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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to                    
Commission file number: 001-38210
_____________________________________________________
Krystal Biotech, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________________

Delaware82-1080209
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2100 Wharton Street, Suite 701
Pittsburgh, Pennsylvania 15203
(Address of principal executive offices and zip code)
(412) 586-5830
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)
Name of each exchange on which registered
Common StockKRYS
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company    
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of April 29, 2024, there were 28,558,440 shares of the registrant’s common stock issued and outstanding.



Krystal Biotech, Inc.
TABLE OF CONTENTS
  Page No.
  
  
  
 
Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023
 
  
  
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (unaudited)
 
  
 
 
 
  
 
   
 
Item 1A.
 
 
 
 
 
 
   
 

2


PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

Krystal Biotech, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except par value)
March 31,
2024
December 31,
2023
Assets
Current assets
Cash and cash equivalents$359,006 $358,328 
Short-term investments179,253 173,850 
Accounts receivable, net
46,467 42,040 
Inventory
11,037 6,985 
Prepaid expenses and other current assets6,485 6,706 
Total current assets602,248 587,909 
Property and equipment, net160,011 161,202 
Long-term investments83,996 61,954 
Right-of-use assets6,845 7,027 
Other non-current assets196 263 
Total assets$853,296 $818,355 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$5,359 $4,132 
Current portion of lease liability1,430 1,474 
Accrued rebates
11,289 5,977 
Accrued expenses and other current liabilities29,511 21,511 
Total current liabilities47,589 33,094 
Lease liability6,465 6,620 
Total liabilities54,054 39,714 
Commitments and contingencies (see note 7)
Stockholders' equity
Common stock; $0.00001 par value; 80,000 shares authorized as of March 31, 2024 and December 31, 2023; 28,528 and 28,237 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively.
  
Additional paid-in capital1,068,436 1,047,830 
Accumulated other comprehensive (loss) gain
(299)638 
Accumulated deficit(268,895)(269,827)
Total stockholders’ equity
799,242 778,641 
Total liabilities and stockholders’ equity
$853,296 $818,355 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3


Krystal Biotech, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)

 Three Months Ended March 31,
(in thousands, except per share data)
20242023
Product revenue, net
$45,250 $ 
Expenses
Cost of goods sold2,419  
Research and development10,957 12,288 
Selling, general, and administrative26,058 24,035 
Litigation settlement12,500 12,500 
Total operating expenses51,934 48,823 
Loss from operations(6,684)(48,823)
Other income
Interest and other income, net7,616 3,526 
Net income (loss)
$932 $(45,297)
Unrealized (loss) gain on available-for-sale securities and other
(937)574 
Comprehensive loss
$(5)$(44,723)
Net income (loss) per common share:
Basic$0.03 $(1.76)
Diluted$0.03 $(1.76)
Weighted-average common shares outstanding:
Basic28,295 25,712 
Diluted29,291 25,712 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4


Krystal Biotech, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
 Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Stockholders’ Equity
(in thousands)
SharesAmount
Balances as of January 1, 202428,237 $ $1,047,830 $638 $(269,827)$778,641 
Issuance of common stock upon exercise of stock options, net
260 — 15,969 — — 15,969 
Vesting of restricted stock units, net of shares withheld for taxes
39 — (4,181)— — (4,181)
Shares of restricted stock awards surrendered for taxes
(8)— (1,205)— — (1,205)
Stock-based compensation
— — 10,023 — — 10,023 
Unrealized loss on investments and other(1)
— — — (937)— (937)
Net income
— — — — 932 932 
Balances as of March 31, 202428,528 $ $1,068,436 $(299)$(268,895)$799,242 
 Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Stockholders’ Equity
(in thousands)
SharesAmount
Balances as of January 1, 202325,764 $ $803,718 $(728)$(280,759)$522,231 
Issuance of common stock upon exercise of stock options, net
42 — 2,208 — — 2,208 
Shares of restricted stock awards surrendered for taxes
(10)— (749)— — (749)
Stock-based compensation
— — 10,599 — — 10,599 
Unrealized gain on investments and other(1)
— — — 574 — 574 
Net loss— — — — (45,297)(45,297)
Balances as of March 31, 202325,796 $ $815,776 $(154)$(326,056)$489,566 
(1)Includes foreign currency translation losses of $62 thousand and $35 thousand for the three months ended March 31, 2024 and 2023, respectively.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5


Krystal Biotech, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 Three Months Ended March 31,
(in thousands)
20242023
Operating Activities
Net income (loss)$932 $(45,297)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation
1,427 1,093 
Accretion on marketable securities
(802)(606)
Amortization of operating lease right-of-use assets
182 218 
Stock-based compensation expense, net
9,299 10,437 
Realized gain on investments
(1,213)(809)
Other, net(238)1 
Changes in operating assets and liabilities
Accounts receivable
(4,427) 
Inventory
(2,238) 
Prepaid expenses and other current assets(264)(126)
Other non-current assets52 (46)
Lease liability(199)(165)
Accounts payable727 107 
Accrued expenses and other current liabilities(5,162)(3,463)
Accrued rebates
5,312  
Accrued litigation settlement12,500 12,500 
Net cash provided by (used in) operating activities
15,888 (26,156)
Investing Activities
Purchases of property and equipment(1,260)(5,381)
Purchases of investments(88,335)(145,576)
Maturities of investments
63,615 154,520 
Net cash (used in) provided by investing activities
(25,980)3,563 
Financing Activities
Proceeds from exercise of stock options, net
15,969 2,223 
Taxes paid for employee tax withholding related to restricted stock units
(4,181) 
Taxes paid related to settlement of restricted stock awards
(1,205)(749)
Net cash provided by financing activities10,583 1,474 
Effect of exchange rate changes on cash and cash equivalents187 (36)
Net increase (decrease) in cash and cash equivalents678 (21,155)
Cash and cash equivalents at beginning of period358,328 161,900 
Cash and cash equivalents at end of period$359,006 $140,745 
Supplemental Disclosures of Non-Cash Investing Activities
Unpaid purchases of property and equipment included in accounts payable and accrued expenses$8,456 $11,865 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6


Krystal Biotech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.    Organization
Krystal Biotech, Inc. (the “Company,” or “we” or other similar pronouns) commenced operations in April 2016. In March 2017, the Company converted from a California limited liability company to a Delaware C-corporation, and changed its name from Krystal Biotech LLC to Krystal Biotech, Inc. In June 2018, the Company incorporated a wholly-owned subsidiary in Australia for the purpose of undertaking preclinical and clinical studies in Australia. In April 2019, the Company incorporated Jeune Aesthetics, Inc. (“Jeune Aesthetics”), in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical and clinical studies for aesthetic skin conditions. In January 2022, August 2022, December 2022, August 2023, and March 2024 the Company incorporated wholly-owned subsidiaries in Switzerland, Netherlands, France, Germany, and Japan, respectively, for the purpose of establishing initial operations in Europe and Japan for the commercialization of the Company’s product pipeline.
We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs. Using our patented gene therapy technology platform that is based on engineered herpes simplex virus-1 (“HSV-1”), we create vectors that efficiently deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the transgene to treat the disease. Our vectors are amenable to formulation for non-invasive or minimally invasive routes of administration at a healthcare professional’s office or in the patient’s home by a healthcare professional. Our innovative technology platform is supported by two in-house, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facilities.
Liquidity
As of March 31, 2024, the Company had an accumulated deficit of $268.9 million. Our transition to operating profitability is dependent upon the continued successful commercialization of VYJUVEK as well as successful development, approval, and commercialization of our other product candidates. Management intends to fund future operations through its on hand cash and cash equivalents, revenue generated from the sale of VYJUVEK, the sale of equity, and may also seek additional capital through arrangements with strategic partners, debt financings, or other sources. There can be no assurance that additional funding will be available on terms acceptable to the Company, if at all.
The Company is subject to risks common to companies in the biotechnology industry, including but not limited to the failure of product candidates in clinical and preclinical studies, the development of competing product candidates or other technological innovations by competitors, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to commercialize product candidates. The Company expects to incur significant costs to further its pipeline and to expand its commercialization capabilities in advance of the potential global regulatory approvals of VYJUVEK. The Company believes that its cash, cash equivalents and short-term investments of approximately $538.3 million as of March 31, 2024 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Quarterly Report on Form 10-Q.
2.    Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, all adjustments, which consist of all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods presented, are reflected in the interim condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“2023 10-K”), as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2024.
7


Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates in the period these variances become known. Estimates are used in the following areas, among others: variable consideration associated with revenue recognition, stock-based compensation expense, accrued expenses, the fair value of financial instruments and the valuation allowance included in the deferred income tax calculation.
Concentration of Credit Risk and Off-Balance Sheet Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short-term investments, long-term investments, and accounts receivable, net. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company is exposed to credit risk in the event of default by the financial institutions to the extent amounts recorded on the condensed consolidated balance sheets are in excess of insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company’s accounts receivable, net and marketable securities, which primarily consist of U.S. government agency securities and treasuries, corporate bonds and commercial paper, potentially subject the Company to concentrations of credit risk. As of March 31, 2024, the credit profile for the Company’s counterparty was deemed to be in good standing and, as such, an allowance for credit losses was not recorded. The Company had one customer for the three months ended March 31, 2024 and no product revenue for the three months ended March 31, 2023. The Company has no financial instruments with off-balance sheet risk of loss.
Summary of Significant Accounting Policies
See Note 2 to our consolidated financial statements included in our 2023 10-K. There were no material changes to the Company's significant accounting policies during the three months ended March 31, 2024.
Recent Accounting Pronouncements
There were no accounting pronouncements issued or adopted during the three months ended March 31, 2024 that are expected to have a material impact on the Company’s condensed consolidated financial statements.
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The purpose of this guidance is to enhance the transparency and usefulness of income tax disclosures and provide comprehensive income tax information, particularly in relation to rate reconciliation and income taxes paid in the U.S. and foreign jurisdictions. This new standard will be effective for fiscal years starting after December 15, 2024, with the option to apply it retrospectively. Early adoption is also allowed. Currently, the Company is assessing the potential impact of this guidance on its consolidated financial statement disclosures.
3.    Revenue Recognition
Following FDA approval on May 19, 2023, the Company began commercial marketing and sales of VYJUVEK throughout the United States and began recognizing revenue in the third quarter of 2023.
The following table summarizes changes in allowances and discounts for the three months ended March 31, 2024:
(in thousands)
Rebates
Prompt Pay
Other Accruals
Total
Balance as of December 31, 2023
$5,977 $858 $279 $7,114 
Provisions
5,746 1,565 211 7,522 
Payments/Credits
(434)(953)(75)(1,462)
Balance, as of March 31, 2024
$11,289 $1,470 $415 $13,174 
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Rebates and other accruals are included in accrued rebates and accrued expenses and other current liabilities, respectively, on the condensed consolidated balance sheets. Prompt pay is recorded as an allowance against accounts receivable, net on the condensed consolidated balance sheets. Provisions for rebates, prompt pay and other accruals are recorded as a reduction to product revenue on the condensed consolidated statements of operations and comprehensive loss.
4.    Net Income (Loss) Per Share Attributable to Common Stockholders
Basic net income (loss) per share attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents outstanding for the period. Common stock equivalents consist of common stock issuable upon (1) exercise of stock options and (2) vesting of restricted stock awards, restricted stock units and performance-based restricted stock units (collectively, “restricted stock”).
For the three months ended March 31, 2024 and 2023, respectively, there were (1) 154 thousand and 3.8 million common stock equivalents outstanding in the form of stock options and (2) 78 thousand and 291 thousand unvested restricted stock, that have each been excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive.
Three Months Ended March 31,
(in thousands, except per share data)
20242023
Numerator: 
Net income (loss)$932 $(45,297)
Denominator:
Weighted-average basic common shares
28,295 25,712 
Dilutive effect of stock options and unvested restricted stock996  
Weighted-average diluted common shares29,291 25,712 
Net income (loss) per common share—Basic
$0.03 $(1.76)
Net income (loss) per common share—Diluted
$0.03 $(1.76)
5.    Fair Value Instruments
The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of March 31, 2024 and December 31, 2023:
 March 31, 2024
(in thousands)
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
(Losses)
Aggregate Fair
Value
Cash and Cash
Equivalents
Short-term
Marketable
Securities(1)
Long-term
Marketable
Securities(2)
Level 1:       
Cash and cash equivalents$359,006 $— $— $359,006 $359,006 $— $— 
Subtotal359,006 — — 359,006 359,006 — — 
Level 2:
Commercial paper18,747  (7)18,740 — 18,740  
Corporate bonds115,918 132 (69)115,981 — 70,182 45,799 
U.S. government agency securities128,682 29 (183)128,528 — 90,331 38,197 
Subtotal263,347 161 (259)263,249 — 179,253 83,996 
Total$622,353 $161 $(259)$622,255 $359,006 $179,253 $83,996 
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 December 31, 2023
(in thousands)
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
(Losses)
Aggregate Fair
Value
Cash and Cash
Equivalents
Short-term
Marketable
Securities(1)
Long-term
Marketable
Securities(2)
Level 1:       
Cash and cash equivalents$358,328 $— $— $358,328 $358,328 $— $— 
Subtotal358,328 — — 358,328 358,328 — — 
Level 2:
Commercial paper17,124 5 (1)17,128 — 17,128  
Corporate bonds111,824 407 (27)112,204 — 70,996 41,208 
U.S. government agency securities106,079 423 (30)106,472 — 85,726 20,746 
Subtotal235,027 835 (58)235,804 — 173,850 61,954 
Total$593,355 $835 $(58)$594,132 $358,328 $173,850 $61,954 
(1)The Company’s short-term marketable securities mature in one year or less.
(2)The Company’s long-term marketable securities mature between one year and two years.
6.    Balance Sheet Components
Inventory
Inventory consisted of the following:
(in thousands)
March 31,
2024
December 31,
2023
Raw materials$4,489 $3,154 
Work-in-process6,387 3,204 
Finished goods161 627 
Inventory$11,037 $6,985 
Property and Equipment, Net
Property and equipment, net consisted of the following:
(in thousands)
March 31,
2024
December 31,
2023
Building and building improvements$111,232 $111,180 
Leasehold improvements25,363 25,068 
Manufacturing equipment25,281 24,905 
Construction in progress
6,905 7,291 
Laboratory equipment3,064 2,339 
Computer equipment and software1,647 1,614 
Furniture and fixtures1,640 1,632 
Total property and equipment175,132 174,029 
Accumulated depreciation(15,121)(12,827)
Property and equipment, net$160,011 $161,202 
Depreciation expense was $1.4 million and $1.1 million for the three months ended March 31, 2024 and 2023, respectively. Depreciation expense capitalized into inventory was $867 thousand and zero for the three months ended March 31, 2024 and 2023, respectively.
In March 2023, the Company received the permanent occupancy permit for its second commercial scale CGMP facility, ASTRA, which allowed the Company to begin utilizing certain portions of the building. As a result, and as qualification of assets occurred through 2023 and the first quarter of 2024, the majority of assets relating to ASTRA were reclassified from construction in progress to leasehold improvements, manufacturing equipment, buildings and building
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improvements, furniture and fixtures, or computer equipment and software as it was determined that assets were ready for their intended use. As certain pieces of equipment are not yet qualified, the Company will continue to hold the remaining assets within construction in progress until qualification has been completed and the assets are ready for their intended use. Estimated remaining payments related to ASTRA were $8.0 million as of March 31, 2024 and are recorded in accounts payable and accrued expenses and other current liabilities on the condensed consolidated balance sheets.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following as of March 31, 2024 and December 31, 2023:
(in thousands)
March 31,
2024
December 31,
2023
Accrued litigation settlement$12,500 $ 
Accrued construction-in-progress
4,998 5,182 
Accrued payroll and benefits3,433 8,778 
Accrued professional fees2,654 1,810 
Other current liabilities2,613 2,210 
Accrued taxes
2,431 2,283 
Accrued preclinical and clinical expenses882 1,248 
Total$29,511 $21,511 
7.    Commitments and Contingencies
Agreements with Contract Manufacturing Organizations and Contract Research Organizations
The Company enters into various agreements in the normal course of business with Contract Research Organizations (“CROs”), Contract Manufacturing Organizations (“CMOs”) and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. The agreements with CMOs primarily relate to the manufacturing of our sterile gel that is mixed with in-house produced vectors as part of the final drug product for VYJUVEK. Agreements with third parties may also include research and development consulting activities, clinical-trial agreements, storage, packaging, labeling, and/or testing of our pre-commercial and clinical-stage products. The Company is obligated to make milestone payments under certain of these contracts. The Company may also be responsible for the payment of a monthly service fee for project management services for the duration of any agreements. The estimated remaining commitments as of March 31, 2024 under these agreements is approximately $1.1 million. The Company has incurred research and development expenses under these agreements of $1.5 million for the three months ended March 31, 2024 and $2.0 million for the three months ended March 31, 2023.
Legal Proceedings
In May 2020, a complaint was filed against the Company in the United States District Court for the Western District of Pennsylvania by PeriphaGen, Inc. (“PeriphaGen”) alleging breach of contract and misappropriation of trade secrets. On April 27, 2022, the Company and PeriphaGen entered into a final settlement agreement, and the Company paid PeriphaGen an upfront payment of $25.0 million on April 28, 2022 for: (i) the release of all claims in the trade secret litigation with PeriphaGen; (ii) the acquisition of certain PeriphaGen assets, and (iii) the grant of a license by PeriphaGen for dermatological applications. In accordance with the settlement agreement, on June 15, 2023, the Company paid PeriphaGen an additional $12.5 million following the FDA’s approval of VYJUVEK. The settlement agreement requires the Company to pay three additional $12.5 million contingent milestone payments upon reaching $100.0 million in total cumulative sales, $200.0 million in total cumulative sales and $300.0 million in total cumulative sales. As defined in the settlement agreement, cumulative sales shall include all revenue from sales of the Company’s products by the Company and its affiliates and licensees, as reported by the Company in its annual Form 10-K filings. If all milestones are achieved, the total consideration for settling the dispute, acquiring certain assets, and granting of a license from PeriphaGen will be $75.0 million, of which $37.5 million has been paid.
The Company recorded litigation settlement expense of $12.5 million for each of the three months ended March 31, 2024 and 2023 on the condensed consolidated statements of operations and comprehensive loss in accordance with the settlement agreement. During the three months ended March 31, 2024, in accordance with ASC 450, Contingencies (“ASC 450”), the Company determined that reaching $100.0 million in total cumulative sales was probable, and recorded litigation settlement expense of $12.5 million relating to the milestone payment, which becomes payable following the filing of the Annual Report on Form 10-K that reports the $100.0 million in total cumulative sales. The Company recorded litigation
11


settlement expense of $12.5 million for the three months ended March 31, 2023, as it determined that FDA approval of B-VEC was probable. As of March 31, 2024, the Company has not recorded an accrual for the remaining two contingent milestone payments totaling $25.0 million.
8.    Leases
As of March 31, 2024, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows:
(in thousands)
Operating
Leases
2024 (remaining nine months)$1,157 
20251,277 
20261,277 
20271,300 
20281,325 
Thereafter9,438 
Future minimum operating lease payments15,774 
Less: Interest(7,879)
Present value of lease liability$7,895 
As of March 31, 2024 and December 31, 2023, the Company's weighted-average remaining lease term for operating leases was 12.2 years and 12.3 years, respectively, and the Company’s weighted-average discount rate for operating leases was 9.5% as of March 31, 2024 and December 31, 2023.
The components of the Company’s lease expense are as follows:

Three Months Ended March 31,
(in thousands)
20242023
Lease cost:
Operating lease expense$299 $463 
Variable lease expense40 59 
Total lease expense$339 $522 
9.    Capitalization
ATM Program
On December 31, 2020, the Company entered into a sales agreement with Cowen and Company, LLC (“Cowen”) with respect to an at-the-market equity offering program (“2020 ATM Program”), under which the Company issued and sold from time to time through Cowen, acting as agent and/or principal, shares of its common stock, par value $0.00001 per share (“Common Stock”), having an aggregate offering price up to $150.0 million (“Placement Shares”). The issuance and sale of the Placement Shares were made pursuant to the Company’s effective “shelf” registration statement on Form S-3 that was filed with the SEC on May 4, 2020 (“2020 Shelf Registration Statement”). During the three months ended March 31, 2023, no shares of Common Stock were issued pursuant to the 2020 ATM Program.
The Company’s 2020 Shelf Registration Statement expired on May 4, 2023, and the Company put in place a new at-the-market equity offering program under substantially the same terms as the 2020 ATM Program (“New ATM Program”). Accordingly, on May 8, 2023, the Company entered into a new sales agreement with Cowen to issue and sell shares of the Company’s Common Stock having an aggregate offering price of up to $150.0 million (“New Placement Shares”) from time to time, under which Cowen will act as the Company’s agent and/or principal. The New Placement Shares will be offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 filed with the SEC on April 6, 2023, and a prospectus supplement relating to the New Placement Shares that was filed with the SEC on May 8, 2023. During the three months ended March 31, 2024, no shares of Common Stock were issued pursuant to the New ATM Program, resulting in $150.0 million available for issuance under the New ATM Program.
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10.    Stock-Based Compensation
In 2017, the Company adopted the 2017 IPO Stock Plan (“Plan”), which governs the issuance of equity awards to employees, certain non-employee consultants, and directors. Initially, the Company reserved 900 thousand shares for issuance under the Plan with an initial sublimit for incentive stock options of 900 thousand shares. On an annual basis, the amount of shares available for issuance under the Plan increases by an amount equal to four percent of the total outstanding shares as of the last day of the preceding calendar year. The sublimit of incentive stock options is not subject to the increase. The Company has historically granted stock options and restricted stock awards (“RSAs”) to its employees. In February 2023, the Company began issuing restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs” and with RSUs commonly referred to collectively as “restricted stock units”) to certain employees.
Shares remaining available for grant under the Plan were 2.4 million as of March 31, 2024.
Stock Options
The following table summarizes the Company’s stock option activity for the three months ended March 31, 2024:
Stock Options Outstanding
Weighted-average Exercise Price
Weighted-average Remaining Contractual Life (in years)
Aggregate Intrinsic Value(1)
(in thousands)
Outstanding as of December 31, 2023
2,606,592 $66.39 7.9$150,405 
Granted126,742 $155.82 
Exercised(259,581)$61.52 
Cancelled or forfeited(245,659)$67.89 
Outstanding as of March 31, 2024
2,228,094 $71.88 7.7$236,279 
Exercisable as of March 31, 2024
854,224 $61.08 6.8$99,815 
(1)Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2023 and March 31, 2024, respectively, and the exercise price of outstanding in-the-money options.
The following table summarizes the Company’s stock option activity for the three months ended March 31, 2023:
Stock Options Outstanding
Weighted-average Exercise Price
Weighted-average Remaining Contractual Life (in years)
Aggregate Intrinsic Value(1)
(in thousands)
Outstanding as of December 31, 2022
3,582,181 $61.15 8.7$64,880 
Granted287,600 $81.83 
Exercised(42,021)$53.54 
Cancelled or forfeited(42,625)$65.59 
Outstanding as of March 31, 2023
3,785,135 $62.75 8.5$66,066 
Exercisable as of March 31, 2023
961,428 $55.08 7.6$24,033 
(1)Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2022 and March 31, 2023, respectively, and the exercise price of outstanding in-the-money options.
The total intrinsic value (the amount by which the fair market value exceeds the exercise price) of stock options exercised was $24.5 million and $1.1 million during the three months ended March 31, 2024 and 2023, respectively.
The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors was $106.92 and $56.86 during the three months ended March 31, 2024 and 2023, respectively.
There was $63.9 million of unrecognized stock-based compensation expense related to employees’, non-employees’, and directors’ options that is expected to be recognized over a weighted-average period of 2.6 years as of March 31, 2024.
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Restricted Stock Awards
The following table summarizes the Company’s RSA activity:
Three Months Ended March 31,
20242023
Number of Shares
Weighted Average Grant Date Fair Value
Number of Shares
Weighted Average Grant Date Fair Value
Non-vested RSAs, beginning of period
44,400 $78.89 66,600 $78.89 
Granted  
Vested(14,523)$78.89 (12,649)$78.89 
Surrendered for taxes(7,677)$78.89 (9,551)$78.89 
Non-vested RSAs, end of period
22,200 $78.89 44,400 $78.89 
There was $1.6 million of unrecognized stock-based compensation expense related to employees’ RSAs that is expected to be recognized over a weighted-average period of 11 months as of March 31, 2024.
Restricted Stock Units
The following table summarizes the Company’s RSU activity:
Three Months Ended March 31,
20242023
Number of Shares
Weighted Average Grant Date Fair Value
Number of Shares
Weighted Average Grant Date Fair Value
Non-vested RSUs, beginning of period
160,900 $81.91  
Granted223,890 $159.59 186,900 $81.91 
Vested(40,075)$81.91  
Forfeited
(14,383)$86.27  
Non-vested RSUs, end of period
330,332 $134.37 186,900 $81.91 
There was $43.4 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.7 years as of March 31, 2024.
Performance-Based Restricted Stock Units
The following table summarizes the Company’s PSU activity:
Three Months Ended March 31,
20242023
Number of Shares
Weighted Average Grant Date Fair Value
Number of Shares
Weighted Average Grant Date Fair Value
Non-vested PSUs, beginning of period
50,000 $81.91  
Granted112,500 $159.47 60,000 $81.91 
Vested(25,000)$81.91  
Forfeited
  
Non-vested PSUs, end of period
137,500 $145.37 60,000 $81.91 
For the three months ended March 31, 2024, the Company granted 112,500 of PSUs, which vest ratably over two years based upon continued service through the vesting date and the achievement of specific regulatory and commercial performance criteria as determined by the Compensation Committee of the Company’s Board of Directors. The performance criteria are to be completed by the end of the year in which the PSU awards were granted. As of the March 31, 2024, the Company estimated that 100% of the newly granted PSUs will be eligible to vest.
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There was $19.0 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 1.8 years as of March 31, 2024.
Stock-Based Compensation Expense, Net
The Company recorded stock-based compensation expense related to its stock options, RSAs, RSUs, and PSUs in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2024 and 2023 as follows:
Three Months Ended March 31,
(in thousands)
20242023
Research and development
$1,868 $2,496 
Selling, general, and administrative
7,431 7,941 
Total stock-based compensation$9,299 $10,437 
After the FDA approval of VYJUVEK on May 19, 2023, the Company began capitalizing stock-based compensation associated with the allocation of labor costs related to work performed to manufacture VYJUVEK. For the three months ended March 31, 2024 and 2023, the Company capitalized stock-based compensation of $724 thousand and zero, respectively, into inventory.
Historically, the Company also capitalized the portion of stock-based compensation related to work performed on the construction of our manufacturing facilities. For the three months ended March 31, 2024 and 2023, the Company capitalized stock-based compensation of zero and $162 thousand, respectively, into property and equipment, net.
11.    Income Taxes
The tax provision for interim periods is calculated using an estimate of the annual effective tax rate, adjusted for discrete items. If there are any changes to the estimated annual tax rate, the Company will make a cumulative adjustment to the income tax provision in the period the change becomes known. The Company did not record an income tax provision for the three months ended March 31, 2024 or 2023 as it generated sufficient tax losses, after consideration of discrete items, during each of the periods. The Company expects to maintain a full valuation allowance against its net deferred tax assets for the year.
12.    Subsequent Events
The Company evaluates events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements, to identify matters that require recognition or disclosure. The Company concluded that no subsequent events have occurred, that would require recognition or disclosure in the condensed consolidated financial statements.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“2023 10-K”), as filed with the SEC on February 26, 2024.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Some of such factors include, but are not limited to:
the commercial success of VYJUVEK® (beremagene geperpavec-svdt), our U.S. Food and Drug Administration (“FDA”) approved product for treating patients, six months of age or older, suffering from dystrophic epidermolysis bullosa (“DEB”);
the initiation, timing, cost, progress and results of our research and development activities, preclinical studies and clinical trials for our product candidates;
the timing, scope or results of regulatory filings and approvals, including timing of final FDA and other regulatory approval of our product candidates;
our ability to achieve certain accelerated or orphan drug designations from the FDA or other regulators;
changes in our estimates regarding the potential market opportunity for our FDA-approved product, VYJUVEK , and our product candidates;
increases in costs associated with our research and development programs for our product candidates;
increases in our selling, general, and administrative expenses;
risks related to our ability to successfully develop and commercialize our product candidates;
our ability to identify new product candidates;
our ability to identify, recruit and retain key personnel;
risks related to our marketing and manufacturing capabilities and strategy;
our business model and strategic plans for our business, product candidates and technology;
the rate and degree of market acceptance and clinical utility of our product candidates and gene therapy, in general;
our competitive position and the success of competing therapies;
our intellectual property position and our ability to protect and enforce our intellectual property;
our ability to establish and maintain collaborations;
our financial performance and our estimates regarding expenses, future revenue, capital requirements and needs for additional financing, as well as our ability to raise capital;
our ability to successfully avoid or resolve any litigation, intellectual property or other claims, that may be brought against us;
global economic conditions, including the recent rise in inflation and interest rates and recent bank failures; and
the impact of changes in laws and regulations.
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Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A of Part II of this Quarterly Report on Form 10-Q and other filings we make with the SEC from time to time. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect.
Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update these forward-looking statements publicly as a result of subsequent events, developments or otherwise, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Throughout this Form 10-Q, unless the context requires otherwise, all references to “Krystal,” “the Company,” “we,” “our,” “us” or similar terms refer to Krystal Biotech, Inc., together with its consolidated subsidiaries. Web links throughout this document are provided for convenience only and are not intended to be active hyperlinks to the referenced websites. No content on the referenced websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.
Overview
We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs. Using our patented gene therapy technology platform that is based on engineered herpes simplex virus-1 (“HSV-1”), we create vectors that efficiently deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the transgene to treat the disease. Our vectors are amenable to formulation for non-invasive or minimally invasive routes of administration at a healthcare professional’s office or in the patient’s home by a healthcare professional. Our innovative technology platform is supported by two in-house, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facilities.
Our FDA Approved Commercial Product
VYJUVEK (beremagene geperpavec-svdt, or B-VEC; referred to as B-VEC outside the U.S.)
On May 19, 2023, the FDA approved VYJUVEK, the first ever redosable gene therapy, for treating patients, six months of age or older, suffering from DEB, a rare and severe monogenic disease that affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1. VYJUVEK is a redosable topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene to a patient’s skin cells to produce the COL7 protein. VYJUVEK is the first and only corrective medicine approved by the FDA for the treatment of DEB, both recessive and dominant, that can be administered by a healthcare professional (“HCP”) in either a clinical setting or in the home. We possess exclusive rights to develop, manufacture, and commercialize VYJUVEK and all our pipeline candidates throughout the world.
We launched VYJUVEK in the United States in the second quarter of 2023. Net VYJUVEK product revenue was $45.3 million for the three months ended March 31, 2024, and $95.9 million in cumulative net product revenue since August 2023.
We have made steady progress securing access and reimbursement for VYJUVEK since launch. In January 2024, we announced that the U.S. Centers for Medicare & Medicaid Services had assigned a permanent and product-specific J-code (J3401) for VYJUVEK, effective on January 1, 2024, and as of April 2024, positive access has been achieved for 96% of lives covered under commercial and Medicaid plans.
As of April 2024, we have secured over 330 reimbursement approvals for VYJUVEK in the U.S.
Product revenue, net for the first quarter of 2024 was negatively impacted by the switchover of patients to the permanent J-code, while reimbursement approvals were delayed by a subsequent cybersecurity incident affecting our specialty pharmacy provider. In both instances, to ensure continuity of treatment, we bridged patients on VYJUVEK with free vials. We estimate that approximately 400 free vials were dispensed in the quarter which would otherwise have been commercial vials. No additional impact is expected moving forward relating to these events.
We seek to make the patient experience of starting and continuing on VYJUVEK treatment as seamless as possible. Since launch, the infrastructure has been in place for patients to be treated in their home by an HCP, reducing the need for
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regular visits to a clinic or hospital. Krystal ConnectTM, our U.S. in-house patient services call center, has been active since FDA approval and assists patients, care givers and HCPs interested in accessing VYJUVEK. We also continue to offer no-cost genetic testing through our DecodeDEB program. Since launch and through the first quarter of 2024, patient compliance with once weekly treatment while on VYJUVEK remains high at 91%.
In February 2024, our Senior Vice President and Head of North America Sales and Marketing joined the Company.
Preparations and infrastructure buildout are underway in Europe and Japan to support our planned direct commercial launch in these regions. In March 2024, we completed the formation of Krystal Biotech Japan, G.K. (“Krystal Japan”), for the purpose of establishing initial operations in Japan, and we concluded our search for the President and General Manager of Krystal Japan who will join the Company in June 2024. In March 2024, our General Manager of Germany and Austria also joined the Company in preparation for a European launch.
In October 2023, we submitted a Marketing Authorization Application (“MAA”) to the European Medicines Agency (“EMA”) for B-VEC for the treatment of DEB in patients from birth. In November 2023, we were notified that the MAA had been validated and was now under Committee for Medicinal Products for Human Use review. In February 2024, the EMA completed inspection of our manufacturing facility as part of the MAA review process. We expect to receive GMP certification from the EMA in the second half of 2024. We expect an EMA decision on our MAA in the second half of 2024.
In July 2023, the Pharmaceuticals and Medical Devices Agency (“PMDA”) in Japan officially accepted the open label extension (“OLE”) study of B-VEC. The efficacy portion of the Japan OLE study was completed in April 2024, and we anticipate filing our Japan New Drug Application with Japan’s PMDA in the second half of 2024, enabling a potential authorization by PMDA in 2025. Previously, in December 2023, B-VEC was granted orphan drug designation status for the treatment of DEB by the Japan Ministry of Health, Labour and Welfare, a designation which confers specific benefits for orphan drug development including priority review of applications, extended registration validity, and reduced development costs.
Pipeline Highlights and Recent Developments
Respiratory
KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length cystic fibrosis transmembrane conductance regulator (“CFTR”) transgene for the treatment of cystic fibrosis (“CF”), a serious rare lung disease caused by missing or mutated CFTR protein. In July 2023, we announced that we had dosed the first patient in CORAL-1, a Phase 1 multi-center, dose-escalation study of evaluating KB407, delivered via a nebulizer, in patients with CF, regardless of their underlying genotype. In March 2024, we completed dosing of the second cohort of CORAL-1, and we intend to initiate the third and final cohort in the second quarter of 2024. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05504837.
KB408 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the SERPINA1 transgene, that encodes for normal human alpha-1 antitrypsin protein, for the treatment of alpha-1 antitrypsin deficiency (“AATD”), a serious rare lung disease. In February 2024, we dosed the first patient in SERPENTINE-1, a Phase 1, open-label, single dose escalation study evaluating KB408, delivered via a nebulizer, in adult patients with AATD with a PI*ZZ genotype. We are working closely with the Alpha-1 Foundation and their Therapeutic Development Network on the SERPENTINE-1 study and intend to announce interim data from the study in the second half of 2024. Recruitment is ongoing and details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier: NCT06049082.
Ophthalmology
In April 2023, we announced clinical data on the compassionate use of B-VEC, administered as an eyedrop, to treat a patient suffering from ocular complications of DEB. Data was first presented at the Association for Research in Vision and Ophthalmology (“ARVO”) 2023 Annual Meeting and subsequently published in the New England Journal of Medicine in February 2024. Regular application of B-VEC to the eye was well tolerated and associated with full corneal healing at 3 months and visual acuity improvement from hand motion to 20/25 by 8 months.
Based on this early clinical evidence of safety and potential benefit under compassionate use, we started discussions with the FDA in the first quarter of 2024 on a potential clinical development path for ophthalmic B-VEC. In February 2024, we aligned with the FDA on our proposed single arm, open label study in approximately 10 patients to enable approval of B-VEC eyedrops to treat ocular complications which are thought to affect over 25% of DEB patients. We plan to initiate this study in the second half of 2024.
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In January 2024, the United States Patent and Trademark Office, or USPTO, issued U.S. Patent No. 11,865,148, covering methods of delivering human transgenes to the eye using replication-incompetent HSV-1. This patent covers the administration of B-VEC to the eye, as well as novel applications of our HSV-1 based platform to deliver genetic material to the eye via multiple routes of administration for the potential treatment of genetic eye diseases.
We will be presenting preclinical data at the ARVO 2024 Annual Meeting later this month highlighting the potential of Krystal’s HSV-1-based gene delivery platform for back of the eye gene delivery, and we are actively evaluating multiple, preclinical-stage genetic medicine candidates for the treatment of front and back of the eye diseases.
Oncology
KB707 is a redosable, immunotherapy designed to deliver genes encoding both human interleukin-2 (“IL-2”) and interleukin-12 (“IL-12”) to the tumor microenvironment and promote systemic immune-mediated tumor clearance. Two formulations of KB707 are in development, a solution formulation for transcutaneous injection and an inhaled (nebulized) formulation for lung delivery.
In July 2023, we announced that the FDA had granted intratumoral KB707 Fast Track Designation for the treatment of anti-PD-1 relapsed/refractory locally advanced or metastatic melanoma and accepted our Investigational New Drug (IND) application to evaluate intratumoral KB707 in a clinical study. In October 2023, we dosed the first patient in OPAL-1, an open-label, multi-center, monotherapy, dose escalation and expansion Phase 1 study, evaluating intratumoral KB707 in patients with locally advanced or metastatic solid tumors, who relapsed or are refractory to standard of care, with at least one measurable and injectable tumor accessible by transcutaneous route. We have cleared the first two dose escalation cohorts of OPAL-1 and have completed enrollment in Cohort 3. Data collected to date have shown KB707 to be generally well tolerated with no patients experiencing dose-limiting toxicities or drug-related grade ≥3 adverse events. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05970497. Based on the current pace of enrollment, we expect to be able to report interim data before the end of the year.
In January 2024, the FDA accepted an amendment to our IND application to evaluate inhaled KB707 in a clinical study, and, in April 2024, we dosed the first patient in KYANITE-1, an open-label, monotherapy, dose escalation and expansion Phase 1 study, evaluating inhaled KB707 in patients with locally advanced or metastatic solid tumors of the lung. Recruitment is ongoing. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT06228326. Inhaled KB707 also received Fast Track Designation from the FDA in February 2024, for the treatment of patients with solid tumors with pulmonary metastases that are relapsed or refractory to standard of care therapy.
We presented preclinical efficacy data generated in syngeneic mouse models using murine equivalents to KB707 at the American Association for Cancer Research Annual Meeting that was held in April 2024. Study results demonstrated that IL-12 and IL-2, delivered intratumorally using Krystal’s HSV-1-based gene delivery platform, enhanced local and systemic T-cell effector responses consistent with previously reported anti-tumor activity.
Dermatology
KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene encoding the human enzyme transglutaminase-1 (“TGM1”) for the treatment of TGM1-deficient autosomal recessive congenital ichthyosis (“TGM1-ARCI”), a serious rare skin disorder caused by missing or mutated TGM1 protein. KB104 is a topical gel formulation of our novel vector designed to deliver two copies of the SPINK5 transgene for the treatment of Netherton Syndrome, a debilitating autosomal recessive skin disorder caused by missing or mutated SPINK5 protein. We expect to resume enrollment in the Phase 2 portion of JADE-1, a randomized, placebo-controlled Phase 1/2 study evaluating KB105 for the treatment of TGM1-ARCI, later in 2024, and plan to file an IND application and initiate a clinical trial of KB104 to treat patients with Netherton Syndrome following initiation of the KB105 Phase 2 study. Details of the JADE-1 Phase 1/2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732.
Aesthetics
We are also leveraging the ability of our platform to deliver proteins of interest to cells in the skin in the context of aesthetic medicine via our wholly-owned subsidiary, Jeune Aesthetics, Inc. (“Jeune”). KB301 is a solution formulation of our novel vector for intradermal injection designed to deliver two copies of the COL3A1 transgene to address signs of aging or damaged skin caused by declining levels of, or damaged proteins within the extracellular matrix, including type III collagen. In April 2023, Jeune initiated and treated the first subject in the Phase 1 PEARL-1 Cohort 3 clinical study. The PEARL-1 Cohort 3 study is an open label study to evaluate different doses of KB301 for the improvement of lateral canthal lines at rest in up to 20 subjects. In January 2024, Jeune initiated the PEARL-1 Cohort 4 clinical study, an open label study to evaluate KB301 for the improvement of dynamic wrinkles of the décolleté in up to 20 subjects. Jeune expects to announce results for both cohorts in
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mid-2024. Following completion of both cohorts, Jeune plans to initiate a Phase 2 study of KB301. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT04540900. Jeune has several other aesthetic medicine product candidates in various stages of preclinical development.
Financial Overview
Revenue
After FDA approval of VYJUVEK in May 2023, we began commercial marketing and sales throughout the United States and began recognizing revenue during the third quarter of 2023. Our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such sales.
We have contracted to sell VYJUVEK to a limited number of specialty pharmacy providers (“SPs”) that mix the medication and administer it to patients in the patient’s home by a healthcare professional and through a specialty distributor (“SD”) to hospitals and outpatient clinics where patients are administered the medication at a healthcare professional’s office. The transaction price that we recognize as revenue for VYJUVEK sales includes an estimate of variable consideration, which includes discounts, returns, copay assistance and rebates that are offered within contracts. Refer to Note 2 of our consolidated financial statements in our 2023 10-K for additional information.
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs related to the manufacturing of VYJUVEK. These costs consist of manufacturing costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Cost of goods sold may also include period costs related to certain manufacturing services and inventory adjustment charges.
Prior to receiving FDA approval in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expenses.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred to advance our preclinical and clinical candidates, which include:
expenses incurred under agreements with contract manufacturing organizations, contract research organizations, consultants and other vendors that conduct our preclinical activities;
costs of acquiring, developing and manufacturing clinical trial materials and lab supplies;
facility costs, depreciation and other expenses, which include direct expenses for rent and maintenance of facilities and other supplies; and
payroll related expenses, including stock-based compensation expense.
We expense internal research and development costs to operations as incurred. We expense third-party costs for research and development activities, such as the manufacturing of preclinical and clinical materials, based on an evaluation of the progress to completion of specific tasks such as manufacturing of drug substance, fill/finish and stability testing, which is provided to us by our vendors.
We expect our research and development expenses will increase as we continue the manufacturing of preclinical and clinical materials and manage the clinical trials of, and seek regulatory approval for, our product candidates and as we expand our product portfolio. In the near term, we expect that our research and development expenses will increase as we continue our Phase 1 trials for KB407, KB408, intratumoral KB707, and inhaled KB707, resume dosing with KB105 in our Phase 1/2 clinical trial, complete the Phase 1, Cohorts 3 and 4 study and initiate a Phase 2 trial for KB301, begin our open label study with ophthalmic B-VEC, and incur preclinical expenses for our other product candidates. Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of clinical trials, and, as a result, the actual costs to complete clinical trials may exceed the expected costs. 
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses consist principally of salaries and other related costs, including stock-based compensation for personnel in our executive, finance, legal, commercial, business development, information technology and other general and administrative functions. Selling, general, and administrative expenses also include professional fees associated with corporate and intellectual property-related legal expenses, consulting and accounting services, insurance, facility-related costs and expenses associated with obtaining and maintaining patents. Other selling, general, and administrative
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costs include travel expenses, patient access program costs, management service fees, marketing expenses, and selling expenses which include transportation, shipping and handling fees.
We anticipate that our selling, general, and administrative expenses will increase in the future relating to our commercialization efforts and to support the development of our product candidates. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate that we will continue to increase our salary and personnel costs and other expenses to support B-VEC commercialization globally.
ASTRA Capital Expenditures
In March 2021, we closed on the purchase of the building that was constructed to house our second commercial scale CGMP facility, ASTRA. In March 2023, we received the permanent occupancy permit for ASTRA which allowed the Company to begin utilizing certain parts of the building for research and development operations once qualification was completed and a portion of the assets were placed into service throughout 2023. We incurred significant capital expenditures related to the construction of ASTRA in 2023 and expect to continue to incur capital expenditures related to ASTRA throughout the operational life of the facility.
Interest and Other Income, Net
Interest and other income, net consists primarily of income earned from our cash, cash equivalents and investments.
Critical Accounting Policies, Significant Judgments and Estimates
There have been no significant changes during the three months ended March 31, 2024 to our critical accounting policies, significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our 2023 10-K.
Results of Operations
Our management’s discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Three Months Ended March 31, 2024 and 2023
 Three Months Ended March 31, 
 20242023Change
(in thousands)
(unaudited) 
Product revenue, net
$45,250 $— $45,250 
Expenses
  
Cost of goods sold2,419 — 2,419 
Research and development10,957 12,288 (1,331)
Selling, general, and administrative26,058 24,035 2,023 
Litigation settlement12,500 12,500 — 
Total operating expenses51,934 48,823 3,111 
Loss from operations(6,684)(48,823)42,139 
Other income 
Interest and other income, net7,616 3,526 4,090 
Net income (loss)
$932 $(45,297)$46,229 
Product Revenue, Net
Product revenue, net was $45.3 million for the three months ended March 31, 2024, as compared to zero for the three months ended March 31, 2023 due to sales of VYJUVEK after FDA approval was obtained on May 19, 2023. As VYJUVEK initial product sales revenue did not begin until the third quarter of 2023, there was no comparative period revenue.
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Cost of Goods Sold
Cost of goods sold was $2.4 million for the three months ended March 31, 2024, as compared to zero for the three months ended March 31, 2023 due to sales of VYJUVEK after FDA approval was obtained on May 19, 2023. Prior to receiving FDA approval for VYJUVEK in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense.
Research and Development Expenses 
Research and development expenses decreased $1.3 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.
The decrease was primarily driven by the following:
a decrease of $1.1 million in manufacturing expenses related to VYJUVEK following FDA approval being recorded as inventory; and
a decrease of $899 thousand in allocated overhead costs due to the capitalization of commercial batches of VYJUVEK after its approval in May 2023.
These decreases were partially offset by increases in the following:
an increase of $287 thousand of clinical development costs; and
an increase of $272 thousand of depreciation due to the Company's second CGMP facility being placed into service in 2023 offset by the capitalization of commercial batches of VYJUVEK after its approval in May 2023.
Research and development expenses consist primarily of costs relating to our preclinical development, the development of our product candidates and our clinical trial programs. Direct research and development expenses associated with our product candidates or development programs consist of compensation related expenses for our internal resources conducting research and development activities, fees paid to external consultants, contract research organizations, or for costs to support our clinical trials. Indirect research and development expenses that are allocated to our product candidates or programs consist of lab supplies and software fees. A significant portion of our research and development expenses are not allocated to individual product candidates and preclinical programs, as certain expenses benefit multiple product candidates and preclinical programs. For example, we do not allocate costs associated with stock-based compensation, manufacturing of preclinical or clinical development products or costs relating to facilities and equipment to individual product candidates and preclinical programs.
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The following table summarizes our research and development expenses by product candidate or program, and for unallocated expenses, by type, for the three months ended March 31, 2024 and 2023.
Three Months Ended March 31,
20242023Change
(in thousands)
(unaudited)
KB103
$2,129$2,387$(258)
KB10515 231 (216)
KB407783 377 406
KB408
245 112 133
KB301176 250 (74)
KB7071,419 — 1,419
Other dermatology programs— (8)
Other aesthetics programs134 13 121
Other research programs351 596 (245)
Other development programs232 335 (103)
Stock-based compensation1,868 2,496 (628)
Other unallocated manufacturing expenses(1)
2,131 3,919 (1,788)
Other unallocated expenses(2)
1,474 1,564 (90)
Research and development expense$10,957$12,288$(1,331)
(1)Unallocated manufacturing expenses consist of shared pre-commercial manufacturing costs, primarily relating to raw materials, contract manufacturing, contract testing, process development, quality control and quality assurance activities and other manufacturing costs which support the development of multiple product candidates in our preclinical and clinical development programs.
(2)Other unallocated expenses include rental, storage, depreciation, and other facility related costs that we do not allocate to our individual product candidates.
The primary changes in our research and development expenses by product candidate or program in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 are as follows:
a decrease in other unallocated manufacturing expenses of $1.8 million due to the costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory and cost of goods sold;
a decrease in stock-based compensation of $628 thousand due to the allocation of labor costs related to work performed to manufacture VYJUVEK to inventory following FDA approval; and
a net decrease in KB103 costs is due to research and development costs being expensed in 2023 prior to receiving FDA approval in May 2023 that are now included as part of the cost of inventory, offset by an increase in overseas preclinical and clinical trial costs, licensing and regulatory costs, and on-going manufacturing efficiency and process optimization costs for which such processes have not yet been approved by the FDA; offset by
an increase in KB707 costs of $1.4 million following the expansion of our research and development pipeline to oncology consisting of increase in payroll related costs to support our research and an increase in contract research expenses in preparation for the Phase 1 clinical trial of inhaled KB707.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $2.0 million in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.
The increase was primarily driven by the following:
an increase in selling expenses related to the launch of VYJUVEK of $2.1 million, which includes $1.5 million related to our patient access program;
an increase of $706 thousand related to professional services incurred to support our commercial growth; and
an increase in net payroll related expenses of approximately $367 thousand, which was primarily driven by an increase in headcount in our commercial and other administrative functions to support overall growth for
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commercialization and includes a partially offsetting decrease in stock-based compensation of $509 thousand due to the departure of certain employees in the second half of 2023.
These increases were partially offset by a decrease in marketing costs of $1.3 million due to the timing of marketing activities ahead of the VYJUVEK launch.
Litigation Settlement
Litigation settlement for each of the three months ended March 31, 2024 and 2023 was $12.5 million, and consisted of amounts related to the settlement of litigation with PeriphaGen. See “Legal Proceedings” in Note 7 of the notes to condensed consolidated financial statements included in this Form 10-Q for more information.
Interest and Other Income, Net
Interest and other income, net for the three months ended March 31, 2024 and 2023 was $7.6 million and $3.5 million, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments. The increase in interest and dividend income is the result of increased investment activity and more favorable interest rates as compared to the prior period and an increase in our balance of cash, cash equivalents, and investments.
Liquidity and Capital Resources
Overview
As of March 31, 2024, our cash, cash equivalents and short-term investments balance was approximately $538.3 million. Since operations began, we have incurred operating losses. As of March 31, 2024, we had an accumulated deficit of $268.9 million. We believe that our cash, cash equivalents and short-term investments as of March 31, 2024 will be sufficient to allow us to fund our operations for at least 12 months from the filing date of this Quarterly Report on Form 10-Q.
Our transition to operating profitability is dependent upon the continued successful commercialization of VYJUVEK and the successful development, approval, manufacturing, and commercialization of our product candidates. Furthermore, we expect to incur increasing costs associated with satisfying regulatory and quality standards, maintaining and initiating product clinical trials, and furthering our efforts to discover, develop, manufacture, and commercialize current and future product candidates. We intend to fund future operations through on hand cash and cash equivalents, revenue generated from the sale of VYJUVEK, the sale of equity, debt financings, and we may also seek additional capital through arrangements with strategic partners or other sources.
Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our continued clinical studies of KB105, KB407, KB408, KB301, KB707 or our planned clinical and preclinical studies for our other product candidates, or our operations. Further, we expect future revenue to fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any product sales. While we are in the process of building out our internal vector manufacturing capacity, some of our manufacturing activities will be contracted out to third parties. Additionally, we currently utilize third-party contract research organizations to carry out some of our clinical development activities. As we seek to obtain regulatory approval for our product candidates, we expect to continue to incur significant manufacturing and commercialization expenses as we prepare for product sales, marketing, commercial manufacturing, packaging, labeling and distribution. Furthermore, pursuant to our settlement agreement with PeriphaGen, we will be required to pay three $12.5 million contingent milestone payments upon reporting $100.0 million in total cumulative sales, $200.0 million in total cumulative sales and $300.0 million in total cumulative sales. Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch KB104, KB105, KB407, KB408, KB301, KB707, ophthalmic B-VEC or any other product candidate. Accordingly, to obtain marketing approval for and to commercialize these or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, if at all. Our failure to raise capital when needed could have a negative effect on our financial condition and our ability to pursue our business strategy.
Operating Capital Requirements
Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs for preclinical and clinical materials, regulatory expenses, third-party clinical trial research and development services, laboratory and related supplies, selling expenses, costs to manufacture our commercial product, legal expenses, payments of settlement amounts to PeriphaGen and general overhead costs. In order to complete the process of obtaining regulatory approval for any of our product candidates and to build the sales, manufacturing, marketing and
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distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we may require substantial additional funding.
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development, manufacturing, and commercialization of genetic medicines, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
the costs needed to commercialize and market our lead product, VYJUVEK;
the progress, timing and costs of clinical trials of our current product candidates;
the progress, timing and costs of manufacturing of VYJUVEK and revenue received from commercial sale of VYJUVEK;
the continued development and the filing of an IND application for current and future product candidates;
the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any product candidates that we may pursue in the future, if any;
the costs of maintaining our own commercial-scale CGMP manufacturing facilities;
the outcome, timing and costs of seeking regulatory approvals;
the costs associated with the manufacturing process development and evaluation of third-party manufacturers;
the extent to which the costs of VYJUVEK and our product candidates, if approved, will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors;
the costs of commercialization activities for our current and future product candidates if we receive marketing approval for such product candidates, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities;
subject to receipt of marketing approval, if any, revenue received from commercial sale of our current and future product candidates;
the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish;
the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, maintenance, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay pursuant to our license agreements;
our current license agreements remaining in effect and our achievement of milestones under those agreements;
our ability to establish and maintain collaborations and licenses on favorable terms, if at all; and
the extent to which we acquire or in-license other product candidates and technologies.
We may need to obtain substantial additional funding in order to receive regulatory approval and to commercialize our product candidates. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely affect our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of our product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to our product candidates that we otherwise would seek to develop or commercialize ourselves. 
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Sources and Uses of Cash
The following table summarizes our sources and uses of cash for the three months ended March 31, 2024 and 2023:
 Three Months Ended March 31,
20242023
(in thousands)
(unaudited)
Net cash provided by (used in) operating activities
$15,888 $(26,156)
Net cash (used in) provided by investing activities
(25,980)3,563 
Net cash provided by financing activities10,583 1,474 
Effect of exchange rate changes on cash and cash equivalents187 (36)
Net increase (decrease) in cash$678 $(21,155)
Operating Activities
Net cash provided by operating activities for the three months ended March 31, 2024 was $15.9 million and consisted primarily of net income of $932 thousand adjusted for $8.7 million of non-cash items and a $6.3 million increase in working capital. Non-cash adjustments included depreciation of $1.4 million, amortization of operating lease right-of-use assets of $182 thousand and stock-based compensation expense, net of $9.3 million, offset by realized gain on investments of $1.2 million, accretion on marketable securities of $802 thousand and other adjustments of $238 thousand.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2024 was $26.0 million and consisted of $88.3 million in purchases of short-term and long-term investments and $1.3 million in purchases of property and equipment, partially offset by $63.6 million received from the maturities of short-term investments.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2024 was $10.6 million and consisted of proceeds of $16.0 million from exercises of stock options, partially offset by $4.2 million used for employee tax withholding payments related to vested restricted stock units and $1.2 million used for employee tax withholding payments for settlement of vested restricted stock awards.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had cash, cash equivalents and short-term investments of $538.3 million as of March 31, 2024, which consisted primarily of money market funds, commercial paper, corporate bonds, and U.S. government agency securities. The investments in these financial instruments are made in accordance with an investment policy which specifies the categories, allocations and ratings of securities we may consider for investment. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Some of the financial instruments in which we invest could be subject to market risk. This means that a change in prevailing interest rates may cause the value of the instruments to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of that security will probably decline. To minimize this risk, we intend to maintain a portfolio which may include cash, cash equivalents and short-term investment securities available-for-sale in a variety of securities which may include money market funds, government and non-government debt securities and commercial paper, all with various maturity dates. Based on our current investment portfolio, we do not believe that our results of operations or our financial position would be materially affected by an immediate change of 10% in interest rates.
We also have established operations in Europe, Australia and Japan and hold cash in Swiss Francs, Euros, Australian Dollars and Japanese Yen. We are subject to foreign exchange rate risk arising from transactions conducted in the aforementioned foreign currencies, however, our foreign operations are not currently material to our business. We do not believe that our results of operations or our financial position would be materially affected by an immediate change of 10% in foreign currency exchange rates.
We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash, cash equivalents and short-term investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and short-term investments do not contain excessive risk, we cannot provide absolute assurance that any investments we make in the future will not be subject to adverse changes in market value. Our cash, cash equivalents and short-term investments are recorded at fair value.
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ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Accounting Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this quarterly report, and our Chief Executive Officer and our Chief Accounting Officer have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1.    LEGAL PROCEEDINGS
The information set forth under the heading “Legal Proceedings” in Note 7 of the notes to condensed consolidated financial statements included in Item 1 of Part I of this Form 10-Q is incorporated by reference in response to this item.
ITEM 1A.    RISK FACTORS
Our business involves significant risks, some of which are described below. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Form 10-Q. If any of the following risks actually occur, it could harm our business, prospects, operating results and financial condition and future prospects. In such event, the market price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to Our Business and Industry
We are substantially dependent on the commercial success of VYJUVEK
To date, we have invested substantial efforts and financial resources in the research and development of our product candidates. Our near-term prospects, including our ability to develop our product candidates and generate revenue, and our future growth is substantially dependent on the commercial success of VYJUVEK.
Although we received approval from the FDA for VYJUVEK for the treatment of DEB on May 19, 2023, we can provide no assurances that we will obtain regulatory approval in any other jurisdiction, which would have an adverse impact on our results of operations. In addition, the successful commercialization of VYJUVEK will depend on a number of factors, including the risks identified in these “Risk Factors.” One or more of these factors, many of which are beyond our control, could cause significant delays or an inability to successfully commercialize VYJUVEK.
We may not be successful in our efforts to identify, develop and commercialize additional product candidates, which may impair our ability to expand our business and achieve our strategic objectives, and we may fail to capitalize on programs or product candidates that may be a greater commercial opportunity or for which there is a greater likelihood of success.
Although a substantial amount of our efforts focuses on the commercialization of VYJUVEK and the development and potential approval of our current product candidates, a key component our strategy is to identify, develop and potentially commercialize a portfolio of genetic medicines. Research programs to identify new product candidates require substantial technical, financial, and human resources and may not be successful in identifying potential product candidates. Even if we identify product candidates that initially show promise, we may fail to successfully develop and commercialize such product candidates for many reasons, including the following:
competitors may develop alternatives that render our product candidates obsolete;
product candidates we develop may be covered by third parties’ patents or other exclusive rights;
a product candidate may, on further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and
a product candidate may not be accepted as safe and effective by patients, the medical community, or third-party payors.
If we are unsuccessful in identifying and developing additional product candidates, our potential for growth may be impaired.
Additionally, because we have limited resources, we may forego or delay pursuit of opportunities with certain programs or product candidates or for indications that later prove to have commercial potential. Our resource allocation decisions may cause us to fail to timely capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs may not yield any commercially viable products. If we do not accurately evaluate the commercial potential for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic collaboration, licensing, or other arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate. Alternatively, we may
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allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.
If any of these events occur, we may be forced to abandon our development efforts with respect to a particular product candidate or fail to develop a potentially successful product candidate, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
VYJUVEK and, if approved, our investigational product candidates regulated as biologics may face competition from biosimilars approved through an abbreviated regulatory pathway.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the ACA, includes a subtitle called the Biologics Price Competition and Innovation Act of 2009, or BPCIA, which created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a Biologics License Application, or BLA, for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity, and potency of the other company’s product. In addition, a competitor may choose to challenge our patent rights relating to the reference product by initiating litigation during the 12-year period of exclusivity. After the FDA approves the BLA for the competing product, the competitor may also bring a declaratory judgment action of non-infringement, invalidity, and/or unenforceability of our patent rights. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty.
We believe that any of our product candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our investigational medicines to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once licensed, will be substituted for any one of our approved products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.
If competitors are able to obtain marketing approval for biosimilars referencing any of our approved products, our approved products may become subject to competition from such biosimilars, which would impair our ability to successfully commercialize and generate revenue from sales of such products.
We face significant competition in an environment of rapid technological change and the possibility that our competitors may achieve regulatory approval before us or develop therapies that are more advanced or effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize and market our product candidates.
We are aware of several companies and institutions that are currently developing alternative autologous or palliative gene therapy approaches for our targeted indications, including DEB and cystic fibrosis. Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical, and other resources, such as larger research and development, clinical, marketing, and manufacturing organizations. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of competitors. Our commercial opportunities could be reduced or eliminated if competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than VYJUVEK or any product candidate that we may develop. Competitors also may obtain FDA or other regulatory approval for their products more rapidly or earlier than we may obtain approval for our product candidates, which could result in our competitors establishing a strong market position before we are able to enter the market. Additionally, technologies developed by our competitors may render VYJUVEK or any of our product candidates uneconomical or obsolete, and we may not be successful in marketing VYJUVEK or any of our product candidates that obtain regulatory approval against competitors.
In the future, even if we commercialize a product candidate faster than our competitors, we could also face competition from lower cost biosimilars.
In addition, as a result of the expiration or successful challenge of our patent rights, we could face litigation with respect to the validity and/or scope of patents relating to our competitors’ products. The availability of our competitors’
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products could limit the demand, and the price we are able to charge, for VYJUVEK or any product candidate that we may develop and commercialize.
If any product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of VYJUVEK or our product candidates.
We face an inherent risk of product liability lawsuits related to the sale of VYJUVEK, use of VYJUVEK and our product candidates, and testing of our product candidates. Product liability claims may be brought against us by participants enrolled in our clinical trials, patients, health care providers or others using, or administering VYJUVEK and our product candidates. If we cannot successfully defend ourselves against any such claims, we may incur substantial liabilities. Regardless of their merit or eventual outcome, liability claims may result in:
decreased demand for VYJUVEK;
injury to our reputation;
withdrawal of clinical trial participants;
termination of clinical trial sites or entire trial programs;
increased regulatory scrutiny;
significant litigation costs;
substantial monetary awards to or costly settlement with claimants;
product recalls for any approved products or a change in the indications for which they may be used;
loss of revenue;
diversion of management and scientific resources from our business operations; and
the inability to successfully commercialize VYJUVEK or our product candidates, if approved.
With respect to VYJUVEK and any of our product candidates that are approved for commercial sale in the future, we are, and will be, highly dependent upon physician and patient perceptions of us and the safety and quality of our products. We could be adversely affected if we are subject to negative publicity. We could also be adversely affected if any of our products or any similar products distributed by other companies prove to be, or are asserted to be, harmful to patients. Because of our dependence upon consumer perceptions, any adverse publicity could have a material adverse impact on our financial condition or results of operations.
Our product liability insurance coverage may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage now that VYJUVEK has been approved by the FDA and when we begin the commercialization of our product candidates, if approved. Insurance coverage is becoming increasingly expensive. As a result, we may be unable to maintain or obtain sufficient insurance at a reasonable cost to protect us against losses that could have a material adverse effect on our business. A successful product liability claim, or series of claims brought against us, particularly if judgments exceed any insurance coverage we may have, could decrease our cash resources and adversely affect our business, financial condition, and results of operations.
Negative public opinion and increased regulatory scrutiny of gene therapy may damage public perception of the safety of our gene therapy product candidates and adversely affect our ability to conduct our business or obtain regulatory approvals for our product candidates.
Gene therapy remains a novel technology. Ethical, social, and legal concerns about gene therapy could result in additional regulations restricting or prohibiting VYJUVEK or our product candidates. Public perception may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. In particular, our success will depend upon physicians who specialize in the treatment of genetic diseases targeted by our product candidates prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments with which they are familiar and for which greater clinical data may be available. More restrictive government regulations or negative public opinion would have an adverse effect on our business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of VYJUVEK or our product candidates or demand for VYJUVEK or any product candidates we may develop. For example, earlier gene therapy trials led to several well- publicized adverse events, including cases of leukemia and death seen in trials using other vectors. Serious adverse events in our clinical trials, or other clinical trials involving gene therapy products or our competitors’ products, even if not ultimately attributable to the relevant product candidates, and the resulting publicity, could result in increased government regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for any such product candidates.
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Our business operations may subject us to disputes, claims and lawsuits, which may be costly and time-consuming and could materially and adversely impact our financial position and results of operations.
From time to time, we may become involved in disputes, claims and lawsuits relating to our business operations. For example, we may, from time to time, face or initiate claims related to intellectual property matters, employment matters, or commercial matters. Any dispute, claim or lawsuit may divert management’s attention away from our business, we may incur significant expenses in addressing or defending any dispute, claim or lawsuit, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and financial results. Litigation related to these disputes may be costly and time-consuming and could materially and adversely impact our financial position and results of operations if resolved against us. In addition, the uncertainty associated with litigation could lead to increased volatility in our stock price.
The increasing use of social media platforms presents new risks and challenges.
Social media is increasingly being used by us, our employees, or others to communicate about our business, VYJUVEK, our clinical development programs, DEB, and the diseases our product candidates are being developed to treat. We use appropriate social media in connection with our commercialization efforts of VYJUVEK and intend to use it in connection with our commercialization efforts of our product candidates, if approved. Social media practices in the biotechnology and biopharmaceutical industries continue to evolve, and regulations and regulatory guidance relating to such use are evolving and not always clear. This evolution creates uncertainty and risk of noncompliance with regulations applicable to our business, resulting in potential regulatory actions against us, along with the potential for litigation and heightened scrutiny by the FDA, the Securities and Exchange Commission, or the SEC, and other regulators. For example, patients may use social media channels to comment on their experience in an ongoing clinical trial of our product candidates, or to report an alleged adverse event. If such disclosures occur, there is a risk that clinical trial enrollment may be adversely impacted, that we may fail to monitor and comply with applicable adverse event reporting obligations, or that we may not be able to defend our business or the public’s legitimate interests in the face of the political and market pressures generated by social media due to restrictions on what we may say about our product candidates. There is also a risk of inappropriate disclosure of sensitive information, loss of trade secrets or other intellectual property, public exposure of personal information of our employees, patients who use VYJUVEK, clinical trial patients, and others, or negative or inaccurate posts or comments about us on any social networking website. In addition, we may encounter attacks on social media regarding our company, management, VYJUVEK, or our product candidates that seriously damage our reputation, brand image, and goodwill. If any of these events were to occur or we otherwise fail to comply with applicable regulations, we could incur liability, face regulatory actions, or incur other harm to our business that could have a material adverse effect on our business, prospects, operating results, and financial condition and could adversely affect the price of our common stock.
We have experienced significant growth in the number of employees and infrastructure and may experience difficulties in managing this growth. If we are unable to manage expected growth in the scale and complexity of our operations, our performance may suffer.
We have experienced a period of significant expansion in personnel and of our facilities, infrastructure and overhead as we developed our own manufacturing facilities, built our sales, marketing and distribution infrastructure that we believe is necessary to commercialize VYJUVEK, and increased our research and development efforts. The commercialization of VYJUVEK and our ongoing development of other product candidates will continue to impose significant capital requirements, as well as added responsibilities on members of management, including the need to identify, recruit, maintain and integrate new personnel. Our future performance and our ability to compete effectively will depend, in part, on our ability to manage our growth effectively. If we are successful in executing our business strategy, we will need to expand our managerial, operational, financial, and other systems and resources to manage our operations, continue our research and development activities and build a commercial infrastructure to support commercialization of any of our product candidates that are approved for sale, and, depending on demand, may need to scale up the manufacturing process for any approved product, which is subject to risks and uncertainties. Future growth would impose significant added responsibilities on members of management. Our management, finance, development personnel, systems, and facilities currently in place may not be adequate to support this expected future growth. Our need to effectively manage our operations, growth and product candidates requires that we continue to develop more robust business processes and improve our systems and procedures in each of these areas and to attract and retain enough numbers of talented employees. We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our research, development, and growth goals.
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Our future success depends on our ability to retain key employees and scientific advisors and to attract, retain and motivate qualified personnel.
We are highly dependent on members of our management team, the loss of whose services may adversely impact the achievement of our objectives. Our employees and scientific advisors are at-will employees and consultants, and the loss of one or more of them might impede the achievement of our research, development, and commercialization objectives.
Recruiting and retaining other qualified employees and scientific advisors for our business, including scientific and technical personnel, also will be critical to our success. Competition for skilled personnel, including in gene therapy research and vector manufacturing, is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies and academic institutions for individuals with similar skill sets. In addition, failure to succeed in preclinical or clinical trials or applications for marketing approval may make it more challenging to recruit and retain qualified personnel. The inability to recruit, or loss of services of certain executives, key employees, or advisors, may impede the progress of our research, development and commercialization objectives and have a material adverse effect on our business, financial condition, results of operations and prospects.
Our employees, principal investigators and advisors may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, and advisors. Misconduct by these parties could include intentional failures to comply with FDA regulations or the regulations applicable in the European Union, or EU, and other jurisdictions, provide accurate information to the FDA, the European Medicines Agency (“EMA”) and other regulatory authorities, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. Sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, financial condition, results of operations and prospects, including the imposition of significant fines, criminal penalties, or other sanctions.
In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA. The FDA may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of the clinical trial. The FDA may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA and may ultimately lead to the denial of marketing approval of our current and future product candidates.
Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.
In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell VYJUVEK and any product candidates for which we obtain marketing approval.
In the United States, there have been and continue to be a number of legislative efforts to contain healthcare costs. Any legislative changes that result in price controls, reduce access to and reimbursement for care or add additional regulations may have an adverse effect on our financial condition and results of operations. Any changes that reduce, or impede the ability to obtain, reimbursement for VYJUVEK or our product candidates that we intend to commercialize in the United States could adversely affect successful commercialization of VYJUVEK and our plans to introduce our product candidates in the United States. For example, the Bipartisan Budget Act of 2018, among other things, amended the ACA, effective January 1, 2019, to increase from 50 percent to 70 percent the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.”
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, in August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by
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Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2027 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to certain providers, and increased the time for Medicare contractors to recoup Medicare overpayments to providers from three to five years. In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government. In relevant part, the IRA allows Medicare to negotiate prices for certain prescription drugs, requires drug manufacturers to pay a rebate to the federal government if prices for single-source drugs and biologicals covered under Medicare Part B and nearly all covered drugs under Part D increase faster than the rate of inflation, caps out of pocket spending for Medicare Part D enrollees, and makes other benefit design changes to Medicare Part D intended to lower drug costs for enrollees and Medicare. Implementation of these changes began in 2023, and will continue to be implemented over the next several years. Multiple pharmaceutical manufacturers have challenged the law in court, largely on constitutional grounds. These suits will continue through 2024 and the ultimate effects of such legal challenges are unclear. At this time, we continue to evaluate the effect of the IRA on our business operations and financial condition and results as the full impact of the IRA remains uncertain.
Further, there has been heightened governmental scrutiny in recent years over the manner in which manufacturers set prices for their marketed products and the cost of prescription drugs to consumers and government healthcare programs, which have resulted in several recent Congressional inquiries and proposed and enacted bills designed to, among other things, reduce the cost of prescription drugs, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. In addition, the United States government, state legislatures, and foreign governments have shown significant interest in implementing cost containment programs, including price-controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs to limit the growth of government paid health care costs. For example, the United States government has passed legislation requiring pharmaceutical manufacturers to provide rebates and discounts to certain entities and governmental payors to participate in federal healthcare programs. Individual states in the United States have also been increasingly passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
Additional changes may affect our business, including those governing enrollment in federal healthcare programs, reimbursement changes, fraud and abuse enforcement, and expansion of new programs, such as Medicare payment for performance initiatives. In October 2022, President Biden signed Executive Order 14087 on “Lowering Prescription Drug Costs for Americans.” The Executive Order specifically requests that the Center for Medicare and Medicaid Innovation consider “models that may lead to lower cost sharing for commonly used drugs and support value-based payment that supports high-quality care.” The outcomes of the findings made under the Executive Order could lead to further drug pricing initiatives that could affect reimbursement for our product and product candidates.
These initiatives, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms could result in reduced demand for our product and product candidates or additional pricing pressures and may adversely impact our ability to generate sufficient revenue, attain consistent profitability, or commercialize our product candidates, if approved.
We are subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
With the FDA approval of VYJUVEK, our operations are directly, or indirectly through our prescribers, customers, and purchasers, subject to various federal and state fraud and abuse laws and regulations, including, without limitation, the federal Anti-Kickback Statute, federal civil and criminal false claims laws and the Physician Payments Sunshine Act and regulations. These laws impact, among other things, our sales, marketing, access assistance, sponsored genetic patient testing, and educational programs. In addition, we are subject to patient privacy laws by both the federal government and the states in which we conduct our business as well as other jurisdictions. The laws that affect our operations include, but are not limited to:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, in return for the purchase, recommendation, leasing or furnishing of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand, and prescribers, purchasers, and formulary managers on the other. The ACA amended the intent requirement of the federal Anti-Kickback Statute to clarify that a person or entity does not have to have actual knowledge of this statute or specific intent to violate it;
federal civil and criminal false claims laws and civil monetary penalty laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid, or other government payors that are false or fraudulent. The ACA provides that a claim for items or services resulting from an Anti-Kickback Statute violation is a false claim under the federal False Claims Act (“FCA”). Cases against pharmaceutical manufacturers support the view that certain marketing practices, including off-label promotion, may implicate the FCA;
the federal Health Care Fraud statute imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and its implementing regulations, and as amended again by the final HIPAA omnibus rule (the “Omnibus Rule” and together with HIPAA and HITECH, the HIPAA Rules), which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information by certain entities subject to the HIPAA Rules, such as health plans, health care clearinghouses and health care providers that engage in certain covered transactions;
federal transparency laws, including the federal Physician Payment Sunshine Act, that require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare and Medicaid Services (“CMS”) information related to: (i) payments or other “transfers of value” made to physicians and teaching hospitals, and (ii) ownership and investment interests held by physicians and their immediate family members;
state and foreign law equivalents of each of the above federal laws, state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts in certain circumstances, such as specific disease states; and
state and foreign laws that govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by the HIPAA Rules, thus complicating compliance efforts.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
Often, to avoid the threat of treble damages and penalties under the FCA, health care providers will resolve allegations in a settlement without admitting liability. Any such settlement could materially affect our business, financial operations, and reputation.
Efforts to ensure that our business arrangements with third parties comply with applicable healthcare laws and regulations involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations.
The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. The shifting compliance environment and
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the need to build and maintain a robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that we may run afoul of one or more of the requirements.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the generation, handling, use, storage, treatment, manufacture, transportation, and disposal of, and exposure to, hazardous materials and wastes, as well as laws and regulations relating to occupational health and safety. Our operations involve the use of hazardous and flammable materials, including chemicals and biologic materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. Moreover, certain environmental laws may impose liability without regard to fault or legality of the action at the time of its occurrence. We also could incur significant costs associated with civil or criminal fines and penalties. We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.
Although we maintain workers’ compensation insurance for certain costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for toxic tort claims that may be asserted against us in connection with our storage or disposal of biologic or hazardous materials. We also may incur substantial costs to comply with current or future environmental, health and safety laws and regulations, which have tended to become more stringent over time. These current or future laws and regulations may impair our research, development, or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions or liabilities, which could materially adversely affect our business, financial condition, results of operations and prospects.
We are subject to stringent and evolving U.S. and foreign laws, regulations and other obligations related to privacy and data security. Our actual or perceived failure to comply with such obligations could lead to regulatory inquiries or actions, litigation, fines and penalties, disruptions to our business operations, reputational harm, loss of revenue, and other adverse business consequences.
Privacy and data security have become significant areas of legal and regulatory focus in the United States, European Union and in many other jurisdictions where we conduct or may conduct our operations. In our ordinary course of business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (collectively, “process”) personal information and other sensitive information, including, but not limited to, health information, individuals’ financial information, as well as proprietary and confidential business data, including trade secrets, intellectual property, and sensitive third-party data (collectively, “sensitive data”). Our data processing activities may subject us to numerous privacy and data security obligations, including, but not limited to, domestic and international laws, regulations, guidance, industry standards, external and internal privacy and security policies, and contractual requirements.
In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal information privacy laws, consumer protection laws, and other similar laws. Notably, HIPAA, as amended by HITECH, imposes requirements on certain entities regarding the privacy, security, and transmission of individually identifiable health information and the California Consumer Privacy Act of 2018 (“CCPA”) requires businesses to provide specific disclosures in their privacy notices and honor California residents’ privacy rights. The CCPA provides for civil penalties of up to $7,500 per violation and allows private litigants affected by certain data breaches to recover significant statutory damages. Although the CCPA does not apply to certain data that we process in the context of clinical trials, efforts to comply with the CCPA may increase our annual compliance costs and subject us to potential liability with respect to other personal information we may maintain about California residents. In addition, the California Privacy Rights Act of 2020 (“CPRA”), which came into effect on January 1, 2023, expanded the CCPA’s requirements, extending it to cover personal information of business representatives and employees and the CPRA established a new regulatory agency to implement and enforce the law. Other states, such as Virginia, Nevada, and Colorado, have also passed comprehensive privacy laws, and similar laws are being considered in several other states, as well as at the federal and local levels. While these states’ laws, like the CCPA, also exempt some data processed in the context of clinical trials, these developments further complicate our compliance efforts and increase both legal risk and compliance costs for us and the third parties upon whom we rely.
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Outside of the United States, there are an increasing number of laws, regulations, and industry standards regarding privacy and data security. For example, the EU General Data Protection Regulation (“GDPR”) and UK GDPR impose strict requirements for processing personal information, and companies that violate the GDPR may face temporary or permanent bans on certain data processing activities and they may be subject to other penalties such as fines of up to 20 million Euros under the EU GDPR / 17.5 million pounds sterling under the UK GDPR or 4% of annual global revenue, whichever is greater; or private litigation related to processing of personal information brought by classes of data subjects or consumer protection organizations authorized to represent data subjects’ interests.
In some circumstances, we may be unable to transfer personal information between certain jurisdictions due to data localization requirements or other limitations on cross-border data flows. Europe and other jurisdictions have enacted laws requiring data to be localized or limiting the transfer of personal information to other countries. In particular, the European Economic Area (“EEA”) and the UK have significantly restricted the transfer of personal information to the United States and other countries whose privacy laws they consider inadequate. Although there are various mechanisms that may be used to transfer personal information from the EEA and UK to the United States in compliance with the law, such as the EEA and UK’s standard contractual clauses, these mechanisms are subject to legal challenges, and we may be unable to rely on these measures to lawfully transfer personal information to the United States in all cases. If there is no lawful manner for us to transfer personal information from the EEA, the UK, or other jurisdictions to the United States, or if the requirements for a legally compliant transfer are too onerous, we could face significant adverse consequences, including increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other third parties, and injunctions against our processing or transferring of personal information necessary to operate our business. Some European regulators have ordered certain companies to suspend or permanently cease certain transfers of personal information to recipients outside Europe for allegedly violating the EU GDPR’s cross-border data transfer limitations. Additionally, companies that transfer personal information to recipients outside of the EEA and/or UK to other jurisdictions, particularly to the United States, are subject to increased scrutiny from regulators, individual litigants, and activist groups.
In addition to any applicable privacy and data security laws and regulations, we may be subject to industry standards adopted by industry groups or bound by other contractual obligations related to privacy and data security. We may publish privacy policies, marketing materials, and other statements, such as compliance with certain certifications or self-regulatory principles, regarding data privacy and security. If these policies, materials, or statements are found to be deficient, lacking in transparency, deceptive, unfair, or misrepresentative of our practices, we may be subject to regulatory inquiries, regulatory enforcement actions and other adverse consequences.
Our obligations related to privacy and data security are quickly changing, becoming increasingly stringent, and creating regulatory uncertainty. Additionally, these obligations may be subject to differing applications and interpretations, which may be inconsistent between jurisdictions. Preparing for and complying with these obligations requires us to devote significant resources and may necessitate changes to our information technologies, systems, and practices and to those of any third parties that process personal information or other sensitive data on our behalf.
We may at times fail (or be perceived to have failed) in our efforts to comply with our privacy and data security obligations. Moreover, despite our efforts, our personnel or third parties on whom we rely on may fail to comply with such obligations, which could negatively impact our business operations. If we or the third parties that process personal information or other sensitive data our behalf fail, or are perceived to have failed, to address or comply with applicable privacy and data security obligations, we could face significant consequences, including but not limited to: government enforcement actions (e.g., investigations, fines, penalties, audits, and inspections); litigation (including class-action claims); additional reporting requirements and/or oversight; bans on processing personal information; and orders to destroy or not use personal information. Any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to loss of customers; significant reputational harm; an inability to process personal information or to operate in certain jurisdictions; limited ability to commercialize VYJUVEK or develop and commercialize our product candidates; expenditures of time and resources to defend ourselves against claims or inquiries; adverse publicity; or substantial changes to our business model or operations.
Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including high inflation and interest rates and concerns of a recession in the United States or other major markets due to a number of factors. For example, inflation and rising interest rates have caused volatility and disruptions in the capital and credit markets, and it is unclear how long such volatility will continue. In addition, Russia’s invasion of Ukraine and/or the Israel-Hamas conflict may lead to a prolonged, adverse impact on global economic, sociopolitical and market conditions. A severe or prolonged economic downturn could result in a variety of risks to our business, including our ability to raise additional capital when needed or on acceptable terms, if at all. A weak or declining economy, sanctions, trade restrictions
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and other global conditions could also strain our suppliers, possibly resulting in supply delays or disruptions. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business, financial condition, results of operations, and prospects.
Our internal computer systems, or those of any third-party with whom we do business may fail or suffer a cyber-security incident, such as a data breach or computer virus, which could harm our business by damaging our reputation, exposing us to liability, adversely impacting our revenue, or materially disrupting our operations, including production of VYJUVEK or our product development programs.
We rely on our information technology systems and infrastructure to manage our business. In addition, we receive, process, store, and transmit, often electronically, confidential data of others, including the participants in our clinical trials. Unauthorized access to our (or any third party with whom we do business, such as suppliers, distributors, manufacturers, or vendors) computer systems or stored data could result in the theft or improper disclosure of personal or confidential information or other sensitive data, the deletion or modification of records, or could cause interruptions in our operations. Cybersecurity threats include, but are not limited to, ransomware attacks, phishing attempts, and the exploitation of software vulnerabilities to gain access to our information technology environment, and cyber-security risks increase when we transmit information from one location to another, including transmissions over the Internet or other electronic networks. Despite our robust security measures and our commitment to implementing and continually improving our cybersecurity posture to mitigate the risk of a cybersecurity incident, we cannot guarantee that such incidents will not occur to us or any third-party with whom we do business. For example, our specialty pharmacy provider was affected by a cybersecurity incident that delayed reimbursement approvals and had a negative impact on our product revenue, net for the first quarter of 2024. Any cybersecurity incident, even if promptly addressed, may harm our reputation, damage our brand, and erode trust. Our facilities and systems, and those of any third-party with whom we do business, may also be vulnerable to acts of vandalism, software viruses, misplaced or lost data, programming and/or human errors, or other similar events which may disrupt our operations or expose personal and confidential information.
Moreover, in the event of a cybersecurity incident, we may face investigations, legal actions, including class action litigation, regulatory inquiries, and regulatory enforcement actions. We may also be subject to fines, consent orders, or mandated corrective actions that could have a material adverse impact on our operations and financial position. Furthermore, cybersecurity incidents and their legal consequences may impact investor confidence, potentially leading to a decrease in our stock price or limitations on our access to capital markets. If such an event were to occur and cause material interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed, and the further development and commercialization of our product candidates could be delayed.
Certain data breaches must be reported to affected individuals and various government and/or regulatory agencies, and in some cases to the media, under provisions of HIPAA, as amended by HITECH, other U.S. federal and state law, and requirements of non-U.S. jurisdictions, including the EU GDPR and relevant member state law in the European Union and other foreign laws, and financial penalties may also apply. Our insurance policies may not be adequate to compensate us for the potential losses arising from breaches, failures or disruptions of our infrastructure, catastrophic events and disasters or otherwise. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention. Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential information of others, whether by us or a third-party, could: (i) subject us to civil and criminal penalties; (ii) have a negative impact on our reputation; or (iii) expose us to liability to third parties or government authorities.
Our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Natural disasters could severely disrupt our operations or the operations of third-party suppliers or service providers and have a material adverse effect on our business, financial condition, results of operations and prospects. The severity and frequency of weather-related natural disasters have been amplified, and are expected to continue to be amplified by, global climate change. Such natural disasters may cause damage to and/or disrupt our operations, which may result in a material adverse effect on our VYJUVEK sales, our other product candidates, business, and results of operations. Moreover, climate change may also result in various chronic physical changes, such as changes in temperature or precipitation patterns or sea-level rise, that may also have an adverse impact on our operations. Our suppliers, vendors and business partners also face similar risks, and any disruption to their operations could have an adverse effect on our supply and manufacturing chain. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that
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damaged critical infrastructure, such as our manufacturing facilities, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans that we have in place currently are limited and may not prove adequate in the event of a serious disaster or similar event. A significant portion of our current supply of drug product for VYJUVEK and our product candidates is located at our manufacturing facilities in Pittsburgh, Pennsylvania. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Increased attention to, and evolving expectations for, environmental, social, and governance (“ESG”) initiatives could increase our costs, harm our reputation, or otherwise adversely impact our business.
Companies across industries are facing increasing scrutiny from a variety of stakeholders related to their ESG and sustainability practices. Expectations regarding voluntary ESG initiatives and disclosures may result in increased costs (including but not limited to increased costs related to compliance, stakeholder engagement, contracting and insurance), enhanced compliance or disclosure obligations, or other adverse impacts to our business, financial condition, or results of operations.
While we may at times engage in voluntary initiatives (such as voluntary disclosures, certifications, or goals, among others) to improve the ESG profile of our company and/or product and product candidates, such initiatives may be costly and may not have the desired effect. Moreover, we may not be able to successfully complete such initiatives due to factors that are within or outside of our control. Even if this is not the case, our actions may subsequently be determined to be insufficient by various stakeholders, and we may be subject to investor or regulator engagement on our ESG efforts, even if such initiatives are currently voluntary.
Certain market participants, including major institutional investors and capital providers, use third-party benchmarks and scores to assess companies’ ESG profiles in making investment or voting decisions. Unfavorable ESG ratings could lead to increased negative investor sentiment towards us or our industry, which could negatively impact our share price as well as our access to and cost of capital. Furthermore, certain investors have been engaged in “anti-ESG” campaigns, and, to the extent we take actions that are seen as positive to some investors other investors may take issue with such actions. To the extent ESG matters negatively impact our reputation, it may also impede our ability to compete as effectively to attract and retain employees or customers, which may adversely impact our operations.
In addition, we expect there will likely be increasing levels of regulation, disclosure-related and otherwise, with respect to ESG matters. For example, the SEC has published proposed rules that would require companies to provide significantly expanded climate-related disclosures in their periodic reporting, which may require us to incur significant additional costs to comply, including the implementation of significant additional internal controls processes and procedures regarding matters that have not been subject to such controls in the past, and impose increased oversight obligations on our management and board of directors. These and other changes in stakeholder expectations will likely lead to increased costs as well as scrutiny that could heighten all of the risks identified in this risk factor. Additionally, our customers and suppliers may be subject to similar expectations, which may augment or create additional risks, including risks that may not be known to us.
Our international operations may expose us to business, regulatory, political, operational, financial, pricing and reimbursement and economic risks associated with doing business outside of the United States.
We currently have operations and employees located outside the United States and our business strategy incorporates potential additional international expansion to target patient populations outside the United States. Doing business internationally involves a number of risks, including, but not limited to:
multiple, conflicting, and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses;
failure by us to obtain and maintain regulatory approvals for the use of our product candidates in various countries;
additional potentially relevant third-party patent rights;
complexities and difficulties in obtaining protection and enforcing our intellectual property;
difficulties in staffing and managing foreign operations;
complexities associated with managing multiple payor reimbursement regimes, government payors, or patient self-pay systems;
limits in our ability to penetrate international markets;
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financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products, and exposure to foreign currency exchange rate fluctuations;
natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade, and other business restrictions;
certain expenses including, among others, expenses for travel, translation, and insurance; and
regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, its books and records provisions, or its anti-bribery provisions.
Any of these factors could significantly harm our potential international expansion and operations and, consequently, our results of operations.
We are subject to U.S. and certain foreign export and import controls, anti-corruption laws and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets. We can face criminal liability and other serious consequences for violations, which can harm our business.
We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, and anti-corruption and anti-money laundering laws and regulations, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, contractors and other collaborators and partners from authorizing, promising, offering, providing, soliciting, or receiving, directly or indirectly, improper payments or anything else of value to recipients in the public or private sector. We may engage third parties to sell VYJUVEK or our product candidates, if approved, abroad and/or to obtain necessary marketing authorizations, permits, licenses, patent registrations and other regulatory approvals. We may have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors and other collaborators and partners, even if we do not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other adverse consequences.
Furthermore, U.S. export control laws and economic sanctions prohibit the provision of certain products and services to countries, governments, and persons targeted by U.S. sanctions.
The effect of pandemics, epidemics, outbreaks of infectious diseases, or similar public health crises on our operations and the operations of our customers, suppliers, third-party partners, and regulators could have an adverse impact our business.
Pandemics, epidemics, outbreaks of infectious diseases, or similar public health crises could adversely disrupt or impact our operations or those of our customers, suppliers, third-party partners, and regulators. In response to a pandemic or public health crisis, authorities may impose, and businesses and individuals may implement, numerous measures to try to contain the pandemic or public health crisis or treat its impact, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, shutdowns, and vaccine requirements. In the event that such measures or similar measures or restrictions are implemented as a result of a pandemic or public health crisis, our employees conducting research and development or manufacturing activities may not be able to access our laboratory or manufacturing spaces, and our core activities may be significantly limited or curtailed, possibly for an extended period of time. In addition, the operations of our customers, suppliers, third-party partners, and regulators could be significantly limited or curtailed. Timely initiation and completion of clinical trials are essential to our business and clinical trials are dependent upon the availability of clinical trial sites, researchers and investigators, regulatory agency personnel, and materials, any of which may be adversely affected by public health crises, such as pandemics. The extent to which a health crisis may impact our business, results of operations and future growth prospects will depend on a variety of factors and future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, scope, and severity of the public health crisis. A future public health crisis may have a material adverse effect on our business and results of operations.
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Inadequate funding for the FDA and other government agencies, including from government shut downs, or other disruptions to these agencies’ operations, could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory and policy changes. Disruptions at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary government agencies, which could adversely affect our business. For example, when the U.S. government has shut down in the past, certain regulatory agencies, such as the FDA and the United States Securities and Exchange Commission, or the SEC, have had to furlough critical employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to review and process our regulatory submissions in a timely manner, which could have a material adverse effect on our business. Further, future government shutdowns could impact our ability to access the public markets and obtain necessary capital. In addition, government funding of government agencies on which our operations may rely is subject to the political process, which is inherently fluid and unpredictable.
Risks Related to the Development, Regulatory Review and Approval of Our Product Candidates
If we are unable to advance our product candidates through clinical trials, obtain regulatory approval and ultimately commercialize our product candidates, or if we experience significant delays in doing so, our business will be materially harmed.
The development and commercialization of our product candidates are subject to many uncertainties, including the following:
successful enrollment and completion of clinical trials;
positive results from our current and planned clinical trials;
receipt of regulatory approvals from applicable regulatory authorities;
successful development of our internal manufacturing processes on an ongoing basis, including any required or desired changes to our manufacturing processes, and maintenance of our existing arrangements with third-party suppliers or manufacturers for clinical supply;
commercial launch of our product candidates, if and when approved, whether alone or in collaboration with others; and
acceptance of our product candidates, if and when approved, by patients, the medical community and third-party payors.
If we fail in one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business. If we do not receive regulatory approvals for our product candidates or changes to our manufacturing processes, our business, financial condition, results of operations and prospects could be materially and adversely affected.
Our gene therapy platform is based on a novel technology, which makes it difficult to predict the time and cost of obtaining regulatory approvals for our product candidates.
The clinical trial requirements of the FDA, EMA and other regulatory authorities and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of such product candidates. The regulatory approval process for novel product candidates such as ours, including approvals of or changes to manufacturing processes, can be more expensive and take longer than for other, better known or more extensively studied product candidates. It is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our product candidates in the United States, the European Union, or elsewhere, or how long it will take to commercialize our product candidates. Approvals by the European Commission may not be indicative of what the FDA may require for approval and approval by the FDA may not be indicative of what the European Commission would require for approval.
Regulatory requirements and policy governing gene and cell therapy products have changed frequently and may continue to change in the future. In 2016, the FDA established the Office of Tissues and Advanced Therapies (“OTAT”) within
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its Center for Biologics Evaluation and Research to consolidate the review of gene therapy and related products, and has established the Cellular, Tissue and Gene Therapies Advisory Committee, among others, to advise this review. In September 2022, the FDA announced retitling of OTAT to the Office of Therapeutic Products (“OTP”) and elevation of OTP to a “Super Office” to meet its growing cell and gene therapy workload. If we engage a National Institutes of Health funded institution to conduct a clinical trial, that institution’s Institutional Biosafety Committee as well as its Institutional Review Board (“IRB”), would need to review the proposed clinical trial to assess the safety of the trial. Similarly, the EMA may issue new guidelines concerning the development and marketing authorization for gene therapy medicinal products and require that we comply with these new guidelines.
These regulatory review committees and advisory groups and the new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. These additional processes may result in a review and approval process that are longer than we otherwise would have expected. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability to generate sufficient product revenue, and our business, financial condition, results of operations and prospects would be materially and adversely affected.
Our product or product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial potential, or result in significant negative consequences before or following any potential marketing approval.
There have been several significant adverse side effects in gene therapy trials using other vectors in the past. Gene therapy is still a relatively new approach to disease treatment and additional adverse side effects could develop. There also is the potential risk of delayed adverse events following exposure to gene therapy products due to persistent biologic activity of the genetic material or other components of products used to carry the genetic material.
In addition to side effects caused by our product candidates, the administration process or related procedures also can cause adverse side effects. If any such adverse events occur, our clinical trials could be suspended or terminated. If in the future we are unable to demonstrate that such adverse events were caused by the administration process or related procedures and not by our product candidates, the FDA, the European Commission, the EMA, or other regulatory authorities could order us to cease further development of, or deny approval of, our product candidates for any or all targeted indications. Even if we can demonstrate that any serious adverse events are not product-related, such occurrences could affect patient recruitment or the ability of enrolled patients to complete the trial. Moreover, if we elect, or are required, to delay, suspend or terminate any clinical trial of our product candidates, the commercial prospects of such product candidates may be harmed and our ability to generate product revenue from the product candidates may be delayed or eliminated. Any of these occurrences may harm our ability to develop product candidates, and may harm our business, financial condition, and prospects significantly.
Additionally, if a product candidate receives marketing approval, the FDA could require us to adopt a post-approval safety monitoring program to ensure that the benefits outweigh its risks, which may include, among other things, a medication guide outlining the risks of the product for distribution to patients and a communication plan to health care practitioners. Furthermore, if we or others later identify undesirable side effects caused by VYJUVEK or our product candidates, several potentially significant negative consequences could result, including:
regulatory authorities may suspend or withdraw approvals of such product;
regulatory authorities may require additional warnings on the label;
we may be required to change the way VYJUVEK or a product candidate is administered or conduct additional clinical trials;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of VYJUVEK or our product candidates and could significantly harm our business, financial condition, results of operations and prospects.
We may encounter substantial delays in our clinical trials, or we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.
Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidate for its intended indications.
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Obtaining marketing approval is an extensive, lengthy, expensive, and inherently uncertain process, and regulatory authorities may delay, limit, or deny approval of our product candidates for many reasons. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:
delays in reaching a consensus with regulatory authorities on trial design;
delays in opening sites and recruiting a sufficient number and diversity of suitable patients to participate in our clinical trials;
imposition of a clinical hold by regulatory authorities as a result of a serious adverse event or concerns with a class of product candidates, or after an inspection of our clinical trial operations or trial sites;
delays in having patients complete participation in a trial or return for post-treatment follow-up;
occurrence of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits; or
changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.
The results of nonclinical and preclinical studies and early clinical trials may not be predictive of the results of later-stage clinical trials, and interim results of a clinical trial do not necessarily predict final results. In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. In addition, preclinical and clinical data are often susceptible to various interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through nonclinical studies and initial clinical trials.
If we make manufacturing processes or formulation changes to our product or product candidates, we may need to conduct additional studies to bridge our modified product or product candidate to earlier versions and obtain regulatory approvals. Clinical trial delays could also shorten any periods during which we may have the exclusive right to commercialize our products or allow our competitors to bring products to market before we do, which could limit our potential revenue or impair our ability to successfully commercialize our products and may harm our business, financial condition, results of operations and prospects. Any delays, setbacks or failures in our clinical trials could materially and adversely affect our business, financial condition, results of operations and prospects.
Additionally, if the results of our clinical trials are inconclusive or if there are safety concerns or serious adverse events associated with our product candidates, we may:
be delayed in obtaining marketing approval, if at all, or be required to conduct additional confirmatory safety and/or efficacy studies;
obtain approval for indications or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
obtain approval without labeling claims that are necessary or desirable for the successful commercialization of our product candidates;
be subject to additional and costly post-marketing testing requirements or clinical trials;
be required to perform additional clinical trials to support approval;
have regulatory authorities withdraw, or suspend, their approval of the product or impose restrictions on its distribution;
be subject to the addition of labeling statements, such as warnings, precautions, or contraindications;
be sued; or
experience damage to our reputation.
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Our product development costs will also increase if we experience delays in testing or obtaining marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, need to be restructured or be completed on schedule, if at all.
Further, we, the FDA or an IRB, may suspend our clinical trials at any time if it appears that we or our collaborators are failing to conduct a trial in accordance with regulatory requirements, including the FDA’s Current Good Clinical Practice, or CGCP, regulations, that we are exposing participants to unacceptable health risks, or if the FDA finds deficiencies in our Investigational New Drug, or IND, applications or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for commencement and completion of future clinical trials. If we experience delays in the commencement or completion of our clinical trials, or if we terminate a clinical trial prior to completion, the commercial prospects of our product candidates could be negatively impacted, and our ability to generate revenue from our product candidates may be eliminated or delayed.
We rely on third parties to conduct certain aspects of our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval for, or commercialize, our product candidates.
We depend upon third parties to conduct certain aspects of our preclinical studies and depend on third parties, including independent principal investigators, to conduct our clinical trials under agreements with universities, medical institutions, and others. We negotiate budgets and contracts with such third parties, which may result in delays to our development timelines and increased costs.
We rely on third parties over the course of our clinical trials, and, as a result, may have limited control over the clinical principal investigators and limited visibility into their day-to-day activities, including with respect to their compliance with the approved clinical protocol. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to comply with CGCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these CGCP requirements through periodic inspections of clinical trial sponsors, clinical investigators, and clinical trial sites. If we or any of these third parties fail to comply with applicable CGCP requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to suspend or terminate these clinical trials or perform additional preclinical studies or clinical trials before approving our marketing applications. We cannot be certain that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with CGCP requirements. In addition, our later-stage clinical trials must be conducted with product produced under CGMP requirements and may require a large number of patients.
Our failure or any failure by these third parties to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be adversely affected if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws. Any third parties conducting aspects of our preclinical studies, or our clinical trials will not be our employees and, except for remedies that may be available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our preclinical studies and clinical programs. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other product development activities, which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the preclinical or clinical data they obtain is compromised due to the failure to adhere to our protocols or regulatory requirements or for other reasons, our development timelines, including clinical development timelines, may be extended, delayed or terminated, and we may not be able to complete development of, obtain regulatory approval of, or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed or precluded entirely. Though we carefully manage our relationships with principal investigators and other third parties, there can be no assurance that we will not encounter challenges or delays or that these delays or challenges will not have a material adverse impact on our business, financial condition, and prospects.
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Interim, “top-line,” and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available or as additional analyses are conducted, and as the data are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publish interim, “top-line” or preliminary data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data becomes available. Preliminary or “top-line” data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Material adverse changes between preliminary, “top-line” or interim data and final data could significantly harm our business, financial condition, results of operations and prospects.
Even if we obtain and maintain approval for our product candidates from the FDA, we may never obtain approval for them outside of the United States, which would limit our market opportunities and adversely affect our business.
Approval of a product candidate in the United States by the FDA does not ensure approval of such product candidate by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. Sales of VYJUVEK or our product candidates, if approved, outside of the United States will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries also must approve the manufacturing and marketing of the product candidate in those countries and the process for obtaining such approval may be lengthy and expensive. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and more onerous than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our product candidates, if approved, is also subject to approval. Obtaining a Marketing Authorization Application (“MAA”) from the European Commission following the opinion of the EMA is a lengthy and expensive process. Even if a product candidate is approved, the FDA or the European Commission, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and the European Union also have requirements for approval of product candidates with which we must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties, and costs for us and could delay or prevent the introduction of our product candidates in certain countries.
Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Also, regulatory approval for any of our product candidates may be withdrawn. If we fail to comply with the regulatory requirements, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed and our business, financial condition, results of operations and prospects will be adversely affected.
VYJUVEK and our product candidates remain subject to regulatory oversight even after regulatory approval. We will continue to incur costs related to regulatory compliance and are subject to risks related to non-compliance with or changes to applicable laws and regulations, which could cause VYJUVEK or any of our product candidates that obtain regulatory approval to lose that approval.
VYJUVEK, our first FDA-approved product, and any other product candidates that obtain regulatory approval in the future, will remain subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information. Any regulatory approvals that we receive for our product candidates may also be subject to a post-approval safety monitoring program, limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the quality, safety, and efficacy of the product. For example, the holder of an approved BLA is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA. The holder of an approved BLA also must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. For example, if demand for an approved product increases more than we previously estimate, we may need or desire to scale up an existing FDA-approved manufacturing process and the scaled-up manufacturing process would be subject to FDA review and approval. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.
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In addition, product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with CGMP requirements and adherence to commitments made in the BLA or foreign marketing application. If we, or a regulatory authority, discover previously unknown problems with an approved product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured or a regulatory authority disagrees with the promotion, marketing or labeling of that product, a regulatory authority may impose restrictions relative to that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.
If we fail to comply with applicable regulatory requirements, a regulatory authority may:
issue a warning letter asserting that we are in violation of the law;
seek an injunction or impose administrative, civil, or criminal penalties or monetary fines;
suspend or withdraw regulatory approval;
suspend any ongoing clinical trials;
refuse to approve a pending BLA or comparable foreign marketing application (or any supplements thereto) submitted by us or our strategic partners, if any;
restrict the marketing or manufacturing of the product;
seize or detain the product or otherwise require the withdrawal of the product from the market;
refuse to permit the import or export of product candidates; or
refuse to allow us to enter into government contracts.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our approved product and product candidates and adversely affect our business, financial condition, results of operations and prospects.
The FDA’s policies, and those of equivalent foreign regulatory agencies, may change and additional government regulations may be enacted that could negatively impact the existing marketing approval for VYJUVEK and prevent, limit, or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would materially and adversely affect our business, financial condition, results of operations and prospects.
While we have obtained orphan drug exclusivity for VYJUVEK and orphan drug designation for KB105, KB407, and KB408, it may not effectively protect us from competition, and we may be unable to obtain orphan drug designation for other product candidates. If our competitors are able to obtain orphan drug exclusivity before us, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.
Regulatory authorities in some jurisdictions, including the United States, the European Union, and Japan may designate drugs for relatively small patient populations as orphan drugs.
Under the Orphan Drug Act of 1983, as amended, the FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as having a patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process, but it can lead to financial incentives, such as opportunities for grant funding toward clinical trial costs, tax advantages and user-fee waivers. In addition, if a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the drug is entitled to orphan drug marketing exclusivity for a period of seven years. Orphan drug marketing exclusivity generally prevents the FDA from approving another application to market the same drug or biological product for the same disease or condition for seven years, except in limited circumstances, including if the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. A designated orphan drug may not receive orphan drug marketing exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Orphan drug marketing exclusivity rights in the United States may be lost if the FDA later determines that the
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request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
In the European Union, the European Commission, upon a recommendation from the EMA’s Committee for Orphan Medicinal Products, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention, or treatment of a life-threatening or chronically debilitating condition affecting not more than 5 in 10,000 persons in the EU. Additionally, orphan designation is granted for products intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating, or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biologic product. In the European Union, orphan medicinal product designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but orphan drug designation may entitle an applicant to financial incentives such as reduction of fees or fee waivers, protocol assistance, and access to the centralized marketing authorization procedure. Upon grant of a marketing authorization, orphan products are entitled to ten years of market exclusivity for the approved therapeutic indication, which means that the EMA and European Commission cannot accept another marketing authorization application, grant a marketing authorization, or accept an application to extend a marketing authorization for a similar product for the same indication for a period of ten years. The period of market exclusivity is extended by two years for orphan medicinal products that have also complied with an agreed Pediatric Investigation Plan, or PIP. The ten-year market exclusivity in the European Union may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for which it received orphan designation, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity, or where the prevalence of the condition has increased above the threshold. Additionally granting of an authorization for another similar orphan medicinal product where another product has market exclusivity can happen at any time: (i) the second applicant can establish that its product, although similar, is safer, more effective, or otherwise clinically superior; (ii) the applicant cannot supply enough orphan medicinal product, or (iii) where the applicant consents to a second orphan medicinal product application.
The orphan drug designation system in Japan aims to support the development of drugs for diseases that affect fewer than 50,000 patients in Japan, for which significant unmet medical need exists. An investigational therapy is eligible to qualify for orphan drug designation in Japan if there is no approved alternative treatment option or if there is high efficacy or safety compared to existing treatment options expected. Specific measures to support the development of orphan drugs in Japan include subsidies for research and development expenditures, prioritized consultation regarding clinical development, reduced consultation fees, tax incentives, priority review of applications, reduced application fees, and extended registration validity period. Up to 10 years of orphan exclusivity, known as the re-examination period, is granted for the product after approval. The orphan drug exclusivity may be rescinded by the Japanese government in certain circumstances.
Even though we have obtained orphan drug exclusivity for VYJUVEK in the United States; orphan drug designation for VYJUVEK in the European Union and Japan; orphan drug designation for KB105 and KB407 in the United States and the European Union; and orphan drug designation for KB408 in the United States, we cannot assure you that we will be able to obtain or maintain orphan drug exclusivity and if we are able to maintain the orphan drug exclusivity, the exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Further, we cannot assure you that any of our other product candidates will be approved for any orphan-designated use in any jurisdiction, in a timely manner or at all, or that a competitor will not obtain orphan drug exclusivity that could block the regulatory approval of any of our drug candidates for several years. If we are unable to maintain or obtain orphan drug exclusivity, our ability to generate sufficient revenue may be negatively affected. If a competitor is able to obtain orphan drug exclusivity that would block our product candidates’ regulatory approval, our ability to generate revenue could be significantly reduced, which would harm our business prospects, financial condition and results of operations. We do not know if, when, or how the FDA or other regulators may change the applicable orphan drug regulations and policies in the future, and it is uncertain how any changes might affect our business. Depending on what changes may be made to orphan drug regulations and policies, our business could be adversely impacted.
Accelerated approval by the FDA, even if granted for any of our product candidates, may not lead to a faster development or regulatory review or approval process and it does not increase the likelihood that our product candidates will receive marketing approval.
We may seek approval of our current or future product candidates using the FDA’s accelerated approval pathway. This pathway may not lead to a faster development, regulatory review or approval process and does not increase the likelihood that our product candidates will receive marketing approval. A product may be eligible for accelerated approval if it treats a serious or life-threatening condition, generally provides a meaningful advantage over available therapies, and demonstrates an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. As a condition of approval, the FDA may require that a sponsor of a product receiving accelerated approval perform adequate and well-controlled post-marketing confirmatory clinical trials. These confirmatory trials must be completed with due diligence. Under the Food and Drug Omnibus Reform Act of 2022,
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or FDORA, the FDA is permitted to require, as appropriate, that a post-approval confirmatory trial or trials be underway prior to approval or within a specified time after the date accelerated approval was granted. FDORA also requires sponsors to send updates to the FDA every 180 days on the status of such studies, including progress toward enrollment targets, and the FDA must promptly post this information publicly. Furthermore, under FDORA, the FDA is empowered to take action, such as issuing fines, against companies that fail to conduct with due diligence any post-approval confirmatory trial or submit timely reports to the agency on their progress. In addition, for products under consideration for accelerated approval, the FDA currently requires, unless otherwise requested by the agency, pre-approval of promotional materials intended for dissemination or publication within 120 days of marketing approval be submitted to the agency for review during the review period, which could adversely impact the timing of the commercial launch of the product. There can be no assurance that the FDA would allow any of our product candidates to proceed on an accelerated approval pathway, and even if the FDA did allow such pathway, there can be no assurance that any expedited development, review, or approval will be granted on a timely basis, or at all.
Breakthrough Therapy Designation, Fast Track Designation, Regenerative Medicine Advanced Therapy Designation or Priority Review by the FDA, or PRIME Scheme by the EMA, even if granted for any of our product candidates, may not lead to a faster development, regulatory review or approval process, and such designations may not increase the likelihood that any of our product candidates will receive marketing approval.
We may seek a Breakthrough Therapy Designation for some of our product candidates. A breakthrough therapy is defined as a therapy that is intended, alone or in combination with one or more other therapies, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the therapy may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For therapies that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Therapies designated as breakthrough therapies by the FDA may also be eligible for priority review and accelerated approval. Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a Breakthrough Therapy Designation for a product candidate may not result in a faster development process, review or approval compared to therapies considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide that such product candidates no longer meet the conditions for qualification or decide that the time for FDA review or approval will not be shortened.
We have obtained and may seek Fast Track Designation for some of our product candidates. For instance, VYJUVEK, KB105, and KB707 were granted Fast Track Designation by the FDA. If a therapy is intended for the treatment of a serious or life-threatening condition and the therapy demonstrates the potential to address unmet medical needs for this condition, the sponsor may apply for Fast Track Designation. The FDA has broad discretion whether or not to grant this designation, so even if we believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant it. Even if we do receive Fast Track Designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. For products that receive Fast Track Designation, sponsors may have greater interactions with the FDA and the FDA may initiate review of sections of the marketing application before the application is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a Fast Track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule for the submission of the remaining information and the sponsor must pay applicable user fees. However, the FDA's time period goal for reviewing an application does not begin until the last section of the application is submitted. The FDA may withdraw Fast Track Designation if it believes that the designation is no longer supported by data from clinical programs. Many biologics that have received Fast Track Designation have failed to obtain marketing approval. Fast Track Designation alone does not guarantee qualification for the FDA’s priority review procedures.
We have obtained and may seek Regenerative Medicine Advanced Therapy, or RMAT, designation for some of our product candidates. For instance, VYJUVEK was granted RMAT designation by the FDA. In 2017, the FDA established the RMAT designation as part of its implementation of the 21st Century Cures Act to expedite review of any drug that meets the following criteria: it qualifies as a RMAT, which is defined as a cell therapy, therapeutic tissue engineering product, human cell and tissue product, or any combination product using such therapies or products, with limited exceptions; it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition; and preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such a disease or condition. Like Breakthrough Therapy Designation, RMAT designation provides potential benefits that include more frequent meetings with the FDA to discuss the development plan for the product candidate, and eligibility for rolling review and priority review. Products granted RMAT designation may also be eligible for accelerated approval on the basis of a surrogate or intermediate endpoint reasonably likely to predict long-
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term clinical benefit, or reliance upon data obtained from a meaningful number of sites, including through expansion to additional sites. RMAT-designated products that receive accelerated approval may, as appropriate, fulfill their post-approval requirements through the submission of clinical evidence, clinical trials, patient registries, or other sources of real-world evidence, such as electronic health records; through the collection of larger confirmatory data sets; or via post-approval monitoring of all patients treated with such therapy prior to approval of the therapy. There is no assurance that we will be able to obtain RMAT designation for our product candidates. RMAT designation does not change the FDA’s standards for product approval, and there is no assurance that such designation will result in expedited review or approval or that the approved indication will not be narrower than the indication covered by the designation. Additionally, RMAT designation can be revoked if the criteria for eligibility cease to be met as clinical data emerges.
If the FDA determines that a product candidate offers a treatment for a serious condition and, if approved, the product would provide a significant improvement in safety or effectiveness, the FDA may designate the product candidate for priority review. A priority review designation means that the goal for the FDA to review an application is six months, rather than the standard review period of ten months. The FDA has broad discretion with respect to whether or not to grant priority review status to a product candidate, so even if we believe a particular product candidate is eligible for such designation or status, the FDA may decide not to grant it. Moreover, a priority review designation does not necessarily result in an expedited regulatory review or approval process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Receiving priority review from the FDA does not guarantee approval within the six-month review cycle, or at all.
We have obtained and may seek to qualify our product candidates under the PRIority MEdicines (“PRIME”) scheme from the EMA. For instance, VYJUVEK was granted PRIME designation. The PRIME scheme is open to medicines under development and for which the applicant intends to apply for an initial MAA through the centralized procedure. Eligible products must target conditions for which where is an unmet medical need (there is no satisfactory method of diagnosis, prevention or treatment in the European Union or, if there is, the new medicine will bring a major therapeutic advantage) and they must demonstrate the potential to address the unmet medical need by introducing new methods or therapy or improving existing ones. There is no assurance that we will be able to obtain PRIME qualification for our product candidates. PRIME does not change the standards for product approval, and there is no assurance that such qualification will result in expedited review or approval. Moreover, where, during the course of development, a product no longer meets the eligibility criteria, support under the PRIME scheme may be withdrawn.
We have obtained a rare pediatric disease designation for certain of our product candidates; however, there is no guarantee that FDA approval will result in issuance of a priority review voucher.
In 2012, Congress authorized the FDA to award priority review vouchers to sponsors of certain rare pediatric disease product applications. This program is designed to encourage development of new drug and biological products for prevention and treatment of certain rare pediatric diseases. Specifically, under this program, a sponsor that receives an approval for a drug or biologic for a “rare pediatric disease” that meets certain criteria may qualify for a voucher that can be redeemed to receive a priority review of a subsequent marketing application for a different product. The sponsor of a rare pediatric disease drug product receiving a priority review voucher may transfer (including by sale) the voucher to another sponsor. The voucher may be further transferred any number of times before the voucher is used, as long as the sponsor making the transfer has not yet submitted the application. The FDA may also revoke any priority review voucher if the rare pediatric disease drug for which the voucher was awarded is not marketed in the United States within one year following the date of approval. We received rare pediatric disease designation for VYJUVEK and were awarded a priority review voucher following FDA approval of VYJUVEK in May 2023. The priority review voucher was sold in August 2023. We have also obtained a rare pediatric disease designation for KB105, KB104, and for KB407. However, there is no guarantee that we will be able to obtain a priority review voucher if these product candidates are approved by the FDA. Congress included a sunset provision in the statute authorizing the rare pediatric disease priority review voucher program. Under the current statutory sunset provisions, after September 30, 2024, the FDA may only award a voucher for an approved rare pediatric disease product application if the sponsor has rare pediatric disease designation for the product candidate, and that designation was granted by September 30, 2024. After September 30, 2026, the FDA may not award any rare pediatric disease priority review vouchers.
We may seek designation for our platform technology as a designated platform technology, but we might not receive such designation, and even if we do, such designation may not lead to a faster development or regulatory review or approval process.
We may seek designation for our platform technology as a designated platform technology. Under the Food and Drug Omnibus Reform Act of 2022, or FDORA, a platform technology incorporated within or utilized by a drug or biologic is eligible for designation as a designated platform technology if (1) the platform technology is incorporated in, or utilized by, a product approved under a New Drug Application, or NDA, or BLA; (2) preliminary evidence submitted by the sponsor of the approved product, or a sponsor that has been granted a right of reference to data submitted in the application for such product,
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demonstrates that the platform technology has the potential to be incorporated in, or utilized by, more than one product without an adverse effect on quality, manufacturing, or safety; and (3) data or information submitted by the sponsor indicates that incorporation or utilization of the platform technology has a reasonable likelihood to bring significant efficiencies to the product development or manufacturing process and to the review process. A sponsor may request the FDA to designate a platform technology as a designated platform technology concurrently with, or at any time after, submission of an IND application for a product that incorporates or utilizes the platform technology that is the subject of the request. If so designated, the FDA may expedite the development and review of any subsequent NDA or BLA for a product that uses or incorporates the platform technology. Even if we believe our platform technology meets the criteria for such designation, the FDA may disagree and instead determine not to grant such designation. In addition, the receipt of such designation for a platform technology does not ensure that our applicable product candidates will be developed more quickly or receive a faster FDA review process or ultimate FDA approval. Moreover, the FDA may revoke a designation if the FDA determines that a designated platform technology no longer meets the criteria for such designation.
Risks Related to Manufacturing
Delays in obtaining regulatory approvals of the process, or changes to the process, and facilities needed to manufacture VYJUVEK or our product candidates or disruptions in our manufacturing process may disrupt our production of VYJUVEK or delay or disrupt our development and commercialization efforts with respect to our product candidates.
Before we can begin to commercially manufacture our product candidates, we must pass a pre-approval inspection of our manufacturing facilities by the FDA. A manufacturing authorization must also be obtained from the appropriate EU regulatory authorities. The timeframe required for us to obtain such approvals is uncertain. To obtain approval, we need to ensure that all our processes, methods and equipment are compliant with CGMP, and perform extensive audits of vendors, contract laboratories, and suppliers. If any of our vendors, contract laboratories, or suppliers is found to be out of compliance with CGMP, we may experience delays or disruptions in manufacturing while we work with these third parties to remedy the violation or while we work to identify suitable replacement vendors, contract laboratories, or suppliers. The CGMP requirements govern quality control of the manufacturing process and documentation policies and procedures. In complying with CGMP, we are obligated to expend time, money and effort in production, record keeping and quality control to assure that the product meets applicable specifications and other requirements. If we fail to comply with these requirements, we will be subject to possible regulatory action and may not be permitted to sell any approved product that we may develop.
In addition, the manufacturing process used to produce VYJUVEK and our product candidates is complex and novel and demand for an approved product may require the need for us to change to the manufacturing process, which may require regulatory approval before we are able to sell the product manufactured by the changed process. The production of VYJUVEK and our product candidates require processing steps that are more complex than those required for most chemical pharmaceuticals. Moreover, unlike chemical pharmaceuticals, the physical and chemical properties of a biologic such as ours generally cannot be fully characterized. As a result, assays of the finished product may not be sufficient to ensure that the product will perform in the intended manner. Accordingly, we employ multiple steps to control our manufacturing process to assure that the process works and that VYJUVEK and our product candidates are made strictly and consistently in compliance with the process. Problems with an approved manufacturing process, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient inventory. In addition to the potential impacts of problems with an approved manufacturing process, changes to an approved manufacturing process may result in problems with the process design, process reproducibility, stability, or batch consistency, and may require regulatory approval before we are permitted to sell products manufactured with the changed manufacturing process, which could potentially delay commercial availability of an approved product. We may encounter problems achieving adequate quantities and quality of materials that meet FDA, EMA or other applicable standards or specifications with consistent and acceptable production yields and costs.
Although we have established our own manufacturing facilities for VYJUVEK and our product candidates, we may also utilize third parties to conduct our product manufacturing or components thereof. Therefore, we are subject to the risk that these third parties may not perform satisfactorily.
We may maintain third-party manufacturing capabilities in order to provide multiple sources of supply of VYJUVEK or a product candidate that is approved for sale. In addition, we may utilize third parties to manufacture components of our products. For example, we use a third-party to manufacture the sterile gel that is mixed with our in-house produced vector for VYJUVEK. Our ability to commercially supply VYJUVEK depends, in part, on the ability of third parties to supply and manufacture the raw materials and other important components related to our manufacture of VYJUVEK. If we fail to develop and maintain supply relationships with these third parties, we may be unable to successfully commercialize VYJUVEK or any approved product candidate. Any of our existing suppliers may:
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fail to supply us on a timely basis or in the requested amount due to unexpected damage to or destruction of facilities or equipment or otherwise;
fail to increase manufacturing capacity and at higher yields in a timely or cost-effective manner, or at all, to sufficiently meet our commercial needs;
be unable to meet our production demands due to issues related to their reliance on sole-source suppliers and manufacturers;
supply us with materials that fail to meet regulatory requirements;
become unavailable through business interruption or financial insolvency;
lose regulatory status as an approved supply source;
be unable or unwilling to (i) honor current supply agreements or (ii) renew current supply agreements when such agreements expire on a timely basis, on acceptable terms or at all; or
discontinue production or manufacturing of materials that we acquire through such third-party supplier.
In the event of any of the foregoing, if we do not have an alternative supplier or manufacturer in place, we may not be able to manufacture our products for commercial, regulatory, or clinical purposes and would be required to expend substantial management time and expense to identify, qualify and transfer to alternative suppliers or manufacturers. There can be no assurance that replacements would be available to us on a timely basis, on acceptable terms, or at all. Any need to find and qualify new suppliers or manufacturers could significantly delay production of VYJUVEK or any product candidate, if approved, adversely impact our ability to market VYJUVEK or any product candidate, if approved, and have a material adverse effect on our business, financial condition, results of operations and prospects.
If we or a third-party supplier or manufacturer fails to comply with applicable CGMP regulations, the FDA and foreign regulatory authorities can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new product candidate or suspension or revocation of a pre-existing approval. Such an occurrence may cause our business, financial condition, results of operations and prospects to be materially harmed.
Any contamination in, or changes to, our manufacturing process, shortages of raw materials or failure of any of our key suppliers to deliver necessary components could result in delays in our ability to produce VYJUVEK or any other approved product for commercial supply or any product candidate for clinical development.
Given the nature of biologics manufacturing, there is a risk of contamination. Any contamination could materially adversely affect our ability to produce VYJUVEK or our product candidates on schedule and could, therefore, harm our results of operations and cause reputational damage.
Some of the raw materials required in our manufacturing process are derived from biologic sources. Such raw materials are difficult to procure and may be subject to contamination or recall. A material shortage, contamination, recall or restriction on the use of biologically derived substances in the manufacture of VYJUVEK or our product candidates could adversely impact or disrupt the commercial manufacturing or the production of clinical material, which could materially and adversely affect our development timelines and our business, financial condition, results of operations and prospects.
Failure to increase manufacturing capacity and at higher yields in a timely or cost-effective manner, or at all, to sufficiently meet our commercial needs could result in delays in commercial availabi