Krystal Biotech Inc

NASDAQ:KRYS

Earnings Call Analysis

Krystal Biotech's VYJUVEK Drives Strong 2023 Growth

Krystal Biotech had a landmark year in 2023 with the launch of VYJUVEK, the first treatment targeting the genetic cause of Dystrophic Epidermolysis Bullosa (DEB). The company achieved over $50 million in net product revenue within six months of VYJUVEK's U.S. approval, showcasing its alignment with some of the most successful rare disease launches. Gross margins stood at 93% for the fourth quarter and are expected to improve to over 95% post-launch. A permanent J code is set to enhance Medicaid coverage, although temporary impacts were noted during the transition to the new code. With regards to total market opportunity, Krystal now comfortably anticipates a global market exceeding $1 billion for VYJUVEK, driven by U.S. launches and positive data from Europe and Japan. The company now enjoys a strong position, with $594.1 million in cash and investments to support ongoing U.S. deployment and planned global expansion. In 2024, Krystal will focus on increasing sales and marketing efforts, aiming for continued growth supported by a robust clinical pipeline and strategic investments in their unique HSV-1 based gene delivery platform.

Revenues and Market Presence

The company has recorded a solid $50.7 million in revenue, setting a positive tone for its financial health, and has successfully secured reimbursement approvals for 228 patients while establishing coverage policies for over 93% of commercial and Medicaid patients.

Global Expansion and Regulatory Progress

As the company awaits drug approval decisions from European and Japanese authorities in the second half of 2024 and 2025 respectively, it remains optimistic about its drug’s approval, based on recent positive interactions with the agencies. This global expansion contributes significantly to the company’s market opportunity, with a potential addition of $250 million to $300 million to the future revenue projections, raising the business valuation to north of $1 billion.

Clinical Pipeline Momentum

The company's clinical pipeline shows promising advancements. Drugs such as KB407 for cystic fibrosis and KB408 for alpha-1 antitrypsin deficiency are progressing through their respective clinical trial phases, with the latter expected to enroll quickly in 2024. Both KB707, a cancer therapy, and KB301, an aesthetic program, are targeting critical milestones and data announcements in the first half of 2024. Additionally, the company plans to begin a Phase II study for the treatment of TGM1-ARCI after aligning study endpoints with the FDA, with more updates expected later this year.

Financial Stability and Cost Management

Ending 2023 with $358.3 million in cash and a strong balance sheet, the company can comfortably fund its operations and growth. Although R&D and SG&A expenses have seen an uptick, to $11.4 million and $24.8 million respectively for the quarter due to investments in expansion and pipeline development, the net income for the quarter has been a positive $8.7 million. Looking into 2024, increased SG&A costs are anticipated due to expansion plans, but the company remains well capitalized to handle these growth drivers.

Market Opportunities Amid Competition

The market response remains strong despite the holiday period lag, and patient treatment patterns are encouraging, with many treating large wound sizes. Compliance with the drug VYJUVEK remains high, and the company is considering ways to increase dosage per vial to enhance treatment. The competitive landscape does not pose a significant threat as the company’s product is deemed more convenient than alternative treatments. The executives are confident about their treatment approach, especially since competitor products, like Abeona's, only demonstrate a 50% wound closure compared to the 100% wound closure achieved by VYJUVEK.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to the Krystal Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to hand the conference over to your host, Meg Dodge, Head of Investor Relations and Corporate Communications. Please begin.

[Meg Dodge, executive]

Good morning, and thank you all for joining today's call. Earlier today, we released our financial results for the fourth quarter and full year of 2023. The press release is available on our website at www.krystalbio.com. Our earnings 8-K was filed earlier today. And additionally, we filed our 10-K with the SEC. Joining me will be Krish Krishnan, Chairman and Chief Executive Officer; Suma Krishnan, President of Research and Development; and Kate Romano, Chief Accounting Officer. I'd like to note, during this webcast, we will be making a number of forward-looking statements about our future business plans, strategies, financial performances and projections, product candidate development plans, including statements about VYJUVEK.

These forward-looking statements involve risks and uncertainties, any of which are beyond Krystal's control. Actual results could materially differ from these forward-looking statements as any and such risks can materially and adversely affect the business, results of operations and trading price of Krystal's common stock. For a detailed description of applicable risks and uncertainties, we encourage you to review our SEC filings. The company does not undertake any obligation to publicly update its forward-looking statements, including any financial projections provided today based on subsequent events or circumstances. With that, let me now turn the call over to Krish.

[Krish Krishnan, executive]

Meg, thank you. Good morning, and thanks for joining the Krystal's earnings call. 2023 was a spectacular year for Krystal and an inflection point for our company. With the approval and launch of VYJUVEK for the treatment of Dystrophic Epidermolysis Bullosa or DEB, we've now brought to market the first and only treatment that addresses the genetic cause of this debilitating disease. It has been immensely rewarding to hear from patients, families and the entire debt community on the positive impact VYJUVEK has had on their lives.

It's also exciting to have secured this first approval for an entirely new treatment paradigm. We believe that a redoseable topical off-the-shelf gene therapy that can be dosed at home by HCP holds significant potential not only for debt patients, but for many others suffering from other rare and serious diseases. We've only just begun tapping into the power of the HSV-1 based gene therapy platform. As I will share in a moment, our U.S. launch of VYJUVEK is in a great place, tracking closely to some of the most successful rare disease launches from recent years with over $50 million in net product revenue from VYJUVEK in the last 6 months since approval. We've seen rapid uptake across the U.S., patient compliance is high, Axis is almost behind this. And all these are starting to reflect in our net revenue.

We're also making significant progress globally and look forward to growing the number of patients benefiting from VYJUVEK in the days, months and years to come. Our success in 2023 allowed us to deliver another year of significant value creation for our shareholders, and perhaps more importantly, set us down a path for continued growth in the years to come. Our vision for Krystal has always been to build a fully integrated commercially established biotechnology company, developing and commercializing a portfolio of high-value generic medicines and generating long-term shareholder returns. Thanks to a breakthrough year in 2023 and growing VYJUVEK revenue, we are positioned better than ever to deliver on that vision. We expect to have at least 5 clinical trials this year, we have alignment with the FDA on a development path for B-VEC formulated as high drops to help treat eye lesions in DEB patients and could potentially start another clinical trial in the second half of 2024.

With strong financial resources and FDA-approved redoseable gene therapy platform and 2 commercial scale GMP manufacturing facilities, we're uniquely positioned to develop and bring to market a highly differentiated gene therapies for many rare and serious diseases. We look forward to making continued progress in 2024. As you have no doubt seen by now, our commercial launch is proceeding exceptionally well. We reported net VYJUVEK revenue of $42.1 million for the fourth quarter and $50.1 million for 2023. Gross margins were 93% for the quarter, in line with our previous guidance of margins north of 90% at launch and expect it to improve to over 95% after a few years. Gross to net adjustments in the fourth quarter were 14%. Our long-term guidance on GTN is unchanged and we expect it will settle into the mid- to high teens range, reflecting a roughly even split of DEB patients on commercial and government plans.

With respect to future revenue, I'd like to highlight that earlier this year, a permanent J code was assigned to VYJUVEK. The J code is an important milestone for finalizing coverage by Medicaid as it is acquired, for many mandatory Medicaid states. Although this is a long-term tailwind and sets us up for sustained broad access in the U.S. I will note that the revenue in the month of January was temporarily impacted as commercial and Medicaid coverage plans, including those that were previously covering VYJUVEK under a temporary J code that updated to the now is permanent J code. You can also expect to see an impact this year as we accrue for patients on contracted commercial plans potentially hitting the price cap of $900,000 gross per patient per calendar year in 2024.

Before sharing details on the U.S. launch, I'd like to highlight a revision to our outlook on the total market opportunity that exists for VYJUVEK. Now that we have the benefit of 6 months launch data in the U.S. and a clear line of sight on registrations and patient numbers in Europe and Japan and alignment with FDA on the development plan to get B-VEC formulated as eye drops to treat eye lesions in DEB patients, we're confident in the total global market opportunity for VYJUVEK to get over $1 billion based on the trajectory of our launch and the feedback we're receiving from the field. Our conviction in the total U.S. market opportunity for VYJUVEK is only growing.

We have spoken before about a total debt population of 3,000 in the U.S., of which 1,200 are identified. That 1,200 figure initially based on independent third-party claims data sets from multiple sources has been further strengthened by our latest data from the field which includes interactions with over 1,500 unique HCPs as well as real-time claims alerts that they used to optimize field developments. We expect to close the gap between 1,200 and 3,000 in the years to come. We're already finding new patients, patients not part of the identified pool in the first few quarters of launch, and we expect this to continue, if not accelerate as we increase our focus on patient finding in later quarters. Once we reach a meaningful threshold of 1,500 patients, we'll update an identified patient population number.

Also, Christine Wilson has now joined Crystal as the Head of U.S. Sales and Marketing, reporting to me. Christine brings decades of commercial experience to Krystal, including a strong record of leading U.S. rare disease sales teams at Travere, Reata and Shire. Most importantly, Christine has direct experience finding and activating rare disease patients in the community and will play a critical role for us as we continue to penetrate in and grow our identified patient pool in the months and years to come.

Outside of the United States, we benefit from patient registries, which give us a high degree of confidence in the global market opportunity. In France, Germany, Italy, Spain and the U.S. alone, we believe there are over 2,200 DEB patients that could benefit from VYJUVEK, and there are hundreds more in Japan. We look forward to seeing continued growth in 2024, not only in the U.S. but also globally as we make progress towards EU and Japanese approvals. As Suma will share, we're on track to launch in both regions in 2025.

Now I'd like to share a few highlights on the U.S. launch. With respect to patient Start Forms, we're pleased to report that we have now received Start Forms representing 35% of the initial 1,200 identified patient pull. We're happy to see that we're both expanding and deepening the prescriber base as we progress in our launch. We now have over 195 unique prescribers of VYJUVEK, up from the 136 unique prescribers we reported in the third quarter. We're encouraged to see the broadening of VYJUVEK prescriber base as awareness of our product grows through both our direct promotion efforts and organically to patient groups and the medical community.

We're also seeing increasing depth of prescribing as the number of physicians that had written 2 or more prescriptions for DEB patients increased from 37% in the third quarter to 60% as of mid-February. We believe this increase is a reflection of the growing familiarity among prescribers with VYJUVEK and we expect this positive trend to continue as patient outcomes on VYJUVEK become more widely known. With respect to the split of PFS between centers of excellence in the community, trends are in line with what we saw earlier in the third quarter, 47% of patient's Start Forms received as of mid-February were from centers of excellence and the balance of the scripts were written by community physicians.

We continue to see a steady flow of Start Forms from centers of excellence at a cadence co-related to EV clinic days. The split between [ DDEB ] and our DEB Start Forms is also largely in line with what we saw in the third quarter with a slight uptick in the proportion of prescriptions received from [ DDEB ] patients. Importantly, we are starting to see significant conversion of patients converted to paid drug with 228 patient reimbursement approvals secured to date. Most approvals are for 6 months or more, so a few have been up for reauthorization so far, but all have been either approved or still in process. In line with our high conversion rates, access is in a great place. We have received positive coverage policies or decisions for 97% of lives covered by commercial plans and 88% of lives covered by Medicaid. With the permanent J code now assigned, the trajectory for access and reimbursement approvals is only looking better. At home administration demand continues to be high now 2 full quarters into launch, with 98% of the drug starts occurring in a home setting. And accordingly, we also continue to see strong patient compliance to once-weekly treatment while on drug holding at 96% in the fourth quarter. We believe that compliance is both a reflection of the significant clinical benefits that can be realized through the VYJUVEK therapy as well as our commitment to the patient experience and ensuring a smooth process to getting on drug.

At this point in our launch, I think it's also worthwhile to reiterate and update on some of the key dynamics that shape the trajectory of the VYJUVEK update. Although there is a [indiscernible] to think that for a severe rare disease such as DEB, all patients would get prescriptions the day after approval. There are practical considerations that need to be understood. First, it's important to recall that COE visits occur at a steady pace around EV clinics, with only a subset of the DEB patients seen at each visit due to the time spent on each patient and the multispecialty care they receive and the COE setting. In addition, we are also seeing some KOLs less familiar with VYJUVEK, taking a stepwise approach, starting with the more severe [indiscernible] patients and stage gating, particularly in the early stages of access, where reimbursement was still being set up.

Second, it's important to understand that DEB patients are not all clustered around centers of excellence. Prior to 2023, only palliative treatment options were available, whether offered by a COE or a community physician. As a result, there was often little reason for a patient to visit, let alone return to a COE unless it was conveniently located. Certainly, there are some patients that are actively managed at COEs, but an equal number or more exists in the community and many patients have relied on community physicians for many years prior to 2023. This also has implications for the launch. It means that we have to make local doctors aware of VYJUVEK, educated on DEB, gene therapy and sometimes poke. Recall as well that prior to VYJUVEK approval, care of [ EB ] wounds did not require genetic confirmation. So even establishing this practice is an evolution in patient management. This is all addressable to physician education programs, [ but ] just take a certain amount of time and contributes to a more gradual ramp in patient starts.

Finally, there are logistical aspects of integrating at-home dosing of VYJUVEK into existing wound care and bandaging routines. As the first and only FDA-approved redoseable gene therapy, providing access to coordinating weekly home treatment of VYJUVEK is not as simple as dispensing pills at a local pharmacy for patient pickup or even one-and-done gene therapies administered at a large specialty center. Once the initial scheduling and setup is complete, which again takes a certain amount of time, what we're seeing is strong adherence given that VYJUVEK is designed to be integrated into existing wound care routines and demonstrated efficacy. Together, these real-world dynamics influence the shape of our launch curve, which we expect to be characterized by a steady stream of prescriptions and patient conversions to drug. Recall that our own estimates for the United States are informed by multiple third-party estimates and our own real-time and boots on the ground insights and further supported by the prevalence in Europe where robust patient registries and genetic testing indicate that prevalence rates well in excess of our U.S. identified patient pool. So trying to correlate the shape of the launch curve to prevalence is simply erroneous. Our conviction in the total opportunity and our ability to capture it have only been strengthened after these first few quarters of launch.

Before closing on the U.S. launch, I'd like to underscore that thanks to the efforts of our team and our focus on the patient experience with changing the treatment paradigm for debt patients. Years ago, we set out to build the necessary infrastructure to support a strong commercial launch, including our patient support program, Krystal Connect, our [indiscernible] genetic testing program, [ Decode DEB ] and a network of local pharmacies to prepare and deliver VYJUVEK to a patient's home, along with the trained nurse to apply the treatment each week. As I just shared, this at-home administration infrastructure has been in high demand since launch, so putting strong compliance to the therapy.

As I also reported, we're broadening and deepening the prescriber base, all KOLs within centers of excellence across the U.S. have now prescribe VYJUVEK and outside of the centers of excellence, our field team has had tremendous success educating regional, adult and pediatric dermatologists and community physicians as evidenced by the continued influx of community prescriptions. Sales cycles tend to be a bit longer in the community but for 2024 with more evidence of a dispersed patient community, we expect to continue to generate demand from large [ EB ] centers, regional [indiscernible] specialists and community physicians.

And finally, our marketing team has invested and will begin deploying several social media campaigns on different channels to generate awareness to patients and families directly who we know similar to other rare diseases, having varying levels of engagement with the health care system as they've learned to self-manage their DEB wounds, but deserve to learn about VYJUVEK and the benefit we can provide to them. Combined with our partnership with adipose groups, we're committed to reaching all patients and families to share the powerful wound healing that VYJUVEK can provide them.

Altogether, these successes point to a strong long-term growth strategy for VYJUVEK in the U.S. And in the interim, it's important to highlight that by any metric, the launch of VYJUVEK has been among the top tier of rare disease launches in recent years. Despite all the nuances that I outlined, in only 2 full quarters since approval, we recorded $50.7 million in revenue. And as -- and now as of mid-February, we've secured reimbursement approvals for 228 patients and have positive coverage policies in place for over 93% of commercial and Medicaid patients. We are excited about our success to date and more excited so by the years to come as we work to change the treatment paradigm for every patient with DEB.

Finally, before I turn the call over to Suma I'd like to touch on the power of our platform and our milestone-rich clinical pipeline. The Krystal story is more than just VYJUVEK. HSV-1 is unlike any other vector system currently in development with the capacity for large genetic cargo, broad tissue tropism, redosability and no integration risk. HSV-1 is also amenable to formulation to target multiple tissues such as the skin, the lung and their eye, providing us with a large number of opportunities to develop first and best-in-class generic medicines for rare and serious diseases. Our team is hard at work, leveraging these unique platform attributes and advancing our programs to and through the clinic. These include a new eye drop formulation of B-VEC to treat ocular complications of DEB, which has already been evaluated in a single patient under compassionate use, 2 clinical stage lung programs targeting cystic fibrosis and alpha antitrypsin deficiency, an emerging oncology program that leverages our experience in skin and lung drug delivery as well as clinical stage candidates for rare skin disease and aesthetic skin conditions. With 4 active clinical programs and more to come later this year, we look forward to the data readouts which will validate the breadth of our HSV-1 based gene delivery platform.

I shall now turn the call over to Suma to provide a clinical and regulatory update and provide more color on the clinical programs.

[Suma Krishnan, executive]

Thank you, Krish. 2023 was a milestone year for Krystal and our development team securing the first-ever FDA approval for a redoseable gene therapy. It has been immensely gratifying to see a growing number of U.S. patients benefit from VYJUVEK as our commercial launch progresses. However, our work is not yet done. Our goal has always been to enable global access for patients suffering from DEB, and I'm happy today to share we are on track for commercial launches in both Europe and Japan by 2025.

For Europe, we announced in October that we filed for a marketing authorization with the European Medical Agency. Subsequently, in November, our filing was validated by the agency, putting us on track for a decision by the European authorities in the second half of 2024. In Japan, we recently announced in December that we had received orphan drug designation by Japan's Pharmaceuticals and Medical Device Agency, a designation, which confers specific benefit for orphan drug development, including priority review of applications extended registration validity and reduced development costs. With our open-label bridging study in Japanese patients fully enrolled, we are on track for a Japanese new drug application filing in 2024 and a decision by Japanese authorities in 2025.

We are also making important progress on our broader clinical pipeline, where we have 4 programs in the clinic and more coming in the first half of this year. As said previously, we are committed to treating DEB comprehensively. Ocular complications are thought to affect over half of patients with recessive death. And to date, only supportive care and surgical interventions are available. Earlier this month, the New England Journal of Medicine published the clinical results [ of ] the first patient treated with topical B-VEC to the eye. The improvement seen in this patient was dramatic including full healing of the corneal epithelium and improvement of visual equity from hand motion to 2025 by 8 months.

Given these outcomes, we started discussion with the FDA earlier this year regarding the potential development program to bring an ophthalmic B-VEC formulation to market. And earlier this month, we reached alignment with the FDA on a single-arm open-label study to enable approval of B-VEC eye drops for the treatment of lesions in the eye of DEB patient. We are now planning to initiate this study in the second half of 2024. On KB407, our redoseable inhaled gene therapy for the treatment of cystic fibrosis, we completed cohort 1 of the [ cortal 1 ] study with no severe or serious adverse events and initiated dosing in cohort 2. [ Cortal 1 ] is a Phase I [ opolicvo ] dose escalation study in patients with cystic fibrosis. The primary objective of the study is to evaluate safety and tolerability of KB407 and but bronchoscopies are planned for cohort 3 to allow evaluation of are epithelial cell transduction and expression of CFTR transcript and protein.

Cohort 3 also includes minimum enrollment thresholds for patients that are not eligible for modulators, an important patient population for which no effective disease modifying therapies exist. The pace of enrollment in [ cortal 1 ] is improving as clinicians grow more familiar with [indiscernible] KB407. The potential for patients to roll over into multiple cohorts is also expected to help us progress more rapidly through cohort 2 and 3. In addition, we continue to work closely with the therapeutic development network of Cystic Fibrosis Foundation to provide us access to the broader site network which should enable us to accelerate enrollment. On KB408, our redoseable inhaled therapy for alpha-1 antitrypsin deficiency, we just recently dosed our first patient in our [ supemtyme 1 ]. [ Sypemtyme 1 ] is a Phase I open-label single-dose escalation study in adult patients with AATD to allow assessment of safety, tolerability and alpha-1 antitrypsin levels and key pharmacodynamic biomarkers with strong support from the alpha-1 research community we are optimistic that this study will enroll quickly in 2024.

We also made several advancements in our oncology program, KB707 last quarter and earlier this year. Recall that KB707 is a modified HSV-1 vector designed to deliver genes encoding both human IL-12 and IL-2 to the tumor micro environment and promote systemic immune-mediated tumor clearance. We have 2 formulations of KB707 in development. A liquid formulation for intertumoral injection and an inhaled formulation for lung delivery. In October, the first patient was dosed in Phase OP study to evaluate intratumoral KB707 monotherapy in patients with locally advanced or metastatic solid tumor malignancies. Additionally, an amendment to the existing KB707 IND was cleared earlier this January, allowing us to evaluate inhaled KB707 in a clinical trial to treat tumors in patients' lungs. We will initiate the study, which we'll be calling [ kinite 1 ] in the first half of 2024. It will be an open label multicenter dose escalation and expansion study to evaluate inhaled KB707 monotherapy in patients with advanced solid tumor malignancies affecting the lung.

And finally, we are looking forward to sharing a data update on our lead aesthetic program, KB301, later this year. KB301 is being evaluated in the [ pearl 1 ] multi-cohort Phase I study. We previously announced data from cohorts 1 and 2 which demonstrated that KB301, and coded with payload [ call 3A1 ] was expressed locally after intradermal injection and that injections to the upper and lower cheek and above the knees were generally well tolerated and associated with clinically meaningful and durable improvement in subject satisfaction. We are now running cohort 3 and for of [ pearl 1 ] in parallel to evaluate KB301, [ for ] 2 potential target indications: improvement of [ flattel cancel ] lines at rest and improvement of dynamic wrinkles of the [ declate ], both were identified as potential indications based on initial data from cohort 1 and cohort 2 and the high demand for effective aesthetic options in these regions. We expect to announce data in first half of 2024. We are also progressing on our broader pipeline in dermatology. We expect to commence the Phase II cohort of the [ KB105--02-JADE-1 ] trial for the treatment of [ TGM1-ARCI ] later this year, subject to alignment with FDA on study endpoints. Additional preclinical candidates are also in development, and we expect to share updates in the quarters to come. Our HSV platform has potential to yield a large number of highly differentiated redoseable gene therapies. We look forward to making continued progress in 2024 and sharing data updates on our clinical pipeline later this year.

With that, I would like to turn the call to Kate.

[Kathryn Romano, executive]

Thank you, Suma. We concluded 2023 with $358.3 million of cash on hand and $594.1 million of cash and investments, which positions us well for our future growth the expansion of VYJUVEK outside of the U.S. and our pipeline development plans. In our second quarter since the launch, we recorded $42.1 million in net product revenues from VYJUVEK in the fourth quarter and $50.7 million for the year ended 2023. As VYJUVEK was approved by the FDA in May of 2023, there were no comparative period revenues. Cost of goods sold was $2.9 million for the quarter or about 7% of net product revenues and $3.1 million for the year or about 6% of net product revenues. Cost of goods sold increased on a sequential quarter basis as a portion of the initial costs associated with the manufacturing of VYJUVEK were expensed as research and development costs earlier in the year prior to approval. Research and development expenses for the quarter were $11.4 million, inclusive of stock-based compensation of $2.4 million compared to $10.7 million for the prior year's quarter, inclusive of $2.4 million of stock-based compensation.

Research and development expenses for the year were $46.4 million, inclusive of stock-based compensation of $10.1 million compared to $42.5 million in the prior year, inclusive of $7.9 million of stock-based compensation. Higher research and development expenses in 2023 and were due to increases in payroll and facility-related costs, primarily driven by an increase in personnel to support our overall growth, especially as we ramp up our KB707 program, partially offset by decreases in R&D manufacturing costs as following our FDA approval, our costs related to the manufacturing of VYJUVEK are now recorded as part of our cost of inventory.

Selling, general and administrative expenses for the quarter were $24.8 million, inclusive of stock-based compensation of $7.5 million compared to $24 million for the prior year's quarter, inclusive of stock-based compensation of $7.2 million. Selling, general and administrative expenses for the year were $98.4 million, inclusive of stock-based compensation of $29.9 million compared to $77.7 million in the prior year, inclusive of stock-based compensation of $25.3 million. Higher selling, general and administrative expenses in 2023 were largely driven by an increase in personnel, increased selling expenses related to the launch of VYJUVEK increased IT infrastructure and software costs as well as increases in travel, sponsorship and professional fees. These increases were partially offset by a decrease in commercial preparation expenses, a decrease in medical affairs costs and a decrease in business development costs.

Our net income for the quarter was $8.7 million, which represented $0.31 per basic share and $0.30 per diluted share. Net income for the year ended 2023 was $10.9 million, which represented $0.40 per basic share and $0.39 per diluted share compared to a $140 million net loss in 2022 which equated to a loss of $5.49 per share, both basic and diluted. We would also like to provide some perspective on our forecast for operating costs in 2024 and given the objectives we have for the year. We expect between $150 million and $175 million in combined non-GAAP R&D and SG&A costs this year. This projection excludes stock-based compensation. This expected increase over 2023 is driven primarily by increased SG&A costs associated with our continued U.S. launch and planned expansion for VYJUVEK outside of the U.S.

From a research and development perspective, we expect a pickup in our clinical and regulatory costs associated with our oncology and respiratory programs. as well as for costs associated with initiating a clinical trial for the B-VEC formulation to treat lesions in the eye of DEB patients. With that being said, and given our projected revenue trajectory in 2024 and our current strong balance sheet, we are well capitalized and positioned for these growth drivers, and we look forward to reporting our progress over the next several quarters.

And now I will turn the call back over to Krish.

[Krish Krishnan, executive]

Before we open the call up to Q&A, I'd like to underscore our excitement for 2024 as we have successfully transitioned Krystal to a fully integrated commercial biotech with a deep clinical pipeline with a great launch underway and growing revenue to contribute to our already strong balance sheet. We believe we are well positioned to create value for our shareholders and deliver our mission for patients now and in the future. Thanks for listening, and I'd like to now open the call for Q&A.

[Operator]

[Operator Instructions] First question today is coming from Alec Stranahan from Bank of America.

[Alec Stranahan, analyst]

Congrats on the strong close to '23. Two questions from us. I guess, what has been the roughly the average conversion time between new Start Forms [ at ] initiating therapy in 4Q? And where do you see this tracking over the next few quarters? Or is this really not the metric we should be looking at anymore? And second, could you maybe walk us through the anticipated J code impact to uptake looking at the next couple of quarters, especially in the Medicare segment.

[Krish Krishnan, executive]

Thanks Alec. On your first question, at the end of Q3, we were tracking like at a 2-month pace between Start Forms to patient on drug we were making progress. And presently, we're about 30 days from a Start Form to patient on drug. Our goal, at least by the second half of this year, is to shrink it down by a few weeks, maybe 2 to 3 weeks. A lot of it has to do with single case agreements and with access getting behind us, we expect the trend to only decrease and get to a steady state of 2 to 3 weeks in the second half of this year. With respect to the J code, the reason I mentioned that comment, look, J code is a great tailwind for the company long term. I just was simply pointing out that in January, as our specialty pharmacy was transitioning people from into the official J code from a prior J code, you should expect a few weeks of a revenue hit to the story in the [ inner rep ]. But outside of that, we don't particularly see the takeout having any impact going forward, especially impact in the positive direction, not having any kind of impact in the other direction.

[Operator]

The next question is coming from [ Yigal Nachamavitz ] from Citi.

[Unknown Analyst]

Could you just help us clarify on the numbers, the 228 reimbursement approvals and the 35% of the 1,200, the 420, is the 228 a subset of the 420? Or are they distinct populations? Just to clarify, please.

[Krish Krishnan, executive]

No, no. I mean, let me answer it this way. The one, the 35% [ so ] 420, that's clearly the stock farms that we've been mentioning in the past. The 228 talks about out of the Start Forms, we've gotten the exact number of reimbursement we have gotten from -- we like that metric because it's a much closer indicator of net revenue in the long term. And so yes, obviously, it is a subset of all the Start Forms we've gotten sort of answered that very directly. But it's a different metric in the sense that it's a more important metric as revenue becomes a much more important part of the story going forward.

[Unknown Analyst]

Okay. And then you referenced that I think you said [ 60 ] of the [ 195 ] were prescribed 2 or more. I was just trying to do a little math on that. It suggests that for those higher prescribers, it's somewhere around 5 patients per prescriber is that the correct thinking? Or is it a different.

[Krish Krishnan, executive]

I think -- I mean, it's a difficult question to answer, immediate, but I think you're right, I think you're right like all we were trying to show is that people will prescribe VYJUVEK to begin with are now getting more familiar with the drug and a repeat prescribing. And that's a good metric for us because it shows the confidence in the drug. It shows they are expanding to a broader base of patients. There were a couple of COEs, I've mentioned this before, who were positioning that let me get my [indiscernible] patients on drug before I get my dominant patients on drug and see how they do. And all in all, the reason for that metric is to show increasing confidence of a prescriber towards continuing to prescribe VYJUVEK.

[Unknown Analyst]

Okay. And then just 1 quick one on the eye drop certainly very interesting early data. Can you just discuss the strategy there longer term? Is that going to be provided as an adjunct to the topical for those that have the eye complications? Or would it be an additionally priced drug separate from the cream?

[Krish Krishnan, executive]

I think it's a bit too early to be very definitive on the matter, but our objective is to have a separately priced product like we do right now on that single patient. We ship that patient the next bile. And so our thinking is to have a separate NDC number, a separate pricing and send it along with the topical [indiscernible]

[Suma Krishnan, executive]

I just want to clarify, sorry, on the eye. As I said, is we have a pre-IND guidance from the agency. So this is going to be a new IND and it's going to be a BLA. So a brand-new label with the new NDC code, as Chris mentioned. I just want to clarify.

[Operator]

The next question is coming from Debjit Chattopadhyay from Guggenheim.

[Robert Finke, analyst]

This is Robert on for Debjit. Can you provide any color on the number of dominant patients on therapy as of December 31 and Feb '24 and also the number of recessive patients on therapy as of December 31. Then I have a follow-up on the ocular complications.

[Krish Krishnan, executive]

No. I think for now, and I don't want to dig through to figure the split out. I think for now, as we mentioned in the call, 25% of the total Start Forms farms were the dominant type. We did not, just to be clear, see any big change in the trend of the dominant or the [ successor ] at the moment.

[Robert Finke, analyst]

Okay. And then on ocular do you currently have 10 or more patients with complications identified who could quickly be enrolled? And how long is follow-up planned for the study?

[Suma Krishnan, executive]

I can answer this question. Yes. In fact, we have a lot of patients and -- I mean the reason we're accelerating is because there is a request for even off-label. So we want to avoid that. Yes, we do have enough patients who have been -- who have a good natural history of the disease. And as you can see, it's a single-arm open-label study. So to be pretty straightforward.

[Operator]

The next question is coming from Dae Gon Ha from Stifel.

[Dae Gon Ha, analyst]

Let me add my congrats on the quarter as well. Krish, just going back to the roughly 136 Start Forms that you reported as of February. I was just kind of curious if you could talk about the cadence of patients. I know it's kind of a combination of Q4 and a little bit of '24, and you've added a lot of conviction around sort of the year-end I mean, the opportunity this year. So if you could kind of comment on that cadence. And then going back to the more than $1 billion opportunity you were talking about I guess, a little early, but if you can maybe frame for us what exactly are you thinking? Because in prior -- I guess, VYJUVEK approval, you've given some conservative estimates that you had to revise. So what should we be thinking in terms of B-VEC ophthalmic solution there?

[Krish Krishnan, executive]

Great. On the cadence of patients, just to correct you, I think 35% of 1,200, I want to be clear that the number of start forms, I heard a #136 that I wasn't sure about. But that said, look, definitely, the holiday period were a bit slow, Slow as in appointments getting pushed out by a week or 2, [ EB clinics ] being rescheduled. And that was a singular cadence that we observed, which is why we kind of pushed out that Start From reporting to as of February. So that's the cadence on that. On the opportunity, look, there was some confusion when we first reported. When we first reported the market opportunity, all we had was an approval in the U.S., and it felt a bit conservative the feedback I got was super conservative.

Now we're starting to see feedback from the [ EMEA ]. We're starting to see feedback from the Japanese authorities. Our conviction in the drug getting approved in Europe and Japan is definitely a lot higher than it was 6 months ago. Then we're also starting to align with the agency on the ophthalmic indication in the eye. And now that it's a single label study. And as Suma mentioned, there are people with natural history, we feel at the moment, pretty good about the [ RD ] patients or 25% of the total debt patients, however you want to look at it, also adding to the market opportunity. And so we thought we'd take the moment to alleviate any confusion from prior and be very definitive on the market opportunity of B-VEC going forward.

[Dae Gon Ha, analyst]

I guess just to clarify on that point, are you able to give some percentage breakdown of how much would that be from B-VEC as it currently is as VYJUVEK or B-VEC formulation?

[Krish Krishnan, executive]

You mean the eye formulation. Look, without the eye formulation, we believe it's north of $1 billion. The eye formulation, and this is a very premature estimate from my end, probably adds another $250 million to $300 million to the opportunity itself.

[Operator]

The next question is coming from Joe Pantginis from H.C. Wainright.

[Joseph Pantginis, analyst]

Of course, congrats as well. But also thank you, Krish, because of the real clarity and visibility that you're providing around the launch, so we all appreciate that. So I guess 2 questions. First, I guess, when you come to the actual patients, do you have any data that you can share with us about the ranges of the treatment area sizes? Number one, and then number two, I know there's great compliance so far, as you've alluded to. Anything you could share with us as to the reasons for patient stops.

[Krish Krishnan, executive]

It's a great question, Joe. In terms of ranges and area size, let me say, look, as the patient population grows, and as the visits [ up ] weekly, we're not particularly tracking every single patient and every single one. But that said, through feedback through Krystal Connect, we do know that there are a good number of patients treating large wound sizes, a good number of patients choosing to start with the small ones moving into the large ones. We see no difference in the way the drug works between recurrent and chronic. And all in all, we believe that VYJUVEK has been great to treat wounds of all sizes and wounds of all cadence as in recurring versus chronic, et cetera.

The only point that we are working on, not immediately, but in the medium term, so is to see if we can increase the dosage per vial per week. That would be beneficial. But that's not an immediate solution. People seem very happy with the drug. People seem very happy with the home dosing. I will say one of the best things we got on the label was home dosing. Compliance is high because of this. We see patients unwilling to even go to a local position to get it done on a weekly basis. And so home dosing has really helped a lot with a lot. In terms of compliance, look, when we look back at our clinical studies, I mean like just before the launch or the first few months of launch, compliance was very high. We expect compliance to continue to be high in 2024. But as wounds start to heal, one has to think about maybe a handful of patients down, either taking a pause and restarting or going from 4 to maybe 3 to 2 vials a month, but it's not immediate. I think our original assumption of having a patient on vials for 12 months or longer as of today continues to track properly.

[Operator]

The next question is coming from Andrea Tan from Goldman Sachs.

[Andrea Tan, analyst]

Krish, just could you speak a little bit more about the evolution of the competitive landscape as you see it? And how you envision the treatment paradigm shifting if [ Abeona's ] graph is approved?

[Krish Krishnan, executive]

Great. On the competitive landscape, Krystal was started in 2016 when we realized that the competitive landscape was not a very commercially viable approach to treating DEB. I mean we obviously appreciate anyone and all working in this debilitating disease. But our view right now, and this could be different since VYJUVEK has the ability to treat larger wounds, we doubt if patients would go through the inconvenience of having to graft over and over and again in the same location and takes a certain bit of time. And if you look at the convenience aspect, it gets much -- VYJUVEK, obviously, is much more convenient and amenable. So we're not presently watching are too anxious about an autologous approach to treating the disease at the moment. we feel that the convenience aspect of VYJUVEK is much more -- that is much more convenient.

Now on the other competitive environment, which is -- does not fundamentally address the cause of the disease, we're less concerned about that because at the end of the day, we believe that most patients and most physicians want an approach that fundamentally treats the nature of the disease.

[Suma Krishnan, executive]

And I'm just going to add another point to [ Abeona ] therapy. It's -- keep in mind, it's 50% go closure. I mean we had a high bar of 100% wound closure. So we are seeing, even with large wounds pretty good closure. So I think, again, as Chris mentioned, easy to apply topical. We don't have to biopsy [ these ] patients these patients cannot stand any sort of pain or inflict on hospitalization. They can't afford that. So I think from that perspective, because of our ease of application and good efficacy, again, we are not concerned.

[Andrea Tan, analyst]

5 Great. And then, Suma, maybe one question here on the pipeline. As you think about the upcoming data reads that you have across the different programs. Just wondering if you could help frame expectations into each one of those. And what would trigger either a go or no go decision to bring those forward.

[Suma Krishnan, executive]

I mean, again, 407, we are excited. We finished cohort 1. Cohort 2 is I mean the acceleration of enrolling those patients is ongoing right now. So we are excited to move that. And quickly into Cohort 3, we think we really believe we have already [ sites ] that are established who can do bronchoscopy and we have now patients identified. So we believe in 407, we should, by end of the year, be able to dose those patients and have some positive bronchoscopy data. But also, we are working on some preclinical models, which we feel we have some promise in getting confidence to get to establish a functionality for TDN to collaborate with us. So we feel pretty positive on 407.

408 again, as we mentioned, we dosed our first patient. This patient was not on augmentation therapy. So again, with the biomarkers that we can measuring because we're going to see blood levels of day A180. And again, it's easy to measure both neutrophil elastases, binding of neutrophil elastase and sputum and see the plasma levels. We feel that these biomarkers will help us identify or get a faster read on 408. And we are very excited actually about 408. I think with the division, the OTP division open to biomarker approach for approval, we think with 408, we hold a good chance of getting in front of them once we have positive data, we discuss biomarker approach for approval. So again, 408 is an exciting program for us.

707 is also exciting. I mean we have, as Krish mentioned, we haven't provided too many specifics, but the program with the intratumoral injection is moving forward. hopefully, we'll have some outcome and data read end of the year. And of course, our lung program, also, again, we are excited. So hopefully, end of the year, there could be an exciting data read on all our programs.

[Operator]

[Operator Instructions] The next question is from Tim Lugo from William Blair.

[Tim Lugo, analyst]

Congratulations on the quarter and also all the clarity. Can you give us a sense of product revenue ramping through 2024? It sounded like there was some seasonality on scheduling in Q4 and we're also 2/3 of the way through Q1. Do you have a sense of it's going to be kind of incremental increases, at least in the near term or if there might be some lumpiness quarter-to-quarter?

[Krish Krishnan, executive]

Tim, we're not providing any guidance to it in respect to revenue. I was -- yes, [indiscernible] There's not much of a seasonality. I was just pointing out that J code transition is a onetime event. It's not a seasonal event. And with that, it's a powerful tailwind behind us. The second, as I mentioned, I mentioned about a handful of patients hitting the cap at the end of the year. And what we're trying to do is to kind of accrue for it as we move through the year to avoid any kind of lumpiness in Q4, one way or the other. So that said, I think as more and more patients come on drug, you can start figuring out what the revenue potential of VYJUVEK is going to be this year. But no comment from us.

[Tim Lugo, analyst]

Understood maybe a question on your platform, you obviously have some unique capabilities with the platform and redosing. Are there any pipeline opportunities you've built out a number of pipeline assets. But are there any that you looked at that might have just been too expensive to run the clinical on that you think a partner would be appropriate for and giving a sense of just how much capacity there is within the manufacturing and kind of development side.

[Krish Krishnan, executive]

Yes. Look, our position on this has stayed the same for large indications. I'll talk about [ alpha ] antitrypsin, large indication, some areas in oncology, large indications. Any time in CF, we're primarily going up [indiscernible]. So we view it much more as a rare disease than is a really large indication. I think we are always open to partnering on large indications. The company wants to stay focused on its ability to develop, manufacture and commercialize rare diseases and definitely would like to see partner on larger indications, but we have enough capacity manufacturing wise to support any partnership, small or large, with the product either in the development stage of the commercial stage.

[Operator]

The next question is coming from Gavin Clark-Gartner from Evercore ISI.

[Gavin Clark-Gartner, analyst]

Just had a couple of clarifications and then questions. On the 228 reimbursement approvals, I wanted to be clear, was this also through mid-February or was that at the end of December?

[Krish Krishnan, executive]

It said on the deck as of February, if I'm not mistaken, then we hold to that. Like let's not -- we're not trying not to get too cute between mid versus early versus late. It was as of February.

[Gavin Clark-Gartner, analyst]

Okay. That's helpful. And just trying to quantify the holiday impact a little bit. Were the Start Forms coming in, in January, February, were those actually at a higher rate than later November or December?

[Krish Krishnan, executive]

Yes. It was a shift, right? And so that kind of affected the rate. shifting from, say, middle of December onto January, et cetera.

[Gavin Clark-Gartner, analyst]

Okay. And have there been any differences in the conversion rate or the conversion time between the Medicaid and commercial patients?

[Krish Krishnan, executive]

In the -- that's a question because it doesn't have a time dimension. Now in the past, in like your 2023, Medicaid definitely took a bit longer because there was no J code, different states were at different points. And commercial was doing pretty well. And I think right now, I wouldn't say starting now going forward, I don't see a measurable difference between the 2. We do depend -- and in fact, on the commercial side, if you end up with a single case agreement on a patient, it could take just as long as is Medicaid. So I mean, to answer your question simply, I was thinking as I was responding, we don't see any meaningful difference in time, especially going forward. And we might have seen some in the past.

[Gavin Clark-Gartner, analyst]

Okay. Great. And last one, I just wanted to ask what your latest expectations for VYJUVEK pricing in Europe was.

[Krish Krishnan, executive]

We don't know. We -- look, we are -- it's a differentiated drug. The efficacy profile is very strong. We're seeing really good demand on named patient sales from a handful of countries. Our conversations with the MAs are going well. Our job is to make a case for -- we know it's going to be lower, but our job is to get to less than a 50% discount if we're fortunate. Less than like -- I hope I'm not confusing people there, something north of a, say, $15,000 per vial would be great for us.

[Operator]

The next question is coming from Josh Schimmer from Cantor.

[Joshua Schimmer, analyst]

I have 3 quick ones. So 228 reimbursement approvals at of around 428 Start Forms, that's 55% conversion. What -- for the remaining 45%, how many of those or what proportion of those do you expect to be able to capture with the new J codes and over what period of time? Second question is if you can quantify any contribution from either inventory building or named patient access in Europe? And then last question, the annual cap of $900,000 gross, is that on a per patient basis or a per plan basis averaged across their population?

[Krish Krishnan, executive]

Look, on the first one, our internal goal is to try and get to all -- you talked about the gap between the Start Forms and the thing. We're trying to get to get all the patients in 2023 on to reimbursement by the end of Q1. That's the goal. And then -- so I don't -- instead of answering your question as 228 versus 428, our internal goal is all the patients who we know of at the end of 2023, we want them on reimbursement by the end of Q1. In terms of was there any inventory or NPP, hardly any yet. We're just starting to get NPP. It will probably get reflected more going forward. And on the annual cap, look, it is the overall discount, I think I've mentioned this is measured at the payer level. So it's kind of like a blended average depending on the number of patients in the plan.

[Operator]

And the next question is coming from Ritu Baral from TD Cowen.

[Anvita Gupta, analyst]

This is Anvit on for Ritu today. Congrats on the quarter. I have 2 questions. So as you see more reauthorization taking place, could you just expand on how -- what's the process of that? And then what is the prescriber need to show for a successful reauthorization? And I have a follow-up after that.

[Krish Krishnan, executive]

Yes. On the reauthorization happens every 6 months. Usually, you need some it's called clinical notes from a physician saying that VYJUVEK is working. Some of them certified without a patient visit and some certified wanting a patient visit, and we're talking a local patient visit for the most part, and that's what it entails. So depending on the patient, it could take a certain amount of time, but usually, it's pretty quick.

[Anvita Gupta, analyst]

Got it. And then could you talk about the market research efforts in the EU ahead of your potential launch there? Like in terms of how patients are currently managed there and now? And just to confirm, now you're expecting a launch there next year versus later this year.

[Krish Krishnan, executive]

Look, later, I want to be clear. It depends on when we get approved. And if you saw what happened to us in the U.S., we're from -- we're always adding 3 months to [indiscernible] date from this point on. It appears to be the norm that anything management says. Having said that, if the launch is scheduled for late in the year, like, say, in December, we probably pushed it out in January. In terms of launch plans, I think we're going to have a general manager in Germany at the beginning of March to build out the team. That will be the first country of launch. In terms of market research, our current EU General Manager, Laurent has already been talking to physicians and centers of excellence who have really strong registries. So we feel really good about the identified patient population. A lot of homebuilding in Europe is handled by the hospital. So a lot of the logistical complications you've see in the U.S. like getting home dosing in place, finding patients are not as big issues in Europe. What is important in EU is that we get to a good place on access. If we get to a good place with respect to access, the EU launch becomes a bit simpler logistically than the U.S. launch. And kind of very similar in Japan story.

[Operator]

There are no other questions in queue at this time. This now concludes the call. At this time, thank you all participants for joining the Krystal Biotech Fourth Quarter and Full Year 2023 Earnings Call. You may now disconnect.