Cryoport, Inc.
Q2 2016 Earnings Call Transcript

Published: 16 Nov 2015

[Operator:]

Good day and welcome to the Cryoport Fiscal Second Quarter 2016 Financial Results Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Garth Russell with KCSA Strategic Communications. Please go ahead, sir.

[Garth Russell:]

Thank you, operator. Good morning everyone and thank you for joining Cryoport's fiscal second quarter conference call. Before we begin today, I would like to remind everyone that this conference call contains certain forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate to occur in the future are forward-looking statements. These forward-looking statements are based on management's beliefs and assumptions and not on information currently available to our management team. Our management believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experiences and our present expectations or projections. These risks and uncertainties include but are not limited to those described in Item 1A risk factors and elsewhere in our annual report on Form 10-K and those described from time to time in other reports which we file with the Securities and Exchange Commission. Now, I'd like to turn over the call over to Mr. Jerry Shelton, Chief Executive Officer of Cryoport. Jerry, the floor is yours.

[Jerry Shelton:]

Thank you, Garth. Good morning, ladies and gentlemen. Thank you for joining us today. Joining me on this morning's call is our, Chief Financial Officer, Robert Stefanovich, who will present our financials later in this call. Over these recent past, month and quarters, we have seen the hard work of our growing sales team and newly appointed marketing team begin to transform prospects into an impressive pipeline of client relationships. We of course have outstanding cooperation and support from our strategic partners DHL, FedEx and UPS, who are doing a lot of work laying the groundwork for the future. The escalating market demand for our solutions is clearly reflected in our financials for the quarter, as we are reporting a 74% increase in revenue year-over-year to $1.4 million for the quarter ended September 30. This extraordinary growth was partially driven by 75% increase in revenue from the reproductive medicine segment as well as new client engagements. It is also wroth mentioning that a couple of headwinds for the second quarter. First, while we are reporting a strong financial performance, year-over-year, the second quarter presents certain seasonality challenges. Secondly, a number of our clients are data driven for clinical trial purposes. And in this particular quarter some of our forecast orders slowed up than scheduled considering these factors, we are even more pleased with our growth metrics for the quarter. However, the real excitement for Cryoport in a nutshell, it is not limited to our current growth rate because the significant embedded growth in our markets and our expanding client base. As the world leader of advanced biogenic logistic solutions for life sciences industry. We have approximately 550 clients to engage our solutions today. Even more noteworthy is the fact that more than 160 of these clients joined us within the past two quarters. Just last, one of our new clients truly signifies a change in Cryoport. We are now supporting large and mobile companies that are working on cutting-edge immunotherapies and biopharmaceuticals including eight of the top ten regenerative therapy companies. Leaving the [indiscernible] out of the broader client base, we are also working with the growing number of central laboratories, contract research organizations, contract manufactures, research universities, animal health companies and reproductive medical facility around the world. Reflecting our diverse client base, the wide variety of commodities for which we provide specific and various logistic support includes cellular therapies, CAR-T cells, antibodies, steam cells, reproductive cells, cell lines, RNA, diagnostics and tissue just to name a few. Further to the point, we believe that Cryoport is playing a pivotal role in enabling the medical advancements in the research community and their counterparts that made a progress and [alleging] [ph] the immunotherapies to address a host of human and animal diseases including and especially cancers. Most importantly each of these commodities is of high-value ranging from thousands of dollars to hundreds of thousands of dollars and in many cases, the commodities are one of kind, they are priceless and irreplaceable. All of those things to say, but our clients needed trusted partner for their precious commodity. And they dependent on Cryoport. In fact, Cryoport currently supports approximately 20% of all the Phase 3 clinical trials for generic medicine, including eight of the top 10 CAR-T cell therapies. And this is just part of the 52 trials we currently support across the world including United States, Europe, Japan, Australia, South America, Africa as well as multiple countries throughout Asia. Over the past six months, this represents 150% increase in the number of trials that we are supporting. And we are currently discussing broader engagements with three of our current clients that are in early stage preparations to enter commercial production. By our estimates, the clinical trials we currently support to generate big revenues of more than $150 million over the next five years for Cryoport. Combined this with expectation to increase the number of clinical trials we support, we can see a clear pathway and transparency for Cryoport. And this is just a little bit what primary cryogeneric logistics market, which is about $1.7 billion and growing at over 14% per year. The annual growth from data, the enormous total biologic market which is estimated at $289 billion today and growing at 10.8% annually. By extrapolation in 2025, the market will be $800 billion to $900 billion. It is a gigantic opportunity of which we know competition will emerge and that will be up to us and our leadership to take advantage we enjoy to take our position and grow with the opportunities ahead of us. These are expectations are not ours alone that are based on in-depth discussions with our clients and trends we are seeing in the overall market. Added to this significant activity in the biologic space can be seen and the recent expansion of some of our clients, specifically Kite Pharma is leasing 44,000 square feet of manufacturing facility in Santa Monica, California including both clinical and commercial capacity. Bluebird Biotherapeutics is moving into a 253,000 square foot facility in Boston, GeNO Therapy has leased a new facility outside of Seattle and Silicon is a entering a new leased one additional 27,000 square feet facility. Further evidence of the expected volume increase can be seen by the commitments with our partners UPS, DHL and FedEx. UPS has built 46 station future network; DHL has built 65 station forming that network, while Federal Express is repositioning it's lead sales strategy, none of these companies would have made these large financial commitment without expectations of large returns on investment. It is in fact -- it is a fact that the immunotherapy at this very moment in time are in a process of changing a promise to reality and have recently provided some patients with long lasting and in some cases permanent remission once previously considered impossible cure from illnesses. For a moment, I would like everyone to pause and think about how long does this current volume growth has been in the making. One very special example in immunotherapy is CAR-T cell therapy. CAR-T cell therapy has had a lengthy run up to what may appear to be an overnight success. To reach out the first CAR-T cells were developed by Weizmann Institute of Science in Israel in the late 1980s by a chemist and immunologist Zelig Eshhar. In 1994 team of scientists at Cell Genesys lead by immunologist Margo Roberts developed the first three clinical CAR model and in 2009, the first CAR therapy was developed by the National Cancer Institute. Five years ago, today's state of development of CAR-T cell cellular therapy was unimaginable. But three years ago, scientist at Fred Hutchinson Cancer Center created the plumbing that is the ability to actually target cancer causing proteins to successful applications in curing cancer and now CAR-T cells are among the most promising immunotherapies position to rollout over the next few years. Cryoport is playing an important role in enabling these therapies by supporting the advanced biogenic logistic solutions. In fact, our sales group is in the late stage of discussions with several clients regarding long-term commercial supply agreement as they prepare to commercialize their respective therapies. There could be no doubt that this an important time for humanity for the advancement of cellular therapy and for Cryoport. The increasing demand, we are experiencing with our unique change solutions represents a company that is in the infancy of its long life ahead. Our advance packaging information technology and logistics expertise make our role in the immunotherapy market critical. As a partner, with these companies we provide cryogenic logistics solutions support and ensure the delivery of their commodities to designated points of destinations. We give our clients peace of mind because we ensure delivery and allow them to focus and we are developing and/or manufacturing innovative treatment and advance [drug] [ph]. No doubt it will be changing as the industry further develops and Cryoport will continue to modify adjust and demonstrate it's agility capitalizing on our head start and leadership positioning. We are excited to be a critical aspect of the development and distribution of these important breakthroughs and have the ability to support these incredible scientific and healthcare advancements. Now I want to give you a real life example, this will undoubtedly be more in the future, we just returned from the CAR-T cell summit of 2015 held in Boston, where Emily Whitehead and her father Tom Whitehead concluded the meeting. About three years ago, 10-year old Emily Whitehead was the first child in the world to receive an experimental T cell therapy at Children's Hospital of Philadelphia, to save her from a life threatening cancer. Emily was diagnosed with acute lymphoblastic leukemia at age five in May 2010 and she relapsed twice. At the second relapse the Whitehead's were told that they were out of options to treat her cancer not willing to give up the Whitehead's pursuit of radical new treatment called T cell therapy at Children's Hospital of Philadelphia. Emily was the first child enrolled in the Phase 1 clinical trial known as CTL019 in April 2012. Her T cells were collected from her body and then were genetically reprogrammed and to recognize and attack cancer cells. In the modified T cells back into Emily's acute body, she became very sick and she spent total weeks in intensive care on a ventilator. A few weeks later her family was given the miracle that they have prayed for. The T cell therapy worked. Doctor's did not detect a single cancer cell on her body. Today Emily has been cancer free for three years. CTL019 is a therapy developed Novartis, Cryoport provide the biogenic logistics. This is one of many. To support our current and expected near term growth, we recently entered into a lease of 27,600 square foot facility in Ervin, California, which is a significant expansion from the 11,900 square foot facility we operated from Lake Forest, California. This new facility will be better suited to support the expansion of our operation and provide the scalability required for demanding client base. Once we are officially in the space and built out, when the lab is final, we will provide greater detail around the specific enhancements, features of new facility. Without a doubt along the way we have expanded our sales and capabilities to additional geographies and segments of the world. Recently, we demonstrated our desire to expand and control our destiny while also opening up potential new segments of the market through the acquisition of certain intellectual property and intellectual property rights to our total operating platform. Cryoportal supports our entire shipment and logistics space through a single owner phase including initial order input document preparation, customs documentation and clearance and greater backbone -- greater management, shipment tracking and eventually support issues of solution and delivery. In addition, the Cryoportal will provide unique and incisive information dashboards and validation documentation for every ship it can record in the team, a fully documented chain of custody and chain of condition for every shipment helping to ensure that quality, safety and stability of shipped commodities and maintain throughout the process. The advance capabilities in Cryoportal importance many of our current relationships including our individual strategic agreements with FedEx, UPS and DHL. Only in this technology out wide gives us greater control of our business and will allow us to leverage our capabilities and expand our solutions into new areas of the life sciences built-in markets. The purchase of this IP and related right enables Cryoport potentially expand the use of the Cryoportal operating platform into new markets including different temperature ranges, different pay loads and other modes of transport as well as possibly facilitate licensing of the software for other users. Further supplementing our capabilities will be the introduction of our advanced Smart Pak II condition monitoring system in the fourth quarter of fiscal year 2016. With the Smart Pak II, clients will be able to locate their shipments in transit or in logistical point and ascertain the location and condition of the commodity being shipped in real-time. In summary, Cryoport is well-positioned to continue it's growth pathway as the life sciences industry quells a growing demand for validated best-in-class co-chain logistic solutions that are reliable, efficient and easy to use. With that, I will turn the call over now to Robert Stefanovich, our Chief Financial Officer to discuss our financial result for the second fiscal quarter ended September 30, 2015. Robert?

[Robert Stefanovich:]

Thank you, Jerry. Good morning, everyone. I'll run through our quarterly and six month financial results then turn the call back over to Jerry. As a reminder our fiscal year ends March 31, 2016, so we are reporting for our second fiscal quarter and first six months of our fiscal quarter 2016. Our net revenues for the six month period ended September 30, 2015 were $2.9 million an increase of 62.8% or $1.1 million as compared to $1.8 million reported for the same period last year. As Jerry mentioned, we added a significant number of customers and generated revenue in all of our target life sciences market such as biotech and diagnostic companies, pharmaceutical companies, central labs, contract research organizations, reproductive medicine markets and research institutions. Revenues in the reproductive medicine market increased by 70.9% over the prior year $0.7 million for the six months ended September 30, 2015 driven by continued success of our target sales and marketing campaign and an increased awareness of our cryogenic logistics solutions in this market. Our revenues from the animal health market were $0.5 million for the six months ended September 30, 2015 representing a 4.8 seasonal decrease for the same period in the prior year. With the increase in our customer base, customer concentration was further reduced and only one of our customers in animal health accounted for approximately 16% of total revenues during the three month ended September 30, 2015 compared to 27.4% in the same period of 2014. Gross margin for the period was 32.2%, $4.9 million as compared to 32% or $0.6 million compared to the same period last year. Our gross margin target continues to be 60%, which can be expected as we reach cash flow breakeven. Note that our cost of revenue are merely comprised of freight charges payroll and related expenses for our operation centre in California, third party charges for our European and Asian operation centers in the Netherlands, Singapore, depreciation expenses of Cryoport expense shippers and supplies and consumables used for our solutions. Also we've recently have expanded our warehouse operations team based on the expected increase of shipping volume. Operating expenses increased by $1.3 million or 40% to $4.4 million for the six months ended September 30, 2015, as compared to $3.1 million for the prior year period. This increase is primarily due to equity based compensation charges, salaries incurred to expand our sales force and the engagement of a new marketing firm to support sales activity. Our research and development efforts are focused continually on improving the features of the Cryoport Express Solution including our cloud-based logistics management platform the Cryoportal, Cryoport Express Shippers and development of additional accessories to facilitate the efficient shipment of life science material. These efforts are expected to lead to the introduction of additional shipper design in-light of market demand and an advanced condition monitoring systems as Jerry referred to earlier. Net loss attributable to common stockholders for the six month period ended September 30, 2015, was $9.6 million or $1.66 per share compared with the net loss of $3.7 million or $1.25 per share. This increase was a six month period ended September 30, 2015 as partially the result of an increase in non-cash preferred stock beneficial conversion charges of $2 million and an increase in undeclared cumulative preferred dividend $5.5 million. Moving to our quarterly results, for the quarter net revenues increased by $0.6 million or 74.2% to $1.4 million for the three months ended September 30, 2015 as compared to $0.8 million for the three months ended September 30, 2014. This growth was driven by an overall surge in the number of clients utilizing the company's solution complemented by growth and frequency of shipments from our current clients. Revenues in the reproductive medicine market increased by 74.7% over the prior year to $0.4 million for the three months ended September 30, 2015, driven by continued success of our target sales and marketing campaigns and awareness of our solutions. [Noteworthy] [ph] is also the increase in clinical trials we are supporting with our cryogenic logistics solutions that Jerry referred to earlier as they represent significant future potential growth. Our revenues from the animal health market were $0.2 million for the three months ended September 30, 2015, which is consistent with the same period of prior year. Gross margin for the three months ended September 30, 2015, was 30% as compared to 27% for the three months ended September 30, 2014. Operating expenses increased $0.7 million for the three months ended September 30, 2015, or 41.1% as compared to the three months ended September 30, 2014. This increase is primarily due to equity based compensation charges, salaries incurred to expand the sales force, the engagement of a new marketing firm and expense associated with the public equity offering. Interest expense for the quarter include a one-time non-cash charge of $0.5 million representing a fair value of the beneficial conversion feature of the related party notables payable. Net loss attributable to common stockholders for the three months ended period was $2.7 million or $0.41 per share compared to $3.2 million or $0.64 per share. As for the quarter ended we had 7.2 million in shares of common stock outstanding. During the quarter we uplisted to the NASDAQ capital market stock exchange and bolstered our cash position through a registered public equity offering. Cash and cash equivalent as of September 30, 2015 was $7.1 million compared to $1.4 million at the fiscal year end March 31, 2016. We will file our 10-Q with the SEC later today. Now I'll turn it back to Jerry. Jerry?

[Jerry Shelton:]

Thank you, Robert. So in conclusion, it is our view that we are now in a position to make real progress in scaling on sales and marketing efforts, which is of course crucial to the scaling of our business. Our progress is being built on our growing reputation in the life sciences industry and our solid performance in ensuring the shipments are delivered on-time and without compromise. In other words the market is recognizing that we are uniquely the solution for cryogenic logistics requirement of today's life sciences industry. We believe that Cryoport is on the right pathway at the right time. We have a clear vision and the management is working hard to execute at all level and as a result and based on what we know at this point in time, we are confirming our revenue guidance for fiscal year 2016 of $10 million to $12 million in revenue. Thank you for joining the call this morning and for your support and for your interest. At this time, I would like to ask Garth to open the call for questions. Garth?

[Operator:]

[Operator Instructions] And we'll take our first question from Brian Marckx with Zacks Investment Research.

[Brian Marckx:]

Good morning, guys, and congratulation on the continued great progress. Jerry, if I could on the revenue guidance that was reiterated. The earnings release says its based on client business that you have visibility on. I was wondering if you could provide a little bit more clarity on exactly what that means?

[Jerry Shelton:]

Well, Brian, I can't go into specific clients, but what I can tell you is this. The way we go about looking at our forecast is, as we look at the current base and we predict on that current base and that's based on not just looking at the numbers but conversations with clients and their plans. And the second part of that is prediction and that's based on the new clients that we -- we have no historic base, but we do have conversations and we are basing our forecast on those conversations. And based on everything that we see at this particular time, we are in a position to reconfirm that guidance.

[Brian Marckx:]

Okay. So it sounds like that does not include any potential future conversations with potential future clients that may come in between now and the end of the year. So essentially, it doesn't include anything that you may talk to a client that you haven't talked to yet, correct?

[Jerry Shelton:]

No. It does not Brian. And look this is a forecast that you can have surprises both way, you can have upside surprises then you have downside surprises. So but at this point, we feel confident enough to give you -- to give the market or to give the folks on this call, our shareholder base, they got it.

[Brian Marckx:]

Okay. Yes. Fair enough.

[Jerry Shelton:]

But it does not include anyone we have not talked, no.

[Brian Marckx:]

Okay, great. And it sounds like in Q2, some of the -- I guess assumed revenue that was going to come in Q2 may have slept until Q3, so the current quarter, so we -- I know you're not going to give me guidance for Q3, but it sounds like just based on those comments that Q3 should see a pretty nice up tick from Q2, is that fair?

[Robert Stefanovich:]

That's fair, Brian. We think so.

[Brian Marckx:]

Okay. On the Q1 call, Jerry, you mentioned that you had a client that had a pipeline product that was in, I think Phase 3 and you expected that may launch in 2016, and that -- if that happens that would most likely support the commercialization. So is that client still in Phase 3 assuming -- essentially is the clinical trial still successful, whereas we could assume that may still launch in 2016?

[Jerry Shelton:]

Yes. It's not our fiscal year 2016, it's the calendar year 2016 and that could be 2016, it could be early 2017 but as I mentioned earlier, we are in conversation with three client, that particular client is still in trial in Phase 3, things are going along well. So it will be either calendar 2016 or early 2017, and then, we have two others that we are in recession with. As you may know, I mean, and I was trying to allude to this during the -- my presentation; it does take time for all of these various stages to take place. And so because logistics is now so important to these immunotherapies, the planning starts -- starts early. At the CAR-T cell conference for example, we saw at the strategic level cryogenic logistic mentioned more than I have ever seen it mentioned before because of its importance in getting product to the patient with efficacy. So, yes, we are in discussion not only with that client with two others as well for commercialization.

[Brian Marckx:]

Great. Can you talk about the status of the current the sales force -- the size of the current sales force? And is there any plans to expand that over the next say 12-month?

[Jerry Shelton:]

Yes. We are continuing to expand our sales force. We have three or four open requisitions right now. We have -- the two folks on the West Coast and Northwest and the Southwest, we have a person in the Southeast and we have a person in the Northeast and we have an opening in two territories, in the Midwest and Mid-Atlantic. And we have an opening in Europe. And we have two openings in IVF in the United States and we actually need to open up an IVF office in Europe shortly. So we got a number of open requisitions and it depends on how you look at it for outside versus inside sales. But we absolutely will continue to expand our sales force and our sales effort.

[Brian Marckx:]

Okay. Last one on animal health, it sounds like revenue from that is relatively insignificant today, is there an opportunity do you believe to increase the presence in the animal health and the increase of the related revenue, I guess?

[Jerry Shelton:]

Animal health will be one of our -- it will be a very significant segment for us. It's not that its insignificant, it's just that -- it let us all into that category and they had some adjustments built in their company and in their processing. We have a pipeline that is definitely targeted to the animal health area. We can play a significant role there. That's an important area for us for sure.

[Brian Marckx:]

All right. All right, great. Thanks Jerry.

[Operator:]

That does conclude today's question-and-answer portion, as well as today's conference. We thank you for your participation. You may now disconnect.