KALA Pharmaceuticals, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The filing identifies the registrant as Kala Pharmaceuticals, Inc. (Nasdaq: KALA). Amounts below are in U.S. dollars; financial statement figures are unaudited.
Business context and reporting period
Kala develops and commercializes therapies for eye diseases using its AMPPLIFY mucus-penetrating particle technology. Its only marketed product was INVELTYS, for inflammation and pain following ocular surgery. Its lead candidate, EYSUVIS, was under FDA review for short-term treatment of dry eye disease symptoms and signs.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net product revenue | $0.8 million | $2.1 million | $1.9 million | $3.4 million |
| Cost of product revenue | $0.8 million | $0.4 million | $1.1 million | $0.6 million |
| SG&A | $15.3 million | $17.0 million | $30.7 million | $35.2 million |
| Research and development | $6.1 million | $7.1 million | $11.5 million | $14.1 million |
| Operating loss | $21.3 million | $22.4 million | $41.4 million | $46.5 million |
| Net loss | $23.3 million | $23.8 million | $45.3 million | $49.2 million |
| Net loss per share, basic and diluted | $0.42 | $0.70 | $0.94 | $1.45 |
- Product revenue fell 60% in Q2 and 45% for the first half year over year. Management attributed the decline primarily to COVID-19-related restrictions on elective ocular surgeries.
- Product costs exceeded revenue in both periods. Q2 and first-half 2020 cost of product revenue included a $0.5 million excess-inventory reserve and a $0.1 million inventory write-off after units failed quality inspection.
- For the six months ended June 30, operating cash use was $39.1 million, compared with $51.6 million a year earlier. Investing cash use was $57.5 million, mainly purchases of short-term investments; financing provided $139.2 million, primarily from equity offerings.
- At June 30, cash and cash equivalents were $128.0 million, short-term investments were $56.5 million, and restricted cash was $12.6 million. Current assets were $197.0 million and current liabilities $16.9 million.
- Long-term debt had a $75.0 million principal balance and $71.7 million net carrying value. The facility bears fixed interest at 9.875%, matures in October 2024, and is secured by substantially all company assets. Interest-only payments continue until the fourth anniversary; principal installments begin in 2022.
- Shareholders’ equity was $128.9 million, versus $29.7 million at year-end 2019. Shares issued and outstanding rose to 55.8 million from 36.1 million, primarily reflecting equity financing.
Material changes versus the prior comparable period
- Lower INVELTYS sales drove the revenue decline; elective-surgery restrictions and limits on in-person sales activity were significant factors.
- SG&A and R&D decreased year over year. Management cited reduced travel and sales activity, lower headcount and launch-related spending, and lower external STRIDE 3 trial costs. R&D also included increased EYSUVIS manufacturing activity.
- Net loss improved by $0.5 million in Q2 and $3.9 million for the first half, despite lower revenue, as operating expenses fell. Lower interest income partly offset the first-half improvement.
- In March and April 2020, the company raised $125.4 million net in an underwritten offering and $12.5 million net through its at-the-market facility. It also established a new shelf registration of up to $350 million and a new ATM facility of up to $75 million.
Outlook, commentary, and risks
- The FDA accepted Kala’s EYSUVIS NDA resubmission as a complete Class 2 response to its prior complete response letter and set an October 30, 2020 PDUFA goal date. Approval was not assured; further FDA requests or COVID-19-related review delays remained possible.
- Management expected existing cash, cash equivalents, and short-term investments to fund operations, lease and debt service, and capital expenditures into at least Q2 2022. The estimate depends on assumptions and could change; the filing also notes a minimum of 12 months’ liquidity from issuance of the financial statements.
- If EYSUVIS were approved, Kala planned—depending on the pandemic—to expand its sales force from 56 to approximately 100–125 representatives. Management anticipated higher future commercialization and organizational expenses and continued operating losses.
- COVID-19 had reduced INVELTYS demand and restricted field sales activity; future restrictions could again affect sales, a potential EYSUVIS launch, research activity, suppliers, and FDA review. Management said it could not reliably estimate the pandemic’s full financial impact.
- Other material risks include continued losses and potential need for additional capital, dilution from future equity financing, debt service and covenant obligations, dependence on third-party manufacturing, reimbursement and market-acceptance uncertainty, and product-development and regulatory risks. Kala reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether EYSUVIS received FDA action by the stated PDUFA date, and any approval conditions, labeling, or additional-study requirements.
- Subsequent INVELTYS sales, elective-surgery recovery, and the extent to which COVID-19 continued to affect prescriptions and in-person promotion.
- Cash and short-term investment balances, operating cash use, and whether the projected runway into Q2 2022 remained achievable.
- Equity issuance and share-count changes, including use of the new $75 million ATM facility and potential dilution.
- Debt covenant compliance, the $10 million minimum-cash requirement, interest payments, and the scheduled start of principal repayments.
- Inventory quality and reserves, product returns and rebate estimates, and the adequacy of manufacturing supply for INVELTYS and any potential EYSUVIS launch.