KRYSTAL BIOTECH, INC. The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , as filed with theSEC , onMarch 10, 2020 .
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.
Forward-looking statements appearing in a number of places throughout this Quarterly Report on Form 10-Q include, but are not limited to, statements about the following, among other things:
• the initiation, timing, progress and results of preclinical and clinical
trials for B-VEC (previously "KB103"), KB105 and any other product
candidates, including statements regarding the timing of initiation and
completion of studies or trials and related preparatory work, the period
during which the results of the trials will become available and our
research and development programs;
• the impact that the COVID-19 pandemic and measures to prevent its spread
may have on our business operations, access to capital, research and
development activities, and preclinical and clinical trials for B-VEC,
KB105 and any other product candidates;
• the timing, scope or results of regulatory filings and approvals, including
timing of final US Food and Drug Administration ("FDA"), marketing and
other regulatory approval of our product candidates;
• our ability to achieve certain accelerated or orphan drug designations from
the FDA;
• our estimates regarding the potential market opportunity for B-VEC, KB105
and any other product candidates;
• our research and development programs for our product candidates;
• our plans and ability to successfully develop and commercialize our product
candidates, including B-VEC, KB105 and our other product candidates;
• our ability to identify and develop new product candidates;
• our ability to identify, recruit and retain key personnel;
• our commercialization, marketing and manufacturing capabilities and strategy;
• the implementation of our business model, strategic plans for our business,
product candidates and technology;
• the scalability and commercial viability of our proprietary manufacturing
methods and processes;
• the rate and degree of market acceptance and clinical utility of our
product candidates and gene therapy, in general;
• our competitive position;
• our intellectual property position and our ability to protect and enforce
our intellectual property;
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• our financial performance;
• developments and projections relating to our competitors and our industry;
• our ability to establish and maintain collaborations or obtain additional
funding;
• our estimates regarding expenses, future revenue, capital requirements and
needs for or ability to obtain additional financing;
• our ability to successfully resolve any intellectual property or other
claims that may be brought against us;
• any statements regarding compliance with the listing standards of The
NASDAQ Capital Market;
• the impact of laws and regulations; and
• any statements regarding economic conditions, including statements related
to the economic fallout from the COVID-19 pandemic and the impact on our
business, or performance and any statement of assumptions underlying any of
the foregoing.
Forward-looking statements are subject to a number of risks, uncertainties and
assumptions, including those described in "Risk Factors" below and in our Annual
Report on Form 10-K for the year ended December 31, 2019 and elsewhere in this
Form 10-Q and in 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 prospectus 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. Also, forward-looking statements represent our management's beliefs
and assumptions only as of the date of this Quarterly Report. You should read
this Quarterly Report completely and with the understanding that our actual
future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update these forward-looking statements publicly, 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 toKrystal Biotech, Inc. , together with its consolidated subsidiaries. 19
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Overview
We are a clinical stage gene therapy company developing a new class of
transformative medicines to treat diseases caused by gene or protein dysfunction
or absence. Using our patented platform that is based on engineered HSV-1, we
create vectors that encode functional proteins. Our vector is designed to be
specifically and efficiently delivered to the target cell in an outpatient
setting, via topical or intradermal routes of administration, where the cell's
own machinery transcribes and translates the encoded protein, restoring or
augmenting protein function to treat or prevent disease.
Presently, we have two product candidates in the clinic to treat rare skin
diseases. We initiated a Phase 3 pivotal trial on our most advanced product
candidate, B-VEC, to treat dystrophic epidermolysis bullosa ("DEB") on July 28,
2020 . Details of the pivotal study can be found at www.clinicaltrials.gov under
NCT identifier NCT04491604. Presently, we anticipate filing the Biologics
License Application ("BLA") for B-VEC in 2021. We initiated the Phase 2 portion
of our Phase 1/2 study on our second product candidate, KB105, to treat
autosomal recessive congenital ichthyosis ("ARCI") on August 4, 2020 following a
successful recent completion of a Phase 1 trial in adults. Details of the Phase
2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732.
Nothing included on these websites shall be deemed incorporated by reference
into this Quarterly Report on Form 10-Q.
We are also applying our HSV-1 platform towards the development of therapies to
treat aesthetic skin conditions. We anticipate commencing a Phase 1 clinical
study on our third product candidate, KB301, to treat wrinkles and acne scars in
2H 2020.
Recognizing the breadth and potential transformative power of our HSV-1 vector
platform, we have expanded the scope of our product development beyond skin and
have begun preclinical efforts in pulmonary diseases. The large payload
capacity, robust tropism to epithelial cells (including human airway epithelia),
immune-evasive properties, and manufacturing scalability of our HSV-based vector
platform gives us an advantage over other viral vector therapies for pulmonary
indications. Our preclinical efforts to date have led to the development of a
novel candidate, KB407, for the treatment of Cystic Fibrosis ("CF"), which has
been shown to successfully transduce human CF patient-derived epithelial cells
and deliver functional cystic fibrosis transmembrane conductance regulator
("CFTR") in vitro in 2D and 3D organotypic systems, and is amendable to
non-invasive inhaled administration in vivo, as indicated by successful delivery
to the lungs through the use of a clinically relevant nebulizer in rodent
healthy and diseased small animal models. Based on feedback from regulatory
agencies, Investigational New Drug ("IND") enabling safety and efficacy studies,
including studies in non-human primates, are underway, and IND filing for KB407
is anticipated in 1H 2021. Additional pulmonary diseases are also being
evaluated.
We believe that gene therapy companies should control their manufacturing
destiny and that having in-house current good manufacturing practices ("cGMP")
facilities allow a gene therapy company to maintain better quality control,
shorter lead times, lower costs and better command over intellectual property.
Last year, we completed the construction of our own commercial scale
cGMP-compliant manufacturing facility, ANCORIS, to enhance supply chain control,
increase supply capacity for clinical trials and ensure commercial demand is met
in the event that B-VEC and our other product candidates receive marketing
approval. The clinical material for the pivotal trial has been produced at
ANCORIS and we expect to produce initial commercial launch material of B-VEC
will be produced at the same facility. Earlier this year, we announced the
ground-breaking of our second commercial gene therapy facility in the
Pittsburgh, Pennsylvania area. The ASTRA facility is being designed as a
state-of-the-art cGMP manufacturing facility that, beyond providing for
expansion of Krystal's current production platform, will allow the in-house
incorporation of raw material preparation, excipient manufacturing, testing,
packaging, labeling and distribution, fully-integrating all components of the
supply chain from starting materials to patient experience. We anticipate that
the ASTRA facility will initially be used as a commercial back-up facility for
B-VEC. Eventually, the ASTRA facility will be expanded to produce
investigational and commercial material for our pipeline products. We have
recently expanded our facility design to include additional production,
administrative and training space and expect the 150,000 square foot facility to
be completed and validated in 2022. We intend to use ASTRA and ANCORIS for
clinical and commercial production of our product candidates.
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We have a rapidly expanding portfolio of issued patents in boththe United States and foreign jurisdictions and believe that the granting of these patents, which are entirely owned by the Company, protects our core platform and products based thereupon, affording us the freedom to use our patented platform for the development of novel therapeutics for multiple indications. We continue to advance our IP portfolio actively through the filing of new patent applications, divisionals, and continuations relating to our technologies as we deem appropriate. In addition to our patents, we rely on trade secrets and know-how to develop and maintain our competitive position. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, and obtain and maintain ownership of certain technologies, in part, through confidentiality agreements and intellectual property assignment agreements with our employees, consultants and commercial partners. We also seek to preserve the integrity and confidentiality of our data, trade secrets, and know-how, including by implementing measures intended to maintain the physical and electronic security of our research and manufacturing facilities, as well as our information technology systems. Our desire is to bring transformative medicines, using our platform, to patients suffering from debilitating diseases and conditions. A brief overview of our pipeline follows below. Pipeline
The following table summarizes information regarding our product candidates in various stages of clinical and preclinical development presently:
[[Image Removed]]
Product Indication Discovery Predlinical Phase I/II Phase Marketed B-VEC†¤•?‡§
Dystrophic EB KB105†¤•‡ TGM1-deficient ARCI KB301 Aesthetic Skin Conditions
KB104 Netherton Syndrome KB407 Cystic Fibrosis KB5XX Chronic Skin Diseases †:
FDA Orphan Drug Designation ¤: FDA Rare Pediatric Disease Designation •:
Fast-track Designation ?: FDA RMAT designation ‡: EMA Orphan Drug Designation §:
EMA PRIME Designation Today 12months
Beremagene Geperpavec ("B-VEC") for the treatment of Dystrophic Epidermolysis Bullosa
Our lead product candidate, B-VEC, is a topical gene therapy to treat DEB, a rare and severe monogenic skin disease for which there is currently no approved treatment. DEB affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1, which is responsible for the formation of the protein type VII collagen, or COL7, that forms anchoring fibrils that bind the dermis, or inner layer of the skin, to the epidermis, or outer layer of the skin. In DEB patients, the genetic defect in COL7A1 results in loss or malfunctioning of these anchoring fibrils, leading to extremely fragile skin that blisters and tears from minor friction or trauma. Thosewho are born with DEB are sometimes called "butterfly children," because their skin is likened to be as fragile as the wings of a butterfly. DEB patients may suffer from open wounds, skin infections, fusion of fingers and toes and gastrointestinal tract problems throughout their lifetime, and may eventually develop squamous cell carcinoma, a potentially fatal condition. 21
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InJuly 2020 , we announced initiation of our Phase 3 pivotal study known as GEM-3. The trial is a randomized, double-blind, intra patient placebo-controlled multicenter study designed to evaluate the efficacy and safety of B-VEC for patients suffering from both recessive and dominant forms of DEB. The trial aims to enroll approximately thirty (30) participants with DEB, aged 6 months or older at time of consent. Investigator identified wound pairs, up to three in each patient, are deemed the "primary" wounds. These primary wounds will be treated once weekly for six months with either B-VEC or placebo, until wound closure. If a wound were to re-open at any point during the study, weekly dosage will resume until closure. The dose administered to each wound is dependent on the size of the wound and ranges from 4x108 to 1.2x109 PFU per wound. A maximum vector dose per patient per week has been defined on the basis of preclinical and clinical safety data. In the event that the maximum dose per patient has not been reached based on dosing of the primary wounds, the study investigators and patients will have the opportunity to select additional "secondary" wounds across which the remaining weekly dose may be applied. The Primary Outcome Measure is complete wound healing determined by the Investigator, as compared to baseline in B-VEC treated wounds versus placebo treated wounds at Weeks 20, 22 and 24. Secondary endpoints to be evaluated in the study include complete wound healing at Weeks 8, 10 and 12; the mean change in pain severity (using either a VAS or FLACC-R Scale) per primary wound site associated with wound dressing; the proportion of primary wound sites with ?75% healing assessed via Canfield photography. Additional exploratory measures include relative time to wound closure from baseline, duration of wound closure, mean reduction in wound surface area in B-VEC treated versus placebo treated wounds, mean change in Quality of Life in addition toSkindex score as compared to baseline at Week 24. Throughout the study, participants will complete questionnaires, have images captured of their study wounds, undergo physical exams, have vital signs and safety labs monitored. Additional details on the study protocol are available at www.clinicaltrials.gov under NCT identifier NCT04491604. Nothing included on this website shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q. We anticipate having top-line data from this trial, as well as filing of a BLA with the FDA in 2021. We are aligned with theEuropean Medicines Agency ("EMA") on a pivotal trial design and we believe that data from GEM-3 will form the basis of a Marketing Authorisation Application ("MAA") filing, shortly after the BLA. In May of 2020, complete Phase 1/2 data from the GEM-1 and GEM-2 studies was presented at theSociety of Investigational Dermatology ("SID") meeting. The Phase 1 portion of the trial commenced inMay 2018 atStanford University , and we announced positive interim results from this clinical study on two patients inOctober 2018 . The Phase 2 portion of the trial commenced inDecember 2018 atStanford University , and we announced positive interim results from this clinical study inJune 2019 . The FDA and the EMA have each granted B-VEC orphan drug designation for the treatment of DEB, and the FDA has granted B-VEC fast track designation and rare pediatric designation for the treatment of DEB. In addition, in 2019, the FDA granted Regenerative Medicine Advanced Therapy ("RMAT") to B-VEC for the treatment of DEB and the EMA granted PRIority MEdicines, or PRIME, eligibility for B-VEC to treat DEB. The PRIME designation is awarded by the EMA to promising medicines that target an unmet medical need.
KB105 for the treatment of Autosomal Recessive Congenital Ichthyosis
Our second pipeline candidate, KB105, delivers functional human transglutaminase
1 ("TGM1"), genes using our gene therapy platform to patients with
TGM1-deficient ARCI. ARCI is a life-long, severe monogenic skin disease. While a
number of genetic mutations have been associated with the development of ARCI,
the most common cause of ARCI is an inactivating mutation in the TGM1 gene
encoding the enzyme transglutaminase-1, a protein that is essential for the
proper formation of the skin barrier. Mutations in the TGM1 gene, and the
subsequent disruption to the epidermal barrier, leads to pronounced dehydration
and trans-epidermal exposure to unwanted toxins and surface microorganisms,
greatly increasing the risk of infection and sepsis. Transglutaminase-1
deficiency is associated with increased mortality in the neonatal period and has
a dramatic impact on quality of life. There are currently no treatments
targeting molecular correction of this disease.
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InAugust 2020 , we initiated the second phase of our Phase 1/2 clinical trial of KB105 to treat ARCI. In this second phase, we plan to enroll up to approximately 4 additional patients, including pediatric patients. Four rectangular 100cm2 (4-inch x 4-inch) areas of skin will be selected as Target Areas on each subject. Two sites will receive an initial and a repeat dose of 4.0 x 109 PFU/Treated Area (TA) while the other two sites will receive 1.0 x 1010 PFU/ TA. The primary objective of the study is to assess the improvement in localized severity of disease through an Investigator's Global Assessment ("IGA") of disease severity in the treatment area and TGM1 expression and activity and to evaluate safety through the incidence of adverse events associated with KB105 post administration. Additional details on the study protocol are available at www.clinicaltrials.gov under NCT identifier NCT04047732. Nothing on this website shall be deemed incorporated into this Quarterly Report on Form 10-Q. InMay 2020 , clinical data from the first phase of the Phase 1/2 study which enrolled adult patients were presented at the SID meeting. Additional details on the interim results are available at http://ir.krystalbio.com/index.php/news-releases/news-release-details/krystal-biotech-announces-positive-interim-results-phase-12. The study was initiated inSeptember 2019 . Nothing on this website shall be deemed incorporated into this Quarterly Report on Form 10-Q.
KB301 for the treatment of aesthetic skin conditions
The skin is largely composed of collagen-rich connective tissue, with dermal collagen, composed primarily of types 1 and 3 collagen fibrils, representing >90% (dry weight) of human skin. The characteristics of skin aging are largely due to aberrant collagen homeostasis, including reduced collagen biosynthesis, increased collagen fibril fragmentation, and progressive loss of dermal collagen culminating in a net collagen deficiency, resulting from both intrinsic (e.g., passage of time, genetics) and extrinsic (e.g., chronic light exposure, pollution) pressures. The goal of skin biorejuvenation is, in part, to enhance the synthesis of human dermal collagens (i.e., neocollagenesis), thereby correcting the molecular defect underlying the aged phenotype. We believe that our approach of directed expression of full-length human type 3 collagen via intradermal application of KB301 provides a unique and straightforward approach to restoring collagen homeostasis, and by extension, reconstructing an optimal physiologic environment in the skin to treat wrinkles and other superficial skin defects.
We anticipate commencing a Phase 1 clinical trial for the treatment of wrinkles and acne scars in 2H 2020.
KB104 for the treatment of Netherton Syndrome
KB104 is designed to deliver functional Serine Protease Inhibitor Kazal-type 5
("SPINK5"), genes using our gene therapy platform to patients suffering from
Netherton Syndrome, which is a debilitating monogenic autosomal recessive skin
disorder that causes defective keratinization, severe skin barrier defects, and
recurrent infections. Severe Netherton Syndrome symptoms in infants are
associated with failure to thrive, hypernatremic dehydration secondary to excess
fluid loss, delayed growth, short stature, and recurrent infections. Clinically,
Netherton Syndrome is characterized by congenital ichthyosiform erythroderma,
hair shaft defects, recurrent infections, and a defective skin barrier. A
predisposition to allergies, asthma, and eczema is also characteristic of
Netherton Syndrome. Ultimately, those afflicted by Netherton Syndrome often
experience chronic skin inflammation, severe dehydration, and stunted growth.
KB407 for the treatment of Cystic Fibrosis
We are developing KB407 as a non-invasive inhaled gene therapy product for the treatment of CF and are currently in the preclinical phase with plans to file an IND for KB407 in 2021. CF, the most common inherited genetic disorder inthe United States , is caused by mutations in the gene encoding CFTR. Lack of functional CFTR in secretory airway epithelia results in defective Cl-, bicarbonate, and thiocyanate secretion, coupled with enhanced Na+ absorption and mucus production, leading to dehydration and acidification of the airway surface liquid. CF is characterized by recurrent chest infections, increased airway secretions, and eventually, respiratory failure. While CF comprises a multiorgan pathology affecting the upper and lower airways, gastrointestinal and reproductive tracts, and the endocrine system, the primary cause of morbidity and mortality in CF is due to progressive lung destruction. According to theUS Cystic Fibrosis Foundation ("CFF"), the median age at death for patients with CF inthe United States was 30.8 years in 2018. Currently approved CFTR modulating therapies are limited to patients with specific genetic mutations and there is a significant unmet medical need for patients with CFwho have genetic mutations non-amenable to currently approved CFTR small molecule "modulators". According to the CFF, approximately 30,000 patients inthe United States and more than 70,000 patients worldwide are living with CF, and approximately 850 new cases of CF were diagnosed in 2018. 23
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Other InDecember 2019 , COVID-19 was first reported inWuhan, China and inMarch 2020 , a global pandemic was declared by theWorld Health Organization . In an effort to slow the spread of the virus, certain governments, including theCommonwealth of Pennsylvania where the Company's primary offices, laboratory and manufacturing spaces are located, enacted stay-at-home orders, and sweeping restrictions to travel were initiated by corporations and governments. Although these restrictions have been lifted in some areas, it is not known at this time whether they will be reestablished or the extent to which the Company will be impacted. The degree of COVID-19's effect on the Company's clinical, operational and financial performance will depend on future developments, including additional protective measures that may be implemented by governmental authorities or the Company to protect its employees, or by investigators, caregivers or patients to minimize exposure, all of which are uncertain and difficult to predict. While to date the impact of COVID-19 on our business and clinical trials has been minimal, we will continue to assess the potential impact of the COVID-19 pandemic on our business and operations, including our supply chain and preclinical and clinical trial activities. OnJuly 21, 2020 , the Company announced the appointment of Whitney Ijem to the newly created position of Senior Vice President, Strategy and Business Development. Ms. Ijem joins Krystal fromGuggenheim Securities , where she served as Managing Director and Senior Biotechnology Analyst covering genetic medicine and rare disease companies. AtJune 30, 2020 , our cash, cash equivalents and short-term investments balance was approximately$297.2 million . Since operations began, we have incurred operating losses. Our net losses were$6.8 million and$12.2 million for the three and six months endedJune 30, 2020 and$5.3 million and$9.5 million for the three and six months endedJune 31, 2019 , respectively. AtJune 30, 2020 , we had an accumulated deficit of$51.2 million . We will need to generate significant revenue to achieve profitability, and we may never generate revenue or enough revenue to achieve profitability. We expect to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect our costs will continue to increase significantly as a result of our current and planned business activities, such as:
• conducting our Phase 3 clinical trial for B-VEC and our continued Phase 1/2 clinical trial for KB105;
• continued research and development-related activities for the advancement of our pipeline product candidates into clinical development, such as KB104, KB301 and KB407;
• construction of our cGMP manufacturing facility, ASTRA, and related completion and validation costs;
• manufacturing of our clinical trial materials;
• pursuing regulatory approval for our product candidates;
• adding personnel to support our administrative, product development and commercialization efforts; and
• activities leading up to the commercial launch of B-VEC in multiple markets.
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Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our planned preclinical studies for our pipeline product candidates, or our operations. Our funds may not be sufficient to enable us to seek marketing approval for or to commercially launch B-VEC, KB105 or any other product candidate. Accordingly, to obtain marketing approval for and to commercialize this or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, if at all. Our failure to raise capital when needed could have a negative effect on our financial condition and our ability to pursue our planned business strategy. Financial Overview Revenue We currently have no approved products for commercial marketing or sale and have not generated any revenue from the sale of products or other sources to date. In the future, we may generate revenue from product sales, royalties on product sales, or license fees, milestones, or other upfront payments if we enter into any collaborations or license agreements. We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.
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, 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 expand our product portfolio. In the near term, we expect that our research and development expenses will increase as we begin our pivotal Phase 3 clinical trial for B-VEC, conduct our ongoing Phase 1/2 clinical trial for KB105, and incur preclinical expenses for our other product candidates. Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of our clinical trials, and, as a result, the actual costs to complete our clinical trials may exceed the expected costs.
General and Administrative Expenses
General and administrative expenses consist principally of professional fees associated with corporate and intellectual property-related legal expenses, consulting and accounting services, facility-related costs and expenses associated with obtaining and maintaining patents. Other general and administrative costs include stock-based compensation and travel expenses.
We anticipate that our general and administrative expenses will increase in the
future to support the continued research and development of our product
candidates and to operate as a public company. 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, if and when we believe a regulatory approval of
our first product candidate appears likely, we anticipate that we will increase
our salary and personnel costs and other expenses as a result of our preparation
for commercial operations.
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Interest Income
Interest income 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 three and six months endedJune 30, 2020 to our critical accounting policies, significant judgments and estimates as disclosed in our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Results of Operations
Three Months Ended
Three Months Ended June 30,
2020 2019 Change
(In thousands) (unaudited)
Expenses
Research and development $ 3,639 $ 4,216 $ (577 )
General and administrative 3,315 1,674 1,641
Total operating expenses 6,954 5,890 1,064
Loss from operations (6,954 ) (5,890 ) (1,064 )
Other Income
Interest and other income, net 121 542 (421 )
Net loss $ (6,833 ) $ (5,348 ) $ (1,485 ) Research and Development Expenses
Research and development expenses decreased$577 thousand in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Lower research and development expenses were due largely to a reduction in outsourcing research and development activities of$981 thousand and lab supplies of$118 thousand offset by increases in payroll related expenses of$367 thousand which is primarily driven by an increase in headcount to support overall growth and includes a$56 thousand increase in stock-based compensation, and other research and development expenses of$155 thousand .
General and Administrative Expenses
General and administrative expenses increased$1.6 million in the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . Higher general and administrative spending was due largely to increases in payroll related expenses of$955 thousand which is primarily driven by an increase in headcount to support overall growth and includes a$426 thousand increase in stock-based compensation, market research related expenses of$490 thousand and other administrative expenses of$196 thousand .
Interest and Other Income
Interest and other income for the three months ended
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Six Months Ended
Six Months Ended June 30,
2020 2019 Change
(In thousands) (unaudited)
Expenses
Research and development $ 7,164 $ 7,383 $ (219 )
General and administrative 5,735 3,202 2,533
Total operating expenses 12,899 10,585 2,314
Loss from operations (12,899 ) (10,585 ) (2,314 )
Other Income
Interest and other income, net 725 1,126 (401 )
Net loss $ (12,174 ) $ (9,459 ) $ (2,715 ) Research and Development Expenses
Research and development expenses decreased$219 thousand in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Lower research and development expenses were due largely to a reduction in the outsourcing research and development activities of approximately$1.0 million and lab supplies of$393 thousand offset by increases in payroll related expenses of$840 thousand which is primarily driven by an increase in headcount to support overall growth and includes a$128 thousand increase in stock-based compensation, and other research and development expenses of$367 thousand .
General and Administrative Expenses
General and administrative expenses increased$2.5 million in the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . Higher general and administrative spending was due largely to increases in payroll related expenses of$1.5 million which is primarily driven by an increase in headcount to support overall growth and includes a$580 thousand increase in stock-based compensation, market research related expenses of$490 thousand , and other administrative expenses of$548 thousand .
Interest and Other Income
Interest and other income for the six months ended
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Liquidity and Capital Resources
Overview
As ofJune 30, 2020 , the Company had an accumulated deficit of$51.2 million . With the net proceeds raised from its public and private securities offerings, including the public offering completed inMay 2020 , the Company believes that its cash, cash equivalents and short-term investments of approximately$297.2 million as ofJune 30, 2020 will be sufficient to allow the Company to fund its operations for at least 12 months from the filing date of this Form 10-Q. As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company's cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through the sale of equity and debt financings and may also seek additional capital through arrangements with strategic partners. There can be no assurances that additional funding will be available on terms acceptable to the Company, if at all. In addition, the COVID-19 pandemic may negatively impact our operations, including possible effects on its financial condition, ability to access the capital markets on attractive terms or at all, liquidity, operations, suppliers, industry, and workforce. The Company will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2020 and beyond.
Operating Capital Requirements
We expect our primary use of capital to continue to be for compensation and related expenses, manufacturing costs for preclinical and clinical materials, third party clinical trial research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs. We believe that our available funds will be sufficient to enable us to complete our pivotal Phase 3 clinical trials for B-VEC and to continue Phase 1/2 clinical trials for KB105 as well as to continue construction and validation related activities associated with our cGMP manufacturing facility, ASTRA. 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 and commercialization of pharmaceutical products, 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 timeline and cost of our pivotal Phase 3 clinical trial for B-VEC;
• the progress, timing, results and costs of our ongoing Phase 1/2 clinical
trial for KB105;
• the progress, timing and costs of manufacturing of B-VEC for our pivotal
Phase 3 clinical trials;
• the continued development and the filing on an IND application for future
product candidates;
• the initiation, scope, progress, timing, costs and results of drugdiscovery, laboratory testing, manufacturing, preclinical studies and
clinical trials for any other product candidates that we may pursue in the
future, if any;
• the costs of maintaining our own commercial-scale cGMP manufacturing
facility;
• the outcome, timing and costs of seeking regulatory approvals;
• the costs associated with the manufacturing process development and
evaluation of third-party manufacturers;
• the costs of future activities, including product sales, medical affairs,
marketing, manufacturing and distribution, in the event we receive
marketing approval for B-VEC, KB105 or any other product candidates we may
develop;
• the extent to which the costs of our product candidates, if approved, will
be paid by health maintenance, managed care, pharmacy benefit and similar
healthcare management organizations, or will be reimbursed by government
authorities, private health coverage insurers and other third-party payors;
• the costs of commercialization activities for B-VEC, KB105 and otherproduct candidates if we receive marketing approval for B-VEC, KB105 or any
other product candidates we may develop, including the costs and timing of
establishing product sales, medical affairs, marketing, distribution and
manufacturing capabilities;
• subject to receipt of marketing approval, if any, revenue received from
commercial sale of B-VEC, KB105 or our other product candidates;
• the terms and timing of any future collaborations, licensing, consulting or
other arrangements that we may establish;
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• 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 expect that we may need to obtain substantial additional funding in order to receive regulatory approval and to commercialize B-VEC or any other product candidates, including KB105. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely affect our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of B-VEC, KB105 or our other product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to B-VEC or KB105 or our other product candidates that we otherwise would seek to develop or commercialize ourselves.
Sources and Uses of Cash
The following table summarizes our sources and uses of cash (in thousands):
Six months Ended
June 30,
2020 2019
(unaudited)
Net cash used in operating activities
Net cash used in investing activities (2,255 ) (3,718 )
Net cash provided by financing activities 117,712 94,059
Net increase in cash $ 104,164 $ 82,917
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2020 was
$11.3 million and consisted primarily of a net loss of $12.2 million adjusted
for non-cash items of depreciation and amortization and stock-based compensation
expense of $2.2 million , and cash used by increases in net operating assets of
approximately $1.3 million .
Net cash used in operating activities for the six months ended June 30, 2019 was
$7.4 million and consisted primarily of a net loss of $9.5 million adjusted for
non-cash items of depreciation and amortization and stock-based compensation
expense of approximately $1.2 million , and cash provided by decreases in net
operating liabilities of $891 thousand .
Investing Activities
Net cash used in investing activities for the six months endedJune 30, 2020 was$2.3 million and consisted primarily of purchases of$3.2 million of short-term available-for-sale investment securities, and expenditures of$3.5 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of$4.4 million received from the maturities of short-term investments. Net cash used in investing activities for the six months endedJune 30, 2019 was$3.7 million and consisted primarily of purchases of$4.7 million of short-term available-for-sale investment securities, and expenditures of$2.9 million on the build-out of our new cGMP facilities and purchases of computer and laboratory equipment, partially offset by proceeds of$3.9 million received from the maturities of short-term investments. 29
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Financing Activities
Net cash provided by financing activities for the six months endedJune 30, 2020 was$117.7 million and was primarily from proceeds from our public offering inMay 2020 of 2,275,000 shares of our common stock to the public at$55.00 per share. Net proceeds to the Company from the offering were$117.2 million after deducting underwriting discounts and commissions of approximately$7.5 million and other offering expenses of approximately$463 thousand , of which$132 thousand was unpaid as ofJune 30, 2020 . Net cash provided by financing activities for the six months endedJune 30, 2019 was$94.1 million and was primarily from proceeds from our public offering inJune 2019 of 2,500,000 shares of our common stock at a price to the public of$40.00 per share. Net proceeds to the Company from the offering were$93.8 million after deducting underwriting discounts and commissions of approximately$6.0 million and other offering expenses of approximately$190 thousand , of which all was unpaid as ofJune 30, 2019 .
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in the rules and
regulations of the
Contractual Obligations There have been no material changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 other than as described in Note 6 "Commitments and Contingencies" of our condensed consolidated financial statements on this Form 10-Q.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business
Startups Act of 2012 ("the JOBS Act"). Under the JOBS Act, emerging growth
companies can delay adopting new or revised accounting standards issued
subsequent to the enactment of the JOBS Act until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves
of this exemption from new or revised accounting standards and, therefore, will
be subject to the same new or revised accounting standards as other public
companies that are not emerging growth companies.
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