KALA Pharmaceuticals, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. The filing identifies the registrant as Kala Pharmaceuticals, Inc.; the request’s “KALA BIO, Inc.” name does not match the filing.
Business context and reporting period
Kala was a development-stage biopharmaceutical company focused on ophthalmic therapies using its AMPPLIFY mucus-penetrating particle technology. FDA-approved INVELTYS, for inflammation and pain after ocular surgery, launched in the United States in January 2019. KPI-121 0.25%, being developed for temporary relief of dry-eye signs and symptoms, was under FDA review. Kala reported one operating segment and no product-sales revenue for 2018.
Key financial metrics
| Metric | FY2018 / December 31, 2018 | FY2017 / December 31, 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $29.3 million | $29.0 million |
| Selling, general and administrative expense | $35.4 million | $10.9 million |
| Total operating expenses / operating loss | $64.7 million / $(64.7) million | $39.9 million / $(39.9) million |
| Net loss | $(66.7) million | $(42.2) million |
| Net loss per share, basic and diluted | $(2.49) | $(3.71) |
| Cash from operating activities | $(54.1) million | $(34.1) million |
| Cash and restricted cash | $183.1 million; includes $12.2 million restricted | $114.7 million; includes $0.1 million restricted |
| Working capital | $160.0 million | $100.3 million |
| Debt principal outstanding | $75.0 million | $18.9 million |
| Total assets / stockholders’ equity | $221.0 million / $105.0 million | $116.5 million / $89.7 million |
Margins are not meaningful because the company reported no revenue. Fourth-quarter 2018 operating expenses were $23.6 million and net loss was $25.2 million; fourth-quarter revenue was not reported as a separate value in the supplied filing text. The auditor gave an unqualified opinion on the consolidated financial statements.
Material changes versus the prior comparable period
- Net loss widened by $24.5 million, while operating expenses rose by $24.8 million. SG&A increased $24.6 million, principally as Kala built its commercial organization ahead of the INVELTYS launch; R&D was broadly flat.
- Operating cash use increased by $20.0 million. Financing provided $124.1 million in 2018, including approximately $66.1 million net from an October share offering and $71.9 million net from the new Athyrium facility, partly offset by repayment of the prior debt facility.
- Shares outstanding increased to 33.9 million from 24.5 million, reflecting equity financing and other issuances.
- Kala recorded $4.1 million of inventory after INVELTYS received FDA approval. The new Watertown headquarters lease resulted in $29.6 million of right-of-use assets and $29.2 million of long-term lease liabilities at year-end.
Outlook, risks, contingencies and unusual items
- Clinical and regulatory: FDA accepted the KPI-121 0.25% NDA for filing and set an August 15, 2019 PDUFA target date. STRIDE 1 met its primary sign and symptom endpoints; STRIDE 2 met the sign endpoint but missed the primary symptom endpoint. FDA recommended an additional Phase 3 trial, STRIDE 3; management expected topline results in Q4 2019. Approval and timing were uncertain.
- Commercial outlook: Kala had launched INVELTYS in January 2019 using a 57-person territory sales team, with plans to add up to 100 personnel if KPI-121 0.25% were approved. Management expected continued losses and did not expect INVELTYS revenue alone to produce profitability for several years, if at all.
- Liquidity and financing: Management said year-end cash was expected to fund planned expenses, debt service and capital needs for at least 12 months from issuance of the statements; elsewhere it estimated runway through at least mid-2020 when including expected INVELTYS revenue. These are estimates based on assumptions, and additional financing may be needed.
- Debt: The $75 million Athyrium term loan bears 9.875% interest, is secured by substantially all assets, and has quarterly interest-only payments through the fourth anniversary, followed by principal and interest payments; maturity is October 2024. A further $35 million may be drawn if specified FDA-approval or INVELTYS revenue conditions are met by June 30, 2020. The agreement includes a $10 million minimum cash covenant; Kala reported compliance at year-end.
- Key operating risks: Clinical-trial outcomes, FDA approval, market adoption and reimbursement, competition, dependence on contract manufacturers, intellectual-property protection, and the need for further capital could materially affect results. The company had no material legal proceedings and reported no off-balance-sheet arrangements.
- Unusual accounting and governance items: Kala early-adopted the lease accounting standard in 2018. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to attest to internal control. March 2019 executive offer-letter amendments increased severance and change-of-control benefits.
Investor facts to verify
- Progress and outcome of the KPI-121 0.25% FDA review and STRIDE 3 trial, including whether additional trials or a narrower label are required.
- INVELTYS prescriptions, net sales, reimbursement access and launch costs following its January 2019 launch.
- Cash burn, restricted cash, debt covenant headroom, scheduled debt service and conditions for accessing the additional $35 million facility tranche.
- Contract-manufacturer capacity and minimum purchase commitments, and the potential dilution from future equity issuance and lender warrants.
- Reconciliation of the stated cash runway estimates, particularly the dependence of the longer estimate on projected INVELTYS revenue.