Krystal Biotech, Inc. 10-Q

ITEM 2. 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 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, 2023 (“2023 10-K”), as filed with the SEC on February 26, 2024. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Some of such factors include, but are not limited to: • the commercial success of VYJUVEK ® (beremagene geperpavec-svdt) , our U.S. Food and Drug Administration (“FDA”) approved product for treating patients, six months of age or older, suffering from dystrophic epidermolysis bullosa (“DEB”); • the timing, scope or results of regulatory filings and approvals for B-VEC outside of the U.S. and the commercial success of B-VEC outside the U.S. • the initiation, timing, cost, progress and results of our research and development activities, preclinical studies and clinical trials for our product candidates; • the timing, scope or results of regulatory filings and approvals, including timing of final FDA and other regulatory approval of our product candidates; • our ability to achieve certain accelerated or orphan drug designations from the FDA or other regulators; • changes in our estimates regarding the potential market opportunity for VYJUVEK and our product candidates; • increases in costs associated with our research and development programs for our product candidates; • increases in our selling, general and administrative expenses; • risks related to our ability to successfully develop and commercialize our product candidates; • our ability to identify new product candidates; • our ability to identify, recruit and retain key personnel; • risks related to our marketing and manufacturing capabilities and strategy; • our business model and strategic plans for our business, product candidates and technology; • the rate and degree of market acceptance and clinical utility of our product candidates and gene therapy, in general; • our competitive position and the success of competing therapies; • our intellectual property position and our ability to protect and enforce our intellectual property; • our ability to establish and maintain collaborations; • our financial performance and our estimates regarding expenses, future revenue, capital requirements and needs for additional financing, as well as our ability to raise capital; • our ability to successfully avoid or resolve any litigation, intellectual property or other claims, that may be brought against us; • global economic conditions; and • the impact of changes in laws and regulations. 18 Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A of Part II of this Quarterly Report on Form 10-Q and other filings we make with the SEC from time to time. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. Forward-looking statements represent our management’s beliefs and assumptions only as of the date of filing this Quarterly Report with the SEC. Except as required by law, we assume no obligation to update these forward-looking statements publicly as a result of subsequent events, developments or otherwise, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. 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. Web links throughout this document are provided for convenience only and are not intended to be active hyperlinks to the referenced websites. No content on the referenced websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q. Overview We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs. Using our patented gene therapy technology platform that is based on engineered herpes simplex virus-1 (“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 transgene to treat the disease. Our vectors are amenable to formulation for non-invasive or minimally invasive routes of administration at a healthcare professional’s office or in the patient’s home by a healthcare professional. Our innovative technology platform is supported by two in-house, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facilities. Our FDA Approved Commercial Product VYJUVEK (beremagene geperpavec-svdt, or B-VEC; referred to as B-VEC outside the U.S.) On May 19, 2023, the FDA approved VYJUVEK, the first ever redosable gene therapy, for treating patients, six months of age or older, suffering from DEB, a rare and severe monogenic disease that affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1 . VYJUVEK is a redosable topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene to a patient’s skin cells to produce the COL7 protein. VYJUVEK is the first and only corrective medicine approved by the FDA for the treatment of DEB, both recessive and dominant, that can be administered by a healthcare professional (“HCP”) in either a clinical setting or in the home. We possess exclusive rights to develop, manufacture, and commercialize VYJUVEK and all our pipeline candidates throughout the world. Net VYJUVEK product revenue was $83.8 million for the three months ended September 30, 2024, and $250.1 million in cumulative net product revenue since launch. Gross margin for the three months ended September 30, 2024 was 92%. We define gross margin as product revenue, net less cost of goods sold expressed as a percentage of product revenue, net. We have made steady progress securing access and reimbursement for VYJUVEK since launch and as of October 2024, positive access determinations have been achieved for 97% of lives covered under commercial and Medicaid plans. As of October 2024, we have secured over 460 reimbursement approvals for VYJUVEK in the U.S. We seek to make the experience of starting and continuing on VYJUVEK treatment seamless for the patient. Since launch, infrastructure has been in place for patients to be treated in their homes by a HCP, reducing the need for regular visits to a clinic or hospital. Krystal Connect TM , our U.S. in-house patient services call center, has been active since FDA approval and assists patients, care givers and HCPs interested in accessing VYJUVEK. Since launch and through the third quarter of 2024, patient compliance with once weekly treatment while on VYJUVEK remains high at 87%. Preparations and infrastructure buildout are underway in Europe and Japan to support our planned direct commercial launch in these regions in 2025. In October 2023, we submitted a Marketing Authorization Application (“MAA”) to the European Medicines Agency (“EMA”) for B-VEC for the treatment of DEB. In November 2023, we were notified that the MAA had been validated and was 19 now under Committee for Medicinal Products for Human Use (“CHMP”) review. In February 2024, the EMA completed inspection of our manufacturing facility as part of the MAA review process and, in May 2024, good manufacturing practices certification was granted by the EMA. Based on recent interactions with the EMA, we expect a CHMP opinion on the MAA in the fourth quarter of 2024 and a launch in Germany in the first half of 2025. In September 2024, the Haute Autorité de Santé in France approved pre-marketing early reimbursed access to B-VEC under the Accès Précoce (AP1) program. DEB patient access to B-VEC under AP1 is expected to start in the fourth quarter of 2024. AP1 allows for early access to innovative therapies in France prior to European regulatory approval when a positive benefit/risk ratio is recognized and when no other therapeutic alternatives are available. In October 2024, we filed a Japan New Drug Application (JNDA) with Japan’s Pharmaceuticals and Medical Devices Agency (PMDA). The JNDA includes the results from the Japan OLE study, the design of which had been approved by the PMDA in July 2023. The efficacy portion of the Japan OLE study was completed in April 2024 and results closely mirrored those of our Phase 3 study in the U.S. A total of five patients were enrolled, with one patient discontinuing after eight weeks due to scheduling challenges. B-VEC was well tolerated in the Japanese study population, with a safety profile consistent with previous studies, and all four patients that completed the study achieved the primary endpoint of complete wound closure at six months. A decision on the JNDA by the PMDA is expected in the second half of 2025. The application is expected to receive priority review given the Orphan Drug Designation status granted to B-VEC in December 2023. Pipeline Highlights and Recent Developments Respiratory 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 protein, for the treatment of alpha-1 antitrypsin deficiency (“AATD”), a serious rare lung disease. In February 2024, we dosed the first patient in SERPENTINE-1, a Phase 1, open-label, single dose escalation study evaluating KB408, delivered via a nebulizer, in adult patients with AATD with a Pi*ZZ or a Pi*ZNull genotype. In September 2024, after initiating dosing in Cohort 2, we amended the SERPENTINE-1 protocol to include mandatory bronchoscopies in Cohort 2 for molecular evaluation of alpha-1 antitrypsin (“AAT”) expression . We are on track to report interim molecular data from the study before the end of the year. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier: NCT06049082. KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length cystic fibrosis transmembrane conductance regulator (“ CFTR ”) transgene for the treatment of cystic fibrosis (“CF”), a serious rare lung disease caused by missing or mutated CFTR protein. In July 2023, we announced that we had dosed the first patient in CORAL-1, a Phase 1 multi-center, dose-escalation study evaluating KB407, delivered via a nebulizer, in patients with CF, regardless of their underlying genotype. In May 2024, we cleared the safety evaluation window for the second cohort of CORAL-1. We recently activated two additional clinical sites for CORAL-1 and expect to report interim molecular data for KB407 in the first half of 2025. Dosing of the first patient in the third and final cohort in CORAL-1 is expected before the end of the year. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05504837. Ophthalmology In April 2023, we announced clinical data on the compassionate use of B-VEC, formulated and administered as an eyedrop, to treat a patient suffering from ocular complications of DEB. Data was first presented at the Association for Research in Vision and Ophthalmology (“ARVO”) 2023 Annual Meeting and subsequently published in the New England Journal of Medicine in February 2024. Regular application of B-VEC to the eye was well tolerated and associated with full corneal healing at three months and visual acuity improvement from hand motion to 20/25 by eight months. Based on this early clinical evidence of safety and potential benefit under compassionate use, we started discussions with the FDA in the first quarter of 2024 on a potential clinical development path for KB803, an ophthalmic formulation of B-VEC, and in February 2024, we aligned with the FDA on our proposed single arm, open label study in approximately 10 to 15 patients to enable approval of KB803 to treat ocular complications which are thought to affect over 25% of DEB patients. We plan to initiate the registrational IOLITE study in the first half of 2025. In August 2024, we initiated a natural history study to prospectively collect data on the frequency of corneal abrasions in patients with DEB and serve as a run-in period for patients who may be eligible to participate in the registrational study. Enrollment in the study is ongoing. We are actively evaluating multiple, preclinical-stage genetic medicine candidates for the treatment of front and back of the eye diseases. 20 Oncology KB707 is a redosable, immunotherapy designed to deliver genes encoding both human interleukin-2 (“IL-2”) and interleukin-12 (“IL-12”) to the tumor microenvironment and promote systemic immune-mediated tumor clearance. Two formulations of KB707 are in development, a solution formulation for transcutaneous injection and an inhaled (nebulized) formulation for lung delivery. Both intratumoral and inhaled KB707 have been granted Rare Pediatric Disease Designation (“RPDD”) by the FDA, with intratumoral receiving RPDD for the treatment of rhabdomyosarcoma in August 2024 and inhaled KB707 receiving RPDD for the treatment of osteosarcoma in May 2024. Both formulations of KB707 have also been granted Fast Track Designation by the FDA. In October 2023, we dosed the first patient in OPAL-1, an open-label, multi-center, monotherapy, dose escalation and expansion Phase 1 study, evaluating intratumoral KB707 in patients with locally advanced or metastatic solid tumors, who relapsed or are refractory to standard of care, with at least one measurable and injectable tumor accessible by transcutaneous route of administration. In May 2024, we cleared the safety evaluation window for our third and final dose escalation cohort of the OPAL-1 study. Enrollment in the dose expansion cohort is ongoing. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05970497. In April 2024, we dosed the first patient in KYANITE-1, an open-label, monotherapy, dose escalation and expansion Phase 1 study, evaluating inhaled KB707 in patients with locally advanced or metastatic solid tumors of the lung. In August 2024, the dose escalation portion of the study was completed and a dose was selected for expansion. Enrollment in the dose expansion cohort is ongoing. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT06228326. Based on the current pace of enrollment in OPAL-1 and KYANITE-1, we expect to report initial interim data for KB707 in the fourth quarter of 2024. Dermatology KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene encoding the human enzyme transglutaminase-1 (“TGM1”) for the treatment of lamellar icthyosis, a serious rare skin disorder most often caused by missing or mutated TGM1 protein. We expect to resume enrollment in the Phase 2 portion of JADE-1, a randomized, placebo-controlled Phase 1/2 study evaluating KB105 for the treatment of lamellar icthyosis in the first half of 2025. Details of the JADE-1 Phase 1/2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732. Aesthetics In addition to focusing on genetic medicines to treat patients with diseases with high unmet medical needs, we are 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 Aesthetics, Inc. (“Jeune”). KB301 is a solution formulation of our novel vector 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. In August 2024, Jeune announced positive interim safety and efficacy results from Cohorts 3 and 4 of the Phase 1 study PEARL-1, open label studies evaluating KB301 in the treatment of lateral canthal lines at rest and dynamic wrinkles of the décolleté, respectively. Meaningful and sustained improvements in multiple skin aesthetic attributes, including wrinkles, crepiness, hydration, and radiance, were reported by the study investigators and subjects alike in both the décolleté and lateral canthal regions. Increased subject satisfaction with wrinkle appearance was also reported. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT04540900. Based on these Phase 1 results, Jeune has selected treatment of the dynamic wrinkles of the décolleté for advanced clinical development and expects to initiate a Phase 2 study evaluating KB301 in this indication in 2025. Jeune has several other aesthetic medicine product candidates in various stages of preclinical development. Financial Overview Product Revenue, Net After FDA approval of VYJUVEK in May 2023, we began commercial marketing and sales and began recognizing revenue during the third quarter of 2023. Our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such sales. We have contracted to sell VYJUVEK to a limited number of specialty pharmacy providers that mix the medication and administer it to patients in the patient’s home by a healthcare professional and through a limited number of hospitals and distributors where patients are administered the medication in a hospital or clinic. The transaction price that we recognize as revenue for VYJUVEK sales includes an estimate of variable consideration, which includes discounts, returns, copay assistance and rebates that are offered within contracts. Refer to Note 3 of the notes to condensed consolidated financial statements included in this Form 10-Q and Note 2 of our consolidated financial statements in our 2023 10-K for additional information. 21 Cost of Goods Sold Cost of goods sold includes direct and indirect costs related to the manufacturing of VYJUVEK. These costs consist of manufacturing costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Cost of goods sold may also include period costs related to certain manufacturing services and inventory adjustment charges. Prior to receiving FDA approval in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expenses. Research and Development Expenses Research and development expenses consist primarily of costs incurred to advance our preclinical and clinical candidates, which include: • expenses incurred under agreements with contract manufacturing organizations, contract research organizations, consultants and other vendors that conduct our preclinical activities; • costs of acquiring, developing and manufacturing clinical trial materials and lab supplies; • facility costs, depreciation and other expenses, which include direct expenses for rent and maintenance of facilities and other supplies; and • payroll related expenses, including stock-based compensation expense. We expense internal research and development costs to operations as incurred. We expense third-party costs for research and development activities, such as the manufacturing of preclinical and clinical materials, based on an evaluation of the progress to completion of specific tasks such as manufacturing of drug substance, fill/finish and stability testing, which is provided to us by our vendors. 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 as we expand our product portfolio. In the near term, we expect that our research and development expenses will increase as we continue our preclinical and clinical trials and studies and incur preclinical and clinical expenses for our product candidates. Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of clinical trials, and, as a result, the actual costs to complete clinical trials may exceed the expected costs. Selling, General and Administrative Expenses Selling, general and administrative expenses consist principally of salaries and other related costs, including stock-based compensation for personnel in our executive, finance, legal, commercial, business development, information technology and other general and administrative functions. Selling, general and administrative expenses also include professional fees associated with corporate and intellectual property-related legal expenses, consulting and accounting services, insurance, facility-related costs and expenses associated with obtaining and maintaining patents. Other selling, general and administrative costs include travel expenses, patient access program costs, management service fees, marketing expenses, and selling expenses which include transportation, shipping and handling fees. We anticipate that our selling, general and administrative expenses will increase in the future relating to our commercialization efforts and to support the development of our product candidates. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate that we will continue to increase our salary and personnel costs and other expenses to support B-VEC commercialization globally. ASTRA Capital Expenditures In March 2021, we closed on the purchase of the building that was constructed to house our second commercial scale CGMP facility, ASTRA. In March 2023, we received the permanent occupancy permit for ASTRA which allowed the Company to begin utilizing certain parts of the building for research and development operations once qualification was completed and a portion of the assets were placed into service throughout 2023 and 2024. We incurred significant capital expenditures related to the construction of ASTRA in 2023 and expect to continue to incur capital expenditures related to ASTRA throughout the operational life of the facility. Gains from Sale of Priority Review Voucher (“PRV”) Gain from sale of priority review voucher relates to proceeds from sale of the rare pediatric PRV we received in connection with the FDA’s approval of VYJUVEK. 22 Interest and Other Income, Net Interest and other income, net consists primarily of income earned from our cash, cash equivalents and investments. Critical Accounting Policies, Significant Judgments and Estimates There have been no significant changes during the nine months ended September 30, 2024 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 2023 10-K. Results of Operations Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Three Months Ended September 30, 2024 and 2023 Three Months Ended September 30, Change 2024 2023 $ % (in thousands) (unaudited) Product revenue, net $ 83,841 $ 8,556 $ 75,285 880 % Expenses Cost of goods sold 6,684 223 6,461 2897 % Research and development 13,511 10,629 2,882 27 % Selling, general and administrative 28,713 23,697 5,016 21 % Litigation settlement 12,500 — 12,500 — % Total operating expenses 61,408 34,549 26,859 78 % Income (loss) from operations 22,433 (25,993) 48,426 (186) % Other income Gain from sale of priority review voucher — 100,000 (100,000) (100) % Interest and other income, net 7,336 6,740 596 9 % Income before income taxes 29,769 80,747 (50,978) (63) % Income tax expense (2,589) — (2,589) — % Net income $ 27,180 $ 80,747 $ (53,567) (66) % Product Revenue, Net Product revenue, net was $83.8 million for the three months ended September 30, 2024, as compared to $8.6 million for the three months ended September 30, 2023. The increase in product revenue, net was driven by an increase in VYJUVEK sales following initial commercial sales recorded in August 2023. Cost of Goods Sold Cost of goods sold was $6.7 million for the three months ended September 30, 2024, as compared to $223 thousand for the three months ended September 30, 2023, due to increased sales of VYJUVEK following initial commercial sales recorded in August 2023. Prior to receiving FDA approval for VYJUVEK in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense. Research and Development Expenses Research and development expenses increased $2.9 million in the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase was primarily driven by the following: • an increase of $1.8 million in clinical development costs, • an increase of $1.5 million in other research and development expenses primarily relating to facilities and equipment related costs, and • an increase of $636 thousand in manufacturing expenses related to our product candidates. 23 These increases were partially offset by: • a decrease of $1.1 million due to the capitalization of allocated overhead costs, including facilities costs, for increased commercial batches of VYJUVEK. Research and development expenses consist primarily of costs relating to our preclinical development, the development of our product candidates and our clinical trial programs. Direct research and development expenses associated with our product candidates or development programs consist of compensation related expenses for our internal resources conducting research and development activities, fees paid to external consultants, contract research organizations, or for costs to support our clinical trials. Indirect research and development expenses that are allocated to our product candidates or programs consist of lab supplies and software fees. A significant portion of our research and development expenses are not allocated to individual product candidates and preclinical programs, as certain expenses benefit multiple product candidates and preclinical programs. For example, we do not allocate costs associated with stock-based compensation, manufacturing of preclinical or clinical development products or costs relating to facilities and equipment to individual product candidates and preclinical programs. The following table summarizes our research and development expenses by product candidate or program, and for unallocated expenses, by type, for the three months ended September 30, 2024 and 2023. Three Months Ended September 30, Change 2024 2023 $ % (in thousands) (unaudited) B-VEC $ 1,255 $ 1,759 $ (504) (29) % KB105 449 8 441 5513 % KB301 138 150 (12) (8) % KB407 180 441 (261) (59) % KB408 612 340 272 80 % KB707 3,312 1,265 2,047 162 % KB803 180 — 180 — % Other ophthalmology programs 303 9 294 3267 % Other aesthetics programs 189 9 180 2000 % Other research programs 247 163 84 52 % Other development programs 171 160 11 7 % Stock-based compensation 2,267 2,336 (69) (3) % Other unallocated manufacturing expenses (1) 2,212 2,672 (460) (17) % Other unallocated expenses (2) 1,996 1,317 679 52 % Research and development expense $ 13,511 $ 10,629 $ 2,882 27 % (1) Unallocated manufacturing expenses consist of shared pre-commercial manufacturing costs, primarily relating to raw materials, contract manufacturing, contract testing, process development, quality control and quality assurance activities and other manufacturing costs which support the development of multiple product candidates in our preclinical and clinical development programs. (2) Other unallocated expenses include rental, storage, depreciation, and other facility related costs that we do not allocate to our individual product candidates. The primary changes in our research and development expenses by product candidate or program in the three months ended September 30, 2024 compared to the three months ended September 30, 2023 are as follows: • an increase of $2.0 million in KB707 costs following the expansion of our research and development pipeline to oncology consisting of an increase in payroll related costs to support our research and an increase in contract research expenses for our Phase 1 clinical trial of inhaled KB707, • an increase of $679 thousand in other unallocated expenses primarily driven by facilities and equipment related costs, and • an increase of $441 thousand in KB105 costs to further advance this program. The increases were partially offset by: • a net decrease of $504 thousand in B-VEC costs due to the timing of the manufacturing process optimization activities and 24 • a decrease of $460 thousand in other unallocated manufacturing expenses primarily due to the increased costs related to the manufacturing of VYJUVEK which are recorded as inventory and cost of goods sold, offset by an increase in facility related expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $5.0 million in the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The increase was primarily driven by the following: • an increase of $5.1 million in stock-based compensation, • an increase of $439 thousand related to professional services incurred to support our commercial growth, and • an increase of $434 thousand in marketing costs to support commercial sales of VYJUVEK. The increases were partially offset by: • a decrease of $714 thousand in payroll related costs. Litigation Settlement Litigation settlement for the three months ended September 30, 2024 and 2023 was $12.5 million and zero, respectively, and consisted of amounts related to the settlement of litigation with PeriphaGen. See “Legal Proceedings” in Note 7 of the notes to condensed consolidated financial statements included in this Form 10-Q for more information. Gain from Sale of Priority Review Voucher Gain from sale of priority review voucher for the three months ended September 30, 2024 and 2023 was zero and $100.0 million, respectively, and consisted of amounts related to the sale of our rare pediatric disease PRV, which was awarded to the Company in connection with the FDA’s approval of VYJUVEK. Interest and Other Income, Net Interest and other income, net for the three months ended September 30, 2024 and 2023 was $7.3 million and $6.7 million, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments. The increase in interest and dividend income is the result of increased investment activity. Income Tax Expense Income tax expense for the three months ended September 30, 2024 and 2023 was $2.6 million and zero, respectively, as a result of initial commercial sales of VYJUVEK recorded in August 2023. Income tax expense for the three months ended September 30, 2024 relates to state, federal and foreign income taxes. Nine Months Ended September 30, 2024 and 2023 Nine Months Ended September 30, Change 2024 2023 $ % (in thousands) (unaudited) Product revenue, net $ 199,376 $ 8,556 $ 190,820 2230 % Expenses Cost of goods sold 15,112 223 14,889 6677 % Research and development 40,050 35,061 4,989 14 % Selling, general and administrative 82,398 73,637 8,761 12 % Litigation settlement 37,500 12,500 25,000 200 % Total operating expenses 175,060 121,421 53,639 44 % Income (loss) from operations 24,316 (112,865) 137,181 (122) % Other income Gain from sale of priority review voucher — 100,000 (100,000) (100) % Interest and other income, net 22,430 15,105 7,325 48 % Income before income taxes 46,746 2,240 44,506 1987 % Income tax expense (3,066) — (3,066) — % Net income $ 43,680 $ 2,240 $ 41,440 1850 % 25 Products Revenue, net Product revenue, net was $199.4 million for the nine months ended September 30, 2024 as compared to $8.6 million for the nine months ended September 30, 2023 due to initial sales of VYJUVEK after FDA approval was obtained on May 19, 2023. Cost of Goods Sold Cost of goods sold was $15.1 million for the nine months ended September 30, 2024 as compared to $223 thousand for the nine months ended September 30, 2023 due to initial sales of VYJUVEK. Prior to receiving FDA approval for VYJUVEK in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense. Research and Development Expenses Research and development expenses increased $5.0 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase was primarily driven by the following: • an increase of $2.8 million in clinical development costs, • an increase of $2.4 million in manufacturing expenses related to our product candidates, • an increase of $2.5 million in other research and development expenses primarily relating to licensing and regulatory costs and facilities and equipment related costs, and • an increase of $1.0 million in depreciation due to the Company’s second CGMP facility being placed into service in 2023 partially offset by the capitalization of depreciation associated with increased commercial batches of VYJUVEK. The increases were partially offset by: • a decrease of $2.4 million due to the capitalization of allocated overhead costs for increased commercial batches of VYJUVEK partially offset by increased payroll related expenses, including stock-based compensation, primarily driven by an increase in headcount to support overall growth and • a net decrease of $1.3 million in direct manufacturing expenses due to the costs to manufacture VYJUVEK being capitalized into inventory and cost of goods sold. 26 The following table summarizes our research and development expenses by product candidate or program, and for unallocated expenses, by type, for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, Change 2024 2023 $ % (in thousands) (unaudited) B-VEC $ 7,068 $ 6,337 $ 731 12 % KB105 484 274 210 77 % KB301 522 480 42 9 % KB407 1,631 1,259 372 30 % KB408 1,107 749 358 48 % KB707 6,469 2,633 3,836 146 % KB803 394 — 394 — % Other ophthalmology programs 801 8 793 9913 % Other aesthetics programs 1,146 23 1,123 4883 % Other research programs 890 421 469 111 % Other development programs 596 689 (93) (13) % Stock-based compensation 6,907 7,695 (788) (10) % Other unallocated manufacturing expenses (1) 6,631 10,181 (3,550) (35) % Other unallocated expenses (2) 5,404 4,312 1,092 25 % Research and development expense $ 40,050 $ 35,061 $ 4,989 14 % (1) Unallocated manufacturing expenses consist of shared pre-commercial manufacturing costs, primarily relating to raw materials, contract manufacturing, contract testing, process development, quality control and quality assurance activities and other manufacturing costs which support the development of multiple product candidates in our preclinical and clinical development programs. (2) Other unallocated expenses include rental, storage, depreciation, and other facility related costs that we do not allocate to our individual product candidates. The primary changes in our research and development expenses by product candidate or program in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 are as follows: • an increase of $3.8 million in KB707 costs following the expansion of our research and development pipeline to oncology consisting of an increase in payroll related costs to support our research and an increase in contract research expenses in preparation for the Phase 1 clinical trial of inhaled KB707 that has now commenced, • an increase of $1.1 million in other aesthetics programs, • an increase of $1.1 million in other unallocated expenses, which largely relates to (1) depreciation due to the Company’s second CGMP facility being placed into service in 2023 partially offset by the capitalization of depreciation associated with increased commercial batches of VYJUVEK and (2) other facilities and equipment related costs, • an increase of $793 thousand in other ophthalmology programs, • a net increase of $731 thousand in B-VEC costs largely due to: ◦ on-going manufacturing efficiency and process optimization costs for which such processes have not yet been approved by the FDA, ◦ an increase in overseas preclinical and clinical trial costs, and ◦ overseas licensing and regulatory costs. The increases were partially offset by: ◦ costs being expensed to research and development expense prior to receiving FDA approval in May 2023 that are now included as part of the cost of inventory, • an increase of $469 thousand in other research programs, • an increase of $394 thousand in KB803 costs, and 27 • an increase of $372 thousand in KB407 costs. The increases were partially offset by: • a decrease of $3.6 million in other unallocated manufacturing expenses primarily due to the increased costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory and cost of goods sold and • a decrease of $788 thousand in stock-based compensation due to the allocation of labor costs related to work performed to manufacture VYJUVEK to inventory. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $8.8 million in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The increase was primarily driven by the following: • an increase of $6.5 million in stock-based compensation, • an increase of $3.3 million in selling expenses related to the commercial launch of VYJUVEK, which includes $1.5 million related to our patient access program, and • an increase of $1.5 million related to professional services incurred to support our commercial growth. The increases were partially offset by: • a decrease of $2.0 million in marketing costs due to the timing of marketing activities ahead of the VYJUVEK commercial launch. Litigation Settlement Litigation settlement for the nine months ended September 30, 2024 and 2023 was $37.5 million and $12.5 million, respectively, and consisted of amounts related to the settlement of litigation with PeriphaGen. See “Legal Proceedings” in Note 7 of the notes to condensed consolidated financial statements included in this Form 10-Q for more information. Gain from Sale of Priority Review Voucher Gain from sale of priority review voucher for the nine months ended September 30, 2024 and 2023 was zero and $100.0 million, respectively, and consisted of amounts related to the sale of our rare pediatric disease PRV, which was awarded to the Company in connection with the FDA’s approval of VYJUVEK. Interest and Other Income, Net Interest and other income, net for the nine months ended September 30, 2024 and 2023 was $22.4 million and $15.1 million, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments. The increase in interest and dividend income is the result of increased investment activity and more favorable interest rates as compared to the prior period and an increase in our balance of cash, cash equivalents and investments. Income Tax Expense Income tax expense for the nine months ended September 30, 2024 and 2023 was $3.1 million and zero, respectively, as a result of initial commercial sales of VYJUVEK recorded in August 2023. Income tax expense for the nine months ended September 30, 2024 relates to state, federal and foreign income taxes. Liquidity and Capital Resources Overview As of September 30, 2024, our cash, cash equivalents and short-term investments balance was approximately $588.3 million. As of September 30, 2024, we had an accumulated deficit of $226.1 million. We believe that our cash, cash equivalents and short-term investments as of September 30, 2024 will be sufficient to allow us to fund our operations for at least 12 months from the filing date of this Quarterly Report on Form 10-Q. Our ability to continue to achieve operating profitability is dependent upon the continued successful commercialization of VYJUVEK and the successful development, approval, manufacturing, and commercialization of product candidates. Furthermore, we expect to incur increasing costs associated with satisfying regulatory and quality standards, maintaining and initiating product clinical trials, and furthering our efforts to discover, develop, manufacture, and commercialize current and future product candidates. We intend to fund future operations through on hand cash and cash equivalents, revenue generated from the sale of VYJUVEK, the sale of equity, debt financings, and we may also seek additional capital through arrangements with strategic partners or other sources. 28 Costs related to clinical trials can be unpredictable and, therefore, there can be no guarantee that we will have sufficient capital to fund the continued or planned pre-clinical and clinical studies for our product candidates, or our operations. Further, we expect future revenue to fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any product sales. 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 some of our clinical development activities. As we seek to obtain regulatory approval for our product candidates, we expect to continue to incur significant manufacturing and commercialization expenses as we prepare for product sales, marketing, commercial manufacturing, packaging, labeling and distribution. Furthermore, pursuant to our settlement agreement with PeriphaGen, we will be required to pay (1) a $6.25 million milestone payment as a result of reporting $100.0 million in cumulative sales during the second quarter of 2024 payable within 120 days following December 31, 2024, (2) a $12.5 million milestone payment as a result of reporting $200.0 million in cumulative sales during the third quarter of 2024 payable within 30 days following the filing by the Company of its Annual Report on Form 10-K for the year ended December 31, 2024 and (3) a $12.5 million contingent milestone payment within 30 days following the filing of its Annual Report on form 10-K that reports $300.0 million in cumulative sales. Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch our product candidates. Accordingly, to obtain marketing approval for and to commercialize these 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 business strategy. ATM Program On May 8, 2023, the Company entered into a sales agreement with Cowen and Company, LLC (“Cowen”) with respect to an at-the-market equity offering program (“ATM Program”), under which the Company may issue and sell from time to time through Cowen, acting as agent and/or principal, shares of its common stock having an aggregate offering price up to $150.0 million (“Placement Shares”). The Placement Shares will be offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 filed with the SEC on April 6, 2023 (the “Form S-3”), and a prospectus supplement relating to the Placement Shares that was filed with the SEC on May 8, 2023. We may terminate the ATM Program at any time upon 10 days’ notice to Cowen. If not earlier terminated, the ATM Program will automatically terminate upon issuance of all of the Placement Shares or the expiration of the Form S-3 on April 6, 2026. The ATM Program is not and has never been active. 2023 Private Placement Offering On May 22, 2023 and May 23, 2023, the Company sold 1,720,100 and 9,629 shares of Common Stock, respectively, in a private placement to certain institutional investors at a price of $92.50 per share for aggregate net proceeds of $160.0 million. In addition, the Company entered into a Registration Rights Agreement that required the Company to file a registration statement with the SEC within 60 days of the date of the Registration Rights Agreement registering the resale of the shares of Common Stock issued in the private placement. On July 18, 2023, the Company filed the resale registration statement on Form S-3ASR with the SEC, which became effective upon filing. Operating Capital Requirements 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, regulatory expenses, third-party clinical trial research and development services, laboratory and related supplies, selling expenses, costs to manufacture our commercial product, legal expenses, payments of settlement amounts to PeriphaGen 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 may 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. Because of the numerous risks and uncertainties associated with research, development, manufacturing and commercialization of genetic medicines, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: • the costs needed to commercialize and market our lead product, VYJUVEK; • the progress, timing and costs of clinical trials of our current product candidates; 29 • the progress, timing and costs of manufacturing VYJUVEK and revenue received from commercial sale of VYJUVEK; • the continued development and the filing of IND applications for current and future product candidates; • the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any product candidates that we may pursue in the future, if any; • 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 extent to which the costs of VYJUVEK and 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 our current and future product candidates if we receive marketing approval for such product candidates, 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; • the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, maintenance, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay pursuant to our license agreements; • our current license agreements remaining in effect and our achievement of milestones under those agreements; • our ability to establish and maintain collaborations and licenses on favorable terms, if at all; and • the extent to which we acquire or in-license other product candidates and technologies. We may 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 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 for the nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 2023 (in thousands) (unaudited) Net cash provided by (used in) operating activities $ 70,577 $ (81,572) Net cash (used in) provided by investing activities (79,661) 92,798 Net cash provided by financing activities 24,586 200,131 Effect of exchange rate changes on cash and cash equivalents 136 (16) Net increase in cash $ 15,638 $ 211,341 30 Operating Activities Net cash provided by operating activities for the nine months ended September 30, 2024 was $70.6 million and consisted primarily of net income of $43.7 million adjusted for $35.7 million of non-cash items and a $8.8 million increase in working capital. Non-cash adjustments included depreciation of $4.6 million, amortization of operating lease right-of-use assets of $556 thousand, stock-based compensation expense of $35.8 million and other adjustments of $725 thousand, offset by realized gain on investments of $4.4 million and accretion on marketable securities of $1.5 million. Net cash used in operating activities for the nine months ended September 30, 2023 was $81.6 million and consisted primarily of net income of $2.2 million adjusted for $71.3 million of non-cash items and a $12.5 million increase in working capital. Non-cash adjustments included gain from sale of priority review voucher of $100.0 million, realized gain on investments of $3.9 million, accretion on marketable securities of $1.6 million and other adjustments of $77 thousand, partially offset by depreciation of $3.5 million, amortization of operating lease right-of-use assets of $671 thousand and stock-based compensation expense of $30.1 million. Investing Activities Net cash used in investing activities for the nine months ended September 30, 2024 was $79.7 million and consisted of $314.3 million in purchases of short-term and long-term investments and $3.4 million in purchases of property and equipment, partially offset by $238.0 million received from the maturities and early calls of short- and long-term investments. Net cash provided by investing activities for the nine months ended September 30, 2023 was $92.8 million and consisted of $428.6 million received from the maturities of short-term investments and $100.0 million received from gain from sale of priority review voucher, partially offset by $425.9 million in purchases of short-term and long-term investments and $10.0 million in purchases of property and equipment. Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2024 was $24.6 million and consisted of proceeds of $30.0 million from exercises of stock options, partially offset by $4.2 million used for employee tax withholding payments related to vested restricted stock units and $1.2 million used for employee tax withholding payments for settlement of vested restricted stock awards. Net cash provided by financing activities for the nine months ended September 30, 2023 was $200.1 million and consisted of proceeds of $159.7 million from issuances of common stock, proceeds of $41.2 million from exercises of stock options, partially offset by $749 thousand used for employee tax withholding payments for settlement of vested restricted stock awards.