CryoPort, Inc.

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. If at any time during this call you require immediate assistance, please press star zero for the operator. As a reminder, this call is being recorded. I will now turn the call over to your host, Mr. Todd Cromer 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 due information or in 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. Gerald Shelton, Chief Executive Officer of Cloudport. Jerry, the floor is yours.

Thank you, Todd. Good afternoon, ladies and gentlemen. We appreciate your joining our earnings call today. With us this afternoon is our Chief Financial Officer, Robert Stavanovich, 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 the 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 MBE 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 MBE'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 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 these 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 life-saving 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 Crowdport for the long-term and profitable growth. This concludes my prepared remarks. 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. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. Your first question is from Puneet Soda from Levering Partners.

Please ask your question.

Hello? Puneet?

Hello?

Yeah, there you are, Puneet.

Sorry, are you able to hear me? Yes, we can. Okay. Yeah, you have mic on for Puneet. 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 saw there was a bit of a jump sequentially in the G&A. I'm wondering if that's like related to IntegraCell or other specific investments you're making.

Yeah, we're making a number of investments here. You're absolutely correct. They're both in technology as well as building out our overall capabilities. One of them is IntegraCell, 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 that out to include IntegraCell Solutions Platforms. Both of those are expected to be fully operational in June of 24. And these investments are all really based on the market insight that we have, which really includes detailed forecasts from our own gene therapy customers. So we're building out capabilities to expand market share as well as wallet share from our customer base.

Got it. 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. I'm just wondering if that's something that's been resolved and if that's something we should take in consideration when thinking about the commercial therapy revenue for the rest of the year.

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

Yeah, it was a planned shutdown for maintenance, calibration and cleaning, and they're back up and running, right?

Got it, thank you very much.

You're welcome.

Your next question is from David Saxon from Needham.

Please ask your question.

Hi. Good afternoon, and thanks for taking my question. Maybe to start on the guidance, it looks like you lowered the guide by 32 million at the midpoint. That's excluding the second quarter miss, but I guess multi-part question here. So, first, can you just break down the components you know, how the guide goes down. I'm assuming a lot of that is MBE, but, you know, 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 MBE trends in China are improving at all. So should we think of, you know, you guys facing somewhere in the $10 million to $12 million headwinds? in the third quarter? You know, maybe you can offset that some, but, you know, should we shake out kind of in the low $50 million range for third quarter and then all of that follow-up?

Yeah, no, look, the revised guidance that we had previously announced, you know, is obviously still intact. We took a very conservative approach to providing guidance with kind of the knowledge and experience that we have from Q2, and that certainly does take into account the current economic issues and 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 may internally see. And then, you know, for the other businesses, again, we took a conservative approach where we're looking into just gradual increases, you know, for the services side of our business.

Okay. All right.

So, I mean, it's, you know, low 50s, a good placeholder. And then I'll just ask my follow-up here. you mentioned mitigation plans following the visit to China. So just, you know, maybe some color on, you know, what initiatives you're working on and what kind of benefit you could see from those in the future. Thanks so much.

Yeah, there are a couple of things that we're working on with China. Number one is the general economic condition. And so we're strengthening our operation there operationally and, and, But the most important thing is most likely the 2025 initiative that's 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, and it's a growing market, and we're going to be claiming more share in that market.

Robert, do you want to comment on that?

Yeah, no, I think your third quarter, you're right. I think for your modeling, I think, yes, that's what I would assume.

Okay, great. Thanks so much. You're welcome.

Thank you. Your next question is from John Sarabier from UBS. Please ask your question.

Yeah, this is Lucas for John Sauerbeer 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 portfolio of assets. MBE is a solid business. It's 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. But 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 MBE is a solid company. So, you know, it's one of the assets that we think will benefit from what's coming.

Yeah, and maybe just to add to it, you know, in 2022, you know, MBE had over $22 million in free cash flow. It maintained good profitability levels even in Q2 of this year in spite of the, you know, weakened demand from the Chinese market.

Yeah. And John, I think you need to recognize its strategic importance to us. I mean, we're the leader in cryogenic systems throughout the world, in every region of the world. Cell and gene therapy will be providing tons of mountains of approvals to come and 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 offensive market gain component.

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 trial count 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.

Thanks, that's all I had. Thanks, Lucas.

Thank you. Your next question is from David Larson from VTIG.

Please ask your question.

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 doers is primarily from the breeder 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. We're the biggest pullback being in China.

Maybe I can just add a little bit of color to it. If you look at China, it's by far the most significant producer. In the email 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-Pac, the other two markets are still pretty solid.

Okay. And then, Jerry, it sounds like you visited with 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. You know, 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, you know, 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 resource that's 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.

I think one thing, Dave, just to take 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 MBE 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, I think you mentioned like steel and other products that you'll be producing in China. Are those also going to 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 as manufacturing at the same quality level All the products are interchangeable, so quality is high and the reach is broad.

Just to remind you, Dave, we have three manufacturing facilities, two in the United States and one in China. And the United States facility in Minnesota makes the doers, the aluminum doers, 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?

Yeah, that's very helpful. Thanks very much. I'll hop back in the queue.

Thanks, David. Thanks.

Thank you. Your next question is from Yuanzhi from B. Riley.

Please ask your question.

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 cryo-PDP, 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 cryo-PDP in China?

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

Yeah. Yeah. So, so we, we are, we're doing our record order. Uh, so we're doing our record order with, with crowd PDP in China. Um, we've looked at acquisitions. Uh, we, we know the opportunity is there. Um, we do some business there now, both with crowd PDP and crowd port 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 cryo-PDP and cryoport systems. There's no way we can avoid that part of the world. As Mark said... you know, the China is forecast to eclipse the United States in cell and gene therapy in the next, within the next decade.

And I think you were on cry PDP, you were also looking for, you know, just broader outside of China, you know, activities. And then something that we've talked about before is, is really cry PDP strength in Europe and Asia pack that continues, but also our, our intent to build out their us capabilities. So that's actively in the works, and we see a lot of synergy opportunities between Cryoport Systems and Cryo PDP in particular with the U.S. customer base that Cryoport Systems has.

So all of this is, you know, working to build up to take advantage of those approvals that are coming. You know, our business is a lot like biologics were, the biologics history, and it If you looked at biologics in 2010, it was around $40 billion. Today, it's $475 billion in revenue, and it just sprung out. And this is a similar situation. So we're preparing all of the time for the future. We have seven potential approvals coming this year, and it's an exciting time. Five. Okay, I'm corrected. Five potential approvals.

We had two already approved this year.

Two already approved. Okay, thank you.

Got it. Thanks for the clarification. Thank you.

Thank you.

Once again, ladies and gentlemen, that is star one, should you wish to ask a question. Your next question is from Rachel Baldry from Roth MKM. Please ask your question.

Thanks. I'm curious if you can give an update on the, I'll miss the technical term, but the blood collection standardization initiatives. Is there any timing for launch, you know, where you're standing on that?

Yeah, we're making great progress. So the facilities in Houston are construction complete. 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... to be ready for launch and start to generate revenue in Q1 of next year. So things are running very, very smoothly. We've already, similar to the bioservices entity, when we opened those last year, we already have folks coming through from our client base, substantial number of them that are pre-evaluating the infrastructure, the facilities and the processes to fast track their audit processes, which we think will provide a very, very strong quick start there 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 the market is coming like this, there are needs for standardization. IntegraCell is built from market demand. It's not built just on a whim. And it's being built for scale. Thanks.

If you look at sort of the newer offerings across your things, whether that's the elite shippers, the ultra-cold and cryosphere, or even 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 do 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 line of shippers, is composed of the cryosphere and the elite ultracol. Ultracol 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 ultracol is. The elite ultracol also has features and benefits that no one else has in the market by a long shot. It has a hold time twice as much as its nearest competitor. And then it has all the monitoring that we provide, along with the crowd portal control, the logistics network, and our fantastic logistics technicians supporting the shipments. It's a revolutionary product, and it's one that Sarepta is using, for example, in their launch of their new gene therapy. And then, of course, the crowd sphere 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. Do you want to add anything, Mark?

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 to, from a modeling standpoint, may want to consider. But as Jerry had mentioned, these are premium products in the space. They're meant to be differentiators, and, you know, 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 allows us to continue to build share overall.

Thanks. And can we, you know, do sort of the same peelback on the CryoPortal 2.0 sort of as a, is it just a replacement or an upgrade? And then maybe there's a decent step up on an acquisition integration cost in the quarter and kind of look underneath the hood on that too. Thank you.

I'm going to turn the question on the integration cost over to Robert in just a moment. But to your question, what was the question? The crowd portal. Oh, to your question about the crowd portal too. Crown Portal 2 is the only logistics management system, to my knowledge, in the industry that is CFR 21 Part 11 compliant. It's GAAP 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. Do you want to add anything to that, Mark?

Yeah, so one of the things you have to think about when you're looking at the CryoPortal 2 is there's a couple of fundamental differences here. First and foremost is it provides a readily made vehicle for integration with third-party systems and competencies. So data is going to be a huge driver in this 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 customary due diligence and market research activities. Having said that, you know, we are actively looking at smaller tactical acquisition opportunities globally, you know, similar to what we have done in the past, and then kind of that's where we stand as of now.

Thanks.

Thank you. Your next question is from Brandon Coneyard from Jefferies. Please ask your question.

Thanks. Good afternoon. A couple more on MDE, if you don't mind. The two key revenue declines, is that all unit volume or 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 MDE business was China in 2020 when you bought it? If you have that.

I'll give the percentages 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.

Yeah, and China-derived sales for MV were in the 19% to 20%. And to make that distinction of China-derived, because you look at the region, we looked for this analysis really at our distributors, our sales within China, our distributors outside of China, where the end destination of the product 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 bit 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, some reprioritization, which you added a lot in the quarter. Do you have to have the breakdown of number of terminations or completions versus gross adds? And how do we kind of reconcile those two bigger points?

Yep, so we absolutely did in Q1 see a substantial number of terminated. We actually had 37 terminations in Q1. That number has dropped to 16 in Q2 from a termination standpoint. So that 27 in Q1 obviously impacted the softness from a revenue standpoint too 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, you know, 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 it doesn't, there is a lag period between onboarding and obviously full activity and revenue contribution.

Got you. Last one. Competitor recently, earlier this week, said it's increasingly clear to them that late stage and approved cell and gene companies looking to multi and dual source their logistics providers. Just would like to get an update from your point of view on that dynamic What that MIPS, you know, 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 maybe you retain 80-20% of the business? How do you see that trend, I guess, today and going forward?

Yeah, so obviously we'll always have some competition in the space. In particular, cell and gene space is rapidly growing and will continue to expand at a rate that's disproportionate to the overall industry. And this is going to run for the foreseeable future. You know, 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. You know, so this reputation is unsurpassed and has allowed us to capture that 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.

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

Thank you for your questions in our discussion. In closing, the second quarter was challenging, but Crowdport 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 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.