Krystal Biotech, Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Krystal Biotech, Inc. is a commercial-stage biotechnology company focused on the discovery, development, and commercialization of gene therapies to treat diseases with high unmet medical needs.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Krystal Biotech operates in the rare disease space, specifically focusing on dermatologic conditions. The company has developed a novel platform for gene therapy based on its proprietary HSV-1 vector technology. The company is primarily focused on rare dermatologic diseases but the platform has broad applicability to other conditions with unmet medical needs.

Business Overview

  • Revenue Distribution: Krystal Biotech is primarily a pharmaceutical company. Its revenue is generated from the commercialization of its gene therapy products. The company has one product, VYJUVEK, on the market as of the latest filings, that currently makes up all of its revenue.
    • VYJUVEK is a gene therapy product for Dystrophic Epidermolysis Bullosa (DEB). Since VYJUVEK is the first FDA-approved treatment for DEB, the company currently enjoys a monopoly position in this market.
  • Industry Trends:

The gene therapy space is seeing a lot of growth. More companies are exploring gene editing and gene therapy treatments.

  • The industry is characterized by high R&D expenses and a long drug development pathway. The FDA approval process is rigorous, requiring extensive clinical trials and manufacturing capabilities.
  • Companies are adopting a more personalized approach to healthcare, and gene therapy holds significant promise in this area, targeting specific gene mutations to treat diseases at their roots.

  • There are increasing levels of investment into rare disease treatments as unmet needs are higher and the incentives are higher for the companies developing these drugs.

  • Margins: Krystal Biotech’s margins have the potential to be robust because it is a high-value drug.
    • However, there are also potential for high expenses relating to its product manufacturing and clinical development that may drive up costs.
  • Competitive Landscape:
    • There are a few companies developing gene therapies for rare diseases. However, the market for their target disease is quite small, and other companies focused on the same target disease are also in the early to mid stage.
    • VYJUVEK is the only FDA-approved product for DEB, and is expected to face competition from other products only after several years.
  • Competitors may offer similar treatments, or alternative approaches that seek to relieve the conditions for which VYJUVEK is designed.
  • What Makes the Company Different:

VYJUVEK is Krystal’s first commercially approved product.

 * The company's platform is based on HSV-1 technology which, they claim is safer than existing technologies.
 * The company has an end-to-end gene therapy platform, ranging from R&D to clinical development, manufacturing, and commercialization.
  * The company has been rapidly scaling operations and building commercial infrastructure for their drug.
 * They have 14 patents that cover their products.

Financials

  • Revenue: Krystal’s revenue in the quarter ended Sept 30, 2023 increased to $70.4m vs $12.1m for the same quarter of 2022. The revenues for 9 months are also up dramatically to $175.5m compared to $20.6m from 2022. This shows good sales growth due to their drug getting into the market.

  • Profitability: While the company showed high profits, it was completely offset by increased operating expenses for sales, marketing, R&D, and SG&A. The net loss is still large - $489.9m for 2022 and $160m through 3 quarters in 2023. R&D and sales expenses are by far the biggest part of the operating expenses.
    • It is normal for biotechnology companies to post significant losses in their earlier years, given the high spending in R&D that is required to bring their drugs to the market. The losses are expected to continue for a while until they are able to achieve scale.
      • It is important to look at the profitability of the product and not necessarily the total profits of the company in the future.
  • Balance Sheet:
    • Cash and cash equivalents, as of September 30, 2023, was $563 million. The company’s cash position is still very high. They have lots of cash to keep their business growing for a while.
    • Current Liabilities were $37m. The company also has lease liability of $243m and other long-term liabilities of $110m. These are low relative to the company’s equity balance of $760m.
    • In the longer-term, it will be very important for the company to focus on profitability.

Moat

  • Moat Rating: 3 / 5
    • Krystal has a “narrow” moat built on intangible assets and their business strategy. Intangible assets include the company’s intellectual property in their products, which are protected by 14 different patents, which does give it a degree of protection from competition, however not a totally insurmountable one.
    • The company also holds regulatory approvals for its products (including the orphan drug designation), which is a key advantage in the medical space.
  • Justification
    • The biggest advantage that Krystal has is their first mover advantage. They are the only provider of a drug for the treatment of DEB, giving them pricing power with insurance companies.
      • Since most of Krystal’s patents are for a specific methodology for administering the drug, it is likely they will be able to generate more patents from it for other drugs, which will make their platform stronger in the future. *The biggest risks for a company like this are that competitor companies will come up with better treatments and potentially take some of their market share. Another risk is that Krystal may have problems in manufacturing or distributing its products and that the company may fail to generate enough sales to justify its costs, but that risk seems low based on the company’s guidance.
    • Moats are only as good as the revenue that a company generates over a long term. Given all the uncertainties in healthcare research, it is harder to classify a company in this sector as having a wide moat when compared to other sectors. Given the uncertainty in clinical trial outcomes and the regulatory landscape, even with a decent competitive advantage, it is hard to assign a high moat rating as the moats in the pharmaceutical space have the potential to erode relatively quickly, thus the rating of 3/5.

Risks to the Moat and Business Resilience

  • Technological Disruption: A key risk is that competitors could develop other technologies, or new methods for gene therapies which are superior to their own. This would also directly affect the value of its patents.
    • The biotechnology space is seeing rapid development in science, and that leads to the potential for some unforeseen technological disruptions that can diminish their competitive advantage.
  • Competitive Risk: Competitor companies may come up with superior treatments or therapies for the same conditions, or their products might be better at what they do.
    • Since it is currently the only product for this condition, there is not yet an established competition that threatens this moat, but that may change in the future.
    • The competitors have yet to reach the clinical stage with drugs targeting DEB.
  • Regulatory Risk: Changes in the regulatory landscape can affect their margins and their product approvals. If the FDA starts to have different requirements for new therapies in the future, or if some of Krystal’s regulatory approvals for existing products are rescinded.
    • The lengthy FDA approval timelines and the risks of trial failures makes this industry highly susceptible to regulatory risk.
  • Market Adoption Risk: Despite having the only FDA-approved drug for DEB, this does not necessarily mean there is a smooth rollout of the drug. Physicians may be wary to adopt new treatments, or they may not like the methodology or the ease of administration. It may also be difficult to convince insurance companies that the drug has enough benefits to warrant its high price.
  • Manufacturing and Supply Chain Risk: As a pharmaceutical company, a lot of Krystal’s long-term future depends on its ability to manufacture and supply its products in a cost effective way.
  • Management Experience and Talent: Krystal is still a relatively young company, and it remains to be seen if they can effectively manage a high growth organization. Moreover, the dependence on a few key people, including the CEO, does pose a risk.

Understandability Rating: 4 / 5

  • Justification:
    • The company’s focus on a rare disease with a specific genetic cause makes it easy to understand what its objectives are. The company’s business model of focusing on the development and marketing of gene therapy products is also relatively simple. However, there are a few intricacies in its manufacturing and research and development processes that may require deeper knowledge.
    • Financials are also not very complicated to understand as of yet but may get more complex as they scale operations.

Balance Sheet Health Rating: 4 / 5

  • Justification:
    • The company’s balance sheet is relatively robust, with current assets exceeding liabilities significantly. It has large cash reserves and minimal debt. However, there is a growing level of operating losses. In the coming years, it is key that the company needs to get to profitability.
    • However, their long-term liabilities are not very high.
    • Their main problem seems to be their R&D, and selling, and administrative expenses, which are quite high.
    • The current assets are mostly liquid, meaning that in case they ever face financial headwinds, they will have plenty of assets that can readily be converted to cash.