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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-09 · 116 added, 200 removed, 111 unchanged (74% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC, on March 10, 2020.

The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC, on March 1, 2021.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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Forward-looking statements appearing in a number of places throughout this Quarterly Report on Form 10-Q include, but are not limited to, statements about the following, among other things:

• the initiation, timing, progress and results of preclinical and clinical trials for B-VEC (previously “KB103”), KB105, KB301 and any other product candidates, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs;

• the impact that the COVID-19 pandemic and measures to prevent its spread may have on our business operations, access to capital, research and development activities, and preclinical and clinical trials for B-VEC, KB105, KB301 and any other product candidates;

• the initiation, timing, progress and results of preclinical and clinical trials for B-VEC (previously “KB103”), KB105, KB104, KB407, KB408, KB301 and any other product candidates, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs;

• the continuing impact that the COVID-19 pandemic and measures implemented to prevent its spread may have on our business operations, access to capital, research and development activities, and preclinical and clinical trials for B-VEC, KB105, KB104, KB407, KB408, KB301 and any other product candidates;

• the timing, scope or results of regulatory filings and approvals, including timing of final US Food and Drug Administration (“FDA”), marketing and other regulatory approval of our product candidates;

• our ability to achieve certain accelerated or orphan drug designations from the FDA;

• our estimates regarding the potential market opportunity for B-VEC, KB105, KB301 and any other product candidates;

• our estimates regarding the potential market opportunity for B-VEC, KB105, KB104, KB407, KB408, KB301 and any other product candidates;

• our research and development programs for our product candidates;

• our plans and ability to successfully develop and commercialize our product candidates, including B-VEC, KB105, KB301 and our other product candidates;

• our plans and ability to successfully develop and commercialize our product candidates, including B-VEC, KB105, KB104, KB407, KB408, KB301 and our other product candidates;

• our ability to identify and develop new product candidates;

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• the impact of laws and regulations;

• any statements regarding economic conditions, including statements related to the economic fallout from the COVID-19 pandemic and the impact on our business, or performance and any statement of assumptions underlying any of the foregoing.

• any statements regarding economic conditions, including statements related to any future economic volatility or uncertainty related to the COVID-19 pandemic and the impact on our business, or performance and any statement of assumptions underlying any of the foregoing.

Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” elsewhere in this Form 10-Q and in other filings we make with the SEC from time to time.

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Throughout this Form 10-Q, unless the context requires otherwise, all references to “Krystal,” “the Company,” we,” “our,” “us” or similar terms refer to Krystal Biotech, Inc., together with its consolidated subsidiaries.

We are a clinical stage gene therapy company developing a new class of transformative medicines to treat diseases caused by gene or protein dysfunction or absence.

Using our patented platform that is based on engineered HSV-1, we create vectors that encode functional proteins.

Our vector is designed to be specifically and efficiently delivered to the target cell in an outpatient setting, via topical or intradermal routes of administration, where the cell’s own machinery transcribes and translates the encoded protein, restoring or augmenting protein function to treat or prevent disease.

Presently, we have two product candidates in the clinic to treat rare skin diseases.

We announced initiation of a Phase 3 pivotal trial on our most advanced product candidate, B-VEC, to treat dystrophic epidermolysis bullosa (“DEB”) on July 28, 2020.

Details of the pivotal study can be found at www.clinicaltrials.gov under NCT identifier NCT04491604.

We expect to complete enrollment in this study in early 2021 and anticipate having top-line data from this trial, as well as filing of a Biologics License Application ("BLA") with the U.S.

Food and Drug Administration ("FDA"), in 2021.

We initiated the Phase 2 portion of our Phase 1/2 study on our second product candidate, KB105, to treat autosomal recessive congenital ichthyosis (“ARCI”) on August 4, 2020 following a successful recent completion of a Phase 1 trial in adults.

We are a clinical stage biotechnology company leading the field of redosable gene therapy for the treatment of serious rare diseases.

Using our patented platform that is based on engineered HSV-1, we create vectors that efficiently deliver therapeutic transgenes to cells of interest in multiple organ systems.

The cell’s own machinery then transcribes and translates the encoded effector to treat or prevent disease.

We formulate our vectors for non-invasive or minimally invasive routes of administration at a doctor’s office or potentially in the patient’s home.

Our goal is to develop easy to use, redosable gene therapies to dramatically improve the lives of patients living with rare diseases.

Our innovative technology platform is supported by in-house, commercial scale cGMP manufacturing capabilities.

Our Product Candidates

The following table summarizes information regarding our product candidates in various stages of clinical and preclinical development:

There can be no assurance that the upcoming milestones will be met on the expected timeline or at all.

Pipeline Highlights and Recent Developments

• B-VEC is a topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene for the treatment of dystrophic epidermolysis bullosa ("DEB"), a serious rare skin disease caused by missing or mutated type VII collagen protein ("COL7").

The randomized, double-blind, placebo-controlled GEM-3 pivotal study is ongoing.

On March 30, 2021 we announced completion of patient enrollment, and we expect to announce top line data 4Q21.

On April 26, 2021 we announced modifications to the Statistical Analysis Plan ("SAP") in the ongoing Phase 3 study based on feedback from the FDA.

In the updated plan, the primary outcome measure is complete wound healing determined by the Investigator in B-VEC treated wounds versus placebo.

A positive response is defined as complete wound healing at week 22 and week 24 or week 24 and week 26.

Details of the pivotal study can be found at www.clinicaltrails.gov under NCT identifier NCT04491604.

Nothing included on these websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.

• KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene for the treatment of TGM1-deficient autosomal recessive congenital ichthyosis ("TGM1-ARCI"), a serious rare skin disorder caused by missing or mutated TGM1 protein.

A randomized, placebo-controlled Phase 1/2 study is ongoing.

Details of the Phase 1/2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732.

Nothing included on these websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.

We are also applying our HSV-1 platform towards the development of therapies to treat aesthetic skin conditions.

We announced initiation of the Phase 1 clinical study on our third product candidate, KB301, to treat wrinkles and acne scars in on August 25, 2020.

• KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length CFTR transgene for the treatment of cystic fibrosis, a serious rare lung disease caused by missing or mutated cystic fibrosis transmembrane conductance regulator ("CFTR") protein.

On April 19, 2021 we announced positive preclinical data from the Good Laboratory Practice ("GLP") toxicology and biodistribution study, in which the No-Observed-Adverse-Effect Level ("NOAEL") was determined to be the highest dose tested.

We expect to initiate clinical testing in 3Q21.

• KB408 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the SERPINA1 transgene, that encodes for normal human alpha-1 antitrypsin ("AAT") protein, for the treatment of alpha-1 antitrypsin deficiency ("AATD").

On April 19, 2021 we announced positive initial proof-of-concept preclinical in vitro and in vivo data.

More detailed preclinical data will be presented at a future scientific conference.

• KB104 is a topical gel formulation of our novel vector designed to deliver two copies of the SPINK5 transgene for the treatment of Netherton Syndrome, a debilitating autosomal recessive skin disorder caused by missing or mutated SPINK5 protein.

We expect to file an investigational new drug ("IND") in 2H21.

We have several other product candidates in various stages of preclinical development.

• On April 27, 2021, we announced that we will present preclinical data from our vector-encoded-antibody platform in a digital poster presentation at the American Society of Genetic & Cell Therapy (ASGCT) Annual Meeting held virtually May 11-14, 2021.

Data to be presented includes evidence of in vitro molecular efficacy with KB501 (expressing a TNF-α targeting antibody), and in vivo proof-of-concept in two well-established models of atopic dermatitis with KB501 and KB502 (expressing an IL-4Rα targeting antibody).

We are also leveraging the ability of our platform to deliver proteins of interest to cells in the skin in the context of aesthetic medicine via our wholly-owned subsidiary Jeune, Inc.

A Summary description of Jeune’s key product candidate and its status is as follows:

• KB301 is a solution for intradermal injection designed to deliver two copies of the COL3A1 transgene to address signs of aging or damaged skin caused by declining levels of, or damaged proteins within the extracellular matrix, including type III collagen.

A Phase 1 study is currently ongoing.

On March 24, 2021 we announced initial data from Cohort 1 of the Phase 1 study that showed safety and tolerability of two (2) repeat KB301 injections in human subjects.

We expect to begin treating patients in an efficacy cohort of the study, as well as announce initial efficacy data in 2H21.

Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT04540900.

During the third quarter of 2020, the United States Patent Office ("USPTO") has granted U.S.

10,786,438 which covers 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.

Recognizing the breadth and potential transformative power of our HSV-1 vector platform, we have expanded the scope of our product development beyond skin and have begun preclinical efforts in pulmonary diseases.

The large payload capacity, robust tropism to epithelial cells (including human airway epithelia), immune-evasive properties, and manufacturing scalability of our HSV-based vector platform gives us an advantage over other viral vector therapies for pulmonary indications.

Our preclinical efforts to date have led to the development of a novel candidate, KB407, for the treatment of Cystic Fibrosis (“CF”), which has been shown to successfully transduce human CF patient-derived epithelial cells and deliver functional cystic fibrosis transmembrane conductance regulator (“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 was also observed in a non-human primate study.

Based on feedback from regulatory agencies, Investigational New Drug (“IND”) enabling safety and efficacy studies,

including an additional safety study in non-human primates, are underway, and IND filing for KB407 is anticipated in 1H 2021.

During the third quarter of 2020, we received a Notice of Allowance for our patent application covering methods of using KB407 for the treatment of Cystic fibrosis and other diseases causing progressive lung destruction, which is expected to issue as US Pat.

10,829,529 on November 10, 2020.

Additional pulmonary diseases are also being evaluated.

We believe that gene therapy companies should control their manufacturing destiny and that having in-house current good manufacturing practices (“cGMP”) facilities allow a gene therapy company to maintain better quality control, shorter lead times, lower costs and better command over intellectual property.

Last year, we completed the construction of our own commercial scale cGMP-compliant manufacturing facility, ANCORIS, to enhance supply chain control, increase supply capacity for clinical trials and ensure commercial demand is met in the event that B-VEC and our other product candidates receive marketing approval.

The clinical material for the pivotal trial has been produced at ANCORIS and we expect to produce initial commercial launch material of B-VEC will be produced at the same facility.

Earlier this year, we announced the ground-breaking of our second commercial gene therapy facility in the Pittsburgh, Pennsylvania area.

The ASTRA facility is being designed as a state-of-the-art cGMP manufacturing facility that, beyond providing for expansion of Krystal’s current production platform, will allow the in-house incorporation of raw material preparation, excipient manufacturing, testing, packaging, labeling and distribution, fully-integrating all components of the supply chain from starting materials to patient experience.

We anticipate that the ASTRA facility will initially be used as a commercial back-up facility for B-VEC in the U.S.

and supply ex-U.S.

Eventually, the ASTRA facility will be expanded to produce investigational and commercial material for our pipeline products.

We have recently expanded our facility design to include additional production, quality control labs for testing and release of product, and administrative and training spaces.

We expect the 150,000 square foot facility to be completed and validated in 2022.

We have a rapidly expanding portfolio of issued patents in both the United States and foreign jurisdictions and believe that the granting of these patents, which are entirely owned by the Company, protects our core platform and products based thereupon, affording us the freedom to use our patented platform for the development of novel therapeutics for multiple indications.

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.

Our desire is to bring transformative medicines, using our platform, to patients suffering from debilitating diseases and conditions.

A brief overview of our pipeline follows below.

Beremagene Geperpavec (“B-VEC”) for the treatment of Dystrophic Epidermolysis Bullosa

Our lead product candidate, B-VEC, is a topical gene therapy to treat DEB, a rare and severe monogenic skin disease for which there is currently no approved treatment.

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, or COL7, that forms anchoring fibrils that bind the dermis, or inner layer of the skin, to the epidermis, or 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.

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.

The Primary Outcome Measure is complete wound healing determined by the Investigator, as compared to baseline in B-VEC treated wounds versus placebo treated wounds at Weeks 20, 22 and 24.

Secondary endpoints to be evaluated in the study include complete wound healing at Weeks 8, 10 and 12;

the mean change in pain severity (using either a VAS or FLACC-R Scale) per primary wound site associated with wound dressing;

the proportion of primary wound sites with ≥75% healing assessed via Canfield photography.

Additional exploratory measures include relative time to wound closure from baseline, duration of wound closure, mean reduction in wound surface area in B-VEC treated versus placebo treated wounds, mean change in Quality of Life in addition to Skindex score as compared to baseline at Week 24.

Throughout the study, participants will complete questionnaires, have images captured of their study wounds, undergo physical exams, have vital signs and safety labs monitored.

Additional details on the study protocol are available at www.clinicaltrials.gov under NCT identifier NCT04491604.

Nothing included on this website shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.

We expect to complete enrollment in this study in early 2021 and anticipate having top-line data from this trial as well as filing of a BLA with the FDA in 2021.

We are aligned with the European Medicines Agency (“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 of 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.

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, or PRIME, eligibility for B-VEC to treat DEB.

The PRIME designation is awarded by the EMA to promising medicines that target an unmet medical need.

KB105 for the treatment of Autosomal Recessive Congenital Ichthyosis

Our second pipeline candidate, KB105, delivers functional human transglutaminase 1 (“TGM1”), genes using our gene therapy platform to patients with TGM1-deficient ARCI.

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 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 and trans-epidermal exposure to unwanted toxins and surface microorganisms, greatly increasing the risk of infection and sepsis.

Transglutaminase-1 deficiency is associated with increased mortality in the neonatal period and has a dramatic impact on quality of life.

There are currently no treatments targeting molecular correction of this disease.

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 100cm 2 (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.

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.

Additional details on the study protocol are available at www.clinicaltrials.gov under NCT identifier NCT04047732.

Nothing on this website shall be deemed incorporated into this Quarterly Report on Form 10-Q.

In May 2020, clinical data from the first phase of the Phase 1/2 study which enrolled adult patients were presented at the SID meeting.

Additional details on the interim results are available at http://ir.krystalbio.com/index.php/news-releases/news-release-details/krystal-biotech-announces-positive-interim-results-phase-12.

We announced that the study was initiated on September 4, 2019.

Nothing on this website shall be deemed incorporated into this Quarterly Report on Form 10-Q.

KB301 for the treatment of aesthetic skin conditions

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.

The goal of skin biorejuvenation is, in part, to enhance the synthesis of human dermal collagens (i.e., neocollagenesis), thereby correcting the molecular defect underlying the aged phenotype.

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 and other superficial skin defects.

We initiated the Phase 1 safety clinical trial for the treatment of wrinkles and acne scars on August 25, 2020.

On October 8, 2020, we announced presentation of preclincial data supporting the ongoing development of KB301 at the American Society for Dermatologic Surgery ("ASDS") 2020 Virtual Meeting.

KB104 for the treatment of Netherton Syndrome

KB104 is designed to deliver functional Serine Protease Inhibitor Kazal-type 5 (“SPINK5”), genes using our gene therapy platform to patients suffering from Netherton Syndrome, which is a debilitating monogenic autosomal recessive skin disorder that causes defective keratinization, severe skin barrier defects, and recurrent infections.

Severe Netherton Syndrome symptoms in infants are 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.

KB407 for the treatment of Cystic Fibrosis

We are developing KB407 as a non-invasive inhaled gene therapy product for the treatment of CF and are currently in the preclinical phase with plans for a clinical study for KB407 in 1H 2021.

The FDA granted Orphan Drug Designation to KB407 on August 17, 2020, and Rare Pediatric Designation on September 28, 2020.

CF, the most common inherited genetic disorder in the United States, is caused by mutations in the gene encoding CFTR.

Lack of functional CFTR 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 US 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 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.

In December 2019, COVID-19 was first reported in Wuhan, China and in March 2020, a global pandemic was declared by the World Health Organization.

In an effort to slow the spread of the virus, certain governments, including the Commonwealth of Pennsylvania where the Company’s primary offices, laboratory and manufacturing spaces are located, enacted stay-at-home orders, and sweeping restrictions to travel were initiated by corporations and governments.

Nothing included on these websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q

Jeune has several other aesthetic medicine product candidates in various stages of preclinical development.

Business Highlights and Recent Developments

• On December 31, 2020, the Company entered into a sales agreement (the "Sales Agreement") with Cowen and Company, LLC ("Cowen") with respect to an at-the-market equity offering program ("ATM Program"), under

which Cowen will act as the Company's agent and/or principal and may issue and sell from time to time, during the term of the Sales Agreement, shares of its common stock, par value $0.0001 per share, having an aggregate offering price up to $150.0 million ("Placement Shares").

Related offering expenses payable by the Company were $172 thousand.

During the first quarter of 2021, we issued 262,500 shares of common stock pursuant to the ATM Program for net proceeds of $16.9 million, resulting in a remaining $132.5 million available for issuance under the ATM Program.

• On January 29, 2021, the Company entered into a PSA for ASTRA with Northfield related to the purchase option exercised by the Company on October 15, 2020 for a purchase price of $9.4 million.

The transaction closed on March 5, 2021.

The Company utilized the $1.5 million deposit with Northfield as a credit against the purchase price and the remaining $7.9 million was paid utilizing cash on hand.

• On February 1, 2021, the Company completed a public offering of 2,211,538 shares of its common stock, including 288,461 shares purchased by the underwriters, at $65.00 per share.

Net proceeds to the Company from the offering were $134.9 million after deducting underwriting discounts and commissions of approximately $8.6 million, and other offering expenses payable by the Company of $198 thousand.

• On March 24, 2021 the Company announced the appointment of Dr.

Bhushan Hardas, M.D., MBA as President of Jeune, Inc., a wholly owned subsidiary of Krystal Biotech.

• On May 3, 2021 the Company announced the appointment of Andy Orth to the position of Chief Commercial Officer of Krystal Biotech.

COVID-19 Update

The COVID-19 pandemic has prompted governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantines.

In an effort to slow the spread of the virus, The Commonwealth of Pennsylvania where the Company’s primary offices, laboratory and manufacturing spaces are located, enacted stay-at-home orders, and sweeping restrictions to travel were initiated by corporations and governments.

Although these restrictions have been lifted in some areas, it is not known at this time whether they will be reestablished or the extent to which the Company will be impacted.

The degree of COVID-19’s effect on the Company’s clinical, operational and financial performance will depend on future developments, including additional protective measures that may be implemented by governmental authorities or the Company to protect its employees, or by investigators, caregivers or patients to minimize exposure, all of which are uncertain and difficult to predict.

While to date the impact of COVID-19 on our business and clinical trials has been minimal, we will continue to assess the potential impact of the COVID-19 pandemic on our business and operations, including our supply chain and preclinical and clinical trial activities.

At September 30, 2020, our cash, cash equivalents and short-term investments balance was approximately $286.4 million.

Since operations began, we have incurred operating losses.

Our net losses were $9.6 million and $21.8 million for the three and nine months ended September 30, 2020 and $4.3 million and $13.7 million for the three and nine months ended September 30, 2019, respectively.

At September 30, 2020, we had an accumulated deficit of $60.8 million.

We will need to generate significant revenue to achieve profitability, and we may never generate revenue or enough revenue to achieve profitability.

We expect to incur significant expenses and increasing operating losses for the foreseeable future.

Our net losses

may fluctuate significantly from quarter to quarter and year to year.

We expect our costs will continue to increase significantly as a result of our current and planned business activities, such as:

• conducting our Phase 3 clinical trial for B-VEC, Phase 1/2 clinical trial for KB105, and Phase 1 clinical trial for KB301;

• continued research and development-related activities for the advancement of our pipeline product candidates into clinical development, such as KB104 and KB407;

• construction of our cGMP manufacturing facility, ASTRA, and related completion and validation costs;

• manufacturing of our clinical trial materials;

• pursuing regulatory approval for our product candidates;

• adding personnel to support our administrative, product development and commercialization efforts;

• activities leading up to the commercial launch of B-VEC in multiple markets.

Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our planned preclinical studies for our pipeline product candidates, or our operations.

Our funds may not be sufficient to enable us to seek marketing approval for or to commercially launch B-VEC, KB105, KB301 or any other product candidate.

Accordingly, to obtain marketing approval for and to commercialize this or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources.

Adequate additional financing may not be available to us on acceptable terms, if at all.

Our failure to raise capital when needed could have a negative effect on our financial condition and our ability to pursue our planned business strategy.

The degree of the pandemic’s effect on the Company’s clinical, operational and financial performance will depend on future developments, including additional protective measures that may be implemented by governmental authorities or the Company to protect its employees, or by investigators, caregivers or patients to minimize exposure, all of which are uncertain and difficult to predict.

While to date the impact of the pandemic on our business and clinical trials has been minimal and the increased vaccination rates in the U.S.

are encouraging, we will continue to assess the potential impact of the COVID-19 pandemic on our business and operations, including our supply chain and preclinical and clinical trial activities.

For additional information regarding the impact of the coronavirus pandemic, please see "Risk Factor - Business interruptions resulting from the COVID-19 outbreak or similar public health crises could cause a disruption of the development efforts of our product candidates and adversely impact our business."

Financial Overview

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We expect our research and development expenses will increase as we continue the manufacturing of preclinical and clinical materials and manage the clinical trials of, and seek regulatory approval for, our product candidates and expand our product portfolio.

In the near term, we expect that our research and development expenses will increase as we begin our pivotal Phase 3 clinical trial for B-VEC, conduct our ongoing Phase 1/2 clinical trial for KB105, and incur preclinical expenses for our other product candidates.

In the near term, we expect that our research and development expenses will increase as we begin our pivotal Phase 3 clinical trial for B-VEC, conduct our ongoing Phase 1/2 clinical trial for KB105, our phase 1 safety study for KB301 and incur preclinical expenses for our other product candidates.

Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of our clinical trials, and, as a result, the actual costs to complete our clinical trials may exceed the expected costs.

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Interest income consists primarily of income earned from our cash, cash equivalents and investments.

Interest Expense

Interest expense consists primarily of non-cash interest expense recognized to accrete the build to suit financial obligation to a balance that equaled the cash consideration that was paid upon the close of the purchase of ASTRA.

Critical Accounting Policies, Significant Judgments and Estimates

There have been no significant changes during the three and nine months ended September 30, 2020 to our critical accounting policies, significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2019.

There have been no significant changes during the three months ended March 31, 2021 to our critical accounting policies, significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Results of Operations

Three Months Ended September 30, 2020 and 2019

Three Months Ended September 30,

2020 2019 Change

(In thousands) (unaudited)

Research and development $ 5,100 $ 3,885 $ 1,215

General and administrative 4,580 1,457 3,123

Total operating expenses 9,680 5,342 4,338

Loss from operations (9,680) (5,342) (4,338)

Interest and other income, net 70 1,070 (1,000)

Net loss $ (9,610) $ (4,272) $ (5,338)

Research and Development Expenses

Research and development expenses increased $1.2 million in the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Higher research and development expenses were due to an increase in outsourcing research and development activities of $352 thousand, lab supplies of $187 thousand, payroll related expenses of $526 thousand which is primarily driven by an increase in headcount to support overall growth and includes a $190 thousand increase in stock-based compensation, and other research and development expenses of $150 thousand.

General and Administrative Expenses

General and administrative expenses increased $3.1 million in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $1.6 million which is primarily driven by an increase in headcount to support overall growth and includes an $888 thousand increase in stock-based compensation, market research related expenses of $611 thousand, legal and professional fees of $631 thousand and other administrative expenses of $298 thousand.

Interest and Other Income

Interest and other income for the three months ended September 30, 2020 and 2019 was $70 thousand and $1.1 million, respectively and consisted of interest and dividend income earned from our cash, cash equivalents and investments.

This decrease was driven by a decline in market interest rates.

Nine Months Ended September 30, 2020 and 2019

Nine Months Ended

September 30,

Three Months Ended March 31, 2021 and 2020

Three Months Ended March 31,

2021 2020 Change

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Loss from operations (14,353) (5,946) (8,407)

Other Income (Expense)

Interest and other income, net 33 605 (572)

Interest expense (1,492) — (1,492)

Net loss $ (15,812) $ (5,341) $ (10,471)

Research and Development Expenses

Research and development expenses increased $997 thousand in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Higher research and development expenses were due largely to an increase in payroll related expenses of approximately $1.4 million which is primarily driven by an increase in headcount to support overall growth and includes a $318 thousand increase in stock-based compensation and a net increase in other research and development expense of $311 thousand offset by an decrease in outsourcing research and development activities of $681 thousand.

Research and development expenses increased $2.7 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Higher research and development expenses were due to an increase in outsourcing research and development activities of approximately $1.4 million, lab supplies of $626 thousand, payroll related expenses of $384 thousand, which is primarily driven by an increase in headcount to support overall growth, and includes a $331 thousand increase in stock-based compensation, and other research and development expenses of $307 thousand.

General and Administrative Expenses

General and administrative expenses increased $5.7 million in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $3.1 million which is primarily driven by an increase in headcount to support overall growth and includes an approximately $1.5 million increase in stock-based compensation, market research related expenses of approximately $1.1 million, legal and professional fees of $748 thousand, insurance expense of $552 thousand and other administrative expenses of $177 thousand.

Interest and Other Income

Interest and other income for the nine months ended September 30, 2020 and 2019 was $795 thousand and $2.2 million, respectively and consisted of interest and dividend income earned from our cash, cash equivalents and investments.

General and administrative expenses increased $5.7 million in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $2.4 million, which is primarily driven by an increase in headcount to support overall growth, and includes an $1.4 million increase in stock-based compensation, market research related expenses of approximately $1.2 million, legal and professional fees of approximately $1.5 million and other administrative expenses of $670 thousand.

Other Income (Expense)

Interest and other income for the three months ended March 31, 2021 and 2020 was $33 thousand and $605 thousand, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments.

This decrease was driven by a decline in market interest rates.

Interest expense for the three months ended March 31, 2021 and 2020 was $1.5 million and zero, respectively, and related to accretion of the financial obligation for the build to suit lease liability during the three months ended March 31, 2021 to a balance that equaled the purchase consideration for ASTRA.

Liquidity and Capital Resources

As of September 30, 2020, the Company had an accumulated deficit of $60.8 million.

With the net proceeds raised from its public and private securities offerings, including the public offering completed on May 21, 2020, the Company believes that its cash, cash equivalents and short-term investments of approximately $286.4 million as of September 30, 2020 will be sufficient to allow the Company to fund its operations for at least 12 months from the filing date of this Form 10-Q.

As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure.

At March 31, 2021, our cash, cash equivalents and short-term investments balance was of approximately $403.4 million.

Since operations began, we have incurred operating losses.

Our net losses were $15.8 million and $5.3 million for the three months ended March 31, 2021 and 2020, respectively.

At March 31, 2021, we had an accumulated deficit of $87.0 million.

With the net proceeds raised from its public and private securities offerings, including the ATM Program and the public offering completed on February 1, 2021, the Company believes that its cash, cash equivalents and short-term investments as of March 31, 2021 will be sufficient to allow the Company to fund its operations for at least 12 months from the filing date of this Form 10-Q.

As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure.

Furthermore, we expect to incur increasing costs associated with operating as a public company, meeting financial controls, satisfying regulatory and quality standards, maintaining product and clinical trials, and furthering our efforts around our current and future product candidates.

The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital.

Management intends to fund future operations through the sale of equity and debt financings and may also seek additional capital through arrangements with strategic partners.

There can be no assurances that additional funding will be available on terms acceptable to the Company, if at al l.

In addition, the COVID-19 pandemic may negatively impact our operations, including possible effects on its financial condition, ability to access the capital markets on attractive terms or at all, liquidity, operations, suppliers, industry, and workforce.

The Company will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2020 and beyond.

Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our continued clinical studies of B-VEC, KB105, KB301 or our planned preclinical studies for our other product candidates, or our operations.

Further, we do not expect to generate any product revenues until 2022, at the earliest, assuming we receive marketing approval for B-VEC on the schedule we currently contemplate.

While we are in the process of building out our internal vector manufacturing capacity, some of our manufacturing activities will be contracted out to third parties.

Additionally, we currently utilize third-party contract research organizations to carry out our clinical development activities.

As we seek to obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses as we prepare for product sales, marketing, manufacturing, and distribution.

Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch B-VEC, KB105, KB301 or any other product candidate.

Adequate additional financing may not be available to us on acceptable terms, if at all.

Our failure to raise capital when needed could have a negative effect on our financial condition and our ability to pursue our business strategy.

Operating Capital Requirements

We expect our primary use of capital to continue to be for compensation and related expenses, manufacturing costs for preclinical and clinical materials, third party clinical trial research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs.

We believe that our available funds will be sufficient to enable us to complete our pivotal Phase 3 clinical trials for B-VEC, to continue our Phase 1/2 clinical trials for KB105, to complete our Phase 1 clinical trials for KB301, as well as to continue construction and validation related activities associated with our cGMP manufacturing facility, ASTRA.

Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs for preclinical and clinical materials, third party clinical trial research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs.

In order to complete the process of obtaining regulatory approval for any of our product candidates and to build the sales, manufacturing, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we will require substantial additional funding.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect.

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• the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any other product candidates that we may pursue in the future, if any;

• the costs of maintaining our own commercial-scale cGMP manufacturing facility;

• the costs of maintaining our own commercial-scale cGMP manufacturing facilities;

• the outcome, timing and costs of seeking regulatory approvals;

• the costs associated with the manufacturing process development and evaluation of third-party manufacturers;

• the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, in the event we receive marketing approval for B-VEC, KB105, KB301 or any other product candidates we may develop;

• the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, in the event we receive marketing approval for our current and future product candidates;

• the extent to which the costs of our product candidates, if approved, will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors;

• the costs of commercialization activities for B-VEC, KB105, KB301 and other product candidates if we receive marketing approval for B-VEC, KB105, KB301 or any other product candidates we may develop, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities;

• subject to receipt of marketing approval, if any, revenue received from commercial sale of B-VEC, KB105, KB301 or our other product candidates;

• the costs of commercialization activities for our current and future product candidates if we receive marketing approval for such product candidates we may develop, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities;

• subject to receipt of marketing approval, if any, revenue received from commercial sale of our current and future product candidates;

• the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish;

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• the extent to which we acquire or in-license other product candidates and technologies.

We expect that we may need to obtain substantial additional funding in order to receive regulatory approval and to commercialize B-VEC or any other product candidates, including KB105.

We expect that we will need to obtain substantial additional funding in order to receive regulatory approval and to commercialize our product candidates.

To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders.

In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely affect our ability to conduct our business.

If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of B-VEC, KB105, KB301 or our other product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to B-VEC, KB105, KB301 or our other product candidates that we otherwise would seek to develop or commercialize ourselves.

If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of our product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to our product candidates that we otherwise would seek to develop or commercialize ourselves.

Sources and Uses of Cash

The following table summarizes our sources and uses of cash (in thousands):

Nine months Ended

September 30,

Three Months Ended March 31,

Net cash used in operating activities $ (9,654) $ (6,227)

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Net cash provided by financing activities 144,304 243

Net increase in cash $ 94,855 $ 91,136

Net increase (decrease) in cash $ 133,903 $ (7,289)

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2020 was $18.1 million and consisted primarily of a net loss of $21.8 million adjusted for non-cash items primarily of depreciation and amortization and stock-based compensation expense of $4.1 million, and cash used by increases in net operating assets of approximately $371 thousand.

Net cash used in operating activities for the nine months ended September 30, 2019 was $11.7 million and consisted primarily of a net loss of $13.7 million adjusted for non-cash items of depreciation and amortization and stock-based compensation expense of approximately $1.7 million, and cash provided by decreases in net operating liabilities of $318 thousand.

Net cash used in operating activities for the three months ended March 31, 2021 was $9.7 million and consisted primarily of a net loss of $15.8 million adjusted for non-cash items primarily of depreciation and amortization and stock-based compensation expense of $2.8 million and build to suit interest expense of $1.5 million, as well as cash used by increases in net operating assets of approximately $1.8 million.

Net cash used in operating activities for the three months ended March 31, 2020 was $6.2 million and consisted primarily of a net loss of $5.3 million adjusted for non-cash items of depreciation and amortization and stock-based compensation expense of approximately $951 thousand, and cash provided by decreases in net operating liabilities of $1.8 million.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2020 was $5.0 million and consisted primarily of purchases of $3.2 million of short-term available-for-sale investment securities, and expenditures of $7.6 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of $5.9 million received from the maturities of short-term investments.

Net cash used in investing activities for the nine months ended September 30, 2019 was $4.4 million and consisted primarily of purchases of $6.9 million of short-term available-for-sale investment securities, and expenditures of $4.1 million on the build-out of our new cGMP facilities and purchases of computer and laboratory equipment, partially offset by proceeds of $6.6 million received from the maturities of short-term investments.

Net cash used in investing activities for the three months ended March 31, 2021 was $747 thousand and consisted primarily of expenditures of $2.5 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of $1.7 million received from the maturities of short-term investments.

Net cash used in investing activities for the three months ended March 31, 2020 was $1.3 million and consisted primarily of purchases of $2.0 million of short-term available-for-sale investment securities, and expenditures of $1.5 million on the build-out of our ASTRA facilities, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of $2.2 million received from the maturities of short-term investments.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2020 was $117.9 million and was primarily from proceeds from our public offering on May 21, 2020 of 2,275,000 shares of our common stock to the public at $55.00 per share.

Net proceeds to the Company from the offering were $117.2 million after deducting underwriting discounts and commissions of approximately $7.5 million and other offering expenses of approximately $463 thousand.

Net cash provided by financing activities for the nine months ended September 30, 2019 was $107.2 million and was primarily from proceeds from our public offering in June 2019 of 2,500,000 shares of our common stock at a price to the public of $40.00 per share.

Net cash provided by financing activities for the three months ended March 31, 2021 was $144.3 million and consisted primarily of proceeds of $152.3 million received from our ATM Program, a public offering, and exercises of stock options, partially offset by proceeds of $8.0 million used for the purchase of the ASTRA building.

During the three months ended March 31, 2021, pursuant to the ATM Program the Company issued 262,500 share of common stock at a weighted average price of $66.50 per share for net proceeds of $16.9 million after deducting underwriting discounts and commissions of approximately $524 thousand.

The Company also incurred $172 thousand of other offering expenses related to the ATM Program.

On February 1, 2021 the Company completed a public offering of 2,211,538 shares of its common stock at $65.00 per share.

Net proceeds to the Company from the offering were $134.9 million after deducting underwriting discounts and commissions of approximately $8.6 million and other offering expenses of approximately $198 thousand.

On July 3, 2019, the underwriters exercised their option to purchase an additional 353,946 shares of common stock at $40.00 per share for additional net proceeds of $13.3 million after deducting underwriting discounts and commissions of approximately $849 thousand.

For the three months ended March 31, 2021, the Company received proceeds of $346 thousand from the exercise of stock options.

Net cash provided by financing activities for the three months ended March 31, 2020 was $243 thousand related to proceeds received from the exercise of stock options.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis