Krystal Biotech (KRYS)

Transcription

1 Initiating Coverage October 13, 2017 Krystal Biotech (KRYS) Initiation Report LifeSci Investment Abstract Krystal Biotech (NasdaqCM: KRYS) is a preclinical stage gene therapy company focused on the development of their Skin TARgeted Delivery (STAR-D) platform. STAR-D incorporates the Herpes Simplex Virus 1 (HSV-1) with a modified backbone as a vector to deliver genes to the skin of patients with conditions caused by mutations or deletions in certain genes. The Company has identified multiple dermatological orphan conditions that fit this description, and as such Krystal is initially developing KB-103 for the treatment of patients affected by dystrophic epidermolysis bullosa (DEB). KB-103 is an off-the-shelf, topical and/ or intradermal treatment that aims to deliver functional copies of COL7A1 to keratinocytes and fibroblasts, which could lead to the restoration of collagen VII function in DEB patients. Krystal aims to file an IND application for KB-103 and initiate an open-label Phase I/II trial in the first quarter of The Company is assessing secondary assets KB-104 and KB-105 in other genetic skin disorders, such as Netherton syndrome and ichthyosis vulgaris, respectively. Key Points of Discussion Krystal s Skin TARgeted Delivery (STAR-D) Platform is Based on a Viral Vector that Utilizes HSV-1. The Company s STAR-D platform uses HSV-1 with a modified backbone to deliver gene therapies to the skin of patients affected by conditions caused by genetic mutations or deletions. The Company has identified multiple dermatological orphan conditions that fit this description, and plans to initially assess this platform technology in patients with DEB. Krystal s STAR-D platform can be defined by several key characteristics, some of which represent meaningful points of differentiation from other gene therapy players. These include: 1) STAR-D is an episomal vector that does not integrate into host s genome, 2) HSV-1 construct has a payload of approximately 30 Kb, 3) virus is replication deficient, 4) off-the-shelf therapy with natural tropism for skin, 5) product is stable frozen and can be refrigerated for shipping. Lead Asset KB-103 is in Development for Dystrophic Epidermolysis Bullosa (DEB), a Severe Orphan Disease with No Approved Therapies. DEB is a heterogeneous condition that occurs across a spectrum of severity, and can include symptoms such as blistering, deformity or loss of fingernails, skin thickening, joint deformities, and difficulty swallowing. There are currently no available therapies that address the underlying causes of EB, and as such standard of care treatment focuses on symptom management, prevention of primary and secondary complications, and disease surveillance. Analysts Patrick Dolezal, M.S. (AC) (212) pdolezal@lifescicapital.com Market Data Price $10.01 Market Cap (M) $102 EV (M) $48 Shares Outstanding (M) 10.2 Fully Diluted Shares (M) 11.3 Avg Daily Vol 62, week Range: $ $11.31 Cash (M) $53.8 Net Cash/Share $5.27 Annualized Cash Burn (M) $27.0 Years of Cash Left 2.0 Debt (M) $0.0 Financials FY Dec 2017A 2018A 2019A EPS Q1 NA NA NA Q2 NA NA NA Q3 NA NA NA Q4 NA NA NA FY NA NA NA Expected Upcoming Milestones Q File an IND application for KB-103 in DEB. Q Initiate a Phase I/II trial for KB-103 in DEB. Q File an IND application for KB-104 in NS. Q File an IND application for KB-105 in IV. Q Initiate a clinical study for KB-104 in NS. Q Initiate a clinical study for KB-105 in IV. For analyst certification and disclosures please see page 26 Page 1

2 Due to the underlying genetic cause of DEB, which emerges due to various mutations affecting the COL7A1 gene (encodes DNA responsible for the production type VII collagen), this indication has become a target for various gene therapy players. Krystal s KB-103 aims to deliver two functional copies of COL7A1 to fibroblasts and keratinocytes in the skin of patients with DEB, which produce and secrete collagen VII in healthy individuals, and thus has potential to resolve the underlying cause of this condition. Company has Demonstrated Proof of Concept for KB-103 in Preclinical Models. Krystal has assessed the potential of KB-103 in several preclinical studies, including in vitro experiments with human-derived fibroblasts and keratinocytes affected by DEB, and in vivo studies using mouse models. Overall, results indicate dose-dependent cell transduction and expression of the viral construct in vitro, as evidenced by western blot analyses showing collagen VII production. Furthermore, results from an in vivo study with KB-103 in a hairless mouse model, which serves as a surrogate for human skin, showed expression of collagen VII protein in the basement membrane zone (BMZ), which is where collagen VII is expressed in healthy individuals. Taken together, these data indicate the potential for: 1) KB- 103 to infect target cells, 2) COL7A1 to be transcribed via host cell machinery, 3) translation of said transcript into collagen VII protein, and 4) secretion and migration of collagen VII to target skin layer. While clinical efficacy remains to be proven, the preclinical studies conducted to date speak to the potential of KB- 103 for DEB. Krystal aims to file an IND application for KB-103 and initiate an open-label Phase I/II trial during the first quarter of Topical Likely Optimal Mode of Administration for DEB, Giving KB-103 Meaningful Differentiation from Other Approaches. Competing gene therapies currently in development for the treatment of DEB include Fibrocell Technologies (NasdaqCM: FCSC) FCX-007 and Abeona Therapeutics (NasdaqCM: ABEO) EB-101. However, we note that these are both autologous approaches, meaning they use cells (fibroblasts in the case of Fibrocell, and keratinocytes in the case of Abeona) harvested from individual patients that are then modified and re-introduced to the original host. These approaches are relatively expensive due to the requisite equipment and highly trained professionals needed, but also patients may need to wait several weeks for development of their individualized product. Krystal looks to circumvent these drawbacks by offering KB-103 as an off-the-shelf topical gene therapy, which does not require cell harvesting and subsequent re-injection or transplantation, but is simply administered as a topical gel. Furthermore, as opposed to targeting either keratinocytes or fibroblasts, KB-103 has been shown to infect both cell types, which may translate into higher collagen VII production. Thus, while there are competing gene therapies in development for this indication, we view Krystal s KB-103 as meaningfully differentiated, with clear advantages in potential pricing / margins as well as commercial viability. Page 2

3 Financial Discussion Initial Public Offering. Krystal began trading on the Nasdaq Capital Market exchange under the ticker KRYS following an initial public offering (IPO) on September 20, The Company upsized the offering to 3,960,000 shares, priced at $10 per share, which yielded Krystal $39.6 million in gross proceeds prior to underwriting discounts, commissions and expenses. We note that the underwriters had the option to purchase an additional 594,000 shares, which was exercised in full. In total, the Company issued 4,554,000 shares at $10 per share, which translates to $45.5 million prior to underwriting discounts, commissions and expenses. Financial Results for the First Half of For the six months ended June 30, 2017, Krystal reported research and development expenses of $0.8 million, as compared to $0.1 million in the same period of General and administrative expenses for the first half of 2017 were $0.4 million, as compared to 0.1 million for the same period of Total operating expenses for the first half of 2017 were $1.2 million, as compared to $0.2 million in the first half of The Company s net loss was $1.3 million or $1.62 per share for the first half of 2017, as compared to a net loss of $0.2 million for the same period of Krystal held $3.52 million in cash as of June 30, 2017, which does not account for the $45.5 million in gross proceeds raised through a recent initial public offering. Page 3

4 Table of Contents Company Description... 5 Skin TARgeted Delivery (STAR-D) Platform... 5 KB-103: A Treatment for Dystrophic Epidermolysis Bullosa... 6 Mechanism of Action Preclinical Studies with KB Safety Profile Dystrophic Epidermolysis Bullosa Cause and Pathogenesis Symptoms and Diagnosis Treatment Market Information Market Size Clinical Data Discussion Phase I Trial with KB Other Drugs in Development for DEB KB-104 for Netherton Syndrome KB-105 for Ichthyosis Vulgaris Intellectual Property & Licensing Management Team Risk to an Investment Analyst Certification Disclosures Page 4

5 Company Description Krystal Biotech (NasdaqCM: KRYS) is a preclinical stage biotechnology company focused on the development of gene therapies utilizing their Skin TARgeted Delivery (STAR-D) platform. STAR-D incorporates the Herpes Simplex Virus 1 (HSV-1) with a modified backbone as a vector to deliver genes to the skin of patients with conditions caused by mutations or deletions in certain genes. The Company has identified multiple dermatological orphan conditions that fit this description, and as such Krystal is initially developing KB-103 for the treatment of patients affected by dystrophic epidermolysis bullosa (DEB). DEB is a genetic skin disorder characterized by blistering of skin and mucous membranes, and is caused by mutations in the collagen VII gene, COL7A1. KB-103 is an off-the-shelf, topical and/or intradermal treatment that aims to deliver functional copies of COL7A1 to keratinocytes and fibroblasts, which could lead to the restoration of collagen VII function in DEB patients. Krystal aims to file an IND application for KB-103 and initiate an open-label Phase I/II trial in the first quarter of Krystal is also developing KB-104 for the treatment of Netherton syndrome (NS), which is a rare, genetic skin disease that is associated with severe inflammation, scaling, a hair shaft alteration, and allergic manifestations. Krystal plans to file an IND application for KB-104 in the third quarter of 2018, with clinical studies beginning in the first quarter of The Company s KB-105 is being developed for ichthyosis vulgaris, and could have an IND filed in the third quarter of 2018 and initial clinical studies in the first quarter of Krystal s developmental pipeline is presented in Figure 1. Figure 1. Krystal s Developmental Pipeline Preclinical Phase I Phase II Phase III KB-103 Dystrophic Epidermolysis Bullosa KB-104 Netherton Syndrome KB-105 Ichthyosis Vulgaris Source: LifeSci Capital Skin TARgeted Delivery (STAR-D) Platform Krystal s Skin TARgeted Delivery (STAR-D) platform is based on a viral vector that utilizes the Herpes Simplex Virus 1 (HSV-1) with a modified backbone to deliver gene therapies to the skin of patients affected by conditions caused by genetic mutations or deletions. The Company has identified multiple dermatological orphan conditions that fit this description, and plans to initially assess this platform technology in patients with dystrophic Page 5

6 epidermolysis bullosa (DEB). Krystal s STAR-D platform can be defined by several key characteristics, some of which represent meaningful points of differentiation from other gene therapy players. These are as follows: STAR-D is an Episomal Vector After the HSV-1 vector enters the nucleus of a host cell, it remains episomal, meaning it is external to the host s genome. An episomal vector targeting rapidly dividing skin cells would likely require chronic administration to maintain activity, however in a topical therapy such as KB-103, application is theoretically a simple process akin to applying ointment and bandages. This is also a meaningful point of differentiation from other lentiviral and retroviral vectors, which integrate into the host s DNA. Lentiviral and retroviral delivery vectors can lead to insertional mutagenesis, in which a gene mutation is caused by the integration of the viral load into the genome, a process that has potential to cause cell proliferation or other deleterious changes. However, we note that the likelihood of a particular construct to lead to such changes should likely be considered on a case-by-case basis, as not all lentiviral or retroviral vectors have such associations, and non-integrating lentiviral (NIL) vectors have also been developed that remain episomal. 1 Non-Replicative Virus with a Payload of Approximately 30Kb Krystal s HSV-1 construct has been modified by the removal of immediate early (IE) genes, which according to the Company, inhibits expression of most of the viral proteins and yields a replication-deficient, non-toxic virus. Without IE genes, Krystal also has the capability to deliver a genetic payload of ~30Kb. KB-103 contains two copies of the COL7A1 gene, which is the collagen VII gene that is mutated in patients with DEB. Off-The-Shelf Platform with Tropism for Skin The STAR-D platform is an off-the-shelf platform, which has a competitive advantage over autologous approaches aiming to cure DEB, as autologous therapies require complicated multi-step procedures that may be burdensome for patients. Furthermore, this platform has a high tropism for skin due to the utilization of HSV-1, potentially enabling efficient transduction and subsequent gene expression. HSV-1 is Stable and Easy to Store Given that STAR-D is an off-the-shelf therapy, a stable product that is easy to store is preferred. The Company has noted the high stability of KB-103, which is resistant to degradation by various solvents and enzymes, which also provide advantages in manufacturing. Furthermore, the product is stable while refrigerated for short-term storage and shipping, though freezing is required for long-term storage. KB-103: A Treatment for Dystrophic Epidermolysis Bullosa Krystal is developing KB-103 for the treatment of dystrophic epidermolysis bullosa (DEB), which is a genetic skin disorder characterized by blistering of skin and mucous membranes. DEB is caused by mutations in the collagen VII gene COL7A1, a protein critical to the mechanical scaffold holding the epidermis and dermis of the skin together. In all cases, DEB patients lack expression of functional collagen VII and exhibit a variety of clinical features including blistering, deformity or loss of fingernails, skin thickening, joint deformities, and difficulty swallowing. There are currently no approved therapies for DEB, and treatment focuses on the management of symptoms. Krystal is currently assessing the potential of KB-103, an off-the-shelf, topical gel, gene therapy that utilizes a nonreplicative, recombinant Herpes Simplex Virus 1 (HSV-1) vector to deliver two copies of the COL7A1 gene to 1 Zhang, M. et al., Gene Delivery and Expression Systems in Induced Pluripotent Stem Cells. Interface Oral Health Science, pp Bruckner-Tuderman, L, et al., Lack of type VII collagen in unaffected skin of patients with severe recessive dystrophic Page 6

7 fibroblasts and keratinocytes, ultimately aiming to enable expression of functional collagen VII. The Company has performed several preclinical studies including in vitro experiments with human-derived fibroblasts and keratinocytes affected by DEB, and in vivo studies using mouse models. Overall, results indicate dose-dependent cell transduction and expression of the viral construct in vitro, as evidenced by western blot analyses showing collagen VII production. Furthermore, results from an in vivo study with KB-103 in a hairless mouse model, which serves as surrogate for human skin, showed expression of collagen VII protein in the basement membrane zone (BMZ), which is where collagen VII is expressed in healthy individuals. Taken together, these data indicate the potential for 1) KB-103 to infect target cells 2) COL7A1 to be transcribed via host cell machinery 3) translation of said transcript into collagen VII protein 4) secretion and migration of collagen VII to target skin layer. While clinical efficacy remains to be proven, the preclinical studies conducted to date speak to the potential of KB-103 for DEB. Krystal aims to file an IND application for KB-103 and initiate an open-label Phase I/II trial during the first quarter of Mechanism of Action. Krystal is developing KB-103 for the treatment of patients affected by dystrophic epidermolysis bullosa (DEB), which is caused by mutations in the collagen VII gene COL7A1, a protein critical to the mechanical scaffold holding the epidermis and dermis of the skin together. 2,3 Specifically, collagen VII serves as a primary component of anchoring fibrils, which are adhesion structures responsible for linking the epidermal basement membrane to the dermis. 4 Due to this mutation, patients lack expression of functional collagen VII, which results in clinical features such as blistering, deformity or loss of fingernails, skin thickening, joint deformities, and difficulty swallowing. 5 Krystal s KB-103 utilizes the Company s STAR-D platform, a viral vector that incorporates the Herpes Simplex Virus 1 (HSV-1) with a modified backbone to deliver the COL7A1 gene to the skin of patients with DEB. This compound s viral HSV-1 construct has been modified by the removal of immediate early (IE) genes, which inhibits expression of most of the viral proteins and yields a replication-deficient virus with reduced toxicity. 6 In place of the IE genes, the Company has inserted two copies of COL7A1, which are delivered to the nuclei of keratinocytes and fibroblasts for transcription into RNA followed by translation into a functional collagen VII protein. Following translation, the collagen VII protein is secreted from keratinocytes and fibroblasts and diffuses to the basement membrane to form anchoring fibrils that adhere the epidermal basement membrane to the dermis, potentially ameliorating DEB pathogenesis. This process is depicted in Figure 2, with a histological cross-section of human skin on the left, and the intracellular process of KB-103 transfusion enlarged on the right. 2 Bruckner-Tuderman, L, et al., Lack of type VII collagen in unaffected skin of patients with severe recessive dystrophic epidermolysis bullosa. Dermatologica, 176(2), pp Christiano, AM, et al., A missense mutation in type VII collagen in two affected siblings with recessive dystrophic epidermolysis bullosa. Nat Genetics, 4, pp Rashidghamat, E. et al., Novel and emerging therapies in the treatment of recessive dystrophic epidermolysis bullosa. Intractable & Rare Diseases Research, 6(1), pp Kern, J.S. et al., Mechanisms of Fibroblast Cell Therapy for Dystrophic Epidermolysis Bullosa: High Stability of Collagen VII Favors Long-term Skin Integrity. Molecular Therapy, 17(9), pp Manservigi, R. et al., HSV Recombinant Vectors for Gene Therapy. The Open Virology Journal, 4, pp Page 7

8 Figure 2. Mechanism of Action of KB-103 Source: Company Presentation An important aspect to consider for any gene therapy is efficiency and mode of transduction, which in the case of KB-103 relies on tropism of the HSV-1 virus to keratinocytes and fibroblasts. We note that keratinocytes have been identified as a target of HSV-1 to establish an infection in skin or mucosal surfaces, and HSV-1 also has the capability of infecting fibroblasts. 7, 8 This process is mediated through several surface glycoproteins that are expressed on the HSV-1 virion and facilitate infection of host cells, including glycoprotein B, C, D, H, and L (gb, gc, gd, gh, gl). Glycoprotein D (gd) in particular is responsible for determining which cells can be infected. 9 Receptors expressed on target host cells that facilitate viral infection include: herpesvirus entry mediator (HVEM), nectin-1, nectin-2, and sites in heparan sulfate proteoglycan (HSPG). 10 Due to the expression of these receptors on keratinocytes and fibroblasts, we have confidence in the mechanistic rationale behind KB-103. The next hurdle beyond proper cellular transduction is expression of the viral construct in such cells and efficient secretion to the basement membrane zone (BMZ) where endogenous collagen VII holds the dermis and epidermis together, along 7 Petermann, P. et al., Entry mechanisms of herpes simplex virus 1 into murine epidermis: involvement of nectin-1 and herpesvirus entry mediator as cellular receptors. Journal of Virology, 89(1), pp Simpson, S.A. et al., Nectin-1/HveC mediates herpes simplex virus type 1 entry into primary human sensory neurons and fibroblasts. Journal of NeuroVirology, 11(2), pp Manoj, S. et al., Mutations in herpes simplex virus glycoprotein D that prevent cell entry via nectins and alter cell tropism. Proceedings of the National Academy of Sciences of the United States of America, 101(34), pp12414, Manservigi, R. et al., HSV Recombinant Vectors for Gene Therapy. The Open Virology Journal, 4, pp Page 8

9 with amelioration of diseasesome of these answers may be found by assessing preclinical work performed by Krystal, which may translate in clinical studies. Preclinical Studies with KB-103 Krystal has performed several preclinical studies to assess the potential of KB-103 for DEB, which include in vitro experiments to assess transduction and expression of the viral construct, and in vivo studies using mice. Overall, results indicate proper cell transduction and expression of the viral construct in both human-derived keratinocytes and fibroblasts in vitro. These findings translated during in vivo mouse studies showing collagen expression in key areas, such as the basement membrane zone (BMZ). These experiments are discussed in greater detail below. In Vitro Transduction Studies with Keratinocytes and Fibroblasts Krystal performed in vitro studies with human derived keratinocytes and fibroblasts (HDK and HDF, respectively) to assess the transduction and expression of KB-103. HDK s affected by recessive DEB (RDEB) and HDF s affected by EB were cultured, and subsequently treated with KB-103 at a multiplicity of infection (MOI) of 0, 0.3, 1, and 3. MOI represents the ratio of infectious particles (KB-103 in this case) to target cells. 48 hours after administration of KB-103, transduction efficiency and collagen VII expression were evaluated with immunofluorescent techniques that utilized an antibody targeting human collagen VII. Results are presented in Figure 3, and indicate successful viral transduction and subsequent expression of the collagen VII construct. Untreated and treated cells are on the left and right side, respectively, while HDK s are on the top half, and HDF s are on the bottom half. Figure 3. Transduction and Expression of KB-103 in HDK s (top) and HDF s (bottom) Source: Company Presentation Page 9

10 Investigators also analyzed the levels of COL7A1 transcripts, which show dose-dependent increases relative to normal HDF s (N-HDF) and normal HDK s (N-HDK), as presented in Figure 4. This result is consistent with the transcription of the COL7A1 gene in both fibroblasts and keratinocytes, introduced to these cells successfully via the administration of KB-103. Figure 4. COL7A1 Transcript Levels in Fibroblasts (top) and Keratinocytes (bottom) Source: Company S-1 Findings were confirmed via western blot, which are presented in Figure 5 and further support immunofluorescent images. The left side of the figure shows RDEB keratinocyte and normal keratinocyte protein expression of collagen VII (Col7) and lysis hydroxylase 3 (LH3), which is an extracellular enzyme involved in organization of the extracellular matrix in skin and fibroblasts, and deficiencies in this protein are associated with RDEB. 11 The concurrent increases in LH3 are consistent with greater amounts of collagen VII. On the right side of the figure is RDEB HDF and normal HDF protein expression of thromospondin-1 (TSP-1), which the Company has noted is 11 Watt, S.A. et al., Lysyl Hydroxylase 3 Localizes to Epidermal Basement Membrane and is Reduced in Patients with Recessive Dystrophic Epidermolysis Bullosa. PLOS One, 10(9), e Page 10

11 inhibited by Col7. Thus, the observed inverse correlation between dosage and TSP-1 may indicate greater concentrations of Col7 protein in the fibroblasts. Taken together, these data confirm the ability of KB-103 to introduce the missing COL7A1 gene in RDEB keratinocytes and fibroblasts, and undergo transcription and translation, which is key to the rationale for KB-103 in the treatment of DEB. Figure 5. Western Blot s for RDEB Keratinocytes (left) and RDEB Fibroblasts (right) Source: Company S-1 Other notable findings in fibroblasts that were treated with KB-103 include increases in keratinocyte adhesion to fibronectin and collagen 1, which appeared to occur in a dose-dependent manner. Krystal has guided that there were no toxicities occurring with administration of therapeutic doses of KB-103 in this study. In Vivo Mouse Study Krystal has also assessed the potential of injectable and topical KB-103 in a hairless mouse model, which serves as surrogate for therapeutic efficacy in human skin. In an initial experiment, mice received single injections of KB-103 and immunofluorescent photos were taken, along with quantitative assessments of the number of collagen VII transcripts and genome copies per 100 ng DNA. Results indicate that treatment with KB-103 translated into the presence of ~10,000 RNA transcripts for collagen VII, and more than 1,000,000 DNA copies per 100ng DNA/cDNA. Furthermore, immunofluorescence imaging of treated skin shows expression of the collagen VII construct in the basement membrane zone (BMZ), which is where collagen VII is expressed in healthy individuals, and in fibroblasts in the dermis. These data are presented in Figure 6, with the number of collagen VII transcripts/copies on the left, and an image showing immunofluorescent collagen VII expression (in red) on the right. Page 11

12 Figure 6. Expression of Col7 Transcript and Protein Following KB-103 Administration Source: Company Presentation The Company performed a subsequent experiment to assess changes in collagen VII transcripts and genome copies with two injections of KB-103 spaced 5 days apart. Results indicate increases in both collagen VII RNA transcripts and DNA genome copies with multiple injections, representing dose-dependent increases in transduction and transcription, respectively. These data are presented in Figure 7. Krystal has noted the stability of this compound, which is a contributing factor to the dose-dependent effect observed in this study. The Company has indicated that the half-life of KB-103 is approximately 30 days in mice. While these in vivo studies used in injectable form of KB- 103, Krystal has formulated a topical aqueous gel which produced a similar number of transcript and genome copies in a similar study. Thus, the injectable and topical formulations of KB-103 appear to be greatly similar, and the Company is currently optimizing the topical product for clinical studies. Page 12

13 Figure 7. Expression of Col7 Transcript and DNA Copies Following Multiple Doses of KB-103 Source: Company Presentation Safety Profile. Krystal has not conducted any clinical studies with KB-103, which make it difficult to assess the safety of this compound in humans. During in vitro studies, Krystal has guided that there were no toxicities occurring with administration of therapeutic doses of KB-103, but it is unclear how this may translate in human studies. To assess the safety of this compound, however, considering the mechanism of action is worthwhile. KB-103 uses an HSV-1 construct that has been modified by the removal of immediate early (IE) genes, which according to the Company, inhibits expression of most of the viral proteins and yields a replication-deficient, non-toxic virus. We note the potential infection of non-target cells (those other than fibroblasts and keratinocytes), as HSV-1 can infect various epithelial cells, sensory neurons, and lymphoid cells, and potentially other cell types. 12 However, infectivity beyond skin cells may be limited in the case of KB-103 due to its replication deficiency, as viral propagation is typically an initial step to entering sensory neurons. 13 Other factors to consider include the potential risks of a topical gene therapy and how expression in non-target cells could emerge as AEs. For the former, skin-to-skin contact has the potential to transmit KB-103 to non-deb individuals, though this may be mitigated by the severity of DEB cases, which may necessitate bandage use and 12 Simpson, S.A. et al., Nectin-1/HveC mediates herpes simplex virus type 1 entry into primary human sensory neurons and fibroblasts. Journal of NeuroVirology, 11(2), pp Nicoll, M.P. et al., The molecular basis of herpes simplex virus latency. FEMS Microbiology Reviews, 36(3), pp Page 13

14 minimal patient contact to avoid exacerbating existing wounds. For the latter, we note that collagen VII is a secreted protein and expression by other skin cells may not be deleterious but has potential to contribute to the therapeutic effects of KB-103. However, if levels of collagen VII production were to surpass endogenous levels, we highlight the potential for conditions such as scleroderma to result, the importance of maintaining a proper balance of this protein. Dystrophic Epidermolysis Bullosa Epidermolysis Bullosa (EB) is a group of heritable, autosomal, genetic skin disorders characterized by blistering of skin and mucous membranes upon minor injury. 14 These heterogeneous conditions are caused by various mutations in genes encoding basement membrane proteins, the absence of which leads to tissue separation at the junction between the epidermal and dermal layers of skin. 15 EB is classified into 4 major subtypes based on the location of blistering within the various layers of skin and the affected proteins. 16 Figure 8 shows the different layers of skin affected by the various types of EB, which include EB Simplex (EBS), Dystrophic EB (DEB), and Junctional EB (JEB), which primarily affect the basal keratinocytes of the epidermis, dermis, and basement membrane, respectively. In the United States, the estimated incidence of EB is 1 is roughly 19.6 per million live births and the estimated prevalence is roughly 11.1 per million. 17 Figure 8. Skin Layers Affected by Major Subtypes of EB Source: Sawamura et al., Bruckner-Tuderman, L., 1992, Pathogenesis of Mechanobullous Disorder, Experimental Dermatology, 1(3), pp Sawamura, D. et al., 2010, Overview of Epidermolysis Bullosa, The Journal of Dermatology, 37(3), pp Varki, R. et al., 2006, Epidermolysis Bullosa. I. Molecular Genetics of the Junctional and Hemidesmosomal Variants, Journal of Medical Genetics, 43(8), pp Fine, J.D., 2016, Epidemiology of Inherited Epiermolysis Bullosa Based on Incidence and Prevelance Estimates from the National Epidermolysis Bullosa Registry, JAMA Dermatology, 152(11), pp Page 14

15 Krystal is developing KB-103 for the treatment of DEB, which is caused by mutations in the COL7A1 gene, which codes for collagen VII protein which is critical to the mechanical scaffold holding the epidermis and dermis of the skin together. 18,19 Specifically, collagen VII serve as a primary component of anchoring fibrils, which are adhesion structures responsible for linking the epidermal basement membrane to the dermis. 20 Due to these mutations, patients lack expression of functional collagen VII, which results in clinical features such as blistering, deformity or loss of fingernails, skin thickening, joint deformities, and difficulty swallowing. We note that DEB can be inherited in an autosomal dominant (DDEB) or autosomal recessive (RDEB) manner, which contributes to heterogeneous clinical presentation. 21 For example, in severe forms of DEB, development of joint contractures and pseudosyndactyly can occur, along with continuous scarring that may lead to the development of squamous-cell carcinomas. Mild cases, however, may show limited blistering with some nail involvement. DEB is the second most common type of EB and accounts for approximately 25% of cases. Overall incidence of DEB is 6.5 per million live births in the United States. 22 The approximate proportions for each EB subtype are presented in Figure 9. Figure 9. Proportion of the EB Population Composed by Each Disease Subtype DEB Unknown 4% EB Unknown 12% RDEB 12% EBS 54% DDEB 14% JEB 4% Source: LifeSci Capital and Fine, J.D. et al., Bruckner-Tuderman, L, et al., Lack of type VII collagen in unaffected skin of patients with severe recessive dystrophic epidermolysis bullosa. Dermatologica, 176(2), pp Christiano, AM, et al., A missense mutation in type VII collagen in two affected siblings with recessive dystrophic epidermolysis bullosa. Nat Genetics, 4, pp Rashidghamat, E. et al., Novel and emerging therapies in the treatment of recessive dystrophic epidermolysis bullosa. Intractable & Rare Diseases Research, 6(1), pp Varki, R. et al., Epidermolysis bullosa. II. Type VII collagen mutations and phenotype-genotype correlations in the dystrophic subtypes. Journal of Medical Genetics, 44(3), pp Pfednder, E. and Lucky, A., 2006, [last updated: ], In: Pagon, R.A. et al. GeneReviews [Internet], available at: Page 15

16 Cause and Pathogenesis DEB is caused by various mutations affecting the COL7A1 gene, which encodes DNA responsible for the production type VII collagen. This protein serves as an anchoring fibril that is critical to hold together the epidermal basement membrane and dermal layer of skin. Mutations in patients with DEB lead to structural and functional alterations in these anchoring fibrils and polymers of collagen VII, rendering them defective and subsequently leading to disease presentation. 23 Fibrils are normally formed by highly organized polymerization of collagen VII that covalently bind to dermal collagen fibrils, providing stable adherence between the dermal and epidermal layers of the skin. Absence or marked reduction of proper fibrils leads to blistering within the basement membrane zone and the dermis. DEB is further subdivided into two major categories, differing by inheritance pattern and severity. Particularly, this condition can be inherited in an autosomal dominant (DDEB) or autosomal recessive (RDEB) manner, which contributes to heterogeneous clinical presentation, as DDEB is typically milder than RDEB. We note that RDEB has an incidence of approximately 1.35 per million births, and DDEB has a prevalence of 1.49 per million births. Both types of DEB are associated with a significantly larger risk of developing squamous cell carcinoma, with an increased risk of up to 90% seen in patients with recessive DEB. 24 Symptoms and Diagnosis As mentioned, DEB is a heterogeneous condition that occurs across a spectrum of severity, and includes symptoms such as blistering, deformity or loss of fingernails, skin thickening, joint deformities, and difficulty swallowing. We note that DEB can be inherited in an autosomal dominant (DDEB) or autosomal recessive (RDEB) manner, which contributes to heterogeneous clinical presentation. 25 For example, in severe forms of DEB development of joint contractures and pseudosyndactyly can occur, along with continuous scarring that leads to development of squamous-cell carcinomas, whereas mild cases may show limited blistering with some nail involvement. Thus, we provide descriptions of both RDEB and DDEB below, with associated symptoms Recessive Dystrophic Epidermolysis Bullosa (RDEB). Recessive DEB is categorized into two major types: Hallopeau-Siemens Recessive Dystrophic Epidermolysis Bullosa (RDEB-HS) and Recessive Dystrophic Epidermolysis Bullosa-Other (RDEB-O). RDEB-HS is the most severe form of DEB with a nearly complete absence of collagen VII expression. 26 Widespread severe blistering presents at birth and is apparent in the early neonatal period, generally with additional involvement of various mucous membranes. Newborns often have blistering in the oral and esophageal mucosa and cornea, and secondary infections are common. Healing blisters can lead to severe scarring, and in some cases pseudosyndactyly with progressive loss of function of the hands and feet. 23Bruckner-Tuderman, L., 2010, Dystrophic Epidermolysis Bullosa: Pathogenesis and Clinical Features, Dermatologic Clinics, 28(1), pp Fine, J.D. et al., 2009, Epidermolysis Bullosa and the risk of Life-Threatening Cancers: The National EB Registry Experience, , Journal of American Academy of Dermatology, 60(2), pp Varki, R. et al., Epidermolysis bullosa. II. Type VII collagen mutations and phenotype-genotype correlations in the dystrophic subtypes. Journal of Medical Genetics, 44(3), pp Intong, L. and Murrell, D., 2012, Inherited Epidermolysis Bullosa: New Diagnostic Criteria and Classification, Clinics in Dermatology, 30(1), pp Page 16

17 October 13, 2017 Mucosal scarring can result in ankylglossia, which is fusion of the tongue to the roof of the mouth, as well as microstomia, or progressive deterioration of the oral cavity. As such, individuals with RDEB-HS also suffer from malnutrition, which leads to a variety of health problems such general growth retardation, osteoporosis from a lack of vitamin D, and anemia from lower iron intake. RDEB-O is a milder version of recessive DEB and generally presents with localized blisters limited to the hands, knees, feet and elbows. More severe cases can present with widespread blistering and less severe scarring compared to patients with RDEB-HS. Though still possible, these patients also have lower risk of growth retardation and systemic illness. Dominant Dystrophic Epidermolysis Bullosa (DDEB). The third type of DEB is the autosomal dominant (DDEB) variant, with the phenotype largely resembling RDEB-O. This is the mildest type among the DEB family of EB, with blisters limited to the hands, knees, feet, knees and elbow. Scarring in individuals with DDEB is minimal compared to the recessive forms. Mild cases of DDEB present with abnormal nails exclusively, which is a common characteristic of this patient subset. Diagnosis. Immunoflourescence Mapping (IFM) is recommended as the primary method for confirming a diagnosis of EB, which necessitates skin biopsy and subsequent immunofluorescence staining. 27 Antigen IFM mapping in patients with DEB shows absent or markedly diminished staining of collagen VII and other EBassociated antigens. Figure 10 shows IFM results characteristic of DEB. In the left panel, there is an absence of collagen VII staining (minimal yellow/green immunofluorescence), and in the middle panel there is a reduction in collagen VII staining (moderate yellow/green immunofluorescence), both relative to collagen IV staining in the right panel (control, high yellow/green immunofluorescence). Figure 10. IFM Results for Dystrophic Epidermolysis Bullosa Source: Barzegar, M. et al., 2015 Transmission Electron Microscopy (TEM) can also be used to visualize the epidermal-dermal junction and to assess skin morphology in that location. Skin biopsies used in IFM or TEM analysis must come from a blister induced within 12 hours for proper antigen preservation. In unaffected individuals, anchoring fibrils will be visible with symmetrical distribution and frayed-end fibrils from the lamina densa to the dermal connective tissue. Patients with RDEB-HS will present with markedly reduced or absent anchoring fibrils, while those with DDEB or RDEB-O generally have less anchoring fibrils or anchoring fibrils with altered morphology, as well as some collagen VII retention within basal keratinocytes. Gonzalez, M., 2013, Evaluation and Treatment of the Newborn with Epidermolysis Bullosa, Seminars in Perinatology, 37(1), pp Page 17

18 There are also options to assess for the presence of EB prior to birth, and pre-implantation for those conceiving via in-vitro fertilization (IVF). For example, EB can be diagnosed with 98% accuracy from DNA isolated from chorionic villus and amniotic fluid obtained between weeks gestational age. Families at high-risk for EB that are conceiving via IVF can also opt for testing prior to embryo implantation. Extracted DNA is tested for mutations and only implanted if a normal or carried genotype is revealed, although this procedure is only available in a few centers worldwide due to its highly specialized nature. Treatment There are currently no available therapies that address the underlying causes of EB, and as such standard of care treatment focuses on symptom management, prevention of primary and secondary complications, and disease surveillance. During the infancy period, skin should be kept well lubricated and in a cool, air-conditioned environment to prevent progression of skin fragility. 28 Parents should adhere to gentle handling of the infant, and clothing should be loose fitting to avoid any potential chafing. Upon the formation of blisters, proper wound care with immediate drainage and application of non-adherent dressing should be used to minimize the risk of infection. Prevention of blisters can also be achieved through the tailoring of activities to minimize trauma. Blister reduction can be achieved with application of 20% aluminum chloride, injection of botulism toxin, application of Periactin (cyproheptadine), and the use of tetracycline. 29,30 Surgery may also be indicated to fix contractures and pseudosyndactyly caused by scarring. Chronic wounds can also be managed with cryopreserved placental membrane (CPM), such as Osiris Therapeutics (OTC: OSIR) Grafix (CPM), which has demonstrated superiority to standard wound care. CPM is a placental membrane matrix that provides the healing wound with epithelial cells, growth factors, stem cells, and neonatal fibroblasts. 31 Market Information Epidemiology. Epidermolysis Bullosa is a rare, inherited skin disorder that affects an estimated 25,000 to 50,000 people in the United States, and about 500,000 individuals worldwide. The overall incidence of the disease is estimated at 11 of every million births. 32 The incidence of DEB in particular is approximately 6.5 per million births in the US. 33 Prevalence of all subtypes of DEB, including recessive DEB (RDEB) and dominant DEB (DDEB), is 28Gonzalez, M., 2013, Evaluation and Treatment of the Newborn with Epidermolysis Bullosa, Seminars in Perinatology, 37(1), pp Swartling, C. et al., 2010, Botulinum toxin in the treatment of sweat-worsended foot problems in patients with Epidermolysis bullosa simplex and pachyonychia congenital, British Journal of Dermatology, 163(5), pp Weiner, M. et al., 2004, Tertracycline and Epidermolysis Bullosa Simplex: A Double Blind, Placebo-Controlled, Crossover, Randomized Clinical Trial, British Journal of Dermatology, 150(3), pp Rashidghamat, E. and McGrath,J., 2017, Novel and Emerging Therapies in the Treatment of Recessive Dystrophic Epidermolysis Bullosa, Intractable & Rare Diseases Research, 6(1), pp Fine, JD., 2016, Epidemiology of Inherited Epidermolysis Bullosa Based on Incidence and Prevalence Estimates from the National Epidermolysis Bullosa Registry, JAMA Dermatology, 152(11), pp Pfednder, E. and Lucky, A., 2006, [last updated: ], In: Pagon, R.A. et al. GeneReviews [Internet], available at: Page 18

19 approximately 3.26 per million individuals in the US. 34 The incidence of junctional EB (JEB) is slightly lower than that of DEB, at approximately 3.59 per million births. 35 US prevalence of JEB has been estimated at 0.49 per million people, EB simplex (EBS) is the most common disease subtype and affects approximately 6 per million people in this territory. A summary of US prevalence estimates for various EB subtypes are presented in Figure 11. We note that between the years of 1986 and 2002, the prevalence of both subtypes of DEB and the prevalence of JEB grew significantly, meaning the above prevalence estimates (which are estimates from 2002) may be conservative. EB can be a life-threatening condition, as the mortality rate for severe forms of JEB is roughly 73%. The prevalence of EB shows no race or gender correlation, and we assume a similar proportion of individuals are affected in the EU as the US. Figure 11. US Prevalence of EB Subtypes (per million) DEB (all) EBS JEB EB (unknown) Source: Fine, J.D. et al., 2016 and LifeSci Capital Disease Burden. Standard of care treatments for EB involve managing symptoms and treating blisters / wounds. Some of the direct and indirect costs associated with the disease are continuous surveillance by patients and healthcare professionals, ointments and medications for wound healing and blister prevention, in addition to deleterious psychosocial impact. For adult patients, the average annual economic burden of the disease is estimated at $41,500, of which $13,400 is attributed to direct health-care costs, $27,000 is indirect health-care costs, and $2,400 is indirect costs. For pediatric patients, the average annual economic burden of having EB is estimated at $77,000, composed of $11,900 in direct healthcare costs and $65,200 in indirect health costs. 36 Market Size. There are currently no approved therapies for EB, and the standard of care treatment is focused on managing symptoms. KB-103 has potential to be the first off-the-shelf gene therapy directed at the underlying cause of DEB, and Krystal intends to develop this product in the US and EU. We assess the size of the EB market in the US and EU in Figure 12, which is based on the following assumptions: We assume prevalence numbers based on a 2002 study for DEB (and its subtypes), EB simplex (EBS), EB of unidentified subtype, and junctional EB (JEB). Furthermore, we assume population sizes of 325 million and 510 million in the US and EU, respectively. 37 Per this analysis, we estimate that the DEB market consists of approximately 1,000 patients in the US and 1,600 in the EU. Due to meaningful growth in prevalence observed for DEB from 1986 through 2002, we feel these estimates hold a measure of conservatism Fine, JD., 2016, Epidemiology of Inherited Epidermolysis Bullosa Based on Incidence and Prevalence Estimates from the National Epidermolysis Bullosa Registry, JAMA Dermatology, 152(11), pp Pfednder, E. and Lucky, A., 2008, [last updated: ], In: Pagon, R.A. et al. GeneReviews [Internet], available at: 36Angelis, A. et al., 2016, Social/Economics Costs and Health-Related Quality of Life in Patients with Epidermolysis Bullosa in Europe, The European Journal of Health Economics, 17(Suppl 1), pp Fine, JD., 2016, Epidemiology of Inherited Epiermolysis Bullosa Based on Incidence and Prevelance Estimates from the National Epidermolysis Bullosa Registry, JAMA Dermatology, 152(11), pp Page 19

20 Figure 12. DEB Market Size in the US and EU Prevalence* US Patients EU Patients Total DEB (all) ,000 1,600 2,600 DDEB ,300 RDEB ,100 Other EBS 6 2,000 3,000 5,000 EB (unknown) ,100 JEB *prevalence reflected per million Source: LifeSci Capital The subset of DEB represents a population of approximately 1,600 patients between the US and EU, which qualifies for orphan drug designation in both territories, and may allow for premium pricing. Due to the combination of orphan drug pricing, disease severity, and potential of KB-103 to modulate disease pathogenesis, we feel that this product could be priced at $300,000 per year, or more, for treatment in the US. We performed a scenario analysis in Figure 13 to assess potential peak sales of this agent, which indicates at a moderate price point with 80% penetrance, sales of KB-103 could translate to $250 million in the US. We note that this does not include the EU opportunity, and KB-103 may be able to achieve similar or larger peak sales in that region. Table 13. Scenario Analysis of Potential KB-103 Sales in the US Penetration 70% 80% 90% Price Low $200 k $200 k $200 k Potential Sales $150 M $170 M $190 M Price Moderate $300 k $300 k $300 k Potential Sales $220 M $250 M $290 M Price High $400 k $400 k $400 k Potential Sales $300 M $340 M $380 M Source: LifeSci Capital Clinical Data Discussion Phase I Trial with KB103 Pending approval of an investigational new drug (IND) application that has been filed with the FDA, Krystal plans to initiate a Phase I clinical trial for KB-103 in patients with DEB. This trial is expected to begin enrolling patients in the first quarter of Study Design. Krystal plans to conduct an open-label Phase I/II trial to assess the safety, tolerability, and efficacy of KB-103 in patients with DEB. 3 adults patients are planned to initially enroll, followed by adult and pediatric Page 20

21 subjects who will receive topical KB-103 on up to 3 wounds. Biopsies will be obtained at baseline, as well as at weeks 6, 12, and 25 post-therapy. Primary endpoints include the incidence of adverse events (AEs) at weeks 12 and 25, expression of collagen VII protein at all time points, and the presence of anchoring fibrils at all time points as assessed by electron microscopy. Secondary endpoints include visual changes in the treated areas at weeks 12 and 25, dimensions of wound sites as assessed by image capture software, and changes in wound dimensions throughout the study. Other Drugs in Development for DEB There are competing gene therapies currently in development for the treatment of DEB. These approaches include Fibrocell Technologies (NasdaqCM: FCSC) FCX-007 and Abeona Therapeutics (NasdaqCM: ABEO) EB-101, which are shown in Figure 14, and highlighted below. We note that EB-101 recently received Breakthrough Therapy Designation (BTD) from the FDA, which allows for priority review and expedites the approval process, highlighting the FDA s recognition of the unmet need in this indication. These gene therapy treatments are autologous, meaning they use cells harvested from individual patients, which are then modified and re-introduced to the original host. While this process has demonstrated efficacy, other concerns such as treatment rejection, high costs, and therapeutic lag time pose potential disadvantages. Not only do autologous therapies require specialized equipment and the time of highly trained professionals, patients may need to wait several weeks before an individualized treatment can be developed. Krystal looks to circumvent these drawbacks by offering KB-103 as an off-the-shelf topical gene therapy. Furthermore, as opposed to targeting either keratinocytes or fibroblasts as with autologous options, KB-103 has been shown to infect both cell types, which may translate into higher collagen VII production. There are also more traditional biopharmaceutical products in development aimed at improving wound healing, including GtreeBNT and RegeneRx s (OTC: RGRX) RGN-137, which is a topical gel product that includes Thymosin β 4 (Tβ4) as an active ingredient and is planned to move into Phase III studies in We view such product candidates as potential agents to combine with KB-103, and note that other cell or gene therapies targeting the genetic cause of DEB are more direct competitors. Figure 14. Other Therapies in Development for DEB Treatment Company Phase Mechanism RGN-137 GtreeBNT and RegeneRx Thymosin β 4 (Tβ4) topical III-ready (OTC: RGRX) gel FCX-007 Fibrocell Technologies Autologous fibroblasts w/ I/II (NasdaqCM: FCSC) Collagen VII expression EB-101 Abeona Therapeutics Autologous keratinocytes w/ I/II (NasdaqCM: ABEO) Collagen VII expression Cell Therapy Kings College London I Autologous fibroblasts INM-750 InMed (OTC: IMLFF) Preclinical Cannabinoids QR-313 ProQR (NasdaqGM: PRQR) Preclinical Exon 73 skipping Source: LifeSci Capital Page 21

22 Fibrocell Technologies (NasdaqCM: FCSC) FXC-007. FCX-007 is an autologous gene therapy being developed with Fibrocell s patented manufacturing process in conjunction with Intrexon (NYSE: XON). This product aims to deliver type VII collagen, the protein missing in patients with DEB, through fibroblasts genetically modified to express the COL7A1 gene that codes for type VII collagen. The company s patented production process is described in Figure 15. Fibroblast biopsies are collected from patients, isolated, and expanded in culture. Fibroblast cultures are then transduced with a lentiviral vector carrying a wild type copy of COL7A1. The modified cells are harvested and injected back into the patient s papillary dermis. In June of 2017, Fibrocell announced that it had completed dosing of patients in Phase I of its Phase I/II clinical trial to evaluate the safety of FXC-007 in patients with RDEB. Twelve-week safety and efficacy data are expected in the third quarter of Figure 15. Fibrocell s Autologous Product Development Process Source: Fibrocell Company Website Abeona Therapeutics (NasdaqCM: ABEO) EB-101. EB-101 is an autologous gene therapy that was developed at Stanford University and later licensed to Abeona. This product has similarities to FXC-007, as it is based on a similar process of extracting, modifying, and re-administering a patient s own cells. In the case of EB-101, keratinocyte cells are isolated from patient biopsies, corrected with the recombinant retroviral LZRSE-COL7A1 vector, and expanded ex vivo. Uniform keratinocyte sheets are obtained following maturation and assembled into epidermal sheets before being transplanted back at the wound site. Abeona released data from its ongoing Phase I/II clinical trial at the Society of Investigative Dermatology conference in April of Evidence suggested a positive effect on wound healing in patients with RDEB. While the Phase I/II study is estimated to complete in 2023, the company announced that it has received FDA guidance to launch a pivotal Phase III trial in early Abeona has another gene editing program for EB, EB-201, in Page 22