Kala Pharmaceuticals Annual Report 2019

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019OR ☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-38150 KALA PHARMACEUTICALS, INC.(Exact name of registrant as specified in its charter) Delaware27-0604595(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.) 490 Arsenal Way, Suite 120 Watertown, MA02472(Address of principal executive offices)(Zip Code) (781) 996-5252(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each classTrading SymbolName of each exchange on which registeredCommon Stock, $0.001 par value per shareKALANasdaq Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “largeaccelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐Accelerated filer ☒Non-accelerated filer ☐Smaller reporting company ☒¨ Emerging growth company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuantto Section 13(a) of the Exchange Act. ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒. As of June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the Common Stock held by non-affiliates of the registrant wasapproximately $160.1 million, based on the closing price of the registrant’s common stock on June 28, 2019. There were 36,803,874 shares of Common Stock ($0.001 par value) outstanding as of February 10, 2020. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report incorporates by reference information from the definitive Proxy Statement for the registrant’s 2020 Annual Meeting of Stockholders, which is expected to be filed with the Securitiesand Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2019. Table of ContentsTable of Contents PagePART I Item 1. Business4Item 1A. Risk Factors55Item 1B. Unresolved Staff Comments103Item 2. Properties103Item 3. Legal Proceedings103Item 4. Mine Safety Disclosures103 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities104Item 6. Selected Financial Data105Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations106Item 7A. Quantitative and Qualitative Disclosures About Market Risk121Item 8. Financial Statements and Supplementary Data121Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure121Item 9A. Controls and Procedures121Item 9B. Other Information122 PART III Item 10. Directors, Executive Officers and Corporate Governance123Item 11. Executive Compensation123Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters123Item 13. Certain Relationships and Related Transactions, and Director Independence123Item 14. Principal Accounting Fees and Services123 PART IV Item 15. Exhibits, Financial Statement Schedules124Item 16. Form 10-K summary127 Signatures128 Table of ContentsReferences to KalaThroughout this Annual Report on Form 10-K, the “Company,” “Kala”, “Kala Pharmaceuticals,” “we,” “us,” and “our,”except where the context requires otherwise, refer to Kala Pharmaceuticals, Inc. and its consolidated subsidiary, and “our boardof directors” refers to the board of directors of Kala Pharmaceuticals, Inc.SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS AND INDUSTRY DATAThis Annual Report on Form 10-K contains forward‑looking statements that involve substantial risks and uncertainties.All statements, other than statements of historical fact, contained in this Annual Report on Form 10-K, including statementsregarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectivesof management, are forward‑looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,”“might,” “plan,” “predict,” “project,” “target,” “potential,” “would,” “could,” “should,” “continue” and similar expressions areintended to identify forward‑looking statements, although not all forward‑looking statements contain these identifying words.The forward‑looking statements in this Annual Report on Form 10-K include, among other things, statements about:·our commercialization efforts for INVELTYS (loteprednol etabonate ophthalmic suspension) 1.0%, our firstproduct which we launched in January 2019, and our plans to develop and commercialize KPI‑121 0.25%, whichwe plan to commercialize under the brand name EYSUVIS (loteprednol etabonate ophthalmic suspension) 0.25%,and any other product candidates, if they are approved;·the timing of and our ability to, obtain and maintain regulatory approvals for EYSUVIS or to submit applicationsfor our other product candidates;·our estimates regarding potential future revenue from sales of INVELTYS and EYSUVIS;·our ability to maintain regulatory approvals for INVELTYS and EYSUVIS, if and when approved;·our ongoing STRIDE 3 clinical trial of EYSUVIS in patients with dry eye disease, and the expected timing forreceipt of topline data;·our expectations regarding our ability to fund our operating expenses, lease and debt service obligations, and capitalexpenditure requirements with our cash on hand and anticipated revenue from product sales;·the potential advantages of INVELTYS and our product candidates, including EYSUVIS;·the rate and degree of market acceptance and clinical utility of our products;·our estimates regarding the potential market opportunity for INVELTYS and our product candidates, includingEYSUVIS;·our commercialization, marketing and manufacturing capabilities and strategy;·our intellectual property position;·our ability to identify additional products, product candidates or technologies with significant commercial potentialthat are consistent with our commercial objectives;·our estimates regarding expenses, future revenue, timing of any future revenue, capital requirements and needs foradditional financing;2®TMTable of Contents·the impact of government laws and regulations;·our competitive position;·developments relating to our competitors and our industry;·our ability to maintain and establish collaborations or obtain additional funding; and·our expectations regarding the time during which we will be an emerging growth company under the Jumpstart ourBusiness Startups Act of 2012.We may not actually achieve the plans, intentions or expectations disclosed in our forward‑looking statements, and youshould not place undue reliance on our forward‑looking statements. Actual results or events could differ materially from theplans, intentions and expectations disclosed in the forward‑looking statements we make. We have included important factors inthe cautionary statements included in this Annual Report on Form 10-K, particularly in the “Risk Factors” section, that webelieve could cause actual results or events to differ materially from the forward‑looking statements that we make. Ourforward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures orinvestments we may make.You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form10-K and have filed as exhibits to this Annual Report on Form 10-K completely and with the understanding that our actual futureresults may be materially different from what we expect. The forward‑looking statements contained in this Annual Report onForm 10-K are made as of the date of this Annual Report on Form 10-K, and we do not assume any obligation to update anyforward‑looking statements except as required by applicable law.This Annual Report on Form 10-K includes statistical and other industry and market data that we obtained from industrypublications and research, surveys and studies conducted by us and third parties as well as our estimates of potential marketopportunities. Industry publications, third‑party and our own research, surveys and studies generally indicate that theirinformation has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completenessof such information. Our estimates of the potential market opportunities for INVELTYS and our product candidates, includingEYSUVIS, include several key assumptions based on our industry knowledge, industry publications, third‑party research andother surveys, which may be based on a small sample size and may fail to accurately reflect market opportunities. While webelieve that our internal assumptions are reasonable, no independent source has verified such assumptions.3Table of Contents Part I Item 1. BUSINESSOverviewWe are a biopharmaceutical company focused on the discovery, development and commercialization of innovativetherapies for diseases of the eye. Our innovative mucus-penetrating particle, or MPP, drug delivery technology, which we refer toas our AMPPLIFY technology, uses selectively‑sized nanoparticles that each have a proprietary coating. We believe that thesetwo key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to targettissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped andeliminated by mucus. We have applied the AMPPLIFY technology to loteprednol etabonate, or LE, a corticosteroid designed forocular applications, resulting in the August 2018 approval of INVELTYS™ (loteprednol etabonate ophthalmic suspension) 1%,our topical twice-a-day ocular steroid for the treatment of inflammation and pain following ocular surgery, by the U.S. Food andDrug Administration, or the FDA, and the development of our lead product candidate, KPI‑121 0.25%, which if approved weplan to commercialize under the brand name EYSUVIS (loteprednol etabonate ophthalmic suspension) 0.25%, for thetemporary relief of the signs and symptoms of dry eye disease. We commercially launched INVELTYS in January 2019. EYSUVIS is our product candidate for patients with dry eye disease utilizing a two‑week course of therapy. In January2018, we announced topline results from two completed Phase 3 clinical trials, which we refer to as STRIDE 1 and STRIDE 2(STRIDE - S hort T erm R elief I n D ry E ye), evaluating the safety and efficacy of EYSUVIS versus vehicle (placebo) inpatients with dry eye disease. In STRIDE 1, statistical significance was achieved for the primary sign endpoint of conjunctivalhyperemia and the primary symptom endpoint of ocular discomfort severity change from baseline to day 15 in the intent to treat,or ITT, population; in addition, statistical significance was also achieved in STRIDE 1 for a second pre-specified primarysymptom endpoint of ocular discomfort severity change from baseline to day 15 in patients with more severe baseline oculardiscomfort. In STRIDE 2, statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia, butstatistical significance was not achieved for the primary symptom endpoint of ocular discomfort severity. EYSUVIS wasgenerally well tolerated in both STRIDE 1 and STRIDE 2, with no clinically significant treatment‑related adverse eventsobserved during the course of either trial, and with elevations in interocular pressure, or IOP, in both trials similar to placebo.In October 2018, we submitted a New Drug Application, or NDA, to the FDA for EYSUVIS for the temporary relief ofthe signs and symptoms of dry eye disease. In August 2019, we announced that we received a complete response letter, or CRL,from the FDA regarding this NDA. The FDA indicated that efficacy data from an additional clinical trial will be needed tosupport a resubmission of the NDA. Based upon the previous recommendation of the FDA, we initiated an additional Phase 3clinical trial, STRIDE 3, in the third quarter of 2018, which we expect will serve as the basis of our response to the CRL. Wehave identified key factors that contributed to the differences observed in the results from STRIDE 2 compared to those ofSTRIDE 1 and the Phase 2 trial, and we believe that the changes made to the inclusion/exclusion criteria of STRIDE 3 based onthese analyses will improve the probability of success of this trial. We are targeting topline data for STRIDE 3 in the first quarterof 2020 and resubmission of the NDA in the second quarter of 2020. If approved, we believe EYSUVIS could become thepreferred first-line prescription therapy for treating dry eye flares, which affect the vast majority of dry eye patients.INVELTYS is the first and only FDA‑approved ocular corticosteroid product with a twice-a-day dosing regimen for thetreatment of post‑operative inflammation and pain. Other approved topical ocular corticosteroid products for this indication aredosed three or four times a day. In clinical trials, INVELTYS showed statistical significance in the primary efficacy endpoints ofcomplete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared toplacebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared toplacebo.We are evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for thetemporary relief of signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease. We also areevaluating compounds in our receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the4®TMTable of Contentsvascular endothelial growth factor, or VEGF, pathway, for the potential treatment of a number of retinal diseases and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk ofIOP increase and cataract formation.INVELTYS received FDA approval under Section 505(b)(2) of the U.S. Federal Food, Drug and Cosmetic Act, or theFDCA, which is the pathway we plan to rely on for the approval of EYSUVIS as well. We have retained worldwide commercialrights for INVELTYS and our current product candidates, including EYSUVIS. Since the FDA approval of INVELTYS, we havebuilt a commercial infrastructure with our own focused, specialty sales force which includes 57 territory sales managers, orTSMs, 7 regional sales leaders, or RSLs, and 3 directors of national accounts, or DNAs. If EYSUVIS is approved by the FDA, weplan to increase our sales force from 57 sales representatives to a total of approximately 75 to 100 sales representatives, who willpromote both EYSUVIS and INVELTYS. We expect to commercialize in the United States any of our other product candidatesthat receive marketing approval as well. We also expect to explore commercialization of EYSUVIS for the treatment of dry eyedisease in certain markets outside the United States, including the European Union, or EU, utilizing a variety of collaboration,distribution and other marketing arrangements with one or more third parties.We own and/or exclusively license patents relating to INVELTYS, EYSUVIS, our other product candidates and ourAMPPLIFY technology, including U.S. and foreign issued patents and pending patent applications covering KPI‑121, our rTKIprogram, other product candidates under development, our AMPPLIFY technology, and its ophthalmic applications. Theexpiration dates of issued U.S. and ex-U.S. patents covering INVELTYS and EYSUVIS are in 2033. The expiration dates ofissued U.S. and ex-U.S. patents relating to our AMPPLIFY technology are in 2025 through 2036.The following table describes the stage of each of our current programs: Our ProductINVELTYS for Post‑Operative Inflammation and PainOcular inflammation and pain are common complications following ocular surgery. According to Marketscope, athird‑party provider of market data, in 2019 there were approximately 8.6 million ocular surgeries in the United States. Tissuedamage caused by ocular surgery leads to the production of prostaglandins, lipids that aid in recovery at the site of an injury, andan increase in blood flow to the affected area, which contribute to inflammation. The standard of care5Table of Contentsfor post‑operative inflammation and pain includes anti‑inflammatory drugs such as corticosteroids, which improve patientcomfort and accelerate recovery through disruption of the inflammatory cascade.INVELTYS received FDA approval in August 2018 for the treatment of post-surgical inflammation and pain followingall ocular surgery, and was commercially launched in the United States in January 2019. INVELTYS is the first and only post-operative ocular steroid shown effective and FDA approved for twice-a-day, or BID, dosing, has the highest concentration (1%)of LE on the market in the United States and is formulated with our AMPPLIFY technology, which enables INVELTYS todeliver 3.75x more drug to the ocular tissue compared to an active comparator. Based on a market survey we commissioned of100 ophthalmologists, we believe INVELTYS offers advantages over other existing post‑surgical treatment options due to itstwice‑daily dosing, two‑week course of treatment and safety data, including low incidence of reported IOP spikes, and efficacydata from our clinical trials.In each of the two Phase 3 clinical trials of INVELTYS in patients who had undergone cataract surgery, administrationof INVELTYS two times a day for 14 days achieved statistical significance for both primary efficacy endpoints of completeresolution of inflammation at day eight maintained through day 15 with no need for rescue medication and complete resolution ofpain at day eight maintained through day 15 with no need for rescue medication. In each of these trials, INVELTYS was welltolerated with similar increases in IOP, a common side effect of steroids, compared to placebo and with no treatment‑relatedsignificant adverse events observed during the course of either trial.Our Product CandidatesEYSUVIS (KPI‑121 0.25%) for Dry Eye DiseaseDry eye disease is a chronic, episodic, multifactorial disease affecting the tears and ocular surface that can result in tearfilm instability, inflammation, discomfort, visual disturbance and ocular surface damage. Dry eye disease can have a significantimpact on quality of life and can potentially cause long‑term damage to the ocular surface. Due to the impact of dry eye diseaseon tear film dynamics, the condition can affect performance of common vision‑related activities such as reading, using acomputer and driving, and can lead to complications associated with visual impairment. In addition, the vast majority of dry eyepatients experience acute exacerbations of their symptoms, which are commonly referred to as flares, at various times throughoutthe year. These flares can be triggered by numerous factors, including exposure to allergens, pollution, wind and low humidity,intense visual concentration such as watching television and working at a computer, hormonal changes, contact lens wear,smoking and sleep deprivation, which cause ocular surface inflammation and impact tear production and/or tear film stability.We estimate dry eye disease affects approximately 33 million people in the United States based on an estimated dry eyedisease prevalence of 14.5% described below and applied to the population of the United States over 20 years old. Based onthird‑party academic research, we believe dry eye disease results in approximately $55 billion in direct and indirect costs in theUnited States each year, of which approximately $3.8 billion are direct medical costs. The exact prevalence of dry eye disease isunknown due to the difficulty in defining the disease and the lack of a single diagnostic test to confirm its presence. The BeaverDam Offspring Study, a major epidemiological study published in 2014 in the American Journal of Ophthalmology, reported thatin a cohort of over 3,000 patients, dry eye disease was self‑reported by 14.5% of the patients. The prevalence of dry eye diseaseincreases with age, and we expect that the number of dry eye disease cases will increase as the U.S. population continues to age.Epidemiology and market research commissioned by us indicate that there are an estimated 17.2 million patients with a diagnosisof dry eye disease in the United States. We commissioned two surveys of 503 and 297 dry eye disease patients, which we refer toas the patient surveys. The patient surveys included a representative set of dry eye patients based on demographics and diseasecharacteristics, such as age, sex and therapeutic history. The patients represented a broad range of dry eye disease severity. Basedupon our review of the patient survey, we believe dry eye disease is a burdensome disease that has a significant impact on thequality of life of patients with dry eye disease.The most commonly used treatments for dry eye disease in the United States are over‑the‑counter eye drops, oftenreferred to as “artificial tears,” and three prescription pharmaceutical products, Restasis, Cequa and Xiidra. Artificial tears areintended to be palliative in nature to supplement insufficient tear production or improve tear film instability, but do not treat theunderlying inflammation in dry eye disease. Restasis and Cequa increase tear production6®TM®Table of Contentsand Xiidra treats the signs and symptoms of dry eye disease, however, Restasis, Cequa and Xiidra are typically used chronicallyfor dry eye patients who have continuous symptoms. As each of Restasis, Cequa and Xiidra have a relatively long onset of action,they are not generally used for the short‑term treatment of episodic dry eye flares. We believe there is a larger proportion of dryeye patients whose symptoms are primarily episodic as opposed to chronic, and for whom a chronic therapy is not necessary. Forthese patients, we believe an FDA‑approved, acute, short‑term therapy can address a significant unmet need. Our review of thepatient surveys indicates that approximately 90% of surveyed patients reported experiencing short-term flares, with flares lastingon average approximately 4 days and occurring approximately 6 times per year. The patients surveyed also indicated that themost common reason for discontinuing the two leading branded dry eye treatments were insufficient efficacy and side effects. Inaddition, the results of a multi-sponsored Gallup Poll survey were consistent with our patient surveys, indicating on average 5-6flares per year lasting on average 4 days.We are developing EYSUVIS for the temporary relief of the signs and symptoms of dry eye disease, utilizing atwo‑week course of therapy administered four times a day. We believe that EYSUVIS’ broad mechanism of action, rapid onset ofrelief of both signs and symptoms, favorable tolerability profile and potential to be complementary to existing therapies, willresult in a favorable profile for the management of dry eye flares and other dry eye associated conditions that would benefit fromtemporary relief of dry eye signs and symptoms. We believe these features of EYSUVIS may be attractive to prescribingclinicians and could be a preferred first-line prescription therapy choice for a vast majority of their dry eye patients. Based uponour review of the patient surveys, we also believe patients with dry eye disease will be attracted to EYSUVIS’ novelty, rapidefficacy in the relief of signs and symptoms and ability to be used on an as‑needed basis to treat the short-term flares.In June 2016, we initiated two Phase 3 clinical trials, STRIDE 1 and STRIDE 2 each with enrollment of over 900 dryeye patients, comparing EYSUVIS to placebo, both administered four times a day for 14 days. We announced topline results fromboth trials in January 2018. Statistical significance was achieved for the primary sign and both pre-specified primary symptomendpoints in STRIDE 1. Statistical significance was achieved for the primary sign endpoint in STRIDE 2 with a trend towards atreatment effect for the primary symptom endpoint. EYSUVIS was generally well tolerated in both STRIDE 1 and STRIDE 2,with no clinically significant treatment‑related adverse events observed during the course of either the trial. In October 2018, wesubmitted an NDA to the FDA for EYSUVIS for the temporary relief of the signs and symptoms of dry eye disease. The NDAincluded data from three clinical trials studying approximately 2,000 patients, including one Phase 2 trial and two Phase 3efficacy and safety trials (STRIDE 1 and STRIDE 2). In August 2019, we announced that we received a CRL from the FDAregarding this NDA. The FDA indicated that efficacy data from an additional clinical trial will be needed to support aresubmission of the NDA. Based upon the previous recommendation of the FDA, we initiated an additional Phase 3 clinical trial,STRIDE 3, in the third quarter of 2018, which we expect will serve as the basis of our response to the CRL. We have identifiedkey factors that contributed to the differences observed in the results from STRIDE 2 compared to those of STRIDE 1 and thePhase 2 trial, and we believe that the changes made to the inclusion/exclusion criteria of STRIDE 3 based on these analyses willimprove the probability of success of this trial. We are targeting topline data for STRIDE 3 in the first quarter of 2020 andresubmission of the NDA in the second quarter of 2020. If approved, we believe EYSUVIS could become the preferred first-lineprescription therapy for treating dry eye flares, which affect the vast majority of dry eye patients.rTKI Program for Retinal DiseasesCommonly used therapies for retinal diseases must be injected directly into the patient’s eye, often at monthly intervals.We believe that our AMPPLIFY technology has the potential to facilitate the delivery of therapeutics into tissues in the back ofthe eye, which has the potential to improve dosing regimen and offers a competitive advantage over current therapies.After synthesizing and testing a number of new chemical entities, or NCEs, from our rTKI program, we are furtherevaluating compounds in our rTKI program that inhibit the VEGF pathway for the potential treatment of a number of retinaldiseases, including wet age‑related macular degeneration, or Wet AMD, Diabetic Retinopathy, or DR, Diabetic Macular Edema,or DME, and Retinal Vein Occlusion, or RVO, each of which involves either the leakage of existing blood vessels or theproliferation of poorly formed and leaky blood vessels at the back of the eye. These eye diseases can significantly reduce visionand eventually lead to blindness. VEGF is a protein that plays a critical role in7Table of Contentsthe formation of new blood vessels and increased permeability, two pathological processes that contribute to the vision lossassociated with certain retinal diseases. In our rTKI program, we are initially targeting Wet AMD with our lead rTKI compound,KPI‑285. KPI‑285 inhibits the VEGF pathway. In preclinical rabbit studies, topical administration of KPI‑285 achievedconcentrations in tissues in the back of the eye well above the concentrations required for in vitro inhibition of 50% of the VEGFreceptor kinase activity. Prior to initiating IND‑enabling studies, we may consider potential collaborative partnershipopportunities to advance product candidates we develop through our rTKI program, including KPI‑285.Novel next-generation anti-inflammatoriesCorticosteroid therapy is considered the standard of care for treating inflammatory conditions. In ophthalmology,corticosteroid use has been associated with IOP increase and cataract formation. We are developing new chemical entities forophthalmic indications that exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase andcataract formation.Other Potential Applications of our AMPPLIFY TechnologyWhile our current focus is on the application of our AMPPLIFY technology in ophthalmology, we have conductedpreclinical studies demonstrating the potential of our AMPPLIFY technology in other therapeutic areas. Mucus limits delivery ofconventionally formulated drugs to the lung, cervical/vaginal tract, gastrointestinal tract and other mucus‑protected tissues. Inpreclinical studies, we have demonstrated that our AMPPLIFY technology can be used to increase the mucus penetration of overfifteen classes of drugs, including anti‑infective and anti‑inflammatory drugs.StrategyOur goal is to become a leading biopharmaceutical company focused on the discovery, development andcommercialization of innovative therapies primarily for diseases of the front and back of the eye. Key elements of our strategyinclude:·Maximize the commercial potential of INVELTYS for post‑operative inflammation and pain. In January 2019,we began to commercialize INVELTYS in the United States with our own focused, specialty sales force of 57TSMs, 7 RSLs and 3 DNAs, targeting both ophthalmologists and optometrists.·Seek and obtain regulatory approval for, and maximize the commercial potential of, EYSUVIS for the treatmentof dry eye disease. In October 2018, we submitted an NDA to the FDA for EYSUVIS for the temporary relief ofthe signs and symptoms of dry eye disease. In August 2019, we announced that we received a CRL from the FDAregarding this NDA. The FDA indicated that efficacy data from an additional clinical trial will be needed to supporta resubmission of the NDA. Based upon the previous recommendation of the FDA, we initiated an additional Phase3 clinical trial, STRIDE 3, in the third quarter of 2018, which we expect will serve as the basis of our response tothe CRL. We have identified key factors that contributed to the differences observed in the results from STRIDE 2compared to those of STRIDE 1 and the Phase 2 trial, and we believe that the changes made to theinclusion/exclusion criteria of STRIDE 3 based on these analyses will improve the probability of success of thistrial. We are targeting topline data for STRIDE 3 in the first quarter of 2020 and resubmission of the NDA in thesecond quarter of 2020.We estimate that dry eye disease affects approximately 33 million people in the United States. If approved, webelieve EYSUVIS could become the preferred first-line prescription therapy for treating dry eye flares, which affectthe vast majority of dry eye patients. We intend to commercialize EYSUVIS in the United States with our specialtysales force, which we plan to increase from 57 sales representatives to a total of approximately 75 to 100 salesrepresentatives, who will promote both EYSUVIS and INVELTYS. We also expect to explore commercialization ofEYSUVIS for the treatment of dry eye disease in certain markets outside the United States, including the EuropeanUnion, or EU, utilizing a variety of collaboration, distribution and other marketing arrangements with one or morethird parties.8Table of Contents·Advance early stage pipeline development programs, and further leverage our proprietary AMPPLIFYtechnology. We are evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosingregimens for the temporary relief of signs and symptoms of dry eye disease and for potential chronic treatment ofdry eye disease. We also are evaluating our current lead rTKI program compound, KPI‑285, a small molecule for thepotential treatment of a number of retinal diseases, and our novel next-generation anti-inflammatories designed toexhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase and cataractformation. Prior to initiating IND‑enabling studies, we may consider potential collaborative partnershipopportunities to advance product candidates we develop, including through these programs. In addition, we also areevaluating additional product opportunities with significant unmet medical needs that we believe can be addressedby our proprietary AMPPLIFY technology.·Business development through selective acquisitions and licensing. We plan to pursue value-driven businessdevelopment opportunities as they arise in order to enhance our business and product pipeline through strategicallyacquiring clinical or commercial-ready product candidates or approved revenue-generating products with growthpotential, particularly in the ophthalmic area. We will also continue to assess the addition of other specialtytherapeutic areas through both product/portfolio acquisitions or other M&A activity with a similar focus onopportunities that we anticipate are or will become revenue generating and accretive.Our MPP TechnologyOpportunities in Drug Delivery across Mucosal BarriersThe body is surrounded by boundary tissues that play the important physiological role of preventing foreign bodies frompenetrating into the body. The mucus that coats these tissues, the eyes, lung, cervical/vaginal tract and gastrointestinal tract, forexample, serves as a protective barrier to trap and eliminate particulate matter, such as viruses, bacteria and allergens, before theseagents can enter the underlying tissues and cause infections or elicit reactions. However, in playing this pivotal role of protection,mucus can also hinder medical treatments by limiting the penetration of medications to mucus‑protected tissues, thereby reducingtheir therapeutic effect.Mucus also makes it difficult to treat many ophthalmic diseases. The body can rapidly eliminate drugs delivered to theeye via the tear film protecting the surface of the eye, which can significantly limit the effectiveness of these drugs. This is thecase both for drugs designed to treat conditions in the front of the eye, such as dry eye disease and post‑operative inflammationand pain, as well as for drugs designed to treat conditions in the back of the eye, such as retinal diseases. We believe that ourproprietary MPP technology, which we refer to as our AMPPLIFY technology, has the potential to address this clear unmetmedical need for more efficient delivery of drugs.MPP TechnologyOur MPPs are selectively‑sized nanoparticles, with average diameters of approximately 330 nanometers, and havenon‑covalent proprietary coatings. We believe that these two key attributes enable even distribution of drug particles on mucosalsurfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus andpreventing drug particles from becoming trapped and eliminated by mucus. We believe this enables enhanced efficacy at equal orlower doses as well as less frequent dosing for improved patient convenience and compliance.In a preclinical study, MPPs or conventional particles in a hypotonic solution were administered intravaginally to mice.Ten minutes after administration, the vaginal tissues were dissected and stained. The image on the left below shows thedistribution of the conventional particles and the image on the right below shows the distribution of the MPPs.9Table of ContentsThe conventional particles aggregated in the lumenal mucus and did not reach the target tissues. In contrast, the MPPs coated theentire vaginal epithelium, including all the target surfaces.Source: Laura M. Ensign et al., Mucus‑Penetrating Nanoparticles for Vaginal Drug Delivery Protect Against Herpes SimplexVirus, Science Translational Medicine, June 14, 2012.Also, for ophthalmic applications, while a significant portion of conventionally formulated ophthalmic drugs are rapidlyeliminated via the tear film, we have shown that our MPPs are capable of achieving higher concentration on the surface of theeye, thereby enabling the active drug substance to reach cells in the underlying ocular tissue at higher levels.10Table of ContentsThe graphic below illustrates the ability of our MPP drug nanoparticles to penetrate the tear and membrane‑boundmucins to reach the ocular surface, as compared to conventional, non‑coated particles, which adhere to the mucins in the tear filmand are cleared with the tears through blinking.This graphic is included for illustrative purposes only and is not intended to provide a complete representation of the way inwhich our MPP drug nanoparticles interact with the ocular surface.Our initial focus is to leverage our MPP technology, to enhance delivery of drugs into the eye. In preclinical studies,KPI‑121 demonstrated favorable pharmacokinetic characteristics and increased drug penetration into ocular tissues as comparedto a branded form of LE. In a preclinical study of ocular inflammation in rabbits, KPI‑121 0.5% administered four times a day, orQID, showed a larger reduction of inflammation as compared to a branded form of LE 0.5% given QID, as measured by the meanaqueous humor cell counts after intravitreal injection of lipopolysaccharide. We also administered either 0.4% KPI‑121 or 0.5%branded LE to the eyes of two groups of rabbits. As illustrated in the line graph below, the concentrations of LE in aqueoushumor, a transparent gelatinous fluid that fills the anterior and posterior chambers between the lens and the cornea, of the rabbiteyes treated with KPI‑121 were more than three times higher than the rabbit eyes treated with branded LE 30 minutes afterdosing, at a 20% lower concentration.11Table of ContentsLE in Aqueous HumorWe administered KPI‑121 0.5%, branded LE 0.5%, or 0.5% of an LE non‑MPP nanoparticle, to the eyes of three groupsof rabbits and measured the amount of LE that was delivered to the cornea. The non‑MPP nanoparticle was similar in size to ourMPP nanoparticles but lacked the proprietary surface coating used in our MPP nanoparticles. As illustrated in the line graphbelow, concentrations of LE in the cornea of the rabbit eyes treated with KPI‑121 were more than three times higher than theconcentrations in rabbits treated with branded LE between 20 and 40 minutes after dosing. In addition, the rabbit eyes treatedwith the non‑MPP nanoparticles had concentrations of LE similar to that in the rabbit eyes treated with branded LE and did notdisplay the improved drug bioavailability properties observed with KPI‑121. We believe these results highlight the importance ofour proprietary MPP technology and show that KPI‑121’s improved pharmacokinetic profile has the potential to reduce thedosing strength and/or frequency of administration of LE with KPI‑121 as compared to branded LE.12Table of ContentsLE in CorneaWe also have demonstrated the potential of our MPP nanoparticles to increase the mucus penetration of over fifteenclasses of drugs. While our current focus is in ophthalmology, in preclinical studies, our MPP technology has been effective indelivering drugs to the lungs, cervical/vaginal tract, gastrointestinal tract and other mucus‑protected tissues. We have the abilityto vary the rate of drug release as appropriate for the targeted disease state and tissue. As a result, drugs can be delivered either inrapid release formulations or as sustained release formulations that slowly release drug over a time period that ranges from hoursto days.Eye DiseaseThe human eye is often segmented into two sections—the front and back of the eye. The front of the eye consists oftissues and structures responsible for the protection and maintenance of the eye (including the cornea, conjunctiva and tear film),for providing nutrition to the various tissues of the eye (aqueous humor) and for facilitating the optimal transfer and focusing oflight to the retina (including the cornea, iris and lens). Front‑of‑the‑eye diseases include ocular inflammation, dry eye disease,infection, allergy and refractive disorders. Clinicians typically treat diseases that affect the front of the eye with topically appliedeye drops. A major limitation of these treatments is that the eye rapidly eliminates topically applied medications via the tear film,limiting the penetration of drugs into the ocular tissue.The back of the eye contains the retina, which is the light sensing layer of tissue, the choroid, which is a key vascularlayer of the eye, the vitreous humor, which is a transparent gel that fills the vitreous chamber between the lens and the retina, andthe optic nerve, which transmits visual information from the retina to the brain. Common retinal diseases include AMD, DR,DME and RVO. These diseases frequently result in damage to the vasculature of the eye, leading to poor function and/or leakingof existing vessels and often leading to proliferation of new, abnormal and leaky blood vessels in the back of the eye. Theseconditions can lead to retinal damage, scarring and irreversible loss of vision. The most common treatments for these diseasesinvolve administration of biologic agents that block the VEGF pathway and prevent or retard the blood vessel leakage and/orproliferation. Unfortunately, clinicians must inject these biologic agents directly into the vitreous of the eye via frequentintravitreal injections, or IVTs, to maintain vision. An effective therapeutic to treat retinal diseases with improved dosing regimenwould bring significant benefits to patients.13Table of ContentsOur Product and Product CandidatesKPI‑121 ProgramBoth INVELTYS and our lead product candidate, EYSUVIS, consist of MPP nanosuspensions of LE designed toenhance penetration through the mucus layer of the tear film to enable LE to reach the underlying ocular tissue. We believe thatINVELTYS and EYSUVIS, have a favorable profile for the treatment of front‑of‑the‑eye inflammatory conditions due to theirbroad mechanism of action, rapid onset of relief and favorable tolerability profile. LE is a corticosteroid developed specificallyfor the treatment of ophthalmic conditions and is designed to limit side effects, such as increases in IOP and cataract formation,that are associated with other ocular steroids. The first LE containing product was approved by the FDA in 1998.INVELTYS and EYSUVIS are eye drops that are topically administered as an aqueous suspension of LE. In preclinicalstudies, MPP nanosuspensions of LE demonstrated superior pharmacokinetic characteristics and bioavailability as compared tobranded LE, with increased penetration of LE into ocular tissues. Our KPI-121 program includes the following:·FDA-approved INVELTYS, administered two times a day, for the treatment of post‑operative inflammation andpain following ocular surgery; and·EYSUVIS, administered four times a day, which we are developing for the temporary relief of the signs andsymptoms of dry eye disease.INVELTYS received FDA approval in August 2018 under Section 505(b)(2) of the FDCA. The Section 505(b)(2)pathway provides an alternate and potentially more expeditious pathway to FDA approval for new or improved formulations, ornew uses of previously approved products, by enabling an applicant to rely, in part, on the FDA’s findings of safety and efficacyfor an existing product, or published literature, in support of the NDA. An NDA filed under Section 505(b)(2) allows us toreference the FDA’s prior findings of safety and efficacy for LE to supplement the safety and efficacy data generated in ourclinical trials. We are seeking FDA approval of EYSUVIS through the Section 505(b)(2) regulatory pathway as well.EYSUVIS (KPI‑121 0.25%) for Dry Eye DiseaseDry Eye Disease OverviewDry eye disease is a chronic, episodic, multifactorial disease affecting the tears and ocular surface that can result in tearfilm instability, inflammation, discomfort, visual disturbance and ocular surface damage. While the precise cause of dry eyedisease is not fully understood, it often involves impairment of the lacrimal unit, which consists of the lacrimal glands, ocularsurface and the sensory and motor nerves that connect them, and has a significant inflammatory component. There is significantpublished research that suggests that inflammation plays a major role in the development of dry eye disease. Dry eye disease canhave a significant impact on quality of life and can potentially cause long‑term damage to the ocular surface. Due to the impact ofdry eye disease on tear film dynamics, the condition can affect performance of common vision‑related activities such as reading,using a computer and driving, and can lead to complications associated with visual impairment. Dry eye disease is commonlytreated by ophthalmologists and optometrists.14Table of ContentsA significant number of dry eye disease patients experience acute, episodic exacerbations of their symptoms, which werefer to as flares, at various times throughout the year that can cause significant discomfort and disability. A dry eye flare isdefined as a rapid onset, inflammation-driven response to a variety of triggers that typically cannot be adequately managed withthe patient’s ongoing therapy. As illustrated in the graphic below, these flares can be triggered by numerous factors, such asenvironmental stimuli related to exposure to allergens, pollution, wind and low humidity. Intense visual concentration, such aswatching television or working at a computer, can also trigger flares. Other potential triggers include contact lens wear, smokingand sleep deprivation, which cause ocular surface inflammation and impact tear production and/or tear film stability.We estimate dry eye disease affects approximately 33 million people in the United States. Based on third‑partyacademic research, we believe dry eye disease results in approximately $55 billion in direct and indirect costs in the United Stateseach year, of which approximately $3.8 billion are direct medical costs. The exact prevalence of dry eye disease is unknown dueto the difficulty in defining the disease and the lack of a single diagnostic test to confirm its presence. The Beaver Dam OffspringStudy, a major epidemiological study published in 2014 in the American Journal of Ophthalmology, reported that in a cohort ofover 3,000 patients, dry eye disease was self‑reported by 14.5% of the patients. The prevalence of dry eye disease increases withage, and we expect that the number of dry eye disease cases will increase as the U.S. population continues to age. Epidemiologyand market research commissioned by us indicate that there are an estimated 17.2 million patients with a diagnosis of dry eyedisease in the United States. The vast majority of dry eye patients experience acute exacerbations of their symptoms, which arecommonly referred to as flares, at various times throughout the year.The most commonly used treatments for dry eye disease in the United States are over‑the‑counter eye drops, oftenreferred to as “artificial tears,” and three prescription pharmaceutical products, Restasis, Xiidra and Cequa. Artificial tears arepalliative in nature and intended to supplement insufficient tear production or improve tear film instability, but do not treat theunderlying inflammation in dry eye disease. Restasis and Cequa both increase tear production and Xiidra treats the signs andsymptoms of dry eye disease, however, Restasis, Cequa and Xiidra are typically used chronically for dry eye patients who havecontinuous symptoms. As each of Restasis, Cequa and Xiidra15Table of Contentshave a relatively long onset of action, they are not generally used for the short‑term treatment of episodic dry eye flares. Webelieve there is a larger proportion of dry eye patients whose symptoms are primarily episodic as opposed to chronic, and forwhom a chronic therapy is not necessary and an FDA‑approved, acute, short‑term therapy can address a significant unmet need.Limitations of Existing Treatments for Dry Eye DiseaseInitial treatment for dry eye disease in the United States frequently consists of over‑the‑counter artificial tear/lubricatingeye drops. Most over‑the‑counter artificial tears are palliative and typically provide only short term or temporary relief bylubricating the eyes and helping to maintain moisture on the outer surface of the eye. These products do not treat the underlyinginflammatory components of dry eye disease.In addition to over‑the‑counter artificial tears, Restasis, Xiidra and Cequa are sometimes prescribed as a chronic therapyfor the treatment of dry eye disease. We believe that less than 15% of patients diagnosed with dry eye disease in the United Statesuse a chronic therapy to treat their disease. Restasis and Cequa are topically applied, ophthalmic formulation of theimmuno‑suppressant cyclosporine. Restasis and Cequa are not approved for the treatment of the signs and symptoms of dry eyedisease, but rather for increasing tear production in patients whose tear production is presumed to be suppressed due to ocularinflammation associated with dry eye disease. Restasis frequently causes burning upon instillation, and, according to the packageinsert, 17% of patients in clinical trials of Restasis reported ocular burning upon instillation. Cequa frequently causes pain uponinstillation, and, according to the package insert, 22% of patients in clinical trials of Cequa reported pain upon instillation ofdrops. Xiidra is a topically applied ophthalmic formulation of lifitegrast, a small molecule LF1a antagonist, which was approvedby the FDA in July 2016 for the treatment of the signs and symptoms of dry eye disease and was commercially launched in theUnited States in August 2016. Xiidra, like Restasis and Cequa, is typically used chronically. Due to each of Restasis, Cequa andXiidra having a relatively long onset of action, they are not generally used for the short‑term treatment of dry eye flares.Topically applied steroids have been shown to provide some clinical benefit to patients with dry eye disease. However,no topical steroid products, including INVELTYS, are approved in the United States for the acute or chronic treatment of dry eyedisease, and there is no widely established treatment paradigm for the safe use of steroids in treating dry eye disease. As a result,treatment of dry eye disease represents a very small percentage of total ophthalmic steroid use in the United States.EYSUVIS (KPI‑121 0.25%) Opportunity in Dry Eye DiseaseWe believe that EYSUVIS has a favorable profile for the management of dry eye disease flares, including the followingattributes:·Broad mechanism of action. LE is a corticosteroid. Corticosteroids are known for their broad anti‑inflammatoryproperties.·Rapid onset of relief. In our Phase 2 and Phase 3 clinical trials, patients treated with EYSUVIS reported reductionsin ocular discomfort within days of initiation of treatment.·Favorable safety and tolerability profile. LE is one of the safest topical ocular steroids available due to its uniquepharmacokinetics. LE was designed to be metabolized after exerting its anti‑inflammatory action in the eye. Themetabolism of LE to inactive metabolites reduces exposure of the trabecular meshwork, an area of tissue located inthe anterior chamber that is responsible for draining the aqueous humor from the eye, to active steroid, thusreducing the risk of an increase in IOP relative to other steroids. In both STRIDE 1 and STRIDE 2, EYSUVIS hadcomparable rates of IOP to placebo. No serious adverse events were associated with EYSUVIS in either trial.·Specifically targeting relief of episodic dry eye flares. The mechanism of action and rapid onset of relief ofEYSUVIS in dry eye disease is distinct from that of artificial tears and chronic therapies like Restasis, Cequa andXiidra. Therefore, we expect it to be used as a stand‑alone short course therapy to provide rapid16Table of Contentsrelief of dry eye flares by improving ocular discomfort (a dry eye symptom) and reducing ocular redness (a dry eyesign).·Potentially complementary to existing therapies. We believe that patients on chronic therapies also experience dryeye flares and could potentially benefit from using EYSUVIS in addition to their maintenance therapy.If we receive FDA approval of an NDA for EYSUVIS for the temporary relief of the signs and symptoms of dry eyedisease, we believe that we could have the first FDA‑approved product for this indication with demonstrated safety and efficacyand a two‑week course dosing regimen. We believe that these attributes will make EYSUVIS attractive to prescribing cliniciansfor treating patients that suffer from dry eye flares.EYSUVIS (KPI‑121 0.25%) Clinical Development ProgramIn 2014, we conducted a Phase 2 double‑masked, randomized, controlled clinical trial of EYSUVIS in 150 patients withdry eye disease at nine clinical sites. Patients were enrolled in the trial based on their magnitude of conjunctival hyperemia andocular discomfort prior to treatment. Patients had a two week run‑in with placebo administered four times a day and wererequired to maintain a similar magnitude of conjunctival hyperemia and ocular discomfort following this run‑in period to beincluded in the randomization portion of the trial. Upon achieving the trial entry criteria after this run‑in period, patients wererandomized to receive either EYSUVIS or a placebo four times a day for 28 days. Safety and efficacy assessments were madeover the four week dosing period.For our Phase 2 clinical trial, the primary sign endpoint was conjunctival hyperemia at day 29, as measured via a 0 to 4scale ranging from no hyperemia (score=0) to severe hyperemia (score=4), and the primary symptom endpoint was oculardiscomfort severity at day 29, as reported by the patient on a visual analog scale ranging from 0 to 100 mm (0 mm=very mild;100 mm=very severe).EYSUVIS achieved statistical significance for the primary clinical sign endpoint of conjunctival hyperemia at day 29. Apositive treatment effect for hyperemia was also achieved for conjunctival hyperemia at day 15 (p=0.0090). In addition, a higherproportion of patients treated with EYSUVIS demonstrated a reduction of one unit or greater in conjunctival hyperemia ascompared to patients treated with placebo. Patients treated with EYSUVIS also showed reductions in the symptom endpoint ofocular discomfort severity at days 29 and 15 but did not reach statistical significance for this endpoint based on the analysis thatwas pre-defined in the statistical analysis plan.Following completion of our Phase 3 trials, we conducted additional analysis on a post-hoc basis of our Phase 2 datausing the same statistical analysis plan as used to test the primary symptom endpoints in the Phase 3 trials. Using this analysis weobserve a treatment effect for ocular discomfort at day 15 of a similar magnitude as was observed in STRIDE 1 (-5.27 mmdifference in Phase 2 compared to -5.44 mm in STRIDE 1) and a p-value of 0.0489. Although post-hoc analyses may be givenless weight by regulatory authorities than pre-specified analyses, we believe these analyses provide important informationregarding EYSUVIS’ clinical effect.EYSUVIS was generally well tolerated in the Phase 2 clinical trial, with no treatment‑related significant adverse eventsobserved during the course of the trial. The only treatment‑emergent adverse event reported in greater than 3% of patients wasinstillation site pain, which was reported in 6.9% of patients treated with EYSUVIS compared to 3.8% of patients treated withplacebo. Patients in the EYSUVIS and placebo treatment arms had a similar profile with respect to mean IOP, and the number ofpatients with an IOP increase of greater than 5 mm Hg was similar in the two treatment groups.In June 2016, we initiated two Phase 3 clinical trials, STRIDE 1 and STRIDE 2, comparing EYSUVIS to placebo, bothadministered four times a day for 14 days. These clinical trials were each multicenter, randomized, double-masked, placebocontrolled, parallel-arm studies comparing EYSUVIS to placebo each dosed QID for 14 days. Patients who met initial screeningand inclusion/exclusion criteria underwent a two week run-in period with placebo dosed in each eye QID for 14 days. Patientswho continued to meet inclusion and exclusion criteria after the run-in were randomized to either EYSUVIS or placebo. A totalof 918 patients were randomized in STRIDE 1 and 909 patients were17Table of Contentsrandomized in STRIDE 2. Conjunctival hyperemia was measured using a 0 to 4 scale ranging from no hyperemia (score=0) tosevere hyperemia (score=4). Ocular discomfort severity was graded daily by the patient over the entire course of the trial using avisual analog grading scale ranging from 0 to 100 mm (0 mm=very mild; 100 mm=very severe) recorded in a patient diary.In STRIDE 1, statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia change frombaseline to day 15 in the ITT population (p<0.0001) and the primary symptom endpoint of ocular discomfort severity changefrom baseline to day 15 in the ITT population (p<0.0001). Statistical significance was also achieved for a second pre-specifiedprimary symptom endpoint of ocular discomfort severity change from baseline to day 15 in patients with more severe baselineocular discomfort (p=0.0008). Statistical significance was not achieved for a second pre-specified primary sign endpoint, inferiorcorneal staining change from baseline to day 15 (p=0.1128). A positive treatment effect for ocular discomfort was also observedin the ITT population at day eight (p=0.0011), a key secondary endpoint.In STRIDE 2, statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia change frombaseline to day 15 in the ITT population (p<0.0001). Statistical significance was not achieved for the primary symptom endpointof ocular discomfort severity change from baseline to day 15 in the ITT population (p=0.1298), although a positive treatmenteffect was observed at day eight (p=0.0408), a key secondary endpoint. A trend towards a positive treatment effect was observedfor ocular discomfort severity change from baseline to day 15 in the patients with more severe baseline ocular discomfort(p=0.0799), which was a key secondary endpoint in this trial.The results for ocular hyperemia, ocular discomfort in the ITT population and ocular discomfort in patients with moresevere baseline discomfort are shown below. 18Table of Contents We have conducted additional analyses on a post-hoc basis of STRIDE 1, STRIDE 2 and our Phase 2 data to betterunderstand our clinical results, inform our developmental plans and potentially support an NDA submission. One key analysiswas evaluation of the Phase 2 ocular discomfort data using the same statistical analysis plan as used to test the primary symptomendpoints in the Phase 3 trials. Using this analysis we observe a treatment effect for ocular discomfort at day 15 of similarmagnitude as was observed in STRIDE 1 (-5.27 mm difference in Phase 2 compared to -5.44 mm in STRIDE 1) and a p-value of0.0489. In addition, we performed an analysis of the pooled data from the ITT populations from STRIDE 1 and STRIDE 2,which resulted in an observed positive treatment effect for ocular discomfort at day 15 (p< 0.0001). The pooled results in 2exploratory analyses in subgroups defined by geographical regions of east and west achieved p-values of 0.0071 and 0.0021respectively and north and south achieved p-values of 0.0002 and 0.0176, respectively. Further, when we analyzed the oculardiscomfort data at days 9 through 14 in STRIDE 1 and STRIDE 2 using the same statistical method as day 8 and 15, we observeda positive treatment effect with p-values less than 0.002 at all-time points between days 8 and 15 in STRIDE 1 and p-values lessthan 0.05 at 6 of 8 time points in STRIDE 2. Although post-hoc analyses may be given less weight by regulatory authorities thanpre-specified analyses, we believe these analyses may provide important information regarding EYSUVIS and may be helpful inreviewing our NDA submission. EYSUVIS was well tolerated in both trials. The most common adverse event observed in STRIDE 1 was instillation sitepain, which was observed in 6.1% of patients in both the EYSUVIS treatment group and the placebo group. The only otheradverse event reported by greater than 1% of patients in STRIDE 1 was eye irritation, which was reported in 1.1% of patients onEYSUVIS vs. 1.5% of patients on placebo. Elevations in IOP, a known side effect with topical corticosteroid administration,were similar in both the treatment group and the placebo group in STRIDE 1 with19Table of Contents0.4% in the EYSUVIS group experiencing an increase in IOP of 5 mm of mercury (mmHg) or greater resulting in an IOP of 21mmHg or greater compared to 0.4% in the placebo group.The most common adverse event observed in STRIDE 2 was instillation pain which was reported by 5.7% of patients inthe EYSUVIS treatment group vs. 4.4% in the placebo group. The only other adverse event reported by greater than 1% ofpatients was blurred vision, which was reported in 0.2% of patients on EYSUVIS vs. 1.3% of patients on placebo. Elevations inIOP were similar in both the treatment group and the placebo group with 1.1% in the EYSUVIS group experiencing an increase inIOP of 5 mmHg or greater resulting in an IOP of 21 mmHg or greater compared to none in the placebo group.In October 2018, we submitted an NDA to the FDA for EYSUVIS for the temporary relief of the signs and symptoms ofdry eye disease. In August 2019, we announced that we received a CRL from the FDA regarding this NDA. The FDA indicatedthat efficacy data from an additional clinical trial will be needed to support a resubmission of the NDA. Based upon the previousrecommendation of the FDA, we initiated an additional Phase 3 clinical trial, STRIDE 3, in the third quarter of 2018, which weexpect will serve as the basis of our response to the CRL. The STRIDE 3 trial is a multicenter, randomized, double-masked,placebo controlled, parallel-arm study comparing EYSUVIS to placebo, each dosed four times a day, or QID, for 14 days, inapproximately 900 patients with dry eye disease. Subjects who meet initial screening and inclusion/exclusion criteria undergo a2-week run-in period with placebo. We have identified key factors that contributed to the differences observed in the results fromSTRIDE 2 compared to those of STRIDE 1 and the Phase 2 trial, and we believe that the changes made to the inclusion/exclusioncriteria of STRIDE 3 based on these analyses will improve the probability of success of this trial. Subjects who continue to meetinclusion/exclusion criteria after the run-in are randomized to either EYSUVIS or placebo. The primary endpoint, Day 15 oculardiscomfort severity, is based upon a patient diary in which ocular discomfort is recorded daily over the entire course of the trialusing a visual analog grading scale. We are targeting topline data for STRIDE 3 in the first quarter of 2020 and resubmission ofthe NDA in the second quarter of 2020.INVELTYS for Post‑Operative Inflammation and PainPost‑Operative Inflammation and Pain OverviewOcular inflammation and pain are common complications following ocular surgery. According to Marketscope, in 2019there were approximately 8.6 million ocular surgeries in the United States. Marketscope also projected that there would beapproximately 10.1 million ocular surgeries in the United States in 2024. Commonly performed ocular surgeries include cataract,cornea, refractive, oculoplastic and glaucoma procedures. Tissue damage caused by ocular surgery leads to the production ofprostaglandins and increases in blood flow to the affected area, which contribute to inflammation. The standard of care forpost‑operative inflammation and pain includes anti‑inflammatory drugs such as corticosteroids, which improve patient comfortand accelerate recovery through disruption of the inflammatory cascade. Commonly used topical ocular corticosteroid productsfor the treatment of post‑operative inflammation and pain are approved for dosing four times a day. This dosing regimen can beburdensome for patients as they are taking multiple eye drops following surgery, and three or four‑times‑a‑day dosing is believedto reduce patient compliance.INVELTYS was approved by the FDA on August 22, 2018. INVELTYS is the first and only twice-daily ocularcorticosteroid indicated for the treatment of post-operative inflammation and pain following ocular surgery.Limitations of Treatments for Post‑Operative Inflammation and PainLE is a unique steroid that was designed to limit side effects, such as increases in IOP and cataract formation, that areassociated with other ocular steroids. The first LE containing product, Lotemax, was approved by the FDA in 1998. Subsequentgel and ointment formulations of Lotemax were approved by the FDA for the treatment of post‑operative inflammation and painfollowing ocular surgery. Durezol is a topical steroid approved by the FDA for the treatment of inflammation and painassociated with ocular surgery. Durezol eye drops are dosed four times a day for two weeks followed by dose tapering based onpatient response.20®®Table of ContentsThe most commonly used ocular steroids, including Lotemax products and Durezol, are approved for the treatment ofpost‑operative inflammation and pain with a three or four‑times‑a‑day dosing regimen. This dosing regimen can be burdensomefor patients as they are taking multiple eye drops following surgery, and three or four‑times‑a‑day dosing may reduce patientcompliance with the prescribed medication. Other than INVELTYS, there is currently no marketed ocular steroid product with anapproved twice‑a‑day dosing regimen.INVELTYS Opportunity in Post‑Operative Inflammation and PainWe believe that INVELTYS has a favorable profile for the treatment of inflammation and pain following ocular surgery,including the following attributes:·Twice daily dosing. INVELTYS is the first and only twice-daily ocular corticosteroid indicated for the treatment ofpost-operative inflammation and pain following ocular surgery. All other ocular corticosteroid products for thetreatment of post‑operative inflammation and pain are approved for dosing four times a day. Given the generallyaccepted view that less frequent dosing leads to higher patient compliance, we believe the ability to achieve asignificant reduction in inflammation and pain following surgery with a twice‑a‑day product will be a keydifferentiating attribute of INVELTYS.·Favorable safety and tolerability profile. LE is one of the safest topical ocular steroids available due to its uniquepharmacokinetics. LE was designed to be metabolized after exerting its anti‑inflammatory action in the eye. Themetabolism of LE to inactive metabolites reduces exposure of the trabecular meshwork to the active steroid, thusreducing risk of IOP increase relative to other steroids. In our completed Phase 3 clinical trials, INVELTYS had atolerability profile comparable to placebo, with no treatment‑related serious adverse events observed during thecourse of either Phase 3 trial.Our current estimates of potential future revenue from sales of INVELTYS are based, in part, on current prescriptiontrends, anticipated changes in payer coverage, market growth assumptions and physician market research data we havecommissioned that examines intent to prescribe. INVELTYS Customer ConcentrationThree customers comprised 10% or more of our revenue during the year ended December 31, 2019. These customerscomprised 39%, 33% and 26% of our revenue, respectively. There were no sales of INVELTYS during the year ended December31, 2018. Other Preclinical Opportunities for Dry Eye DiseaseBuilding on the results of our clinical trials for our INVELTYS and EYSUVIS product candidates, we are evaluatingopportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the temporary relief of the signs andsymptoms of dry eye disease and for potential chronic treatment of dry eye disease.rTKI ProgramRetinal DiseaseThere are a range of retinal diseases and conditions that adversely affect vision.Age‑Related Macular Degeneration (AMD)AMD is a degeneration of the macula of the retina that leads to impairment and loss of central vision. There are twocategories of AMD: “Dry” AMD, which involves slow deterioration of the retina with submacular drusen, atrophy, loss ofmacular function and central vision impairment; and “Wet” AMD, which involves growth of abnormal blood vessels under theretina and macula, resulting in edema, tissue damage and rapid loss of central vision. If untreated, neovascularization in WetAMD patients typically results in significant vision loss and the formation of a scar under the21Table of Contentsmacular region of the retina. Most cases begin as Dry AMD, which can progress to Wet AMD. Wet AMD is a leading cause ofblindness in people over the age of 55 in the United States and the European Union. The incidence of Wet AMD increasessubstantially with age, and we expect that the number of cases of Wet AMD will increase with growth of the elderly population inthe United States.The current standard of care for Wet AMD is intravitreal injection of drugs that target VEGF, one of the key proteinsinvolved in neovascularization.Diabetic Retinopathy (DR) and Diabetic Macular Edema (DME)DR is an ocular complication of diabetes involving changes of retinal blood vessels that lead to significant visualimpairment. These changes include dysfunction of retinal vasculature (nonproliferative retinopathy), with vascular occlusion andincreased permeability, leading to retinal hypoxia and DME. The disease can further progress to proliferative retinopathy withretinal neovascularization, hemorrhage and retinal detachment.Among an estimated 19.8 million adults in the United States aged forty years and older known to have diabetes, theprevalence rate for DME is 3.8%, or approximately 746,000 people. DME is the leading cause of visual impairment and blindnessin Americans between 20 and 74 years old.Retinal Vein Occlusion (RVO)RVO is a blockage of the small veins that carry blood away from the retina. The disease can cause sudden blurring orvision loss in all or part of one eye. RVO has been estimated to affect 16 million people worldwide.Limitations of Existing Treatments for Retinal DiseaseVEGF is a protein that plays a critical role in the formation of new blood vessels and increased permeability, twopathological processes that contribute to the vision loss associated with certain retinal diseases. Several tyrosine kinase inhibitorshave been investigated in AMD patients in clinical trials. These inhibitors have been administered in a variety of ways, includingintravitreal injection, oral administration and topical dosing. To date, no tyrosine kinase inhibitors have been approved in theUnited States for the treatment of ocular diseases. We believe that there is a substantial market opportunity for a safe and effectiveVEGF tyrosine kinase inhibitors to treat various retinal diseases, such as AMD, DR, DME, RVO and related neovasculardiseases.The most common treatments for retinal diseases involve administration of biologic agents that block the VEGFpathway and prevent or retard the blood vessel leakage and/or proliferation. Unfortunately, clinicians must inject these biologicagents directly into the eye via frequent IVTs to maintain vision. Sales of the two leading IVT biologic agents used to treat eyediseases associated with abnormal blood vessel proliferation, Genentech’s Lucentis and Regeneron’s Eylea , were $1.7 billionand $4.1 billion, respectively, in the in the United States in 2018. A new biologic form of Novartis’ Beovu was approved inOctober 2019. An effective therapeutic to treat retinal diseases with improved dosing regimen would bring significant benefits topatients.rTKI Program for the Potential Treatment of Wet AMD, DR, DME and RVOThrough our rTKI program we generate small molecule NCEs that are designed to be potent VEGF receptor kinaseinhibitors. KPI‑285 is our current rTKI lead compound. In preclinical rabbit studies, KPI‑285 demonstrated a potency of less thanone nanomolar against the VEGF receptor‑2 kinase and good selectivity against particular growth factor receptor kinases, cellcycle kinases and other detrimental receptors.Also in preclinical rabbit studies, topical administration of KPI‑285 achieved concentrations in tissues in the back of theeye well above the concentrations required for in vitro inhibition of 50% of the VEGF receptor kinase activity. In addition, in arabbit model of VEGF induced vascular leakage, topically applied KPI‑285 MPP reduced leakage to an extent similar to thatachieved with an IVT injection of Genentech’s Avastin , a recombinant human monoclonal antibody that binds to VEGF. In thismodel, vascular leakage of fluorescein was induced by IVT injections22®®®®Table of Contentsof VEGF. The extent of fluorescein leakage observed in various treatment groups was scored in a blinded fashion on a scale from0 to 4, with 0 being no leakage and 4 being heavy leakage. As shown in the photographs below, the magnitude of the effectachieved with topical administration of KPI‑285 5.0% was similar to that observed with IVT injection of Avastin.We believe that an effective therapy with an improved dosing regimen for patients with retinal diseases such as AMD,DR, DME and RVO will be a significant advancement in the treatment of these diseases and could increase patient complianceand reduce treatment burden in patients suffering from these sight threatening diseases. Prior to initiating IND‑enabling studies,we may consider potential collaborative partnership opportunities to advance our product candidates we develop through ourrTKI program, including KPI‑285.Novel next-generation anti-inflammatoriesCorticosteroid therapy is considered the standard of care for treating inflammatory conditions. In ophthalmology,corticosteroid use has been associated with IOP increase and cataract formation. We are developing new chemical entities forophthalmic indications that exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase andcataract formation.Potential Applications in Other DiseasesMucus limits delivery of conventionally formulated drugs to mucosal tissues such as the lung, cervical/vaginal andgastrointestinal tract. While our current focus is in ophthalmology, our AMPPLIFY technology has been effective in preclinicalstudies in enhancing drug delivery to these other tissues. We also have demonstrated in preclinical studies that AMPPLIFYtechnology can be used to increase mucus penetration of over fifteen classes of drugs.CompetitionThe biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intensecompetition and a strong emphasis on proprietary products. While we believe that our technologies, knowledge, experience andscientific resources provide us with competitive advantages, we face competition from many different sources, including majorpharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies andpublic and private research institutions. Any product candidates that we successfully23Table of Contentsdevelop and commercialize will compete with existing therapies and new therapies that may become available in the future.Our competitors include large pharmaceutical and biotechnology companies, and specialty pharmaceutical and genericdrug companies. Many of our competitors have significantly greater financial resources and expertise in research anddevelopment, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketingapproved products than we do. These competitors also compete with us in recruiting and retaining qualified scientific, sales andmanagement personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiringtechnologies complementary to, or necessary for, our programs. Smaller or early stage companies may also prove to besignificant competitors, particularly through collaborative arrangements with large and established companies.The key competitive factors affecting the success of INVELTYS, our first product, and EYSUVIS and other productcandidates, if approved, are likely to be the product or product candidate’s efficacy, safety, method of administration,convenience, price, the level of generic competition and the availability of insurance coverage and reimbursement fromgovernment and other third‑party payors.Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products thatare safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products thatwe may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we mayobtain approval for ours. In addition, our ability to compete may be affected because in many cases insurers or other third‑partypayors seek to encourage the use of generic products.Competition in Inflammation and Pain Following Ocular SurgeryFollowing ocular surgery, topical steroids are commonly prescribed to manage and prevent complications frompost‑operative inflammation. Topical steroid drops are the main competition to INVELTYS for the treatment of inflammation andpain following ocular surgery. The current branded market leaders for topical steroids in the United States based on revenue areLotemax products and Durezol. Generic topical steroid formulations consist mainly of products containing prednisolone,fluorometholone or dexamethasone. In addition, the first generic formulation of loteprednol suspension 0.05% (Lotemaxsuspenson) was launched in May 2019 and Durezol lost its patent exclusivity in late 2019, which could result in a potentialgeneric launch of this product.There are also non-topical formulations of ocular steroids that have been recently approved and/or marketed. EyePointPharmaceuticals, or EyePoint, launched Dexycu, an intraocular suspension of dexamethasone for the treatment of post-operativeinflammation, in July 2019. Also in July 2019, Ocular Therapeutix, or Ocular, launched Dextenza, an intracanalicular insert ofdexamethasone for the treatment of ocular pain following ophthalmic surgery. There are also a number of companies in theUnited States developing products and therapies in preclinical research and clinical development for the treatment ofinflammation and pain following ocular surgery. In addition, there are various formulations of steroids that are produced bycompounding pharmacies and that are in drop form or are injected into the eye following ocular surgery.Competition in Dry Eye DiseaseWe are developing EYSUVIS for the temporary relief of the signs and symptoms of dry eye disease, which may includethe management of dry eye disease flares. The current disease management approaches for dry eye disease in the United Statesincludes non-pharmaceutical therapies and pharmaceutical therapies. Non-pharmaceutical therapies include over‑the‑counterartificial tear eye drops, which are palliative and used on an intermittent or chronic basis to provide short‑term symptomatic reliefof dryness and irritation; hot compresses for the eye and lid hygiene management; devices, such as punctal plugs that are insertedinto the tear ducts to inhibit tear drainage, resulting in more moisture on the surface of the eye; and TrueTear Intranasal TearNeurostimulator, a neurostimulator that received marketing approval from the FDA in April 2017, which provides electricalpulses within the nasal cavity to stimulate tear production.24TM®®Table of ContentsPharmaceutical therapies for dry eye disease include on label prescription drugs, including Restasis, Xiidra, and Cequa,which are the only prescription pharmaceutical products that are approved in the United States for use in patients with dry eyedisease; off‑label prescription drugs, including topical steroid drops and/or other similar products, which are prescribed onoccasion for treatment of dry eye disease; and various drugs that are produced by compounding pharmacies. Generic versions ofRestasis are expected to become available in the U.S. in 2020. Restasis and Cequa are both topical cyclosporine formulations thatare approved for increasing tear production in patients whose tear production is presumed to be suppressed due to ocularkeratoconjunctivitis sicca. Xiidra is a topical anti-inflammatory therapy approved for treatment of the signs and symptoms of dryeye disease.There are several product candidates in preclinical and clinical development in the United States for the treatment of dryeye disease. These product candidates are being developed by pharmaceutical companies, biotechnology companies, andspecialty pharmaceutical and generic drug companies of various sizes, such as Oyster Point Pharma’s OC‑01 and OC‑02, AldeyraTherapeutics’ reproxalap ophthalmic solution, ReGenTree’s RGN-259, Aurinia Pharmaceuticals’ voclosporin ophthalmicsolution, Novaliq’s Cyclasol and NOV03 candidates, Silk Technologies’ SDP-4 ophthalmic solution, and others.Based on publicly available information, we have identified various other product candidates in clinical development forthe chronic treatment of dry eye disease in the United States. If any of these product candidates is approved and such productcandidate either effectively treats the signs and symptoms of dry eye disease or reduces the frequency of flares in dry eyepatients, it could reduce the overall market opportunity for EYSUVIS.Competition in Retinal DiseaseSeveral therapies have been developed to block the effects of VEGF by binding to and sequestering the protein. Theseinclude Regeneron Pharmaceuticals, Inc.’s Eylea, Genentech, Inc.’s Lucentis and Avastin, and Novatis’ Beovu. Avastin isapproved as an anti‑cancer agent, but is widely used off‑label in ophthalmic diseases. All of these therapies are administered byintravitreal injections and must be regularly dosed for optimal efficacy.In addition to the anti-VEGF therapies, there also are marketed drug delivery systems, or DDS, that are used to treatretinal diseases, notably: Ozurdex, which releases dexamethasone, a corticosteroid, and is marketed by Allergan; Iluvien, whichreleases fluocinolone acetonide, a corticosteroid, and is marketed by Alimera Sciences; and Yutiq, which releases fluocinoloneacetonide, a corticosteroid, and is marketed by Eyepoint.There are a number of preclinical research and clinical development programs being conducted by third parties todevelop treatments for retinal diseases. We expect that product candidates currently in clinical development, or that could enterclinical development in the near future, may represent significant competition if approved. These product candidates may provideefficacy, safety, convenience and other benefits that are not provided by currently marketed therapies.Sales and MarketingIn January 2019, we began commercializing INVELTYS in the United States with our own focused, specialty salesforce of 57 TSMs, 7 RSLs and 3 DNAs. We believe our sales team is one of the most experienced in our specialty with our RSLshaving an average of 10.3 years ophthalmic experience and 4.6 years sales leadership experience and our 57 TSMs having anaverage of 8.3 years ophthalmic experience and 13.7 years pharmaceutical sales experience.If EYSUVIS is approved for the temporary treatment of dry eye disease, we plan to increase from 57 salesrepresentatives to a total of approximately 75 to 100 sales representatives, who will promote both EYSUVIS and INVELTYS .We expect to explore commercialization of EYSUVIS and potentially other product candidates in certain markets outside theUnited States, including the EU, utilizing a variety of collaboration, distribution and other marketing arrangements with one ormore third parties.25®®TMTable of ContentsManufacturingWe utilize our substantial in‑house expertise and know‑how to develop and scale up our manufacturing processes beforethese processes are transferred to third‑party contract manufacturers, and to understand and establish controls of critical processparameters. We also have personnel with deep product development experience who actively manage the third‑party contractmanufacturers producing KPI‑121 and other products that we may develop in the future.Our KPI‑121 drug product, including commercial lots of INVELTYS, is currently manufactured at qualified contractmanufacturing facilities in compliance with current good manufacturing practice, or cGMP, regulations. We expect that the samefacilities we use to manufacture commercial lots of INVELTYS will be used to manufacture commercial lots of EYSUVIS.Preparation of the concentrated milled suspension is performed by a third party using a manufacturing process developed by us.The milled suspension is sterilized by gamma radiation at a separate third‑party facility. The sterilized milled suspension is thendiluted to the final drug product concentrations and filled into multi‑dose ophthalmic dropper bottles at a third‑partymanufacturer. Our third‑party manufacturers are subject to FDA inspections from time to time.We have supply agreements in place with these contract manufacturers to support KPI‑121 commercial, clinical andregistration manufacturing, release testing, registration stability, and labeling and packaging. We also have entered into long termcommercial supply agreements with these contract manufacturers to supply KPI‑121.Catalent Commercial Supply Agreement. In June 2016, we entered into a Commercial Supply Agreement, or theCatalent Agreement, which we amended in February 2018, with Catalent Pharma Solutions, LLC, or Catalent, pursuant to whichCatalent has agreed to manufacture and supply to us, and we have agreed to purchase from Catalent, a minimum amount ofINVELTYS and EYSUVIS for commercial use. The Catalent Agreement has an initial term of eight years from August 22, 2018,which is the date INVELTYS was approved for commercial sale in the United States, and which is subject to three‑yearautomatic renewal periods after the initial term, absent termination by either party in accordance with the terms of the CatalentAgreement. The Catalent Agreement provides for pricing for INVELTYS and EYSUVIS structured on a tiered basis, with theprice reduced as the volume of each product ordered increases. We also have annual minimum purchase requirements for each ofINVELTYS and EYSUVIS. We may also pay certain fees in connection with validation and stability test services andcommercialization ramp‑up following regulatory approval. We may cancel any purchase order under the Catalent Agreement,subject to our minimum purchase obligations. Each party has the right to terminate the Catalent Agreement for customary reasonssuch as material breach and bankruptcy. The Catalent Agreement contains provisions relating to compliance by Catalent withcGMP, indemnification, confidentiality, dispute resolution and other customary matters for an agreement of this kind.Alliance Commercial Supply Agreement. In October 2017, we entered into an Amended and Restated Master ServicesAgreement, or the Alliance Agreement, with Alliance Contract Pharma, LLC, or Alliance, pursuant to which Alliance has agreedto provide to us, and we have agreed to purchase from Alliance, bulk KPI‑121 concentrates. The Alliance Agreement provides forpricing for KPI‑121 concentrates structured on a tiered basis, with the price reduced as the volume of product ordered increases.Under the Alliance Agreement, we will provide a forecast of orders for the quantities of bulk KPI‑121 concentrates we believe wewill require, and forecasted quantities will become binding at a certain point before the firm delivery date set forth in the forecast.Unless earlier terminated pursuant to its terms, the Alliance Agreement has an initial term of ten years, after which it continuesuntil terminated. Each party has the right to terminate the Alliance Agreement for customary reasons such as material breach andbankruptcy. In addition, we have the right to terminate the Alliance Agreement at any time for any or no reason upon sufficientadvance notice, in which case we would owe payment to Alliance for any firm orders and certain raw materials. The AllianceAgreement contains provisions relating to compliance by Alliance with cGMP, indemnification, confidentiality, disputeresolution and other customary matters for an agreement of this kind.Chemo Iberica Manufacturing and Supply Agreement. In January 2017, we entered into a Manufacturing and SupplyAgreement, or the Chemo Agreement, with Chemo Iberica SA, or Chemo, pursuant to which Chemo has agreed to manufactureand supply to us, and we have agreed to purchase from Chemo, bulk supply of loteprednol, with pricing structured on aper‑kilogram basis. Under the Chemo Agreement, we will provide a forecast of orders for the quantities of loteprednol we believewe will require, and we commit to purchasing 75% of the forecasted quantities. We can alter26Table of Contentsportions of a forecast at any time, except that, without Chemo’s consent, we cannot alter a portion of the forecast less than ninetydays before the period to which such portion pertains. Unless earlier terminated pursuant to its terms, the Chemo Agreement hasan initial term of seven years, after which it renews in two year increments unless either party gives notice of non‑renewal at leastone year in advance. Each party has the right to terminate the Chemo Agreement for customary reasons such as material breachand bankruptcy. The Chemo Agreement contains provisions relating to compliance by Chemo with cGMP, indemnification,confidentiality, dispute resolution and other customary matters for an agreement of this kind.Intellectual PropertyOur success depends significantly on our ability to obtain and maintain proprietary protection for our products, productcandidates, technology and know‑how, to operate without infringing the proprietary rights of others and to prevent others frominfringing our proprietary rights. We seek to protect our proprietary position by, among other methods, filing U.S. and certainforeign patent applications related to our proprietary technology, inventions and improvements that are important to thedevelopment of our business, where patent protection is available. We also rely on trade secrets, know‑how, continuingtechnological innovation and in‑licensing opportunities to develop and maintain our proprietary position.As of February 1, 2020, we owned 31 U.S. issued patents and 15 U.S. patent applications, as well as 32 foreign issuedpatents and 94 foreign patent applications (including Patent Cooperation Treaty, or PCT, applications). We exclusively licensed atotal of 23 U.S. issued patents and 17 U.S. patent applications, as well as 36 foreign issued patents and 34 foreign patentapplications including original filings, continuations and divisional applications. Our patent portfolio includes the followingpatents and patent applications that we own or exclusively license:·seven U.S. patents and six U.S. patent application, relating to our MPP technology, which we refer to as ourAMPPLIFY technology, including those related to INVELTYS and EYSUVIS, in‑licensed from The Johns HopkinsUniversity, or JHU, two related foreign patents jointly owned by us and JHU, six related foreign patent applicationsjointly owned by us and JHU, eight related foreign patents owned by us and 24 related foreign patent applicationsowned by us, which, if granted with respect to the patent applications, and if the appropriate maintenance, renewal,annuity or other governmental fees are paid, are expected to expire in 2033;·one U.S. patent application relating to our AMPPLIFY technology, and two related foreign patents and six relatedforeign patent applications, which are owned by us, and which, if granted with respect to the patent applications, andif the appropriate maintenance, renewal, annuity or other governmental fees are paid, are expected to expire in 2033;·28 U.S. patents and 10 U.S. patent applications, relating to rTKI compounds, including KPI‑285, and their uses, and16 related foreign patents, and 51 foreign related patent applications, including pending PCT applications, which areowned by us, and which, if granted with respect to the patent applications, and if the appropriate maintenance,renewal, annuity or other governmental fees are paid, which are expected to expire beginning in 2034 through 2038;·two U.S. patents and one U.S. patent application, relating to antibiotic compounds and their uses, and two relatedforeign patents and four related foreign patent applications, which are owned by us, and which, if granted withrespect to the patent applications, and if the appropriate maintenance, renewal, annuity or other governmental feesare paid, are expected to expire in 2034;·eight U.S. patents and four U.S. patent applications, relating to methods for treating an eye disease or disorder byinjecting or instilling a drug delivery system, and 13 related foreign patents, and 24 related foreign patentapplications, which are exclusively sub‑licensed from GrayBug Vision, Inc., and which, if granted with respect tothe patent applications, and if the appropriate maintenance, renewal, annuity or other governmental fees are paid,are expected to expire beginning in 2031 through 2035; and27Table of Contents·eight U.S. patents and seven U.S. patent applications, related to our AMPPLIFY technology, and 23 related foreignpatents and 10 related foreign patent applications, which are exclusively in‑licensed from JHU, and which, ifgranted with respect to the patent applications, and if the appropriate maintenance, renewal, annuity or othergovernmental fees are paid, are expected to expire beginning in 2025 through 2036.The term of individual patents depends upon the legal term for patents in the countries in which they are granted. Inmost countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of anon‑provisional patent application in the applicable country. In the United States, a patent’s term may, in certain cases, belengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and TrademarkOffice in examining and granting a patent, or may be shortened if a patent is terminally disclaimed over a commonly ownedpatent or a patent naming a common inventor and having an earlier expiration date. The Drug Price Competition and Patent TermRestoration Act of 1984, or the Hatch‑Waxman Act, permits a patent term extension of up to five years beyond the expirationdate of a U.S. patent as partial compensation for the length of time the drug is under regulatory review while the patent is in force.A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of productapproval, only one patent applicable to each regulatory review period may be extended and only those claims covering theapproved drug, a method for using it or a method for manufacturing it may be extended. We cannot provide any assurance thatany patent term extension with respect to any U.S. patent will be obtained and, if obtained, the duration of such extension.Similar provisions are available in the European Union and certain other foreign jurisdictions to extend the term of apatent that covers an approved drug. In the future, if and when our product candidates receive approval by the FDA or foreignregulatory authorities, we expect to apply for patent term extensions on issued patents covering those products, if permitted underthe applicable laws, regulations, and rules and depending upon the length of the clinical trials for each drug and other factors. Theexpiration dates referred to above are without regard to potential patent term extension or other market exclusivity that may beavailable to us. However, we cannot provide any assurances that any such patent term extension of any patent will be obtainedand, if obtained, the duration of such extension.Trade SecretsIn addition to patents, we may rely, in some circumstances, on trade secrets to protect our technology. However, tradesecrets can be difficult to protect. We seek to protect our proprietary technology and processes, and obtain and maintainownership of certain technologies, in part, by confidentiality and invention assignment agreements with our employees,consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and tradesecrets by maintaining physical security of our premises and physical and electronic security of our information technologysystems.License AgreementsThe Johns Hopkins UniversityIn November 2009, we entered into an exclusive license agreement with JHU, which was amended in November 2012,May 2014, August 2014, and June 2018 and amended in part by the JHU settlement agreement described below. We refer to theamended license agreement with JHU as the JHU license agreement. Pursuant to the JHU license agreement, JHU granted us anexclusive, worldwide, sublicensable license under specified patent rights covering various aspects of MPP technology, toresearch, develop, make, use and sell products and provide services in any field. JHU also granted us a non‑exclusive license touse specified know‑how with limits on JHU’s right to license the know‑how to other commercial entities.Financial TermsIn connection with the JHU license agreement, we paid JHU an upfront license fee in the low tens of thousands ofdollars and issued to JHU a low single digit percentage of our common stock. We also reimbursed JHU for the prosecution andmaintenance costs incurred by JHU for the licensed patent rights prior to our entering into the JHU license agreement, and we areresponsible for all of the ongoing costs relating to the prosecution and maintenance of the28Table of ContentsJHU patent rights licensed to us. We paid JHU fees in the low tens of thousands of dollars upon entering into certain of theamendments to the JHU license agreement.In connection with the JHU license agreement and the JHU settlement agreement described below, we are obligated tomake certain future payments to JHU. In the first quarter of 2019, we paid JHU a development milestone fee of $300,000 inconnection with the first commercial sale of INVELTYS. We also paid JHU an additional $112,500 in minimum annual royaltyand running fees in the aggregate in 2019. We are obligated to pay JHU annual minimum royalties that will not exceedapproximately $113,000 per year in the future. In addition, we must pay JHU a tiered royalty rate in the low single‑digits onannual net sales by us or our affiliates of products or services covered by a valid issued claim, or certain pending claims, of alicensed JHU patent right in the country of sale, from which we may, under specified circumstances, offset portions of amountswe must pay as royalties on other patent rights in order to commercialize a licensed product or licensed service up to a maximumreduction of a mid‑double digit percentage. We must also pay a percentage, in the high single digits, of certain consideration weor our affiliates receive from sublicensing rights under the licensed JHU intellectual property, subject to specified offsets anddeductions. We may offset against each minimum annual payment the royalties and sublicense income that we pay to JHU in thepreceding twelve‑month period. We also are obligated to pay to JHU certain remaining milestone payments, which will notexceed approximately $0.9 million in the aggregate, if certain development and commercial events are achieved. The JHU patentrights sublicensed to us by GrayBug under the JHU settlement agreement described below are considered in the same way as theJHU patent rights directly licensed to us by JHU for purposes of determining these payments.Diligence ObligationsWe are required to use commercially reasonable efforts to develop and introduce the licensed products and licensedservices to the market, including developing licensed products suitable for different indications, consistent with sound andreasonable business practice and judgment, and, after introducing a licensed product or licensed service into the market, we mustendeavor to keep licensed products and licensed services reasonably available to the public consistent with sound and reasonablebusiness practice and judgment.Term and TerminationThe JHU license agreement will expire on a country‑by‑country basis upon the expiration of the last to expire licensedpatent in such country or, if no licensed patent issues in such country, then in November 2029. Either we or JHU may terminatethe JHU license agreement for the other party’s breach that is not cured within specified time periods or if the other party issubject to certain bankruptcy protections. In addition, we may terminate the JHU license agreement, for any reason, upon90 days’ prior written notice to JHU.Assignment and Exclusive LicenseIn April of 2017 we assigned to JHU certain Kala‑owned patent applications and our interest in certain patents andpatent applications formerly co‑owned by JHU and Kala, unifying ownership of the assigned patent rights in JHU’s name. As partof the assignment of these patent rights to JHU, Kala was granted an exclusive, non‑royalty bearing, sub‑licensable license fromJHU under all of the patent rights Kala assigned in this transaction, which will expire upon the expiration of the last to expirelicensed patent under the new license. No fees were paid to JHU for this exclusive license.GrayBug Vision, Inc. and The Johns Hopkins UniversityA dispute arose between us, JHU, and GrayBug Vision, Inc. (formerly known as GrayBug, LLC and GrayBug, Inc.), orGrayBug, over rights licensed to us and GrayBug under certain patent rights owned by JHU. In October 2014, we, GrayBug, andJHU resolved this matter by entering into a Settlement and License Agreement, which was amended in January 2015, which werefer to as the JHU settlement agreement.Under the JHU settlement agreement, GrayBug granted us, under specified patent rights that are exclusively licensed toGrayBug by JHU in all fields, an exclusive, worldwide royalty‑free sublicense in the field of use of a particle29Table of Contentswith specified characteristics for delivery of a biologically active material through mucus, mucin, or a mucosal barrier where suchdelivery does not involve administration via injection to the eye, which we refer to as the Kala sublicense field. In December2017 and April 2019, GrayBug terminated its exclusive license from JHU as to two patent families among these patent rights.Pursuant to the JHU settlement agreement, these patent rights were to be automatically directly licensed to us under the terms ofthe JHU license agreement unless we specifically declined to accept such automatic direct license. While we did not accept theautomatic direct license to one of the patent families as it does not directly relate to INVELTYS, EYSUVIS or any other potentialdrug candidates, we accepted the automatic direct license to the other patent family and are now responsible for all future patentprosecution costs for these patent rights.In turn, pursuant to the JHU settlement agreement we granted GrayBug, under specified patent rights that are exclusivelylicensed to us by JHU in all fields, an exclusive, worldwide royalty‑free sublicense in the field of use of a particle with specifiedcharacteristics for delivery of a biologically active material to the eye via injection, excluding any particle comprising orconsisting of loteprednol etabonate, which we refer to as the GrayBug sublicense field.In addition, JHU granted us, under the terms of the JHU license agreement, an exclusive, sublicensable, worldwidelicense under certain additional specified patent rights relating to further aspects of MPP technology in the Kala sublicense field.JHU also granted to GrayBug a similar license under these same patent rights in the GrayBug sublicense field. In January 2017,GrayBug terminated its license under all but one patent family in these additional specified patent rights, and in July 2017,GrayBug terminated its license under the remaining patent family. As a result, for those patent rights terminated by GrayBug, weare now licensed in both the Kala sublicense field and the GrayBug sublicense field. JHU also granted us certain rights to obtain anon‑exclusive license to certain additional patent rights and, if we obtain such a license, we would have the exclusive right tonegotiate for a specified time period an exclusive license under such patent rights in the Kala sublicense field. Under the JHUsettlement agreement, we agreed not to exercise our rights under the JHU patent rights licensed or sublicensed to us to use aparticular active ingredient. Each party to the JHU settlement agreement may sublicense the rights granted to it pursuant to theJHU settlement agreement, subject to notice requirements and the requirement that any such sublicense must involve some aspectof collaboration, joint research, development, manufacture, partnership or the like. In any event, sublicenses beyond a specifiednumber of tiers are not permitted without the original licensing party’s written consent.We, GrayBug and JHU each released the others, and certain persons affiliated with them, from any claims and lossesknown to the releasing party as of the effective date of the JHU settlement agreement in connection with the dispute that led to theJHU settlement agreement.Financial TermsThe JHU settlement agreement also amended certain of our financial obligations under the JHU license agreement,which we have reflected in the description above. Neither we nor GrayBug owe the other any royalties, milestone payments orother payments with respect to the sublicenses and other rights granted to each other. In addition, JHU agreed that we are notresponsible for paying to JHU any sublicense fees or other payments due under our JHU license agreement that may otherwisehave arisen as a result of our granting GrayBug the sublicenses under the JHU settlement agreement.For the specified patent rights directly licensed to us by JHU in the Kala sublicense field under the JHU settlementagreement, we reimbursed JHU for a portion of the patent prosecution and maintenance costs incurred prior to entering the JHUsettlement agreement, and we are responsible for all of the ongoing prosecution and maintenance costs of any of these JHU patentrights for which there is no other direct licensee of JHU, such as the JHU patent rights licensed to us in both the Kala sublicensefield and the GrayBug sublicense field.Term and TerminationThe JHU settlement agreement will expire upon the expiration of all the patent rights that are the subject of the JHUsettlement agreement. We may terminate one or more of the licenses or sublicenses granted to us in the JHU settlement agreementon a country‑by‑country basis for convenience upon 30 days’ prior written notice to GrayBug. We or GrayBug may terminate oneor more the sublicenses granted to the other party under the JHU patent rights if the other30Table of Contentsparty, or its employees, officers, directors, agents or representatives, takes certain steps to oppose, attempt to invalidate or preventthe issuance of any of the patent rights directly licensed to the terminating party by JHU.Government Regulation and Product ApprovalsGovernment authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions,including the European Union, extensively regulate, among other things, the research, development, testing, manufacture, pricing,quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of biopharmaceutical products. The processes for obtaining marketingapprovals in the United States and in foreign countries and jurisdictions, along with compliance with applicable statutes andregulations and other regulatory authorities, require the expenditure of substantial time and financial resources.Approval and Regulation of Drugs in the United StatesIn the United States, drug products are regulated under the FDCA and applicable implementing regulations andguidance. The failure of an applicant to comply with the applicable regulatory requirements at any time during the productdevelopment process, including non-clinical testing, clinical testing, the approval process or post-approval process, may result indelays to the conduct of a study, regulatory review and approval and/or administrative or judicial sanctions. These sanctions mayinclude, but are not limited to, the FDA’s refusal to allow an applicant to proceed with clinical trials, refusal to approve pendingapplications, license suspension or revocation, withdrawal of an approval, warning letters, adverse publicity, product recalls,product seizures, total or partial suspension of production or distribution, injunctions, fines and civil or criminal investigationsand penalties brought by the FDA or Department of Justice, or DOJ, or other government entities, including state agencies.An applicant seeking approval to market and distribute a new drug in the United States generally must satisfactorilycomplete each of the following steps before the product candidate will be approved by the FDA:·preclinical testing including laboratory tests, animal studies and formulation studies, which must be performed inaccordance with the FDA’s good laboratory practice, or GLP, regulations and standards;·submission to the FDA of an IND for human clinical testing, which must become effective before human clinicaltrials may begin;·approval by an independent institutional review board, or IRB, representing each clinical site before each clinicaltrial may be initiated;·performance of adequate and well-controlled human clinical trials to establish the safety, potency and purity of theproduct candidate for each proposed indication, in accordance with current good clinical practices, or GCP;·preparation and submission to the FDA of an NDA for a drug product which includes not only the results of theclinical trials, but also, detailed information on the chemistry, manufacture and quality controls for the productcandidate and proposed labelling for one or more proposed indication(s);·review of the product candidate by an FDA advisory committee, where appropriate or if applicable;·satisfactory completion of an FDA inspection of the manufacturing facility or facilities, including those of thirdparties, at which the product candidate or components thereof are manufactured to assess compliance with cGMPrequirements and to assure that the facilities, methods and controls are adequate to preserve the product’s identity,strength, quality and purity;31Table of Contents·satisfactory completion of any FDA audits of the non-clinical and clinical trial sites to assure compliance with GCPand the integrity of clinical data in support of the NDA;·payment of user fees and securing FDA approval of the NDA to allow marketing of the new drug product; and·compliance with any post-approval requirements, including the potential requirement to implement a RiskEvaluation and Mitigation Strategy, or REMS, and the potential requirement to conduct any post-approval studiesrequired by the FDA. Preclinical StudiesBefore an applicant begins testing a product candidate with potential therapeutic value in humans, the product candidateenters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, formulation and stability,as well as other studies to evaluate, among other things, the toxicity of the product candidate. The conduct of the preclinical testsand formulation of the compounds for testing must comply with federal regulations and requirements, including GLP regulationsand standards. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted tothe FDA as part of an IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events andcarcinogenicity, and long-term toxicity studies, may continue after the IND is submitted.The IND and IRB ProcessesAn IND is an exemption from the FDCA that allows an unapproved product candidate to be shipped in interstatecommerce for use in an investigational clinical trial and a request for FDA authorization to administer such investigationalproduct to humans. Such authorization must be secured prior to interstate shipment and administration of any product candidatethat is not the subject of an approved NDA. In support of a request for an IND, applicants must submit a protocol for eachclinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, the resultsof the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plansfor clinical trials, among other things, must be submitted to the FDA as part of an IND. The FDA requires a 30-day waitingperiod after the filing of each IND before clinical trials may begin. This waiting period is designed to allow the FDA to review theIND to determine whether human research subjects will be exposed to unreasonable health risks. At any time during this 30-dayperiod, or thereafter, the FDA may raise concerns or questions about the conduct of the trials as outlined in the IND and impose aclinical hold or partial clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns beforeclinical trials can begin.Following commencement of a clinical trial under an IND, the FDA may also place a clinical hold or partial clinical holdon that trial. A clinical hold is an order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspendan ongoing investigation. A partial clinical hold is a delay or suspension of only part of the clinical work requested under the IND.For example, a specific protocol or part of a protocol is not allowed to proceed, while other protocols may do so. No more than30 days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of thebasis for the hold. Following issuance of a clinical hold or partial clinical hold, an investigation may only resume after the FDAhas notified the sponsor that the investigation may proceed. The FDA will base that determination on information provided by thesponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the investigation can proceed.A sponsor may choose, but is not required, to conduct a foreign clinical study under an IND. When a foreign clinicalstudy is conducted under an IND, all FDA IND requirements must be met unless waived. When a foreign clinical study is notconducted under an IND, the sponsor must ensure that the study complies with certain regulatory requirements of the FDA inorder to use the study as support for an IND or application for marketing approval. Specifically, on April 28, 2008, the FDAamended its regulations governing the acceptance of foreign clinical studies not conducted under an investigational new drugapplication as support for an IND or a new drug application. The final rule provides that such studies must be conducted inaccordance with good clinical practice, or GCP, including review and approval by an independent ethics committee, or IEC, andinformed consent from subjects. The GCP requirements in the32Table of Contentsfinal rule encompass both ethical and data integrity standards for clinical studies. The FDA’s regulations are intended to helpensure the protection of human subjects enrolled in non-IND foreign clinical studies, as well as the quality and integrity of theresulting data. They further help ensure that non-IND foreign studies are conducted in a manner comparable to that required forIND studies.In addition to the foregoing IND requirements, an IRB representing each institution participating in the clinical trialmust review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conductcontinuing review and reapprove the study at least annually. The IRB must review and approve, among other things, the studyprotocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with FDAregulations. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if theclinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associatedwith unexpected serious harm to patients.Additionally, some trials are overseen by an independent group of qualified experts organized by the trial sponsor,known as a data safety monitoring board or committee, or DSMB. This group provides recommendations as to whether or not atrial may move forward at designated check points based on access that only the group maintains to available data from the study.Suspension or termination of development during any phase of clinical trials can occur if it is determined that the participants orpatients are being exposed to an unacceptable health risk. Other reasons for suspension or termination may be made by us basedon evolving business objectives and/or competitive climate.Information about clinical trials must be submitted within specific timeframes to the National Institutes of Health, orNIH, for public dissemination on its ClinicalTrials.gov website.Expanded Access to an Investigational Drug for Treatment UseExpanded access, sometimes called “compassionate use,” is the use of investigational new drug products outside ofclinical trials to treat patients with serious or immediately life-threatening diseases or conditions when there are no comparable orsatisfactory alternative treatment options. The rules and regulations related to expanded access are intended to improve access toinvestigational drugs for patients who may benefit from investigational therapies. FDA regulations allow access to investigationaldrugs under an IND by the company or the treating physician for treatment purposes on a case-by-case basis for: individualpatients (single-patient IND applications for treatment in emergency settings and non-emergency settings); intermediate-sizepatient populations; and larger populations for use of the drug under a treatment protocol or Treatment IND Application.When considering an IND application for expanded access to an investigational product with the purpose of treating apatient or a group of patients, the sponsor and treating physicians or investigators will determine suitability when all of thefollowing criteria apply: patient(s) have a serious or immediately life-threatening disease or condition, and there is no comparableor satisfactory alternative therapy to diagnose, monitor, or treat the disease or condition; the potential patient benefit justifies thepotential risks of the treatment and the potential risks are not unreasonable in the context or condition to be treated; and theexpanded use of the investigational drug for the requested treatment will not interfere initiation, conduct, or completion of clinicalinvestigations that could support marketing approval of the product or otherwise compromise the potential development of theproduct.On December 13, 2016, the 21st Century Cures Act established (and the 2017 Food and Drug AdministrationReauthorization Act later amended) a requirement that sponsors of one or more investigational drugs for the treatment of a seriousdisease(s) or condition(s) make publicly available their policy for evaluating and responding to requests for expanded access forindividual patients. Although these requirements were rolled out over time, they have now come into full effect. This provisionrequires drug and biologic companies to make publicly available their policies for expanded access for individual patient access toproducts intended for serious diseases. Sponsors are required to make such policies publicly available upon the earlier of initiationof a Phase 2 or Phase 3 study; or 15 days after the drug or biologic receives designation as a breakthrough therapy, fast trackproduct, or regenerative medicine advanced therapy.In addition, on May 30, 2018, the Right to Try Act, was signed into law. The law, among other things, provides a federalframework for certain patients to access certain investigational new drug products that have completed a Phase33Table of ContentsI clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seektreatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program.There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right toTry Act, but the manufacturer must develop an internal policy and respond to patient requests according to that policy.Human Clinical Trials in Support of an NDAClinical trials involve the administration of the investigational product candidate to human subjects under thesupervision of a qualified investigator in accordance with GCP requirements which include, among other things, the requirementthat all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials areconducted under written clinical trial protocols detailing, among other things, the objectives of the study, inclusion and exclusioncriteria, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.Human clinical trials are typically conducted in three sequential phases, but the phases may overlap or be combined.Additional studies may also be required after approval.Phase 1 clinical trials are initially conducted in a limited population to test the product candidate for safety, includingadverse effects, dose tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics in healthy humans or inpatients. During Phase 1 clinical trials, information about the investigational drug product’s pharmacokinetics andpharmacological effects may be obtained to permit the design of well-controlled and scientifically valid Phase 2 clinical trials.Phase 2 clinical trials are generally conducted in a limited patient population to identify possible adverse effects andsafety risks, evaluate the efficacy of the product candidate for specific targeted indications and determine dose tolerance andoptimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning largerand more costly Phase 3 clinical trials. Phase 2 clinical trials are well controlled, closely monitored and conducted in a limitedpatient population.Phase 3 clinical trials proceed if the Phase 2 clinical trials demonstrate that a dose range of the product candidate ispotentially effective and has an acceptable safety profile. Phase 3 clinical trials are undertaken within an expanded patientpopulation to further evaluate dosage, provide substantial evidence of clinical efficacy and further test for safety in an expandedand diverse patient population at multiple, geographically dispersed clinical trial sites. A well-controlled, statistically robustPhase 3 clinical trial may be designed to deliver the data that regulatory authorities will use to decide whether or not to approve,and, if approved, how to appropriately label a drug: such Phase 3 studies are referred to as “pivotal.”In some cases, the FDA may approve an NDA for a product candidate but require the sponsor to conduct additionalclinical trials to further assess the product candidate’s safety and effectiveness after approval. Such post-approval trials aretypically referred to as Phase 4 clinical trials. These studies are used to gain additional experience from the treatment of a largernumber of patients in the intended treatment group and to further document a clinical benefit in the case of drugs approved underaccelerated approval regulations. Failure to exhibit due diligence with regard to conducting Phase 4 clinical trials could result inwithdrawal of approval for products.Progress reports detailing the status and a brief description of available results of the clinical trials must be submitted atleast annually to the FDA and more frequently if serious adverse events occur. In addition, IND safety reports must be submittedto the FDA for any of the following: serious and unexpected suspected adverse reactions; findings from other studies or animal orin vitro testing that suggest a significant risk in humans exposed to the product; and any clinically important increase in the caseof a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Phase 1, Phase 2 and Phase 3clinical trials may not be completed successfully within any specified period, or completed at all. Furthermore, the FDA or thesponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects arebeing exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at itsinstitution, or an institution it34Table of Contentsrepresents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product has beenassociated with unexpected serious harm to patients. The FDA will typically inspect one or more clinical sites to assurecompliance with GCP and the integrity of the clinical data submitted.Concurrent with clinical trials, companies often complete additional animal studies and must also develop additionalinformation about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing theproduct in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable ofconsistently producing quality batches of the product candidate and, among other things, must develop methods for testing theidentity, strength, quality, purity, and potency of the final drug. Additionally, appropriate packaging must be selected and testedand stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deteriorationover its shelf life.Review and Approval of an NDAIn order to obtain approval to market a drug product in the United States, a marketing application must be submitted tothe FDA that provides sufficient data establishing the safety, purity and potency of the proposed drug product for its intendedindication. The application includes all relevant data available from pertinent preclinical and clinical trials, including negative orambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry,manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical trialsintended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studiesinitiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity toestablish the safety, purity and potency of the drug product to the satisfaction of the FDA.The NDA is a vehicle through which applicants formally propose that the FDA approve a new product for marketingand sale in the United States for one or more indications. Every new drug product candidate must be the subject of an approvedNDA before it may be commercialized in the United States. Under federal law, the submission of most NDAs is subject to anapplication user fee, which for federal fiscal year 2020 is $2,942,965 for an application requiring clinical data. The sponsor of anapproved NDA is also subject to an annual program fee, which for fiscal year 2020 is $325,424. Certain exceptions and waiversare available for some of these fees, such as an exception from the application fee for products with orphan designation and awaiver for certain small businesses.Following submission of an NDA, the FDA conducts a preliminary review of the application generally within60 calendar days of its receipt and strives to inform the sponsor by the 74 day after the FDA’s receipt of the submission whetherthe application is sufficiently complete to permit substantive review. The FDA may request additional information rather thanaccept the application for filing. In this event, the application must be resubmitted with the additional information. Theresubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing,the FDA begins an in-depth substantive review. The FDA has agreed to specified performance goals in the review process ofNDAs. Under that agreement, 90% of applications seeking approval of New Molecular Entities, or NMEs, are meant to bereviewed within ten months from the date on which the FDA accepts the application for filing, and 90% of applications for NMEsthat have been designated for “priority review” are meant to be reviewed within six months of the filing date. For applicationsseeking approval of products that are not NMEs, the ten-month and six-month review periods run from the date that the FDAreceives the application. The review process and the PDUFA goal date may be extended by the FDA for three additional monthsto consider new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDAfollowing the original submission.Before approving an application, the FDA typically will inspect the facility or facilities where the product is or will bemanufactured. These pre-approval inspections may cover all facilities associated with an NDA submission, including componentmanufacturing, finished product manufacturing and control testing laboratories. The FDA will not approve an application unlessit determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assureconsistent production of the product within required specifications. Additionally, before approving an NDA, the FDA willtypically inspect one or more clinical sites to assure compliance with GCP. Under the FDA Reauthorization Act of 2017, theFDA must implement a protocol to expedite review of responses to35thTable of Contentsinspection reports pertaining to certain applications, including applications for products in shortage or those for which approval isdependent on remediation of conditions identified in the inspection report.In addition, as a condition of approval, the FDA may require an applicant to develop a REMS. REMS use riskminimization strategies beyond the professional labeling to ensure that the benefits of the product outweigh the potential risks. Todetermine whether a REMS is needed, the FDA will consider the size of the population likely to use the product, seriousness ofthe disease, expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events andwhether the product is a new molecular entity.The FDA may refer an application for a novel product to an advisory committee or explain why such referral was notmade. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, thatreviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions.The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully whenmaking decisions.Fast Track, Breakthrough Therapy, Priority Review and Regenerative Advanced Therapy DesignationsThe FDA is authorized to designate certain products for expedited review if they are intended to address an unmetmedical need in the treatment of a serious or life‑threatening disease or condition. These programs are referred to as fast trackdesignation, breakthrough therapy designation, priority review designation and regenerative advanced therapy designation.Specifically, the FDA may designate a product for Fast Track review if it is intended, whether alone or in combinationwith one or more other products, for the treatment of a serious or life‑threatening disease or condition, and it demonstrates thepotential to address unmet medical needs for such a disease or condition. For Fast Track products, sponsors may have greaterinteractions with the FDA and the FDA may initiate review of sections of a Fast Track product’s application before theapplication is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical datasubmitted by the sponsor, that a Fast Track product may be effective. The sponsor must also provide, and the FDA must approve,a schedule for the submission of the remaining information and the sponsor must pay applicable user fees. However, the FDA’stime period goal for reviewing a Fast Track application does not begin until the last section of the application is submitted. Inaddition, the Fast Track designation may be withdrawn by the FDA if the FDA believes that the designation is no longersupported by data emerging in the clinical trial process.Second, a product may be designated as a Breakthrough Therapy if it is intended, either alone or in combination withone or more other products, to treat a serious or life‑threatening disease or condition and preliminary clinical evidence indicatesthat the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints,such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect toBreakthrough Therapies, including holding meetings with the sponsor throughout the development process; providing timelyadvice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning across‑disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner.Third, the FDA may designate a product for priority review if it is a product that treats a serious condition and, ifapproved, would provide a significant improvement in safety or effectiveness. The FDA determines, on a case‑by‑case basis,whether the proposed product represents a significant improvement when compared with other available therapies. Significantimprovement may be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantialreduction of a treatment‑limiting product reaction, documented enhancement of patient compliance that may lead to improvementin serious outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority designation is intended to directoverall attention and resources to the evaluation of such applications, and to shorten the FDA’s goal for taking action on amarketing application from ten months to six months.With passage of the 21st Century Cures Act, or the Cures Act, in December 2016, Congress authorized the FDA toaccelerate review and approval of products designated as regenerative advanced therapies. A product is eligible36Table of Contentsfor this designation if it is a regenerative medicine therapy that is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product has the potential to address unmetmedical needs for such disease or condition. The benefits of a regenerative advanced therapy designation include earlyinteractions with FDA to expedite development and review, benefits available to breakthrough therapies, potential eligibility forpriority review and accelerated approval based on surrogate or intermediate endpoints.Accelerated Approval PathwayThe FDA may grant accelerated approval to a product for a serious or life‑threatening condition that providesmeaningful therapeutic advantage to patients over existing treatments based upon a determination that the product has an effecton a surrogate endpoint that is reasonably likely to predict clinical benefit. The FDA may also grant accelerated approval for sucha condition when the product has an effect on an intermediate clinical endpoint that can be measured earlier than an effect onirreversible morbidity or mortality, or IMM, and that is reasonably likely to predict an effect on irreversible morbidity ormortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability orlack of alternative treatments. Products granted accelerated approval must meet the same statutory standards for safety andeffectiveness as those granted traditional approval.For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement,radiographic image, physical sign or other measure that is thought to predict clinical benefit, but is not itself a measure of clinicalbenefit. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. An intermediate clinicalendpoint is a measurement of a therapeutic effect that is considered reasonably likely to predict the clinical benefit of a drug, suchas an effect on IMM. The FDA has limited experience with accelerated approvals based on intermediate clinical endpoints, buthas indicated that such endpoints generally may support accelerated approval where the therapeutic effect measured by theendpoint is not itself a clinical benefit and basis for traditional approval, if there is a basis for concluding that the therapeuticeffect is reasonably likely to predict the ultimate clinical benefit of a product.The accelerated approval pathway is most often used in settings in which the course of a disease is long and an extendedperiod of time is required to measure the intended clinical benefit of a product, even if the effect on the surrogate or intermediateclinical endpoint occurs rapidly. Thus, accelerated approval has been used extensively in the development and approval ofproducts for treatment of a variety of cancers in which the goal of therapy is generally to improve survival or decrease morbidityand the duration of the typical disease course requires lengthy and sometimes large trials to demonstrate a clinical or survivalbenefit. Thus, the benefit of accelerated approval derives from the potential to receive approval based on surrogate endpointssooner than possible for trials with clinical or survival endpoints, rather than deriving from any explicit shortening of the FDAapproval timeline, as is the case with priority review.The accelerated approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner,additional post‑approval confirmatory studies to verify and describe the product’s clinical benefit. As a result, a product candidateapproved on this basis is subject to rigorous post‑marketing compliance requirements, including the completion of Phase 4 orpost‑approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post‑approval studies, orconfirm a clinical benefit during post‑marketing studies, would allow the FDA to initiate expedited proceedings to withdrawapproval of the product. All promotional materials for product candidates approved under accelerated regulations are subject toprior review by the FDA.The FDA’s Decision on an NDAOn the basis of the FDA’s evaluation of the application and accompanying information, including the results of theinspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letterauthorizes commercial marketing of the product with specific prescribing information for specific indications. A completeresponse letter generally outlines the deficiencies in the submission and may require substantial additional testing or informationin order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfactionin a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions intwo or six months depending on the type of information included.37Table of ContentsEven with submission of this additional information, the FDA ultimately may decide that the application does not satisfy theregulatory criteria for approval.If the FDA approves a new product, it may limit the approved indications for use of the product. The agency may alsorequire testing and surveillance programs to monitor the product after commercialization, or impose other conditions, includingdistribution restrictions or other risk management mechanisms, including REMS, to help ensure that the benefits of the productoutweigh the potential risks. REMS can include medication guides, communication plans for health care professionals, andelements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification forprescribing or dispensing, dispensing only under certain circumstances, special monitoring and the use of patent registries. TheFDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs.After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes andadditional labeling claims, are subject to further testing requirements and FDA review and approval.Post-Approval RegulationIf regulatory approval for marketing of a new product or new indication for an existing product is obtained, the sponsorwill be required to comply with all regular post-approval regulatory requirements as well as any post-approval requirements thatthe FDA may have imposed as part of the approval process. The sponsor will be required to report, among other things, certainadverse reactions and manufacturing problems to the FDA, provide updated safety and efficacy information and comply withrequirements concerning advertising and promotional labeling requirements. Manufacturers and certain of their subcontractorsare required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannouncedinspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMPregulations, which impose certain procedural and documentation requirements upon manufacturers. Accordingly, the sponsor andits third-party manufacturers must continue to expend time, money and effort in the areas of production and quality control tomaintain compliance with cGMP regulations and other regulatory requirements.A product may also be subject to official lot release, meaning that the manufacturer is required to perform certain testson each lot of the product before it is released for distribution. If the product is subject to official release, the manufacturer mustsubmit samples of each lot, together with a release protocol showing a summary of the history of manufacture of the lot and theresults of all of the manufacturer’s tests performed on the lot, to the FDA. The FDA may in addition perform certain confirmatorytests on lots of some products before releasing the lots for distribution. Finally, the FDA will conduct laboratory research relatedto the safety, purity, potency and effectiveness of pharmaceutical products.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is notmaintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with aproduct, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to complywith regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess safety risks; or imposition of distribution or other restrictions under a REMS program.Other potential consequences include, among other things:·restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the marketor product recalls;·fines, warning letters or holds on post-approval clinical trials;·refusal of the FDA to approve pending applications or supplements to approved applications, or suspension orrevocation of product license approvals;·product seizure or detention, or refusal to permit the import or export of products; or·injunctions or the imposition of civil or criminal penalties.38Table of ContentsThe FDA strictly regulates the marketing, labeling, advertising and promotion of prescription drug products placed onthe market. This regulation includes, among other things, standards and regulations for direct-to-consumer advertising,communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activitiesinvolving the Internet and social media. Promotional claims about a drug’s safety or effectiveness are prohibited before the drugis approved. After approval, a drug product generally may not be promoted for uses that are not approved by the FDA, asreflected in the product’s prescribing information. In the United States, health care professionals are generally permitted toprescribe drugs for such uses not described in the drug’s labeling, known as off-label uses, because the FDA does not regulate thepractice of medicine. However, FDA regulations impose rigorous restrictions on manufacturers’ communications, prohibiting thepromotion of off-label uses. It may be permissible, under very specific, narrow conditions, for a manufacturer to engage innonpromotional, non-misleading communication regarding off-label information, such as distributing scientific or medical journalinformation.If a company is found to have promoted off-label uses, it may become subject to adverse public relations andadministrative and judicial enforcement by the FDA, the Department of Justice, or the Office of the Inspector General of theDepartment of Health and Human Services, as well as state authorities. This could subject a company to a range of penalties thatcould have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the mannerin which a company promotes or distributes drug products. The federal government has levied large civil and criminal finesagainst companies for alleged improper promotion, and has also requested that companies enter into consent decrees orpermanent injunctions under which specified promotional conduct is changed or curtailed.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, orPDMA, and its implementing regulations, as well as the Drug Supply Chain Security Act, or DSCA, which regulate thedistribution and tracing of prescription drug samples at the federal level, and set minimum standards for the regulation ofdistributors by the states. The PDMA, its implementing regulations and state laws limit the distribution of prescriptionpharmaceutical product samples, and the DSCA imposes requirements to ensure accountability in distribution and to identify andremove counterfeit and other illegitimate products from the market.Section 505(b)(2) NDAsNDAs for most new drug products are based on two full clinical studies which must contain substantial evidence of thesafety and efficacy of the proposed new product for the proposed use. These applications are submitted under Section 505(b)(1)of the FDCA. The FDA is, however, authorized to approve an alternative type of NDA under Section 505(b)(2) of the FDCA.This type of application allows the applicant to rely, in part, on the FDA’s previous findings of safety and efficacy for a similarproduct, or published literature. Specifically, Section 505(b)(2) applies to NDAs for a drug for which the investigations made toshow whether or not the drug is safe for use and effective in use and relied upon by the applicant for approval of the application“were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from theperson by or for whom the investigations were conducted.”Thus, Section 505(b)(2) authorizes the FDA to approve an NDA based on safety and effectiveness data that were notdeveloped by the applicant. NDAs filed under Section 505(b)(2) may provide an alternate and potentially more expeditiouspathway to FDA approval for new or improved formulations or new uses of previously approved products. If the 505(b)(2)applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, the applicant may eliminate theneed to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to performadditional studies or measurements to support the change from the approved product. The FDA may then approve the new drugcandidate for all or some of the label indications for which the referenced product has been approved, as well as for any newindication sought by the Section 505(b)(2) applicant.Abbreviated New Drug Applications for Generic DrugsIn 1984, with passage of the Hatch-Waxman Amendments to the FDCA, Congress established an abbreviatedregulatory scheme authorizing the FDA to approve generic drugs that are shown to contain the same active ingredients as, and tobe bioequivalent to, drugs previously approved by the FDA pursuant to NDAs. To obtain approval of a generic39Table of Contentsdrug, an applicant must submit an abbreviated new drug application, or ANDA, to the agency. An ANDA is a comprehensivesubmission that contains, among other things, data and information pertaining to the active pharmaceutical ingredient,bioequivalence, drug product formulation, specifications and stability of the generic drug, as well as analytical methods,manufacturing process validation data and quality control procedures. ANDAs are “abbreviated” because they generally do notinclude preclinical and clinical data to demonstrate safety and effectiveness. Instead, in support of such applications, a genericmanufacturer may rely on the preclinical and clinical testing previously conducted for a drug product previously approved underan NDA, known as the reference-listed drug, or RLD.Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLDwith respect to the active ingredients, the route of administration, the dosage form, the strength of the drug and the conditions ofuse of the drug. At the same time, the FDA must also determine that the generic drug is “bioequivalent” to the innovator drug.Under the statute, a generic drug is bioequivalent to a RLD if “the rate and extent of absorption of the drug do not show asignificant difference from the rate and extent of absorption of the listed drug.” Upon approval of an ANDA, the FDA indicateswhether the generic product is “therapeutically equivalent” to the RLD in its publication “Approved Drug Products withTherapeutic Equivalence Evaluations,” also referred to as the “Orange Book.” Physicians and pharmacists consider a therapeuticequivalent generic drug to be fully substitutable for the RLD. In addition, by operation of certain state laws and numerous healthinsurance programs, the FDA’s designation of therapeutic equivalence often results in substitution of the generic drug without theknowledge or consent of either the prescribing physician or patient.Under the Hatch-Waxman Amendments, the FDA may not approve an ANDA until any applicable period of non-patentexclusivity for the RLD has expired. The FDCA provides a period of five years of non-patent data exclusivity for a new drugproduct containing a new chemical entity. For the purposes of this provision, a NCE is a drug that contains no active moiety thathas previously been approved by the FDA in any other NDA. An active moiety is the molecule or ion responsible for thephysiological or pharmacological action of the drug substance. In cases where such NCE exclusivity has been granted, an ANDAmay not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IVcertification, in which case the applicant may submit its application four years following the original product approval.The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more newclinical investigations, other than bioavailability or bioequivalence studies, that were conducted by or for the applicant and areessential to the approval of the application. This three-year exclusivity period often protects changes to a previously approveddrug product, such as a new dosage form, route of administration, combination or indication. Three-year exclusivity would beavailable for a drug product that contains a previously approved active moiety, provided the statutory requirement for a newclinical investigation is satisfied. Unlike five-year NCE exclusivity, an award of three-year exclusivity does not block the FDAfrom accepting ANDAs seeking approval for generic versions of the drug as of the date of approval of the original drug product.The FDA typically makes decisions about awards of data exclusivity shortly before a product is approved.The FDA must establish a priority review track for certain generic drugs, requiring the FDA to review a drug applicationwithin eight (8) months for a drug that has three (3) or fewer approved drugs listed in the Orange Book and is no longer protectedby any patent or regulatory exclusivities, or is on the FDA’s drug shortage list. The new legislation also authorizes FDA toexpedite review of ‘‘competitor generic therapies’’ or drugs with inadequate generic competition, including holding meetingswith or providing advice to the drug sponsor prior to submission of the application.Hatch-Waxman Patent Certification and the 30-Month StayUpon approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent withclaims that cover the applicant’s product or an approved method of using the product. Each of the patents listed by the NDAsponsor is published in the Orange Book. When an ANDA applicant files its application with the FDA, the applicant is requiredto certify to the FDA concerning any patents listed for the reference product in the Orange Book, except for patents coveringmethods of use for which the ANDA applicant is not seeking approval. To the extent that the40Table of ContentsSection 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify tothe FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicantwould.Specifically, the applicant must certify with respect to each patent that:·the required patent information has not been filed;·the listed patent has expired;·the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration;or·the listed patent is invalid, unenforceable or will not be infringed by the new product.A certification that the new product will not infringe the already approved product’s listed patents or that such patentsare invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the listed patents orindicates that it is not seeking approval of a patented method of use, the application will not be approved until all the listedpatents claiming the referenced product have expired (other than method of use patents involving indications for which theapplicant is not seeking approval).If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of theParagraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA andpatent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. Thefiling of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents theFDA from approving the ANDA until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of thepatent, or a decision in the infringement case that is favorable to the ANDA applicant.To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, theapplicant is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the sameextent that an ANDA applicant would. As a result, approval of a Section 505(b)(2) NDA can be stalled until all the listed patentsclaiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of anew chemical entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IVcertification and subsequent patent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in theinfringement case that is favorable to the Section 505(b)(2) applicant.Pediatric Studies and ExclusivityUnder the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are adequate toassess the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations, and tosupport dosing and administration for each pediatric subpopulation for which the product is safe and effective. Sponsors mustalso submit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatricstudy or studies the applicant plans to conduct, including study objectives and design, any deferral or waiver requests and otherinformation required by regulation. The applicant, the FDA, and the FDA’s internal review committee must then review theinformation submitted, consult with each other and agree upon a final plan. The FDA or the applicant may request an amendmentto the plan at any time.For drugs intended to treat a serious or life-threatening disease or condition, the FDA must, upon the request of anapplicant, meet to discuss preparation of the initial pediatric study plan or to discuss deferral or waiver of pediatricassessments. In addition, FDA will meet early in the development process to discuss pediatric study plans with sponsors and FDAmust meet with sponsors by no later than the end-of-phase 1 meeting for serious or life-threatening diseases and by no later thanninety (90) days after FDA’s receipt of the study plan.41Table of ContentsThe FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or allpediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in theFood and Drug Administration Safety and Innovation Act, or FDASIA. Unless otherwise required by regulation, the pediatricdata requirements do not apply to products with orphan designation.The FDA Reauthorization Act of 2017 established new requirements to govern certain molecularly targeted cancerindications. Any company that submits an NDA three years after the date of enactment of that statute must submit pediatricassessments with the NDA if the drug is intended for the treatment of an adult cancer and is directed at a molecular target thatFDA determines to be substantially relevant to the growth or progression of a pediatric cancer. The investigation must bedesigned to yield clinically meaningful pediatric study data regarding the dosing, safety and preliminary efficacy to informpediatric labeling for the product.Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for theattachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including thenon-patent and orphan exclusivity. This six-month exclusivity may be granted if an NDA sponsor submits pediatric data thatfairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in thepediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protectionis granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits,whatever statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six months. This isnot a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve anotherapplication. With regard to patents, the six-month pediatric exclusivity period will not attach to any patents for which a generic(ANDA or 505(b)(2) NDA) applicant submitted a paragraph IV patent certification, unless the NDA sponsor or patent owner firstobtains a court determination that the patent is valid and infringed by a proposed generic product. Orphan Drug Designation and ExclusivityUnder the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a raredisease or condition, generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases inwhich there is no reasonable expectation that the cost of developing and making a product available in the United States fortreatment of the disease or condition will be recovered from sales of the product. A company must seek orphan drug designationbefore submitting an NDA for the candidate product. If the request is granted, the FDA will disclose the identity of the therapeuticagent and its potential use. Orphan drug designation does not shorten the PDUFA goal dates for the regulatory review andapproval process, although it does convey certain advantages such as tax benefits and exemption from the PDUFA applicationfee.If a product with orphan designation receives the first FDA approval for the disease or condition for which it has suchdesignation or for a select indication or use within the rare disease or condition for which it was designated, the product generallywill receive orphan drug exclusivity. Orphan drug exclusivity means that the FDA may not approve another sponsor’s marketingapplication for the same drug for the same condition for seven years, except in certain limited circumstances. Orphan exclusivitydoes not block the approval of a different product for the same rare disease or condition, nor does it block the approval of thesame product for different conditions. If a drug designated as an orphan drug ultimately receives marketing approval for anindication broader than what was designated in its orphan drug application, it may not be entitled to exclusivity.Orphan drug exclusivity will not bar approval of another product under certain circumstances, including if a subsequentproduct with the same drug for the same condition is shown to be clinically superior to the approved product on the basis ofgreater efficacy or safety, or providing a major contribution to patient care, or if the company with orphan drug exclusivity is notable to meet market demand. This is the case despite an earlier court opinion holding that the Orphan Drug Act unambiguouslyrequired the FDA to recognize orphan exclusivity regardless of a showing of clinical superiority.42Table of ContentsPatent Term Restoration and ExtensionA patent claiming a new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Act,which permits a patent restoration of up to five years for patent term lost during product development and the FDA regulatoryreview. The restoration period granted on a patent covering a product is typically one-half the time between the effective date of aclinical investigation involving human beings is begun and the submission date of an application, plus the time between thesubmission date of an application and the ultimate approval date. Patent term restoration cannot be used to extend the remainingterm of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved product iseligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question.A patent that covers multiple products for which approval is sought can only be extended in connection with one of the approvals.The U.S. Patent and Trademark Office reviews and approves the application for any patent term extension or restoration inconsultation with the FDA.FDA approval and regulation of companion diagnosticsIf safe and effective use of a therapeutic depends on an in vitro diagnostic, then the FDA generally will require approvalor clearance of that diagnostic, known as a companion diagnostic, at the same time that the FDA approves the therapeuticproduct. In August 2014, the FDA issued final guidance clarifying the requirements that will apply to approval of therapeuticproducts and in vitro companion diagnostics. According to the guidance, for novel drugs, a companion diagnostic device and itscorresponding therapeutic should be approved or cleared contemporaneously by the FDA for the use indicated in the therapeuticproduct’s labeling.If the FDA determines that a companion diagnostic device is essential to the safe and effective use of a novel therapeuticproduct or indication, the FDA generally will not approve the therapeutic product or new therapeutic product indication if thecompanion diagnostic device is not approved or cleared for that indication. Approval or clearance of the companion diagnosticdevice will ensure that the device has been adequately evaluated and has adequate performance characteristics in the intendedpopulation. The review of in vitro companion diagnostics in conjunction with the review of our therapeutic treatments for cancerwill, therefore, likely involve coordination of review by the FDA’s Center for Drug Evaluation and Research and the FDA’sCenter for Devices and Radiological Health Office of In Vitro Diagnostics Device Evaluation and Safety.Under the FDCA, in vitro diagnostics, including companion diagnostics, are regulated as medical devices. In the UnitedStates, the FDCA and its implementing regulations, and other federal and state statutes and regulations govern, among otherthings, medical device design and development, preclinical and clinical testing, premarket clearance or approval, registration andlisting, manufacturing, labeling, storage, advertising and promotion, sales and distribution, export and import, and post-marketsurveillance. Unless an exemption applies, diagnostic tests require marketing clearance or approval from the FDA prior tocommercial distribution. The two primary types of FDA marketing authorization applicable to a medical device are premarketnotification, also called 510(k) clearance, and premarket approval, or PMA approval.The PMA process, including the gathering of clinical and preclinical data and the submission to and review by the FDA,can take several years or longer. It involves a rigorous premarket review during which the applicant must prepare and provide theFDA with reasonable assurance of the device’s safety and effectiveness and information about the device and its componentsregarding, among other things, device design, manufacturing and labeling. PMA applications are subject to an application fee,which exceeds $250,000 for most PMAs. In addition, PMAs for certain devices must generally include the results from extensivepreclinical and adequate and well-controlled clinical trials to establish the safety and effectiveness of the device for eachindication for which FDA approval is sought. In particular, for a diagnostic, a PMA application typically requires data regardinganalytical and clinical validation studies. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilitiesfor compliance with the Quality System Regulation, or QSR, which imposes elaborate testing, control, documentation and otherquality assurance requirements.PMA approval is not guaranteed, and the FDA may ultimately respond to a PMA submission with a not approvabledetermination based on deficiencies in the application and require additional clinical trial or other data that may be expensive andtime-consuming to generate and that can substantially delay approval. If the FDA’s evaluation of43Table of Contentsthe PMA application is favorable, the FDA typically issues an approvable letter requiring the applicant’s agreement to specificconditions, such as changes in labeling, or specific additional information, such as submission of final labeling, in order to securefinal approval of the PMA. If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will denyapproval of the PMA or issue a not approvable letter. A not approvable letter will outline the deficiencies in the application and,where practical, will identify what is necessary to make the PMA approvable. The FDA may also determine that additionalclinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials areconducted and then the data submitted in an amendment to the PMA. If the FDA concludes that the applicable criteria have beenmet, the FDA will issue a PMA for the approved indications, which can be more limited than those originally sought by theapplicant. The PMA can include post-approval conditions that the FDA believes necessary to ensure the safety and effectivenessof the device, including, among other things, restrictions on labeling, promotion, sale and distribution. Once granted, PMAapproval may be withdrawn by the FDA if compliance with post-approval requirements, conditions of approval or otherregulatory standards is not maintained or problems are identified following initial marketing.After a device is placed on the market, it remains subject to significant regulatory requirements. Medical devices may bemarketed only for the uses and indications for which they are cleared or approved. Device manufacturers must also establishregistration and device listings with the FDA. A medical device manufacturer’s manufacturing processes and those of itssuppliers are required to comply with the applicable portions of the QSR, which cover the methods and documentation of thedesign, testing, production, processes, controls, quality assurance, labeling, packaging and shipping of medical devices. Domesticfacility records and manufacturing processes are subject to periodic unscheduled inspections by the FDA. The FDA also mayinspect foreign facilities that export products to the United States.Health care Law and RegulationHealth care providers and third-party payors play a primary role in the recommendation and prescription of drugproducts that are granted marketing approval. Arrangements with providers, consultants, third-party payors and customers aresubject to broadly applicable fraud and abuse, anti-kickback, false claims laws, patient privacy laws and regulations and otherhealth care laws and regulations that may constrain business and/or financial arrangements. Restrictions under applicable federaland state health care laws and regulations, include the following:·the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly andwillfully soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash or in kind,to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any goodor service, for which payment may be made, in whole or in part, under a federal health care program such asMedicare and Medicaid;·the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penaltieslaws, which prohibit individuals or entities from, among other things, knowingly presenting, or causing to bepresented, to the federal government, claims for payment that are false, fictitious or fraudulent or knowinglymaking, using or causing to made or used a false record or statement to avoid, decrease or conceal an obligation topay money to the federal government.·the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additionalfederal criminal laws that prohibit, among other things, knowingly and willfully executing, or attempting toexecute, a scheme to defraud any health care benefit program or making false statements relating to health carematters;·HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and theirrespective implementing regulations, including the Final Omnibus Rule published in January 2013, which imposeobligations, including mandatory contractual terms, with respect to safeguarding the privacy, security andtransmission of individually identifiable health information;44Table of Contents·the federal false statements statute, which prohibits knowingly and willfully falsifying, concealing ·or covering up amaterial fact or making any materially false statement in connection with the delivery of or payment for health carebenefits, items or services;·the Foreign Corrupt Practices Act, or FCPA, which prohibits companies and their intermediaries from making, oroffering or promising to make improper payments to non-U.S. officials for the purpose of obtaining or retainingbusiness or otherwise seeking favorable treatment;·the federal transparency requirements known as the federal Physician Payments Sunshine Act, under the PatientProtection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, or theAffordable Care Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies toreport annually to the Centers for Medicare & Medicaid Services, or CMS, within the United States Department ofHealth and Human Services, information related to payments and other transfers of value made by that entity tophysicians and teaching hospitals, as well as ownership and investment interests held by physicians and theirimmediate family members; and·analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which mayapply to health care items or services that are reimbursed by non-government third-party payors, including privateinsurers.Further, some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntarycompliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiringmanufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.Additionally, some state and local laws require the registration of pharmaceutical sales representatives in the jurisdiction. Stateand foreign laws also govern the privacy and security of health information in some circumstances, many of which differ fromeach other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.Pharmaceutical Insurance Coverage and Health Care ReformIn the United States and markets in other countries, patients who are prescribed treatments for their conditions andproviders performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and othergovernment authorities. Thus, even if a product candidate is approved, sales of the product will depend, in part, on the extent towhich third-party payors, including government health programs in the United States such as Medicare and Medicaid,commercial health insurers and managed care organizations, provide coverage and establish adequate reimbursement levels for,the product. The process for determining whether a payor will provide coverage for a product may be separate from the processfor setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payorsare increasingly challenging the prices charged, examining the medical necessity and reviewing the cost-effectiveness of medicalproducts and services and imposing controls to manage costs. Third-party payors may limit coverage to specific products on anapproved list, also known as a formulary, which might not include all of the approved products for a particular indication.In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need toconduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product,in addition to the costs required to obtain FDA or other comparable marketing approvals. Nonetheless, product candidates maynot be considered medically necessary or cost effective. A decision by a third-party payor not to cover a product could reducephysician utilization once the product is approved and have a material adverse effect on sales, results of operations and financialcondition. Additionally, a payor’s decision to provide coverage for a product does not imply that an adequate reimbursement ratewill be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will alsoprovide coverage and reimbursement for the product, and the level of coverage and reimbursement can differ significantly frompayor to payor.45Table of ContentsThe containment of health care costs also has become a priority of federal, state and foreign governments and the pricesof products have been a focus in this effort. Governments have shown significant interest in implementing cost-containmentprograms, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoptionof price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controlsand measures, could further limit a company’s revenue generated from the sale of any approved products. Coverage policies andthird-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for oneor more products for which a company or its collaborators receive marketing approval, less favorable coverage policies andreimbursement rates may be implemented in the future.There have been a number of federal and state proposals during the last few years regarding the pricing ofpharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and biologics and other medicalproducts, government control and other changes to the health care system in the United States.In March 2010, the United States Congress enacted the Affordable Care Act, or ACA, which, among other things,includes changes to the coverage and payment for drug products under government health care programs. Among the provisionsof the ACA of importance to our potential product candidates are:·an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs andbiologic agents, apportioned among these entities according to their market share in certain government healthcareprograms;·expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaidcoverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentiallyincreasing a manufacturer’s Medicaid rebate liability;·expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimumrebate for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, forcalculating and reporting Medicaid drug rebates on outpatient prescription drug prices;·addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Programare calculated for drugs that are inhaled, infused, instilled, implanted or injected;·expanded the types of entities eligible for the 340B drug discount program;·established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% (and70% starting January 1, 2019) point-of-sale-discount off the negotiated price of applicable brand drugs to eligiblebeneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be coveredunder Medicare Part D; and·a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparativeclinical effectiveness research, along with funding for such research.Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint SelectCommittee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several governmentprograms. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effectin April 2013 and, due to subsequent legislative amendments, will remain in effect through 2027 unless additional Congressionalaction is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, amongother things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatmentcenters, and increased the statute of limitations period for the government to recover overpayments to providers from three to fiveyears.46Table of ContentsSince enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal andreplace provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by thePresident on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires mostAmericans to carry a minimal level of health insurance, will become effective in 2019. According to the Congressional BudgetOffice, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums ininsurance markets may rise. Additionally, on January 22, 2018, President Trump signed a continuing resolution onappropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called“Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insuranceproviders based on market share, and the medical device excise tax on non-exempt medical devices. Further, the BipartisanBudget Act of 2018, among other things, amends the ACA, effective January 1, 2019, to increase from 50 percent to 70 percentthe point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close thecoverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. The Congress will likely consider otherlegislation to replace elements of the ACA during the next Congressional session.In addition, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individualmandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealedas part of the TCJA, the remaining provisions of the ACA are invalid as well. The Trump administration and CMS have bothstated that the ruling will have no immediate effect, and on December 30, 2018 the same judge issued an order staying thejudgment pending appeal. The Trump Administration recently represented to the Court of Appeals considering this judgment thatit does not oppose the lower court’s ruling. On July 10, 2019, the Court of Appeals for the Fifth Circuit heard oral argument inthis case. On December 18, 2019, that court affirmed the lower court’s ruling that the individual mandate portion of the ACA isunconstitutional and it remanded the case to the district court for reconsideration of the severability question and additionalanalysis of the provisions of the ACA. Litigation and legislation over the ACA are likely to continue, with unpredictable anduncertain results. The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. SinceJanuary 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions ofthe ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Orderdirects federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay theimplementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcareproviders, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order terminates thecost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administrationfrom terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25,2017. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarks forinsurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefitsrequired under the ACA for plans sold through such marketplaces. Further, on June 14, 2018, U.S. Court of Appeals for theFederal Circuit ruled that the federal government was not required to pay more than $12 billion in ACA risk corridor payments tothird-party payors who argued were owed to them. The effects of this gap in reimbursement on third-party payors, the viability ofthe ACA marketplace, providers, and potentially our business, are not yet known. Further, there have been several recent U.S.congressional inquiries and proposed federal and proposed and enacted state legislation designed to, among other things, bringmore transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costsof drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level,Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrativemeasures to control drug costs. For example, on May 11, 2018, the Administration issued a plan to lower drug prices. Under thisblueprint for action, the Administration indicated that the Department of Health and Human Services will: take steps to end thegaming of regulatory and patent processes by drug makers to unfairly protect monopolies; advance biosimilars and generics toboost price competition; evaluate the inclusion of prices in drug makers’ ads to enhance price competition; speed access to andlower the cost of new drugs by clarifying policies for sharing information between insurers and drug makers; avoid excessivepricing by relying more on value-based pricing by expanding outcome-based payments in Medicare and Medicaid; work to givePart D plan sponsors more negotiation power with drug makers; examine which Medicare Part B drugs could be negotiated for alower price by Part D plans, and improving the design of the Part B Competitive Acquisition Program; update47Table of ContentsMedicare’s drug-pricing dashboard to increase transparency; prohibit Part D contracts that include “gag rules” that preventpharmacists from informing patients when they could pay less out-of-pocket by not using insurance; and require that Part D planmembers be provided with an annual statement of plan payments, out-of-pocket spending, and drug price increases.In addition, on December 23, 2019, the Trump Administration published a proposed rulemaking that, if finalized, wouldallow states or certain other non-federal government entities to submit importation program proposals to FDA for review andapproval. Applicants would be required to demonstrate their importation plans pose no additional risk to public health and safetyand will result in significant cost savings for consumers. At the same time, FDA issued draft guidance that would allowmanufacturers to import their own FDA-approved drugs that are authorized for sale in other countries (multi-market approvedproducts).At the state level, individual states are increasingly aggressive in passing legislation and implementing regulationsdesigned to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints,discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases,designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities andindividual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which supplierswill be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand forour products, once approved, or put pressure on our product pricing. We expect that additional state and federal healthcarereform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will payfor healthcare products and services, which could result in reduced demand for our product candidates or additional pricingpressures.Review and Approval of Medicinal Products in the European UnionIn order to market any product outside of the United States, a company must also comply with numerous and varyingregulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among otherthings, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not it obtains FDAapproval for a product, an applicant will need to obtain the necessary approvals by the comparable non-U.S. regulatory authoritiesbefore it can commence clinical trials or marketing of the product in those countries or jurisdictions. Specifically, the processgoverning approval of medicinal products in the European Union (“EU”) generally follows the same lines as in the United States.It entails satisfactory completion of preclinical studies and adequate and well-controlled clinical trials to establish the safety andefficacy of the product for each proposed indication. It also requires the submission to the relevant competent authorities of amarketing authorization application, or MAA, and granting of a marketing authorization by these authorities before the productcan be marketed and sold in the EU.Clinical Trial ApprovalThe Clinical Trials Directive 2001/20/EC, the Directive 2005/28/EC on Good Clinical Practice, or GCP, and the relatednational implementing provisions of the individual EU Member States govern the system for the approval of clinical trials in theEU. Under this system, an applicant must obtain prior approval from the competent national authority of the EU Member Statesin which the clinical trial is to be conducted. Furthermore, the applicant may only start a clinical trial at a specific study site afterthe competent ethics committee has issued a favorable opinion. The clinical trial application must be accompanied by, amongother documents, an investigational medicinal product dossier (the Common Technical Document) with supporting informationprescribed by Directive 2001/20/EC, Directive 2005/28/EC, where relevant the implementing national provisions of theindividual EU Member States and further detailed in applicable guidance documents.In April 2014, the new Clinical Trials Regulation, (EU) No 536/2014 (Clinical Trials Regulation) was adopted. TheRegulation was published on June 16, 2014 but is not expected to apply until 2020. The Clinical Trials Regulation will be directlyapplicable in all the EU Member States, repealing the current Clinical Trials Directive 2001/20/EC and replacing any nationallegislation that was put in place to implement the Directive. Conduct of all clinical trials performed in the EU will continue to bebound by currently applicable provisions until the new Clinical Trials48Table of ContentsRegulation becomes applicable. The extent to which on-going clinical trials will be governed by the Clinical Trials Regulationwill depend on when the Clinical Trials Regulation becomes applicable and on the duration of the individual clinical trial. If aclinical trial continues for more than three years from the day on which the Clinical Trials Regulation becomes applicable theClinical Trials Regulation will at that time begin to apply to the clinical trial.The new Clinical Trials Regulation aims to simplify and streamline the approval of clinical trials in the EU. The maincharacteristics of the regulation include: a streamlined application procedure via a single entry point, the “EU Portal andDatabase”; a single set of documents to be prepared and submitted for the application as well as simplified reporting proceduresfor clinical trial sponsors; and a harmonized procedure for the assessment of applications for clinical trials, which is divided intwo parts. Part I is assessed by the appointed reporting Member State, whose assessment report is submitted for review by thesponsor and all other competent authorities of all EU Member States in which an application for authorization of a clinical trialhas been submitted (Concerned Member States). Part II is assessed separately by each Concerned Member State. Strict deadlineshave been established for the assessment of clinical trial applications. The role of the relevant ethics committees in the assessmentprocedure will continue to be governed by the national law of the Concerned Member State. However, overall related timelineswill be defined by the Clinical Trials Regulation.PRIME Designation in the EUIn March 2016, the European Medicines Agency, or EMA, launched an initiative to facilitate development of productcandidates in indications, often rare, for which few or no therapies currently exist. The PRIority MEdicines, or PRIME, scheme isintended to encourage drug development in areas of unmet medical need and provides accelerated assessment of productsrepresenting substantial innovation reviewed under the centralized procedure. Products from small- and medium-sizedenterprises, or SMEs, may qualify for earlier entry into the PRIME scheme than larger companies. Many benefits accrue tosponsors of product candidates with PRIME designation, including but not limited to, early and proactive regulatory dialoguewith the EMA, frequent discussions on clinical trial designs and other development program elements, and accelerated marketingauthorization application assessment once a dossier has been submitted. Importantly, a dedicated Agency contact and rapporteurfrom the Committee for Human Medicinal Products (CHMP) or Committee for Advanced Therapies (CAT) are appointed early inPRIME scheme facilitating increased understanding of the product at EMA’s Committee level. A kick-off meeting initiates theserelationships and includes a team of multidisciplinary experts at the EMA to provide guidance on the overall development andregulatory strategies.Marketing AuthorizationTo obtain a marketing authorization for a product under EU regulatory systems, an applicant must submit an MAAeither under a centralized procedure administered by the EMA, or one of the procedures administered by competent authorities inthe EU Member States (decentralized procedure, national procedure or mutual recognition procedure). A marketing authorizationmay be granted only to an applicant established in the EU. Regulation (EC) No 1901/2006 provides that prior to obtaining amarketing authorization in the EU, applicants have to demonstrate compliance with all measures included in an EMA-approvedPediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted (1) a product-specific waiver, (2) a class waiver or (3) a deferral for one or more of the measures included in the PIP.The centralized procedure provides for the grant of a single marketing authorization by the European Commission that isvalid across the European Economic Area (i.e. the EU as well as Iceland, Liechtenstein and Norway). Pursuant to Regulation(EC) No 726/2004, the centralized procedure is compulsory for specific products, including for medicines produced by certainbiotechnological processes, products designated as orphan medicinal products, ATMPs and products with a new active substanceindicated for the treatment of certain diseases, including products for the treatment of cancer. For products with a new activesubstance indicated for the treatment of other diseases and products that are highly innovative or for which a centralized processis in the interest of patients, the centralized procedure may be optional. The centralized procedure may at the request of theapplicant also be used in certain other cases. We anticipate that the centralized procedure will be mandatory for the productcandidates we are developing.49Table of ContentsUnder the centralized procedure, the CHMP is also responsible for several post-authorization and maintenance activities,such as the assessment of modifications or extensions to an existing marketing authorization. Under the centralized procedure inthe EU, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops, when additional informationor written or oral explanation is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluationmight be granted by the CHMP in exceptional cases, when a medicinal product is of major interest from the point of view ofpublic health and in particular from the viewpoint of therapeutic innovation. If the CHMP accepts such request, the time limit of210 days will be reduced to 150 days but it is possible that the CHMP can revert to the standard time limit for the centralizedprocedure if it considers that it is no longer appropriate to conduct an accelerated assessment. At the end of this period, the CHMPprovides a scientific opinion on whether or not a marketing authorization should be granted in relation to a medicinal product.Within 15 calendar days of receipt of a final opinion from the CHMP, the European Commission must prepare a draft decisionconcerning an application for marketing authorization. This draft decision must take the opinion and any relevant provisions ofEU law into account. Before arriving at a final decision on an application for centralized authorization of a medicinal product theEuropean Commission must consult the Standing Committee on Medicinal Products for Human Use. The Standing Committee iscomposed of representatives of the EU Member States and chaired by a non-voting European Commission representative. TheEuropean Parliament also has a related “droit de regard”. The European Parliament's role is to ensure that the EuropeanCommission has not exceeded its powers in deciding to grant or refuse to grant a marketing authorization.The European Commission may grant a so-called “marketing authorization under exceptional circumstances”. Suchauthorization is intended for products for which the applicant can demonstrate that it is unable to provide comprehensive data onthe efficacy and safety under normal conditions of use, because the indications for which the product in question is intended areencountered so rarely that the applicant cannot reasonably be expected to provide comprehensive evidence, or in the present stateof scientific knowledge, comprehensive information cannot be provided, or it would be contrary to generally accepted principlesof medical ethics to collect such information. Consequently, marketing authorization under exceptional circumstances may begranted subject to certain specific obligations, which may include the following:·the applicant must complete an identified program of studies within a time period specified by the competentauthority, the results of which form the basis of a reassessment of the benefit/risk profile;·the medicinal product in question may be supplied on medical prescription only and may in certain cases beadministered only under strict medical supervision, possibly in a hospital and in the case of a radiopharmaceutical,by an authorized person; and·the package leaflet and any medical information must draw the attention of the medical practitioner to the fact thatthe particulars available concerning the medicinal product in question are as yet inadequate in certain specifiedrespects.A marketing authorization under exceptional circumstances is subject to annual review to reassess the risk-benefitbalance in an annual reassessment procedure. Continuation of the authorization is linked to the annual reassessment and anegative assessment could potentially result in the marketing authorization being suspended or revoked. The renewal of amarketing authorization of a medicinal product under exceptional circumstances, however, follows the same rules as a “normal”marketing authorization. Thus, a marketing authorization under exceptional circumstances is granted for an initial five years, afterwhich the authorization will become valid indefinitely, unless the EMA decides that safety grounds merit one additional five-yearrenewal.The European Commission may also grant a so-called “conditional marketing authorization” prior to obtaining thecomprehensive clinical data required for an application for a full marketing authorization. Such conditional marketingauthorizations may be granted for product candidates (including medicines designated as orphan medicinal products), if (i) therisk-benefit balance of the product candidate is positive, (ii) it is likely that the applicant will be in a position to provide therequired comprehensive clinical trial data, (iii) the product fulfills an unmet medical need and (iv) the benefit to public health ofthe immediate availability on the market of the medicinal product concerned outweighs the risk inherent in the fact that additionaldata are still required. A conditional marketing authorization may contain specific50Table of Contentsobligations to be fulfilled by the marketing authorization holder, including obligations with respect to the completion of ongoingor new studies, and with respect to the collection of pharmacovigilance data. Conditional marketing authorizations are valid forone year, and may be renewed annually, if the risk-benefit balance remains positive, and after an assessment of the need foradditional or modified conditions and/or specific obligations. The timelines for the centralized procedure described above alsoapply with respect to the review by the CHMP of applications for a conditional marketing authorization.The EU medicines rules expressly permit the EU Member States to adopt national legislation prohibiting or restrictingthe sale, supply or use of any medicinal product containing, consisting of or derived from a specific type of human or animal cell,such as embryonic stem cells. While the products we have in development do not make use of embryonic stem cells, it is possiblethat the national laws in certain EU Member States may prohibit or restrict us from commercializing our future products, if thesefuture products contain, consist of or are derived from such a human or animal cell, even if they have been granted an EUmarketing authorization.Unlike the centralized authorization procedure, the decentralized marketing authorization procedure requires a separateapplication to, and leads to separate approval by, the competent authorities of each EU Member State in which the product is tobe marketed. This application is identical to the application that would be submitted to the EMA for authorization through thecentralized procedure. The reference EU Member State prepares a draft assessment and drafts of the related materials within 120days after receipt of a valid application. The resulting assessment report is submitted to the concerned EU Member States who,within 90 days of receipt, must decide whether to approve the assessment report and related materials. If a concerned EU MemberState cannot approve the assessment report and related materials due to concerns relating to a potential serious risk to publichealth, disputed elements may be referred to the European Commission, whose decision is binding on all EU Member States.The mutual recognition procedure similarly is based on the acceptance by the competent authorities of the EU MemberStates of the marketing authorization of a medicinal product by the competent authorities of other EU Member States. The holderof a national marketing authorization may submit an application to the competent authority of an EU Member State requestingthat this authority recognize the marketing authorization delivered by the competent authority of another EU Member State.Regulatory Data Protection in the EUIn the EU, innovative medicinal products approved on the basis of a complete independent data package qualify foreight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant toDirective 2001/83/EC. Regulation (EC) No 726/2004 repeats this entitlement for medicinal products authorized in accordance thecentralized authorization procedure. Data exclusivity prevents applicants for authorization of generics of these innovativeproducts from referencing the innovator’s data to assess a generic (abridged) application for a period of eight years. During anadditional two-year period of market exclusivity, a generic marketing authorization application can be submitted and authorized,and the innovator’s data may be referenced, but no generic medicinal product can be placed on the EU market until the expirationof the market exclusivity. The overall ten-year period will be extended to a maximum of 11 years if, during the first eight years ofthose ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which,during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison withexisting therapies. Even if a compound is considered to be a new chemical entity so that the innovator gains the prescribed periodof data exclusivity, another company nevertheless could also market another version of the product if such company obtainedmarketing authorization based on an MAA with a complete independent data package of pharmaceutical tests, preclinical testsand clinical trials.Periods of Authorization and RenewalsA marketing authorization has an initial validity for five years in principle. The marketing authorization may berenewed after five years on the basis of a re-evaluation of the risk-benefit balance by the EMA or by the competent authority ofthe EU Member State. To this end, the marketing authorization holder must provide the EMA or the competent authority with aconsolidated version of the file in respect of quality, safety and efficacy, including all51Table of Contentsvariations introduced since the marketing authorization was granted, at least six months before the marketing authorization ceasesto be valid. The European Commission or the competent authorities of the EU Member States may decide, on justified groundsrelating to pharmacovigilance, to proceed with one further five-year period of marketing authorization. Once subsequentlydefinitively renewed, the marketing authorization shall be valid for an unlimited period. Any authorization which is not followedby the actual placing of the medicinal product on the EU n market (in case of centralized procedure) or on the market of theauthorizing EU Member State within three years after authorization ceases to be valid (the so-called sunset clause).Pediatric Studies and ExclusivityPrior to obtaining a marketing authorization in the European Union, applicants must demonstrate compliance with allmeasures included in an EMA‑approved PIP covering all subsets of the pediatric population, unless the EMA has granted aproduct‑specific waiver, a class waiver, or a deferral for one or more of the measures included in the PIP. The respectiverequirements for all marketing authorization procedures are laid down in Regulation (EC) No 1901/2006, the so‑called PediatricRegulation. This requirement also applies when a company wants to add a new indication, pharmaceutical form or route ofadministration for a medicine that is already authorized. The Pediatric Committee of the EMA, or PDCO, may grant deferrals forsome medicines, allowing a company to delay development of the medicine for children until there is enough information todemonstrate its effectiveness and safety in adults. The PDCO may also grant waivers when development of a medicine forchildren is not needed or is not appropriate, such as for diseases that only affect the elderly population. Before an MAA can befiled, or an existing marketing authorization can be amended, the EMA determines that companies actually comply with theagreed studies and measures listed in each relevant PIP. If an applicant obtains a marketing authorization in all EU MemberStates, or a marketing authorization granted in the Centralized Procedure by the European Commission, and the study results forthe pediatric population are included in the product information, even when negative, the medicine is then eligible for anadditional six month period of qualifying patent protection through extension of the term of the Supplementary ProtectionCertificate, or SPC.Orphan Drug Designation and ExclusivityRegulation (EC) No. 141/2000, as implemented by Regulation (EC) No. 847/2000 provides that a drug can bedesignated as an orphan drug by the European Commission if its sponsor can establish: that the product is intended for thediagnosis, prevention or treatment of (1) a life-threatening or chronically debilitating condition affecting not more than five in tenthousand persons in the EU when the application is made, or (2) a life-threatening, seriously debilitating or serious and chroniccondition in the EU and that without incentives it is unlikely that the marketing of the drug in the EU would generate sufficientreturn to justify the necessary investment. For either of these conditions, the applicant must demonstrate that there exists nosatisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in the EU or, ifsuch method exists, the drug will be of significant benefit to those affected by that condition.Once authorized, orphan medicinal products are entitled to 10 years of market exclusivity in all EU Member States andin addition a range of other benefits during the development and regulatory review process including scientific assistance forstudy protocols, authorization through the centralized marketing authorization procedure covering all member countries and areduction or elimination of registration and marketing authorization fees. However, marketing authorization may be granted to asimilar medicinal product with the same orphan indication during the 10-year period with the consent of the marketingauthorization holder for the original orphan medicinal product or if the manufacturer of the original orphan medicinal product isunable to supply sufficient quantities. Marketing authorization may also be granted to a similar medicinal product with the sameorphan indication if this product is safer, more effective or otherwise clinically superior to the original orphan medicinal product.The period of market exclusivity may, in addition, be reduced to six years if it can be demonstrated on the basis of availableevidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of market exclusivity52Table of ContentsRegulatory Requirements after a Marketing Authorization has been ObtainedIn case an authorization for a medicinal product in the EU is obtained, the holder of the marketing authorization isrequired to comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale of medicinalproducts. These include:·Compliance with the EU’s stringent pharmacovigilance or safety reporting rules must be ensured. These rules canimpose post-authorization studies and additional monitoring obligations.·The manufacturing of authorized medicinal products, for which a separate manufacturer’s license is mandatory,must also be conducted in strict compliance with the applicable EU laws, regulations and guidance, includingDirective 2001/83/EC, Directive 2003/94/EC, Regulation (EC) No 726/2004 and the European CommissionGuidelines for Good Manufacturing Practice. These requirements include compliance with EU cGMP standardswhen manufacturing medicinal products and active pharmaceutical ingredients, including the manufacture of activepharmaceutical ingredients outside of the EU with the intention to import the active pharmaceutical ingredients intothe EU.·The marketing and promotion of authorized drugs, including industry-sponsored continuing medical education andadvertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the EUnotably under Directive 2001/83EC, as amended, and EU Member State laws. Direct-to-consumer advertising ofprescription medicines is prohibited across the EU.Brexit and the Regulatory Framework in the United KingdomOn June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the EU (which is commonly referredto as “Brexit”). Following protracted negotiations, the United Kingdom left the European Union on January 31, 2020. Under thewithdrawal agreement, there is a transitional period until December 31, 2020 (extendable up to two years). Discussions betweenthe United Kingdom and the EU have so far mainly focused on finalizing withdrawal issues and transition agreements but havebeen extremely difficult. To date, only an outline of a trade agreement has been reached. Much remains open but the UK PrimeMinister has indicated that the United Kingdom will not seek to extend the transitional period beyond the end of 2020. If no tradeagreement has been reached before the end of the transitional period, there may be significant market and economic disruption.The UK Prime Minister has also indicated that the UK will not accept high regulatory alignment with the EU.Since the regulatory framework for pharmaceutical products in the United Kingdom covering quality, safety andefficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales, and distribution of pharmaceuticalproducts is derived from European Union directives and regulations, Brexit could materially impact the future regulatory regimethat applies to products and the approval of product candidates in the United Kingdom. Any delay in obtaining, or an inability toobtain, any marketing approvals, as a result of Brexit or otherwise, may force us to restrict or delay efforts to seek regulatoryapproval in the United Kingdom and/or European Union for INVELTYS or our product candidates, including EYSUVIS, whichcould significantly and materially harm our business.Pricing Decisions for Approved ProductsIn the EU, pricing and reimbursement schemes vary widely from country to country. Some countries provide thatproducts may be marketed only after a reimbursement price has been agreed. Some countries may require the completion ofadditional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies or so-called health technology assessments, in order to obtain reimbursement or pricing approval. For example, the EU providesoptions for its Member States to restrict the range of products for which their national health insurance systems providereimbursement and to control the prices of medicinal products for human use. Member States may approve a specific price for aproduct or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the product onthe market. Other Member States allow companies to fix their own prices for products, but monitor and control prescriptionvolumes and issue guidance to physicians to limit prescriptions. Recently, many countries in the EU have increased the amount ofdiscounts required on pharmaceuticals and these efforts could continue as countries attempt to manage health care expenditures,especially in light of the severe fiscal and debt crises experienced by many countries in the EU. The downward pressure on healthcare costs in general,53Table of Contentsparticularly prescription products, has become intense. As a result, increasingly high barriers are being erected to the entry of newproducts. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiationsmay continue after reimbursement has been obtained. Reference pricing used by various Member States, and parallel trade, i.e.,arbitrage between low-priced and high-priced Member States, can further reduce prices. There can be no assurance that anycountry that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement andpricing arrangements for any products, if approved in those countries.General Data Protection RegulationThe collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the EU, includingpersonal health data, is subject to the EU General Data Protection Regulation, or GDPR, which became effective on May 25,2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data,including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom thepersonal data relates, providing information to individuals regarding data processing activities, implementing safeguards toprotect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measureswhen engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside theEU, including the U.S., and permits data protection authorities to impose large penalties for violations of the GDPR, includingpotential fines of up to €20 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private rightof action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, andobtain compensation for damages resulting from violations of the GDPR. Compliance with the GDPR will be a rigorous andtime-intensive process that may increase the cost of doing business or require companies to change their business practices toensure full compliance.EmployeesAs of December 31, 2019, we had a total of 136 full‑time employees. None of our employees are represented by laborunions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.Our Corporate InformationWe were incorporated under the laws of the State of Delaware in July 2009. Our office is located at 490 Arsenal Way,Suite 120, Watertown, MA 02472, and our telephone number is (781) 996-5252. Our website address is www.kalarx.com.Available InformationThrough our website, we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) ofthe Securities Exchange Act of 1934, or the Exchange Act. We make these reports available through our website as soon asreasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and ExchangeCommission, or the SEC. You can review our electronically filed reports and other information that we file with the SEC on theSEC’s web site at http://www.sec.gov. We also make available, free of charge on our website, the reports filed with the SEC byour executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonablypracticable after copies of those filings are provided to us by those persons. In addition, we regularly use our website to postinformation regarding our business, product development programs and governance, and we encourage investors to use ourwebsite, particularly the information in the section entitled “Investors & Media,” as a source of information about us.The information on our website is not incorporated by reference into this Annual Report on Form 10-K and should notbe considered to be a part of this Annual Report on Form 10-K. Our website address is included in this Annual Report on Form10-K as an inactive technical reference only.54Table of Contents Item 1A RISK FACTORSInvesting in our common stock involves a high degree of risk. You should carefully consider the risks and uncertaintiesdescribed below together with all of the other information contained in this Annual Report on Form 10‑K, including our financialstatements and the related notes appearing at the end of this Annual Report on Form 10‑K, before deciding to invest in ourcommon stock. If any of the following risks actually occur, our business, prospects, operating results and financial conditioncould suffer materially. In such event, the trading price of our common stock could decline and you might lose all or part of yourinvestment.Risks Related to Our Financial Position and Need For Additional CapitalWe have incurred significant losses from operations and negative cash flows from operations since our inception. We expectto incur losses over the next several years and may never achieve or maintain profitability.Since inception, we have incurred significant losses from operations and negative cash flows from operations. Our netlosses were $94.3 million for the year ended December 31, 2019 and $66.7 for the year ended December 31, 2018. As ofDecember 31, 2019, we had an accumulated deficit of $295.5 million. In January 2019, we launched our first product,INVELTYS (loteprednol etabonate ophthalmic suspension) 1% for the treatment of post-operative inflammation and painfollowing ocular surgery, and have had limited revenues to date from product sales. We have financed our operations primarilythrough proceeds from public offerings of common stock, private placements of preferred stock, convertible debt financings,borrowings under credit facilities, warrants, and sales under our at-the-market offering facility, or the ATM Offering. We havedevoted substantially all of our financial resources and efforts to research and development, including preclinical studies andclinical trials and engaging in activities to commercially launch INVELTYS. Although we expect to continue to generate revenuefrom sales of INVELTYS, there can be no assurance as to the amount or timing of any such revenue, and we expect to continue toincur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly fromquarter‑to‑quarter and year‑to‑year.We anticipate that our expenses will increase substantially as compared to prior periods as we continue tocommercialize INVELTYS in the United States and engage in activities to prepare for commercialization of our lead productcandidate, KPI-121 0.25%, which if approved we plan to commercialize under the brand name EYSUVIS (loteprednoletabonate ophthalmic suspension) 0.25%, for the temporary relief of signs and symptoms of dry eye disease, as a result ofincreased headcount, including management personnel to support our clinical, manufacturing and commercialization activities,expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with beinga public company and increased insurance premiums, among other factors. Our license agreement with The Johns HopkinsUniversity, or JHU, under which we license certain of our patent rights and a significant portion of the technology forINVELTYS and EYSUVIS, imposes royalty and other financial obligations on us, and we may enter into additional licensing andfunding arrangements with third parties that may impose milestone payment, royalty, insurance and other obligations on us. Our expenses will also increase if and as we:·continue to grow our sales, marketing and distribution capabilities in connection with the commercialization ofINVELTYS and any product candidates, including EYSUVIS, for which we may submit for and obtain marketingapproval;·conduct any necessary clinical trials, including conducting our ongoing Phase 3 clinical trial, and other developmentactivities and/or seek marketing approvals for EYSUVIS and any other product candidates;·pursue the clinical development of KPI‑121 for the treatment of other additional indications or for use in otherpatient populations or, if approved, seek to broaden the label of KPI‑121;·pursue the preclinical and clinical development of product candidates, including our receptor Tyrosine KinaseInhibitor program, or rTKI program, for use in the treatment of retinal diseases, and novel55®TMTable of Contentsnext‑generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal ofeliminating the risk of IOP increase and cataract formation;·seek regulatory approval for INVELTYS or any other product candidate outside of the United States;·continue to scale up our manufacturing processes and capabilities to support commercialization of INVELTYS, andany of our product candidates, including EYSUVIS, for which we seek and/or obtain marketing approval;·leverage our proprietary AMPPLIFY technology to advance additional potential high‑value therapeutics intopreclinical and clinical development;·in‑license or acquire the rights to other products, product candidates or technologies;·maintain, expand and protect our intellectual property portfolio;·hire additional clinical, quality control, scientific, manufacturing, commercial and management personnel;·expand our operational, financial and management systems and increase personnel, including personnel to supportour clinical development, manufacturing and commercialization efforts and our operations as a public company;and·increase our product liability insurance coverage as we expand our commercialization efforts.Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable toaccurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Ourexpenses will increase from what we anticipate if:·we elect to or are required by the FDA or non‑U.S. regulatory agencies to perform clinical trials or studies inaddition to those expected;·there are any delays in enrollment of patients in or completing our clinical trials or the development of our productcandidates; or·there are any third‑party challenges to our intellectual property portfolio, or the need arises to defend againstintellectual property‑related claims or enforce our intellectual property rights.Our ability to become and remain profitable depends on our ability to generate revenue. While we began to generaterevenue from the sales of INVELTYS in January 2019, there can be no assurance as to the amount or timing of any such revenue,and we may not achieve profitability for several years, if at all. Achieving and maintaining profitability will require us to besuccessful in a range of challenging activities, including:·successfully growing INVELTYS revenues, including by further developing our sales force, marketing anddistribution capabilities;·achieving an adequate level of market acceptance, and obtaining and maintaining coverage and adequatereimbursement from third‑party payors for INVELTYS and any other products we commercialize;·obtaining and maintaining marketing approval for EYSUVIS or any other product candidates;·manufacturing at commercial scale, marketing, selling and distributing INVELTYS or any product candidates forwhich we obtain marketing approval, including EYSUVIS;56Table of Contents·maintaining regulatory and marketing approvals for INVELTYS and for any other product candidates for which weobtain approval;·hiring and building a full commercial organization required for marketing, selling and distributing those productsfor which we obtain marketing approval; and·obtaining, maintaining and protecting our intellectual property rights.INVELTYS is our only product that has been approved for sale and it has only been approved in the United States. Ourability to generate revenue from operations will depend, in part, on the success of commercial sales of INVELTYS, which wecommercially launched in the United States in January 2019. However, the successful commercialization of INVELTYS in theUnited States is subject to many risks. We are currently undertaking our first commercial launch with INVELTYS, and we maynot be able to do so successfully. There are numerous examples of unsuccessful product launches and failures to meetexpectations of market potential, including by pharmaceutical companies with more experience and resources than us. We do notanticipate our revenue from sales of INVELTYS alone will be sufficient for us to become profitable for several years, if at all.We may never succeed in these activities and may never generate revenue that is sufficient to achieve profitability. Evenif we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure tobecome and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand ourbusiness, maintain our research and development efforts, diversify our product offerings or even continue our operations. Adecline in the value of our company could also cause you to lose all or part of your investment.Our limited operating history as a commercial company may make it difficult for you to evaluate the success of our businessto date and to assess our future viability.We are an early‑stage commercial company. Our operations to date have been limited to organizing and staffing ourcompany, acquiring rights to intellectual property, business planning, raising capital, developing INVELTYS and our productcandidates, including EYSUVIS, and preparing for and commercially launching INVELTYS. We are in the early stages of theprocess of transitioning from a company solely with a research and development focus to a company engaging in commercialactivities. We may not be successful in such a transition. We only launched INVELTYS in January 2019 and are still in theprocess of executing our commercial launch plan, have no history of commercializing products, and, to date, have generatedlimited revenue from the sale of INVELTYS. Consequently, any predictions you make about our future success or viability maynot be as accurate as they could be if we had a longer operating and commercialization history.We expect our financial condition and operating results to fluctuate significantly from quarter‑to‑quarter andyear‑to‑year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the resultsof any quarterly or annual periods as indications of future operating performance.We may need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay,reduce or eliminate our product development programs or commercialization efforts.We expect to devote substantial financial resources to our ongoing and planned activities, particularly as wecommercialize INVELTYS, seek marketing approval for EYSUVIS, and continue the development of and potentially seekmarketing approval for other product candidates. Our expenses may increase substantially in connection with our ongoingactivities, particularly as we commercialize INVELTYS, EYSUVIS, if and when approved, and as we advance our preclinicalactivities and clinical trials for our product candidates. In addition, our expenses will further increase if we elect to or are requiredto conduct any further trials for EYSUVIS. We also expect to devote additional financial resources to conducting research anddevelopment, and potentially initiating clinical trials of, and seeking regulatory approval for, other potential product candidates,including product candidates that we may develop using our rTKI program and novel next-generation anti-inflammatoriesdesigned to exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase and cataractformation.57Table of ContentsOur expenses have increased relative to prior periods in connection with our launch and commercialization ofINVELTYS, including costs associated with the addition of our specialty sales force and increased marketing, distribution andmanufacturing capabilities. If we obtain marketing approval for any product candidate that we develop, we may incur significantadditional commercialization expenses for such product candidate. For example, if EYSUVIS is approved, we plan to increaseour sales force from 57 sales representatives to a total of approximately 75 to 100 sales representatives, who will promote bothEYSUVIS and INVELTYS. Furthermore, we will incur additional costs associated with operating as a public company, hiringadditional personnel and expanding our facilities. Accordingly, we may need to obtain substantial additional funding inconnection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could beforced to delay, reduce or eliminate our research and development programs or any current or future commercialization efforts.Our future capital requirements will depend on many factors, including:·our ability to successfully commercialize and sell INVELTYS in the United States;·the cost, and our ability to expand and maintain the commercial infrastructure and manufacturing capabilitiesrequired to support the commercialization of INVELTYS, and any other products for which we receive marketingapproval, including product sales, medical affairs, marketing, manufacturing and distribution;·the results of our ongoing Phase 3 trial for EYSUVIS, STRIDE 3 (STRIDE—Short Term Relief In Dry Eye);·the costs, timing and outcome of regulatory review of EYSUVIS, including whether any additional clinical trials orother activities are required for approval or label expansion;·the progress, costs and results of any clinical activities for regulatory review of INVELTYS and EYSUVIS outsideof the United States;·the costs and timing of process development and manufacturing scale‑up activities associated with INVELTYS;·the costs and timing of commercialization activities for EYSUVIS if we receive marketing approval, including thecosts and timing of expanding our sales force and establishing additional product sales, marketing, distribution andoutsourced manufacturing capabilities;·the amount of revenue received from commercial sales of INVELTYS and, if approved, EYSUVIS or any otherproduct candidates;·our ability to establish and maintain strategic collaborations, licensing or other agreements and the financial terms ofsuch agreements;·the scope, progress, results and costs of any product candidates that we may derive from any other productcandidates that we may develop;·the extent to which we in‑license or acquire rights to other products, product candidates or technologies; and·the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting ourintellectual property rights and defending against any intellectual property‑related claims.We expect to continue to incur significant expenses and operating losses for the next several years. Net losses mayfluctuate significantly from quarter-to-quarter and year-to-year. We expect that our existing cash on hand as of58Table of ContentsDecember 31, 2019, together with anticipated net revenue from sales of INVELTYS, will enable us to fund our plannedoperations, lease and debt service obligations, and capital expenditure requirements into the second quarter of 2021. Thisevaluation is based on our operating plan which includes projected net revenue from sales of INVELTYS. If we do not achieveour projected net revenue, we believe we have the ability to manage spending under this operating plan in order to fundoperations into the second quarter of 2021. This evaluation is based on relevant conditions and events that are currently known orreasonably knowable. As a result, we could deplete our available capital resources sooner than we currently expect. We havebased these estimates on assumptions that may prove to be wrong, and our operating projections, including our projected netrevenue, may change as a result of many factors currently unknown to us.Conducting preclinical testing and clinical trials, seeking market approvals and commercializing products aretime‑consuming, expensive and uncertain processes that take years to complete. Although we commercially launchedINVELTYS in early 2019, we do not anticipate that our revenue from product sales of INVELTYS will be sufficient for us tobecome profitable for several years, if at all. Additionally, in August 2019, we announced that we received a complete responseletter, or CRL, from the FDA regarding our new drug application, or NDA, for EYSUVIS for the temporary relief of the signsand symptoms of dry eye disease. The FDA indicated that efficacy data from an additional clinical trial will be needed to supporta resubmission of the NDA. Based upon the previous recommendation of the FDA, we initiated an additional Phase 3 clinicaltrial, STRIDE 3, in the third quarter of 2018, which we expect will serve as the basis of our response to the CRL. However, wemay not generate the data necessary or otherwise obtain regulatory approval to commercialize EYSUVIS. Further, we may alsodetermine to conduct additional Phase 3 trials for EYSUVIS or to potentially expand the label of EYSUVIS if we receivemarketing approval for a narrower indication than we are targeting.We will need to obtain substantial additional financing to achieve our business objectives. In addition, we may seekadditional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds forour current or future operating plans. Adequate additional financing may not be available to us on acceptable terms, or at all. Ifadequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinicalstudies, clinical trials or other development activities for one or more of our product candidates or delay, limit, reduce orterminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercializeINVELTYS or any other product candidates for which we obtain approval.Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights toour technologies or product candidates.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through acombination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements,and marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity orconvertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation orother preferences that adversely affect your rights as a common stockholder. The lenders under our credit facility with AthyriumOpportunities III Acquisition LP, or our Athyrium Credit Facility, are currently entitled to exercise warrants for up to184,660 shares of common stock. If we draw down on the remaining $35.0 million of potentially available borrowings under ourAthyrium Credit Facility, the lenders thereunder will be entitled to exercise warrants for up to an additional 86,175 shares of ourcommon stock. Your ownership interest will be diluted to the extent any such warrants are exercised. Debt financing andpreferred equity financing, if available, may involve agreements that include pledging of assets as collateral, covenants limitingor restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaringdividends. Our pledge of our assets as collateral to secure our obligations under our Athyrium Credit Facility may limit ourability to obtain additional debt financing. Under our Athyrium Credit Facility, we are also restricted from paying dividends onour common stock and limited with respect to certain other uses of our cash without the lenders’ consent.If we raise additional funds through collaborations, strategic alliances, licensing arrangements, royalty agreements, ormarketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams,research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raiseadditional funds through equity or debt financings when needed, we may be required to59Table of Contentsdelay, limit, reduce or terminate our product development or current or future commercialization efforts or grant rights to developand market products or product candidates that we would otherwise prefer to develop and market ourselves.Our substantial indebtedness may limit cash flow available to invest in the ongoing needs of our business.We have a significant amount of indebtedness. As of December 31, 2019, we had $75.0 million of outstandingborrowings under the Athyrium Credit Facility. Amounts outstanding under the Athyrium Credit Facility bear interest at a rate of9.875% per annum. The Athyrium Credit Facility provides for quarterly interest‑only payments for 48 months. Beginning onSeptember 30, 2022, we will be required to make principal and interest payments through October 1, 2024. Our obligations underthe Athyrium Credit Facility are secured by substantially all of our assets. We could in the future incur additional indebtednessbeyond our borrowings under our Athyrium Credit Facility.Our debt combined with our other financial obligations and contractual commitments could have significant adverseconsequences, including:·requiring us to dedicate a substantial portion of cash flow from operations or cash on hand to the payment ofinterest on, and principal of, our debt, which will reduce the amounts available to fund working capital, capitalexpenditures, product development efforts and other general corporate purposes;·increasing our vulnerability to adverse changes in general economic, industry and market conditions;·subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain furtherdebt or equity financing;·limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and·placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicingoptions.We intend to satisfy our current and future debt service obligations with our existing cash and anticipated productrevenue from INVELTYS. Nonetheless, we may not have sufficient funds or may be unable to arrange for additional financing topay the amounts due under our existing debt and funds from external sources may not be available on acceptable terms, if at all.In addition, a failure to comply with the covenants under our Athyrium Credit Facility could result in an event of default andacceleration of amounts due. If an event of default occurs and the lender accelerates the amounts due under our Athyrium CreditFacility, we may not be able to make accelerated payments, and the lender could seek to enforce security interests in the collateralsecuring such indebtedness.If our estimates or judgments relating to our critical accounting policies, or any of our projections, prove to be inaccurate orfinancial reporting standards or interpretations change, our results of operations could be adversely affected.The preparation of financial statements in conformity with generally accepted accounting principles in the United States,or U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of our assets, liabilities, revenues and expenses. Such estimates and judgments includerevenue recognition, inventory, the present value of lease liabilities and the corresponding right-of-use assets, the fair value ofwarrants, stock compensation, accrued expenses and the recoverability of our net deferred tax assets and related valuationallowance. We base our estimates and judgments on historical experience, expected future experience and on various otherassumptions that we believe to be reasonable under the circumstances. In addition, from time to time, we may rely on projectionsregarding our expected future performance that represent our management’s then-current estimates. However, any of theseestimates, judgments or projections, or the assumptions underlying them, may change over time or may otherwise prove to beinaccurate. Our results of operations may be adversely affected if our estimates, assumptions or projections change or if actual60Table of Contentscircumstances differ from those in our estimates or assumptions, which could cause our results of operations to fall below theexpectations of securities analysts and investors, resulting in a decline in the trading price of our common stock.For example, we rely on third-party data providers to collect and report estimates of prescription information andpipeline inventory levels as components of our estimations for revenue recognition. There is a limited amount of informationavailable to such data providers to determine the actual number of total prescriptions for prescription products during suchperiods. Their estimates are based on a combination of data received from pharmacies and other distributors, and historical datawhen actual data is unavailable. Their calculations of changes in prescription levels between periods can be significantly affectedby lags in data reporting from various sources or by changes in pharmacies and other distributors providing data. Such methodscan from time to time result in significant inaccuracies in information when ultimately compared with actual results. Further, datafor a single and limited period may not be representative of a trend or otherwise predictive of future results.Additionally, we regularly monitor our compliance with applicable financial reporting standards and review newpronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards and changesin their interpretation, we might be required to change our accounting policies, alter our operational policies and implement newor enhance existing systems so that they reflect new or amended financial reporting standards, or we may be required to restateour published financial statements. Such changes to existing standards or changes in their interpretation may have an adverseeffect on our reputation, business, financial position, and profit.Risks Related to Product DevelopmentWe are dependent on the success of INVELTYS and our lead product candidate, EYSUVIS. If we are unable to successfullycommercialize INVELTYS or obtain marketing approval for EYSUVIS, or if we experience significant delays in doing so, orif, after obtaining marketing approval for EYSUVIS, we fail to successfully commercialize EYSUVIS, our business will bematerially harmed.We have devoted a significant portion of our financial resources and business efforts to the development of INVELTYSfor the post‑operative treatment of inflammation and pain following ocular surgery and EYSUVIS for the temporary relief of thesigns and symptoms of dry eye disease. There is a significant risk that we will fail to successfully commercialize INVELTYS andto successfully obtain marketing approval for and commercialize EYSUVIS. In January 2018, we announced that we hadcompleted two Phase 3 clinical trials evaluating EYSUVIS, STRIDE 1 and STRIDE 2, evaluating the safety and efficacy ofEYSUVIS versus placebo in patients with dry eye disease. In STRIDE 1, statistical significance was achieved for both primaryendpoints. However, in STRIDE 2 we did not achieve statistical significance for the primary symptom endpoint of oculardiscomfort severity. In October 2018, we submitted an NDA to the FDA for EYSUVIS. In August 2019, we announced that wereceived a CRL from the FDA regarding this NDA. The FDA indicated that efficacy data from an additional clinical trial will beneeded to support a resubmission of the NDA. Based upon the previous recommendation of the FDA, we initiated an additionalPhase 3 clinical trial, STRIDE 3, in the third quarter of 2018, which we expect will serve as the basis of our response to the CRL. However, we may not generate the data necessary to or otherwise obtain regulatory approval to commercialize EYSUVIS. Wemay also determine to conduct additional Phase 3 trials for EYSUVIS or to potentially expand the label of EYSUVIS if wereceive marketing approval for a narrower indication than we are targeting. We cannot accurately predict when or if EYSUVISwill receive marketing approval. Our ability to generate meaningful product revenues will depend on our successfulcommercialization of INVELTYS and our obtaining marketing approval for, and successfully commercializing, EYSUVIS.The success of our product INVELTYS and any other product candidates for which we receive marketing approval,including our lead product candidate, EYSUVIS, will depend on many factors, including the following:·successful commercialization of INVELTYS in the United States, including maintaining sales, marketing anddistribution capabilities for INVELTYS;61Table of Contents·acceptance of INVELTYS and, if and when approved, EYSUVIS and our other product candidates, by patients, themedical community and third‑party payors;·obtaining and maintaining coverage, adequate pricing, and adequate reimbursement from third‑party payors,including government payors, for INVELTYS and our product candidates, including EYSUVIS;·successfully developing and applying for and receiving marketing approvals from applicable regulatory authoritiesfor EYSUVIS and other product candidates;·receiving regulatory approval of our manufacturing processes and our third‑party manufacturers’ facilities fromapplicable regulatory authorities;·maintaining a workforce of experienced scientists and others with experience in AMPPLIFY technology and eyediseases to continue to develop our product candidates;·leveraging our sales, marketing and distribution capabilities for EYSUVIS and expanding upon these capabilities ifand when appropriate;·establishing additional sales, marketing and distribution capabilities for, and successfully launching commercialsales of, any other product candidates for which we obtain marketing approval, whether alone or in collaborationwith others;·effectively competing with other therapies;·maintaining an acceptable safety profile of our products following approval;·obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;·protecting our rights in our intellectual property portfolio; and·not infringing on others’ intellectual property rights.Successful development of KPI‑121 for additional indications, if any, or for use in broader patient populations willdepend on similar factors.If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays oran inability to successfully commercialize INVELTYS or our product candidates, including EYSUVIS, which would materiallyharm our business.If clinical trials of EYSUVIS or any other product candidate that we develop fail to demonstrate safety and efficacy to thesatisfaction of the FDA or other regulatory authorities or do not otherwise produce favorable results, we may incur additionalcosts or experience delays in completing, or ultimately be unable to complete, the development and commercialization of suchproduct candidate.Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we mustcomplete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our productcandidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and isuncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinicaltesting and early clinical trials may not be predictive of the success of later stage clinical trials, and interim results of a clinicaltrial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretationsand analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies andclinical trials have nonetheless failed to obtain marketing62Table of Contentsapproval of their product candidates. Furthermore, the failure of any product candidates to demonstrate safety and efficacy in anyclinical trial could negatively impact the perception of our other product candidates and/or cause the FDA or other regulatoryauthorities to require additional testing before approving any of our product candidates. For example, we previously conducted aPhase 2 clinical trial of EYSUVIS for the treatment of meibomian gland dysfunction which did not achieve its primary endpoint.The failure of this trial may have an adverse impact on the perceived safety or efficacy of EYSUVIS in treating dry eye disease orother indications or of INVELTYS.In January 2018, we announced that we had completed two Phase 3 clinical trials evaluating EYSUVIS, STRIDE 1 andSTRIDE 2, evaluating the safety and efficacy of EYSUVIS versus placebo in patients with dry eye disease. In STRIDE 1,statistical significance was achieved for both primary endpoints. However, in STRIDE 2 we did not achieve statisticalsignificance for the primary symptom endpoint of ocular discomfort severity. In August 2019, we announced that we received aCRL from the FDA regarding this NDA. The FDA indicated that efficacy data from an additional clinical trial will be needed tosupport a resubmission of the NDA. Based upon the previous recommendation of the FDA, we initiated an additional Phase 3clinical trial, STRIDE 3, in the third quarter of 2018, which we expect will serve as the basis of our response to the CRL. However, we may not generate the data necessary to or otherwise obtain regulatory approval to commercialize EYSUVIS. Wemay also determine to conduct additional Phase 3 trials for EYSUVIS or to potentially expand the label of EYSUVIS if wereceive marketing approval for a narrower indication than we are targeting. If the FDA determines that we have not sufficientlydemonstrated efficacy for both signs and symptoms of dry eye, we may need to conduct additional clinical trials to supportapproval of EYSUVIS for temporary relief of signs and symptoms of dry eye disease. If we conduct additional clinical trials ofEYSUVIS, our expenses will significantly increase and could delay or halt our ability to obtain marketing approval. Our Phase 3clinical trials of EYSUVIS may not be sufficient to support an application for marketing approval outside the United States.Further, if regulatory authorities outside the United States do not accept the data from any trial we conduct in the United States, inparticular if the European Union does not allow us to utilize the results from our Phase 3 clinical trials of EYSUVIS pursuant tothe Article 10(3) submission pathway or otherwise, we will likely need to conduct additional trials to obtain marketing approvalin such jurisdiction, which would be costly and time‑consuming and could delay or permanently halt our ability to commercializethe applicable product candidates in the applicable jurisdictions.We performed additional analyses on a post‑hoc basis on the results of our completed Phase 2 clinical trial for EYSUVISfor the purpose of designing our STRIDE 1 and STRIDE 2 clinical trials for EYSUVIS. Following completion of these Phase 3trials we conducted additional analyses on a post‑hoc basis of the data from both these Phase 3 trials and the Phase 2 clinical trialto support our NDA submission and to inform the design of our STRIDE 3 clinical trial and our development plan. We may alsoconduct additional post‑hoc analyses on the results of clinical trials in the future, including STRIDE 3. Post‑hoc analysesperformed after unmasking trial results can result in the introduction of bias, may not be predictive of success in any futureclinical trials and are given less weight by regulatory authorities than pre‑specified analyses. If we are required to conductadditional clinical trials or other testing of EYSUVIS or any other product candidate that we develop beyond those that wecurrently expect, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results ofthese trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:·be delayed in obtaining marketing approval for our product candidates;·not obtain marketing approval at all;·obtain approval for indications or patient populations that are not as broad as intended or desired;·obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, includingboxed warnings;·be subject to additional post‑marketing testing requirements; or·have the product removed from the market after obtaining marketing approval.63Table of ContentsIf we experience any of a number of possible unforeseen events in connection with our clinical trials, potential marketingapproval or commercialization of our product candidates could be delayed or prevented, and our competitors could bringproducts to market before we do.We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent ourability to receive marketing approval or commercialize EYSUVIS or any other product candidates that we may develop,including:·clinical trials of our product candidates, including STRIDE 3, may produce negative or inconclusive results, and wemay decide, or regulators may recommend or require us, to conduct additional clinical trials or abandon productdevelopment programs;·the number of patients required for clinical trials of our product candidates may be larger than we anticipate,enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinicaltrials at a higher rate than we anticipate;·our third‑party contractors may fail to comply with regulatory requirements or meet their obligations to us in atimely manner, or at all;·regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial orconduct a clinical trial at a prospective trial site;·we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinicaltrial protocols with prospective trial sites;·we may decide, or regulators or institutional review boards may require us, to suspend or terminate clinical researchfor various reasons, including noncompliance with regulatory requirements or a finding that the participants arebeing exposed to unacceptable health risks;·we may be subject to additional post‑marketing testing requirements to maintain regulatory approval;·regulators may revise the requirements for approving our product candidates, or such requirements may not be aswe anticipate;·the cost of clinical trials of our product candidates may be greater than we anticipate;·the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our productcandidates may be insufficient or inadequate or may be delayed;·our product candidates may have undesirable side effects or other unexpected characteristics, causing us or ourinvestigators, regulators or institutional review boards to suspend or terminate trials; and·regulatory authorities may withdraw their approval of a product or impose restrictions on its distribution, such as inthe form of a modified Risk Evaluation and Mitigation Strategy.Our product development costs will also increase if we experience delays in testing or marketing approvals. We do notknow whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will becompleted on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which wemay have the exclusive right to commercialize our product candidates or allow our competitors, such as those developingtreatments for dry eye disease, to bring products to market before we do and impair our ability to successfully commercialize ourproduct candidates.64Table of ContentsIf we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatoryapprovals could be delayed or prevented.We may not be able to initiate or continue clinical trials for product candidates we develop if we are unable to locate andenroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authoritiesoutside the United States.Patient enrollment is affected by a variety of factors, including:·the prevalence and severity of the disease or condition under investigation;·the patient eligibility criteria for the trial in question;·the perceived risks and benefits of the product candidate under study;·the existence of existing treatments for the indications for which we are conducting clinical trials;·the efforts to facilitate timely enrollment in clinical trials;·the patient referral practices of clinicians;·the ability to monitor patients adequately during and after treatment;·the proximity and availability of clinical trial sites for prospective patients;·the conducting of clinical trials by competitors for product candidates that treat the same indications as our productcandidates; and·the lack of adequate compensation for prospective patients.For example, we experienced a delay in patient enrollment for our Phase 3 clinical trial, STRIDE 3, evaluatingEYSUVIS for the temporary relief of the signs and symptoms of dry eye disease, which has now completed the last patient visit.There were a number of factors that may have impacted the delay, including increased competition for eligible patients fromcompetitors that are developing product candidates to treat similar indications and the limited number of patients who fit theeligibility criteria for STRIDE 3. As a result of the delay, we are targeting topline data for STRIDE 3 in the first quarter of 2020,and we were previously targeting to announce topline data by the end of 2019. Our inability to locate and enroll a sufficientnumber of patients for our clinical trials would result in further significant delays, could require us to abandon one or moreclinical trials altogether and could delay or prevent our receipt of necessary regulatory approvals. Enrollment delays in ourclinical trials may result in increased development costs for our product candidates, which would cause the value of our companyto decline and limit our ability to obtain additional financing.If serious adverse or unacceptable side effects are identified during the development or commercialization of our product orproduct candidates, we may need to abandon or limit our development of such product or product candidates.If INVELTYS or any of our product candidates, including EYSUVIS, are associated with serious adverse events orundesirable side effects in clinical trials or following approval and/or commercialization, or if our product or product candidateshave characteristics that are unexpected, we may need to abandon their development or limit development or marketing tonarrower uses or subpopulations in which the serious adverse events, undesirable side effects or other characteristics are lessprevalent, less severe or more acceptable from a risk‑benefit perspective. The most common adverse effects to date in trialsevaluating the safety and efficacy of INVELTYS and EYSUVIS have been eye pain, instillation site pain, blurred vision andphotophobia, which is discomfort or pain due to exposure to light.65Table of ContentsThere have been no serious adverse events related to the administration of KPI‑121 reported in any of our clinical trials to date.Increases in IOP and cataract formation are additional adverse effects associated with the use of corticosteroids. We have noclinical safety data on or patient exposure to either KPI‑121 concentration for longer than 28 days. Our understanding of therelationship between our products and these adverse effects may change as we gather more information, and additionalunexpected adverse effects may occur. Compounds that initially show promise in clinical or earlier stage testing for treatingophthalmic disease or other diseases may later be found to cause side effects that prevent further development andcommercialization of the compound. In addition, adverse events which had initially been considered unrelated to the studytreatment may later, even following approval and/or commercialization, be found to be caused by the study treatment. Moreover,incorrect or improper use of our product or our product candidates (including use of INVELTYS or EYSUVIS, if approved, morefrequently than is prescribed) by patients could cause increases in IOP and may result in additional unexpected side effects oradverse events. There can be no assurance that our product or our product candidates will be used correctly, and if usedincorrectly, such misuse could hamper commercial adoption or market acceptance of our product or product candidates, ifapproved, at the rate we currently expect.We may not be successful in our efforts to develop product candidates based on our AMPPLIFY technology or expand the useof our AMPPLIFY technology for treating additional diseases and conditions.We are currently directing a portion of our development efforts towards applying our AMPPLIFY technology to developproduct candidates that are designed to diffuse through the mucus layer and enable the active drug substance to reach cells in theunderlying target tissue. We have product candidates at various stages of development for treatment of eye diseases and mayexplore the potential use of our AMPPLIFY technology in other diseases. Our existing product candidates and any other potentialproduct candidates that we identify may not be suitable for continued preclinical or clinical development, including as a result ofbeing shown to have harmful side effects or other characteristics that indicate that they are unlikely to be products that willreceive marketing approval and achieve market acceptance. If we do not successfully develop and commercialize our productcandidates that we develop based upon our AMPPLIFY technology, we will not be able to obtain substantial product revenues infuture periods.We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on productcandidates or indications that may be more profitable or for which there is a greater likelihood of success.Because we have limited financial and managerial resources, we focus on research programs and product candidates thatwe identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates orfor other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to failto capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research anddevelopment programs and product candidates for specific indications may not yield any commercially viable products. If we donot accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuablerights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would havebeen more advantageous for us to retain sole development and commercialization rights to such product candidate.We may in the future conduct clinical trials for product candidates at sites outside the United States, and the FDA may notaccept data from trials conducted in such locations.We may in the future choose to conduct one or more of our clinical trials outside the United States. Although the FDAmay accept data from clinical trials conducted outside the United States, acceptance of these data is subject to conditions imposedby the FDA. For example, the clinical trial must be well designed and conducted and be performed by qualified investigators inaccordance with ethical principles. The trial population must also adequately represent the U.S. population, and the data must beapplicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In addition, whilethese clinical trials are subject to the applicable local laws, FDA acceptance of the data will depend on its determination that thetrials also complied with all applicable U.S. laws and regulations. If the FDA does not accept the data from any trial that weconduct outside the United States, it would likely result in the need for additional trials, which would be costly andtime‑consuming and could delay or permanently halt our development of the applicable product candidates.66Table of ContentsRisks Related to the Commercialization of INVELTYS and our Product CandidatesINVELTYS or any of our product candidates that receives marketing approval, including EYSUVIS, may fail to achievemarket acceptance by clinicians and patients, or adequate formulary coverage, pricing or reimbursement by third‑partypayors and others in the medical community, and the market opportunity for these products may be smaller than we estimate.INVELTYS or any product candidate that we develop that receives marketing approval, including EYSUVIS, may failto gain sufficient market acceptance by clinicians, patients, third‑party payors and others in the medical community. Commontreatments in the United States for inflammation and pain following ocular surgery include corticosteroids. Our current estimatesof potential future revenue from sales of INVELTYS are based, in part, on market research data we have commissioned. Forexample, based on a market survey we commissioned in 2018 of 100 ophthalmologists, we believe INVELTYS offers advantagesover existing post‑surgical treatment options due to its AMPPLIFY technology and being the first and only topical twice‑dailydosing, two‑week course of treatment and safety data, including low incidence of reported IOP spikes, and efficacy data from ourclinical trials. In this market survey, a majority of surveyed ophthalmologists indicated they were likely to prescribe INVELTYS.We also conducted an Attitudes, Trial and Usage Study (ATU) in August 2019 with approximately 200 eye care professionals, orECPs, which indicated that many current INVELTYS prescribers intend to increase their usage of INVELTYS. However, doctorsmay continue to rely on ocular steroids other than INVELTYS and other treatments rather than INVELTYS. In addition, there arealso non-topical formulations of ocular steroids that have been recently approved and/or marketed. It is also possible that othertherapeutics will be approved for treatment of inflammation and pain following ocular surgery with twice‑a‑day or less frequentdosing.While there are no drugs currently approved in the United States for the temporary relief of the signs and symptoms ofdry eye disease, current treatments that are used in the United States for dry eye disease include over‑the‑counter artificial tears,Restasis, Xiidra, Cequa, off‑label use of corticosteroids and various drugs that are produced by compounding pharmacies.Generic versions of Restasis are also expected to become available in the United States in 2020. Our current expectationsregarding market potential for EYSUVIS are based, in part, on market research data we have commissioned. For example, basedon two surveys we commissioned of 503 and 297 dry eye disease patients in 2017 and 2018, respectively, which we refer to asour patient surveys, 90% of surveyed patients reported experiencing dry eye flares, with the majority experiencing on averagefour days of flares six times per year, and the most common reason given by patients for discontinuing the two leading brandeddry eye treatments were insufficient efficacy and side effects. However, it is possible that doctors may continue to rely on otherexisting treatments rather than EYSUVIS, if and when it is approved for marketing by the FDA. In addition, if generic versions ofany products that compete with any of our product candidates are approved for marketing by the FDA, they would likely beoffered at a substantially lower price than we expect to offer for our product candidates, if approved. As a result, clinicians,patients and third‑party payors may choose to rely on such products rather than our product candidates.Our assessment of the potential market opportunity for INVELTYS and our product candidates, including EYSUVIS, isbased on industry and market data that we obtained from industry publications and research, surveys and studies conducted bythird parties, some of which we commissioned. Industry publications and third‑party research, surveys and studies generallyindicate that their information has been obtained from sources believed to be reliable, although they do not guarantee theaccuracy or completeness of such information. While we believe these industry publications and third‑party research, surveys andstudies are reliable, we have not independently verified such data. The potential market opportunity for the treatment of dry eyedisease in particular is difficult to precisely estimate. The results from our patient surveys may be less reflective of the dry eyedisease population as a whole than a survey conducted with a larger sample size. Our estimates of the potential marketopportunities for our product candidates include several key assumptions based on our industry knowledge, industry publications,third‑party research and other surveys, which may be based on a small sample size and fail to accurately reflect marketopportunities. While we believe that our internal assumptions are reasonable, no independent source has verified suchassumptions. If any of our assumptions or estimates, or these publications, research, surveys or studies prove to be inaccurate,then the actual market for INVELTYS or any of our product candidates, including EYSUVIS, may be smaller than we expect, andas a result our product revenue may be limited and it may be more difficult for us to achieve or maintain profitability.67®®TMTable of ContentsIf INVELTYS or any of our product candidates for which we obtain marketing approval, including EYSUVIS, do notachieve adequate levels of acceptance, formulary coverage, pricing or reimbursement, we may not generate significant productrevenues and we may not become profitable. The degree of market acceptance of INVELTYS or any product candidates forwhich we obtain marketing approval, will depend on a number of factors, including:·the efficacy and potential advantages of our product or our product candidates compared to alternative treatments,including the existing standard of care;·our ability to offer our products for sale at competitive prices, particularly in light of the lower cost of alternativetreatments;·the availability of third‑party formulary coverage and adequate reimbursement, particularly by Medicare in light ofthe prevalence of dry eye disease and cataracts in persons over age 55;·the clinical indications for which the product is approved;·the convenience and ease of administration compared to alternative treatments;·the willingness of the target patient population to try new therapies and of clinicians to prescribe these therapies;·the strength of our marketing and distribution support;·the timing of market introduction of competitive products;·the prevalence and severity of any side effects; and·any restrictions on the use of our products together with other medications.Even if we are able to successfully commercialize INVELTYS or any product candidate that we may develop, includingEYSUVIS, the products may become subject to unfavorable pricing regulations, third‑party coverage or reimbursementpractices or healthcare reform initiatives, which could harm our business.Our ability to successfully commercialize INVELTYS or any of our product candidates, including EYSUVIS, that wemay develop successfully will depend, in part, on the extent to which coverage and adequate reimbursement for these productsand related treatments will be available from government healthcare programs, private health insurers, managed care plans andother organizations. Government authorities and third‑party payors, such as private health insurers and health maintenanceorganizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S.healthcare industry and elsewhere is cost containment. Government authorities and third‑party payors have attempted to controlcosts by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third‑party payors arerequiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices chargedfor medical products. Coverage and reimbursement may not be available for INVELTYS or any product candidate that wecommercialize and, even if they are available, the level of reimbursement may be limited or not satisfactory.Inadequate reimbursement may adversely affect the demand for, or the price of, INVELTYS or any product candidatefor which we obtain marketing approval. Obtaining and maintaining adequate reimbursement for our products may be difficult.We may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level ofreimbursement relative to other therapies. If coverage and adequate reimbursement are not available or reimbursement is availableonly to limited levels, we may not be able to successfully commercialize INVELTYS or any product candidate for which weobtain marketing approval.68Table of ContentsThere may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage maybe more limited than the indications for which the drug is approved by the FDA or similar regulatory authorities outside theUnited States. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at arate that covers our costs, including research, development, manufacture, sale and distribution expenses. Interim reimbursementlevels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursementrates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levelsalready set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may bereduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any futurerelaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in theUnited States. Third‑party payors often rely upon Medicare coverage policy and payment limitations in setting their ownreimbursement policies. Our inability to promptly obtain coverage and adequate reimbursement rates from bothgovernment‑funded and private payors for any approved products that we develop would compromise our ability to generaterevenues and become profitable.The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products varywidely from country to country. Current and future legislation may significantly change the approval requirements in ways thatcould involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drugbefore it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval isgranted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control evenafter initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then besubject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negativelyimpact the revenues we are able to generate from the sale of the product in that country. To obtain reimbursement or pricingapproval in some countries, we may be required to conduct a clinical trial that compares the cost‑effectiveness of our productcandidate to other available therapies. Adverse pricing limitations may hinder our ability to recoup our investment in one or moreproduct candidates, even if our product candidates obtain marketing approval.There can be no assurance that INVELTYS or our product candidates, including EYSUVIS, even if such productcandidates are approved for sale in the United States or in other countries, will be considered medically reasonable and necessaryfor a specific indication or cost‑effective by third‑party payors, or that coverage and an adequate level of reimbursement will beavailable or that third‑party payors’ reimbursement policies will not adversely affect our ability to sell INVELTYS or our productcandidates profitably.If we are unable to maintain our sales, marketing and distribution capabilities, establish additional capabilities if and whennecessary, or enter into sales, marketing and distribution agreements with third parties, we may not be successful incommercializing INVELTYS or any of our product candidates that we may develop if and when they are approved.We have only recently established our sales and marketing infrastructure for our commercial launch of INVELTYS,our first product, and have no prior experience in the sales, marketing or distribution of therapeutic products. To achievecommercial success for any product for which we obtained marketing approval, we may need to establish additional sales,marketing and distribution capabilities, either ourselves or through collaborations or other arrangements with third parties.In 2019, we completed the buildout of our specialty sales, marketing and distribution infrastructure in the United Statesto commercialize INVELTYS and may need to expand that infrastructure to market any of our product candidates that wedevelop in the United States, if and when such product candidates are approved. For example, if EYSUVIS is approved, we planto increase our sales force from 57 sales representatives to a total of approximately 75 to 100 sales representatives, who willpromote both EYSUVIS and INVELTYS. There are risks involved with establishing, maintaining and expanding our own sales,marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming andcould delay any future product launch. Further, we may underestimate the size of the sales force required for a successful productlaunch and may need to expand our sales force earlier and at a higher cost than we anticipated. If the commercial launch of any ofour product candidates for which we establish69Table of Contentsadditional commercial infrastructure is delayed or does not occur for any reason, we would have prematurely or unnecessarilyincurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain orreposition our sales and marketing personnel.Factors that may inhibit our efforts to commercialize INVELTYS or any product candidates for which we receivemarketing approval, including EYSUVIS, on our own include:·our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;·our ability to obtain and maintain coverage, adequate pricing, and adequate reimbursement from third‑party payors,including government payors, for INVELTYS and our product candidates;·the inability of sales personnel to obtain access to clinicians or persuade adequate numbers of clinicians to prescribeour products;·the lack of complementary products to be offered by sales personnel, which may put us at a competitivedisadvantage relative to companies with more extensive product lines; and·unforeseen costs and expenses associated with maintaining and expanding an independent sales, marketing anddistribution organization.While we cannot be certain when, if ever, we will seek and/or receive marketing approval to commercialize any of ourproduct candidates outside the United States, we plan to seek marketing approval and explore commercialization of EYSUVIS incertain markets outside the United States, including the European Union, utilizing a variety of collaboration, distribution andother marketing arrangements with one or more third parties. Our product revenues and our profitability, if any, under any suchthird‑party collaboration, distribution or other marketing arrangements are likely to be lower than if we were to market, sell anddistribute EYSUVIS ourselves. We may also consider seeking marketing approval outside the United States for other productcandidates in the future. If we decide to seek regulatory approval for any of our product candidates outside the United States, wemay need to seek additional patent approvals, seek licenses to patents held by third parties and/or face claims of infringingthird‑party patent rights.In addition, we may not be successful in entering into arrangements with third parties to sell, market and distributeINVELTYS or any of our product candidates, including EYSUVIS, or we may be unable to do so on terms that are favorable tous. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources andattention to sell and market INVELTYS or any of our product candidates for which we obtain marketing approval, includingEYSUVIS, effectively. If we do not maintain our sales, marketing and distribution capabilities successfully, or do not establishadditional capabilities if and when needed successfully, either on our own or in collaboration with third parties, we will not besuccessful in commercializing INVELTYS, or any of our product candidates for which we obtain marketing approval, includingEYSUVIS.We face substantial competition, which may result in others discovering, developing or commercializing products before ormore successfully than we do. Our competitors include major pharmaceutical companies with significantly greater financialresources. INVELTYS, and our product candidates, including EYSUVIS, if approved, will also compete with existing branded,generic and off‑label products.The development and commercialization of new drug products is highly competitive. We face competition with respectto INVELTYS and our product candidates, including EYSUVIS, and will face competition with respect to any other productcandidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialtypharmaceutical companies and biotechnology companies worldwide. Potential competitors also include academic institutions,government agencies and other public and private research organizations that conduct research, seek patent protection andestablish collaborative arrangements for research, development, manufacturing and commercialization.70Table of ContentsOur product and our product candidates will target markets that are already served by a variety of competing products.Many of these existing products have achieved widespread acceptance among clinicians, patients and payors. In addition, many ofthese products are available on a generic basis, and our product or our product candidates may not demonstrate sufficientadditional clinical benefits to clinicians, patients or payors to justify a higher price compared to generic products. In many cases,insurers or other third‑party payors, particularly Medicare, seek to encourage the use of generic products.Following ocular surgery, topical steroids are commonly prescribed to manage and prevent complications frompost‑operative inflammation. Topical steroid drops are the main competition to INVELTYS for the treatment of inflammation andpain following ocular surgery. The current branded market leaders for topical steroids in the United States, based on revenue, areLotemax products and Durezol. Generic topical steroid formulations consist mainly of products containing prednisolone,fluorometholone or dexamethasone. In addition, the first generic formulation of loteprednol suspension 0.05% (Lotemaxsuspension) was launched in May 2019 and Durezol lost its patent exclusivity in late 2019, which could result in a potentialgeneric launch of this product.There are also non-topical formulations of ocular steroids that have been recently approved and/or marketed. EyepointPharmaceutical, or Eyepoint, launched Dexycu, an intraocular suspension of dexamethasone for the treatment of post-operativeinflammation, in July 2019. Also in July 2019, Ocular Therapeutix launched Dextenza, an intracanalicular insert ofdexamethasone, for the treatment of ocular pain following ophthalmic surgery. There are also a number of companies in theUnited States developing products and therapies in preclinical research and clinical development for the treatment ofinflammation and pain following ocular surgery. In addition, there are various formulations of steroids that are produced bycompounding pharmacies and that are in drop form or are injected into the eye following ocular surgery.The current disease management approaches for dry eye disease in the United States includes non-pharmaceuticaltherapies and pharmaceutical therapies. Non-pharmaceutical therapies include over the counter artificial tear eye drops, which arepalliative and used on an intermittent or chronic basis to provide short term symptomatic relief of dryness and irritation; hotcompresses for the eye and lid hygiene management; devices, such as punctal plugs that are inserted into the tear ducts to inhibittear drainage, resulting in more moisture on the surface of the eye; and TrueTear® Intranasal Tear Neurostimulator, aneurostimulator that received marketing approval from the FDA in April 2017, which provides electrical pulses within the nasalcavity to stimulate tear production.Pharmaceutical therapies for dry eye disease include on label prescription drugs, including Restasis, Xiidra, and Cequa,which are the only prescription pharmaceutical products that are approved in the United States for use in patients with dry eyedisease; and off label prescription drugs, including topical steroid drops and/or other similar products, which are prescribed onoccasion for treatment of dry eye disease. Generic versions of Restasis are expected to become available in the U.S. in 2020.Restasis and Cequa are both topical cyclosporine formulations that are approved for increasing tear production in patients whosetear production is presumed to be suppressed due to ocular keratoconjunctivitis sicca. Xiidra is a topical anti-inflammatorytherapy approved for treatment of the signs and symptoms of dry eye disease.We are developing EYSUVIS for the temporary relief of the signs and symptoms of dry eye disease, which may includethe management of dry eye disease flares. Any product that is developed for the temporary relief of the signs and symptoms ofdry eye disease could directly compete with EYSUVIS. There are several product candidates in preclinical and clinicaldevelopment in the United States for the treatment of dry eye disease. If any of these product candidates is approved and suchproduct candidate either treats the signs or symptoms of dry eye disease or reduces the frequency of flares in dry eye patients, itcould reduce the overall market opportunity for EYSUVIS. These product candidates are being developed by pharmaceuticalcompanies, biotechnology companies, and specialty pharmaceutical and generic drug companies of various sizes, such as OysterPoint Pharma’s OC-01 and OC-02, Aldeyra Therapeutics’ reproxalap ophthalmic solution, ReGenTree’s RGN-259, AuriniaPharmaceuticals’ voclosporin ophthalmic solution, Novaliq’s Cyclasol and NOV03 candidates, Silk Technologies’ SDP-4ophthalmic solution, and others.Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products thatare safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive71®®TM®Table of Contentsthan our products. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than wemay obtain approval for ours, which could result in our competitors establishing a strong market position before we are able toenter the market.In addition, our ability to compete may be affected in many cases by insurers or other third‑party payors, particularlyMedicare, seeking to encourage the use of generic products. Generic products are currently being used for certain of theindications that we are pursuing, and additional products are expected to become available on a generic basis over the comingyears.Many of the companies against which we are competing or which we may compete against in the future havesignificantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conductingclinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in thepharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number ofour competitors. Smaller and other early stage companies may also prove to be significant competitors, particularly throughcollaborative arrangements with large and established companies. These third parties compete with us in recruiting and retainingqualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well asin acquiring technologies complementary to, or necessary for, our programs. Given that INVELTYS and EYSUVIS utilize aknown FDA‑approved corticosteroid, these products and any similar product candidates, if approved, may face competition fromgeneric and branded versions of existing drugs based on corticosteroids that are administered in a different manner.If our contracted manufacturing facilities experience production issues for any reason, we may be unable to manufacturecommercial quantities of our product or our product candidates for a substantial amount of time, which could have a materialadverse effect on our business.We rely on third‑party contract manufacturers to manufacture commercial supplies of INVELTYS and EYSUVIS.Specifically, we rely on the following: Catalent Pharma Solutions, LLC, or Catalent, to manufacture and supply to us a minimumamount of INVELTYS and EYSUVIS for commercial use; Alliance Contract Pharma, LLC, or Alliance, for manufacturing bulkKPI‑121 concentrates; and Chemo Iberica SA, or Chemo Iberica, to manufacture and supply to us a bulk supply of loteprednoletabonate, or LE. We expect to rely on third parties to manufacture clinical supplies of any other product candidates andcommercial supplies of any other products, if and when approved for marketing by applicable regulatory authorities, as well asfor packaging, serialization, storage, distribution and other production logistics. If these third parties do not successfully carry outtheir contractual duties, meet expected deadlines or manufacture our product or our product candidates in accordance withregulatory requirements, if there are disagreements between us and such parties, or if such parties are unable to expand capacitiesto support commercialization of our product or any of our product candidates for which we obtain marketing approval, we maynot be able to compete, or may be delayed in producing sufficient product or product candidates to meet our supply requirements.These facilities may also be affected by natural disasters, such as floods or fire, or such facilities could face manufacturing issues,such as contamination or regulatory concerns following a regulatory inspection of such facility. In such instances, we may needto locate an appropriate replacement third‑party relationship, which may not be readily available or on acceptable terms, or at all,which would cause additional delay and increased expense, including as a result of additional required FDA approvals, and mayhave a material adverse effect on our business.Our third‑party manufacturers are subject to inspection and approval by the FDA before we can commence themanufacture and sale of any of our products or product candidates, and thereafter subject to FDA inspection from time to time.Failure by our third‑party manufacturers to pass such inspections and otherwise satisfactorily complete the FDA approvalregimen with respect to our product or product candidates may result in regulatory actions such as the issuance of FDA Form 483notices of observations, warning letters or injunctions or the loss of operating licenses. Depending on the severity of any potentialregulatory action, our clinical or commercial supply could be interrupted or limited, which could have a material adverse effecton our business.We or our third‑party manufacturers may also encounter shortages in the raw materials or active pharmaceuticalingredient necessary to produce our product candidates in the quantities needed for our clinical trials or, our product or ourproduct candidates if approved, in sufficient quantities for commercialization or to meet an increase in demand, as a72Table of Contentsresult of capacity constraints or delays or disruptions in the market for the raw materials or active pharmaceutical ingredient,including shortages caused by the purchase of such raw materials or active pharmaceutical ingredient by our competitors orothers. The failure of us or our third‑party manufacturers to obtain the raw materials or active pharmaceutical ingredientnecessary to manufacture sufficient quantities of our product candidates, may have a material adverse effect on our business.Product liability lawsuits against us could divert our resources and could cause us to incur substantial liabilities and to limitcommercialization of INVELTYS and any other products that we may develop.We face an inherent risk of product liability exposure related to the use of our product candidates that we develop inhuman clinical trials. We face an even greater risk as we commercialize INVELTYS or any other products that we may develop.If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incursubstantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:·decreased demand for INVELTYS and any other products that we may develop;·injury to our reputation and significant negative media attention;·withdrawal of clinical trial participants;·significant costs to defend the related litigation;·substantial monetary awards to trial participants or patients;·loss of revenue;·reduced time and attention of our management to pursue our business strategy; and·the inability to successfully commercialize INVELTYS and any other products that we may develop.We currently hold $15 million in product liability insurance coverage in the aggregate, with a per incident limit of$15 million, which may not be adequate to cover all liabilities that we may incur. We may need to increase our insurancecoverage if and as we commence commercialization of EYSUVIS or any other product candidates for which we obtain marketingapproval. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable costor in an amount adequate to satisfy any liability that may arise.Risks Related to Our Dependence on Third PartiesWe rely, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not performsatisfactorily, including failing to meet deadlines for the completion of such trials.We rely on third parties, such as clinical research organizations, or CROs, clinical data management organizations,medical institutions and clinical investigators, in conducting our clinical trials, including STRIDE 3, and expect to continue to relyon such parties to conduct clinical trials of any product candidate that we develop. We or these third parties may terminate theirengagements with us at any time for a variety of reasons, including a failure to perform by the third parties. If we need to enterinto alternative arrangements, that could delay our product development activities.Our reliance on these third parties for clinical development activities reduces our control over these activities but doesnot relieve us of our responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is conductedin accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply withstandards, commonly referred to as Good Clinical Practices for conducting, recording and73Table of Contentsreporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrityand confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results ofcompleted clinical trials on a government‑sponsored database, ClinicalTrials.gov, within specified timeframes. Failure to do socan result in fines, adverse publicity and civil and criminal sanctions.If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct ourclinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayedin obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to,successfully commercialize our product candidates. Furthermore, these third parties may also have relationships with otherentities, some of which may be our competitors.We also rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure onthe part of our distributors could delay clinical development or marketing approval of our product candidates orcommercialization of our products, producing additional losses and depriving us of potential product revenue.We contract with third parties for the manufacture of INVELTYS and EYSUVIS for commercialization and for clinical trialsand commercialization of any of our other existing and any future product candidates. This reliance on third parties increasesthe risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptablecost, which could delay, prevent or impair our development or commercialization efforts.We do not own or operate manufacturing facilities for the production of commercial quantities of INVELTYS andclinical or commercial quantities of EYSUVIS or any other product candidates. We rely on Catalent to manufacture and supply tous a minimum amount of INVELTYS and EYSUVIS for commercial use; Alliance for manufacturing bulk KPI‑121 concentrates,and Chemo Iberica to manufacture and supply to us a bulk supply of LE. We expect to rely on third‑party manufacturers tomanufacture commercial supplies of all of our products and clinical supplies of any other product candidates if and whenapproved for marketing by applicable regulatory authorities. Our current and anticipated future dependence upon others for themanufacture of INVELTYS, EYSUVIS and any other product or product candidate that we develop may adversely affect ourfuture profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitivebasis. In addition, certain of our third-party manufacturers have in the past, and may in the future, experience performance issuesthat result in lower than expected yields. Any performance failure on the part of our existing or future manufacturers could delayclinical development, marketing approval or the supply and sale of any product of ours that has been approved for commercialuse.To date, we have obtained materials for KPI‑121 for our clinical trials and the commercialization of INVELTYS fromthird‑party manufacturers, including Catalent and Alliance. We have supply agreements in place with these contractmanufacturers to provide commercial supply. We obtain the active pharmaceutical ingredient, or API, for KPI‑121 from ChemoIberica, a third‑party API manufacturer. While we have long‑term commercial supply agreements with these third‑partymanufacturers, if these suppliers do not perform as we expect, we may be required to replace one or more suppliers. Although webelieve that there are a number of potential long‑term replacements to our suppliers, we may incur added costs and delays inidentifying and qualifying any such replacements.The FDA maintains strict requirements governing the manufacturing process. When a manufacturer seeks to modify ormake even seemingly minor changes to that process, the FDA may require the applicant to conduct a comparability study thatevaluates the potential differences in the product resulting from the change in the manufacturing process. The FDA has issuedseveral rounds of guidance on this point. In connection with any application for approval to market EYSUVIS or other productcandidates in the United States, we may be required to conduct a comparability study if the product we intend to market issupplied by a manufacturer different from the one who supplied the product evaluated in our clinical studies. Delays in designingand completing this study to the satisfaction of the FDA could delay or preclude our development and commercialization plansand thereby limit our revenues and growth.74Table of ContentsReliance on third‑party manufacturers entails additional risks, including:·INVELTYS, EYSUVIS and any other product that we develop may compete with other product candidates andproducts for access to a limited number of suitable manufacturing facilities that operate under current goodmanufacturing practices, or cGMP, regulations;·reliance on the third-party for regulatory compliance and quality assurance;·the possible breach of the manufacturing agreement by the third-party;·the possible misappropriation of our proprietary information, including our trade secrets and know‑how; and·the possible termination or nonrenewal of the agreement by the third-party at a time that is costly or inconvenientfor us.Third‑party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outsidethe United States. Our failure, or the failure of our third‑party manufacturers, to comply with applicable regulations could resultin sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal ofapprovals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminalprosecutions, any of which could significantly and adversely affect supplies of our products and harm our business and results ofoperations.Any products that we may develop may compete with other product candidates and products for access to manufacturingfacilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable ofmanufacturing for us. We were previously required to change our third‑party manufacturer when the manufacturer was purchasedby a third-party and exited the contract manufacturing business. The process of changing manufacturers can cause substantialtime delays, and if we are required to change our manufacturer again in the future, it may delay our planned clinical trials ordevelopment timeline.Any performance failure on the part of our existing or future manufacturers could delay clinical development ormarketing approval. We do not currently have arrangements in place for redundant supply for bulk drug substances. If any one ofour current contract manufacturers cannot perform as agreed, we may be required to replace that manufacturer. Although webelieve that there are several potential alternative manufacturers who could manufacture our product candidates, we may incuradded costs and delays in identifying and qualifying any such replacement.Our current and anticipated future dependence upon others for the manufacture of INVELTYS or our product candidatesmay adversely affect our future profit margins and our ability to commercialize any medicines that receive marketing approval ona timely and competitive basis.We may enter into collaborations with third parties for the development or commercialization of our product candidates. Ifour collaborations are not successful, we may not be able to capitalize on the market potential of these product candidates.We expect to utilize a variety of types of collaboration, distribution and other marketing arrangements with third partiesto develop and commercialize INVELTYS or any of our product candidates, including EYSUVIS, for which we seek or obtainmarketing approval in markets outside the United States. We also may enter into arrangements with third parties to perform theseservices in the United States to enhance our own sales, marketing and distribution capabilities in the United States or if wedetermine that such third‑party arrangements are otherwise beneficial. We also may seek third‑party collaborators fordevelopment and commercialization of our product candidates. We may also consider potential collaborative partnershipopportunities prior to initiating IND‑enabling studies on KPI‑285, our lead rTKI compound, or any other product candidates wedevelop, including our novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action withthe goal of eliminating the risk of IOP increase and75Table of Contentscataract formation. Our likely collaborators for any sales, marketing, distribution, development, licensing or broader collaborationarrangements include large and mid‑size pharmaceutical companies, regional and national pharmaceutical companies andbiotechnology companies. We are not currently party to any such arrangement. However, if we do enter into any sucharrangements with any third parties in the future, we will likely have limited control over the amount and timing of resources thatour collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenuesfrom these arrangements will depend on our collaborators’ abilities and efforts to successfully perform the functions assigned tothem in these arrangements.Collaborations that we enter into may pose a number of risks, including the following:·collaborators have significant discretion in determining the amount and timing of efforts and resources that they willapply to these collaborations;·collaborators may not perform their obligations as expected;·collaborators may not pursue development of our product candidates or may elect not to continue or renewdevelopment programs based on results of clinical trials or other studies, changes in the collaborators’ strategicfocus or available funding, or external factors, such as an acquisition, that divert resources or create competingpriorities;·collaborators may not pursue commercialization of our product candidates that receive marketing approval or mayelect not to continue or renew commercialization programs based on changes in the collaborators’ strategic focus oravailable funding, or external factors, such as an acquisition, that divert resources or create competing priorities;·collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial orabandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a productcandidate for clinical testing;·collaborators could independently develop, or develop with third parties, products that compete directly orindirectly with our products or product candidates if the collaborators believe that competitive products are morelikely to be successfully developed or can be commercialized under terms that are more economically attractivethan ours;·product candidates discovered in collaboration with us may be viewed by our collaborators as competitive withtheir own products or product candidates, which may cause collaborators to cease to devote resources to thecommercialization of our product candidates;·a collaborator with marketing and distribution rights to one or more of our products or product candidates thatachieve regulatory approval may not commit sufficient resources to the marketing and distribution of such productor products;·disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or thepreferred course of development, might cause delays or termination of the research, development orcommercialization of product candidates, might lead to additional responsibilities for us with respect to productcandidates, or might result in litigation or arbitration, any of which would divert management attention andresources, be time‑consuming and expensive;·collaborators may not properly maintain or defend our intellectual property rights or may use our proprietaryinformation in such a way as to invite litigation that could jeopardize or invalidate our intellectual property orproprietary information or expose us to potential litigation;76Table of Contents·collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation andpotential liability; and·collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required toraise additional capital to pursue further development or commercialization of the applicable product candidates.Collaboration agreements may not lead to development or commercialization of product candidates in the most efficientmanner, or at all. If any collaborations that we enter into do not result in the successful development and commercialization ofproducts or if one of our collaborators terminates its agreement with us, we may not receive any future research funding ormilestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, ourdevelopment of our product candidates could be delayed, and we may need additional resources to develop our productcandidates. All of the risks relating to product development, regulatory approval and commercialization described herein alsoapply to the activities of our collaborators.Additionally, subject to its contractual obligations to us, if a collaborator of ours were to be involved in a businesscombination, it might de‑emphasize or terminate the development or commercialization of any product candidate licensed to it byus. If one of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators and ourperception in the business and financial communities could be harmed.If we are not able to establish collaborations, we may have to alter our development and commercialization plans and ourbusiness could be adversely affected.For some of our product candidates, we may decide to collaborate with pharmaceutical or biotechnology companies forthe development of our product candidates and the commercialization of our products or the potential commercialization of ourproduct candidates. We face significant competition in seeking appropriate collaborators. Whether we reach a definitiveagreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise,the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Thosefactors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authoritiesoutside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing anddelivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to ourownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge,and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologiesfor similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than theone with us for our product or product candidate. We may also be restricted under future license agreements from entering intoagreements on certain terms with potential collaborators. Collaborations are complex and time‑consuming to negotiate anddocument. In addition, there have been a significant number of recent business combinations among large pharmaceuticalcompanies that have resulted in a reduced number of potential future collaborators.If we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we mayhave to curtail the development of a product candidate, reduce or delay its development program or one or more of our otherdevelopment programs, delay the commercialization of a product or a product candidate or reduce the scope of any sales ormarketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense.If we elect to fund and undertake development or commercialization activities on our own, we may need to obtain additionalexpertise and additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter intocollaborations and do not have sufficient funds or expertise to undertake the necessary development and commercializationactivities, we may not be able to further develop our product candidates or bring them to market or continue to develop ourproduct platform.77Table of ContentsRisks Related to Our Intellectual PropertyWe may be unable to obtain and maintain patent protection for our technology, products and product candidates, or the scopeof the patent protection obtained may not be sufficiently broad or enforceable, such that our competitors could develop andcommercialize technology, products and product candidates similar or identical to ours, and our ability to successfullycommercialize our technology, products and product candidates may be impaired.Our success depends in large part on our ability to obtain and maintain patent protection in the United States and othercountries with respect to our proprietary technology, products and product candidates. We have sought to protect our proprietaryposition by filing in the United States and in certain foreign jurisdictions patent applications related to our novel technologies,products and product candidates.The patent prosecution process is expensive and time‑consuming, and we may not have filed, maintained, or prosecutedand may not be able to file, maintain and prosecute all necessary or desirable patents or patent applications at a reasonable cost orin a timely manner. We may also fail to identify patentable aspects of our research and development output before it is too late toobtain patent protection.The patent position of pharmaceutical, biotechnology, and medical device companies generally is highly uncertain,involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance,scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patentapplications may fail to result in issued patents in the United States or in other foreign countries which protect our technology,products or product candidates, or which effectively prevent others from commercializing competitive technologies and products.In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and thestandards applied by the U.S. Patent and Trademark Office and foreign patent offices in granting patents are not always applieduniformly or predictably. For example, unlike patent law in the United States, European patent law precludes the patentability ofmethods of treatment of the human body and imposes substantial restrictions on the scope of claims it will grant if broader thanspecifically disclosed embodiments. Publications of discoveries in the scientific literature often lag behind the actual discoveries,and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or insome cases not at all. Therefore, we cannot be certain whether we or our licensors were the first to make the inventions claimed inour owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protectionof such inventions. Databases for patents and publications, and methods for searching them, are inherently limited so we may notknow the full scope of all issued and pending patent applications. As a result, the issuance, scope, validity, enforceability, andcommercial value of our patent rights are uncertain. Our pending and future patent applications may not result in patents beingissued which protect our technology, products or product candidates, in whole or in part, or which effectively prevent others fromcommercializing competitive technologies, products and product candidates. In particular, during prosecution of any patentapplication, the issuance of any patents based on the application may depend upon our ability to generate additional preclinical orclinical data that support the patentability of our proposed claims. We may not be able to generate sufficient additional data on atimely basis, or at all. Moreover, changes in either the patent laws or interpretation of the patent laws in the United States andother countries may diminish the value of our patents or narrow the scope of our patent protection.Even if our owned and licensed patent applications issue as patents, they may not issue in a form that will provide uswith any meaningful protection for our proprietary technology, products and product candidates, prevent competitors fromcompeting with us, or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent ourowned or licensed patents by developing similar or alternative technologies, products or product candidates in a non‑infringingmanner. In particular, a competitor may develop an approach to deliver drugs through the mucus layer to the underlying targettissue that uses a different approach than our AMPPLIFY technology, and therefore may not infringe on our patent rights.The issuance of a patent is not conclusive as to its inventorship, ownership, scope, validity, or enforceability, and ourowned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challengesmay result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, whichcould limit our ability to stop others from using or commercializing similar or identical78Table of Contentstechnology, products or product candidates, or limit the duration of the patent protection of our technology, products and productcandidates. Given the amount of time required for the development, testing, and regulatory review of new product candidates,patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our patentportfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.Patent reform legislation under Leahy-Smith America Invests Act could increase the uncertainties and costs surrounding theprosecution of our patent applications and the enforcement or defense of our issued patents.On September 16, 2011, Leahy‑Smith America Invents Act, or the Leahy‑Smith Act, was signed into law. TheLeahy‑Smith Act includes a number of significant changes to United States patent law. These include provisions that affect theway patent applications are prosecuted and may also affect patent litigation. The United States Patent Office has been developingnew regulations and procedures to govern administration of the Leahy‑Smith Act, and many of the substantive changes to patentlaw associated with the Leahy‑Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013.The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patentingthat invention, even if such invention was the first invention. Although it is not clear what, if any, impact the Leahy‑Smith Actwill have on the operation of our business, the Leahy‑Smith Act and its implementation could increase the uncertainties and costssurrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, which could have amaterial adverse effect on our business, financial condition, results of operations and prospects. For example, the Leahy‑SmithAct provides a new administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, that provides a venue forcompanies to challenge the validity of competitor patents at a cost that is much lower than district court litigation and ontimelines that are much faster. Although it is not clear what, if any, long term impact the PTAB proceedings will have on theoperation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 haveresulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower‑cost, faster and potentially morepotent tribunal for challenging patents could therefore increase the likelihood that our own patents will be challenged, therebyincreasing the uncertainties and costs of maintaining, defending and enforcing them.If we are not able to obtain patent term extension in the United States under the Hatch‑Waxman Act and in foreign countriesunder similar legislation, thereby potentially extending the term of our marketing exclusivity for our products or productcandidates, our business may be materially harmed.Depending upon the timing, duration, and specifics of FDA marketing approval of our product candidates, one of theU.S. patents covering each of such product candidates or the use thereof may be eligible for up to five years of patent termextension under the Hatch‑Waxman Act. The Hatch‑Waxman Act allows a maximum of one patent to be extended per FDAapproved product as compensation for the patent term lost during the FDA regulatory review process. A patent term extensioncannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only those claimscovering such approved drug product, a method for using it or a method for manufacturing it may be extended. We do not expectthe U.S. patents covering INVELTYS to be eligible for patent term extension due to this limitation. Patent term extension alsomay be available in certain foreign countries upon regulatory approval of our product candidates. Nevertheless, we may not beable to seek or be granted patent term extension either in the United States or in any foreign country because of, for example,failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicabledeadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicable requirements.Moreover, the term of extension, as well as the scope of patent protection during any such extension, afforded by thegovernmental authority could be less than we request.If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we request,the period during which we will have the right to exclusively market our product may be shortened and our competitors mayobtain approval of competing products following our patent expiration sooner, and our revenue could be reduced, possiblymaterially.It is possible that we will not obtain patent term extension under the Hatch‑Waxman Act for a U.S. patent coveringproducts or one of our product candidates even where that patent is eligible for patent term extension, or if we79Table of Contentsobtain such an extension, it may be for a shorter period than we had sought. Further, for our licensed patents, we may not have theright to control prosecution, including filing with the U.S. Patent and Trademark Office, a petition for patent term extension underthe Hatch‑Waxman Act. Thus, if one of our licensed patents is eligible for patent term extension under the Hatch‑Waxman Act,we may not be able to control whether a petition to obtain a patent term extension is filed, or obtained, from the U.S. Patent andTrademark Office.Also, there are detailed rules and requirements regarding the patents that may be submitted to the FDA for listing in theApproved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book. We may be unable to obtain patentscovering our product candidates that contain one or more claims that satisfy the requirements for listing in the Orange Book.Even if we submit a patent for listing in the Orange Book, the FDA may decline to list the patent, or a manufacturer of genericdrugs may challenge the listing. If one of our product candidates is approved and a patent covering that product candidate is notlisted in the Orange Book, with respect to the patent, a manufacturer of generic drugs would not have to provide advance notice tous of any Abbreviated New Drug Application filed with the FDA to obtain permission to sell a generic version of such productcandidate.We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive,time‑consuming and unsuccessful.Competitors and other third parties may infringe, misappropriate or otherwise violate our owned and licensed patents,trade secrets, or other intellectual property. As a result, to counter infringement, misappropriation or unauthorized use, we may berequired to file infringement or misappropriation claims or other intellectual property related proceedings, which can beexpensive and time‑consuming. Any claims we assert against perceived infringers could provoke these parties to assertcounterclaims against us alleging that we infringe their patents or that our asserted patents are invalid. In addition, in a patentinfringement or other intellectual property related proceeding, a court may decide that a patent of ours is invalid or unenforceable,in whole or in part, construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue onthe grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put oneor more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly, and could put any of our patentapplications at risk of not yielding an issued patent. Furthermore, because of the substantial amount of discovery required inconnection with intellectual property litigation, there is a risk that some of our confidential information or trade secrets could becompromised by disclosure during this type of litigation.We may be subject to a third‑party preissuance submission of prior art to the U.S. Patent and Trademark Office, orbecome involved in other contested proceedings such as opposition, derivation, reexamination, inter partes review, post‑grantreview, or interference proceedings in the United States or elsewhere, challenging our patent rights or the patent rights of others.An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patentrights, allow third parties to commercialize our technology, products or product candidates and compete directly with us, withoutpayment to us, or result in our inability to manufacture or commercialize products without infringing third‑party patent rights. Inaddition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuadecompanies from collaborating with us to license, develop or commercialize current or future product candidates.In the United States, the FDA does not prohibit clinicians from prescribing an approved product for uses that are notdescribed in the product’s labeling. Although use of a product directed by off‑label prescriptions may infringe ourmethod‑of‑treatment patents, the practice is common across medical specialties, particularly in the United States, and suchinfringement is difficult to detect, prevent, or prosecute.Third parties may initiate legal proceedings alleging that we are infringing, misappropriating or otherwise violating theirintellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the successof our business.Our commercial success depends upon our ability to develop, manufacture, market, and sell INVELTYS and ourproduct candidates, including EYSUVIS, and use our proprietary technologies without infringing, misappropriating or otherwiseviolating the intellectual property and other proprietary rights of third parties. There is a considerable80Table of Contentsamount of intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, orthreatened with, infringement litigation claims regarding our products, product candidates and technology, including claims fromcompetitors or from non‑practicing entities that have no relevant product revenue and against whom our own patent portfoliomay have no deterrent effect. Moreover, we may become party to future adversarial proceedings or litigation regarding our patentportfolio or the patents of third parties. Such proceedings could also include contested post‑grant proceedings such as oppositions,inter partes review, reexamination, interference, or derivation proceedings before the U.S. Patent and Trademark Office orforeign patent offices.The legal threshold for initiating litigation or contested proceedings is low, so that even lawsuits or proceedings with alow probability of success might be initiated and require significant resources to defend. Litigation and contested proceedings canalso be expensive and time‑consuming, and our adversaries in these proceedings may have the ability to dedicate substantiallygreater resources to prosecuting these legal actions than we can. The risks of being involved in such litigation and proceedingsmay increase as our product candidates near commercialization and as we gain the greater visibility associated with being apublic company. Third parties may assert infringement claims against us based on existing patents or patents that may be grantedin the future. We may not be aware of all such intellectual property rights potentially relating to our products or productcandidates and their uses. Thus, we do not know with certainty that INVELTYS or any of our product candidates, includingEYSUVIS, or our development and commercialization thereof, do not and will not infringe or otherwise violate any third-party’sintellectual property.If we are found to infringe, misappropriate or otherwise violate a third-party’s intellectual property rights, we could berequired to obtain a license from such third-party to continue developing, manufacturing, marketing and selling our products,product candidates and technology. However, we may not be able to obtain any required license on commercially reasonableterms or at all. Even if we were able to obtain a license, it could be non‑exclusive, thereby giving our competitors access to thesame technologies licensed to us and could require us to make substantial licensing and royalty payments. We could be forced,including by court order, to cease commercializing the infringing technology, products or product candidates. In addition, wecould be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfullyinfringed a patent and could be forced to indemnify our customers or collaborators. A finding of infringement could also result inan injunction that prevents us from commercializing our products or product candidates or forces us to cease some of ourbusiness operations, which could materially harm our business. In addition, we may be forced to redesign our product candidates,seek new regulatory approvals and indemnify third parties pursuant to contractual agreements. Claims that we havemisappropriated the confidential information or trade secrets of third parties could have a similar negative impact on ourbusiness.Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, feepayment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced oreliminated for non‑compliance with these requirements.Periodic maintenance, renewal and annuity fees on any issued patent must be paid to the U.S. Patent and TrademarkOffice and foreign patent agencies in several stages or annually over the lifetime of our owned and licensed patents and patentapplications. The U.S. Patent and Trademark Office and various foreign governmental patent agencies require compliance with anumber of procedural, documentary, fee payment and other similar provisions during the patent application process. In certaincircumstances, we rely on our licensing partners to pay these fees to, or comply with the procedural and documentary rules of, therelevant patent agency. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means inaccordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patentor patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non‑compliance events thatcould result in abandonment or lapse of a patent or patent application include failure to respond to official actions withinprescribed time limits, non‑payment of fees and failure to properly legalize and submit formal documents. If we or our licensorsfail to maintain the patents and patent applications covering our product candidates, it would have a material adverse effect onour business.81Table of ContentsINVELTYS, EYSUVIS and certain aspects of our AMPPLIFY technology are protected by patents exclusively licensed fromother companies or institutions. If these third parties terminate their agreements with us or fail to maintain or enforce theunderlying patents, or we otherwise lose our rights to these patents, our competitive position and our market share in themarkets for any of our approved products will be harmed.A substantial portion of our patent portfolio is in‑licensed. As such, we are a party to license agreements and certainaspects of our business depend on patents and/or patent applications owned by other companies or institutions. In particular, wehold exclusive licenses for patent families relating to INVELTYS and our product candidates, including EYSUVIS, and someaspects of our AMPPLIFY technology. While we control patent prosecution of the licensed patent families relating toINVELTYS and EYSUVIS, for the remainder of the patent families subject to our exclusive license agreement with JHU thatrelate to our AMPPLIFY technology, JHU retains control of patent prosecution. Our rights with respect to in‑licensed patents andpatent applications may be lost if the applicable license agreement expires or is terminated. We are likely to enter into additionallicense agreements to in‑licensed patents and patent applications as part of the development of our business in the future, underwhich we may not retain control of the preparation, filing, prosecution, maintenance, enforcement and defense of such patents. Ifwe are unable to maintain these patent rights for any reason, our ability to develop and commercialize our products or productcandidates could be materially harmed.Our licensors may not successfully prosecute certain patent applications, the prosecution of which they control, underwhich we are licensed and on which our business depends. Even if patents issue from these applications, our licensors may fail tomaintain these patents, may decide not to pursue litigation against third‑party infringers, may fail to prove infringement, or mayfail to defend against counterclaims of patent invalidity or unenforceability.Risks with respect to parties from whom we have obtained intellectual property rights may also arise out ofcircumstances beyond our control. In spite of our best efforts, our licensors might conclude that we have materially breached ourintellectual property agreements and might therefore terminate the intellectual property agreements, thereby removing our abilityto market products covered by these intellectual property agreements. If our intellectual property agreements are terminated, or ifthe underlying patents fail to provide the intended market exclusivity, competitors would have the freedom to seek regulatoryapproval of, and to market, products similar or identical to ours. Moreover, if our intellectual property agreements are terminated,our former licensors and/or assignors may be able to prevent us from utilizing the technology covered by the licensed or assignedpatents and patent applications. This could have a material adverse effect on our competitive business position and our financialcondition, results of operations and our business prospects.Some intellectual property which we own or have licensed may have been discovered through government funded programsand thus may be subject to federal regulations such as “march‑in” rights, certain reporting requirements, and a preferencefor United States industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure ofresources with respect to reporting requirements, and limit our ability to contract with non‑U.S. manufacturers.Some of the intellectual property rights we own or have licensed have been generated through the use of United Statesgovernment funding and may therefore be subject to certain federal regulations. For example, certain aspects of our AMPPLIFYtechnology as well as certain aspects of our patents that use LE as an active ingredient were developed using United Statesgovernment funds. As a result, the United States government may have certain rights to intellectual property embodied in ourcurrent or future products and product candidates based on our AMPPLIFY technology or that use LE as an active ingredientpursuant to the Bayh‑Dole Act of 1980. These United States government rights in certain inventions developed under agovernment‑funded program include a non‑exclusive, non‑transferable, irrevocable worldwide license to use inventions for anygovernmental purpose. In addition, the United States government has the right to require us to grant exclusive, partiallyexclusive, or non‑exclusive licenses to any of these inventions to a third-party if it determines that: (i) adequate steps have notbeen taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or(iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march‑inrights”). The United States government also has the right to take title to these inventions if we fail to disclose the invention to thegovernment and fail to file an application to register the intellectual property within specified time limits. In addition, the UnitedStates government may acquire title to these inventions in any country in which a patent application is not filed within specifiedtime limits. Intellectual82Table of Contentsproperty generated under a government funded program is also subject to certain reporting requirements, compliance with whichmay require us to expend substantial resources. In addition, the United States government requires that any products embodyingthe subject invention or produced through the use of the subject invention be manufactured substantially in the United States. Themanufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable butunsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacturesubstantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. Thispreference for United States manufacturers may limit our ability to contract with non‑U.S. product manufacturers for productscovered by such intellectual property. Any exercise by the government of any of the foregoing rights could harm our competitiveposition, business, financial condition, results of operations and prospects.If we fail to comply with our obligations in our intellectual property licenses and funding arrangements with third parties, wecould lose rights that are important to our business.Our license agreement with JHU, under which we license certain of our patent rights and a significant portion of thetechnology for INVELTYS and our product candidates, including EYSUVIS, imposes royalty and other financial obligations onus and other substantial performance obligations. We also may enter into additional licensing and funding arrangements withthird parties that may impose diligence, development and commercialization timelines and milestone payment, royalty, insuranceand other obligations on us. If we fail to comply with our obligations under current or future license and collaborationagreements, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop,manufacture or market any product or product candidate that is covered by these agreements or may face other penalties under theagreements. Such an occurrence could diminish the value of our products or product candidates. Termination of these agreementsor reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstatedagreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to importantintellectual property or technology.In addition, it is possible that JHU may conclude that we have materially breached the JHU licensing agreement andmight therefore terminate the agreement, thereby removing our ability to market products covered by our license agreement withJHU. If the JHU licensing agreement is terminated, or if the underlying patents fail to provide the intended market exclusivity,competitors would have the freedom to seek regulatory approval of, and to market, products similar or identical to ours.Moreover, if our license agreement with JHU is terminated, JHU and/or its assignors may be able to prevent us from utilizing thetechnology covered by the licensed or assigned patents and patent applications. If we breach the agreement (including by failingto meet our payment obligations) and do not adequately cure such breach, the rights in the technology licensed to us under theJHU license agreement will revert to JHU at no cost to JHU. This could have a material adverse effect on our competitivebusiness position, our financial condition, our results of operations and our business prospects.In addition, the agreements under which we currently license intellectual property or technology from third parties arecomplex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contractinterpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectualproperty or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, eitherof which could have a material adverse effect on our business, financial condition, results of operations, and prospects.Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our currentlicensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize theaffected products or product candidates, which could have a material adverse effect on our business, financial conditions, resultsof operations, and prospects.We may not be able to protect our intellectual property and proprietary rights throughout the world.Filing, prosecuting, and defending patents on product candidates in all countries throughout the world would beprohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the UnitedStates. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside theUnited States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.Competitors may use our technologies in jurisdictions where we have not obtained patent83Table of Contentsprotection to develop their own products and, further, may export otherwise infringing products to territories where we havepatent protection or licenses, but enforcement is not as strong as that in the United States. These products may compete with ourproducts, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.Many companies have encountered significant problems in protecting and defending intellectual property rights inforeign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor theenforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnologyproducts, which could make it difficult for us to stop the infringement of our patents or marketing of competing products inviolation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property andproprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects ofour business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk ofnot issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, andthe damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce ourintellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantagefrom the intellectual property that we develop or license.Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to thirdparties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. Inthese countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we orany of our licensors is forced to grant a license to third parties with respect to any patents relevant to our business, ourcompetitive position may be impaired, and our business, financial condition, results of operations, and prospects may beadversely affected.We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectualproperty, or claiming ownership of what we regard as our own intellectual property.Many of our and our licensors’ employees and contractors were previously employed at other biotechnology, medicaldevice or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that ouremployees and contractors do not use the proprietary information or know‑how of others in their work for us, we may be subjectto claims that these individuals have used or disclosed intellectual property, including trade secrets or other proprietaryinformation, of any such employee’s former employer. Litigation may be necessary to defend against these claims.In addition, while it is our policy to require our employees and contractors who may be involved in the development ofintellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing suchan agreement with each party who in fact develops intellectual property that we regard as our own. Furthermore, we are unable tocontrol whether our licensors have obtained similar assignment agreements from their own employees and contractors. Our andtheir assignment agreements may not be self‑executing or may be breached, and we or our licensors may be forced to bringclaims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as ourintellectual property.If we or our licensors fail in prosecuting or defending any such claims, in addition to paying monetary damages, we maylose valuable intellectual property rights or personnel which could have a material adverse effect on our competitive businessposition and prospects. Such intellectual property rights could be awarded to a third-party, and we could be required to obtain alicense from such third-party to commercialize our technology or products, which may not be available on commerciallyreasonable terms or at all. Even if we are successful in prosecuting or defending against such claims, litigation could result insubstantial costs and be a distraction to management.84Table of ContentsIntellectual property litigation or other legal proceedings relating to intellectual property could cause us to spend substantialresources and distract our personnel from their normal responsibilities.Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause usto incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. Inaddition, there could be public announcements of the results of hearings, motions or other interim proceedings or developmentsand if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the priceof our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resourcesavailable for development activities or any future sales, marketing or distribution activities. We may not have sufficient financialor other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costsof such litigation or proceedings more effectively than we can because of their greater financial resources and may also have anadvantage in such proceedings due to their more mature and developed intellectual property portfolios. Uncertainties resultingfrom the initiation and continuation of patent litigation or other proceedings could have an adverse effect on our ability tocompete in the marketplace.If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.In addition to seeking patents for our technology, our products and product candidates, we also rely on trade secrets,including unpatented know‑how, technology and other proprietary information, to maintain our competitive position. We seek toprotect these trade secrets, in part, by entering into non‑disclosure and confidentiality agreements with parties who have access tothem, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants,advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with ouremployees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietaryinformation, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Detecting thedisclosure or misappropriation of a trade secret and enforcing a claim that a party illegally disclosed or misappropriated a tradesecret is difficult, expensive and time‑consuming, and the outcome is unpredictable. In addition, some courts inside and outsidethe United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained orindependently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, fromusing that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independentlydeveloped by a competitor, our competitive position would be harmed.Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance MattersIf we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, andour ability to generate significant revenue will be materially impaired. The marketing approval process is expensive,time‑consuming and uncertain. As a result, we cannot predict when or if we, or any collaborators we may have in the future,will obtain marketing approval to commercialize our product candidates.Our product candidates, including EYSUVIS, and the activities associated with their development andcommercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval,advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agenciesin the United States and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidatewill prevent us from commercializing the product candidate.On August 22, 2018, we received approval from the FDA to market INVELTYS in the United States, which is our firstand only product candidate to receive marketing approval. We have not received approval to market EYSUVIS or any otherproduct candidate from regulatory authorities in any jurisdiction. In August 2019, we announced that we received a CRL fromthe FDA regarding our NDA for EYSUVIS for the temporary relief of the signs and symptoms of dry eye disease. The FDAindicated that efficacy data from an additional clinical trial will be needed to support a resubmission of the NDA. Based upon theprevious recommendation of the FDA, we initiated an additional Phase 3 clinical trial, STRIDE 3, in the third quarter of 2018evaluating EYSUVIS, which we expect will serve as the basis of our response to the CRL. However, we may not generate thedata necessary or otherwise obtain regulatory approval to85Table of Contentscommercialize EYSUVIS. Further, we may determine to conduct additional Phase 3 trials for EYSUVIS or to potentially expandthe label of EYSUVIS if we receive marketing approval for a narrower indication than we are targeting. In addition, we maynever generate the necessary data or results required to obtain regulatory approval of EYSUVIS or any other products with themarket potential sufficient to enable us to achieve profitability. We have only limited experience in submitting and supporting theapplications necessary to gain marketing approvals and have relied on, and expect to continue to rely on, third‑party consultantsand vendors to assist us in this process. Securing marketing approval requires the submission of extensive preclinical and clinicaldata and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’ssafety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturingprocess to, and inspection of manufacturing facilities by, the regulatory authorities. The FDA or other regulatory authorities maydetermine that any product candidate that we develop is not effective, is only moderately effective or has undesirable orunintended side effects, toxicities or other characteristics that preclude our obtaining marketing approval or prevent or limitcommercial use.The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years,if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity andnovelty of the product candidates involved. Changes in marketing approval policies during the development period, changes in orthe enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, maycause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approvalprocess and may refuse to accept any application or may decide that our data are insufficient for approval and require additionalpreclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testingcould delay, limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may belimited or subject to restrictions or post‑approval commitments that render the approved product not commercially viable.If we experience delays in obtaining approval or if we fail to obtain approval of EYSUVIS or any other productcandidate that we develop, the commercial prospects for such product candidate may be harmed and our ability to generaterevenues will be materially impaired.If the FDA does not conclude that EYSUVIS satisfies the approval requirements under Section 505(b)(2) of the Federal FoodDrug and Cosmetics Act, or if the requirements for EYSUVIS under Section 505(b)(2) are not as we expect, the approval forEYSUVIS may take longer, cost more and entail greater complications and risks than anticipated, and may not be achieved.The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch‑Waxman Act, addedSection 505(b)(2) to the Federal Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2) permits the filing of an NDA whereat least some of the information required for approval comes from studies that were not conducted by or for the applicant, and forwhich the applicant has not received a right of reference, which could expedite the development program for EYSUVIS bypotentially decreasing the amount of preclinical and clinical data that we would need to generate in order to obtain FDA approval.We are seeking FDA approval of EYSUVIS through the Section 505(b)(2) regulatory pathway. The FDA previouslyapproved INVELTYS through the Section 505(b)(2) regulatory pathway. If the FDA does not allow us to pursue theSection 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional non‑clinical and clinical trials, provideadditional data and information and meet additional standards for regulatory approval. If this were to occur, the time and financialresources required to obtain FDA approval for EYSUVIS, and complications and risks associated with approval of EYSUVIS,would likely substantially increase. Even if we are allowed to pursue the Section 505(b)(2) pathway to FDA approval, we cannotassure you that EYSUVIS will receive the requisite approvals for commercialization.In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last fewyears, certain competitors and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretationof Section 505(b)(2) is successfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, whichcould delay or even prevent the FDA from approving any NDA that we submit under86Table of ContentsSection 505(b)(2), including our NDA for EYSUVIS. In addition, the pharmaceutical industry is highly competitive, andSection 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previouslyapproved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and tomandatory delays in approval of our NDAs for up to 30 months, depending on the outcome of any litigation. It is not uncommonfor a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or imposeadditional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or evenprevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantiallydelay approval while it considers and responds to the petition. Thus, even if we are able to utilize the Section 505(b)(2) regulatorypathway, there is no guarantee this would ultimately lead to faster product development or earlier approval of EYSUVIS.Even if EYSUVIS is approved under Section 505(b)(2), its approval may be subject to limitations on the indicated usesfor which the products may be marketed or to other conditions of approval, or may contain requirements for costlypost‑marketing testing and surveillance to monitor the safety or efficacy of the products.Failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketedabroad.In order to market and sell INVELTYS or our product candidates, including EYSUVIS, in the European Union andmany other jurisdictions, we or our potential third‑party collaborators, must obtain separate marketing approvals and comply withnumerous and varying regulatory requirements. The approval procedure varies among countries and can involve additionaltesting. Our Phase 3 clinical trials of EYSUVIS or any other product candidate may not be sufficient to support an application formarketing approval outside the United States.The time required to obtain approval outside of the United States may differ substantially from that required to obtainFDA approval. The regulatory approval process outside the United States generally includes all of the risks associated withobtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved forreimbursement before the product can be sold in that country. We or our potential collaborators may not obtain approvals fromregulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval byregulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States doesnot ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. However, a failure or delay inobtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. We may notbe able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any market,which could significantly and materially harm our business.Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union,commonly referred to as Brexit. Following protracted negotiations, the United Kingdom left the European Union on January 31,2020. Under the withdrawal agreement, there is a transitional period until December 31, 2020 (extendable up to two years).Discussions between the United Kingdom and the EU have so far mainly focused on finalizing withdrawal issues and transitionagreements but have been extremely difficult. To date, only an outline of a trade agreement has been reached. Much remainsopen but the UK Prime Minister has indicated that the United Kingdom will not seek to extend the transitional period beyond theend of 2020. If no trade agreement has been reached before the end of the transitional period, there may be significant market andeconomic disruption. The UK Prime Minister has also indicated that the UK will not accept high regulatory alignment with theEU. Since the regulatory framework for pharmaceutical products in the United Kingdom covering quality, safety andefficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales, and distribution of pharmaceuticalproducts is derived from European Union directives and regulations, Brexit could materially impact the future regulatory regimethat applies to products and the approval of product candidates in the United Kingdom. Any delay in obtaining, or an inability toobtain, any marketing approvals, as a result of Brexit or otherwise, may force us to restrict or delay efforts to seek regulatoryapproval in the United Kingdom and/or European Union for INVELTYS or our product candidates, including EYSUVIS, whichcould significantly and materially harm our business.87Table of ContentsThe terms of approvals, ongoing regulations and post‑marketing restrictions for our products may limit how we manufactureand market our products, which could materially impair our ability to generate revenue.Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject toongoing review and extensive regulation. We, and any potential collaborators we may have in the future, must therefore complywith requirements concerning advertising and promotion for INVELTYS or for any of our products for which we or ourcollaborators obtain marketing approval. Promotional communications with respect to drug products and medical devices aresubject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approvedlabeling. Thus, we are limited to promoting INVELTYS in accordance with its approved label and the accompanying label maylimit the approved use of any other product for which we obtain marketing approval, which could limit sales of such product.The FDA may also impose requirements for costly post‑marketing testing and surveillance to monitor the safety orefficacy of the product, including the adoption and implementation of risk evaluation and mitigation strategies. The FDA closelyregulates the post‑approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications andin accordance with the provisions of the approved labeling and regulatory requirements. The FDA imposes stringent restrictionson manufacturers’ communications regarding off‑label use and if we do not restrict the marketing of our products only to theirapproved indications, we may be subject to enforcement action for off‑label marketing. Violations of the FDCA relating to thepromotion of prescription drugs or the promotion or manufacturing of drug products or medical devices may lead to investigationsby the FDA, Department of Justice and state Attorneys General alleging violations of federal and state healthcare fraud and abuselaws, as well as state consumer protection laws.In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturersor manufacturing processes, or failure to comply with regulatory requirements, may have various consequences, including:·restrictions on such products, manufacturers or manufacturing processes;·restrictions and warnings in the labeling and marketing of a product;·restrictions on product distribution or use;·requirements to conduct post‑marketing clinical trials;·warning or untitled letters;·withdrawal of the products from the market;·refusal to approve pending applications or supplements to approved applications that we submit;·recall of products;·fines, restitution or disgorgement of profits or revenue;·suspension or withdrawal of marketing approvals;·refusal to permit the import or export of our products;·product seizure; or·injunctions or the imposition of civil or criminal penalties.88Table of ContentsNon‑compliance with European Union requirements or laws of other countries regarding safety monitoring orpharmacovigilance can also result in significant financial penalties. Similarly, failure to comply with the European Union’s orother countries’ requirements regarding the protection of personal information can lead to significant penalties and sanctions.In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply withextensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs applicableto drug manufacturers or quality assurance standards applicable to medical device manufacturers, which include requirementsrelating to quality control and quality assurance as well as the corresponding maintenance of records and documentation andreporting requirements. We, our contract manufacturers, any contract manufacturers we may engage in the future, our futurecollaborators and their contract manufacturers will also be subject to other regulatory requirements, including submissions ofsafety and other post‑marketing information and reports, registration and listing requirements, requirements regarding thedistribution of samples to clinicians, recordkeeping, and costly post‑marketing studies or clinical trials and surveillance to monitorthe safety or efficacy of the product such as the requirement to implement a risk evaluation and mitigation strategy.We may be subject to substantial penalties if we fail to comply with regulatory requirements or if we experienceunanticipated problems with our products.Under the Trump Administration’s regulatory reform initiatives, the FDA’s policies, regulations and guidance may be revisedor revoked and that could prevent, limit or delay regulatory approval of our product candidates, which would impact ourability to generate revenue.We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation oradministrative or executive action, either in the United States or abroad. For example, certain policies of the Trumpadministration may impact our business and industry. Namely, the Trump administration has taken several executive actions,including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay,the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking,issuance of guidance, and review and approval of marketing applications. An under‑staffed FDA could result in delays in theFDA’s responsiveness or in its ability to review submissions or applications, issue regulations or guidance, or implement orenforce regulatory requirements in a timely fashion or at all. Moreover, on January 30, 2017, President Trump issued anExecutive Order, applicable to all executive agencies, including the FDA, which required that for each notice of proposedrulemaking or final regulation to be issued in fiscal year 2017, the agency must identify at least two existing regulations to berepealed, unless prohibited by law. These requirements are referred to as the “two‑for‑one” provisions. This Executive Orderincluded a budget neutrality provision that requires the total incremental cost of all new regulations in the 2017 fiscal year,including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, theExecutive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate thetotal costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office ofInformation and Regulatory Affairs within the Office of Management and Budget on February 2, 2017, the administrationindicated that the “two‑for‑one” provisions may apply not only to agency regulations, but also to significant agency guidancedocuments. In addition, on February 24, 2017, President Trump issued an executive order directing each affected agency todesignate an agency official as a “Regulatory Reform Officer” and establish a “Regulatory Reform Task Force” to implement thetwo‑for‑one provisions and other previously issued executive orders relating to the review of federal regulations. More recently,on October 9, 2019, the President issued another executive order (“Executive Order on Promoting the Rule of Law ThroughImproved Agency Guidance Documents”). The order is meant to ensure that agency guidance documents do not establish legallybinding requirements and it directs each agency to rescind guidance documents that it determines should no longer be in effect. Itis difficult to predict how these requirements will be implemented, and the extent to which they will impact the FDA’s ability toexercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight andimplementation activities in the normal course, our business may be negatively impacted.89Table of ContentsInadequate funding for the FDA, the Securities and Exchange Commission and other government agencies could hinder theirability to hire and retain key leadership and other personnel, prevent new products and services from being developed orcommercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on whichthe operation of our business may rely, which could negatively impact our business.The ability of the FDA to review and approve new products can be affected by a variety of factors, includinggovernment budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory,regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition,government funding of the Securities and Exchange Commission, or the SEC, and other government agencies on which ouroperations may rely, including those that fund research and development activities is subject to the political process, which isinherently fluid and unpredictable.Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/orapproved by necessary government agencies, which would adversely affect our business. For example, over the last several years,the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had tofurlough critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdownoccurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which couldhave a material adverse effect on our business. Further, in our operations as a public company, future government shutdownscould impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue ouroperations.Our relationships with customers and third‑party payors may be subject, directly or indirectly, to applicable anti‑kickback,fraud and abuse, false claims, transparency, health information privacy and security, and other healthcare laws andregulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm,administrative burdens and diminished profits and future earnings.Healthcare providers, clinicians and third‑party payors in the United States and elsewhere play a primary role in therecommendation and prescription and use of INVELTYS, and will play a primary role in the recommendation and prescriptionand use of any product candidates for which we obtain marketing approval. Our future arrangements with third‑party payors andcustomers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain thebusiness or financial arrangements and relationships through which we market, sell and distribute INVELTYS and any productsfor which we obtain marketing approval. In addition, we may be subject to transparency laws and patient privacy regulation byU.S. federal and state governments and by governments in foreign jurisdictions in which we conduct our business. The applicablefederal, state and foreign healthcare laws and regulations that may affect our ability to operate include:·the federal Anti‑Kickback Statute, which prohibits, among other things, persons from knowingly and willfullysoliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce orreward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, anygood or service, for which payment may be made under a federal healthcare program such as Medicare andMedicaid;·federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act,which impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals orentities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare andMedicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease orconceal an obligation to pay money to the federal government;·the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal andcivil liability for executing a scheme to defraud any healthcare benefit program or making false statements relatingto healthcare matters;90Table of Contents·HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, andtheir respective implementing regulations, which imposes obligations, including mandatory contractual terms, oncovered healthcare providers, health plans and healthcare clearinghouses, as well as their business associates, withrespect to safeguarding the privacy, security and transmission of individually identifiable health information; and·analogous state and foreign laws and regulations, such as state anti‑kickback and false claims laws, which mayapply to sales or marketing arrangements and claims involving healthcare items or services reimbursed bynon‑governmental third‑party payors, including private insurers, state and foreign laws that require pharmaceuticalcompanies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevantcompliance guidance promulgated by the federal government or otherwise restrict payments that may be made tohealthcare providers, state and foreign laws that require drug manufacturers to report information related topayments and other transfers of value to clinicians and other healthcare providers or marketing expenditures, andstate and foreign laws governing the privacy and security of health information in certain circumstances, many ofwhich differ from each other in significant ways and often are not preempted by HIPAA, thus complicatingcompliance efforts.If our operations are found to be in violation of any of the laws described above or any governmental regulations thatapply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, individual imprisonment,integrity obligations, and the curtailment or restructuring of our operations. Any penalties, damages, fines, individualimprisonment, integrity obligations, exclusion from funded healthcare programs, or curtailment or restructuring of our operationscould adversely affect our financial results. Our corporate compliance program is designed to ensure that we will develop, marketand sell our products and product candidates in compliance with all applicable laws and regulations, but we cannot guarantee thatthis program will protect us from governmental investigations or other actions or lawsuits stemming from a failure to be incompliance with such laws or regulations. If any such actions are instituted against us and we are not successful in defendingourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition ofsignificant fines or other sanctions.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws andregulations may involve substantial costs. It is possible that governmental authorities will conclude that our business practicesmay not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcarelaws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations thatmay apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation,damages, fines, imprisonment, exclusion from participation in government funded healthcare programs, such as Medicare andMedicaid, and the curtailment or restructuring of our operations. If any of the clinicians or other healthcare providers or entitieswith whom we do or expect to do business is found to be not in compliance with applicable laws, it may be subject to criminal,civil or administrative sanctions, including exclusions from participation in government funded healthcare programs.Recently enacted and future legislation may affect our ability to commercialize and the prices we obtain for any products thatare approved in the United States or foreign jurisdictions.In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes andproposed changes regarding the healthcare system that could affect our ability to profitably sell or commercialize INVELTYS orany product candidate, including EYSUVIS, for which we obtain marketing approval. The pharmaceutical industry has been aparticular focus of these efforts and have been significantly affected by legislative initiatives. Current laws, as well as otherhealthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additionaldownward pressure on the price that we receive for any FDA approved product.In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MedicareModernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicarecoverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices forclinician administered drugs. In addition, this legislation provided authority for limiting the91Table of Contentsnumber of drugs that will be covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislationcould decrease the coverage and price that we receive for any approved products. While the Medicare Modernization Act appliesonly to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations insetting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare ModernizationAct may result in a similar reduction in payments from private payors.In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by theHealth Care and Education Affordability Reconciliation Act, or collectively the ACA. Among the provisions of the ACA ofimportance to our business, including, without limitation, our ability to commercialize and the prices we may obtain for any ofour product candidates and that are approved for sale, are the following:·an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs andbiologic agents;·an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;·a new Medicare Part D coverage gap discount program, in which participating manufacturers must agree to offer70% point‑of‑sale discounts off negotiated drug prices during the coverage gap period as a condition for themanufacturer’s outpatient drugs to be covered under Medicare Part D;·expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti‑KickbackStatute, and the addition of new government investigative powers, and enhanced penalties for noncompliance;·extension of manufacturers’ Medicaid rebate liability;·expansion of eligibility criteria for Medicaid programs; and·expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program.In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changesinclude the Budget Control Act of 2011, which, among other things, led to aggregate reductions to Medicare payments toproviders of up to 2% per fiscal year that started in 2013 and, due to subsequent legislative amendments to the statute, will stay ineffect through 2025 unless additional congressional action is taken, and the American Taxpayer Relief Act of 2012, which,among other things, reduced Medicare payments to several types of providers and increased the statute of limitations period forthe government to recover overpayments to providers from three to five years. These new laws may result in additional reductionsin Medicare and other healthcare funding and otherwise affect the prices we may obtain for INVELTYS and for any of ourproduct candidates for which we may obtain regulatory approval or the frequency with which INVELTYS or any productcandidate is prescribed or used. Further, there have been several recent U.S. congressional inquiries and proposed state andfederal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship betweenpricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government programreimbursement methodologies for drug products.We expect that these healthcare reforms, as well as other healthcare reform measures that may be adopted in the future,may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new paymentmethodologies and additional downward pressure on the price that we receive for INVELTYS or any other approved productand/or the level of reimbursement physicians receive for administering any approved product we might bring to market.Reductions in reimbursement levels may negatively impact the prices we receive or the frequency with which our products areprescribed or administered. Any reduction in reimbursement from Medicare or other government programs may result in a similarreduction in payments from private payors.92Table of ContentsSince enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal andreplace provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by thePresident on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which required mostAmericans to carry a minimal level of health insurance, became effective in 2019. According to the Congressional Budget Office,the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurancemarkets may rise. While the timing and scope of any potential future legislation to repeal and replace ACA provisions is highlyuncertain in many respects, it is also possible that some of the ACA provisions that generally are not favorable for the research-based pharmaceutical industry could also be repealed along with ACA coverage expansion provision. We will continue toevaluate the effect that the ACA and its possible repeal and replacement could have on our business.The Trump Administration has also taken executive actions to undermine or delay implementation of the ACA. SinceJanuary 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provisions ofthe ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Orderdirects federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay theimplementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcareproviders, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order terminates thecost-sharing subsidies that reimburse insurers under the ACA. Several state Attorneys General filed suit to stop the administrationfrom terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25,2017. In addition, the Centers for Medicare & Medicaid Services, or CMS has recently proposed regulations that would givestates greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have theeffect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces. Further, on June14, 2018, U.S. Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12billion in ACA risk corridor payments to third-party payors who argued were owed to them. The effects of this gap inreimbursement on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yetknown.Further, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individualmandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealedas part of the Tax Cuts and Jobs Act of 2017, the remaining provisions of the ACA are invalid as well. The Trump administrationand CMS have both stated that the ruling will have no immediate effect, and on December 30, 2018 the same judge issued anorder staying the judgment pending appeal. The Trump Administration represented to the Court of Appeals considering thisjudgment that it does not oppose the lower court’s ruling. On July 10, 2019, the Court of Appeals for the Fifth Circuit heard oralargument in this case. In those arguments, the Trump administration argued in support of upholding the lower court decision. OnDecember 18, 2019, that court affirmed the lower court’s ruling that the individual mandate portion of the ACA isunconstitutional and it remanded the case to the district court for reconsideration of the severability question and additionalanalysis of the provisions of the ACA. Litigation and legislation over the ACA are likely to continue, with unpredictable anduncertain results.The costs of prescription pharmaceuticals in the United States has also been the subject of considerable discussion in theUnited States, and members of Congress and the Trump Administration have stated that they will address such costs through newlegislative and administrative measures. The pricing of prescription pharmaceuticals is also subject to governmental controloutside the United States. In these countries, pricing negotiations with governmental authorities can take considerable time afterthe receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may berequired to conduct a clinical trial that compares the cost‑effectiveness of our product candidates to other available therapies. Ifreimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our abilityto generate revenues and become profitable could be impaired. Finally, legislative and regulatory proposals have also been madeto expand post‑approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot besure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will bechanged, or what the impact of such changes on the marketing approvals of our products and product candidates, if any, may be.In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketingapproval, as well as subject us and any future collaborators to more stringent product labeling and93Table of Contentspost‑marketing testing and other requirements with respect to INVELTYS or any other product candidate for which we obtainapproval.Specifically, there have been several recent U.S. congressional inquiries and proposed federal and proposed and enactedstate legislation designed to, among other things, bring more transparency to drug pricing, review the relationship betweenpricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government programreimbursement methodologies for drug products. At the federal level, Congress and the Trump administration have each indicatedthat it will continue to seek new legislative and/or administrative measures to control drug costs. For example, on May 11, 2018,the Administration issued a plan to lower drug prices. Under this blueprint for action, the Administration indicated that theDepartment of Health and Human Services (HHS) will: take steps to end the gaming of regulatory and patent processes by drugmakers to unfairly protect monopolies; advance biosimilars and generics to boost price competition; evaluate the inclusion ofprices in drug makers’ ads to enhance price competition; speed access to and lower the cost of new drugs by clarifying policiesfor sharing information between insurers and drug makers; avoid excessive pricing by relying more on value-based pricing byexpanding outcome-based payments in Medicare and Medicaid; work to give Part D plan sponsors more negotiation power withdrug makers; examine which Medicare Part B drugs could be negotiated for a lower price by Part D plans, and improving thedesign of the Part B Competitive Acquisition Program; update Medicare’s drug-pricing dashboard to increase transparency;prohibit Part D contracts that include “gag rules” that prevent pharmacists from informing patients when they could pay less out-of-pocket by not using insurance; and require that Part D plan members be provided with an annual statement of plan payments,out-of-pocket spending, and drug price increases.At the state level, individual states are increasingly aggressive in passing legislation and implementing regulationsdesigned to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints,discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases,designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities andindividual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which supplierswill be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand forour products, once approved, or put pressure on our product pricing. We expect that additional state and federal healthcarereform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will payfor healthcare products and services, which could result in reduced demand for our product candidates or additional pricingpressures.If we or any third‑party manufacturers we engage fail to comply with environmental, health and safety laws and regulations,we could become subject to fines or penalties or incur significant costs.We and any third‑party manufacturers we engage or may engage are subject to numerous environmental, health andsafety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment anddisposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardousmaterials, including chemicals and biological materials, and produce hazardous waste products. We generally contract with thirdparties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from thesematerials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for anyresulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil orcriminal fines and penalties for failure to comply with such laws and regulations.Although we maintain general liability insurance as well as workers’ compensation insurance to cover us for costs andexpenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may notprovide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tortclaims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactivematerials.In addition, we may incur substantial costs in order to comply with current or future environmental, health and safetylaws and regulations. These current or future laws and regulations may impair our research, development or94Table of Contentsproduction efforts. Our failure to comply with these laws and regulations also may result in substantial fines, penalties or othersanctions.Further, with respect to the operations of any future third‑party contract manufacturers, it is possible that if they fail tooperate in compliance with applicable environmental, health and safety laws and regulations or properly dispose of wastesassociated with our products, we could be held liable for any resulting damages, suffer reputational harm or experience adisruption in the manufacture and supply of our product candidates or products.We are subject to anti‑corruption laws, as well as export control laws, customs laws, sanctions laws and other laws governingour operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measuresand legal expenses, be precluded from developing manufacturing and selling certain products outside the United States or berequired to develop and implement costly compliance programs, which could adversely affect our business, results ofoperations and financial condition.Our operations are subject to anti‑corruption laws, including the U.S. Foreign Corrupt Practices Act, or FCPA, the U.K.Bribery Act 2010, or Bribery Act, and other anti‑corruption laws that apply in countries where we do business and may dobusiness in the future. The FCPA, Bribery Act and these other laws generally prohibit us, our officers, and our employees andintermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtainor retain business or gain some other business advantage. Compliance with the FCPA, in particular, is expensive and difficult,particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in thepharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospitalemployees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work havebeen deemed to be improper payments to government officials and have led to FCPA enforcement actions.We may in the future operate in jurisdictions that pose a high risk of potential FCPA or Bribery Act violations, and wemay participate in collaborations and relationships with third parties whose actions could potentially subject us to liability underthe FCPA, Bribery Act or local anti‑corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatoryrequirements to which our international operations might be subject or the manner in which existing laws might be administeredor interpreted. If we expand our operations outside of the United States, we will need to dedicate additional resources to complywith numerous laws and regulations in each jurisdiction in which we plan to operate.We are also subject to other laws and regulations governing our international operations, including regulationsadministered by the governments of the United Kingdom and the United States, and authorities in the European Union, includingapplicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchangeregulations, collectively referred to as the Trade Control laws. In addition, various laws, regulations and executive orders alsorestrict the use and dissemination outside of the United States, or the sharing with certain non‑U.S. nationals, of informationclassified for national security purposes, as well as certain products and technical data relating to those products. If we expandour presence outside of the United States, it will require us to dedicate additional resources to comply with these laws, and theselaws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the UnitedStates, which could limit our growth potential and increase our development costs.There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti‑corruptionlaws, including the FCPA, the Bribery Act or other legal requirements, including Trade Control laws. If we are not in compliancewith the FCPA, Bribery Act and other anti‑corruption laws or Trade Control laws, we may be subject to criminal and civilpenalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact onour business, financial condition, results of operations and liquidity. The SEC also may suspend or bar issuers from tradingsecurities on U.S. exchanges for violations of the FCPA’s accounting provisions. Any investigation of any potential violations ofthe FCPA, the Bribery Act, other anti‑corruption laws or Trade Control laws by U.S., U.K. or other authorities could also have anadverse impact on our reputation, our business, results of operations and financial condition.95Table of ContentsThe 2017 comprehensive tax reform bill, or the “2017 Tax Act” could adversely affect our business and financial condition.On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal RevenueCode of 1986, as amended. The 2017 Tax Act, among other things, contains significant changes to corporate taxation, includingreduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for netinterest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operatinglosses to 80% of current year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising intaxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely), onetime taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreignearnings (subject to certain important exceptions) received as dividends by certain U.S. corporations, immediate deductions forcertain new investments instead of deductions for depreciation expense over time, and modifying or repealing many businessdeductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the 2017 Tax Act isuncertain and our business and financial condition could be adversely affected. In addition, it is uncertain how various states willrespond to the 2017 Tax Act. The impact of this tax reform on holders of our common stock is also uncertain and could beadverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential taxconsequences of investing in or holding our common stock.We might not be able to utilize a significant portion of our net operating loss carryforwards and research and development taxcredit carryforwards.As of December 31, 2019, we had federal net operating loss carryforwards of $168.8 million, which may be available tooffset future federal tax liabilities and expire at various dates beginning in 2030. At December 31, 2019, we also had state netoperating loss carryforwards of $171.8 million, which may be available to offset future state income tax liabilities and expire atvarious dates beginning in 2030. These net operating loss carryforwards could expire unused and be unavailable to offset ourfuture income tax liabilities. Under the newly enacted federal income tax law, federal net operating losses incurred in 2018 and infuture years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertainhow various states will respond to the newly enacted federal tax law. In addition, under Section 382 of the U.S. Internal RevenueCode of 1986, as amended, the amount of benefits from our NOL carryforwards may be impaired or limited if we incur acumulative ownership change of more than 50%, as interpreted by the U.S. Internal Revenue Service, over a three-year period.We may have experienced ownership changes in the past and may experience changes in the future as a result of subsequent shiftsin our stock ownership, some of which are outside our control. As a result, our use of federal NOL carryforward could be limited.State NOL carryforwards may be similarly limited. Any such disallowances may result in greater tax liabilities than we wouldincur in the absence of such a limitation and increased liabilities could adversely affect our business, results of operations,financial position and cash flows. If our ability to use our historical net operating loss carryforwards is materially limited, it wouldharm our future operating results by effectively increasing our future tax obligations.Risks Related to Employee Matters and Managing GrowthOur future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.We are highly dependent on the research and development, clinical, business development and commercializationexpertise of Mark Iwicki, our President and Chief Executive Officer, Todd Bazemore, our Chief Operating Officer, MaryReumuth, our Chief Financial Officer, Kim Brazzell, Ph.D., our Chief Medical Officer, Hongming Chen, Sc.D., our ChiefScientific Officer, and Eric Trachtenberg, our General Counsel, Chief Compliance Officer and Corporate Secretary, as well as theother principal members of our management, scientific, clinical and commercial teams. Although we have entered intoemployment agreements with our executive officers, each of them may terminate their employment with us at any time. We donot maintain “key person” insurance for any of our executives or other employees.96Table of ContentsRecruiting and retaining qualified scientific, clinical, manufacturing, accounting, legal and sales and marketingpersonnel will also be critical to our success. The loss of the services of our executive officers or other key employees couldimpede the achievement of our research, development and commercialization objectives and seriously harm our ability tosuccessfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult andmay take an extended period of time because of the limited number of individuals in our industry with the breadth of skills andexperience required to successfully develop, gain regulatory approval of and commercialize products. Competition to hire fromthis limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms giventhe competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experiencecompetition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely onconsultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development andcommercialization strategy. Our consultants and advisors may be employed by employers other than us and may havecommitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable tocontinue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.We have expanded and may continue to expand our development, regulatory, commercial and manufacturing capabilities andare continuing to implement sales, marketing and distribution capabilities, and as a result, we may encounter difficulties inmanaging our growth, which could disrupt our operations.We have experienced and expect to continue experiencing significant growth in the number of our employees and thescope of our operations, particularly in the areas of drug development, clinical, regulatory affairs, manufacturing, sales,marketing and distribution. To manage our recent and potential future growth, we must continue to implement and improve ourmanagerial, operational and financial systems, and may further expand our facilities and continue to recruit and train additionalqualified personnel. Due to our limited financial resources and our limited experience in managing such growth, we may not beable to effectively manage our recently expanded operations or any future expansion of our operations or recruit and trainadditional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management andbusiness development resources. Any inability to manage growth could delay the execution of our business plans or disrupt ouroperations.Our internal computer systems, or those of our contractors or consultants, may fail or suffer security breaches, which couldresult in a material disruption of our product development programs and commercialization of our products.Despite the implementation of security measures, our internal computer systems and those of our current and any futurecontractors or consultants, including any collaborator, are vulnerable to damage from cyber-attacks, computer viruses, worms andother destructive or disruptive software, unauthorized access, natural disasters, terrorism, war and telecommunication andelectrical failures. Cyber incidents or attacks could include the deployment of harmful malware, ransomware, denial-of-serviceattacks, unauthorized access to or deletion of files, social engineering and other means to affect service reliability and threaten theconfidentiality, integrity and availability of information. Cyber incidents also could include phishing attempts or e-mail fraud tocause payments or information to be transmitted to an unintended recipient. System failures, accidents, cyberattacks or securitybreaches could cause interruptions in our operations, it could result in a material disruption of our development programs, thecommercialization of our products and our business operations, whether due to a loss of our trade secrets or other proprietaryinformation or other similar disruptions, in addition to possibly requiring substantial expenditures of resources to remedy. Theloss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts andsignificantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to resultin a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential, personal or proprietaryinformation, we could incur liability, including civil fines and penalties under GDPR, HIPAA and other relevant state and federalprivacy laws in the United States and abroad, our competitive position could be harmed and the further development andcommercialization of our product candidates could be delayed. In addition, we may not have adequate insurance coverage toprovide compensation for any losses associated with such events. While we have not experienced any material losses relating to cyber-attacks, we have been the subject of a successfulphishing attempt. We could be subject to risks caused by misappropriation, misuse, leakage, falsification or intentional oraccidental release or loss of information maintained in the information systems and networks of our97Table of Contentscompany, including personal information of our employees. In addition, outside parties may attempt to penetrate our systems orthose of our vendors or fraudulently induce our employees or employees of our vendors to disclose sensitive information in orderto gain access to our data. Like other companies, we may experience threats to our data and systems, including malicious codesand viruses, and other cyber-attacks. The number and complexity of these threats continue to increase over time. If a materialbreach of our security or that of our vendors occurs, the market perception of the effectiveness of our security measures could beharmed, we could lose business and our reputation and credibility could be damaged. We could be required to expend significantamounts of money and other resources to repair or replace information systems or networks. Although we develop and maintainsystems and controls designed to prevent these events from occurring, and we have a process to identify and mitigate threats, thedevelopment and maintenance of these systems, controls and processes is costly and requires ongoing monitoring and updating astechnologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, thepossibility of these events occurring cannot be eliminated entirely.Risks Related to Our Common StockOur executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability tosignificantly influence all matters submitted to stockholders for approval.As of February 10, 2020, our executive officers and directors and principal stockholders in the aggregate, owned sharesrepresenting approximately 23.9% of our capital stock, based on the most recent institutional shareholder ownership filings withthe SEC. As a result, if these stockholders were to choose to act together, they may be able to significantly influence all matterssubmitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose toact together, could significantly influence the election of directors and approval of any merger, consolidation or sale of all orsubstantially all of our assets.This concentration of voting power may:·delay, defer or prevent a change in control;·entrench our management and our board of directors; or·delay or prevent a merger, consolidation, takeover or other business combination involving us on terms that otherstockholders may desire.Provisions in our corporate charter documents and under Delaware law could make an acquisition of our company, whichmay be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove ourcurrent management.Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition orother change in control of our company that stockholders may consider favorable, including transactions in which you mightotherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay inthe future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because ourboard of directors are responsible for appointing the members of our management team, these provisions may frustrate or preventany attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders toreplace members of our board of directors. Among other things, these provisions:·provide for a classified board of directors such that only one of three classes of directors are elected each year;·allow the authorized number of our directors to be changed only by resolution of our board of directors;·limit the manner in which stockholders can remove directors from our board of directors;98Table of Contents·provide for advance notice requirements for stockholder proposals that can be acted on at stockholder meetings andnominations to our board of directors;·require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by ourstockholders by written consent;·limit who may call stockholder meetings;·authorize our board of directors to issue preferred stock without stockholder approval, which could be used toinstitute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectivelypreventing acquisitions that have not been approved by our board of directors; and·require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast toamend or repeal specified provisions of our certificate of incorporation or bylaws.Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the DelawareGeneral Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging orcombining with us for a period of three-years after the date of the transaction in which the person acquired in excess of 15% ofour outstanding voting stock, unless the merger or combination is approved in a prescribed manner.An active trading market for our common stock may not be sustained.Our shares of common stock began trading on The Nasdaq Global Select Market on July 20, 2017. Given the limitedtrading history of our common stock, there is a risk that an active trading market for our shares will not be sustained, which couldput downward pressure on the market price for our common stock and thereby affect your ability to sell your shares. An inactivetrading market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair ourability to acquire other companies or technologies by using our shares as consideration.The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses forpurchasers of our common stock.Our stock price is likely to be volatile. The stock market in general and the market for smaller biopharmaceuticalcompanies in particular have experienced extreme volatility that has often been unrelated to the operating performance ofparticular companies. As a result of this volatility, you may not be able to sell your common stock at or above the price you paidfor such common stock. The market price for our common stock may be influenced by many factors, including:·our success commercializing INVELTYS;·results of clinical trials of any of our product candidates, including EYSUVIS;·results of clinical trials of product candidates of our competitors;·our success in obtaining FDA approval of EYSUVIS;·changes in the structure of healthcare payment systems;·our success in commercializing EYSUVIS and other product candidates, if and when approved;·the success of competitive products or technologies;99Table of Contents·regulatory or legal developments in the United States and other countries, including in the U.K. in connection withBrexit;·developments or disputes concerning patent applications, issued patents or other proprietary rights;·the recruitment or departure of key scientific, commercial or management personnel;·the level of expenses related to the commercialization of INVELTYS and clinical development programs for any ofour product candidates, including EYSUVIS;·the results of our efforts to discover, develop, acquire or in‑license additional products, product candidates ortechnologies for the treatment of diseases or conditions, the costs of commercializing any such products and thecosts of development of any such product candidates or technologies;·actual or anticipated changes in estimates as to financial results, development timelines or recommendations bysecurities analysts;·variations in our financial results or those of companies that are perceived to be similar to us;·market conditions in the pharmaceutical and biotechnology sectors;·general economic, industry and market conditions; and·the other factors described in this “Risk Factors” section.In the past, following periods of volatility in the market price of a company’s securities, securities class‑action litigationhas often been instituted against that company. We also may face securities class‑action litigation if we fail to successfullycommercialize INVELTYS, or if we cannot obtain regulatory approvals for or otherwise fail to successfully develop orcommercialize EYSUVIS or our other product candidates. Such litigation, if instituted against us, could cause us to incursubstantial costs to defend such claims and divert management’s attention and resources.Sale of a substantial number of shares of our common stock into the market could cause the market price of our commonstock to drop significantly, even if our business is doing well.Sales of a substantial number of shares of our common stock in the public market, or the perception in the market thatthe holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of February10, 2020, we had outstanding 36,803,874 shares of common stock. Shares of our common stock may be freely sold in the publicmarket at any time to the extent permitted by Rules 144 and 701 under the Securities Act of 1933, as amended, or the SecuritiesAct, or to the extent such shares have already been registered under the Securities Act and are held by non‑affiliates of ours.Persons who were our stockholders prior to our initial public offering continue to hold a substantial number of shares of ourcommon stock. If such persons sell, or indicate an intention to sell, substantial amounts of our common stock in the publicmarket, the trading price of our common stock could decline. Moreover, holders of a substantial number of shares of ourcommon stock, including shares of our common stock issuable upon exercise of outstanding warrants and options, have rights,subject to specified conditions, to require us to file registration statements covering their shares or to include their shares inregistration statements that we may file for ourselves or other stockholders. We have filed or intend to file registration statementsregistering all shares of common stock that we may issue under our equity compensation plans or pursuant to equity awards madeto newly hired employees outside of equity compensation plans. These shares can be freely sold in the public market uponissuance, subject to volume limitations applicable to affiliates.100Table of ContentsWe are an “emerging growth company” and a “smaller reporting company”, and the reduced disclosure requirementsapplicable to emerging growth companies and smaller reporting companies may make our common stock less attractive toinvestors.We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBSAct, and may remain an emerging growth company until December 31, 2022, although if the market value of our common stockthat is held by non‑affiliates exceeds $700 million as of the prior June 30th or if we have annual gross revenues of $1.07 billionor more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year. We alsowould cease to be an emerging growth company if we issue more than $1 billion of non‑convertible debt over a three‑year period.We are also a “smaller reporting company,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, asamended. We would cease to be a smaller reporting company if we have a public float in excess of $250 million or have annualrevenues in excess of $100 million and a public float in excess of $700 million, determined on an annual basis.As an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosurerequirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:·not being required to comply with the auditor attestation requirements in the assessment of our internal control overfinancial reporting;·not being required to comply with any requirement that may be adopted by the Public Company AccountingOversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providingadditional information about the audit and the financial statements;·reduced disclosure obligations regarding executive compensation; and·exemptions from the requirements of holding a nonbinding advisory vote on executive compensation andstockholder approval of any golden parachute payments not previously approved.In addition to the above reduced disclosure requirements applicable to emerging growth companies, as a smallerreporting company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable toother public companies that are not smaller reporting companies. These exemptions include:·being permitted to provide only two years of audited financial statements in our annual report on Form 10-K, withcorrespondingly reduced "Management's Discussion and Analysis of Financial Condition and Results ofOperations" disclosure;·not being required to furnish a contractual obligations table in "Management's Discussion and Analysis of FinancialCondition and Results of Operations"; and·not being required to furnish a stock performance graph in our annual report.We cannot predict whether investors will find our common stock less attractive as a result of our reliance on theseexemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for ourcommon stock and our stock price may be more volatile.101Table of ContentsWe have incurred and will continue to incur increased costs as a result of operating as a public company, and ourmanagement is now required to devote substantial time to new compliance initiatives and corporate governance practices.As a public company, and particularly after we are no longer an emerging growth company, we will incur significantlegal, accounting and other expenses that we did not incur as a private company. The Sarbanes‑Oxley Act of 2002, theDodd‑Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The Nasdaq Global Select Market andother applicable securities rules and regulations impose various requirements on public companies, including establishment andmaintenance of effective disclosure and financial controls and corporate governance practices. Our management and otherpersonnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations haveincreased our legal and financial compliance costs and will make some activities more time‑consuming and costly.For as long as we remain an emerging growth company or a smaller reporting company, we may take advantage ofcertain exemptions from various reporting requirements that are applicable to other public companies that are not emerginggrowth companies or smaller reporting companies as described in the preceding risk factor.Pursuant to Section 404 of the Sarbanes‑Oxley Act of 2002, or Section 404, we are required to furnish a report by ourmanagement on our internal control over financial reporting. However, while we remain an emerging growth company, we willnot be required to include an attestation report on internal control over financial reporting issued by our independent registeredpublic accounting firm. To achieve compliance with Section 404 within the prescribed period, we engaged in a process todocument and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we willneed to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assessand document the adequacy of internal control over financial reporting, continue steps to improve control processes asappropriate, validate through testing that controls are functioning as documented and implement a continuous reporting andimprovement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able toconclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required bySection 404. If we identify one or more material weaknesses in our internal control over financial reporting, it could result in anadverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, ifany, will be your sole source of gain.We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our futureearnings, if any, to finance the growth and development of our business. In addition, the terms of our Athyrium Credit Facilitypreclude us from paying dividends without the lenders’ consent, and any future debt agreements that we may enter into maypreclude us from paying dividends without the lenders’ consent or at all. As a result, capital appreciation, if any, of our commonstock will be your sole source of gain for the foreseeable future.Our certificate of incorporation designates the state courts in the State of Delaware as the sole and exclusive forum for certaintypes of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against thecompany and our directors, officers and employees.Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, theCourt of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding broughton our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or employees toour company or our stockholders, any action asserting a claim against us arising pursuant to any provision of the GeneralCorporation Law of the State of Delaware or our certificate of incorporation or bylaws or as to which the General CorporationLaw of the State of Delaware confers jurisdiction on the Court of Chancery of the State of Delaware, or any action asserting aclaim against us governed by the internal affairs doctrine. We do not expect this choice of forum provision will apply to suitsbrought to enforce a duty or liability created by the Securities Act, the Exchange Act, or any other claim for which federal courtshave exclusive jurisdiction. 102Table of ContentsThis exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that suchstockholders find favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuitsagainst us and our directors, officers and employees. Alternatively, if a court were to find the choice of forum provision containedin our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated withresolving such action in other jurisdictions, which could materially adversely affect our business, financial condition andoperating results. Item 1B Unresolved Staff CommentsNone. Item 2. PropertiesOur principal facilities consist of office and laboratory space. On February 28, 2018, we entered into a lease, ourWatertown Lease, for our current corporate headquarters located in Watertown, Massachusetts, which consists of 66,052 rentablesquare feet. We began to occupy this space on January 28, 2019. The Watertown Lease has an initial term of eight years and anoption to extend for an additional term of five years.Prior to occupying the premises under the Watertown Lease, we occupied approximately 11,747 square feet of officeand laboratory space in Waltham, Massachusetts under a lease that expired in January 2019 and approximately 6,294 additionalsquare feet of office space at a different location in Waltham, Massachusetts pursuant to a one year lease that expired on March15, 2019. Item 3. Legal ProceedingsWe are not currently subject to any material legal proceedings. Item 4. Mine Safety DisclosuresNone.103Table of Contents Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer’s Purchases of Equity SecuritiesOur common stock has been publicly traded on the Nasdaq Global Select Market under the symbol “KALA” since July20, 2017 in connection with our initial public offering, or IPO. Prior to that time, there was no public market for our commonstock.HoldersAs of February 10, 2020, there were approximately 10 holders of record of our common stock. This number does notinclude beneficial owners whose shares are held by nominees in street name.Dividend policyWe have not declared or paid any cash dividends on our common stock since our inception. We intend to retain allavailable funds and any future earnings to finance the operation and expansion of our business and do not anticipate paying anycash dividends in the foreseeable future. In addition, our ability to pay cash dividends is currently restricted by the terms of ourAthyrium Credit Facility, and future debt financing arrangements may contain terms prohibiting or limiting the amount ofdividends that may be declared or paid on our common stock. Any future determination to declare and pay dividends will bemade at the discretion of our board of directors and will depend on then-existing conditions, including our results of operations,financial condition, contractual restrictions, capital requirements, business prospects and other factors our board of directors maydeem relevant.Information about our equity compensation plansThe information required by this item will be set forth in our Proxy Statement for the 2020 Annual Meeting ofStockholders and is incorporated in this Annual Report on Form 10-K by reference.Recent sales of unregistered securities.Set forth below is information regarding shares of our common stock issued and stock options granted by us for thetwelve months ended December 31, 2019 that were not registered under the Securities Act of 1933, as amended, or the SecuritiesAct and that have not otherwise been described in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.On October 15, 2019, we granted stock options to two new employees to purchase an aggregate of 8,000 shares of ourcommon stock at an exercise price of $3.49 per share. On November 15, 2019, we granted stock options to three new employeesto purchase an aggregate of 16,000 shares of our common stock at an exercise price of $3.69 per share. On December 13, 2019,we granted stock options to two new employees to purchase an aggregate of 8,000 shares of our common stock at an exerciseprice of $4.81 per share. These options were inducement grants made outside of our 2017 Equity Incentive Plan in accordancewith Nasdaq Listing Rules 5635(c)(4) and Section 4(a)(2) of the Securities Act of 1933, as amended. The options have a ten-yearterm and vest over four years, with 25% of the shares underlying each option award vesting on the one-year anniversary of theapplicable employee’s new hire date and the remaining 75% of the shares underlying each award vesting monthly thereafter forthree years. Vesting of each option is subject to the option holders continued service with our company through theapplicable vesting dates. We intend to file a registration statement on a Form S-8 to register the shares of common stockunderlying these inducement grants prior to the time at which these options become exercisable.Purchase of Equity SecuritiesWe did not purchase any of our registered equity securities during the period covered by this Annual Report on Form10-K.104Table of Contents Item 6. Selected Financial DataYou should read the following selected consolidated financial data together with our consolidated financial statementsand accompanying notes appearing elsewhere in this Annual Report on Form 10-K and the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K. We have derived theselected consolidated statement of operations data for the years ended December 31, 2019 and 2018, and the selectedconsolidated balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements at the endof this Annual Report on Form 10-K. The selected consolidated statement of operations data for the years ended December 31,2017, 2016 and 2015 and balance sheet data as of December 31, 2017, 2016 and 2015 set forth below have been derived from theaudited financial statements for such years not included in this Annual Report on Form 10-K. Our historical results for any priorperiod are not necessarily indicative of the results that may be expected in any future period. Year Ended December 31, 2019 2018 2017 2016 2015Statement of Operations Data:(in thousands, except share and per share amounts)Product revenues, net $6,074 $ — $ — $ — $45Costs and expenses: Cost of product revenues 2,008 — — — —Selling, general and administrative 65,015 35,431 10,867 7,640 4,609Research and development 27,275 29,290 29,008 25,029 11,382Total costs and expenses 94,298 64,721 39,875 32,669 15,991Loss from operations (88,224) (64,721) (39,875) (32,669) (15,946)Other income (expense) Interest income 2,357 1,687 527 147 Interest expense (8,480) (3,314) (1,019) (767) (604)Loss on extinguishment of debt — (390) — — —Change in fair value of warrant liability — — (1,844) 122 (132)Net loss attributable to commonstockholders $(94,347) $(66,738) $(42,211) $(33,167) $(16,682)Net loss per share attributable to commonstockholders—basic and diluted $(2.76) $(2.49) $(3.71) $(28.07) $(14.89)Weighted average shares outstanding—basic and diluted 34,209,756 26,753,906 11,375,000 1,181,429 1,120,268 As of December 31, 2019 2018 2017 2016 2015 (in thousands)Balance Sheet Data: Cash $85,449 $170,898 $114,565 $45,472 $5,759Total assets 154,323 220,966 116,546 46,329 8,448Working capital(1) 80,710 160,018 100,341 40,080 2,094Long‑term debt—less current portion 71,184 70,226 11,987 9,098 7,795Other long‑term liabilities 28,673 28,752 8 17 3Total stockholders’ equity (deficit) 29,692 104,978 89,679 (87,762) (56,664)(1)We define working capital as current assets less current liabilities.105Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.You should read the following discussion and analysis of our financial condition and results of operations together withour financial statements and related notes thereto appearing at the end of this Annual Report on Form 10‑K. Some of theinformation contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, includinginformation with respect to our plans and strategy for our business and related financing, includes forward‑looking statementsthat involve risks and uncertainties. See “Special Note Regarding Forward‑Looking Statements and Industry Data.” Because ofmany factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actualresults could differ materially from the results described in or implied by the forward‑looking statements contained in thefollowing discussion and analysis.OverviewWe are a biopharmaceutical company focused on the discovery, development and commercialization of innovativetherapies for diseases of the eye. Our innovative mucus-penetrating particle, or MPP, drug delivery technology, which we refer toas our AMPPLIFY technology, uses selectively‑sized nanoparticles that each have a proprietary coating. We believe that thesetwo key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to targettissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped andeliminated by mucus. We have applied the AMPPLIFY technology to loteprednol etabonate, or LE, a corticosteroid designed forocular applications, resulting in the August 2018 approval of INVELTYS(loteprednol etabonate ophthalmic suspension) 1%, ourtopical twice-a-day ocular steroid for the treatment of inflammation and pain following ocular surgery, by the U.S. Food andDrug Administration, or the FDA, and the development of our lead product candidate, KPI‑121 0.25%, which if approved weplan to commercialize under the brand name EYSUVIS (loteprednol etabonate ophthalmic suspension) 0.25%, for the temporaryrelief of the signs and symptoms of dry eye disease. We commercially launched INVELTYS in January 2019. EYSUVIS is our product candidate for patients with dry eye disease utilizing a two‑week course of therapy. In January2018, we announced topline results from two completed Phase 3 clinical trials, which we refer to as STRIDE 1 and STRIDE 2(STRIDE - S hort T erm R elief I n D ry E ye), evaluating the safety and efficacy of EYSUVIS versus vehicle (placebo) inpatients with dry eye disease. In STRIDE 1, statistical significance was achieved for the primary sign endpoint of conjunctivalhyperemia and the primary symptom endpoint of ocular discomfort severity change from baseline to day 15 in the intent-to-treat,or ITT population, in addition, statistical significance was also achieved in STRIDE 1 for a second pre-specified primarysymptom endpoint of ocular discomfort severity change from baseline to day 15 in patients with more severe baseline oculardiscomfort. In STRIDE 2, statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia, butstatistical significance was not achieved for the primary symptom endpoint of ocular discomfort severity. EYSUVIS wasgenerally well tolerated in both STRIDE 1 and STRIDE 2, with no clinically significant treatment‑related adverse eventsobserved during the course of either trial, and with elevations in interocular pressure, or IOP, in both trials similar to placebo.In October 2018, we submitted a New Drug Application, or NDA, to the FDA for EYSUVIS for the temporary relief ofthe signs and symptoms of dry eye disease. In August 2019, we announced that we received a complete response letter, or CRL,from the FDA regarding this NDA. The FDA indicated that efficacy data from an additional clinical trial will be needed tosupport a resubmission of the NDA. Based upon the previous recommendation of the FDA, we initiated an additional Phase 3clinical trial, STRIDE 3, in the third quarter of 2018, which we expect will serve as the basis of our response to the CRL. Wehave identified key factors that contributed to the differences observed in the results from STRIDE 2 compared to those ofSTRIDE 1 and the Phase 2 trial, and we believe that the changes made to the inclusion/exclusion criteria of STRIDE 3 based onthese analyses will improve the probability of success of this trial. We are targeting topline data for STRIDE 3 in the first quarterof 2020 and resubmission of the NDA in the second quarter of 2020. If approved, we believe EYSUVIS could become thepreferred first-line prescription therapy for treating dry eye flares, which affect the vast majority of dry eye patients.INVELTYS is the first and only FDA‑approved ocular corticosteroid product with a twice-a-day dosing regimen for thetreatment of post‑operative inflammation and pain. Other approved topical ocular corticosteroid products for this indication aredosed three or four times a day. In clinical trials, INVELTYS showed statistical significance in the106® Table of Contentsprimary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need forrescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need forrescue medications compared to placebo.We are evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for thetemporary relief of signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease. We also areevaluating compounds in our receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the vascular endothelialgrowth factor, or VEGF, pathway, for the potential treatment of a number of retinal diseases and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase andcataract formation.INVELTYS received FDA approval under Section 505(b)(2) of the FDCA, which is the pathway we plan to rely on forthe approval of EYSUVIS as well. We have retained worldwide commercial rights for INVELTYS and our current productcandidates, including EYSUVIS. Since the FDA approval of INVELTYS, we have built a commercial infrastructure with ourown focused, specialty sales force which includes 57 territory sales managers, or TSMs, 7 regional sales leaders, or RSLs, and 3directors of national accounts, or DNAs. If EYSUVIS is approved by the FDA, we plan to increase our sales force from 57 salesrepresentatives to a total of approximately 75 to 100 sales representatives, who will promote both EYSUVIS and INVELTYS. Weexpect to commercialize in the United States any of our other product candidates that receive marketing approval as well. Wealso expect to explore commercialization of EYSUVIS for the treatment of dry eye disease in certain markets outside the UnitedStates, including the European Union, or EU, utilizing a variety of collaboration, distribution and other marketing arrangementswith one or more third parties.Since inception, we have incurred significant losses from operations and negative cash flows from operations. Our netlosses were $94.3 million for the year ended December 31, 2019 and $66.7 million for the year ended December 31, 2018. As ofDecember 31, 2019, we had an accumulated deficit of $295.5 million. As we commercially launched our first product,INVELTYS, in January 2019, we have had only limited revenues to date from product sales and have financed our operationsprimarily through public offerings of common stock, private placements of preferred stock, convertible debt financings,borrowings under credit facilities, warrants, and sales of our common stock under our at-the-market offering facility, or the ATMOffering. We have devoted substantially all of our financial resources and efforts to research and development, includingpreclinical studies and clinical trials and engaging in activities to commercialize INVELTYS. Although we expect to continue togenerate revenue from sales of INVELTYS, there can be no assurance that we will generate any such revenue or as to the timingof any such revenue, and we expect to continue to incur significant expenses and operating losses over the next several years. Ournet losses may fluctuate significantly from quarter‑to‑quarter and year‑to‑year.Financial Operations OverviewProduct Revenues, NetAs a result of the commercial launch of INVELTYS in the United States in early January 2019, we commencedgenerating product revenues from sales of INVELTYS. Our product revenues are recorded net of provisions relating to estimatesfor (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates,chargebacks and co-pay assistance program, and (iii) reserves for expected product returns. These estimates reflect currentcontractual and statutory requirements, known market events and trends, industry data and forecasted customer buying andpayment patterns. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted inthe period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment.Cost of Product RevenuesCost of product revenues consists primarily of materials, third-party manufacturing costs, freight and distribution costs,royalty expense, allocation of labor, quality control and assurance, reserves for defective inventory, and other manufacturingoverhead costs. We expense cost of product revenues related to product candidates as research107Table of Contentsand development expenses prior to regulatory approval in the respective territory. We received U.S. regulatory approval forINVELTYS on August 22, 2018.Selling, General and Administrative ExpensesSelling, general and administrative expenses consist primarily of salaries, benefits, commissions, stock‑basedcompensation and travel expenses related to our commercial infrastructure and our executive, finance, human resources, legal,information technology and business development functions. Selling, general and administrative expenses also includes externalcosts related to marketing, samples and professional fees for auditing, tax, information technology, consultants, legal services andallocated facility‑related costs not otherwise included in research and development expenses.We anticipate that our selling, general and administrative expenses will increase in the future if and as we increase ourheadcount to support our continued research activities and development of our product candidates or additional productcandidates and continue to build our commercial infrastructure to support the commercialization of INVELTYS or of any productcandidates for which we obtain marketing approval, including EYSUVIS. In addition, we anticipate increased expenses related tosupporting a larger organization and increase in selling expense related to EYSUVIS, if approved.Research and Development ExpensesResearch and development expenses consist of costs associated with our research activities, including compensation andbenefits for full‑time research and development employees, an allocation of facilities expenses, overhead expenses, payments touniversities under our license agreements and other outside expenses. Our research and development expenses include:·employee‑related expenses, including salaries, related benefits, travel and stock‑based compensation;·expenses incurred for the preclinical and clinical development of our product candidates and under agreements withcontract research organizations, or CROs, including costs of manufacturing product candidates prior to receipt ofregulatory approval;·facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance offacilities and supplies; and·payments made under our third‑party licensing agreements, including development royalty and reimbursableexpenses for defense of agreed upon patents under a license agreement with JHU.We expense research and development costs as they are incurred. Research and development costs that are paid inadvance of performance are capitalized as a prepaid expense until incurred. We track outsourced development costs bydevelopment program but do not allocate personnel costs, payments made under our license agreements or other costs to specificproduct candidates or development programs. These costs are included in Employee‑related costs and Other research anddevelopment costs in the line items in the tables under “Results of Operations”.We expect that our research and development costs will decrease in 2020 as compared to the year ended December 31,2019 as a result of the completion of STRIDE 3. However, we expect that such costs will increase if and as we continue toadvance our product candidates, including EYSUVIS, and conduct additional late-stage clinical trials. The process of conductingpreclinical studies and clinical trials necessary to obtain regulatory approval is costly and time‑consuming. We may neversucceed in obtaining marketing approval for any of our product candidates, including EYSUVIS. The probability of success foreach product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturingcapability and commercial viability.108Table of ContentsInterest IncomeInterest income consists of interest earned on our cash balance held in a deposit account.Interest ExpenseInterest expense primarily consists of contractual coupon interest, amortization of debt discounts and debt issuance costsrecognized on our debt facility.Loss on Extinguishment of DebtLoss on extinguishment of debt in 2018 primarily consisted of unamortized debt issuance cost and a prepayment penaltyon our venture debt facility entered into in 2014 which was repaid in full with proceeds from the Athyrium Credit Facility onOctober 1, 2018.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our financialstatements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that severalaccounting policies are important to understanding our historical and future performance. We refer to these policies as criticalbecause these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time wemake the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoingbasis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates onhistorical experience and other market‑specific or other relevant assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.While our significant accounting policies are described in more detail in the notes to our financial statements appearingat the end of this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to thejudgments and estimates used in the preparation of our financial statements.RevenueWe account for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue fromContracts with Customers. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promisedgoods or services, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods orservices. We perform the following five steps to recognize revenue under ASC Topic 606: (i) identify the contract(s) with acustomer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate thetransaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies aperformance obligation. We only recognize revenue when it is probable that we will collect the consideration to which we areentitled in exchange for the goods or services that will be transferred to the customer.Product revenues, netWe sell INVELTYS to wholesalers and/or specialty distributors in the United States, or Customers. These Customerssubsequently resell our products to specialty and other retail pharmacies. In addition to agreements with Customers, we enter intoarrangements with payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discountsfor the purchase of our products.The goods promised in our product sales contracts represent a single performance obligation. We recognize revenuefrom product sales at the point the Customer obtains control of the product, which occurs upon delivery. The transaction price(“net sales price”) that is recognized as revenue for product sales includes the selling price to the109Table of ContentsCustomer and an estimate of variable consideration. Components of variable consideration include prompt pay and otherdiscounts, product returns, government rebates, third-party payor rebates, coverage gap rebates, incentives such as patient co-payassistance, and other fees paid to Customers where a distinct good or service is not received. Variable consideration is recordedon the consolidated balance sheet as either a reduction of accounts receivable, if payable to a Customer, or as a current liability, ifpayable to a third-party other than a Customer. We consider all relevant information when estimating variable consideration suchas assessment of our current and anticipated sales and demand forecasts, actual payment history, information from third partiesregarding the payor mix for products, information from third parties regarding the units remaining in the distribution channel,specific known market events and trends, industry data and current contractual and statutory requirements that are reasonablyavailable. We include estimated amounts for such variable consideration in the net sales price to the extent it is determinedprobable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with thevariable consideration is resolved.Payment terms with Customers do not exceed one year and, therefore, we do not account for a significant financingcomponent in our arrangements. We expense the incremental cost of obtaining a contract with a Customer when incurred as theperiod of benefit is less than one year. Reserves for Variable Consideration:Trade Discounts and AllowancesWe provide our Customers with certain trade discounts and allowances including discounts for prompt payments andfees paid for distribution, data and administrative services. These discounts and fees are based on contractually-determinedpercentages and are recorded as a reduction of revenue and accounts receivable in the period in which the related product revenueis recognized.ChargebacksChargebacks for fees and discounts to providers represent the estimated obligations resulting from contractualcommitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers whodirectly purchase the product from us. Customers charge us for the difference between what they pay for the product and theultimate selling price to the qualified healthcare providers. These components of variable consideration are established in thesame period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Reservesfor chargebacks consist of credits we expect to issue for units that remain in the distribution channel at the end of each reportingperiod and that we expect will be sold to qualified healthcare providers, as well as chargebacks that Customers have claimed, butfor which we have not yet issued a credit.Product ReturnsConsistent with industry practice, we have a product returns policy that provides Customers right of return for productpurchased within a specified period prior to and subsequent to the product’s expiration date. We estimate the amount of productsthat may be returned and present this amount as a reduction of revenue in the period the related product revenue is recognized, inaddition to establishing a liability. Our estimate for product returns are based upon available industry data and our own salesinformation, including our visibility into the inventory remaining in the distribution channel.Commercial Payor and Medicare Part D Rebates We contract with certain third-party payors, primarily pharmacy benefit managers, or PBM’s, and health plans, or Plans,for the payment of rebates with respect to utilization of our product. These rebates are based on contractual percentages applied tothe amount of product prescribed to patients who are covered by the PBMs or the Plans with which it contracts. We estimaterebates for commercial and Medicare Part D payors based on the contractual discount percentage, the various payor mix forINVELTYS as well as future rebates that will be made for product that has been recognized as revenue but remains in thedistribution channel at the end of each reporting period. We also estimate the110Table of Contentsnumber of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part Dprogram. Such estimates are recorded in the same period the related revenue is recognized, resulting in a reduction of productrevenue and the establishment of a current liability.Government RebatesWe are subject to discount obligations under Medicaid and other government programs. For Medicaid, reserves arebased on actual payment history, and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebateformula established by the Centers for Medicaid and Medicare Services. Our liability for these rebates consists of estimates ofclaims for the current period and estimated future claims that will be made for product that has been recognized as revenue butremains in the distribution channel at the end of each reporting period. These reserves are recorded in the same period the relatedrevenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.Co-pay Assistance ProgramWe offer a co-pay assistance program (the “co-pay program”), which is intended to provide financial assistance topatients who may or may not be covered by commercial insurance or who opt out of Medicare Part D programs. The calculationof accruals for the co-pay program is based on actual claims processed during the period as well as an estimate of the number andcost per claim that we expect to receive associated with product that has been recognized as revenue but remains in thedistribution channel at the end of each reporting period. Allowances for estimated co-pay claims are recorded in the same periodthe related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. Accounts Receivable, NetAccounts receivable, net relates to amounts due from customers, net of applicable revenue reserves. Accounts receivableare typically due within approximately 65 days. We analyze accounts that are past due for collectability and provide an allowancefor receivables when collection becomes doubtful. Given the nature and limited history of collectability of our accountsreceivable, an allowance for doubtful accounts is not deemed necessary at December 31, 2019.InventoryWe capitalize inventories manufactured in preparation for initiating sales of a product candidate when the relatedproduct candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to berecoverable through sales of the inventories. In determining whether or not to capitalize such inventories, we evaluate, amongother factors, information regarding the product candidate’s safety and efficacy, the status of regulatory submissions andcommunications with regulatory authorities and the outlook for commercial sales, including the existence of current oranticipated competitive drugs and the availability of reimbursement. In addition, we evaluate risks associated with manufacturingthe product candidate, including the ability of our third-party suppliers to complete the validation batches, and the remaining shelflife of the inventories. Costs associated with manufacturing product candidates prior to satisfying the inventory capitalizationcriteria are charged to research and development expense as incurred.We value our inventories at the lower of cost or estimated net realizable value. We determine the cost of our inventories,which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. We perform an assessmentof the recoverability of capitalized inventory during each reporting period, including quality control and assurance reserves fordefective inventories, and we also write-down any excess and obsolete inventories to their estimated realizable value in the periodin which the impairment is first identified. Such impairment charges, should they occur, are recorded within cost of productrevenues, unless associated with our samples inventory, in which case the charges are recorded to selling, general andadministrative expense. The determination of whether inventory costs will be realizable requires estimates by management. Ifactual market conditions are less favorable than projected by111Table of Contentsmanagement, additional write-downs of inventory may be required which would be recorded as a cost of product revenues in theconsolidated statements of operations.Shipping and handling costs for product shipments are recorded as incurred in costs of revenues along with costsassociated with manufacturing the product, and any inventory write-downs.LeasesWe elected to early adopt Accounting Standards Update, or ASU, 2016-02, Leases or ASC 842, effective January 1,2018. Under this new lease standard, most leases are required to be recognized on the balance sheet as right-of-use assets andcorresponding lease liabilities. We identified and assessed the following significant assumptions in recognizing the right-of-useasset and corresponding liability.·Expected lease term - The expected lease term includes both contractual lease periods and, as applicable, cancelableoption periods where failure to exercise such options would result in an economic penalty.·Incremental borrowing rate- As our lease does not provide an implicit rate, we estimated the incrementalborrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of ourrecent Athyrium Credit Facility and adjusting it for factors that appropriately reflect the profile of securedborrowing over the expected term of the lease.The standard was implemented using the required modified retrospective approach and we also elected to utilize theavailable practical expedients. In using the modified retrospective approach, we were required to recognize and measure leasesexisting at, or entered into after, the beginning of the earliest comparative period presented. The adoption of this standard did nothave a material impact on our consolidated statements of operations. On February 28, 2018 we entered into a lease for our newcorporate headquarters located in Watertown, Massachusetts, which consists of 66,052 rentable square feet with an initial term ofeight years and a five year renewal option.Stock‑based Compensation and Common Stock ValuationStock‑based CompensationWe measure stock options and other stock‑based awards granted to employees and directors based on the fair value ofthe award on the date of the grant and recognize the corresponding compensation expense of those awards using the straight-linemethod, over the requisite service period, which is generally the vesting period of the respective award, and account for the effectof forfeitures as they occur.We estimate the fair value of each stock option grant using the Black‑Scholes option‑pricing model, which uses asinputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term ofour stock options, the risk‑free interest rate for a period that approximates the expected term of our stock options and ourexpected dividend yield.Common Stock ValuationPrior to our IPO in 2017, there was no public market for our common stock. For awards granted prior to our IPO, theestimated fair value of our common stock was determined by our Board of Directors as of the date of each option grant, withinput from management, considering our most recently available third‑party valuations of common stock and our board ofdirectors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changedfrom the date of the most recent valuation through the date of the grant. These third‑party valuations were performed inaccordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and ValuationGuide, Valuation of Privately‑Held‑Company Equity Securities Issued as Compensation. Our common stock valuations wereprepared using either a hybrid method, which used market approaches to estimate our enterprise value, or a probability‑weightedexpected return method, or PWERM, which used a combination of market approaches and a cost approach to estimate ourenterprise value. The hybrid method is a112Table of ContentsPWERM where the equity value in one or more of the scenarios is calculated using an option‑pricing method, or OPM. Under thePWERM methodology, the fair value of common stock was estimated based upon an analysis of future values for our company,assuming various outcomes. The common stock value was based on the probability‑weighted present value of expected futureinvestment returns considering each of the possible outcomes available as well as the rights of each class of stock. The futurevalue of the common stock under each outcome was discounted back to the valuation date at an appropriate risk‑adjusteddiscount rate and probability weighted to arrive at an indication of value for the common stock.In addition to considering the results of these third‑party valuations, our board of directors considered various objectiveand subjective factors to determine the fair value of our common stock as of each grant date, which may have been as of a datelater than the most recent third‑party valuation date, including the prices at which we sold shares of preferred stock and thesuperior rights and preferences of securities senior to our common stock at the time of each grant, the progress of our researchand development programs, external market conditions affecting and trends within the biotechnology industry and the likelihoodof achieving a liquidity event.The assumptions underlying these valuations represented management’s best estimates, which involved inherentuncertainties and the application of management judgment.As of December 31, 2019, and 2018, we had $19.2 million and $21.1 million of total unrecognized compensationexpense, which is expected to be recognized over a weighted average remaining vesting period of approximately 2.31 years and2.84 years, respectively. We expect the impact of our stock‑based compensation expense for stock options to employees andnon‑employee consultants to grow in future periods due to the potential increases in the value of our common stock andheadcount.Emerging Growth Company StatusIn April 2012, the Jumpstart Our Business Startup Act, or JOBS Act, was enacted by the federal government.Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period forcomplying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certainaccounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to availourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevantdates on which adoption of such standards is required for other public companies.113Table of ContentsResults of OperationsComparison of the Years ended December 31, 2019 and 2018The following table summarizes the results of our operations for the years ended December 31, 2019 and 2018: Year Ended December 31, 2019 2018 Change (in thousands) Product revenues, net $6,074 $ — $6,074 Costs and expenses: Cost of product revenues 2,008 — 2,008 Selling, general and administrative 65,015 35,431 29,584 Research and development 27,275 29,290 (2,015) Total costs and expenses 94,298 64,721 29,577 Loss from operations (88,224) (64,721) (23,503) Other income (expense) Interest income 2,357 1,687 670 Interest expense (8,480) (3,314) (5,166) Loss on extinguishment of debt — (390) 390 Total other expense (6,123) (2,017) (4,106) Net loss $(94,347) $(66,738) $(27,609) Product revenues, netProduct revenues, net was $6.1 million for the year ended December 31, 2019 and related to sales of INVELTYS, whichwe launched in the United States in January 2019. INVELTYS is our first product to receive regulatory approval. We did notgenerate any revenues from product sales prior to 2019. We expect product revenues to increase if and as we obtain and maintaincoverage and adequate reimbursement for INVELTYS from third-party payors.Cost of product revenuesCost of product revenues was $2.0 million for the year ended December 31, 2019. We began capitalizing inventory costsfor INVELTYS after receipt of FDA approval of INVELTYS on August 22, 2018. Prior to receiving FDA approval, such costswere expensed as research and development expenses. Included in the cost of product revenues for the year ended December 31,2019, is $0.2 million related to the write-off of certain INVELTYS units that did not pass quality inspection.Selling, General and Administrative ExpensesSelling, general and administrative expenses were $65.0 million for the year ended December 31, 2019 compared to$35.4 million for the year ended December 31, 2018, an increase of $29.6 million. The increase was driven by a $18.4 millionincrease in employee-related costs during year ended December 31, 2019 comprised of a $17.5 million increase in expenses froman increase in employee headcount and merit-based pay, primarily driven by the hiring of our sales force and a $0.9 millionincrease in stock-based compensation expenses primarily related to stock options issued to our sales force. In addition, weincurred a $5.1 million increase in costs for sales and marketing and other activities primarily related to our executive, finance,human resource, legal, information technology, business development and support functions for the commercial launch ofINVELTYS, a $2.6 million increase in sample costs, a $0.1 million increase in costs associated with legal, accounting andfinance, a $2.6 million increase in facilities costs related to our Watertown Lease, which commenced in November 2018, alongwith a larger allocation of our overall facility costs related to this lease, $0.3 million of expense related to the milestone that waspayable to JHU upon first commercial sale of INVELTYS and $0.4 million for the annual product fee for INVELTYS under thePDUFA program.114Table of ContentsWe anticipate that our selling, general and administrative expenses will increase in the future if and as we increase ouradministrative headcount to support our continued research activities and seek marketing approval for our lead product candidate,EYSUVIS and expand our salesforce if EYSUVIS receives regulatory approval. Research and Development ExpensesThe following table summarizes the research and development expenses incurred during the years ended December 31,2019 and 2018: Year Ended December 31, 2019 2018 Change (in thousands) KPI-121 development costs $12,323 $14,698 $(2,375) Employee‑related costs 11,333 12,712 (1,379) Other research and development costs 3,619 1,880 1,739 Total research and development $27,275 $29,290 $(2,015) Research and development expenses were $27.3 million for the year ended December 31, 2019 compared to $29.3million for the year ended December 31, 2018, a decrease of $2.0 million. This decrease in research and development expenseswas primarily due to a $2.4 million decrease in KPI-121 development costs driven by a decrease in the manufacturing cost ofINVELTYS, which was recognized as research and development cost prior to FDA approval, and subsequently recognized as costof product revenues, and a decrease related to our external cost for our Phase 3 clinical trial of INVELTYS for the treatment ofinflammation and pain following ocular surgery. The KPI-121 development cost expense decreases were primarily offset by anincrease in development costs related to STRIDE 3, which began in the third quarter of 2018. Also contributing to the decrease inresearch and development expenses was a $1.4 million decrease in costs related to employees that were engaged in productmanufacturing activities and were classified under research and development prior to regulatory approval of INVELTYS and arenow classified as manufacturing employees and, are accordingly being recorded in inventory and cost of product revenues.Partially offsetting these decreases in research and development expense was an increase in other research and development costsof $1.7 million, primarily related to our new Watertown location in 2019. We expect that our research and development costs willdecrease in 2020 as compared to the year ended December 31, 2019 as a result of the completion of STRIDE 3. However, weexpect that such costs will increase if and as we continue to advance our product candidates, including EYSUVIS, and conductadditional clinical trials.Interest IncomeInterest income was $2.4 million for the year ended December 31, 2019, compared to $1.7 million for the year endedDecember 31, 2018, an increase of $0.7 million. The increase was attributable to a higher interest rate and higher average cashbalance during the year ended December 31, 2019 from the sale of shares of our common stock in an underwritten offering inOctober 2018 and proceeds from our Athyrium Credit Facility in October 2018, and to a lesser extent, the receipt of $8.4 millionof net proceeds from the sale of our common stock from our ATM Offering during the third and fourth quarters of 2019.Interest ExpenseInterest expense was $8.5 million for the year ended December 31, 2019, compared to $3.3 million for the year endedDecember 31, 2018, an increase of $5.2 million. The increase was primarily due to the October 2018 draw down of $75.0 millionunder the Athyrium Credit Facility, which resulted in a higher outstanding debt balance for the year ended December 31, 2019.115Table of ContentsLoss on extinguishment of debtThe loss of extinguishment of debt was $0.4 million for the year ended December 31, 2018. There was no loss onextinguishment of debt for the year ended December 31, 2019. Upon the repayment in full of the principal balance and relatedoutstanding interest under the 2014 Debt Facility, the unamortized debt discount and prepayment penalty was recorded as loss onextinguishment of debt for the year ended December 31, 2018.Liquidity and Capital ResourcesSince our inception, we have incurred significant operating losses. We have been in the process of commercializing ourfirst FDA-approved product, INVELTYS, and we did not generate revenue from sales of any product before 2019. We havefunded our operations to date with public offerings of common stock, private placements of preferred stock, convertible debtfinancings, borrowings under credit facilities, warrants, and sales of our common stock under our ATM Offering.In July 2017, we completed our IPO pursuant to which we issued and sold 6,900,000 shares of our common stock,which included 900,000 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares, at a price of$15.00 per share. We received net proceeds of $94.0 million after deducting underwriting discounts and commission of$7.3 million and offering costs incurred in 2017 of $2.2 million.In November 2014, we entered into our 2014 Debt Facility, which was subsequently amended in October2016, November 2017 and March 2018. The 2014 Debt Facility, as amended, increased the initial commitment under the debtfacility to a total of $20.0 million of funding and extended the interest-only end date for 12 months following the execution of theMarch 2018 amendment. On October 1, 2018, we repaid the outstanding principal balance under the 2014 Debt Facility of $20.0million. In connection with the repayment of the 2014 Debt Facility, we paid a prepayment fee of $0.2 million.On August 9, 2018, we filed a Shelf Registration with the SEC, which was declared effective on August 27, 2018.Under the Shelf Registration, we may offer and sell up to $250.0 million of a variety of securities including common stock,preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of suchsecurities during the three-year period that commenced upon the Shelf Registration becoming effective. Under the ShelfRegistration, we may periodically offer one or more types of securities in amounts, at prices and on terms announced, if and whenthe securities are ever offered.On October 5, 2018, we sold 7,500,000 shares of our common stock in an underwritten offering pursuant to the ShelfRegistration at a public offering price of $8.25 per share, before underwriting discounts and commissions. In addition, theunderwriters were granted an overallotment option to purchase an additional 1,125,000 shares of the common stock at the samepublic offering price, less underwriting discounts and commissions. On October 11, 2018, the underwriters exercised in full theiroption to purchase the overallotment shares. The total number of shares sold in the offering was 8,625,000, resulting in our receiptof $66.1 million in net proceeds, after underwriting discounts and offering expenses.In connection with the filing of the Shelf Registration, we entered into a sales agreement with Jefferies, LLC pursuant towhich we may issue and sell, from time to time, up to an aggregate of $50.0 million of our common stock in at-the-market equityofferings, or the ATM Offering, through Jefferies, LLC, as sales agent. As of December 31, 2019, we had issued 2,592,934 sharesof our common stock under our ATM Offering, resulting in our receipt of $13.1 million in net proceeds. In the period beginningJanuary 1, 2020 through the date of this Annual Report on Form 10-K, we issued and sold an additional 583,411 shares of ourcommon stock under our ATM Offering, resulting in our receipt of $2.2 million in net proceeds. As of December 31, 2019, therewas approximately $36.4 million of shares of common stock remaining under the ATM Offering that we may issue and sell in thefuture and, excluding the funds designated to be offered under our ATM Offering, there was approximately $128.8 million ofsecurities available to be issued under the Shelf Registration.116Table of ContentsOn October 1, 2018, we entered into a $110 million Athyrium Credit Facility. The Athyrium Credit Facility provides fora Term Loan A in the aggregate principal amount of $75.0 million, and an Athyrium Term Loan B in the aggregate principalamount of $35.0 million. On October 1, 2018, we borrowed the entire principal amount of the Term Loan A. We may draw downthe Athyrium Term Loan B upon either (i) FDA approval of EYSUVIS for a dry eye disease indication or (ii) reaching certain netproduct revenues for INVELTYS, in each case on or prior to June 30, 2020; however, we do not expect to satisfy either suchcondition on or prior to June 30, 2020 and, as a result, do not currently expect we will be eligible to draw down any of theAthyrium Term Loan B funds. The maturity date of the Athyrium Credit Facility is October 1, 2024. The Term Loan A bearsinterest at a rate of 9.875% per annum, with quarterly, interest-only payments until October 1, 2022. The unpaid principal amountof the Term Loan A is due and payable in quarterly installments starting at the end of the fourth anniversary of the loan.Cash FlowsAs of December 31, 2019 and 2018, we had $85.4 million and $170.9 million in cash on hand, respectively, and $75.0million in indebtedness. The indebtedness in 2018 and 2019 represented the aggregate principal amount that was outstandingunder the Athyrium Credit Facility.The following table summarizes our sources and uses of cash for each of the periods presented: Year Ended December 31, 2019 2018 (in thousands) Net cash used in operating activities $(92,720) $(54,121) Net cash used in investing activities (1,335) (1,578) Net cash provided by financing activities 8,982 124,104 Decrease in cash and restricted cash $(85,073) $68,405 Operating ActivitiesDuring the year ended December 31, 2019, our cash used in operating activities was primarily due to our net loss of$94.3 million, as we incurred selling, general and administrative costs associated with the commercialization of INVELTYS,which we launched in January 2019, and external research and development costs associated with our clinical trials for our leadproduct candidate, EYSUVIS. These costs were partially offset by non‑cash charges of $13.6 million, consisting primarily of$10.0 million in stock‑based compensation, $3.6 million related to leases, debt discount and depreciation, and net cash used bychanges in our operating assets and liabilities of $11.9 million. The changes in our operating assets and liabilities of $11.9million were primarily due to an increase of $11.6 million in accounts receivable and a $4.3 million increase in inventory fromthe commencement of INVELTYS sales in 2019, and a $1.2 million decrease in lease liabilities and other long-term liabilitiesprimarily related to cash lease payments. Partially offsetting these decreases in operating cash flows from operating assets andliabilities was a $6.9 million increase in accrued expenses and accounts payable. The increase in accrued expenses was primarilythe result of accrued revenue reserves established for sales incentives, discounts and chargebacks related to INVELTYS sales in2019. The decrease in accounts payable was primarily a result of a decrease in volume of expenses related to our contractmanufacturer, and a decrease in expenses incurred on behalf of our landlord for construction of our Watertown facility, partiallyoffset by increases for sales incentives, discounts and chargebacks related to INVELTYS sales in 2019, and the timing of vendorinvoices and payments. During the year ended December 31, 2018, our cash used in operating activities was primarily due to our net loss of$66.7 million as we incurred external research and development costs associated with our clinical trials and selling, general andadministrative costs partially offset by non‑cash charges of $10.2 million, consisting primarily of a $1.2 million related toamortization of the right-of-use assets, debt discount and depreciation, $8.6 million in stock‑based compensation, $0.4 million inloss for extinguishment of the 2014 Debt Facility and net cash provided by changes in our operating assets and liabilities of $2.4million. The changes in our operating assets and liabilities of $2.4 million primarily due to an increase of $8.1 million in accruedexpenses and accounts payable partially offset by a decrease of117Table of Contents$0.4 million in lease liabilities and other long-term liabilities primarily due to principal lease payments, and an increase of $5.3million primarily driven by inventory related to INVELTYS and receivable related to the construction of our Watertown facility.The increase in accrued expenses was primarily a result of an increase in amounts accrued for compensation and benefits relatedexpenses, contract manufacturing expense, payable related to the construction of our Watertown facility and professional servicesoffset by lower accruals for clinical and regulatory consulting expenses for our clinical trials, and the increase in accounts payablewas primarily a result of increase in volume of expenses related to our contract manufacturer, expenses incurred on behalf of ourlandlord for construction of our Watertown facility, and the timing of vendor invoices and payments.Investing ActivitiesNet cash used in investing activities for all periods presented consists of purchases of property and equipment, primarilylaboratory and manufacturing equipment. Purchases of property and equipment were $1.3 million and $1.6 million for the yearsended December 31, 2019 and 2018, respectively.Financing ActivitiesNet cash provided by financing activities was $9.0 million for the year ended December 31, 2019, consisting of $8.4million of net proceeds from the sale of shares of our common stock under the ATM Offering, and $0.6 million of proceeds fromthe exercise of stock options and the issuance of common stock under our employee stock purchase plan.Net cash provided by financing activities was $124.1 million for the year ended December 31, 2018, consisting of$70.8 million from our underwritten offerings of common stock net of underwriting discounts, commissions and offering costs,$2.7 million from our 2014 Debt Facility, $72.0 million from our Athyrium Credit Facility net of debt discounts and debtissuance costs, and $0.5 million from the exercise of stock options, offset by repayment of our 2014 Debt Facility of $21.8million.Funding RequirementsWe anticipate that our expenses will increase substantially as compared to prior periods as we continue tocommercialize INVELTYS in the United States and engage in activities to prepare for commercialization of our lead productcandidate, EYSUVIS, for the temporary relief of signs and symptoms of dry eye disease, as a result of increased headcount,including management personnel to support our manufacturing and commercialization activities, expanded infrastructure,increased legal, compliance, accounting and investor and public relations expenses associated with being a public company andincreased insurance premiums, among other factors. Our license agreement with JHU, under which we license certain of ourpatent rights and a significant portion of the technology for INVELTYS and EYSUVIS, imposes royalty and other financialobligations on us, and we may enter into additional licensing and funding arrangements with third parties that may imposemilestone payment, royalty, insurance and other obligations on us.Our expenses will also increase if and as we:·continue to grow our sales, marketing and distribution capabilities in connection with the commercialization ofINVELTYS and any product candidates, including EYSUVIS, for which we may submit for and obtain marketingapproval;·conduct any necessary clinical trials, including conducting our ongoing Phase 3 clinical trial, and other developmentactivities and/or seek marketing approvals for EYSUVIS and any other product candidates;·pursue the clinical development of KPI‑121 for the treatment of other additional indications or for use in otherpatient populations or, if approved, seek to broaden the label of KPI‑121;·pursue the preclinical and clinical development of product candidates, including our rTKI program, for use in thetreatment of retinal diseases, and novel next-generation anti-inflammatories designed to exhibit118Table of Contentssteroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase and cataract formation;·seek regulatory approval for INVELTYS or any other product candidate outside of the United States·continue to scale up our manufacturing processes and capabilities to support commercialization of INVELTYS, andany of our product candidates, including EYSUVIS, for which we seek and/or obtain marketing approval;·leverage our proprietary AMPPLIFY technology to advance additional potential high‑value therapeutics intopreclinical and clinical development;·in‑license or acquire the rights to other products, product candidates or technologies;·maintain, expand and protect our intellectual property portfolio;·hire additional clinical, quality control, scientific, manufacturing, commercial and management personnel;·expand our operational, financial and management systems and increase personnel, including personnel to supportour clinical development, manufacturing and commercialization efforts and our operations as a public company;and·increase our product liability insurance coverage as we expand our commercialization efforts.We expect to continue to incur significant expenses and operating losses for the next several years. Net losses mayfluctuate significantly from quarter-to-quarter and year-to-year. We expect that our existing cash on hand as of December 31,2019, together with anticipated net revenue from sales of INVELTYS, will enable us to fund our planned operations, lease anddebt service obligations, and capital expenditure requirements into the second quarter of 2021. This evaluation is based on ouroperating plan which includes projected net revenue from sales of INVELTYS. If we do not achieve our projected net revenue,we believe we have the ability to manage spending under this operating plan in order to fund operations into the second quarter of2021. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. As a result, wecould deplete our available capital resources sooner than we currently expect. We have based these estimates on assumptions thatmay prove to be wrong, and our operating projections, including our projected net revenue, may change as a result of manyfactors currently unknown to us.Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable toaccurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Ourexpenses will increase from what we anticipate if:·we elect to or are required by the FDA or non‑U.S. regulatory agencies to perform clinical trials or studies inaddition to those expected;·there are any delays in enrollment of patients in or completing our clinical trials or the development of our productcandidates; or·there are any third‑party challenges to our intellectual property portfolio, or the need arises to defend againstintellectual property‑related claims or enforce our intellectual property rights.119Table of ContentsOur ability to become and remain profitable depends on our ability to generate revenue. While we began to generaterevenue from the sales of INVELTYS in January 2019, there can be no assurance as to the amount or timing of any such revenue,and we may not achieve profitability for several years, if at all. Achieving and maintaining profitability will require us to besuccessful in a range of challenging activities, including:·successfully growing INVELTYS revenues, including by further developing our sales force, marketing anddistribution capabilities;·achieving an adequate level of market acceptance ,and obtaining and maintaining coverage and adequatereimbursement from third‑party payors for INVELTYS and any other products we commercialize;·obtaining and maintaining marketing approval for EYSUVIS or any other product candidates;·manufacturing at commercial scale, marketing, selling and distributing INVELTYS or any product candidates forwhich we obtain marketing approval, including EYSUVIS;·maintaining regulatory and marketing approvals for INVELTYS and for any other product candidates for which weobtain approval;·hiring and building a full commercial organization required for marketing, selling and distributing those productsfor which we obtain marketing approval; and·obtaining, maintaining and protecting our intellectual property rights.INVELTYS is our only product that has been approved for sale and it has only been approved in the United States. Ourability to generate revenue from operations will depend, in part, on the success of commercial sales of INVELTYS, which wecommercially launched in the United States in January 2019. However, the successful commercialization of INVELTYS in theUnited States is subject to many risks. We are currently undertaking our first commercial launch with INVELTYS, and we maynot be able to do so successfully. There are numerous examples of unsuccessful product launches and failures to meetexpectations of market potential, including by pharmaceutical companies with more experience and resources than us. We do notanticipate our revenue from sales of INVELTYS alone will be sufficient for us to become profitable for several years, if at all.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through acombination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements,and marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity orconvertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation orother preferences that adversely affect your rights as a common stockholder. The lenders under our Athyrium Credit Facility arecurrently entitled to exercise warrants for up to 184,660 shares of common stock. Although we do not expect to be able to do so, ifwe draw down on the remaining $35.0 million of potentially available borrowings under our Athyrium Credit Facility, the lendersthereunder will be entitled to exercise warrants for up to an additional 86,175 shares of our common stock. Your ownershipinterest will be diluted to the extent any such warrants are exercised. Debt financing and preferred equity financing, if available,may involve agreements that include pledging of assets as collateral, covenants limiting or restricting our ability to take specificactions, such as incurring additional debt, making capital expenditures or declaring dividends. Our pledge of our assets ascollateral to secure our obligations under our Athyrium Credit Facility may limit our ability to obtain additional debt financing.Under our Athyrium Credit Facility, we are also restricted from paying dividends on our common stock without the lenders’consent.We will need to raise additional capital in the future to advance our business. Additional private or public financingsmay not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a materialadverse effect on our financial condition and our ability to pursue our business strategy. If we raise additional funds throughcollaborations, strategic alliances, licensing arrangements, royalty agreements, or marketing and distribution arrangements, wemay have to relinquish valuable rights to our technologies, future revenue120Table of Contentsstreams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable toraise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate ourproduct development or current or future commercialization efforts or grant rights to develop and market products or productcandidates that we would otherwise prefer to develop and market ourselves.Off‑Balance Sheet ArrangementsWe did not have during the periods presented, and we do not currently have, any off‑balance sheet arrangements, asdefined in the rules and regulations of the Securities and Exchange Commission.Recently Issued Accounting PronouncementsFrom time to time the Financial Accounting Standards Board, or FASB, or other standard‑setting bodies, issue newaccounting pronouncements. Where applicable, we adopt these new standards according to the specified effective dates. Unlessotherwise disclosed in Note 2 to the financial statements appearing at the end of this Annual Report on Form 10-K, we believethat the impact of any recently issued standard(s) that are not yet effective will not have a material impact on our financialposition or results of operation upon adoption. Item 7A. Quantitative and Qualitative Disclosures About Market Risk.We did not hold any investments as of December 31, 2019. As of December 31, 2019, the aggregate principaloutstanding under the Athyrium Credit Facility was $75.0 million, which bears interest at a fixed rate of 9.875% per annum. Item 8. Financial Statements and Supplementary DataOur financial statements, together with the report of our independent registered public accounting firm, appear on pagesF-1 through F-27 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone. Item 9A. Controls and Procedures.Evaluation of disclosure controls and proceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures as of December 31, 2019. The term “disclosure controls and procedures,”as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by a company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designedto ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the company’s management, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures,no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and managementnecessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on theevaluation of our disclosure controls and procedures as of December 31, 2019, our Chief Executive Officer and Chief FinancialOfficer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.121Table of ContentsManagement’s annual report on internal control over financial reportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting forthe company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the ExchangeAct as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers andeffected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles and includes those policies and procedures that:·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the company;·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use ordisposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. Inmaking this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in Internal Control—Integrated Framework (2013). Based on that assessment, our management concludedthat, as of December 31, 2019, our internal control over financial reporting was effective.As an “emerging growth company”, as defined in the JOBS Act, our independent registered public accounting firm isnot required to issue an attestation report on the internal control over financial reporting.Changes in internal control over financial reportingNo change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the fourth quarter ended December 31, 2019 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting. Item 9B. Other InformationNone. 122Table of Contents Part III Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by this Item is incorporated by reference from the information that will be contained in ourProxy Statement for our 2020 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the endof the fiscal year to which this Annual Report on Form 10-K relates pursuant to General Instruction G(3) of Form 10-K. Item 11. Executive CompensationThe information required by this Item is incorporated by reference from the information that will be contained in ourProxy Statement for our 2020 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the endof the fiscal year to which this Annual Report on Form 10-K relates pursuant to General Instruction G(3) of Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is incorporated by reference from the information that will be contained in ourProxy Statement for our 2020 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the endof the fiscal year to which this Annual Report on Form 10-K relates pursuant to General Instruction G(3) of Form 10-K. Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is incorporated by reference from the information that will be contained in ourProxy Statement for our 2020 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the endof the fiscal year to which this Annual Report on Form 10-K relates pursuant to General Instruction G(3) of Form 10-K. Item 14. Principal Accounting Fees and ServicesThe information required by this Item is incorporated by reference from the information that will be contained in ourProxy Statement for our 2020 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the endof the fiscal year to which this Annual Report on Form 10-K relates pursuant to General Instruction G(3) of Form 10-K.123Table of Contents Part IV Item 15. Exhibits, Financial Statement Schedules(1)Financial Statements.The following documents are included beginning on page F-1 attached hereto and are filed as part of this Annual Reporton Form 10-K.KALA PHARMACEUTICALS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm F‑1Consolidated Balance Sheets as of December 31, 2019 and 2018 F‑2Consolidated Statements of Operations for the years ended December 31, 2019 and 2018 F‑3Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019 and 2018 F‑4Consolidated Statements of Cash Flows for the years ended December 31, 2019, and 2018 F‑5Notes to Consolidated Financial Statements F‑6 (2)Financial Statement Schedules.No financial statement schedules have been filed as part of this Annual Report on Form 10-K because they are notapplicable, not required or because the information is otherwise included in our financial statements or notes thereto.(3)Exhibits.The following is a list of exhibits filed or furnished as part of this Annual Report on Form 10--K.ExhibitNumber Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’scurrent report on Form 8‑K (File No. 001‑38150) filed on July 25, 2017)3.2 Amended and Restated By‑laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’scurrent report on Form 8‑K (File No. 001‑38150) filed on July 25, 2017)4.1 Specimen Stock Certificate evidencing the shares of common stock (incorporated by reference to Exhibit 4.1 to theRegistrant’s registration statement on Form S‑1/A (File No. 333 ‑218936) filed on July 10, 2017)4.2 Third Amended and Restated Registration Rights Agreement of the Registrant, as amended (incorporated byreference to Exhibit 10.1 to the Registrant’s registration statement on Form S‑1 (File No. 333‑218936) filed onJune 23, 2017)4. 3* Description of the Registrant’s Securities Registered under Section 12 of the Exchange Act10.1+ 2009 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to theRegistrant’s registration statement on Form S‑1 (File No. 333‑218936) filed on June 23, 2017)10.2+ Form of Stock Option Agreement under the 2009 Employee, Director and Consultant Equity Incentive Plan(incorporated by reference to Exhibit 10.2 to the Registrant’s registration statement on Form S‑1 (FileNo. 333‑218936) filed on June 23, 2017)10.3+ Amended and Restated 2017 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to theRegistrant’s quarterly report on Form 10-Q (File No. 001-38150) filed on May 9, 2019) 10.4+ 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s registration statement onForm S‑1/A (File No. 333‑218936) filed on July 10, 2017)10.5+ Form of Incentive Stock Option Agreement under 2017 Equity Incentive Plan (incorporated by reference toExhibit 10.5 to the Registrant’s registration statement on Form S‑1/A (File No. 333‑218936) filed on July 10,2017)124Table of ContentsExhibitNumber Description of Exhibit10.6+ Forms of Non‑Qualified Option Agreement under 2017 Equity Incentive Plan (incorporated by reference toExhibit 10.6 to the Registrant’s registration statement on Form S‑1/A (File No. 333‑218936) filed on July 10,2017)10.7† Exclusive License Agreement, dated November 10, 2009, by and between the Registrant and The Johns HopkinsUniversity, as amended by the First Amendment dated November 19, 2012, the Second Amendment dated May 23,2014 and the Third Amendment dated August 26, 2014 (incorporated by reference to Exhibit 10.7 to theRegistrant’s registration statement on Form S‑1 (File No. 333‑218936) filed on June 23, 2017)10.8† Settlement and License Agreement, dated October 24, 2014, by and between the Registrant and GrayBug, LLC(incorporated by reference to Exhibit 10.8 to the Registrant’s registration statement on Form S‑1 (FileNo. 333‑218936) filed on June 23, 2017)10.9+ Inducement Stock Option Agreement by and between the Registrant and Eric L. Trachtenberg (incorporated byreference to Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q (File No. 001‑38150) filed on August 9,2018)10.10+ Letter Agreement, dated March 25, 2018, by and between the Registrant and Eric L. Trachtenberg (incorporated byreference to Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q (File No. 001‑38150) filed on August 9,2018)10.11+ Amended and Restated Letter Agreement, dated September 10, 2015, by and between the Registrant and MarkIwicki, as amended by the First Amendment, dated September 28, 2017 (incorporated by reference to Exhibit 10.1to the Registrant’s quarterly report on Form 10‑Q (File No. 011‑38150) filed on November 7, 2017)10.12+ Letter Agreement, dated November 6, 2017, by and between the Registrant and Todd Bazemore (incorporated byreference to Exhibit 10.12 of the Registrant’s annual report on Form 10-K (File No. 011‑38150) filed on April 2,2018)10.13+ Amended and Restated Letter Agreement, dated May 10, 2016, by and between the Registrant and Kim Brazzell(incorporated by reference to Exhibit 10.13 to the Registrant’s registration statement on Form S‑1 (FileNo. 333‑218936) filed on June 23, 2017)10.14+ Form of Indemnification Agreement between the Registrant and each of its Executive Officers and Directors(incorporated by reference to Exhibit 10.14 to the Registrant’s registration statement on Form S‑1/A (FileNo. 333‑218936) filed on July 10, 2017)10.15† Exclusive License Agreement, effective as of May 1, 2017, by and between the Registrant and The Johns HopkinsUniversity (incorporated by reference to Exhibit 10.15 to the Registrant’s registration statement on Form S‑1 (FileNo. 333‑218936) filed on June 23, 2017)10.16† Assignment, dated April 26, 2017, by and between the Registrant and The Johns Hopkins University (incorporatedby reference to Exhibit 10.16 to the Registrant’s registration statement on Form S‑1 (File No. 333‑218936) filed onJune 23, 2017)10.17† Assignment, dated April 26, 2017, by and between the Registrant and The Johns Hopkins University (incorporatedby reference to Exhibit 10.17 to the Registrant’s registration statement on Form S‑1 (File No. 333‑218936) filed onJune 23, 2017)10.18† Amended and Restated Master Services Agreement, dated October 4, 2017, by and between the Registrant andAlliance Contract Pharma, LLC (incorporated by reference to Exhibit 10.18 of the Registrant’s annual report onForm 10-K (File No. 011‑38150) filed on April 2, 2018)10.19† Commercial Supply Agreement, dated June 27, 2016, by and between the Registrant and Catalent PharmaSolutions, LLC (incorporated by reference to Exhibit 10.19 to the Registrant’s registration statement on Form S‑1(File No. 333‑218936) filed on June 23, 2017)10.20† Manufacturing and Supply Agreement, dated January 10, 2017, by and between the Registrant and ChemoIberica SA (incorporated by reference to Exhibit 10.20 to the Registrant’s registration statement on Form S‑1 (FileNo. 333‑218936) filed on June 23, 2017)10.21† Amendment No. 1 to Commercial Supply Agreement, dated February 16, 2018, by and between the Registrant andCatalent Pharma Solutions, LLC (incorporated by reference to Exhibit 10.21 of the Registrant’s annual report onForm 10-K (File No. 011‑38150) filed on April 2, 2018)125Table of ContentsExhibitNumber Description of Exhibit10.22 Lease, dated as of February 28, 2018, by and between the Registrant and 480 Arsenal Group LLC (incorporated byreference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed on March 12, 2018)10.23† Fourth Amendment to Exclusive License Agreement, dated June 22, 2018, by and between the Johns HopkinsUniversity and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report onForm 10-Q (File No. 001‑38150) filed on August 9, 2018)10.24 Credit Agreement, dated as of October 1, 2018, among the Registrant, as the Borrower, certain subsidiaries of theBorrower, as the Guarantors, Athyrium Opportunities III Acquisition LP, as the Administrative Agent, and thelenders (incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K (FileNo. 001‑38150) filed on October 2, 2018)10.25 Security Agreement, dated October 1, 2018, by and among the Registrant and Athyrium Opportunities IIIAcquisition LP (incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K (FileNo. 001‑38150) filed on October 2, 2018)10.26 Pledge Agreement, dated October 1, 2018, by and among the Registrant and Athyrium Opportunities IIIAcquisition LP (incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K (FileNo. 001‑38150) filed on October 2, 2018)10.27 Common Stock Purchase Warrant, dated October 1, 2018, by and among the Registrant and AthyriumOpportunities III Acquisition LP (incorporated by reference to Exhibit 10.4 to the Registrant’s current report onForm 8-K (File No. 001‑38150) filed on October 2, 2018)10.28+ Form of Inducement Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’squarterly report on Form 10-Q (File No. 001‑38150) filed on November 8, 2018) 10.29 Sales Agreement, dated August 9, 2018, by and between the Registrant and Jefferies LLC (incorporated byreference to Exhibit 1.2 to the Registrant’s registration statement on Form S-3 (File No. 333‑226748) filed onAugust 9, 2018) 10.30+ Form of Amendment to Offer Letters (incorporated by reference to Exhibit 10.30 to the Registrant’s annual reporton Form 10-K (File No. 001-38150) filed on March 12, 2019)21.1* Subsidiaries of the Registrant23.1* Consent of Deloitte & Touche LLP31.1* Rule 13a-14(a) Certification of Principal Executive Officer31.2* Rule 13a-14(a) Certification of Principal Financial Officer32.1* Certification of Principal Executive Officer pursuant to 18 U.S.C. §135032.2*Certification of Principal Financial Officer pursuant to 18 U.S.C. §1350101.INS XBRL Instance Document.101.SCH XBRL Taxonomy Extension Schema Document.101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF XBRL Taxonomy Extension Definition Linkbase Document.101.LAB XBRL Taxonomy Extension Label Linkbase Document.101.PREXBRL Taxonomy Extension Presentation Linkbase Document.* Filed herewith.† Confidential treatment granted as to portions of the exhibit. Confidential materials omitted and filed separately with theSecurities and Exchange Commission.+ Management contract or compensatory plan or arrangement filed in response to Item 15(a)(3) of the Instructions to theAnnual Report on Form 10-K. 126Table of ContentsItem 16. Form 10-K SummaryNone.127Table of Contents SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto duly authorized. KALA PHARMACEUTICALS, INC.. Dated: February 12, 2020By:/s/ Mark Iwicki Mark Iwicki Chief Executive Officer, President andChairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated./s/ Mark IwickiMark Iwicki President, Chief Executive Officer and Chairmanof Board of Directors (Principal ExecutiveOfficer) February 12, 2020 /s/ Mary ReumuthMary Reumuth Chief Financial Officer (Principal Financial andAccounting Officer) February 12, 2020 /s/ Gregory GrunbergGregory Grunberg, M.D. Director February 12, 2020 /s/ Andrew I. KovenAndrew I. Koven Director February 12, 2020 /s/ Robert PaullRobert Paull Director February 12, 2020 /s/ Gregory PerryGreg Perry Director February 12, 2020 /s/ Howard RosenHoward Rosen Director February 12, 2020 /s/ Rajeev ShahRajeev Shah Director February 12, 2020 128Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Kala Pharmaceuticals, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Kala Pharmaceuticals, Inc. and its subsidiary (the“Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity, and cashflows for each of the two years in the period ended December 31, 2019 and the related notes (collectively referred to as the“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of theCompany as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in theperiod ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion onthe Company’s financial statements based on our audits. We are a public accounting firm registered with the Public CompanyAccounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company inaccordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due toerror or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control overfinancial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reportingbut not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due toerror or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accountingprinciples used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Deloitte & Touche LLPBoston, MassachusettsFebruary 12, 2020We have served as the Company's auditor since 2013. F-1Table of Contents PART I – FINANCIAL INFORMATION Item 1.Consolidated Financial Statements.KALA PHARMACEUTICALS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts) December 31, December 31, 2019 2018 Assets Current assets: Cash $85,449 $170,898Accounts receivable, net 11,563 —Inventory 4,648 4,095Prepaid expenses and other current assets 3,824 2,035Total current assets 105,484 177,028Non-current assets: Property and equipment, net 2,698 2,166Long-term inventory 3,778 —Right-of-use assets 29,781 29,566Restricted cash 12,582 12,206Total assets $154,323 $220,966Liabilities and Stockholders' Equity Current liabilities: Accounts payable $2,518 $5,446Accrued expenses and other current liabilities 20,929 11,101Current portion of lease liabilities 1,327 463Total current liabilities 24,774 17,010Long-term liabilities: Long-term lease liabilities - less current portion 28,673 28,752Long-term debt 71,184 70,226Total long-term liabilities 99,857 98,978Total liabilities 124,631 115,988Commitments and Contingencies (Note 14) Stockholders' equity: Common stock, $0.001 par value; 120,000,000 shares authorized as of December 31, 2019 andDecember 31, 2018; 36,086,254 and 33,863,077 shares issued and outstanding as ofDecember 31, 2019 and December 31, 2018, respectively 36 34Additional paid-in capital 325,112 306,053Accumulated deficit (295,456) (201,109)Total stockholders' equity 29,692 104,978Total liabilities and stockholders' equity $154,323 $220,966 The accompanying notes are an integral part of these consolidated financial statements. F-2Table of ContentsKALA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except share and per share amounts) Year Ended December 31, 2019 2018 Product revenues, net $6,074 $ —Costs and expenses: Cost of product revenues 2,008 —Selling, general and administrative 65,015 35,431Research and development 27,275 29,290Total costs and expenses 94,298 64,721Loss from operations (88,224) (64,721)Other income (expense): Interest income 2,357 1,687Interest expense (8,480) (3,314)Loss on extinguishment of debt — (390)Total other expense (6,123) (2,017)Net loss $(94,347) $(66,738)Net loss per share—basic and diluted $(2.76) $(2.49)Weighted average shares outstanding—basic and diluted 34,209,756 26,753,906 The accompanying notes are an integral part of these consolidated financial statements F-3Table of ContentsKALA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share amounts) Common Stock Additional Total $0.001 Par Value Paid-In Accumulated Stockholders' Shares Amount Capital Deficit EquityBalance as of January 1, 2018 24,538,309 $25 $224,025 $(134,371) $89,679Common stock offering, net of issuance cost andunderwriting fees of $5.0 million 8,625,000 9 66,123 66,132At the market offering, net of sales agent commission andfees of $0.1 million 518,135 — 4,634 4,634Issuance of equity classified warrants, net of issuance cost 1,900 1,900Exercise of stock options 181,633 — 530 530Stock-based compensation expense 8,841 8,841Net loss (66,738) (66,738)Balance as of December 31, 2018 33,863,077 $34 $306,053 $(201,109) $104,978At the market offering, net of sales agent commission andfees of $0.3 million 2,074,799 2 8,423 8,425Exercise of stock options 24,714 — 42 42Issuance under employee stock purchase plan 123,664 — 545 545Stock-based compensation expense 10,049 10,049Net loss (94,347) (94,347)Balance as of December 31, 2019 36,086,254 $36 $325,112 $(295,456) $29,692The accompanying notes are an integral part of these consolidated financial statements. F-4Table of ContentsKALA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2019 2018 Cash flows from operating activities: Net loss $(94,347) $(66,738) Adjustments to reconcile net loss to cash used in operating activities: Depreciation 843 352 Non-cash operating lease cost 1,773 603 Loss on extinguishment of debt — 390 Amortization of debt discount and other non-cash interest 958 274 Stock-based compensation 9,991 8,615 Change in operating assets and liabilities: Accounts receivable (11,563) — Prepaid expenses and other current assets (1,789) (1,387) Inventory (4,271) (3,868) Accounts payable (2,770) 4,088 Accrued expenses and other current liabilities 9,630 3,968 Lease liabilities and other long-term liabilities (1,175) (418) Net cash used in operating activities (92,720) (54,121) Cash flows from investing activities: Purchases of property and equipment (1,335) (1,578) Net cash used in investing activities (1,335) (1,578) Cash flows from financing activities: Proceeds from common stock offerings, net of underwriters' discounts and offering cost 8,425 70,766 Proceeds from venture debt, net of debt issuance costs of $0 and $50 — 2,728 Proceeds from issuance of debt and warrants, net of debt issuance costs of $0 and $3,073 — 71,927 Payment of principal and prepayment penalty on venture debt — (21,847) Payment of principal on finance lease (30) — Proceeds from exercise of stock options and issuance of common stock under employee stockpurchase plan 587 530 Net cash provided by financing activities 8,982 124,104 Net decrease in cash and restricted cash: (85,073) 68,405 Cash and restricted cash at beginning of period 183,104 114,699 Cash and restricted cash at end of period $98,031 $183,104 Reconciliation of cash and restricted cash: Cash and restricted cash at end of period $98,031 $183,104 Less restricted cash (12,582) (12,206) Cash at end of period $85,449 $170,898 Non-cash investing and financing activities: Right-of-use asset obtained in exchange for finance lease obligation $136 $ — Purchases of property and equipment in accrued expenses 195 — Purchases of property and equipment in accounts payable — 155 Supplemental disclosure: Cash paid for interest $7,522 $3,041 Right-of-use assets obtained in exchange of operating lease obligations 1,852 29,427 The accompanying notes are an integral part of these consolidated financial statements. F-5Table of ContentsKALA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1: Nature of businessNature of Business— Kala Pharmaceuticals, Inc. (the “Company”) was incorporated on July 7, 2009, and is abiopharmaceutical company focused on the discovery, development and commercialization of innovative therapies for diseases ofthe eye. The Company has applied its AMPPLIFY mucus-penetrating particle (“MPP”) Drug Delivery Technology toloteprednol etabonate (“LE”), a corticosteroid designed for ocular applications, resulting in the U.S. Food and DrugAdministration’s (the “FDA”) approval of INVELTYS (loteprednol etabonate ophthalmic suspension) 1% as the first and onlytopical twice-daily ocular corticosteroid for treatment of post-operative inflammation and pain following ocular surgery, and thedevelopment of its lead product candidate, KPI-121 0.25%, which if approved it plans to commercialize under the brand nameEYSUVIS (loteprednol etabonate ophthalmic suspension) 0.25%, for the temporary relief of the signs and symptoms of dry eyedisease. In October 2018, the Company submitted a New Drug Application (“NDA”) to the FDA for EYSUVIS. In August 2019,the Company announced that it received a complete response letter (“CRL”) from the FDA regarding this NDA. The FDAindicated that efficacy data from an additional clinical trial will be needed to support a resubmission of the NDA. Based upon theprevious recommendation of the FDA, the Company initiated an additional Phase 3 clinical trial (“STRIDE 3”) (STRIDE- ShortTerm Relief In Dry Eye), in the third quarter of 2018, which the Company expects will serve as the basis for its response to theCRL. The Company is targeting topline data for STRIDE 3 in the first quarter of 2020 and resubmission of the NDA in the secondquarter of 2020. The Company is evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosingregimens for the temporary relief of the signs and symptoms of dry eye disease and for potential chronic treatment of dry eyedisease. The Company is also evaluating compounds in its receptor Tyrosine Kinase Inhibitor program (the “rTKI program”), thatinhibit the vascular endothelial growth factor (“VEGF”), pathway, for the potential treatment of a number of retinal diseases andnovel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal ofeliminating the risk of IOP increase and cataract formation.In January 2019, the Company launched its first commercial product, INVELTYS, in the United States. The Companyis currently engaged in the commercialization of INVELTYS, research and development activities, raising capital and recruitingskilled personnel. The Company is subject to a number of risks similar to those of other companies conducting high‑risk, researchand development of pharmaceutical product candidates and launching a product for the first time. Principal among these risks aredependence on key individuals and intellectual property, competition from other products and companies and the technical risksassociated with the successful research, development and marketing of its product candidates. The Company’s success isdependent upon its ability to raise additional capital in order to fund ongoing and future research and development, obtainregulatory approval of its product candidates, successfully commercialize its products, generate revenue, meet its obligations,and, ultimately, attain profitable operations.October 2018 and Subsequent Financings— On August 9, 2018, the Company filed a shelf registration statement onForm S-3 with the SEC, which was declared effective on August 27, 2018 (the “Shelf Registration”). Under the ShelfRegistration, the Company may offer and sell up to $250.0 million of a variety of securities including common stock, preferredstock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities duringthe three-year period that commenced upon the Shelf Registration becoming effective. On October 5, 2018, the Company sold7,500,000 shares of the Company’s common stock (the “Shares”) in an underwritten offering pursuant to the Shelf Registration ata public offering price of $8.25 per share, before underwriting discounts and commissions. In addition, the underwriters weregranted an overallotment option to purchase an additional 1,125,000 shares of the common stock at the same public offeringprice, less underwriting discounts and commissions (the “Overallotment Shares”). On October 11, 2018, the underwritersexercised in full their option to purchase the Overallotment Shares. The total number of Shares and Overallotment Shares sold bythe Company in the offering was 8,625,000 shares, resulting in net proceeds to the Company, after underwriting discounts andoffering expenses, of approximately $66.1 million.F-6®®TMTable of ContentsIn connection with the filing of the Shelf Registration, the Company entered into a sales agreement with Jefferies, LLC(the “Sales Agreement”) pursuant to which the Company may issue and sell, from time to time, up to an aggregate of $50.0million of its common stock in an at-the-market equity offering (“ATM Offering”) through Jefferies, LLC, as sales agent. As ofDecember 31, 2019, the Company issued 2,592,934 shares of its common stock under the ATM Offering, resulting in netproceeds to the Company of approximately $13.1 million. In the period beginning January 1, 2020 through the issuance date ofthese consolidated financial statements, the Company issued and sold an additional 583,411 shares of its common stock underthe ATM Offering, resulting in net proceeds to the Company of approximately $2.2 million. As of December 31, 2019, there wasapproximately $36.4 million shares of common stock remaining under the ATM Offering that the Company may issue and sell inthe future and, excluding the funds designated to be offered under the ATM Offering, there was approximately $128.8 million ofsecurities available to be issued under the Shelf Registration. On October 1, 2018, the Company entered into a credit agreement (the “Athyrium Credit Facility”), with AthyriumOpportunities III Acquisition LP (“Athyrium”). The Athyrium Credit Facility provides for a Term Loan A in the aggregateprincipal amount of $75.0 million (the “Athyrium Term Loan A”), and a Term Loan B in the aggregate principal amount of $35.0million (the “Athyrium Term Loan B”). On October 1, 2018, the Company borrowed the entire principal amount of the AthyriumTerm A Loan. The Company may draw down the Athyrium Term Loan B upon either (i) FDA approval of EYSUVIS for a dryeye disease indication or (ii) reaching certain net product revenues for INVELTYS, in each case on or prior to June 30, 2020;however, the Company does not expect to satisfy either such condition on or prior to June 30, 2020 and, as a result, does notcurrently expect that it will be eligible to draw down any of the Athyrium Term Loan B funds.Note 2: Summary of Significant Accounting PoliciesPrinciples of consolidation—The accompanying consolidated financial statements include the accounts of KalaPharmaceuticals, Inc. and its wholly owned subsidiary, Kala Pharmaceuticals Security Corporation, which is a Massachusettssubsidiary created to buy, sell and hold securities. All intercompany transactions and balances have been eliminated.Basis of Presentation—The accompanying consolidated financial statements have been prepared on a going concernbasis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. TheCompany has generated only limited revenues to date from product sales and has incurred recurring losses and negative cashflows from operations, including a net loss of $94.3 million and $66.7 million, for the years ended December 31, 2019 and 2018,respectively, and used cash in operations of $92.7 million and $54.1 million, in the years ended December 31, 2019 and 2018,respectively. The Company has financed its operations to date primarily through proceeds from its initial public offering ofcommon stock (“IPO”), private placements of preferred stock, convertible debt financings, borrowings under credit facilities,warrants, public offerings of common stock and sales of its common stock under its ATM Offering facility. The Company hasdevoted substantially all of its financial resources and efforts to research and development, including preclinical studies andclinical trials and engaging in activities to launch and commercialize INVELTYS.The Company expects to continue to incur significant expenses and operating losses for the next several years. Netlosses may fluctuate significantly from quarter-to-quarter and year-to-year. The Company also expects that its existing cash onhand as of December 31, 2019, together with anticipated net revenue from sales of INVELTYS, will enable it to fund its plannedoperations, lease and debt service obligations, and capital expenditure requirements for at least 12 months from the date of theseconsolidated financial statements. This evaluation is based on the Company’s current operating plan which include projected netrevenue from sales of INVELTYS. If the Company does not achieve its projected net revenue, it believes it has the ability tomanage spending under its operating plan in order to fund operations for at least 12 months from the date of these consolidatedfinancial statements. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable.As a result, the Company could deplete its available capital resources sooner than it currently expects. The Company has basedthese estimates on assumptions that may prove to be wrong, and the Company’s operating projections including its projected netrevenue, may change as a result of many factors currently unknown.F-7Table of Contents Reclassifications— Certain reclassifications, primarily related to gross deferred tax assets and liabilities, have beenmade to prior period amounts to conform to the current period financial statement presentation. Use of Estimates— The preparation of consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue, expense, and related disclosures. The Company bases estimates andassumptions on historical experience when available and on various factors that it believes to be reasonable under thecircumstances. The Company evaluates its estimates and assumptions on an ongoing basis. Estimates and assumptions reliedupon in preparing these consolidated financial statements relate to, but are not limited to, revenue recognition, inventory, thepresent value of lease liabilities and the corresponding right-of-use assets, the fair value of warrants, stock compensation, accruedexpenses and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Actual results maydiffer from these estimates under different assumptions or conditions.Product Revenues, Net— The Company sells INVELTYS, its topical twice-a-day ocular steroid for the treatment ofinflammation and pain following ocular surgery, to wholesalers and/or specialty distributors in the United States (collectively,“Customers”). These Customers subsequently resell the Company’s products to specialty and other retail pharmacies. In additionto agreements with Customers, the Company enters into arrangements with payors that provide for government-mandated and/orprivately-negotiated rebates, chargebacks and discounts for the purchase of our product.The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenuefrom Contracts with Customers. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control ofpromised goods or services, in an amount that reflects the consideration that the entity expects to be entitled in exchange for thosegoods or services. The Company performs the following five steps to recognize revenue under ASC Topic 606: (i) identify thecontract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv)allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entitysatisfies a performance obligation. The Company only recognizes revenue when it is probable that it will collect the considerationto which it is entitled in exchange for the goods or services that will be transferred to the customer.Performance ObligationsThe Company determined that performance obligations are satisfied and revenue is recognized when a customer takescontrol of the Company’s product, which occurs at a point in time. This generally occurs upon delivery of the products tocustomers, at which point the Company recognizes revenue and records accounts receivable. Payment is typically received 70 to90 days after satisfaction of the Company’s performance obligations.Transaction Price and Variable ConsiderationRevenue is measured as the amount of consideration the Company expects to receive in exchange for transferringproducts or services to a customer (“transaction price”). The transaction price for product sales includes variable considerationrelated to chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns. The Company will estimatethe amount of variable consideration that should be included in the transaction price. These estimates take into consideration arange of possible outcomes that are probability-weighted for relevant factors such as the Company’s historical experience,current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customerbuying and payment patterns. These provisions reflect the Company’s best estimates of the amount of consideration to which it isentitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may beconstrained and is included in net sales only to the extent that it is probable that a significant reversal in the amount of thecumulative revenue recognized will not occur in a future period. In general, performance obligations do not include any estimatedamounts of variable consideration that are constrained. Actual amounts of consideration ultimately received may differ from theCompany’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates,which would affect net product revenue and earnings in the period such variances become known. F-8Table of ContentsThe following table summarizes activity in each of the Company’s product revenue provision and allowance categoriesfor the year ended December 31, 2019: Trade Discounts, Allowances and Rebates and Chargebacks (1) Product Returns (2) Incentives (3) Balance at January 1, 2019 $ - $ - -Provision related to current period sales 4,031 321 24,812Credit/payments made (2,248) (141) (14,768)Balance at December 31, 2019 $1,783 $180 $10,044(1)Trade allowances and chargebacks include fees for distribution service fees, prompt pay discounts, and chargebacks. Tradeallowances and chargebacks are deducted from gross revenue at the time revenues are recognized and are recorded as areduction to accounts receivable in the Company’s Consolidated Balance Sheets.(2)Provisions for product returns are deducted from gross revenues at the time revenues are recognized and are included inaccrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.(3)Rebates and incentives includes managed care rebates, government rebates, co-pay program incentives, and sales incentivesand allowances. Provisions for rebates and discounts are deducted from gross revenues at the time revenues are recognizedand are included in accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.As of December 31, 2019, the Company did not have any transaction price allocated to remaining performance obligations andany costs to obtain contracts with customers, including pre-contract costs and set up costs, were immaterial.Accounts Receivable, net— Accounts receivable are reported on the consolidated balance sheets at outstandingamounts due from Customers for product sales. The Company deducts sales discounts for prompt payments and contractual feesfor service arrangements, and chargebacks from accounts receivable. The Company evaluates the collectability of accountsreceivable on a regular basis, by reviewing the financial condition and payment history of Customers, an overall review ofcollections experience on other accounts, and economic factors or events expected to affect future collections experience. Anallowance for doubtful accounts is recorded when a receivable is deemed to be uncollectible.The Company recorded no allowance for doubtful accounts as of December 31, 2019. The Company recorded anallowance of approximately $1.8 million for expected sales discounts, related to prompt pay discounts and contractual fee forservice arrangements, to wholesalers and distributors as of December 31, 2019.Cost of Product Revenues—The cost of product revenues consists primarily of materials, third-party manufacturingcosts, freight and distribution costs, royalty expense, allocation of labor, quality control and assurance, reserves for defectiveinventory, and other manufacturing overhead costs. The Company expenses cost of product revenues related to productcandidates as research and development expenses prior to regulatory approval in the respective territory. The Company receivedU.S. regulatory approval for INVELTYS on August 22, 2018.Cash and Concentration of Credit Risk—Financial instruments that potentially expose the Company to concentrationsof credit risk consist primarily of cash and accounts receivable. Periodically, the Company maintains deposits in accreditedfinancial institutions in excess of federally insured limits. The Company deposits its cash in financial institutions that it believeshave high credit quality and has not experienced any losses on such accounts and does not believe it is exposed to any unusualcredit risk beyond the normal credit risk associated with commercial banking relationships.Three Customers comprised 10% or more of the Company’s accounts receivable balance as of December 31, 2019.These Customers comprised 41%, 35% and 23% of the accounts receivable balance, respectively, as of December 31, 2019. Todate, the Company has not experienced any losses with respect to the collection of itsF-9Table of Contentsaccounts receivable and believes that its entire accounts receivable balances is collectible as of December 31, 2019. The samethree Customers comprised 10% or more of the Company’s revenue during the year ended December 31, 2019. These Customerscomprised 39%, 33% and 26% of revenue, respectively. The Company has no financial instruments with off‑balance sheet risk ofloss.Restricted Cash—As of December 31, 2019 and 2018, the Company had restricted cash of $12.6 million and $12.2million, respectively, which represents cash held to satisfy its financial covenant (See Note 8) and serve as collateral for theCompany’s vehicle fleet lease, credit cards and its facility lease in Watertown, Massachusetts. This cash is classified as a non-current asset in the accompanying consolidated balance sheets.Inventory—Inventory is stated at the lower of cost or net realizable value, on a first-in, first-out (“FIFO”) method.Costs include amounts related to third party manufacturing, transportation, internal labor and overhead. Capitalization of costs asinventory begins when the product has received regulatory approval. The Company expenses inventory costs related to productcandidates as research and development expenses prior to regulatory approval in the respective territory, even if this inventorymay later be sold. For INVELTYS, capitalization of costs as inventory began upon U.S. regulatory approval on August 22, 2018.Inventory produced that will be used in a promotional sample program is expensed to selling, general and administrative expensewhen it is selected for use and shipped as part of a marketing program. Long-term inventory includes inventory with ananticipated sale or consumption beyond one year based on the Company’s forecasted expectations.Leases—At the inception of an arrangement the Company determines whether the arrangement is or contains a lease.Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, ifapplicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one-year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of leasepayments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such,the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basisover a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.The components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-leasecomponents (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes,insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must beallocated based on fair values to the lease components and non-lease components. Although separation of lease and non-leasecomponents is required, certain practical expedients are available to entities. Entities electing the practical expedient would notseparate lease and non-lease components. Rather, they would account for each lease component and the related non-leasecomponent together as a single component. The Company’s facilities operating leases have lease and non-lease componentswhich the Company has elected to use the practical expedient and account for each lease component and related non-leasecomponent as one single component. The lease component results in a right-of-use asset being recorded on the balance sheet andamortized as lease expense on a straight-line basis to the statements of operations.Property and Equipment, net—Property and equipment are recorded at cost. Depreciation is provided using thestraight‑line method over the estimated useful lives of the related assets. Depreciation expense is included in operations.Laboratory equipment and office and computer equipment is depreciated over three to five years. Leasehold improvements aredepreciated over the shorter of their useful life or the life of the lease. Major additions and upgrades are capitalized; maintenanceand repairs, which do not improve or extend the life of the respective assets, are expensed as incurred. Upon retirement or sale,the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain orloss is included in loss from operations.Patent Costs—Costs to secure and defend patents are expensed as incurred and are classified as selling, general andadministrative expenses in the Company’s consolidated statements of operations.F-10Table of ContentsImpairment of Long‑Lived Assets—Long‑lived assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, the Companycompares the carrying amounts of the assets to their undiscounted expected future cash flows. If the undiscounted cash flows areinsufficient to recover the carrying value, the assets are recorded at the lesser of the carrying value or fair value. For the yearsended December 31, 2019 and 2018, no impairments were recorded.Segment Information—Operating segments are identified as components of an enterprise about which separatediscrete financial information is made available for evaluation by the chief operating decision maker (“CODM”) in makingdecisions regarding resource allocation and assessing performance. The CODM is the Company’s Chief Executive Officer. TheCompany manages its operations as a single segment for the purposes of assessing performance and making operating decisions.The Company’s singular focus is on the development and commercialization of therapeutics using its proprietary AMPPLIFYtechnology. All of the Company’s tangible assets are held in the United States. To date, all of the Company’s revenue has beengenerated in the United States.Research and Development Costs—Research and development expenses consist of expenses incurred in performingresearch and development activities, including compensation and benefits for full‑time research and development employees, anallocation of facilities expenses, overhead expenses, payments to universities under the Company’s license agreements and otheroutside expenses. Research and development costs are expensed as incurred. Research and development costs that are paid inadvance of performance, including nonrefundable prepayments for goods or services, are deferred and capitalized as a prepaidexpense. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it isno longer expected that the goods will be delivered or the services rendered.Accrued Expenses— The Company accrues for variable consideration related to rebates, sales incentives andallowances, distribution service fees, and returns. Such estimates are recorded in the same period the related revenue isrecognized, resulting in a reduction of product revenue and the establishment of the accrued expense. The Company also accruesexpenses related to development activities performed by third parties based on an evaluation of services received and effortsexpended pursuant to the terms of the contractual arrangements. Payments under some of these contracts depend on clinical trialmilestones. There may be instances in which payments made to the Company’s vendors will exceed the level of services providedand result in a prepayment of expenses. In accruing service fees, the Company estimates the time period over which services willbe performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the levelof effort varies from the estimate, the Company will adjust the accrual or prepaid expense accordingly.Stock‑Based Compensation—The Company accounts for all stock‑based awards granted as compensation expense atfair value. The Company generally issues stock option awards with the measurement date for awards as the date of grant.Stock‑based compensation costs are recognized as expense over the employees’ requisite service period, which is the vestingperiod, on a straight‑line basis. Stock‑based compensation is classified in the accompanying consolidated statements of operationsbased on the function to which the related services are provided, or capitalized with inventory until related expense is recognized.The Company recognizes compensation expense for the portion of awards that have vested. After the adoption ofAccounting Standards Update (“ASU”) 2016-09, described in further detail below, forfeitures are recorded as they occur.The fair value of each stock option grant is estimated on the date of grant using the Black‑Scholes option‑pricing model.The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates. TheCompany lacks sufficient company‑specific historical and implied volatility information. Therefore, it estimates its expectedstock volatility based on the historical volatility of a publicly traded set of peer companies and will continue to do so until it hasadequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock optionshas been determined utilizing the “simplified” method for awards that qualify as “plain‑vanilla” options. The risk‑free interest rateis determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periodsapproximately equal to the expected termF-11Table of Contentsof the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock anddoes not expect to pay any cash dividends in the foreseeable future.Common Stock Valuation Prior to the IPO—Through the consummation of the IPO in July 2017, due to the absenceof an active market for the Company’s common stock, the Company utilized methodologies in accordance with the framework ofthe American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately‑Held Company EquitySecurities Issued as Compensation, to estimate the fair value of its common stock. In determining the exercise prices for optionsgranted, the Company has considered the estimated fair value of the common stock as of the measurement date. The estimatedfair value of the common stock has been determined at each grant date based upon a variety of factors, including the illiquidnature of the common stock, arm’s‑length sales of the Company’s capital stock (including redeemable convertible preferredstock), the effect of the rights and preferences of the preferred shareholders, and the prospects of a liquidity event. Among otherfactors are the Company’s financial position and historical financial performance, the status of technological developments withinthe Company’s research, the composition and ability of the current research and management team, an evaluation or benchmarkof the Company’s competition, and the current business climate in the marketplace. Significant changes to the key assumptionsunderlying the factors used could have resulted in different fair values of common stock at each valuation date.Income Taxes—Deferred tax assets and liabilities are recognized for the expected future tax consequences of eventsthat have been included in the Company’s consolidated financial statements and tax returns. Deferred tax assets and liabilities aredetermined based upon the differences between the consolidated financial statement carrying amounts and the tax basis ofexisting assets and liabilities and for loss and credit carryforwards using enacted tax rates expected to be in effect in the years inwhich the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely thannot that some portion or all of the deferred tax asset will not be realized.The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positionsand other issues. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not thatthe position will be sustained on examination by the taxing authorities based on the technical merits of the position. The taxbenefits recognized in the consolidated financial statements from such a position is measured based on the largest benefit that hasa greater than 50% likelihood of being realized upon ultimate settlement. As a result, reserves are based on a determination ofwhether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realizedfollowing resolution of any potential contingencies present.Net Loss per Share—Basic net loss per share is computed using the weighted‑average number of common sharesoutstanding during the period. Diluted net loss per share is computed using the weighted average number of common sharesoutstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including theassumed exercise of stock options and warrants.The weighted average number of common shares included in the computation of diluted net loss gives effect to allpotentially dilutive common equivalent shares, including outstanding stock options, and warrants. Common stock equivalentshares are excluded from the computation of diluted net loss per share if their effect is antidilutive. In periods in which theCompany reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders isthe same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to havebeen issued if their effect is anti‑dilutive. The Company reported a net loss attributable to common stockholders for the yearsended December 31, 2019 and 2018.Comprehensive Loss—Comprehensive loss is equal to net loss for the periods presented.Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) effective January 1, 2018. ASU 2014-09 statesthat an entity should recognize revenue based on the transfer of promised goods or services to customers in an amount thatreflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASBsubsequently issued amendments to ASU 2014-09 that had the same effective date ofF-12Table of ContentsJanuary 1, 2018. Revenue from sales of INVELTYS, as well as any other future revenue arrangements, are and will be recognizedunder the provisions of ASU 2014-09. While the Company adopted ASU 2014-09 effective January 1, 2018, the Company didnot generate any revenue from product sales prior to 2019.In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation Improvements to NonemployeeShare-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 substantially aligns accounting for share-based payments toemployees and non-employees. This ASU became effective for annual periods beginning after December 15, 2018, includinginterim periods within that period, and early adoption is permitted. The new standard was effective on January 1, 2019 and theadoption of ASU 2018-07 did not have an impact on the Company’s consolidated financial statements and related disclosures.In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement ofCredit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 significantly changes the impairment model for mostfinancial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit lossesexpected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowancesfor credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginningDecember 1, 2020 and subsequent interim periods. The adoption of this standard is not expected to have a material impact on theCompany’s consolidated financial statements and related disclosures.In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements forFair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of disclosures in the notes tofinancial statements related to fair value measurements in Topic 820. This ASU will become effective for annual periodsbeginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The adoptionof this standard is not expected to have a material impact on the Company’s consolidated financial statements and relateddisclosures.In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software -Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU2018-15”). ASU 2018-15 aligns the accounting for implementation costs incurred in a hosting arrangement that is a servicecontract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This ASU willbecome effective for annual periods beginning after December 15, 2019, including interim periods within that period, and earlyadoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidatedfinancial statements and related disclosures. Note 3: InventoryCurrent and long-term inventory consist of the following (in thousands): December 31, December 31, 2019 2018 Raw materials $1,387 $350Work in progress 4,166 3,357Finished goods 2,873 388Total inventory $8,426 $4,095 As of December 31, 2019, the Company had $4.6 million of current inventory and $3.8 million of long-term inventory.As of December 31, 2018, the Company had $4.1 million of current inventory and no long-term inventory.F-13Table of ContentsNote 4: Prepaid Expenses and Other Current AssetsPrepaid Expenses and Other Current Assets, consists of the following (in thousands): December 31, December 31, 2019 2018 Insurance $906 $532Deposits 699 —Non-trade receivables 1,535 Receivable for construction related to facility — 1,026Other 684 477Prepaid expenses and other current assets $3,824 $2,035 Note 5: Property and Equipment, NetProperty and equipment, net, consists of the following (in thousands): December 31, December 31, 2019 2018 Equipment $2,627 $2,400Leasehold improvements 356 114Computer hardware and software 892 599Furniture and office equipment 1,144 67Construction in progress 195 804Property and equipment—at cost 5,214 3,984Less: Accumulated depreciation (2,516) (1,818)Property and equipment—net $2,698 $2,166 Depreciation expense for the years ended December 31, 2019 and 2018 was $0.8 million and $0.4 million respectively. Note 6: Accrued ExpensesAccrued expenses consist of the following (in thousands): December 31, December 31, 2019 2018 Compensation and benefits $6,502 $5,352Accrued revenue reserves (1) 9,482 —Development costs 1,600 1,223Professional services 760 1,019Commercial cost 930 1,722Contract manufacturing 630 434Payable related to construction of facility — 1,026Other 1,025 325Accrued expenses $20,929 $11,101(1)As of December 31, 2019, $0.7 million of additional revenue reserves were in accounts payable.F-14Table of ContentsNote 7: LeaseOperating leasesThe Company entered into a three‑year lease agreement for its former headquarters (the “Waltham Lease”) onSeptember 30, 2013, with a commencement date of February 1, 2014. On June 30, 2016, the lease was amended to extend theterm from January 31, 2017 to January 31, 2019. In connection with the lease agreement, the Company issued a letter of credit tothe landlord for $0.1 million. The Company secured the letter of credit for the full amount of the letter with cash on deposit,which was reported as restricted cash as of December 31, 2018. Upon the expiration of the lease term on January 31, 2019, thedeposit was returned.On February 28, 2018, the Company entered into a lease agreement with 480 Arsenal Group LLC (the “Arsenal Group”)for the lease of a portion of the building located at 490 Arsenal Way Watertown, Massachusetts (the “Watertown Lease”). Theinitial term of the Watertown Lease is eight years with an option to extend for an additional five years, which are recognized aspart of our right of use asset and lease liability. The Company occupied the premises in Watertown in early 2019 as its corporateheadquarters and for research and development. The lease commencement date was November 15, 2018 and the Companyconcluded that it controlled the space, as of the lease commencement date.The Company identified and assessed the following significant assumptions in recognizing the right-of-use asset andcorresponding liability for the Watertown Lease.·Expected lease term - The expected lease term includes both contractual lease periods and, when applicable,cancelable option periods where failure to exercise such options would result in an economic penalty.·Incremental borrowing rate- As the Company’s lease does not provide an implicit rate, the Company estimated theincremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair valueanalysis of the Company’s Athyrium Credit Facility and adjusting it for factors that reflect the profile of securedborrowing over the expected term of the lease.The Company recognized the right-of-use asset and corresponding lease liability, by calculating the present value oflease payments, discounted at 9.9%, the Company’s estimated incremental borrowing rate, over the 13 year expected term. Asof December 31, 2019, the remaining lease term on the Watertown Lease was 11.83 years. Variable lease expense for theWatertown Lease, includes real estate taxes, common area maintenance, and management fees.In connection with the Watertown Lease, the Company issued a letter of credit to the Arsenal Group for $2.0 million.The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cashon the Consolidated Balance Sheets.F-15Table of ContentsVehicle Fleet leaseDuring the year ended December 31, 2019, the Company entered into a master fleet lease agreement (the “Vehicle FleetLease”), pursuant to which it currently leases 65 vehicles. In connection with the Vehicle Fleet Lease, the Company issued a letterof credit for $0.5 million, which is reported as restricted cash on the Consolidated Balance Sheet. The Vehicle Fleet Lease has anexpected term of three years, which commenced upon the delivery of the vehicles in March 2019. As of December 31, 2019, theremaining lease term was 2.2 years.The components of lease expense and related cash flows were as follows (in thousands): Years Ended December 31, 2019 2018Lease cost Operating lease cost $4,614 $1,099Short-term lease cost — 183Variable lease cost 1,766 83Total lease cost $6,380 $1,365 Operating cash outflows from operating leases $5,445 $988 Maturities of lease liability due under these lease agreements as of December 31, 2019 are as follows (in thousands):Years Ending December 31, Operating LeaseObligations (1) Finance LeaseObligation (2) Total2020 $ 4,141 $ 41 $ 4,1822021 4,233 41 4,2742022 4,021 41 4,0622023 3,960 — 3,9602024 4,079 — 4,079Thereafter 31,336 — 31,336Present value adjustment (21,877) (16) (21,893)Present value of lease payments $ 29,893 $ 107 $ 30,000(1)Future minimum lease payments under the Company’s Watertown Lease and its Vehicle Fleet Lease.Future minimum lease payments under the Company’s finance lease obligation.(2) Future minimum lease payments under the Company's finance lease obligation.Note 8: Debt2014 Debt FacilityIn November 2014, the Company entered into a venture debt facility (“2014 Debt Facility”) for a total loan commitmentof $10.0 million. On October 13, 2016, the Company entered into a First Amendment to the 2014 Debt Facility the (''FirstAmendment''), which reaffirmed the initial commitment to a total of $10.0 million of funding (“Term Loan A”) and increased theCompany’s total borrowing capacity by an additional $10.0 million (“Term Loan B” and together with Term Loan A, ''TermLoans'').In connection with the 2014 Debt Facility, the Company issued warrants that can be exercised into common stock thatexpire between April 2021 and October 2026 (see Note 9).Under the terms of the 2014 Debt Facility, the borrowings accrued interest at an annual rate equal to 3.00% above thePrime Rate then in effect. The applicable interest rate for the outstanding principal balance was 8.25% as ofF-16Table of Contentsthe repayment date of October 1, 2018. The Company recognized interest expense of $1.2 million related to the 2014 DebtFacility during the year ended December 31, 2018, which consisted of amortization of the debt discount of $0.1 million, andcontractual coupon interest of $1.1 million.On October 1, 2018, the Company repaid the outstanding principal balance under the 2014 Debt Facility of $20.0million. In connection with the repayment of the 2014 Debt Facility, the Company paid a prepayment fee of $0.2 million.Athyrium Credit FacilityOn October 1, 2018, the Company entered into a $110.0 million Athyrium Credit Facility with Athyrium. The AthyriumCredit Facility provides for an Athyrium Term Loan A in the aggregate principal amount of $75.0 million, and an Athyrium TermLoan B in the aggregate principal amount of $35.0 million. On October 1, 2018, the Company borrowed the entire principalamount of the Athyrium Term Loan A. The Company may draw down the Athyrium Term Loan B upon either (i) FDA approvalof EYSUVIS for a dry eye disease indication or (ii) reaching certain net product revenues for INVELTYS, in each case on orprior to June 30, 2020; however, the Company does not expect to satisfy either such condition on or prior to June 30, 2020 and, asa result, does not currently expect that it will be eligible to draw down any of the Athyrium Term Loan B funds. The maturity dateof the Athyrium Credit Facility is October 1, 2024, the six-year anniversary of the close.The Athyrium Term Loan A bears interest at a rate of 9.875% per annum, with quarterly, interest-only payments untilthe fourth anniversary of the Athyrium Term Loan A. The unpaid principal amount of the Athyrium Term Loan A is due andpayable in quarterly installments starting on the fourth anniversary of the loan. The Company may make voluntary prepayments,in whole or in part, and subject to certain exceptions, is required to make mandatory prepayments upon the occurrence of certainevents of default as defined in the agreement, including but not limited to, the occurrence of a change of control. In addition, uponpayment or repayment of any outstanding balance under the Athyrium Credit Facility, the Company will have to pay a 1% exitfee of the total principal payments (whether mandatory, voluntary, or at maturity) made throughout the term. The exit fee of $0.7million based on the $75 million principal amount outstanding, will be accreted to the carrying amount of the debt using theeffective interest method over the term of the loan.All mandatory and voluntary prepayments of the Athyrium Credit Facility are subject to the payment of prepaymentpremiums as follows: (i) if prepayment occurs prior to the second anniversary of the applicable date of issuance, an amount equalto the amount by which (a) the present value of 105% of the principal prepaid plus all interest that would have accrued on suchprincipal through such second anniversary exceeds (b) the amount of principal prepaid, (ii) if prepayment occurs on or after thesecond anniversary of the applicable date of issuance but prior to the third anniversary of such issuance, an amount equalto 3% of the principal prepaid, and (iii) if prepayment occurs on or after the third anniversary of the applicable date of issuancebut prior to the fourth anniversary of such issuance, an amount equal to 2% of the principal prepaid. No prepayment premium isdue on any principal prepaid after the fourth anniversary of the applicable date of issuance.The Athyrium Credit Facility includes two features upon the event of default requiring (1) additional interest rate uponan event of default accrued at an additional 3%, or a total interest rate of 12.875%, and (2) the lender has a right to declare alloutstanding principal and interest immediately payable. These two features were analyzed and determined to be embeddedderivatives to be valued as separate financial instruments. These embedded derivatives were bundled and valued as onecompound derivative in accordance with the applicable accounting guidance for derivatives and hedging. The Companydetermined that, due to the unlikely event of default, the embedded derivatives have a de minimis value as of December 31, 2019.The derivative liability will be remeasured at fair value at each reporting date, with changes in fair value being recorded as otherincome (expense) in the consolidated statements of operations.The Athyrium Credit Facility is secured by a pledge of substantially all of the Company’s assets and containsaffirmative and negative covenants customary for financings of this type, including limitations on the Company’s and itssubsidiaries’ ability to, among other things, incur and prepay additional debt, grant or permit additional liens, make investmentsand acquisitions, merge or consolidate with others, dispose of assets, change in the nature of business, enterF-17Table of Contentsinto sale and leaseback transactions, make distributions, and enter into affiliate transactions, in each case, subject to certainexceptions. In addition, the Athyrium Credit Facility also contains a financial covenant requiring the Company to maintain atleast $10.0 million of cash and cash equivalents. As of December 31, 2019, the Company was in compliance with the covenants.In connection with the Athyrium Credit Facility, the Company issued a warrant (“Warrant”), to purchase up to 270,835shares of the Company’s common stock, at an exercise price per share of $12.18456. The Warrant is immediately exercisable asto 184,660 shares and will become exercisable as to the remaining 86,175 shares only upon the Company’s draw of the AthyriumTerm Loan B. The Warrant is exercisable through October 1, 2025. The Warrant is considered equity classified and as such, theCompany allocated the proceeds from the Athyrium Term Loan A to the Warrant using the relative fair value method. The initialfair value of the Warrant of $1.9 million is recorded in equity and creates a debt discount.In addition, the Company paid certain fees to Athyrium and another third party service provider in the aggregateamount of $3.0 million. These fees paid Athyrium were recorded as a debt discount while the fees paid to the other third partyservice provider were recorded as debt issuance cost, respectively, in the aggregate amount of $3.0 million. These costs, alongwith the fair value of Warrant of $1.9 million are being amortized using the effective interest method over the term of theAthyrium Credit Facility. The amortization of debt discount and debt issuance cost is included in interest expense within theConsolidated Statements of Operations. As of December 31, 2019, the effective interest rate was 11.63%, which takes intoconsideration the non-cash accretion of the exit fee and the amortization of the debt discount and issuance costs. During the yearended December 31, 2019, the Company recognized interest expense of $8.3 million which consisted of amortization of the debtdiscount of $0.8 million, and the contractual coupon interest expense of $7.5 million.The components of the carrying value of the debt consist of the following (in thousands): December 31, December31, 2019 2018Principal loan balance $75,000 $75,000Unamortized debt discount and issuance cost (3,999) (4,806)Cumulative accretion of exit fee 183 32Long-term debt, net $71,184 $70,226 The future annual principal payments due under the Athyrium Credit Facility as of December 31, 2019 were as follows(in thousands):Years Ending December 31, 2020 $ —2021 —2022 16,6652023 33,3302024 25,005Total $75,000 F-18Table of ContentsNote 9: WarrantsThe Company has issued warrants in connection with debt transactions that were completed prior to 2017 (see Note 8).In connection with and in consideration for the commitment of the Athyrium Credit Facility, on October 1, 2018, theCompany issued to Athyrium the Warrant as described in Note 8.The following table summarizes the common stock warrants outstanding as of December 31, 2019 and December 31,2018, each exercisable into the number of shares of common stock set forth below as of the specified dates: Shares Exercisable at Exercise Expiration Exercisable December 31, December 31, Issued Price Date From 2019 20182013 $7.50 April 2021 July 2017 82,816 82,8162014 $7.50 November 2024 July 2017 16,000 16,0002016 $8.27 October 2026 September2017 14,512 14,5122018 $12.18 October 2025 October2018 184,660 184,6602018 $12.18 October 2025 (1) — — 297,988 297,988(1)As of December 31, 2019, warrants outstanding to acquire 86,175 of common stock are not exercisable and are onlyexercisable upon draw down of Athyrium Term Loan B.Note 10: Fair Value of Financial InstrumentsThe Company classifies fair value based measurements using a three-level hierarchy that prioritizes the inputs used tomeasure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use ofunobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1, quoted market prices in activemarkets for identical assets or liabilities; Level 2, observable inputs other than quoted market prices included in Level 1, such asquoted market prices for markets that are not active or other inputs that are observable or can be corroborated by observablemarket data; and Level 3, unobservable inputs that are supported by little or no market activity and that are significant to the fairvalue of the assets or liabilities, including estimates and assumptions developed by the Company, reflective of those that a marketparticipant would use, as inputs to certain pricing models, discounted cash flow methodologies and similar techniques that usesignificant unobservable inputs. The carrying value of cash, restricted cash, accounts payable and accrued expenses approximate their fair value due tothe short‑term nature of these assets and liabilities. Management believes that the Company’s long‑term debt (See Note 8) bearsinterest at the prevailing market rate for instruments with similar characteristics and, accordingly, the carrying value of long‑termdebt, also approximates its fair value. The fair value of the outstanding debt was estimated using a discounted cash flow analysisbased on current market interest rates for debt issuances with similar remaining years to maturity, adjusted for credit risk, whichrepresents a Level 3 measurement. There were no transfers between fair value measurement levels during the year endedDecember 31, 2019 or December 31, 2018. F-19Table of ContentsNote 11: Common and Preferred StockPreferred StockThe Company was authorized to issue up to 5,000,000 shares of preferred stock as of December 31, 2019 and 2018.There was no preferred stock outstanding as of December 31, 2019 and 2018.Common StockThe Company was authorized to issue up to 120,000,000 shares of common stock with a $0.001 par value per share as ofDecember 31, 2019 and 2018. The Company had 36,086,254 and 33,863,077 shares of common stock issued and outstanding asof December 31, 2019 and 2018, respectively.Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote ofstockholders and do not have cumulative voting rights. Each election of directors by our stockholders will be determined by aplurality of the votes cast by the stockholders entitled to vote on the election. Holders of common stock are entitled to receiveproportionately any dividends as may be declared by our Board, subject to any preferential dividend rights of outstandingpreferred stock that we may issue in the future.In the event of our liquidation or dissolution, the holders of our common stock are entitled to receive proportionately allassets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights ofany of our outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption orconversion rights. The rights, preferences and privileges of holders of our common stock are subject to and may be adverselyaffected by the rights of the holders of shares of any series of our preferred stock that we may designate and issue in the future.Voting, dividend and liquidation rights of the holders of the common stock are subject to and qualified by the rights,powers and preferences of the holders of preferred stock that we may issue in the future.VotingEach holder of outstanding shares of common stock shall be entitled to one vote in respect of each share. The holders ofoutstanding shares of common stock, voting together as a single class, shall be entitled to elect one director. The number ofauthorized shares of common stock may be increased or decreased by the affirmative vote of a majority of the outstanding sharesof common stock and preferred stock voting together as a single class.DividendsSubject to the payment in full of all preferential dividends to which the holders of preferred stock may be entitled, theholders of common stock shall be entitled to receive dividends out of funds legally available therefor at such times and in suchamounts as the Board may determine in its sole discretion, with holders of preferred stock and common stock sharing pari passuin such dividends.Liquidation RightsUpon any liquidation, after the payment or provision for payment of all debts and liabilities of the Company and allpreferential amounts to which the holders of preferred stock may be entitled with respect to the distribution of assets inliquidation, the holders of common stock shall be entitled to share ratably in the remaining assets of the Company available fordistribution.F-20Table of ContentsReserved SharesAs of December 31, 2019 and 2018, the Company has reserved shares of common stock for issuance upon exercise ofrights under warrants, under the Amended and Restated 2017 Employee Stock Purchase Plan (as amended, the “ESPP”) and uponthe exercise of stock options as follows (see Note 12): December 31, December 31, 2019 2018 Warrant rights to acquire Common Stock 384,163 384,163ESPP 438,307 223,341Outstanding inducement stock option awards 705,500 498,0002009 Plan 2,530,586 2,563,0722017 Plan 4,429,849 3,130,910Total 8,488,405 6,799,486 Note 12: Stock-based CompensationStock Incentive PlansIn December 2009, the Board adopted the 2009 Employee, Director and Consultant Equity Incentive Plan (the “2009Plan”) for the issuance of common stock and stock options to employees, officers, directors, consultants, and advisors.In July 2017, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective, and as a result no furtherawards will be made under the 2009 Plan. The 2017 Plan was established to provide equity based ownership opportunities foremployees, officers, directors, consultants, and advisors. As of December 31, 2019, there were 146,942 shares of common stockavailable for grant under the 2017 Plan. In addition, any shares of common stock subject to awards under the 2009 Plan thatexpire, are forfeited, or are otherwise surrendered, without having been fully exercised or resulting in any common stock beingissued will become available for issuance under the 2017 Plan, up to an additional 2,530,586 shares, which is the number ofshares issuable pursuant to outstanding awards granted under the 2009 Plan.Also approved under the 2017 Plan is an annual increase for each of the years through December 31, 2027, equal to theleast of (i) 3,573,766 shares of common stock, (ii) 4% of the shares of common stock outstanding on December 31 of the prioryear and (iii) an amount determined by the Board.Under the plans, the Board determines the number of shares of common stock to be granted pursuant to the awards, aswell as the exercise price and terms of such awards. The exercise price of incentive stock options could not be less than the fairvalue of the common stock on the date of grant. Stock options awarded under the plans expire 10 years after the grant date, unlessthe Board sets a shorter term. Options granted under the plans generally vest over a four‑year period. A portion of the unvestedstock options will vest upon the sale of all or substantially all of the stock or assets of the Company.Inducement Stock Option AwardsDuring the year ended December 31, 2019, the Company granted non-statutory stock options to purchase an aggregateof 207,500 shares of the Company’s common stock to new employees. These stock options will vest over a four-year period, with25% of the shares underlying each option award vesting on the one-year anniversary of the applicable employees’ hire date andthe remaining 75% of the shares underlying each option award vesting monthly thereafter for three-years. Vesting of each optionis subject to such employee’s continued service with the Company through the applicable vesting dates. These stock options weregranted outside of the 2017 Plan as an inducement material to each employee’s acceptance of employment with the Company inaccordance with Nasdaq Listing Rule 5635(c)(4).F-21Table of ContentsA summary of option activity for employee awards under the 2009 Plan, the 2017 Plan and inducement grants for theyear ended December 31, 2019 is as follows: Weighted Weighted Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Shares Price Term Value (Years) (in thousands)Outstanding at January 1, 2019 5,111,690 $8.96 8.0 $3,771Granted 2,637,175 4.90 Exercised (24,714) 1.70 Forfeited (271,075) 11.33 Outstanding at December 31, 2019 7,453,076 $7.46 7.7 $1,313Vested or expected to vest at December 31, 2019 7,453,076 $7.46 7.7 $1,313Options exercisable at December 31, 2019 4,076,113 $7.02 6.8 $1,170 The Company records stock‑based compensation related to stock options granted at fair value. The Company utilizes theBlack‑Scholes option‑pricing model to estimate the fair value of stock option grants and to determine the related compensationexpense. The assumptions used in calculating the fair value of stock‑based payment awards represent management’s bestestimates. The assumptions used in determining fair value of the stock options granted in the years ended December 31, 2019 and2018 are as follows: Year Ended December 31, 2019 2018Expected volatility 81%–84% 80%–115%Risk-free interest rate 1.44%–2.58% 2.63%–2.96%Expected dividend yield 0% 0% Expected term (in years) 5.27–6.63 5.27–6.13 The Company derived the risk-free interest rate assumption from the U.S. Treasury rates for U.S. Treasury zero-couponbonds with maturities similar to those of the expected term of the awards being valued. The Company based the assumed dividendyield on its expectation of not paying dividends in the foreseeable future. The Company calculated the expected term of optionsusing the simplified method, as the Company lacks relevant historical data due to the Company’s limited operating experience.The estimated volatility is based upon the historical volatility of comparable companies with publicly available share prices. Theimpact of forfeitures on compensation expense is recorded as they occur.The weighted average grant-date fair value of options granted during the years ended December 31, 2019 and 2018, was$3.45 and $9.05, respectively. The fair value is being recognized over the vesting period of the options on a straight-line basis asthe services are being provided. As of December 31, 2019 and 2018, there was $19.2 million and $21.1 million of unrecognizedcompensation cost related to the stock options granted, which is expected to be recognized over a weighted-average period of 2.31years and 2.84 years, respectively. Stock-based compensation recognized was classified in the consolidated statements ofoperations as follows (in thousands): Year Ended December 31, 2019 2018 Cost of product revenues $268 $ — Research and development 2,844 2,660 Selling, general and administrative 6,879 5,955 Total $9,991 $8,615 F-22Table of ContentsFor the year ended December 31, 2019, stock-based compensation expense for the Company’s manufacturingemployees related to INVELTYS manufactured since the FDA approval of $0.1 million, has been capitalized into inventory as acomponent of overhead.The Company received cash proceeds from the exercise of stock options of $42,000 and $0.5 million during the yearsended December 31, 2019 and 2018, respectively. The total intrinsic value of options exercised for the year ended December 31,2019 and 2018, was $0.1 million and $1.3 million, respectively.Employee Stock Purchase PlanIn 2017, the Company approved the 2017 Employee Stock Purchase Plan, which was amended and restated inDecember 2018 (as amended, the “ESPP”), under which participating employees can authorize the Company to withhold aportion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s commonstock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% ofthe lesser of the closing price of the common stock on (i) the first business day of the plan period or (ii) the exercise date. Duringthe year ended December 31, 2019, employees of the Company purchased an aggregate of 123,664 shares under the ESPP. Thesecond offering period for 2019 ended on December 31, 2019. In January 2020, employees of the Company purchased anaggregate of 85,553 shares under the ESPP. The Company recorded $0.3 million of stock-based compensation expense related tothe ESPP for the year ended December 31, 2019. There were no purchases under the ESPP for the year ended December 31,2018.Note 13: Income TaxesThe Company has had no income tax expense due to operating losses incurred for the years ended December 31, 2019and 2018. The Company has also not recorded any income tax benefits for the net operating losses incurred in each period due toits uncertainty of realizing a benefit from those items. All of the Company’s losses before income taxes were generated in theUnited States.A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year Ended December 31, 2019 2018 Federal statutory income tax rate 21.0% 21.0%Effect of: Change in valuation allowance (25.8) (28.5) State income taxes, net of federal benefit 4.3 5.9 Research and development tax credits 1.0 2.7 Other (0.5) (1.1) Effective income tax rate —% —% F-23Table of ContentsNet deferred tax assets as of December 31, 2019 and 2018 consisted of the following (in thousands): December 31, 2019 2018Deferred tax assets: Net operating loss carryforwards $49,018 $46,933 Research and development tax credit carryforwards 6,250 5,070 Stock-based compensation 5,414 3,010 Lease liabilities 9,369 8,280 Other 2,467 1,318 Capitalized research and development and start-up expenditures 6,733 193Total deferred tax assets $79,251 $64,804Deferred tax liabilities: Right-of-use assets (9,178) (8,221)Total deferred tax liabilities $(9,178) $(8,221)Valuation allowance $(70,073) $(56,583)Net deferred tax assets $ — $ — The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets.Management has considered the Company’s history of cumulative net losses incurred since inception and has concluded that it ismore likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuationallowance has been established against the deferred tax assets as of December 31, 2019 and 2018. The valuation allowanceincreased by $13.5 million in 2019 due to an increase in the net operating loss carryforwards and research and development taxcredits, partially offset by limitations caused by ownership changes under the provisions of 382. Management reevaluates thepositive and negative evidence at each reporting period.At December 31, 2019 and 2018, the Company had federal net operating loss carryforwards of $168.8 million and$165.0 million, respectively, which may be available to offset future federal tax liabilities and expire at various dates beginningin 2030. At December 31, 2019 and 2018, the Company had state net operating loss carryforwards of $171.8 million and $156.4million, respectively, which may be available to offset future state income tax liabilities and expire at various dates beginning in2030. As of December 31, 2019 and 2018, the Company also had federal and state research and development credit carryforwardsof approximately $6.3 million and $5.1 million, respectively, which are available to reduce future income taxes, if any, from 2030through 2039 (federal) and 2025 through 2034 (state).Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxableincome within the net operating loss carryforward period. Under the provisions of Section 382 of the Internal Revenue Code of1986, certain substantial changes in the Company’s ownership, including a sale of the Company, or significant changes inownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards,which could be used annually to offset future taxable income. The Company previously determined that an ownership changeoccurred as of April 2016, and such change did not materially impact the Company’s ability to utilize its net operating losscarryforwards and research and development tax credits as of that date to offset future tax liabilities. The Company recentlycompleted an analysis and determined that an additional ownership change occurred and that such change has materially limitedthe net operating loss carryforwards and research and development tax credits available to offset future tax liabilities. The Company files its corporate income tax returns in the United States and various states. All tax years since the dateof incorporation remain open to examination by the major taxing jurisdictions (state and federal) to which the Company issubject, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal RevenueService (‘‘IRS’’) or other authorities if they have or will be used in a future period. The Company is not currently underexamination by the IRS or any other jurisdictions for any tax year.As of December 31, 2019 and 2018 the Company had no uncertain tax positions. The Company’s policy is to recognizeinterest and penalties related to income tax matters as a component of income tax expense, of which no interest or penalties wererecorded for the years ended December 31, 2019 and 2018.F-24Table of ContentsNote 14: Commitments and ContingenciesLicense Agreement — In 2009, the Company entered into an exclusive license agreement with The Johns HopkinsUniversity (“JHU”), as amended in November 2012, May 2014, August 2014, October 2014 and June 2018, which licensed to theCompany a portfolio of specified patent rights and remains in full force and effect. Pursuant to the terms of the agreement, asamended, the Company agreed to pay an initial license fee, minimum annual payments beginning in 2017, certain developmentand commercial milestone payments, royalties on product sales and reimburse all or a portion of the costs associated with thepreparation, filing, prosecution and maintenance of the agreed-upon patents and patent applications to JHU.After 2016 and until the first commercial sale of product, which occurred in January 2019, the minimum annualpayment was $37,500. Upon the launch of INVELTYS, the annual minimum payment increased to $0.1 million. The Company isobligated to pay JHU a tiered royalty rate in the low single-digits on net annual sales of the licensed products. The Company alsohas an obligation to pay JHU certain one‑time development and commercial milestone payments. During the year endedDecember 31, 2019, the Company paid JHU $0.4 million related to the first commercial sale milestone and subsequent royalties.The Company also recorded expenses totaling $0.3 million for each of the years ended December 31, 2019 and 2018,respectively, primarily related to the prosecution and maintenance costs on the JHU patent rights licensed to the Company.The Company’s minimum obligations due under its license agreements as of December 31, 2019, are as follows (inthousands):Years Ending December 31, 2020 $1132021 1132022 1132023 1132024 113Thereafter 1,012Total minimum license payments $1,577 Other Commitments — The Company entered into a commercial supply agreement with Catalent Pharma Solutions,LLC to manufacture commercial supplies of INVELTYS and EYSUVIS, with annual minimum purchase requirements. TheCompany is subject to these minimum purchase requirements upon receiving an approval for commercial sale for the approvedproduct.The Company has the following minimum purchase obligations for INVELTYS (in thousands):Years Ending December 31, 2020 $8012021 1,1732022 1,1732023 1,1732024 880Thereafter 1,155Total minimum purchase commitments $6,355 Litigation—The Company is not currently subject to any material legal proceedings.Guarantees and Indemnifications—The Company’s Certificate of Incorporation authorizes the Company to indemnifyand advance expenses to its officers and directors and agents to the fullest extent permitted by law. The Company leases officespace under a non-cancelable operating lease, pursuant to which the Company is required toF-25Table of Contentsindemnify the landlord against claims, actions, or damages incurred in connection with, among other items, the Company’soccupancy and use of the premises.The Company’s equity agreements and certain other arrangements include standard indemnifications against claims,actions, or other matters that may arise in connection with these arrangements.As of December 31, 2019 and 2018, the Company had not experienced any losses related to these indemnificationobligations, and no claims with respect thereto were outstanding. The Company does not expect significant claims related to theseindemnification obligations and has no amount accrued related to these contingencies. The Company does not expect theseindemnifications to have a material adverse effect on these consolidated financial statements.Note 15: Defined Contribution PlanThe Company has a 401(k) defined contribution plan (the ‘‘401(k) Plan’’) for substantially all of its employees. Eligibleemployees may make pretax contributions to the 401(k) Plan up to statutory limits.The Company made discretionary matching contributions of $0.5 million and $0.2 million to the 401(k) Plan during forthe year ended December 31, 2019 and 2018, respectively.Note 16: Selected Quarterly Financial Data (Unaudited)Selected quarterly financial data is as follows (in thousands, except per share data): Three months ended March 31, June 30, September 30, December 31, 2019 2019 2019 2019 (in thousands, except per share data)Product revenues, net $1,386 $2,057 $1,451 $1,180Costs and expenses: 25,436 24,467 23,018 21,377Total other income (expense) (1,338) (1,415) (1,609) (1,761)Net loss attributable to common stockholders $(25,388) $(23,825) $(23,176) $(21,958)Net loss per share attributable to commonstockholders—basic and diluted $(0.75) $(0.70) $(0.68) $(0.63) Three months ended March 31, June 30, September 30, December 31, 2018 2018 2018 2018 (in thousands, except per share data)Product revenues, net $ - $ - $ - $ -Costs and expenses: 11,139 14,519 15,496 23,567Total other income (expense) (158) (101) (107) (1,651)Net loss attributable to common stockholders $(11,297) $(14,620) $(15,603) $(25,218)Net loss per share attributable to commonstockholders—basic and diluted $(0.46) $(0.60) $(0.63) $(0.76) Note 17: Subsequent EventsThe Company has evaluated all events and transactions that occurred after the balance sheet date through the date of thisfiling. During this period, the Company did not have any material subsequent events that impacted its consolidated financialstatements or disclosures. F-26Exhibit 4.3DESCRIPTION OF SECURITIES REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACTThe following description of registered securities of Kala Pharmaceuticals, Inc. (“us,” “our,” “we” or the “Company”) is intended as asummary only and therefore is not a complete description of our capital stock. This description is based upon, and is qualified by reference to,our certificate of incorporation, our bylaws and applicable provisions of the Delaware General Corporate Law (the “DGCL”). You should readour certificate of incorporation and our bylaws, which are incorporated by reference as Exhibit 3.1 and Exhibit 3.2, respectively, to the AnnualReport on Form 10-K of which this Exhibit 4.3 is a part, for the provisions that are important to you.Authorized Capital StockOur authorized capital stock consists of 120,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares ofpreferred stock, par value $0.001 per share, all of which preferred stock is undesignated. Our common stock is registered under Section 12(b)of the Exchange Act.Common StockAnnual Meeting. Annual meetings of our stockholders are held on the date designated in accordance with our by-laws. Written noticemust be mailed to each stockholder entitled to vote not less than ten nor more than 60 days before the date of the meeting. The presence inperson or by proxy of the holders of record of a majority of our issued and outstanding shares entitled to vote at such meeting constitutes aquorum for the transaction of business at meetings of the stockholders. Special meetings of the stockholders may be called for any purpose bythe board of directors, the chairman of the board or the chief executive officer. Except as may be otherwise provided by applicable law, ourcertificate of incorporation or our by-laws, all elections of directors shall be decided by a plurality, and all other questions shall be decided by amajority, of the votes cast by stockholders entitled to vote thereon at a duly held meeting of stockholders at which a quorum is present.Voting Rights. Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote ofstockholders and do not have cumulative voting rights.Dividends. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board ofdirectors, subject to any preferential dividend rights of outstanding preferred stock.Liquidation and Dissolution. In the event of our liquidation or dissolution, the holders of our common stock are entitled to receiveproportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to anypreferential rights of any outstanding preferred stock.Other Rights. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferencesand privileges of holders of our common stock are subject to and may be adversely affected by the rights of the holders of shares of any seriesof our preferred stock that we may designate and issue in the future.Preferred StockWe are authorized to issue “blank check” preferred stock, which may be issued in one or more series upon authorization of our boardof directors. Our board of directors is authorized to fix the designations, powers, preferences and the relative, participating, optional or otherspecial rights and any qualifications, limitations and restrictions of the shares of each series of preferred stock. The authorized shares of ourpreferred stock are available for issuance without further action by our stockholders, unless such action is required by applicable law or therules of any stock exchange on which our securities may be listed. The issuance of preferred stock could impede the completion of a merger,tender offer or other takeover attempt.Provisions of Our Certificate of Incorporation and By-laws and Delaware Law That May Have Anti-Takeover EffectsDelaware Law. We are subject to Section 203 of the DGCL. Subject to certain exceptions, Section 203 prevents a publicly heldDelaware corporation from engaging in a "business combination" with any "interested stockholder" for three years following the date that theperson became an interested stockholder, unless either the interested stockholder attained such status with the approval of our board of directors, the business combination is approved by our board ofdirectors and stockholders in a prescribed manner or the interested stockholder acquired at least 85% of our outstanding voting stock in thetransaction in which it became an interested stockholder. A "business combination" includes, among other things, a merger or consolidationinvolving us and the "interested stockholder" and the sale of more than 10% of our assets. In general, an "interested stockholder" is any entityor person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlledby such entity or person. The restrictions contained in Section 203 are not applicable to any of our existing stockholders that owned 15% ormore of our outstanding voting stock upon the closing of our initial public offering.Staggered Board; Removal of Directors. Our certificate of incorporation and our bylaws divide our board of directors into threeclasses with staggered three-year terms. In addition, our certificate of incorporation and our bylaws provide that directors may be removed onlyfor cause and only by the affirmative vote of the holders of 75% of our shares of capital stock present in person or by proxy and entitled to vote.Under our certificate of incorporation and bylaws, any vacancy on our board of directors, including a vacancy resulting from an enlargement ofour board of directors, may be filled only by vote of a majority of our directors then in office. Furthermore, our certificate of incorporationprovides that the authorized number of directors may be changed only by the resolution of our board of directors. The classification of ourboard of directors and the limitations on the ability of our stockholders to remove directors, change the authorized number of directors and fillvacancies could make it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of our company.Stockholder Action; Special Meeting of Stockholders; Advance Notice Requirements for Stockholder Proposals and DirectorNominations. Our certificate of incorporation and our bylaws provide that any action required or permitted to be taken by our stockholders at anannual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken bywritten action in lieu of a meeting. Our certificate of incorporation and our bylaws also provide that, except as otherwise required by law,special meetings of the stockholders can only be called by the chairman of our board of directors, our chief executive officer or our board ofdirectors. In addition, our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting ofstockholders, including proposed nominations of candidates for election to our board of directors. Stockholders at an annual meeting may onlyconsider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our board ofdirectors, or by a stockholder of record on the record date for the meeting who is entitled to vote at the meeting and who has delivered timelywritten notice in proper form to our secretary of the stockholder’s intention to bring such business before the meeting. These provisions couldhave the effect of delaying until the next stockholder meeting stockholder actions that are favored by the holders of a majority of ouroutstanding voting securities. These provisions also could discourage a third party from making a tender offer for our common stock becauseeven if the third party acquired a majority of our outstanding voting stock, it would be able to take action as a stockholder, such as electing newdirectors or approving a merger, only at a duly called stockholders meeting and not by written consent.Super-Majority Voting. The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on anymatter is required to amend a corporation’s certificate of incorporation or bylaws unless a corporation’s certificate of incorporation or bylaws,as the case may be, requires a greater percentage. Our bylaws may be amended or repealed by a majority vote of our board of directors or theaffirmative vote of the holders of at least 75% of the votes that all our stockholders would be entitled to cast in any annual election of directors.In addition, the affirmative vote of the holders of at least 75% of the votes that all our stockholders would be entitled to cast in any election ofdirectors is required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of our certificate of incorporationdescribed above.Exclusive Forum Selection. Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternativeforum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (1) any derivative action or proceeding broughton behalf of our company, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or employees toour company or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the General Corporation Law of the Stateof Delaware or as to which the General Corporation Law of the State of Delaware confers jurisdiction on the Court of Chancery of the State ofDelaware, or (4) any action asserting a claim arising pursuant to any provision of our certificate of incorporation or bylaws (in each case, as they may be amended from time to time) or governed by the internal affairsdoctrine. Although our certificate of incorporation contains the choice of forum provision described above, we do not expect this choice offorum provision will apply to suits brought to enforce a duty or liability created by the Securities Act of 1933, as amended, the SecuritiesExchange Act of 1934, as amended, or any other claim for which federal courts have exclusive jurisdiction.Exhibit 21.1Subsidiaries of the Registrant Name Jurisdiction of OrganizationKala Pharmaceuticals Security Corporation Massachusetts Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement No. 333-226748 on Form S-3 and Nos. 333-219403,333-224083 and 333-230206 on Form S-8 of our report dated February 12, 2020, relating to the consolidated financial statements ofKala Pharmaceuticals, Inc. and its subsidiaries appearing in the Annual Report on Form 10-K of Kala Pharmaceuticals, Inc. forthe year ended December 31, 2019. /s/ Deloitte & Touche LLP Boston, MassachusettsFebruary 12, 2020 Exhibit 31.1CERTIFICATIONSI, Mark Iwicki, certify that:1. I have reviewed this Annual Report on Form 10-K of Kala Pharmaceuticals, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: February 12, 2020/s/ Mark Iwicki Mark Iwicki President and Chief Executive Officer (principal executive officer) Exhibit 31.2CERTIFICATIONSI, Mary Reumuth, certify that:1. I have reviewed this Annual Report on Form 10-K of Kala Pharmaceuticals, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: February 12, 2020/s/ Mary Reumuth Mary Reumuth Chief Financial Officer (principal financial and accounting officer) Exhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Kala Pharmaceuticals, Inc. (the “Company”) for the year ended December 31, 2019, asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mark Iwicki, President and ChiefExecutive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge on the date hereof:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: February 12, 2020/s/ Mark Iwicki Mark Iwicki President and Chief Executive Officer (principal executive officer) Exhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Kala Pharmaceuticals, Inc. (the “Company”) for the year ended December 31, 2019, asfiled with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mary Reumuth, Chief Financial Officerof the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that to the best of her knowledge on the date hereof:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: February 12, 2020/s/ Mary Reumuth Mary Reumuth Chief Financial Officer (principal financial and accounting officer)

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