Currently, individuals affected by the rare skin disease dystrophic epidermolysis bullosa (DEB) can only receive palliative care costing $200,000 to $400,000 per year. Severe cases of the disease can cause large open wounds from simple touch. As a result, many individuals cannot complete everyday tasks, such as wearing a shirt or taking a shower.

That will finally change now that Vyjuvek earned U.S. Food and Drug Administration (FDA) approval as the first disease-altering treatment for DEB. The drug product delivers working copies of the COL7A1 gene that allows cells to make healthy copies of the COL7 protein, which anchors skin layers together.

Vyjuvek joins a small but growing list of approved gene therapies in the United States.

Krystal Biotech's first commercial product boasts a few accolades among the U.S. gene therapy landscape:

• 6th in vivo gene therapy
• 2nd HSV gene therapy
• 1st gene therapy for skin
• 1st gene therapy that can be re-dosed
• 1st gene therapy that can be administered at home (by a healthcare professional)

Although investors and analysts often treat a successful phase 3 clinical trial as the final bookend for a therapeutic asset, that's only partially correct. A positive late-stage study and regulatory approval mark the end of clinical development, but signal the beginning of commercial activities and market development.

Approval doesn't guarantee success in the market. In the case of Vyjuvek, there's a much smoother path ahead due to the dynamics of the DEB landscape.

Forecast & Modeling Insights

Solt DB Invest shared insights from our initial post-approval model for Krystal Biotech in December 2022. Due to the uncertainty of pricing and certain details involving patient discovery, it's appropriate to keep this model in place. But our models tend to err on the side of conservative estimates.

To recap, we expect the following:

• Vyjuvek will reach annual revenue of at least $400 million by 2026 and peak annual global sales of at least $540 million.
• Our model assumes a blended global average selling price of $450,000 per year. Although there are an estimated 3,000 patients in each the United States and Europe (6,000 patients total), the product will likely cost more in the United States than Europe.
• Although there are an estimated 6,000 patients in the United States and Europe, there are varying levels of DEB severity. In fact, many patients with less severe manifestations of the rare disease are misdiagnosed or undiagnosed. Therefore, we assume Krystal Biotech will only treat 20% of the estimated patient population, or roughly 1,200 patients globally, at its peak.

In addition to being the first FDA-approved treatment for DEB, there's relatively little threat from the competitive landscape.

Competitors such as Amryt Pharma (acquired by Chiesi Farmaceutici), Abeona Therapeutics, and Castle Creek Biosciences have less convenient and more complicated drug candidates in development. All but Castle Creek Biosciences have inferior primary endpoints in their pivotal study compared to the high bar set by Vyjuvek.

Finally, the approval of Vyjuvek has earned Krystal Biotech a priority review voucher (PRV). These are awarded for drug developers who earn regulatory approval for rare disease treatments, as a way to incentivize the development of medicines for underserved patient populations.

A PRV can be used to speed up the regulatory review of a separate drug candidate. The owner of a PRV can keep it or sell it to a different company – the going rate in the market is roughly $110 million. Krystal Biotech could sell its voucher for a non-dilutive cash injection or use it to expedite the review of an asset in a more competitive therapeutic area, such as KB407 in cystic fibrosis.

Regardless of how the company chooses to use its PRV, Solt DB Invest expects a public offering of common stock as soon as next week (Monday, May 22, 2023).

Margin of Safety & Allocation

(Updated to reflect post-approval model)

Krystal Biotech is considered a Growth (Speculative) position. The current Margin of Safety range for the company based on our post-approval model for Vyjuvek is below:

• Current Price (market close May 18): $87.45 per share
• Likely Undervalued:          <$91.00 per share
• Midpoint:                            $107.85 per share
• Likely Overvalued:            >$124.71 per share
• Allocation Range:             Up to 5%

Krystal Biotech reported 25.800 million shares outstanding as of May 1, 2023. The Margin of Safety range above assumes 29.670 million shares outstanding, which prices in 15% dilution.

Further Reading

• May 2023 press release announcing FDA approval of Vyjuvek
• May 2023 article from MIT Technology Review interviewing a young patient and his family on their experience with Vyjuvek (disclosure: we're quoted in the article)
• May 2023 research note detailing delays throughout Krystal Biotech's pipeline
• December 2022 research note sharing our post-approval model for the first time
• July 2022 research note analyzing the potential for Krystal Biotech to earn a PRV if Vyjuvek earned approval