Krystal Biotech, Inc. (NASDAQ:KRYS) Q4 2023 Earnings Call Transcript
Krystal Biotech, Inc. (NASDAQ:KRYS) Q4 2023 Earnings Call Transcript February 26, 2024
Krystal Biotech, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to the Krystal Biotech Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are on a lesson-only mode. After the speakers' presentations, there will be a question-and-answer session. As a reminder, today's conference is being recorded. I would now like to hand the conference over to your host, Meg Dodge, Head of Investor Relations and Corporate Communications. Please begin.
Meg Dodge: Good morning, and thank you all for joining today's call. Earlier today, we released our financial results for the fourth quarter and full year of 2023. The press release is available on our website at www.krystalbio.com. Our earnings 8-K was filed earlier today, and additionally we filed a 10-K with the SEC. Joining me will be Krish Krishnan, Chairman and Chief Executive Officer; Suma Krishnan, President of Research and Development; and Kate Romano, Chief Accounting Officer. I'd like to note, during this webcast we will be making a number of forward-looking statements about our future business plans, strategies, financial performances and projections, product candidate development plans, including statements about VYJUVEK.
These forward-looking statements involve risks and uncertainties, any of which are beyond Krystal's control. Actual results could materially differ from these forward-looking statements, as any -- and such risk can material and adversely affect the business, results of operations, and trading price of Krystal's common stock. For a detailed description of applicable risks and uncertainties, we encourage you to review our SEC filings. The company does not undertake any obligation to publicly update its forward-looking statements, including any financial projections provided today based on subsequent events or circumstances. With that, let me now turn the call over to Krish.
Krish Krishnan: Meg, thank you. Good morning and thanks for joining the Krystal’s earnings call. 2023 was a spectacular year for Krystal and an inflection point for our company. With the approval and launch of VYJUVEK for the treatment of dystrophic epidermolysis bullosa, or DEB, we've now brought to market the first and only treatment that addresses the genetic cause of this debilitating disease. It has been immensely rewarding to hear from patients, families, and the entire DEB community on the positive impact VYJUVEK has had on their lives. It's also exciting to have secured this first approval for an entirely new treatment paradigm. We believe that a redosable topical off-the-shelf gene therapy that can be dosed at home by a HCP holds significant potential not only for DEB patients,, but for many others suffering from other rare and serious diseases.
We've only just begun tapping into the power of the HSV-1 based gene therapy platform. As I will share in a moment, our US launch of VYJUVEK is in a great place, tracking closely to some of the most successful rare disease launches from recent years with over $50 million in net product revenue from VYJUVEK in the last six months since approval. We've seen rapid uptake across the US, patient compliance is high, access is almost behind us, and all these are starting to reflect in our net revenue. We're also making significant progress globally and look forward to growing the number of patients benefiting from VYJUVEK in the days, months, and years to come. Our success in 2023 allowed us to deliver another year of significant value creation for our shareholders and perhaps more importantly, set us down a path for continued growth in the years to come.
Our vision for Krystal has always been to build a fully integrated, commercially established biotechnology company, developing and commercializing a portfolio of high-value genetic medicines and generating long-term shareholder returns. Thanks to a breakthrough year in 2023 and growing VYJUVEK revenue, we are positioned better than ever to deliver on that vision. We expect to have at least five clinical trials this year. We have alignment with the FDA on a development path for B-VEC, formulated as eye drops to help treat eye lesions in DEB patients, and could potentially start another clinical trial in the second half of 2024. With strong financial resources and FDA-approved redosable gene therapy platform and two commercial-scale GMP manufacturing facilities, we're uniquely positioned to develop and bring to market highly differentiated gene therapies for many rare and serious diseases.
We look forward to making continued progress in 2024. As you have no doubt seen by now, our commercial launch is proceeding exceptionally well. We reported net VYJUVEK revenue of $42.1 million for the fourth quarter and $50.1 million for 2023. Gross margins were 93% for the quarter, in line with our previous guidance of margins north of 90% at launch and expected to improve to over 95% after a few years. Gross-to-net adjustments in the fourth quarter were 14%. Our long-term guidance on GTN is unchanged and we expect it will settle into the mid to high teens range, reflecting a roughly even split of their patients on commercial and government plans. With respect to future revenue, I'd like to highlight that earlier this year, a permanent J-code was assigned to VYJUVEK.
The J-code is an important milestone for finalizing coverage by Medicaid as it is required for many mandatory Medicaid states. Although this is a long-term tailwind and sets us up for sustained broad access in the US, I will note that the revenue in the month of January was temporarily impacted as commercial and Medicaid coverage plans, including those that were previously covering VYJUVEK under a temporary J-code, were updated to the now-issued permanent J-code. You can also expect to see an impact this year as we accrue for patients on contracted commercial plans, potentially hitting the price cap of $900,000 gross per patient per calendar year in 2024. Before sharing details on the US launch, I'd like to highlight a revision to our outlook on the total market opportunity that exists for VYJUVEK.
Now that we have the benefit of six months' launch data in the US and a clear line of sight on registrations and patient numbers in Europe and Japan, and alignment with the FDA on the development plan to get B-VEC formulated as eye drops to treat eye lesions in DEB patients, we're confident in the total global market opportunity for VYJUVEK to get over $1 billion based on the trajectory of our launch and the feedback we are receiving from the field, our conviction in the total US market opportunity for VYJUVEK is only growing. We have spoken before about a total DEB population of 3,000 in the US, of which 1,200 are identified. That 1,200 figure, initially based on independent third-party claims, data sets from multiple sources, has been further strengthened by our latest data from the field, which includes interactions with over 1,500 unique HCPs, as well as real-time claims, alerts that they use to optimize field developments.
We expect to close the gap between 1,200 and 3,000 in the years to come. We're already finding new patients, patients not part of the identified pool in the first few quarters of launch, and we expect this to continue, if not accelerate, as we increase our focus on patient finding in later quarters. Once we reach a meaningful threshold of 1,500 patients, we'll update our identified patient population number. Also, Christine Wilson has now joined Krystal as the Head of US Sales and Marketing reporting to me. Christine brings decades of commercial experience to Krystal, including a strong record of leading US rare disease sales themes at Travere, Reata, and Shire. Most importantly, Christine has direct experience finding and activating rare disease patients in the community and will play a critical role for us as we continue to penetrate in and grow our identified patient pool in the months and years to come.
Outside of the United States, we benefit from patient registries, which give us a high degree of confidence in the global market opportunity. In France, Germany, Italy, Spain, and the US alone, we believe there are over 2,200 DEB patients that could benefit from VYJUVEK, and there are hundreds more in Japan. We look forward to seeing continued growth in 2024, not only in the US, but also globally, as we make progress towards EU and Japanese approvals. As Suma will share, we're on track to launch in both regions in 2025. Now I'd like to share a few highlights on the US launch. With respect to patient start forms, we're pleased to report that we have now received start forms representing 35% of the initial 1,200 identified patient pool. We're happy to see that we're both expanding and deepening the prescriber base as we progress in our launch.
We now have over 195 unique prescribers of VYJUVEK, up from the 136 unique prescribers we reported in the third quarter. We're encouraged to see the broadening of VYJUVEK prescriber base as awareness of our product grows through both our direct promotion efforts and organically through patient groups and the medical community. We're also seeing increasing depth of prescribing, as the number of physicians that had written two or more prescriptions for DEB patients increased from 37 in the third quarter to 60 as of mid-February. We believe this increase is a reflection of the growing familiarity among prescribers with VYJUVEK, and we expect this positive trend to continue as patient outcomes on VYJUVEK become more widely known. With respect to the split of PSFs between centers of excellence and the community, trends are in line with what we saw earlier in the third quarter.
47% of patient start forms received as of mid-February were from centers of excellence and the balance of the scripts were written by community physicians. We continue to see a steady flow of start forms from centers of excellence at a cadence correlated to EV clinic days. The split between D-DDEB and RDEB start forms is also largely in line with what we saw in the third quarter, with a slight uptick in the proportion of prescriptions received from DDEB patients. Importantly, we are starting to see significant conversion of patients converted to paid drug with 228 patient reimbursement approvals secured to date. Most approvals are for six months or more, so a few have been up for reauthorization so far, but all have been either approved or still in process.
In line with our high conversion rates, access is in a great place. We have received positive coverage policies or decisions for 97% of lives covered by commercial plans and 88% of lives covered by Medicaid. With the permanent J-code now assigned, the trajectory for access and reimbursement approvals is only looking better. At-home administration demand continues to be high, now two full quarters into launch, with 98% of the drug starts occurring in a home setting. And accordingly, we also continue to see strong patient compliance to once weekly treatment while on drug, holding at 96% in the fourth quarter. We believe that compliance is both a reflection of the significant clinical benefits that can be realized with the VYJUVEK therapy, as well as our commitment to the patient experience and ensuring a smooth process to getting on drugs.
At this point in our launch, I think it's also worthwhile to reiterate and update on some of the key dynamics that shape the trajectory of the VYJUVEK update. Although there is a temptation to think that for a severe rare disease such as DEB, all patients would get prescriptions the day after approval, there are practical considerations that need to be understood. First, it's important to recall that COE visits occur at a steady pace around EB clinics, with only a subset of that EB patient seen at each visit due to the time spent on each patient and the multi-specialty care they receive in the COE setting. In addition, we are also seeing some KOLs less familiar with VYJUVEK, taking a step-wise approach, starting with the more severe RDEB patients and stage gating, particularly in the early stages of access where reimbursement was still being set up.
Second, it's important to understand that DEB patients are not all clustered around centers of excellence. Prior to 2023, only palliative treatment options were available, whether offered by a COE or a community physician. As a result, there was often little reason for a patient to visit, let alone return to a COE, unless it was conveniently located. Certainly, there are some patients that are actively managed at COEs, but an equal number or more exists in the community, and many patients have relied on community physicians for many years prior to 2023. This also has implications for the launch. It means that we have to make local doctors aware of VYJUVEK, educated on DEB, gene therapy, and sometimes both. Recall as well that prior to VYJUVEK approval, care of EB wounds did not require genetic confirmation.
So even establishing this practice is an evolution in patient management. This is all addressable through physician education programs, but it does take a certain amount of time and contributes to a more gradual ramp in patient starts. Finally, there are logistical aspects of integrating at-home dosing of VYJUVEK into existing wound care and bandaging routines. As the first and only FDA-approved redosable gene therapy, providing access to and coordinating weekly home treatment of VYJUVEK is not as simple as dispensing pills at a local pharmacy for patient pick-up or even one-and-done gene therapies administered at a large specialty center. Once the initial scheduling and setup is complete, which again takes a certain amount of time, what we're seeing is strong adherence, given that VYJUVEK is designed to be integrated into existing wound care routines and demonstrated efficacy.
Together, these real-world dynamics influence the shape of our launch curve, which we expect to be characterized by a steady stream of prescriptions and patient conversions to drug. Recall that our own estimates for the United States are informed by multiple third-party estimates and our own real-time and boots-on-the-ground insights, and further supported by the prevalence in Europe, where robust patient registries and genetic testing indicate that prevalence rates well in excess of our US-identified patient pool. So trying to correlate the shape of the launch curve to prevalence is simply erroneous. Our conviction in the total opportunity and our ability to capture it have only been strengthened after these first few quarters of launch. Before closing on the US launch, I'd like to underscore the thanks to the efforts of our team and our focus on the patient experience with changing the treatment paradigm for DEB patients.
Years ago, we set out to build the necessary infrastructure to support a strong commercial launch including our patient support program, Krystal Connect, our no-cost genetic testing program, DecodeDEB, and a network of local pharmacies to prepare and deliver VYJUVEK to a patient's home along with a trained nurse to apply the treatment each week. As I just shared, this at-home administration infrastructure has been in high demand since launch, supporting strong compliance to the therapy. As I also reported, we're broadening and deepening the prescriber base. All KOLs within centers of excellence across the US have now prescribed VYJUVEK. And outside of the centers of excellence, our field team has had tremendous success educating regional, adult, and pediatric dermatologists and community physicians as evidenced by the continued influx of community prescriptions.
Sales cycles tend to be a bit longer in the community, but for 2024, with more evidence of a dispersed patient community, we expect to continue to generate demand from large EB centers, regional [DEB] (ph) specialists, and community physicians. And finally, our marketing team is invested and will begin deploying several social media campaigns on different channels to generate awareness to patients and families directly who we know, similar to other rare diseases, having varying levels of engagement with the healthcare system as they've learned to self-manage their DEB wounds but deserve to learn about VYJUVEK and the benefit it can provide to them. Combined with our partnership with advocacy groups, we're committed to reaching all patients and families to share the powerful wound healing that VYJUVEK can provide them.
Altogether, these successes point to a strong long-term growth strategy for VYJUVEK in the US. And, in the interim, it's important to highlight that by any metric, the launch of VYJUVEK has been among the top tier of rare disease launches in recent years. Despite all the nuances that I outlined, in only two full quarters since approval, we recorded $50.7 million in revenue. And now, as of mid-February, we've secured reimbursement approvals for 228 patients and have positive coverage policies in place for over 93% of commercial and Medicaid patients. We are excited about our success to date and more excited still by the years to come as we work to change the treatment paradigm for every patient with DEB. Finally, before I turn the call over to Suma, I'd like to touch on the power of our platform and our milestone-rich clinical pipeline.
The Krystal story is more than just VYJUVEK. HSV-1 is unlike any other vector system currently in development with a capacity for large genetic cargo, broad tissue tropism, redosability, and no integration risk. HSV-1 is also amenable to formulation to target multiple tissues, such as the skin, the lung, and the eye, providing us with a large number of opportunities to develop first and best-in-class genetic medicines for rare and serious diseases. Our team is hard at work leveraging these unique platform attributes and advancing our programs to and through the clinic. These include a new eye drop formulation of B-VEC to treat ocular complications of DEB, which has already been evaluated in single patient under compassionate use, two clinical stage lung programs targeting cystic fibrosis and alpha-1 antitrypsin deficiency, an emerging oncology program that leverages our experience in skin and lung drug delivery, as well as clinical stage candidates for rare skin disease and aesthetic skin conditions.
With four active clinical programs and more to come later this year, we look forward to the data readouts which will validate the breadth of our HSV-1 based gene delivery platform. I shall now turn the call over to Suma to provide a clinical and a regulatory update and provide more color on the clinical programs.
Suma Krishnan: Thank you, Krish. 2023 was a milestone year for Krystal, and our development team securing the first ever FDA approval for a redosable gene therapy. It has been immensely gratifying to see a growing number of US patients benefit from VYJUVEK as our commercial launch progresses. However, our work is not yet done. Our goal has always been to enable global access for patients suffering from DEB. And I'm happy today to share we are on track for commercial launches in both Europe and Japan by 2025. For Europe, we announced in October that we filed for a marketing authorization with the European Medical Agency. Subsequently, in November, our filing was validated by the Agency, putting us on track for a decision by the European authorities in the second half of 2024.
In Japan, we recently announced in December that we had received orphan drug designation by Japan's Pharmaceuticals and Medical Device Agency, a designation which confers specific benefit for orphan drug development, including priority review of applications, extended registration validity, and reduced development costs. With our open-label bridging study in Japanese patients fully enrolled, we are on track for a Japanese new drug application filing in 2024 and a decision by Japanese authorities in 2025. We are also making important progress on our broader clinical pipeline, where we have four programs in the clinic and more coming in the first half of this year. As said previously, we are committed to treating DEB comprehensively. Ocular complications are thought to affect over half of patients with recessive DEB, and to date, only supportive care and surgical interventions are available.
Earlier this month, the New England Journal of Medicine published the clinical results of the first patient treated with topical B-VEC to the eye. The improvement seen in this patient was dramatic, including full healing of the corneal epithelium and improvement of visual equity from hand motion to 20/25 by eight months. Given these outcomes, we started discussion with the FDA earlier this year regarding a potential development program to bring an ophthalmic B-VEC formulation to market and earlier this month we reached alignment with the FDA on a single arm open label study to enable approval of B-VEC eye drops for the treatment of lesions in the eye of DEB patients. We are now planning to initiate this study in the second half of 2024. On KB407, our redosable inhaled gene therapy for the treatment of cystic fibrosis, we completed Cohort 1 of the CORAL-1 study with no severe or serious adverse events, and initiated dosing in Cohort 2.
CORAL-1 is a Phase 1 open label dose escalation study in patients with cystic fibrosis. The primary objective of the study is to evaluate safety and tolerability of KB407, but bronchoscopies are planned for Cohort 3 to allow evaluation of airway epithelial cell transduction and expression of CFTR transcript and protein. Cohort 3 also includes minimum enrollment threshold for patients that are not eligible for modulators, an important patient population for which no effective disease modifying therapies exist. The pace of enrollment in CORAL-1 is improving as clinicians grow more familiar with inhaled KB407. The potential for patients to roll over into multiple cohorts is also expected to help us progress more rapidly through Cohort 2 and 3.
In addition, we continue to work closely with the therapeutic development network of Cystic Fibrosis Foundation to provide us access to the broader site network, which would enable us to accelerate enrollment. On KB408, our redosable inhale therapy for alpha-1 antitrypsin deficiency, we just recently dosed our first patient in our SERPENTINE-1 study. SERPENTINE-1 is a Phase 1 open-label, single-dose escalation study in adult patients with AATD to allow assessment of safety, tolerability, and alpha-1 antitrypsin levels and key pharmacodynamic biomarkers. With strong support from the alpha-1 research community, we are optimistic that this study will enroll quickly in 2024. We also made several advancements in our oncology program, KB707, last quarter and earlier this year.
Recall that KB707 is a modified HSV-1 vector designed to deliver genes encoding both human IL-12 and IL-2 to the tumor microenvironment and promote systemic immune mediated tumor clearance. We have two formulations of KB707 in development, a liquid formulation for intratumoral injection and an inhaled formulation for lung delivery. In October, the first patient was dosed in Phase 1 OPAL-1 study to evaluate intratumoral KB707 monotherapy in patients with locally advanced or metastatic solid tumor malignancies. Additionally, an amendment to the existing KB707 IND was cleared earlier this January, allowing us to evaluate inhaled KB707 in a clinical trial to treat tumors in patients' lungs. We will initiate this study, which we'll be calling KYANITE-1 in the first half of 2024.
It will be an open-label, multi-centered dose escalation and expansion study to evaluate inhaled KB707 monotherapy in patients with advanced solid tumor malignancies affecting the lungs. And finally, we're looking forward to sharing a data update on our lead aesthetic program, KB301, later this year. KB301 is being evaluated in the PEARL-1 multi-cohort Phase 1 study. We previously announced data from Cohorts 1 and 2, which demonstrated that KB301 encoded with payload COL3A1 was expressed locally after intradermal injection and that injections to the upper and lower cheek and above the knees were generally well tolerated and associated with clinically meaningful and durable improvement in subject satisfaction. We are now running Cohort 3 and 4 of PEARL-1 in parallel to evaluate KB301 for two potential target indications, improvement of lateral canthal lines at rest and improvement of dynamic wrinkles of the decollete.
Both were identified as potential indications based on initial data from Cohort 1 and Cohort 2, and the high demand for effective aesthetic options in these regions. We expect to announce data in first half of 2024. We are also progressing on our broader pipeline in dermatology. We expect to commence the Phase 2 cohort of this KB105-02 JADE-1 trial for the treatment of TGM1-ARCI later this year, subject to alignment with FDA on study endpoints. Additional preclinical candidates are also in development and we expect to share updates in the quarters to come. Our HSV platform has potential to yield a large number of highly differentiated redosable gene therapies. We look forward to making continued progress in 2024 and sharing data updates on our clinical pipeline later this year.
With that, I would like to turn the call to Kate.
Kate Romano: Thank you, Suma. We concluded 2023 with $358.3 million of cash on hand and $594.1 million of cash and investments, which positions us well for our future growth, the expansion of VYJUVEK outside of the US, and our pipeline development plans. In our second quarter since the launch, we recorded $42.1 million in net product revenues from VYJUVEK in the fourth quarter and $50.7 million for the year ended 2023. As VYJUVEK was approved by the FDA in May of 2023, there were no comparative period revenues. Cost of goods sold was $2.9 million for the quarter, or about 7% of net product revenues, and $3.1 million for the year, or about 6% of net product revenues. Cost of goods sold increased on a sequential quarter basis as a portion of the initial cost associated with the manufacturing of VYJUVEK were expensed as research and development costs earlier in the year prior to approval.
Research and development expenses for the quarter were $11.4 million, inclusive of stock-based compensation of $2.4 million, compared to $10.7 million for the prior year's quarter, inclusive of $2.4 million of stock-based compensation. Research and development expenses for the year were $46.4 million, inclusive of stock-based compensation of $10.1 million, compared to $42.5 million in the prior year, inclusive of $7.9 million of stock-based compensation. Higher research and development expenses in 2023 were due to increases in payroll and facility-related costs, primarily driven by an increase in personnel to support our overall growth, especially as we ramp up our KB707 program, partially offset by decreases in R&D manufacturing costs as, following our FDA approval, our costs related to the manufacturing of VYJUVEK are now recorded as part of our cost of inventory.
Selling, general and administrative expenses for the quarter were $24.8 million, inclusive of stock-based compensation of $7.5 million, compared to $24 million for the prior year's quarter, inclusive of stock-based compensation of $7.2 million. Selling, general, and administrative expenses for the year were $98.4 million, inclusive of stock-based compensation of $29.9 million, compared to $77.7 million in the prior year, inclusive of stock-based compensation of $25.3 million. Higher selling, general, and administrative expenses in 2023 were largely driven by an increase in personnel, increased selling expenses related to the launch of VYJUVEK, increased IT infrastructure and software costs, as well as increases in travel, sponsorship, and professional fees.
These increases were partially offset by a decrease in commercial preparation expenses, a decrease in medical affairs costs, and a decrease in business development costs. Our net income for the quarter was $8.7 million, which represented $0.31 per basic share and $0.30 per diluted share. Net income for the year end of 2023 was $10.9 million, which represented $0.40 per basic share and $0.39 per diluted share, compared to a $140 million net loss in 2022, which equated to a loss of $5.49 per share, both basic and diluted. We would also like to provide some perspective on our forecast for operating costs in 2024, given the objectives we have for the year. We expect between $150 million and $175 million in combined non-GAAP R&D and SG&A costs this year.
This projection excludes stock-based compensation. This expected increase over 2023 is driven primarily by increased SG&A costs associated with our continued US launch and planned expansion for VYJUVEK outside of the US. From a research and development perspective, we expect a pickup in our clinical and regulatory costs associated with our oncology and respiratory programs, as well as for costs associated with initiating a clinical trial for the B-VEC formulation to treat lesions in the eye of DEB patients. With that being said, and given our projected revenue trajectory in 2024, and our current strong balance sheet, we are well capitalized and positioned for these growth drivers, and we look forward to reporting our progress over the next several quarters.
And now, I will turn the call back over to Krish.
Krish Krishnan: Before we open the call up to Q&A, I'd like to underscore our excitement for 2024 as we have successfully transitioned Krystal to a fully integrated commercial biotech with a deep clinical pipeline. With a great launch underway and growing revenue to contribute to our already strong balance sheet, we believe we are well positioned to create value for our shareholders and deliver our mission for patients now and in the future. Thanks for listening and I'd like to now open the call for Q&A.
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