Krystal(KRYS) - 2022 Q4 - Annual Report

PART I Business Krystal Biotech is a biotechnology company developing genetic medicines for rare diseases using its proprietary redosable HSV-1 gene therapy platform Overview and Redosable Gene Therapy Platform The company's platform uses an engineered Herpes Simplex Virus 1 (HSV-1) for repeatable, non-integrating gene delivery with a large payload capacity - The company's gene therapy platform is based on an engineered HSV-1 virus, designed for repeat administration and efficient delivery of large genetic payloads to target cells without integrating into the host genome[19][20] - Key platform advantages include: Repeat Administration, Non-Integrating Nature, High Payload Capacity (>35Kb), High Transduction Efficiency, Direct Delivery, Stability, and Scalable Manufacturing[20][22] Our Product Candidates The company's pipeline includes lead candidate B-VEC for DEB, alongside clinical and preclinical programs in dermatology, respiratory, and aesthetics Product Candidate Pipeline Overview | Product | Protein | Indication | Stage | | :--- | :--- | :--- | :--- | | B-VEC | Type VII collagen | Dystrophic Epidermolysis Bullosa (DEB) | BLA/MAA Submitted | | KB105 | Transglutaminase-1 | TGM1-deficient ARCI | Phase 1/2 | | KB104 | SPINK5/LEKTI | Netherton Syndrome | Preclinical (IND planned 2023) | | KB407 | CFTR | Cystic Fibrosis | Phase 1 | | KB408 | SERPINA1 | Alpha-1 Antitrypsin Deficiency (AATD) | Preclinical (IND planned 2023) | | KB301 | Type III collagen | Aesthetic Skin Conditions | Phase 1 Complete (Phase 2 planned 2023) | - B-VEC for DEB: A Biologics License Application (BLA) was submitted to the FDA and accepted with Priority Review, with a revised PDUFA date of May 19, 2023[32][33] - KB407 for Cystic Fibrosis: The company received approval to conduct a Phase 1 trial in Australia and the FDA accepted its IND application in the U.S, with trials planned for the first half of 2023[54][55] - KB301 for Aesthetics: Positive proof-of-concept data from the Phase 1 PEARL-1 study showed a nine-month durability of effect, with a Phase 2 study planned for 2023[66][68] Manufacturing The company operates in-house CGMP manufacturing facilities, ANCORIS and ASTRA, to control its supply chain for clinical and commercial production - The first commercial-scale CGMP facility, ANCORIS, successfully completed an FDA audit as part of the B-VEC BLA review[71] - A second facility, ASTRA, is expected to be completed and validated in 2023, adding significant capacity and integrating the entire supply chain[72] - The proprietary manufacturing process is highly reproducible and scalable, utilizing a Master Virus Seed Stock (MVSS) and a complementing Master Cell Bank (MCB)[74][75] Competition The company faces competition from other gene therapy developers and palliative treatments for its target indications like DEB and Cystic Fibrosis - Competitors in DEB are categorized into corrective approaches (Abeona, Castle Creek Pharmaceuticals) and palliative treatments (Amryt Pharmaceuticals, Castle Creek Pharmaceuticals)[82] - In Cystic Fibrosis, the company is aware of several preclinical or early clinical stage nucleic-acid-based programs from competitors like TranslateBio and 4D Molecular Therapeutics[81] Intellectual Property The company's success depends on its intellectual property portfolio, including patents covering its core platform and product candidates through 2040 Key U.S. Patents | Patent Number | Product/Platform | Patent Type | Expiration Date | | :--- | :--- | :--- | :--- | | U.S. 10,441,614 | STAR-D Platform | Composition & Methods | 12/28/2036 | | U.S. 9,877,990 | B-VEC | Composition & Methods | 12/28/2036 | | U.S. 10,525,090 | KB105 | Composition & Methods | 4/11/2039 | | U.S. 10,786,438 | KB301 | Composition & Methods | 4/26/2039 | | U.S. 10,829,529 | KB407 | Methods of Use | 2/07/2040 | Government Regulation and Product Approval Products are subject to extensive regulation by the FDA and global bodies, with several candidates receiving designations to expedite development - Gene therapy products are regulated by the FDA's Center for Biologics Evaluation and Research (CBER) and require an Investigational New Drug (IND) application before human clinical trials can begin[91][92] - The company has received Orphan Drug Designation for B-VEC, KB105, and KB407, providing benefits like market exclusivity for seven years in the U.S. upon approval[111][112] - B-VEC has been granted Fast Track, Regenerative Medicine Advanced Therapy (RMAT), and PRIME designations, all designed to expedite development and review[110][114][115] Human Capital As of February 2023, the company employed 210 full-time staff across R&D, manufacturing, and commercial preparation roles - As of February 20, 2023, the company had 210 full-time employees[133] Risk Factors The company faces risks related to its history of net losses, dependence on B-VEC's success, regulatory hurdles, and manufacturing challenges Risks Related to Financial Position and Capital Needs The company has a history of net losses, an accumulated deficit of $280.8 million, and may require additional funding for future operations - The company has incurred net losses since inception and had an accumulated deficit of $280.8 million as of December 31, 2022[137] - Future profitability depends on successfully commercializing product candidates, which involves completing clinical trials, obtaining regulatory approval, and achieving market acceptance[138] - The company may need to raise substantial additional funding, and failure to do so could force delays, limitations, or termination of product development efforts[141] Risks Related to Business Operations Near-term prospects depend heavily on B-VEC's approval and commercialization, facing regulatory uncertainty, competition, and market acceptance hurdles - The company's future growth is substantially dependent on the commercial success of its lead product candidate, B-VEC, for which the PDUFA target date is May 19, 2023[147] - B-VEC is based on a novel technology, making it difficult to predict the time and cost of obtaining regulatory approval[158][155] - The company faces significant competition from companies with greater financial and technical resources, who may achieve regulatory approval first or develop more effective therapies[186] - Commercial success depends on market acceptance by physicians, patients, and third-party payors, as well as obtaining adequate insurance coverage and reimbursement[206][211] Risks Related to Manufacturing Manufacturing faces risks from potential regulatory delays for facilities, process validation challenges, and supply chain disruptions - Before commercial manufacturing can begin, the company's facilities must pass a pre-approval inspection by the FDA and obtain authorization from EU authorities[193] - The manufacturing process for the product candidates is complex and novel; problems could result in product defects, recalls, or insufficient inventory[194] - The company is subject to risks of contamination in the manufacturing process and shortages of raw materials, which could delay clinical development[197][198] Risks Related to Intellectual Property Success hinges on obtaining and defending robust patent protection, with risks of failed applications, infringement lawsuits, and legal changes - The company's ability to successfully commercialize its products is highly dependent on obtaining and maintaining broad patent protection[260] - The company may face legal proceedings from third parties alleging infringement of their intellectual property rights, which could be costly and have an adverse effect on the business[265] - Changes in U.S. patent law and court decisions could diminish the value of patents and impair the company's ability to protect its products[272][273] Risks Related to Common Stock Ownership Stock ownership risks include significant insider voting influence, price volatility, potential dilution, and no anticipated dividend payments - As of December 31, 2022, the CEO and the President of R&D beneficially owned approximately 15% of the company's capital stock, giving them substantial influence[277] - The company's common stock price is volatile and subject to fluctuation based on clinical, regulatory, and market developments[282] - The company has never paid cash dividends and does not intend to in the foreseeable future, making capital appreciation the only potential source of gain[287] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[290] Properties The company leases office and lab space in Pittsburgh and is completing its second owned manufacturing facility, ASTRA - The company leases approximately 54,000 sq. ft. of lab and office space in Pittsburgh, PA[291] - The second commercial facility, ASTRA, was acquired in March 2021 and is expected to be completed and validated in 2023[293] Legal Proceedings This section references Note 6 of the financial statements regarding the settlement of a trade secret litigation - Information regarding legal proceedings is incorporated by reference from Note 6 of the Notes to the Consolidated Financial Statements[294] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[295] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "KRYS," and the company has never paid dividends and has no plans to do so - Common stock is listed on the Nasdaq Capital Market under the symbol "KRYS"[298] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future[300] Management's Discussion and Analysis of Financial Condition and Results of Operations The net loss increased to $140.0 million in 2022 due to higher operating expenses, with sufficient cash to fund operations for at least 12 months Results of Operations The 2022 net loss grew to $140.0 million from $69.6 million in 2021, driven by a litigation settlement and increased G&A and R&D expenses Consolidated Statements of Operations (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Research and development | $42,461 | $27,884 | $17,936 | | General and administrative | $77,735 | $40,391 | $15,063 | | Litigation settlement | $25,000 | $— | $— | | Total operating expenses | $145,196 | $68,275 | $32,999 | | Loss from operations | $(145,196) | $(68,275) | $(32,999) | | Interest and other income, net | $5,221 | $(1,295) | $832 | | Net loss | $(139,975) | $(69,570) | $(32,167) | - Research and development expenses increased by $14.6 million in 2022, primarily due to an $8.9 million increase in payroll-related expenses[337] - General and administrative expenses increased by $37.3 million in 2022, driven by a $28.8 million increase in payroll and a $5.7 million increase in commercial preparedness expenses[339] - A one-time litigation settlement expense of $25.0 million was incurred in 2022 related to the PeriphaGen case[342] Liquidity and Capital Resources The company held $379.2 million in cash and investments at year-end 2022, which is deemed sufficient for at least the next 12 months - The company's cash, cash equivalents, and short-term investments totaled approximately $379.2 million as of December 31, 2022[345] - Management believes current cash reserves are sufficient to fund operations for at least 12 months from the filing date of the Form 10-K[345] - Future funding requirements are dependent on numerous factors, including the costs of clinical trials, manufacturing, and commercialization activities[350] Cash Flows Net cash used in operations was $100.6 million in 2022, with significant cash also used for investments and facility construction Summary of Cash Flows (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(100,569) | $(47,938) | $(26,083) | | Net cash used in investing activities | $(114,083) | $(226,770) | $(11,181) | | Net cash provided by financing activities | $35,347 | $347,685 | $118,019 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate changes on its $379.2 million investment portfolio, with minimal foreign exchange risk - The company's primary market risk is interest rate risk on its $379.2 million portfolio of cash, cash equivalents, and short-term investments[368] - The company does not believe its results would be materially affected by an immediate 10% change in interest rates or foreign currency exchange rates[368][369] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and related notes for the fiscal year ended December 31, 2022 Consolidated Balance Sheets Total assets were $558.5 million as of December 31, 2022, with total stockholders' equity at $522.2 million Key Balance Sheet Data (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $161,900 | $341,246 | | Total current assets | $383,779 | $442,267 | | Total assets | $558,450 | $626,295 | | Total liabilities | $36,219 | $32,719 | | Total stockholders' equity | $522,231 | $593,576 | Consolidated Statements of Operations and Comprehensive Loss The company reported a net loss of $140.0 million, or ($5.49) per share, for the fiscal year 2022 Net Loss and EPS | | 2022 | 2021 | | :--- | :--- | :--- | | Net loss (in thousands) | $(139,975) | $(69,570) | | Net loss per share (basic and diluted) | $(5.49) | $(3.13) | Consolidated Statements of Cash Flows Net cash used in operations was $100.6 million, contributing to a $179.3 million net decrease in cash and cash equivalents during 2022 - Net cash used in operating activities was $100.6 million for the year ended December 31, 2022[398] - Cash and cash equivalents decreased by $179.3 million during 2022, ending the year at $161.9 million[398] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure In May 2022, the company dismissed Mayer Hoffman McCann P.C. and engaged KPMG LLP as its new independent accounting firm - Effective May 24, 2022, the company dismissed Mayer Hoffman McCann P.C. and engaged KPMG LLP as its new independent registered public accounting firm[498] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[499] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, and this assessment was audited by KPMG LLP[501] Other Information There is no other information to report under this item - None[515] PART III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference to the 2023 Definitive Proxy Statement[517] Executive Compensation Required information is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference to the 2023 Definitive Proxy Statement[518] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference to the 2023 Definitive Proxy Statement[519] Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference to the 2023 Definitive Proxy Statement[520] Principal Accounting Fees and Services Required information is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference to the 2023 Definitive Proxy Statement[521] PART IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This section contains a list of all exhibits filed with the report, including corporate governance documents, material contracts, and certifications[524][525] Form 10-K Summary The company has elected not to include a Form 10-K summary - The Company has elected to not include a summary[528]