Can This Healthcare Stock Keep Beating the Market?

While the broader market is struggling, Krystal Biotech (KRYS -0.89%) is performing relatively well. Shares of the gene-editing specialist are in the green for the year. It’s been a volatile ride, though, and there could be more twists and turns for Krystal Biotech in the next 10 months. On the other hand, there are good reasons the biotech might continue to deliver market-beating returns. Should investors bet on Krystal Biotech right now?

KRYS data by YCharts

Vyjuvek is leading the way

Krystal Biotech is, at the moment, a clinical-stage company that focuses on rare dermatologic diseases. However, it recently got a little closer to launching a product on the market. In June, Krystal Biotech submitted an application to the U.S. Food and Drug Administration (FDA) for Vyjuvek, a potential gene-editing therapy for dystrophic epidermolysis bullosa (DEB).

This rare condition causes the skin to become fragile and makes it more susceptible to injuries. A defective gene causes DEB, and Vyjuvek addresses the cause of the disease at the genetic level. Vyjuvek produced strong results in clinical trials. In a study that enrolled 31 DEB patients with wounds treated by Vyjuvek, 71% and 67% achieved complete wound healing three months and six months after treatment, respectively.

By comparison, only 20% of wounds treated with placebo achieved the same feat at three months and 22% at six months. Further, investigators observed no severe adverse reactions during the trial and only one mild reaction. In other words, Vyjuvek seems to have a solid safety and efficacy profile. According to Krystal biotech, there could be a total of 9,000 DEB patients in the world based on its genetic prevalence.

That includes roughly 3,000 in the U.S. and 3,000 in Europe. While that does not seem like a vast patient population, gene therapies aren’t known for being cheap. Krystal Biotech estimates that the DEB market represents a more than $500 million worldwide opportunity. The company plans to submit an application for Vyjuvek in Europe during the second half of the year.

What’s next for Krystal Biotech?

Although the data from clinical trials looks promising, Vyjuvek could run into unforeseen regulatory problems. It’s also essential to consider Krystal’s ability to fund its operations. Smaller biotechs can often face severe problems as a result of funding issues. Krystal Biotech currently generates no revenue and is not profitable. The gene-editing specialist ended the first quarter with $269.3 million in cash and cash equivalents and an additional $165.3 million in short-term investments.

Given Krystal Biotech’s cash burn of almost $24 million during the first quarter, its current cash balance seems enough to support its operations during the roughly 10 months it generally takes for the FDA to decide on new drug applications. Funding shouldn’t be too much of an issue for the biotech, at least until regulators get back with an answer on Vyjuvek.

However, Krystal Biotech may need to raise additional funds to support its commercialization efforts for Vyjuvek, assuming the therapy earns the green light. The company may resort to dilutive forms of financing, especially since the approval of its leading candidate would likely lead to a sharp increase in the share price; that’s something smaller biotech companies often do. Krystal Biotech last issued new shares in November 2021.

Krystal Biotech has a lot riding on Vyjuvek, the approval of which would help validate the company’s platform. The biotech has several other pipeline candidates targeting other skin-related illnesses. Revenue from Vyjuvek would help Krystal Biotech pour more funding into research and development, and allow it to make even more progress with its other candidates.

What does that mean for investors? On the one hand, Krystal Biotech seems risky; if Vyjuvek fails to win regulators over, the company’s shares will fall off a cliff. On the other hand, the company’s prospects look bright. Even if Vyjuvek fails to earn approval initially, it could be due to technical and resolvable issues.

Eventually, the gene therapy looks reasonably likely to make it to the market — even if regulatory delays happen. That bodes well for Krystal Biotech’s future. While it is hard to predict how the company will perform until the FDA’s decision, long-term investors comfortable with above-average risk and volatility might consider initiating a (small) position in this biotech stock

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