KRYS

Business Context and Reporting Period

Company: Krystal Biotech, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2018
Business Overview: Krystal Biotech is a clinical-stage gene therapy company developing off-the-shelf treatments for dermatological diseases using its proprietary STAR-D platform (modified HSV-1 viral vector). The company has no approved products and has not generated revenue.

• Lead Candidate: KB103 (bercolagene telserpavec) for Dystrophic Epidermolysis Bullosa (DEB). Currently in Phase 2 of a Phase 1/2 clinical trial (GEM-1 study). Positive interim results were announced in October 2018 showing functional protein expression and wound closure in two patients.
• Second Candidate: KB105 for Autosomal Recessive Congenital Ichthyosis (ARCI). In preclinical development; IND filing anticipated in H1 2019.
• Manufacturing: Completed construction of a commercial-scale cGMP facility ("Ancoris") in January 2019.

Key Financial Metrics

Material Changes vs. Prior Period

• Increased Burn Rate: Net loss increased by $2.97 million (37.5%) year-over-year, driven by a $4.55 million increase in R&D expenses and a $2.59 million increase in G&A expenses.
• R&D Drivers: Higher R&D costs were due to increased professional services for outsourced manufacturing and clinical studies ($1.9M), payroll and stock-based compensation ($1.5M), and lab supplies ($0.86M) as the company scaled up KB103 and KB105 development.
• G&A Drivers: Increased costs were attributed to legal/professional services, payroll, and insurance expenses associated with being a public company for the full year.
• Capital Raising: The company significantly bolstered its balance sheet through equity financing in 2018, including a secondary public offering (October 2018) yielding ~$64.3 million net and a private placement (August 2018) yielding $10 million gross.
• Investing Activities: Net cash used in investing activities increased to $10.3 million, primarily due to $8.1 million in short-term investment purchases and $2.2 million in expenditures for the new GMP facility.

Guidance, Outlook, and Risks

• Clinical Outlook: Management anticipates announcing top-line data from the full enrollment of six patients in the KB103 Phase 1/2 trial in the first half of 2019. If successful, pivotal Phase 3 trials are expected to commence in the second half of 2019.
• Liquidity: With approximately $111.8 million in cash and investments as of December 31, 2018, management believes funds are sufficient to operate for at least 12 months from the filing date (March 2019).
• Future Capital Needs: The company expects to incur significant expenses and increasing operating losses for the foreseeable future. Additional funding will be required to complete Phase 3 trials, seek regulatory approval, and commercialize products. An "at-the-market" equity offering program was planned for March 2019.
• Key Risks:
  • Development Risk: Failure of clinical trials to demonstrate safety or efficacy; potential for adverse events in gene therapy.
  • Regulatory Risk: Uncertainty regarding FDA/EMA approval timelines and requirements for novel gene therapies.
  • Manufacturing Risk: Reliance on third-party manufacturers until the new facility is fully validated; complexity of viral vector production.
  • Financial Risk: History of losses and dependence on future capital raises, which may result in dilution.

Investor Verification Checklist

• Verify the timeline and results of the KB103 Phase 1/2 trial top-line data announcement expected in H1 2019.
• Confirm the status of the FDA validation for the new "Ancoris" cGMP manufacturing facility.
• Monitor the company's cash burn rate relative to the $111.8 million liquidity position to assess the runway for future capital raises.
• Review the progress of the KB105 IND filing anticipated for H1 2019.
• Assess the impact of the planned "at-the-market" equity offering on existing shareholder dilution.