KALA Pharmaceuticals, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The unaudited filing identifies the registrant as KALA Pharmaceuticals, Inc. (the request metadata names KALA BIO, Inc.). Unless stated otherwise, financial figures below are in millions of dollars.
Business context
Kala is a biopharmaceutical company focused on eye diseases. Its commercial products are INVELTYS, launched in the U.S. in January 2019 for inflammation and pain following ocular surgery, and EYSUVIS for short-term treatment of dry eye disease. The FDA approved EYSUVIS on October 26, 2020, after the quarter; the company expected initial wholesaler shipments by year-end 2020 and a full promotional launch in January 2021.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net product revenue | $2.220 | $1.451 | $4.124 | $4.894 |
| Cost of product revenue | $0.701 | $0.668 | $1.814 | $1.261 |
| Gross margin | 68.4% | 54.0% | 56.0% | 74.2% |
| SG&A expense | $23.893 | $15.280 | $54.602 | $50.523 |
| R&D expense | $3.468 | $7.070 | $14.955 | $21.137 |
| Operating loss | $(25.842) | $(21.567) | $(67.247) | $(68.027) |
| Net loss | $(27.948) | $(23.176) | $(73.215) | $(72.389) |
| Basic and diluted loss per share | $(0.50) | $(0.68) | $(1.44) | $(2.13) |
At September 30, 2020, cash and cash equivalents were $45.526 million and short-term investments were $113.594 million, for $159.120 million combined. Current assets were $178.156 million and current liabilities $19.550 million. Total assets were $225.096 million, total liabilities $119.066 million, and stockholders’ equity $106.030 million. Accumulated deficit was $368.671 million.
Debt principal was $75.0 million under the Athyrium facility; its balance-sheet carrying value, net of unamortized discount and issuance costs, was $71.967 million. The loan bears fixed interest of 9.875%, with interest-only payments through the fourth anniversary and quarterly principal installments thereafter; maturity is October 2024. Debt is secured by substantially all company assets, and the facility requires at least $10 million in cash and cash equivalents, recorded as restricted cash.
For the first nine months, operating cash use was $64.775 million, investing cash use was $115.051 million (including $113.592 million in short-term investment purchases), and financing cash provided was $139.906 million, primarily from equity offerings. Cash, cash equivalents and restricted cash declined $39.920 million; reported ending cash and cash equivalents were $45.526 million.
Material changes versus comparable periods
- Q3 revenue rose $0.769 million year over year, driven mainly by higher INVELTYS unit sales and a prior-year revenue-estimate adjustment. For the nine-month period, revenue fell $0.770 million as COVID-related elective-surgery restrictions reduced INVELTYS sales.
- Q3 SG&A increased $8.613 million, principally from EYSUVIS launch preparation, stock-based compensation and professional services. Nine-month SG&A rose $4.079 million.
- R&D declined $3.602 million in Q3 and $6.182 million year to date, reflecting lower EYSUVIS trial spending and, in Q3, capitalization of certain EYSUVIS manufacturing costs into inventory.
- Nine-month net loss was broadly stable, increasing $0.826 million year over year. Q3 net loss increased $4.772 million.
- Cash and cash equivalents fell from $85.449 million at year-end 2019 to $45.526 million, while short-term investments grew to $113.594 million. The company raised $137.969 million net from common-stock offerings and ATM sales during the first nine months. Shares outstanding increased from 36.086 million at December 31, 2019 to 56.061 million at September 30, 2020.
Outlook, risks and unusual items
- Management estimated that September 30 cash, cash equivalents and short-term investments, together with anticipated INVELTYS revenue, would fund operations, lease and debt service, and capital expenditures into at least Q3 2022; anticipated EYSUVIS revenue was expected to extend runway. The filing cautions that estimates depend on assumptions and actual cash needs may differ. The financial-statement liquidity note separately states the resources were expected to fund requirements for at least 12 months from issuance.
- Management expected higher commercialization and operating costs, including a planned sales-force expansion from 56 representatives to approximately 90 in Q4 2020 and approximately 125 in 2021, subject to the pandemic. No quantified revenue or earnings guidance was provided.
- COVID-19 had reduced elective ocular surgeries and INVELTYS demand, restricted in-person sales activity, and could disrupt EYSUVIS launch plans, research, suppliers and future fundraising. The duration and financial impact were described as uncertain.
- As a subsequent event, EYSUVIS received FDA approval on October 26, 2020. The company disclosed $47.969 million of minimum future purchase commitments to its commercial manufacturer, including commitments that increased upon approval.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It maintained a full valuation allowance against U.S. deferred tax assets and said an ownership change had materially limited certain tax-loss carryforwards and credits. Management concluded disclosure controls were effective; no material quarterly change in internal control was reported.
Important facts for investors to verify
- Whether EYSUVIS shipments and the planned January 2021 launch occurred on schedule, and the resulting sales, costs and inventory utilization.
- INVELTYS prescription and revenue trends as elective surgeries and in-person sales activity evolve; assess the continuing effects of COVID-19.
- Cash burn, accessible liquidity versus restricted cash, and whether the stated runway assumptions remain supportable.
- Debt-service obligations, covenant compliance, and the timing and amount of principal payments beginning in 2022.
- Future financing needs and potential dilution, given the increase in shares outstanding and available shelf and ATM capacity.
- Commercial uptake, pricing and reimbursement, manufacturing capacity and purchase commitments, and the competitive and patent risks described in the filing.