This year has been a good one for equity markets so far, but even by that standard, some stocks are doing incredibly well.
That's the case with Krystal Biotech (KRYS 0.77%), a mid-cap company that is already up 48% in 2023. As is often the case in this industry, the rare-diseases-focused biopharmaceutical company owes its solid run on the stock market to a recent regulatory approval (more on that below).
But after gaining that much, is Krystal Biotech still worth investing in at current levels? Let's find out.
A game-changing product
Krystal Biotech started the year as a clinical-stage company -- that is, with no product on the market. But the company was awaiting word from the U.S. Food and Drug Administration on an application for its lead candidate Vyjuvek. This gene therapy for the treatment of dystrophic epidermolysis bullosa (DEB, a rare genetic skin disease) finally earned approval from the agency on May 19.
It became the first DEB medicine to be granted the green light in the U.S. Krystal Biotech is working on commercialization efforts, and plans to launch Vyjuvek by the third quarter. Let's take a minute to look at the commercial opportunity available.
DEB results from mutations that affect the COL7A1 gene, which normally encodes for a protein that strengthens the outer layers of people's skins. The disease makes patients' skin brittle and susceptible to wounds. For instance, patients with DEB can incur injuries merely from bumping against an object or scratching their skin to relieve an itch. This illness is extremely debilitating -- and it gets worse. Those with DEB are often more likely to develop skin cancer.
Vyjuvek is a topical gel that addresses DEB at the genetic level, and helps heal the wounds associated with the disease. Krystal Biotech estimates that there are about 9,000 DEB patients worldwide and 3,000 in the U.S., although many are undiagnosed.
The company will charge an average of about $24,250 per vial of Vyjuvek. The total annual price per patient will be around $485,000 (when taking into account government discounts). Assuming an (unrealistic) best-case scenario where Krystal Biotech will manage to treat all 3,000 U.S. patients, the market opportunity could be about $1.5 billion in the country.
A promising outlook, but beware the risks
It's important to factor in Vyjuvek's worldwide opportunity to decide whether Krystal Biotech is reasonably valued. After all, the company is looking to earn approval for the gene therapy elsewhere, including in Europe. Investment bank William Blair & Company projects $1.1 billion in sales for Vyjuvek by 2030, including $668 million in the U.S.
Is that enough to justify a market capitalization of $3.2 billion today? Hardly. However, let's look at the rest of Krystal Biotech's business. While it has no other approved products, it has many pipeline candidates. But only three are undergoing clinical trials, and none of the three is in a late-stage study. In other words, it will be a while before these therapies earn approval, if they ever do. So Krystal Biotech could still be very far from turning a profit.
The company reported a net loss of $45.3 million in the first quarter, slightly better than the net loss of almost $50 million in the year-ago period. The company will have to spend money on Vyjuvek's launch. It recently raised $160 million through a private equity placement. While that should help, expect the company's expenses to rise in the coming quarters.
With all that said, Krystal Biotech certainly looks like a promising company. The recent approval of Vyjuvek helps validate its gene therapy platform, and the multiple projects it is working on could yield major approvals down the road.
However, with just one product on the market that will take some time before starting to generate consistent revenue and no other medicine that will launch within the next two years (at least), Krystal Biotech looks like a risky stock. Thankfully, there are much more attractive biotech stocks to consider investing in today.
