Krystal Biotech, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods. The unaudited statements cover a clinical-stage gene therapy company developing treatments for skin diseases. The company reported no product revenue.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $1.914 million | $1.355 million | $4.959 million | $2.120 million |
| General and administrative expense | $1.058 million | $0.738 million | $2.738 million | $1.154 million |
| Net loss | $2.755 million | $5.273 million | $7.181 million | $6.527 million |
| Operating cash used | Not stated by quarter | Not stated by quarter | $5.927 million | $1.763 million |
At September 30, 2018, cash and cash equivalents were $46.667 million and short-term investments were $5.627 million, totaling approximately $52.3 million. Total assets were $54.453 million, total liabilities $2.161 million, and stockholders’ equity $52.292 million. The filing shows no outstanding debt at period end. Current liabilities were $1.916 million. Operating cash outflow increased year over year; investing cash outflow was $6.556 million, including $5.626 million of short-term investment purchases and $0.930 million of property and equipment purchases. Financing provided $9.559 million, primarily from the August 2018 private placement. The company has no commercial revenue, so operating margins are not meaningful.
Material changes and unusual items
- Quarterly operating expenses rose $0.879 million year over year, with higher payroll, benefits, stock compensation and lab supplies; reduced outsourced manufacturing and study services partially offset the R&D increase.
- Nine-month operating expenses rose $4.423 million, reflecting increased outsourced manufacturing and study services, payroll and benefits, lab supplies, public-company insurance, and other costs.
- Q3 net loss improved from 2017 largely because the prior-year quarter included a $3.2 million non-cash expense related to the beneficial conversion feature on convertible notes. For the nine months, the absence of that prior-year expense was more than offset by higher operating costs, and net loss increased.
- Accumulated deficit was $16.3 million. The company expects operating losses and expenses to increase as it advances clinical programs and develops manufacturing capacity.
Business, outlook and risks
- Lead candidate KB103 is a topical gene therapy for dystrophic epidermolysis bullosa (DEB). A Phase 1/2 study began in May 2018. The company reported positive interim results on October 15, 2018, after quarter end: results in two patients met reported primary efficacy and safety endpoints. These are interim, early-stage results, not evidence of regulatory approval or commercial success.
- KB105, in preclinical development for TGM-1-deficient autosomal recessive congenital ichthyosis, received FDA orphan drug designation. The company anticipated filing an IND in Q4 2018.
- The company stated that September-end cash, cash equivalents and short-term investments, together with October offering proceeds, were expected to fund operations for at least 12 months from the filing date. It also said available funds were expected to support KB103 Phase 1/2 data and initiation of KB105 Phase 1/2 trials, but not marketing approval or commercialization.
- On October 23, 2018, the company completed a public offering of 3.45 million shares at $20 per share. Proceeds were approximately $64.9 million after underwriting discounts and commissions, but before company offering expenses. This subsequent financing was not included in September 30 balances.
- Key risks include clinical or preclinical failure, regulatory and manufacturing challenges, uncertain trial costs, dependence on future financing, and the possibility the company never achieves profitability. Management noted that additional capital may be needed and may not be available on acceptable terms.
- The company reported no material litigation, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Progress, durability, safety and subsequent results from the small KB103 Phase 1/2 study, and the timing and outcome of regulatory interactions.
- Whether KB105’s anticipated IND filing and clinical-trial plans were achieved, and the associated funding requirements.
- Actual cash use, operating-cost growth and runway after the October 2018 offering, including offering expenses and the impact of share issuance on dilution.
- Manufacturing-facility buildout, clinical supply commitments and trial-cost estimates; the filing disclosed approximately $0.906 million of remaining clinical manufacturing commitments at September 30.
- Future financing needs and the ability to secure funding, since the company had no revenue and stated that current resources would not cover approval and commercialization.