Good morning, and welcome to Kala Pharmaceuticals Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] 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 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 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, statements regarding the regulatory and commercial plans for EYSUVIS, the sufficiency of our cash resources and projected revenue. These 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 statements to reflect events or circumstances after 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 quarterly reports on Form 10-Q and other filings we make with the SEC. The Form 10-Q 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.

Thank you, Niranjan. Good morning, everyone, and thank you for joining us this morning to review our second quarter financial results and recent business highlights. We continue to make strong progress across our business despite the uncertainties imposed by the ongoing pandemic. As a reminder, we announced top line results from the STRIDE 3 trial of EYSUVIS, our product candidate for the short-term treatment of the signs and symptoms related to dry eye disease in early March. In that study, EYSUVIS achieved statistically significant results for the primary and key secondary endpoints, replicating the positive results from earlier studies and addressing the only deficiency noted in the complete response letter received in August 2019 in which the FDA indicated that positive results from an additional clinical trial were needed to demonstrate efficacy. We are very pleased that less than 2 months later, we resubmitted our NDA for EYSUVIS to the FDA, which the FDA subsequently accepted and confirmed that the resubmission is a complete Class II response to the CRL issued in August 2019 and set a PDUFA goal date of October 30, 2020. We are preparing across the organization to launch EYSUVIS before the end of the year, if approved. As we've highlighted before, we believe EYSUVIS has the potential to make an immediate impact to the dry eye disease treatment paradigm and become the preferred first-line prescription therapy for the short-term treatment of the signs and symptoms of dry eye disease. Over 30 million people in the United States live with dry eye disease, of which over 17 million have already been diagnosed by an eye care professional. Our market research suggests that 80% to 90% of these patients suffer from episodic flares rather than continuous symptoms, and feedback from eye care professionals suggest that these flares are - will be under-managed by current therapies. Based on efficacy and safety data that we have generated from over 2,800 patients across 4 clinical trials, we believe EYSUVIS has the potential to address the significant unmet need, providing rapid and effective relief of both the signs and symptoms of dry eye disease while also being very well tolerated and convenient to administer. We're very excited about EYSUVIS and look forward to delivering this important new option to patients and physicians, if approved. Before handing the call over to Todd to go over commercial updates, I want to take a moment to recognize all that our team at Kala has accomplished despite the ongoing challenges presented by the COVID-19 pandemic. As we've dealt with the situation, I'm very proud of our employees who have remained focused on the needs of eye care professionals and their patients and have adapted to new ways of working. Their perseverance has enabled us to continue to deliver on our key corporate goals for 2020 as we work to advance INVELTYS and lay the groundwork for a potential EYSUVIS approval and launch. I'd like to now turn it over to Todd.

Thank you, Mark, and good morning. I'd like to begin with INVELTYS, our twice-daily, postsurgical ocular steroid. In the second quarter, there were approximately 21,000 prescriptions of INVELTYS reported by Symphony Health, which represents a decrease of approximately 51% compared to the first quarter of 2020. This decrease was due to the impact of the ongoing coronavirus pandemic, which was felt most acutely in the month of April. Total cataract procedures in Q2 of 2020 were down 50% compared to Q2 of 2019. The market did begin to recover in late April as states began to allow elective surgical procedures to recommence. Since then, total INVELTYS prescriptions have achieved strong growth, going from 544 prescriptions written during the week ended April 17 to over 3,000 prescriptions during the week ended July 24. INVELTYS weekly prescription volumes are steadily building back towards the pre-COVID levels. We are encouraged by this significant recovery which is also reflected in the most recent month-over-month data and compares favorably versus the steroid market more broadly. As of July 24, INVELTYS prescriptions were up 12.8% in the most recent 4 weeks versus prior 4 weeks compared to the branded and generic steroid markets, which were up 4.1% and 3.4%, respectively. And prior to the onset of COVID-19 pandemic, INVELTYS prescriptions were tracking up quarter-over-quarter, suggesting continued growth trends and strong demand. We believe the strength of our recovery reflects the strong clinical profile of INVELTYS, a positive reception to INVELTYS among our target eye care professionals and the effectiveness of the Kala sales team. While we suspended substantially all in-person interactions with our customers, including visits to physicians' offices, clinics and hospitals early in the pandemic, our sales force continued to provide support virtually through both telephone and web-based technologies. We continue to follow recommendations from…

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 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. As of June 30, we reported total cash, cash equivalents and short-term investments of $184.6 million compared to $85.4 million as of December 31, 2019. This increase reflects proceeds from our underwritten public offering of common stock in March 2020 as well as proceeds from sales of our common stock under our ATM program during the first part of 2020, partially offset by cash used to fund our operating expenses in the second quarter. We anticipate that our existing cash, cash equivalents and short-term investments will enable us to fund operations into at least the second quarter of 2022. For the second quarter of 2020, we reported INVELTYS net revenue of $0.8 million compared to $2.1 million in the second quarter of 2019. Net revenues in the second quarter of 2020 were impacted by a reduction in ocular surgeries due to restrictions related to COVID-19 when compared to the same period in 2019. We recognize revenue when product is shipped to distributors. Cost of product revenues for the second quarter of 2020 were $0.8 million compared to $0.4 million for the same period in 2019. Due to COVID-19 and the restrictions placed on elective procedures earlier this quarter, cost of product revenues for the second quarter of 2020 includes a reserve of $0.5 million related to excess inventory. Non-GAAP cost of product revenues were $0.7 million for the second quarter of 2020 compared to $0.3 million for the same period in 2019. SG&A expenses for the second quarter of…

[Operator Instructions] Our first question comes from Christopher Neyor with JPMorgan. Your line is now open.

First one's on the planned sales force expansion for - ahead of potential EYSUVIS launch. How are COVID-related disruptions and limitations on face-to-face interactions with eye care professionals impacting the size and the timing of your plans to add sales reps, if at all? And more broadly, for the existing sales force, how are you thinking about productivity levels and incentives for their virtual interactions versus the traditional in-person, face-to-face visits? And then second, on the upcoming Analyst/Investor Day, could you maybe touch on how the VA came about for the event and the key topics you're hoping to address ahead of the potential EYSUVIS launch?

Todd, do you want to take the first part of that question? Maybe Niranjan, you can take the second part.

Sure. Happy to do so. Chris, so the way I would describe our sales force plan is we've built a very flexible and adaptable plan in order to be able to respond to what may be going on with the pandemic as we head into the fall and winter flu season. As you know, we've got an existing sales force, specialty sales force of 56 ophthalmologists - ophthalmology representatives that are highly experienced, and we've actually already begun their disease state training so that they're coming up to speed on dry eye. We will be in a position to launch soon after approval of that existing sales force that currently covers about 7,000 to 7,500 eye care professionals, of which nearly 100% of them are very important dry eye targets. So we'll be in a position to launch EYSUVIS pretty quickly to the eye care professionals that represent about 70% of all dry eye prescriptions. We then, as we have stated, have a plan to ultimately grow the sales force to somewhere between 100 and 125 representatives in total. We're still finalizing those numbers as we work through sales force sizing and structure. And we've got plans that could be everything from - look, if the pandemic's really bad this winter and we're in another shutdown, we could initially launch with just the 56, including if they have to launch the product on a virtual promotion. We could take a phased approach, depending if some offices are open and some are closed, where maybe we don't go straight to the 100 to 125, but maybe we go some portion of the way there and then bring on the remaining sales force once things start to clear up a bit. Or if things are in really good shape, as they are right now, when we have access to most of our offices, we have the ability to hire all the representatives at once and have them in place. I would think of that as sort of late this year, early next. So a lot of flexibility in the plan, Chris, depending on the situation that we're dealing with this - going into the fall and winter. Your second question, I think, was in relation to rep's ability to promote virtually, if I understood correctly. And we had a full suite of virtual tactics in place for INVELTYS during the shutdowns that occurred this spring. The team continues to investigate best practices that we've seen across industry for additional potential tactics. These include everything from sales force interactions with eye care professionals to peer-to-peer programming to virtual sampling. So we feel really confident about our abilities to promote virtually as we expect that will likely be some portion of the overall promotional mix as we're launching EYSUVIS in the fall. And then Niranjan, do you want to talk a little bit about the KOL event?

Absolutely. So Chris, we will be hosting a KOL event on September 17. And as Todd mentioned, we'll have two of the top dry eye experts in the country, offering their views of the unmet need on how EYSUVIS fits into that unmet need and how it could potentially change the treatment paradigm for dry eye disease today. And also, the team is conducting a lot of work right now. Specifically, Todd's team is spending a lot of work right now in the background to - and planning for the launch of EYSUVIS, and so we'll have an update on that trend as well.

Our next question comes from Kit Ma with Jefferies. Your line is now open.

This is Kit on for Biren. I actually have several questions, if I may. My first question is I'm wondering if you have any payer discussions for EYSUVIS. And what kind of feedback did you get from there? My second question is what kind of rebate rate do you expect from EYSUVIS? Would it be similar to INVELTYS? And my last question is regarding INVELTYS. Is there currently any off-label use of INVELTYS in dry eye?

This is Todd, I'm happy to jump in. So you're - I'm not sure I quite heard your second question. If you could repeat that one again, just want to make sure I can go through all of them for you.

Yes, sure. Second question is regarding the rebate rate for EYSUVIS. Would it be similar to - yes, yes.

So to answer your first question, we have begun payer discussions that we are having disease state discussions right now for our account directors. Obviously, no product discussions ahead of an approval. And so those conversations are going quite well as we're talking to payers about the need for any short-term treatment as there are currently no FDA-approved short-term treatments for the signs and symptoms of dry eye disease. We've also done a lot of market research with payers and have received very positive feedback about the product profile for EYSUVIS and about its place in therapy. So we feel really, really good about that. As far as pricing and rebating, we've not provided any guidance on that. Those conversations are actually still ongoing, and we're doing our work there to determine ultimately what the list price and rebates required will be. So what I would tell you is more to come on that in the future. And is there another question in there?

Regarding INVELTYS, can it be used for off-label in dry eye?

The vast majority of use for INVELTYS is all for postocular surgery. Remember, we have a broad label that covers - although our Phase III studies were done in cataract surgery, the label is broad and covers all postocular surgery treatment of pain and inflammation. And we believe from the data that we look at, that 85%, 90% of all prescriptions for INVELTYS are being used for that specific indication. So there may be a little bit of off-label use but very, very little.

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

Could you please comment on the current geographic distribution of ocular surgery volume in COVID-19 - such as - in COVID-19 hotspots, such as California, Texas and Florida versus areas that are no longer hotspots, such as New York State?

This is Todd. I'm happy to answer that question. Look, certainly, we do see sort of fluctuations in procedures and prescription volumes in certain regions based on - if they become hotspots or you see a spike. Most of those areas, though, have not shut down elective procedures. There are a few areas that have been. But even the hotspots where we're seeing a spike in the number of reported or diagnosed cases of COVID, at this point, most of them have continued to allow the elective procedures to occur. In some of those areas, maybe patients are choosing not to have the procedure conducted at this time. And like I said, it is causing some small fluctuations. But for the most part, the markets look like they are continuing to recover. The biggest impact, obviously, would be if local governments got to a point in certain regions of the country that they chose to defer elective procedures and not - or to allow those elective procedures to continue to occur for some period of time. But for the most part, that is not currently the case.

And do you believe ophthalmologists' offices have had established protocols to remain open in the upcoming fall/winter season, if a second wave hits?

Yes. Again, Yi, what I would say is I think that's going to be largely driven by decisions that are made by local and state governments, right? If - I believe from what we're hearing that if the ophthalmologists' offices are allowed to remain open, then that's their plan, and they will continue to conduct these ocular surgeries. If they are forced to shut down, obviously, at that point, they would not be open for some period of time. We did see with the shutdowns that occurred this past spring that there was a large number of these surgeries that were quickly rescheduled once they were allowed to recommence the surgical procedures and saw big growth in the market for both INVELTYS as well as all the other postocular products.

My last question is with two commercialized products on the market, is there a plan to add additional pipeline candidates?

Yi, it's Mark. We are continuing to advance some early-stage programs that are in our own pipeline as well as thinking about additional products that could become either part of the product pipeline or promoted products. So we are continually looking at options on the outside that would be a good strategic fit for us long term.

Our next question comes from François Brisebois with Oppenheimer. Your line is now open. François Brisebois: I was just wondering with the COVID situation right now, is it possible that docs, more than ever, might be more interested with products that they're a little more used to, like INVELTYS versus newer products that might be a different method of use kind of like an implant or whatnot?

This is Todd. I'll jump in on just what we're hearing from our interactions with customers and then perhaps Kim can chime in as well. It's a really good thought. We have not followed as closely what's gone on this past quarter with some of the other insert products. What I will tell you is that INVELTYS continues to be very, very well received, and we have seen INVELTYS's - the growth that INVELTYS has shown since these elective procedures have been allowed to recommence has outpaced all other products in the market. So we do know that we get very positive feedback on the product profile for INVELTYS and eye care professionals report having really, really good results in their patients. And I think as elective procedures have been allowed to recommence in the U.S., the growth rate that we've seen with which INVELTYS prescriptions have come back have been indicative of that. Kim, I don't know if you would add anything else.

Yes, yes. I think in our discussions with the eye care professionals about the profile of EYSUVIS, in particular, the safety and the efficacy results, they've been very impressed by that and very open to using that. So I don't think when we come to market with EYSUVIS that there will be significant reluctance. We will be the first product with the indication of short-term use in the treatment of dry eye, and we'll be the first corticosteroid that's approved in the dry eye space. So I don't sense that there's going to be a great deal of reluctance because of the COVID situation of trying, trialing and eventually using. I assume this on a regular basis. François Brisebois: Okay. Great. That's interesting. Sorry. Go ahead.

I was just going to say, I think we've also heard that some of the things that are happening now with telemedicine and the eye care professionals is that dry eye is one of those conditions that lends itself a bit more to kind of tele or remote medicine. François Brisebois: That's interesting. On the - in terms of your market research, can you remind us where you think you might get the most patients? Is it - the population here for dry eye is so big. But do you think most of them are the patients that might be just using over-the-counter products? Or is it more of the transitioning idea of using this acute therapy before going into maybe a chronic therapy as a step-through?

Yes. I think we'll probably get business across the board, and it's maybe a matter of time. I think in the short term, there are a lot of patients out there that have tried OTCs many times and have been in and out of various eye care professionals' offices. So I think like a lot of products that come onto the market in a reasonably established condition, we'll probably get some more of those moderate to severe patients that have already been treated with other things. And the doctor will try EYSUVIS there - or the eye care professional, I should say, will try EYSUVIS as well as new patients coming in that maybe have been on those OTCs. We really believe the profile lines up well as kind of the first-line prescription therapy to treat the episodes and the more mild to moderate patients have these episodes rather than typically showing up with significant continual symptoms. We know that the profile lines up well for eye care professionals. It works very quickly, treats signs and symptoms. You see meaningful corneal healing within the first couple of weeks. So I think largely, over time, we'll probably get more and more kind of first-line patients coming off OTCs. But certainly, as we launch, we're likely to get some either treatment failures or patients that have been in the eye care professional offices for quite a while. François Brisebois: And then just lastly, if I could ask one more here. In terms of the sales reps and the launch efforts, I know there's a lot of moving parts right now with everything that's going on. But from the existing 56, when you're thinking about adding on to get to 100, 125, is this something that you're looking at hiring now and it's kind of like a hire pending on approval? Or is this something that you'll go into trying to hire talent after the approval and once kind of - at least you give an extra product in the bag of the current 56 perhaps you have?

Yes. It's a great question. We have been saying that we'll do some of the preparation work. So it's possible that in the next couple of months, we may start to interview for positions. But I think, right now where we sit, we're likely to not actually hire or bring on the new sales representatives until we have the approval. So I think we can do a lot of the work. We intend to hire really experienced sales professionals and believe that on the backside of hiring, the training and ramp-up will be reasonably quick. So we're getting close. But for us, it just seems prudent to make sure we secure the approval.

[Operator Instructions] Our next question comes from Tazeen Ahmad with Bank of America. Your line is now open.

A couple of questions for Todd, if I may. Todd, can you just give us an idea based on your market data research, how often do you diagnose dry eye patients go to their physicians in a year?

Yes. Sure. Tazeen, so from our market research, we believe that these patients are visiting their eye care professional on average 2 to 3 times a year. The frequency of visits seem to be tied somewhat to the corrective - type of corrective lens that the patient has, if they wearing corrective lenses. So for example, if you're wearing contacts, you visit your eye care professional more often. It can be up to 3 times per year. Also, interestingly, from our research, about 42% of the office visits are tied to a dry eye flare-up. So it may not only be their primary reason for the office visit, but while that patient is in there, a flare-up of their dry eye disease is one of the issues that's being discussed with the eye care professional. And that's really why we feel so strongly that we're not going to need a big direct-to-consumer campaign when we're launching the product. We certainly will have a presence online with what I would call sort of more direct-to-patient efforts when patients are seeking information for dry eye. But we know that 17 million of these patients are already diagnosed. They visit their eye care professional 2 to 3 times a year. And nearly half the time that they're in there, they're discussing a flare-up of their dry eye disease, so.

And so during the pandemic, do you know whether the points of contact with physicians as it relates to dry eye specifically have gone down more or less than other visits to the eye doctors?

No. I don't believe so. In a proportion - sort of proportionately. Obviously, overall office visits were down across therapeutic areas and across specialties during the pandemic shutdown. Interestingly enough and what Mark said earlier is that we've heard from eye care professionals that the biggest use - one of the biggest uses of telemedicine they had was, in fact, for dry eye disease. And we certainly have had a number of eye care professionals, particularly the ophthalmologist, who feel like telemedicine can continue to play a very important role in the future for their patients with dry eye.

And have they been able to diagnose new instances of dry eye flares through telemedicine business that you know during the pandemic?

Yes. It's a really good question. I don't know about new diagnosis. But again, there's 17 million currently diagnosed patients. And yes, we know that a big part of the discussions - of their dry eye discussions with the use of telemedicine was about flare-ups that the patients were experiencing. And again, that comes from feedback from a number of advisory boards that we've done - virtual advisory boards during the pandemic.

And then do you know what percent of patients are actually managed by optometrists versus ophthalmologists?

I don't know on a patient basis. I know on a prescription basis that probably about 55% of all dry eye prescriptions are generated by ophthalmologists and around 45% by optometrists. So not quite an even split but close to.

And the last question, I promise, is do you know if optometrists have been able to move to telemedicine in a way that a physician - ophthalmologists have? Some of them have store fronts, some of them are within eye care centers in a mall, for example. And so I'm just wondering, geographically, if there's been any kind of observation you've been able to make about optometrists in general.

Yes. I would say that if there are optometrists who have large dry eye practices, they certainly are using telemedicine. Often, this sort of optometry practice that you're describing, store fronts, center malls are not really the big dry eye optometrists. They're mostly - their business is mostly corrective lenses. There's a group of optometrists. And so think of it, there's tens of thousands of optometrists in the U.S., but it's probably well less than 10,000 that actually have what I would describe as significant dry eye practices for which dry eye is one of the biggest, if not the biggest, components of their practice. And as I said, those that have dry eye practices, many have opened up dry eye clinics, they are certainly also using telemedicine the way the ophthalmologists are.

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

This is Andreas in for Liana. Most of our questions for INVELTYS or EYSUVIS have been asked. So just maybe you can provide some color on the pipeline, KPI-285 in retinal diseases. Wondering if you guys are going to provide some color for the development.

Kim, do you want to take that?

Sure. We're doing ongoing studies, both with that and with our new anti-inflammatory program. And now that we're - having filed the NDA and getting preparation for launch, we're going to be having a sort of a comprehensive evaluation of our pipeline and how to move forward in looking at both our internal pipeline products and some BD opportunities that we look at. So we don't have an update today but we hope to in the coming months.

And no idea about an indication that you guys might be going after? Or have you narrowed those down?

No. Our initial thoughts were around either macular - AMD or diabetic retinopathy, and we're having discussions with KOLs to determine where the biggest unmet need is today and how a product like a tyrosine kinase inhibitor would fit in to that and if it is still a logical approach for treating those diseases. But it's likely would be - the main indication, should we go forward, would be one of those 2.

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Mark Iwicki for closing remarks.

Well, thanks to everyone for participating this morning. We continue to be very pleased with the progress that we're able to make given the situation with COVID, having prescriptions begin to rebound significantly with INVELTYS. And we look forward to, hopefully, an approval of EYSUVIS soon, and we'll update everyone as soon as we have more information. So thank you very much for your time today.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.