Good afternoon, ladies and gentlemen, and welcome to the Cryoport Second Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Operator Instructions. As a reminder, this call is being recorded. I would now turn the call over to your host, Mr. 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 other reports which we file 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 your joining the earnings call today. With us this afternoon is our Chief Financial Officer, 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 our second quarter 2023 in review document to our website. It can be found under Investor Relations in the Events and Presentation section. This document provides a review of our financial and operational performance and a general business outlook. If you have not had a chance to read it, I would encourage you to download it at this time. I will provide you with a brief update on the business and then we will move on to answering your questions. Today we reported second quarter revenue of $57 million, which was in line with the guidance that we had previously furnished. Our second quarter results reflected significantly weaker than expected demand for capital equipment from China and lower than expected ramps from certain clients during the second quarter. Specifically, China's economic condition and a significant drop in orders caused a second quarter decline in MVE Biological Solutions China-derived revenue of 67% or $5.8 million year-over-year. For the previous two years, the Chinese market has represented approximately 23% of MVE's total revenue and 10% of Cryoport's overall revenue. Based on our most recent conversations with our clients as well as third-party sources, we expect these slowdowns to persist through the third and possibly the fourth quarter of this year. Given this and after thorough consideration, we revised our full year financial forecast, with revenue now expected to be in the range of $233 million to $243 million for 2023 as previously communicated. While this is disappointing in the short-term, we have been working actively to mitigate the situation and serve our clients' changing needs. Our leadership team has been meeting with key partners and distributors. Management has recently been to China to meet with our MVE team based there along with key clients and distributors with the objective of reinforcing our strengths and relationships. As a part of this effort, we have devised mitigation plans we believe will help to build our MVE long-term market leading position. I also want to be very clear that we have confidence in our corporate strategy and that our long-term growth drivers are firmly intact despite the short-term challenges. We operate in a very resilient industry as life sciences treatments are a critical need. And we have a very pivotal role in serving this industry. We are a clear leader in providing solutions to support lifesaving cell and gene therapies and today's commercially approved therapies represent the tip of the iceberg. Despite any short-term headwinds, we expect to benefit from the continued growth of the cell and gene therapy industry, which is expected to grow at a 10-year compounded annual growth rate greater than 20%. In addition to the positive dynamics of the cell and gene therapy market, we are continuing to make strategic investments and form relationships to further enhance our growth prospects. You can find further details on these investments and relationships in our second quarter 2023 in review document, which I mentioned earlier. We believe our growth prospects are stronger than ever and we will continue to cement our leadership position in the cell and gene therapy industry as we move through current macroeconomic challenges that impacted our second quarter results. We are resolved to further strengthen our business and continue to position Cryoport for the long-term and profitable growth. This concludes my prepared remarks and now we will be happy to take your questions. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Operator Instructions. Your first question is from Puneet Souda from Leerink Partners. Please ask your question.

So for the first question, I was just wondering if you could elaborate a little bit on the investments you're making for the business. I thought it was a bit of a jump sequentially in the G&A. I'm wondering if that's related to IntegriCell or other specific investments you're making?

Yes. We're making a number of investments here, you are absolutely correct. They're both in technology as well as building our overall capabilities. One of them is IntegriCell, where we're building out Centers of Excellence both in Europe and Belgium. That's tied to the acquisition of Cell Matters in 2022, as well as the Center of Excellence in Houston, where we already have significant capabilities. And we're building it out to include the IntegriCell solutions platform. Both of those are expected to be fully operational in Q1 of '24. And these investments are all really based on the market insight that we have, which really includes detailed forecasts from our cell and gene therapy customers. So we're building out capabilities to expand market share as well as wallet share from our customer base.

Yes. Thank you. And then for my other question, I was wondering if you could offer a little bit of clarity about the impact from one of your customers ramp? Just wondering if that's something that's been resolved. And that's something we should take into consideration when thinking about the commercial therapy revenue progression for the year.

Obviously, as these guys gear up, they have things like temporary shutdowns for manufacturing purposes and other things. In the second quarter we had one of our potential partners that did have a shutdown for a period of time to do maintenance on it. That's a transient issue.

Yes. It was a planned shutdown for maintenance, calibration and cleaning and they're back up and running.

Got it. Thank you very much.

Your next question is from David Saxon from Needham.

Hi, good afternoon and thanks for taking my questions. Maybe to start on the guidance. It looks like you lowered the guide by $32 million at midpoint, that's excluding the second quarter miss, but I guess, multipart question here. So first, can you just break down the components of how the guide goes down? I'm assuming a lot of that is MVE. But, we'll let you fill in the details there. And then, the second part of the question is just on the cadence in the back half. I mean, it doesn't sound like MVE trends in China are improving at all. So should we think of, you guys facing somewhere in a $10 million to $12 million headwind in the third quarter? Maybe you can offset that some, but should we shake out kind of in the low $50 million range for third quarter? And then, I have a follow-up.

Yes. Look, the revised guidance that we had previously announced is obviously still intact, we took a very conservative approach to providing guidance. We have the knowledge and experience that we have from Q2, and that certainly does take into account the current economic issues and the weak demand that we're experiencing within China. So that's already baked into the guidance for the full year. So definitely, we expect from a guidance perspective the MVE revenue to come in even a little bit lower than Q2. Again, I'm talking about guidance, not in terms of what we made internally. And then for the other businesses, again, we took a conservative approach, where we're looking into just gradual increases for the services side of our business.

Okay. All right. I mean, it's low 50, to a good place holder. And then I'll just ask my follow up here. Jerry, you mentioned mitigation plans following the visit to China. Could you give maybe some color on what initiatives you're working on? And what kind of benefit you could see from those in the future. Thanks so much.

Yes. There are a couple of things that we're working on with China. Number one is a general economic condition. And so we're strengthening our operation there operationally. But the most important thing is the 2025 initiative is underway to buy in China, and we're going to participate in that. We'll be manufacturing stainless product there eventually. We'll start off within six months of kitting those products and sending them to China so that they're manufactured in China, and that will help us with market share there. Within two years, we'll be manufacturing and sourcing the materials in China, building up that China operation. We've needed to do this for some time; this economic pullback has just facilitated us and helped us accelerate that plan. But we have a vast market in China. It's a growing market. And we're going to be claiming more share in that market.

Robert, do you want to comment on the third quarter?

No. I think for your third quarter modeling, I think yes. That's what I would assume.

Your next question is from John Sourbeer from UBS. Please ask your question.

Yes. This is Lucas on for John Sourbeer here at UBS. I guess my first question is on MVE. Thinking about it since acquisition, the performance has been a bit mixed. Do you think Cryoport currently has the right portfolio of assets? Or could there potentially be some opportunities to divest some things? Thank you.

John, we absolutely have the right portfolio of assets. MVE is a solid business run by an excellent management team. It is the global leader throughout the world. And it is poised to benefit from the mountain of new approvals that are coming in cell and gene therapy that will drive it very largely; it's a well-run company, fits in the portfolio, very profitable, produces cash flow. It's a company that you want to own and MVE is a solid company. So, it's one of the assets that we think will benefit from what's coming.

Yes, maybe just to add to it: in 2020, MVE had over $22 million in free cash flow, it maintained good profitability levels, even in Q2 of this year, in spite of the weakened demand from the Chinese market.

Yes. And John, I think you need to recognize it's of strategic importance to us. I mean, we're the leader in cryogenic systems throughout the world, in every region of the world, selling gene therapy; we'll be providing tons of mountains of approvals to come in hundreds of millions of dollars of opportunity. And the industry will be gearing up. We have the number one source of supply for cryogenic systems. And that means also that we have the internal source that is the supply support for our other companies. So there's an insurance component to it as well as an opportunity to gain market share.

Thank you. That's good color. And then I guess, switching over to Cryoport Systems and some of the delays you saw there in the clinical trial business. I mean, were those more from large pharma, emerging biotech or both?

No. So we did have an increase in clinical trials this quarter, which was a nice step up versus last quarter. But it takes time for those to ramp once they initiate. The drawdown that we saw last quarter as it relates to numbers was more heavily weighted to the smaller scale folks, not the large entities.

Your next question is from David Larsen from BTIG.

Hi. Beyond China, in other regions of the world, how is demand for MVE? And I'm assuming the slowdown in demand is really for the large freezers. Is that correct or not? How is demand for the dewars and the small freezers, in regions beyond China, in Europe and the U.S.? Thank you.

The demand for dewars is primarily from the research community, and it's strong. It hasn't fallen back. That's the supply of protein. So it's solid. The demand for freezers is around the world, it's a universal pullback, but the biggest pullback being in China.

So maybe I can just add a little bit of color to it. If you look at China's by far, the most significant. In the EMEA region, we had decreased quarter-over-quarter last year, about 15% in the U.S., about 9%. So compared to the impact on China, and specific and to some extent, Asia Pacific, the other two markets are still pretty solid.

Okay. And then, Jerry, it sounds like you visited China, and I'm assuming you met with some folks. And it seems like you're investing even more in that region going forward. That's part of your mitigation strategy. I'm kind of assuming that the only reason you'd be investing more is, if you had some sort of a sense that there would be revenue coming from that area in the future. I mean, were there any sort of verbal commitments as part of your ongoing and increased investments in that country despite the economic challenges?

So one of the things you have to think about when you look at that is, what's going on in the cell and gene space. So China has eclipsed Europe as the number two entity for clinical activity in the cell and gene space, and is actually projected in the next three years to eclipse the United States in activity. So there's a significant substantial pipeline and resources that are going to be required that will need cryogenic equipment from both a distribution and storage standpoint. So there's a lot of data behind that that supports that strategy.

Just to add on to Mark's comments real quick. There is an initiative in China in 2025 for the companies in China to buy equipment only made by companies in China. And so that's one of the drivers we're already moving on, is to manufacture MVE equipment in China for China. So that's part of that initiative.

Okay. And then just one more question in this area. Is China largely a self-contained region or will the products that you'll be producing in China also be supplying other regions like the U.S. and Europe? Will you be dependent on what's manufactured in China for the rest of the business? Or is it going to be largely self-contained?

No. China is already an export part of our company. We export out of China to EMEA and to the Americas. We look at all of our plants to ensure they are manufacturing at the same quality level. All the products are interchangeable. So quality is high. And the reach is broad.

Just to remind you David, we have three manufacturing facilities, two in the United States and one in China. And the United States facility in Minnesota makes the dewars, the aluminum dewars for the United States and around the world. And then the Ball Ground, Georgia facility manufactures the freezers for the United States and EMEA mostly. Does that help?

Yes. That's very helpful. Thanks very much. I'll hop back in the queue.

Your next question is from Yuan Zhi from B. Riley.

Thank you for taking our questions. I think most of my question has been answered. But Jerry, can you maybe talk about the expansion opportunity for CRYOPDP? And do you see the opportunity or synergy with MVE in China? Thank you.

So if I understand your question, it was the opportunities and expansion of CRYOPDP in China?

That's broadly on the expansion opportunity for CRYOPDP and then synergy with MVE in China.

Yes. So we're doing our reconnaissance with CRYOPDP in China. We've looked at acquisitions. We know the opportunity is there. We do some business there now both with CRYOPDP and Cryoport Systems. It accounts for 1.5 billion people in this world and the Chinese government operates very differently than any other part of the world. And as Mark said, there's an enormous opportunity. So you can expect some future activity in China from CRYOPDP and Cryoport Systems. There's no way we can avoid that part of the world. As Mark said, China is forecast to eclipse the United States in cell and gene therapy activity within the next decade.

And I think you were asking about CRYOPDP broadly outside of China activities as well. Something that we've talked about before is really CRYOPDP's strength in Europe and Asia Pacific that continues but also our intent to build out their U.S. capabilities. So that's actively in the works. And we see a lot of synergy opportunities between Cryoport Systems and CRYOPDP in particular, with the U.S. customer base that Cryoport Systems has.

So all of this is working to build up to take advantage of those approvals that are coming. Our business is a lot like biologics and the biologics history. If you looked at biologics in 2010, it was around $40 billion, today is $475 billion in revenue and it just sprang out and this is a similar situation. So we're preparing all the time for the future. We have seven potential approvals coming this year. And it's an exciting time. Two already approved. Okay. Thank you.

Operator Instructions. Your next question is from Richard Baldry from ROTH MKM.

Thanks. I'm curious, if you can give an update on the blood collection standardization initiative, or any timing for launch where you're standing on that?

Yes. We're making great progress. So the facilities in Houston are construction complete where we've initiated the validation and qualification activities for the process as well as all the equipment. The site in Belgium is running a month or two behind that. Both are anticipated to be ready for launch and start to generate revenue in Q1 of next year. So they're running very, very smoothly. We've already, similar to the bio-services entity when we opened those last year, had folks coming through from our client base — a substantial number of them that are pre-evaluating the infrastructure, the facilities and the processes to fast track their processes, which we think will provide a very, very strong quick start once we open for business next year.

I'd like to remind you that all of these efforts are again preparing for the future, the market that we know is coming. And when a market is coming like this, there are needs for standardization. IntegriCell is built from market demand. It's not built just on a whim. It's being built for scale.

Thanks. And we look at sort of the newer offerings across your things, whether that's the Elite shippers, the Ultracold and Cryosphere, or in the Cryoportal 2.0. How do you think that changes your go-to-market pricing? Is it sort of a new higher tier, does it just replace what's there as is, how we think about the economics as you make those shifts?

I'll turn it over to Mark in just a second to add to this. But the Elite one of shippers is composed of Cryosphere and the Elite Ultracold. Ultracold is at minus 80. It opens up the whole gene market to us because generally speaking, not always, but generally speaking, gene therapies require minus 80 degrees Celsius. That's what the Elite Ultracold is. The Elite Ultracold also has features and benefits that no one else has in the market by a longshot. It has a whole time, twice as much as its nearest competitor. And then it has all the monitoring that we provide, along with the Cryoport control, the logistics network and our fantastic logistics technicians supporting the shipments. It's a revolutionary product. And it's one that Serepta is using, for example, in their launch of their new gene therapy. And then, of course, the Cryosphere is the other part of the Elite line. But the Elite line stands out in a very poignant way from other competitors in the marketplace.

I think Jerry covered it really well. If you guys are thinking about it from an economic standpoint, there will be a slight premium associated with it that you guys may want from a modeling standpoint to consider. But as Jerry mentioned, these are premium products in the space. They're meant to be differentiators. And, obviously, the ultracold is a new product line for us and allows us to extend into the gene therapy space and capture aspects of the market that we didn't have accessibility to previously, which allow us to continue to build share overall.

Thanks. And can you peel back on the Cryoportal 2.0, or is it just a replacement or an upgrade? And then maybe there's a decent step up on acquisition integration costs in the quarter and kind of look underneath the hood on that, too. Thank you.

The question on the integration cost over to Robert in just a moment, but to your question about Cryoportal 2: Cryoportal 2 is the only logistics management system to my knowledge in the industry that is 21 CFR Part 11 compliant and fully validated. It sets us apart from anyone else in the industry, in terms of information and security, and speed and comprehensiveness. And it also gives us a platform for expansion and adding other services in the future.

So one of the things you have to think about when you're looking at the Cryoportal 2 is there are a couple of fundamental differences here. First and foremost it provides a readily made vehicle for integration with third-party systems and competency. So data is going to be a huge driver in the space moving forward. And this provides the ability to more effectively transfer and manage data. And it also allows us to start to monetize the data that we have in our system. So we're going to be initiating, and we already have in some cases, a data services platform that will allow us to start to monetize that data moving forward, which is a step change from the historical portal.

And then just to your second question related to the acquisition-related costs. We did explore a strategic acquisition opportunity during the first half of this year, but ultimately decided not to move forward with that. The costs that we had are just customer due diligence and market research activities. Having said that, we are actively looking at smaller tactical acquisition opportunities globally, similar to what we have done in the past. And that's where we stand as well.

Your next question is from Brandon Couillard from Jefferies.

A couple more questions. The 2Q revenue decline: is that all unit volume, are you seeing some pricing pressure as well, specifically within China? How sure are you that it's macro and not a local competition dynamic? And third question, what percent of the MVE business was China in 2020, when you bought it?

I'll give the percentage to Robert in just a moment. But we're certain that it wasn't competition. We have a lot of intelligence going on around competition, especially in China. So we're certain of that.

Yes. China-derived sales for MVE were in the 19% to 20% range. And then, to make that distinction of China-derived, because if you look at the region, we looked at, for this analysis, really at our distributors, our sales within China, our sales outside of China where the end destination of the products is China as well as our direct customers, whether it's in the U.S. or elsewhere, where their end destination is China. So we tried to really capture all of the China impact in that number, but about a little less than 20%.

Okay. Second question, just on the number of clinical trials you added in the second quarter. I thought when we talked a month ago, you were actually seeing some revenue impact from trials being terminated, some cancellations and reprioritization, which added a lot in the quarter. Do you have a breakdown of number of terminations or completions versus gross adds? And how do we reconcile those two data points?

Yes. So we absolutely did in Q1 see a substantial number of terminations; we actually had 37 terminations in Q1. That number dropped to 16 in Q2 from a termination standpoint. So that 27 reduction in Q1 obviously impacted the softness from a revenue standpoint in Q2 because those programs weren't running. We did have a nice add in the second quarter. But those trials don't start at full enrollment. So you initiate those trials, they come online, but they take a couple of quarters to really ramp. And so that obviously bodes well for the future. But there is a lag period between onboarding and full activity in revenue contribution.

Last one, a competitor recently said it's increasingly clear to them that late stage and approved companies are looking to multi-source and dual-source their logistics providers. I'd like to get an update from your point of view on that dynamic and what that mix could really look like as you see it on the ground today. Is it 50:50 share? Or are they keeping a second vendor just warm and you retain 80:20 of the business? How do you see that trend moving forward?

So obviously, we'll always have some competition in this space. In particular, the cell and gene space is rapidly growing and will continue to expand at a rate that's disproportionate to the overall industry. This is going to run for the foreseeable future. But I'll put our solutions up against anyone else in the space at any time. We have been very successful and captured nearly 70% of the market due to the fact that we are best-in-class. We have exemplary performance and we are building for scale. So this reputation is unsurpassed and has allowed us to capture that roughly 70% market share. So we feel very confident that our solution will continue to dominate in the market, both the clinical and the commercial markets for the foreseeable future.

Thank you. There are no further questions at this time. I will now hand the call back to your speakers for the closing remarks.

Thank you for your questions and our discussion. In closing, the second quarter was challenging. Cryoport is continuing to execute on its plans to position our company as a value-added provider and vital resource serving the cell and gene therapy industry, which is poised for substantial growth as it transforms the way medicine is practiced. We're doing so by making targeted investments, introducing important new services and products and forming key strategic relationships. We believe all these actions combined will make us a stronger, more efficient organization and ultimately support our company's long-term growth. We want to 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 when we report on our third quarter 2023 results. Good night.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining; you may all disconnect.