KALA Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; unaudited. The filing identifies the issuer as KALA Pharmaceuticals, Inc. The company is a clinical-stage biopharmaceutical developer focused on eye diseases and its Mucus Penetrating Particles (MPP) technology.
Business context and development stage
The company had no product sales and was primarily funding research and development. Its lead candidates were INVELTYS (KPI-121 1.0%) for post-operative ocular inflammation and pain, and KPI-121 0.25% for dry eye disease. It also evaluated an MPP receptor tyrosine kinase inhibitor program. In October 2017, after the quarter ended, it submitted an NDA for INVELTYS.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | No product-sales revenue | No product-sales revenue | No product-sales revenue | No product-sales revenue |
| Research and development | $7.0 million | $8.3 million | $23.1 million | $18.1 million |
| General and administrative | $2.5 million | $1.5 million | $5.6 million | $6.4 million |
| Operating loss | $9.5 million | $9.7 million | $28.7 million | $24.5 million |
| Net loss | $10.2 million | $9.7 million | $30.9 million | $24.8 million |
| Net loss per share | $0.56 | $8.18 | $4.51 | $20.97 |
| Cash used in operations | Not presented for quarter | Not presented for quarter | $27.5 million | $20.0 million |
At September 30, 2017, cash was $122.0 million, total assets $123.7 million, total liabilities $24.8 million, and stockholders’ equity $98.9 million. The filing reports no product revenue; gross margin is therefore not meaningful. Nine-month cash used in investing was $0.2 million, while financing provided $104.3 million. Cash increased by $76.6 million to $122.0 million.
Outstanding venture debt principal was $20.0 million, bearing a variable rate of 7.25% at quarter-end. The balance sheet reported $6.1 million current and $13.6 million long-term debt, net of discount. Principal repayment began in October 2017, with scheduled payments extending through 2020. Management estimated that September 30 cash would fund planned expenses, debt service and capital expenditures through the second quarter of 2019, while warning that assumptions could prove incorrect and funds could run out sooner.
Material changes and unusual items
- The July 2017 IPO raised approximately $94.1 million net of underwriting discounts and offering costs. The company also drew $10.0 million under Term Loan B in September.
- At the IPO closing, all preferred stock converted into approximately 16.1 million common shares. A one-for-5.2083 reverse stock split was effected in July; reported historical share and per-share amounts were adjusted for it.
- Research and development expense rose $5.0 million for the nine-month period, primarily due to clinical-trial activity, hiring and consulting. Q3 R&D declined year over year as external trial costs decreased after completion of the INVELTYS Phase 3 trial and lower KPI-121 costs.
- Q3 general and administrative expense increased $1.0 million, including costs associated with becoming a public company. Nine-month G&A declined $0.7 million, mainly because 2016 included a $1.8 million write-off of deferred offering costs.
- Warrant fair-value changes caused a $1.8 million nine-month expense, including a $0.6 million Q3 expense. On completion of the IPO, the $2.9 million warrant liability was reclassified to additional paid-in capital; no warrant liability remained at quarter-end. These valuation changes affected reported earnings but were noncash.
Outlook, commentary and risks
Management expected topline results from the two KPI-121 0.25% Phase 3 dry-eye trials by the end of 2017 and, assuming positive results, anticipated an NDA submission in the first half of 2018. The trials each targeted at least 900 patients. The company planned to pursue regulatory review through the Section 505(b)(2) pathway. It expected expenses to rise as it advanced trials, prepared for possible commercialization and incurred public-company costs. No profitability or revenue guidance was provided; the company did not expect product-sales revenue before 2019, if ever.
Key risks include clinical-trial outcomes and delays, FDA or foreign regulatory decisions, successful commercialization and market uptake, pricing and reimbursement, competition, dependence on third-party manufacturers and CROs, intellectual-property protection, and the possibility of needing additional financing. The filing notes a third-party testing laboratory had received an FDA Form 483 with two observations; the laboratory considered them non-critical, but supply or development could be affected by regulatory action. The company reported no material legal proceedings. Management said disclosure controls were effective as of September 30, 2017, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the FDA accepted the INVELTYS NDA for filing and the timing and outcome of its review.
- Results of both KPI-121 0.25% Phase 3 trials and any resulting NDA plans.
- Cash burn, the assumptions behind the stated runway through Q2 2019, and the effect of debt repayments and commercialization spending.
- Debt terms, covenants, collateral and repayment schedule, as well as the availability and terms of any additional financing.
- Manufacturing and testing-laboratory regulatory status, supply capacity, and the potential impact of the cited Form 483 observations.
- Potential dilution from outstanding options and warrants and shares becoming eligible for sale or registration after IPO lock-ups.