KALA Pharmaceuticals, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing was signed April 2, 2018. The company was a development-stage biopharmaceutical business focused on ophthalmic drugs using its proprietary Mucus Penetrating Particles (MPP) technology. It had no product sales or approved products during 2017.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Revenue | $0 | $0 | No product revenue; 2015 revenue was $45,000 from feasibility work. |
| Research and development | $29.0 million | $25.0 million | Up $4.0 million, mainly from added clinical/regulatory staff and consulting. |
| General and administrative | $10.9 million | $7.6 million | Up $3.3 million, including public-company, personnel, consulting and legal costs. |
| Total operating expenses | $39.9 million | $32.7 million | Up $7.2 million. |
| Operating loss | $39.9 million | $32.7 million | No revenue to offset expenses; operating margins are not meaningful. |
| Net loss | $42.2 million | $33.2 million | Loss widened $9.0 million; 2017 included a $1.8 million warrant-liability fair-value loss. |
| Cash used in operating activities | $34.1 million | $27.3 million | Cash burn increased $6.8 million. |
| Cash and cash equivalents | $114.6 million | $45.5 million | Increased principally from the July 2017 IPO. |
| Working capital | $100.8 million | $40.1 million | Current assets less current liabilities. |
| Debt outstanding | $18.9 million | $10.0 million | $6.7 million principal due within one year at year-end; debt secured by substantially all assets except intellectual property. |
The company reported total assets of $116.1 million and stockholders’ equity of $89.7 million at year-end, compared with a stockholders’ deficit of $87.8 million in 2016. The IPO raised $94.0 million net; the company reported using approximately $17.0 million of proceeds by December 31, 2017. There were no cash equivalents or investments at year-end beyond cash, and no off-balance-sheet arrangements were reported.
Business, material developments and outlook
- INVELTYS (KPI-121 1.0%): The FDA accepted the NDA in December 2017 for inflammation and pain following ocular surgery and set an August 24, 2018 PDUFA action goal date. Two Phase 3 cataract-surgery trials met their primary efficacy endpoints; the company reported tolerability comparable to placebo. Approval was not assured.
- KPI-121 0.25% for dry eye: In January 2018, the company reported topline results from STRIDE 1 and STRIDE 2. STRIDE 1 met its primary sign and symptom endpoints; STRIDE 2 met the sign endpoint but missed the primary symptom endpoint. The company planned to consult the FDA in Q2 2018 on next steps, which could include another Phase 3 trial. Post-hoc analyses were exploratory and may carry less regulatory weight.
- Other pipeline: The company was evaluating less-frequent-dose LE formulations and KPI-285, a topical MPP tyrosine kinase inhibitor targeting VEGF for retinal diseases. KPI-285 remained preclinical; any potential topical delivery benefit was not clinically established.
- Commercial plans: If approved, Kala planned U.S. commercialization using its own specialty sales force—about 75 sales and marketing personnel initially for INVELTYS, with up to 100 additional personnel if KPI-121 0.25% is approved. Management did not expect product revenue before 2019, if at all, and expected losses and expenses to rise as it prepared for approval and commercialization.
- Liquidity outlook: Management stated year-end cash was expected to fund planned operating expenses, debt service and capital expenditures for at least 12 months from issuance of the financial statements. This depended on assumptions and did not remove the need for future financing; the company warned that capital might not be available on acceptable terms.
Risks, contingencies and unusual items
- Commercial success depended on FDA approval, successful launch, physician and patient uptake, reimbursement, pricing and competition, including generics and established therapies.
- STRIDE 2’s missed symptom endpoint could lead to additional trials, delay or prevent an NDA, and increase cash needs. The company had limited long-term safety exposure to its corticosteroid candidates; steroid-associated risks include increased intraocular pressure and cataract formation.
- Manufacturing depended on third-party suppliers. A contract testing laboratory had received an FDA Form 483 with two observations; the laboratory considered them non-critical, but supply interruption remained a disclosed risk. The company also had minimum purchase obligations under its supply arrangements, including an approximately $1.5 million first-year minimum if both lead products were approved.
- Intellectual-property risks included a European patent relating to LE and dry eye uses, in force in several countries through early 2025. Kala cited an opinion that the patent was invalid but said it could still impede European commercialization absent invalidation or a license.
- At year-end the debt facility bore a 7.5% interest rate and required scheduled principal repayments. On March 29, 2018, a subsequent amendment extended the interest-only period by 12 months, extended maturity to March 29, 2022, and provided up to $5 million of additional borrowing contingent on INVELTYS FDA approval.
- Subsequent to year-end, Kala signed an eight-year Watertown headquarters lease for 66,052 square feet, with initial rent of approximately $322,000 per month beginning November 2018, and a separate one-year Waltham lease. These commitments were not included in the year-end contractual-obligations table.
- The 2017 tax law reduced the federal corporate tax rate, but the company recorded no net deferred tax asset because of a full valuation allowance. Federal NOL carryforwards were $120.9 million; their use may be limited by ownership changes and tax rules.
Important facts for investors to verify
- FDA actions and any additional evidence or trials required for INVELTYS and KPI-121 0.25%.
- Actual cash burn, financing needs and available liquidity relative to commercialization, lease and debt obligations.
- Debt terms, collateral, covenants and the conditions for accessing the additional $5 million facility commitment.
- Commercial manufacturing readiness, supplier capacity, inspection status and binding minimum purchase commitments.
- Patent scope, ownership and enforceability, particularly the European dry-eye patent issue and licensed patent obligations.
- Assumptions behind market-size estimates and the expected adoption, pricing and reimbursement of any approved products.