Krystal Biotech, Inc. (NASDAQ:KRYS) Q3 2023 Earnings Call Transcript

Krystal Biotech, Inc. (NASDAQ:KRYS) Q3 2023 Earnings Call Transcript November 6, 2023

Krystal Biotech, Inc. beats earnings expectations. Reported EPS is $-0.69, expectations were $-1.1.

Operator: Thank you for standing by and welcome to the Krystal Biotech Third Quarter 2023 Earnings Conference Call. As a reminder today’s conference call 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 we released our financial results for the third quarter of 2023. The press release is available on our website at krystalbio.com. Our earnings 8-K was filed earlier today and additionally we filed our 10-Q with the SEC. Joining me on the call are 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 that during this call 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 materially 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 view 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 I’d like to now turn the call over to Krish. Krish?

Krish Krishnan: Thank you Meg. Welcome to Krystal Biotech’s first ever earnings call. It’s a bit of a coincidence that we’re having our first earnings call when we have positive earnings but I want to be clear that this quarter’s positive EPS is simply driven by the sale of the Priority Review Voucher in Q3. More importantly, we are having this call on the heels of EB Awareness Week. We thank the entire dystrophic epidermolysis bullosa community who worked tirelessly to improve outcomes for patients with this genetic disease. As we recognize the challenges that the patients and their families face every single day, our goal remains focused on helping as many DEB as possible. We know that this disease extends far beyond the skin and we’re committed to continuing to work to treat this disease comprehensively.

We will discuss our early initial efforts in treating DEB patients with lesions in the eye and those with squamous cell carcinoma of the skin later in this call. With that I’d like to say that after the first full quarter into the VYJUVEK launch, I’m extremely pleased and proud by the commercial progress we are making. We continue to see strong patient demand into Q4 and as we announced we finished Q3 with 284 start forms since VYJUVEK was approved. Our estimate right now is about an 85% conversion from start forms to patients on drug, but we’ll continue to update the stat in subsequent quarters as more and more start farms continue to convert. That said, even at 85% we are at a 20% penetration of the identified base of patients following one full quarter post launch.

Of the 284 start forms received, 20% were from patients suffering from the dominant form of DEB. As I have mentioned before, patients from dominant DEB patients continue to expand our base of identified patients. One third or 33% of the start forms were from patients 10 years of age or younger to as young as six months old. We track that because it gives us a better sense of an overall estimate of the induction phase as we believe that patients younger than 10 years of age could potentially have a longer induction phase than adults. Meaning that they will potentially consume more VYJUVEK [ph] annually for a longer period of time than adults do. So of the 284 start forms 20% were from dominant DEB patients, 33% from patients 10 years or younger, and presently estimate an 85% conversion relate to patients on drug which could potentially be higher as we move into subsequent quarters.

What is interesting and maybe a bit surprising is that only 46%, less than half of patient start forms were from Centers of Excellence with the balance of scripts written by the community physicians. So it has not been a bolus from the Center of Excellence but rather a steady flow off start forms and this is attributable to one, that some KOLs wanting a patient to physically visit at their centers tried to initiating them on VYJUVEK. Now that takes a certain amount of time because a lot of patient do not live right next to the Center of Excellence and scheduling can often be a challenge given the busy schedule of these KOL. Some other KOLs, generally those who did not have prior experience with VYJUVEK in a clinical study or in the open label extension studies are choosing a gated approach prioritizing their most severe patients on VYJUVEK first, seeing how it goes, and then writing prescriptions for moderate patients.

That said we have encountered no reluctance from any KOL with respect to wanting to put their patients on VYJUVEK. It’s simply a timing issue and our Medical Affairs team is working closely with these KOLs to educate them on the importance of getting the patient started on VYJUVEK as soon as possible. With respect to reimbursement, 45% of the patient start forms that have been received as of the end of Q3 were from patients with a commercial insurance plan. Most of these patients, over 80% of them, are already eligible for commercial reinvestment. As we mentioned in the press release the company has received positive coverage determinations from all major commercial national health plans and several regional health plans. So 45% commercial insurance, of the remaining 55% on government insurance, 74% are presently eligible for reimbursement and we expect the remaining to be eligible once the permanent J code becomes available in Jan 2024.

So overall this is in a really good place and we expect almost all patients to be eligible for some form of reimbursement early in 2024, at which point we intend to transition to reporting number of patients on drug as opposed to patient platforms as patients on drug will become a much better predictor of net revenues and start forms. So we talked about color on the start farms and on access, now about conversion to net revenues. Krystal’s guiding principle in the VYJUVEK launch is centered around the patient experience and we work tirelessly to ensure that each patient’s PAT, with respect to getting on VYJUVEK and staying on it is smooth, timely, and hassle free. We’re partnering with patients and families who were previously traveling to a Center of Excellence for palliative treatment and transitioning them to a home health visited by an HCP to apply the medication at a convenient time in their weekly schedule.

Think about that. Definitely more steps involved than simply having a physician write his script and getting it filled at the local pharmacy. In addition, we’re also working with payers who almost all agreed that the home setting is best for the patient. So patient experience is foremost on our mind and with respect to VYJUVEK launch, we work to ensure that we do not make a patient wait for long, that we don’t accept the start form unless we have a clear line of sight into getting our patients access to VYJUVEK within a reasonable time. Our goal in 2024 is to convert start forms to patient on drug in about two to three weeks. We’re not there yet but we expect we’ll have most of assets in place by the end of the year and we’re learning from some of the experiences on the initial set of patients so we feel really confident in achieving that objective.

It’s really difficult to go below two to three weeks, because it takes many families a week or two to get comfortable with the nurse and schedule a home health visit. So this launch has been all about home dosing. Over 88% of the patients start forms, received by the end of September were for patients who want to be dosed at home. And we expect that trend to continue and potentially go higher. This has definitely helped adherence to drug which has been excellent to rate and currently tracks around 96%. We shall continue to update this statistic in upcoming quarters. So following approval in May, it took us a few weeks to get the drug in the channel, negotiate reimbursement, and scheduled home health visits. So our first paid patient did not get on VYJUVEK until early August.

So the net revenue number of 8.6 million is approximately two full revenue months in Q3, during a period where both commercial and government policies and reimbursement continued to be negotiated and issued. The point being while patients start forms is attributable to a full quarter, net product revenue is only attributable to two out of the three months in the quarter. So to summarize, we believe we have a strong launch in our hands, we see really good demand from both recessive and dominant patients, access coverage has been relatively smooth, and home health visits are pointing to a high patient compliance. We expect this momentum to continue going forward. Beyond the U.S. commercial launch, we’re also looking to expand the number of patients treated with VYJUVEK and we are working towards the main patient program in EU as we await our marketing authorization approval in the second half of 2024 and launch thereafter.

Suma will speak to the strength of our pipeline shortly but with close to 600 million on our balance sheet, a strong launch and a very productive pipeline we’re well positioned strategically and financially to support the global launch of VYJUVEK and advance our clinical programs. I shall turn the call over Suma to provide color on the clinical programs.

Suma Krishnan: Thank you, Krish. This is an exciting time for us and that with the approval of VYJUVEK, our commercial team is leading the way for a successful U.S. launch. Our objective is to provide access to VYJUVEK globally, and someday treat this debilitating disease comprehensively. To that extent, we filed a marketing authorization with the European medical agency in October, and we anticipate an approval in the EU in the second half of 2024. Additionally, following acceptance of the open label extension study of B-VEC by Japan’s pharmaceuticals and medical device agency in July 2023, we initiated the extension study and dosed five patients. Following completion of the open label extension study in Japan, we intend to file a Japanese new drug application for B-VEC for DEB in the first half of 2024.

We are presently expecting launch in the EU and in Japan in 2025. With respect to treating this disease comprehensively, you have all seen the remarkable benefits including B-VEC patients with lesions in the eye, and we are in early stages of working with PFT [ph] to develop an approach for studying VYJUVEK for this indication. We estimate proximately 750 patients with this manifestation in the U.S. In addition, we are hoping to enroll DEB patients with squamous cell carcinoma of the skin in our Phase 1 oncology study. While VYJUVEK could potentially slow down the onset of SCC in the skin in the long-term, having a near-term benefit with KB707 will go a long way towards treating this disease comprehensively. Moving on to a rich clinical pipeline using our HSV-1 platform.

On KB407 we completed Cohort 1 of the CORAL-1 study with no severe or serious adverse events, and plan on initiating Cohort 2 in the upcoming weeks. We anticipate announcing data from this study in 2024. In addition, we continue to work closely with the TDL network of the CF Foundation to provide us access to the broader network which will enable us to complete this study a lot faster than the pace we are at right now. On KB408 for the treatment of Alpha-1 Antitrypsin deficiency, which is formulated for inhaled delivery through the respiratory cells of the lungs via nebulization, the Phase 1 clinical trial is a Phase 1 open label single dose escalation study in adult patients with AATD with a PIZZ genotype. Three planned dose levels of KB408 will be evaluated by three patients in each cohort to evaluate the safety, tolerability, and expression of the protein in lung cells and the serum.

In September, we announced that FDA cleared our IND for KB408 and the agency granted KB408 orphan drug designation. We expect to dose the first patient in the clinic in a Phase 1 clinical trial in the first quarter of 2024. Our oncology program, KB707 has made advancements this past quarter after the FDA cleared our IND and granted us a fast track application for KB707 in July for the treatment of locally advanced or metastatic solid tumor malignancies. As a reminder, KB707 is a modified HSV-1 vector designed to deliver genes and coding both 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 long delivery.

The intratumoral KB707 Phase 1 OPAL-1 study is an open label multicenter monotherapy dose escalation and expansion study enrolling patients with globally advanced or metastatic solid tumors, relapsed or refractory to standard of care with at least one measurable and injectable accessible tumor. The primary objective of this study is to evaluate safety and tolerability of KB707. Efficacy will also be assessed by multiple measures including overall response rate, progression free survival, and overall survival and immune effects of KB707 monotherapy will be assessed in tumor tissue, lymph node and blood. In October the first patient was dosed in the Phase 1 study to evaluate intratumoral KB707 in patients with globally advanced or metastatic solid tumor malignancies.

We are on track to file an amendment to the existing KB707 IND in the fourth quarter of 2023 to allow us to evaluate inhaled KB707 in a clinical trial to treat tumors in the patient’s lungs. We expect to dose the first patient with inhaled KB707 in the first half of 2024. Data was presented at the Society for Immunotherapy of Cancer in October. On localized delivery of Combinatorial IL-2 and IL-12 for the treatment of cutaneous malignancies we presented preclinical data showing that intratumoral injection enhances tumor regression and survival in B16F10 murine melanoma compared to control or single vector treatment. Additional data was presented showing that when administered intratracheally and as this tumor progression and survival in K7M2 murine osteosarcoma lung metastasis model compared to control a single vector treatment.

Regarding our dermatology program, KB405 for the treatment of TGM1-ARCI and KB104 to treat patients with Netherton Syndrome, we continue to move forward with both programs. We are on track to commence the Phase 2 Cohort of the KB105-02 trial for the treatment of TGM1-ARCI in 2024. For KB104 we plan to file an IND to initiate a clinical trial of KB104 to treat patients with Netherton Syndrome in late 2024. As stated in our press release, other pipeline programs continue to advance. I’d like to finish by saying we are presently working to advance four ongoing clinical programs, and anticipate presenting clinical data across these programs in 2024 besides advancing our preclinical and clinical efforts in the skin and in ophthalmology. With that, I would like to turn the call to Kate.

Kathryn Romano: Thank you Suma. With our focus in the VYJUVEK launch being centered around the patient journey, and resulting initial strong patient adherence on drug in the first few months of launch, we reported $8.6 million in net product revenues, which began in August of 2023 through the end of the third quarter. As VYJUVEK was approved by the FDA in May of 2023, there were no comparative period revenues. Cost of goods sold was $223,000 for the quarter as compared to zero for the previous year’s third quarter due to initial sales of VYJUVEK after FDA approval was obtained on May 19, 2023. Prior to receiving FDA approval, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense, and as such a portion of the cost of inventory sold during the period had been previously expensed prior to FDA approval.

We expect that cost of goods sold will continue to be lower as we sell off the remaining inventory that had portion of its costs that were previously expensed as R&D prior to approval. Research and Development expenses for the quarter were $10.6 million inclusive of $2.3 million of stock based compensation, compared to $11.5 million inclusive of $2.2 million of stock based compensation for the quarter ended September 30, 2022. This overall decrease of $887,000 was primarily due to costs related to the manufacturing of VYJUVEK being recorded to inventory following our FDA approval that were previously expensed to research and development expense. Selling, general, and administrative expenses for the quarter were $23.7 million inclusive of $6 million of stock based compensation, compared to $19.9 million, inclusive of $6.9 million of stock based compensation for the quarter ended September 30, 2022.

This overall increase of $3.8 million was largely due to costs incurred related to launching VYJUVEK, such as salaries, travel, technology, and other professional fees. And was offset by lower marketing costs due to the timing of developing marketing materials. This quarter, we also recorded a gain from the sale of our rare pediatric disease Priority Review Voucher, which was awarded to the company in connection with the FDA’s approval of VYJUVEK, of $100 million. I want to emphasize that this gain was a one-time item recorded in other income and was the primary driver of net income and positive EPS this quarter. Finally, we closed the quarter well capitalized with $598.6 million in cash, cash equivalents and investments on hand as of September 30th.

And we believe this cash on hand is sufficient to fund all of our planned activities for the next several quarters. And with that, I will turn the call back over to Krish.

Krish Krishnan: Thanks, Kate. Well, Krystal has always been known for execution on the developmental front. The third quarter demonstrated our ability to execute equally well on a commercial front. We’re now a fully integrated company with a commercially validated platform that allows us the privilege of developing medicines to serve patients with debilitating diseases. With a strong launch, a productive pipeline, and $600 million or so on the balance sheet we are in a strong place financially to execute on our objectives. Finally, as the largest shareholders in the company, management is aligned and well positioned to continue to deliver increasing value to all our shareholders now, and over the years ahead. Thanks for listening. And I’d like to now open the call for Q&A.

Operator: Absolutely. [Operator Instructions]. The first question comes from the line of Robert Finke with Guggenheim Partners. Your line is now open.

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Q&A Session

Robert Finke: Hey, good morning, team. This is Robert on for Debjit. Thanks for taking our questions and congrats on the strong launch. One question from us today, do you anticipate any slowdown in the fourth quarter compared to third quarter as far as patient start form rate and if so, what does this imply about peak demand? Thank you. Krish, excuse me, but there’s nothing coming from your line. You might be on mute.

Krish Krishnan: Oh, I’m sorry. Oh, thanks Rob, I was going on and on for a minute. So as of now, Robert, the pace continues to be as it was at the end of 3Q. What is difficult to predict is how the holidays if at all are going to have an impact on the patient start forms. So my best answer is as of now we continue at the same pace and it remains to be seen how the next few months go by. With respect to peak demand, look when I — when we made the call at the time of approval, it was simply based on a base of 1200 to 1500 identified patients paying about $500,000 annually. That’s how we came up with 750 million. As we find more dominant patients, as we start getting approved in Europe and Japan, as the base of identified patient grows, we’ll continue to update that number.

Robert Finke: Great, thank you and one follow-up from us. The start form numbers start from approximately 20 per week in second quarter to 13.5 per week in the third quarter. What’s your best explanation for why this occurred? Thanks, Krish.

Krish Krishnan: Look, maybe the first six weeks where there was a little bit of bolus from the open label extension study, as I mentioned, we’re also a bit careful of rushing to put somebody on a start form if we don’t have a clear line of sight into when the nurse is going to come home or they’re going to get reimbursed. The worst thing we can do is to have a patient submit us our form and have them wait a significant amount of time before converting. And so to some extent, we manage the inbound queue a little bit. That’s just started to open up as I mentioned with access, we pretty much have majority of the commercial plans in place. A significant amount of the Medicaid plans in place, especially a bunch starting in October. And so some of it is the OLE some of it a bit is our own doing to maximize patient experience.

Robert Finke: Great, thank you.

Operator: Thank you. The next question comes from the line of Alec Stranahan with Bank of America Merrill Lynch. Your line is now open.

Alec Stranahan: Hey, guys, thanks for taking our questions. And congratulations as well on the early launch progress. Just a couple of questions from us. Maybe first, could you walk us through the process a bit further of getting new patient start forms and then converting those patients onto therapy and what was the barrier for maybe the 15% or so that that didn’t confer and I think you just touched on this in the last question, but do you think it’s reasonable to assume that now that insurance is probably coming online that the rate of conversion between start form and initialization on therapy could accelerate?

Krish Krishnan: We believe so, that 85% is an estimate, right. We don’t have enough to make a very substantive prediction on that number. 85% is just based on some patients may be wanting not to get going for a while, some patients do not have insurance, some patients choosing to wait to see how other patients are doing. So it’s a pure estimate. We definitely expect that number to go up. I alluded to that in the call. But in terms of process, look, we like to get quality and audited start form to begin with. Because that helps from a timing perspective of converting them to patient on drug. Because if you don’t have a fully filled start form with the physician report and the genetic sequencing, a lot of information on prior what they have — the prior history of the patient, it takes longer.

At least in the beginning, it took longer with insurance to get them reimbursed. And to avoid that, we were trying to get a clear line of sight before we totally accepted a start form internally, because patients get very anxious once they submit a start form to get access to the to the drug as soon as possible. We try to bridge that gap with some free vial program while waiting for the insurance and that varies depending on if you’re a commercial or Medicaid. And once we get a start form, essentially about a couple of things happen in parallel once about getting them on the reimbursement. And the other path is to work with our specialty pharmacy to get the nurse scheduled to come home at a time that’s convenient to them and that usually takes a week or two.

So that’s essentially the process. But once the patient is on drug and the reimbursement is in place, the adherence rate has been really high because of the nurses essentially basically going home to fit with the patient’s schedule, as opposed to put any burden on the patient having to travel week after week to some site. And as I mentioned, a significant percentage of our patients are on home dosing at the moment.

Alec Stranahan: Okay, thanks. And one more question. When you look to approval and launch in the EU and Japan, Krish, how will you be approaching these markets? And if you do seek to partner, would you still be making VYJUVEK yourselves presumably and how would this work logistically? Thanks.

Krish Krishnan: Yeah, I think we’re sticking to what we’ve been saying that our intent is to launch in the EU and Japan. We already have a team in the EU. We’re starting to think about building out a small team in Japan in anticipation of a launch in 2025. In terms of supply of a drug, it will all be supplied from [indiscernible] which has the capacity for a global supply of VYJUVEK at the right point in time may be supplemented with Astra which is now up and running. So essentially, we do not anticipate setting up any manufacturing facility in either Europe or Japan.

Alec Stranahan: Okay, great. Well, thanks. Congrats again on the progress.

Krish Krishnan: Thanks, Alec.

Operator: Thank you. The next question comes from the line of Ritu Baral with Cowen. Your line is now open.

Ritu Baral: Good morning, guys. Thanks for taking the question. And thanks for hosting the call this time. Krish, I wanted to sort of get my arms around the sort of intent to prescribe. So you mentioned that the 284 start forms if I’m interpreting it correctly, the 284 start forms that you reported this morning, these are high quality, accepted start forms. And there are additional start forms that either you have not accepted or that you are sort of pushing back. And I guess waiting to tally as part of your report. Can you give us an idea of qualitative or quantitative about the number of outstanding, like half-filled start forms or inadequate start forms just to give us an idea of intent to prescribe? And then I’m also wondering about the non-Center of Excellence prescribing doctors, is there a profile of these doctors that is emerging? And then I have another follow-up, thanks.