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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS

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As confidentially submitted to the Securities and Exchange Commission on June 2, 2017 as
Amendment No. 4 to the confidential submission File No. 377-01157

Registration No. 333-        

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

KALA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

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100 Beaver Street, Suite 201
Waltham, MA 02453
(781) 996-5252
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

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Mark Iwicki
Chief Executive Officer
Kala Pharmaceuticals, Inc.
100 Beaver Street, Suite 201
Waltham, MA 02453
(781) 996-5252
(Name, address, including zip code, and telephone number, including area code, of agent for service)

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Approximate date of commencement of proposed sale to public:
As soon as practicable after this Registration Statement is declared effective.

           If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

           If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

           If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

           If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

           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 "large accelerated filer," "accelerated filer" "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

           If an emerging growth company, indicate by check mark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 7(a)(2)(B) of the Securities Act. ý

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CALCULATION OF REGISTRATION FEE

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

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           The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

   

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED                        , 2017

PROSPECTUS

              Shares

Common Stock

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        This is an initial public offering of common stock by Kala Pharmaceuticals, Inc. We are selling                shares of common stock. The estimated initial public offering price is between $        and $        per share.

        Prior to this offering, there has been no public market for our common stock. We intend to apply to list our common stock on the NASDAQ Global Market under the symbol "KALA."

        We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

(1)

We have agreed to reimburse the underwriters for certain FINRA-related expenses. See "Underwriting" on page 180.

        We have granted the underwriters the right to purchase up to an additional                shares of common stock. The underwriters may exercise this right at any time within 30 days after the date of this prospectus.

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        Investing in our common stock involves risks. See "Risk Factors" beginning on page 11 of this prospectus.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the shares of common stock to purchasers on or about                        , 2017.

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                        , 2017

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        Neither we nor the underwriters have authorized anyone to provide you with any information other than that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

        For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

        We own or have rights to trademarks, service marks and trade names that we use in connection with the operation of our business, including our corporate name, logos and website names. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners. The service marks and trademarks that we own include Kala® and Kala^TM. Solely for convenience, some of the trademarks, service marks and trade names referred to in this prospectus are listed without the ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and trade names.

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occur, our business, prospects, operating results and financial condition could suffer materially. In such event, the trading price of our common stock could decline and you might lose all or part of your investment.

Risks Related to Our Financial Position and Need For Additional Capital

We have incurred significant losses from operations and negative cash flows from operations since our inception. We expect to 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 net losses were $16.7 million for the year ended December 31, 2015, $33.2 million for the year ended December 31, 2016 and $9.8 million for the three months ended March 31, 2017. As of March 31, 2017, we had an accumulated deficit of $101.9 million. We have not generated any revenues to date from product sales and have financed our operations primarily through private placements of our preferred stock, convertible debt financings and borrowings under credit facilities. We have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and clinical trials. We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year.

        We anticipate that our expenses will increase substantially as compared to prior periods as we complete our Phase 3 trials of KPI-121 0.25% in patients with dry eye disease and prepare for commercialization of our product candidates, as a result of increased 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 being a public company and increased insurance premiums, among other factors. Our license agreement with The Johns Hopkins University, or JHU, under which we license certain of our patent rights and a significant portion of the technology for KPI-121 1.0% and KPI-121 0.25%, imposes royalty and other financial obligations on us, and we may enter into additional licensing and funding 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:

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seek marketing approvals for KPI-121 1.0% and KPI-121 0.25% and any other product candidates that successfully complete clinical development;



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pursue the clinical development of KPI-121 for the treatment of other additional indications or for use in other patient populations or, if approved, seek to broaden the label of KPI-121 1.0% or KPI-121 0.25%;



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pursue the preclinical and clinical development of product candidates derived from our rTKI program for use in the treatment of retinal diseases, such as AMD, DR, DME and RVO;



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establish sales, marketing and distribution capabilities for our product candidates for which we obtain marketing approval;



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scale up our manufacturing processes and capabilities to support our clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval;

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leverage our proprietary MPP technology to advance high-value therapeutics into preclinical and clinical development;



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in-license or acquire the rights to other products, product candidates or technologies;



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maintain, expand and protect our intellectual property portfolio;



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hire additional clinical, quality control, scientific and management personnel;



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expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company; and



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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 to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Our expenses will increase if:

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we are required by the FDA or non-U.S. regulatory agencies to perform trials or studies in addition to those currently expected;



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there are any delays in enrollment of patients in or completing our clinical trials or the development of our product candidates; or



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there are any third-party challenges to our intellectual property portfolio, or the need arises to defend against intellectual property-related claims.

        Our ability to become and remain profitable depends on our ability to generate revenue. We do not expect to generate revenue that is sufficient to achieve profitability unless and until we obtain marketing approval for and commercialize one of our product candidates. We do not expect to commercialize any of our product candidates before 2019, if ever. This will require us to be successful in a range of challenging activities, including:

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completing and obtaining favorable results from our two ongoing Phase 3 clinical trials of KPI-121 0.25% in patients with dry eye disease;



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obtaining marketing approval for KPI-121 1.0%, KPI-121 0.25% or any other product candidates;



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manufacturing at commercial scale, marketing, selling and distributing those products for which we obtain marketing approval;



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achieving an adequate level of market acceptance of and obtaining and maintaining coverage and adequate reimbursement from third-party payors for our products; and



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obtaining, maintaining and protecting our intellectual property rights.

        We may never succeed in these activities and may never generate revenue that is sufficient to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

        We are an early-stage company. Our operations to date have been limited to organizing and staffing our company, acquiring rights to intellectual property, business planning, raising capital and

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developing KPI-121 and other product candidates. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.

        In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

        We expect our financial condition and operating results to fluctuate significantly from quarter-to-quarter and year-to-year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.

We will 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 we conduct our multiple Phase 3 clinical trials and, assuming positive results from these trials, seek marketing approval for KPI-121 1.0% and KPI-121 0.25%, and continue the development of and potentially seek marketing approval for other product candidates. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our preclinical activities and clinical trials. In addition, our expenses will further increase if we suffer any delays in our Phase 3 clinical programs for KPI-121 0.25%, including delays in enrollment of patients. We also expect to devote additional financial resources to conducting research and development, initiating clinical trials of, and potentially seeking regulatory approval for, other potential product candidates, including product candidates that we may develop using our rTKI program.

        If we obtain marketing approval for KPI-121 1.0%, KPI-121 0.25% or any other product candidate that we develop, we expect to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company, hiring additional personnel and expanding our facilities. Accordingly, we may need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

        Our future capital requirements will depend on many factors, including:

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the progress, costs and results of our ongoing Phase 3 clinical trials for KPI-121 0.25% and of any clinical activities for regulatory review of KPI-121 1.0% and KPI-121 0.25% outside of the United States;



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the costs and timing of process development and manufacturing scale-up activities associated with KPI-121 1.0% and KPI-121 0.25%;



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the costs, timing and outcome of regulatory review of KPI-121 1.0% and KPI-121 0.25%;



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the costs of commercialization activities for KPI-121 1.0% and KPI-121 0.25% if we receive, or expect to receive, marketing approval, including the costs and timing of establishing product sales, marketing, distribution and outsourced manufacturing capabilities;



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subject to receipt of marketing approval, revenue received from commercial sales of KPI-121 1.0% and KPI-121 0.25%;



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our ability to establish and maintain strategic collaborations, licensing or other agreements and the financial terms of such agreements;

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the scope, progress, results and costs of any product candidates that we may derive from our rTKI program or any other product candidates that we may develop;



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the extent to which we in-license or acquire rights to other products, product candidates or technologies; and



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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property-related claims.

        As of March 31, 2017, we had cash of approximately $36.0 million. We believe that the net proceeds from this offering, together with our existing cash as of March 31, 2017, will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements at least through                . However, we have based this estimate on assumptions that may prove to be wrong, and our operating plan may change as a result of many factors currently unknown to us. As a result, we could deplete our capital resources sooner than we currently expect.

        Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete. We may never generate the necessary data or results required to obtain regulatory approval of products with the market potential sufficient to enable us to achieve profitability. We do not expect to generate revenue from sales of any product candidates until at least 2019, if at all. Accordingly, we will need to obtain substantial additional financing to achieve our business objectives. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. Adequate additional financing may not be available to us on acceptable terms, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for one or more of our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.

Raising additional capital may cause dilution to our stockholders, including purchasers of our common stock in this offering, restrict our operations or require us to relinquish rights to our technologies or product candidates.

        Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and marketing and distribution arrangements. Our only committed external source of funds is $10.0 million under our 2014 Debt Facility. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. If we draw down on the remaining $10.0 million of potentially available borrowings under our 2014 Debt Facility, the lenders thereunder will be entitled to exercise warrants for up to an additional 251,951 shares of our common stock. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Our pledge of our assets as collateral to secure our obligations under our credit facility may limit our ability to obtain additional debt financing.

        If we raise additional funds through collaborations, strategic alliances, licensing arrangements or marketing 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 raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or

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future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

Our existing and future indebtedness may limit cash flow available to invest in the ongoing needs of our business.

        As of March 31, 2017, we had $10.0 million of outstanding borrowings under our 2014 Debt Facility, which we are required to begin repaying following the end of an interest-only period, in October 2017, in equal monthly installments until October 2020. We also are eligible to borrow an additional $10.0 million under the 2014 Debt Facility before October 13, 2017. Our obligations under this agreement are secured by substantially all of our assets other than our intellectual property. We could in the future incur additional indebtedness beyond our borrowings under the 2014 Debt Facility.

        Our debt combined with our other financial obligations and contractual commitments could have significant adverse consequences, including:

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requiring us to dedicate a substantial portion of cash flow from operations or cash on hand to the payment of interest on, and principal of, our debt, which will reduce the amounts available to fund working capital, capital expenditures, product development efforts and other general corporate purposes;



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increasing our vulnerability to adverse changes in general economic, industry and market conditions;



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subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions or obtain further debt or equity financing;



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limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and



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placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.

        We intend to satisfy our current and future debt service obligations with our existing cash and funds from external sources. Nonetheless, we may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under our existing debt. 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 credit facility could result in an event of default and acceleration of amounts due. If an event of default occurs and Square 1 Bank accelerates the amounts due under the 2014 Debt Facility, we may not be able to make accelerated payments, and Square 1 Bank could seek to enforce security interests in the collateral securing such indebtedness.

Risks Related to Product Development

We are dependent on the success of our lead product candidates, KPI-121 1.0% and KPI-121 0.25%. If we are unable to successfully complete our Phase 3 clinical programs and obtain marketing approvals for either KPI-121 1.0% or KPI-121 0.25%, or experience significant delays in doing so, or if, after obtaining marketing approvals, we fail to commercialize these product candidates, our business will be materially harmed.

        We have devoted a significant portion of our financial resources and business efforts to the development of KPI-121 1.0% for the post-operative treatment of inflammation and pain following ocular surgery and KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease. There is a significant risk that we will fail to successfully develop KPI-121 1.0% and/or KPI-121 0.25%. We received topline results from our second Phase 3 clinical trial evaluating KPI-121 1.0% in 520 patients with inflammation and pain following cataract surgery in May 2017. Our Phase 3 clinical program for KPI-121 0.25% consists of two parallel Phase 3 clinical trials evaluating KPI-121 0.25%, each of which is expected to include approximately 900 dry eye patients. We expect to receive topline

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results from these parallel Phase 3 clinical trials by the end of 2017. The timing of the availability of such topline data and the completion of our Phase 3 clinical trials for KPI-121 0.25% is dependent, in part, on our ability to locate and enroll a sufficient number of eligible patients in our Phase 3 clinical trials on a timely basis. We cannot accurately predict when or if either of these product candidates will be proven to be effective or safe in humans or whether either will receive marketing approval. Our ability to generate product revenues will depend on our obtaining marketing approval for, and commercializing one or both of, KPI-121 1.0% and KPI-121 0.25%.

        The success of KPI-121 1.0% and KPI-121 0.25% and any other product candidates will depend on many factors, including the following:

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completing and obtaining favorable results from our two ongoing Phase 3 clinical trials of KPI-121 0.25%;



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applying for and receiving marketing approvals from applicable regulatory authorities for our product candidates;



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receiving regulatory approval of our manufacturing processes and our third-party manufacturers' facilities from applicable regulatory authorities;



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expanding and maintaining a workforce of experienced scientists and others with experience in MPP technology to continue to develop our product candidates;



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establishing sales, marketing and distribution capabilities for KPI-121 1.0% and KPI-121 0.25% and successfully launching commercial sales of any other product candidates for which we obtain marketing approval, whether alone or in collaboration with others;



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acceptance of KPI-121 1.0% and KPI-121 0.25% and our other product candidates, if and when approved, by patients, the medical community and third-party payors;



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effectively competing with other therapies;



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maintaining an acceptable safety profile of our products following approval;



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obtaining and maintaining coverage, adequate pricing, and adequate reimbursement from third-party payors, including government payors, for our product candidates;



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obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;



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protecting our rights in our intellectual property portfolio; and



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not infringing on others' intellectual property rights.

        Successful development of KPI-121 1.0% or KPI-121 0.25% for additional indications, if any, or for use in broader patient populations and our ability, if it is approved, to broaden the label for KPI-121 1.0% or KPI-121 0.25% will depend 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 or an inability to successfully commercialize our product candidates, which would materially harm our business.

If clinical trials of KPI-121 1.0% and KPI-121 0.25% or any other product candidate that we develop fail to demonstrate safety and efficacy to the satisfaction of the FDA or other regulatory authorities or do not otherwise produce favorable results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of such product candidate.

        Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, including KPI-121 1.0% and KPI-121 0.25%, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to

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complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later stage clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their product candidates. Furthermore, the failure of any other product candidates to demonstrate safety and efficacy in any clinical trial could negatively impact the perception of our other product candidates and/or cause the FDA or other regulatory authorities to require additional testing before approving any of our product candidates. For example, we previously conducted a Phase 2 clinical trial of KPI-121 0.25% 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 KPI-121 0.25% in treating dry eye disease or other indications or of KPI-121 1.0%. In addition, we have not conducted any Phase 2 clinical trial of KPI-121 1.0%. The lack of Phase 2 trial data may have an adverse impact on the perceived safety or efficacy of KPI-121 1.0% for the treatment of post-operative inflammation and pain following ocular surgery or other indications, and may adversely affect our ability to obtain marketing approval for KPI-121 1.0% from the FDA or outside the United States.

        We reported topline results from our second Phase 3 clinical trial evaluating KPI-121 1.0% in patients with inflammation and pain following cataract surgery in May 2017, in which KPI-121 1.0% achieved statistical significance for both of its primary efficacy endpoints and all secondary endpoints. Further analyses of the data from the second Phase 3 clinical trial are ongoing. Clinical trial data are subject to differing interpretations, and the FDA, medical and scientific experts and others may not share our views of the Phase 3 data. Any such differing interpretations could adversely affect our ability to demonstrate the safety and efficacy of KPI-121 1.0% to the satisfaction of the FDA or other regulatory authorities.

        We expect, based on our current development plan, that the FDA will require us to demonstrate effectiveness on both of our primary endpoints in our two Phase 3 clinical trials for market approval of an indication for the temporary relief of the signs and symptoms of dry eye disease. KPI-121 0.25% did not achieve statistical significance for the endpoint of ocular discomfort severity in our completed Phase 2 clinical trial. If KPI-121 0.25% does not achieve statistical significance in both primary endpoints in our Phase 3 clinical trials, the FDA may require us to conduct additional clinical trials to support approval of KPI-121 0.25% in this indication. Regulatory authorities outside the United States, in particular in the European Union, have not issued guidance on the requirements for approval of a dry eye drug. Our Phase 3 clinical trials of KPI-121 0.25% 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, in particular if the European Union does not allow us to utilize the results from our ongoing Phase 3 clinical trials of KPI-121 0.25% pursuant to the Article 10(3) submission pathway or otherwise, we will likely need to conduct additional trials to obtain marketing approval in such jurisdiction, which would be costly and time-consuming and could delay or permanently halt our ability to commercialize the applicable product candidates in the applicable jurisdictions.

        We performed post-hoc analyses on the results of our completed Phase 2 clinical trial for KPI-121 0.25% for purpose of designing our Phase 3 clinical trials for KPI-121 0.25%. We may also conduct post-hoc analyses on the results of clinical trials in the future. Post-hoc analyses performed after unmasking trial results can result in the introduction of bias and may not be predictive of success in our Phase 3 clinical trials.

        If we are required to conduct additional clinical trials or other testing of KPI-121 0.25% or KPI-121 1.0% or any other product candidate that we develop beyond those that we currently expect, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the

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results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

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be delayed in obtaining marketing approval for our product candidates;



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not obtain marketing approval at all;



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obtain approval for indications or patient populations that are not as broad as intended or desired;



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obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;



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be subject to additional post-marketing testing requirements; or



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have the product removed from the market after obtaining marketing approval.

If we experience any of a number of possible unforeseen events in connection with our clinical trials, potential marketing approval or commercialization of our product candidates could be delayed or prevented.

        We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize KPI-121 1.0%, KPI-121 0.25% or any other product candidates that we may develop, including:

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clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;



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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 clinical trials at a higher rate than we anticipate;



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our third-party contractors may fail to comply with regulatory requirements or meet their obligations to us in a timely manner, or at all;



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regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;



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we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;



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we may decide, or regulators or institutional review boards may require us, to suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;



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regulators or institutional review boards may require us to perform additional or unanticipated clinical trials to obtain approval or we may be subject to additional post-marketing testing requirements to maintain regulatory approval;



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regulators may revise the requirements for approving our product candidates, or such requirements may not be as we anticipate;



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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 product candidates may be insufficient or inadequate or may be delayed;



•

our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or institutional review boards to suspend or terminate trials; and

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regulatory authorities may withdraw their approval of a product or impose restrictions on its distribution, such as in the form of a modified Risk Evaluation and Mitigation Strategy, or REMS.

        Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates.

If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.

        We may not be able to initiate or continue clinical trials for KPI-121 0.25% or any other product candidate we develop if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States.

        Patient enrollment is affected by a variety of factors, including:

•

the prevalence and severity of the ophthalmic 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 product candidates; and



•

the lack of adequate compensation for prospective patients.

        Our inability to locate and enroll a sufficient number of patients for our clinical trials would result in significant delays, could require us to abandon one or more clinical trials altogether and could delay or prevent our receipt of necessary regulatory approvals. Enrollment delays in our clinical trials may result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing.

If the FDA does not conclude that KPI-121 1.0% and KPI-121 0.25% satisfy the requirements under Section 505(b)(2) of the Federal Food Drug and Cosmetics Act, or if the requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those product candidates may take longer, cost more and entail greater complications and risks than anticipated, and may not be successful.

        We intend to seek FDA approval of KPI-121 1.0% and KPI-121 0.25% through the Section 505(b)(2) regulatory pathway. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug and Cosmetic Act. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant, and for which the applicant has not received a right of reference, which could expedite the development

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program for KPI-121 1.0% and KPI-121 0.25% by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for KPI-121 1.0% and KPI-121 0.25%, and complications and risks associated with approval of KPI-121 1.0% and KPI-121 0.25%, would likely substantially increase. Even if we are allowed to pursue the Section 505(b)(2) pathway to FDA approval, we cannot assure you that KPI-121 1.0% and KPI-121 0.25% 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 few years, certain competitors and others have objected to the FDA's interpretation of Section 505(b)(2). If the FDA's interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and to mandatory delays in approval of our NDAs for up to 30 months, depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. Thus, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead to faster product development or earlier approval of KPI-121 1.0% or KPI-121 0.25%.

        Even if KPI-121 1.0% and KPI-121 0.25% are approved under Section 505(b)(2), their approval may be subject to limitations on the indicated uses for which the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.

If serious adverse or unacceptable side effects are identified during the development of KPI-121 1.0%, KPI-121 0.25% or any other product candidates that we may develop, we may need to abandon or limit our development of such product candidates.

        If KPI-121 1.0%, KPI-121 0.25% or any other product candidates are associated with serious adverse events or undesirable side effects in clinical trials or have characteristics that are unexpected, we may need to abandon their development or limit development to more narrow uses or subpopulations in which the serious adverse events, undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. The most common adverse effects to date in trials evaluating the safety and efficacy of KPI-121 1.0% and KPI-121 0.25% have been eye pain, instillation site pain and photophobia, which is discomfort or pain due to exposure to light. There 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 and in our Phase 2 trial of KPI-121 0.25%, one patient out of the 72 patients in the KPI-121 0.25% treatment arm had elevated IOP classified as an adverse event as of day 29. We have no clinical safety data on or patient exposure to either KPI-121 concentration for longer than 28 days. Our understanding of the relationship between our products and these adverse effects may change as we gather more information, and additional unexpected adverse effects may occur. Many compounds that initially showed promise in clinical or earlier stage testing for treating ophthalmic disease have later been found to cause side effects that prevented further development of the compound. In addition, adverse events which had initially been considered

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unrelated to the study treatment may later be found to be caused by the study treatment. Moreover, incorrect or improper use of our product candidates (including use of KPI-121 0.25% more frequently than is prescribed) by patients could cause increases in IOP, and may result in additional unexpected side effects or adverse events. There can be no assurance that our product candidates will be used correctly, and if used incorrectly, such misuse could hamper commercial adoption of our product candidate, if approved, at the rate we currently expect.

We may not be successful in our efforts to develop product candidates based on our MPP technology or expand the use of our MPP technology for treating additional diseases and conditions.

        We are currently directing all of our development efforts towards applying our MPP technology to develop product candidates that are designed to diffuse through the mucus layer and enable the active drug substance to reach cells in the underlying target tissue. We have product candidates at various stages of development for treatment of eye diseases and are exploring the potential use of our MPP technology in other diseases, including diseases of the lungs, cervical/vaginal tract and gastrointestinal tract. Our existing product candidates and any other potential product candidates that we identify may not be suitable for continued preclinical or clinical development, including as a result of being shown to have harmful side effects or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance. If we do not successfully develop and commercialize our product candidates that we develop based upon our MPP technology approach, we will not be able to obtain substantial product revenues in future periods.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates 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 that we identify for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been 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 not accept 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 FDA may accept data from clinical trials conducted outside the United States, acceptance of these data is subject to conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and be performed by qualified investigators in accordance with ethical principles. The trial population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will depend on its determination that the trials also complied with all applicable U.S. laws and regulations. If the FDA does not accept the data from any trial that we conduct outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming and could delay or permanently halt our development of the applicable product candidates.

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Risks Related to the Commercialization of Our Product Candidates

Even if KPI-121 1.0%, KPI-121 0.25% or any other product candidates receives marketing approval, they may fail to achieve market acceptance by clinicians and patients, or adequate formulary coverage, pricing or reimbursement by third-party payors and others in the medical community, and the market opportunity for these products may be smaller than we estimate.

        If KPI-121 1.0%, KPI-121 0.25% or any other product candidate that we develop receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by clinicians, patients, third-party payors and others in the medical community. Common treatments in the United States for inflammation and pain following ocular surgery include corticosteroids. While the most commonly used corticosteroids are approved for four-times-a-day dosing, and we plan to seek approval of KPI 1.0% with twice-a-day dosing, doctors may continue to rely on ocular steroids other than KPI-121 1.0% and other treatments rather than KPI-121 1.0%, if and when it is approved for marketing by the FDA. It is also possible that other therapeutics will be approved for treatment of inflammation and pain following ocular surgery with twice-a-day dosing.

        While there are no drugs currently approved in the United States for the temporary relief of the signs and symptoms of dry eye disease, current treatments that are used in the United States for dry eye disease include over-the-counter artificial tears, Restasis®, Xiidra® and off-label use of corticosteroids. It is possible that doctors may continue to rely on these treatments rather than KPI-121 0.25%, if and when it is approved for marketing by the FDA. In addition, if generic versions of any products that compete with any of our product candidates are approved for marketing by the FDA, they would likely be offered 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.

        If KPI-121 1.0% or KPI-121 0.25% does not achieve an adequate level of acceptance, formulary coverage, pricing or reimbursement we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of KPI-121 1.0%, KPI-121 0.25% or any other product candidate that we develop, if approved for commercial sale, will depend on a number of factors, including:

•

the efficacy and potential advantages of 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 alternative treatments;



•

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 availability of third-party formulary coverage and adequate reimbursement, particularly by Medicare in light of the prevalence of dry eye disease and cataracts in persons over age 55;



•

the prevalence and severity of any side effects; and



•

any restrictions on the use of our products together with other medications.

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        Our assessment of the potential market opportunity for KPI-121 1.0%, KPI-121 0.25% and other product candidates is based on industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties, some of which we commissioned. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data. The potential market opportunity for the treatment of dry eye disease in particular is difficult to precisely estimate. In particular, we commissioned ClearView Healthcare Partners, a life science strategy consulting firm, to conduct a survey of 30 dry eye disease patients, which we refer to as the patient survey. As the patient survey involved a limited number of patients, the results from such survey may be less reflective of the dry eye disease population as a whole than a survey conducted with a larger sample size. Our estimates of the potential market opportunities 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 market opportunities. While we believe that our internal assumptions are reasonable, no independent source has verified such assumptions. If any of our assumptions or estimates, or these publications, research, surveys or studies prove to be inaccurate, then the actual market for KPI-121 1.0%, KPI-121 0.25% or any other product candidates may be smaller than we expect, and as a result our product revenue may be limited and it may be more difficult for us to achieve or maintain profitability.

If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution agreements with third parties, we may not be successful in commercializing KPI-121 1.0%, KPI-121 0.25% or any other product candidates that we may develop if and when they are approved.

        We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of therapeutic products. To achieve commercial success for any product for which we obtained marketing approval, we will need to establish sales, marketing and distribution capabilities, either ourselves or through collaborations or other arrangements with third parties.

        Subject to successful results of our ongoing Phase 3 clinical trials and FDA approval of any of our product candidates, we plan to build a focused specialty sales and marketing infrastructure to market or co-promote KPI-121 1.0%, KPI-121 0.25% and possibly other product candidates that we develop in the United States, if and when they are approved, as well as distribution capabilities. There are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. Further, we may underestimate the size of the sales force required for a successful product launch and may need to expand our sales force earlier and at a higher cost than we anticipated. If the commercial launch of KPI-121 1.0%, KPI-121 0.25% or any other product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

        Factors that may inhibit our efforts to commercialize KPI-121 1.0%, KPI-121 0.25% or any other product candidates on our own include:

•

our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;



•

the inability of sales personnel to obtain access to clinicians or persuade adequate numbers of clinicians to prescribe our products;



•

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

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unforeseen costs and expenses associated with creating an independent sales, marketing and distribution organization.

        While we cannot be certain when, if ever, we will seek and/or receive marketing approval to commercialize any of our product candidates outside the United States, assuming positive results from our U.S. Phase 3 clinical trials of KPI-121 0.25% for the treatment of dry eye disease, we plan to seek marketing approval and explore commercialization of KPI-121 0.25% in certain markets outside the United States, including the EU, utilizing a variety of collaboration, distribution and other marketing arrangements with one or more third parties. Our product revenues and our profitability, if any, under any such third-party collaboration, distribution or other marketing arrangements are likely to be lower than if we were to market, sell and distribute KPI-121 0.25% ourselves. We may also consider seeking marketing approval outside the United States for other product candidates in future. If we decide to seek regulatory approval for any of our product candidates outside the United States, we may need to seek additional patent approvals, seek licenses to patents held by third parties and/or face claims of infringing third-party patent rights. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute KPI-121 1.0%, KPI-121 0.25% or any other product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market KPI-121 1.0%, KPI-121 0.25% or other product candidates effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing KPI-121 1.0%, KPI-121 0.25% or any other product candidates that we may develop.

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do. Our product candidates will, if approved, 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 respect to KPI-121 1.0%, KPI-121 0.25% and any other product candidates, and will face competition with respect to any other product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical 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 and establish collaborative arrangements for research, development, manufacturing and commercialization.

        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 of these products are available on a generic basis, and our product candidates may not demonstrate sufficient additional 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. Given that we are developing products that utilize an FDA-approved corticosteroid, our product candidates, if approved, will face competition from generic and branded versions of existing drugs based on corticosteroids that are administered in a different manner.

        Following ocular surgery, topical steroids are commonly used to manage and prevent complications from post-operative inflammation. The current market leaders for topical steroids in the United States, based on revenue, are Lotemax® products and Durezol®. There are also a number of companies in the United States developing products and therapies in preclinical research and clinical development for the treatment of inflammation and pain following ocular surgery, including the following: Valeant Pharmaceuticals International, Inc. is developing an LE gel, which is formulated for topical delivery and is currently in Phase 3 clinical development; Ocular Therapeutix, Inc. is developing Dextenza™, a

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punctal plug that is currently in Phase 3 clinical development and has filed an NDA for the treatment of ocular pain following ophthalmic surgery; and Icon Bioscience, Inc. is developing IBI-10090, which is formulated as a drug delivery system, or DDS, to be injected into the eye following ocular surgery and is currently in Phase 3 clinical development.

        Current disease management approaches for dry eye disease in the United States include the following: over-the-counter artificial tear eye drops, which are used on an intermittent or chronic basis to provide short term symptomatic relief of dryness and irritation; off-label prescription drugs, including topical steroid drops and/or other similar products, which are prescribed on occasion for treatment of dry eye disease; on-label prescription drugs, including Restasis and Xiidra, which are the only prescription pharmaceutical products that are approved in the United States for use in patients with dry eye disease. Restasis is approved for increasing tear production in patients whose tear production is presumed to be suppressed due to ocular inflammation and Xiidra is approved for treatment of the signs and symptoms of dry eye disease. Both are typically used chronically as part of the dry eye management regimen, which also includes artificial tears and other palliative therapies, such as hot compresses for the eye and lid hygiene management; and devices, such as punctal plugs that are inserted into the tear ducts to inhibit tear drainage, resulting in more moisture on the surface of the eye.

        We are developing KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease, which may include the management of dry eye disease flares. Any product that is developed for the temporary treatment of the signs and symptoms of dry eye disease could directly compete with KPI-121 0.25%. There are several product candidates in preclinical and clinical development in the United States for the treatment of dry eye disease. If any of these product candidates is approved and such product candidate either treats the signs and symptoms of dry eye disease or reduces the frequency of flares in dry eye patients, it could reduce the overall market opportunity for KPI-121 0.25%. These product candidates are being developed by pharmaceutical companies, biotechnology companies, and specialty pharmaceutical and generic drug companies of various sizes, such as Mimetogen Pharmaceuticals, Inc., or Mimetogen (MIM-D3), Sun Pharmaceuticals (Seciera™), ReGenTree (TGN-259) and Allergan plc, or Allergan (AGN-195263). There are also other product candidates for the treatment of dry eye disease in the United States in earlier stage development. Further, Oculeve, which was acquired by Allergan, is developing True Tear, a nasal neurostimulation medical device that is intended to increase tear production.

        See "Business—Competition" for additional information regarding competing products and product candidates.

        Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than our products. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.

        In addition, our ability to compete may be affected in many cases by insurers or other third-party payors, particularly Medicare, seeking to encourage the use of generic products. Generic products are currently being used for certain of the indications that we are pursuing, and additional products are expected to become available on a generic basis over the coming years.

        Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early stage companies may also prove to be significant

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competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

If our contracted manufacturing facilities experience production issues for any reason, we may be unable to manufacture commercial quantities of our product candidates for a substantial amount of time, which could have a material adverse effect on our business.

        We will rely on third-party contract manufacturers to manufacture commercial supplies of KPI-121 1.0% and KPI-121 0.25%. Specifically, we will rely on Catalent Pharma Solutions, LLC, or Catalent, to manufacture and supply to us a minimum amount of KPI-121 1.0% and KPI-121 0.25% for commercial use; Alliance Contract Pharma, LLC, or Alliance, for manufacturing bulk KPI-121 concentrates, and Chemo Iberica SA, or Chemo Iberica, to manufacture and supply to us a bulk supply of loteprednol, or LE. We expect to rely on third parties to manufacture clinical supplies of other product candidates and commercial supplies of all of our products, if and when approved for marketing by applicable regulatory authorities, as well as for packaging, serialization, storage, distribution and other production logistics. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or manufacture our product candidates in accordance with regulatory requirements, if there are disagreements between us and such parties, or if such parties are unable to expand capacities to support commercialization of any of our product candidates for which we obtain marketing approval, we may not be able to complete, or may be delayed in producing sufficient 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 need to locate an appropriate replacement third-party relationship, which may not be readily available or on acceptable terms, which would cause additional delay and increased expense, including as a result of additional required FDA approvals, and may have a material adverse effect on our business.

        Our third-party manufacturers are subject to inspection and approval by the FDA before we can commence the manufacture and sale of any of our 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 approval regimen with respect to our product candidates may result in regulatory actions such as the issuance of FDA Form 483 notices of observations, warning letters or injunctions or the loss of operating licenses. For example, one of our third-party testing laboratories recently received a Form FDA 483 containing two inspectional observations. While the testing laboratory determined that the observations are non-critical and do not pose any risk or have any impact on its analytical programs, depending on the severity of any potential regulatory action, our clinical or commercial supply could be interrupted or limited, which could have a material adverse effect on our business.

        We or our third-party manufacturers may also encounter shortages in the raw materials or active pharmaceutical ingredient necessary to produce our product candidates in the quantities needed for our clinical trials or, if our product candidates are approved, in sufficient quantities for commercialization or to meet an increase in demand, as a result 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 or others. The failure of us or our third-party manufacturers to obtain the raw materials or active pharmaceutical ingredient necessary to manufacture sufficient quantities of our product candidates, may have a material adverse effect on our business.

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Even if we are able to commercialize KPI-121 1.0%, KPI-121 0.25% or any other product candidate that we may develop, the products may become subject to unfavorable pricing regulations, third-party coverage or reimbursement practices or healthcare reform initiatives, which could harm our business.

        Our ability to commercialize KPI-121 1.0%, KPI-121 0.25% or any other product candidates that we may develop successfully will depend, in part, on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government healthcare programs, private health insurers, managed care plans and other organizations. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, 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 control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Coverage and reimbursement may not be available for KPI-121 1.0%, KPI-121 0.25% or any other product that we commercialize and, even if they are available, the level of reimbursement may not be satisfactory.

        Inadequate reimbursement may adversely affect the demand for, or the price of, any product candidate for 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 of reimbursement relative to other therapies. If coverage and adequate reimbursement are not available or reimbursement is available only to limited levels, we may not be able to successfully commercialize KPI-121 1.0%, KPI-121 0.25% or any other product candidate for which we obtain marketing approval.

        There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the indications for which the drug is approved by the FDA or similar regulatory authorities outside the United States. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that we develop would compromise our ability to generate revenues and become profitable.

        The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country. To obtain

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reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain marketing approval.

        There can be no assurance that our product candidates, even if they are approved for sale in the United States or in other countries, will be considered medically reasonable and necessary for a specific indication or cost-effective by third-party payors, or that coverage and an adequate level of reimbursement will be available or that third-party payors' reimbursement policies will not adversely affect our ability to sell our product candidates profitably.

Product liability lawsuits against us could divert our resources and could cause us to incur substantial liabilities and to limit commercialization of any products that we develop.

        We face an inherent risk of product liability exposure related to the use of our product candidates that we develop in human clinical trials. We face an even greater risk if we commercially sell any products that we develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

•

decreased demand for any product candidates or products that we 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 commercialize any products that we develop.

        We currently hold $10 million in product liability insurance coverage in the aggregate, with a per incident limit of $10 million, which may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials. We will need to further increase our insurance coverage if we commence commercialization of any of KPI-121 1.0%, KPI-121 0.25% or any product candidates for which we obtain marketing approval. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

Risks Related to Our Dependence on Third Parties

We rely, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

        We relied on third-party clinical research organizations, or CROs, in conducting our completed Phase 3 clinical trials of KPI-121 1.0% for the treatment of inflammation and pain following cataract surgery, our completed Phase 2 clinical trial of KPI-121 0.25% in patients with dry eye disease, and our ongoing Phase 3 clinical trials of KPI-121 0.25%. We expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to conduct clinical trials of any other product candidate that we develop. We or these third parties may terminate their engagements with us at any time for a variety of reasons, including a failure to perform

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by the third parties. If we need to enter into alternative arrangements, that would delay our product development activities.

        Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, or GCPs, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within specified timeframes. Failure to do so can 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 our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in 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 other entities, 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 on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

We contract with third parties for the manufacture of KPI-121 1.0% and KPI-121 0.25% for commercialization and for clinical trials and commercialization of any of our other existing and any future product candidates. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

        We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of KPI-121 1.0% and KPI-121 0.25% or any other product candidates. We will rely on Catalent to manufacture and supply to us a minimum amount of KPI-121 1.0% and KPI-121 0.25% 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 such third-party manufacturers to manufacture commercial supplies of all of our products and clinical supplies of any other product candidates if and when approved for marketing by applicable regulatory authorities. Our current and anticipated future dependence upon others for the manufacture of KPI-121 1.0% and KPI-121 0.25% and any other product candidate or product that we develop may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis. In addition, any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval.

        To date, we have obtained materials for KPI-121 for our clinical trials from third-party manufacturers, including Catalent and Alliance. We have supply agreements in place with these contract manufacturers to provide commercial supply. We obtain the active pharmaceutical ingredient for KPI-121 from Chemo Iberica, a third-party API manufacturer. While we have long-term commercial supply agreements with these third-party manufacturers, if these suppliers do not perform as we expect, we may be required to replace one or more suppliers. Although we believe that there are a number of potential long term replacements to our suppliers, we may incur added costs and delays in identifying and qualifying any such replacements.

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        The FDA maintains strict requirements governing the manufacturing process. When a manufacturer seeks to modify or make even seemingly minor changes to that process, the FDA may require the applicant to conduct a comparability study that evaluates the potential differences in the product resulting from the change in the manufacturing process. The FDA has issued several guidances on this point. In connection with our application for approval to market KPI-121 1.0%, KPI-121 0.25% or other product candidates in the United States, we may be required to conduct a comparability study if the product we intend to market is supplied by a manufacturer different from the one who supplied the product evaluated in our clinical studies. Delays in designing and completing this study to the satisfaction of the FDA could delay or preclude our development and commercialization plans and thereby limit our revenues and growth.

        Reliance on third-party manufacturers entails additional risks, including:

•

KPI-121 1.0%, KPI-121 0.25% and any other product that we develop may compete with other product candidates and products for access to a limited number of suitable manufacturing facilities that operate under current good manufacturing practices, or cGMP, regulations;



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reliance on the third party for regulatory compliance and quality assurance;



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the possible breach of the manufacturing agreement by the third party;



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the possible misappropriation of our proprietary information, including our trade secrets and know-how; and



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the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.

        Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products and harm our business and results of operations.

        Any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us. We were previously required to change our third-party manufacturer when the manufacturer was purchased by a third party and exited the contract manufacturing business. The process of changing manufacturers can cause substantial time delays, and if we are required to change our manufacturer again in the future, it may delay our planned clinical trials or development timeline.

        Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply for bulk drug substances. If any one of our current contract manufacturers cannot perform as agreed, we may be required to replace that manufacturer. Although we believe that there are several potential alternative manufacturers who could manufacture our product candidates, we may incur added costs and delays in identifying and qualifying any such replacement.

        Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to commercialize any medicines that receive marketing approval on a timely and competitive basis.

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We may enter into collaborations with third parties for the development or commercialization of our product candidates. If our 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 parties to develop and commercialize KPI-121 1.0%, KPI-121 0.25% or any other product candidates for which we obtain marketing approval in markets outside the United States. We also may enter into arrangements with third parties to perform these services in the United States if we do not establish our own sales, marketing and distribution capabilities in the United States for our product candidates or if we determine that such third-party arrangements are otherwise beneficial. We also may seek third-party collaborators for development and commercialization of other product candidates. For example, we may utilize a variety of collaboration, distribution and other marketing arrangements with one or more third parties to facilitate commercialization of KPI-121 0.25% outside the U.S. We may also consider potential collaborative partnership opportunities prior to initiating IND-enabling studies on KPI-285 or any other product candidates we develop through our rTKI program. Our likely collaborators for any sales, marketing, distribution, development, licensing or broader collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. We are not currently party to any such arrangement. However, if we do enter into any such arrangements with any third parties in the future, we will likely have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our collaborators' abilities and efforts to successfully perform the functions assigned to them in these arrangements.

        Collaborations that we enter into may pose a number of risks, including the following:

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collaborators have significant discretion in determining the amount and timing of efforts and resources that they will apply to these collaborations;



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collaborators may not perform their obligations as expected;



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collaborators may not pursue development of our product candidates or may elect not to continue or renew development programs based on results of clinical trials or other studies, changes in the collaborators' strategic focus or available funding, or external factors, such as an acquisition, that divert resources or create competing priorities;



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collaborators may not pursue commercialization of our product candidates that receive marketing approval or may elect not to continue or renew commercialization programs based on changes in the collaborators' strategic focus or available funding, or external factors, such as an acquisition, that divert resources or create competing priorities;



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collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;



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collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;



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product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;

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•

a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of such product or products;



•

disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of product candidates, might lead to additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would divert management attention and resources, be time-consuming and expensive;



•

collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;



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collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and



•

collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to raise 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 efficient manner, or at all. If any collaborations that we enter into do not result in the successful development and commercialization of products or if one of our collaborators terminates its agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, our development of our product candidates could be delayed and we may need additional resources to develop our product candidates. All of the risks relating to product development, regulatory approval and commercialization described in this prospectus also apply 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 business combination, it might de-emphasize or terminate the development or commercialization of any product candidate licensed to it by us. If one of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators and our perception 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 our business could be adversely affected.

        For some of our product candidates, we may decide to collaborate with pharmaceutical or biotechnology companies for the development and potential commercialization of those product candidates. We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement 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. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership 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 technologies

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for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. We may also be restricted under future license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies 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 may have to curtail the development of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing 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 additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our product candidates or bring them to market or continue to develop our product platform.

Risks Related to Our Intellectual Property

We may be unable to obtain and maintain patent protection for our technology and product candidates, or the scope of the patent protection obtained may not be sufficiently broad or enforceable, such that our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology 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 other countries with respect to our proprietary technology and product candidates. We have sought to protect our proprietary position by filing in the United States and in certain foreign jurisdictions patent applications related to our novel technologies and product candidates.

        The patent prosecution process is expensive and time-consuming, and we may not have filed, maintained or prosecuted and may not be able to file, maintain and prosecute all necessary or desirable patents or patent applications at a reasonable cost or in a timely manner. We may also fail to identify patentable aspects of our research and development output before it is too late to obtain 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 patent applications may fail to result in issued patents in the United States or in other foreign countries which protect our technology 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 the standards applied by the U.S. Patent and Trademark Office and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, unlike patent law in the United States, European patent law precludes the patentability of methods of treatment of the human body and imposes substantial restrictions on the scope of claims it will grant if broader than specifically 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 in some cases not at all. Therefore, we cannot be certain whether we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions. Databases for patents and publications,

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and methods for searching them, are inherently limited so we may not know the full scope of all issued and pending patent applications. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or product candidates, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. In particular, during prosecution of any patent application, the issuance of any patents based on the application may depend upon our ability to generate additional preclinical or clinical data that support the patentability of our proposed claims. We may not be able to generate sufficient additional data on a timely basis, or at all. Moreover, changes in either the patent laws or interpretation of the patent laws in the United States and other 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 us with any meaningful protection for our proprietary technology and product candidates, prevent competitors from competing with us, or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner. In particular, a competitor may develop an approach to deliver drugs through the mucus layer to the underlying target tissue that uses a different approach than our MPP 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 our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and product candidates. 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 patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution 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. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The United States Patent Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law 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 patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, which could have a material adverse effect on our business, financial condition, results of operations and prospects. For example, the Leahy-Smith Act provides a new administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, that provides a venue for companies to challenge the validity of competitor patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long term impact the PTAB proceedings will have on the operation of our business, the initial results of patent

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challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could therefore increase the likelihood that our own patents will be challenged, thereby increasing 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 countries under similar legislation, thereby potentially extending the term of our marketing exclusivity for our product candidates, our business may be materially harmed.

        Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, one of the U.S. patents covering each of such product candidates or the use thereof may be eligible for up to five years of patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one patent to be extended per FDA approved product as compensation for the patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only those claims covering such approved drug product, a method for using it or a method for manufacturing it may be extended. Patent term extension also may be available in certain foreign countries upon regulatory approval of our product candidates. Nevertheless, we may not 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 applicable deadlines, 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 the governmental 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 may obtain approval of competing products following our patent expiration sooner, and our revenue could be reduced, possibly materially.

        It is possible that we will not obtain patent term extension under the Hatch-Waxman Act for a U.S. patent covering one of our product candidates even where that patent is eligible for patent term extension, or if we obtain such an extension, it may be for a shorter period than we had sought. Further, for our licensed patents, we do not have the right to control prosecution, including filing with the U.S. Patent and Trademark Office, a petition for patent term extension under the 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 and Trademark Office.

        Also, there are detailed rules and requirements regarding the patents that may be submitted to the FDA for listing in the Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book. We may be unable to obtain patents covering 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 generic drugs may challenge the listing. If one of our product candidates is approved and a patent covering that product candidate is not listed in the Orange Book, a manufacturer of generic drugs would not have to provide advance notice to us of any Abbreviated New Drug Application filed with the FDA to obtain permission to sell a generic version of such product candidate.

        We also intend to seek pediatric exclusivity for certain of our product candidates, including KPI-121 1.0%. Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve another application. We cannot provide any assurance that pediatric exclusivity will be obtained for any of our product candidates.

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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 be required to file infringement or misappropriation claims or other intellectual property related proceedings, which can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents or that our asserted patents are invalid. In addition, in a patent infringement 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 on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly, and could put any of our patent applications at risk of not yielding an issued patent. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information or trade secrets could be compromised 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, or become involved in other contested proceedings such as opposition, derivation, reexamination, inter partes review, post-grant review 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 patent rights, allow third parties to commercialize our technology or product candidates and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies 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 not described in the product's labeling. Although use of a product directed by off-label prescriptions may infringe our method-of-treatment patents, the practice is common across medical specialties, particularly in the United States, and such infringement is difficult to detect, prevent or prosecute.

Third parties may initiate legal proceedings alleging that we are infringing, misappropriating or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

        Our commercial success depends upon our ability to develop, manufacture, market and sell KPI-121 1.0%, KPI-121 0.25% and other product candidates and use our proprietary technologies without infringing, misappropriating or otherwise violating the intellectual property and other proprietary rights of third parties. There is a considerable amount of intellectual property litigation in the biotechnology and pharmaceutical industries. We may become party to, or threatened with, infringement litigation claims regarding our products and technology, including claims from competitors or from non-practicing entities that have no relevant product revenue and against whom our own patent portfolio may have no deterrent effect. Moreover, we may become party to future adversarial proceedings or litigation regarding our patent portfolio 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 or foreign patent offices. For example, we are aware of a third-party European patent that contains claims related to use of LE for the treatment of moderate to severe dry eye disease and the use of LE for

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reducing conjunctival redness associated with dry eye disease. This European patent will expire in early 2025, and is in force in Germany, the United Kingdom, Spain, Italy, and France. There is no United States counterpart patent or pending U.S. patent application. While we have obtained an opinion of European counsel that this patent is invalid, until this patent expires or a court of competent jurisdiction finally determines the patent is invalid in each country, the patent holder may be able to block our ability to develop and commercialize KPI-121 0.25% for the treatment of dry eye disease in Europe unless we obtain a license under this patent in each country where it is in force. Such a license may not be available on commercially reasonable terms or at all. If we are unable to invalidate the patent in each country or obtain a license on commercially reasonable terms, our ability to commercialize KPI-121 0.25% for the treatment of dry eye disease in Europe may be impaired, delayed or halted altogether.

        The legal threshold for initiating litigation or contested proceedings is low, so that even lawsuits or proceedings with a low probability of success might be initiated and require significant resources to defend. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can. The risks of being involved in such litigation and proceedings may increase as our product candidates near commercialization and as we gain the greater visibility associated with being a public company. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future. We may not be aware of all such intellectual property rights potentially relating to our product candidates and their uses. Thus, we do not know with certainty that KPI-121 1.0%, KPI-121 0.25% or any other product candidates, or our development and commercialization thereof, do not and will not infringe or otherwise violate any third party's intellectual property.

        If we are found to infringe, misappropriate or otherwise violate a third party's intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same 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 or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys' fees if we are found to have willfully infringed a patent and could be forced to indemnify our customers or collaborators. A finding of infringement could also result in an injunction that prevents us from commercializing our product candidates or forces us to cease some of our business 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 have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated 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 Trademark Office and foreign patent agencies in several stages or annually over the lifetime of our owned and licensed patents and patent applications. The U.S. Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In certain circumstances, we rely on our licensing partners to pay these fees to, or comply with the procedural and documentary rules of, the relevant patent agency. While an inadvertent lapse can in many cases be

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cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering our product candidates, it would have a material adverse effect on our business.

KPI-121 1.0%, KPI-121 0.25% and certain aspects of our MPP technology are protected by patents exclusively licensed from other companies or institutions. If these third parties terminate their agreements with us or fail to maintain or enforce the underlying patents, or we otherwise lose our rights to these patents, our competitive position and our market share in the markets 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 certain aspects of our business depend on patents and/or patent applications owned by other companies or institutions. In particular, we hold exclusive licenses for patent families relating to KPI-121 1.0% and KPI-121 0.25%, other product candidates and some aspects of our MPP technology. While we control patent prosecution of the licensed patent families relating to KPI-121 1.0% and KPI-121 0.25%, for the remainder of the patent families subject to our exclusive license agreement with JHU that relate to our MPP technology, JHU retains control of patent prosecution. Our rights with respect to in-licensed patents and patent applications may be lost if the applicable license agreement expires or is terminated. We are likely to enter into additional license agreements to in-license patents and patent applications as part of the development of our business in the future, under which we may not retain control of the preparation, filing, prosecution, maintenance, enforcement and defense of such patents. If we are unable to maintain these patent rights for any reason, our ability to develop and commercialize our product candidates could be materially harmed.

        Our licensors may not successfully prosecute certain patent applications, the prosecution of which they control, under which we are licensed and on which our business depends. Even if patents issue from these applications, our licensors may fail to maintain these patents, may decide not to pursue litigation against third-party infringers, may fail to prove infringement, or may fail 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 of circumstances beyond our control. In spite of our best efforts, our licensors might conclude that we have materially breached our intellectual property agreements and might therefore terminate the intellectual property agreements, thereby removing our ability to market products covered by these intellectual property agreements. If our intellectual property agreements are 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 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 assigned patents and patent applications. This could have a material adverse effect on our competitive business position and our business prospects

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Some intellectual property which we own or have licensed may have been discovered through government funded programs and thus may be subject to federal regulations such as "march-in" rights, certain reporting requirements, and a preference for United States industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources 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 States government funding and may therefore be subject to certain federal regulations. For example, certain aspects of our MPP technology as well as certain aspects of our patents that use LE as an active ingredient were developed using United States government funds. As a result, the United States government may have certain rights to intellectual property embodied in our current or future products and product candidates based on our MPP technology or that use LE as an active ingredient pursuant to the Bayh-Dole Act of 1980. These United States government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the United States government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been 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-in rights"). The United States government also has the right to take title to these inventions if we fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition, the United States government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us to expend substantial resources. In addition, the United States government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for United States manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property. Any exercise by the government of any of the foregoing rights could harm our competitive position, 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, we could 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 the technology for KPI-121 1.0%, KPI-121 0.25% and other product candidates, imposes royalty and other financial obligations on us and other substantial performance obligations. We also may enter into additional licensing and funding arrangements with third parties that may impose diligence, development and commercialization timelines and milestone payment, royalty, insurance and other obligations on us. If we fail to comply with our obligations under current or future license and collaboration agreements, 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 that is covered by these agreements or may face other penalties under the agreements. Such an occurrence could diminish the value of our product. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology.

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        In addition it is possible that JHU may conclude that we have materially breached the JHU licensing agreement and might therefore terminate the agreement, thereby removing our ability to market products covered by our license agreement with JHU. 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 the technology covered by the licensed or assigned patents and patent applications. If we breach the agreement (including by failing to meet our payment obligations) and do not adequately cure such breach, the rights in the technology licensed to us under the JHU license agreement will revert to JHU at no cost to JHU. This could have a material adverse effect on our competitive business position and our business prospects.

        In addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of 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 current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our business, financial conditions, results of 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 be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United 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 patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection or licenses but enforcement is not as strong as that in the United States. These products may compete with our products, 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 in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from 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 third parties. In addition, many countries limit the enforceability of patents against

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government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our licensors is forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations, and prospects may be adversely affected.

We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, 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, medical device or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees and contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, 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 of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Furthermore, we are unable to control whether our licensors have obtained similar assignment agreements from their own employees and contractors. Our and their assignment agreements may not be self-executing or may be breached, and we or our licensors may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.

        If we or our licensors fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel which could have a material adverse effect on our competitive business position and prospects. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or products, which may not be available on commercially reasonable terms or at all. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.

Intellectual property litigation or other legal proceedings relating to intellectual property could cause us to spend substantial resources 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 us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and may also have an advantage in such proceedings due to their more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have an adverse effect on our ability to compete in the marketplace.

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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 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 to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, 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 our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Detecting the disclosure or misappropriation of a trade secret and enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance Matters

If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our 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 KPI-121 1.0% and KPI-121 0.25%, and the activities associated with their development and commercialization, 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 agencies in the United States and by comparable authorities in other countries.

        Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. We have not received approval to market KPI-121 1.0%, KPI-121 0.25% or any other product candidate from regulatory authorities in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on third-party consultants and vendors to assist us in this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate's safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. The FDA or other regulatory authorities may determine that KPI-121 1.0%, KPI-121 0.25% or any other product candidate that we develop is not effective, is only moderately effective or has undesirable or unintended side effects, toxicities or other characteristics that preclude our obtaining marketing approval or prevent or limit commercial 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 and novelty of the product candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional

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statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we ultimately obtain may be limited 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 KPI-121 1.0%, KPI-121 0.25% or any other product candidate that we develop, the commercial prospects for such product candidate may be harmed and our ability to generate revenues will be materially impaired.

Failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketed abroad.

        In order to market and sell KPI-121 1.0%, KPI-121 0.25% or other product candidates in the European Union and many other jurisdictions, we or our potential third-party collaborators, must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. Regulatory authorities outside the United States, in particular in the European Union, have not issued guidance on the requirements for approval of a dry eye drug. Our Phase 3 clinical trials of KPI-121 0.25% may not be sufficient to support an application for marketing approval outside the United States.

        The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be sold in that country. We or our potential collaborators may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in any market.

        Additionally, on June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the European Union, commonly referred to as Brexit. On March 29, 2017, the United Kingdom formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. Since a significant proportion of the regulatory framework in the United Kingdom is derived from European Union directives and regulations, the withdrawal could materially impact the regulatory regime with respect to the approval of our product candidates in the United Kingdom or the European Union. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing our product candidates in the United Kingdom and/or the European Union and restrict our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or European Union for our product candidates, which could significantly and materially harm our business.

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The terms of approvals, ongoing regulations and post-marketing restrictions for our products may limit how we manufacture and 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 to ongoing review and extensive regulation. We, and any potential collaborators we may have in the future, must therefore comply with requirements concerning advertising and promotion for any of our products for which we or our collaborators obtain marketing approval. Promotional communications with respect to drug products and medical devices are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product's approved labeling. Thus, if any of our product candidates receives marketing approval, the accompanying label may limit the approved use of our product, which could limit sales of the product.

        The FDA may also impose requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product, including the adoption and implementation of risk evaluation and mitigation strategies. The FDA closely regulates the post-approval marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling and regulatory requirements. The FDA imposes stringent restrictions on manufacturers' communications regarding off-label use and if we do not restrict the marketing of our products only to their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the Federal Food, Drug, and Cosmetic Act relating to the promotion of prescription drugs may lead to investigations alleging violations of federal and state healthcare fraud and abuse laws, as well as state consumer protection laws.

        In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or 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;



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warning or untitled letters;



•

withdrawal of the products from the market;



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refusal to approve pending applications or supplements to approved applications that we submit;



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recall of products;



•

fines, restitution or disgorgement of profits or revenue;



•

suspension or withdrawal of marketing approvals;



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refusal to permit the import or export of our products;



•

product seizure; or



•

injunctions or the imposition of civil or criminal penalties.

        Non-compliance with European Union requirements regarding safety monitoring or pharmacovigilance can also result in significant financial penalties. Similarly, failure to comply with the European Union's 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 with extensive FDA requirements, including ensuring that quality control and manufacturing

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procedures conform to cGMPs applicable to drug manufacturers or quality assurance standards applicable to medical device manufacturers, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. We, any contract manufacturers we may engage in the future, our future collaborators and their contract manufacturers will also be subject to other regulatory requirements, including submissions of safety and other post-marketing information and reports, registration and listing requirements, requirements regarding the distribution of samples to clinicians, recordkeeping, and costly post-marketing studies or clinical trials and surveillance to monitor the 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 experience unanticipated problems with our products.

        Violations of the Federal Food, Drug, and Cosmetic Act relating to the promotion or manufacturing of drug products or medical devices may lead to investigations by the FDA, Department of Justice and state Attorneys General alleging violations of federal and state healthcare fraud and abuse laws, as well as state consumer protection laws. In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:

•

restrictions on such products, manufacturers or manufacturing processes;



•

restrictions on the labeling or marketing of a product;



•

restrictions on product distribution or use;



•

requirements to conduct post-marketing studies or clinical trials;



•

warning 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 revenues;



•

suspension or withdrawal of marketing approvals;



•

refusal to permit the import or export of our products;



•

product seizure or detention; or



•

injunctions or the imposition of civil or criminal penalties.

        Non-compliance with European Union requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties.

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 and regulations, 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 will play a primary role in the recommendation and prescription and use of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain

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the business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain marketing approval. In addition, we may be subject to transparency laws and patient privacy regulation by U.S. federal and state governments and by governments in foreign jurisdictions in which we conduct our business. The applicable federal, 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 willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid;



•

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 or entities for knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;



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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;



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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and their respective implementing regulations, which imposes obligations, including mandatory contractual terms, on covered healthcare providers, health plans and healthcare clearinghouses, as well as their business associates, with respect 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 may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers, state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to clinicians and other healthcare providers or marketing expenditures, and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

        Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may 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 and Medicaid, and the curtailment or restructuring of our operations. If any of the clinicians or other healthcare providers or entities with whom we 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.

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Recently enacted and future legislation may affect our ability to commercialize and the prices we obtain for any products that are 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 and proposed changes regarding the healthcare system that could affect our ability to profitably sell or commercialize KPI-121 1.0%, KPI-121 0.25% or any other product candidate for which we obtain marketing approval. The pharmaceutical industry has been a particular focus of these efforts and have been significantly affected by legislative initiatives. Current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward 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 Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for clinician administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products. While the Medicare Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the Medicare Modernization Act 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 the Health Care and Education Affordability Reconciliation Act, or collectively the ACA. Among the provisions of the ACA of importance to our business, including, without limitation, our ability to commercialize and the prices we may obtain for any of our product candidates and that are approved for sale, are the following:

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an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents;



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an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;



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a new Medicare Part D coverage gap discount program, in which participating manufacturers must agree to offer 50% point-of-sale discounts off negotiated drug prices during the coverage gap period as a condition for the manufacturer's outpatient drugs to be covered under Medicare Part D;



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expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, and the addition of new government investigative powers, and enhanced penalties for noncompliance;



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extension of manufacturers' Medicaid rebate liability;



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expansion of eligibility criteria for Medicaid programs; and



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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. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach

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required goals, thereby triggering the legislation's automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.

        With the new Administration and Congress, there may be additional legislative changes, including potentially repeal and replacement of certain provisions of the ACA. It remains to be seen, however, whether new legislation will be enacted and, if so, precisely what any new legislation could provide and what impact it will have on the availability of healthcare and containing or lowering the cost of healthcare. For example, it is possible that any repeal and replacement initiatives, if enacted into law, could ultimately result in fewer individuals having health insurance coverage or in individuals having insurance coverage with less generous benefits. The timing and scope of any potential future legislation to repeal and replace ACA provisions is highly uncertain in many respects.

        Accordingly, such reforms, if enacted, could have an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which we may obtain marketing approval and may affect our overall financial condition and ability to develop or commercialize product candidates. We expect that the ACA, 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 payment methodologies and additional downward pressure on the price that we receive for any approved product and/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 any products we may develop are prescribed or administered. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.

        The costs of prescription pharmaceuticals in the United States has also been the subject of considerable discussion in the United States, and members of Congress and the Administration have stated that they will address such costs through new legislative and administrative measures. The pricing of prescription pharmaceuticals is also subject to governmental control outside the United States. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our ability to generate revenues and become profitable could be impaired.

If we or any third-party manufacturers we engage in the future 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 may engage in the future are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the future, our operations may involve the use of hazardous materials, including chemicals and biological materials, and produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our

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resources. We also could incur significant costs associated with civil or criminal 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 and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.

        In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Our failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

        Further, with respect to the operations of any future third-party contract manufacturers, it is possible that if they fail to operate in compliance with applicable environmental, health and safety laws and regulations or properly dispose of wastes associated with our products, we could be held liable for any resulting damages, suffer reputational harm or experience a disruption 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 governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures and legal expenses, be precluded from developing manufacturing and selling certain products outside the United States or be required to develop and implement costly compliance programs,, which could adversely affect our business, results of operations and financial condition.

        Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or Bribery Act, the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws that apply in countries where we do business and may do business in the future. The Bribery Act, FCPA and these other laws generally prohibit us, our officers, and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or 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 the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been 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 Bribery Act or FCPA violations, and we may participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under the Bribery Act, FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted. If we expand our operations outside of the United States, we will need to dedicate additional resources to comply with 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 regulations administered by the governments of the United Kingdom and the United States, and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws. In addition, various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of

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information classified for national security purposes, as well as certain products and technical data relating to those products. If we expand our presence outside of the United States, it will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the United States, 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-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. The Securities and Exchange Commission also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA's accounting provisions. Any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control laws by U.K., U.S. or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.

Risks Related to Employee Matters and Managing Growth

Our 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 and business development expertise of Mark Iwicki, our Chief Executive Officer, Charlie McDermott, our President and Chief Business Officer, Kim Brazzell, Ph.D., our Chief Medical Officer, and Hongming Chen, Sc.D., our Chief Scientific Officer, as well as the other principal members of our management, scientific and clinical team. Although we have entered into employment agreements with our executive officers, each of them may terminate their employment with us at any time. We do not maintain "key person" insurance for any of our executives or other employees.

        Recruiting and retaining qualified scientific, clinical, manufacturing, legal and sales and marketing personnel will also be critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.

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We expect to expand our development, regulatory and manufacturing capabilities and potentially implement sales, marketing and distribution capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

        We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, clinical, regulatory affairs, manufacturing, sales, marketing and distribution. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and our limited experience in managing such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

Risks Related to Our Common Stock and This Offering

After this offering, our executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to control all matters submitted to stockholders for approval.

        Upon the closing of this offering, our executive officers and directors and our stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately        % of our capital stock. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially 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 other stockholders may desire.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

        Provisions in our certificate of incorporation and our bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

•

establish a classified board of directors such that only one of three classes of directors is elected each year;



•

allow the authorized number of our directors to be changed only by resolution of our board of directors;

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•

limit the manner in which stockholders can remove directors from our board of directors;



•

establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;



•

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders 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 to institute a "poison pill" that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing 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 to amend or repeal specified provisions of our certificate of incorporation or bylaws that will become effective upon the closing of this offering.

        Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

        The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. To the extent outstanding options or warrants are exercised, you will incur further dilution. Based on an assumed initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, you will experience immediate dilution of $            per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price.

An active trading market for our common stock may not develop.

        Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. Although we applied to have our common stock approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares or at all.

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.

        Our stock price is likely to be volatile. The stock market in general and the market for smaller biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may

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not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

•

results of clinical trials of KPI-121 0.25% and any other product candidates;



•

results of clinical trials of product candidates of our competitors;



•

our success in commercializing KPI-121 1.0% and KPI-121 0.25%;



•

the success of competitive products or technologies;



•

regulatory or legal developments in the United States and other countries;



•

developments or disputes concerning patent applications, issued patents or other proprietary rights;



•

the recruitment or departure of key scientific or management personnel;



•

the level of expenses related to any of our product candidates or clinical development programs;



•

the results of our efforts to discover, develop, acquire or in-license additional products, product candidates or technologies for the treatment of ophthalmic diseases or conditions, the costs of commercializing any such products and the costs of development of any such product candidates or technologies;



•

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;



•

variations in our financial results or those of companies that are perceived to be similar to us;



•

changes in the structure of healthcare payment systems;



•

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 litigation has often been instituted against that company. We also may face securities class-action litigation if we cannot obtain regulatory approvals for or if we otherwise fail to commercialize KPI-121 1.0%, KPI-121 0.25% or other product candidates. Such litigation, if instituted against us, could cause us to incur substantial costs to defend such claims and divert management's attention and resources.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

        Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could cause the price of our common stock to decline and delay the development of our product candidates. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of our common stock 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 that the holders of a large number of shares intend to sell shares, could

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reduce the market price of our common stock. After this offering, we will have            shares of common stock outstanding based on the number of shares outstanding as of April 30, 2017. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates or existing stockholders. The remaining             shares are currently restricted as a result of securities laws or lock-up agreements but will become eligible to be sold at various times after the offering. Moreover, beginning 180 days after the completion of this offering, holders of an aggregate of 83,863,957 shares of our common stock will have rights, along with holders of an additional 7,872,633 shares of our common stock issuable upon exercise of outstanding warrants and options, subject to specified conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the "Underwriting" section of this prospectus.

We are an "emerging growth company," and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

        We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years. As an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

•

being permitted to provide only two years of audited financial statements in this prospectus, in addition to any required unaudited interim financial statements, with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure;



•

not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;



•

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional 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 and shareholder approval of any golden parachute payments not previously approved.

        We have taken advantage of reduced reporting obligations in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will incur increased costs as a result of operating as a public company, and our management will be 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 significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the

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listing requirements of The NASDAQ Global Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.

        We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

        For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies as described in the preceding risk factor. We may remain an emerging growth company until the end of the fiscal year in which the fifth anniversary of this offering occurs, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1.07 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year. We also would cease to be an emerging growth company if we issue more than $1 billion of non-convertible debt over a three-year period.

        Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses in our internal control over financial reporting, it could result in an adverse 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, if any, 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 future earnings, if any, to finance the growth and development of our business. In addition, the terms of our 2014 Debt Facility preclude us from paying dividends without the lenders' consent, and any future debt agreements that we may enter into may preclude us from paying dividends without the lenders' consent or at all. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

        This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of 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 are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

        The forward-looking statements in this prospectus include, among other things, statements about:

•

our ongoing clinical trials, including our two Phase 3 clinical trials of KPI-121 0.25% in patients with dry eye disease;



•

our plans to develop and commercialize KPI-121 1.0%, KPI-121 0.25% and any other product candidates, if they are approved;



•

the timing of and our ability to submit applications for, obtain and maintain regulatory approvals for KPI-121 1.0%, KPI-121 0.25% and other product candidates;



•

our expectations regarding our ability to fund our operating expenses and capital expenditure requirements with our cash on hand and proceeds of this offering;



•

the potential advantages of our product candidates;



•

the rate and degree of market acceptance and clinical utility of our products;



•

our estimates regarding the potential market opportunity for our product candidates;



•

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 potential that are consistent with our commercial objectives;



•

our expectations related to the use of proceeds from this offering;



•

our estimates regarding expenses, future revenue, timing of any future revenue, capital requirements and needs for additional financing;



•

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 JOBS Act.

        We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the "Risk Factors" section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking

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statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

        You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this prospectus are made as of the date of this prospectus, and we do not assume any obligation to update any forward-looking statements except as required by applicable law.

        This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties as well as our own estimates of potential market opportunities. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Our estimates of the potential market opportunities 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 may fail to accurately reflect market opportunities. While we believe that our internal assumptions are reasonable, no independent source has verified such assumptions.

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USE OF PROCEEDS

        We estimate that the net proceeds from our issuance and sale of                        shares of our common stock in this offering will be approximately $             million, assuming an initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares of our common stock in full, we estimate that the net proceeds from this offering will be approximately $             million.

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        As of March 31, 2017, we had cash on hand of $36.0 million. We currently estimate that we will use the net proceeds from this offering, together with our existing cash on hand, as follows:

•

approximately $             million to fund clinical development of our KPI-121 product candidates, including preparation of NDA submissions for KPI-121 1.0% for the treatment of post-operative inflammation and pain following ocular surgery and for KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease;



•

approximately $             million to prepare for commercialization of KPI-121 1.0% and KPI-121 0.25%, including establishment of a focused, specialty sales force;



•

approximately $             million to support the manufacture of a commercial supply of KPI-121;



•

approximately $             million to fund other early stage pipeline development programs; and



•

the remainder for working capital and other general corporate purposes, including scheduled payments on existing indebtedness and funding the costs of operating as a public company.

        This expected use of net proceeds from this offering and our existing cash represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status of and results from clinical trials, the timing of regulatory submissions and the outcome of regulatory review, as well as any collaborations that we may enter into with third parties for our product candidates, and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

        Based on our planned use of the net proceeds from this offering and our existing cash described above, we estimate that such funds will be sufficient to enable us to                                    . We do not anticipate that the net proceeds from this offering together with our existing cash will be sufficient to allow us to                                    .

        Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

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DIVIDEND POLICY

        We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. In addition, our ability to pay cash dividends is currently restricted by the terms of our 2014 Debt Facility, and future debt financing arrangements may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any future determination to declare and pay dividends will be made 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 may deem relevant.

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CAPITALIZATION

        The following table sets forth our cash and capitalization as of March 31, 2017:

•

on an actual basis;



•

on a pro forma basis to give effect to: (i) the automatic conversion of all outstanding shares of our convertible preferred stock into 83,863,957 shares of common stock upon closing of this offering; (ii) the automatic conversion of outstanding warrants to purchase shares of our preferred stock into warrants to purchase 1,052,222 shares of our common stock upon closing of this offering; (iii) the automatic conversion upon closing of this offering of outstanding warrants to purchase shares of our preferred stock into warrants to purchase 251,951 shares of our common stock that become exercisable only upon our draw down of the remaining $10.0 million of available borrowings under our 2014 Debt Facility; and (iv) the filing and effectiveness of our amended and restated certificate of incorporation upon closing of this offering.



•

on a pro forma as adjusted basis to give further effect to our issuance and sale of                shares of our common stock in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        The pro forma and pro forma as adjusted information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information together with our financial statements and related notes appearing at the end of this prospectus and

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the information set forth under the headings "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

        A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash, additional paid-in capital, total capitalization and total stockholders' equity, in each case on a pro forma as adjusted basis by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering costs payable by us. An increase (decrease) of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) each of cash, additional paid-in capital, total capitalization and total stockholders' equity, in each case on a pro forma as adjusted basis by approximately $             million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        The number of shares of common stock issued and outstanding, actual, pro forma and pro forma as adjusted in the table above excludes the following shares:

•

16,610,286 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2017 under the 2009 Plan at a weighted average exercise price of $0.62 per share;



•

1,794,584 shares of common stock reserved for future issuance under the 2009 Plan as of March 31, 2017;

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•

                additional shares of our common stock that will be available for future issuance, as of the closing of this offering, under our 2017 Plan;



•

1,052,222 shares of common stock issuable following the closing of this offering upon the exercise of outstanding warrants as of March 31, 2017, at a weighted average exercise price of $1.41 per share; and



•

251,951 shares of common stock issuable following the closing of this offering upon the exercise of outstanding warrants as of March 31, 2017, that become exercisable only upon our draw down of the remaining $10.0 million of available borrowings under our 2014 Debt Facility at a weighted average exercise price of $1.59 per share.

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DILUTION

        If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

        Our historical net tangible book value as of March 31, 2017 was $21.1 million, or $3.42 per share of our common stock. Our historical net tangible book value is the amount of our total tangible assets less our total liabilities. Historical net tangible book value per share represents historical net tangible book value divided by the 6,153,300 shares of our common stock outstanding as of March 31, 2017.

        Our pro forma net tangible book value as of March 31, 2017 was $22.1 million, or $0.25 per share of our common stock. Pro forma net tangible book value represents the amount of our total tangible assets less our total liabilities, after giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into 83,863,957 shares of common stock upon the closing of this offering; (ii) the automatic conversion of outstanding warrants to purchase preferred stock into warrants to purchase 1,052,222 shares of our common stock upon the closing of this offering; and (iii) the automatic conversion upon the closing of this offering of outstanding warrants to purchase shares of our preferred stock into warrants to purchase 251,951 shares of our common stock that become exercisable only upon our draw down of the remaining $10.0 million of available borrowings under our 2014 Debt Facility. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding as of March 31, 2017, after giving effect to the pro forma adjustments described in (i), (ii) and (iii) above.

        After giving effect to our issuance and sale of shares of our common stock in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2017 would have been $             million, or $            per share. This represents an immediate increase in pro forma as adjusted net tangible book value per share of $            to existing stockholders and immediate dilution of $            per share in pro forma as adjusted net tangible book value per share to new investors purchasing common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

        A $1.00 increase or decrease in the assumed initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value by $             million, our pro forma as adjusted net tangible book value per share by $            and dilution per share to new investors purchasing shares in this offering by $            , assuming that the number of shares offered by us, as set

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forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. An increase of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value per share after this offering by $            and decrease the dilution per share to new investors participating in this offering by $            , assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and commissions. A decrease of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by $            and increase the dilution per share to new investors participating in this offering by $            , assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and commissions.

        If the underwriters exercise in full their option to purchase additional shares, our pro forma as adjusted net tangible book value per share after this offering would be $             per share, representing an immediate increase in pro forma as adjusted net tangible book value per share of $            to existing stockholders and immediate dilution of $            in pro forma as adjusted net tangible book value per share to new investors purchasing common stock in this offering, assuming an initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

        The following table summarizes, as of March 31, 2017, on a pro forma as adjusted basis described above, the total number of shares purchased from us on an as converted to common stock basis, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by new investors in this offering at an assumed initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid.

        A $1.00 increase or decrease in the assumed initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $             million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by                                      percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by percentage points, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase or decrease of 1.0 million shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors by $             million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by                         percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by percentage points, assuming no change in the assumed initial public offering price.

        The table above assumes no exercise of the underwriters' option to purchase additional shares in this offering. If the underwriters' option to purchase additional shares is fully exercised, the number of

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shares of our common stock held by existing stockholders would be reduced to        % of the total number of shares of our common stock outstanding after this offering, and the number of shares of common stock held by new investors participating in the offering would be increased to        % of the total number of shares of our common stock outstanding after this offering.

        The foregoing discussion and tables are based on the number of shares of common stock outstanding as of March 31, 2017, and exclude:

•

16,610,286 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2017 under the 2009 Plan at a weighted average exercise price of $0.62 per share;



•

1,794,584 shares of common stock reserved for future issuance under the 2009 Plan as of March 31, 2017;



•

                additional shares of our common stock that will be available for future issuance, as of the closing of this offering, under our 2017 Plan;



•

1,052,222 shares of common stock issuable following the closing of this offering upon the exercise of outstanding warrants as of March 31, 2017, at a weighted average exercise price of $1.41 per share; and



•

251,951 shares of common stock issuable following the closing of this offering upon the exercise of outstanding warrants as of March 31, 2017 that become exercisable only upon our draw down of the remaining $10.0 million of available borrowings under our 2014 Debt Facility at a weighted average exercise price of $1.59 per share.

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SELECTED FINANCIAL DATA

        The selected financial data as of and for the years ended December 31, 2015 and 2016 have been derived from our audited financial statements appearing at the end of this prospectus. The selected financial data for the three months ended March 31, 2016 and 2017, and the balance sheet data as of March 31, 2017, have been derived from our unaudited financial statements appearing at the end of this prospectus and have been prepared on the same basis as the audited financial statements. In the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information in those statements. You should read this data together with our historical financial statements and the related notes appearing at the end of this prospectus and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of this prospectus. Our historical results are not necessarily indicative of our future results and our interim results are not necessarily indicative of results to be expected for a full fiscal year or any other interim period. The selected financial data in this section are not intended to replace our financial statements and related notes appearing at the end of this prospectus.

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•

the automatic conversion of all outstanding shares of our preferred stock into 83,863,957 shares of common stock upon the closing of this offering;



•

the automatic conversion of outstanding warrants to purchase preferred stock into warrants to purchase 1,052,222 shares of common stock upon the closing of this offering;



•

the automatic conversion upon the closing of this offering of outstanding warrants to purchase preferred stock into warrants to purchase 251,951 shares of common stock that become exercisable only upon our draw down of the remaining $10.0 million of available borrowings under our 2014 Debt Facility; and



•

the filing and effectiveness of our amended and restated certificate of incorporation upon the closing of this offering.

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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 with our financial statements and related notes thereto appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements and Industry Data." Because of many factors, including those factors set forth in the "Risk Factors" section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

        We are a biopharmaceutical company focused on the development and commercialization of therapeutics using our proprietary nanoparticle-based Mucus Penetrating Particles, or MPP, technology, with an initial focus on the treatment of eye diseases. Our MPPs are selectively-sized nanoparticles and have proprietary coatings. We believe that these two key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped and eliminated by mucus. We have applied the MPP technology to create nanosuspensions of loteprednol etabonate, or LE, a corticosteroid designed for ocular applications, resulting in two product candidates in Phase 3 clinical development, KPI-121 1.0% for the treatment of inflammation and pain following ocular surgery and KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease.

        We have completed two Phase 3 clinical trials of KPI-121 1.0%, our topical twice-a-day product candidate for patients with inflammation and pain following cataract surgery, which is the most common type of ocular surgery in the United States. Commonly used topical ocular corticosteroid products for the treatment of post-operative inflammation and pain are approved for dosing four times a day. In 2014, we conducted our first Phase 3 clinical trial, which was designed to evaluate KPI-121 1.0% administered twice a day and KPI-121 0.25% administered four times a day. Statistical significance was achieved in the primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared to placebo with both KPI-121 1.0% and KPI-121 0.25%. Both KPI-121 1.0% and KPI-121 0.25% were well-tolerated, with no treatment-related serious adverse events observed during the course of the trial. In May 2017, we announced topline results from the second, confirmatory Phase 3 clinical trial. In this second Phase 3 clinical trial, administration of KPI-121 1.0% two times a day achieved statistical significance for both primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared to placebo and all secondary endpoints. In this trial, KPI-121 1.0% was well tolerated with no treatment-related significant adverse events observed during the course of the trial. Based on the results of our two completed Phase 3 trials of KPI-121 1.0%, we anticipate submitting a new drug application, or NDA, for the approval of KPI-121 1.0% for the treatment of post-operative inflammation and pain following ocular surgery by the end of 2017. If approved, KPI-121 1.0% could be the first FDA-approved product for the treatment of post-operative inflammation and pain with twice daily dosing.

        KPI-121 0.25% is our product candidate for patients with dry eye disease utilizing a two-week course of therapy. After achieving positive results in a Phase 2 clinical trial, we initiated two parallel

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Phase 3 clinical trials of KPI-121 0.25% in June 2016. Each of these Phase 3 clinical trials has a target enrollment of at least 900 dry eye patients and had enrolled over 600 dry eye patients as of May 15, 2017. We expect to receive topline results from these clinical trials by the end of 2017. Assuming positive results from these Phase 3 clinical trials, we anticipate submitting an NDA for KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease in the first half of 2018. If approved, KPI-121 0.25% could be the first FDA-approved product for the short-term treatment of dry eye disease.

        We are evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the treatment of inflammation and pain following ocular surgery, for the temporary relief of the signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease. We also are evaluating compounds in our topically applied MPP receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the vascular endothelial growth factor, or VEGF, pathway, for the potential treatment of a number of retinal diseases.

        For both KPI-121 1.0% and KPI-121 0.25% product candidates, we plan to rely on the potentially more expeditious pathway to U.S. Food and Drug Administration, or the FDA, approval under Section 505(b)(2) of the U.S. Federal Food, Drug and Cosmetic Act, or the FDCA. For our KPI-121 0.25% product candidate, we believe based on our discussions with regulatory authorities from two countries in the European Union, or EU, that we will be able to utilize the results, if positive, from our ongoing Phase 3 dry eye disease trials to support a submission of a Marketing Authorization Application, or MAA, for KPI-121 0.25% for the short-term treatment of dry eye disease in the EU through the Article 10(3) submission pathway.

        After synthesizing and testing a number of new chemical entities, or NCEs, from our topically applied rTKI program, we are further evaluating compounds for the potential topical treatment of a number of retinal diseases, 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 the proliferation of poorly formed and leaky blood vessels at the back of the eye. These eye diseases can significantly reduce vision and eventually lead to blindness. VEGF is a protein that plays a critical role in the formation of new blood vessels and increased permeability, two pathological processes that contribute to the vision loss associated 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 achieved concentrations in tissues in the back of the eye well above the concentrations required for in vitro inhibition of 50% of the VEGF receptor kinase activity. Prior to initiating IND-enabling studies, we may consider potential collaborative partnership opportunities to advance product candidates we develop through our rTKI program, including KPI-285.

        Since our inception in July 2009, we have devoted substantial resources to the research and development of nanoparticle-based drug products and our proprietary MPP technology. We have no products approved for sale and all our revenue to date has been derived from feasibility agreements with our collaboration partners. To date, we have funded our operations primarily through private placements of preferred stock, convertible promissory notes and warrants. In addition, we have borrowed under venture debt facilities to fund our operations. Specifically, since our inception and through March 31, 2017, we have raised an aggregate of $131.4 million to fund our operations, of which $113.9 million was from the sale of preferred stock, $6.0 million was from convertible promissory notes and warrants and $11.5 million was from borrowings and warrants under venture debt facilities. As of March 31, 2017, we had cash on hand of $36.0 million.

        Since inception, we have incurred significant operating losses. Our net loss was $16.7 million and $33.2 million for the years ended December 31, 2015 and 2016, respectively, and $5.3 million and $9.8 million for the three months ended March 31, 2016 and 2017, respectively. We recognized revenue

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of $45,000 and $0 for the years ended December 31, 2015 and 2016, respectively, and $0 and $0 for the three months ended March 2016 and 2017, respectively. We have not generated any revenue from the sale of products. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our current product candidates and programs. Substantially all our operating losses resulted from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations. As of March 31, 2017, we had an accumulated deficit of $101.9 million. We expect to continue to incur significant and increasing losses in the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if and as we:

•

seek marketing approvals for KPI-121 1.0% and KPI-121 0.25% and any other product candidates that successfully complete clinical development;



•

pursue the clinical development of KPI-121 product candidates for the treatment of other additional indications or for use in other patient populations or, if approved, seek to broaden the label of KPI-121 1.0% or KPI-121 0.25%;



•

pursue the clinical development of product candidate derived from our rTKI program for use in the treatment of retinal diseases, such as AMD, DR, DME and RVO;



•

establish sales, marketing and distribution capabilities for our product candidates for which we obtain marketing approval;



•

scale up our manufacturing processes and capabilities to support our ongoing clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval;



•

leverage our proprietary MPP technology to advance high-value therapeutics into preclinical 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 and management personnel;



•

expand our operational, financial and management systems and increase personnel, including personnel to support our 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 do not expect to generate revenue from product sales until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which is subject to significant uncertainty. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Until such time, if ever, that we generate product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings and research collaboration and license agreements. We may be unable to raise capital or enter such other arrangements when needed or on favorable terms. Our failure to raise capital or enter such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.

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Financial Operations Overview

Revenue

        Our revenue to date has been generated through payments received through feasibility agreements with collaboration partners. For each such agreement, we and our collaboration partners agreed to an investigational study with specified phases and endpoints. These studies were executed according to a predefined work plan. Under the terms of each agreement, we received an upfront payment upon consummation, additional upfront payments upon continuation to future phases after predefined objectives had been met and a final payment upon approval of a final report.

        We do not currently anticipate generating any significant additional revenue through feasibility agreements or other collaboration arrangements in the future. If we fail to raise additional capital, obtain regulatory approval of our products or successfully commercialize our products, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

        Research and development expenses consist of costs associated with our research activities, including compensation and benefits for full-time research and development employees, an allocation of facilities expenses, overhead expenses, payments to universities 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 with contract research organizations, or CROs;



•

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and supplies; and



•

payments made under our third-party licensing agreements, including our license agreement with Johns Hopkins University, or JHU.

        We expense research and development costs as they are incurred. Research and development costs that are paid in advance of performance are capitalized as a prepaid expense until incurred. We track outsourced development costs by development program but do not allocate personnel costs, payments made under our license agreements or other costs to specific product candidates or development programs. These costs are included in Employee-related costs and Other research and development costs in the table below.

        The following table summarizes our research and development expenses incurred during the years ended December 31, 2015 and 2016 and the three months ended March 31, 2016 and 2017:

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        We expect our research and development expenses to increase for the foreseeable future as we advance our product candidates toward regulatory approval. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. We may never succeed in obtaining marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability.

        Our research and development programs are at various stages of development. Successful development and completion of clinical trials is uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict. We will continue to make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to our ability to enter into collaborations with respect to each product candidate, the scientific and clinical success of each product candidate as well as ongoing assessments as to the commercial potential of product candidates. We will need to raise additional capital and may seek collaborations in the future to advance our various product candidates. Additional private or public financings may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.

General and Administrative Expenses

        General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, business development and support functions. Other general and administrative expenses include travel expenses, professional fees for auditing, tax, consultants and legal services and allocated facility-related costs not otherwise included in research and development expenses.

        We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company.

Interest Income

        Interest income consists of interest earned on our cash balance held in a deposit account.

Interest Expense

        Interest expense primarily consists of contractual coupon interest, amortization of debt discounts and debt issuance costs recognized on our debt facility.

Change in Fair Value of Warrant Liability

        We recognize gains and losses on the change in the fair value of outstanding warrants to purchase our Series Seed, Series B and Series C preferred stock as a component of other income (expense). We have issued warrants for the purchase of our Series Seed, Series B and Series C preferred stock. These warrants are financial instruments that are issuable for contingently redeemable securities. Therefore, we have classified the warrants as liabilities that we remeasure to fair value at each reporting period, and we record the re-measurement as the change in fair value of warrant liability in the statement of operations. Upon the closing of this offering, the underlying preferred stock will be converted into common stock, the preferred stock warrants will become exercisable for common stock instead of preferred stock, and the fair value of the warrant liability at that time will be reclassified to additional paid-in capital.

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Critical Accounting Policies and Significant Judgments and Estimates

        Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our 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 appearing at the end of this prospectus, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Accrued Expenses

        As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and adjust if necessary. Examples of estimated accrued expenses include fees payable to:

•

vendors for clinical development activities;



•

salary and employee benefits payable; and



•

providers of consulting and related services.

        We record accruals related to development activities based on our estimates of the services received and efforts expended pursuant to the terms of our contractual arrangements. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on clinical trial milestones. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

Preferred Stock Warrant Liability

        We classify warrants to purchase shares of our Series Seed, Series B and Series C preferred stock as a liability on our balance sheet as the warrants are free-standing financial instruments that are issuable for contingently redeemable securities. The warrants were initially recorded at fair value on the date of grant, and are subsequently remeasured to fair value at each balance sheet date. Changes in the fair value of the warrants are recognized separately in our statement of operations. We will continue to

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adjust the liability for changes in fair value until the earlier of the exercise, conversion or expiration of the warrant.

        We utilize the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value each preferred stock warrant. We assess these assumptions and estimates on a quarterly basis as additional information impacting the assumptions are obtained. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying Series Seed, Series B, and Series C preferred stock, the remaining contractual term of the warrants, risk-free interest rate, expected dividend yield, expected volatility of the price of the underlying preferred stock, and to the extent the exercisable shares underlying the warrants are contingently adjustable, the probability that we will draw down on the remaining debt facility. We determine the fair value per share of the underlying preferred stock by taking into consideration our most recent sales of our preferred stock as well as additional factors that we deem relevant. We have historically been a private company and lack company-specific historical and implied volatility information of our stock. Therefore, we estimate expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrant. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrant. We have assumed a 0% dividend yield considering that our board of directors has no history of declaring dividends.

        Upon the closing of this offering, the underlying preferred stock will be converted to common stock, the preferred stock warrants will become exercisable for common stock instead of preferred stock, and the fair value of the warrant liability at that time will be reclassified to additional paid-in capital. No further re-measurement of the warrants would occur if the warrants become exercisable for common stock.

Deferred Income Taxes

        We file U.S. federal income tax returns and Massachusetts, California, Kentucky, New Hampshire, New York, North Carolina and Pennsylvania state tax returns. Our deferred tax assets were primarily comprised of federal and state tax net operating losses and research and development tax credit carryforwards and were recorded using enacted tax rates expected to be in effect in the years in which these temporary differences are expected to be utilized. As of December 31, 2016, the federal and state net operating loss carryforwards were approximately $85.3 million and $80.5 million, respectively, and the federal and state research and development tax credit carryforwards were $2.4 million and $0.5 million, respectively. These tax credits begin to expire in 2030 in the case of the federal tax credits and 2025 in the case of the state tax credits. At December 31, 2016, we had $0 of unrecognized tax benefits.

        Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation due to historical or future ownership percentage change rules provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of certain net operating loss and tax credit carryforwards before their utilization. However, due to uncertainties surrounding our ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset our deferred tax assets.

Stock-based Compensation and Common Stock Valuation

Stock-based Compensation

        We measure stock options and other stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognize the corresponding compensation expense of those awards, net of forfeitures, over the requisite service period, which is generally the vesting period of the respective award.

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        We generally issue stock option awards with service-based vesting conditions and record the expense for these awards using the straight-line method. We measure stock-based awards granted to consultants and non-employees based on the fair value of the award on the date at which the related service is complete. Compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, we remeasure the fair value of these awards using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option pricing model.

        Performance-based option awards vest subject to the achievement of performance criteria as determined by management. These criteria are milestone events that are specific to our corporate goals. The grant date and fair value for each award is determined on the date that the performance criteria are established. If, and when, we determine it is probable that the performance condition will be achieved, compensation expense will be recognized from the date of grant through the fiscal year under which the requisite service period has been rendered.

        We recognize compensation expense for outstanding awards during the vesting period and account for the effect of forfeitures as they occur.

        We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.

Common Stock Valuation

        As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants' Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common stock valuations were prepared using either a hybrid method, which used market approaches to estimate our enterprise value, or a probability-weighted expected return method, or PWERM, which used a combination of market approaches and a cost approach to estimate our enterprise value. The hybrid method is a PWERM where the equity value in one or more of the scenarios is calculated using an option-pricing method, or OPM. Under the PWERM methodology, the fair value of common stock is estimated based upon an analysis of future values for the Company, assuming various outcomes. The common stock value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available as well as the rights of each class of stock. The future value of the common stock under each outcome is discounted back to the valuation date at an appropriate risk-adjusted discount 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 objective and subjective factors to determine the fair value of our common stock as of each grant date, which may be as of a date later than the most recent third-party valuation date, including the prices at which we sold shares of preferred stock and the superior rights and preferences of securities senior to our common stock at the time of each grant, the progress of our research and development programs, external market conditions affecting and trends within the biotechnology industry and the likelihood of achieving a liquidity event.

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        The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.

        Following the closing of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock.

        The following table summarizes our stock-based compensation for employees and non-employees' expenses incurred during the years ended December 31, 2015 and 2016 and the three months ended March 31, 2016 and 2017:

        As of March 31, 2017, we had $5.0 million of total unrecognized compensation expense, which is expected to be recognized over a weighted average remaining vesting period of approximately 2.5 years. We expect the impact of our stock-based compensation expense for stock options and restricted stock granted to employees and non-employees to grow in future periods due to the potential increases in the value of our common stock and headcount.

Emerging Growth Company Status

        In 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 for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

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Results of Operations

Comparison of the Years Ended December 31, 2015 and 2016

        The following table summarizes the results of our operations for the years ended December 31, 2015 and 2016:

Revenue

        Our revenue recognized during 2015 was derived from services performed under feasibility agreements with two collaboration partners that were completed by May 2015. We recognized revenue of $45,000 for the year ended December 31, 2015, compared to $0 for the year ended December 31, 2016. We were not party to any collaboration arrangements during the year ended December 31, 2016, and in the future, we do not anticipate generating any significant additional revenue from feasibility agreements or other collaboration arrangements.

Research and Development Expenses

        Research and development expenses were $11.4 million for the year ended December 31, 2015, compared to $25.0 million for the year ended December 31, 2016, an increase of $13.6 million, or 120%. This increase is primarily the result of a $12.8 million increase in KPI-121 development costs due to the increase in external costs associated with our second Phase 3 clinical trial of KPI-121 1.0% for the treatment of inflammation and pain following cataract surgery and our two parallel Phase 3 clinical trials of KPI-121 0.25% for the treatment of dry eye disease, all of which began in June 2016. Our KPI-121 external development costs for the year ended December 31, 2015 were comprised primarily of costs associated with our Phase 2 dry eye trial and our first Phase 3 post-operative trial, each of which had fewer patients than our ongoing Phase 3 trials. We incurred a $1.2 million increase

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in employee-related costs during the year ended December 31, 2016 due to the additional hiring of clinical and regulatory personnel as a result of our progress on the Phase 3 trials, overall merit increases and an increase in stock compensation expense related to stock option grants. These increases were partially offset by a decrease of $0.4 million in other research and development costs. We expect our research and development expenses to continue to increase in the future as we continue spending on our development programs.

General and Administrative Expenses

        General and administrative expenses were $4.6 million for the year ended December 31, 2015 compared to $7.6 million for the year ended December 31, 2016, an increase of $3.0 million, or 66%. The increase was primarily due to the write-off of $1.8 million in deferred offering costs resulting from our decision not to update our 2015 confidential S-1 filing during the second quarter of 2016 at which point in time our initial public offering was no longer considered to be probable of being consummated in 2016. We also incurred an increase in employee-related costs of $1.5 million. This was a result of an increase in stock compensation expense due to additional stock option grants, an increase in salaries due to hiring of additional finance and accounting personnel, and the impact of merit-based salary increases. These increases were partially offset by a $0.3 million decrease in our consulting costs as result of hiring permanent accounting and finance personnel. We expect general and administrative expenses to increase in the future as we expand our operating activities and incur additional costs associated with being a public company.

Interest Income

        Interest income was $0 for the year ended December 31, 2015 compared to $0.1 million for the year ended December 31, 2016. The increase of $0.1 million was the result of interest income generated on our higher average cash balance for the year ended December 31, 2016 compared to the year ended December 31, 2015, due to the receipt of $67.5 million in net proceeds from our Series C financing in April 2016.

Interest Expense

        Interest expense was $0.6 million for the year ended December 31, 2015 compared to $0.8 million for the year ended December 31, 2016, an increase of $0.2 million, or 27%. The higher interest expense during the year ended December 31, 2016 was primarily due to the additional $5.0 million draw of our venture debt facility in July 2015, resulting in a $10.0 million outstanding loan for the year ended December 31, 2016. Additionally, the variable portion of the interest rate applicable to our debt facility increased marginally during 2016, from 3.25% in January 2016 to 3.5% in December 2016.

Change in Fair Value of Warrant Liability

        Changes in the fair value of our preferred stock warrants resulted in a $0.1 million loss for the year ended December 31, 2015, as compared to a $0.1 million gain for the year ended December 31, 2016. The gain recognized in the year ended December 31, 2016 was a result of a decrease in the fair value on the warrants, which was primarily due to the decrease in the fair value of the underlying preferred shares on a period-over-period basis. The loss recognized for the year ended December 31, 2015 was a result of an increase in the fair value of the warrants, which was due primarily to the increase in the fair value of the underlying preferred shares on a period-over-period basis.

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Comparison of the Three Months ended March 31, 2016 and 2017

        The following table summarizes the results of our operations for the three months ended March 31, 2016 and 2017:

Research and Development Expenses

        Research and development expenses were $3.9 million for the three months ended March 31, 2016, compared to $8.0 million for the three months ended March 31, 2017, an increase of $4.1 million, or 106%. This increase is primarily the result of a $3.1 million increase in KPI-121 development costs due to the increase in external costs associated with our second Phase 3 clinical trial of KPI-121 1.0% for the treatment of inflammation and pain following cataract surgery and our two parallel Phase 3 clinical trials of KPI-121 0.25% for the treatment of dry eye disease, all of which began enrolling patients in June 2016. We incurred a $0.6 million increase in employee-related costs during the three months ended March 31, 2017 due to the hiring of additional clinical and regulatory personnel throughout 2016 and an increase in stock compensation expense related to stock option granted in during 2016. We incurred a $0.5 million increase in other research and development costs due to the clinical consulting support for the three Phase 3 trials and the regulatory consulting support for our NDA preparation, and recruiting costs due to the additional hires. We expect our research and development expenses to continue to increase in the future as we continue spending on our development programs.

General and Administrative Expenses

        General and administrative expenses were $1.1 million for the three months ended March 31, 2016 compared to $1.5 million for the three months ended March 31, 2017, an increase of $0.4 million, or 32%. We incurred an increase in employee-related costs of $0.2 million. This was a result of an

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increase in salaries due to hiring of additional personnel and an increase in stock compensation expense due to additional stock option grants during 2016. We incurred an increase in external general and administrative costs of $0.1 million, which is primarily the result of the timing of the performance of the audit of our financial statements for the year ended December 31, 2016 during the three months ended March 31, 2017 compared to the audit of our financial statements for the year ended December 31, 2015 which took place during the three months ended June 30, 2016. We also incurred a $0.1 million increase in other general and administrative costs due to an increase in our corporate franchise taxes. We expect general and administrative expenses to increase in the future as we expand our operating activities and incur additional costs associated with being a public company.

Interest Income

        Interest income was $0 for the three months ended March 31, 2016 compared to $46,000 for the three months ended March 31, 2017. The increase of $46,000 was the result of a higher cash balance from the receipt of $67.5 million in net proceeds from our Series C financing in April 2016. Our cash is held in an interest-bearing account.

Interest Expense

        Interest expense was $0.2 million for the three months ended March 31, 2016 and 2017. The variable portion of the interest rate applicable to our debt facility increased marginally during the three months ended March 31, 2017, from 3.5% in January 2016 to 4.0% in March 31, 2017.

Change in Fair Value of Warrant Liability

        Changes in the fair value of our preferred stock warrants resulted in income of less than $0.1 million for the three months ended March 31, 2016, as compared to a $0.1 million loss for the three months ended March 31, 2017. The change recognized in each respective period was a result of a change in the fair value of the warrants, which was primarily due to the decrease in the fair value of the underlying preferred shares on a period-over-period basis for the three months ended March 31, 2016 and the increase in the fair value of the underlying preferred shares on a period-over-period basis for the three months ended March 31, 2017.

Liquidity and Capital Resources

        Since our inception, we have incurred significant operating losses. We have derived limited revenue to date from feasibility studies with collaboration partners. We have not yet commercialized any of our product candidates, which are in various phases of clinical development, and we do not expect to generate revenue from sales of any product before 2019, if ever. We have funded our operations to date with proceeds from the sale of preferred stock, borrowings under venture debt facilities, the issuance of convertible promissory notes and warrants and to a lesser extent, payments received in connection with various feasibility studies. Through March 31, 2017, we have received gross proceeds of $131.4 million, which consists of $113.9 million from the sale of preferred stock, $11.5 million from borrowings under venture debt facilities and $6.0 million from the issuance of convertible promissory notes.

        On November 20, 2014, we entered into a venture debt facility, or the 2014 Debt Facility, for a total loan commitment of $10.0 million, of which we borrowed $5.0 million upon closing of the loan and another $5.0 million in July 2015. Under the terms of the agreement, the borrowings accrue interest at an annual rate equal to the greater of (i) 3.00% above the prime rate then in effect, or (ii) 6.25%. On October 13, 2016, we entered into a first amendment to the 2014 Debt Facility, or the Amendment. The Amendment reaffirmed the initial commitment of $10.0 million in funding. Additionally, the Amendment increased our borrowing capacity through the commitment of an

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additional $10.0 million in funding, which we refer to as Term Loan B. The availability of Term Loan B will commence upon receipt of positive results sufficient to support an NDA submission, with no significant treatment-related safety findings, from our second Phase 3 clinical trial of KPI-121 1.0% for the treatment of inflammation and pain following cataract surgery and will continue until October 13, 2017. As of March 31, 2017, we had not completed the second Phase 3 trial and therefore Term Loan B was not available to be drawn. In May 2017, we announced positive topline results from our Phase 3 trial. KPI-121 1.0% dosed twice-a-day for two weeks achieved statistical significance versus placebo for both primary efficacy endpoints and all secondary endpoints. We believe, per the terms of the Amendment, that these results are sufficient to submit an NDA for KPI-121 1.0% and therefore Term Loan B will be available to be drawn through October 13, 2017. As of June 2, 2017, no amounts have been drawn against the incremental $10.0 million commitment. The 2014 Debt Facility, as amended on October 13, 2016, provides for interest only payments through October 13, 2017, and matures on October 13, 2020. Interest is payable monthly in arrears through to the maturity date.

Cash Flows

        As of March 31, 2017, we had $36.0 million in cash on hand and $10.0 million in indebtedness. The indebtedness represents the aggregate outstanding principal amount under the 2014 Debt Facility.

        The following table summarizes our sources and uses of cash for each of the periods presented:

Operating Activities

        We have incurred losses since inception. During the year ended December 31, 2015, our cash used in operating activities was primarily due to our net loss of $16.7 million as we incurred external research and development activities associated with our clinical trials and our general and administrative expenses. The loss was partially offset by non-cash charges of $1.3 million, including $0.6 million of stock-based compensation, and net cash provided by changes in our operating assets and liabilities of $0.3 million. Net cash provided by changes in our operating assets and liabilities was primarily due to an increase of $0.9 million in accounts payable related to the timing of vendor invoices and payments, partially offset by a decrease in accrued expenses of $0.6 million related to payments of development costs and development milestones in 2015.

        During the year ended December 31, 2016, our cash used in operating activities was primarily due to our net loss of $33.2 million as we incurred increased external research and development costs associated with our clinical trials during 2016 and increased general and administrative costs, partially offset by non-cash charges of $2.3 million, consisting primarily of stock-based compensation, the write-off of deferred offering costs related to our confidential submission of a draft registration statement on Form S-1 in 2015 of $1.8 million and net cash provided by changes in our operating assets and liabilities of $1.7 million. Net cash provided by changes in our operating assets and liabilities was primarily due to an increase of $2.1 million in accrued expenses, partially offset by a $0.3 million decrease in accounts payable and a $0.1 million increase in prepaid expenses primarily as a result of prepayments made in connection with medical benefits and corporate insurance policies. The increase in accrued expense was primarily a result of an increase in amounts accrued for patients in the ongoing

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clinical trials and the decrease in accounts payable was a result of the timing of vendor invoices and payments.

        During the three months ended March 31, 2016, our cash used in operating activities was primarily due to our net loss of $5.3 million as we incurred increased external research and development costs associated with our clinical trials during the three months ended March 31, 2016 and increased general and administrative costs, partially offset by non-cash charges of $0.5 million, consisting primarily of stock-based compensation and net cash provided by changes in our operating assets and liabilities of $0.3 million. Net cash provided by changes in our operating assets and liabilities was primarily due to an increase of $0.3 million increase in accounts payable.

        During the three months ended March 31, 2017, our cash used in operating activities was primarily due to our net loss of $9.8 million as we incurred increased external research and development costs associated with our clinical trials during the three months ended March 31, 2017 and increased general and administrative costs, and net cash used by changes in our operating assets and liabilities of $0.3 million partially offset by non-cash charges of $0.7 million, consisting primarily of stock-based compensation. Net cash used by changes in our operating assets and liabilities was primarily due to a decrease of $1.4 million in accrued expenses, and a $0.1 million increase in prepaid expenses primarily as a result of prepayments made in connection with our the manufacturing of our products offset by a $1.2 million increase in accounts payable. The decrease in accrued expense was primarily a result of our 2016 bonus payment during March 2017.

Investing Activities

        Net cash used in investing activities for all periods presented consists of purchases of property and equipment, primarily laboratory equipment. Purchases of property and equipment were $0.3 million and $0.2 million for the years ended December 31, 2015 and 2016, respectively and $0 and $72,000 for the three months ended March 31, 2016 and 2017, respectively.

Financing Activities

        Net cash provided by financing activities was $10.5 million for the year ended December 31, 2015, consisting of $6.9 million in net proceeds from the issuance of Series B-1 preferred stock, $5.0 million in net proceeds from the drawdown from the 2014 Debt Facility and proceeds of $0.1 million from the exercise of stock options, partially offset by the payment of deferred offering costs of $1.5 million.

        Net cash provided by financing activities was $67.2 million for the year ended December 31, 2016, consisting of $67.5 million in net proceeds from the issuance of Series C preferred stock, partially offset by the payment of deferred offering costs of $0.3 million related to our confidential filing of a draft registration statement on form S-1 in 2015.

        Net cash provided by financing activities was $0.3 million for the three months ended March 31, 2016, consisting of $0.5 million in proceeds received in advance for our Series C preferred stock financing, partially offset by payments for costs associated with the Series C preferred stock financing and payments of $0.2 million for deferred offering costs related to our confidential submission of a draft registration statement on Form S-1 in 2015.

        Net cash used in financing activities was $19,000 for the three months ended March 31, 2017, consisting of payments of deferred offering costs related to our confidential submission of a draft registration statement on Form S-1 in 2017.

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Funding Requirements

        We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our preclinical activities and clinical trials. In addition, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company.

        Our expenses will also increase if and as we:

•

seek marketing approvals for KPI-121 1.0% and KPI-121 0.25% and any other product candidates that successfully complete clinical development;



•

pursue the clinical development of KPI-121 for the treatment of other additional indications or for use in other patient populations or, if approved, seek to broaden the label of KPI-121 1.0% or KPI-121 0.25%;



•

pursue the preclinical and clinical development of product candidates derived from our rTKI program for use in the treatment of retinal diseases, such as AMD, DR, DME and RVO;



•

establish sales, marketing and distribution capabilities for our product candidates for which we obtain marketing approval;



•

scale up our manufacturing processes and capabilities to support our clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval;



•

leverage our proprietary MPP technology to advance high-value therapeutics into preclinical 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 and management personnel;



•

expand our operational, financial and management systems and increase personnel, including personnel to support our 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.

        As of March 31, 2017, we had cash on hand of $36.0 million. We believe that the anticipated net proceeds from this offering, together with our existing cash on hand as of March 31, 2017, will enable us to fund our operating expenses and capital expenditure requirements through at least                . We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

        Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including:

•

the progress, costs and results of our ongoing Phase 3 clinical trials for KPI-121 0.25% and of any clinical activities for regulatory review of KPI-121 1.0% and KPI-121 0.25% outside of the United States;



•

the costs and timing of process development and manufacturing scale-up activities associated with KPI-121 1.0% and KPI-121 0.25%;



•

the costs, timing and outcome of regulatory review of KPI-121 1.0% and KPI-121 0.25%;

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•

the costs of commercialization activities for KPI-121 1.0% and KPI-121 0.25% if we receive, or expect to receive, marketing approval, including the costs and timing of establishing product sales, marketing, distribution and outsourced manufacturing capabilities;



•

subject to receipt of marketing approval, revenue received from commercial sales of KPI-121 1.0% and KPI-121 0.25%;



•

our ability to establish and maintain strategic collaborations, licensing or other agreements and the financial terms of such agreements;



•

the scope, progress, results and costs of any product candidates that we may derive from our rTKI program or any other product candidates 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 our intellectual property rights and defending against any intellectual property-related claims.

        Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaboration agreements, other third-party funding, strategic alliances, licensing arrangements and marketing and distribution arrangements.

        To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaboration agreements, strategic alliances, licensing arrangements or marketing 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 raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

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Contractual Obligations and Commitments

        The following is a summary of our significant contractual obligations as of December 31, 2016:

        We will rely on third-party contract manufacturers to manufacture commercial supplies of KPI-121 1.0% and KPI-121 0.25%. Under our Commercial Supply Agreement with Catalent Pharma Solutions, LLC, or the Catalent Agreement, we have annual minimum purchase requirements for each of KPI-121 1.0% and KPI-121 0.25%. Under the minimum unit purchase requirements, if both KPI-121 1.0% and KPI-121 0.25% are approved for commercial sale, our minimum payment obligation in the first 12-month period would be approximately $1.2 million, subject to specified annual increases. We will also pay certain fees in connection with validation and stability test services and commercialization ramp-up. Under our Amended and Restated Master Services Agreement with Alliance Contract Pharma, LLC, or the Alliance Agreement, we will provide a forecast of orders for the quantities of bulk KPI-121 concentrates we believe we will require, and forecasted quantities will become binding at a certain point before the firm delivery date set forth in the forecast. Because the amount, timing and likelihood of payments under the Catalent Agreement and the Alliance Agreement are not known with certainty, payments that we expect will become due under these agreements are not included in the table of contractual obligations above. See "Business—Manufacturing" for more information.

        Under our Manufacturing and Supply Agreement with Chemo Iberica SA, or the Chemo Agreement, we will provide a forecast of orders for the quantities of loteprednol we believe we will require, and we commit to purchasing 75% of the forecasted quantities. Payments that we expect will become due under the Chemo Agreement are not included in the table of contractual obligations above because we entered into the Chemo Agreement after December 31, 2016 and also because

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amounts, timing and likelihood of potential payments under the agreement are not known with certainty. See "Business—Manufacturing" for more information.

        In addition, we enter into contracts in the normal course of business with various third parties for preclinical research studies, clinical trials, manufacturing and other services. These contracts are cancellable by us typically upon prior notice of 60 days or less. Payments due upon cancellation generally consist only of payments for services provided and expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. These payments are not included in the table of contractual obligations above.

Off-Balance Sheet Arrangements

        We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

Recently Issued Accounting Pronouncements

        From time to time the Financial Accounting Standards Board, or FASB, or other standard-setting bodies, issue new accounting pronouncements. Where applicable, we adopt these new standards according to the specified effective dates. Unless otherwise disclosed in the notes to the financial statements appearing at the end of this prospectus, we believe that the impact of any recently issued standard(s) that are not yet effective will not have a material impact on our financial position or results of operation upon adoption.

Quantitative and Qualitative Disclosure About Market Risk

        We did not hold any cash equivalents or investments as of March 31, 2017. As of March 31, 2017, our exposure to the risk of changes in market interest rates related primarily to our borrowings under our 2014 Debt Facility, which are subject to a variable interest rate. See "Liquidity and Capital Resources" above for a discussion of the interest rates applicable to our 2014 Debt Facility. We do not expect any material impact on our operating results from a reasonably possible change in market interest rates. A 50-basis point increase or decrease in interest rates would increase or decrease annual interest expense by $50,000 related to our borrowings under our 2014 Debt Facility.

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BUSINESS

Overview

        We are a biopharmaceutical company focused on the development and commercialization of therapeutics using our proprietary nanoparticle-based Mucus Penetrating Particles, or MPP, technology, with an initial focus on the treatment of eye diseases. Our MPPs are selectively-sized nanoparticles and have proprietary coatings. We believe that these two key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped and eliminated by mucus. We have applied the MPP technology to create nanosuspensions of loteprednol etabonate, or LE, a corticosteroid designed for ocular applications, resulting in two product candidates in Phase 3 clinical development, KPI-121 1.0% for the treatment of inflammation and pain following ocular surgery and KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease.

        We have completed two Phase 3 clinical trials of KPI-121 1.0%, our topical twice-a-day product candidate for patients with inflammation and pain following cataract surgery, which is the most common type of ocular surgery in the United States. Commonly used topical ocular corticosteroid products for the treatment of post-operative inflammation and pain are approved for dosing four times a day. In 2014, we conducted our first Phase 3 clinical trial, which was designed to evaluate KPI-121 1.0% administered twice a day and KPI-121 0.25% administered four times a day. Statistical significance was achieved in the primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared to placebo with both KPI-121 1.0% and KPI-121 0.25%. Both KPI-121 1.0% and KPI-121 0.25% were well-tolerated, with no treatment-related serious adverse events observed during the course of the trial. In May 2017, we announced topline results from the second, confirmatory Phase 3 clinical trial. In this second Phase 3 clinical trial, administration of KPI-121 1.0% two times a day achieved statistical significance for both primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared to placebo and all secondary endpoints. In this trial, KPI-121 1.0% was well tolerated with no treatment-related significant adverse events observed during the course of the trial. Based on the results of our two completed Phase 3 trials of KPI-121 1.0%, we anticipate submitting a new drug application, or NDA, for the approval of KPI-121 1.0% for the treatment of post-operative inflammation and pain following ocular surgery by the end of 2017. If approved, KPI-121 1.0% could be the first FDA-approved ocular corticosteroid product for the treatment of post-operative inflammation and pain with twice daily dosing.

        KPI-121 0.25% is our product candidate for patients with dry eye disease utilizing a two-week course of therapy. After achieving positive results in a Phase 2 clinical trial, we initiated two parallel Phase 3 clinical trials of KPI-121 0.25% in June 2016. Each of these Phase 3 clinical trials has a target enrollment of at least 900 dry eye patients and had enrolled over 600 dry eye patients as of May 15, 2017. We expect to receive topline results from these clinical trials by the end of 2017. Assuming positive results from these Phase 3 clinical trials, we anticipate submitting an NDA for KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease in the first half of 2018. If approved, KPI-121 0.25% could be the first FDA-approved product for the short-term treatment of dry eye disease.

        We are evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the treatment of inflammation and pain following ocular surgery, for the temporary relief of the signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease.

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We also are evaluating compounds in our topically applied MPP receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the vascular endothelial growth factor, or VEGF, pathway, for the potential treatment of a number of retinal diseases.

        For both KPI-121 1.0% and KPI-121 0.25% product candidates, we plan to rely on the potentially more expeditious pathway to U.S. Food and Drug Administration, or the FDA, approval under Section 505(b)(2) of the U.S. Federal Food, Drug and Cosmetic Act, or the FDCA. For our KPI-121 0.25% product candidate, we believe, based on our discussions with regulatory authorities from two countries in the European Union, or EU, that we will be able to utilize the results, if positive, from our ongoing Phase 3 dry eye disease trials to support a submission of a Marketing Authorization Application, or MAA, for KPI-121 0.25% for the short-term treatment of dry eye disease in the EU through the Article 10(3) submission pathway.

        We have retained worldwide commercial rights for our current product candidates. If our current product candidates receive marketing approval, we expect to seek approval and commercialize them in the United States with our own focused, specialty sales force. We believe that this commercial organization will consist of approximately 150 sales and marketing personnel that will call on ophthalmologists and optometrists. In anticipation of the potential to commercialize KPI-121 for dry eye disease in the EU we are evaluating a variety of collaboration, distribution and other marketing arrangements with one or more third parties.

        We own and/or exclusively license patents relating to our product candidates and MPP technology, including U.S. and foreign issued patents and pending patent applications covering KPI-121, our rTKI program and our MPP technology, along with pending patent applications relating to ophthalmic applications of our MPP technology. The earliest expiration date of an issued U.S. patent covering our current product candidates is in 2033. The earliest expiration date of an issued U.S. patent relating to our MPP technology is in 2027.

Our Product Candidates

        The following table describes the development stage of each of our current development programs:

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KPI-121 1.0% for Post-Operative Inflammation and Pain

        Ocular inflammation and pain are common complications following ocular surgery. According to Marketscope, a third-party provider of market data, in 2016 there were 7.7 million ocular surgeries in the United States. Tissue damage caused by ocular surgery leads to the production of prostaglandins, lipids that aid in recovery at the site of an injury, and an increase in blood flow to the affected area, which contribute to inflammation. The standard of care for post-operative inflammation and pain includes anti-inflammatory drugs such as corticosteroids, which improve patient comfort and accelerate recovery through disruption of the inflammatory cascade. The current four times a day dosing regimen for corticosteroid treatment can be burdensome for patients as they are taking multiple eye drop products following surgery, and is believed to reduce patient compliance. There are no ocular corticosteroid products currently approved in the United States for dosing two times a day for the treatment of post-operative inflammation and pain.

        KPI-121 1.0%, our twice-a-day product candidate for the treatment of inflammation and pain following ocular surgery, has completed Phase 3 clinical trials and we anticipate submitting an NDA by the end of 2017. We believe that KPI-121 1.0% has a favorable profile for the treatment of inflammation and pain following ocular surgery, due to its twice-a-day dosing regimen, rapid onset of relief and tolerability profile. We believe these features of KPI-121 1.0% may be attractive to patients and prescribing clinicians.

        In each of our successfully completed Phase 3 clinical trials of KPI-121 1.0% in patients who had undergone cataract surgery, administration of KPI-121 1.0% two times a day for 14 days achieved statistical significance for both primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication and complete resolution of pain at day eight maintained through day 15 with no need for rescue medication. In each of these trials, KPI-121 1.0% was well tolerated with no increases in intraocular pressure, or IOP, a common side effect of steroids, compared to placebo and with no treatment-related significant adverse events observed during the course of either trial.

        We anticipate submitting an NDA for KPI-121 1.0% by the end of 2017. Although our Phase 3 trials of KPI-121 1.0% are in patients who have undergone cataract surgery, we expect that these trials will support, and we intend to seek, an indication for post-operative inflammation and pain following ocular surgery. If approved, KPI-121 1.0% could be the first FDA-approved product for the treatment of post-operative inflammation and pain with twice daily dosing.

KPI-121 0.25% for Dry Eye Disease

        Dry eye disease is a chronic, episodic, multifactorial disease affecting the tears and ocular surface that can result in tear film instability, inflammation, discomfort, visual disturbance and ocular surface damage. Dry eye disease can have a significant impact on quality of life and can potentially cause long-term damage to the ocular surface. Due to the impact of dry 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. In addition, the vast majority of dry eye patients experience acute exacerbations of their symptoms, which are commonly referred to as flares, at various times throughout the 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, 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 third-party academic research, we believe dry eye disease results in approximately $55 billion in direct and indirect costs in the United States each year, of which approximately $3.8 billion are direct

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medical costs. The exact prevalence of dry eye disease is unknown due to the difficulty in defining the disease and the lack of a single diagnostic test to confirm its presence. The Beaver Dam Offspring Study, a major epidemiological study published in 2014 in the American Journal of Ophthalmology, reported that in a cohort of over 3,000 patients, dry eye disease was self-reported by 14.5% of the patients. The prevalence of dry eye disease increases 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 16 million patients with a diagnosis of dry eye disease in the United States. We commissioned ClearView Healthcare Partners, a life science strategy consulting firm, to conduct a survey of 30 dry eye disease patients, which we refer to as the patient survey. The patient survey included a representative set of dry eye patients based on demographics and disease characteristics, such as age, sex and therapeutic history. The patients represented a broad range of dry eye disease severity. In conducting the survey, Clearview asked patients about their existing dry eye symptoms, including the typical frequency and duration of their dry eye flares, as well as their current disease management approaches, if any. Clearview also described the KPI-121 0.25% expected product attributes and anticipated treatment regimen to gauge their level of interest in the product candidate. Although the patient survey involved a limited number of patients and thus may be less representative than a survey conducted with a larger sample size, we believe it provides useful insight into the prevalence and severity of dry eye disease. Based upon our review of the patient survey, we believe dry eye disease is a burdensome disease that has a significant impact on the quality 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, often referred to as "artificial tears," and two prescription pharmaceutical products, Restasis® and Xiidra®. Artificial tears are intended to supplement insufficient tear production or improve tear film instability, but do not treat the underlying inflammation in dry eye disease. Restasis increases tear production and Xiidra treats the signs and symptoms of dry eye disease, however, both Restasis and Xiidra are typically used chronically for dry eye patients who have continuous symptoms. In 2016, Restasis had sales of approximately $1.42 billion in the United States, while Xiidra, which was FDA approved in July 2016 and commercially launched in the United States in August 2016, had sales of $54.0 million. As each of Restasis 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 dry eye patients whose symptoms are primarily episodic as opposed to chronic, and for whom a chronic therapy is not necessary. For these patients, we believe an FDA-approved, acute, short-term therapy can address a significant unmet need. Our review of the patient survey indicates that approximately 90% of surveyed patients reported experiencing flares, with flares on average lasting approximately 11 days and occurring approximately 9 times per year.

        We are developing KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease, utilizing a two-week course of therapy administered four times a day. We believe that KPI-121 0.25%'s broad mechanism of action, rapid onset of relief of both signs and symptoms, favorable tolerability profile and potential to be complementary to existing therapies, will result in a favorable profile for the management of dry eye flares and other dry eye associated conditions that would benefit from temporary relief of dry eye signs and symptoms. We believe these features of KPI-121 0.25% may be attractive to prescribing clinicians and could be a first line prescription medication choice for a substantial number of their dry eye patients. Based upon our review of the patient survey, we also believe patients with dry eye disease will be attracted to KPI-121 0.25%'s novelty, rapid efficacy and as-needed use.

        In our Phase 2 clinical trial of 150 patients with dry eye disease, administration of KPI-121 0.25% four times a day for 4 weeks resulted in a statistically significant reduction in the primary sign endpoint of conjunctival hyperemia, or redness, at day 29 compared to placebo. Significant reduction in conjunctival hyperemia was also observed at day 15, the first measurement point two weeks after

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initiation of dosing with KPI-121 0.25%. There was also a meaningful reduction in the primary symptom endpoint of patient-reported ocular discomfort severity at days 15 and 29, although the improvements did not achieve statistical significance. We did not expect to achieve statistical significance for ocular discomfort in light of the small number of patients in this Phase 2 trial. KPI-121 0.25% was generally well tolerated, with no clinically significant treatment-related adverse events observed during the course of the trial.

        Following discussions with key advisors and a meeting with the FDA in June 2015, we initiated in June 2016 two parallel Phase 3 clinical trials, each with a target enrollment of at least 900 dry eye patients, comparing KPI-121 0.25% to placebo, both administered four times a day for 14 days. We expect to receive topline results from both trials by the end of 2017. As of May 15, 2017, we had enrolled over 600 dry eye patients in each trial. The primary endpoints in these trials are conjunctival hyperemia, or redness, at day 15 and ocular discomfort severity at day 15. The trial design of the parallel Phase 3 trials is similar to our completed Phase 2 trial, other than the shortened length of dosing, the timing of the primary endpoint measurements and the increased number of patients. We believe that we will be able to demonstrate statistically significant reductions in our two primary endpoints in these Phase 3 trials. If these trials are successful, we anticipate submitting an NDA for KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease in the first half of 2018.

rTKI Program for Retinal Diseases

        Commonly used therapies for retinal diseases must be injected directly into the patient's eye, often at monthly intervals. We believe that our MPP technology has the potential to facilitate the delivery of therapeutics into tissues in the back of the eye via topical dosing, which has the potential to provide a less invasive method of administration and a competitive advantage over therapies administered by intravitreal injection.

        After synthesizing and testing a number of new chemical entities, or NCEs, from our topically applied rTKI program, we are further evaluating compounds in our rTKI program that inhibit the VEGF pathway for the potential topical treatment of a number of retinal diseases, 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 the proliferation of poorly formed and leaky blood vessels at the back of the eye. These eye diseases can significantly reduce vision and eventually lead to blindness. VEGF is a protein that plays a critical role in the formation of new blood vessels and increased permeability, two pathological processes that contribute to the vision loss associated 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 achieved concentrations in tissues in the back of the eye well above the concentrations required for in vitro inhibition of 50% of the VEGF receptor kinase activity. Prior to initiating IND-enabling studies, we may consider potential collaborative partnership opportunities to advance product candidates we develop through our rTKI program, including KPI-285.

Other Potential Applications of our MPP Technology

        While our current focus is on the application of our MPP technology in ophthalmology, we have conducted preclinical studies demonstrating the potential of our MPP technology in other therapeutic areas. Mucus limits delivery of conventionally formulated drugs to the lung, cervical/vaginal tract, gastrointestinal tract and other mucus-protected tissues. In preclinical studies, we have demonstrated that our MPP technology can be used to increase the mucus penetration of over fifteen classes of drugs, including anti-infective and anti-inflammatory drugs.

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Strategy

        Our goal is to become a leading biopharmaceutical company focused on the development and commercialization of therapeutics using our proprietary MPP technology. Key elements of our strategy include:

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Successfully complete the clinical development of, and seek regulatory approval for, our KPI-121 1.0% and KPI-121 0.25% product candidates.  Having received positive topline data from our second Phase 3 clinical trial for KPI-121 1.0%, we plan to submit an NDA for the treatment of post-operative inflammation and pain following ocular surgery by the end of 2017. We are also focused on completing our two ongoing parallel Phase 3 clinical trials for KPI-121 0.25%, administered four times a day in patients with dry eye disease. We expect to receive topline data from our ongoing Phase 3 clinical trials by the end of 2017 and, if successful, plan to submit an NDA for the temporary relief of the signs and symptoms of dry eye disease in the first half of 2018.



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Maximize the commercial potential of KPI-121 1.0% for post-operative inflammation and pain.  Assuming we submit an NDA by the end of 2017, we expect the FDA could approve the NDA for KPI-121 1.0% for the treatment of post-operative inflammation and pain following ocular surgery in the second half of 2018. Assuming we receive marketing approval for KPI-121 1.0% within this timeframe, we intend to commercialize KPI-121 1.0% in the United States by the end of 2019 with our own specialty sales force that will target ophthalmologists and optometrists.



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Maximize the commercial potential of KPI-121 0.25% for dry eye disease.  If our ongoing parallel Phase 3 clinical trials for KPI-121 0.25% in patients with dry eye disease are successful and we submit an NDA in the first half of 2018, we expect the FDA could approve the NDA for KPI-121 0.25% for dry eye in late 2018 to early 2019. Assuming we receive marketing approval for KPI-121 0.25% within this timeframe, we intend to commercialize KPI-121 0.25% in the United States by the end of 2019 with our own specialty sales force that will target ophthalmologists and optometrists. If the results of our ongoing Phase 3 trials for patients with dry eye disease are positive, we also expect to submit an MAA for KPI-121 0.25% for the short-term treatment of dry eye disease. We also expect to explore commercialization of KPI-121 0.25% for the treatment of dry eye in certain markets outside the United States, including the EU, utilizing a variety of collaboration, distribution and other marketing arrangements with one or more third parties.



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Advance early stage pipeline development programs, and further leverage our proprietary MPP technology.  We are evaluating our current lead rTKI program compound, KPI-285, a topically applied MPP small molecule for the potential treatment of a number of retinal diseases. Prior to initiating IND-enabling studies, we may consider potential collaborative partnership opportunities to advance product candidates we develop through our rTKI program, including KPI-285. We are also evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the treatment of post-operative inflammation and pain and the temporary relief of the signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease. In addition, we also are evaluating additional product opportunities with significant unmet medical needs that we believe can be addressed by our proprietary MPP technology, including diseases of the lung, cervical/vaginal tract and gastrointestinal tract.

Our MPP Technology

Opportunities in Drug Delivery across Mucosal Barriers

        The body is surrounded by boundary tissues that play the important physiological role of preventing foreign bodies from penetrating into the body. The mucus that coats these tissues, the eyes,

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lung, cervical/vaginal tract and gastrointestinal tract, for example, serves as a protective barrier to trap and eliminate particulate matter, such as viruses, bacteria and allergens, before these agents 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 reducing their therapeutic effect.

        Mucus also makes it difficult to treat many ophthalmic diseases. The body can rapidly eliminate drugs delivered to the eye via the tear film protecting the surface of the eye, which can significantly limit the effectiveness of these drugs. This is the case both for drugs designed to treat conditions in the front of the eye, such as dry eye disease and post-operative inflammation and pain, as well as for drugs designed to treat conditions in the back of the eye, such as retinal diseases. We believe that our proprietary MPP technology has the potential to address this clear unmet medical need for more efficient delivery of drugs administered via topical ocular dosing.

MPP Technology

        Our MPPs are selectively-sized nanoparticles, with average diameters of approximately 330 nanometers, and have non-covalent proprietary coatings. We believe that these two key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped and eliminated by mucus. We believe this enables enhanced efficacy at equal or lower 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 the distribution of the conventional particles and the image on the right below shows the distribution of the MPPs. The conventional particles aggregated in the lumenal mucus and did not reach the target tissues. In contrast, the MPPs coated the entire vaginal epithelium, including all the target surfaces.

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Source: Laura M. Ensign et al., Mucus-Penetrating Nanoparticles for Vaginal Drug Delivery Protect Against Herpes Simplex Virus, Science Translational Medicine, June 14, 2012.

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        While a significant portion of conventionally formulated ophthalmic drugs are rapidly eliminated via the tear film, we have shown that our MPPs are capable of achieving higher concentration on the surface of the eye, thereby enabling the active drug substance to reach cells in the underlying ocular tissue at higher levels.

        The graphic below illustrates the ability of our MPP drug nanoparticles to penetrate the tear and membrane-bound mucins to reach the ocular surface, as compared to conventional, non-coated particles, which adhere to the mucins in the tear film and are cleared with the tears through blinking.

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This graphic is included for illustrative purposes only and is not intended to provide a complete representation of the way in which 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 compared to a branded form of LE. In a preclinical study of ocular inflammation in rabbits, KPI-121 0.5% administered four times a day, or QID, showed a larger reduction of inflammation as compared to a branded form of LE 0.5% given QID, as measured by the mean aqueous humor cell counts after intravitreal injection. 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 aqueous humor, a transparent gelatinous fluid that fills the anterior and posterior chambers between the lens and the cornea, of the rabbit eyes treated with KPI-121 were more than three times higher than the rabbit eyes treated with branded LE 30 minutes after dosing, at a 20% lower concentration.

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LE in Aqueous Humor

        We administered KPI-121 0.5%, branded LE 0.5%, or 0.5% of an LE non-MPP nanoparticle, to the eyes of three groups of rabbits and measured the amount of LE that was delivered to the cornea. The non-MPP nanoparticle was similar in size to our MPP nanoparticles but lacked the proprietary surface coating used in our MPP nanoparticles. As illustrated in the line graph below, concentrations of LE in the cornea of the rabbit eyes treated with KPI-121 were more than three times higher than the concentrations in rabbits treated with branded LE between 20 and 40 minutes after dosing. In addition, the rabbit eyes treated with the non-MPP nanoparticles had concentrations of LE similar to that in the rabbit eyes treated with branded LE and did not display the improved drug bioavailability properties observed with KPI-121. We believe these results highlight the importance of our proprietary MPP technology and show that KPI-121's improved pharmacokinetic profile has the potential to reduce the dosing strength and/or frequency of administration of LE with KPI-121 as compared to branded LE.

LE in Cornea

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        We also have demonstrated the potential of our MPP nanoparticles to increase the mucus penetration of over fifteen classes of drugs. While our current focus is in ophthalmology, in preclinical studies, our MPP technology has been effective in delivering drugs to the lungs, cervical/vaginal tract, gastrointestinal tract and other mucus-protected tissues. We have the ability to vary the rate of drug release as appropriate for the targeted disease state and tissue. As a result, drugs can be delivered either in rapid release formulations or as sustained release formulations that slowly release drug over a time period that ranges from hours to days.

Eye Disease

        The human eye is often segmented into two sections—the front and back of the eye. The front of the eye consists of tissues 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 of light 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 applied eye 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 vascular layer of the eye, the vitreous humor, which is a transparent gel that fills the vitreous chamber between the lens and the retina, and the 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 leaking of existing vessels and often leading to proliferation of new, abnormal and leaky blood vessels in the back of the eye. These conditions can lead to retinal damage, scarring and irreversible loss of vision. The most common treatments for these diseases involve administration of biologic agents that block the VEGF pathway and prevent or retard the blood vessel leakage and/or proliferation. Unfortunately, clinicians must inject these biologic agents directly into the vitreous of the eye via frequent intravitreal injections, or IVTs, to maintain vision. Topical administration of therapeutics to treat retinal diseases has not yet been demonstrated to be effective in the management of retinal disease, most likely due to insufficient delivery of drug to the back of the eye.

Our Product Candidates

KPI-121 Product Candidates

        Both KPI-121 1.0% and KPI-121 0.25% consist of MPP nanosuspensions of LE designed to enhance penetration through the mucus layer of the tear film to enable LE to reach the underlying ocular tissue. We believe that both of our KPI-121 product candidates have a favorable profile for the treatment of front-of-the-eye inflammatory conditions due to their broad mechanism of action, rapid onset of relief and favorable tolerability profile. LE is a corticosteroid developed specifically for 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.

        Both of our KPI-121 product candidates, KPI-121 1.0% and KPI-121 0.25%, are eye drops that are topically administered as an aqueous suspension of LE. In preclinical studies, MPP nanosuspensions of LE demonstrated superior pharmacokinetic characteristics and bioavailability as compared to branded LE, with increased penetration of LE into ocular tissues. These product candidates include:

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KPI-121 1.0%, administered two times a day, which we are developing for the treatment of post-operative inflammation and pain following ocular surgery; and

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KPI-121 0.25%, administered four times a day, which we are developing for the temporary relief of the signs and symptoms of dry eye disease.

        We initially filed an IND for KPI-121 for the treatment of post-operative inflammation and pain following ocular surgery in December 2013, and subsequently amended the IND to also include the treatment of the signs and symptoms of dry eye disease in June 2014. We have completed two pivotal Phase 3 clinical trials of KPI-121 1.0% and a Phase 2 clinical trial of KPI-121 0.25%. We anticipate that we will submit an NDA for KPI-121 1.0% for the treatment of post-operative inflammation and pain following ocular surgery by the end of 2017. Assuming we achieve positive results from our ongoing Phase 3 clinical trials for KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease, we anticipate that we will submit an NDA for KPI-121 0.25% in the first half of 2018. We expect to file both of these NDA submissions 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, or new uses of previously approved products, by enabling an applicant to rely, in part, on the FDA's findings of safety and efficacy for an existing product, or published literature, in support of the NDA. An NDA filed under section 505(b)(2) would allow us to reference the extensive data already collected by the FDA on LE to supplement the safety and efficacy data generated in our clinical trials of KPI-121 1.0% and KPI-121 0.25%.

KPI-121 1.0% for Post-Operative Inflammation and Pain

Post-Operative Inflammation and Pain Overview

        Ocular inflammation and pain are common complications following cataract surgery. According to Marketscope, in 2016 there were 7.7 million ocular surgeries in the United States, including 3.9 million cataract surgeries. Marketscope also projected that there would be approximately 9.4 million ocular surgeries in the United States in 2021, including approximately 4.6 million cataract surgeries. Other commonly performed ocular surgeries include cornea and glaucoma procedures. Tissue damage caused by ocular surgery leads to the production of prostaglandins and increases in blood flow to the affected area, which contribute to inflammation. The standard of care for post-operative inflammation and pain includes anti-inflammatory drugs such as corticosteroids, which improve patient comfort and accelerate recovery through disruption of the inflammatory cascade. Commonly used topical ocular corticosteroid products for the treatment of post-operative inflammation and pain are approved for dosing four times a day. This dosing regimen can be burdensome for patients as they are taking multiple eye drops following surgery, and four-times-a-day dosing is believed to reduce patient compliance. There are no ocular corticosteroid products currently approved in the United States for dosing two times a day for the treatment of post-operative inflammation and pain.

Limitations of Existing Treatments for Post-Operative Inflammation and Pain

        LE is a unique steroid that was 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, Lotemax®, was approved by the FDA in 1998. Subsequent gel and ointment formulations of Lotemax were approved by the FDA for the treatment of post-operative inflammation and pain following ocular surgery. Durezol® is a topical steroid approved by the FDA for the treatment of inflammation and pain associated with ocular surgery. Durezol eye drops are dosed four times a day for two weeks followed by dose tapering based on patient response.

        The most commonly used ocular steroids, including Lotemax products and Durezol, are approved for the treatment of post-operative inflammation and pain with a four-times-a-day dosing regimen. This dosing regimen can be burdensome for patients as they are taking multiple eye drops following surgery, and four-times-a-day dosing may reduce patient compliance with the prescribed medication. There is currently no marketed ocular steroid product with an approved twice-a-day dosing regimen.

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KPI-121 1.0% Opportunity in Post-Operative Inflammation and Pain

        We believe that KPI-121 1.0% has a favorable profile for the treatment of inflammation and pain following ocular surgery, including the following attributes:

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Twice daily dosing.  In our completed Phase 3 clinical trials, patients who had undergone cataract surgery and were treated with KPI-121 1.0% demonstrated a significant increase in the resolution of inflammation and pain after seven days of dosing using a twice daily dosing regimen as compared to patients treated with placebo. Given the generally accepted view that less frequent dosing leads to higher patient compliance, we believe the ability to achieve a significant reduction in inflammation and pain following surgery with a twice-a-day product will be a key differentiating attribute of KPI-121 1.0%.



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Favorable tolerability profile.  LE is one of the safest topical ocular steroids available due to its unique pharmacokinetics. LE was designed to be metabolized after exerting its anti-inflammatory action in the eye. The metabolism of LE to inactive metabolites reduces exposure of the trabecular meshwork to the active steroid, thus reducing risk of IOP increase relative to other steroids. In our completed Phase 3 clinical trials, KPI-121 1.0% had a tolerability profile comparable to placebo, with no treatment-related serious adverse events observed during the course of either Phase 3 trial.

KPI-121 1.0% Phase 3 Clinical Development Program

        In 2014, we conducted our first Phase 3 multi-center, randomized, double-masked, placebo-controlled, parallel-group trial designed to evaluate two dosing regimens of KPI-121 ophthalmic suspension versus placebo in 380 patients following cataract surgery. Patients who had a threshold degree of ocular inflammation on the day after surgery were randomized to receive either KPI-121 1.0% administered twice a day, or BID, KPI-121 0.25% administered QID or placebos administered with the same frequency, in each case for two weeks. The primary endpoints for each of the treatment arms were:

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the proportion of patients with complete resolution (grade=0) of anterior chamber cells, which is an objective measure of intraocular inflammation, at post-operative day eight and maintained through the end of the trial with no need for rescue medication; and



•

the proportion of patients with complete resolution of pain (grade=0) at post-operative day eight and maintained through the end of the trial with no need for rescue medication.

        At day eight, statistical significance in the primary endpoint of complete resolution of inflammation with no need for rescue medications was achieved with both KPI-121 1.0% (p=0.0024) and KPI-121 0.25% (p<0.0001). Statistical significance in the primary endpoint of complete resolution of ocular pain by day eight with no need for rescue medications was also achieved for KPI-121 1.0% (p=0.0019) and KPI-121 0.25% (p=0.0003). We determined statistical significance based on a widely used, conventional statistical method that establishes the p-value of clinical results. The p-value is a measure of compatibility between the observed outcomes and the hypothesis that there is no treatment effect attributable to the product candidate; the p-value represents the likelihood that the observed outcome occurred by chance alone. Typically, a p-value of 0.05 or less represents statistical significance. The bar graph on the left below shows the percentage of patients in the KPI-121 0.25% and placebo treatment arms who had complete resolution of inflammation and complete resolution of pain at day eight of treatment, and the bar graph on the right below shows the percentage of patients in the KPI-121 1.0% and placebo treatment arms who had complete resolution of inflammation and complete resolution of pain at day eight of treatment.

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        Both KPI-121 1.0% and KPI-121 0.25% were well-tolerated in this trial, with no treatment-related serious adverse events observed during the course of the trial. Six and four tenths percent (6.4%) of patients in the KPI-121 1.0% treatment arm and 10.2% of patients in the KPI-121 0.25% treatment arm reported ocular adverse events, compared to 15.9% of patients in the placebo arm. The most common ocular adverse events were reported by no more than 1.6% of patients in the KPI-121 1.0% treatment arm, 2.3% of patients in the KPI-121 0.25% treatment arm, and 4.0% of patients in the placebo arm. Patients in the KPI-121 1.0% and placebo treatment arms had a similar profile with respect to mean IOP on each of days four, eight, 15 and 18 of the trial. Furthermore, no more than 1.5% of patients at each testing point in each of the KPI-121 and placebo arms experienced increases in IOP of greater than 5 mm Hg resulting in total IOP greater than 20 mm Hg, each as compared to baseline (measured prior to onset of treatment) on days four, eight, 15 and 18 of the trial.

        In June 2016, we initiated enrollment in a 520 patient confirmatory double-masked, randomized, controlled Phase 3 clinical trial of KPI-121 1.0% to evaluate the safety and efficacy of KPI-121 1.0% in subjects with inflammation and pain following cataract surgery. The Phase 3 clinical trial was designed to compare KPI-121 1.0% administered twice a day for 14 days to placebo.

        In this trial, patients who had a threshold degree of ocular inflammation on the day after surgery were randomized in an approximate 1:1 ratio to receive either KPI-121 1.0% ophthalmic suspension or placebo, in each case dosed twice a day for 14 days.

        The primary endpoints in the trial are the same as those in the initial Phase 3 trial:

•

the proportion of patients with complete resolution (grade=0) of inflammation as measured by anterior chamber cells at post-operative day eight and maintained through day 15 with no need for rescue medication; and



•

the proportion of patients with complete resolution of pain (grade=0) at post-operative day eight and maintained through the day 15 with no need for rescue medication.

        In May 2017 we announced topline results from this trial. In this second trial, statistical significance was achieved in the primary efficacy endpoint of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medications for KPI-121 1.0% (p=0.01) compared to placebo. Statistical significance was also achieved in the primary efficacy endpoint of complete resolution of pain at day eight maintained through day 15 with no need for rescue medications for KPI-121 1.0% (p<0.0001) compared to placebo. The bar graph below shows the percentage of patients in the KPI-121 1.0% and placebo treatment arms who had complete resolution of inflammation and complete resolution of pain at day eight of treatment.

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        KPI-121 1.0% also achieved statistical significance in each of the secondary endpoints of: complete resolution of pain at day four with no need for rescue medications (p<0.0001); complete resolution of anterior chamber flare at day four with no need for rescue medications (p<0.0001); and change from baseline in mean anterior cell count at day four (p=0.0078).

        KPI-121 1.0% was well-tolerated in this trial, with no treatment-related serious adverse events observed during the course of the trial. Six and nine tenths percent (6.9%) of patients in the KPI-121 1.0% treatment arm reported ocular adverse events compared to 10.4% of patients in the placebo arm. The most common ocular adverse events were reported by no more than 1.1% of patients in the KPI-121 1.0% treatment arm and 2.3% of patients in the placebo arm. Patients in the KPI-121 1.0% and placebo treatment arms had a similar profile with respect to mean IOP on each of days four, eight, 15 and 18 of the trial. Furthermore, no more than 1% of patients at each testing point in each of the KPI-121 and placebo arms experienced increases in IOP of greater than 5 mm Hg resulting in total IOP greater than 20 mm Hg, each as compared to baseline (measured prior to onset of treatment) and on days four, eight, 15 and 18 of the trial.

        Based on our discussions with the FDA, we believe that we have generated sufficient safety information to support an NDA submission and that the only additional clinical trial required is a pharmacokinetic trial in 20 healthy volunteers to evaluate plasma levels of LE and its key metabolites following topical dosing of KPI-121 1.0%. We recently completed this trial and found no detectable plasma concentrations of LE or its key metabolites during and following two weeks topical dosing of KPI-121 1.0% given BID. We expect to submit an NDA by the end of 2017. Although we have conducted our Phase 3 trials of KPI-121 1.0% in patients who have undergone cataract surgery, based upon our discussions with the FDA, we anticipate that these trials may support, and we intend to seek, an indication for the treatment of post-operative inflammation and pain following ocular surgery. In connection with our NDA submission, we intend to submit an application for pediatric exclusivity, which, if granted, could provide an additional six months of marketing exclusivity for KPI-121 1.0% once we complete a planned clinical trial in pediatric patients who have undergone cataract surgery. We also intend to seek "priority review" of our NDA submission.

KPI-121 0.25% for Dry Eye Disease

Dry Eye Disease Overview

        Dry eye disease is a chronic, episodic, multifactorial disease affecting the tears and ocular surface that can result in tear film instability, inflammation, discomfort, visual disturbance and ocular surface damage. While the precise cause of dry eye disease is not fully understood, it often involves impairment of the lacrimal unit, which consists of the lacrimal glands, ocular surface and the sensory and motor nerves that connect them, and has a significant inflammatory component. There is significant published

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research that suggests that inflammation plays a major role in the development of dry eye disease. Dry eye disease can have a significant impact on quality of life and can potentially cause long-term damage to the ocular surface. Due to the impact of dry 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 commonly treated by ophthalmologists and optometrists.

        A significant number of dry eye disease patients experience acute, episodic exacerbations of their symptoms, which we refer to as flares, at various times throughout the year that can cause significant discomfort and disability. As illustrated in the graphic below, these flares can be triggered by numerous factors, such as environmental stimuli related to exposure to allergens, pollution, wind and low humidity. Intense visual concentration, such as watching television or working at a computer, can also trigger flares. Other potential triggers include 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 third-party academic research, we believe dry eye disease results in approximately $55 billion in direct and indirect costs in the United States each year, of which approximately $3.8 billion are direct medical costs. The exact prevalence of dry eye disease is unknown due to the difficulty in defining the disease and the lack of a single diagnostic test to confirm its presence. The Beaver Dam Offspring Study, a major epidemiological study published in 2014 in the American Journal of Ophthalmology, reported that in a cohort of over 3,000 patients, dry eye disease was self-reported by 14.5% of the patients. The prevalence of dry eye disease increases 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 16 million patients with a diagnosis of dry eye disease in the United States. The vast majority of dry eye patients experience acute exacerbations of their symptoms, which are commonly referred to as flares, at various times throughout the year.

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        The most commonly used treatments for dry eye disease in the United States are over-the-counter eye drops, often referred to as "artificial tears," and two prescription pharmaceutical products, Restasis and Xiidra. Artificial tears are intended to supplement insufficient tear production or improve tear film instability, but do not treat the underlying inflammation in dry eye disease. Restasis increases tear production and Xiidra treats the signs and symptoms of dry eye disease, however, both Restasis and Xiidra are typically used chronically for dry eye patients who have continuous symptoms. As each of Restasis 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 dry eye patients whose symptoms are primarily episodic as opposed to chronic, and for whom 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 Disease

        Initial treatment for dry eye disease in the United States frequently consists of over-the-counter artificial tear/lubricating eye drops. Most over-the-counter artificial tears work by lubricating the eyes and helping to maintain moisture on the outer surface of the eye to provide temporary improvement in patient comfort. These products do not treat the underlying inflammatory components of dry eye disease.

        In addition to over-the-counter artificial tears, Restasis and Xiidra are sometimes prescribed as a chronic therapy for the treatment of dry eye disease. Restasis is a topically applied, ophthalmic formulation of the immuno-suppressant cyclosporine. Restasis is not approved for the treatment of the signs and symptoms of dry eye disease, but rather for increasing tear production in patients whose tear production is presumed to be suppressed due to ocular inflammation associated with dry eye disease. We believe that less than 10% of patients diagnosed with dry eye disease in the United States use Restasis. In 2016, Restasis had sales of approximately $1.42 billion in the United States. Restasis, however, frequently causes burning upon instillation, and, according to the package insert, 17% of patients in clinical trials of Restasis reported ocular burning upon instillation. Xiidra is a topically applied ophthalmic formulation of lifitegrast, a small molecule LF1a antagonist, which was approved by the FDA in July 2016 for the treatment of the signs and symptoms of dry eye disease and was commercially launched in the United States in August 2016. Xiidra had sales of $54.0 million in the United States in partial launch year 2016. Xiidra, like Restasis, is typically used chronically. Due to each of Restasis and Xiidra having a relatively long onset of action, they are not generally used for the short-term treatment of episodic 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 are approved in the United States for the treatment of dry eye disease, 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.

KPI-121 0.25% Opportunity in Dry Eye Disease

        Based on our completed Phase 2 trial, we believe that KPI-121 0.25% has a favorable profile for the management of dry eye disease flares, including the following attributes:

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Broad mechanism of action.  LE is a corticosteroid. Corticosteroids are known for their broad anti-inflammatory properties.



•

Rapid onset of relief.  In our Phase 2 clinical trial, patients treated with KPI-121 0.25% reported reductions in ocular discomfort within one to two days of initiation of treatment.



•

Favorable tolerability profile.  LE is one of the safest topical ocular steroids available due to its unique pharmacokinetics. LE was designed to be metabolized after exerting its anti-inflammatory

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action in the eye. The metabolism of LE to inactive metabolites reduces exposure of the trabecular meshwork, an area of tissue located in the anterior chamber that is responsible for draining the aqueous humor from the eye, to active steroid, thus reducing the risk of an increase in IOP relative to other steroids. To date, we have unmasked data from over 400 patients treated with KPI-121 and have seen similar profiles with respect to mean IOP and the frequency of increases in IOP levels in patients treated with KPI-121 compared to patients treated with placebo. In our Phase 2 clinical trial of KPI-121 0.25% in dry eye disease, only 6.9% of patients treated with KPI-121 0.25% reported instillation site pain as compared to 3.8% for placebo.

•

Specifically targeting relief of episodic dry eye flares.  The mechanism of action and rapid onset of relief of KPI-121 0.25% in dry eye disease is distinct from that of artificial tears and chronic therapies like Restasis and Xiidra. Therefore, we expect it to be used as a stand-alone short course therapy to provide rapid relief of dry eye flares by improving ocular discomfort (a dry eye symptom) and reducing ocular redness (a dry eye sign).



•

Potentially complementary to existing therapies.  We believe that patients on chronic therapies can also experience dry eye flares and could potentially benefit from using KPI-121 0.25% in addition to their maintenance therapy.

        If we successfully complete our development program and receive FDA approval of our NDA for KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease, we believe that we will have the first FDA-approved product for this indication with demonstrated safety and efficacy and an easy-to-follow two-week course dosing regimen. We believe that these attributes will make KPI-121 0.25% attractive to prescribing clinicians for treating patients that suffer from dry eye flares.

KPI-121 0.25% Phase 2 Clinical Trial Results

        In 2014, we conducted a Phase 2 double-masked, randomized, controlled clinical trial of KPI-121 0.25% in 150 patients with dry eye disease at nine clinical sites. Patients were enrolled in the trial based on their magnitude of conjunctival hyperemia and ocular discomfort prior to treatment. Patients had a two week run-in with placebo administered four times a day and were required to maintain a similar magnitude of conjunctival hyperemia and ocular discomfort following this run-in period to be included in the randomization portion of the trial. Upon achieving the trial entry criteria after this run-in period, patients were randomized to receive either KPI-121 0.25% or a placebo four times a day for 28 days. Safety and efficacy assessments were made over 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 4 scale ranging from no hyperemia (score=0) to severe hyperemia (score=4), and the primary symptom endpoint was ocular discomfort severity, as reported by the patient on a visual analog scale ranging from 0 to 100 mm (0 mm=very mild; 100 mm=very severe).

        KPI-121 0.25% achieved statistical significance for the primary clinical sign endpoint of conjunctival hyperemia at day 29 with a treatment difference between KPI-121 0.25% and placebo of 0.21 units (p=0.0387). The line graph on the left below plots the mean conjunctival hyperemia score for patients in the KPI-121 0.25% treatment arm and the placebo treatment arm, in each case as measured on days one, 15 and 29 of the trial. As illustrated below, the treatment difference at day 15 between KPI-121 0.25% and placebo was 0.26 units (p=0.0090). In addition, a significantly higher proportion of patients treated with KPI-121 0.25% demonstrated a reduction of one unit or greater in conjunctival hyperemia as compared to patients treated with placebo. The bar graph on the right below shows the number and percentage of patients in each of the KPI-121 0.25% and placebo treatment arms who demonstrated a reduction of one unit or greater in conjunctival hyperemia scores at days 15 and 29 of the trial.

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        In the trial, patients treated with KPI-121 0.25% also showed reductions in the symptom endpoint of ocular discomfort severity. While KPI-121 0.25% did not achieve statistical significance for this endpoint, the treatment difference between KPI-121 0.25% and placebo for reduction of ocular discomfort was 4.1 mm at day 15 (p=0.1072) and 2.6 mm at day 29 (p=0.3674). We did not expect to achieve statistical significance for ocular discomfort in light of the small number of patients in the trial (73 patients were treated with KPI-121 0.25% and 77 patients were treated with placebo). We believe we will be able to demonstrate statistical significance for ocular discomfort severity in our upcoming Phase 3 trials, which will include much larger numbers of patients.

        The line graph on the left below plots the mean ocular discomfort severity score for patients in the KPI-121 0.25% and placebo treatment arms, in each case measured as the mean of the seven days prior to days one, 15 and 29 of the trial. We conducted post-hoc analyses of the data using the three-and five-day ocular discomfort mean data for purposes of designing our Phase 3 clinical trials. Utilizing the three-day mean data for the statistical analysis yielded a treatment difference at day 15 of 5.01 mm (p=0.062). Although post-hoc analyses performed after unmasking trial results can result in the introduction of bias and may not be predictive of success in our Phase 3 clinical trials, we believe that these retrospective analyses provide additional information regarding our Phase 2 clinical trial. Based on our discussions with the FDA, we are using three-day ocular discomfort means for the statistical analysis of our primary efficacy endpoints in our ongoing Phase 3 clinical trials.

        The line graph on the right below plots the mean daily ocular discomfort score for patients in the KPI-121 0.25% and placebo treatment arms for the first 14 days of the trial, showing rapid reduction in the severity of ocular discomfort for patients dosed with KPI-121.

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        KPI-121 0.25% was generally well tolerated, with no treatment-related significant adverse events observed during the course of the trial. The only treatment-emergent adverse event reported in greater than 3% of patients was instillation site pain, which was reported in 6.9% of patients treated with KPI-121 0.25% compared to 3.8% of patients treated with placebo. Patients in the KPI-121 0.25% and placebo treatment arms had a similar profile with respect to mean IOP, and the number of patients with an IOP increase of greater than 5 mm Hg was similar in the two treatment groups. The table below shows the mean IOP measurements for patients in the KPI-121 0.25% administered four times a day, or QID, and placebo treatment arms, in each case as measured on days one, 15 and 29 of the trial.

Mean IOP (mm Hg) in Study Eye

        The table below shows the number of patients in the KPI-121 0.25% and placebo treatment arms who experienced an IOP increase of 5 mm Hg or greater from baseline (as measured at the onset of treatment) on days 15 and 29 of the trial. One patient in each of the KPI-121 0.25% and placebo treatment arms had elevated IOP classified as adverse events.

Number of Patients with IOP Increase of Greater than 5 mm Hg in Study Eye Leading to IOP Greater than 20 mm Hg

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KPI-121 0.25% Phase 3 Clinical Development Program

        In June 2016, we initiated two parallel Phase 3 clinical trials, each with approximately 900 dry eye patients, comparing KPI-121 0.25% to placebo, both administered four times a day for 14 days. Both ongoing Phase 3 trials have the same patient inclusion/exclusion criteria as the Phase 2 trial and the same primary endpoints of conjunctival hyperemia and ocular discomfort severity, but in the Phase 3 trials these primary endpoints will be measured at day 15 compared to day 29 in the Phase 2 trial. We believe that measuring our primary endpoint at day 15 in the ongoing Phase 3 trials is advantageous because the statistical results of the Phase 2 trial were more robust at day 15 than at day 29. We believe ophthalmologists and optometrists are familiar with two-week dosing regimens from their use of other steroids for post-operative inflammation and pain, and we discussed with the FDA the use of a two-week dosing regimen for KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease in our June 2015 meeting. Except for the number of patients (approximately 900 in each of the Phase 3 trials versus 150 in the Phase 2 trial), the timing of the primary endpoint measurements (day 15 in the ongoing Phase 3 trials versus day 29 in the Phase 2 trial) and the duration of dosing (14 days in the Phase 3 trials versus 28 days in the completed Phase 2 trial), the key elements of the Phase 3 trial design are substantially similar to the Phase 2 trial design.

        The two ongoing Phase 3, multi-center, double-masked, randomized, vehicle-controlled, parallel-group trials are designed to evaluate the safety and efficacy of KPI-121 0.25% ophthalmic suspension versus placebo in patients with dry eye disease. Patients are being enrolled in each trial based on their magnitude of conjunctival hyperemia and ocular discomfort prior to treatment. Patients have a two week run-in with placebo administered four times a day and are required to maintain a similar magnitude of conjunctival hyperemia and ocular discomfort following this run-in period to be included in the randomization portion of the trials. Upon achieving the trial entry criteria after this run-in period, patients are being randomized to either KPI-121 or placebo study arms in an approximate 1:1 ratio. Patients are receiving 1-2 drops in each eye four times a day for approximately 14 days. Key inclusion criteria include a diagnosis of dry eye in both eyes, a conjunctival hyperemia score of 2 or greater and a patient-reported ocular discomfort severity score of at least 50 mm at visit 1 (prior to the two week run-in period) and 40 mm at visit 2 (following the two week run-in period) using a visual analog scale. Patients are being evaluated at the beginning of the trial and evaluated at day eight and day 15.

        The primary sign endpoint for each trial is mean change from baseline bulbar conjunctival hyperemia at day 15 as compared to day one in the region of highest severity of bulbar conjunctival hyperemia in the study eye as determined by photographic assessment using a masked photographic reading center. The primary symptom endpoint for each trial is mean change from baseline ocular discomfort severity as determined by the scores recorded in the patient's diary for the three days prior to day 15 compared to the three days prior to day one. In our Phase 2 trial, we achieved a treatment difference of 5.01 mm and the p-value of 0.062 using the mean for the three days prior to day 15 compared to three days prior to day one for the statistical analyses in post-hoc analyses.

        We expect, based on our current development plan, that the FDA will require us to demonstrate effectiveness on both of our primary endpoints in our two Phase 3 clinical trials for market approval of an indication for the temporary relief of the signs and symptoms of dry eye disease. Based on our discussions with the FDA, we believe that following completion of the two Phase 3 trials, we will have generated sufficient safety information to support an NDA submission and that the only additional clinical trial required is a pharmacokinetic trial in 20 healthy volunteers to evaluate plasma levels of LE and its key metabolites following topical dosing of KPI-121 0.25%. We recently completed this trial and found no detectable plasma concentrations of LE or its key metabolites during and following two weeks topical dosing of KPI-121 0.25% given BID. We expect to submit an NDA by the end of 2017. We also intend to seek "priority review" of our NDA submission.

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        Based on our discussions with EU regulatory authorities, if the results of our ongoing Phase 3 trials are positive, we believe that we will be able to utilize the results from these U.S. dry eye disease trials to support a submission of an MAA for KPI-121 0.25% for the short-term treatment of dry eye disease in the EU through the Article 10(3) submission pathway. We also are currently evaluating the scope of additional manufacturing and stability data we may need to acquire to support our MAA submission. In anticipation of the potential to seek approval and commercialize KPI-121 for dry eye disease in the EU we are evaluating a variety of collaboration, distribution and other marketing arrangements with one or more third parties.

Other Preclinical Opportunities for Post-Operative Inflammation and Pain and Dry Eye Disease

        Building on the results of our clinical trials for our KPI-121 1.0% and KPI-121 0.25% product candidates, we are evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the treatment of inflammation and pain following ocular surgery, for the temporary relief of the signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease.

rTKI Program

Retinal Disease

        There 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 two categories of AMD: "Dry" AMD, which involves slow deterioration of the retina with submacular drusen, atrophy, loss of macular function and central vision impairment; and "Wet" AMD, which involves growth of abnormal blood vessels under the retina and macula, resulting in edema, tissue damage and rapid loss of central vision. If untreated, neovascularization in Wet AMD patients typically results in significant vision loss and the formation of a scar under the macular region of the retina. Most cases begin as Dry AMD, which can progress to Wet AMD. Wet AMD is a leading cause of blindness in people over the age of 55 in the United States and the European Union. The incidence of Wet AMD increases substantially with age, and we expect that the number of cases of Wet AMD will increase with growth of the elderly population in the United States.

        The current standard of care for Wet AMD is intravitreal injection of drugs that target VEGF, one of the key proteins involved 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 visual impairment. These changes include dysfunction of retinal vasculature (nonproliferative retinopathy), with vascular occlusion and increased permeability, leading to retinal hypoxia and DME. The disease can further progress to proliferative retinopathy with retinal 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, the prevalence rate for DME is 3.8%, or approximately 746,000 people. DME is the leading cause of visual impairment and blindness in Americans between 20 and 74 years old.

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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 or vision loss in all or part of one eye. RVO has been estimated to affect 16 million people worldwide.

Limitations of Existing Treatments for Retinal Disease

        VEGF is a protein that plays a critical role in the formation of new blood vessels and increased permeability, two pathological processes that contribute to the vision loss associated with certain retinal diseases. Several VEGF tyrosine kinase inhibitors have been investigated in AMD patients in clinical trials. These inhibitors have been administered in a variety of ways, including intravitreal injection, oral administration and topical dosing. To date, no VEGF tyrosine kinase inhibitors have been approved in the United States for the treatment of ocular diseases. We believe that there is a substantial market opportunity for a safe and effective topically applied VEGF tyrosine kinase inhibitors to treat various retinal diseases, such as AMD, DR, DME, RVO and related neovascular diseases.

        The most common treatments for retinal diseases involve administration of biologic agents that block the VEGF pathway and prevent or retard the blood vessel leakage and/or proliferation. Unfortunately, clinicians must inject these biologic agents directly into the eye via frequent IVTs to maintain vision. Sales of the two leading IVT biologic agents used to treat eye diseases associated with abnormal blood vessel proliferation, Genentech's Lucentis® and Regeneron's Eylea®, were $1.4 billion and $3.3 billion, respectively, in the in the United States in 2016. Topical administration of therapeutics to treat retinal diseases has not yet been demonstrated to be effective in the management of retinal disease, most likely due to insufficient delivery of drug to the back of the eye.

rTKI Program for the Potential Treatment of Wet AMD, DR, DME and RVO

        Through our rTKI program we generate small molecule new chemical entities, or NCEs, that are designed to be potent VEGF receptor kinase inhibitors. KPI-285, our current rTKI lead compound, is engineered with our MPP technology to facilitate its penetration into tissues in the back of the eye following topical dosing. In preclinical rabbit studies, KPI-285 demonstrated a potency of less than one nanomolar against the VEGF receptor-2 kinase and good selectivity against particular growth factor receptor kinases, cell cycle kinases and other detrimental receptors. KPI-285 is designed to be administered topically as an eye drop.

        In preclinical rabbit studies, topical administration of KPI-285 achieved concentrations in tissues in the back of the eye well above the concentrations required for in vitro inhibition of 50% of the VEGF receptor kinase activity. In addition, in a rabbit model of VEGF induced vascular leakage, topically applied KPI-285 MPP reduced leakage to an extent similar to that achieved with an IVT injection of Genentech's Avastin®, a recombinant human monoclonal antibody that binds to VEGF. In this model, vascular leakage of fluorescein was induced by IVT injections of VEGF. The extent of fluorescein leakage observed in various treatment groups was scored in a blinded fashion on a scale from 0 to 4, with 0 being no leakage and 4 being heavy leakage. As shown in the photographs below, the magnitude of the effect achieved with topical administration of KPI-285 5.0% was similar to that observed with IVT injection of Avastin.

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        We believe that an effective topical therapy 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 compliance and 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 our rTKI program, including KPI-285.

Potential Applications in Other Diseases

        Mucus limits delivery of conventionally formulated drugs to mucosal tissues such as the lung, cervical/vaginal and gastrointestinal tract. While our current focus is in ophthalmology, our MPP technology has been effective in preclinical studies in enhancing drug delivery to these other tissues. We also have demonstrated in preclinical studies that MPP technology can be used to increase mucus penetration of over fifteen classes of drugs.

Competition

        The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our technologies, knowledge, experience and scientific resources provide us with competitive advantages, we face competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any product candidates that we successfully develop 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 generic drug companies. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in

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acquiring technologies complementary to, or necessary for, our programs. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

        The key competitive factors affecting the success of KPI-121 0.25%, KPI-121 1.0% and other product candidates, if approved, are likely to be the product candidate's efficacy, safety, method of administration, convenience, price, the level of generic competition and the availability of insurance coverage and reimbursement from government and other third-party payors.

        Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours. In addition, our ability to compete may be affected because in many cases insurers or other third-party payors seek to encourage the use of generic products.

Competition in Inflammation and Pain Following Ocular Surgery

        Following ocular surgery, topical steroids are commonly prescribed to manage and prevent complications from post-operative inflammation.

        Currently marketed topical steroids are the main competition to KPI-121 for the treatment of inflammation and pain following ocular surgery. The current market leaders in the United States based on revenue are Lotemax products and Durezol. Generic topical steroid formulations consist mainly of products containing prednisolone, fluorometholone or dexamethasone. In addition, there are various formulations of steroids that are produced by compounding pharmacies and are injected into the eye following ocular surgery.

        There are a number of product candidates in preclinical research and clinical development by third parties in the United States for the treatment of inflammation and pain following ocular surgery, including the following: Valeant Pharmaceuticals International, Inc. is developing an LE gel, which is formulated for topical delivery and is currently in Phase 3 clinical development; Ocular Therapeutix is developing Dextenza™, a punctal plug that is currently in Phase 3 clinical development and has filed an NDA for the treatment of ocular pain following ophthalmic surgery; and Icon Bioscience, Inc. is developing IBI-10090, which is formulated as a drug delivery system, or DDS, to be injected into the eye following ocular surgery and is currently in Phase 3 clinical development.

        There also are other product candidates for treatment of pain and inflammation following ocular surgery in the United States that are in earlier stage development.