Description

Kala Pharmaceuticals

Kala recently announced positive Phase III results for Eysuvis, their treatment for dry eye disease (DED).  In early May they resubmitted their NDA for Eysuvis to the FDA and expect approval and launch by the end of 2020.  We believe that Eysuvis can meet an acute need in the $1.5B DED market and is undervalued.  We believe that Eysuvis can do $500M in sales in DED and that the stock is worth $26 per share.  This would also provide a very attractive tuck-in acquisition for a larger player in the space.  As a point of reference, last year Novartis purchased another DED drug (Xiidra) for $3.4B upfront and $1.9B in milestone payments when it had done $400M in 2018 sales.  

History of Eysuvis

Eysuvis is based on AMPPLIFY technology, which is also used in Inveltys which is KALA’s other approved drug.  This technology increases drug penetration into the relevant tissues of the eye.  

KALA ran three Phase 3 studies for Eysuvis in signs and symptoms ofDry Eye Disease.  Normally two positive Phase 3 trials are enough, however, because the symptoms endpoint was not statistically significant in one of the trials (even though the signs endpoint was), a third trial needed to be run.  The three Phase III trials run were STRIDE 1, 2, and 3.  

Their STRIDE 1 and STRIDE 2 Phase III trials both showed a statistically significant result on the primary sign endpoint.  

However on the symptom endpoint only one of the Phase III studies was statistically significant (STRIDE 1).  In STRIDE 2 the symptoms endpoint showed a trend toward improvement but did not hit with a p-value of 0.1298.  

KALA received a CRL for KPI-121 in August 2019 from their initial submission in 2018.  They had submitted an NDA even though they knew they would likely need to conduct another Phase III trial (the STRIDE 3 study) because they believe this would speed up the overall time to market.  

This strategy of starting a Phase III anticipating a CRL was also used by Shire for their approval of Xiidra.  As the Jefferies Initiation from March 13th, 2019 explains: 

There is a precedence to Kala’s regulatory strategy, which mimics the path taken by Shire to secure approval of Xiidra in 2016. Of three PIII studies for Xiidra, two demonstrated stat sig benefits in symptoms (OPUS-2 and -3) while the third showed stat sig benefits in signs (OPUS-1). Shire originally filed its NDA on OPUS-1 and -2 plus a long-term safety study, SONATA. In OPUS-1, patients treated with Xiidra showed improvements in signs but not symptoms, while OPUS-2 demonstrated the reverse trend. FDA accepted the NDA in April 2015 and granted priority review, but then issued a CRL to Shire in October 2015 which requested an additional study. Shire had in fact already initiated OPUS-3 in late 2014, several months prior to filing the NDA. OPUS-3 was completed in October 2015, showing improvement in the primary symptom endpoint as well as secondary endpoints on symptom scores and eye discomfort. Notably, signs were not assessed as primary or secondary endpoints in OPUS-3. This allowed Shire to resubmit its NDA in January 2016 and receive approval six months later under priority review.

On March 9, 2020 KALA announced that the STRIDE 3 study had met both the signs and symptoms endpoints.  

The STRIDE 3 study was successful and means that they had the necessary 2 Phase III studies with showing symptom improvement.  They resubmitted the NDA application for Eysuvis on May 4th and announced that the acceptance of the application on May 26th.  The new PDUFA date is October 30th, 2020.  

Commercial

We believe there is a substantial opportunity for Eysuvis in DED.  The two other drugs approved for DED did ~$1.6B in sales in 2019.  Restasis (owned by AGN) is the dominant player doing ~$1.2B in sales.  Xiidra was originally owned by Shire and then Takeda after the merger.  In May 2019, Novartis acquired Xiidra for $3.4B in cash and a total consideration of up to $5.3B with milestones.  This was based on $400M in sales in 2018 for Xiidra.  

You can see there was substantial growth in the DED market after the launch of Xiidra.  

The currently approved therapies for DED have very high discontinuation rates.  They also are not fast-acting enough to deal with flares and doctors also concurrently prescribe other medicines upon treatment initiation for more immediate relief.  

The currently approved drugs are meant to be taken chronically, but this is a disease that has flares, even if on medication.  Unlike the existing medications, Eysuvis is quick-acting, with improvement in symptoms within a week.  Feedback from physicians suggests Restasis/Xiidra can take months to have an effect.  This is why physicians often start pulse steroids concurrently with Restasis/Xiidra initiation.  

With the currently approved therapies only treating a small number of the currently diagnosed patients and with short retention, Eysuvis will have a large opportunity given its ability to be combined with existing treatments and fast treatment of action for flares.  

We believe that Eysuvis can do >$500M in sales and the shares should be worth $26 per share.  

The patent portfolio on Eysuvis goes until 2033 and is based on the drug delivery technology.  Furthermore, ocular drugs are more difficult to genericize limiting the impact.  

With $196M in cash at the end of the 1Q, the company believe they have sufficient cash to fund operations into at least the 2Q of 2022.  

Risks

Eysuvis is a new formulation of loteprednol etabonate using their AMPPLIFY technology.  Other versions of loteprednol are used off-label for DED.  It is possible that doctors may use other steroids as they currently do instead of prescribing Eysuvis.  We believe this risk is manageable as there are benefits physicians to prescribing a safe steroid that is on label.  

The patent portfolio is also based on the drug delivery technology and not a composition of matter patent.  Composition of matter patents are typically the strongest patents for a drug.  However, given the eye is a localized environment with limited tissue/plasma distribution generics are not easily substitutible.  

Catalyst

• FDA approval of Eysuvis
• Launch of Eysuvis