Krystal Biotech is not a trendy biotech stock, but solid clinical results from the business have turned it into a solid investment in recent years. Despite relatively limited interest among individual investors, many aware of the technology platform are excited about the company's emerging aesthetics portfolio.

The top-down optics are intriguing. Herpes simplex virus (HSV) gene therapy can be tuned for various tissue types, including skin, which opens opportunities within the $2.7 billion global ($1.4 billion U.S.) aesthetics market.

The bottom-up realities tell a different story.

Solt DB Invest assigns a near-zero valuation on the company's aesthetics subsidiary, Jeune Aesthetics, which makes no contribution to our valuation model. Preliminary data from the PEARL-1 study for KB301 were underwhelming and non-competitive relative to neuromodulators such as Botox and Daxxify. In fact, blinded independent reviewers found no clinical separation between the drug candidate and placebo using a rating scale developed by Jeune Aesthetics specifically for KB301.

Our model can change with additional data, but there's no need to price the aesthetics pipeline into shares at this time. The primary value driver for Krystal Biotech remains the therapeutic pipeline.

Jeune Aesthetics Selects First Target

The aesthetics pipeline comprises HSV gene therapy candidates intended to replenish depleted copies of genes that impact skin elasticity.

For example, type 1 and type 3 collagen are the primary building blocks of the connective tissue (called the extracellular matrix) in the dermis. The dermis is the second layer of skin sitting directly under the epidermis. Although wrinkles are visible on the epidermis, they're caused by the loss of extracellular matrix in the dermis.

Think of the dermis as a memory foam pillow, the extracellular matrix as the memory foam material, and the epidermis as a pillowcase.

• If the extracellular matrix is well maintained at the cellular level, then an individual will have fewer visible wrinkles. The pillow is nice and plump.
• If the extracellular matrix is less well maintained at the cellular level, then an individual will have more visible wrinkles. It's time to listen to your wife and buy some new pillows.

Natural biological aging, UV damage from the sun, and diet can impair collagen synthesis in skin cells. Dermatologists have developed ways to temporarily improve the appearance of wrinkles, but not by directly impacting biology.

• Neuromodulators such as Botox and Daxxify are derived from bacterial toxins that cause botulism ("Botox" <> "botulism" <> "Clostridium botulinum"). These agents temporarily paralyze muscles underneath the skin. The reduced movement of muscles also reduces movement of the extracellular matrix, which gives the appearance of fewer wrinkles.
• Dermal fillers are used to temporarily add material to the extracellular matrix, which gives the appearance of fewer wrinkles.

Krystal Biotech thinks it can alter the underlying biology of skin cells to directly improve the maintenance of the extracellular matrix in the dermis.

Data Source: Jeune Aesthetics.

The lead drug candidate of the aesthetics pipeline, KB301, uses HSV to deliver a copy of a type 3 collagen gene into skin cells. The COL3A1 gene allows cells to produce the COL3 protein, which forms long threads (called fibrils). The extracellular matrix is a complex scaffold comprising mostly type 1 collagen fibrils, type 3 collagen fibrils, and elastin fibrils.

Therein lies one challenge facing Jeune Aesthetics. Delivering genes for only one of these components may be insufficient to achieve clinically meaningful aesthetic outcomes. (Assets such as KB304 could be more viable.)

There are early signs of this potential limitation of the current approach. The PEARL-1 study is an ongoing phase 1 clinical trial for KB301 designed to gather initial safety, efficacy, and durability data for aesthetic outcomes. Preliminary data are relatively underwhelming:

• Safety:
• All dose levels tested were generally well tolerated. Side effects declined with subsequent injections.
• Efficacy:
• The high dose appeared to be more active, although subsequent doses provided no discernible increase in cellular production of COL3. That's actually okay – there's a biological limit, but it could be a sign of limited therapeutic potential using the current approach.
• There were limited improvements in Subject Satisfaction Scores (SSS), a subjective measure scored by patients. The scale ranges from 0 to 4. Median score changes from baseline were 1.9 (vs. 0.9 for placebo) for lower cheek injections and 1.3 (vs. 0.7 for placebo) for upper cheek injections.
• There was no clinical separation between KB301 and placebo when images were evaluated by blinded independent reviewers. Worse, these reviewers used the Jeune Aesthetics Skin Roughness Score (JASRS), which was specifically designed for KB301. Oof.
• Durability:
• Jeune Aesthetics claimed it observed durable responses of up to nine months following high-dose KB301, but provided no data or median durability metrics. This is therefore a meaningless data point for investors.

Forecast & Modeling Insights

(No change.)

The PEARL-1 study cohorts completed to date specifically tested injections above the knee, in the upper cheek, and in the lower cheek. Based on the exploratory data, Jeune Aesthetics decided the final cohort would evaluate a high dose version of KB301 in lateral canthal lines at rest. More commonly known as Crow's feet, these wrinkles appear in the upper cheek below the eye when smiling or using facial muscles. Neuromodulators such as Botox and Daxxify are approved to treat lateral canthal lines, but provide limited benefit at rest (again, they paralyze muscles and reduce movement to improve the appearance of wrinkles).

The selection of this specific indication appears to have been driven by the lack of competition and differentiated mechanism of action for KB301. However, it also instills more confidence in our modeling that assigns a near-zero value to Jeune Aesthetics with the current approach. A few nuances that don't stand out from press releases or investor presentations.

• Results from the completed cohorts of the PEARL-1 study in the upper cheek were the least impressive. This is where lateral canthal lines appear.
• Although the global aesthetics market is valued at $2.7 billion, only 53%, or $1.4 billion, is accessible within the United States. The specific indication targeted by KB301 represents a relatively small and undefined opportunity, which Solt DB Invest estimates is worth less than $159 million in the United States. It could become a meaningful contributor within a broader portfolio, but Jeune Aesthetics is in the early stages of development.
• Treatments for lateral canthal lines require 40% fewer units compared to forehead lines, which makes treatment less valuable. That said, the average selling price of an aesthetic treatment is influenced by multiple factors. A more durable treatment would be more valuable, but the data are too immature to draw meaningful conclusions.
• Whereas the therapeutic pipeline in dermatology utilizes topical HSV gene therapy formulations, the aesthetics pipeline utilizes intradermal injections for more targeted delivery into the extracellular matrix.
• Whereas every asset in the therapeutic pipeline (skin and lung) delivers two gene copies per vector, every asset in the aesthetic pipeline appears to deliver only one copy per vector. This is likely due to managing the manufacturing cost profile of an aesthetic product versus a therapeutic product, but it also likely reduces efficacy. Whether encapsulating a biologic drug in lipid nanoparticles or viral vectors, a significant number of vehicles are empty – they contain no biologic drug (a gene in this case) at all. Oversimplifying:
• If you aim to encapsulate two copies of a gene, then some vectors will have two, some will have one, and others will have none. Within this distribution, two types of vectors have potential therapeutic activity.
• If you aim to encapsulate one copy of a gene, then some vectors will have one and some will have none. You have less wiggle room to create truly active vehicles, and efficiency losses can play a bigger role in clinical outcomes.

On a more positive note, the relatively massive carrying capacity and low immunogenicity of HSV vectors suggests the challenges facing Jeune Aesthetics are addressable. The company could design treatments that combine multiple different types of genes into one injection, which could yield more favorable efficacy outcomes. For example, the preclinical asset KB304 includes genes for both type 3 collagen and elastin, presumably addressing two of the three primary components of the extracellular matrix within the dermis, but the timeline for entering the clinic is unclear at this time.

Margin of Safety & Allocation

(No change.)

Krystal Biotech is considered a Growth (Quality) position. The current Margin of Safety range for the company based on our 2023 model (pre-Vyjuvek approval) is below:

• Current Price (market close April 25): $87.39 per share
• Likely Undervalued:          <$50.58 per share
• Midpoint:                            $67.44 per share
• Likely Overvalued:           >$84.40 per share
• Allocation Range:              Up to 10%

Krystal Biotech reported 25.788 million shares outstanding as of March 22, 2023. The Margin of Safety range above assumes 29.656 million shares outstanding, which prices in another 15% dilution. We expect a public offering of common stock in May 2023 following FDA approval of Vyjuvek.

Further Reading

• April 2023 press release announcing dosing of first patient in cohort 3 of the PEARL-1 study, which is specifically focused on lateral canthal lines at rest
• December 2022 article walking through our pre-approval and post-approval modeling of Krystal Biotech
• November 2022 press release announcing durability data from the extension cohort of the PEARL-1 study
• March 2022 press release announcing data from the efficacy cohort of the PEARL-1 study

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