Biolife Solutions Inc Q3 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the BioLife Solutions Third Quarter 2023 Shareholder and Analyst Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I will now turn the call over to Troy Wichterman, Chief Financial Officer of BioLife Solutions.

Thank you, operator. Good afternoon everyone and thank you for the BioLife Solutions 2023 third quarter earnings conference call. To start off the call, I'd like to give a warm welcome back to Rod de Greef, our recently appointed Chairman and Chief Executive Officer, who is on the call with me today. On this call, we will cover business highlights and financial performance for the quarter and reiterate our previous comments on full year revenue guidance. Earlier today, we issued a press release announcing our financial results and operational highlights for the third quarter of 2023, which is available at biolifesolutions.com. As a reminder, during this call, we will make forward-looking statements. These statements are subject to risks and uncertainties that can be found in our SEC filings. These statements will be formally as of the date given, and we undertake no obligation to update them. We will also speak to non-GAAP or adjusted results. Reconciliations of GAAP to non-GAAP or adjusted financial metrics are included in the press release we issued this afternoon. Now, I'd like to turn over to Rod de Greef, Chairman and CEO of BioLife.

Thanks Troy. Good afternoon, and welcome to BioLife's third quarter 2023 conference call and my first call since rejoining the company in mid-October. While I think most of you on the call know me, for those of you who don't, I have over 30 years of senior financial, operating and Board experience in both public companies in the medical technology and life science industries. My history with BioLife dates back to the early 2000s when I joined the Board and raised several rounds of capital through 2013. In early 2016, I returned as CFO and later became trading officer until December of last year when I retired and rejoined the Board. I bring significant strategic and operational experience and a strong understanding of the company's operations, products and customers, as well as solid relationships with management team and key shareholders. I've been asked several times why I made the decision to return to an operating role at BioLife. And the answer is simple: it comes down to the opportunity. The growth potential of the cell and gene therapy market, combined with how well BioLife is positioned to participate in that growth creates a unique opportunity to build on our market leadership position and generate shareholder value. The chance to lead the organization throughout this critical time was extremely compelling, and I can honestly say I am glad to be back. As stated on our last call and consistent with our peers, both large and small, the macro headwinds and global economic uncertainties experienced throughout the bioprocessing industry related to pharma destocking, a constrained biotech funding environment and weakness in China have persisted throughout the third quarter. While these challenges have been inevitable, we're beginning to see signs of stabilization, and they've also presented BioLife opportunities to adapt as we navigate through these dynamic times. In this spirit, my immediate efforts are to continue the renewed focus on our cell processing and biostorage platforms and to bring the divestiture process of our freezer business to a conclusion as quickly as possible. I'll provide a brief update on our progress there later in my prepared remarks. In the mid to long-term, our thesis remains intact, and we believe that the company is very well positioned to take advantage of the underlying drivers of what is still a nascent CGT market in order to drive profitable growth. These growth drivers include additional approvals in multiple jurisdictions, a growing number of clinical trials, geographic expansion, and the migration of existing approved therapies to second and first-line treatment as well as the longer-term growth of allogeneic therapies. These tailwinds are further underpinned by a growing interest from large pharma in the CGT space. Our cryopreservation media has become the industry standard, evidenced by our media products being embedded in 506 approved CAR-T therapies and a total of 11 relevant approved cell and gene therapies, in addition to being in hundreds of clinical trials globally. In addition, our other cell processing tools and biostorage services are used in 10 relevant cell and gene therapies as well as being incorporated in well over 100 clinical trials. To our knowledge, there is not another commercially available cryopreservation media that is in any relevant approved therapy, which tends to couple our core scientific expertise, industry reputation and the market position we have achieved with a relatively small but focused team of scientifically oriented sellers to drive the adoption of the other cell processing product portfolio. With that context, I'd like to say a few words on our revenue platforms, while allowing Troy to speak in more detail to our Q3 financial results during his portion of the call. For our cell processing platform, revenue for these products was in line with internal expectations and impacted by the same headwinds others in the CGT industry faced in the third quarter, resulting in a 29% sequential decrease for this platform compared to Q2. Within the cell processing platform, non-biopreservation media product sales were essentially flat compared to the prior quarter. However, media revenue decreased by $5.4 million or 32% sequentially. When we reviewed Q3 customer data, we found that approximately $3 million or 55% of the sequential decrease was related to reduced purchases by several large direct customers, which we believe is attributable to their efforts to lower inventory levels. The balance of the decrease was split evenly between our smaller direct customers that make up approximately 20% of the overall media revenue and our larger distributors that account for approximately one-third of total media revenue, which we attribute to the general macro conditions being felt industry-wide. On the biostorage services side, the flat year-over-year results masked the strong ex-COVID growth of 50% that Garrie Richardson, our new Chief Revenue Officer and his team were able to deliver. We will continue to focus on scaling our existing biostorage capacity in Boston, New Jersey, and Amsterdam, which will generate positive financial results in 2024, as well as look strategically at new sites for further expansion. We are confident that these efforts will result in a return to consistent revenue growth, robust profitability, and a healthy cash flow profile. Moving on to freezers, you will recall that the company initiated a strategic review of the freezer businesses last May. In August, we announced that we intended to proceed with divesting our CBS and sterling product lines and refocus our efforts on the core recurring high-margin cell processing products as well as building out the biostorage services platform. We're fully committed to this effort and are working hard to drive it to a timely close. At the end of October, we received multiple letters of intent (LOIs) and still have other parties working through the process. Due to the competitive dynamics involved, I can't discuss any specifics. However, I will say that we expect to close on the transactions in early 2024. We believe the financial profile of the company post-divestiture of the freezer products will immediately benefit from the operating leverage provided by the high-margin recurring revenue generated by the core biopreservation media products. As part of the recently announced management changes, I'd like to welcome Garrie Richardson to the team as our newly appointed Chief Revenue Officer. Garrie founded our biostorage business 13 years ago, which we then acquired in 2020. Since then, he's done a great job expanding that business as part of BioLife and has a proven track record of delivering on revenue commitments and establishing and maintaining large biopharma accounts. I look forward to his contribution as he refocuses the sales team on our cell processing platform. Now, I'd like to turn the call over to Troy to review the third quarter financial results.

Thank you, Rod. We reported Q3 revenue of $33.3 million, representing a decrease of 18% year-over-year, excluding COVID-related revenue from Q3 of 2022, the decline was 10%. The year-over-year decrease was primarily related to a 26% decrease in our cell processing platform. And as Rod noted earlier, with a sequential decline, generally speaking, those same factors of destocking and broader industry headwinds are also applicable to the year-over-year decline. Turning to our biostorage services platform, revenue for the third quarter was $6.6 million, a decrease of 10% over the same period in 2022. Excluding COVID-related revenue from Q3 2022, revenue in Q3 2023 increased by 50%. Freezers and Thaw Systems platform revenue for the third quarter was $13.4 million, a decrease of 13% over the same period in 2022. Excluding COVID-related revenue from Q3 2022, revenue in Q3 2023 decreased by 9%. Adjusted gross margin for the third quarter was 30% compared with 34% in the prior year. The decrease was primarily due to lower revenue from our high-margin biopreservation media. At the end of September, we reduced our corporate non-freeze operations headcount by 10% in order to right-size the organization in anticipation of the divestiture of our freezer operations. We recognized cash severance costs of $500,000 and $2.4 million in accelerated stock compensation in Q3. In addition, we eliminated discretionary travel and marketing expenses. GAAP operating expenses for Q3 2023 were $62.1 million versus $52.5 million in Q3 2022. The increase was largely due to a noncash asset impairment on the freezer businesses of $15.5 million. Adjusted operating expenses for Q3 2023 totaled $24.4 million compared with $20.8 million in the prior year. The increase was largely due to $2.9 million in severance costs. Our adjusted operating loss for the third quarter of 2023 was $14.4 million compared with $7.1 million in Q3 2022. Our GAAP net loss was $29.1 million in Q3 compared to $10.3 million in the prior year. The increase in net loss was due to lower revenue in our processing platform, a $15.5 million noncash asset impairment charge related to Sterling and CBS, and severance costs of $2.9 million. Adjusted EBITDA for the third quarter of 2023 was negative $3.1 million compared with positive $1.8 million in the prior year. Our adjusted EBITDA decreased primarily due to lower biopreservation media revenue. Our financial profile for Q3 was impacted by a decrease in our high-margin biopreservation media revenue, which has an outsized impact on our profitability due to the margin profile and highly leverageable operating costs. Our biopreservation media business is well positioned and due to the sticky nature of our products, requires minimal selling, general and administrative expenses to support revenue growth. Turning to our balance sheet, our cash and marketable securities balance at September 30th, 2023, was $42.2 million compared with $48.1 million at June 30th, 2023. Taking into consideration our adjusted EBITDA of negative $3.1 million, cash use in Q3 2023 was primarily related to capital expenditures of $2 million and unfavorable working capital of $2 million, largely due to the timing of raw material deliveries related to our media products. On October 19th, 2023, we closed a $10.4 million PIPE at market with an existing shareholder. We will be filing two S3s in the near-term. One S3 is related to the registration of shares from the PIPE financing and the other S3 will be a shelf registration to replace our expired self-registration statement, which we believe is good corporate governance and housekeeping. Our SVB long-term debt balance was $20 million, which is interest-only through Q2 2024 with quarterly repayments of $2.5 million beginning in Q3 of 2024. Turning to 2023 revenue guidance, as we have previously stated, on October 19th, we expect to come in at the low end of our guidance issued August 8th, which was total revenue of approximately $144 million, comprised of cell processing platform approximately $65 million, which assumes flat to modest sequential growth; biostorage services platform, approximately $26 million; and freezers and thaw systems platform, approximately $53 million. Finally, in terms of our share count, as of today, we have 44 million shares issued and outstanding and 46.9 million shares on a fully diluted basis. Now, I'll turn the call back to the operator to open the call for questions.

The floor is now open for your questions. Our first question comes from the line of Jacob Johnson with Stephen. Your line is open.

Hey, good afternoon Rod. Good to have you back. Thanks for the additional color on kind of the media breakdown. I guess as we think about those buckets, the large direct customers, the smaller ones, and the distributors, you're certainly pointing to these headwinds persisting in the fourth quarter. But how should we think about maybe some of those pressures alleviating across those buckets as we look into next year?

Yes, good point, Jacob, and thanks for the comment. Listen, I think that when we look at Q4, and we're looking at media revenue on a weekly basis by customer. Of those three buckets, I would say the small direct customers are sort of aligned with where we would expect them to be. That is the business that comes in consistently throughout the quarter as opposed to the larger direct and distributor customers, which come in much more variably. So, our comment with respect to seeing Q4 come in at or slightly better than Q3 is really based on that weekly analysis and what we're seeing. We still have some room to make up with respect to the larger distributors and larger direct customers, but that's normal. So, I would say at this point in the quarter, we feel good about where we are relative to the guidance we've provided on Q4. Regarding 2024, we'd like to hold any commentary on 2024 until we get through the fourth quarter here because I think that will give us a better sense of what we're kind of seeing, and we believe things have bottomed and perhaps are starting to move back up. We're going through our budgeting process at the moment, and again, on the media side, it's by customer. So I think we will be in a much better position to speak to 2024 when we're ready to put out that guidance, hopefully early in the year.

I see what you did there, Rod. You still have your skills intact. Garrie, now the Chief Revenue Officer, and you have made some reductions in staff. Can you discuss any adjustments to the go-to-market strategy following the freezer sale?

Yes. So, I think the profile of the sales individuals related to freezers versus the profile of those selling cell processing tools is pretty different. We have a small group of cell processing sales team members who are going to work with Dr. AB Matthew and Sean Warner, who are our scientific experts in-house to craft the selling message and strategy and drive adoption for those other cell processing tools that we picked up from Sexton, as well as the media. As you know, we are well entrenched on the media side, and it's really about capturing new companies as they come out. The opportunity, in addition to capitalizing on those tailwinds with the media, is to increase the adoption of those other cell processing tools. These sellers, and there will be four or five of them, most of whom we already have on the team, are more scientifically focused than the freezer sales individuals, who are more capital equipment focused. We're really looking forward to Garrie putting his efforts into that team, married with the expertise that Dr. AB Matthew and Sean brings to the table, and we are optimistic about the results.

Got it. Thanks Rod. I'll leave it there.

Thanks, Jacob. We'll see you next week.

Our next question comes from the line of Matt Hewitt with Craig-Hallum. Your line is open.

Good afternoon. Thank you for taking the questions. Maybe the first one, regarding the market, and I very much appreciate the market segmentation that you provided. I'm just curious, as you look into areas where there has been some weakness or some headwinds, how much of that is tied to the reprioritization of pipelines versus preservation of capital? We're hearing that both ends of the spectrum, small and large pharma, are just being a little bit more cautious and slowing some of their pipeline projects. But is there a way to break out the two? How much of it is budgetary from the customers versus how much of it is just shifting of the pipelines and priorities that could potentially rebound faster?

Yes, I think a large part of the decrease with respect to those several large direct customers is internal inventory levels that they are trying to manage tighter than they have in the past. So, I really believe that this is a transient phenomenon, and whether it gets cleared up in Q4 or Q1 remains to be seen. However, we're pretty optimistic based on what we see right now that it is truly transient and not due to any issues with demand for their products or any cutbacks in their R&D program. Again, we are subject to pretty high concentration within that group of customers. Any one of them wanting to hold back and push out an inventory order for a quarter definitely has material repercussions for us. Some of the other headwinds you referred to might be felt more in the small direct customers and, in particular, our largest distributor, who has a substantial number of customers in the thousands. Many of these customers are academic and small research labs, so they might be affected more so than the larger customers with respect to R&D budget tightening. We tried to signal this in our commentary both in my script and in the press release.

Got it. That's super helpful. And then regarding the freezer divestiture, it appears that you're now targeting early 2024 for completion. I think last quarter, the conversation indicated you expected to have it done by the end of the year. How is that process proceeding? What's your current perspective?

It's proceeding. The delay into Q1 really has more to do with some late entrants, which are legitimate potential buyers of the company. We wanted to have them in the mix and take advantage of whatever they might offer. Additionally, we've got two holidays approaching, so practically speaking, it's unlikely to happen in Q4. One or both could, but it's more likely to occur in early Q1.

Understood. Thank you.

You bet.

Our next question comes from the line of Paul Knight with KeyBanc. Your line is open.

Hi Rod. What event do you need to move this on to discontinued operations?

Yes, Paul, since I've been back, I've spent too much time with auditors and learned quite a lot about the gap around discontinued operations. It’s a very complicated process. We need a signed deal in hand that the Board has approved in order to put things into discontinued operations. In short, that's really the test.

And what's your view on the burn rate of the company this year? And what do you think the burn rate would be excluding Sterling?

I don't want to get into too much detail. We're in the middle of our budgeting process, Paul. We expect to have a much clearer picture of non-freezer BioLife with respect to adjusted EBITDA and cash flow. I will say that we would have been positive adjusted EBITDA in Q3 here had it not been for the freezer business, and that's irrespective of the fact that our media business was down as low as it was.

Okay. Thank you.

You bet.

Our next question comes from the line of Steven Mah with TD Cowen. Your line is open.

Great. Thanks for the questions. A lot of ground already covered. Just two follow-ups. To continue on the line of questioning regarding some of these larger direct customers. Rod, you mentioned that some of these direct customers could rebound faster as they recover from destocking. What gives you that confidence? We've heard similar sentiments from some of the other bioproduction companies that they are seeing a bottom with regard to destocking headwinds. Could you provide more color on what you're observing?

Sure, I'll give you an anecdotal situation that we encountered just last week. A large customer, without going into too much detail, requested to postpone the delivery of their order by a quarter, which we agreed to. Then, two weeks later, they called back saying, guess what, we didn't have as much as we thought. They wanted to get 10% of that order actually in-house before the year-end. It’s situations like that which suggest to us that perhaps they've gone too far with their destocking efforts. This also indicates a lack of complete management and transparency within their own organization about their needs. Many of these large customers have multiple departments purchasing from us, but they all come under the same corporate umbrella. It’s almost as if at some level, the left hand doesn’t know what the right hand has, and they open the freezer to find that there’s not enough cryopreservation media and realize, okay, we better go buy some. That is happening, and it's a bit of a reversal from what we've experienced. Again, this is anecdotal, but it's what we're facing.

Okay, that’s super helpful. Lastly, when you mentioned the freezer divestiture process likely closing in early 2024, does that indicate you are close to signing a definitive agreement? Will you disclose it when that signing occurs?

Yes, good question. We are not going to announce the signing of a definitive agreement. We will announce the closure of the transaction, but due to competitive reasons, I would rather not specify exactly where we are with the different parties involved. I trust you'll appreciate that.

Yes, fair enough. Appreciate it. Thank you.

Thank you.

Next question comes from the line of Thomas Flaten with Lake Street. Your line is open.

Hey, Rod, welcome back. I don’t want to push the freezer business questioning too far, but do you foresee or can you help us understand if this will be a single transaction for both businesses or more likely to be two transactions?

Yes. Thanks, Thomas. Both options are on the table. That’s the best I can do given the competitive dynamics we’re involved in. Some parties want both, while others want each individually.

Got it. You mentioned reviewing potential locations for a new SciSafe facility. Is there anything you can share regarding the location? Are you thinking most likely the US, Europe, or Asia?

I think it would be in the US. We have a very nice site in Amsterdam that still has some room, given its location next to Schiphol Airport. So, we feel good in Europe. Therefore, it will likely be a very strategic location in the US. Garrie's strategy has been to identify an anchor tenant, which, when that transaction or agreement is signed, will cover the fixed cost of that new facility, and then we will fill it after that. It's subject to several conversations that are ongoing in different locations in the states regarding identifying and locking down that anchor tenant.

Got it. Just one last quick one, if I might. I know there’s a lot of interest in understanding what the forecast looks like for next year, but even more importantly, I’d like to get a sense of the midrange forecast. I understand you previously had the 2025 numbers out there. How comfortable are you with providing that midrange forecast?

I don’t have a specific timeframe, but I can provide you with a piece of information that we find pretty interesting. Currently, our media is embedded in 11 approved cell and gene therapies. Looking at 2024, it’s anticipated that there are at least 19 more potential approvals in the process, 12 of which are already embedded with our media. So, it’s possible that by the end of 2024, the number of therapies our media is in could double. To us, that is a very inspiring number and looks favorable for what 2025 and beyond would bring for us.

Excellent. Appreciate you taking the questions. Thanks.

You bet.

Our next question comes from the line of Michael Okunewitch with Maxim Group. Your line is open.

Hey guys. Thank you for taking the questions. Can you provide any color on how the current challenging biotech environment could impact the longer-term opportunity within cell and gene therapies? How much of your longer-term opportunity do you see being driven by larger biopharmas who may be able to invest in cell and gene therapy compared to smaller biotech firms, where you may face challenges accessing capital?

Yes, that’s a good question. About 20% of our revenue from the media side comes from small R&D companies and labs. The majority of our revenue, around 50%, comes from companies with approved therapies. As that number increases, we expect our revenue from larger firms will also grow. When we onboard a small company, particularly in the early stages, it takes several years for them to progress through preclinical, Phase 1, and Phase 2 before having any substantial impact on our revenue line. While we welcome the growth of small companies, we believe a shakeout at the early stage won’t impact us much, if at all.

Thank you for that. One last question from me, regarding the sale of the freezer business and the potential to free up capital, how do you plan to deploy that capital? Are you considering M&A, and are there specific areas you would look at, or do you think prioritizing return to profitability is the best use of that capital?

Certainly, the focus is on profitability; that’s our number one priority. With respect to capital deployment, it will go toward the business segments and product lines that we believe will drive profitable growth. We want to invest in our growth. While some of that may possibly go toward inorganic opportunities, it’s not a primary focus. If we pursue something inorganic, it would be closely related to our current core technology. The goal is to direct capital towards the product lines we know can grow profitably over time.

Thank you very much for your responses.

You bet.

There are no further questions at this time. Mr. De Greef, I'll turn the call back over to you.

Thank you, operator. In closing, it's been a busy few weeks since I stepped back into an operating role. While it's clear we have work to do, I'm confident that BioLife will not only weather the storm but emerge stronger, more agile, and well-positioned for success. The more I dig in, the more enthusiastic I am about the opportunity that lies ahead of us. I'd also like to acknowledge and thank our team members for their unwavering commitment to drive BioLife's mission forward as a leading provider of cell processing tools and biostorage services to the CGT and broader biopharma markets. Thank you all for your time today, and we look forward to updating you on future calls and meeting with some of you at the Stephens Conference next week.

This concludes today's conference call. You may now disconnect.