Krystal Biotech, Inc. — Q3 2019 Form 10-Q
Business context and period: Clinical-stage gene therapy company developing treatments for dermatological diseases. This unaudited report covers the quarter and nine months ended September 30, 2019; comparative figures are for 2018. The company had no approved products and reported no revenue.
Financial results and position
- Q3 2019: R&D expense was $3.9 million and G&A expense was $1.5 million, bringing total operating expenses to $5.3 million. Net loss was $4.3 million, or $0.25 per share, versus a $2.8 million loss, or $0.26 per share, in Q3 2018. Interest and other income was $1.1 million, compared with $0.2 million.
- Nine months 2019: Operating expenses were $15.9 million (R&D $11.3 million; G&A $4.7 million). Net loss was $13.7 million, or $0.89 per share, versus $7.2 million, or $0.69 per share, in the prior-year period. No operating margin is meaningful because the company had no revenue.
- Cash and liquidity: At September 30, cash and cash equivalents were $194.8 million and short-term investments were $8.4 million, totaling $203.2 million. Total current assets were $204.4 million; current liabilities were $3.7 million. Management said available funds were expected to support planned operations for at least 12 months from the filing date.
- Cash flow, nine months: Operating activities used $11.7 million; investing activities used $4.4 million; financing activities provided $107.2 million. Cash increased $91.1 million to $194.8 million. Investing included $4.1 million of property and equipment purchases, principally for GMP facility build-out.
- Debt and leases: The balance sheet reports no borrowings. Lease liabilities totaled about $3.3 million, including $0.5 million current and $2.9 million long-term. Total liabilities were $6.6 million.
Material changes versus prior comparable periods
- Q3 R&D expense rose $2.0 million year over year, primarily from higher lab supplies, outsourced R&D, payroll, and other R&D costs. Nine-month R&D expense rose $6.3 million.
- Q3 G&A expense rose $0.4 million; nine-month G&A expense rose $1.9 million, mainly reflecting higher payroll and related costs.
- Net loss widened to $13.7 million for the nine-month period from $7.2 million, despite higher interest income, as operating expenses increased.
- The June 2019 public offering and July underwriter option generated approximately $107.1 million in net proceeds. Common shares outstanding increased from 14.4 million at December 31, 2018 to 17.3 million at September 30, 2019.
- Adoption of lease accounting in January 2019 added a right-of-use asset and lease liability to the balance sheet. Property and equipment, net, increased to $6.9 million from $3.0 million at year-end 2018.
Outlook, developments, and risks
- Management expected R&D spending to increase as it prepared a pivotal Phase 3 study of B-VEC and continued the Phase 1/2 study of KB105. G&A expenses were also expected to rise as the company expanded operations and prepared for potential commercialization.
- In October 2019, the company reported positive combined Phase 1/2 B-VEC results: 9 of 10 treated wounds achieved complete closure; average time to closure was 17.4 days. The company was discussing manufacturing and pivotal endpoints with the FDA and planned to initiate a pivotal study thereafter. These are forward-looking development milestones, not financial guidance.
- KB105 Phase 1/2 began in September 2019; interim data were expected in mid-2020. The FDA granted KB105 Fast Track designation in October 2019. B-VEC had FDA and EMA orphan designations, FDA Fast Track and rare pediatric designations, FDA RMAT designation, and EMA PRIME eligibility.
- Management cautioned that clinical, manufacturing, regulatory, and commercialization costs and timing are uncertain; the company may need additional capital and may never achieve profitability. Further equity financing could dilute shareholders; debt could impose repayment obligations and restrictive covenants.
- Remaining estimated CMO manufacturing commitments were approximately $3.7 million. Future minimum operating lease payments were $4.5 million before $1.1 million of imputed interest. The company reported a legal proceeding not expected to result in a material loss and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress, timing, endpoints, and regulatory alignment for the planned B-VEC pivotal study, including whether reported early wound-closure results are confirmed in larger studies.
- KB105 enrollment and interim-data timing, and the effect of clinical results on future development costs.
- Cash use, investment balances, and whether the stated runway assumptions remain valid as R&D and manufacturing spending increases.
- Potential dilution or other financing needs, including availability of the remaining $16.8 million under the ATM program.
- Clinical manufacturing commitments, facility spending, and the terms and obligations of the long-term lease.