Edited Transcript of KALA.OQ earnings conference call or presentation 7-May-20 12:00pm GMT

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [3]

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Thank you, Niranjan. Good morning, everyone, and thanks for joining us. Earlier today, we issued a press release detailing our first quarter 2020 financial results and recent business highlights. Before speaking to our progress, I want to acknowledge the ongoing COVID-19 pandemic. These are challenging and uncertain times for all of us. In a matter of months, the way we live and conduct business has been significantly changed and many of us have experienced firsthand the social, economic and emotional burdens brought by COVID-19.

Like all of you, we are deeply grateful to the doctors, nurses and other health care professionals on the front lines, and we are hopeful that ongoing efforts across the world will soon result in new therapies and vaccines to treat and prevent the further spread of COVID-19.

In spite of COVID-19, the first quarter was marked by substantial progress across our business. In March, we announced positive top line results from STRIDE 3, our third Phase III clinical trial of EYSUVIS, and earlier this week, we announced the resubmission of our new drug application for EYSUVIS to the FDA. We believe that the application will be considered a Class II resubmission subject to a 6-month review period under PDUFA, and we are preparing to launch EYSUVIS before year-end.

COVID-19-related restrictions on elective procedures, which includes most ocular surgeries, have negatively affected INVELTYS prescriptions and revenue, as Todd will describe shortly. However, based on our interactions with customers, we are optimistic that deferred procedures will be rescheduled once it is safe to do so and expect INVELTYS prescriptions and revenue to return to growth.

Let me take a moment to review the data from STRIDE 3 and reiterate why we believe EYSUVIS has the potential to become the preferred first-line prescription therapy for the short-term treatment of dry eye disease. STRIDE 3 achieved both of its primary endpoints as well as key secondary endpoints with a high degree of statistical significance. We observed statistically significant improvements in the primary symptom endpoints of ocular discomfort severity at day 15 in both the overall intent-to-treat population and in a subgroup of patients with more severe discomfort at baseline as well as in the prespecified sign endpoint of conjunctival hyperemia.

Significant results were also observed for total corneal staining at day 15 in the ITT population. Additionally, EYSUVIS was safe and well tolerated with adverse events and intraocular pressure increases comparable to vehicle. Together, these data replicate a positive sign and symptom results from previous trials and demonstrate EYSUVIS’ ability to address the substantial unmet needs of people living with dry eye disease. In the complete response letter that we received last year, the FDA indicated that positive results from an additional clinical trial was needed to demonstrate efficacy and support a resubmission of the NDA. With the STRIDE 3 results in hand, we believe we’ve satisfied this request, and we are confident that we’ve provided a robust package to support approval of EYSUVIS. With the NDA resubmission behind us, we are now actively planning for a potential approval and launch by the end of the year.

As we look ahead, we are also fortunate to be operating from a position of financial strength. In the first quarter, we completed a public offering of common stock and in April, we received additional funds when the underwriters partially exercised their option to purchase additional shares. Together with the sale of common stock under our existing ATM facility, we raised approximately $147 million in gross proceeds since the beginning of the year, which will fund our operations into at least the second quarter of 2022, well beyond the potential launch of EYSUVIS.

With that, I will now pass the call over to Todd Bazemore, our Chief Operating Officer, to provide further details on INVELTYS and EYSUVIS. Todd?

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [4]

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Thank you, Mark, and good morning, everyone. Let me begin today with INVELTYS, our twice-daily postsurgical ocular corticosteroid. In the first quarter, there were over 42,000 prescriptions of INVELTYS reported by Symphony Health, which represents a decrease of approximately 9.5% over the fourth quarter of 2019 due to the impact of COVID-19.

Through the first 2 months of Q1, prior to COVID-19 impacts, INVELTYS prescriptions were up 4% compared to fourth quarter of 2019. While the overall ocular steroid market was down 2% and the branded market was down 14% during the same time period. As Mark alluded to, beginning in March 2020 and continuing into the second quarter, prescriptions of INVELTYS have been affected by the ongoing COVID-19 pandemic as federal and local governments have implemented restrictions on elective procedures, which includes most ocular surgeries.

We expect these limitations to negatively impact full year INVELTYS revenue for 2020. That said, we are encouraged for a couple of reasons. First, based on our interactions with eye care professionals across the United States, we believe physicians will move quickly to reschedule deferred procedures once restrictions are lifted, which gives us confidence that INVELTYS’ prescriptions and revenues will return to growth. In fact, in the most recent weekly report from Symphony Health, we achieved 35% week-over-week increases in INVELTYS NRxs and overall market prescriptions were up 3.6%, marking the first week of growth since the deferral of elective procedures began in early March.

Second, prior to the onset of COVID-19 pandemic, prescriptions were tracking up quarter-over-quarter, suggesting continued positive growth trends and strong demand. We continue to be encouraged by the strong reception to INVELTYS among our target eye care professional audience. 45% report having already prescribed INVELTYS and prior to the pandemic, we had achieved a branded new prescription market share of 18.3% among our called-on eye care professionals. We believe the strength of this reception reflects both the strong clinical profile of INVELTYS and the effectiveness of the Kala sales team. While we have suspended substantially all in-person interactions with our customers, including visits to physicians’ offices, clinics and hospitals, our sales force continues to provide support virtually through both telephone and web-based technologies. The team was able to transition swiftly to a virtual working model, and we are pleased with their productivity over the last several weeks.

Going forward, we will continue to follow recommendations from the U.S. Centers for Disease Control and Prevention as well as federal state and local governments, and we’ll continue to assess when it is appropriate for all employees, including our sales force, to return to normal work practices. This will include a phased approach for sales representatives to return to the field as individual states allow elective surgeries to recommence. Several states have already begun to do so, and our representatives in those states have begun to reengage in in-person sales calls with those practices that are open for business and are willing to see sales representatives.

In parallel with the ongoing efforts on INVELTYS, our commercial team has been busy with launch preparations for EYSUVIS. And we believe we are well positioned to execute on a potential launch later this year. Given the significant overlap in Kala targets for INVELTYS and EYSUVIS, we believe we will be able to launch EYSUVIS soon after approval relying on our existing 57 sales professionals to target the top dry eye prescribers, who collectively represent approximately 70% of all dry eye prescriptions. If the FDA approves EYSUVIS, we plan to expand our sales force to approximately 100 to 125 representatives. A sales force of this size will allow us to effectively cover the eye care professionals who are responsible for about 85% of all dry eye prescriptions.

Our account director team is preparing to engage payers in dry eye disease state discussions, and we will leverage the team to quickly drive formulary reviews of EYSUVIS if and when approved. We believe that EYSUVIS represents a tremendous commercial opportunity. We estimate that there are approximately 33 million people suffering from dry eye disease in the U.S., of which over 17 million have been diagnosed and are managed by an eye care professional. Our quantitative market research suggests that approximately 80% to 90% of these patients experience episodic dry eye flares rather than continuous symptoms. These flares are inflammatory-driven responses to a variety of triggers, and feedback from both doctors and patients suggest they are not adequately managed by current therapies.

As we shared previously, we believe that approximately 78% of patients on artificial tears and approximately 82% of patients on chronic daily prescription therapies suffer from breakthrough flares. Moreover, data demonstrated there’s a high discontinuation rate among patients treated with existing prescription dry eye treatment options. And our research indicates this is due to insufficient efficacy provided by these options and their significant side effect profiles.

There is a clear need for a new treatment option that can address the underlying inflammation of the disease, provide rapid effective relief of the signs and symptoms of dry eye and is well tolerated by patients. We expect the uptake of EYSUVIS at launch to be supported by the fact that there are already more than 17 million diagnosed dry eye disease patients visiting their eye care professional on average 2 to 3 times a year. Approximately 42% of these office visits occur because the patient is actively experiencing a dry eye flare.

That means we don’t need to drive patients into the doctor’s offices. They are already there, often explicitly looking for a new treatment option. We believe EYSUVIS is well positioned to become the preferred first-line prescription therapy for the short-term treatment of the signs and symptoms of dry eye disease, which includes flares. If approved, EYSUVIS will be the first and only ocular steroid to have an indication for dry eye disease. Our research demonstrates that it is important to eye care professionals for a few reasons. First, the efficacy or safety of steroids vary, and EYSUVIS’ clinical data is viewed very favorably by prescribers. Second, inherent risk associated with prescribing off-label steroids. Third, patients are more comfortable having a dry eye indication in the labeling of their medicine. And fourth, safety and efficacy that has been vetted by the FDA.

95% of the doctors surveyed in market research stated that they are interested in the availability of a steroid with an FDA-approved dry eye indication. And most indicated they would prescribe EYSUVIS specifically for a majority of their dry eye patients. When we apply physician feedback from market research to the dry eye disease market, we estimate that there are more than 9 million dry eye disease patients that could potentially be prescribed EYSUVIS. Additionally, we estimate that there are over 330 million dry eye flare days per year in the U.S. alone, representing a total addressable market potential in excess of $8 billion annually. If approved as the only available short-term treatment with a rapid onset of action to treat the signs and symptoms of dry eye disease, we believe we will be well positioned to capitalize on this opportunity.

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

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Mary Reumuth, Kala Pharmaceuticals, Inc. – CFO & Treasurer [5]

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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.

Our cash position as of March 31, 2020, was $196.5 million compared to $85.4 million as of December 31, 2019. This increase reflects proceeds from our underwritten public offering of common stock, which closed in March of 2020, partially offset by cash used to fund our operating expenses in the first quarter.

Cash as of March 31, 2020, does not include an additional $7.2 million in net proceeds we received in early April as a result of the underwriters option to purchase additional shares in our follow-on offering. Together, we anticipate that our existing cash will enable us to fund operations into at least the second quarter of 2022. For the first quarter of 2020, we reported INVELTYS net revenue of $1.1 million compared to $1.4 million in the first quarter of 2019. Net revenues in the first quarter of 2020 were impacted by higher reserves as compared to the same period in 2019.

As a reminder, we recognize revenue when we ship to distributors. We expect gross-to-net discounts to improve throughout the year and going forward. Cost of product revenues for the first quarter of 2020 were $0.4 million compared to $0.2 million for the same period in 2019. As we began capitalizing inventory costs for INVELTYS after receipt of FDA approval in August 2018, cost of product revenues for the quarter ended March 31, 2019, were more favorably impacted by costs, which were expensed as research and development prior to FDA approval.

Non-GAAP cost of product revenues were $0.3 million for the first quarter of 2020 compared to $0.2 million for the same period in 2019. SG&A expenses for the first quarter of 2020 were $15.4 million compared to $18.2 million for the same period in 2019. The decrease in SG&A expenses for the first quarter in 2020 compared to the same period in 2019 was primarily due to launch-related marketing and selling expenses incurred during the quarter ended March 31, 2019, associated with the commercial launch of INVELTYS, which were not incurred during the same period in 2020 as well as a decrease in stock compensation costs. Non-GAAP SG&A expenses were $13.5 million for the quarter ended March 31, 2020, compared to $16.3 million for the same period in 2019.

R&D expenses for the first quarter of 2020 were $5.4 million compared to $7 million for the same period in 2019. This decrease was primarily due to a $1.7 million decrease in external costs for the STRIDE 3 clinical trial, partially offset by an increase in employee-related costs, driven by manufacturing employees allocating more time to EYSUVIS R&D. Non-GAAP R&D expenses were $4.6 million for the first quarter of 2020 compared to $6.3 million for the same period in 2019.

Loss from operations for the first quarter of 2020 was $20.1 million compared to $24.1 million for the same period in 2019. Non-GAAP operating loss was $17.4 million for the first quarter of 2020 compared to $21.4 million for the same period in 2019.

Net loss for the first quarter of 2020 was $22 million or $0.54 per share compared to a net loss of $25.4 million or $0.75 per share for the same period in 2019. Non-GAAP net loss was $19 million for the first quarter of 2020 compared to $22.5 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.

With respect to the impact of COVID-19, we cannot estimate the length and severity of this pandemic and thus cannot specifically measure the impact on our financial results for the full year. We expect that it will have a negative impact on INVELTYS prescriptions and full year net revenue for 2020. Further, we expect that full year operating expenses could be reduced as a result of the restrictions in the activities of our sales force as well as the limitation of certain business activities of other personnel as a result of the pandemic. That concludes our prepared remarks for today. I will now pass the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Chris Schott with JPMorgan.

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Christopher Z. Neyor, JP Morgan Chase & Co, Research Division – Analyst [2]

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This is Chris Neyor on for Chris Schott. Congrats on the submission of EYSUVIS, this is an important milestone for the company. So my first question is on — for EYSUVIS, acknowledging it’s early days for the product with the recent FDA submission, are there any appreciable impacts to the product from COVID-19, whether that be from a regulatory perspective or for the pending product launch either — or after post approval? And then second, on — for INVELTYS, can you update us on where the product stands from a commercial and Medicare coverage perspective?

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [3]

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Todd, do you want to take that?

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [4]

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Sure. Happy to. Chris, thanks for your questions. Why don’t I start with INVELTYS and your questions about coverage. We currently have a little over 80% unrestricted commercial access for INVELTYS, so with commercial payers. We are at about 23% with Medicare Part D with all of our Medicare Part D bids having been submitted in the fourth quarter of last year. We expect the review of those bids to occur in the second half of this year for consideration for formulary addition on January 1, 2021. There is, as you know, with Medicare, always the opportunity that if there’s a positive decision, the start date of being added to formulary can be moved up, and we certainly will be pursuing that. But at this point, all of those bids are in, and we look forward to discussions with those different payers on those Medicare bids. But we’re very happy with our commercial access. And early this year, we are seeing actually a shift to more commercial business for INVELTYS compared to the first year of launches. Our commercial access has continued to improve. And that’s obviously important because commercial is a high ASP for INVELTYS.

And your questions on EYSUVIS. Launch plannings are full underway. The team is doing a great job working remotely. We have the cross-functional launch planning team in place. They are meeting and working on launch plans on a weekly basis. So really happy with the progress that’s being made there. And see no hinderance from COVID-19 on our ability to plan and be prepared for a launch before the end of this year. I’ll hand it back over to Mark to comment on the filing and any potential impacts from a regulatory review standpoint. Mark, not sure if you want to…

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [5]

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Kim, do you want to — yes. Yes, I did. I was just thinking maybe Kim wants to answer that.

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Kim Brazzell, Kala Pharmaceuticals, Inc. – Chief Medical Officer [6]

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Sure. We are not aware of anything in particular that would slow down the review. We have been dealing with the agency, the ophthalmic division, on some other minor issues, and they’ve been very responsive and have met all their time lines. So from a review perspective, there’s nothing obvious. The world is changing a bit, but we don’t foresee anything at this point that would slow us down, but things can always change as we move forward.

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Christopher Z. Neyor, JP Morgan Chase & Co, Research Division – Analyst [7]

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That’s helpful. One follow-up question for INVELTYS. You guys highlighted expectations for gross-to-net to improve throughout 2020. Can you maybe just talk to the magnitude and maybe pace of that change through the year?

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [8]

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Sure, Chris. This is Todd again. I’m happy to take that. We don’t give direct guidance — revenue guidance or gross-to-net guidance on INVELTYS. What we’ve stated before is that we expect the gross-to-net to continue to improve probably over the next 18 months or so, and to eventually settle in around where we believe the other branded postsurgical ocular steroids are today, which is somewhere in the mid-60% range on a gross-to-net discount basis. So we believe we’re heading in that trajectory and that we will eventually settle where the other branded steroids are.

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Operator [9]

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And our next question comes from the line of Liana Moussatos with Wedbush.

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Vasiliana Vireen Moussatos, Wedbush Securities Inc., Research Division – MD of Equity Research [10]

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How should we — this is to Mary. How should we think about operation expense Q2 versus Q1 and for the rest of the year?

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Mary Reumuth, Kala Pharmaceuticals, Inc. – CFO & Treasurer [11]

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Yes. Thanks, Liana. So I would say just kind of overall, if you look at our operating expenses on a noncash basis for — non-GAAP basis, so cash basis only for 2019, could be about $82 million. So we expect, overall, even outside of COVID, that they would be less than that because we finished the STRIDE 3 trial. So having said that, going Q1 into Q2, normally, we expect an uptick in expenses in the second quarter. There’s more meetings and things like that, but given COVID, we would expect OpEx to probably be flat to a little bit less than Q1. And then for the year overall, like I said, less than 2019.

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Operator [12]

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And our next question comes from the line of Biren Amin with Jefferies.

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Biren N. Amin, Jefferies LLC, Research Division – MD and Senior Equity Research Analyst [13]

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Mark, I guess, with the COVID situation, the fact that clinics are shut down, how do you incentivize your sales force during this time, at least as it relates to INVELTYS? Because I think you’re going to need some of those salespeople when you launch EYSUVIS.

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [14]

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Yes, great question, Biren, and thanks for participating this morning. So we have done everything we can to really keep the sales force engaged. There’s a lot of home learning that’s going on that we’ve taken this opportunity to start getting everybody thinking about what’s going to happen when we get EYSUVIS approved. And you’re right, we expect to launch immediately with the current sales force. And then very likely if things return to normal, expand the sales force after we get approval. So I feel like the team has been doing a great job, things from home, engaging with physicians and offices remotely. And ideally, as things begin to open back up, we can just get a quick start to getting them back out in the field.

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Biren N. Amin, Jefferies LLC, Research Division – MD and Senior Equity Research Analyst [15]

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Okay. That’s helpful. And then I guess, now that you’ve got STRIDE 3 data in hand, have you approached payers in terms of the type of access that they would provide for EYSUVIS and the type of reimbursement? And also, I guess, have you done price sensitivity analysis and shared that with payers to get their thoughts on potential pricing?

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [16]

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Yes, it’s a great question. The data came and then the COVID situation happened right away. So the truth is, there hasn’t been a lot done with payers since we’ve gotten the data. But certainly, just before we had the data, in anticipation of it being positive — and maybe I’ll turn it over to Todd and just have him give some high-level thoughts on what we’ve been hearing from payers.

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [17]

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Sure. Thanks, Mark, and really good question, Biren. We’ve engaged payers on multiple occasions as we’ve been preparing for launch with the product profile on EYSUVIS and have had really good receptivity and recognition from payers for the need of a short-term treatment for — effective treatment for signs and symptoms of dry eye disease. And what we’ve seen is, payers have been really receptive to this idea that although dry eye is a chronic disease, the vast majority of patients do not have chronic or continual persistent symptoms. The vast majority of patients experience these episodic flares to their disease in which they’re symptomatic a few times a year. And what payers have acknowledged is there’s probably a lot of patients out there who do not require daily chronic prescription medication, would be just fine with a short-term treatment they can use on an as-needed basis when they’re symptomatic. So they’re very receptive to that profile. They see it as meaningful and differentiated. And what they told us is, although we haven’t done our specific quantitative pricing research, they’ve given us some good guidance on thinking about pricing as it relates to the current prescription dry eye therapies, which, as you know, are all in that list price range of between $500 and $600. And so we think we’ve got a good strategy in understanding what payers expectations are that with some smart risk pricing and modest rebates, we expect to gain very quick formulary coverage, certainly with commercial payers within the first year of launch. And then as you know, with Medicare, it always typically takes a little bit longer, but we expect to enjoy a broad coverage with both commercial and Medicare payers.

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Biren N. Amin, Jefferies LLC, Research Division – MD and Senior Equity Research Analyst [18]

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Okay. And then maybe just a question on the regulatory aspects. FDA, I think, has restricted manufacturing site visits. So for EYSUVIS, are you going to require a CMC inspection? And is there a potential impact from COVID as a result of that?

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Kim Brazzell, Kala Pharmaceuticals, Inc. – Chief Medical Officer [19]

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Kim Brazzell. First of all, we’re unsure of that. That’s not specifically known at this point. However, the manufacturing process for EYSUVIS is virtually identical for that for INVELTYS, which was approved a year or so ago. So if the FDA can rely on that, then we don’t think we would need inspections. There is possibilities of virtual manufacturing inspections as well. And the place where we do the bulk of our manufacturing has had inspections in the past. So it’s too early to really answer that question, but we’re optimistic that, that won’t become an issue either because they don’t need to reinspect or because they can do virtual inspections.

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Operator [20]

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And our next question comes from the line of Yi Chen with H.C. Wainwright.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Healthcare Analyst [21]

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First question is, have you observed any ASC starting to reopen during the past week? And if so, how limited is their operation volume compared to normal levels?

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [22]

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Todd, do you want to take that?

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [23]

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Sure, happy to take. The answer to your question is yes, we are seeing surgical centers starting to reopen in select states. I’m sure you’re following and seeing that some states have allowed elective procedures to begin again, which includes ocular surgeries. And the ramp, I think it’s too early to say right now, and it’s varying from practice to practice. As you can imagine, there’s quite a backlog of patients waiting for their cataract surgery. And we have certainly had the ophthalmology practices tell us that they plan to put in additional hours as they’re able to open back up to get caught up on the backlog of surgeries that have been postponed for the past couple of months. So what we are definitely seeing, it open in some states. We are rolling out a phased approach for a return to the field for our sales force in those states. So when states in which surgeries have begun again and those surgical practices are open for business and are willing to see sales representatives, we have a plan where our sales reps are returning to work — returning to the field rather in those states. So — and we expect that trend to continue to grow over the next several weeks as more and more states are planning to start allowing these elective surgeries to begin again.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Healthcare Analyst [24]

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Got it. Second question. First quarter sales were impacted by higher reserves. Were these reserves acquired by distributors in the fourth quarter of 2019? And what is the typical level of reserve do these distributors keep?

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [25]

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Mary, would you like to weigh in?

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Mary Reumuth, Kala Pharmaceuticals, Inc. – CFO & Treasurer [26]

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Yes, I can take that. So it’s — the reserves we’re talking about, Yi, was the gross-to-net. They’re just impacted by higher reserves. So for example, we accrued for higher estimates related to patients’ high deductible plans, assuming that because of COVID, they may not have gotten all the way through their high deductible period. That’s what I was referring to.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division – MD of Equity Research & Senior Healthcare Analyst [27]

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Okay. Got it. Last question is, the STRIDE 3 study has met both sign and symptom endpoints. Which endpoint among all those measured in the study would be the most important from physician’s perspective to deliver clinical improvement and drive prescriptions?

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [28]

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Yes, it’s a great question, Yi. I would say making sure that we hit those primary endpoints is probably the most important thing. I think physicians do want to see that the product really has a meaningful effect on symptoms. And for our product, they really appreciate that the product starts having a meaningful effect on the first couple of days. When you think about where we believe the product will be positioned as that first-line prescription product, especially in the mild-to-moderate patient population, they want to see that, that symptom data starting right away, so that the patient feels better. It’s one of the great frustrations they have with the current products that are on the market and even many of the products that are in development are really not rapid-acting products when it comes to the symptoms that patients experience. And then interestingly, as we reported, we have a very meaningful effect on corneal staining in just 2 weeks in our trial, which if you compare that to other products, that’s really quickly, a really quick action. If you look at the lifitegrast’s clinical trial database on inferior corneal staining, you’re really not seeing an effect until 12 weeks. So as we’ve shown the data to some of the top thought leaders in dry eye disease, they’ve had a really big favorable reaction to that rapid corneal staining benefit which does make sense. The product is a steroid. It works very quickly. And you’re seeing kind of the dual effect, right, on the signs or the real — the most subjective measures that you can have with the hyperemia, which is the immediate symbol for the inflammation, sign of the inflammation and then the repairing of the corneal surface, which shows up in that corneal staining data. So I think it’s going to be a mix of endpoints, the rapid onset of action within a few days and really clearing up that ocular surface by looking at the hyperemia and the corneal staining data.

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Operator [29]

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And our next question comes from the line of Tazeen Ahmad with Bank of America.

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Tazeen Ahmad, BofA Merrill Lynch, Research Division – VP [30]

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One on INVELTYS. Can you talk to us about, since it’s launched, the percentage of targeted physicians that your sales force has been able to make contacts with. And to the extent that you have this data, what types of interactions or how many type — interactions are needed on average with the sales reps before a physician does write the scripts for INVELTYS?

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [31]

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Todd, do you want to take those?

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [32]

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Sure. So we’re focused on a call universe of about 7,000, mostly ophthalmologists. There are some optometrists we call on that co-manage the postsurgical patient, but at this point, it’s mostly ophthalmologists. Call universe of about 7,000. I think it’s just shy of 3,500 or nearly half of them that have prescribed so far. And you’re asking a really good question, how long does it take to get them on board. And the call cycle is definitely a little bit longer for surgery. I don’t have an exact number of sales calls for you. But it’s a pretty intensive and involved situation, but I think I’ve described in the past to being a bit analogous to getting a product on a hospital formulary, where you have to do a lot of groundwork of multiple decision makers. But once you get on that formulary, you’re open for significant volume to come through the practice. In the case of these surgical practices, it’s not a formulary, but rather a postsurgical protocol. And so you’re really working to get them comfortable with the clinical profile, understanding the reimbursement, making sure that their patients are going to be able to get scripts filled and that scripts are going to be affordable, either through coverage in their Medicare or commercial plan or use of the copay reduction cards. And once everything is set up and running really smoothly, you actually get added to the postsurgical protocol, where most patients are getting a specific steroid eye drop, a specific nonsteroidal anti-inflammatory and a specific antibiotic. And once you get to that point, you can see sort of what we call the flip of the switch, and volume can come very, very quickly from these large practices.

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Tazeen Ahmad, BofA Merrill Lynch, Research Division – VP [33]

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Okay. And how many of those 7,000 mostly ophthalmologists has your sales force had contact with?

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [34]

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All of them at this point. Go ahead. Sorry.

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Tazeen Ahmad, BofA Merrill Lynch, Research Division – VP [35]

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Yes, go ahead. No, no. Keep going.

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [36]

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I was just going to say, when you think of our 7,000 targets, those are the 7,000 that we’re calling on. Obviously, we’re at different reach and frequency numbers based on where we are in the sales cycle with those targets.

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Tazeen Ahmad, BofA Merrill Lynch, Research Division – VP [37]

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Okay. So as we think forward to EYSUVIS, assuming that a lot of these doctors will be part of your continued touch points, can you point to some differences between INVELTYS and EYSUVIS in the type of patients? Presumably, there are a lot more young patients with dry eye relative. And also how you’re thinking about rebating? You did mention that for the chronically-prescribed drugs, for example, that there could be some significant rebates happening. Would you consider the same level of rebating there? And I guess the last question I’ll ask because of the time that we’re in. As we think about the unemployment rate in the U.S., unfortunately, continuing to tick higher, how would you think about what kind of mix to expect from payers when this does launch next year?

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [38]

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Yes. So there’s a few things in there. Let me see if I can kick through. And Tazeen, if there’s anything I miss, please don’t hesitate to jump back in. So I view the — if you think about the sales interactions with EYSUVIS, they’re going to be much more traditional, sort of retail-based sales interactions versus the situation I just described with INVELTYS, right? The surgical call is a very involved sales cycle with multiple calls, multiple stakeholders and really a lot of work that our sales force does a tremendous job of trying to get our product added to a surgical protocol.

EYSUVIS is going to be much more traditional where your reps are out detailing physicians, providing some samples and copay cards, physicians will start trialing the product right away with some patients that they think are good candidates and looking for feedback from patients on how they feel, and then we expect that really positive feedback from patients will then further reinforce physicians using even more EYSUVIS within their practice. So I think a much more traditional sales interaction. We have said that we do plan to grow the sales force from our current 57 to somewhere between 100 to 125. And that’s so we can add a large number of optometrists to the call panel. So the roughly 7,000 ophthalmologists that we call on today, 100% of them are also dry eye targets. So there’ll be great dual calls for both INVELTYS and for EYSUVIS. And in the future, we’ll probably end up adding about 10,000 or so optometrists that are very important dry eye prescribers. The overall dry eye market prescriptions, about half are produced by ophthalmologists and about half by optometrists. The ophthalmologists on a per capita basis are more productive writers because there’s fewer of them, but on an overall volume basis for the entire market, optometrists are extremely important prescribers, and we look forward to growing the sales force and adding them to our call panel as well.

On the payer front, we — I wouldn’t call it deep rebating that I think is going on right now. There’s certainly some rebating going on within the chronic therapies. I think what’s important for us in our interactions with payers is, one, they have told us that they view EYSUVIS as being sort of its own unique dry eye category. So it’s the only acute or short-term dry eye therapy. And therefore, we’ll not run into any issues with contracts with the chronic daily medications that are out there right now. And so that’s an important understanding for us. And then their expectation is that we should be able to achieve broad and open access for the product once we get on the market with an understanding, and what we’ve actually had payers come back to us and say is that, with a good short-term acute therapy, we may be able to delay the time into which patients need to go on chronic daily prescription medications because they can treat their dry eye disease in a more as-needed basis when the patient was symptomatic. I think — was there another question there, Tazeen, that I’m forgetting to answer?

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Tazeen Ahmad, BofA Merrill Lynch, Research Division – VP [39]

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No. Thanks for being so thorough. The other part that I’d asked was distribution relative to payer mix. So should we assume that the dry eye patients have a much more broad age distribution, as we sit here today, what proportion of scripts would you say would be commercial?

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Todd Bazemore, Kala Pharmaceuticals, Inc. – COO [40]

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Yes. If I look at the market today of the current chronic therapies, it’s pretty evenly split. About half the scripts are commercial — a little more than half are commercial and the rest are Medicare. Maybe it’s about 50% commercial, 40%, 42% Medicare and then there’s another 8% or so in there that’s a low mix of a little bit of cash and Medicaid. We would expect that to be a similar situation for us. I think it’s interesting when you look at Xiidra, they have very good commercial coverage, but they’ve never been able to secure good Medicare coverage. Yet with just commercial coverage, they’ve grown that to a $400 million-a-year brand. So I suspect Novartis will work hard and if they can increase the Medicare coverage, that will open up a whole another opportunity for growth. So I think Shire and now Novartis have shown you can be very successful with good access within one payer segment, in their case commercial. We’re confident from the interactions we’ve had with payers that we’re going to have very good commercial and Medicare Part D coverage. I think over time, you’ve asked a really good question, what’s the impact of COVID and unemployment rates, and how does that shift to payer mix over time? And I think it’s too early to say. I think we are aware as most that there are likely to be fewer people with commercial coverage because of the high unemployment rates. And you’re likely to have more cash-paying patients in the market. And so that’s going to cause us to really take a look at what type of copay programs do we need to have — copay assistance programs do we need to have at launch to support those patients, who are going to be good candidates that need to go on therapy. So I would say it’s too early to say exactly what that impact is going to be, but we’re certainly keeping a close eye on it. And do expect that the high unemployment rates will have an impact on the number of patients in the U.S. that have commercial insurance.

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Operator [41]

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And with that, I’ll turn the call back over to CEO, Mark Iwicki, for any closing remarks.

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Mark T. Iwicki, Kala Pharmaceuticals, Inc. – Chairman, President & CEO [42]

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Well, I’d just like to thank everyone for joining this morning. Despite what’s going on with the COVID-19 pandemic right now, we are quite excited about the future for Kala, thrilled that we’ve been able to resubmit the NDA for EYSUVIS. And really hoping that the country and the world get back to normal soon, so we can get back in the field and really work on our plans with INVELTYS and hopefully get ready for the potential launch of EYSUVIS by the end of the year. Thank you again, and I hope everyone stays safe. Have a great day.

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Operator [43]

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Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect.