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November 6, 2023

Sell ATI (ATI) For a Quick 15% Gain; Krystal Biotech (KRYS) Reports

Sell ATI (ATI) For a Quick 15% Gain; Krystal Biotech (KRYS) Reports

We jumped into ATI (ATI) the week before last when the stock looked to be at an obvious buy point. Soon after we received a good earnings report, the broad market had its best week in forever, and shares of ATI are up 15% from our entry point. There may easily be more upside to ATI in the near term. However, given how this year has gone, I’m inclined to take an “easy win” when it’s right in front of us and look for the next opportunity (bird in the hand, etc.). Therefore, let’s go ahead and book the double-digit gain in ATI today. The stock will remain on my radar for potential inclusion in our portfolio in the future. SELL

Krystal Biotech (KRYS) reported this morning and I listened to the conference call and then reviewed the transcript. There is a lot to digest here so I’m going to give a quick overview of the company to kick-start your memory then try and just hit the high notes, leaving the drug pipeline discussion for another day.

Krystal is a biotech company with treatments for rare diseases that is transitioning from clinical to commercial stage with the launch of its first gene therapy, Vyjuvek. The just-reported quarter represents the first quarter of Vyjuvek revenue. Beyond that treatment, the pipeline is focused on inherited dermatological and respiratory diseases, with investigational therapies for oncology and ophthalmology as well. Stepping back from specific treatments, this is also a platform technology opportunity, with the key being Krystal’s proprietary Skin Targeted Delivery (STAR-D) platform and modified HSV-1 viral vectors. The approval of Vyjuvek (which requires infusion) increased the odds of other pipeline treatments “working.”

On to the 3rd quarter results. Net patient revenue from Vyjuvek was $8.6 million, right about what analysts expected when I picked up coverage in September, but well ahead of the $6.3 million that was the consensus heading into the event. Only two of the three months in the quarter brought in revenue due to the timing of getting the first patient started. The company recorded a $100 million gain on an FDA Priority Review Voucher, which I won’t get into but suffice to say that’s not a recurring event and it threw off EPS in the quarter ($2.79, a $3.99 “beat”).

Now, keep in mind that the end of the patient-to-revenue journey here goes, more or less, from a patient submitting a start form then getting on to the drug in two to three weeks. There’s a lot that goes into cultivating patients to get those start forms done, getting insurance approved, etc. But high level, the deal is that management is being very intentional with cultivating the patient experience through this journey and not rushing them along (nurses come into the patient’s home to do the infusion). In Q3 about 15% of patients that had start forms didn’t start treatment for one reason or another (wanted to see how other patients did, waiting on life, insurance, etc.).

Looking out into Q4, there is the holiday season so that may or may not impact the number of patient start forms (and those that move on to start treatment), which had begun to slow from the initial surge of 20 per week in Q2 to 13.5 per week in Q3. Management didn’t want to overstate patient start potential through the holiday period.

At the end of the quarter, the company had 284 patient start forms, which implies (at 85% conversion) roughly 20% of the identifiable population (1,200) in the U.S. Management is working to identify additional patients here, but mostly abroad (Japan, EU) where it is also seeking approval.

Stepping back, it was a decent quarter. We’re seeing the stock move around a lot, probably because there wasn’t a blowout jump in new patient start forms and management was wishy-washy on Q4 (holiday, etc.). I think it’s important to recognize that this is a relatively small patient population, and each patient is worth about $500K in annual revenue. Given that, management is understandably being VERY careful with each patient to try and ensure a good experience. Two patients who are “unhappy” and bail could represent a million bucks!

Lastly, the company ended the quarter with almost $600 million in cash and no debt.

I’m going to listen to the call again and review any analyst notes I can get my hands on and will likely follow up with additional notes. In the meantime, watching KRYS and keeping at buy. BUY

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.