Financial statements are unaudited and amounts below are in U.S. dollars.
Business context and reporting period
Kala was a clinical-stage biopharmaceutical company developing ocular therapies using its Mucus Penetrating Particles technology. Its lead candidates were KPI-121 1.0% for post-operative inflammation and pain following ocular surgery, and KPI-121 0.25% for temporary relief of dry eye signs and symptoms. The company had no product-sales revenue and remained focused on research and development.
Key financial metrics
| Metric | Q2 2017 / June 30, 2017 | Comparable period / prior balance |
|---|---|---|
| Revenue | No product-sales revenue reported | No product-sales revenue reported |
| Research and development expense | $8.071 million for Q2; $16.110 million for six months | $5.950 million and $9.861 million, respectively, in 2016 |
| General and administrative expense | $1.559 million for Q2; $3.091 million for six months | $3.700 million and $4.865 million, respectively, in 2016 |
| Net loss | $10.986 million for Q2; $20.745 million for six months | $9.853 million and $15.105 million, respectively, in 2016 |
| Operating cash used | $18.204 million for six months | $11.876 million in 2016 |
| Cash | $26.350 million | $45.472 million at December 31, 2016 |
| Debt | $10.0 million principal outstanding; $2.222 million current and $7.488 million long-term carrying amounts | $10.0 million principal outstanding at December 31, 2016 |
Gross margin and operating margin are not meaningful for this pre-commercial company; the filing reports no product-sales revenue. Cash used in investing activities was $0.134 million for the first half of 2017. Financing activities used $0.784 million, primarily for IPO-related deferred offering costs. The warrant liability rose to $2.260 million from $1.039 million at year-end; its fair-value remeasurement contributed a non-cash loss of $1.221 million in the first half.
Material changes versus prior comparable periods
- First-half R&D expense increased $6.249 million, primarily from higher KPI-121 clinical development costs, clinical and regulatory staffing, and consulting as the company advanced three Phase 3 trials.
- First-half G&A expense fell $1.774 million, mainly because the 2016 period included a $1.789 million write-off of deferred IPO costs.
- First-half net loss increased $5.640 million. Higher operating expenses and a larger non-cash warrant fair-value loss were partly offset by the prior-year IPO-cost write-off included in G&A.
- Cash declined $19.122 million during the first half of 2017, compared with a $55.316 million increase in the 2016 period, when the company received Series C preferred-stock proceeds.
Outlook, commentary, risks and unusual items
- Management reported positive topline results in May 2017 from the second Phase 3 trial of KPI-121 1.0%: the candidate met both primary efficacy endpoints and all secondary endpoints, and was described as well tolerated with no treatment-related significant adverse events observed. Kala expected to submit an NDA by year-end 2017.
- Two parallel Phase 3 trials of KPI-121 0.25% were ongoing, each targeting at least 900 patients. Management expected topline results by year-end 2017 and, if positive, anticipated an NDA submission in the first half of 2018.
- The July 25, 2017 IPO, after the reporting date, issued 6.9 million shares at $15 per share and generated $94.9 million in net proceeds. Preferred stock converted into 16.102 million common shares upon closing. The filing states that IPO proceeds, June 30 cash and available debt borrowings were expected to fund operations, debt service and capital expenditures through Q2 2019; this estimate depends on assumptions and could prove shorter.
- The $10 million venture debt facility carried a 7.0% variable interest rate at June 30. Principal repayment was scheduled to begin in October 2017; an additional $10 million could be borrowed before October 13, 2017, subject to facility terms. A 50-basis-point rate change would change annual interest expense by approximately $50,000.
- Key risks include clinical-trial outcomes and enrollment, FDA or foreign regulatory requirements, commercialization and reimbursement, competition, reliance on contract manufacturers and CROs, intellectual-property challenges, and the need for additional capital. A prior KPI-121 0.25% Phase 2 trial for meibomian gland dysfunction missed its primary endpoint; the dry-eye Phase 2 trial also missed statistical significance on ocular discomfort severity. Kala reported no clinical safety data for either concentration beyond 28 days.
- The filing notes that a third-party testing laboratory received an FDA Form 483 with two inspection observations; the laboratory characterized them as non-critical and said they did not affect its analytical programs. Kala warned that regulatory action could disrupt supply. It also disclosed a European patent that could impede KPI-121 0.25% commercialization for dry eye in certain countries unless invalidated or licensed.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and procedures as of June 30, 2017. It maintained a full valuation allowance against deferred tax assets.
Most important facts for investors to verify
- Whether KPI-121 0.25% Phase 3 results met both required endpoints, and whether the anticipated NDA timelines were achieved.
- Whether KPI-121 1.0% received regulatory approval and whether the May 2017 topline findings supported the eventual application and label.
- Actual cash burn and runway versus management’s Q2 2019 estimate, including the use of IPO proceeds and any further financing needs.
- Debt-facility availability, repayment terms, covenants and any drawdown-related warrant dilution.
- Manufacturing and testing-laboratory regulatory status, and the outcome of the European patent issue affecting potential dry-eye commercialization.