Krystal Biotech - Earnings Call - Q4 2024

Executive Summary

• Q4 delivered strong top-line and profitability: revenue rose 116% YoY to $91.1M with 95% gross margin and diluted EPS of $1.52; sequential revenue growth persisted for the sixth straight quarter, supported by high patient persistence and broad U.S. access for VYJUVEK.
• Global expansion is at the doorstep: management expected a CHMP opinion in 1Q25 on the call and subsequently received a positive CHMP opinion on Feb 28; first EU launch targeted for mid‑2025, with Japan decision expected 2H25—key stock catalysts into 2025.
• 2025 non‑GAAP OpEx guidance (R&D+SG&A) set at $150–$175M, reflecting ex‑U.S. launch investment and pipeline advancement; cash and investments ended Q4 at $749.6M, providing ample flexibility (buyback discussed in Q&A).
• Pipeline momentum continued in Q4: KB408 AATD data showed lung gene delivery and functional AAT at therapeutic levels; KB707 inhaled monotherapy produced early clinical activity in advanced NSCLC; KB407 CF Phase 1 moving into molecular readout mid‑2025—broadening optionality beyond dermatology.

What Went Well and What Went Wrong

• What Went Well

  • Commercial execution: Q4 VYJUVEK revenue climbed to $91.1M, gross margin reached 95%, and diluted EPS was $1.52, marking the fourth consecutive quarter of sequential earnings growth.
  • Access and persistence: >510 reimbursement approvals as of February with ~97% payer lives covered and 85% weekly‑on‑drug compliance; 97% of doses administered at home, underscoring convenience and patient preference.
  • Global/regulatory steps: CHMP positive opinion recommending EU approval (includes home dosing/patient or caregiver administration), positioning Germany launch for mid‑2025; Japan NDA review on track for 2H25 decision.

• What Went Wrong

  • Holiday/seasonality friction: management cited Q4 holiday‑related slowdowns affecting prescriber office activity and payer responses; January reverification season also created delays, though momentum resumed into early 2025.
  • Slight compliance moderation: weekly‑on‑drug compliance trended from 90% (Q2) to 87% (Q3) to 85% (Q4) as some patients pause therapy after wound closure before resuming for maintenance—favorable clinically but can temper dose cadence.
  • Competitive overhang: potential DEB competition as early as 2Q was raised in Q&A; management is engaging physicians/patients and remains confident in VYJUVEK’s value proposition and 2‑year penetration goals.

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Krystal Biotech Q4 2024 Earnings Call. At this time, all participants are on a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. 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. You may 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 fourth quarter and full year of 2024. The press release is available on our website at www.krystalbio.com. We also filed our earnings 8-K and 10-K 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, in 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)

Stéphane, thank you. Good morning and welcome to the call. 2024 was a strong year for Krystal. VYJUVEK's U.S. launch continued to progress well and tracks in the top tier of rare disease launches. The strength of the launch speaks to the robust efficacy and safety profile of VYJUVEK and our relentless focus on patient and physician experience. In addition, in 2024, we demonstrated that we can safely and repeatedly deliver genes to the lung with a nebulizer across our cystic fibrosis, alpha-1 antitrypsin, and NSCLC programs, clearly validating the lung as a second target tissue for our platform. There were also strong early signs of efficacy in our readouts, and we fully expect the data to mature later this year. Looking ahead at 2025, we have three primary things to accomplish. First, a successful VYJUVEK launch in the EU and Japan.

Second, to translate the early signs of efficacy into strong results across our CF and AATD programs. The third is to prepare for the anticipated launch of B-VEC to treat lesions in the eye of DEB patients. If we do these right, we believe the company will be in a much stronger place with respect to revenue, net income, and market cap going into 2026. For the year, net income per share was $3.12 per share, up sequentially from $0.40 per share in 2023. This is our sixth straight quarter of positive EPS and fourth straight quarter of sequential earnings growth. In addition to operational success, we have also put ourselves in a strong financial position for future growth. In aesthetics, Jeune Aesthetics reported a strong KB301 phase I data for the treatment of décolletage, and we plan to start a phase II study later this year.

We're in the process of building out a senior management team at Jeune Aesthetics, with more to come on this later in 2025. $341 million in net revenue within 18 months of launch and sequential revenue growth for six straight quarters is a tremendous achievement and a testament to the tireless contributions by our commercial and patient support teams on behalf of patients with DEB. Net VYJUVEK revenue for the Q came in at $91.1 million, bringing revenue for 2024 to $290.5 million. Gross margins and GTN were consistent with prior Qs. I'll now turn it over to Jen and Christine to share more details on the U.S. launch.

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

Thank you, Krish. Looking back on 2024 and now the early days of 2025, I'm incredibly proud of what our team has been able to accomplish. With steady progress over the entire year and a strong access landscape carrying over from 2024 into 2025, a growing number of DEB patients have or will soon benefit from fundamentally corrective VYJUVEK therapy. I'm also happy to share a major milestone achievement for our United States team as we recently crossed 500 reimbursement approvals nationwide. As of February, the number of patients with reimbursement approvals exceeds 510. This is in spite of losing a few weeks to holidays in the fourth quarter. With a good pickup of the pace of approvals to start 2025, as well as strong underlying demand trends, we remain confident in our ability to hit our ambitious pre-launch penetration targets.

Reimbursement approval splits were again largely in line with recent quarters and roughly evenly split between commercial and government plans. Approvals continue to come across the entire DEB population, including patients of all ages and with either dominant or recessive forms of the disease. With effectively full nationwide commercial and Medicaid coverage, the access landscape for VYJUVEK remains strong. Reauthorizations are getting processed smoothly. All have either been approved or are in process. In the community, we are still seeing a lag from prescription to approval dictated primarily by the availability of genetic test results and prescriber familiarity with access pathways. As always, our Krystal Connect team is working closely with home healthcare providers to meet patient needs and preferences. It is this infrastructure and patient-centric approach that has allowed us to navigate scheduling constraints and holidays to ensure patients can get on and stay on treatment.

Patient preference for at-home administration is again effectively unchanged, with 97% of the weekly treatments occurring in the home setting. Patient compliance to weekly treatments while on drug was 85% as of the end of the fourth quarter. In the third quarter, it was at 87%. As we progress our U.S. launch, we are thrilled to see that patients are achieving durable wound closure and getting to live fuller, more active lives. This, of course, is the whole point of VYJUVEK. As patients enjoy their first pauses in therapy and then settle into a more regular maintenance regimen, we do expect to see compliance to continue to trend towards the rates that we guided at launch. We are learning from real-world experience that the treatment journey for each patient is unique and dynamic.

A 21-year-old initiating therapy after decades of blistering and wounding may have a very different journey than a very active toddler. The time to wound closure and durability are dependent on a myriad of inputs, including nutritional status and iron levels, as well as the patient's age, their mobility and activity levels, and, of course, the location and the age of the specific wound treated. Because each patient and each wound area is unique, the length and frequency of treatment pauses are personalized to the patient. Critically, patients and their prescribers understand the importance of treatment persistence, and patients that have benefited from a pause due to full wound closure are now transitioning into an ongoing wound maintenance routine with VYJUVEK, helped by our Krystal Connect team.

As always, our team will be with them every step of the way to ensure they have steady access and can continue to enjoy the benefits of regular VYJUVEK treatment. I will now hand it off to Christine to discuss recent sales and marketing activities, which are keeping us on our top-tier launch trajectory. Christine.

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

Thank you, Jen. As we enter 2025, it is my pleasure to report that tactics that we developed in 2024 continue to pay dividends, driving significant growth in reimbursement approvals and strong patient demand across the country. Prescribing trends, claims analytics, and patient engagement all point to strong and sustained underlying demand. Education and patient activation remain core focus areas for our field team as we look to further penetrate into the identified patient pool. We partnered with multiple advocacy groups in EB in the fourth quarter to host live webinars led by prescribing physicians and patients who shared their experience with VYJUVEK and positive progress that they've experienced since starting on therapy in 2023. In addition, and in honor of EB Awareness Week, we hosted a national broadcast led by Dr. John Browning.

The virtual platform allowed us to reach healthcare professionals across the United States and showcase our clinical trial data, longer-term safety and efficacy data, and case studies of patients on VYJUVEK. This event also included a patient ambassador on VYJUVEK sharing their firsthand experience. This comprehensive showcase of trial data and real-world insights emphasized the clear and durable benefits of therapy and, critically, demonstrated the significant impact it can have for patients. We also equipped our sales team with new promotional material that emphasizes the long-term safety and efficacy of VYJUVEK. These materials not only reinforce the durable wound healing benefits that can be achieved only with a corrective therapy like VYJUVEK, they also underscore that all DEB patients can benefit from therapy, with actual patient images demonstrating healing in both the RDEB and DDEB subtypes across both the adult and pediatric spectrum.

Most importantly, these efforts have yielded tangible results. Not only did we achieve significant reimbursement approval growth over the past few months, we also continue to expand our prescriber base. Over 65% of prescribers in the fourth quarter were new writers. With each new prescriber, awareness of VYJUVEK grows, extending our reach into new communities. As the number of patients on therapy grows, I would also like to highlight that we have personalized and ongoing communication with patients and their caregivers to ensure they are supported throughout their journey. These communications are via phone call, email, or text, all based on the preferences of patients and their families. These touchpoints are another part of our commitment to patients, allowing us to move proactively to meet their needs with practical resources and EB community connections, while also gaining valuable insights to support new patient starts.

With strong underlying demand, growing awareness, and a broadening prescriber base, we are excited to continue growing the number of patients on VYJUVEK across the U.S. Now I will hand it back to Krish to share an overview of our global expansion plans for 2025.

Krish Krishnan (Chairman and CEO)

Thanks, Christine. We expect a positive CHMP opinion on our application later this month, and based on this timeline, we expect our first EU launch in Germany around mid-year, along with commencing an Accès Précoce AP2 program in France. The opportunity that exists in Europe is significant, with many already identified DEB patients in urgent need of fundamentally corrective therapy. In Germany and France alone, there are over 1,000 identified DEB patients. As in the U.S., our initial focus will be to penetrate the identified patient pool. We're also on track for a regulatory decision in Japan later this year, enabling launch into another market with hundreds of already identified DEB patients. In support of this filing and our launch, we have established our head office team in Tokyo and have started hiring our field force. It has always been our goal to treat DEB globally and comprehensively.

Thanks to the continued efforts of our development team, we're also working steadily towards treating lesions in the eye of DEB patients. Suma will now share more detail on both our ophthalmic B-VEC program and our broader pipeline.

Suma Krishnan (President of Research and Development)

Thank you, Krish. As Krish just noted, we are committed to treating DEB comprehensively and are very excited to be progressing our second product, KB803, towards a potential approval to address the ocular complications associated with DEB. In support of this goal, we initiated a natural history study last year to prospectively collect data on the frequency of corneal abrasions in DEB patients. This study is providing valuable information on the burden of disease and is helping us refine endpoint selection for our phase III study. The natural history study may also serve as a run-in to our registrational trial, adding more baseline data to contextualize our phase III results.

The high rate of enrollment in the study, with approximately 50 patients enrolled, underscores the unmet need and demand for a corrective therapy for the eye, and given the run-in options, should provide us an opportunity to rapidly enroll our phase III once initiated. We are finalizing the study design and statistical analysis plan with the agency and remain on track to initiate our registrational phase III, which we refer to as our IOLITE study, in the first half of the year. Assuming rapid enrollment, given the run-in option, we continue to expect top-line data before year-end. We look forward to sharing updates on IOLITE and our natural history study in the coming months. We also announced a series of updates on our inhaled programs last quarter that, in our view, validate the lung as a second target tissue for our HSV-1-based gene delivery platform.

Included in these updates was a first look at safety and gene delivery data for our KB408 program, which collectively demonstrated that we could safely deliver functional genetic cargo to the lung. KB408 is a re-dosable inhaled therapy for the treatment of AATD, a serious disease linked to the absence of functional AAT in the lung. KB408 is designed to deliver two copies of the SERPINA1 transgene, which encodes for normal human AAT protein, to enable local AAT production in the lung itself. KB408 is currently being evaluated in our first-in-human phase I SERPENTINE-1 study, an open-label single-dose escalation study in adult patients with AATD. SERPENTINE-1 is designed to include up to three dose escalation cohorts evaluating single administration of 10E9, 10E10, and 10E11 PFU of KB408 via inhalation.

In December of last year, we announced an interim clinical data update, including safety data for seven patients enrolled in the first two dose escalation cohorts of SERPENTINE-1, as well as molecular data from two patients in the second cohort that had consented to bronchoscopy. KB408 was found to be well tolerated at both tested dose levels, with only mild to moderate and transient adverse events observed. No serious adverse events or dose-limiting toxicities were reported. In addition, clear evidence of successful gene delivery was observed in both patients that underwent bronchoscopies, with the proportion of conducting airway epithelial cells positive for AAT increasing from 0% to 39% in one patient and from 3% to 35% in the other.

Secretion and functionality of encoded AAT was also demonstrated in the patient with available lavage samples, with AAT levels in epithelial lining fluid reaching 729 nanomolar and the proportion of free neutrophil elastase dropping from 97.2% to 40.2% after a single KB408 dose. Following this data update, we simultaneously expanded the second SERPENTINE-1 cohort and opened enrollment in the third for more comprehensive molecular assessment at both dose levels. We are working closely with the Alpha-1 Foundation and the Therapeutic Development Network on the SERPENTINE-1 study and expect to announce complete study results later this year. Our second rare respiratory disease program, KB407, is also progressing well. KB407 is a re-dosable inhaled therapy designed to deliver two copies of full-length CFTR transgene for the mutation-agnostic treatment of cystic fibrosis.

As summarized on this slide, we have built out a robust preclinical data package that demonstrates that KB407 efficiently transduces target airway epithelial cells, leading to the expression of full-length, properly localized, glycosylated, and functional CFTR. On the back of this data, a growing clinical data set, I'm pleased to report that we recently received full sanctioning of our KB407 phase I protocol, providing further validation of our program and opening up access to network trial sites for future clinical development efforts. We also recently announced an initial safety update on cystic fibrosis patients treated with KB407 in the first two dose escalation cohorts of CORAL-1, our ongoing first in-human phase I study. Both single and repeat inhaled administration of KB407 was well tolerated with only mild to moderate and transient adverse events.

Again, there were no reports of serious adverse events or dose-limiting toxicities, reinforcing the attractive safety profile of our vector when delivered via inhalation. With the first two cohorts successfully cleared and KB407 well tolerated, we have progressed to our third cohort and expect to report top-line results, including molecular data, around the middle of this year. These are just a few of the recent highlights from our clinical stage pipeline. We also recently reported early evidence of monotherapy activity with inhaled KB707 in heavily pretreated patients with advanced lung cancer, and earlier in the year, shared positive safety and efficacy results of our aesthetic candidate, KB301, which we are progressing into phase II. As we look forward, 2025 is shaping up to be another busy year. Some of the key development milestones for our team are laid out here.

In addition to the initiation and completion of our registrational study evaluating KB803 for ocular complications of DEB, we are also expecting to provide molecular data updates for our rare respiratory disease program, KB408 and KB407, as well as first-in-human data for our second aesthetic product candidate, KB304, which encodes both type III collagen and elastin. Our oncology programs will continue to progress, with potential of interim updates later in the year. As our recent data announcements have demonstrated, the potential HSV-1-based gene delivery goes well beyond the skin. We are looking forward to making rapid progress of our pipeline in 2025 and further validating the breadth of the opportunities in front of us targeting the skin, lung, and eye. With that, I would like to turn the call to Kate.

Kate Romano (CAO)

Thank you, Suma. In the fourth quarter, Krystal saw continued VYJUVEK revenue growth, with net product revenue of $91.1 million, representing an increase of approximately $49 million over the fourth quarter of 2023, which was the first full quarter that Krystal had revenue after our approval in May of 2023. Cost of goods sold for the quarter was $4.9 million, resulting in a gross margin of 95%. In the fourth quarter of 2023, cost of goods sold was $2.9 million, resulting in a 93% gross margin. Research and development expenses for the quarter were $13.5 million, inclusive of stock-based compensation of $2.3 million, compared to $11.4 million for the prior year's fourth quarter, inclusive of $2.4 million of stock-based compensation.

Higher research and development expenses in the fourth quarter of 2024 were mainly due to increased clinical trial-related costs, increased R&D manufacturing costs for our pipeline candidates, and increased license and regulatory fees. Selling general and administrative expenses for the quarter were $31.3 million, inclusive of stock-based compensation of $11 million, compared to $24.8 million for the prior year's fourth quarter, which was inclusive of stock-based compensation of $7.5 million. Higher selling general and administrative expenses in the fourth quarter of 2024 were primarily the result of increased personnel-related costs, increased professional service fees, and increased VYJUVEK sales and marketing costs as compared to the prior year's fourth quarter. Net income for the quarter was $45.5 million, which represented $1.58 per basic and $1.52 per diluted share. I'd also like to provide some perspective on our forecast for operating expenses in 2025.

We expect to incur between $150 and $175 million in combined non-GAAP R&D and SG&A costs this year. This projection excludes stock-based compensation. This expected increase in operating expenses compared to 2024 is driven primarily by increased SG&A costs for our planned commercial launches outside of the United States and increased R&D costs from our continued clinical and regulatory costs associated with our expanded pipeline programs. In closing, we ended the fourth quarter with $344.9 million in cash on hand and $749.6 million in total cash plus short-term and long-term investments, noting quarterly growth in our overall cash and investments position, with an increase over our third quarter of 2024 cash and investments balanced by about $55 million, and now I will turn the call back over to Krish.

Krish Krishnan (Chairman and CEO)

Thanks, Kate. As you heard from Christine and Jen, patients are achieving profound benefits with VYJUVEK and getting to live fuller, more active lives. We're steadily expanding our prescriber base and further penetration into the community setting. With one full calendar year of launch in the U.S. behind us and increasing presence in key European markets and Japan, our conviction in the global peak sales estimate of over $1 billion for VYJUVEK has only strengthened. As we look forward, I'd like to share a few key lessons we have learned since launch so we're aligned on how we get to realize the opportunity in front of us. The first lesson has to do with timing, from initial patient interest to starting treatment. As Jen mentioned earlier, patients and prescribers in the community often need more support to navigate the path to success.

Our turnaround time on average is still between 45 and 60 days with respect to these patients. The second lesson is a realization that we never really get a full quarter when we are talking about VYJUVEK. VYJUVEK is a weekly therapy administered at home by a HCP, and life gets in the way for these patients in each quarter. In the first quarter, many families will be changing insurance. In the second, we have to work through summer holidays. In the third, Labor Day and back to school for families, and in the fourth, we navigate around major U.S. holidays. In spite of that, I'm pleased and proud to report sequential net VYJUVEK revenue growth and continue to have strong conviction in our global VYJUVEK peak sales estimates.

The third lesson has to do with high compliance, which has been well above what we estimated at the time of launch. That said, we are entering a phase where some patients are now able to take initial pauses, enjoy the benefits of durable wound closure, and come back on drug when there is a wound disruption. This is a fantastic outcome for patients and their families. Our Krystal Connect team remains in close contact with all of our patients, and when new wounds emerge, reinitiation of treatment is seamless. Our relationship with our patients is for the long term, and we want them to feel the freedom of being able to live their lives as they choose, independently, actively, with the confidence of knowing that they can now control their wounds with VYJUVEK. Finally, we've done a terrific job of accruing for the price cap of VYJUVEK.

We've had no volatility in net revenues in 2024, and we do not expect to have any going forward. Finally, in closing, as you can see from the slide, we have several important clinical and regulatory milestones in 2025 to demonstrate the full breadth of our platform, and we're excited for 2025 with what we can deliver to patients and shareholders. I'd like to thank my Krystal colleagues for their dedication and perseverance that underscore our excitement in the long-term outlook for Krystal and the patients we aim to serve. Thanks for listening, and I'd like to open the call for Q&A.

Operator (participant)

Certainly. At this time, we will be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time.

We ask that while posing your question, you please 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 continued progress. Just two from us. First on VYJUVEK, wondering if you saw any year-end stocking in 4Q, and maybe you could just remind us how accounting for patient annual cap fed into the 4Q results and sequentially into 1Q 2025 as this is reset.

Krish Krishnan (Chairman and CEO)

Thanks, Alec. Thanks for your question. Nothing substantially different in Q4 versus any other quarters. So there was no any change in stocking or inventory with respect to Q4 as compared to Q3 or Q2 or Q1. And in terms of price cap, I think I've gone through this many times. At the end of every quarter, we look back, starting at the beginning of 2024, see how we're going to how patients are doing. We revisit that calculation at the end of Q2, Q3, and Q4. So we actually believe, as I said in my speech, that we do a really good job of making sure there's no volatility in revenue. Of course, cap calculation is complicated because it is at a payer level and has a lot to do with the mix within each payer, the number of patients, and when they start during the year.

But we've done a pretty good job of maintaining, taking volatility out of the equation.

Alec Stranahan (VP of Equity Research)

Okay. That makes sense. And maybe one quick one on the CF study. I guess, how is enrollment going? Is cohort three maybe accruing faster or in line with cohorts one and two? And maybe walk us through how the CFF TDN sanctioning maybe helps with this. Thank you.

Krish Krishnan (Chairman and CEO)

No, it's definitely super helpful, but we just got started, so there's always a time lag when you just get started. It takes a few months to get a few patients on drug, but enrollment in cohort three has already begun, and I'll let Suma add some more color to the story.

Suma Krishnan (President of Research and Development)

Absolutely. I mean, obviously, getting TDN sanctioning was very important because all of these academic major sites that can do bronch and have expertise in CF and have these patients now are very excited. In fact, many of them reached out to us directly to participate. We have seven to eight sites active. We are in the process of doing all of the administrative stuff, such as contracts, budgets, as Krish mentioned. But we have two sites that are part of TDN that are up and running, and we have already enrolled patients for this cohort. So it's moving pretty well.

Alec Stranahan (VP of Equity Research)

Thank you.

Operator (participant)

As a reminder, please limit yourself to two questions. Your next question for today is from Ritu Baral with TD Cowen.

Ritu Baral (Managing Director and Healthcare Biotechnology Research Analyst)

Good morning, guys. Thanks for taking the question. I wanted to ask a little bit about what you guys are expecting from Europe in the second half of the year. Krish, I believe you mentioned that there are about 1,000 patients total between Germany and France that are identified. Can you give any additional breakdown of that 1,000 between the two geographies? Are they treated at centers of excellence like in the U.S.? And if so, is there a number between the two geographies? And then I have my second question, my follow-up question is on pricing. How right now are you thinking about the initial sort of German free price range and the French, at least, expanded access price? And how should we be thinking about modeling longer-term price in Europe?

Krish Krishnan (Chairman and CEO)

Thanks, Ritu. At a high level, both Germany and France are a bit more concentrated than the United States. That said, Germany is closer to the U.S., and France is much more concentrated among centers of excellence, and the spread of the 1,000 is about 600 in Germany. At a very high level, 400 in France. In terms of pricing, in Germany, for the first six months, we get to launch with the U.S. price as we put the dossier in place and start the negotiations. At the end of six months, depending on how we feel, how the negotiations are going, we start accruing for the next six months, and the expectation is in 12 months, we would get an actual German price and be steady-state from that point on. In France, we're under the AP2 program, and it kind of forces us to start accruing from day one.

So the expectation, I mean, so the AP2 program should start maybe slightly after the German launch, but not too far out. And in France, maybe in about 15-18 months from approval, we expect to get a price in France. And that's how they're laid out.

Ritu Baral (Managing Director and Healthcare Biotechnology Research Analyst)

Got it. Very quick follow-up. Should we be thinking about home dosing in Europe as well?

Krish Krishnan (Chairman and CEO)

Yes, you should, for sure.

Ritu Baral (Managing Director and Healthcare Biotechnology Research Analyst)

Okay. Thanks for taking all the questions.

Operator (participant)

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

Gavin Clark-Gartner (Managing Director of Biotechnology of Equity Research)

Good morning. Thanks for taking the questions. Just on the reimbursement approvals first, if I'm doing my math correctly, last quarter, about 50% of new patients coming on were dominant patients, and this quarter, that seems to be about up to 75% dominant patients. Is that math correct? Do you think this trend will continue, and how do you account for that in your compliance assumptions?

Krish Krishnan (Chairman and CEO)

Gavin, look, the percentage of dominant and recessive varies quarter by quarter. As we go into the community, I mean, your math is right that we did see more dominant in Q4 than we saw in Q3 as we go into the community. But although at a high level, people think about recessive being more severe than dominant, there are a lot of patients who are on the cusp. There are dominant patients who are just as severe as recessive and recessive patients who are just as mild as dominant. So I would not, I mean, in terms of compliance going forward, I do not expect the material change in the way I do not expect a big change based on the percentage of dominant in the study. But it is, yeah, it is true.

But that said, when we report Q1, our expectation is not that dominant will continue to go up. It could easily shift back to what it was in Q3 or Q2.

Gavin Clark-Gartner (Managing Director of Biotechnology of Equity Research)

Very helpful, and then just one bigger picture question. So you have about $750 million cash on the balance sheet. Consensus has you doing around $250 million cash flow this year, ballpark $300 million next year, depending on how exactly ex-US launch goes. But even if you did want to allocate a good chunk of capital to additional R&D, you still have a lot of financial flexibility. So how are you thinking about buybacks, capital allocation overall as you kind of progress to the next phase here? Thank you.

Krish Krishnan (Chairman and CEO)

Look, I mean, it's a valid point. It's definitely a discussion point within Krystal. We're just figuring out the timing of such a buyback and the extent that is meaningful and measurable. So definitely a valid question, Gavin. And we're thinking about it pretty seriously going forward.

Gavin Clark-Gartner (Managing Director of Biotechnology of Equity Research)

Got it. Thank you.

Operator (participant)

Your next question for today is from Sami Corwin with William Blair.

Sami Corwin (Research Analyst)

Hey, good morning. Thanks for taking my question. Congrats on the progress. I was wondering if you could provide a high-level update on the EU regulatory process. I think we initially expected to hear a decision from CHMP in late 2024. So I was curious if you had any insight into the reason behind the delay. And then my second question is, given you could face some DEB commercial competition as early as 2Q, just how you're kind of thinking about maintaining and expanding market share in the face of that competition? Thank you.

Suma Krishnan (President of Research and Development)

Yeah. I can address the first question. Obviously, the delay was because we were trying to get the best label. I mean, we have a very favorable label as the SmPC. So obviously, the home dosing and caregiver administrations, all of those nuances needed to be ironed out. So there were training materials that needed to be prepared to support that on the label. So that was the reason for the delay. And I think the two months helped us get all of those documentations and training materials in place to achieve that, to get a favorable label.

Krish Krishnan (Chairman and CEO)

[On DEB]. Competition. Look, at a high level, it's tough to beat the value proposition of VYJUVEK, both in terms of, and if you look at how 98% of our patients are opting for home dosing and not even going to the local physician office, we have learned that the profile of VYJUVEK is well aligned with the expectations of the patients. But that said, we are putting in, we are not ignoring that the market could potentially become more competitive later in the year. And our medical affairs team is having the right kind of conversations with the physicians. Our patient services team is having the right kind of conversation with patients. And we feel pretty good about our ability to hit the two-year target and the overall peak sales in spite of the competitive nature of the market.

Sami Corwin (Research Analyst)

Got it. Thank you.

Operator (participant)

Your next question for today is from Ry Forseth with Guggenheim.

Ry Forseth (Biotechnology Equity Research)

Hi, this is Ry from Debjit's team. For 407, how are you thinking about FEV1 in terms of the bar for advancing the program? And is that bar sort of consistent across genotypes?

Krish Krishnan (Chairman and CEO)

Look, we're just starting to dose our patient in the efficacy cohort. Realize that the long-term direction for Krystal is to target the null population, which is a complete unmet medical need. There have been comments made in press from other competing companies that in null patients, any kind of FEV1 improvement over 3%, 4%, 5%, all the way up to 10% is considered a very positive outcome for these patients. But please realize we are a redosing paradigm. So no matter where we start with these patients, we have the opportunity to build upon the FEV1 levels over time. And so we feel really good about our focus strategy on going after the null mutation. And then, as a secondary effort, maybe, as Suma mentioned in her speech, become mutation agnostic.

Suma Krishnan (President of Research and Development)

Yeah. I mean, there's null patients, and there's also a subset of population where they don't get correctors or these kind of therapies. They're not conducive to it, so it's both these populations that we are targeting. And obviously, as Krish mentioned, we are reducible, so we have that flexibility. We will look at improvements in FEV1. There's flexibility from a regulatory strategy for us to go, just like we did in the eye, to do a single-label, open-label study with some sort of natural history. I think from a regulatory perspective, if we have any improvements in, I mean, we show functionality, we show some expression, and we show even slight improvement in FEV1, we have a very favorable regulatory environment and a pathway to move this program very rapidly into the clinic and into an approval path, just like we did with the eye.

Ry Forseth (Biotechnology Equity Research)

Thanks for that.

Operator (participant)

Your next question for today is from Josh Schimmer with Cantor.

Josh Schimmer (Managing Director and Biotech Equity Research Analyst)

Great. Thanks for taking the questions. Two quick ones. First, can you help quantify the impact of the annual cap on VYJUVEK in 2024 and how you think that might impact in 2025 and whether you're planning any changes to that cap? And then second, the 10-K has some new language around VYJUVEK manufacturing process changes and some risks around that, at least theoretical. Have there been any changes to the VYJUVEK manufacturing process? And if so, can you explain what?

Kate Romano (CAO)

So for the cap, we have been seeing about 8% of commercial patients on the cap consistently from the beginning.

Suma Krishnan (President of Research and Development)

For the manufacturing process, we just scaled up, and so we have gone to the higher-level bioreactor level. We filed a PS, and we got approval for it. Again, we have a scale-up process that is approved by the FDA. The beauty about it is this process can be adaptable across our pipeline. If you see 407, I mean, the limitation is not going to be CMC anymore. We can scale up. We can make the material. The process is pretty much cut and paste across all of our pipeline products. CMC, we de-risk CMC for these other products that may need more commercial material. I think that was very positive for us getting that scale-up approved by the FDA.

Josh Schimmer (Managing Director and Biotech Equity Research Analyst)

Great. Thank you.

Operator (participant)

Your next question is from Yigal Nochomovitz with Citi.

Hi, this is Rena on for Yigal. Thanks for taking my question. I just wanted to ask, on AATD, could you give us a little bit more color on what we should expect to see from the expanded cohort 2 and cohort 3 data? What are more comprehensive molecular assessments that you're considering beyond AATD levels? And what therapeutic effect do you hope to see that you would consider clinically meaningful for these patients? And I have a follow-up.

Krish Krishnan (Chairman and CEO)

Yeah. So on cohort 2, pretty much not much of a change than what we reported previously. We're just adding more patients to confirm what we saw. We were pretty pleased with what we saw. And we just want to add one or two patients more to confirm both the levels in the lung, the increase in the levels in the systemic circulation, and to quantify in terms of at a molecular level what they are. So cohort 2. And cohort 3 is simply exactly cohort 2, but at a higher dose. So do not expect anything dramatically different between the two.

Suma Krishnan (President of Research and Development)

I mean, obviously, we are looking for dose response. I mean, we know cohort 2. We didn't even expect at the cohort dose level to see these levels of AAT in the lung. So we're very pleased to see that. I mean, obviously, it's a very safe, and we feel it's a dose that showed functional AAT expression at a pretty decent level. So we do want to see what we get at the third dose because, again, it's safe. So we want to see there's an increase, and what does that correlate to levels in the serum too? So it's lung and serum. If we see a good correlation and increase, then maybe that's the dose we will move forward for repeat dose administration and beyond.

Okay. Great. Thanks. And just as a quick follow-up, we understand that plasma AATD should be sort of a relevant benchmark if synthesis were to occur in the liver because of the need to transport into the circulatory system to get to the lung. But since you're already synthesizing in the lung to start with, shouldn't we maybe not put too much weight on plasma AATD since it's not?

That is correct.

As relevant to the therapeutic goals? I guess if you could give more color on that, how we should be thinking about that or things like that.

Yeah. I think what we're going to look is correlation of a dose response of how much level are we seeing in the lung and what levels are we seeing in the plasma. So we want to see that correlation. But increasing and going to the next dose, we want to see what that increases. So once we have that correlation, then we can go to the FDA and let them know that a biomarker approach, we can say, "Yes, we see this level of lung and the plasma levels to this level in the lung based on the kind of dose that we are giving these patients. This is the ratio." So I think that will help us to go into from a regulatory pathway to sit down with the agency and discuss a biomarker pathway.

We don't have to bronch these patients, but can use serum levels that is meaningful for a lung administration for this patient population.

Krish Krishnan (Chairman and CEO)

Yeah. I do want to repeat what she just said. We do not care. Fundamentally, you're right. We do not care about levels in the lung, levels in the systemic circulation. I apologize. We look for levels in the lung and maybe a correlation between the two so we could avoid potentially bronching for molecular approval.

Makes sense. Super helpful. Thanks so much.

Operator (participant)

Once again, if you would like to ask a question, please press star one. Your next question for today is from Andrea Newkirk with Goldman Sachs.

Andrea Newkirk (VP of Biotechnology Equity Research)

Good morning. Thanks for taking our question. For Jen and Christine, I'm just curious here, based off of what you're seeing right now in terms of the rate of reimbursement approvals, what is needed to re-accelerate patients coming onto drug in order to reach your 60% penetration goal within two years of launch?

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

Yeah. I can start that. I mean, I think we definitely, as I said in the speech, saw some slowdown over the holidays virtually with physician offices and payers sort of delaying and not answering the phone during those times. So we feel like we've increased our trajectory already. We have a healthy pipeline right now of potential patients. And we were right on path for that. So we already started seeing that come up. Obviously, the first few weeks of January, the same thing was occurring with re-verification season and payers being sort of distracted at that point. So there were delays happening there as well.

Andrea Newkirk (VP of Biotechnology Equity Research)

Okay. And Krish, just when you think about that billion-plus peak sales opportunity globally, just curious if you could provide a little bit more granularity on how the U.S. versus the E.U. opportunity breaks down across that billion-plus or even with Japan as well?

Krish Krishnan (Chairman and CEO)

Look, there are 3,000 patients in the U.S., 3,000 patients in Europe at a high level, and about 3,000 worldwide. The pricing in the U.S. versus the pricing in Europe accounts for the ratio. The expectation on pricing in Europe is anywhere at the high end at 60-70% discount, I mean, 60-70% off the U.S. price to maybe 50-60% of the U.S. price. But that said, if you look at our drug, it was a blinded phase III study. The efficacy results were very powerful. The convenience is amazing. It is a loud disease, right? Meaning very visible, loud disease, unmet medical need, some chances of getting squamous cell carcinoma in a certain percentage of these patients. So we have a compelling case to make in the dossier with respect to pricing in Europe. And so we feel good about going into the negotiations.

So to answer your question at a high level, the way you split the billion-plus across the nations is purely a function of the ratio of the pricing across these nations. And so if your assumption is 70% of the U.S. price, then that's how they split because the prevalence is pretty identical across the three segments.

Operator (participant)

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.