KALA Pharmaceuticals, Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2018. The unaudited filing describes a biopharmaceutical company developing and commercializing eye-disease therapies using its AMPPLIFY drug-delivery technology. At the filing date, INVELTYS was approved but had not yet launched, and the company had not generated product-sales revenue.
Financial performance and position
- Revenue and margins: No product-sales revenue was reported. Gross margin and operating margin on product sales are therefore not meaningful for this period.
- Third-quarter results: Operating expenses were $15.5 million, including $7.0 million of R&D and $8.5 million of G&A. Net loss was $15.6 million, or $0.63 per share, compared with a $10.2 million loss, or $0.56 per share, in Q3 2017.
- Nine-month results: Operating expenses were $41.2 million, versus $28.7 million in the first nine months of 2017. Net loss was $41.5 million, or $1.69 per share, compared with a $30.9 million loss, or $4.51 per share. The prior-year per-share comparison reflects a substantially lower weighted-average share count.
- Expense trends: Q3 R&D was essentially flat year over year; nine-month R&D declined $3.1 million to $20.1 million, mainly as earlier trials concluded, partly offset by STRIDE 3 and higher personnel costs. G&A rose $6.0 million in Q3 and $15.5 million for the nine months, reflecting commercial build-out, headcount, stock compensation, public-company costs, and facilities.
- Cash flow: Operating cash use was $38.1 million for the first nine months of 2018, versus $27.5 million in 2017. Investing cash use was $0.7 million; financing provided $1.2 million. Cash and restricted cash decreased $37.6 million.
- Liquidity: At September 30, cash was $74.9 million and restricted cash was $2.2 million; current assets were $80.5 million and current liabilities $12.7 million. Accumulated deficit was $175.9 million.
- Debt: September 30 debt was $20.0 million principal under the 2014 facility, with $3.3 million classified as current. The facility bore variable interest of 8.25% at September 30 and was secured by substantially all assets except intellectual property.
- Other items: No income-tax provision or benefit was recorded. Stock-based compensation was $6.4 million for the nine months, compared with $2.1 million in 2017.
Material changes and subsequent events
- The FDA approved INVELTYS on August 22, 2018, for post-operative inflammation and pain following ocular surgery. The company planned a U.S. launch in early 2019 and expected an initial sales and marketing organization of approximately 75 people.
- The company submitted an NDA for KPI-121 0.25% on October 16, 2018, for temporary relief of dry-eye signs and symptoms. STRIDE 3, an additional Phase 3 trial recommended by the FDA, began in Q3; top-line results were expected in Q4 2019.
- In October 2018, the company borrowed $75 million under a new six-year Athyrium facility at a fixed 9.875% rate and repaid the 2014 debt facility, including a $180,000 prepayment fee. A further $35 million may be drawn if specified FDA-approval or INVELTYS revenue conditions are met by June 30, 2020. A warrant for up to 270,835 shares was issued in connection with the facility.
- An October 2018 underwritten stock offering of 8.625 million shares generated approximately $66.4 million in net proceeds. Through November 8, the ATM offering had generated approximately $4.7 million from 518,135 shares. Management said September 30 cash plus October financing proceeds were expected to fund planned operations, debt service, and capital expenditures through at least early 2020, while cautioning that actual cash needs could be higher.
- The Watertown headquarters lease has an eight-year initial term. The company had not recorded a right-of-use asset or lease liability for that space as of September 30 because it concluded it did not yet control the space during construction.
Outlook, risks, and contingencies
- Management expected R&D and G&A spending to rise as it conducts STRIDE 3, advances other programs, scales manufacturing, and commercializes INVELTYS. The company expected product-sales revenue to begin in 2019 but gave no revenue or profitability guidance.
- KPI-121’s Phase 3 evidence was mixed: STRIDE 1 met both primary endpoints, while STRIDE 2 did not meet its primary symptom endpoint. NDA acceptance and approval are uncertain, and additional trials could increase spending or delay approval.
- The company had no history of commercial product sales and identified launch execution, market acceptance, pricing and reimbursement, competition, manufacturing and third-party supplier performance, regulatory requirements, clinical outcomes, and intellectual-property protection as significant risks.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It disclosed a European patent concerning LE use for dry eye that could impede commercialization in certain European countries unless invalidated or licensed; the company cited counsel’s opinion that the patent is invalid.
Important facts for investors to verify
- Whether INVELTYS launched on schedule and generated sufficient demand, access, and revenue to support the commercial investment.
- FDA processing and review of the KPI-121 0.25% NDA, and STRIDE 3 enrollment, execution, and results.
- Cash burn and runway against management’s early-2020 estimate, including interest and principal obligations under the Athyrium facility.
- Conditions and timing for access to the additional $35 million of Athyrium borrowing, and dilution from equity issuance and warrants.
- Manufacturing readiness, product supply, and the timing and balance-sheet treatment of the Watertown lease as occupancy begins.