KALA Pharmaceuticals, Inc. — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; the filing also provides unaudited fourth-quarter results. The registrant filed as Kala Pharmaceuticals, Inc. (ticker: KALA). It is an eye-focused biopharmaceutical company using its AMPPLIFY mucus-penetrating particle technology. INVELTYS, its first approved product, launched in the United States in January 2019. EYSUVIS remained an unapproved candidate for temporary relief of dry-eye signs and symptoms.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net product revenue | $6.074 million | None |
| Cost of product revenue | $2.008 million | None |
| Gross profit / margin | $4.066 million / approximately 67% | Not applicable |
| Selling, general and administrative expense | $65.015 million | $35.431 million |
| Research and development expense | $27.275 million | $29.290 million |
| Operating loss | $88.224 million | $64.721 million |
| Net loss | $94.347 million | $66.738 million |
| Net loss per share, diluted | $2.76 | $2.49 |
| Cash used in operating activities | $92.720 million | $54.121 million |
- Fourth-quarter 2019 product revenue was $1.180 million and net loss was $21.958 million, or $0.63 per share.
- Cash at year-end was $85.449 million, down from $170.898 million a year earlier; restricted cash was an additional $12.582 million. Working capital was $80.710 million.
- Outstanding debt principal was $75.0 million, secured by substantially all company assets. The loan carries a 9.875% stated rate; its reported effective rate was 11.63%. Principal payments begin in 2022, with maturity in October 2024.
- Management expected year-end cash plus anticipated INVELTYS revenue to fund planned operations, lease and debt service, and capital expenditures into the second quarter of 2021. This estimate depends on sales assumptions and spending adjustments.
Material changes versus the prior period
- 2019 was the first year of commercial sales: INVELTYS generated $6.074 million, while 2018 had no product revenue.
- SG&A rose $29.584 million, mainly reflecting commercial-launch staffing, sales and marketing, samples, and facilities costs. R&D fell $2.015 million, primarily due to lower INVELTYS manufacturing costs classified as R&D before approval and lower costs for its Phase 3 trial, partly offset by STRIDE 3 spending.
- Net loss increased $27.609 million, and operating cash use increased $38.599 million. Interest expense rose $5.166 million following the 2018 Athyrium borrowing.
- The company raised $8.425 million net through its at-the-market equity offering in 2019. After year-end, it sold a further 583,411 shares for $2.2 million net through the filing date.
Outlook, risks and notable items
- The FDA issued a complete response letter for EYSUVIS in August 2019, requiring efficacy data from an additional trial. Kala targeted STRIDE 3 topline results in the first quarter of 2020 and NDA resubmission in the second quarter of 2020; approval was uncertain.
- STRIDE 1 met its primary sign and symptom endpoints, but STRIDE 2 missed its primary symptom endpoint. Management cited changes to STRIDE 3 eligibility criteria as intended to address differences between trials. Post-hoc analyses are exploratory and may receive less regulatory weight.
- Management expected R&D expense to decrease in 2020 as STRIDE 3 completed, while noting costs could rise with further trials and pipeline development. No numerical sales or earnings guidance was provided.
- Kala reported a cumulative deficit of $295.5 million and expected significant losses for several years. It stated it would need additional capital; equity financing could dilute shareholders. The potential additional $35 million Athyrium tranche was conditional, and the company did not expect to qualify by June 30, 2020.
- Three customers represented 39%, 33% and 26% of 2019 revenue, respectively. The company also depended on third-party manufacturers and had minimum supply-purchase commitments.
- Key risks include INVELTYS adoption and reimbursement, EYSUVIS trial and regulatory outcomes, competition and generic products, cash burn and financing needs, debt covenants, and manufacturing or supply interruptions. The company reported no material legal proceedings or off-balance-sheet arrangements.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Subsequent STRIDE 3 results, FDA feedback, NDA resubmission status, and any final EYSUVIS approval or labeling.
- INVELTYS prescription demand, net sales growth, payer coverage, channel inventory, and customer concentration.
- Cash runway versus actual operating cash burn, financing activity, and eligibility for the conditional Athyrium tranche.
- Debt service requirements, covenant compliance, collateral, and the impact of any future borrowing or equity issuance.
- Product gross margin sustainability, inventory quality and shelf life, and the company’s manufacturing capacity and supplier commitments.