Krystal Biotech, Inc. 10-K

Item 1. Business. Overview Krystal Biotech, Inc. (the “Company,” “Krystal,” “we,” or “us,” or other similar pronouns) is a clinical-stage biotechnology company focused on the development of easy to use, redosable gene therapies to dramatically improve the lives of patients living with rare diseases. We have developed a proprietary gene delivery platform that enables off-the-shelf treatments for serious rare diseases with significant unmet need, initially in the areas of dermatology and respiratory diseases. Our platform consists of a patented, engineered viral vector derived from the herpes simplex virus type 1 (“HSV-1”) that we have optimized for local and repeat gene transfer to epithelial cells. We are initially using our platform to develop treatments for rare or orphan monogenic diseases caused by the absence of or a mutation in a single gene. We are also leveraging our innovative platform to develop novel therapies to treat more prevalent conditions. Further, we have incorporated a wholly owned subsidiary, Jeune Inc, under which we are developing treatments for use in the setting of aesthetic skin conditions. Our Redosable Gene Therapy Platform 3 We believe that certain inherent features of HSV-1 virus, combined with the modifications we have made to the viral backbone provides our proprietary gene therapy platform with specific advantages over other viral and non-viral vector platforms including the following: • Repeat Administration : One of the major challenges with many viral vector platforms is that the host immune system may recognize them as foreign agents and launch a robust immune response, resulting in toxicity and rapid removal of the virus. Wild type HSV-1 is known to persist in the body by becoming latent and hiding from the immune system. We have harnessed the natural ability of HSV-1 to evade host-mediated immunogenicity, while removing specific viral elements that exacerbate the host immunity, thus making our viral vector safer for repeat administration as needed to achieve durability of effect. The immune evasive properties of our vector also enable us to treat patients who may have baseline antibodies to HSV-1, ensuring that prior exposure to the wildtype virus will not limit the number of patients who may be amenable to treatment with our product candidates. • Non-Integrating Nature : Upon entry into cells, the HSV-1 vector persists as an episomal unit in the nucleus, meaning it remains physically separate from the host cell chromosome. Certain other viral vectors currently being used in the development of gene therapy treatments, such as the lentiviral and retroviral vectors, integrate into the host cell DNA to achieve gene expression. Integration into the host cell DNA carries the risk of disrupting host genes. In contrast, a non-integrating vector such as our HSV-1 vector does not carry the same risk of disrupting the expression of host cell genes. • Payload Capacity : HSV-1 is a large virus, approximately 150 kilobases, or Kb, of DNA in size. We have made strategic deletions within this genome to remove critical “immediate early”, or IE, genes. These IE genes are required for expression of most of the downstream genes that allow the HSV-1 virus to replicate and destroy host cells. Deletion of these IE genes inhibits expression of most of the viral proteins, making the resulting viral vector replication-deficient and non-toxic. These deletions also enable the vector to easily accommodate a payload of 35Kb or greater without any significant impact on yield or titer. In our lead product candidate, B-VEC, we have successfully inserted two functional copies of the complete ~9Kb human COL7A1 gene. In contrast, packaging capacity for most other vectors being used is at or under ~10Kb, which limits their ability to deliver large transgenes. In addition, we believe the high payload capacity of our viral vector will allow us to insert multiple and/or combinations of genes or effectors that could enable the treatment of non-monogenic conditions. • High Transduction Efficiency : Poor transduction efficiency has remained a major hurdle for direct delivery of most vectors particularly in the epithelia of the skin and lung. HSV-1 has a natural affinity, or tropism, for epithelial cells, consequently our vector penetrates and delivers its payload much more efficiently than other vectors, resulting in transduction efficiencies or cell penetration as high as 95% in cell-based studies. The greater payload capacity of our vector and the high transduction efficiencies achieved allow us to deliver a full gene (or genes) directly to any patient’s tissues for off-the-shelf, in vivo gene expression without additional manipulation. • Direct Delivery : Our engineered HSV-1 vector allows for noninvasive or minimally invasive local gene delivery. The advantages of direct delivery are that our products can be administered in a doctor’s office or potentially the patient’s home, requiring no hospitalization or expensive, invasive, and time-consuming procedures or sophisticated medical teams. Taking gene therapy to the patient minimizes patient travel and circumvents upfront logistical burdens typical of other gene therapy approaches. • Stability : HSV-1 is extremely stable and resistant to degradation by physical shearing, solvents, and enzymes, facilitating purification and flexibility with final formulation of our product candidates. Our vectors are stable frozen for long-term storage, under refrigerated conditions for short-term storage and shipment, in addition to being stable over several freeze-thaw cycles. This should facilitate our ability to ship our products globally from our manufacturing facilities in Pennsylvania. • Reproducible and Scalable Manufacturing : Successful production of viral vectors involves two steps: (i) the ‘upstream’ process, which yields a bulk virus harvest; and (ii) the ‘downstream’ process, which involves purification and concentration of the clinical product. Successful and reproducible execution of both processes is critical for clinical manufacturing and scale-up. Our scientific team collectively has decades of experience and expertise in HSV engineering and purification that has allowed us to successfully optimize our HSV-1 vector production process and develop in-house CMC capabilities. • Existing Regulatory Precedent : The first FDA- and European Medicines Agency (“EMA”)-approved oncolytic virus product, Imlygic ® by Amgen, for treatment of melanoma, a skin cancer, is based on a genetically engineered HSV-1 virus. Because this product also employs an HSV-1 backbone, it has 4 created a regulatory precedent for approval of an HSV-1-based therapy. In addition, Imlygic ® is a chronic therapy, given bi-weekly, which provides support for the use of an HSV-1 backbone in chronic gene therapy of the type we are developing. The above listed benefits of our innovative platform make it the ideal choice for topical and intradermal applications to treat skin diseases, skin conditions and inhaled formulations to treat respiratory diseases. 5 Our Product Candidates The following table summarizes information regarding our product candidates in various stages of clinical and preclinical development: Rare Skin Programs Beremagene Geperpavec (“B-VEC”) for dystrophic epidermolysis bullosa (“DEB”) Disease Background Dystrophic epidermolysis bullosa, or DEB, is a rare and severe monogenic skin disease. DEB affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1, which is responsible for the formation of the protein type VII collagen ("COL7) that forms anchoring fibrils that bind the dermis ( inner layer of the skin) to the epidermis (outer layer of the skin). In DEB patients, the genetic defect in COL7A1 results in loss or malfunctioning of these anchoring fibrils, leading to extremely fragile skin that blisters and tears from minor friction or trauma. Those who are born with DEB are sometimes called “butterfly children,” because their skin is likened to be as fragile as the wings of a butterfly. DEB patients may suffer from open wounds, skin infections, fusion of fingers and toes and gastrointestinal tract problems throughout their lifetime, and may eventually develop squamous cell carcinoma, a potentially fatal condition. We believe that there are, at present, approximately 3,000 diagnosed DEB patients in the United States and ~9,000 worldwide. The current standard of care for DEB patients is limited to palliative measures that seek to provide relief from some of the symptoms of DEB but do not meaningfully impact disease outcomes. While not disease-modifying, current treatment is estimated to cost between $200,000 and $400,000 annually per patient in the United States. B-VEC B-VEC is a redosable, off-the-shelf gene therapy designed to deliver two copies of the COL7A1 gene when applied topically, directly onto an open wound. Unlike the current standard of care, B-VEC seeks to treat DEB at the molecular level by providing the patient’s skin cells the template to make normal COL7 protein, thereby addressing the fundamental disease-causing mechanism. B-VEC was specifically designed to be easily administered by a healthcare professional in a doctor’s office 6 or potentially at the patient’s home. The FDA and the EMA have each granted B-VEC orphan drug designation for the treatment of DEB, and the FDA has granted B-VEC fast track designation and rare pediatric designation for the treatment of DEB. In addition, in 2019, the FDA granted Regenerative Medicine Advanced Therapy (“RMAT”) to B-VEC for the treatment of DEB and the EMA granted PRIority MEdicines ("PRIME"), eligibility for B-VEC to treat DEB. We believe our approach to treating DEB is positively differentiated relative to other known efforts to develop corrective treatments that employ autologous approaches. Autologous treatments use a patient’s own tissues and cells to manufacture an individualized therapy. Such therapies tend to be expensive, invasive and time consuming to use, and require extensive patient travel, extended hospital stays, highly sophisticated medical teams and procedures. Clinical Development of B-VEC On July 28, 2020, we announced initiation of our Phase 3 pivotal study known as GEM-3. The trial is a randomized, double-blind, intra-patient placebo-controlled multicenter study designed to evaluate the efficacy and safety of B-VEC for patients suffering from both recessive and dominant forms of DEB. The trial aims to enroll approximately thirty (30) participants with DEB, aged 6 months or older at time of consent. Investigator identified wound pairs, up to three in each patient, are deemed the “primary” wounds. These primary wounds will be treated once weekly for six months with either B-VEC or placebo, until wound closure. If a wound were to re-open at any point during the study, weekly dosage will resume until closure. The dose administered to each wound is dependent on the size of the wound and ranges from 4x10^8 to 1.2x10^9 PFU per wound. A maximum vector dose per patient per week has been defined on the basis of preclinical and clinical safety data. In the event that the maximum dose per patient has not been reached based on dosing of the primary wounds, the study investigators and patients will have the opportunity to select additional “secondary” wounds across which the remaining weekly dose may be applied. We expect to complete enrollment in this study in the first quarter of 2021 and anticipate having top-line data from this trial in 4Q21. We expect to file a Biologics License Application ("BLA") with the FDA shortly thereafter. We are aligned with the EMA on a pivotal trial design and we believe that data from GEM-3 will form the basis of a Marketing Authorisation Application ("MAA"), filing shortly after the BLA. In May 2020, complete Phase 1/2 data from the GEM-1 and GEM-2 studies was presented at the Society of Investigational Dermatology ("SID") meeting. The Phase 1 portion of the trial commenced in May 2018 at Stanford University, and we announced positive interim results from this clinical study on two patients in October 2018. The Phase 2 portion of the trial commenced in December 2018 at Stanford University, and we announced positive interim results from this clinical study on June 24, 2019. KB105 for TGM1-deficient autosomal recessive congenital ichthyosis (“TGM1-ARCI”). Disease Background ARCI is a life-long, severe monogenic skin disease. While a number of genetic mutations have been associated with the development of ARCI, the most common cause of ARCI is an inactivating mutation in the human transglutaminase-1 (“TGM1”) gene encoding the enzyme transglutaminase-1, a protein that is essential for the proper formation of the skin barrier. Mutations in the TGM1 gene, and the subsequent disruption to the epidermal barrier, leads to pronounced dehydration, trans-epidermal exposure to unwanted toxins and surface microorganisms, and a greatly increased risk of infection. Transglutaminase-1 deficiency is associated with increased mortality in the neonatal period and has a dramatic impact on quality of life. Patients suffering from ARCI often exhibit life-long pronounced plate-like scaling of the skin, which is often of a dark color and can cover the whole body. Such patients frequently suffer from exposure of the inner eyelid surface due to turning away of the eyelids from the eye (ectropion), the turning outwards of the lips (eclabium), deformities of joint and nasal cartilage (hypoplasia), scarring alopecia (especially at the edge of the scalp) and a thickening of the skin on the palms of the hands and soles of the feet (palmoplantar keratoderma). Additional complications experienced by ARCI patients include episodes of sepsis, fluid and electrolyte imbalances due to impaired skin barrier function, and failure to thrive, especially during the neonatal period and infancy. Severe heat intolerance and nail dystrophy are also frequently observed. There are currently no treatments targeting molecular correction of this disease. There are approximately 20,000 cases of TGM1-deficient ARCI worldwide and about 400 new cases per year globally. KB105 7 KB105 is a redosable, off the-shelf gene therapy designed to deliver two copies of the TGM1 gene when applied topically, directly to a patient’s exfoliated skin. The goal of direct supplementation of TGM1 protein at the site of administration is local correction and phenotypic improvement. Like B-VEC, KB105 was designed to be easily administered by a healthcare professional in the doctor’s office or, potentially, at the patient’s home. The FDA and the EMA have each granted KB105 orphan drug designation for the treatment of TGM1-ARCI, and the FDA has granted KB105 fast track designation and rare pediatric designation for the treatment of TGM1-ARCI. Clinical Development of KB105 In August 2020, we initiated the second phase of our Phase 1/2 clinical trial of KB105 to treat ARCI. We have enrolled one patient in whom four rectangular 100cm2 (4-inch x 4-inch) areas of skin were selected as Target Areas. Two sites will receive an initial and a repeat dose of 4.0 x 10^9 PFU/Treated Area ("TA") while the other two sites will receive 1.0 x 10^10 PFU/ TA. Data from this patient is anticipated in the first half of 2021 and will inform the dosing regimen and enrollment criteria for the enrollment of subsequent patients in 2021. The primary objective of the study is to assess the improvement in localized severity of disease through an Investigator’s Global Assessment (“IGA”) of disease severity in the treatment area and TGM1 expression and activity and to evaluate safety through the incidence of adverse events associated with KB105 post administration. In May 2020, initial clinical data from the first phase of the Phase 1/2 study which enrolled adult patients were presented at the SID meeting. KB104 for Netherton Syndrome Disease Background Netherton Syndrome is a debilitating monogenic autosomal recessive skin disorder. The disease arises due to mutations in the Serine Protease Inhibitor Kazal-type 5 (“SPINK5”) gene, resulting in loss of activity of its encoded serine protease inhibitor protein SPINK5 (also known as Lympho-Epithelial Kazal type-related Inhibitor (“LEKTI”)). In healthy individuals, SPINK5 is one of the serine protease inhibitors expressed in the outermost layers of the skin, and it plays a critical role in the regulation of serine proteases which hydrolyze extracellular proteins that hold corneocytes together. In patients suffering from Netherton Syndrome, the suppressive effects of SPINK5 on these serine proteases is abolished due to underlying genetic mutations in the SPINK5 gene. Consequently, hyperactivated serine proteases in the skin cause uncontrolled desquamation, leading to a defective skin barrier. In infants severe Netherton Syndrome can be associated with failure to thrive, hypernatremic dehydration secondary to excess fluid loss, delayed growth, short stature, and recurrent infections. Clinically, Netherton Syndrome is characterized by congenital ichthyosiform erythroderma, hair shaft defects, recurrent infections, and a defective skin barrier. A predisposition to allergies, asthma, and eczema is also characteristic of Netherton Syndrome. Ultimately, those afflicted by Netherton Syndrome often experience chronic skin inflammation, severe dehydration, and stunted growth. There are approximately 38,000 cases of patients worldwide and about 700 new cases per year globally. There are no current approved treatments for Netherton Syndrome. Existing approaches are limited to palliative treatments, including topical moisturizers, repair formulas and steroids. KB104 KB104 is a redoseable gene therapy designed to deliver two copies of the SPINK5 gene to relevant skin cells when applied topically. By directly supplementing the skin with functional SPINK5, the goal of therapy is to locally correct the desquamation and improve the barrier function of the skin. In preclinical testing a properly localized human SPINK5 gene was detected 48 hours after topical KB104 application in mice without toxicity. KB104-mediated human SPINK5 was expressed in the correct layer of skin at the transcript and protein levels. Rare Pulmonary Programs KB407 for Cystic Fibrosis (“CF”) Disease Background 8 CF is the most common inherited genetic disorder in the United States and is caused by mutations in the cystic fibrosis transmembrane conductance regulator (“CFTR”) gene. Lack of functional CFTR protein in secretory airway epithelia results in defective Cl-, bicarbonate, and thiocyanate secretion, coupled with enhanced Na+ absorption and mucus production, leading to dehydration and acidification of the airway surface liquid. CF is characterized by recurrent chest infections, increased airway secretions, and eventually, respiratory failure. While CF comprises a multiorgan pathology affecting the upper and lower airways, gastrointestinal and reproductive tracts, and the endocrine system, the primary cause of morbidity and mortality in CF is due to progressive lung destruction. According to the U.S. Cystic Fibrosis Foundation (“CFF”), the median age at death for patients with CF in the United States was 30.8 years in 2018. Currently approved CFTR modulating therapies are limited to patients with specific genetic mutations and there is a significant unmet medical need for the ~10% of patients with CF who have genetic mutations non-amenable to currently approved CFTR small molecule “modulators”. According to the CFF, approximately 30,000 patients in the United States and more than 70,000 patients worldwide are living with CF, and approximately 850 new cases of CF were diagnosed in 2018. KB407 KB407 is a redosable gene therapy designed to deliver two copies of the CFTR gene directly to the airway epithelia via inhaled (nebulized) administration. By inducing expression of full length, normal CFTR protein in the lung, treatment with KB407 has potential to restore ion and water flow into and out of lung cells to correct the lung manifestations of the disease in patients regardless of their underlying genetic mutation. Preclinical efforts to date have shown that KB407 successfully transduces patient-derived epithelial cells and delivers functional CFTR in vitro in 2D and 3D organotypic systems, and is amendable to non-invasive inhaled administration in vivo, as indicated by successful delivery to the lungs through the use of a clinically relevant nebulizer in small animal models. Successful delivery and distribution throughout the lung also was observed in a nonhuman primate. We expect to announce additional preclinical data from the GLP toxicology study, which evaluated repeat doses of KB407 in 36 nonhuman primates, and initiate a clinical trial in 1H2021. The FDA has granted KB407 orphan drug designation and rare pediatric designation for the treatment of cystic fibrosis. Other Programs While our focus is on the development of gene therapies to treat serious rare diseases, we are also evaluating the potential of our platform to address more prevalent and/or non-genetic conditions. To that end, on April 24, 2019, we incorporated Jeune, Inc. a wholly-owned subsidiary, for the purposes of undertaking preclinical studies for aesthetic skin conditions. KB301 for aesthetic skin conditions Disease Background The skin is largely composed of collagen-rich connective tissue, with dermal collagen, composed primarily of types 1 and 3 collagen fibrils, representing >90% (dry weight) of human skin. The characteristics of skin aging are largely due to aberrant collagen homeostasis, including reduced collagen biosynthesis, increased collagen fibril fragmentation, and progressive loss of dermal collagen culminating in a net collagen deficiency, resulting from both intrinsic ( e.g. , passage of time, genetics) and extrinsic ( e.g. , chronic light exposure, pollution) pressures. Facial injectables, including hyaluronic acid, botulinum toxin type A, collagen, polymer fillers, and calcium hydroxyapatite microparticles, are intended to correct perceived facial defects ( e.g. , fine lines, shallow wrinkles, and deeper furrows), and are administered for both cosmetic and therapeutic indications. In 2017, the global facial injectables market generated more than $7.2 billion in revenue from approximately 8.5 million procedures performed, with a majority (~70%) of revenue being generated in the aesthetic setting. While the United States and Europe represent the largest markets for facial injectables to-date, significant expansion in market share is projected for Asia and Latin America in the coming years. Due to the rising awareness of cosmetic procedures, the growing geriatric population, and a shift from invasive to minimally/non-invasive treatment options, the aesthetics facial injectables market is projected to grow to more than a $12 billion industry by 2025. KB301 9 KB301 leverages our clinical experience in delivering genes of interest to the skin, and is designed to stimulate biorejuvenation of the skin via delivery of the gene that encodes for type III collagen ("COL3") when administered via intradermal injection. We believe that our approach of directed expression of full-length human type 3 collagen via intradermal application of KB301 provides a unique and straightforward approach to restoring collagen homeostasis, and by extension, reconstructing an optimal physiologic environment in the skin to treat wrinkles or other presentations of aged or damaged skin. Clinical development of KB301 We initiated a Phase 1 safety clinical trial for the treatment of wrinkles and acne scars on August 25, 2020. We expect to announce initial safety data from the first cohort of this study in 1Q21. On October 8, 2020, we announced presentation of preclinical data supporting the ongoing development of KB301 at the American Society for Dermatologic Surgery 2020 Virtual Meeting. Future Opportunities We believe the ability to redose as well as the large payload capacity of our proprietary vectors will allow us to deliver multiple genes and other effectors, which could enable development of therapies to treat non-monogenic skin diseases like psoriasis and atopic dermatitis, as well as conditions that are not necessarily the result of an inherited genetic defect, such as chronic wounds. For example, as proof-of concept we have generated a library of vectors designed to deliver anti-inflammatory antibodies. Further, we evaluated one of these vectors in an animal model of atopic dermatitis where expression of the vector-encoded-antibody was confirmed and efficacy was observed. . If we are able to successfully generate product candidates to treat non-orphan diseases, we intend to seek collaborative alliances towards the development and potential commercialization of these therapies. Manufacturing In-House Good Manufacturing Practice (“GMP”) Facilities We have built in-house current good manufacturing practices (“cGMP”) facilities to enable better quality control, shorter lead times, lower costs and better command over our intellectual property. Our first, 7,500 square foot commercial scale cGMP-compliant manufacturing facility, ANCORIS, is producing the pivotal and long-term extension study material for B-VEC at commercial scale and we expect to produce initial commercial launch material of B-VEC at the same facility. Our second commercial scale cGMP facility, ASTRA, is 150,000 square feet and expected to be complete and validated in 2022. It is a state-of-the-art cGMP manufacturing facility that, in addition to adding significant capacity to support the growing pipeline, will also allow the in-house incorporation of raw material preparation, excipient manufacturing, testing, packaging, labeling and distribution, thereby fully-integrating all components of the supply chain from starting materials to patient experience. We announced the ground breaking of ASTRA on January 24, 2020. Our proprietary manufacturing process which was initially developed for B-VEC and is now being used across our platform, was developed and optimized internally and involves both an upstream production process and downstream purification process. Recombinant viral vectors are made safe by removal of specific viral machinery, including packaging proteins, so that they are rendered incapable of, or attenuated for, replicating in human cells. However, to produce the recombinant virus, these viral proteins have to be re-introduced into the virus production process so that the viral vector can be packaged. In most other viral vector production systems, the missing viral proteins are supplied in one or more individual helper plasmids, along with the base viral vector plasmid. All the plasmids are then co-transfected into a production cell line in the presence of a transfection agent to facilitate viral vector production and packaging. The difficulty of this approach is that it requires c-scale manufacturing and qualification of each of the packaging plasmids and optimization of the transfection method. Even with optimized reagents and methods, significant batch-to-batch variability is seen in viral vector yield and titer that, we believe, drives up the cost of viral vector manufacturing and scale-up and increases the risk of failure during manufacturing. Our proprietary upstream process for HSV-1 production avoids the aforementioned issues. Our process requires three critical components: • Production of a master virus seed stock ("MVSS"); • Production of complementing master cell bank ("MCB"); and • Optimized transduction parameters. 10 For each of our product candidates, we generate a MVSS which is scaled up from a single purified clone of the modified HSV-1 vector expressing the therapeutic effector. The MCB is a complementing cell line that stably expresses the HSV-1 viral proteins that are required for HSV-1 growth but have been deleted from the recombinant HSV-1 backbone. By introducing the deleted proteins into the MCB, as opposed to including them in the viral replication process via co-transfection of individual plasmids, we eliminate the need for multiple qualifications of the plasmids or variability in transfection efficiency from batch to batch, that other production processes face. Infection of the MCB with the MVSS at the optimal concentration results in production of the viral particle. Once the MCB, the MVSS, and the conditions of infection are established, virus production and resultant yield and titer are highly reproducible and scalable over multiple runs, and the risk of failure is minimal. Optimization of MCB, MVSS and production methods requires extensive knowledge and technical experience with the HSV-1 genome and significant upfront effort to design and select the best virus seed stock and complementing cell line. To date we have screened hundreds of cell line clones to find the best complementing cell lines, and similarly designed and generated the optimal virus seed stocks for each of our product candidates. The viral seed stock expresses the therapeutic proteins under the control of strong constitutive or tissue-specific promoters and additional non-coding regulatory sequences have been included to optimize gene expression. We also have optimized the transduction conditions to reproducibly obtain high yields of the virus. Unlike the upstream process, steps used to purify and concentrate the viral vector product are often common across different viral vector platforms and usually involve multiple stages of purification, clarification, concentration, and diafiltration, with the ultimate goal to remove contaminants and concentrate the product. We have developed a robust and reproducible process for purifying our viral vector to required concentrations for clinical use, while successfully removing contaminants to meet FDA guidelines. We believe that the MVSS and MCB are a vital part of the production of our product candidates, as they ensure the reproducible production of multiple clinical and potentially commercial batches in a short six-week cycle time frame and in a cost-effective manner. We have made significant investments in developing the most comprehensive and optimized manufacturing process for our vector product candidates including: • A proprietary vector manufacturing technique and a series of high-efficiency purification processes that produce highly purified therapeutic vectors and can be adapted for each product candidate; and • A critical list of GMP assays to accurately characterize our process and the HSV-1 vectors we produce. Competition The biotechnology and pharmaceutical industries are highly competitive. In particular, the field of gene therapy is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Some of our competitors have substantially greater financial resources and larger research and development organizations. In addition, our experience in clinical trials, obtaining FDA and other regulatory approvals, and manufacturing and commercialization of products may be more limited. Epidermolysis Bullosa A number of companies are developing drug candidates for EB. There is no approved treatment for DEB at this time. We believe our competitors fall into two broad categories: • Corrective approaches: We are aware of two companies, Abeona and Castle Creek Pharmaceuticals, which are developing autologous or grafting gene therapy approaches to treating DEB. We are also aware of a recombinant-protein based approach being developed by Phoenix Tissue Repair. • Palliative Treatments: We are aware of companies such, as Amryt Pharmaceuticals and Castle Creek Pharmaceuticals, who are developing product candidates taking a palliative approach to treating the disease. Autosomal Recessive Congenital Ichthyosis ("ARCI") We are aware of companies like Novartis Inc. and Patagonia Pharmaceuticals, LLC who have conducted clinical trials for ARCI in the past. We are unaware of any companies conducting active clinical trials in ARCI presently. 11 Netherton Syndrome We are aware that Novartis Inc. has conducted clinical trials for Netherton Syndrome. We are unaware of any companies currently conducting active clinical trials in Netherton Syndrome presently. Cystic Fibrosis We are aware of several preclinical or early clinical stage nucleic-acid-based programs for the treatment of CF including TranslateBio, Spirovant, and 4D Molecular Therapeutics. Intellectual Property Our success depends in part on our ability to maintain proprietary protection surrounding our product candidates, platform technology, and know-how, to operate without infringing the proprietary rights of others, and to prevent others from infringing our proprietary rights. We have a portfolio of patents, patent applications and other intellectual property owned entirely by the Company - that protect our core platform technology (sometimes referred to as STAR-D) and products based thereupon, and affords us freedom to use this platform for the development of novel therapeutics for multiple applications. We continue to advance our IP portfolio actively through the filing of new patent applications, divisionals, and continuations relating to our technologies as we deem appropriate. In addition to our patents, we rely on trade secrets and know-how to develop and maintain our competitive position. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, and obtain and maintain ownership of certain technologies, in part, through confidentiality agreements and intellectual property assignment agreements with our employees, consultants and commercial partners. We also seek to preserve the integrity and confidentiality of our data, trade secrets, and know-how, including by implementing measures intended to maintain the physical and electronic security of our research and manufacturing facilities, as well as our information technology systems. Platform Patent Number Country / Region* Patent Type Expiration Date** Owner / Licensor U.S. 10,441,614 United States Composition of Matter & Methods of Use – The Skin TARgeted Delivery platform, or STAR-D, for skin-targeted therapeutics, as well as methods of its use for delivering any effector of interest to the skin 12/28/2036 Krystal Beremagene Geperpavec ("B-VEC") Patent Number Country / Region* Patent Type Expiration Date** Owner / Licensor U.S. 9,877,990 United States Composition of Matter & Methods of Use – Compositions comprising HSV vectors encoding certain effectors, including the gene encoded in B-VEC, and methods of using the same for providing prophylactic, palliative or therapeutic relief of a wound, disorder or disease of the skin 12/28/2036 Krystal U.S. 10,155,016 United States Composition of Matter & Methods of Use – Covers compositions containing B-VEC, formulated for alternate routes of administration 12/28/2036 Krystal EP 3 377 637 B1 Europe Composition of Matter & Methods of Use – Pharmaceutical compositions comprising B-VEC, as well as uses thereof. 12/28/2036 Krystal KB105 12 Patent Number Country / Region* Patent Type Expiration Date** Owner / Licensor U.S. 10,525,090 United States Composition of Matter & Methods of Use – KB105, as well as medical applications of this product for treating TGM1-deficient ARC 4/11/2039 Krystal KB301 Patent Number Country / Region* Patent Type Expiration Date** Owner / Licensor U.S. 10,786,438 United States Composition of Matter & Methods of Use – Pharmaceutical compositions comprising HSV vectors encoding one or more cosmetic proteins, as well as methods of their use for improving skin condition, quality, and/or appearance. 4/26/2039 Krystal KB407 Patent Number Country / Region* Patent Type Expiration Date** Owner / Licensor U.S. 10,829,529 United States Methods of Use – Methods of using KB407 for the treatment of Cystic fibrosis and other diseases causing progressive lung destruction 2/07/2040 Krystal * Granted patents in the U.S. and Europe ("EP") are shown. Additional patent protection in the U.S. and Europe or other countries or regions through pending or granted counterparts may be available. ** Stated expiration dates do not account for any patent term extension, supplemental protection certificate, or pediatric extensions that may be available. Government Regulation and Product Approval In the United States, the FDA regulates biologic products including gene therapy products under the Federal Food, Drug, and Cosmetic Act ("FDCA"), the Public Health Service Act ("PHSA"), and regulations and guidance implementing these laws. The FDCA, PHSA and their corresponding regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, packaging, storage, record keeping, distribution, reporting, advertising and other promotional practices involving biologic products. Applications to the FDA are required before conducting human clinical testing of biologic products. Additionally, each clinical trial protocol for a gene therapy product candidate is reviewed by the FDA, and in limited instances the National Institutes of Health ("NIH"), through its Recombinant DNA Advisory Committee, or RAC. FDA approval also must be obtained before marketing of biologic products. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources and we may not be able to obtain the required regulatory approvals to successfully develop and commercialize our product candidates. Within the FDA, the Center for Biologics Evaluation and Research ("CBER") regulates gene therapy products. Within CBER, the review of gene therapy and related products is in the Office of Cellular, Tissue and Gene Therapies ("OCTGT") and the FDA has established the Cellular, Tissue and Gene Therapies Advisory Committee ("CTGTAC") to advise CBER on its reviews. CBER works closely with the NIH and the RAC, which makes recommendations to the NIH on gene therapy issues and engages in a public discussion of scientific, safety, ethical and societal issues related to proposed and ongoing gene therapy protocols. The FDA has provided guidance for the development of gene therapy products generally, including a growing body of guidance documents on Chemistry, Manufacturing and Control ("CMC") clinical investigations and other areas of gene therapy development, all of which are intended to facilitate the industry’s development of gene therapy products. 13 Ethical, social and legal concerns about gene therapy, genetic testing and genetic research could result in additional regulations restricting or prohibiting the processes we may use. Federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating biotechnology. More restrictive regulations or claims that our products are unsafe or pose a hazard could prevent us from commercializing any products. New government requirements may be established that could delay or prevent regulatory approval of our product candidates under development. It is impossible to predict whether legislative changes will be enacted, regulations, policies or guidance changed, or interpretations by agencies or courts changed, or what the impact of such changes, if any, may be. U.S. Biologic Products Development Process The FDA must approve a product candidate before it may be legally marketed in the United States. The process required by the FDA before a biologic product candidate may be marketed in the United States generally involves the following: • completion of preclinical laboratory tests and in vivo studies in accordance with the FDA’s current Good Laboratory Practice ("GLP"), regulations and applicable requirements for the humane use of laboratory animals or other applicable regulations; • submission to the FDA of an IND application, which allows human clinical trials to begin unless FDA objects within 30 days; • approval by each clinical trial site’s institutional review board ("IRB") and institutional biosafety committee, or IBC before the clinical trial may be initiated; • performance of adequate and well-controlled human clinical trials according to the FDA’s Good Clinical Practice ("GCP") regulations and any additional requirements for the protection of human research subjects and their health information, to establish the safety and efficacy of the proposed biologic product candidate for its intended use; • preparation and submission to the FDA of a BLA for marketing approval that includes substantial evidence of safety, purity and potency from results of nonclinical testing and clinical trials; • review of the product by an FDA advisory committee, if applicable; • satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biologic product candidate is produced to assess compliance with c requirements and to assure that the facilities, methods and controls are adequate to preserve the biologic product candidate’s identity, safety, strength, quality, potency and purity; • potential FDA audit of the nonclinical and clinical trial sites that generated the data in support of the BLA; and • payment of user fees and FDA review and approval, or licensure, of the BLA. Before testing any biologic product candidate in humans, including a gene therapy product candidate, the product candidate must undergo preclinical testing. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as in vivo studies to assess the potential safety and activity of the product candidate and to establish a rationale for therapeutic use. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs. Concurrent with clinical trials, companies usually must complete some long-term preclinical testing, such as animal studies of reproductive adverse events and carcinogenicity and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the drug in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging must be selected and tested, and stability studies must be conducted, to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life. The clinical trial sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. With gene therapy protocols, if the FDA allows the IND to proceed, but the RAC decides that full public review of the protocol is warranted, the FDA will request at the completion of its IND review that sponsors delay initiation of the protocol until after completion of the RAC review process. The FDA also may 14 impose clinical holds on a biologic product candidate at any time before or during clinical trials due to safety concerns or non-compliance. If the FDA imposes a clinical hold, trials may not recommence without FDA authorization and then only under terms authorized by the FDA. Accordingly, we cannot be sure that submission of an IND for our future product candidates will result in the FDA allowing clinical studies to begin, or that, once begun, issues will not arise that suspend or terminate such studies. Human Clinical Trials Under an IND Clinical trials involve the administration of the biologic product candidate to healthy volunteers or patients under the supervision of qualified investigators which generally are physicians not employed by or under the control of the trial sponsor. Clinical trials are conducted under written study protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety, including stopping rules that assure a clinical trial will be stopped if certain adverse events should occur. Each protocol and any amendments to the protocol must be submitted to the FDA as part of the IND. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the trial on clinical hold, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Accordingly, submission of an IND may or may not result in the FDA allowing clinical trials to commence. Clinical trials must be conducted and monitored in accordance with the FDA’s regulations comprising good clinical practices, or GCP requirements, including the requirement that all research subjects provide informed consent. Further, each clinical trial must be reviewed and approved by an IRB and IBC at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers items such as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent that must be signed by each clinical trial subject, or their legal representative, reviews and approves the study protocol, and must monitor the clinical trial until completed. Clinical trials involving recombinant DNA also must be reviewed by an IBC, a local institutional committee that reviews and oversees basic and clinical research that utilizes recombinant DNA at that institution. The IBC assesses the safety of the research and identifies any potential risk to public health or the environment. Human clinical trials typically are conducted in three sequential phases that may overlap or be combined: • Phase 1. The biologic product candidate initially is introduced into a small number of healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion and, if possible, to gain an early understanding of its effectiveness. In the case of some product candidates for severe or life-threatening diseases, especially when the product candidate may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients. Phase 1 clinical trials of gene therapies are typically conducted in patients rather than healthy volunteers. • Phase 2. The biologic product candidate is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product candidate for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule. • Phase 3. Phase 3 clinical trials are commonly referred to as “pivotal” studies, which typically denotes studies that present the data the FDA or other relevant regulatory agencies will use to determine whether or not to approve a biologic product. In Phase 3 studies, the biologic product candidate is administered to an expanded patient population, generally at multiple geographically dispersed clinical trial sites in adequate and well-controlled clinical trials to generate sufficient data to statistically confirm the potency and safety of the product for approval. These clinical trials are intended to establish the overall risk/benefit ratio of the product candidate and provide an adequate basis for product labeling. • Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted after marketing approval. These clinical trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety follow-up. During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Additional Regulation for Gene Therapy Clinical Trials 15 In addition to the regulations discussed above, there are a number of additional standards that apply to clinical trials involving the use of gene therapy. The FDA has issued various guidance documents regarding gene therapies, which outline additional factors the FDA will consider at each of the above stages of development and relate to, among other things: the proper preclinical assessment of gene therapies; the CMC information that should be included in an IND application; the proper design of tests to measure product potency in support of an IND or BLA application; and measures to observe delayed adverse effects in subjects who have been exposed to investigational gene therapies when the risk of such effects is high. Further, the FDA usually recommends that sponsors observe subjects for potential gene therapy-related delayed adverse events for a 15-year period, including a minimum of five years of annual examinations followed by 10 years of annual queries, either in person or by questionnaire. The NIH and the FDA have a publicly accessible database, the Genetic Modification Clinical Research Information System, which includes information on gene therapy trials and serves as an electronic tool to facilitate the reporting and analysis of adverse events on these trials. U.S. Review and Approval Processes The results of the preclinical tests and clinical trials, together with detailed information relating to the product’s CMC and proposed labeling, among other things, are submitted to the FDA as part of a BLA requesting approval to market the product for one or more indications. For gene therapies, selecting patients with applicable genetic defects is a necessary condition to effective treatment. For the therapy we are currently developing, we believe that diagnoses based on existing genetic tests developed and administered by laboratories certified under the Clinical Laboratory Improvement Amendments ("CLIA") are sufficient to select appropriate patients and will be permitted by the FDA. Under the Prescription Drug User Fee Act ("PDUFA") each BLA must be accompanied by a significant user fee. The FDA adjusts the PDUFA user fees on an annual basis. The PDUFA also imposes an annual product fee for biologics and an annual establishment license fee on facilities used to manufacture prescription biologics. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on BLAs for product candidates designated as orphan drugs, unless the product candidate also includes a non-orphan indication. The FDA reviews a BLA within 60 days of submission to determine if it is substantially complete before it accepts it for filing. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In that event, the BLA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth, substantive review of the BLA. The FDA reviews the BLA to determine, among other things, whether the proposed product candidate is safe and potent, or effective, for its intended use, has an acceptable purity profile and whether the product candidate is being manufactured in accordance with cGMP to assure and preserve the product candidate’s identity, safety, strength, quality, potency and purity. The FDA may refer applications for novel biologic products or biologic products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. During the product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategies ("REMS") is necessary to assure the safe use of the product candidate. REMS use risk minimization strategies beyond the professional labeling to ensure that the benefits of the product outweigh the potential risks. To determine whether a REMS is needed, the FDA will consider the size of the population likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events, and whether the product is a new molecular entity. A REMS could include medication guides, physician communication plans and elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS; the FDA will not approve the BLA without a REMS, if required. Before approving a BLA, the FDA will inspect the facilities at which the product candidate is manufactured. The FDA will not approve the product candidate unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product candidate within required specifications. Additionally, before approving a BLA, the FDA typically will inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND trial requirements and GCP requirements. On the basis of the BLA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the biologic product with specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for 16 the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the BLA, the FDA will issue an approval letter. If a product candidate receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a REMS, or otherwise limit the scope of any approval. In addition, the FDA may require post-marketing clinical trials, sometimes referred to as Phase 4 clinical trials, designed to further assess a biologic product’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved products that have been commercialized. The FDA has agreed to specified performance goals in the review of BLAs under the PDUFA. One such goal is to review standard BLAs in 10 months after the FDA accepts the BLA for filing, and priority BLAs in six months, whereupon a review decision is to be made. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs and its review goals are subject to change from time to time. The review process and the PDUFA goal date may be extended by three months if the FDA requests or the BLA sponsor otherwise provides additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date. Fast Track Designation Fast Track designation is granted to drugs being developed for the treatment of serious or life-threatening diseases or conditions where there is an unmet medical need. The purpose of the Fast Track designation provision is to help facilitate development and expedite the review and potential approval of drugs to treat serious and life-threatening conditions. Sponsors of drugs that receive Fast Track designation have the opportunity for more frequent interactions with the FDA review team throughout the development program. These can include meetings to discuss study design, data required to support approval, or other aspects of the clinical program. Additionally, products that have been granted Fast Track designation may be eligible for priority review of a BLA application and the FDA may consider reviewing portions of a New Drug Application ("NDA") before the sponsor submits the complete application, also known as a rolling review. Orphan Drug Designation On Under the Orphan Drug Act, the FDA may designate a biologic product as an “orphan drug” if it is intended to treat a rare disease or condition, generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is no reasonable expectation that the cost of developing and making a biologic product available in the United States for treatment of the disease or condition will be recovered from sales of the product If a product with orphan status receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan product exclusivity, meaning that the FDA may not approve any other applications to market the same drug or biologic product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity or if the party holding the exclusivity fails to assure the availability of sufficient quantities of the drug to meet the needs of patients with the disease or condition for which the drug was designated. Competitors, however, may receive approval of different products for the same indication for which the orphan product has exclusivity or obtain approval for the same product but for a different indication for which the orphan product has exclusivity. Other benefits include reduced regulatory fees, protocol assistance and tax credits for certain clinical research costs. Orphan medicinal product status in the European Union ("EU") has similar, but not identical benefits. Regenerative Medicine Advanced Therapy (“RMAT”) Designation Established under the 21st Century Cures Act, RMAT designation is a program designed to expedite the development and approval of regenerative medicine products, including gene therapy products. An investigational therapy is eligible for the RMAT designation if it is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates a potential to address unmet medical needs for that disease or condition. The designation includes all the benefits of the FDA's Fast Track and Breakthrough Therapy designations and enables the ability to work more closely and frequently with the FDA to discuss surrogate or intermediate endpoints to support the potential acceleration of approval and satisfy post-approval requirements. Prime Designation 17 The PRIME designation is awarded by the EMA to promising medicines that target an unmet medical need. These medicines are considered priority medicines by the EMA. To be eligible and accepted for PRIME, a medicine has to show its potential to benefit patients with unmet medical needs based on early clinical data coupled with non-clinical data. Through PRIME, the EMA offers enhanced support to medicine developers including early interaction and dialogue, and a pathway for accelerated evaluation by the agency. The program is intended to optimize development plans and expedite the review and approval process so that these medicines may reach patients as early as possible. Rare Pediatric Disease Priority Review Voucher The FDA also offers a rare pediatric disease drug designation. If a drug receives the designation of a “rare pediatric disease” drug, it is eligible during the FDA marketing process to apply for a Rare Pediatric Disease Priority Review Voucher. According to the FDA website, under the Rare Pediatric Priority Review Voucher Program, a sponsor who receives an approval for a drug or biologic for a “rare pediatric disease” may qualify for a voucher that can be redeemed to receive a priority review of a subsequent marketing application for a different product. U.S. patent Term Restoration and Marketing Exclusivity Depending upon the timing, duration and specifics of FDA approval of product candidates, some of a sponsor’s U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period generally is one-half the time between the effective date of an IND and the submission date of a BLA plus the time between the submission date of a BLA and the approval of that application. Only one patent applicable to an approved biologic product is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. Moreover, a given patent may only be extended once based on a single product. The United States Patent and Trademark Office ("USPTO"), in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. Post-Approval Requirements Rigorous and extensive FDA regulation of biologic products continues after approval, particularly with respect to cGMP requirements. Manufacturers are required to comply with applicable requirements in the cGMP regulations, including quality control and quality assurance and maintenance of records and documentation. Other post-approval requirements applicable to biologic products include reporting of cGMP deviations that may affect the identity, potency, purity and overall safety of a distributed product; recordkeeping requirements; reporting of adverse effects; reporting updated safety and efficacy information; and complying with electronic record and signature requirements. After a BLA is approved, the product also may be subject to official lot release. If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA, together with a release protocol, showing a summary of the history of manufacture of the lot and the results of all tests performed on the lot. The FDA also may perform certain confirmatory tests on lots of some products before releasing the lots for distribution. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency and effectiveness of biologic products. A sponsor also must comply with the FDA’s advertising and promotion requirements, such as the prohibition on promoting products for uses or in- patient populations that are not described in the product’s approved labeling (known as “off-label use”). Discovery of previously unknown problems or the failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. In addition, changes to the manufacturing process or facility generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval. Government Regulation Outside of the United States In addition to regulations in the United States, sponsors are subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of biologic products. Because biologically sourced raw materials are subject to unique contamination risks, their use may be restricted in some countries. Whether or not a sponsor obtains FDA approval for a product, a sponsor must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial 18 application, much like the IND, prior to the commencement of human clinical trials. In the EU, for example, a request for a Clinical Trial Authorization, or CTA, must be submitted to the competent regulatory authorities and the competent Ethics Committees in the EU Member States in which the clinical trial takes place, much like FDA and the IRB, respectively. Once the CTA request is approved in accordance with the EU and the EU Member State’s requirements, clinical trial development may proceed. The requirements and processes governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, the clinical trials are conducted in accordance with GCPs and the applicable regulatory requirements of the country or countries in which the clinical trial is performed, as well as the ethical principles that have their origin in the Declaration of Helsinki (whichever provides the greater protection to the clinical trial participants). Failure to comply with applicable foreign regulatory requirements may result in, among other things, fines; suspension, variation or withdrawal of regulatory approvals; product recalls; seizure of products; operating restrictions; and criminal prosecution. Other Healthcare Laws and Regulations Healthcare providers, physicians and third-party payors play a primary role in the recommendation and use of pharmaceutical products that are granted marketing approval. Arrangements with third-party payors, existing or potential customers and referral sources are subject to broadly applicable fraud and abuse and other healthcare laws and regulations, and these laws and regulations may constrain the business or financial arrangements and relationships through which manufacturers market, sell and distribute the products for which they obtain marketing approval. Such restrictions under applicable federal and state healthcare laws and regulations include the following: • the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or kind, in exchange for, or to induce, either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs 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 Patient Protection and Affordable Care Act ("PPACA") amended the intent requirement of the federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to commit a violation; • the federal false claims and civil monetary penalties laws, including the civil False Claims Act ("FCA"), which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government. Certain marketing practices, including off-label promotion, also may implicate the FCA. In addition, the PPACA codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA; • the federal Physician Payments Sunshine Act, which requires 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 & Medicaid Services ("CMS") information related to payments and other transfers of value to physicians, certain other healthcare providers and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members; • the federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA") imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; • HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and its implementing regulations, which imposes obligations, including mandatory contractual terms, with respect to safeguarding the transmission, security and privacy of protected health information; • the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; and • state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance 19 guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; 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. Violation of the laws described above or any other governmental laws and regulations may result in penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of operations, the exclusion from participation in federal and state healthcare programs, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and imprisonment. Furthermore, efforts to ensure that business activities and business arrangements comply with applicable healthcare laws and regulations can be costly. Coverage and Reimbursement Significant uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain regulatory approval. In the United States, sales of any product candidates for which regulatory approval for commercial sale is obtained will depend in part on the availability of coverage and adequate reimbursement from third-party payors. Third-party payors include government authorities and health programs in the United States such as Medicare and Medicaid, managed care providers, private health insurers and other organizations. These third-party payors are increasingly reducing reimbursements for medical products and services. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to incurring the costs required to obtain FDA approvals. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all FDA-approved drugs for a particular indication. Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The U.S. 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. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future. In the EU, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies. EU member states may approve a specific price for a product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the market. Other member states allow companies to fix their own prices for products, but monitor and control company profits. The downward pressure on health care costs has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations may not allow favorable reimbursement and pricing arrangements. Health Reform The United States and some foreign jurisdictions are considering or have enacted a number of reform proposals to change the healthcare system. There is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. In the United States, for example, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected and continues to face major uncertainty due to the status of major legislative initiatives surrounding healthcare reform. Additional Regulation In addition to the foregoing, state and federal laws regarding environmental protection and hazardous substances, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act, affect our business. These and other laws govern the use, handling and disposal of various biologic, chemical and radioactive substances used in, and wastes generated by, operations. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governmental fines. Equivalent laws have been adopted in other countries that impose similar obligations. 20 U.S. Foreign Corrupt Practices Act The U.S. Foreign Corrupt Practices Act ("FCPA") prohibits U.S. corporations and individuals from engaging in certain activities to obtain or retain business abroad or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Equivalent laws have been adopted in other foreign countries that impose similar obligations. Human Capital As of February 19, 2021, we had 75 full-time employees, primarily engaged in research and development, manufacturing and administrative activities. None of our employees are represented by a labor union and we consider our employee relations to be good. We believe our employees are among the most important assets to our company and are key to achieving our goals and expectations. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, and incentivizing our existing and new employees. We offer robust compensation packages, including competitive base pay, incentive compensation and stock compensation programs, and provide a broad range of benefits. The principal purpose of our stock compensation program is to attract, retain and reward personnel through the granting of stock-based awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives. In addition, we are committed to the professional advancement of our employees and offer various training programs and career development opportunities. Corporate Information We commenced operations on April 15, 2016. On March 31, 2017, we converted from a California limited liability company to a Delaware C-corporation, and changed our name from Krystal Biotech, LLC to Krystal Biotech, Inc. Our principal offices are located at 2100 Wharton Street, Suite 701, Pittsburgh, PA 15203, and our telephone number is 412-586-5830. On June 19, 2018, the Company incorporated Krystal Australia Pty Ltd., an Australian proprietary limited company, for the purpose of undertaking preclinical and clinical studies in Australia. On April 24, 2019, the Company incorporated Jeune, Inc. in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical studies for aesthetic skin conditions. Our website address is www.krystalbio.com. Our website and the information contained on, or that can be accessed through, the website will not be deemed to be incorporated by reference in, and are not considered part of, this Annual Report on Form 10-K. You should not rely on any such information in making your decision whether to purchase our common stock. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are available free of charge on the investor relations section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to the Securities and Exchange Commission ("SEC"). The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding the Company that we file electronically with the SEC. The address of the website is http://www.sec.gov. Implications of Being an Emerging Growth Company We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). As a smaller reporting company and an emerging growth company, we may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include: • Reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data in this Form 10-K; • An exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; • Reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and • Exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements. 21 We may take advantage of these provisions for up to five years or such earlier time that we no longer qualify as an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our capital stock held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. For example, we intend to take advantage of the reduced reporting requirements with respect to disclosure regarding our executive compensation arrangements, have presented only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this Annual Report on Form 10-K, and have taken advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. To the extent that we take advantage of these reduced reporting burdens, the information that we provide stockholders may be different than you might obtain from other public companies in which you hold equity interests. In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to adopt this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. 22