KRYS - NASDAQ

Thank you for standing by, and welcome to the Krystal Biotech Q4 2024 Earnings Call. At this time, all participants are on a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. As a reminder, today's conference is being recorded. I would now like to hand the conference over to your host, Stephane Paquette, Vice President of Corporate Development. You may begin.

Good morning, and thank you all for joining today's call. Earlier today, we released our financial results for the fourth quarter and full year of 2024. The press release is available on our website at www.krystalbio.com. We also filed our earnings 8-K and 10-K with the SEC earlier today. Joining me today will be Krish Krishnan, Chairman and Chief Executive Officer; Suma Krishnan, President of Research and Development; Jennifer McDonough, Senior Vice President of Patient Access, Analytics and Operations; Christine Wilson, Senior Vice President and Head of U.S. Sales and Marketing and Kate Romano, Chief Accounting Officer. This conference call will, and our responses to questions may, contain forward-looking statements. You are cautioned not to rely on these forward-looking statements, which are based on current expectations using the information available as of the date of this call and are subject to certain risks and uncertainties that may cause the company's actual results to differ materially from those projected. A description of these risks, uncertainties and other factors can be found in our SEC filings. With that, I will turn the call over to Krish.

Stephane, thank you. Good morning, and welcome to the call. 2024 was a strong year for Krystal. VYJUVEK U.S. Launch continue to progress well and tracks in the top tier of rare disease launches. The strength of the launch speaks to the robust efficacy and safety profile of VYJUVEK and our relentless focus on patient and physician experience. In addition, in 2024, we demonstrated that we can safely and repeatedly deliver genes to the lung with a nebulizer across our cystic fibrosis, alpha-1 antitrypsin and NSCLC programs, clearly validating the lung as a second target tissue for our platform. There were also strong early signs of efficacy in our readouts, and we fully expect the data to mature later this year. Looking ahead at 2025, we have three primary things to accomplish: first, a successful VYJUVEK launch in EU and Japan; second, to translate the early signs of efficacy into strong results across our CF and A1AT programs and the third is to prepare for the anticipated launch of B-VEC to treat lesions in the eye of deaf patients. If we do this right, we believe the company will be in a much stronger place with respect to revenue, net income and market cap going into 2026. For the year, net income per share was $3.12 per share, up sequentially from $0.40 per share in 2023. This is our sixth straight quarter of positive EPS and fourth straight quarter of sequential earnings growth. In addition to operational success, we have also put ourselves in a strong financial position for future growth. In aesthetics, Jeune Aesthetics reported a strong KB301 Phase 1 data for the treatment of decollete and we plan to start a Phase 2 study later this year. We're in the process of building out a seasoned management team at Jeune Aesthetics with more to come on this later in 2025. $341 million in net revenue within 18 months of launch and sequential revenue growth for six straight quarters is a tremendous achievement and a testament to the tireless contributions by our commercial and patient support teams on behalf of patients with DEB. Net VYJUVEK revenue for the Q came in at $91.1 million bringing revenue for 2024 to $290.5 million. Gross margins in TDN were consistent with prior Qs. I'll now turn it over to Jen and Christine to share more details on the U.S. Launch.

Thank you, Krish. Looking back on 2024 and now the early days of 2025, I'm incredibly proud of what our team has been able to accomplish. With steady progress over the entire year and a strong access landscape carrying over from 2024 into 2025, a growing number of dead patients have or will soon benefit from fundamentally corrective VYJUVEK therapy. I'm also happy to share a major milestone achievement for our United States team as we recently crossed 500 reimbursement approvals nationwide. As of February, the number of patients with reimbursement approvals exceeds 510. This is in spite of losing a few weeks to holidays in the fourth quarter. With a good pickup of the pace and approvals to start 2025 as well as strong underlying demand trends, we remain confident in our ability to hit our ambitious prelaunch penetration targets. Reimbursement approval splits were again largely in line with recent quarters and roughly evenly split between commercial and government plans. Approvals continue to come across the entire deaf population, including patients of all ages and with either dominant or recessive forms of the disease. With effectively full nationwide commercial and Medicaid coverage, the access landscape for VYJUVEK remains strong. Reauthorizations are getting processed smoothly. All have either been approved or are in process. In the community, we are still seeing a lag from prescription to approval dictated primarily by the availability of genetic test results and prescriber familiarity with access pathways. As always, our Krystal Connect team is working closely with home health care providers to meet patient needs and preferences. It is this infrastructure and patient-centric approach that has allowed us to navigate scheduling constraints and holidays to ensure patients can get on and stay on treatment. Patient preference for at home administration is, again, effectively unchanged with 97% of the weekly treatments occurring in the home setting. Patient compliance to weekly treatments while on drug was 85% as of the end of the fourth quarter. In the third quarter, it was at 87%. As we progress our U.S. launch, we are thrilled to see that patients are achieving durable wound closure and getting to live fuller, more active lives. This, of course, is the whole point of VYJUVEK. As patients enjoy their first pauses in therapy and then settle into a more regular maintenance regimen, we do expect to see compliance to continue to trend towards the rates that we guided at launch. We are learning from real-world experience that the treatment journey for each patient is unique and dynamic. A 21-year-old initiating therapy after decades of blistering and wounding may have a very different journey than a very active toddler. The time to wound closure and durability are dependent on a myriad of inputs, including nutritional status and iron levels, as well as the patient's age, their mobility and activity levels, and of course, the location and the age of the specific wound treated. Because each patient and each wound area is unique, the length and frequency of treatment pauses are personalized to the patient. Critically, patients and their prescribers understand the importance of treatment persistence, and patients that have benefited from a pause due to full wound closure are now transitioning into an ongoing wound maintenance routine with VYJUVEK helped by our Krystal Connect team. As always, our team will be with them every step of the way to ensure they have a steady access and can continue to enjoy the benefits of regular VYJUVEK treatment. I will now hand it off to Christine to discuss recent sales and marketing activities, which are keeping us on our top-tier launch trajectory. Christine?

Thank you, Jen. As we enter 2025, it is my pleasure to report that tactics that we developed in 2024 continue to pay dividends, driving significant growth in reimbursement approvals and strong patient demand across the country. Prescribing trends, claims analytics and patient engagement all point to strong and sustained underlying demand. Education and patient activation remain core focus areas for our field team as we look to further penetrate into the identified patient pool. We partnered with multiple advocacy groups in EB in the fourth quarter to host live webinars led by prescribing physicians and patients who share their experience with VYJUVEK and positive progress that they've experienced since starting on therapy in 2023. In addition, and in honor of EB Awareness Week, we hosted a national broadcast led by Dr. John Browning. The virtual platform allowed us to reach healthcare professionals across The United States and showcase our clinical trial data, longer-term safety and efficacy data and case studies of patients on VYJUVEK. This event also included a patient ambassador on VYJUVEK sharing their firsthand experience. This comprehensive showcase of trial data and real-world insights emphasized the clear and durable benefits of therapy and critically demonstrated the significant impact it can have for patients. We also equipped our sales team with new promotional material that emphasizes the long-term safety and efficacy of VYJUVEK. These materials not only reinforce the durable wound healing benefits that can be achieved only with a corrected therapy like VYJUVEK, they also underscore that all deb patients can benefit from therapy with actual patient images demonstrating healing in both the R-DEB and D-DEB subtypes across both the adult and pediatric spectrum. Most importantly, these efforts have yielded tangible results. Not only did we achieve significant reimbursement approval growth over the past few months, we also continue to expand our prescriber base. Over 65% of prescribers in the fourth quarter were new writers. With each new prescriber, awareness of deb and VYJUVEK grows, extending our reach into new communities. As the number of patients on therapy grows, I would also like to highlight that we have personalized and ongoing communication with patients and their caregivers to ensure they are supported throughout their journey. These communications are via phone call, email or text, all based on the preferences of patients and their families. These touch points are another part of our commitment to patients, allowing us to move proactively to meet their needs with practical resources and EB community connections, while also gaining valuable insights to support new patient starts. With strong underlying demand, growing awareness and a broadening prescriber base, we are excited to continue growing the number of patients on VYJUVEK across the U.S. Now I will hand it back to Krish to share an overview of our global expansion plans for 2025.

Thanks, Christine. We expect a positive CHMP opinion on our application later this month. And based on this timeline, we expect our first EU launch in Germany around midyear, along with commencing an access per course AP2 program in France. The opportunity that exists in Europe is significant with many already identified deaf patients in urgent need of fundamentally corrective therapy. In Germany and France alone, there are over 1,000 identified deaf patients. As in the U.S, our initial focus will be to penetrate the identified patient pool. We're also on track for the regulatory decision in Japan later this year, enabling launch into another market with hundreds of already identified deaf patients. In support of this filing and our launch, we have established our head office team in Tokyo and have started hiring our field force. It has always been our goal to treat DEB globally and comprehensively. And thanks to the continued efforts of our development team, we're also working steadily towards treating lesions in the eye of DEB patients. Suma will now share more detail on both our ophthalmic B-VEC program and our broader pipeline.

Thank you, Krish. As Krish just noted, we are committed to treating DEB comprehensively and are very excited to be progressing our second product, KB803, towards a potential approval to address the ocular complications associated with DEB. In support of this goal, we initiated a natural history study last year to prospectively collect data on the frequency of corneal abrasions in DEB patients. This study is providing valuable information on the burden of disease and is helping us refine endpoint selection for our Phase 3 study. The natural history study may also serve as a run in to our registrational trial adding more baseline data to contextualize our Phase 3 results. The high rate of enrollment in the study with approximately 50 patients enrolled underscores the unmet need and demand for a corrective therapy for the eye and given the run-in options should provide as an opportunity to rapidly enroll our Phase 3 once initiated. We are finalizing the study design and statistical analysis plan with the agency and remain on track to initiate our registrational Phase 3, which we refer to as our IOLITE study in the first half of the year. Assuming rapid enrollment, given the run-in option, we continue to expect top-line data before year-end. We look forward to sharing updates on IOLITE and our natural history study in the coming months. We also announced a series of updates on our inhaled programs last quarter that, in our view, validate the lung as a second target tissue for our HSV-1 based gene delivery platform. Included in these updates was the first look at safety and gene delivery data for our KB408 program, which collectively demonstrated that we could safely deliver functional genetic cargo to the lung. KB408 is a redoseable inhaled therapy for the treatment of AATD, a serious disease linked to the absence of functional AAT in the lung. KB408 is designed to deliver two copies of the SERPINA1 gene, which encodes for normal human AAT protein to enable local AAT production in the lung itself. KB408 is currently being evaluated in our first-in-human Phase I SERPENTINE-1, an open-label single-dose escalation study in adult patients with AATD. SERPENTINE-1 is designed to include up to three dose escalation cohorts evaluating single administration of 10A9, 10A10 and 10A11 PFU of KB408 via inhalation. In December of last year, we announced an interim clinical data update including safety data for seven patients enrolled in the first two dose escalation cohort of SERPENTINE-1 as well as molecular data from two patients in the second cohort that had consented to bronchoscopy. KB408 was found to be well tolerated at both tested dose levels with only mild to moderate and transient adverse events observed. No serious adverse events or dose-limiting toxicities were reported. In addition, clear evidence of successful gene delivery was observed in both patients that underwent bronchoscopies with the proportion of conducting airway epithelial cells positive for AAT, increasing from 0% to 39% in one patient and from 3% to 35% in the other. Secretion and functionality of encoated AAT was also demonstrated in the patient with available samples, with AAT levels in epithelial lining fluid reaching 729 nanomolar and the proportion of 3 neutrophil elastase dropping from 97.2% to 40.2% after a single KB408 dose. Following this data update, we simultaneously expanded the second SERPENTINE-1 cohort, and opened enrollment in the third for more comprehensive molecular assessment at both dose levels. We are working closely with the Alpha-1 Foundation and The Therapeutic Development Network on the SERPENTINE-1 and expect to announce complete study results later this year. Our second rare respiratory disease program, KB407, is also progressing well. KB407 is our redoseable inhaled therapy designed to deliver two copies of full-length CFTR transgene for the mutation-agnostic treatment of cystic fibrosis. As summarized on this slide, we have built out a robust preclinical data package that demonstrates that KB407 efficiently transduces target airway epithelial cells, leading to the expression of full-length properly localized glycos-related and functional CFTR. On the back of this data, a growing clinical data set, I'm pleased to report that we recently received full sanctioning of KB407 Phase I protocol, providing further validation of our program and opening up access to network trial sites for future clinical development efforts. We also recently announced an initial safety update on cystic fibrosis patients treated with KB407 in the first two dose escalation cohorts of CORAL-1, our ongoing first-in-human Phase I study. Both single and repeat inhaled administration of KB407 was well tolerated with only mild to moderate and transient adverse events. Again, there were no reports of serious adverse events or dose-limiting toxicities, reinforcing the attractive safety profile of our vector when delivered via inhalation. With the first two cohorts successfully cleared and KB407 well tolerated, we have progressed to our third cohort and expect to report top-line results, including molecular data around the middle of this year. These are just a few of the recent highlights from our clinical-stage pipeline. We also recently reported early evidence of monotherapy activity with inhaled KB707 in heavily pretreated patients with advanced lung cancer; and earlier in the year, shared had positive safety and efficacy results of our aesthetic candidate, KB301, which we are progressing into Phase 2. As we look forward, 2025 is shaping up to be another busy year. Some of the key development milestones for our team are laid out here. In addition to the initiation and completion of our registrational study evaluating KB803 for ocular complications of DEB, we are also expecting to provide molecular data updates for a rare respiratory disease program KB408 and KB407 as well as first-in-human data for a second aesthetic product candidate, KB304, which encodes, both type three collagen and elastic. Our oncology programs will continue to progress with potential of interim updates later in the year. As our recent data announcement have demonstrated, the potential HSV-1 based gene delivery goes well beyond the skin. We are looking forward to making rapid progress of our pipeline in 2025 and further validating the breadth of the opportunities in front of us targeting the skin, lung and eye. With that, I would like to turn the call to Kate.

Thank you, Suma. In the fourth quarter, Krystal saw continued VYJUVEK revenue growth with net product revenue of $91.1 million, representing an increase of approximately $49 million over the fourth quarter of 2023, which was the first full quarter that Krystal had revenue after our approval in May of 2023. Cost of goods sold for the quarter was $4.9 million resulting in a gross margin of 95%. In the fourth quarter of 2023, cost of goods sold was $2.9 million, resulting in a 93% gross margin. Research and development expenses for the quarter were $13.5 million inclusive of stock-based compensation of $2.3 million compared to $11.4 million for the prior year's fourth quarter inclusive of $2.4 million of stock-based compensation. Higher research and development expenses in the fourth quarter of 2024 were mainly due to increased clinical trial-related costs, increased R&D manufacturing costs for our pipeline candidates and increased license and regulatory fees. Selling, general and administrative expenses for the quarter were $31.3 million inclusive of stock-based compensation of $11 million compared to $24.8 million for the prior year's fourth quarter, which was inclusive of stock-based compensation of $7.5 million. Higher selling, general and administrative expenses in the fourth quarter of 2024 were primarily the result of increased personnel-related costs, increased professional service fees and increased VYJUVEK sales and marketing costs as compared to the prior year's fourth quarter. Net income for the quarter was $45.5 million, which represented $1.58 per basic and $1.52 per diluted share. I'd also like to provide some perspective on our forecast for operating expenses in 2025. We expect to incur between $150 million and $175 million in combined non-GAAP R&D and SG&A costs this year. This projection excludes stock-based compensation. This expected increase in operating expenses compared to 2024 is driven primarily by increased SG&A costs for our planned commercial launches outside of the United States and increased R&D costs from our continued clinical and regulatory costs associated with our expanded pipeline programs. In closing, we ended the fourth quarter with $344.9 million in cash on hand and $749.6 million in total cash plus short-term and long-term investments, noting quarterly growth in our overall cash and investments position with an increase over our third quarter of 2024 cash and investments balance by about $55 million. And now I will turn the call back over to Krish.

Thanks, Kate. As you heard from Christine and Jen, patients are achieving profound benefits with VYJUVEK and getting to live fuller, more active lives. We're steadily expanding our prescriber base and further penetration into the community setting. With one full calendar year of launch in the U.S. behind us and increasing presence in key European markets and Japan, our conviction in the global peak sales estimate of over $1 billion for VYJUVEK has only strengthened. As we look forward, I'd like to share a few key lessons we have learned since launch, so we're aligned on how we get to realize the opportunity in front of us. The first lesson has to do with timing, from initial patient interest to starting treatment. As Jen mentioned earlier, patients and prescribers in the community often need more support to navigate the path to success. Our turnaround time on average is still between 45 and 60 days with respect to these patients. The second lesson is the realization that we never really get a full quarter when we are talking about VYJUVEK. VYJUVEK is a weekly therapy administered at home by HCP, and life gets in the way for these patients in each quarter. In the first quarter, many families will be changing insurance; in the second, we have to work through summer holidays; in the third, Labor Day and back-to-school for families; and in the fourth, we navigate around major U.S. holidays. In spite of that, I'm pleased and proud to report sequential net VYJUVEK revenue growth and continue to have strong conviction in our global VYJUVEK peak sales estimates. The third lesson has to do with high compliance, which has been well above what we estimated at the time of launch. That said, we are entering a phase where some patients are now able to take initial pauses, enjoy the benefits of durable wound closure and come back on drug when there is a wound disruption. This is a fantastic outcome for patients and their families. Our Krystal Connect team remains in close contact with all of our patients, and when new wounds emerge, reinitiation of treatment is seamless. Our relationship with our patients is for the long term, and we want them to feel the freedom of being able to live their lives as they choose: independently, actively, with the confidence of knowing that they can now control their wounds with VYJUVEK. Finally, we've done a terrific job of accruing for the price cap of VYJUVEK. We've had no volatility in net revenues in 2024 and we do not expect to have any going forward. Finally, in closing, as you can see from the slide, we have several important clinical and regulatory milestones in 2025 to demonstrate the full breadth of our platform. And we're excited for 2025 with what we can deliver to patients and shareholders. I'd like to thank my Krystal colleagues for their dedication and perseverance that underscore our excitement in the long-term outlook for Krystal and the patients we aim to serve. Thanks for listening, and I'd like to open the call for Q&A.

[Operator Instructions]. Your first question for today is from Alec Stranahan with Bank of America.

Thanks for taking my questions, and congrats on the continued progress. Just two from us. First, on VYJUVEK. Wondering if you saw any year-end stocking in 4Q. And maybe you could just remind us how accounting for patient annual cap fed into the 4Q results and sequentially into 2025 as this is reset.

Thanks, Alec. Thanks for your question. Nothing substantially different in Q4 versus any other quarters. So, there was no -- any change in stocking or inventory with respect to Q4 as compared to Q3 or Q2 or Q1. And in terms of price cap, I think I've gone through these many times. At the end of every quarter, we look back starting at the beginning of 2024, see how we're going to -- how patients are doing. We revisit the calculation at the end of Q2, Q3 and Q4. So, we actually believe, as I said in my speech that we do a really good job of making sure there's no volatility in revenue. Of course, cap calculation is complicated because it is at a payer level and has a lot to do with the mix within each payer, the number of patients and when they start during the year. But we've done a pretty good job of maintaining -- taking volatility out of the equation.

Okay. That makes sense. And maybe one quick one on the CF study. I guess how is enrollment going? Is Cohort 3 maybe accruing faster or in line with Cohorts 1 and 2? And maybe walk us through how the CFF TDN sanctioning -- maybe help us with this. Thank you.

No, it's definitely super helpful. But we just got started. So, there's always a time lag when you just get started, it takes a few months to get a few patients on drug. But enrollment in Cohort 3 has already begun, and I'll let Suma add some more color to this story.

Yes. Absolutely. I mean, obviously, getting TDN sanctioning was very important because all the academic major sites that can do broncho and have expertise in CF and have these patients now are very excited. In fact, many of them reached out to us directly to participate. We have seven to eight sites active. We are in the process of doing all of the administrative stuff for these contracts, budgets, as Krish mentioned. But we have two sites that are part of TDN that are up and running, and we have already enrolled patients for this cohort. It's going pretty well.

Your next question for today is from Ritu Baral with TD Cowen.

Good morning, guys. Thanks for taking my questions. I wanted to ask a little bit about what you guys are expecting from Europe in the second half of the year. Krish, I believe you mentioned that there are about 1,000 patients total between Germany and France that are identified. Can you give any additional breakdown of that 1,000 between the two geographies? Are they treated at centers of excellence, like in the U.S.? And if so, is there a number between the two geographies? And then I have my second question. My follow-up question is on pricing. How right now are you thinking about the initial sort of German free price range? And the French at least expanded access price. And how should we be thinking about modeling longer-term price in Europe?

Thanks, Ritu. At a high level, both Germany and France are a bit more concentrated than the United States. That said, Germany is closer to the U.S. and France is much more concentrated among centers of excellence. And the spread of the 1,000 is about 600 in Germany at a very high level, 400 in France. In terms of pricing, in Germany, for the first 6 months, we get to launch with the U.S. price as we put the dossier in place and start the negotiations. At the end of 6 months, depending on how we feel, how the negotiations are going, we start accruing for the next 6 months. And the expectation is in 12 months, we would get an actual German price and be steady state from that point on. In France, we're under the AP2 program, and it kind of forces us to start accruing from day 1. So, the expectation, I mean, so -- and the AP2 program should start maybe slightly after the German launch but not too far out. And in France, maybe in about 15 months, 18 months from approval, we expect to get a price in France. And that's how they're laid out.

Got it. Very quick follow-up. Should we be thinking about home dosing in Europe as well?

Yes, you should. For sure.

Your next question is from Gavin Clark-Gartner with Evercore ISI.

Good morning. Thanks for taking my question. Just on the reimbursement approvals first. If I'm doing my math correctly, last quarter, about 50% of new patients coming on were dominant patients. And this quarter, that seems to be about up to 75% dominant patients. Is that math correct? Do you think this trend will continue? And how do you account for that in your compliance assumptions?

Gavin, look, the percentage of dominant and recessive varies quarter-by-quarter. As we go into the community -- I mean, your math is right that we did see more dominant in Q4 than we saw in Q3 as we go into the community. But although at a high level, people think about recessive being more severe than dominant, there are a lot of patients who are in the cusp that are dominant patients who are just as severe as recessive and recessive patients who are just mild as dominants. So, I would not -- I mean, in terms of compliance going forward, I do not expect a material change in the way -- I do not expect a big change based on the percentage of dominant in the study. But it is -- yes, it is true. But that said, we don't -- like when we report Q1, our expectation is not that dominant will continue to go up. It could easily shift back to what it was in Q3 or Q2.

Very helpful. And then just one bigger picture question. So, you have about $750 million cash on the balance sheet. Consensus has you doing around $250 million cash flow this year, ballpark $300 million next year depending on how exactly ex U.S. launch goes. So even if you did want to allocate a good chunk of capital to additional R&D, you still have a lot of financial flexibility. So how are you thinking about buybacks, capital allocation overall as you kind of progress to the next phase here? Thank you.

Look, I mean, it's a valid point. It's definitely a discussion point within Krystal. We're just figuring out the timing of such a buyback and the extent that is meaningful and measurable. So definitely a valid question, Gavin. And we're thinking about it pretty seriously going forward.

Got it. Thank you.

Your next question for today is from Sami Corwin with William Blair.

Good morning. Thanks for taking my question. Congrats on the progress. I was wondering if you could provide a high-level update on the regulatory process. I think we initially expected to hear a decision from CHMP in late 2024. So, I was curious if you had any insight into the reason behind the delay. And then my second question is, given you could face some DEB commercial competition as early as 2Q, just how you're kind of thinking about maintaining and expanding market share in the face of that competition. Thank you.

Yes. I can address the first question. Obviously, the delay was because we were trying to get the best label. I mean, we have a very favorable label, the SMBC. So obviously, the home dosing and caregiver administrations, all of those nuances needed to be ironed out. So, there were training materials that needed to be prepared to support that on the label. So that was the reason for the delay. And I think that 2 months helped us get all of those documentations and training material in place to achieve that to get a favorable label.

On the competition, look, at a high level, it's tough to beat the value proposition of VYJUVEK both in terms of -- and if you look at how 98% of our patients are opting for home dosing and not even going to the local physician office, we have learned that the profile of VYJUVEK is well aligned with the expectations of the patients. But that said, we are putting in -- we are not ignoring that the market could potentially become more competitive later in the year. And our medical affairs team is having the right kind of conversations with the physicians. Our patient services team are having the right kind of conversation with patients. And we feel pretty good about our ability to hit the 2-year target and the overall peak sales in spite of the competitive nature of the market.

Your next question for today is from Ry Forseth with Guggenheim.

This is Ry from Debjit's team. For 407, how are you thinking about FEV1 in terms of the bar for advancing the program? And is that bar sort of consistent across genotypes?

Look, it's -- we're just starting to dose our patients in the efficacy cohort, realized that the long-term direction for Krystal is to target the null population, which is a complete unmet medical need. There have been comments made, interest from other competing companies that in null patients, any kind of FEV improvement, over 3%, 4%, 5% all the way up to 10 is considered a very positive outcome for these patients. But please realize we are at the redosing paradigm. So, no matter where we start with these patients, we have the opportunity to build upon the FEV levels over time. And so, we feel really good about our focused strategy on going after the null mutation; and then as a secondary effort maybe, as Suma mentioned in her speech, become mutation agnostic.

Yes. I mean there's null patients -- and there's also a set of population where they are -- they don't get correctors this kind of therapies. They're not inducive to it. So, it's both the populations that we are targeting. And obviously, as Krish mentioned, we are redosable so we have that flexibility. We will look at improvements in FEV1. There's flexibility from a regulatory strategy for us to go, just like we did in the eye, to do a single-label, open-label study with some sort of natural history. So, I think from a regulatory perspective, if we have any improvements in -- I mean, we show functionality, we show them expression and we show even a slight improvement in FEV1. I think we have a very favorable regulatory environment and a pathway to move this program very rapidly into the interclinic and to an approval path, just like we did with the eye.

Your next question for today is from Josh Schimmer with Cantor.

Two quick ones. First, can you help quantify the impact of the annual cap on VYJUVEK in 2024 and how you think that might impact in 2025 and whether you're planning any changes to that cap? And then second, the 10-K has some new language around VYJUVEK manufacturing process changes and some risks around that, at least theoretical. Have there been any changes to the VYJUVEK manufacturing process? And if so, can you explain what?

You want to go?

So, for the cap, we have been seeing about 8% of commercial patients on the cap consistently from the beginning.

For the manufacturing process, we just scaled up. And so, we have gone to the higher-level bioreactor level. And we have -- we filed the PS and we got approval for it. So again, so we have a scale-up process that is approved by the FDA. And the beauty about it is this process is -- can be adaptable across our pipeline. So, if you see 407, I mean, the limitation is not going to be CMC anymore. We can scale up, we can make the material, the processes pretty much cut in place across all of our pipeline products. So, CMC -- we derisk CMC from -- for these other products that may need more commercial material. So, I think that was very positive for us, getting that scale up approved by the FDA.

Your next question is from Yigal Nochomovitz with Citi.

This is Reena on Yigal. I just wanted to ask on AATD, could you give us a little bit more color on what we should expect to see from the expanded Cohort 2 and Cohort 3 data? What are more comprehensive molecular assessments that you're considering beyond AATD levels and what therapeutic effect do you hope to see that you would consider clinically meaningful for these patients? And I have a follow-up.

Yes. So, on Cohort 2, pretty much not much of a change than what we reported previously. We're just adding more patients to confirm what we saw. We were pretty pleased with what we saw, and we just want to add 1 or 2 patients more to confirm both the levels in the lung, the increase in the levels in the systemic circulation and to quantify in terms of at a molecular level what they are, so Cohort 2. And cohort 3 is simply exactly Cohort 2 but at a higher dose. So, I do not expect anything dramatically different between the two.

Obviously, we are looking for dose response. I mean, we know Cohort 2. We didn't even expect that the cohort dose level to see these levels of AAT in the lung. So, we're very pleased to see that. I mean, obviously, we can -- it's a very safe and we feel it's a dose that showed functional AAT expression at a pretty decent level. So, we do want to see what we get at the third dose, because again it's safe. So, we want to see that's an increase and what does that correlate to levels in the serum 2. So, it's lung and serum. If we see a good correlation and increase, then maybe that's the dose we will move forward for repeat dose administration and beyond.

Okay. Great. And just as a quick follow-up. I understand that plasma AATD should be sort of a relevant benchmark if synthesis were to occur in the liver because of the need to transport into the circulatory system to get to the lung. But since you're already synthesizing in the lung to start with, should we maybe not put too much weight on plasma AATD since it's not relative to the therapeutic goals? I guess if you could give more color on that, how we should be thinking about that or...

Yes. I think what you're going to look is correlationship of a dose-response of how many levels are we seeing in the lung and what levels are we seeing in the plasma? So, we want to see that correlationship with increasing and going to the next dose, we want to see what that increases. So, we -- once we have that correlationship, then we can go to the FDA and let them know that -- a biomarker approach. We can say, yes, we see this level of lung and the plasma levels to this level in the lung based on the kind of dose that we are giving these patients. This is the ratio. So, I think that will help us to go into -- from a regulatory pathway to sit down with the agency and discuss our biomarker path where we don't have to bronch these patients, but we can use serum levels that is meaningful for a lung administration for this patient population.

Yes. I do want to repeat what she just said. We do not care -- fundamentally, you're right. We do not care about levels in the lung -- levels in the systemic circulation, I apologize. We look for levels in the lung and maybe a correlation between the two so we could avoid potentially bronching for molecular approval.

[Operator Instructions]. Your next question for today is from Andrea Newkirk with Goldman Sachs.

For Jen and Christine, I'm just curious here, based off of what you're seeing right now in terms of the rate of reimbursement approvals, what is needed to reaccelerate patients coming on to drug in order to reach your 60% penetration goal within 2 years of launch?

Yes, I can start that. I mean I think we definitely, as I said in the speech, saw some slowdown over the holidays virtually with physician offices and payers’ sort of delaying and not answering the phone during this time. So, we feel like we've increased our trajectory already. We have a healthy pipeline right now of potential patients. And we're right on path for that. So, we already started seeing that comp. Obviously, the first few weeks of January, the same thing was occurring with reverification season and payers being sort of distracted at that point. So, there were delays happening there as well.

Okay. And Krish, just when you think about that $1 billion peak sales opportunity globally, just curious if you could provide a little bit more granularity on how the U.S. versus the EU opportunity breaks down across that $1 billion plus, or even in Japan as well.

Look, there are 3,000 patients in the U.S., 3,000 patients in Europe at a high level and about 3,000 worldwide. The pricing in U.S. versus the pricing in Europe makes -- accounts for the ratio. The expectation on pricing in Europe is anywhere at the high end at 60%, 70% discount -- 60%, 70% of the U.S. price to maybe 50%, 60% of the U.S. price. But that said, if you look at our drug, it was a blinded Phase 3 study. The efficacy results were very powerful. The convenience is amazing. It is a loud disease, right, meaning very visible, loud disease, unmet medical need, some chances of getting squamous cell carcinoma in a handful -- in a certain percentage of these patients. So, we have a compelling case to make in the dossier with respect to pricing in Europe. And so, we feel good about going into the negotiations. So, to answer your question at a high level, the way you split the $1 billion plus across the nations is purely a function of the ratio of the pricing between -- across these nations. And so, if your assumption is 70% of the U.S. price, and that's how they split because the prevalence is pretty identical across the three centers.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.