KRYS - Krystal Biotech: A Promising Gene Therapy Innovator

2023-05-18 14:09:46 ET

Summary

• Krystal Biotech, Inc. is a promising gene therapy innovator that is benefitting from sector rotation.
• The lead gene therapy (B-vec) is designed to treat a debilitating skin condition coined dystrophic epidermolysis bullosa.
• Though B-vec has a small addressable market, other gene therapy franchises like KB407 for cystic fibrosis can capture a much larger market size.

Such a study indicates that the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. - Phillip Fischer (Warren Buffett's second mentor).

Author's Note : This is an abbreviated version of an article originally published in advance on May 18, inside Integrated BioSci Investing for our members.

If you've been following the market closely, you can see there are early signs of sector rotation back into biotech. That is to say, Wall Street is pulling capital from other sectors to allocate to biotech. That explains the recent biotech market resurgence. Underlying the rotation is the tremendous amount of biotech companies that are delivering robust clinical data and gaining unprecedented approval.

By strategically positioning your investments and trades during this time, you can capture more investment profits. One of those beneficiaries of the aforesaid phenomenon is a gene-therapy innovator dubbed Krystal Biotech, Inc. (KRYS). In this research, I'll feature a fundamental analysis of Krystal and share with you my expectation of this intriguing equity.

Figure 1: Krystal chart.

About The Company

As usual, I'll present a brief corporate overview for new investors. If you are familiar with Krystal Biotech, Inc., I recommend that you skip to the next section. Headquartered in Pittsburgh, Pennsylvania, Krystal is focused on the development and commercialization of gene therapies to fill the unmet needs of rare diseases.

As shown below, most pipeline assets are in their early-stage investigation. The sole exception is B-vec which already cleared its Phase 3 study. Additionally, the firm has a wholly-owned subsidiary dubbed Jeune Aesthetics which also leverages gene therapy to treat aging and/or damaged skin conditions.

Figure 2: Therapeutic pipeline.

Technology Platform

Viewing the figure below, you can see that Krystal's HSV-1 vector platform has key differentiating characteristics. For example, you can dose the patient directly (i.e., in vivo) rather than having to do it in test tubes.

As a highly efficient genetic cargo, the HSV-1 vector can carry large genes into the patient. Nevertheless, those genes don't incorporate into the patient's DNA, which prevents potential toxicity. That aside, the ability to have repeated dosing makes it different from the commonly used vectors, AAVs.

Figure 3: HSV1 gene delivery platform.

Notably, you can see that HSV1 has high infectivity, which means that it has broad applications to various tissues like skin, lungs, the cornea of the eyes, etc. Here's your proof in the pudding. That is to say, nearly all people got a cold sore in their lifetime, which is due to the high infectivity of HSV1. Harnessing HSV1's power, Krystal removed its virulent genes and loaded the viral coat with beneficial genes to treat rare genetic conditions.

Figure 4: HSV1's broad application.

Dystrophic Epidermolysis Bullosa

As a serious and ultra-rare blistering disease, dystrophic epidermolysis bullosa (DEB) is caused by COL7A1 gene mutations. Consequently, the COL7 protein is defective, thus preventing the outer skin layer (i.e., epidermis) to anchor to an inner layer (i.e., dermis). As a devastating result, this structural deficiency causes severe skin blistering, separation, and wound, as depicted in the figure below.

Figure 5: DEB pathophysiology.

Beremagene Geperpavec for DEB

Given the serious nature of DEB and without an available treatment, you can bet that there is an extremely strong demand to fill the need. Ergo, a novel and exotic solution like Beremagene Geperpavec (i.e., B-VEC) is ideal for DEB.

Here's how it works: the B-Vec cream coating the HSV1 vector that ferries the missing COL7A1 genes to the patient's cell on the skin. The corrected COL7 protein then allows the skin's layers (epidermis and dermis) to anchor together. The ultimate result is structural integrity restoration.

Figure 6: B-vec for DEB.

Robust Clinical Data

Now, all the sound underlying science/medicine is meaningless unless B-vec can demonstrate clinical efficacy. As you know, I'm in favor of gene therapy for certain conditions and not others. For DEB, you can bet that I'm highly optimistic here.

In the GEM-3 pivotal study, 31 patients suffering from DEB are designed to receive either B-vec or a placebo cream. The study is overall high-quality, as it's double-blinded with randomization. However, you can say that I'm nitpicking when it comes to data analysis.

And you guessed it correctly, I didn't like the fact that the study is open-label. Moreover, there were only 31 patients in the trial. Nonetheless, this is an ultra-rare condition, and you can imagine it's extremely difficult to recruit patients.

Figure 7: GEM-3 trial design.

In the figure below, you can appreciate that B-vec demonstrated superior and robust efficacy compared to placebo. For both the 3 months and 6 months periods, wound healing is achieved in 71% to 67% of B-vec-treated patients versus the corresponding 20% and 22% of patients on the placebo. Since the p-value were all less than 0.05, you can ascertain that these are real findings rather than random occurrences.

Figure 8: Robust B-vec data.

Estimated Market

With only 9K patients afflicted by this condition globally, B-vec's total market size is quite limited. Given that the company can ascribe a premium reimbursement (i.e., $200K to $400K annually), the total addressable market is still over $500M.

You can imagine that it made sense to reward B-vec with a premium reimbursement to foster the innovation process for an ultra-rare disease like DEB. Else, no company would take roughly 7-10 years to develop a drug that burns about $1B in the process, only to lose profits in the launch.

Figure 9: Estimated DEB market.

Financial Assessment

Just as you would get an annual physical for your well-being, it's important to check the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll assess the 1Q2023 earnings report for the period that ended on March 31.

Like most developmental-stage biotech, Krystal has yet to generate sales. As such, it's more meaningful for us to check other salient metrics. On that note, the research and development (R&D) registered at $12.2M compared to $9.3M for the same period a year prior.

Additionally, there were $45.2M ($1.76 per share) net losses versus $49.9M ($1.99 per share) net declines for the same comparison. It's great that Krystal is narrowing its bottom-line depreciation.

Figure 10: Key financial metrics.

About the balance sheet , there were $355.5M in cash, equivalents, and investments. Against the $48.8M quarterly OpEx, there should be adequate capital to fund operations into 4Q2024 before the need for additional financing. Simply put, the cash position is strong relative to the burn rate.

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the main concern for Krystal is whether B-vec can gain FDA approval for DEB. Moreover, there is a risk that other franchises might post subpar outcomes. In that event, the stock is likely to tumble over 50% and vice versa. As a young company, Krystal might grow too aggressively and thereby consume too much cash.

Concluding Remarks

In all, I issued a highly speculative buy recommendation on Krystal Biotech, Inc. with a 4.8/5 stars rating. As an intriguing growth stock, Krystal Biotech takes the prudent approach of prioritizing the advancement of the first and most crucial gene therapy before others. Phase 3 data showed that B-vec is an excellent solution for DEB. Keep in mind, DEB has a small market size. Nonetheless, other orphan conditions being brewed in early clinical trials (like the CF franchise) has multi-blockbuster sales potential. You also have the Jeune Aesthetic subsidiary to drive further value growth in the coming years.

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