Good morning and welcome to Kala Pharmaceuticals' Third 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 Niranjan Kameswaran, Vice President of Strategy for Kala Pharmaceuticals. Please proceed.

Thank you, operator. Good morning everyone and thank you for joining today's call. Joining me from the company are Mark Iwicki, Chairman President and Chief Executive Officer; Todd Bazemore, Chief Operating Officer; Mary Reumuth, Chief Financial Officer; Hongming Chen, Chief Scientific Officer; and Kim Brazzell, Chief Medical Officer. Today's call is being webcast live. The webcast link can be found in the Investors and Media section on our website kalarx.com. During this call, we will be referring to non-GAAP financial measures which are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release issued today which can also be found on our website. On this call, we will make certain comments about Kala's future expectations, plans, and prospects that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements will include: Observations associated with our commercialization of INVELTYS in the U.S.; statements regarding the development and commercial plans for EYSUVIS including the STRIDE 3 clinical trial; the sufficiency of our cash resources; and projected revenue. These statements are based on the beliefs and expectations of management as of today, November 7th, 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. This forward-looking statement is included in the company's filings with the SEC including the quarterly report on Form 10-Q. The Form 10-Q will be filed with the SEC after the market closes today and will be available on our website. I will now turn the call over to Kala's CEO Mark Iwicki. Mark?

Thanks Niranjan and good morning everyone. Thank you for joining us today to review our third quarter financial results which we released earlier this morning. As Todd will describe in further detail later in the call, we are pleased with how the INVELTYS launch is progressing. Approximately 97,000 prescriptions of INVELTYS have been reported since launch and we've made significant market access progress. More importantly, feedback from eye care professionals has been exceedingly positive reaffirming INVELTYS' unique value proposition of strong efficacy, safety, and twice-a-day dosing. As you're aware we filed an NDA for our dry eye product candidate EYSUVIS in October of 2018. That NDA was supported by data from one Phase 2 trial and two Phase 3 trials STRIDE 1 and STRIDE 2. In August, we announced that we had received a complete response letter from the FDA with respect to this NDA. The FDA indicated that efficacy data from the additional -- from an additional clinical trial would be needed to support a resubmission. Based upon the previous recommendation of the FDA, we initiated an additional Phase 3 clinical trial STRIDE 3 in the third quarter of 2018 which we expect will serve as the basis of our response to the CRL. We designed STRIDE 3 with certain modifications to the inclusion/exclusion criteria which we believe improve the study's probability of success. We are looking forward to the conclusion of the trial in the coming months. We've experienced a slightly slower patient enrollment than originally projected and we're now targeting top line results in the first quarter of 2020. We expect a Class 2 resubmission of the NDA in the first half of 2020 which should be subject to a six-month review clock. Finally, we believe we have a healthy cash position. We anticipate that our existing cash resources, together with projected INVELTYS revenue will enable us to fund operations through the next 18 months. I'd now like to turn the call over to Todd to discuss the INVELTYS launch.

Thank you, Mark. Good morning everyone. We are pleased with how the INVELTYS launch is progressing. We continue to see strong prescription growth with approximately 40,000 prescriptions of INVELTYS being reported by Symphony Health in the third quarter, which represents an increase of 30% over the second quarter. As of the week ending October 25th, approximately 97,000 prescriptions have been reported and INVELTYS has achieved a branded new prescription market share of 10.1% in just over 10 months since launch. Branded new prescription market share grew by 55% in Q3 compared to Q2. Our INVELTYS prescriber base also continues to achieve strong growth. New prescribers grew by 19% in Q3 compared to Q2. Launch-to-date, nearly 2,700 eye care professionals have prescribed INVELTYS which represents approximately 40% of our target. We believe this means there is still significant room for growth as we continue to add new prescribers. Importantly, INVELTYS has demonstrated strong prescription and market share growth in a year in which the other major branded and generic steroids are showing declining trends. Symphony Health, one of the third-party providers, whose data we rely on to make our estimates related to revenue recognition, has informed us that commencing the week ended October 11th, 2019, they began a six-week process of phasing in a 5% change to their projection methodology for reporting INVELTYS demand prescriptions. Mary will discuss this further later in the call. We recently completed a large quantitative market research study with 200 eye care professionals. In this study, approximately half of the ECPs reported having already prescribed INVELTYS and rated it highly for the key attributes of inflammation suppression and low risk of increasing intraocular pressure. This group of ECPs also reported that they intend to increase prescribing from a current self-reported overall share of 6% up to…

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 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. For the third quarter of 2019, we reported INVELTYS net revenue of $1.5 million. Included in net revenue, is a $600,000 reduction, resulting from a change in the estimated payer mix due to the revision in Symphony Health's projection methodology. As Todd noted, we have relied on this third-party data to make estimates regarding our revenue recognition. This downward adjustment, primarily relates to the second quarter of 2019. Excluding this adjustment, we would have reported a quarter-over-quarter increase in net revenue, in line with the growth in prescriptions. SG&A expenses for the third quarter of 2019 were $15.3 million, compared to $8.5 million for the same period in 2018. The increase was primarily due to costs associated with hiring additional personnel, building our commercial organization to support the launch of INVELTYS and an increase in facility-related costs. Non-GAAP SG&A expenses for the third quarter of 2019 were $13.5 million, compared to $6.9 million for the same period in 2018. R&D expenses for the third quarter of 2019 were $7.1 million, consistent with the same period in 2018. A decrease in INVELTYS-related R&D spending for the third quarter of 2019, were offset by an increase in facility-related costs. Non-GAAP R&D expenses for the third quarter were $6.1 million compared to $6.3 million for the same period in 2018. Loss from operations for the third quarter of 2019 was $21.6 million, compared to $15.5 million for the same period in 2018. Non-GAAP operating loss was $18.8 million for the third…

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

Thanks. This is Chris Neyor on for Chris Schott. First question on EYSUVIS. For the pivotal readout for dry eye data, it's now expected in early 2020 with the CRL response planned for the first half of 2020. What are your expectations for the potential launch time line? And if possible, any expectations on initial coverage particularly in full year 2021? And then a second question on INVELTYS. You're currently at 23% unrestricted coverage. Should we expect that similar level of coverage sequentially in 4Q? And is there any color you can provide on the timing for coverage decisions in 2020? Thanks so much.

Good morning, Chris thanks for the question. So, your time line that you talked about is kind of our planning thoughts as well. So, you never know the exact time line, but we do believe that the product could see approval in 2020. We are able to launch the product very quickly because we have our existing sales infrastructure in the marketplace. So, I think very late 2020 is when we would hope, that it would be approved and then get it launched quickly here at the end of the year or the very beginning of 2021. And then maybe for the INVELTYS access question that you have and I think it was around Medicare, but maybe Todd, can just talk about the Medicare and the commercial access that we've had.

Sure. And I think there was a couple of access questions you had there Chris, both what it may look like when we first launch EYSUVIS and currently for INVELTYS. So, I'll address INVELTYS first. The access is actually 75% unrestricted within the commercial payer or the commercial book of business and currently 23% for Medicare. So, we're just in the final stages of negotiations in Medicare and we'll be looking to update what our access is going into next year. I think a baseline assumption of 23% for Medicare in fourth quarter of this year is reasonable. And then, we'll report at the end of fourth quarter what we -- what our access is going to be in 2020. But currently, the commercial access for INVELTYS is 75% unrestricted. When we get to dry eye, that market is 50-50 commercial and Medicare. And we expect that we'll be able to negotiate and start gaining unrestricted access very quickly after launch, as we were able to do this year with INVELTYS, particularly within the commercial book of business. As I stated, after only three quarters in the market, we already have 75% unrestricted access with commercial payers for INVELTYS, which demonstrates there is opportunity to gain significant market access within the launch year. Operator, I hand it back over to you.

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

Hey, this is Kambiz on for Liana. What did you do in the STRIDE 3 to reduce placebo symptom effects through the inclusion/exclusion criteria? And as a second question, can you take us through the needs of patients suffering from the episodic manifestation versus more severe cases of dry eye? Thank you so much.

On your first question, we did some revisions to the inclusion/exclusion criteria and the focus was to screen out patients that didn't have a stable baseline in terms of symptoms, patients that varied quite a bit during the run-in phase. We've said before, for example, there was a small group of patients about 80 that had significant improvement of their symptoms in the run-in phase, but still were eligible to go into randomization. And these as we looked at their profiles were likely patients that were experiencing flares. And once they got on treatment they continued to improve dramatically. So we added an inclusion/exclusion -- actually an exclusion criteria to keep those patients out of the trial. We added a couple of more. There was only a handful about three changes. But when we put all those together and applied those changes in the criteria to the STRIDE 2, we get a p-value of 0.002. So basically we're trying to screen out those patients that created a problem for us in STRIDE 2. Take those and look at STRIDE 1, and it didn't impact the treatment effect on those as well. So, we're optimistic that these changes are going to get us to a point we were in STRIDE 1.

And thanks for the question about unmet need. The vast majority of patients, we estimate as much as 90% of patients suffer from an episodic manifestation of their disease. And even the really severe patients that end up on a chronic dry eye medicine, which is as Todd said only about 10% of all diagnosed patients are actively on a chronic medication like Xiidra and Restasis. It's a very small group of patients. But even those patients have significant breakthrough flares, as they're called by patients and doctors. And so what we expect is for the huge group of 15 million patients that our product EYSUVIS could actually be the first-line product that physicians use and also a product that stays with the patient's therapy for their whole course of their disease, because even when you get to be placed on a more chronic medicine those medicines do not eliminate symptoms. In fact those patients have as many, if not more, breakthrough flares per year because of the severity of their disease and the marginal effect of the drugs they're on than even the more mild patients. So the way to kind of think about this is EYSUVIS we believe might very likely be the first-line prescription therapy and you would use it a few times a year. If your disease progresses to a moderate level, maybe use it a few more times a year to treat your episodes. And we think that patients have maybe between four and six flares a year. Of course, this varies by severity. And then as you get to be a more severe patient, you'll keep your EYSUVIS, this is our expectation, and you'll kind of use it as your rescue product when you have breakthrough flares even though you may be on a baseline maintenance therapy.

Thank you. [Operator Instructions] And our next question comes from the line of Yi Chen with H.C. Wainwright. Your line is now open.

Hi. This is Faizzan in for Yi Chen. Just a couple of quick questions. Have sales of INVELTYS in 3Q met your internal expectations? Do you expect market penetration to accelerate remain stable rate or decelerate going forward?

Yeah, great question. We do believe that we're going to continue to see improvements and increases in the amount of prescriptions that have been written. And as access improves, we believe that we'll gain a better ASP price for each prescription. We currently continue to use a significant amount of co-pay cards to help cover the prescription costs in the short-term while we're building access. So we're on a very nice run rate. I think Todd mentioned earlier that prescriptions increased by about 30% Q2 into Q3. You've probably seen from the weekly data that, we certainly have a new much higher plateau of scripts the last couple of weeks and we believe that will continue to build into 2020.

Okay. Excellent. One other thing and I may have missed this. Are you guys still on track to announce the dry eye Phase 3 data before the end of 2019?

We actually announced this morning that we've had a slightly slower enrollment than we expected. And we announced that we expect to have the data in the first quarter of 2020.

Okay. Excellent. Thanks. That's it for me.

Thank you.

Thank you. And at this time, I'm not showing -- no more questions in the queue. Mr. Iwicki, I'll turn the call back to you.

Well, we just appreciate everyone's time this morning for listening in on the call. We remain very excited about the launch of our product EYSUVIS, the access gains we've made, the feedback from physicians and the still strong prescription growth. We're very clearly turning our eye toward our dry eye product EYSUVIS, a few more months to finish that trial. And then, hopefully with a good data set be able to make a resubmission and get that product approved ideally in 2020 or very early 2021. And that market is absolutely huge and really in general untapped. There are a few products that have been approved, but those products as we've said a few times on this call are really relegated to the most severe patients. Patients don't stay on those products very long, because they're not well tolerated. And they really don't seem to be appropriate for the earlier more mild-to-moderate patients where EYSUVIS, we believe can really be the mainstay first-line product for physicians and patients to treat their dry eye disease and to be able to stay on EYSUVIS for the whole course of their disease. So we're very optimistic about our final hopefully STRIDE 3 trial in dry eye disease and we look forward to updating everyone in the future. Thank you again for your time this morning. And that's it operator.

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