KRYS - Krystal Biotech: Pioneering Rare Disease Gene Therapies

2023-07-31 22:26:21 ET

Summary

• Krystal Biotech's FDA-approved gene therapy for DEB sets a medical milestone, opening new revenue streams.
• With a robust financial health, Krystal prepares to launch a diverse pipeline of innovative gene therapies.
• Despite potential rewards, rising R&D expenses and market acceptance of therapies present considerable risks.
• Despite risks, Krystal Biotech receives a "Strong Buy" rating given its pioneering gene therapies and solid financial position.

Introduction

Krystal Biotech ( KRYS ) leverages its patented engineered HSV-1 platform to develop genetic medicines for rare diseases. Their technology delivers therapeutic genes to cells in various organs, overcoming challenges of gene disruption, immune response, and delivery efficiency. Designed for easy administration, it's supported by in-house manufacturing capabilities and regulatory precedence. Their aim is to transform patient experiences with rare and chronic conditions.

Recent developments: In May, the US FDA approved Krystal Biotech's Vyjuvek (B-VEC), the first gene therapy for dystrophic epidermolysis bullosa (DEB), a rare genetic skin disorder. Subsequent, Krystal Biotech sold ~1.73M shares at $92.50/share to institutional buyers in a private placement, and expected to raise ~$160M in proceeds.

The following article provides an in-depth analysis of Krystal Biotech, focusing on its innovative gene therapy platform, recent FDA approval of B-VEC for a rare skin disorder, financial performance, promising pipeline, stock evaluation, and potential risks. It concludes with a "Strong Buy" recommendation.

Financial Performance & Stock Evaluation

For the quarter ending March 31, 2023, the company held $355.5 million in cash, cash equivalents, and investments. The Research and Development expenses rose to $12.3 million, up from $9.3 million in the same quarter of the previous year. General and administrative expenses also saw a rise from $15.9 million to $24.0 million when compared year on year. The net losses for the quarter were $45.3 million, marking a slight decrease from the $50.0 million recorded for the same quarter in 2022.

Taking a look at Seeking Alpha data, the FY EPS (earnings per share) is expected to significantly improve over the next two years, from -4.98 in 2023 to 1.71 in 2025. This is accompanied by a robust increase in sales revenue, forecasted to grow from $27.38M in 2023 to $327.34M in 2025.

KRYS's stock momentum is rated A+, showing strong positive performance over the past year, significantly outperforming the SP500.

In terms of capital structure, the company has a market cap of $3.39B, total debt of $8.76M, and cash of $350.39M, leading to an enterprise value of $3.04B.

According to WhaleWisdom, the institutional interest in KRYS has increased, with the number of funds holding it rising from 113 to 156 between July 2021 and July 2023. Notable funds such as Deerfield, Point72, and Baker Brothers are among those holding the stock.

FDA Approves B-VEC: A Game-Changing Gene Therapy for Dystrophic Epidermolysis Bullosa

In May 2023, the FDA heralded a significant milestone in the medical field by approving beremagene geperpavec (B-VEC), a novel topical gene therapy. This groundbreaking therapy is intended for patients as young as six months who are affected by dystrophic epidermolysis bullosa (DEB). DEB is a rare genetic disorder, characterized by variants in the type VII collagen alpha 1 chain gene (COL7A1), leading to extremely fragile skin and chronic wound formation. It is caused by a deficiency of type VII collagen, an essential element for skin resilience and strength.

Krystal Biotech, the innovative force behind B-VEC, has presented an answer to the debilitating effects of DEB. B-VEC employs a non-replicating herpes simplex virus vector, designed to directly deliver a functional COL7A1 gene to the skin cells. By restoring the production of type VII collagen, it offers a beacon of hope for patients battling DEB. The therapy is administered topically on selected wounds, in evenly spaced droplets, once per week.

B-VEC's approval was backed by compelling clinical trials. The therapeutic outcomes were significantly positive, with a large number of wounds treated with B-VEC achieving complete healing compared to those treated with a placebo. Moreover, sustained wound closure was observed months after discontinuing the treatment. The therapy was generally well-tolerated, with reported adverse events being predominantly mild or moderate. Nevertheless, during the trials, three patients developed cutaneous squamous cell carcinoma at wound sites not exposed to B-VEC, underlining the need for continued monitoring of patients.

B-VEC's cost stands at $631,000 per patient per year, a sizable investment. However, considering the potential for a drastic improvement in patients' lives, this high cost could be justified. Based on DEB's prevalence of 11.1 per one million live births and a population of 330 million, the number of DEB patients in the U.S. could be reasonably estimated to be between 3,000 and 5,000. At 100% market saturation, peak annual revenue could reach between $1.89 and $3.15 billion. In a more conservative, and realistic, scenario of a 20% market capture, potential annual revenue stands at $378 million to $630 million. Globally, B-VEC could reasonably net at least $700 million.

Advancing Gene Therapies: Krystal Biotech's Innovative Pipeline

In addition to B-VEC, Krystal Biotech is advancing a diverse pipeline of innovative gene therapies. Here's a brief description of some of their notable drugs:

KB105: This therapy is designed for TGM1-deficient autosomal recessive congenital ichthyosis (ARCI). It is a topically applied gene therapy meant to deliver two copies of the TGM1 gene to a patient's skin to improve local condition and phenotype. The FDA and EMA have provided KB105 with orphan drug designation, and it also has fast track and rare pediatric designations from the FDA. The drug's Phase 1/2 trial showed promising improvements, and they plan to continue enrollment in the Phase 2 trial in 2023.

KB104: KB104 aims to treat Netherton Syndrome, a serious skin disorder caused by mutations in the SPINK5 gene. This off-the-shelf gene therapy, applied topically, introduces two copies of the SPINK5 gene to relevant skin cells. The drug, which currently has rare pediatric designation from the FDA, will have its clinical trial initiated in 2023.

KB407: This gene therapy is in development for Cystic Fibrosis ((CF)). Administered via inhalation, KB407 delivers two copies of the full-length CFTR transgene to the airway epithelia, potentially restoring ion and water flow within lung cells. The FDA and EMA have each granted KB407 orphan drug designation, and it also holds rare pediatric designation for the treatment of CF from the FDA. Krystal is currently "recruiting" for a Phase 1 trial .

KB408: Targeting Alpha-1 antitrypsin deficiency (AATD), KB408 is an inhaled formulation designed to deliver two copies of the SERPINA1 transgene. This treatment could potentially help AATD patients by allowing the production and secretion of a full-length human AAT protein capable of irreversibly binding its cognate target NE. An IND for KB408 is planned to be filed in 2023.

KB301: Apart from serious rare diseases, Krystal Biotech is also exploring treatments for aesthetic skin conditions. KB301 stimulates biorejuvenation of the skin via the delivery of the gene that encodes for type III collagen (COL3) when administered via intradermal injection. After a successful Phase 1 trial, the company plans to initiate a Phase 2 study for the treatment of fine lines in 2023.

My Analysis & Recommendation

As an analyst who's closely watched the story of Krystal Biotech unfold, I'm left with a mixture of excitement, optimism, and caution. Let's talk about why.

The firm's innovative approach in the field of gene therapy, leveraging a patented engineered HSV-1 platform, is certainly compelling. Their dedication to developing genetic medicines for rare diseases, like DEB, is nothing short of remarkable. The approval of B-VEC, a gene therapy for DEB, by the FDA serves as a testament to their technical prowess and pioneering spirit. It not only represents a significant medical milestone but also opens up new revenue streams for the company.

One positive aspect of the investment picture is Krystal's robust financial health, with a cash position of $355.5 million as of Q1 2023. This cash reserve, augmented by the recent private placement raising approximately $160M, puts them in a strong position to finance their R&D and operations, without the need for immediate additional capital.

However, caution is warranted due to a few factors. Firstly, Krystal's rising R&D and administrative expenses need to be carefully monitored. Secondly, it remains to be seen how Krystal's gene therapies will be welcomed on the market. For example, B-VEC's high price may only interest a niche of the DEB market. The success of B-VEC, and others, will also depend on reimbursement negotiations with payers, which will be a critical aspect to watch.

When Krystal reports Q2 earnings in August, investors should look for any signs of further escalating expenses, changes in net losses, as well as the progress of their broad pipeline of gene therapies, including KB105, KB104, KB407, KB408, and KB301. Information about any partnerships or collaborations for manufacturing, distribution, and marketing could be critical too.

The potential market for B-VEC is sizable, given the estimated number of DEB patients in the U.S. alone. This, coupled with a promising drug pipeline targeting various rare and aesthetic skin conditions, gives Krystal Biotech a significant market opportunity.

Taking these factors into account, I give Krystal Biotech a "Strong Buy" rating. My recommendation is based on the firm's pioneering position in gene therapy, the potential of its product pipeline, and its robust financial health. However, it's crucial for investors to keep a close eye on the firm's cost management, progress in their product pipeline, and market adoption of their approved therapies. Like any investment, it's not without risk, but Krystal's potential rewards appear quite promising.

Risks to Thesis

When the facts change, I change my mind.

Consider the following potential challenges to my "Strong Buy" suggestion:

1. Failure of Clinical Trials: A significant risk linked with Krystal Biotech and comparable biotechnology firms is the frequent occurrence of unsuccessful clinical trials. Despite displaying encouraging outcomes previously, there remains a constant hazard that present or future clinical trials may not produce the anticipated results or might encounter unforeseen harmful effects. This could postpone or even terminate the introduction of their treatments to the market.
2. Regulatory Obstacles: Regulatory authorities like the FDA and similar global bodies have rigorous standards for sanctioning new treatments. Regardless of their past achievements, it's conceivable that future treatments may fail to secure necessary approvals. Moreover, modifications in healthcare laws might impact their capacity to market and sell their offerings.
3. Market Acceptance: Even after getting regulatory approval, the triumph of a new product is largely determined by its acceptance in the marketplace. This acceptance can be influenced by a variety of factors such as competition, the effectiveness of the product, perceived benefits, and the capability to negotiate compensation from insurance providers.
4. Financial Challenges: Even though the financial status of Krystal Biotech appears sound for now, the elevated expenses linked to drug development and launch could stress their financial situation. Increases in research & development and administrative expenses could exceed revenues, particularly if there are any setbacks in the product launch.

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