KALA Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The unaudited filing was signed August 6, 2019. The company is a biopharmaceutical developer and commercializer of eye-disease therapies using its AMPPLIFY drug-delivery technology. It launched INVELTYS in the United States in January 2019; KPI-121 0.25% is its lead dry-eye candidate.
Financial performance and position
Amounts below are in millions of dollars unless otherwise indicated.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net product revenue | $2.057 | $0 | $3.443 | $0 |
| Cost of product revenue | $0.352 | $0 | $0.593 | $0 |
| Gross profit / margin | $1.705 / 82.9% | — | $2.850 / 82.8% | — |
| Selling, general and administrative | $17.007 | $7.151 | $35.243 | $12.633 |
| Research and development | $7.108 | $7.368 | $14.067 | $13.024 |
| Operating loss | $(22.410) | $(14.519) | $(46.460) | $(25.657) |
| Interest expense | $2.061 | $0.414 | $4.155 | $0.781 |
| Net loss | $(23.825) | $(14.620) | $(49.213) | $(25.916) |
| Basic and diluted loss per share | $(0.70) | $(0.60) | $(1.45) | $(1.06) |
- Cash and liquidity: At June 30, cash was $118.0 million and restricted cash was $12.6 million. Current assets were $132.8 million and current liabilities $17.7 million. Cash and restricted cash totaled $130.6 million.
- Cash flow: For the first six months, operating activities used $51.6 million, investing activities used $0.9 million, and financing activities provided $0.02 million. Cash and restricted cash decreased $52.5 million.
- Debt and leases: Athyrium term-loan principal was $75.0 million, carried at $70.7 million net of discount and issuance costs; the loan bears fixed interest of 9.875% and matures October 2024. Long-term lease liabilities were $29.4 million, with $1.6 million current. The loan is secured by substantially all company assets and includes a $10 million minimum-cash covenant.
- Equity: Stockholders’ equity was $61.1 million, down from $105.0 million at year-end 2018, primarily reflecting the six-month net loss. Shares outstanding were 33.9 million at June 30 and 34.0 million as of August 2.
Material changes versus the prior comparable period
- Product sales began in 2019, producing $2.1 million of Q2 revenue and $3.4 million for the six-month period; there were no product sales in the comparable 2018 periods.
- Q2 net loss increased $9.2 million year over year; the six-month net loss increased $23.3 million. Operating loss increased $7.9 million in Q2 and $20.8 million for six months.
- SG&A rose $9.9 million in Q2 and $22.6 million for six months, largely due to building the commercial organization, sales and marketing for INVELTYS, and higher facility costs. The company reported 57 territory sales managers, seven regional sales leaders and three national-account directors.
- Six-month R&D expense increased $1.0 million, including increased KPI-121 development activity for STRIDE 3, partly offset by lower pre-approval INVELTYS manufacturing costs recorded as R&D in 2018.
- Interest expense increased as the company replaced its former $20 million debt facility with the $75 million Athyrium Term Loan A in October 2018.
- Inventory increased from $4.1 million at December 31, 2018 to $8.2 million at June 30, 2019; accounts receivable was $5.6 million, versus zero at year-end, reflecting the new product launch.
Outlook, commentary and risks
- Management said June 30 cash was expected to fund planned operating expenses, debt service and capital expenditures through at least Q3 2020, with additional runway expected from INVELTYS revenue. The filing cautions that estimates depend on assumptions and cash could be depleted sooner. The financial-statement note separately says cash was expected to cover at least twelve months from issuance.
- The FDA’s target action date for KPI-121 0.25% was August 15, 2019. The filing notes approval was uncertain and that the FDA had recommended an additional Phase 3 trial. Management targeted STRIDE 3 topline results by year-end 2019; a further trial could be required.
- Management expected expenses to increase with continued commercialization, clinical development, manufacturing scale-up and possible expansion of the sales force. It said INVELTYS revenue alone was not expected to make the company profitable for several years, if at all.
- Key risks include limited INVELTYS sales and uncertain reimbursement or market acceptance; clinical and regulatory uncertainty for KPI-121; reliance on third-party manufacturers and suppliers; substantial cash burn and additional financing needs; debt service, collateral and covenant restrictions; and potential dilution from future equity issuance or warrants.
- The Athyrium facility permits a further $35 million draw only if specified conditions are met by June 30, 2020, including FDA approval of KPI-121 0.25% or qualifying INVELTYS revenue. The filing describes the facility’s conditions and thresholds; investors should review the agreement details.
- The company reported no material legal proceedings and no material subsequent events. It has minimum-purchase obligations under its commercial supply agreement and royalty and milestone obligations under its Johns Hopkins license. No income tax provision or benefit was recorded; deferred tax assets remained fully valuation-allowanced.
- Management concluded disclosure controls were effective as of June 30, 2019 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Subsequent FDA action on KPI-121 0.25% after the stated August 15, 2019 target date, and the outcome and timing of STRIDE 3.
- INVELTYS prescription demand, net sales growth, returns and rebate reserves, payer coverage, and cash collections.
- Actual cash burn and updated runway assumptions, including whether commercial revenues meet management’s expectations.
- Compliance with the $10 million minimum-cash covenant, debt interest and repayment terms, and whether the additional $35 million facility tranche becomes available.
- Manufacturing capacity and supply continuity, inventory levels, and contractual minimum purchase requirements.
- Potential dilution from equity financing, outstanding options and warrants, and any future draw-related warrants.