Biotech Values

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KALA > bull & bear case...

Jefferies...

As previously reported, Jefferies analyst Biren Amin downgraded Kala Pharmaceuticals to Hold from Buy with a price target of $10, down from $21 after surveying 25 ophthalmologists and 25 optometrists who are based in the U.S. and treat an average of 224 dry eye disease patients per month. While Amin expects FDA approval for Eysuvis by its October 30 PDUFA date, the eye care professionals surveyed estimated Eysuvis could capture 12% market share at launch in year one and 13% in year two, assuming a price of $280/bottle, said Amin, who believes the company is evaluating a price in the range of $300-600/bottle. Most of the survey doctors pointed to product cost and insurance coverage as the main hurdle to strong Eysuvis adoption, added Amin.

JPM...

Kala’s Eysuvis FDA approval represents an important milestone for the company, with the product approved for both the sign and symptoms of short-term dry eye disease (as expected). At the same time, expectations have built ahead of today’s FDA decision with a ‘sell the news’ event on the product approval, with KALA shares down 15% ($60mm of market cap, vs S&P Biotech up ~1%) as investor focus now shifting to a near-term product launch in 4Q20 and into 2021.

Overall, we see today’s share pullback as a meaningful buying opportunity, with two FDA approved products and Eysuvis, the company’s lead product, holding a significant dry eye market opportunity where we forecast >$750mm peak sales (which could prove conservative). We highlight a) significant unmet need in the acute dry eye market, with Eysuvis representing the first approved treatment, and b) strong B/S position with $159mm in cash to support the product launch and operations thru mid-2022. With KALA shares trading at a ~$375mm market cap and <$7/share, we see an attractive valuation and risk/reward opportunity into the Eysuvis launch with several hundred million annual sales opportunity expected by 2024. Reiterate OW.

• Eysuvis approved for both the sign and symptoms of short-term dry eye disease. Today, Kala announced the FDA approval for Eysuvis, the company’s lead product, for short-term dry eye disease, representing the first approved FDA treatment to offer rapid relief for acute dry eye symptoms. The Eysuvis approval is in line with our expectations with an FDA label for both the signs and symptoms of dry eye disease and no restrictions on continued prescription refills.

• Acute dry eye represents a significant market opportunity with no approved treatment currently. We forecast Eysuvis peak sales of >$750mm on fairly conservative assumptions for both product pricing (below chronic dry eye therapies) and market penetration (among ~17mm US diagnoses dry eye patients), with upside to >$1bn potential peak sales. Our physician feedback indicates significant unmet need for an acute dry eye treatment, with patients of nearly all severity levels experiencing intermittent flares. Further, there are currently no approved products on the market or late-stage competitors that offer rapid relief for short-term acute dry eye symptoms within a few days.

• Kala will leverage its existing sales & marketing infrastructure to launch Eysuvis. Kala’s existing Inveltys salesforce overlaps completely with the target Eysuvis ophthalmology prescribing base, and Kala plans to further expand its sales force to ~100-125 reps with the Eysuvis launch over time. Overall, we would expect faster uptake / reimbursement decisions on Eysuvis relative to the company’s Inveltys launch given the significant unmet need with no currently approved product and a majority of patients on commercial insurance.

• We see a highly attractive risk/reward for Kala into Eysuvis product launch in 4Q20 and into 2021. With the recent KALA share pullback, we see an attractive risk/reward into the Eysuvis launch with the company well capitalized to support the product’s dry eye launch with mid-2022 cash runway. On valuation, KALA trades at only at a ~$375mm market cap ($7/share), and we see shares as significantly undervalued with annual sales potential of several hundred million by 2024, assuming the company executes on launch plans over the next 12-24 months. Further, we see limited downside given the company’s extended IP life and two FDA approved products.

• Kala is well capitalized to support pending Eysuvis and ongoing Inveltys product launches. Kala ended 3Q 2020 with $159.1 of cash on the balance sheet, which the company expects will fund operations through at least 3Q 2022.