Kala Pharmaceuticals, Inc. (KALA) Q2 2019 Earnings Call Transcript

Kala Pharmaceuticals, Inc. (KALA)
Q2 2019 Earnings Call
Aug. 6, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Kala Pharmaceutical's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management 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 Mary Reumuth, Chief Financial Officer for Kala Pharmaceuticals. Please proceed.

Mary Reumuth -- Chief Financial Officer

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; Kim Brazzell, Chief Medical Officer; and Todd Bazemore, Chief Operating Officer. Today's call is being webcast live, and the webcast link can be found in the Investors and Media section on the Kala corporate website at 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 be found in the Investors and Media section of 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 commercial launch of INVELTYS in the US, statements regarding our ongoing STRIDE 3 clinical trial, and the sufficiency of our cash resources. These statements are based on the belief and expectations of management as of today, August 6th, 2019. 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 the date of 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 statements included in the company's filings with the SEC, including our quarterly report on Form 10-Q which will be filed with the SEC after the market closes today and will be available on our corporate website.

I will now turn the call over to Kala's CEO, Mark Iwicki. Mark?

Mark Iwicki -- Chairman, President, and Chief Executive Officer

Thank you, Mary, and good morning, everyone. We appreciate you joining us today to review our second quarter financial results, which we released earlier this morning. 2019 continues to be a strong growth year for Kala, as we execute on both our commercial and R&D programs. As Todd will describe in further detail later in the call, we believe that the INVELTYS launch is going very well. We are reporting $2.1 million in second quarter net revenue, and approximately 53,000 prescriptions of INVELTYS have been written since launch.

Importantly, we've made important and significant strides in gaining unrestricted market access for INVELTYS. In just over six months, INVELTYS has achieved unrestricted market access in approximately 50% of all lives covered by commercial payers. And even though most Medicare Part D coverage decisions are anticipated in 2020, INVELTYS has already achieved unrestricted market access in approximately 23% of all lives covered by Medicare Part D payers. The launch uptake of INVELTYS reaffirms our confidence in the amplified platform technology and in the need for a therapeutic with the combination of efficacy, safety, and twice-a-day dosing that INVELTYS provides.

Our R&D efforts are also advancing nicely. We await the FDA's decision on our NDA submission for KPI-121 0.25% expected by August 15th. Recall that the NDA included results from our two completed Phase 3 clinical trials STRIDE 1 and STRIDE 2 and our Phase 2 clinical trial. We continue to make good progress on the ongoing STRIDE 3 trial, which we designed specifically to address key factors that may have contributed to the differences observed in the results from STRIDE 2 as compared to the results of STRIDE 1 in our Phase 2 trials. We are targeting top-line data from STRIDE 3 by the end of 2019.

I'd now like to turn the call over to Todd to discuss the INVELTYS launch.

Todd Bazemore -- Chief Operating Officer

Thank you, Mark, and good morning, everyone. As Mark mentioned, we continue to be very pleased with the progress we have made in these early days of the INVELTYS launch. As we have previously stated, our primary goals during this phase of launch are to ensure that physicians are gaining clinical experience with INVELTYS and patients are able to filter INVELTYS prescriptions at the pharmacy without restrictions, and we continue to achieve both of these goals. Approximately 31,000 prescriptions of INVELTYS were filled in the second quarter, representing an increase of 173% over the previous quarter. As of the weekend in July 26th, approximately 53,000 prescriptions have been filled, and INVELTYS has achieved a branded new prescription market share of 6.8% in just over six months since launch.

Our sales force continues to make significant progress in securing surgical protocol pull-though with high prescribing targets. The majority of our sales efforts are targeted toward decile five through 10 eyecare professionals who comprise approximately 90% of all INVELTYS prescriptions launched to date. And of the decile nine through 10 prescribers, approximately 50% have already prescribed INVELTYS since the launch. Mark noted the significant progress we have made in securing market access coverage in the early days of launch.

As a reminder, the ocular steroid market is approximately 50% commercial and 39% Medicare Part D coverage. On our first quarter call, we reported that we had achieved unrestricted commercial coverage for approximately 70 million patients. We are pleased to report that as of today, we have achieved unrestricted access for approximately 92 million patients, representing approximately 50% of all commercial lives. Medicare Part D contract negotiations are ongoing, with most coverage decisions anticipated in early 2020. As of today, INVELTYS has already achieved unrestricted market access in approximately 23% of all lives covered by Medicare Part D payers. This represents significant progress since our first quarter update of 10% of Medicare Part D lives.

We continue to see robust usage of the copay program, which has received excellent feedback from eyecare professionals. Launched to date, the majority of INVELTYS prescriptions have been filled utilizing our copay program. In line of our strategy of driving physician experience with INVELTYS and patients' ability to fill their prescriptions, we expect significant use of the copay program through the rest of 2019. We anticipate reduced reliance on the copay program in 2020 and beyond, as we expand our commercial and Medicare coverage.

In summary, although it is still early days in the INVELTYS launch, we continue to be very pleased with our performance. Our commercial team is executing on our key drivers, and we look forward to updating you on our progress on future calls.

I will now turn the call over to Mary to discuss our financial results.

Mary Reumuth -- Chief Financial Officer

Thanks, Todd. During this discussion of our quarterly financial results, I will reference certain non-GAAP financial measures. These non-GAAP financial measures exclude stock compensation, depreciation, and non-cash 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.

For the second quarter of 2019, we reported net product revenue from sales of INVELTYS of $2.1 million, compared to $1.4 million in the first quarter of 2019, representing quarter-over-quarter growth of 50%. We recorded no revenue in the same quarter in 2018. Cost of product revenues in the second quarter of 2019 were $0.4 million, representing a gross margin of approximately 83%, which is consistent with the first quarter of 2019. We recorded no cost-of-product revenues for the same quarter of 2018.

SG&A expenses for the second quarter of 2019 were $17 million, compared to $7.2 million for the same period in 2018. The increase was primarily due to cost associated with hiring personnel, building our commercial organization, and an increase in our facility cost associated with our corporate headquarters under a new lease, which commenced in late 2018. Non-GAAP SG&A expenses for the second quarter of 2019 were $15.1 million, compared to $5.6 million for the same period in 2018.

R&D expenses for the second quarter of 2019 were $7.1 million, compared to $7.4 million for the same period in 2018. The decrease in R&D expenses was primarily due to a decrease in manufacturing costs associated with INVELTYS, which were expensed as research and development prior to FDA approval, partially offset by an increase in clinical costs associated with STRIDE 3. Non-GAAP R&D expenses for the second quarter of 2019 were $6.2 million, compared to $6.5 million for the same period in 2018.

Loss from operations for the second quarter was $22.4 million, compared to $14.5 million for the same period in 2018. Non-GAAP operating loss was $19.6 million for the second quarter of 2019 compared to $12.1 million for the same period in 2018. Net loss for the second quarter of 2019 was $23.8 million, or $0.70 per share, compared to a net loss of $14.6 million, or $0.60 per share for the same period in 2018. Non-GAAP net loss was $20.7 million, compared to $12.2 million for the same quarter of 2018. The weighted average number of shares used to calculate net loss per share was $33.9 million for the quarter ended June 30th, 2019 and $24.6 million for the quarter ended June 30th, 2018.

Our cash position as of June 30th, 2019 was $118 million, compared to $170.9 million as of December 31st, 2018. We anticipate that our existing cash will enable us to fund operations through at least the third quarter of 2020, with additional cash runway expected when including revenue from INVELTYS.

That concludes our prepared remarks for today, and we will now hold a question and answer session. Please note that as the PDUFA date for our KPI-121 0.25% NDA filing is set for next week, we will not be answering questions regarding the NDA or the regulatory review process or status.

...

Operator, we are ready to take questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, if you have a question, please press *1 on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press #. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. One moment for our first question.

And our first question coming from the line of Chris Schott with JP Morgan. Your line is open.

Chris Neyor -- JP Morgan -- Vice President, Equity Research

Good morning. This is Chris Neyor for Chris Schott. My first question, you kinda addressed this in your prepared remarks, but as we get closer to the completion of the STRIDE 3 study, can you walk us through what gives you confidence around the readout, particularly relative to the prior Phase 3 studies? For example, you've highlighted changes to the inclusion/exclusion criteria is important to addressing patients with highly variable symptoms. And second, with Novartis' recent completion of the Xiidra acquisition in July, the company has highlighted increased medical education in dry eye disease and also increased promotion activity, including a DTC campaign that's beginning later this year. Do you see these efforts creating a positive effect on the potential dry eye product launch? Any comments on overall market opportunity? Thanks very much.

Mark Iwicki -- Chairman, President, and Chief Executive Officer

Good morning, Chris, and thanks so much for your questions. To talk first about the STRIDE 3 trial, yes, as we've said, we've designed STRIDE 3 with the knowledge of some of the differences between STRIDE 1 and STRIDE 2, and as you point out, what we've really concentrated on is making sure that in the inclusion/exclusion criteria that we have a significant set of symptomatology and a stable patient base over that run-in period, and we believe that's a really important success factor for improving the probability of success in STRIDE 3. And I'd like to say that STRIDE 3 is going well, and we feel like that inclusion/exclusion criteria change or changes that we made have been working well, and we're getting the kinds of patients that we had hoped to see in the STRIDE 3 trial.

Moving on to your second question, I think there's a couple of things with the Novartis acquisition of Xiidra. First, it reaffirms just how big this market is. When you look what they paid for that product, albeit a product that's really used for a small minority of the most severe patients, that [audio cuts out] 85% to 90% of patients suffer from a much more episodic manifestation of dry eye disease where those products are likely not nearly as useful as something like KPI-121 would be with our, hopefully, rapid onset of action and relief of the sign and symptoms of dry eye disease if ultimately STRIDE 3 is positive and the product is eventually approved. So, we feel that that's a really great sign for the market.

Of course, any education that happens in the marketplace is a really good thing. There was a clear bump in patients being treated when the Xiidra DTC was started when they first launched their product, and there's a long way to go to educate patients around dry eye disease. There are maybe as many as 35 million patients that suffer from dry eye disease and roughly only around 16 million diagnosed patients, and even fewer than them, maybe 1 million to 2 million at the most that are actively being treated with a pharmaceutical product by their caregiver. So, we think there's just a tremendous opportunity.

We continue to be very bullish on the market, especially the part of the market that we're going after, again, the temporary relief of the sign and symptoms of dry eye disease for people that have a much more episodic manifestation of the disease. And really, our product we think could be the ideal first-line product and then also, a patient could use KPI-121, if eventually approved, for the whole course of their disease from a more mild to moderate manifestation of the disease the whole way through, even more severe patient types where they might be adding it onto a maintenance therapy to treat flares or episodes when they happen.

Operator, can we take the next question?

Chris Neyor -- JP Morgan -- Vice President, Equity Research

Great. Thanks a lot.

Mark Iwicki -- Chairman, President, and Chief Executive Officer

You're welcome, Chris.

Operator

Our next question coming from the line of Biren Amin with Jeffries. Your line is open.

Biren Amin -- Jefferies -- Senior Research Analyst

Hi, guys. Thanks for taking my question.

Mark Iwicki -- Chairman, President, and Chief Executive Officer

Hi, Biren.

Biren Amin -- Jefferies -- Senior Research Analyst

I noticed for INVELTYS, you forwarded 31,000 scripts this quarter with $2.1 million in terms of revenue, so it seems like revenue per script dropped versus Q1. Can you just, I guess, explain what happened in Q2 versus Q1?

Todd Bazemore -- Chief Operating Officer

Sure, Biren. Good question. The revenues per script did not drop in the quarter. In fact, we saw some slight improvements in gross-to-net quarter-over-quarter. What we were doing in second quarter is working through the initial launch trade stocking that occurred in the first quarter, and it had gotten to a point where our inventory levels are now normalized and our sales are reflective of demand. So, recall, we had our initial trade launch in the first quarter and have now worked through those inventories in the second quarter.

Biren Amin -- Jefferies -- Senior Research Analyst

And then, I guess on the 31,000 scripts, how many of those are for your drug program or sampling?

Todd Bazemore -- Chief Operating Officer

I'm sorry, could you repeat the question?

Mark Iwicki -- Chairman, President, and Chief Executive Officer

Those are all scripts, Biren. Whenever you look at a script, that's not free drug. A fair amount of those patients are using our copay program, but it's not "samples" or "free drug".

Biren Amin -- Jefferies -- Senior Research Analyst

So, Mark, I guess what percent of those are using the copay program?

Todd Bazemore -- Chief Operating Officer

I'm sorry, I was just gonna say it's a little north of 60% of the prescriptions getting filled are filled utilizing the copay card.

Biren Amin -- Jefferies -- Senior Research Analyst

Got it. And then, I guess when do you expect that to decline so that they become paying scripts or fully paying scripts, I guess?

Todd Bazemore -- Chief Operating Officer

That's a good question. We expect it to continue to evolve over time, probably the biggest improvements starting to begin in 2020. And over time, we'll continue to have less reliance. Remember, that can be in a couple different ways. One is getting fewer scripts that use a copay card, but also, it can be less of a buy-down if a copay card is used. Once we have unrestricted access in contracts and pay, for example, with commercial payers, a patient may still elect to use a copay card, for example, maybe to buy themselves down from a Tier 3 to a Tier 2 copay, but that buy-down is a lot less than the buy-down from an uncovered prescription to a covered prescription so that it has less impact on our gross to net in the future.

Biren Amin -- Jefferies -- Senior Research Analyst

Got it. Thank you.

Mark Iwicki -- Chairman, President, and Chief Executive Officer

You're welcome.

Operator

Our next question coming from the line of Esther Rajavelu from Oppenheimer. Your line is open.

Esther Rajavelu -- Oppenheimer -- Senior Equities Research Analyst

Good morning. Thank you for taking my questions. I have a couple. On STRIDE 3, can you give us an update on enrollment? Is it complete or when do you think that will wrap up?

Mark Iwicki -- Chairman, President, and Chief Executive Officer

We've not made any guidance about that. What we've done this quarter is kind of narrowed our guidance from 4Q to really the very end of the year. We may in the future announce when we get the trial completed or last patient, last visit, but we haven't given any specific guidance on that yet, Esther.

Esther Rajavelu -- Oppenheimer -- Senior Equities Research Analyst

Gotcha. But you're still targeting that 900 patients?

Mark Iwicki -- Chairman, President, and Chief Executive Officer

We are, correct. We haven't changed that, and trial's going well, and we're, of course, well into the enrollment of the trial.

Esther Rajavelu -- Oppenheimer -- Senior Equities Research Analyst

Gotcha. And then, can you help us understand specifically for the inflammation associated with dry eye disease, is there a seasonality aspect to it, or would we expect to see use for inflammation specifically throughout the year?

Todd Bazemore -- Chief Operating Officer

There's certainly an environmental component, but it's a lot of stimuli and involvement. Certainly, the allergy season will create a great deal of dry-eye flares, as we talk about. Other environmental things, the cold winters tend to stimulate it. One of the things that we're learning more and more about is screen time increases the likelihood of getting some form of dry eye or dry-eye flare. So, there's a lot of triggers, and there may be some seasonality, but a lot of these triggers are pretty constant throughout the year.

Esther Rajavelu -- Oppenheimer -- Senior Equities Research Analyst

Gotcha. And my last --

Todd Bazemore -- Chief Operating Officer

It won't be like an allergy drug where you see distinct periods in the spring and in the fall.

Esther Rajavelu -- Oppenheimer -- Senior Equities Research Analyst

Gotcha. And then my last question, what percentage of INVELTYS use is in cataract surgery versus other types?

Todd Bazemore -- Chief Operating Officer

Good question. We'd say probably the majority of our use right now, more than half, is in cataract. More than half of our scripts are actually Medicare, so if we look at the breakout, about a third of our scripts are commercial, and a little north than 50% of our scripts are Medicare patients, which are typically most predominantly cataract patients.

Esther Rajavelu -- Oppenheimer -- Senior Equities Research

Gotcha. Thank you very much.

Mark Iwicki -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question coming from the line of Yi Chen with H.C. Wainwright. Your line is open.

Yi Chen -- H.C. Wainwright -- Senior Healthcare Analyst

Thank you for taking my question. My first question is what are the INVELTYS levels at distributors? And do you expect a significant restocking order in the current quarter?

Todd Bazemore -- Chief Operating Officer

Yeah, Yi. What we've said is our inventory levels have normalized, and we expect now that our sell-out is reflective of demand. So, we've worked through the initial launch trade load that occurred in the first quarter.

Yi Chen -- H.C. Wainwright -- Senior Healthcare Analyst

And second question, how should we look at the SG&A expenses going forward?

Mary Reumuth -- Chief Financial Officer

So, SG&A in Q2 was fairly similar to Q1, so I would say, without giving specific guidance, we've hired our sales force and our full complement of our commercial team in Q1, so we should expect the trajectory to continue from there.

Yi Chen -- H.C. Wainwright -- Senior Healthcare Analyst

Thank you.

Mark Iwicki -- Chairman, President, and Chief Executive Officer

You're welcome. Thank you.

Operator

And as a reminder, ladies and gentlemen, to ask a question, please press *1 on your touch-tone telephone.

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

Mark Iwicki -- Chairman, President, and Chief Executive Officer

Thank you very much, and I'd just like to say thank you to everyone for joining us this morning. We continue to be really excited about the launch of INVELTYS, making progress not only with our uptake and market share growth as one of the fastest growing brands in the market today, the steroid market and especially for post-op steroids, but also with the excitement around our STRIDE 3 trial and hopefully getting near the end of that by the end of 2019, and we will certainly update everyone when we hear anything specific from the FDA on their response to our NDA for KPI-121 0.25% for dry eye disease. So, thank you again for your time this morning, and we look forward to updating everyone soon.

...

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.

Duration: 25 minutes

Call participants:

Mary Reumuth -- Chief Financial Officer

Mark Iwicki -- Chairman, President, and Chief Executive Officer

Todd Bazemore -- Chief Operating Officer

Mary Reumuth -- Chief Financial Officer

Chris Neyor -- JP Morgan -- Vice President, Equity Research

Biren Amin -- Jefferies -- Senior Research Analyst

Esther Rajavelu -- Oppenheimer -- Senior Equities Research Analyst

Yi Chen -- H.C. Wainwright -- Senior Healthcare Analyst

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