Good morning and welcome to Kala Pharmaceuticals Conference Call to review its Fourth Quarter and Full Year 2021 Financial Results. [Operator Instructions] As a reminder, this call is being recorded. I would like to turn the call over to Jill Steier, Executive Director, Investor Relations and Corporate Communications for Kala Pharmaceuticals. Please proceed.

Thank you, operator and thank you all for participating in today’s call. Joining me from the company are Mark Iwicki, Chairman and Chief Executive Officer; Todd Bazemore, President and Chief Operating Officer; Kim Brazzell, Head of R&D and Chief Medical Officer; Mary Reumuth, Chief Financial Officer; and Darius Kharabi, our Chief Business Officer, will also be joining us for the Q&A portion of today’s call. Today’s call is being webcast live. The webcast link can be found in the Investors section of our website at www.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 direct comparable 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 statements regarding our commercialization of EYSUVIS and INVELTYS, statements regarding the development programs and market potential for KPI-012, and updates on our preclinical programs and the sufficiency of our cash resources. These and other forward-looking statements are based on the beliefs and expectations of management as of this conference call. Our actual results may differ materially from our expectations. The company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after this conference call, except as required by law. Investors should carefully read the risks and uncertainties described in today’s press release as well as the risk factors, which identify specific risks and other important factors that may cause actual results or events to differ materially from those described in our forward-looking statements included in the company’s annual report on Form 10-K and other filings we make with the SEC. The Form 10-K will be filed with the SEC later today and will be available on our website. I will now turn the call over to Kala’s CEO, Mark Iwicki.

Good morning, everyone and thank you for joining us today to review our fourth quarter and full year 2021 financial results and recent business highlights. Our mission at Kala is to provide patients and eye care professionals with a portfolio of innovative medicines that can better treat diseases that affect the front and back of the eye. As we move into 2022, we have seen continued progress across our commercial portfolio and the expansion of our clinical pipeline with KPI-012, a Phase 2/3 ready asset that we are developing to treat an array of devastating rare conditions. Together, we believe that our commercial and clinical programs have the opportunity to deliver tremendous value to the eye care community. Let me now turn to our recent performance, beginning with EYSUVIS, our approved medicine for the short-term treatment of dry eye disease. We have spoken about our efforts to expand payer coverage and establish EYSUVIS as a preferred first-line therapy for the treatment of dry eye disease, including dry eye flares. Following a number of commercial and Medicare wins in the fourth quarter and recent months as well as the launch of our first direct-to-consumer marketing campaign, we are seeing persistent upward trends in EYSUVIS scripts. In the fourth quarter of 2021, we reported EYSUVIS prescription growth of 21% over the third quarter and we have seen this trend continue through the early months of 2022. We continued to receive positive feedback from both eye care professionals and patients and we are confident this momentum will continue to build as we implement a number of targeted strategies aimed at patients with the goal of providing them the information and resources necessary to proactively discuss their dry eye disease and flares with our doctors. In parallel, we continue to advance our development portfolio,…

Thank you, Mark. For the fourth quarter of 2021, Symphony Health reported 22,460 EYSUVIS prescriptions, representing an increase of 21% over the third quarter. We are encouraged by the continued acceleration in growth and in particular by the uptick in Q4 prescriptions that is carried over into the first quarter of 2022. Since the product first launched in January 2021, a total of approximately 87,000 prescriptions of EYSUVIS, including over 14,500 refill prescriptions were written by more than 7,400 unique prescribers through March 18, 2022. This is particularly noteworthy as this uptick began prior to the recent payer wins and we believe that this momentum is likely to be supported by significant tailwinds in the months ahead. Turning to execution on our market access efforts, as I alluded to, we have made significant progress toward our goal of growing coverage with key commercial and Medicare Part D payers and we now have coverage for more than 125 million lives. Specifically, in March 2022, we secured coverage on the United Healthcare, one of the largest commercial health plans in the United States, which covers approximately 13 million lives. This brings our total commercial coverage to approximately 118 million lives or 70% of all commercial lives in the U.S. In addition, in February, we secured coverage under Cigna Medicare, which covers about 1.9 million lives, bringing EYSUVIS total Medicare coverage to approximately 7.1 million lives or 15% of all Medicare lives. We are very pleased with this continued growth in payer coverage, particularly since we expect it will translate into higher prescription fulfillment rates for EYSUVIS and further accelerate our growth trends. We will continue to vigorously pursue additional payer coverage and expect to secure additional wins in the first half of 2022. In addition to growing EYSUVIS payer coverage, there remains…

Thanks, Todd. We are really excited about the KPI-012 program and the progress we have made over the last few months. As we previously discussed, KPI-012 is a novel biologic clinical stage asset that we acquired as part of Combangio in November of last year. This has been a great addition to our pipeline and to our strategy to develop novel therapies for significant unmet needs in ophthalmology. This promising therapy is an application of novel technology involving the utilization of secretome, which for KPI-012 are harvested from human bone marrow-derived mesenchymal stem cells. The secretome approach allows us to produce a cell-free therapy comprised of the essential biomolecules secreted by the mesenchymal stem cells, such as growth factors, protease inhibitors, matrix proteins and neurotrophic factors that has the potential for multiple therapeutic applications. Being cell-free, the secretome approach provides many of the benefits of cell therapy without the need for the administration of intact sales, which can have unexpected and untoward effects. KPI-012 is currently in clinical development for the treatment of persistent corneal epithelial defect or PCEDs as we call them, which are defined as non-healing corneal wounds or defects that are refractive to conventional treatments. PCED can be the result of numerous etiologies, including but not limited to infectious keratitis, neurotrophic keratitis, surgical and non-surgical trauma, Sjogren’s syndrome, severe dry eye and others. If left untreated, these persistent defects can lead to significant morbidity, including infection, corneal perforation, scarring and ultimately vision loss. PCED is a rare disease, with an estimated incidence of approximately 100,000 patients per year in the U.S. and 238,000 patients per year in the U.S., EU and Japan combined. KPI-012 has received orphan drug detection from the FDA for the treatment of PCED and we are exploring potential submissions for fast track and…

Thanks, Kim. During this discussion of our financial results, I will reference certain non-GAAP financial measures. These non-GAAP financial measures exclude stock-based compensation, noncash interest, depreciation and amortization, loss on extinguishment of debt required in process research and development, gain on fair value remeasurement of deferred purchase consideration, transaction costs related to the acquisition of Combangio and the impact of the termination of the lease of the company’s former corporate headquarters. 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. Turning to a recap of the fourth quarter of 2021, our cash position as of December 31 was $92.1 million compared to $124.5 million as of September 30, 2021. This decrease primarily reflects cash used in operations as well as the $5 million paid as upfront consideration for the acquisition of Combangio, which closed in the fourth quarter of 2021. Our year-end cash position does not include an additional $4 million received in 2022 related to the termination of the lease on our former corporate headquarters. Based on our current plans, we anticipate that our cash resources as of December 31, 2021, together with anticipated revenue from EYSUVIS and INVELTYS will enable us to fund operations into the second quarter of 2023. As we look ahead, we continue to focus on extending our cash runway while progressing our development pipeline and executing on our commercialization efforts. To achieve this, in 2022, we are targeting an approximate $25 million reduction in expenses compared to 2021, which we plan to achieve through improved operating efficiencies, a reduction in lease expense as well as the elimination of one-time expenses related to the launch of EYSUVIS. For the fourth quarter of 2021, we reported net product revenues of $1.9 million…

[Operator Instructions] Our first question comes from Andreas Andreas Argyrides with Wedbush. Your line is open.

Thank you and good morning. Just a couple of questions to start. While you haven’t provided guidance for EYSUVIS revenues, but can you provide some color on how you anticipate expanded coverage may translate to greater revenues this year? And then currently, what percentage of scripts are being rejected due to lack of coverage? And then lastly, for KPI-287, what data can we expect to see when you provide it in the coming months? Thanks.

Todd, want to take those first two, and then Kim?

Yes. Happy to do so. And good morning, Andreas, so on the coverage front, we think the growing coverage it was going to help with revenues in multiple ways, right? One is having more of the demand that we’re generating, resulting in filled prescriptions, which gets to the second part of your question. We know that currently about 50% of commercial prescriptions are not getting filled and 70% of Medicare Part D prescriptions are not getting filled, right? So that’s an opportunity to increase our prescription volume on a weekly basis by more than 2x with growing our managed care coverage. The other area that is going to help significantly is with improving our gross to nets. We continued in the fourth quarter to be heavily reliant on our co-pay assistance programs. And in particular, for those patients that don’t have a benefit that’s being applied to their prescription of EYSUVIS by their health plan, that buy-down for that patient is from the WAC of $485 down to the $60 acquisition fee. So that puts a lot of pressure on the gross to net. Once those patients have a benefit coverage for EYSUVIS through their health plan, then those scripts are covered and paid for by that patient’s insurance. So the combination of increasing prescription volume as well as improving gross to nets as we become less dependent of the patient co-pay programs in the future are going to be the key drivers of revenue this year. And then I’ll hand it over to Kim to answer clinical questions.

Yes. Good morning, Andreas. For the KPI-287, we’re currently conducting a series of preclinical studies evaluating the pharmacokinetics and efficacy in a standard VEGF challenge model. We’re doing both short-term and long-term, when I say long-term, 6-month study and many of these are on the way. So we anticipate over the coming months to be providing updates on the pharmacokinetics and the efficacy, really focused on durability and efficacy over multiple months. And we’re hoping to provide that data over the next few months.

Great. Thank you.

Our next question comes from Chris Neyor with JPMorgan. Your line is open.

Great. Thanks for taking the questions. First one is on kind of inventory dynamics in gross to net by service in the quarter. So EYSUVIS reported sales of $1.2 million, which were down meaningfully quarter-over-quarter, but you reported prescription growth of roughly 21%. So is there any way you could help us bridge the difference between the two? How much of that was patient assistance or whether any inventory dynamics that you would highlight? I’ll start there with the first question.

Yes. Chris, this is Todd. I’m happy to jump in and answer there. So both our demand prescription volume as well as our ex-factory volume, were up in Q4, TierPoint revenues were down quarter-over-quarter. So that was completely an impact on gross to nets. And the biggest impact there is definitely from the co-pay assistance program that I referred to earlier. So both prescription demand and x factory shipments of products are up. We did have extra impacts on gross to net because of the co-pay assistance program. And as I said, as we get more managed care coverage, and fewer scripts filled with that program, it will result in significant improvements in our gross to net.

Understood. That’s helpful. And kind of on the – another question on more of the payer coverage side, you are currently standing at 70% commercial coverage, about 15% Medicare coverage. One of the things you highlighted on the last call was the lack of payer coverage has really been a headwind for the EYSUVIS launch. With this recent United Health win, do you feel like you’re in a good enough place where some of those payer coverage concerns are ameliorated. And what can we expect for additional coverage, both on the commercial side and then on the Medicare Part D side through 2022?

Yes, really good question. So on the commercial side, we certainly feel like we’re in a position of strength now having secured UnitedHealthcare and being at 70% coverage. The last big plan to fall on the commercial side now will be CVS Caremark. Those bids have been submitted, and we’re deep into discussions there. And securing CVS Caremark in the first half of this year would grow our commercial coverage to 85% and put our commercial coverage on par to Restrsis and Xiidra. So we feel really good about where we are on the commercial front, and we expect to gain even further coverage in the first half of 2022. On the Medicare front, with the recent addition of Cigna, we are now at 15%. We have submitted all of our Medicare bids the three large Medicare plans, as you know, are Humana, Caremark SilverScript and United’s AARP and securing those three plans would grow our Medicare coverage to greater than 80%. We expect to learn about Medicare throughout the course of 2022 and are hopeful that we can actually see some wins also within the first half of this year, which would be really important. As I stated earlier, is our current Medicare rejection rate is about 70%. So even winning one or two of those big Medicare plans would help prescription fulfillment rates.

Great. Thanks for taking the questions.

Our next question comes from Franc Brisebois with Oppenheimer. Your line is open.

Hi, thanks for taking the question. So just to hit on, sorry, if questions have been touched on. But on the gross to net side, I understand the patient assistance program, but it seems like based on the scripts and the revenues and what you mentioned there in terms of the WAC gross to net discount, what happened in the fourth quarter that maybe made it? I understand that wins on the commercial side and the Medicare side will help. But why – is there a reason that it got worse in the fourth quarter in terms of the gross to net versus the third quarter or second quarter?

Why don’t I provide a little bit of color on the co-pay assistance program, then perhaps Mary can jump in with some additional insight. But Franc, one of the issues with the co-pay program is that as we’re securing more coverage, that’s great. It’s allowing more scripts to get filled. But for the health plans that we don’t have coverage, in the fourth quarter, we saw a larger number of prescriptions in which the patients had no benefit from their health insurance, which means that those buy-downs on our co-pay program were higher, right? Those are patients that we’re buying down from that $485 WAC down to a $60 acquisition fee. And so as that represented a larger percentage of prescriptions filled in the fourth quarter, that put more pressure on the gross to net. And hence, why it’s so important that we’ve seen the growing coverage that we have in the first quarter, which will allow going forward more of those scripts to be covered by the patient’s insurance. And fewer of those scripts to have to go through our co-pay assistance program. So that’s on the co-pay card. Mary, I’ll hand it over to you to see if there is any additional color you want to provide around rebates or anything else.

Yes. That’s exactly right, Todd. It was – both the increase in the number of units going through the co-pay card and a higher percentage of the overall prescriptions that were filled in that manner, which is really what’s driving that, Franc.

Okay. And – but if we just look at the 22,460 scripts that you mentioned and $1.2 million, just a quick back of the envelope, that’s around $53. I’m just wondering, is it like almost all scripts were filled with the co-pay assistance program?

It’s the largest portion of that business. So, I wouldn’t say it’s almost all, but it’s the largest portion of that business.

Okay. Understood. And then on the – I guess just last thing on that side. As these things are going up, how important is the Medicare wins for the gross to net, or is commercial here if we can get CVS Caremark soon, then that’s pretty much where we want to ultimately be – or just trying to get a better feel of the timing as to when these gross to net issues can kind of figure themselves up.

Sure. So, on the Medicare front, I would think of Medicare is more about opening up additional demand fulfillment for the product, right. Because if your patients on Medicare, they are not eligible to use our co-pay assistance program. So, Medicare is really about allowing more prescriptions to be wrote and filed – written filled rather for our Medicare patient population. The improvements in gross to net will come on the commercial side. And as we gain more health plans like the win we just had with United, those patients now have a benefit through their insurance that will pay for EYSUVIS. So, if they do use the co-pay card, it may be to buy a co-pay down from say $50 to $40. So, it has a lot less of an impact on our gross to net. And so think of growing commercial coverage helps to reduce the gross to net pressure from the co-pay card, growing Medicare coverage is more about doctors being able to write and get prescriptions filled for Medicare patients.

Perfect. That’s helpful. And then just to make sure here, in terms of the duration of one script, can you just remind us how long that can last a patient or how many flares that can cover?

Yes. We think patients are probably successfully treating at least a couple of flares with a single prescription. Anecdotally, we hear feedback that they will use their EYSUVIS for a few days or up to a week to treat a flare than they reserve the rest of the medication that’s in the bottle for the next time that they have a flare.

Okay. Thank you.

Our next question comes from Chris Howerton with Jefferies. Your line is open.

Hi. Good morning. Thanks again for taking all the questions. pretty rich discussion thus far, particularly on the commercial side. I guess just to follow-up on those previous line of questioning with respect to that, can you give us some sense in terms of how long a patient is on the co-pay assistance program? Have you been successful in converting patients, or I guess maybe what is the success rate of converting those patients to paying customers at this point if you can answer that? And then the second question I would have would be for KPI-012. Just curious if you could give us some more information on what those pre-IND activities are in terms of gating procedures, whether it’s with respect to toxicology or CMNC? Thank you.

Chris, I will answer your questions about the patient business program and then hand it over to Kim to talk about the KPI-012 preclinical work. So, remember, this is an acute therapy that’s used to treat dry eyes for us for the most part. So, it’s not a situation where patients are typically refilling a prescription every month. And therefore, once their insurance covers the product, you go sort of from one month from co-pay assistance to next month under the patient’s insurance. That having been said, if a patient goes back for a refill, and I think we have stated before that we think most patients will probably still on average about two prescriptions a year. In the case of UnitedHealthcare, for example, that, that script was filled in the fourth quarter. And when we were not on formulary and there was not a benefit for that patient as of March of this year. And going forward, if that patient goes back in now to get a refill of that United patient goes back to get a refill in their EYSUVIS, that will be covered by the patient’s insurance and the burden of the co-pay assistance program will be a lot less. So, it will improve, as I said over time, it does require that patient to be going back in for the refill if they are already on therapy. And like we said, we expect that to be about two prescription fills per calendar year. And Kim, I will hand it over to you to answer the question on KPI-012.

Sure. On the development program for 012, the activities we are doing now are fairly straightforward. We are optimizing the manufacturing process and demonstrating its reproducibility, optimizing the analytical techniques to control the product, both at the secret total stage and at the final product stage. We will soon be initiating a GLP toxicology study, top ocular study to look at a number of doses of KPI-012 to provide the safety coverage for our Phase 2/3 trial. We are finalizing the protocol for that trial, working with numerous key opinion leaders. They are experts in this field. So, everything is moving along as we had planned. We haven’t run into any major issues and are moving forward towards an IND hopefully to the third quarter of this year.

Okay. And if I – I may be able to just go back to EYSUVIS, I appreciate the answers so far. Thank you very much. But just going back to EYSUVIS really briefly, maybe another way to ask the question is are you seeing repeat prescription behavior affected by the lack of fills? In other words, how are you messaging to physicians, “Hey, I know that 50% of your scripts aren’t getting filled now, but keep writing them because it will get better.” I guess that’s like my concern.

Yes. Good question, Chris. And so the sales force has targeting tools, so they know exactly what the – at a physician level, what the mix of insurance within that practice is. And so we can start now being very targeted. For example, the UnitedHealthcare win and go through practices that have a lot of patients enrolled within UnitedHealthcare to positively message this new win in addition to the formulary, just like we can do with ESI and other major health plans where we have been added to formulary. So, I would say, think of the physician messaging about being very targeted in those practices where we know we have got good coverage, where they have a high percentage of health plans for which we have good coverage, so we can assure that a lot of those scripts get filled. And in those other practices, where maybe there is less coverage, we obviously have our co-pay assistance program that we are using to try to make sure that those doctors can get their patients on EYSUVIS.

Okay. Alright. Well, I really appreciate that color. Thanks again.

Our next question comes from Yi Chen with H.C. Wainwright. Your line is open.

Thank you for taking my question. Since PCED is driven by multiple ideologies, does the upcoming Phase 2/3 trial need to recruit patients only from a group of patients with similar etiologies?

Good morning Yi. This is Kim. Yes, our clinical trial is being designed really focusing on PCEDs from any underlying etiology. And as you have said, there are a variety of them. So, it’s really as we sometimes call a trial for all comers. So, the primary entry criteria will be the presence of a persistent corneal epithelial defect and then we will include information from the clinician and on the case report forms in terms of what the underlying etiology is. Does that answer your question?

Yes. So, you believe the multifactor mechanism of action of the candidate should be able to address all the underlying etiology?

Yes, we do. That’s our working hypothesis and we have shown in a variety of different animal models that it works from different insults. And because of the nature of the product being a secretome that carries within a number of different biologic molecules that have a lot of different effects. So, in general, we are attacking this problem from multiple directions, and we feel we should be able to treat them the vast majority of these PCDs regardless of their etiology. The key for us will be making sure we exclude those patients that can’t heal no matter what. And we have worked a lot with the KOLs. There are a certain group of patients are just – their corneas are worn out, and you can’t bring them back. But besides that, I think we feel very confident we can treat the majority of these patients.

Got it. And do you expect to report preclinical data from a TKI candidate very soon?

Well, we – these studies are ongoing. They take a little bit of time and what we have said publicly is we will be reporting probably throughout the year as we get substantial data. So, we are hoping this year to be able to report a couple of sets of data as they come off out of the studies.

Okay. Thank you.

[Operator Instructions] Our next question comes from Tim Chiang with Northland Securities. Your line is open.

Thanks. Hey Mark. Hey Todd. It seems like you are definitely feeling the effects of like the couponing program and then a lot of these insurance companies clamping down as well as you are waiting for CVS Caremark to add you to the formulary on EYSUVIS. And I am sort of wondering, is there a triggering point in terms of when you think EYSUVIS net sales are actually going to start to rise meaningfully this year? That was my first question. And then I think with this – I had a follow-up question for Kim on KPI-012.

Tim, I will answer your first question, and let’s ask your second question of Kim. We expect meaningful growth in EYSUVIS revenues to begin in the first half of this year. So, getting this UnitedHealthcare win was really, really important. That gets us well on our path to not only accelerating prescription growth, but net revenue growth as well. And then we anticipate also learning about CVS Caremark in the first half of the year, which would be another really important win. And as I said earlier, we expect our Medicare Part D wins to come throughout the year. So, we expect impact in the first half of this year and to see further accelerations in both volume as well as net revenue.

Maybe just a follow-up to that. I mean how much of an impact did COVID have on your launch of EYSUVIS, because obviously, I guess there are now face-to-face interactions with your sales force and in the physician base. Do you think that will matter this year?

Yes. I think it will help a lot now that most of our interactions are face-to-face, right. COVID had an impact on almost every launch that has occurred over the last 2 years. There was a paper published on this [indiscernible] looked at – I believe it was in the ballpark of about 48 drug launches that occurred during the pandemic, and there was significant impact on almost every one of those launches. Now that hopefully, the worst is behind us and practices are open and patients are returning, and most of our sales interactions are face-to-face. We also expect that will be a positive catalyst this year.

Okay. And Kim, my question on KPI-012, obviously, this has been what, seven or eight patients dosed, what sort of side effects did these patients experience post dosing?

Yes. In the first clinical trial, there were no really significant adverts to death. One patient complained of some irritation or discomfort. And you have to remember, these patients have, in many cases, a denuded cornea, so you might expect that. But in this initial trial, we didn’t see any really worse side effects. We will of course, be looking at that in the upcoming trials, but we don’t see any liabilities in terms of tolerability. And to-date, I haven’t seen anything that would look like and toward a fact that’s being seen in these patients. And that’s not to be unexpected. It’s human biomolecules that are being applied to a human. So, there is nothing there that the eye has not been exposed to at one point or another.

Okay. Great. Thanks again.

At this time, I am showing no more questions in the queue. Mr. Iwicki, I will turn the call back to you.

Well, thank you very much and thanks everyone for joining us this morning. We continue to progress our in-line products and are very excited about the pipeline and the studies that we have ongoing right now with our TKI as well as our expectation to be able to start a late-stage clinical trial for KPI-012 by the end of the year. And we look forward to updating everyone as we continue to make progress. Thanks again for your time this morning.

This concludes the program. You may now disconnect. Everyone, have a great day.