They explain in the chapter notes at the end.
I'm not sure exactly what she is, but it's clearly a very Saya no Uta (if I remember the name right) situation. His new altered perception shows monsters everywhere, but the 'real' monster is a beauty to him.
Since the dog-head-guy recognized the portrait in shock, I am guessing it may be the spy who became a dog creature... but who knows how many failed experiments Fran has let loose? It could be anything.