KALA BIO, Inc. (KALA) Q2 2022 Earnings Report, Transcript and Summary

Good day. My name is Shantel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kala Pharmaceuticals Second Quarter 2022 Financial Results Conference Call. As a reminder, today's conference call is being recorded. [Operator Instructions] Hannah Deresiewicz from Stern Investor Relations, you may begin your conference.

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; Kim Brazzell, Head of R&D and Chief Medical Officer; and Mary Reumuth, Chief Financial Officer; Darius Kharabi, our Chief Business Officer, will also be joining us for the Q&A portion of today's call. 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 statements regarding the development program and market potential of KPI-012, planned productions and operating expenses 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 factors that may cause actual results or events to differ materially from those described in our forward-looking statements included in the company's quarterly report on Form 10-Q and other filings we make with the SEC. I will now turn the call over to Kala's CEO, Mark Iwicki.

Thanks, Hannah. And thank you everyone for joining us this morning. We are entering the second half of 2022 focused on transitioning from a commercial stage company back to our roots as an R&D organization with our efforts targeted on developing novel medicines that can improve the care and treatment of serious eye diseases. In July, we completed the sale of EYSUVIS and INVELTYS and transitioned all responsibilities for the global commercialization of both assets to Alcon Incorporated. This was an important transaction for Kala and more importantly, for the patients and health care providers we aim to help. Kala made meaningful progress in launching these products in the United States, including building awareness among health care professionals and securing strong payer coverage. We believe Alcon is particularly well suited to expand the reach of both medicines. Alcon has decades of experience delivering market-leading vision care products around the world and benefits from robust franchises in dry eye disease and surgical care, including long-standing relationships with the eye care professionals and patients EYSUVIS and INVELTYS are targeted to. We are excited about the Alcon transaction and look forward to seeing many more patients benefit as a result of their efforts. With EYSUVIS and INVELTYS in Alcon's hands, we've turned our focus to our mesenchymal stem cell secretome platform, which we are evaluating for the treatment of multiple rare diseases of the front and back of the eye. As Kim will describe shortly, we are on track to initiate a Phase II/III clinical trial of KPI-012 for the treatment of persistent corneal epithelial defect in the fourth quarter of this year. And we anticipate expanding development of KPI-021 into two additional indications, partial limbal stem cell deficiency and Sjogren's disease. Together, these rare diseases affect nearly 300,000 people in the United States alone, resulting in significant morbidity, including potential loss of vision. These indications represent large markets, for which there are currently no approved prescription treatments and provide ample opportunity for us to positively impact the treatment of patients in need. R&D is at the core of who we are as a company, and our team is eager to leverage our development expertise to advance KPI-012 through the clinic and to further develop our secretome platform. Importantly, we also have the means to invest substantially in these efforts. At the close of the transaction, we received $65 million from Alcon, which included an upfront cash payment of $60 million plus an additional $5 million for the purchase of inventory. And going forward, we are eligible to receive up to $325 million in commercial-based milestone payments. We believe our existing cash resources and recent reductions in operating expenses will allow us to fund our operations beyond the data readout from the planned Phase II/III trial of KPI-012 in PCED. Now I'd like to turn the call over to Kim to discuss our pipeline programs.

Thank you, Mark. I'm happy to share our progress with the KPI-012 program and additional work we're doing with our mesenchymal stem cell secretome platform. As Mark mentioned, we're on track to file an IND for KPI-012 and to initiate a Phase II/III clinical trial in persistent corneal epithelial defect patients in the fourth quarter of this year. We've also made significant progress towards identifying additional front-of-the-eye indications that are currently evaluating potential KPI-012 for the treatment of partial limbal stem cell deficiency and the ocular manifestations of moderate-to-severe Sjogren's, both of which are areas of significant unmet medical need. In addition, we're also exploring some exciting retinal applications for the secretome program. As we've discussed previously, KPI-012 is an application of our novel technology utilizing secretome harvested from human bone marrow derived mesenchymal stem cell. The secretome approach allows us to produce a cell-free therapy comprised of the essential biomolecule secreted by the mesenchymal stem cell, including growth factors, protease inhibitors, matrix proteins and neurotrophic factors with the potential for multiple therapeutic applications. Because our approach is cell-free, allows for many of the same benefits as more traditional cell therapy without the need for the administration of intact cells, which we believe will avoid many of the safety and logistics concerns associated with current cell therapy approaches. We are initially advancing KPI-012 for the treatment of persistent corneal epithelial defect, or PCED, which is defined as a nonhealing corneal wound or defect that is refractory to conventional treatments. PCED is a disease of impaired corneal healing that can be the result of numerous underlying etiologies, including, but not limited to, neurotrophic keratitis, infectious keratitis, surgical or nonsurgical trauma and severe ocular surface disease of various causes. Corneal healing is a highly regulated multifactorial process that involves numerous biological pathways and molecules. And we believe that effective treatment of PCED across its various etiologies require a multifactorial mechanism of action, such as that of KPI-012, to address the impaired healing that is the hallmark of the disease. PCED affects an estimated 100,000 patients each year in the U.S., and we believe it represents a potential market opportunity in excess of $1 billion. There is one approved therapy in the PCED space, OXERVATE, which has only been shown to be effective for the treatment of neurotrophic keratitis, which is estimated to be the underlying etiology for only third of all PCED cases. This therapy is quite burdensome for the patients. It is dosed six times a day at two-hour intervals for eight weeks and requires a multistep reconstitution process prior to each dose. We believe there is a clear unmet need for a new therapy that can provide benefit for all the various etiologies of PCED and improve the vision and quality of life of all PCED patients. As we have shared previously, the initial clinical trial conducted with KPI-012 in PCED patients of various etiologies demonstrated benefit in all eight evaluable PCED patients with complete healing of the PCED lesion in six of eight of these patients. KPI-012 was well tolerated in the trial with no significant safety issues. Pending FDA clearance of our planned IND, we plan to initiate a Phase III trial in PCED patients in the fourth quarter of 2022, which, if positive, could serve as one of the two required pivotal trials necessary for FDA approval. We expect top line results from this Phase II/III trial in the first quarter of 2024. Based on the compelling mechanism of action and numerous interactions with key opinion leaders, we're also evaluating the potential of KPI-012 for the treatment of partial limbal stem cell deficiency or partial LSCD, as we call it, and for the ocular manifestations of moderate-to-severe Sjogren's. Limbal stem cell deficiency is an ocular surface disease, characterized by the loss or deficiency of stem cells in the junction of the cornea and limbus, where they play an essential role in the generation and repopulation of corneal epithelial cells. When the limbal stem cell population is reduced or depleted, the ability of the corneal epithelium to prepare and renew itself is compromised, which can result in recurrent epithelial breakdown, neovascularization, conjunctival overgrowth and other sequelae that can lead to loss of corneal clarity and vision impairment as well as significant pain and diminished quality of life. There are currently no approved pharmaceutical products for the treatment of LSCD. Approximately 70% of LSCD patients or about 70,000 patients in the U.S. have partial LSCD, meaning they have some level of remaining stem cells, but still suffer significant pathology and symptomatology. We believe these patients would be appropriate candidates for KPI-012 to maintain the integrity of the ocular surface and avoid the vision impairment and pain associated with the disease. In addition to the effects of KPI-012 on corneal healing observed in both animal models and in PCED patients in the previous trial, the stat on the literature that suggests that MSC secretomes could also restore the limbal stem cell niche, which would be a significant benefit in both partial and complete LSCD. The other ocular surface indication of interest is Sjogren's, a chronic multisystem autoimmune disease, characterized by insufficient fluid production in certain glands of the body, leading to substantial dryness, primarily of the eyes and of the mouth. Approximately 90% of Sjogren's patients suffer from ocular manifestations and experience significant ocular symptoms, which often impacts patients' daily life and productivity. And as a result, the quality of life in Sjogren's patients can be significantly diminished. Despite current treatments, many Sjogren's patients do not achieve significant improvement in their ocular symptoms. There's a significant unmet need for new therapies that can provide meaningful improvement in the ocular symptoms, visual impair and quality of life to the approximately 50% of Sjogren's patients or roughly 95,000 people in the U.S. who suffer with moderate-to-severe disease. We estimate that partial limbal stem cell deficiency and the ocular manifestations of moderate-to-severe Sjogren's together represent a total potential market opportunity of between $1.5 billion and $2 billion in the United States alone. Finally, as we mentioned earlier, we also believe our secretome platform has potential utility for retinal degenerative diseases, such as retinitis pigmentosa and Stargardt disease. We plan to initiate preclinical trials evaluating the utility of our secretome platform for retinal degenerative diseases in the coming months with the goal of selecting a retinal indication for further development in the second half of 2023. Taken together, we believe our efforts with KPI-012 and our secretome platform provide ample opportunity to improve the treatment of a number of severe ocular surface diseases that impact thousands of patients around the world. We look forward to providing additional updates as we initiate our Phase II/III clinical trial in PCED planned for later this year and to potentially expand our efforts into additional indications in 2023. Now I'd like to pass the call to Mary to go over our financial results.

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, non-cash interest, depreciation and amortization, loss on extinguishment of debt, transaction costs related to the Alcon transaction and gain or loss on fair value measurements of deferred purchase consideration and contingent consideration. 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 second quarter. Our cash position as of June 30, 2022 was $44.6 million compared to $92.1 million as of December 31, 2021. This decrease primarily reflects cash used in operations. Our cash position as of June 30 does not include the net proceeds received in early July in connection with the closing of the Alcon transaction. We anticipate that our cash resources, together with the net payments received from Alcon and planned reductions in operating expenses will enable us to fund operations into the second quarter of 2024. Over the course of the year, we have been working to reduce our operating expenses and extend our cash runway. Following the closing of the Alcon transaction, we have streamlined our corporate infrastructure and planned to reduce our non-GAAP operating expenses by more than 50% as compared to our non-GAAP total operating expenses for the first half of the year and by 60% to 70% for the full year 2023 compared to our non-GAAP total operating expenses for the full year 2021. SG&A expenses were $22.7 million for the second quarter of 2022 compared to $27 million for the first quarter of 2022, primarily reflecting reductions in employee-related spending. Non-GAAP SG&A expenses were $20.4 million for the second quarter of 2022 compared to $24.7 million for the first quarter of 2022. R&D expenses were $4.5 million for the second quarter of 2022, which was consistent with the first quarter of 2022 and includes expenses related to the development of KPI-012. That concludes our prepared remarks for today. I will now pass the call over to the operator for questions.

[Operator Instructions] Our first question comes from Yi Chen with H.C. Wainwright. Your line is open.

Congratulations on all the progress. I'm Chait, on behalf of Yi Chen. First on your pipeline progress, where are you with those two programs, LSCD and Sjogren's preclinically? Do you – are you still waiting on some preclinical data before pushing in through to the clinic? And the second question I have is on KPI-012. I'm pretty sure you must have commented on this previously, but do you need to see some data from your Phase II/III study before you start thinking about the other pivotal study that is required for the eventual approval? And lastly, if you could comment on your cash runway and when you would potentially need to raise further funds that would be helpful? Thank you.

Excuse me. This is Kim Brazzell. I'll comment on your first couple of questions. With regard to your second question, we certainly will be doing preparations prior to the top line data readout. But we will need the results from that readout to finalize the second pivotal Phase III trial around dose and duration of dosing and so forth. With the other two indications, we're still doing analysis of the development pathways going forward and are looking into clinical designs for the protocol. So we're still a bit of a way off from being able to go in the clinic. One of the advantages of these two indications is that we can utilize the CMC and the clinical supplies that we are developing for the PCED program. So we won't have to do additional CMC work, and we'll be able to move into the clinic without having to do additional work on the product itself. And I think there was a question on runway for Mark or for Mary.

Sure. I can take the cash runway question. So we said that our cash resources, together with the net proceeds that we received from Alcon, would last us until the second quarter of 2024. That gets us beyond the data readout from our KPI-012 Phase II/III trial.

Excellent. Thank you.

[Operator Instructions] We have reached the end of the question-and-answer session. I'll now turn the call back over to Mark for closing remarks.

Well, thank you, everyone, for joining us today, and we look forward to continuing to update you as we make progress during the year. Have a great day.

This concludes today's conference call. You may now disconnect.