Good morning, and welcome to Kala Pharmaceuticals Second Quarter 2019 Earnings Conference Call. 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 Mary Reumuth, Chief Financial Officer, 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, 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 & 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 also be found in the Investors & 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 U.S.; 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 6, 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 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?

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 covered 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 AMPPLIFY 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 15. 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 and the results from STRIDE 2 as compared to the results of STRIDE 1 and 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.

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 to ensure that physicians are gaining clinical experience with INVELTYS and patients are able to fill their 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 week ending July 26, 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-through with high prescribing targets. The majority of our sales efforts are targeted towards decile 5 through 10 eye care professionals, who comprise approximately 90% of all INVELTYS prescriptions launched to-date. And of the decile 9 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 updates of 10% of Medicare Part D lives. We continue to see robust usage of the co-pay program which has received excellent feedback from eye care professionals. Launch to-date, the majority of INVELTYS prescriptions have been filled utilizing our co-pay program. In line with our strategy of driving physician experience with INVELTYS, and patients' ability to fill their prescriptions, we expect significant use of the co-pay program through the rest of 2019. We anticipate reduced reliance on the co-pay 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'll now turn the call over to Mary to discuss our financial results.

Thanks, Todd. During this discussion of our quarterly financial results I will reference certain non-GAAP financial measures. These non-GAAP financial measures excludes 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 is primarily due to cost associated with hiring personnel, building our commercial organization, and an increase in our facility costs 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 was $6.2 million compared to $6.5 million for the same period in 2018. Loss…

Thank you. [Operator Instructions]. And our first question coming from the line of Chris Schott with JPMorgan. Your line is open.

Good morning. This is Chris [indiscernible] on for Chris Schott. My first question as you kind of 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 as important suggesting patients with highly variable symptoms. And the second with Novartis's recent completion of the Xiidra acquisition in July the companies 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 and Kala’s overall market opportunity? Thanks very much.

Good morning, Chris, and thanks so much for your questions. To talk first about the STRIDE 3 trial, yes, as we've said, we 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 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 signs 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 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 where 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 signs 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 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 on to a maintenance therapy to treat flares or episodes when they happen. Operator, can we take the next question. Yes, you're welcome Chris.

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

Hey guys, thanks for taking my question. I refer INVELTYS in your 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?

Sure, Biren, good question. The revenues per scripts not dropped in the quarter. In fact we saw some slight improvement in gross to net quarter-over-quarter. What we were doing in second quarter is working through the initial trade launch trade stocking that occurred in the first quarter and 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.

And then I guess of the 31,000 scripts how many of those are with us for your drug for [indiscernible] sampling?

I'm sorry could you repeat the question.

Yes, those are all scripts, Biren, whenever you look at a script that's not free drug, fair amount of those patients are using our co-pay program but it's not "samples or free drug".

So Mark I guess what percent of those are using the co-pay program?

Yes, I'm sorry, I'm just going to say it's little north of 60% of the prescriptions getting filled are filled utilizing the co-pay card.

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?

Yes, it's a good question. We expected to continue to evolve over time probably the biggest improvements starting to begin in 2020 and in over time; we'll continue to have less reliance. Remember that that can be in a couple of different ways. One is getting fewer scripts that use a co-pay card but also it can be less of a buy down if a co-pay card is used once we have unrestricted access in contracts and pay, for example, commercial payers a patient may still elect to use a co-pay card for example maybe to buy themselves down from a Tier 3 to Tier 2 co-pay 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.

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

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?

Yes. 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, our last patient -- last visit but we haven't given any specific guidance on that yet, Esther.

Got it. But you're still targeting that 900 patients?

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

Got it. 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?

There's certainly an environmental component but it's a lot of stimuli can involve it, certainly allergy will -- the allergy season will create a great deal of dry 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.

Got it.

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

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

Yes, it's good question, Esther. So we would say probably the majority of used 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 a commercial and a little north 50% of our scripts are Medicare patients which are typically most predominantly cataract patients.

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

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?

Yi, we just -- what we've said is that 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.

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

Yes. 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.

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

Thank you very much. And I 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.

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