The large print giveth, and the small print taketh away.

The focus for Krystal Biotech is rightly placed on Vyjuvek. The drug candidate is very likely to earn FDA approval in February 2023. It will become the first, most effective, and most convenient treatment option for dystrophic epidermolysis bullosa (DEB) – a solid trifecta. It appears to be the best option among anything in the emerging competitive landscape, too.

However, prioritizing bandwidth for Vyjuvek has led to delays for the rest of the pipeline.

‍*Two phase 1 studies will be initiated, one in the United States and one in Australia. Data Source: Krystal Biotech.

The delays aren't necessarily meaningful. Krystal Biotech made the decision to delay each program, likely to preserve capital and focus on Vyjuvek's regulatory review and upcoming launch. Engineers have also been attempting to commission a new manufacturing facility in Pittsburgh.

Nonetheless, Vyjuvek served as the foundation stone in the hypothesis for building a gene therapy platform around herpes simplex virus (HSV). It's important to build around the asset and deliver steady signs of progress across the pipeline.

Margin of Safety & Allocation

(No change.)

Krystal Biotech is considered a Growth (Quality) position. The current margin of safety range for the company is below:

• Current Price (market close November 7): $78.05 per share
• Likely Undervalued:         <$50.82 per share
• Midpoint:                           $67.77 per share
• Likely Overvalued:            >$84.71 per share
• Allocation Range:              Up to 10%

Krystal Biotech reported 25.75 million shares outstanding as of October 31, 2022. The margin of safety range above assumes 29.5 million shares outstanding, which prices in 15% dilution.

The quiet delays for the pipeline are frustrating, but they don't change the investment opportunity at the moment. Vyjuvek has global peak annual sales potential of over $650 million and could eclipse $300 million by 2026. Building commercial infrastructure for the first time will be expensive, but will also lay the groundwork for future pipeline programs.

Krystal Biotech is expected to report significantly larger operating losses in 2023 and 2024 compared to the historical trend. The business ended September 2022 with $407 million in cash, which is healthy but not enough to fund a commercial ramp and pipeline development. Investors should expect a public offering of common stock of at least 10% (raising gross proceeds of $200 million to $250 million) in early 2023, likely at the time Vyjuvek earns FDA approval.

If Vyjuvek earns FDA approval, then Krystal Biotech could receive a priority review voucher (PRV). It could sell the PRV for at least $100 million in cash to limit dilution for shareholders.

The risk here is that Vyjuvek gets off to a slow start during Q2 2023 and Q3 2023, which investors will learn when quarterly updates are provided in August 2023 and November 2023, respectively. New drug product launches can be highly variable. Delays could reduce the mid-term growth trajectory or be corrected quickly. But if Vyjuvek gets off to a slow start, then delays in the rest of the pipeline could compound the misery for shareholders.

Further Reading

• November 2022 press release discussing Q3 2022 business updates
• November 2022 SEC filing (10-Q) for Q3 2022
• November 2022 article from TheStreet discussing HSV gene therapy vs. AAV gene therapy
• August 2022 company update discussing the regulatory path for Vyjuvek
• July 2022 company update discussing the ability to earn and sell PRVs for $100 million in cash

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