Good morning, and welcome to Kala Pharmaceuticals Conference Call to Review its First Quarter 2022 Financial Results. At this time, all participants are in a listen-only mode. Following management's prepared remarks, a Q&A session will be held. As a reminder, this call is being recorded. I would now like to turn the call over to Jill Steier, Executive Director, Investor Relations and Corporate Communications for Kala Pharmaceuticals. Please proceed.

Thank you, operator, and thank you all for participating in today's call. Joining me from the company are Mark Iwicki, Chief Executive Officer; Todd Bazemore, President and Chief Operating Officer; Kim Brazzell, Head of R&D and Chief Medical Officer; Mary Reumuth, Chief Financial Officer; and Darius Kharabi, our Chief Business Officer, will also be joining us for the Q&A portion of today's call. During 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 EYSUVIS and INVELTYS, statements regarding the development program and market potential of KPI-012, and the sufficiency of our cash resources. These and other forward-looking 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 forward-looking statements to reflect events or circumstances that occur after this conference call except as required by law. 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 our forward-looking statements, included in the company's quarterly report on Form 10-Q and other filings we made with the SEC. I will now turn the call over to Kala's CEO, Mark Iwicki.

Thanks, Jill, and thank you, everyone, for joining us this morning. We started Kala a number of years ago with the mission to advance the treatment of front and back of the eye diseases by providing patients and physicians with a portfolio of new medicines that are safe, well tolerated and highly effective. Over the past several years, consistent with this goal, we successfully advanced EYSUVIS and INVELTYS through clinical development and into the hands of many patients in need. In the case of EYSUVIS, we developed the first and only prescription therapy for the short-term treatment of the signs and symptoms of dry eye disease, with a product profile that addresses the unmet needs articulated by patients and eye care professionals alike. Since the product was approved in 2020, we've made great strides toward changing the treatment paradigm for this disease, educating ophthalmologists and optometrists on the frequent episodic nature of flares on EYSUVIS as the first FDA-approved therapy to bridge the gap between over the counter artificial tears and chronic prescription therapies. In recent weeks, we have also significantly expanded our payer coverage. And with the addition of CVS Caremark, we now have coverage for 92% of commercial lives and 30% of Medicare lives, ensuring that many more patients will be able to easily access EYSUVIS. This is a really important milestone in our launch for both patients and for Kala. We expect the additional coverage to translate into a meaningful increase in prescriptions being filled for patients. Moreover, we expect it will significantly reduce reliance on patient assistance programs and therefore support growth in net revenue. As a reminder, we have used patient assistance programs throughout the launch to ensure prescriptions are being filled in situations where a patient's insurance did not fully cover EYSUVIS. In recent months, consistent with trends in prior quarters, we have seen increased use of the patient assistance program, representing more demand for EYSUVIS, but also negatively impacting our net revenues. With the expansion in payer coverage, we expect our patient assistance programs to be reduced, translating to an improvement in average selling price and, as a result, an increase in future net revenue. As we continue to progress the commercial launch of EYSUVIS, we are also focusing on our clinical and research stage programs, which we believe has the potential to meaningfully impact the care and treatment of people living with underserved eye diseases. We are advancing KPI-012 for the treatment of persistent corneal epithelial defect or PCED and other rare and severe ocular diseases. In May, we presented the full Phase 1b data for KPI-012 at the ARVO Annual Meeting. These data, which serve as the foundation for our acquisition of Combangio late last year, highlight the significant potential of our novel secretome therapy to deliver a new approach to treat PCED and potentially other front and back of the eye diseases. We look forward to advancing this program into our planned Phase 2/3 clinical trial in the fourth quarter of 2022 and to sharing additional details around our indication expansion strategy later this year. With that, I'll turn the call over to Todd to review our commercial performance.

Thank you, Mark. For the first quarter of 2022, Symphony Health reported 26,518 EYSUVIS prescriptions, an increase of 18% over the fourth quarter of 2021. EYSUVIS prescription growth rates have accelerated in Q2 compared to Q1, currently growing at 31%. Since the product first launched through May 6, 2022, we have now seen a total of approximately 104,000 prescriptions, including approximately 18,000 refills written by more than 8,200 unique prescribers. As I mentioned on the last quarter's call, this uptick in prescribing began prior to our most recent payer wins. And we believe this momentum is likely to be supported by significant tailwinds in the months ahead. To that point, just a few weeks ago, we announced another meaningful expansion of our payer coverage. CVS Caremark, the largest pharmacy benefit manager in the United States, added EYSUVIS as a covered brand on its commercial formulary, effective May 2, 2022. This adds 28.5 million commercial lives, bringing total EYSUVIS coverage to 155.3 million lives or 92% of all commercial lives. EYSUVIS is now covered on formulary by all three of the largest commercial PBMs in the U.S. This formulary addition is particularly important in light of the fact that, in the second half of 2021, CVS Caremark implemented increased coverage restrictions on EYSUVIS, which in turn resulted in more prescriptions going through the patient copay assistance program, having a disproportionate negative impact on net revenues in Q4 of 2021 and Q1 of 2022. We anticipate the addition of EYSUVIS to the CVS Caremark formulary will not only accelerate prescription growth, but also positively impact our net average sales price. In fact, in just the first couple of weeks since this formulary addition, we've already started to see a shift away from the copay assistance program over to a higher percentage of commercial covered prescriptions. In addition, effective June 1, 2022, Humana, one of the largest Medicare health plans in the United States, will include EYSUVIS as a preferred brand on its Medicare formularies. This will add an additional 7 million lives, doubling our total Medicare coverage to 14.1 million lives or approximately 30% of all Medicare lives. As Mark noted, we are very pleased by this continued growth in our payer coverage. And we expect it will translate into higher prescription fulfillment rates for EYSUVIS and higher net average sales prices. We are excited about these recent payer wins and expect additional positive coverage decisions in 2022. Turning to INVELTYS. In the first quarter of 2022, there were approximately 34,690 prescriptions reported by Symphony Health compared to 36,700 in the fourth quarter of 2021. We continue to believe that INVELTYS prescriptions and revenues will grow as Medicare Part D coverage for the product increases. As previously stated, our commercial efforts for INVELTYS are completely synergistic with EYSUVIS as 100% of INVELTYS targets are also dry eye targets, for which EYSUVIS is the primary focus and INVELTYS is in a second position sales call. I will now turn the call over to Kim to discuss our pipeline programs.

Thank you, Todd. We continue to make significant progress on KPI-012 and are currently on track to file an IND and initiate a Phase 2/3 clinical trial in the fourth quarter of 2022 in patients suffering from a persistent corneal epithelial defect, or PCED as we call it. As we've discussed previously, KPI-012 is a novel clinical stage asset that we acquired as part of the Combangio acquisition in November of 2021. This has been a great addition to our pipeline and to our strategy to develop innovative therapies for significant unmet needs in ophthalmology. This promising therapy is an application of novel technology involving the utilization of secretome, which for KPI-012 are harvested from human bone marrow derived mesenchymal stem cells. The secretome approach allows us to produce a cell-free therapy comprised of a number of essential biomolecules, secreted by the mesenchymal stem cells such as growth factors, protease inhibitors, matrix proteins and neurotrophic factor that has the potential for multiple therapeutic applications. Being cell-free, the secretome approach provides many of the benefits of cell therapy without the need for administration of intact cells, which can often have unexpected and untoward events. We're currently developing KPI-012 for the treatment of PCED, which is defined as a non-healing corneal wound or defect that is refractory to conventional treatment. PCED can be the result of numerous etiologies including, but not limited to, neurotrophic keratitis, infectious keratitis, surgical or non-surgical trauma, Sjögren's syndrome, limbal stem cell deficiency and dry eye. If left untreated, these persistent defects can lead to significant morbidity including infection, corneal perforation, scarring, and ultimately vision loss. PCED is a rare disease with an estimated incidence of approximately 100,000 patients per year in the U.S. and 238,000 patients per year in the U.S., EU, and Japan combined. KPI-012 has received orphan drug designation from the FDA for the treatment of PCED, and we're exploring potential submissions for fast track and breakthrough designations as well. We recently presented the results of the KPI-012 Phase 1b clinical trial that was conducted by Combangio, which demonstrates significant benefit in patients with PCED. This was a single-arm, prospective, open-label trial which evaluated KPI-012 in 12 patients. This included three non-PCED patients who were enrolled in a safety cohort and then 9 PCED patients who were enrolled in an efficacy cohort. Within the efficacy cohort, patients presented with PCED of various etiologies and durations, ranging from 15 to 871 days. Patients were treated with KPI-012 twice daily for up to four weeks, with a follow-up of up to 12 weeks. The key efficacy endpoint was complete healing of the corneal defect, as evaluated by corneal fluorescein staining. Other efficacy endpoints included reduction in defect size, pain, visual acuity, and corneal opacity. Safety measures included tolerability, intraocular pressure, and patient-reported adverse events. In the trial, eight patients were evaluable for efficacy as one participant was determined to be ineligible due to a non-treatment related adverse event. Significant improvements in the corneal defect were observed in 7 of 8 of the PCED patients. Six of the eight were completely healed by the end of week four, including four who were healed by the end of week one and one who had healed by the end of week two. All six patients remained healed throughout the end of the follow-up period. KPI-012 also demonstrated benefits against other key efficacy endpoints including best corrected visual acuity, corneal opacity, and pain. For example, all six patients who reported PCED related pain at baseline experienced a reduction in pain by the end of week one, with four achieving a zero pain score by the end of week one and all six achieving a zero pain score by the end of week three. KPI-012 was well tolerated in the trial with no significant safety issues observed. We've had the opportunity to interact with key opinion leaders across the eyecare community who share our enthusiasm around the KPI-012 product profile. They highlighted the urgent need for an approved therapy that can address PCEDs of all etiologies, as well as the opportunity for simple, convenient eyedrops that can improve the patient's experience. We're very encouraged by these initial clinical trial results, and we're looking forward to advancing KPI-012 into a Phase 2/3 clinical trial in the U.S. later this year. We remain on track to initiate the trial in the fourth quarter of 2022, which, if positive, could serve as one of our two required pivotal trials in the U.S. Additionally, we view KPI-012 as a potential pipeline and product opportunity due to its multifactorial mechanism of action. Based on our existing preclinical and clinical data, we believe that KPI-012 has the potential to treat multiple corneal diseases characterized by severe ocular surface damage. Furthermore, mesenchymal stem cell secretomes are known to have therapeutic potential for diseases of the back of the eye. We're currently conducting a more in-depth analysis to identify specific front and back of the eye indications for future development, and we plan to provide updates later this year. Now, I'd like to pass the call to Mary to go over our financial results.

Thanks, Kim. During this discussion of our financial results, I will reference certain non-GAAP financial measures. These non-GAAP financial measures exclude stock-based compensation, non-cash interest, depreciation and amortization, loss on fair value remeasurement of deferred purchase consideration, and gain on fair value remeasurement of contingent consideration. 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. For the first quarter of 2022, we reported net product revenues of $1.4 million compared to $1.9 million in the fourth quarter of 2021. By product, this $1.4 million of net revenue consists of $1 million from the sales of EYSUVIS as compared to $1.2 million in the fourth quarter and $400,000 from the sales of INVELTYS as compared to $700,000 in the fourth quarter. As Todd described earlier and as we discussed last quarter, the impact seen on our net revenue for EYSUVIS in the first quarter of 2022 is the direct result of our reliance on our patient assistance programs, in large part because of the increased coverage restrictions implemented by CVS Caremark in the second half of last year. With the addition of EYSUVIS to the CVS Caremark formulary in May, we will be able to significantly reduce our reliance on these patient assistance programs, which we believe will have a positive impact on our average sales price. SG&A expenses were $27 million for the first quarter of 2022. Non-GAAP SG&A expenses were $24.7 million. R&D expenses were $4.5 million for the first quarter of 2022 and non-GAAP R&D expenses were $3.9 million. Our cash position as of March 31, 2022 was $70.2 million compared to $92.1 million as of December 31, 2021. This decrease primarily reflects cash used in operations. Based on our current plans, we anticipate that our cash resources as of March 31, 2022, together with anticipated revenue from EYSUVIS and International will enable us to fund operations into the second quarter of 2023. As we mentioned last quarter, we remain committed to further extending our cash runway by reducing operating expenses over the rest of the year and going forward. That concludes our prepared remarks for today. I will now pass the call over to the operator for questions.

Thank you. Our first question comes from Chris Neyor with JPMorgan.

So, the first one, just on the gross to net dynamics for EYSUVIS. So, if you look at the quarter, EYSUVIS sales were down sequentially for the second quarter in a row. And at the same time, you've had script growth of 18% in 1Q. And then, that's on the back of 21% growth in 4Q. So, could you just help us bridge the difference between kind of the prescription growth and the sales growth? You guys referenced the CVS Caremark restrictions. Is that the vast majority of the impact? And when can we expect prescription growth to better translate into net sales growth? Should we see a positive impact in 2Q or is that more kind of a second half of 2022 event?

This is Mark. I think just to answer your question at the high level, first, yes, those restrictions from CVS Caremark made up a big portion of the increase in the use of the patient assistance programs. There's not perfect data to know exactly how many prescriptions go through an individual payer, but it was a substantial proportion of patients and they went from essentially covering the product for many of the patients that have CVS Caremark to putting significant restrictions in. And so, that is what caused that drop. And then to get to the second part of your question, we've already seen an increase in prescriptions going through at CVS Caremark and a reduction in copay assistance programs. And so, yes, we expect that to start soon and clearly be an improvement in the second half of this year.

That also touches on kind of my second question regarding payer coverage. So, you guys mentioned you're now seeing that 90% commercial covered lives coverage and then also roughly 30% on Medicare as well. So, with these recent coverage expansions, including CVS Caremark and prior to that United Health, to what extent does this kind of resolve for most commercial headwinds you've been referencing earlier in the EYSUVIS launch? And second, could you maybe just touch on the high level strategy for Medicare Part D coverage and where that can go through the remainder of 2022?

This is Todd. I'm happy to jump in and answer the questions. And so, first, on the commercial side, I would say we're done, right? I think you'll recall on prior calls that we said that our target was to ultimately get the brand in the sort of 80% to 85% range for commercial coverage. We're now at 92%. So, we've effectively gotten all the major national plans, a lot of the large regional plans. Doesn't mean that there's not maybe some small individual state Blue Cross Blue Shield plans, we'll continue to go after. But I would say we're at over 90% coverage. We have all the commercial coverage in place that we need. That's going to result in two things, right? An acceleration in prescription growth. And we're already seeing that here in the early first few weeks of the second quarter for which we have script data. Scripts are up 31%. So, almost double the growth rate in Q2 compared to the growth rate of Q1 compared to Q4. So, we're seeing that acceleration. And then importantly, in the early data, we're already seeing a decrease in the amount of scripts that are being filled, utilizing one of the copay assistance programs. So, think of those numbers of sort of in the fourth quarter of last year, as many as 70% of EYSUVIS scripts were getting filled utilizing one of our copay assistance programs, as Mark said, largely driven by the restrictions that CVS Caremark implemented that required more patients to use copay assistance. In the most recent week of data that we have, the percent of EYSUVIS prescriptions getting filled using the copay assistance program is down to 54%. So, already, we're seeing a dramatic shift in reliance on that program, along with an acceleration in our prescription growth rates. And so, the combination for two more scripts at what will be at a more favorable net ASP will positively impact our net revenues going forward. On the Medicare front, we just secured Humana that starts on June 1. There are three large Medicare plans that control upwards of 70% of all Medicare coverage in the U.S. They are Humana, CVS Caremark SilverScript, and United AARP. So, in acquiring coverage at Humana, we've now achieved coverage at one of the big three, and we have bids that are pending with both United AARP and SilverScript at CVS Caremark and we expect to learn about those bids sometime later in the third quarter. And we feel really good about those bids, right? And I think I also feel good about the fact that CVS Caremark's commercial side of the business and United's commercial side of the business, both just took positive formulary coverage decisions for EYSUVIS. United added us to the formulary effective April 1. And as you know, CVS Caremark added us effective May 2. So, having positive coverage decisions on the commercial side has me feeling really good about those Medicare bids that we've submitted and the coverage decisions that we would expect in the third quarter of this year.

Our next question comes from Franc Brisebois with Oppenheimer.

So just to hit on the CVS Caremark restrictions, do we know why they added restrictions all of a sudden and then now the coverage. Just any color on to why this happened? And could this happen again? And did it hit products across the industry? Or was it mostly EYSUVIS that took a hit here?

This is Todd. I would say it was sort of normal negotiating and formulary management. And so, on the formulary management side, in the beginning of the first half of 2021 when we were launching, EYSUVIS was being covered it required a prior authorization that patients had previously tried an over-the-counter artificial tear. That's a standard prior authorization that pretty much all dry eye medications have. And our prescriptions were getting through covered at full price, right, because we were not on formulary, we did not have a rebate or discount in place. So, those prescriptions were going through, and they were going through at a very favorable net average sales price. It is not uncommon for payers to put restrictions in place for newly launched products or to heighten those restrictions if the product starts to gain some momentum and the product is not yet on their formulary, which is essentially what occurred in the second half of last year and really impacted net revenues in Q4 of 2021 and Q1 of 2022. We have been negotiating, as I think all of you know, CVS Caremark to get added to formulary, they took a positive decision, and added us to their formulary effective May 2, which removes those restrictions. And so now, those prescriptions can flow through again, now at CVS Caremark. They will under our rebate contract with them, which will, as I said, both increase our volume, as well as the net average sales prices.

In terms of the impact here in May, but then I think I heard that we were expecting more of an impact in the second half of the year. So, I'm just trying to gauge the gross to net improvement, obviously, would be gradual. Was that fair to assume? And the impact to May, I guess, is well into the second quarter, I guess, is this something that we would hope by the end of the year to get to a level that we want, just based on how good the commercial coverage is now? Or just look there on the timing of it.

Look, we will start to see improvements in net average selling prices in the quarters in which those coverage decisions were taken. But, really, I would sort of expect the more significant ramp in those improvements to occur in the second half of this year. And, certainly, by year-end, as you stated, we should be realizing, on the commercial side of the business, the full benefit of these contracts that had been put in place. And then, obviously, as we continue to focus on growing our Medicare coverage, if we are successful in securing both United AARP and CVS Caremark SilverScript coverage, there's a significant opportunity there in the Medicare side as well.

I think in the past, you've discussed the fact that the demand, the amount of prescriptions that were written versus the ones that were filled, I think was around 50%. You've touched on a little bit, who uses the patient assistance program, but any idea now where we stand on the written versus filled prescriptions? And then, just quickly on the PCED side, also, can you just talk about maybe the competitive landscape, anyone else working in this case?

I'll take the first part of the question and then I'll hand the second part of the question – or the PCED program to Kim. It's early, Franc. So, we're seeing an acceleration in prescription growth rates attributed to these recent wins. We'll get the data here over the next few weeks and we'll get a good look at the percent of scripts written that are getting filled and covered. So, the more granular level data, there's always a little bit more of a lag on payer data than there is on just the pure prescription data that comes out on a weekly basis. We, as I said, do have some high-level data that has showed a drop in scripts being filled with the copay assistance program. That number now is down 54%, at the same time that we know that our prescription growth rates have been accelerating. So, when we get the more granular data here in a few weeks, I suspect that what it's going to indicate is that there's been a larger number of the scripts showing up at the pharmacy are getting filled, and they're getting filled as paid commercial scripts covered by the patient's insurance. Ken, I'll hand it over to you on the PCED questions.

In the PCED spaces, only one marketed product today, a product called OXERVATE by Dompe. It's an Italian company. And its indication is only for neurotrophic keratitis. So, our epidemiology suggests that PCEDs that arise from neurotrophic keratitis represent probably about a third of all PCED. Our approach, of course, is to go after PCEDs of all etiology. So, we think we have significant potential there. They also have a rather complicated formulation system that is frozen, requires 19 steps to reconstitute and they have to be administered six times a day. Our goal will be to provide a single dose unit of the solution, similar to how current dry eye drops are provided. So, we think that'll be significant benefit in terms of the patient experience. There's really one other product that's a secretome in active trials that we know of for PCED. It's a company called Noveome and they have a secretome product that they just started a Phase 2/3 trial for. Their Phase 1 results were published recently and they did not see certainly the level of healing that we saw. But that seems to be the one product in the PCED space. There are a few and then neurotrophic keratitis space as well. But again, that's, in our view, a subset of the entire PCED opportunity.

Our next question comes from Andreas Argyrides.

Just can you tell us for International the percentage of scripts that are being rejected and then provide an update on KPI-287?

It's Todd. Franc asked a similar question. Give us a few weeks here to get some updated data. We believe those rejection rates are going down simply by the fact that the early data that we have is showing a decrease in the number of scripts going into the copay assistance program and increase in commercial coverage scripts at a time that prescription rates are accelerating. So, we'll have more granular data here post the CVS Caremark decision that just took effect two weeks ago. But suspect that when we get that data, it's going to indicate that a larger percentage of prescriptions are getting filled. Fewer scripts are getting rejected at the pharmacy, but just a couple of weeks lag on having that data available. And then I'll hand it over to Kim to answer questions on 287.

Yes, we're continuing to evaluate and develop KPI-287. We have preclinical trials that are ongoing, we've had a couple of delays, unexpected related to the CROs where we're doing the sites, but we're still actively evaluating that and are hoping to be in a position to provide updates in the next quarter, perhaps a little after that, but it's still active and we've still got a lot of activity.

Thank you. At this time, I'm showing no more questions in the queue. Mr. Iwicki, I'll turn the call back to you.

Well, thank you very much, operator. And thanks, everyone, for joining us today. We really appreciate your continued interest in Kala and look forward to updating you soon. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.