Good morning and welcome to the Kala Pharmaceuticals' Fourth Quarter and Full-Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the 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, Senior Vice President of Strategy 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; Todd Bazemore, Chief Operating Officer; Mary Reumuth, Chief Financial Officer; Kim Brazzell, Chief Medical Officer and Hongming Chen, Chief Scientific 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, February 12, 2020. 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 statement, included in the company's Annual Report on Form 10-K and other filings with the SEC. The Form 10-K will be filed with the SEC and will be available on our website. I will now turn the call over to Kala's CEO, Mark Iwicki.

Thanks, Niranjan. Good morning, everyone and thank you for joining us. Earlier today we issued our financial results for the fourth quarter and full-year ended December 31, 2019. 2019 was a defining year for Kala. We made significant progress on the STRIDE 3 Phase 3 trial of EYSUVIS, our dry eye disease pipeline candidate and we successfully launched our first commercial product INVELTYS, the first and only twice-daily post-surgical ocular corticosteroid. We are pleased to announce that the last patient in the STRIDE 3 trial has now completed their final study visit. We remain on track to announce top line data from STRIDE in this quarter and to resubmit our NDA to the FDA in the second quarter of 2020. We expect our NDA resubmission will be designated as Class II, which would be subject to a six month review. If approved, we believe that EYSUVIS could become the preferred first line prescription option for the treatment of dry eye flares. In January 2019, we successfully launched our first commercial product INVELTYS. For the treatment of post operative inflammation and pain following ocular surgery, we’ve consistently received positive feedback from eye care professionals and have seen steady prescription growth throughout the year. Since launch, over 144,000 INVELTYS prescriptions were written by more than 3,300 eye care professionals. Our commercial team has done a terrific job educating prescribers on INVELTYS and we are pleased to provide ocular surgery patients with the only BID option that deliver strong efficacy without compromising on safety or tolerability. We look forward to seeing demand continue to increase as we enter our second year post-launch. Importantly, we believe our success with INVELTYS provides a strong foundation as we prepare for the potential launch of EYSUVIS later this year. I will now pass the call over to Kim Brazzell, our Chief Medical Officer to further provide details on the STRIDE 3 clinical trial. KIM?

Thank you, Mark, and good morning, everyone. As Mark noted, we are pleased to announce that all patients in the STRIDE 3 trial have now completed their final study visit and that all patient assessments have been completed. We are now preparing for data base lock and statistical analysis. We continue to be on track for top line results in this quarter. As a reminder, we've previously completed one Phase 2 and two Phase 3 clinical trials, Stride 1 and Stride 2. In these trials, we demonstrated statistical significance for the primary sign endpoint of conjunctival hyperemia in all three trials. In addition, statistical significance was achieved for two pre-specified primary symptom endpoints, ocular discomfort in the entire population and ocular discomfort in a predefined subgroup of patients with more severe baseline discomfort in Stride 1 with the strong trend for both symptom endpoints in Stride 2. EYSUVIS was very well tolerated with a very low-level of adverse events and intraocular pressure effects comparable to vehicle. Based on clinical data from these three trials, we filed a new drug application in October of 2018. In August of 2019, we announced that we had received a complete response letter from the FDA with respect to this NDA. In the CRL, the FDA indicated that efficacy data from an additional clinical trial would be needed to support a resubmission. We initiated the ongoing STRIDE 3 trial in the third quarter of 2018, which we expect will serve as the basis of our response to the CRL. We design Stride 3 with certain modifications to the inclusion/exclusion criteria relative to STRIDE 1 and STRIDE 2, which we believe will improve the probability of success of the trial. As a reminder, STRIDE 3 has` two independent primary symptom endpoints, ocular discomfort in the entire population and ocular discomfort in the more severe subgroup. We believe that achieving statistical significance for either of these pre-specified symptom endpoints in STRIDE 3 will be sufficient to demonstrate efficacy to support the resubmission of the NDA. We're looking forward to announcing top line results for STRIDE 3 in this quarter. I will not pass the call over to Todd Bazemore, Our Chief Operating Officer to provide further details on INVELTYS and EYSUVIS. Todd?

Thank you, Kim. We are very excited about the commercial potential of EYSUVIS. As a reminder, there are approximately 33 million patients with dry disease in the U.S., of which over 17 million have been diagnosed and are managed by an eye care professional. However, less than 1 million of them are currently treated with a prescription therapy. Quantitative market research studies conducted with dry eye patients indicate that approximately 80% to 90% of them report experiencing dry eye flares. We estimate that there are over 300 million dry eye flare days per year in the U.S. alone, representing a total addressable market potential in excess of approximately $8 million annually. If approved, we believe EYSUVIS could become the preferred prescription therapy for the vast majority of dry eye patients who experience episodic flares, and would benefit from a rapid-acting short-term treatment they can address the inflammation, which is considered a key trigger of flares. Our market research indicates that EYSUVIS would be used in mild to moderate patients who currently use palliative approaches such as artificial tears, which do not directly impact ocular inflammation as well as in more severe patients as an adjunctive therapy to their chronic dry eye prescription medication, as either induction therapy or to treat breakthrough symptoms. This will allow us to position EYSUVIS as first-line therapy to treat flares for all dry eye patients. Our market research also indicates eye care professionals intend to prescribe EYSUVIS for more than half of their dry eye patients, regardless of whether they are currently on a prescription medication or are only using artificial tears. Our team is making great progress on launch planning preparations and we feel we are well-positioned to leverage our existing commercial infrastructure to support the potential launch of EYSUVIS in late 2020. Additionally,…

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 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. Our cash position as of December 31, 2019 was $85.4 million compared to $170.9 million as of December 31, 2018. We anticipate that our existing cash, together with projected INVELTYS revenue, will enable us to fund operations into the second quarter of 2021. for the fourth quarter of 2019, we’ve reported INVELTYS net revenue of $1.2 million and for the full-year 2019 we reported INVELTYS net revenue of $6.1 million. As a reminder, we recognize revenue when products are delivered to distributors. Net revenues in Q4 were impacted by higher reserve estimates at the end of 2019. We expect improvements in our gross to net discounts beginning in Q1 2020 and to continue throughout the year and going forward. Cost of product revenues for the fourth quarter of 2019 were $700,000. We began capitalizing inventory cost for INVELTYS after receipt of FDA approval on August 22, 2018. Prior to receiving FDA approval, such costs were expensed as research and development. Non-GAAP cost of product revenues was $600,000 for the fourth quarter of 2019. SG&A expenses for the fourth quarter of 2019 were $14.5 million compared to $14.3 million for the same period in 2018. The increase in SG&A expenses for the fourth quarter of 2019 compared to the same period in 2018 was primarily due to costs associated with the commercial infrastructure being in place for the entire fourth quarter of 2019 as compared to only a portion of the fourth quarter of 2018 as well as an increase…

Thank you. [Operator Instructions] Our first question comes from Liana Moussatos with Wedbush Securities. Your line is open.

Thank you for taking my question. Can you remind us of the difference in patient characteristics in STRIDE 2 versus STRIDE 1 associated with the symptom endpoint? And what changes were made to the inclusion/exclusion criteria in Stride 3?

Thanks, Liana. Nice question. We haven't really talked about the difference in the patient characteristics, but we can talk a bit about the changes we made in the STRIDE 3 inclusion/exclusion criteria. And the primary focus of those changes was to screen out patients that did not have a stable symptom profile during run-in. That could be either patients that were improving significantly during the run-in, but still would have made randomization or patients that had highly variable symptom profile through the run-in. We often give an example, there were 80 or so patients in the STRIDE 2 trial that had significant improvement in symptoms during the run-in phase, but has still had sufficient symptoms to be eligible for randomization. As we look at those patient, we assume these were patients who were having a typical dry flare and they continued to improve regardless of whether they were on drug or placebo. In that situation, if you remove those 90 patients from the analysis, then you get a P value of .02. That's just one example. We had a couple of other changes. If you take those patients that we've excluded in STRIDE 3 and remove those from the analysis of STRIDE 1 and STRIDE 2, then you get P values of 0.002 for both of the trials. So our goal was sort of to eliminate those patients that were problematic patients in STRIDE 2.

Thank you.

Thank you. And our following question comes from the line of Chris Schott with J.P. Morgan. Your line is now open.

Good morning. This is Chris Neyor on for Chris Schott. So first is on INVELTYS. We have seen solid progress on coverage and script growth throughout 2019. And you previously discussed targeting roughly 6,000 to 7,000 high prescribing physicians. Could you update us on where we stand on adding new physicians for the script? And then, second on EYSUVIS. The completion -- with the completion of the STRIDE 3 study, can you just reiterate the factors that give you confidence in the 6-month filing timeline? Thank you very much.

Sure, Chris. Thanks for the question. This is Todd. I'll handle the INVELTYS question, then I will hand it over to Kim to address your question with regards to EYSUVIS. So we still -- our target universe for INVELTYS is about 6,000 to 7,000 physicians. You know, those physicians collectively represent 80% to 85% of prescribing of all ocular steroids. And all of that universe, to date, over 3,300 have already prescribed INVELTYS. We are at about 50% penetration of the target universe in terms of prescribers in INVELTYS. And that number is up significantly quarter-over-quarter, 22% growth at number of prescribers and growth at number of prescribers from Q3 to Q4. I will hand it over to Kim to answer your EYSUVIS call.

With regards to the resubmission, as you recall, Chris, we did submit an NDA and received a complete response letter. In that situation, then the resubmission is considered as Class II resubmission. And that timeline for that Class II or the PDUFA for that is 6 months. It's a very similar situation that Shire experienced with Xiidra where they had a CRL resubmitted the results and got approval, in that case 5 months. So we’re quite confident that the 6-month timeline is correct.

Thanks so much.

Thank you. And our following question comes from the line of Esther Rajavelu with Oppenheimer. Your line is open.

Good morning. Thank you for taking my question. Can you please help us understand how you're thinking about 2020 priorities in the context of a positive and or a negative read out really for EYSUVIS?

Sure. Hi, Esther. It's Mark. Thanks for the question. Obviously, we're feeling a lot of excitement. We're nearing the end of the STRIDE 3 trial and excited about seeing the results in the first quarter and being able to report those out to everyone and that will be a huge change for the company. We really understand that the unmet need for a product in the dry eye market that could be used in a first-line fashion could be used as adjunctive therapy to Xiidra and Restasis is just something that the market has wanted for a long time. You know, there are no really quick acting products that can be used to treat patients flares and we know that over 90% of patients experience these flares routinely. And that's whether they're on just OTC therapies, like artificial tears or other kind of home remedies, or if they're on more maintenance products. So that's a real change for us. The good news is we've created a terrific infrastructure. We have an outstanding sales force and commercial organization with really deep experience, both in post-surgery market as well as the dry eye market. So we are gearing up and ready to hopefully see those positive results in a matter of weeks here and to be able to get the NDA in, and then hopefully secure approval and launch. And I think as Todd mentioned earlier, we're fully capable of launching the product with our existing sales force and then also adding some additional representatives to make sure that we appropriately can go after what we think is just a huge unmet need in the marketplace and target all of the appropriate eye care professionals. Certainly, if there's more work to be done, we'll have to evaluate that. If the results require us to take some time and we'll get back to everyone and let people know. But right now, we're gearing up and excited for what we hope to be a real positive outcome on STRIDE 3 and then preparing to make the file and the launch.

Okay. A quick follow-up from a cost basis. Are we sort of assuming that over the course of 2020, you're not -- it sounds like you're not going to need to spend a ton more than what you've been doing with on the sales force? I just wanted to confirm that.

Yes. No, that's right. I think in general, 2020 is much more of a sort of stable year. And if we did secure the approval later this year, then we will most likely and plan to increase the sales force. But our expectation would be right now that, that would likely come either very late in the year or early next year, depending on when we secure the approval. So you're right. This year is much more of a stable OpEx situation. Of course, as the trial ends, though, that expense run rate will be reduced a bit. So you're spot on with your assessment.

[Indiscernible]. Thank you very much.

Thank you.

Thank you. And our next question comes from the line of Biren Amin with Jefferies. Your line is open.

Hi. Thanks for taking my questions. Mark, can you -- I got on the call a little late, but can you just go over what type of a sales force increase you would need if STRIDE 3 were positive and if you were able to secure dry eye approval?

Absolutely. I'll just have Todd answer that for you, Biren.

Sure, Biren. The current sales organization is about 57 sales representatives. We believe we would grow the sales force to somewhere between 75 and 100 sales representatives. And in that range, it would allow us to effectively cover 75% to 85% of all the dry eye prescriptions being written today.

Okay. And then I guess just from a pipeline standpoint, can you maybe update us on where the TKI [ph] program is for retinal diseases?

Yes, sure. We have advanced that over the 2019 calendar year. And we've not made any specific announcements about that program, but it does continue to move forward. And, of course, over the last few years, we've concentrated the vast majority of our resources on our first two programs. But hopefully on the other side of positive dry eye data and securing an approval, that is an important program to us and we would expect to invest more in it over time. And it's just a reminder that is an NCE kinase inhibitor that our internal discovery team has developed. And we're quite excited about it. But again, have remained focused on INVELTYS and hopefully the upcoming positive data for EYSUVIS.

Great. Thank you.

You’re welcome. Thank you.

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

Thank you for taking my question. My first question is, it seems that the growth rate in INVELTYS scripts has been slow -- slowing during the past two quarters. Could you let us know what would be the catalyst in 2020 and beyond that to -- that will continue to drive the growth in INVELTYS script?

Sure, Yi. This is Todd. I think the growth trends have been really strong for INVELTYS. Remember, they were -- scripts were up in Q3 by 30% versus Q2. The growth rate was 17% for Q4 versus Q3, but that was largely impacted by the holidays, right. Between Thanksgiving and Christmas holidays, you have a lot of practices that are not conducting surgery, cataract surgeries during that period of time. If we were to back out those holidays and treat them as normal days with normal script volumes, our growth again in the fourth quarter would have been up 30% quarter-over-quarter, just like it was Q3 over Q2. So we think the growth rates have been tremendous and expect continued growth rates this year, largely driven by our increasing market access. So you'll recall that in the second quarter, third quarter of last year, our commercial market access was around 50%. And fourth quarter, that jumped up to 80%. So we currently have between our Medicare Part D and commercial access, unrestricted access to about a 145 million lives in the U.S. and feel that we've got a lot of headroom in front of us to continue to show strong growth in the brand throughout 2020.

Thank you. My second question is, could you give us some color on the gross margin in the first quarter of 2019? Whether we can expect that EYSUVIS to have a similar gross margin compared to INVELTYS?

I'm assuming you're referring to the reserves that we took at the end of the year. So they were higher in Q4 of '19 and there are a few items that contributed to that in the fourth quarter.

Yes. Yes.

First, it was the resetting of the deductibles under the health insurance plans as of January 1, which meant that more patients were using our co-pay card when they are in the higher deductible portion of their plan. And second, we had a price increase on January 1, which meant that the units that we sell to distributors in 2019, we would reserve for at the rebates based on the new 2020 price. So those both impacted the reserves that we took in 2019.

Okay. For EYSUVIS, will it have a higher gross margin than INVELTYS?

So we haven't talked about that yet and given guidance on EYSUVIS yet.

Okay, got it. My final question is, can we assume that the R&D expense -- quarterly R&D expenses will be lower significantly, once the STRIDE 3 trial is completed?

Yes, it's a great question. At this time, we don't have another large Phase 2 or Phase 3 program that we're putting into place. We have earlier stage programs. So it is our expectation that compared to 2018 and 2019 that overall the R&D expense in particular associated with clinical work will be reduced. There's always some R&D expense when you’re manufacturing new supplies and other things. But as it relates to clinical trial work, we do expect a reduction there.

Got it. Thank you. One more thing. Could you give us the shares outstanding at the end of 2019 and when the 10-K will be filed?

Sure. 35.5 million shares outstanding at the end of '19 and we'll file the 10-K this week.

Thank you.

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

Well, thank you very much, everyone, for your time this morning. We greatly appreciate your interest at this really exciting juncture for Kala Pharmaceuticals, and we look forward to updating you later in the quarter. Have a great day.

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