KRYS - Krystal Biotech's Vyjuvek Impresses Early On Bolsters Prospects

2023-12-11 01:03:08 ET

Summary

• Krystal Biotech's Vyjuvek shows strong early sales for DEB treatment, indicating market acceptance and revenue potential.
• Financially, Krystal is robust with $598.5M in liquid assets and a low risk of near-term financing needs.
• Market sentiment is mixed; Krystal's market cap reflects confidence, but insider selling and high short interest suggest caution.
• Investment recommendation: 'Strong Buy' for Vyjuvek's market success and Krystal's financial health, with attention to inherent biotech risks.

At a Glance

In my last update on Krystal Biotech ( KRYS ), I focused on the impressive trajectory of Vyjuvek (B-VEC) for dystrophic epidermolysis bullosa (DEB), post-approval. My analysis centered on Krystal's pioneering gene therapy platform and its financial footing. Vyjuvek had already secured approval, positioning it as a front-runner in rare disease treatment. The impact of this approval has become increasingly evident. The sale of the FDA priority review voucher boosted their recent earnings, underscoring the strategic value of Vyjuvek. It's quickly becoming a key revenue driver, as reflected in its early sales performance. Clinically, Vyjuvek's effectiveness and its relevance to a broad patient population bolster its operational strength. On the financial front, Krystal stands strong with ample liquidity and an extended cash runway, easing the pressure for immediate fundraising. Yet, the reliance on a single product for revenue growth and the familiar market challenges for gene therapies – such as pricing and insurance acceptance – are critical factors that warrant continuous vigilance.

Vyjuvek: A New Era in Gene Therapy for DEB

Krystal's Vyjuvek , the first topical gene therapy approved by the FDA for DEB treatment in patients aged six months and older, represents a significant step in rare disease therapy. This novel treatment, by delivering functional human COL7A1 gene copies, aims to heal wounds by targeting the genetic defect responsible for DEB. The FDA approval, underscored by results from the GEM-1/2 and GEM-3 clinical trials, highlights Vyjuvek's effectiveness. These trials demonstrated full-length cutaneous COL7 expression, sustained wound healing, and anchoring fibril formation with minimal side effects, marking a breakthrough in treating both recessive and dominant DEB forms, rare conditions affecting the skin and mucosal tissues.

On the financial front, Krystal's Q3 earnings were boosted by a $100M priority review voucher sale . Vyjuvek's market introduction is anticipated to be a key revenue driver for the company. It generated $8.6M in revenue in less than two months of its third-quarter sales. Sales forecasts for Vyjuvek are optimistic , with Wall Street consensus predicting $163M next year and Evercore ISI estimating potential sales of up to $273M, based on early launch data. Long-term, Vyjuvek is projected to secure over $1 billion per annum by 2031.

As of the close of Q3 2023, Krystal reported receiving 284 patient start forms, originating from 136 unique prescribing physicians. A significant portion, approximately 20%, pertains to cases of dominant DEB. An interesting observation is that about a third (33%) of these forms come from patients younger than 10 years. This younger demographic generally necessitates an extended period for therapy induction, potentially boosting the utilization of Vyjuvek. Krystal has successfully gained favorable coverage determinations from key commercial national health plans and anticipates an expansion in coverage in the near future.

Krish Krishnan, Krystal's CEO, has expressed optimism about Vyjuvek's strong market entry, highlighting good demand among both recessive and dominant DEB patients, favorable access coverage, and high patient adherence, enhanced by the at-home administration option. The company is broadening its market, seeking approval in Europe and starting an open-label extension study in Japan.

This milestone signifies a transformative phase for Krystal, emphasizing its growth in rare disease treatment and reinforcing its position as a comprehensive company capable of delivering innovative therapies. Vyjuvek's success marks a pivotal moment in the company's trajectory within the pharmaceutical industry and could pave the way for further gene therapy advancements and treatments for other rare diseases.

Q3 Earnings

Looking at Krystal's most recent earnings report , the company showed a significant turnaround with a net income of $80.7M in Q3 2023, compared to a net loss of $29.85M in Q3 2022. This dramatic shift is largely attributed to a one-time gain from the sale of a priority review voucher. Excluding this, the operational loss widened from $31.45M to $25.99M Y/Y. Notably, product revenues marked their debut at $8.56M. R&D expenses decreased slightly from $11.52M to $10.63M, while SG&A expenses rose from $19.94M to $23.7M, as expected with increased commercial activities. The company experienced share dilution, with the weighted average common shares outstanding increasing from 25.62M to 28.04M in basic and 25.62M to 28.89M in diluted shares.

Financial Health

Turning to Krystal's balance sheet , their total liquid assets, comprising cash and cash equivalents ($373.2M), short-term investments ($188.8M), and long-term investments ($36.5M), amount to $598.5M. The current ratio, calculated as total current assets divided by total current liabilities, is approximately 21.1, reflecting strong short-term liquidity. Comparing assets to debts, the company's total liabilities are significantly lower than its assets, with current liabilities at $27.6M and total liabilities at $34.4M.

Over the last nine months, the net cash used in operating activities is $81.6M, translating to a monthly burn rate of approximately $9.1M. The cash runway can be estimated by dividing liquid assets by monthly cash burn, resulting in approximately 65.8 months of runway. However, these values are based on past data and may not be indicative of future performance.

Given the substantial cash runway and current liquidity position, the likelihood of Krystal requiring additional financing within the next twelve months is low. However, this assessment must be tempered by the dynamic nature of biotech funding needs, especially in light of ongoing research, development, and commercialization activities.

In summary, Krystal's short-term financial health can be qualified as "robust" due to their strong liquidity and low debt levels. The long-term financial health also appears "robust," given their substantial cash reserves and manageable burn rate.

Market Sentiment

According to Seeking Alpha data, Krystal has a market capitalization of $3.01 billion, signaling market confidence, particularly considering its impressive growth prospects with projected revenue increasing from $37.26M in 2023 to $341.76M in 2025. The stock's momentum is mixed, underperforming the S&P 500 ( SPY ) in the short term (-13.85% over 3 months) but outperforming over a year (+43.63%).

High short interest at 10.31% with 2.07M shares short indicates market skepticism or speculative activity. Institutional ownership is robust at 86.19%, with notable increases and decreases in positions; Vanguard notably increased their holding by 40.66%. Insider activity shows a concerning trend with zero buys and significant selling, totaling a net activity of -736,893 shares over the past year.

Overall, the data suggests a cautious yet hopeful market sentiment, qualifying it as "Adequate" due to mixed stock momentum, substantial institutional interest, and high short interest balanced against optimistic growth projections and concerning insider selling trends.

My Analysis & Recommendation

To conclude, Krystal's Vyjuvek is a drug to watch closely. Its market entry, particularly in the specialized area of DEB, is not just a win for its market presence but also a testament to the overall potential of Krystal's Skin TARgeted Delivery platform . The initial sales have been positive, suggesting patient/clinician interest and a promising growth path.

That said, it's crucial for investors to be aware of the risks typical in the biotech sector. This industry is notoriously unpredictable, with stock values heavily influenced by factors like clinical trial results, regulatory decisions, and how new treatments are received in the market. To navigate these risks, a diversified biotech portfolio, staying informed on industry trends, and a long-term investment view to withstand short-term market shifts are advisable.

Krystal's financial health is solid, marked by strong liquidity and a significant cash reserve. This stability lessens the pressure for immediate additional funding, allowing the company to concentrate on advancing Vyjuvek and developing other products in its pipeline.

Considering Vyjuvek's successful launch, Krystal's robust financial status, and the growth potential in the rare disease treatment sector, a 'Strong Buy' recommendation remains justified. Investors should keep a close eye on the company’s expansion, especially into European and Japanese markets, and any progress in its Skin TARgeted Delivery platform. This could be key in addressing other rare conditions and mitigating the risks associated with single-product dependency.

Risks to Thesis

In light of my optimistic perspective on Krystal, it's imperative to scrutinize potential pitfalls and obstacles that may exert influence on its forthcoming performance. One facet that may have received insufficient attention is the company's reliance on Vyjuvek for its future revenue growth. While the initial sales trajectory shows promise, it's worth highlighting that Krystal's current prosperity hinges considerably on this solitary product. This reliance introduces a heightened level of vulnerability in the event of unforeseen challenges, such as intensified competition, shifts in treatment protocols, or safety-related concerns.

Another noteworthy aspect that warrants consideration is the market's response to gene therapies. Despite their innovative nature, gene therapies frequently encounter impediments in terms of market acceptance, reimbursement hurdles, and the necessity for long-term data on both efficacy and safety. Moreover, the substantial cost associated with these therapies may restrict their widespread adoption, particularly if insurance providers exhibit reluctance in covering them.

With regard to Krystal's financial well-being, while the present liquidity position appears robust, it's essential to acknowledge the capital-intensive nature of the biotechnology sector. This implies that the company may have substantial future funding requirements, particularly in the realm of research and development. Therefore, the company's fiscal stability is intricately tied to the continued triumph of Vyjuvek and the creation of supplementary revenue streams.

Lastly, one must not overlook the potential impact of setbacks in Krystal's other clinical assets. Any adverse developments in these areas could exert downward pressure on the company's stock performance.

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