Krystal Biotech, Inc. (KRYS) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Jason Russell from the Morgan Stanley Health Care Investment Banking team. I'm joined on the phone this afternoon by Krish Krishnan, Chairman and CEO of Krystal Biotech. Before we jump into the discussion, I'll cover a quick disclaimer. Please note that this call is for Morgan Stanley clients and appropriate Morgan Stanley employees only. This call is not for members of the press. If you're a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So Krish, with that mouthful, welcome. Excited to have you join us today for the chat.

Thanks, Jason.

So maybe first, Krish, you have a very novel approach to gene therapy. I think our audience is likely very familiar with gene therapy naturally, given all the innovation in the space. But everyone is likely more familiar with AAV versus lenti as kind of the traditional methods. So to kick things off, do you mind spending a little bit of time about your unique approach at Krystal and specifically the HSV-1 delivery platform?

Sure. Look, HSV-1 is a DNA virus and has -- actually has many favorable properties, both as a delivery vector for therapeutic genes and as a backbone. The virus is highly infectious, as you know. And so it actually has huge transfection efficiencies, especially with skin cells. So it's an efficient vehicle for delivering not just genes but any kind of exogenous materials to the cells. A lot has been written about HSV-1. So in terms of genetic manipulation, while the actual physical thing of making the manipulations are difficult, it's quite well known, for the most part, what genes contribute to what attribute. And cytotoxicity, therefore, can -- is somewhat relatively easily abolished by deleting certain gene products, et cetera. It has a large genome size, so it can accommodate large amounts of foreign DNA, has a payload capacity of about 150 kb. So contemplating loading up 30 kilobytes is pretty easy without stressing the virus. It grows pretty nicely in tissue culture, although that's a manufacturing comment. And when we started, the virus has been studied in neuronal indications and it failed. But one thing that was observed in those studies was it tended to stay localized in the skin. And so the Krystal hypothesis was that this localization could be harnessed for dermatological indications, and that's how we kind of got started. A few other things about the vector quickly without getting into a long education on the vector, look, it's an episomal vector, which means it does not integrate into the DNA -- into the host DNA. And in skin cells, the cells turnover pretty fast. So the concept of one-and-done is kind of a very difficult conceivable concept in skin. The vector when we thought about it for the first time had no demonstrated risk of oncogenicity. And I say that because the vector -- the HSV-1 has been approved. The oncolytic, which means replication competent, HSV vector, IMLYGIC, T-VEC by Amgen has been approved from melanoma, and it's approved for repeat administration. And so there is enough knowledge about this vector from an ability to be redosed. And in skin because they turn over pretty fast, I think it was a very -- in retrospective at least, it was a very obvious choice for skin indications. Now and also from -- just I'll just leave with this one comment from a manufacturing ability, while the downstream for HSV-1 vector is not that different than some of the other vectors, the upstream process, which I can get into, if there was a manufacturing question, is a bit easier to scale the vector. Gene therapy manufacturing is difficult. So when I say easier, it's not a standout comment on its own, it's relatively a bit easier on the upstream side than what I've heard with respect to AAV and lenti vectors.

Very helpful, Krish. And you covered a number of my questions with regards to kind of the why HSV-1. Maybe just to round that out, I mean, are there any other companies operating in the field looking at using HSV-1 for derm-type applications?

Not to my knowledge, the only precedent that I'm aware of Amgen and IMLYGIC and I'm aware of another company that is trying to create a better version of the IMLYGIC drug. But with regard to HSV and skin, no. And some of the literature ironically actually teaches away from using HSV for skin, which is kind of interesting in retrospect.

Yes. Yes. Okay. Great. That's helpful. Maybe -- you touched on manufacturing, so let's go there. Obviously, critically important and very difficult in gene therapy. Your comments on HSV-1 being a bit easier or certainly well received. But I guess, given the nature of skin cells and they turnover, these therapies that you're developing are expected to be chronic, I would presume. And so maybe with that, manufacturing and scalability become really critical. So walk us through your efforts that you've done so far with your Ancoris facility up and running? And then if you could step us through the plans for ASTRA?

Yes. So we were -- we actually started building our GMP facility pretty early in the evaluation of the life cycle of the company. So we pretty much contemplated building our first facility after we got our initial preclinical data. So we have a facility built that is operational, that's up and running, that made the pivotal material for the lead product, which is KB103 or B-VEC, and also is anticipated to provide the commercial material upon launch. So that facility is called Ancoris. And one of the reasons for starting so early with GMP was we found there was not much contract manufacturing experience with respect to HSV, their contribution to our process was essentially a clean broom. And also with the number of gene therapy companies targeting these manufacturing organizations from a time line, cost and trade secret perspective, it wasn't too -- it was getting challenging in the early days. So we just decided to go build our own. So I'm happy to say that one is up and running and gave us a lot of experience on how to get the vector scaled up and how to get all the assays around it and how to have a repeatable process. With that knowledge, we've embarked on a second large manufacturing facility called ASTRA. It's about 150,000 square feet. We broke ground in January of this year and to date, the disruptions from COVID have been minimal, and we anticipate getting that commercial-ready in the first half of 2022. So while we intend to launch feedback from Ancoris, ASTRA is not too far behind and a, will serve as a backup; b, will provide us significantly more manufacturing capacity, especially as we contemplate from indications like the aesthetic indication and as we hopefully are able to move into CF, and while always being a great backup for KB103 as we try and commercial that on a worldwide basis.

That's great. Thank you for that color. I think maybe let's go straight into B-VEC, or formerly KB103, as your lead candidate. So I'm aware of the disease, dystrophic epidermolysis bullosa, DEB. It's obviously, a rare genetic disease. There are other gene therapy approaches being [indiscernible] for DEB. But before we get to that or to B-VEC, can you just spend a minute or 2 on the disease itself and help us understand the -- how devastating and the manifestation of the disease?

Yes. So as you mentioned, it's a genetic condition that causes the skin to be very fragile and blister easily. Blisters form in response to minor injury, friction, rubbing, scratching, and it's caused by mutation in this one gene called the COL7A1 gene. And this gene provides instructions for making the protein that is used to assemble type VII collagen. So type VII collagen, or COL7, plays an important role in strengthening and stabilizing the skin. It's the main component of the structures called anchoring fibrils, which anchor the top layer of the skin, the epidermis; to the bottom layer, the dermis. And so when type -- when collagen VII is abnormal or missing due to the missing gene or a mutation in the gene, just friction or any type of minor trauma, it can cause the 2 skin layers to separate. And so it's a very -- I mean, it's a very debilitating disease because the blistering affects the hands, the feet, the knees, the elbows and sometimes can lead to vision loss, disfigurement. But more importantly -- and not more importantly, but unfortunately, some of these wounds develop a form of cancer called squamous carcinoma, which leads to mortality at a pretty young age. So a, there is no treatment; b, the burden of the disease is high with a bunch of wounds that cause burning all the time all over. The entire family -- the burden on the family is extremely high. And unfortunately, it leads to mortality. So a really debilitating disease. And I've heard a comment that it's the worst disease you've never heard of in some kind of -- yes, it truly is at the top of -- in terms of burden.

Great. Maybe -- you touched on effectively what the construct is for B-VEC. So maybe let's just go to the data. So you released some data from the Phase I/II trial work that's been done in DEB. And so perhaps, if you could summarize those results to date and touch on the key efficacy findings that you've observed?

Yes. So the Phase I/II was a placebo-controlled study. And just before I get into summarizing it, all the details of the data that -- about the study and those that were presented at medical conferences can be found on our website. So if I miss something specific, the details are out there. Just to summarize what we found, we repeat-dosed many of the patients in the study. Maybe -- I would say maybe all the patients in the study. And one of the -- in terms of safety, which is what a Phase I/II is primarily designed to do, we were happy, there were no significant drug-related adverse events in the study. And when you say safety, not only do we look, obviously, for safety in terms of like inflammation, fever, chills, whatever, we are also asked to do viral shedding studies and blood draws to see where the vector -- what happens to the vector. And by and large, and from a safety side, the vector does its job of transfecting the cells, staying in the nucleus, [ getting ] eliminated when the cells turnover. And then when you redose, the same thing kind of repeats itself. So safety profile was relatively clean, has been summarized, no significant AEs. From an efficacy side, in my opinion, the results were remarkable in the extent that we obtained complete wound healing on the majority, if not all of the wounds. And some of the -- and there were 2 types of wounds. There was the recurring ones, which behaved -- which closed somewhere in between 2 to 3 weeks and tended to stay closed over a 90-day period. And there were 1 or 2 chronic wounds in the study, which -- chronic wounds, by definition, are those that have been open for many years in a patient and those are tough because they have lost that ability to epithelialized, which is why they stay open. And even in the chronic wound, we found that after repeat dosing while it took longer for them to close, they were not as quick as the recurring ones, they seemed to close pretty nicely and stay closed. And look, our application, as I've mentioned to you, the vector is encoded in a topical gel. And it's simply a matter of have -- I don't want to use the word rubbing. It sounds rough for EB patients. It's simply a matter of applying the gel on to the wound and bandaging it. And from a patient perspective, that was well received because they do apply some kind of palliative treatment anyway to the wound. And so a painless way of application was well received by the patients. So just to quickly -- and what our principal investigator, Dr. Peter Marinkovich from Stanford, at SID presented a retrospective statistical analysis because Phase I/II, you collect all the data, you don't know how the data is going to behave, and he did a retrospective stat analysis. And what we found because we had a placebo-controlled study, while the placebo-controlled wounds opened and closed with some frequency very predictably, the B-VEC wounds, once they closed, tended to stay closed. So from a wound closure perspective, we separated really nicely from placebo, especially as we looked at high percentage wound closures. And what I mean by that is as we went from 50% wound closure to 75% to 90% to complete, the higher the bar, the more the separation from placebo. So overall, we were pretty pleased with the results of the Phase I/II study. And in the interest of time, while I'm not going into every detail and what happened to the wounds, much of the data is on our website.