How Kala Pharmaceuticals Could Rise 100% to 200%

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Kala Pharmaceuticals, Inc. (NASDAQ: KALA) is a recent initial public offering that could come blessed with magical upside if its possibilities blossom into a positive reality. The company is targeting the commercialization of two different Phase III product candidates. One is its KPI-121 1.0% for the treatment of inflammation and pain following ocular surgery. The other is the KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease using its proprietary mucus-penetrating particle technology.

Now its post-IPO quiet period has come to an end. Kala Pharma’s initial public offering of 6,900,000 shares at $15.00 per share, and the underwriters’ option, allowed the company to raise gross proceeds of approximately $103.5 million.

If the analysts covering Kala Pharmaceutical are correct, Kala has much upside from the current share price. One analyst even sees the potential for Kala shares to triple under the right circumstances.

The firms J.P. Morgan, BofA Merrill Lynch and Wells Fargo all acted as joint book-runners for Kala’s IPO. Wedbush PacGrow acted as its co-manager.

J.P. Morgan started coverage as Overweight and assigned a $35 price target. While this is a high target for an IPO from a firm like J.P. Morgan, the reality is that this target is not the most aggressive — and not by a long shot.

Wells Fargo started coverage as Outperform as well, but it apparently has just a $24 price target.

Kala was started as Outperform with a $46 price target at Wedbush Securities. The firm’s report said:

NDA submission for dry eye is anticipated in the first half of 2018 and we anticipate U.S. approval for both between the fourth quarter of 2018 and the first half of 2019. We estimate that in 2027 gross annual sales for KPI-121 1% could reach about $271 million for post-op inflammation and pain and for KPI-121 0.25% about $1.9 billion for dry eye disease flares. We anticipate Kala could be acquired following Phase III success in the fourth quarter of 2017 with KPI-121 0.25% for dry eye disease flares.

BofA Merrill Lynch started Kala with a Buy rating and a $33 price objective, but it was Merrill Lynch that became the most aggessive. The firm sees positive risk/reward ahead of Phase III dry eye data by the end of 2017 and noted that KPI-121 could address the under-met need in the large dry eye market. Also noted was that robust Phase II data somewhat de-risks the Phase III readout.

The firm models 40% probability of success as the base case here — but Merrill Lynch’s note said that solid Phase III dry eye data could move its net present value share to $62 per share. Merrill Lynch’s investment rationale said:

In our view, KPI-121 has potentially significant commercial opportunity given it addresses the under-met needs in both post-operation inflammation and pain as well as dry eye disease. We like the risk/reward on KALA ahead of Phase 3 dry eye data given robust Phase 2 data. We see solid Phase 3 data in post-operation inflammation and pain provides a floor to valuation.

In an effort to show both of the coin, Merrill Lynch also gave some more minimal and downside targets. If the data is mixed, a potential
one-year delay and haircut to peak share could lower the firm’s NPV to $23 per share. A complete failure of the Phase 3 DED study, which the firm sees as being unlikely, would lower Kala’s NPV down to $9 per share.

The reality is that all of the analysts covering Kala Pharmaceuticals see the shares being worth more than the current post-IPO range would have indicated. That does not assure that its stock will rise, but at least one form outlined how Kala Pharma shares could rise another 200%.

Kala Pharma shares rose 9% by late on Monday, and its post-IPO range is $16.38 to $21.84. Its market cap is $520 million, and the consensus analyst target price from the analysts at the underwriting syndicate firms would be $34.50. If that proves to be correct, shares of Kala Pharma could rise another 50% or more before ever even getting closer to the much larger upside targets.