Krystal Biotech - Q2 2024

Transcript

Operator (participant)

Thank you for standing by, and welcome to Krystal Biotech's Second Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speakers' presentations, there will be a Q&A session. During the Q&A session, there will be a limit of two questions per participant. As a reminder, today's conference is being recorded. I would now like to hand the conference over to your host, Stéphane Paquette, Vice President of Corporate Development. Please begin.

Stéphane Paquette (VP of Corporate Development)

Good morning, and thank you all for joining today's call. Earlier today, we released our financial results for the second quarter of 2024. The press release is available on our website at www.krystalbio.com. We also filed our earnings 8-K and 10-Q with the SEC earlier today. Joining me today will be Krish Krishnan, Chairman and Chief Executive Officer; Suma Krishnan, President of Research and Development; Jennifer McDonough, Senior Vice President of Patient Access, Analytics and Operations; Christine Wilson, Senior Vice President and Head of U.S. Sales and Marketing; and Kate Romano, Chief Accounting Officer.

This conference call will, and our responses to questions may, contain forward-looking statements. You are cautioned not to rely on these forward-looking statements, which are based on current expectations using the information available as of the date of this call and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected. A description of these risks, uncertainties, and other factors can be found in our SEC filings. With that, I will turn the call over to Krish.

Krish Krishnan (Chairman And CEO)

Thank you, Stéphane. Thank you all for joining the call. Q2 2024 was a great quarter for us, during which we continued to make great progress, both with respect to VYJUVEK launch and on the clinical pipeline. More importantly, it was quiet. Quiet from external disruptions that we faced in 1Q of this year. Today's strong results reflect our commitment to improving the lives of patients suffering from DEB. The benefits that DEB patients are realizing on VYJUVEK, the first and only corrective therapy for this debilitating disease, serve as a powerful reminder of what we can achieve as an organization.

They also push us forward in our mission to treat DEB comprehensively and to develop new medicines for urgent unmet needs. As we will discuss in a moment, strong fundamentals continue to propel our U.S. launch. Patient demand remains high, and we are increasingly seeing positive impacts both in patient starts and in new patient identification. Access, as you are aware, is in a great place, and compliance remains strong. Net product revenue growth in the quarter was up over 55% compared to Q1 2024. We look forward to delivering further growth both in the U.S. and in overseas markets as we progress towards launches in Europe and Japan in 2025.

We're also on the verge of a wave of clinical data readouts. Later this quarter, we expect to announce the first of these clinical updates for our vision aesthetics program, KB301, which is being evaluated in two parallel phase I cohorts for the treatment of wrinkles in unmet aesthetic areas. Before year-end, we expect to issue interim clinical updates both for KB408; for the treatment of alpha-1 antitrypsin deficiency and intratumoral KB707 for the treatment of injection-accessible solid tumors. Additional clinical updates are expected in 2025 as enrollment continues across our expanding clinical pipeline.

We continue to invest in our manufacturing infrastructure and are presently working with the FDA on a scale-up of our current approved manufacturing process to increase both VYJUVEK yields and margins, with the potential for approval by end of the year. The scale-up process would increase the number of vials produced per manufacturing run by fourfold. As you can discern, this will further improve margins, require fewer packaging slots at our vendor, and ease any potential supply chain constraints to meet the growing demand from global markets.

We're also on track to start tech transfer of our commercial process to ASTRA later this year. Finally, I'm happy to report another profitable quarter for Krystal at $0.54 per share, up sequentially from $0.03 per share in the first quarter of 2024. In Q2, we accrued $12.5 million in litigation expenses that once again mitigated our EPS as it did in Q1. We presently anticipate one more final accrual of the litigation expense this year. With strong and growing capital reserves, climbing revenues, and two commercial-scale cGMP facilities, we're well positioned as ever to execute on our long-term growth plans, expand our global footprint, and bring to market a portfolio of highly differentiated genetic medicines.

Moving now to our results. Net VYJUVEK revenues for the quarter came in at $70.3 million, an increase of 55.3% compared to revenues from the first quarter of 2024. Note that this prior quarter had been affected by one-time disruptions. Looking back over our first four full quarters since first sale in August of 2023, total net VYJUVEK revenues now exceed $166 million, and we continue to keep pace with the top tier of rare disease launches. Gross margins were 91% for the quarter. We continue to expect margins to be above 90% in the coming quarters, gradually improving to over 95% within a few years. Gross-to-net adjustments in the first quarter were 18%.

We expect gross-to-net will remain in the high-teens, reflecting a roughly even split of DEB patients on commercial and government plans. As we disclosed last quarter, please note that the net VYJUVEK revenues reported today also include an accrual for patients on contracted commercial plans who are projected to potentially hit the cap of $900,000 gross per patient per calendar year in 2024. Our rapid revenue growth in the quarter was driven by strong launch fundamentals and the tireless contributions of our team at Krystal. I'll now hand it off to Jen and Christine, who will provide more color on our successes, helping patients get on VYJUVEK and stay on therapy. Jennifer?

Jennifer McDonough (SVP of Patient Access, Analytics and Operations)

Thank you, Krish. The number of dystrophic EB patients gaining access to VYJUVEK and benefiting from fundamentally corrective therapy grew significantly in the second quarter of 2024. I am pleased to say that commercial and Medicaid access remains strong nationwide. We now have received positive policies or decisions from roughly 97% of all covered lives. This is up from 96% in our last report, as we approach effectively full coverage across the country. But with positive policies in place at all major plans, we are progressing patients steadily to treatment, and as of July, we have secured over 400 patient reimbursement approvals.

As you can see on the slide, reimbursement approvals continue to be roughly evenly split across commercial and government plans. More importantly, we continue to see reimbursement approvals across the DEB patient population, including patients of both DEB subtypes and of all ages, in similar proportions as reported last quarter. I would like to point out that while reimbursement approvals are a good leading indicator of revenue, they do not immediately translate to revenue. As you know, it often takes 2-3 weeks after insurance authorization to schedule a first home visit by a nurse and sometimes further exacerbated over the summer, where usual routines are disrupted.

Conversion times held steady over the last quarter, and on average, it takes us 4-6 weeks to obtain insurance authorization and complete the first home treatment. Although the team continues to make process improvements, these were offset in the quarter by a high proportion of prescriptions coming from community prescribers less familiar with rare disease reimbursement; it required more active management by our team. Albeit taking a bit longer, thanks to the hands-on expertise and support of Krystal Connect, even in these cases, we are able to achieve successful access outcomes.

Finally, as we enter into our second year since approval, the volume of reauthorizations required each month continues to grow, and same as in our previous quarters, all reauthorizations to date have been approved or are, are in process. Moving to the patient experience and compliance. Patient preference for at-home administration remains effectively unchanged, with 96% of the weekly treatments again occurring in the patient's home. We are pleased to report that compliance to weekly application through the end of the second quarter remains high at 90%, even as patient base and average length of therapy continues to grow.

We believe that the high VYJUVEK compliance is driven not only by the profound impact of corrective therapy has on the patients' lives, but also the convenience of home administration facilitated by our team at Krystal Connect. As we progress in our launch, we remain unwavering in our focus on the patient experience and ensuring patients are able to access VYJUVEK promptly and conveniently to ensure maximal clinical benefit. I will now hand it off to Christine to discuss recent sales and marketing activities, driving awareness and new DEB patient starts on VYJUVEK. Christine?

Christine Wilson (SVP and Head of U.S. Sales and Marketing)

Thank you, Jen. I'm happy to share today that Krystal's integrated commercial strategy, organized around our three pillars of claim analytics, medical education, and patient activation, is driving significant growth of VYJUVEK in the U.S. Our claims monitoring infrastructure continues to flag new alerts, enabling targeted deployments of our field force. We're also making great progress raising DEB and VYJUVEK awareness among the medical community through our educational efforts, including recent publications and virtual speaker events.

And perhaps most importantly, we are connecting to patients and enabling patient-to-patient dialogue, amplifying early successes and activating patients that may have otherwise resigned themselves to their disease. Although our primary commercial focus remains on penetration of the 1,200 DEB patients identified at launch, and we continue to make rapid progress on this front, our commercial efforts are also organically expanding the DEB patient pool. This will take on greater emphasis as we progress in our launch and as we work to ensure all DEB patients, whether diagnosed today or not, ultimately have the chance to access VYJUVEK therapy.

I would also like to feature today a few recent highlights from our work to raise awareness and activate DEB patients across the U.S.. Earlier this quarter, a review article was published to serve as a practical guide for real-world use of VYJUVEK. The article, authored in collaboration with DEB key opinion leaders, is now available open access and provides to readers an overview of the DEB disease burden, VYJUVEK clinical trial outcomes, as well as physician, patient, and caregiver recommendations. Later this year, we expect to publish detailed results from the OLE study, providing additional information to prescribers and the DEB community on the extended use of VYJUVEK.

These publications and related educational materials provide the medical community with easy access to critical data on the many benefits of VYJUVEK therapy and best practices on its use. They also help enrich our medical teams' interactions with care providers, either during one-on-ones or in the increasing number of virtual and in-person events that we put on across the country. At the same time, we are making progress in facilitating patient-to-patient interactions, including holding our first patient webinar with EB Lifestyle this quarter. With testimonies from multiple VYJUVEK advocates, these virtual events allow us to disseminate their learnings and successes across the country at events such as the DEBRA Care Conference, recently held in July.

We will be supplementing our virtual efforts with multiple in-person events in the second half of the year and a meeting series covering four major metropolitan areas across the U.S.. Thanks to these initiatives and others, we made excellent progress in both raising the profile of DEB and communicating the value proposition of VYJUVEK to patients and their caregivers. It is gratifying to see this work translate into new patient starts and DEB diagnosis, and look forward to the path ahead. Now I will hand it off to Suma to share pipeline highlights.

Suma Krishnan (President of Research and Development)

Thank you, Christine. Our development team's strong momentum to start 2024 continued throughout this past quarter, as we made significant progress towards our goal of treating DEB comprehensively and globally, while also advancing a broad pipeline of urgently needed redosable genetic medicines. With respect to the global development of B-VEC, we remain on track for launches in both Europe and Japan by 2025. In Europe, EMA's review of our Marketing Authorization Application is progressing well, and in May, cGMP certification of our commercial manufacturing facility, Ancoris, was granted by the European authorities.

As we shared last quarter, based on recent discussions, we believe EMA, like the FDA, is also supportive of home dosing. We continue to expect a decision on our Marketing Authorization Application before the end of the year and a first launch in Germany in 2025. In Japan, we remain on track to file the Japanese New Drug Application on VYJUVEK in the second half of the year. Having previously received Orphan Drug designation by Japan's Pharmaceuticals and Medical Devices Agency, a designation which confers specific benefits for Orphan Drug development, including priority review of applications, we remain on a trajectory for both a decision by the Japanese authorities as well as launch in 2025.

Our application to the Japanese authorities will include the results of our open-label extension study in the Japanese patients that was completed earlier this year. Key details, including safety and efficacy observations from the Japanese open-label extension studies, are shown here. Overall, results closely mirrored those from our registrational phase three trial. The Japanese study was a multicenter, open-label extension study in Japanese patients with DEB. The primary endpoint was the same as in our registrational study: complete closure of a pre-specified primary wound at the six-month time point. Key inclusion criteria and dosing are shown on the slide.

Importantly, we aligned with the Japanese regulatory authorities on the study design, number of patients for the Japanese study, and the use of U.S. clinical data to fulfill requirement for the Japanese New Drug Application submission. In total, we enrolled five patients, with one dropping out due to scheduling challenges. All enrolled patients had recessive DEB and covered a wide age range. As shown on the right, all four patients that completed the study achieved complete wound closure at the six-month time point. In addition, B-VEC was well tolerated in the Japanese population, and both efficacy and safety profile was consistent with previous U.S. studies.

We view these results as supportive of our application to the Japanese regulators and look forward to filing later this year. Moving now to our broader pipeline. Here, as well as we have made rapid progress, putting us on track for three readouts before the end of the year. We expect to share the first of these readouts later this quarter, with interim top-line results for both Cohort 3 and 4 of our KB301 phase I study. Both cohorts are running concurrently to evaluate our aesthetic medicine candidate, KB301, in two potential target indications: improvement of lateral canthal lines at rest and improvement of dynamic wrinkles of the décolleté.

Following readouts from Cohort 3 and 4, we expect to select a single indication for phase II development. In the fourth quarter, we also expect to disclose interim data updates from both our KB408 and intratumoral KB707 programs. KB408 is our redosable inhaled therapy for alpha-1 antitrypsin deficiency, which is currently being evaluated in a phase I SERPENTINE-1 study. SERPENTINE-1 is open-label, single-dose escalation study in adult patients with AATD to allow assessment of safety, tolerability, alpha-1 antitrypsin levels, and key pharmacodynamic biomarkers.

We have completed Cohort 1 and are currently enrolling Cohort 2. With strong support from the alpha-1 research community, we remain on track for an interim data readout before the end of 2024. Intratumoral KB707 is an injectable formulation of our modified HSV-1 vector, designed to deliver genes encoding both human IL-12 and IL-2 to the tumor microenvironment and promote systemic immune-mediated tumor clearance. It is being evaluated in a phase I dose escalation and expansion study of OPAL-1. We have now completed all 3 dose escalation cohorts, and dose expansion is underway. We'll issue an interim data update before year-end.

I'm happy to share that intratumoral KB707 was recently granted a Rare Pediatric Disease Designation for the treatment of osteosarcoma. This is in addition to a Fast Track designation granted last year. We are also making progress in our phase I studies, evaluating inhaled KB407 for cystic fibrosis and inhaled KB707 for solid tumors of the lung. We have now completed Cohort 2 in our phase I CORAL-1 study, evaluating KB407, and completed the first dose level 1, KYANITE-1 study, evaluating inhaled KB707. We look forward to providing data updates on these programs as they advance.

Finally, we are moving ahead in our work towards developing an ophthalmic formulation of B-VEC for treatment of ocular complications in DEB patients. Earlier this year, we reached alignment with the FDA on single-arm, open-label study to enable approval of B-VEC eye drops for the treatment of lesions in the eye of DEB patients. In support of this development strategy, earlier this month, we initiated a natural history study to prospectively collect data on the frequency and severity of corneal abrasions in patients with DEB. This study will also serve as a run-in period for patients who may be eligible to participate in the registrational study.

We remain on track to start the study before the end of this year, with potential for top-line data read in 2025. The next 12 months have the potential to be transformational for Krystal as we read out on trials that showcase the breadth of our gene therapy platform. We look forward to sharing these updates as they come and progressing our pipeline of highly differentiated genetic medicines. With that, I would like to turn the call to Kate.

Kathryn Romano (EVP and Chief Accounting Officer)

Thank you, Suma. With our growing demand for VYJUVEK in the U.S., our net product revenue for the quarter was $70.3 million, which represents a 55% increase over the first quarter of 2024. As VYJUVEK was approved by the FDA in May of 2023, and our first sales occurred in August of 2023, there was no comparative period revenue. Cost of goods sold was $6 million for the quarter, or about 9% of net product revenue, resulting in a gross margin of 91%. Before our approval in May of 2023, costs associated with the manufacturing of VYJUVEK were expensed as R&D, and as previously mentioned, our first sales occurred in the third quarter of 2023.

Therefore, there was no comparative period cost of goods sold in the second quarter of 2023. R&D expenses for the quarter were $15.6 million, inclusive of stock-based compensation of $2.8 million, compared to $12.1 million for the prior year's second quarter, inclusive of $2.9 million of stock-based compensation. Higher R&D expenses in the second quarter of 2024 were due to increased R&D-related manufacturing and process optimization expenses for our product candidates, increased R&D depreciation expense, increased clinical development costs, as well as increased license and regulatory costs this quarter.

These increases were partially offset by capitalization of direct and indirect overhead costs to manufacture VYJUVEK being charged to inventory following FDA approval. Selling general and administrative expenses for the quarter were $27.6 million, inclusive of stock-based compensation of $10.4 million, compared to $25.9 million for the prior year's second quarter, inclusive of stock-based compensation of $8.5 million.

Higher selling general and administrative expenses in the second quarter of 2024 compared to the prior year's similar quarter, were primarily the result of increased stock-based compensation, increased commercial-related professional services fees, increased VYJUVEK selling expenses, and increased VYJUVEK patient access program costs. These increases were partially offset by a decrease in launch-related marketing costs incurred prior to our VYJUVEK launch in the second quarter of 2023.

This quarter, we again recorded litigation settlement expense of $12.5 million due to our anticipation of reaching the second milestone payment in the PeriphaGen settlement, which is triggered at $200 million in cumulative sales, payable following the filing of our Form 10-K, in which the $200 million milestone is achieved. The third and final milestone will be triggered by reaching $300 million in total cumulative revenue from sales of the company's products. Net income for the quarter was $15.6 million, which represented $0.54 per basic and $0.53 per diluted share.

Our non-GAAP operating expense guidance for 2024 remains unchanged. This guidance excludes the non-cash impact of stock-based compensation. Finally, we ended the second quarter with $345.8 million in cash on hand and $628.9 million in total cash, plus short-term and long-term investments, marking quarterly growth in our overall cash and investments position with an increase over our first quarter of 2024 cash and investments by about $7 million. Now I will turn the call back over to Krish.

Krish Krishnan (Chairman And CEO)

Thanks, Kate. With an annualized product revenue run rate already over $250 million and four quarters of positive EPS, we've been able to deliver significant value to our shareholders through the U.S. launch of VYJUVEK. And yet we see opportunities for significantly more value creation in the years ahead, both through the global expansion of VYJUVEK launch and the advancement of our clinical stage programs, each of which addresses a clear unmet need and showcases the breadth of our platform. With the benefit of commercial scale in-house GMP manufacturing infrastructure, we're uniquely positioned to rapidly execute against these goals and bring to market a portfolio of highly differentiated, redosable genetic medicines. Thanks for listening. I'd like to now open the call for Q&A.

Operator (participant)

Certainly. At this time, we will be conducting a Q&A session. If you have any questions or comments, please press star one on your phone at this time. As a reminder, during the Q&A session, there will be a limit of two questions per participant. We ask that you pick up your handset if listening on speakerphone for optimum sound quality. Please hold while we poll for questions. Your first question for today is from Alec Stranahan with Bank of America.

Alec Stranahan (VP of Equity Research)

Hey, guys. Thanks for taking our questions, and congrats on the strong quarter. Two questions from us. First, just on patient compliance, how do you expect this to trend in the second half? Do you think it's reasonable to expect this to reach some steady state as new patients go on therapy and older patients, you know, maybe see a benefit from therapy? And then, second question, any changes in the way you plan to approach the international markets, if VYJUVEK is approved, say, in the EU or Japan? Thanks.

Krish Krishnan (Chairman And CEO)

Hey, Alec. Thank you. Hey, on the second question, which is, quicker, no change in the approach we've had to date. We want to self-launch in EU or UK and Japan, and we're looking to do distributor agreements in countries outside of that and the ROW. So, really no change to the way we're looking at international markets. Hey, on the compliance trend, I will say I'll make a couple anecdotes. Look, we also track the OLE patients, who on average have been to date on drug for about 35 months or so, and we are seeing a minority of patients drop below max compliance.

And we define max compliance as north of 90%, because there's always a situation where someone misses a vial for personal issues, whatever. So we're starting to see, at this point in time, especially with the OLE patients. That said, the majority of them are still tracking to pretty high compliance at four vials, noting that most of the patients in the OLE were severe. And so from a patient severity perspective, we're starting to see some good trends with respect to compliance. On the mild to moderate, look, most of the dominant patients have been on drugs since the launch. And I'll turn it over to Jennifer to talk a little bit more about what she's seeing in compliance in a commercial setting.

Jennifer McDonough (SVP of Patient Access, Analytics and Operations)

Sure, sure. Thanks, Krish. So yeah, I think as we look out, our one-year anniversary is just around the corner. Our first dispense was in August, so we are able to start analyzing some of those cohorts that came on early. And we are really excited around, you know, their adherence to the weekly dosing. So from an overall weekly application, the in-home nursing, that seems to be working really well. Patients are able to schedule within their, within their normal schedules, whether, you know, it's the same day of the week, which really seems to do well.

For those folks that Krish mentioned, those open-label extension have been on a relatively long period of time, several years, they may, you know, pause treatment if, you know, for the most part, because they may have no open wounds, and then they write, they cycle back as life continues to happen for them. So overall, as we analyze those first cohorts, we see very, very high compliance in that one-year period, which is kind of that threshold that we're looking at. And again, we believe that weekly convenience of home application and the impact of VYJUVEK making on their daily lives is driving that high compliance percentage. So we're really happy with what we're seeing in real world.

Alec Stranahan (VP of Equity Research)

Thank you.

Operator (participant)

The next question is from Ritu Baral, from TD Cowen.

Ritu Baral (Managing Director and Senior Biotechnology Analyst)

Hi, guys. Good morning. Thanks for taking the question. I want to ask about the status of manufacturing, the manufacturing approvals for expanded capacity, and then my follow-up is on the European application. It sounds like you are seeking sort of FDA sign-off on expansion in the Ancoris plant. Will there be any sort of new inspection required, new assays? Are you taking, like, another floor in Ancoris, or will it be the same sort of square footage?

Krish Krishnan (Chairman And CEO)

I'll turn it over to Suma to...

Suma Krishnan (President of Research and Development)

So where we stand with Ancoris is, Ancoris has the capacity to fully meet the commercial demand for the U.S. and potentially in Europe. So as far as with the current scale, obviously we are, you know, going into the large scale production. We have filed the PAS for that filing, and we anticipate that should, I mean, we hope to get that approved, you know, by end of the year. So we're pretty excited about our scale up.

With regard to inspection of the Ancoris facility, again, as you know, we have been inspected by the FDA with very minimal 483 or any findings. Same with the EMA. Again, they were very pleased with the inspection. The inspection results went pretty well. I mean, obviously, you know, every two years we have routine inspections. I think we are prepared. We, I mean, we know the agency, we know all of the, you know, what they look for. I think we are well prepared. With regard to scale up, we may, we may not receive inspections. Again, we don't know. But if we do, we are absolutely prepared.

With regard to ASTRA, we have already transferred some of our key starting materials into ASTRA, and that's filed. That's. I mean, we are already talking with the agency of getting ASTRA approved for those key starting raw materials. So we anticipate transfer of our ASTRA process, which is the scale-up process, to ASTRA sometime this year. So I think we are in good shape with manufacturing. We feel very... Manufacturing is pretty, going pretty smoothly.

Ritu Baral (Managing Director and Senior Biotechnology Analyst)

Great. Then on the European applications, can you give us the status on, like, 120-day questions, or have you moved on to the 180-day questions? And basically, are the topics covered in those questions related to home dosing? Are they materially different than what the FDA asked during its review period? And any points of note there?

Suma Krishnan (President of Research and Development)

Yes. I mean, we have completed responding to all of the questions. We should be submitting it shortly. Pretty much the questions were very aligned and predictable. There were no surprises, Ritu, it was because, again, because we have the PRIME designation, we had many scientific meetings with the agency, with the EMA. I think there were no surprises. Obviously, you know, EMA is thorough because we have the rapporteur and co-rapporteur countries.

Again, the questions, we were—all of them were addressable. Yes, home dosing was in that list of questions, and we have obviously, you know, responded to some of their questions regarding home dosing. Home dosing is very much in the discussion point. If you look at our SmPC right now, home dosing is part of our SmPC. Again, I think with regards to all of the questions and our responses, we feel very comfortable because there's no surprises. Very similar trend from the FDA, and we are very prepared. We feel confident while responding to those questions in a timely manner.

Ritu Baral (Managing Director and Senior Biotechnology Analyst)

Understood. Just to clarify, these were the 180-day questions that you spoke of, or the 120?

Suma Krishnan (President of Research and Development)

I mean, the 120. That, that's the, I mean, review is done, and we should get the 180 shortly.

Ritu Baral (Managing Director and Senior Biotechnology Analyst)

Okay, got it. Thank you.

Operator (participant)

Your next question for today is from Andrea Tan with Goldman Sachs.

Andrea Tan (Biotechnology Equity Research)

Good morning. Thanks for taking our questions. I was just wondering if you could provide color on the proportion of VYJUVEK patients who are coming from centers of excellence, and to what extent are you seeing uptake amongst other patients who might have stepped away from these centers previously and thus require a little bit more work to bring back into the system? And then I have a follow-up.

Krish Krishnan (Chairman And CEO)

Sure. Thanks, Andrea. Jen?

Jennifer McDonough (SVP of Patient Access, Analytics and Operations)

Yeah, sure. So as we look at the analytics around measuring, you know, who's coming from a CoE versus community, we do know, you know, the majority of our patients are really seen in both areas, both sites of care. You know, we see a trend towards the community for sure. However, you know, the centers are strong. They continue to as they prescribe, as they see new patients or new patients are being diagnosed, we see them coming in earlier and earlier, which is a great trend. Second part of that question, sorry.

Krish Krishnan (Chairman And CEO)

It was basically about CoE and any overlap between CoE and community.

Jennifer McDonough (SVP of Patient Access, Analytics and Operations)

Yeah. So again, the community continues to be strong. I think in this past quarter, the majority are coming from community, which is exactly where our strategy is pointing our sales team. So overall, you know, just as expected, with strong utilization in both the centers and in the community settings.

Andrea Tan (Biotechnology Equity Research)

Great. And then my second question is actually for Suma. I was just hoping you might be able to frame expectations ahead of the AAT data later this year, specifically around how many patients we might be able to expect. Will it be from both Cohorts 1 and 2? And then what will you be looking for specifically to make a go, no-go decision on the program? Thanks again.

Suma Krishnan (President of Research and Development)

Yeah. So again, cohort two is pretty much fully enrolled. I mean, again, so we expect to go into Cohort 3 pretty shortly. I think Cohort 3 is going to be our important cohort because we're gonna go with the, the highest dose, and this is where we are going to have bronchoscopy and evaluate that. So obviously, we'll have some data with regard to, you know, expression of alpha-1 antitrypsin, both in the lung, in the lavage, and also we look at systemic levels if it's in the plasma. So again, we expect to enroll patients and get some molecular direction into, you know, bronchoscopy data in the patient.

Andrea Tan (Biotechnology Equity Research)

Got it. And to confirm, Cohort 3 data will be the key data set that we're expecting by year end?

Suma Krishnan (President of Research and Development)

Correct. That's what we're targeting. Yes.

Krish Krishnan (Chairman And CEO)

I will point out, Andrea, we view the releases from phase I data, like, it's tough to predict if all the data would be in on all the patients by the end of the year. But we definitely think that most of them would be in, so we're still calling it interim phase I/II update.

Andrea Tan (Biotechnology Equity Research)

Okay, thanks so much.

Operator (participant)

Your next question is from Tim Lugo with William Blair.

Speaker 14

Hi, this is John on for Tim. Thanks so much for taking our question. I was wondering if you could talk a little bit more about the number of new patients you've identified outside of the original 1,200 that were identified, and talk a little bit more about your current comfort level with the estimated total of around 3,000 patients in the U.S.?

Krish Krishnan (Chairman And CEO)

Okay, let me start. Look, we definitely are starting to see new patients being identified outside of the 1,200. It's basically analytics driven. And it, it's not as simple and direct as you can imagine because of the, because of the, the way that how some patients are treated, both in the CoE and in the community. It's tough to put an exact fine point on it. But our internal view on the matter is that we have expanded on the identified base by close to 10% at the moment.

Speaker 14

Okay. And in your current comfort level, around the estimated total around 3,000 patients?

Krish Krishnan (Chairman And CEO)

Oh, it's still the same.

Speaker 14

Okay. Thank you so much.

Operator (participant)

Your next question for today is from Yigal Nochomovitz with Citi.

Yigal Nochomovitz (Director of SMid Cap Biotech Equity Research)

Hi, Greetings team. I had a question on the ocular formulation. Regarding the natural history run-in, I'm just curious, what sort of eligibility criteria would you be using, in that run-in to determine who would qualify for the treatment phase of that study?

Suma Krishnan (President of Research and Development)

I mean, the qualification is, I mean, the inclusion criteria is the patient must have at least two episodes of, you know, blisters or incidences of blisters in the past six months. And I can tell you, I mean, it's the natural history study is going pretty well because there's a lot of patients with blister manifestation. I mean, more than I thought, because these patients do have, you know, constant blistering in their eyes. So two blisters, that's what the agency we have discussed with, and so that's a requirement.

Yigal Nochomovitz (Director of SMid Cap Biotech Equity Research)

Okay, thanks. And I recall there was one instance of a compassionate use case, in a 13-year-old boy with VYJUVEK, intraocular. Have there been other instances of compassionate use, or use off-label of VYJUVEK for ocular, complications with the commercial drug?

Suma Krishnan (President of Research and Development)

So right now, the boy that had the ocular, so it was in his left eye. Now, they have also been treated his right eye. So both his left and right eye has been treated with VYJUVEK for an extended period of time. So that's the only compassionate use. Obviously, we do get a lot of requests, but I think now since we are, you know, in the process of getting the clinical study going, and the natural history study has been rolled out, so we have a lot of patients enrolling in the natural history study. So we are hoping we'll be able to enroll the study pretty fast in a few months.

Krish Krishnan (Chairman And CEO)

Hey, Yigal, on your question on off-label use, look, the drug is mixed in the pharmacy;

Suma Krishnan (President of Research and Development)

Right.

Krish Krishnan (Chairman And CEO)

It's almost inconceivable, the way it's mixed and delivered to contemplate any, even remotely off-label use on the drug present.

Speaker 14

Okay, thank you.

Operator (participant)

Your next question for today is from Gavin Clark-Gartner with Evercore ISI.

Gavin Clark-Gartner (Managing Director and Biotechnology Equity Research Analyst)

Hey, guys. Thanks for taking the questions. I had one more granular one and one higher level question. First, just on the reimbursement approvals. So I believe you had around 420 start forms as of mid-February, and now around 400 reimbursement approvals. I'm just wondering, for some of those start forms that didn't come through as reimbursement approvals, what's the current status of them? And just overall, how many of the reimbursement approvals do you expect will ultimately make it to patients on drug at some point?

Krish Krishnan (Chairman And CEO)

Hey, so, can we not go into the term start forms? Because we're never gonna talk about start forms. And be excited that we've gotten beaten up on that term for, like, 6 months, for absolutely no reason. In terms of reimbursement approvals to net revenue, the most important thing to realize, that it's not immediate. It still takes 2-3 weeks to schedule openers, in some cases with the summer schedules, comorbidity in some cases. So there's always a timeline, and Jen can elaborate on exactly what it is we track. Now, look, reimbursement approvals, as I see it, is a great predictor of net revenue, but not an immediate predictor of net revenue.

So if you look at it that way, I think it's the closest indicator you can have to kind of estimating what net revenues could be, in the future. You know, we've always said, look, the start form, we don't call something a start form till it's adjudicated. You know, you can call it a script. And as we go into the community, especially, genetic testing rates are lower, even if they have been done many years ago, or they used to be cleared in the CoE, paperwork gets misplaced. So more in the community, you should assume that the majority of scripts we get don't convert to start forms till we get the genetic testing done. So that's important to note.

But outside of that, besides the lag in time, given the high compliance, there isn't anything magical about the way the launch is going. It's going really well. Patients who get on drug get compliant. We would like to see the patients get on drug sooner than they do, but life does get in the way, and we are super focused on patient experience, making sure we're not rushing them into something that they're not super comfortable with, given personal life and schedules, et cetera.

Gavin Clark-Gartner (Managing Director and Biotechnology Equity Research Analyst)

Yeah, that makes sense. And just one higher level question then. As you kind of transition to a more mature period of the launch, I'm just wondering what, what we should expect for go-forward metrics. So are you guys gonna keep reporting the reimbursement approvals and the compliance every quarter? Will you ever report patients on drug or maybe plan to give any guidance? Just wondering what we should expect for the go-forward metrics. Thanks, guys.

Krish Krishnan (Chairman And CEO)

Hey, first, I don't believe we're entering the mature phase of launch. The way we look at, we still believe we're in a high growth, in a, you know, I don't wanna call it high growth, we're in a growth phase. Look, when we get to the mature phase of launch, hopefully sometime next year, our present intentions, which can change, is simply to guide on revenue, because as more and more people- like, you know how Jen alluded this, start and stop, or I'll come back to it after summer, and I'm not that severe. Compliance will start to get, as you go into the community, go into dominant, compliance will get less clear over time.

We're still at very high numbers. Our expectation, if you remember, at the time of launch, was 4 vials a month for the first 18 months and going to 2 vials. So we were expecting compliance to drop to 50% in, like, 18 months post-launch. The trend doesn't look like it's going that way at the moment, but we reserve our judgment on where it's gonna end up. We're still, in many ways, in the early stages of launch. So A, we're in a growth period, early stages of launch, and if we ever get to the mature phase, we'll probably simply guide on net revenue at that time.

Operator (participant)

Your next question is from Dae Gon Ha with Stifel.

Dae Gon Ha (Director of Biotech Equity Research)

Great, good morning. Thanks for taking our questions. Maybe a question for Krish or Christine. Just in terms of looking at the commercial portion, you put the headwinds behind us since the first quarter. So I'm just kind of wondering, you know, is this kind of community type setting phase going to continue where we can anticipate a little bit more of a conversion period delay?

Or, you know, if you could maybe comment on sort of the physician and patient behavior transitions or evolution, if you will, since the August first commercial launch last year, that would be great. And then second question specifically for Suma. Just reverting back to the KB408 expectation. I mean, is the anticipation that you're gonna focus more on the lung bronchoscopy measurement of the AAT concentration? And if so, what's the bogey, or what's the level that you're kind of seeing as a potentially promising level? Thanks so much.

Krish Krishnan (Chairman And CEO)

To see; why, [audio distortion].

Christine Wilson (SVP and Head of U.S. Sales and Marketing)

Sure. Yeah, so as mentioned, our claims monitoring infrastructure continues to flag new alerts, which is what has supported our ability to not just focus on the CoEs, but also in the community-based setting. And as we look about that community-based setting, we are finding patients all across the United States, which is really exciting because it gives us an opportunity to introduce VYJUVEK to both the HCP and the patient. Our intention is to continue on both tracks, right? We continue to cultivate our CoEs. Our KOL advocacy continues to strengthen as time goes on.

But in addition, we are seeing that growth in the community setting. And as mentioned, the dynamics are a bit different, as you would imagine, in the community, right? Where patients may have been less engaged with the healthcare system as a whole, and therefore it takes a bit more time to get the genetic testing done, the clinical notes that are required for reimbursement, approval, et cetera. So we do anticipate that as our growth continues in both platforms, we will see a combination of timelines that are associated amongst both the CoE and the community setting for pull-through.

Krish Krishnan (Chairman And CEO)

Great, thanks. To Suma?

Suma Krishnan (President of Research and Development)

Sure. With regards to 408, obviously, I mean, you want expression in the lungs, right? I mean, that's what's speaking to our key KOLs. That's what we hear. I mean, again, nobody knows what kind of levels we need to see a correction or improvement. But again, you know, obviously the lung improvement and functions, we're gonna tell you as we start measuring them. With regards to AAT, the beauty of AAT is, it's a, it's a secreted protein, and it's, you know, we already know that from a vector, we see high expressions of the secreted protein.

So we anticipate when you go into the lungs and you nebulize it, it's going to infect any cells that's gonna see, and you're gonna see a lot of the protein that's being generated, at least based on our animal data and our in vitro data, we expect high expression. So when we look at the bronchoscopy, again, when we compare it to baseline, we would- that's where we're gonna compare what is the difference in the levels. And obviously, going forward, we're gonna start measuring improvements in lung function as part of the efficacy.

But again, I think with 408, the beauty of 408 is, I mean, there is no approved product for this therapy. So we from a regulatory strategy point for us, as we believe, we can go to the agency and go with the biomarker approach. That's if you are seeing expression levels in the lung and we can quantify them, the plan or the incentive for us to obviously sit down with the agency and see if there's a pathway for accelerated approval with this particular indication. So that could be an opportunity for us.

Stéphane Paquette (VP of Corporate Development)

Yeah, Dae Gon, This is Stéphane here, just adding on top of what Suma said. You know, clearly based on the mechanism here, it's the lung levels that are important. We're measuring systemically, but that's not what's gonna drive decision-making for us. The PD biomarkers will give us a sense of if we're in a clinically useful AAT range.

There's also, you know, in the literature and understanding, you know, levels in ELF, for example, relative systemic, maybe 5%-10% in that range. And so there are tools to benchmark what we would expect to be clinically useful AAT, which will then be bracketed by the information we get from baseline, both patients on and off augmentation, and those PD biomarkers as of having the effect that we would want in the context of the lung. So collectively, we think that will give us the information we need to make a decision on progressing into a phase II plus.

Krish Krishnan (Chairman And CEO)

Hey, Dae Gon, I do have a final comment. Please realize we're redosable gene therapy, right? And we make the argument for CF, how we chip away at the problem, and that unlike other gene therapies, which are, you know, primarily, for the most part, one and done, people look at first read out. Just always bear in mind as we report data, that we have the ability to redose into a more amenable situation than we started with.

Dae Gon Ha (Director of Biotech Equity Research)

On that point, Krish, I guess this Cohort 3 data won't necessarily give us what the redosable frequency may be, right?

Suma Krishnan (President of Research and Development)

I mean, yes, correct, because it's a single dose, but very quickly, we are going to go in maybe some of those same patients. We can enroll them into the extension study where we can start redosing them, because I think one week we will have a good understanding what levels we see, and based on that, we are going to, you know, roll over those patients and continue to, you know, collect that data.

Dae Gon Ha (Director of Biotech Equity Research)

That makes sense. Thank you very much.

Suma Krishnan (President of Research and Development)

Bronchoscopy is tricky, but we'll try. We'll see what we can gather from patients. But many of these patients are amenable. They are, you know, open to doing, allowing bronchoscopy because, you know, they seem to be okay with it. So we will find enough patients to collect that data with redosable; what, I mean, capture those levels.

Dae Gon Ha (Director of Biotech Equity Research)

Okay, great. Thanks so much.

Operator (participant)

Once again, if you would like to ask a question, please press star one on your phone at this time. Your next question is from Debjit Chattopadhyay with Guggenheim Securities.

Debjit Chattopadhyay (Managing Director)

Hey, good morning. Krish, could you clarify what you expect steady state, given the earlier comments on some of the OLE patients out to month 35? Are these patients now at two vials per month, and what are you assuming steady-state revenue per patient?

Krish Krishnan (Chairman And CEO)

So let me just clarify the comment. I don't know, I don't recall saying two, so it could be three or two or one, something less than four. But I'll let Jen comment on what exactly the share is specifically.

Jennifer McDonough (SVP of Patient Access, Analytics and Operations)

Yeah. So as we look at the cohort of patients, they do vary, and we've kind of separated into, you know, kind of two different cohorts. One that consistently is remaining on therapy at four months for that entire year, and then those folks that potentially are pausing and coming back. And that's the cohort that, as Krish said, it's a little premature to kinda understand where they're at. They do, you know, vary based on their length of therapy and the other comorbidities that they are dealing with, whether they're in the hospital, et cetera.

So we are continuing to trend. I think it is a little early to say where the final results will be based on severity, based on where the wounds are at, based on everything else that's going on in the patient's lives. But overall, again, the patients that are continuing weekly stay on weekly and then potentially a pause here and there as life happens for them. So we'll continue to track it, and I think steady state will eventually evolve, as patients continue on therapy.

Krish Krishnan (Chairman And CEO)

Yeah, and I think net revenue there, Debjit, I mean, it's sometime next year we'll have a much better idea what the number looks like. We're still less than—I mean, we're almost at 12 months into launch. We're still not at the 18 months yet. So anything we said would be a bit premature, but right now, compliance is good. We're tracking ahead of our expectations with respect to launch. So hopefully next year.

Debjit Chattopadhyay (Managing Director)

Awesome. So, couple of follow-ups here. Do you think you could get to over 700 patients on approved therapy by mid-2025, which would roughly be about 60% of the identified 1,200 patients?

Krish Krishnan (Chairman And CEO)

Look, our goal in the launch always has been to get to 60% market share in two years. Although, I will caveat a little bit. At the time when we said that, we were talking in terms of start forms and not in terms of patients on track. But, that said, our internal goal, Debjit, just to be very clear on the topic, is to work pretty hard to try and get to that number, two years from launch. Yes, that's the goal.

Debjit Chattopadhyay (Managing Director)

Got it. And the ophthalmic indication, is that a separate BLA, or a label expansion? And what should be the pricing assumption for this segment?

Suma Krishnan (President of Research and Development)

It's going to be a different BLA because, again, the volume is gonna be different, the safety outcome is gonna be different because it's the eye. So it is a separate BLA, but again, as we mentioned, we have agreement with the agency, so we have- what we're embarking on is a registrational trial, which we expect to complete next year. So it's going to be a new BLA.

Krish Krishnan (Chairman And CEO)

Yeah, and the pricing-

Debjit Chattopadhyay (Managing Director)

[audio distortion]

Krish Krishnan (Chairman And CEO)

Oh, sorry.

Debjit Chattopadhyay (Managing Director)

So I was just gonna say, if it's a separate BLA, should we also expect a pediatric review voucher along with that, if approved?

Suma Krishnan (President of Research and Development)

Yeah. I mean, as for the regulatory guidance for the same molecular entity, I mean, this is what happened to Bluebird, if you guys remember. I think they do not issue a second pediatric voucher. It depends on the molecular entity. So that's the guidance.

Debjit Chattopadhyay (Managing Director)

Thank you so much.

Operator (participant)

This now concludes the call. At this time, thank you to all participants for joining the Krystal Biotech Second Quarter 2024 Earnings Conference Call. You may now disconnect.