It's been a solid year for Krystal Biotech (KRYS 0.77%), a midcap company focusing on developing gene therapies, as it has easily outperformed the market this year. However, zooming out tells an even more impressive story: In the past five years, its shares have risen by 384% -- more than quadrupling in this period.
The company owes this performance to solid clinical and regulatory progress. But can it pull off something similar in the next half a decade? Let's find out.
Krystal Biotech's first approval
Krystal started the year with no product on the market, but that has since changed. In May, the U.S. Food and Drug Administration (FDA) gave the green light to the company's Vyjuvek, a gene therapy for dystrophic epidermolysis bullosa (DEB), sometimes called butterfly skin.
Krystal Biotech focuses on rare skin diseases, of which DEB is a prime example. This illness makes the skin fragile, brittle, and highly prone to injuries from things most people would consider routine; patients can suffer severe injuries merely from scratching an itch. Vyjuvek is a topical gel that can treat wounds associated with DEB. It's the first such product approved by the FDA, so there's a good chance it will dominate the field.
However, DEB is an exceedingly rare illness. There are only 3,000 patients in the U.S. and a total of 9,000 worldwide. Even with a price tag of $485,000 per year in the U.S. to treat a patient with Vyjuvek, Krystal's total addressable market in the country is only about $1.5 billion.
Vyjuvek isn't yet approved in Europe, although Krystal recently issued an application for marketing authorization to regulatory authorities in the region. It is unlikely (at best) that the biotech will treat all 9,000 DEB patients worldwide. Even the total number of patients in the U.S. and Europe -- about 6,000 -- will be a challenging goal to achieve. Assuming it prices Vyjuvek in Europe at roughly the same level as in the U.S., the company's opportunity comes out to about $2.9 billion.
Krystal Biotech's market cap as of this writing is exactly that -- $2.9 billion.
True, Vyjuvek's reception has so far been encouraging. Krystal reported 284 patient starts as of the end of the third quarter, with still-strong demand. The medicine's net revenue came in at $8.6 million since approval. Still, based on this analysis alone, some would argue that the stock is overvalued and is likely to underperform the market in the next few years.
Krystal's overall prospects
There is more to the story for Krystal Biotech. First, the company's success in developing a gene therapy for a rare disease is an impressive display of its innovative abilities. Second, Krystal has a reasonably deep pipeline for a mid-cap biotech. The company is running about a dozen programs targeting various rare diseases.
But here's the problem: The most advanced of the bunch is in a phase 1/2 clinical trial. Even in the best-case scenario, this program won't reach the market in anything less than two years. And, of course, it's important to factor in potential issues -- clinical and regulatory -- that could hold Krystal's performance back, or even send its shares dropping off a cliff.
Funding could also be an issue, as it often is with smaller biotech companies. Cash, cash equivalents, and investments as of Sept. 30 came in at $598.6 million, compared to $383.8 million at the end of 2022. Krystal will also generate some revenue from Vyjuvek -- about $184.21 million next year, according to the consensus of analysts. It isn't clear that the company can fund its multiple clinical programs without resorting to other alternatives to raise funds.
All in all, Krystal Biotech does look promising, but there are substantial risks involved. Will the stock quadruple again in the next five years? The answer is a resounding no, in my view. Can Krystal deliver market-beating returns during this period? That's a harder question, and there are too many unknown and moving parts to settle on a definitive answer.
What seems clear, though, is that only investors comfortable with heightened risk and volatility should consider initiating a small position in the stock.
