Investing in early-stage biotech is high-risk and capital-intensive, with long, regulated development cycles that often see many failures before any commercial success. 

Krystal Biotech (KRYS) has come out of this process by turning its first approved gene therapy, Vyjuvek, into a profitable, easy-to-use treatment for a rare skin disorder, delivering strong returns and growth last year. 

Despite these strong results, the market is cautious about whether Krystal can replicate that success across its broader pipeline.

To address this, Krystal is expanding Vyjuvek globally, running a Phase 3 trial for an eye treatment extension, and advancing lung-targeted programs for diseases like cystic fibrosis, any of which could vindicate its platform and boost its valuation.

Investor Essentials Daily:
Tuesday News-based update
Powered by Valens Research

Investing in biotech companies, particularly those that have yet to achieve significant revenue growth, can be challenging and high-risk.

The early stages of research and development require significant funding, typically with little to no revenue to show for it.

Furthermore, the drug development process is highly regulated and requires multiple stages of testing before a drug can even be considered for approval.

It starts with preclinical trials, where the drug is tested on animals or in labs, followed by several phases of human trials.

Each phase is designed to assess the safety, efficacy, and optimal dosage of the drug, with each subsequent phase involving more participants and larger trials.

Even if a drug passes all these hurdles, it still must be approved by regulatory bodies like the U.S. Food and Drug Administration (FDA), which can be a lengthy and complex process.

If a biotech company successfully brings a drug to market, the potential rewards are enormous for investors.

However, the risks are equally substantial, as many drugs fail at various stages of development, leading to sunk costs and a collapsing share price.

With that in mind, when a biopharma company shows signs of being on the cusp of a major breakthrough, it can be an exciting and pivotal moment for both the company and its investors.

Krystal Biotech (KRYS) is a company focused on developing and commercializing gene therapies for rare, debilitating diseases.

Its business model centers on leveraging its proprietary platform to deliver corrective genes to patients. 

The company has already demonstrated significant commercial success with its first approved product, Vyjuvek, a topical gene therapy for Dystrophic Epidermolysis Bullosa (DEB). 

This devastating genetic condition causes extremely fragile skin that blisters and tears from minor friction, leading to chronic, painful wounds. Prior to Vyjuvek, treatment was limited to palliative wound care.

Vyjuvek’s market reception has been strong due to its compelling product profile. 

It is a simple, “off-the-shelf” topical gel that can be applied at home by the patient or a caregiver, a significant advantage in managing a chronic illness.

Vyjuvek delivers the missing COL7A1 gene directly to open wounds and insurance coverage runs above 95%.

Clinical data has shown its effectiveness, with studies demonstrating that 67% of wounds treated with Vyjuvek achieved complete healing at six months, compared to 22% for the placebo. 

This efficacy extends to small, medium, and even very large chronic wounds that have been open for years. 

In contrast, its primary competitor, Abeona Therapeutics’ Zevaskyn, involves a far more complex and burdensome process. 

Zevaskyn requires a patient’s skin cells to be surgically biopsied, sent for custom manufacturing over three weeks, and then surgically grafted back onto the patient’s wounds in a hospital setting. 

This procedure carries a price of $3.1 million per treatment, faces significant logistical hurdles, and has demonstrated lower efficacy, with only 16% of patients achieving complete wound healing at six months in its key study. 

This clear differentiation in convenience, efficacy, and safety has established Vyjuvek as the clear market leader.

Vyjuvek’s success enabled the company to finally become profitable and achieve a high 42% Uniform return on assets ”ROA” and 24% asset growth last year.

Despite this initial success, the market is questioning whether the company can successfully commercialize its broader pipeline and replicate the success of Vyjuvek, reflected by the firm’s modest 13.5x Uniform P/E.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s Uniform ROA to decline to around 26% from 42% last year.

The core of Krystal’s long-term business strategy is to prove that its platform is not limited to a single dermatological condition but can be adapted to treat a range of diseases.

The company is actively addressing these concerns through a clear, multi-faceted growth plan. 

First, it is expanding Vyjuvek’s reach globally, with launches in Europe and Japan underway in 2025. 

This move is expected to substantially increase the product’s revenue, moving it closer to its target of over $1 billion in peak annual sales. 

Second, and more critical to its long-term valuation, is the progress of its pipeline. Krystal is leveraging its expertise in treating DEB to develop a version of Vyjuvek for the ocular complications of the disease, which can cause severe vision loss. 

This program is already in a late-stage Phase 3 trial, with results anticipated by the end of 2025. 

Success here would represent a significant line extension and a key step in validating the platform’s versatility. 

Beyond dermatology and ophthalmology, Krystal has made important strides in validating the lung as a second major target tissue for its gene therapies. 

Early human trial data have shown successful gene delivery to the lungs, paving the way for its programs targeting respiratory diseases such as cystic fibrosis and alpha-1 antitrypsin deficiency. 

If Krystal can demonstrate further clinical success in these new areas, it would confirm the broader utility of its technology and could lead to a significant reevaluation of the company’s growth potential.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research