We can squabble over a few hundred million dollars here or there, but Krystal Biotech is roughly fairly valued based on Vyjuvek and overall profitability.

That might be a problem.

The gene therapy pioneer has one of the most efficient operational footprints in the industry. Although that benefited investors during the development of Vyjuvek by limiting cash burn and dilution, management is stubbornly sticking to its austerity approach despite having ample cash flow to reinvest into the next wave of assets. In other words, the company's profitability and cash flow are likely inflated because it's not making adequate investments in R&D.

To put it into perspective, the gene therapy pioneer reported total R&D expenses of $142 million in the three-year period spanning 2022 to 2024. All but one drug developer in the coverage ecosystem spent more than that last year alone.

It seems obvious to me the husband-wife team leading Krystal Biotech are positioning the business for an acquisition, which is a plausible outcome in the near team. But it might now be the only tenable outcome for shareholders to hold onto historic paper gains. Without an acquisition, the business risks an uncomfortable reality check as Vyjuvek revenue is likely to abruptly plateau and investors realize a neglected pipeline offers no immediate options for rescue.

It very well might be acquisition or bust for Krystal Biotech – at least from the current $5.4 billion valuation.

Krystal Biotech's R&D Spending, Visualized

To highlight the company's abnormally low R&D investments, it helps to compare it to the rest of the coverage ecosystem. This includes comparisons with precommercial drug developers, as well as commercial drug developers with similar levels of revenue.

Krystal Biotech reported total R&D expenses of just $53.6 million in 2024. Only Coherus BioSciences spent less than $100 million last year, primarily because it was preparing its acquired pipeline for clinical starts in 2025.

Fellow commercial-stage drug developer SpringWorks Therapeutics spends that every four months. Relay Therapeutics invests that every quarter. It invested $92 million in clinical trials last year, which are just one component of R&D expenses and supported just two assets.

Harmony Biosciences, which doesn't even wield a congruent technology platform, spent 3x more than Krystal Biotech last year. Blueprint Medicines – which has the same level of revenue as Krystal Biotech – allocates roughly $50 million for nerds in lab coats on its payroll every two months.

Meanwhile, Arrowhead Pharmaceuticals spends roughly $50 million on R&D expenses every month. The RNAi specialist spent heavily to prepare assets for out licensing, culminating in a deal with Sarepta Therapeutics that will allow it to recoup $1.125 billion in the first year.

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Krystal Biotech's unusually low R&D spending isn't a function of a small team size. The company entered 2025 with 275 full-time employees. That's exactly the median of the coverage ecosystem's drug developers. It's less than the average of 362 employees excluding Pittsburgh's premier gene therapy company, but far from the smallest team.

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If Krystal Biotech invested the average R&D expenses of the coverage ecosystem, then it would spend $66.5 million per quarter and $266 million per year. That would increase annual research expenses by $212 million, plus additional costs for a larger team, more vendors, and so on.

Considering the business reported full-year 2024 earnings before income taxes (EBIT) of $95 million and operating cash flow of $123 million, a normal level of investment in the technology platform and pipeline would result in an unprofitable and cash-burning business.

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Investors Can Expect Increased R&D Spending Ahead

The risks of chronically low R&D spending can be severe. Investors should be careful not to extrapolate Vyjuvek's development to the remaining pipeline. The asset benefitted from a unique combination of characteristics that led to the ridiculously efficient development, but those conditions will be impossible to replicate for core pipeline programs now making their way through clinical trials.

The asset enrolled only 30 patients in its pivotal study. That's possible when targeting a rare disease like dystrophic epidermolysis bullosa (DEB) with no competing treatment options or development candidates, but it won't work for larger indications in the pipeline such as alpha-1 antitrypsin (A1AT) deficiency, cystic fibrosis, or lung cancer. Krystal Biotech simply cannot continue as an independent company without significantly higher R&D investments.

Consider how little the pipeline has advanced in the last three-and-a-half years.

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To be fair, portfolio optimization isn't a bad thing. Investors want to see mindful investments rather than reckless spending with no payoff, which many drug developers continue to do (for some reason…). Many drug developers wish they were in a similar position to control their own destiny. The gene therapy specialist can fund itself and go as fast or slow as it wants with pipeline programs.

But Krystal Biotech is really pushing the limits of operational efficiency. As pipeline programs advance it'll need to significantly increase investment.

The phase 1 study of KB407 in cystic fibrosis is enrolling only 12 patients, same as the phase 1 study of KB408 in A1AT deficiency. By contrast, the phase 3 studies for fazirsiran in A1AT deficiency being conducted by Takeda Pharmaceuticals and Arrowhead Pharmaceuticals will enroll over 250 patients.

Meanwhile, the phase 1/2 program for KB707 in lung tumors is designed to enroll 240 patients – several times more patients than the company has enrolled in clinical trials across its entire pipeline since it was founded. As the asset advances to the phase 2 portion, investors can expect a significant increase in R&D expenses.

The strange thing is the business ended 2024 with $750 million in cash. That should provide a comfortable runway even under scenarios where it invests a "normal" amount in research each quarter.

Forecast & Modeling Insights

(Refined, increased.)

A lack of investment in the technology platform (which the company "misappropriated" from its former neighbor PeriphaGen and cost $75 million in litigation settlement payments) and pipeline played a role in my decision to exit a position in Krystal Biotech. I haven't been shy about my frustration with the sluggish pace of pipeline progress. The business has a shady reputation in Pittsburgh, and the abrupt departure of its former Chief Commercial Officer right before the launch of Vyjuvek was enough for me.

Of course, shares have almost doubled since my exit.

My updated model also represents an increase. An estimated fair valuation of $4.499 billion works out to $148.76 per share, up from $4.416 billion and $143.86 per share. Some of the increase was driven by reducing dilution expectations, although investors shouldn't be surprised to see a public offering if the company wants to raise a cool $500 million and get more aggressive.

In simple terms, Krystal Biotech is roughly fairly valued based on Vyjuvek alone. Investors will want to keep an eye out for revenue surprises in 2025, as patients will require fewer treatments the longer they remain on the drug, and we're now far away enough from launch to begin to see a bigger impact.

I'd like to add more significant contributions from pipeline assets, especially drug candidates delivered to the lungs, but data are too immature to have much confidence. If the company has teased early data from dose escalation studies in an attempt to get acquired, then that makes sense.

On the other hand, if Wall Street is valuing Krystal Biotech as a standalone business, then analysts appear to be ignoring or downplaying the financial implications of significantly increased R&D investments on the horizon. If that reality hits when Vyjuvek revenue begins to stagnate, then shares could become volatile.

Margin of Safety & Allocation

Krystal Biotech is considered a Growth (Quality) position. The current fair valuation for the company based on my 2025 model is below:

• Market close March 23: $187.15 per share
• Modeled Fair Valuation: $148.76 per share
• Allocation Range: Up to 10%

Krystal Biotech reported 28.806 million shares outstanding as of February 12, 2025. The modeled fair valuation above assumes 30.246 million shares outstanding, which is equivalent to 5% dilution.

Further Reading

• February 2025 press release announcing 2024 operating results
• February 2025 regulatory filing (10-K) detailing 2024 operating results
• February 2024 research note exploring an eventual loss of efficacy and dosing requirements for long-term Vyjuvek patients
• May 2023 research note exploring the lack of pipeline progress