Cryoport, Inc. Q2 FY2022 Earnings Call

Good afternoon. And welcome to the Cryoport’s Second Quarter 2022 Earnings Conference Call. All participants will start in a listen-only mode. As a reminder, this call is being recorded. I will turn the call over to your host Todd Fromer from KCSA Strategic Communications. Please go ahead.

Thank you, operator. Before we begin today, I would like to remind everyone that this conference call contains certain forward-looking statements. All statements that address our operating performance, events or developments that we expect or anticipate occurring 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 team 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 or 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 experience 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 filed with the Securities and Exchange Commission, and those described from time-to-time in the other reports, which we filed with the Securities and Exchange Commission. It is now my pleasure to turn the call over to Mr. Jerrell Shelton, Chief Executive Officer of Cryoport. Jerry, the floor is yours.

Thank you, Todd. Good afternoon, ladies and gentlemen. We appreciate you joining our earnings call today. With us this afternoon is our Chief Financial Officer, Mr. Robert Stefanovich; our Chief Scientific Officer, Dr. Mark Sawicki; and our Vice President of Corporate Development and Investor Relations, Thomas Heinzen. As a reminder, we have uploaded the second quarter 2022 in review document to our website. It can be found under Investor Relations in the 'Events and Presentations' section. This document provides a review of our recent financial and operational performance and a general business outlook. If you have not had a chance to read it, I would encourage you to go to our website and download it. I will provide a brief update on our business, and then we'll move on to answering your questions. Reflecting strong demand across all business units and geographies, we delivered another solid quarter with second quarter revenue increasing 14% or 18% on a constant currency basis to a record $64.2 million. Importantly, all our business delivered double digits, top-line growth in this period. Our gross margin increased slightly more than 200 basis points from the first quarter of 2022 as we continue with our disciplined approach to CapEx as our New Prague manufacturing operations return to production. Although the macro environment has been volatile this year, demand for our products and services remains strong. We are meeting this demand and preparing for projected demand through continued expansion of our business through both acquisitions and internal expansion projects. An important milestone for us during the quarter was the opening of our first two global supply chain centers. These two new world-class facilities are located in Houston, Texas, and Morris Plains, New Jersey, and form the foundation of our Global Supply Chain Center Network. I'm happy to report that both facilities are fully staffed and accepting clients. During the quarter, we were also busy on the acquisition front, as we further strengthen our presence in the EMEA region with the acquisition of Cell&Co BioServices located in Clermont-Ferrand, France. Given its capabilities, licensing, and strategic locations, Cell&Co will play an important role for our company by accelerating the expansion of our new Global Supply Chain Center Network in the EMEA region by approximately two years. Also, just last week we closed on the acquisition of Cell Matters located in Liège, Belgium. Cell Matters specializes in cryo-process, optimization, cryo-processing, and cryo-preservation, which further expands our supply chain platform from the Life Sciences' upstream in support of standardized apheresis collection and processing. Our increasing portfolio of new products, services, and systems, coupled with our expanding global footprint is continually moving us forward and achieving a growing essentiality within our markets and the Life Sciences. Across the cell and gene industry, as we are increasingly providing new solutions to de-risk processes for delivering therapy efficacy for patients in need. We have successfully accomplished this as we have been methodical and disciplined in expanding our platform and global footprint through organic development, acquisitions, partnerships, and business alliances. And looking ahead, we believe that there are still many opportunities on which we can capitalize to deepen our relationship with our clients. Fortunately, we're in a strong financial position with approximately $550 million in cash, which is sufficient to support our planned growth initiatives. Regenerative medicine is growing, and so is our pipeline of potential commercial customers in regenerative medicine with a total number of global clinical trials, supported by Cryoport, reaching a record 626 at the end of the second quarter of 2022, a net increase of 65 over the second quarter of 2021 and 24 over the year. It is worth noting that a record 81 of these trials are in Phase 3, up from 69 this same time last year. In addition to strong demand for our product, systems, and services, we will also benefit from increased client utilization of our new and expanding bio services, which includes commercial therapy storage, secondary labeling, kitting, and fulfillment. Therefore, we are confirming our full year 2022 revenue guidance to $260 million to $265 million. This revenue guidance represents solid growth of 17% to 19% and is driven by current demand across our business units. This ends my prepared remarks. Now we'll be happy to take your questions. So operator, if you'll please open the lines for questions.

We will now begin the question-and-answer session. And our first question will come from Puneet Souda of SVB Securities. Please go ahead.

Hi. Yes, you have Michael on for Puneet. Yes, thanks for taking my question. So for my first question, I was just wondering about the FX impact in the quarter. Could you provide any color on how that impact is spread across the various parts of the business? And for 2022 overall, what FX impact are you contemplating on the top line, and do you see FX meaningfully impacting any of your margins?

Yes, thanks for the question, Michael. Just a few comments on that. As you have seen in our earnings release, we did disclose the constant currency versus the as-reported revenue growth. So as reported, 14% and constant currency, 18%. We have about 36% of our revenue related to foreign currency. So we certainly saw an impact in Q2. Without that impact, revenues would've been $66.1 million instead of the $64.2 million, so about a $1.9 million increase in revenues on a constant currency basis. There is an impact, and we do expect to see a continued impact going forward into the second half of the year. Obviously, nobody knows exactly where the exchange rates will be. In terms of the exchange rate impact on the various markets, we've seen an impact on all three markets, with the biggest part being in animal health and in biopharma.

Got it. That's helpful. And then I think a question about clinical trials. So it's good to see net ads across the board and we're just wondering, given the macro environment, if there is any potential cancellations or curtailing, especially from small biotechs? Is it possible to give any color on just how many of these clinical trials you are servicing are with smaller biotechs versus big pharma?

Yes, we see no evidence of any deceleration as it relates to clinical portfolio activity within the entities in the programs that we support to date. We've done an analysis internally and the programs that we support are very well supported from a cash position. Therefore, we have a high degree of confidence that we're not going to see any negative impact related to any sort of macro environment. In fact, the cell and gene space is still very robustly being invested. There are a lot of investments still going into the space as it relates to healthcare and biotech overall.

Great. That's helpful. Thank you very much.

Thank you.

The next question comes from John Sourbeer of UBS. Please go ahead.

Hi, thanks for taking my question. Maybe just a question on the commercial revenues, which continue to ramp year-over-year. Any way to provide some color on what you have in the outlook for the guidance on the second half of the year and how you see that ramping throughout 2022?

Yes, just maybe before Mark comments on it, on the revenue outlook, we don't give that granularity in revenues. We did provide guidance for the full year of $265 million. We do reiterate that guidance now as well. I see it as going to be a mix of the business units and of the revenue driven by the growth and maturation of clinical trials, and then ultimately the growth and the commercial revenue as well.

Yes, just to add to that, obviously we've had a significant focus on building as robust of a clinical trial pipeline as we can. That has demonstrated the ability to transition into commercial therapies where we're currently supporting nine programs. That's despite the fact that cell and gene is still very early in its development. We do anticipate commercial growth to continue, and there are a couple of different areas and reasons behind that. First and foremost, we're seeing continued expansion of approved therapies on a global basis launching in new countries and new geographies. A lot of these therapies are also really pushing towards earlier line therapy, and we're seeing success in them moving from fourth line to third line and now third line to second line treatment. They are also focused on expanding the number of indications which have also seen substantial success from many of the therapies that we're supporting now. That doesn't even include any new therapy launches. So I think the combination of these four things is a very positive element and will continue to drive growth in this space for us.

Got it. I appreciate the color. And maybe just a follow-up on the last comments there. On allogeneic therapies, are you anticipating any approvals in 2022? Can you just add some additional color on what you see as the opportunities around allogeneic?

Tom, why don't you take that?

Hi, John. There could be two allogeneic therapies maybe three approved this year. If you recall, we're currently supporting a little bit more than 30% of our pipeline with allogeneic at this point.

Got it. I appreciate the color. And then I guess maybe just one last one. It sounds like the New Prague facility is operational at capacity. Any additional color you can provide on how MVE is recovering and maybe any insight into how the backlog is looking on that business?

Yes, MVE is doing fine at this point. We're working hard throughout the rest of the year to make up the lost capacity that we had, the lost production we had in the first quarter. But the plant is working well, and MVE is doing very well.

Great. Thanks for the color and taking my questions.

Thank you.

Thanks, John.

The next question comes from Richard Baldry of Roth Capital. Please go ahead.

Thanks. This question is sort of outside of your own controls, but I'm curious what you think is gating the growth rates for the commercial side of the business? I think what I read is 22%. It seems to me that the number of new indications coming online, sort of the critical treatment protocols they are providing, that I would have thought would be growing significantly faster. Is there something, whether it's manufacturing capacities or otherwise, that's holding that back? And how do you think that will progress over the near, intermediate term? Thanks.

Hey, Rich, it's Tom. I'll take a swing at it first, and then maybe Mark can add to it. But you hit it on the head: it's manufacturing capacity. Again, if you go back and look at Bristol Myers that just reported their quarter ahead of ours a couple of days ago, they called it out again. They couldn't fill demand. Thankfully, Gilead did increase their demand; they opened up a new facility in Maryland that increased their capacity by 50%, but that's not fully up and running at full tilt. And then more capacity is coming on hopefully as we speak here. We have a lot of customers building out. So that's the biggest thing today.

No, I think you hit it right on the head. I mean, there are two primary issues. One is final product manufacturing capacity, which a lot of these companies are bringing online. Tom mentioned the Kite facility down in Frederick, Maryland is one of them. The second is viral vector capacity. A lot of folks are starting to internalize viral vector production so they have more control over their supply chain and eliminate that as a barrier to scalability.

Could you talk maybe a little bit, if not qualitatively or quantitatively qualitatively to the acquisition revenue impacts in the third and fourth quarter from your most recent deals? Is there any way to kind of get our hands around how large those entities were, the headcounts they would have brought in and maybe back into some concepts of the size on our own? Thanks.

Yes. I mean, those are relatively small acquisitions. If you look at those acquisitions, they certainly have a strategic component to them, but in terms of size, if you look at the acquisitions that we talked about that we closed subsequent to quarter end, you look at Cell Matters, it's a very strategic acquisition but again, it's a small acquisition. Ultimately, they are going to start generating revenues as part of this broader initiative. You look at Polar Express in Spain; that's part of the expansion of CRYOPDP into the Spanish market. That was an acquisition of $1.5 million with an earn-out. Those are going to contribute some revenue. If you look at the acquisition that we closed in April selling Cell&Co in France, they had contribution which was less than a million, a little over $500,000.

For the quarter.

Great. Thanks.

Thanks, Rich.

The next question comes from Yuan Zhi of B. Riley Securities. Please go ahead.

Hi team. Congratulations on an impressive quarter. So maybe first question directly to Jerrell. When we look at the global footprint, we began to see some overlap locations between Cryoport Systems and CRYOPDP. So maybe, can you talk about the plan here, either replicating the success you have here in the U.S. to EU considering the numerous acquisitions that have happened in the last couple of months, or do you plan to improve the synergy between these two segments in the U.S. here?

There is really no overlap. Cryoport Systems has a different mission than CRYOPDP, which is a specialty carrier serving biopharmaceutical. But we are working on the synergies and we absolutely will improve them over time.

The other thing I'll just add to that is that we are focused on looking at opportunities for where it makes sense for co-location and obviously cost management associated with co-occupying common facilities, as well as the synergies associated with the business platform. So both of those things are also significant factors in looking at that synergy activity.

Yes, got it. That's helpful. And a follow-up here is the quarterly review; you mentioned some interesting metrics here, the quality audit. Just curious, is there an improvement compared to the first half of 2021? And are these from new customers or from existing customers?

It's a mix of new and existing, but it grows all the time because we keep growing our pipeline of business. So it's something we thought was important. We talk about quality a lot, but we really hadn't disclosed anything. And we thought it was important for the Street, our customers, everyone that looks at these reports to see how dedicated we are globally to our quality team, our quality systems, our processes.

Yes. Thanks. And one last question from us: since you guys reiterated the guidance again for 2022, just curious since the guidance is calculated based on your order book and the expectations, and we have started to see some improvement of supply chain in cell and gene therapy, like you mentioned, Gilead had a great culture just announced. Just want to check if there is any read-through to your order book and the near-term demand that we have when we think about the modeling.

Yes, I mean, just obviously, if you look at the guidance, we're clearly looking at the supply chain issues, the foreign exchange, and we still feel very strong about the revenue that we can achieve for the full year. Hence, we’re reiterating that guidance. I don't know, Mark, if you want to add anything.

Yes, the only thing I'll add is you asked about the order book. And so obviously we do our extrapolations based on client feedback. We try to get as much forecasting information as we can from our clients, in particular, as it relates to volume considerations around our service business. We take that into account as well. You have to step back and look at where we are right now as a company; the number of clinical trials we're supporting is at 626 and the expected BLA filings and MAA filings that will further contribute to those dynamics. We have a very strong customer base and strong support of clinical trial portfolios that ultimately will assist in driving the revenue for the remainder of the year.

Great. Thank you for the additional context.

Thank you.

The next question comes from David Saxon of Needham & Co. please go ahead.

Yes. Hi everyone. Thanks for taking the questions. And congrats on the quarter. Maybe a follow-up to the last question. Yes, guidance does require some sort of acceleration into the back half, but you also have this $9.4 million of revenue from the fire. So just wanted to see did you – were you able to recapture that in the second quarter? And what's the expectation for the cadence of recapturing whatever is left of that $9.4 million?

Yes, no, it's a very good question. I think just to be very clear, if you look at the performance for Q2, this is not driven by recapture of revenue from the New Prague facility. This is really driven by growth in all of our business units where we're starting to see very solid growth. So in terms of recapturing, the revenue from Q1, as we mentioned, that's going to happen over time, as we brought the manufacturing facility in New Prague, which is one of three manufacturing facilities of MVE Biological Solutions. As that has ramped up, obviously we're going to serve the client base and recapture some of that revenue over the quarters. The impact on Q2 is really minimal, and the growth is really driven by all of our business units collectively.

Okay. So, if I'm hearing that correctly, it might extend into 2023. Is that correct?

No, I think it's really more. When you look at – when we say recapturing revenue, I mean, that's not an exact science, right? And so, look at the revenue you are bringing on, and that's driven by client demand. Certainly, we had an issue in Q1 through the fire damage. With the New Prague facility being fully up and running, we are recapturing revenue from some of that, but I can't really quantify that as well.

David, we added a third shift in order to catch up that we didn't have before. So we think we can catch up this year.

Okay. Got it. And then my second question is just on margins, gross margin. There was some sequential improvement, which is good to see. Just wondering what you are seeing from an inflation perspective and whether or not you can take price to offset that?

Yes, look, you are absolutely right: we had really strong, sequential growth over Q1. We do believe margins have stabilized, and we expect those to gradually improve over time. You have to also look at the types of investments we're making and the expected growth that we are seeing in this market. That will impact gross margins, for example, in bio services. So we're just starting to roll out bio services. We had two facilities that were opened in Houston and in Morris Plains in June. Clients are now going through the audit processes and you will start to see revenue come in through those bio services facilities as well. I'd expect gross margins to improve. In terms of pricing, we are looking at our pricing, making adjustments to our pricing, and that's really an ongoing exercise as we review the inflationary trends as well as foreign exchange currency.

Got it. Thank you.

The next question comes from Brandon Couillard of Jefferies. Please go ahead.

Hey guys, this is Matt on for Brandon. Thanks for taking the question. First, one on Cell Matters, the deal you announced this week, did you guys enter into a strategic partnership with them this year? Can you talk a little bit about maybe what you learned from the partnership to acquire the asset was all planned? And then, how do you expect this to impact your cryo-preservation offering going forward? Maybe talk about the ability it offers you to expand the portfolio upstream a bit more?

Yes, so one of the things we're always doing is we're always critically evaluating the overall supply chain related to cell and gene distribution. One of the biggest pain points is moving upstream, and that is the collection and processing related activities of apheresis and leukapheresis product, as well as the associated distribution requirements of moving fresh product all around the world. It has been a pain point in the industry for the last number of years. We've got resounding feedback from the initial engagement around this platform, as well as industry feedback that this is a critical pain point that needs to be addressed. This gives us a substantial opportunity to address that. It will address the deficiency in the marketplace in general, but it also provides the ability to de-risk and improve product quality, which is a critical consideration, particularly concerning the manufacturing variability that a lot of these companies are seeing based on the collection related activities and collection processing activities. So we think it's a significant opportunity. And it's an opportunity to de-risk; it's an opportunity to obviously present a platform that substantially improves the overall product quality that's going into the manufacturing centers. That's the feedback that we're getting from the industry as well.

And then following-up to another question on the two new facilities you guys opened. Can you just talk about kind of initial thoughts or reactions from your customer base? I think Robert noted that a handful are going through their audit processes, and then how you expect utilization in those two new facilities to kind of ramp up throughout the year? Is there a way to handicap the potential revenue there if we look out 12 to 18 months once things normalize?

Yes. Client activity is already happening. We're already supporting client clinical activity in both locations. Some of our clients actually audit the facilities pre-completion to be able to move product in there as quickly as we can. That being said, obviously it takes time to build up that backlog associated with the storage and fulfillment considerations. We're still bringing certain services online in the bio services area with them. So, from our perspective, it's probably a 12- to 18-month process before you get a full absorption of those particular assets from a storage consideration.

Matt, one other thing to keep in mind is if you think about allogeneic therapy and allogeneic coming to market, there aren't any allogeneic approved yet. So we have to be our clients’ demand and be ahead of the curve so they can be getting this into their filings, they can be auditing in our facilities and everything else. So we have to be out ahead of this a bit. We don't want to be too far ahead, but we're really bullish on the bio services, the whole network of the global supply chain network. It is going to be a big factor for us moving forward.

Makes sense. I'll leave it there. Thank you guys.

Thank you.

The next question comes from David Larsen of BTIG. Please go ahead.

Hi, can you just remind me: what was the FX impact? I think you said it was like a $2.2 million revenue drag. Is that correct? And then how quickly can you react to price? So if you are seeing inflation pressures with steel, freight, and semiconductors, like how quickly do you actually see those higher costs coming through? And then can you turn around and increase price like that same month, or is there a quarter delay or a six-month delay?

Yes, no, absolutely. So just in terms of the FX impact, for the quarter it’s about $1.9 million; for the six months, it’s about $2.8 million. It did have an impact, in spite of us showing record revenue for the second quarter. Obviously, if we didn't have an exchange rate impact, it would've been still quite a bit higher. In terms of the supply chain and inflationary issues or trends, that's a balancing act. There is certainly a lag time between the time that we can implement pricing changes, which we have already done during Q1. You will see those kick in; some of the contractual arrangements have to be put in place. So typically, it will be more than a month lag time that you will see there.

Okay. And then the New Prague facility for MVE, that's up in operational and at full capacity, is that correct? And it's my understanding there are three plants, and all three of them have triple shifts going on at each of them to meet this high level of demand. Is that the case?

The New Prague facility has three shifts. We don't normally comment on details about our operations. New Prague was an exception because of the fire. However, the other operations are operating at full capacity as well.

Okay. And then just my last question, I've been getting questions from investors around the competitive market. Any thoughts on BioLife, for example? I think they may have a relationship with Thermo Fisher. Just any broad thoughts on the competitive environment. Thank you.

Yes, David, this is a market of co-opetition. You often are competing with entities that are your customers or your suppliers. That's the nature of the market. In terms of competition, it's a growing market, and I've said over and over, we can expect competition on all fronts as the market grows. It definitely is growing. There are small competitors, but we are the market leaders and we remain the market leaders; we’re committed to continuing to be the market leaders.

Okay, great. Thanks very much.

Thank you.

And our next question comes from Jacob Johnson of Stephens. Please go ahead.

Hey, thanks. Good afternoon. I guess a couple of follow-ups on a couple of different things. Maybe first, just follow-up on Matt's question about the supply chain centers and thinking about the opportunity there. You guys have this target for $20 million to $28 million of revenue from a commercial therapy. Is there any way to tease out kind of what the supply chain centers represent of that opportunity?

Jake, we don't comment on details of our operation. However, these supply chain centers are significant to our strategy; they were well thought out and have been three years in the making. They are up and running, and customers are already coming into the facility, moving their product into the facility. That's about as far as I can go with that, except to tell you they are going to be significant. And these are the first two supply chain centers of a global supply chain network. We have four more that we're discussing right now, and you can expect to see a lot more activity in that area.

The only thing I'll add to that, Jacob, is obviously one of our core strategies is revenue diversification of our existing relationships and expansion of services through acquisitions and new service platforms, which is really focused on driving that. Basically, looking at driving the percentage of revenue that we get out of each patient interaction that we have within our organization.

Okay. I figured I would give it a shot. Thanks for that. And then Robert, just on guidance, we've seen FX headwinds kind of intensify since you initially gave guidance, and you reiterated it today. Should we read that as you have a larger FX headwind, so kind of operationally you are increasing your expectations? Or maybe there is some M&A flowing through there that's offsetting some of the FX headwind, but I just wanted to kind of pick your brain on that.

I think, look, we’re clearly looking at the supply chain issues, the foreign exchange, and we still feel very strong about the revenue that we can achieve for the full year. Hence, we’re reiterating that guidance. I don't know if Mark wants to add anything.

Yes, so, again, we're very immersed in the cell and gene therapy space, covering a lot of companies, portfolios, and clinical trials. We have a lot of visibility. Having said that, obviously, if you look at risk factors in our queue, you'll see those uncertainties related to foreign exchange translations, supply chain risks, and others. We're trying to weigh that and see how that impacts our full year revenue guidance, and we feel confident with the revenue guidance we provide for the year, based on the views we have and the discussions with our clients. Again, we have strong positioning in the market space with the clinical trials we're supporting with MVE being the global leader for cryogenic freezers and shipper systems, and CRYOPDP, having a strong presence and leadership in temperature-controlled courier solutions. So we have a number of revenue streams that all contribute to that full year guidance.

Okay. Thanks for that, Robert. I'll leave it there. Thanks.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Jerrell Shelton for any closing remarks.

Thank you, operator. In closing, first quarter 2022 was another quarter demonstrating our leadership position in temperature control supply chain solutions for the life sciences industry, supporting our markets of biopharma, animal health, and reproductive medicine, especially the life-saving cell and gene therapies across the clinical and commercial spectrum. We're working hard to be the world's most comprehensive, fully integrated, commercially successful, enabling company in the life sciences. Our focus is on biotechnology, providing the industry a fully integrated supply chain platform from the earlier stages of research to the delivery of the end commodities in their final form. Cryoport is known for industry leadership, dependability, agility, reliability, innovation, and excellence, and we will strive to continue to achieve a growing essentiality to our markets. Thank you for joining us today. We appreciate your continuing support and interest in our company. We look forward to updating you on our progress again next quarter. We hope you have a good evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.