KALA BIO, Inc. Q2 FY2020 Earnings Call

Thank you, operator, and thank you all for participating in today's call. Joining me from the company are Mark Iwicki, Chairman, President and Chief Executive Officer; Todd Bazemore, Chief Operating Officer; Mary Reumuth, Chief Financial Officer; Kim Brazzell, Chief Medical Officer; and Hongming Chen, Chief Scientific Officer. Today's call is being webcast live. The webcast link can be found in the Investors and Media section of our website at www.kalarx.com. During this call, we will be referring to non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release issued today, which can also be found on our website. On this call, we will make certain comments about Kala's future expectations, plans, and prospects that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements will include observations associated with our commercialization of INVELTYS, statements regarding the regulatory and commercial plans for EYSUVIS, the sufficiency of our cash resources, and projected revenue. These statements are based on the beliefs and expectations of management as of this conference call. Our actual results may differ materially from our expectations. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after this conference call. Investors should carefully read the risks and uncertainties described in today's press release, as well as the risk factors which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statement included in the company's quarterly reports on Form 10-Q and other filings we make with the SEC. The Form 10-Q will be filed with the SEC later today and will be available on our website. I will now turn the call over to Kala's CEO, Mark Iwicki.

Thank you, Niranjan. Good morning, everyone, and thank you for joining us this morning to review our second quarter financial results and recent business highlights. We continue to make strong progress across our business despite the uncertainties imposed by the ongoing pandemic. As a reminder, we announced top line results from the STRIDE 3 trial of EYSUVIS, our product candidate for the short-term treatment of the signs and symptoms related to dry eye disease in early March. In that study, EYSUVIS achieved statistically significant results for the primary and key secondary endpoints, replicating the positive results from earlier studies and addressing the only deficiency noted in the complete response letter received in August 2019 in which the FDA indicated that positive results from an additional clinical trial were needed to demonstrate efficacy. We are very pleased that less than 2 months later, we resubmitted our NDA for EYSUVIS to the FDA, which the FDA subsequently accepted and confirmed that the resubmission is a complete Class II response to the CRL issued in August 2019 and set a PDUFA goal date of October 30, 2020. We are preparing across the organization to launch EYSUVIS before the end of the year if approved. As we've highlighted before, we believe EYSUVIS has the potential to make an immediate impact on the dry eye disease treatment paradigm and become the preferred first-line prescription therapy for the short-term treatment of the signs and symptoms of dry eye disease. Over 30 million people in the United States live with dry eye disease, of which over 17 million have already been diagnosed by an eye care professional. Our market research suggests that 80% to 90% of these patients suffer from episodic flares rather than continuous symptoms, and feedback from eye care professionals suggests that these flares will be under-managed by current therapies. Based on efficacy and safety data that we have generated from over 2,800 patients across 4 clinical trials, we believe EYSUVIS has the potential to address the significant unmet need, providing rapid and effective relief of both the signs and symptoms of dry eye disease while also being very well tolerated and convenient to administer. We're very excited about EYSUVIS and look forward to delivering this important new option to patients and physicians if approved. Before handing the call over to Todd to go over commercial updates, I want to take a moment to recognize all that our team at Kala has accomplished despite the ongoing challenges presented by the COVID-19 pandemic. I'm very proud of our employees who have remained focused on the needs of eye care professionals and their patients and have adapted to new ways of working. Their perseverance has enabled us to continue to deliver on our key corporate goals for 2020 as we work to advance INVELTYS and lay the groundwork for a potential EYSUVIS approval and launch. I'd like to now turn it over to Todd.

Thank you, Mark, and good morning. I'd like to begin with INVELTYS, our twice-daily, postsurgical ocular steroid. In the second quarter, there were approximately 21,000 prescriptions of INVELTYS reported by Symphony Health, which represents a decrease of approximately 51% compared to the first quarter of 2020. This decrease was due to the impact of the ongoing coronavirus pandemic, which was felt most acutely in the month of April. Total cataract procedures in Q2 of 2020 were down 50% compared to Q2 of 2019. The market did begin to recover in late April as states began to allow elective surgical procedures to recommence. Since then, total INVELTYS prescriptions have achieved strong growth, going from 544 prescriptions written during the week ended April 17 to over 3,000 prescriptions during the week ended July 24. INVELTYS weekly prescription volumes are steadily building back towards the pre-COVID levels. We are encouraged by this significant recovery which is also reflected in the most recent month-over-month data and compares favorably versus the steroid market more broadly. As of July 24, INVELTYS prescriptions were up 12.8% in the most recent 4 weeks versus the prior 4 weeks compared to the branded and generic steroid markets, which were up 4.1% and 3.4%, respectively. Prior to the onset of the COVID-19 pandemic, INVELTYS prescriptions were tracking up quarter-over-quarter, suggesting continued growth trends and strong demand. We believe the strength of our recovery reflects the strong clinical profile of INVELTYS, a positive reception to INVELTYS among our target eye care professionals, and the effectiveness of the Kala sales team. While we suspended substantially all in-person interactions with our customers, including visits to physicians' offices, clinics, and hospitals early in the pandemic, our sales force continued to provide support virtually through both telephone and web-based technologies. We continue to follow recommendations from the U.S. Centers for Disease Control and Prevention as well as federal, state, and local governments and have slowly been able to return our sales representatives to the field. As of July 1, all territories were cleared for in-person field activities. All our representatives have been educated on appropriate local and regional procedures, have been provided personal protective equipment, and we are conducting daily health screenings of our sales team to ensure both their safety and that of our customers. While we are very encouraged by these trends and believe they bode well for INVELTYS over the long term, we recognize that the ongoing surge or future surges in COVID cases may result in some states reinstating restrictions on elective procedures or limiting the ability of our sales force to engage in person, which could again impact INVELTYS sales. As we stated last quarter, we continue to expect that the ongoing pandemic will negatively affect full-year INVELTYS revenue. In recent months, our commercial team has also been busy with launch preparations for EYSUVIS. As we stated previously, many of our call targets for INVELTYS overlap with those for EYSUVIS, which will enable us to launch shortly after approval, relying initially on our existing 56 sales professionals to target the top dry eye prescribers. Together, these prescribers represent about 70% of all dry eye prescriptions. Shortly after launch and pending the status of the COVID-19 pandemic, we will begin expanding our existing sales force to a total of approximately 100 to 125 representatives, which we believe will allow us to effectively cover the eye care professionals who are responsible for about 85% of all dry eye prescriptions. We are in the process of training our existing reps on the dry eye disease state. In parallel, our account director team has begun engaging payers in dry eye disease state discussions. We plan to leverage these payer discussions to quickly drive clinical presentations and formulary reviews of EYSUVIS if and when approved. As Mark noted earlier, we believe that EYSUVIS represents a tremendous commercial opportunity with the potential to treat millions of patients and a total addressable market potential in excess of $8 billion annually. As we continue to engage in market research with ophthalmologists, optometrists, and patients in advance of a potential launch, we remain steadfast in our belief that EYSUVIS may be suitable for the vast majority of patients with dry eye disease, including those requiring a first-line prescription therapy for short-term treatment. In our market research, eye care professionals report the potential to prescribe EYSUVIS in over half of all of their dry eye patients. More than 90% of patients indicated they would ask their physicians about EYSUVIS in hopes of finding a short-term treatment that can provide rapid relief from the signs and symptoms of their dry eye disease. We are incredibly excited about the opportunity to deliver on the promise of EYSUVIS for these patients. Next month, we will host a key opinion leader event to speak more specifically to the unmet need in dry eye disease and the opportunity for EYSUVIS. This event will feature two dry eye experts: Dr. Edward J. Holland, the Director of Cornea Services at Cincinnati Eye Institute, and Professor of Ophthalmology at the University of Cincinnati; and Dr. Kelly K. Nichols, the Dean of and Professor at the School of Optometry at the University of Alabama at Birmingham. Dr. Holland and Dr. Nichols will speak to their own experiences treating patients with dry eye disease as well as the need for new therapeutic options. We will also review our clinical data supporting the potential approval of EYSUVIS, and we look forward to sharing additional details on our ongoing launch preparations for EYSUVIS at that time. I will now turn the call over to Mary to discuss our financial results.

Thanks Todd. During this discussion of our financial results, I will reference certain non-GAAP financial measures. These non-GAAP financial measures exclude stock compensation, depreciation, and noncash interest expense. For a full reconciliation of our GAAP to non-GAAP financial measures, please refer to today's press release, which is available on our website. As of June 30, we reported total cash, cash equivalents, and short-term investments of $184.6 million compared to $85.4 million as of December 31, 2019. This increase reflects proceeds from our underwritten public offering of common stock in March 2020 as well as proceeds from sales of our common stock under our ATM program during the first part of 2020, partially offset by cash used to fund our operating expenses in the second quarter. We anticipate that our existing cash, cash equivalents, and short-term investments will enable us to fund operations into at least the second quarter of 2022. For the second quarter of 2020, we reported INVELTYS net revenue of $0.8 million compared to $2.1 million in the second quarter of 2019. Net revenues in the second quarter of 2020 were impacted by a reduction in ocular surgeries due to restrictions related to COVID-19 when compared to the same period in 2019. We recognize revenue when product is shipped to distributors. Cost of product revenues for the second quarter of 2020 were $0.8 million compared to $0.4 million for the same period in 2019. Due to COVID-19 and the restrictions placed on elective procedures earlier this quarter, cost of product revenues for the second quarter of 2020 includes a reserve of $0.5 million related to excess inventory. Non-GAAP cost of product revenues were $0.7 million for the second quarter of 2020 compared to $0.3 million for the same period in 2019. SG&A expenses for the second quarter of 2020 were $15.3 million compared to $17 million for the same period in 2019. The decrease was primarily due to lower travel and external expenses due to COVID-19 as well as INVELTYS launch-related expenses which were incurred in the second quarter of 2019 and not incurred during the same quarter in 2020. Non-GAAP SG&A expenses were $13.2 million for the second quarter of 2020 compared to $15.1 million for the same period in 2019. R&D expenses for the second quarter of 2020 were $6.1 million compared to $7.1 million for the same period in 2019. The decrease was primarily due to less spending on STRIDE 3, our recently completed Phase III trial of EYSUVIS as we announced top line results early this year, partially offset by an increase in costs associated with the manufacturing of EYSUVIS units prior to commercial launch. Non-GAAP R&D expenses were $5.4 million for the quarter ended June 30, 2020, compared to $6.2 million for the same period in 2019. Loss from operations for the second quarter of 2020 was $21.3 million compared to $22.4 million for the same period in 2019. Non-GAAP operating loss was $18.6 million for the second quarter of 2020 compared to $19.6 million for the same period in 2019. Net loss for the second quarter of 2020 was $23.3 million or $0.42 per share compared to a net loss of $23.8 million or $0.70 per share for the same period in 2019. Non-GAAP net loss was $20.1 million for the second quarter of 2020 compared to $20.7 million for the same period in 2019. Please refer to today's press release for the weighted average number of shares used in the calculation of our net loss per share for each of the quarterly periods discussed. While we've been encouraged with the prescription recovery that we've experienced since the end of last quarter, we are still unable to estimate the length and severity of this pandemic and thus cannot specifically measure the impact on our financial results for the full year, though we expect that it will continue to have a negative impact on INVELTYS prescriptions and full-year net revenue. That concludes our prepared remarks for today. I will now pass the call over to the operator for questions.

Our first question comes from Christopher Neyor with JPMorgan. Your line is now open.

First one's on the planned sales force expansion for the potential EYSUVIS launch. How are COVID-related disruptions and limitations on face-to-face interactions with eye care professionals impacting the size and the timing of your plans to add sales reps, if at all? And more broadly, for the existing sales force, how are you thinking about productivity levels and incentives for their virtual interactions versus the traditional in-person, face-to-face visits? And then second, on the upcoming Analyst/Investor Day, could you maybe touch on how the VA came about for the event and the key topics you’re hoping to address ahead of the potential EYSUVIS launch?

Sure. Happy to do so. Chris, the way I would describe our sales force plan is we've built a very flexible and adaptable plan in order to be able to respond to what may be going on with the pandemic as we head into the fall and winter flu season. As you know, we've got an existing sales force of 56 highly experienced ophthalmology representatives, and we've actually already begun their disease state training so that they're coming up to speed on dry eye. We will be in a position to launch soon after approval of that existing sales force covering about 7,000 to 7,500 eye care professionals, nearly 100% of whom are very important dry eye targets. So we'll be in a position to launch EYSUVIS quickly to the eye care professionals that represent about 70% of all dry eye prescriptions. We then, as we have stated, have a plan to ultimately grow the sales force to somewhere between 100 and 125 representatives in total. We're still finalizing those numbers as we work through sales force sizing and structure. We've got plans that could be everything from - if the pandemic's really bad this winter and we're in another shutdown, we could initially launch with just the 56, including if they have to launch the product on a virtual promotion. We could take a phased approach, depending if some offices are open and some are closed, where maybe we don't go straight to the 100 to 125, but maybe we go some portion of the way there and then bring on the remaining sales force once things start to clear up a bit. Or if things are in really good shape, as they are right now, when we have access to most of our offices, we have the ability to hire all the representatives at once and have them in place. I would think of that as sort of late this year, early next. So a lot of flexibility in the plan, Chris, depending on the situation that we're dealing with this fall and winter. Your second question was about rep's ability to promote virtually, if I understood correctly. We had a full suite of virtual tactics in place for INVELTYS during the shutdowns that occurred this spring. The team continues to investigate best practices that we've seen across the industry for additional potential tactics. These include everything from sales force interactions with eye care professionals to peer-to-peer programming to virtual sampling. So we feel really confident about our abilities to promote virtually as we expect that will likely be some portion of the overall promotional mix as we're launching EYSUVIS in the fall. And then Niranjan, do you want to talk a little about the KOL event?

Absolutely. So Chris, we will be hosting a KOL event on September 17. As Todd mentioned, we'll have two of the top dry eye experts in the country offering their views of the unmet need on how EYSUVIS fits into that unmet need and how it could potentially change the treatment paradigm for dry eye disease today. The team is conducting a lot of work right now. Specifically, Todd's team is spending a lot of time in the background planning for the launch of EYSUVIS, and we'll have an update on that trend as well.

Our next question comes from Kit Ma with Jefferies. Your line is now open.

This is Kit on for Biren. I actually have several questions, if I may. My first question is I'm wondering if you have any payer discussions for EYSUVIS. And what kind of feedback did you get from there? My second question is what kind of rebate rate do you expect from EYSUVIS? Would it be similar to INVELTYS? And my last question is regarding INVELTYS. Is there currently any off-label use of INVELTYS in dry eye?

This is Todd, I'm happy to jump in. To answer your first question, we have begun payer discussions that we are having disease state discussions right now for our account directors. Obviously, no product discussions ahead of an approval. Those conversations are going quite well as we're talking to payers about the need for any short-term treatment as there are currently no FDA-approved short-term treatments for the signs and symptoms of dry eye disease. We've also done a lot of market research with payers and have received very positive feedback about the product profile for EYSUVIS and its place in therapy. As far as pricing and rebating, we've not provided any guidance on that. Those conversations are still ongoing, and we're doing our work there to determine ultimately what the list price and rebates required will be. What I would tell you is more to come on that in the future. Regarding INVELTYS, the vast majority of use for INVELTYS is for postocular surgery. Remember, we have a broad label that covers - although our Phase III studies were done in cataract surgery, the label is broad and covers all postocular surgery treatment of pain and inflammation. We believe that 85% to 90% of all prescriptions for INVELTYS are being used for that specific indication. Thus, there may be a little bit of off-label use but very, very little.

Our next question comes from Yi Chen with H.C. Wainwright. Your line is now open.

Could you please comment on the current geographic distribution of ocular surgery volume in COVID-19 hotspots, such as California, Texas, and Florida versus areas that are no longer hotspots, such as New York State?

This is Todd. I'm happy to answer that question. Look, we do see fluctuations in procedures and prescription volumes in certain regions based on - if they become hotspots or you see a spike. Most of those areas, though, have not shut down elective procedures. There are a few areas that have been. But even the hotspots where we're seeing a spike in the number of reported or diagnosed cases of COVID, at this point, most of them have continued to allow the elective procedures to occur. In some of those areas, maybe patients are choosing not to have the procedure conducted at this time. It is causing some small fluctuations. But for the most part, the markets look like they are continuing to recover. The biggest impact would be if local governments decided to defer elective procedures and not allow those to continue, but for the most part, that is not currently the case.

And do you believe ophthalmologists' offices have had established protocols to remain open in the upcoming fall/winter season, if a second wave hits?

Yes. What I would say is I think that's going to be largely driven by decisions that are made by local and state governments. If ophthalmologists' offices are allowed to remain open, then that's their plan and they will continue to conduct these ocular surgeries. If they are forced to shut down, they would not be open for some period of time. We did see with the shutdowns that occurred this past spring that there was a large number of these surgeries that were quickly rescheduled once they were allowed to recommence. We saw big growth in the market for both INVELTYS as well as all other postocular products.

My last question is with two commercialized products on the market, is there a plan to add additional pipeline candidates?

Yes. We are continuing to advance some early-stage programs that are in our own pipeline as well as thinking about additional products that could become either part of the product pipeline or promoted products. We are continually looking at options on the outside that would be a good strategic fit for us long term.

Our next question comes from François Brisebois with Oppenheimer. Your line is now open.

I was just wondering with the COVID situation right now, is it possible that doctors might be more interested in products that they're a little more used to, like INVELTYS versus newer products that might be a different method of use, kind of like an implant or whatnot?

This is Todd. I'll jump in on just what we're hearing from our interactions with customers. INVELTYS continues to be very well received, and we have seen that INVELTYS's growth since these elective procedures have been allowed to recommence has outpaced all other products in the market. The growth rate that we've seen with INVELTYS prescriptions has been indicative of that. We do know that we receive very positive feedback on the product profile for INVELTYS, and eye care professionals report having really good results with their patients. Kim, do you want to add anything?

Yes. In our discussions with eye care professionals about the profile of EYSUVIS, especially the safety and efficacy results, they've been very impressed and open to using that. I don't think when we come to market with EYSUVIS that there will be significant reluctance. We will be the first product with the indication of short-term use in the treatment of dry eye and the first corticosteroid that's approved in that space. So I don't sense there will be a great deal of reluctance because of the COVID situation of trying, trialing, and eventually using.

I think we've also heard that some of the things happening now with telemedicine and eye care professionals is that dry eye is one of those conditions that lends itself more to tele or remote medicine.

That's interesting. On the market research, can you remind us where you think you might get the most patients? Is it - the population for dry eye is so big, but do you think most of them are the patients that might be just using over-the-counter products? Or is it more the transitioning idea of using this acute therapy before going into chronic therapy?

Yes. I think we'll probably get business across the board, and it’s a matter of time. In the short term, many patients have tried OTCs numerous times and have been in and out of various eye care professionals' offices. Many will probably be moderate to severe patients that have already been treated with other things. The eye care professional will then also try EYSUVIS, in addition to new patients that might have been on those OTCs. We believe the profile aligns well as kind of the first-line prescription therapy to treat episodic symptoms, particularly when patients present with more mild to moderate symptoms rather than continuous ones. We know the profile aligns well for eye care professionals. It works very quickly, treating signs and symptoms and providing meaningful corneal healing within the first couple of weeks.

And lastly, if I could ask one more. Regarding the sales reps and the launch efforts, I know there's a lot of moving parts right now with everything going on. But from the existing 56, when you're thinking about adding on to get to 100, 125, is this something that you're looking at hiring now, pending approval? Or will you go into trying to hire talent after approval?

Yes. We have been saying that we'll do some of the preparation work. It’s possible that in the next couple of months, we may start to interview for positions. But right now, we're likely to not actually hire or bring on the new sales representatives until we have the approval. We can do a lot of the work, and we intend to hire very experienced sales professionals, believing that the training and ramp-up will be reasonably quick.

Our next question comes from Tazeen Ahmad with Bank of America. Your line is now open.

A couple of questions for Todd, if I may. Todd, can you just give us an idea based on your market data research, how often do you diagnose dry eye patients go to their physicians in a year?

Yes. From our market research, we believe that these patients are visiting their eye care professional on average 2 to 3 times a year, with the frequency tied somewhat to the corrective type of lenses that the patient wears. For example, if wearing contacts, you may visit your eye care professional up to 3 times per year. About 42% of the office visits are tied to a dry eye flare-up, so while it may not be their primary reason for the visit, a flare-up of their dry eye disease is often one of the issues discussed. That’s why we feel strongly that a direct-to-consumer campaign won’t be necessary when launching the product, as 17 million of these patients are already diagnosed and visit their eye care professionals regularly.

During the pandemic, do you know whether the points of contact with physicians regarding dry eye specifically have gone down more or less than other visits to eye doctors?

I don't believe they have gone down proportionately. Overall office visits were down across therapeutic areas and specialties during the pandemic shutdown. Interestingly, we've heard from eye care professionals that one of the biggest uses of telemedicine they have had was for dry eye disease.

Have they been able to diagnose new instances of dry eye flares through telemedicine during the pandemic?

Yes. That’s a really good question. While I don't have specific data on new diagnoses, we know that there are 17 million currently diagnosed patients, and flare-ups are a significant part of that. A large part of the discussions regarding dry eye during telemedicine visits revolves around those flare-ups.

What percent of patients are managed by optometrists versus ophthalmologists?

On a prescription basis, about 55% of all dry eye prescriptions are generated by ophthalmologists and around 45% by optometrists. So not quite an even split but close.

Have optometrists been able to transition to telemedicine similar to ophthalmologists during the pandemic?

Yes. Optometrists who have significant dry eye practices are using telemedicine much like ophthalmologists. However, the storefront optometrists tend to focus more on corrective lenses and not dry eye. There’s a smaller group of optometrists that focus on dry eye practices, and many of them have opened dry eye clinics and are certainly using telemedicine.

And our next question comes from Liana Moussatos with Wedbush Securities. Your line is now open.

This is Andreas in for Liana. Most of our questions for INVELTYS or EYSUVIS have been asked, so just maybe you can provide some color on the pipeline, KPI-285 in retinal diseases. Wondering if you guys are going to provide some color for the development.

Kim, do you want to take that?

Sure. We're doing ongoing studies, both with that and with our new anti-inflammatory program. Now that we've filed the NDA and are preparing for launch, we're conducting a comprehensive evaluation of our pipeline and looking at both our internal products and some business development opportunities. We don't have an update today but hope to in the coming months.

I'm showing no further questions in the queue at this time. I'd like to turn the call back to Mark Iwicki for closing remarks.

Well, thanks to everyone for participating this morning. We continue to be very pleased with the progress that we're able to make given the situation with COVID, having prescriptions begin to rebound significantly with INVELTYS. We look forward to hopefully having an approval for EYSUVIS soon, and we'll update everyone as soon as we have more information. So thank you very much for your time today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program, and you may now disconnect.