BioLife Solutions Inc (BLFS) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2018 BioLife Solutions Inc. earnings conference call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Roderick de Greef, chief financial officer. You may begin.

Thank you, [Sonia]. Good morning, everyone, and thank you for joining us for the BioLife Solutions conference call to review the operating and financial results for the second quarter of 2018.

Earlier this morning we issued a press release, which summarizes our results for the three and six months ended June 30. We also issued a press release announcing a $20 million investment in BioLife Casdin Capital to support our growth strategy. Both releases are available on the investor relations page of our Web site at BioLifeSolutions.com.

As a reminder, this call is being recorded and broadcast life on our Web site. a replay of the Webcast will be available through the same link for 90 days.

Before we get started, I would like to remind everyone that during this call, we will make projections and other forward-looking statements regarding future events or the future financial performance of the company. These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

For a detailed discussion of the risks and uncertainties that affect the Company's business and that qualify as forward-looking statements on this call, I refer you to our periodic and other public filings filed with the SEC.

Company projections and forward-looking statements are based on factors that are subject to change and therefore, these statements speak only of as date they are given. The Company assumes no obligation to update any projections or forward-looking statements except as required by law.

Now, I'd like to turn the call over to Mike Rice, President and CEO of BioLife.

Thank you, Rod, and good morning, everyone. Thank you for joining the call. We appreciate your interest in BioLife and are very pleased to report our best quarter yet, with actual top to bottom results.

In Q2, we solidified our position as the sole source supplier of proprietary preservation media products to the cell and gene therapy market. Product demand from this segment drove over 102% year-over-year revenue increase to 5.2 million.

In the second quarter of 2018, we gained 48 new direct customers with 37 new cell and gene therapy customers in the high growth, regenerative medicine segment. Today we are supplying thousands of customers directly and indirectly through our network of domestic and international distributors.

To recap the regenerative medicine market segment, this is our most strategic market, and is comprised of cell and gene therapy companies, hospital-based stem cell transplant centers, and contract development and manufacturing organizations, such as Lonza, WuXi, Hitachi, and Brammer Bio.

The alliance for regenerative medicine just published its Q2 2018 data report, which cites continuous strong investments in the space, with $4.1 billion invested in Q2, and nearly $8 billion year-to-date. In Q2, regenerative medicine segment revenue was $3 million. This was 58% of total revenue, with 176% growth over Q2 last year, and 42% growth over Q1.

New direct cell and gene therapy customers included Aduro, AgenTus Therapeutics, Bio Reliance, Orca Biosystems, Refuge Biotechnologies, and Senti Biosciences.

Today, we believe our proprietary bio-preservation media products have been used in more than 300 customer clinical applications.

I?ll remind our listeners that this number is likely higher due to the success our distributors have demonstrated in getting our products embedded in early stage clinical trials. With most distributors, we ship in bulk, and they distribute to the end users, so we don?t have complete visibility on their reach. This is especially the case with Stemcell Technologies and MilliporeSigma, our two largest distributors.

We estimate that each customer clinical application, if approved at full manufacturing scale, represents annual revenue in a range of $500,000 to $2 million, and we have several potential outliers that great exceed this annual revenue range.

Over the last several years, we established a very strong position as the leading supplier of proprietary agents that are critical for successful cell and gene therapy manufacturing with a marquee customer base, sticky relationships, limited commercial competition, and a phenomenal growth opportunity. This year, we expect three to five additional regulatory filings by our customers, with the possibility for two additional approvals by the end of the year.

I?d now like to talk more about our indirect sales channel of domestic and international distributors. In Q2, our distribution partners contributed $1.7 million in revenue, or 33% of total revenue. And this grew 146% over Q2 last year and 62% from Q1.

It?s clear that we have significant sales and marketing leverage from our channel partners. Key worldwide distributors include Stemcell Technologies, MilliporeSigma, Thermo Fisher, and VWR. Based on distributor forecast, we expect continued strong growth from our indirect sales channel throughout 2018.

To close the loop on segment sales, drug discovery and bio-banking each contributed less than 5% of total revenue. And we expect flat to lower full year 2018 revenue compared to 2017.

Before I talk about the press release we issued earlier today, announcing a $20 million investment by Casdin Capital, I?ll ask Rod to share our financial highlights for Q2 and the first half of 2018. Rod?

Thanks, Mike. As you noted, bio-preservation media revenue for the second quarter of 2018 reached a record $5.4 million, representing a 102% increase over the second quarter of last year. For the six months ended June 30, revenue grew 83% to $9 million, up from $4.9 million last year.

The increase in revenue for both periods is primarily the result of higher direct sales to our customers in the regen med space, and to our indirect distribution channels.

The gross margin for the second quarter of 2018 increase 7 percentage points to 70%, compared to 63% for the second quarter of last year. For the first six months of this year, grow margin was 68%, compared to 62% for the first six months of 2017.

The increase in gross margin for both periods as compared to 2017 was primarily driven by volume related reductions in cost of goods sold, and higher blended products ASPs. The gross margin for the second quarter demonstrated the operating leverage we can achieve on higher revenue levels.

Operating expenses in Q2 totaled $2.4 million, compared to $1.9 million in Q2 of 2017. For the first six months of 2018, operating expenses total $4.7 million, compared to $3.8 million in the first six months of 2017.

The increase in operating expenses for both periods is primarily the result of higher performance based compensation expense and increased costs related to enhancing our quality management systems.

The second quarter?s operation profit was $1.3 million, compared to an operating loss of $341,000 in the second quarter of 2017. For the six month period, operating profit totaled $1.4 million, compared to an operating loss of $805,000 for the same period in 2017.

I?m really pleased to report that for the first time in the company?s history, we?ve achieved full GAAP profitability for the second quarter, that income attributable to common shareholders was $1 million, or 5 cents per diluted share. This compares to a net loss attributable to common shareholders for the second quarter of 2017 or $768,000 or 6 cents per share.

For the first six months of 2018, that income attributable to common shareholders was $943,000, or 5 cents per diluted share, compared to a net loss of $1.6 million or 13 cents per share last year.

EBITDA for the second quarter was positive, $1.2 million, compared to negative $514,000 in the same period last year. For the six months, EBITDA was positive $1.3 million, compared to negative $1.1 million in the first six months of 2017.

Cash flow from operations for the second quarter total $562,000, compared to cash used by operations of $103,000 in 2017. For the six months, cash flow from operations was $953,000 this year, compared to cash used by operations of $272,000 for the same period last year.

The combination of cash flow from operations and proceeds from the exercise of outstanding warrants resulted in an ending cash balance at June 30, 2018, of $14.2 million, compared to $2.3 million at the same time last year.

With respect to our outlook for the full year of 2018, as we noted in our preliminary revenue release in early July, we now expect bio-preservation media revenue to range between $18.5 and $20 million, representing 68% to 82% growth over 2017.

Given our results for the first six months of this year, we are increasing our gross margin range to 68% to70% for the full year, compared to our previous expectation of 63% to 65%, and up from 61% last year.

Based primarily on accelerated hiring plans to handle our revised revenue expectations, we now expect operating expenses for the full year to fall between $9.5 and $10 million, compared to our earlier guidance of $9 to $9.5 million.

We maintain our expectation for continued full year operating profitability and corresponding increases in cash flow from operations and EBITDA. We also expect to achieve net income for the full year of 2018.

Finally, as disclosed earlier this morning, we have entered into an agreement to sell Casdin Capital 1.4 million shares at $14 per share, for total proceeds of $20 million. Other than standard legal fees, there were no fees or other expenses related to this displacement. Shares issued to Casdin represent less than a 6% increase in our full diluted share count, and the willingness of Casdin to enter into a one year lock-up on these share underscores their long term, fundamental investment strategy.

Now I?d like to turn the call back over to Mike.

Thanks, Rod. Turning back to our other news today, I?d like to take a few minutes to outline our vision to create an even more valuable enterprise.

For some time now, we?ve been evaluating various opportunities to acquire additional cell and gene therapy manufacturing tools and services, companies or technologies to accelerate growth. The tool supplier side of the regen med space is highly fragmented.

Today, in the cell and gene therapy manufacturing workflow continuum, we offer bio-preservation media used to preserve source material and manufactured cell and gene therapies. Our share of the per-dose spend on manufacturing tools ranges from about $100 to $500.

Executing our acquisition strategy could provide several benefits, including revenue and profit increases, sales and marketing leverage, cost synergies, and scale. We believe consolidation opportunities to acquire a complementary companies or technologies could increase our share of the per-dose tool spend by 5X to 10X.

To help fund the initial phase of our M&A growth strategy, as Rod mentioned, we negotiated a $20 million investment with Casdin Capital. This $20 million investment by Casdin, in combination with our cash balance of approximately $15 million, allows us the financial flexibility to initiate our strategy.

We?re in the process of evaluating several opportunities that support this strategy and look forward to sharing announcements on our progress at the appropriate times. Collectively, our management team and board members have significant M&A, negotiation, and integration experience, so we?re confident we can execute this strategy to scale the company.

In closing, Q2 was an operational and financial success and continued evidence of our ability to efficiently manage the business in a period of sustained high growth. We feel confident at how the second half of 2018 will turn out, and you heard Rod reaffirm and update our guidance.

We?re excited and optimistic about the potential to drive additional growth and shareholder value. We?d like to thank our long term and new shareholders for your interest and support of BioLife Solutions.

Now we?ll turn the call over to the operator to take your questions. Sonia?

(Operator Instructions) Our first question comes from Paul Knight of Janney Montgomery.

Hey, Mike, could you talk about your distributor channel? What visibility is there versus your direct channel? And then, additionally, you had mentioned 48 new direct customers in the quarter. What was that count in the first quarter of the year?

Hi, Paul. So with, as I mentioned, with the indirect partners, our distributors ? there are four large distributors. And, again, those are Stemcell Technologies and Sigma, who buy in bulk and distribute to their end customers. And so, in most cases, we don?t know where the products are going.

Although I will say that both of those distributors have updated us on the number of unique customers they ship product to. For example, in the calendar year 2017, Stemcell Technologies shipped our products to more than 1,000 unique customers or end users. Additionally, Sigma shipped our products to more than 600 unique users. So that?s just great reach, that?s great leverage. It?s a force multiplier with their sales teams, for sure.

On the direct side, of course, we know where everything goes, and we?re actively engaged in intense customer and tech support and scientific support to make sure these customers in the cell and gene therapy space know how to use our products, how to reference the use of our products in their regulatory filings, and interpret the results of their validations, and so on and so forth.

In terms of new customers and the trend, I believe that in the fourth quarter of last year, I?ll say, in total, it could have been 20 or so, and then in Q1, perhaps 36. But more specifically and more importantly, is the number of new cell and gene therapy customers.

So in the first quarter this year, of those 36 new customers, 19 were cell and gene therapy customers. And of the quarter we just concluded in Q2, 37 customers were in cell and gene therapy.

So that rate is accelerating, and it?s evidenced on the awareness for our products and the efforts of our marketing, our tradeshow activities, customers publishing data on the performance of our products. So it?s working.

And then, lastly, you?ve obviously raised capital. What is the typical size of companies in the cell and gene therapy market? Are they $1 million? Are they $10 million? Could you talk to revenue size on these businesses, Mike?

Sure, a bit, Paul. So first and foremost, our focus is clearly going to be on revenue generating companies, or at least companies that we can see a path to revenue in the short to mid term for sure.

And in terms of revenues of these companies, $5 to $10 million or more. There could be some on the outlier side which are much greater than that. So you could envision a number of solid base hits and a few home run opportunities there that we?re evaluating.

Our next question comes from Jason McCarthy of Maxim Group.

So I?d like to see how you view the cell therapy space. The first CAR Ts are slowly and steadily gaining traction. Do you expect approvals in the space to accelerate? And how would this translate to growth for BioLife?

Yes. Really good question. So for all of us who follow the space, we were clearly witnessing a fast-tracked approval, relatively fast-tracked, compared to the way that new cell gene therapy development had gone the previous several years.

But with Kymriah and Yescarta; Spark Therapeutics, Luxturna; with GSK, with Strimvelis. So that was sort of the first wave. And remember that at least a few of those were approved on the basis of phase two data, which is really encouraging. So we see only more of the same.

Some of you may have heard FDA Commissioner Gottlieb?s remarks at the bio conference just a few months ago, where he was outlining new fast-tracked approval mechanisms. And that now, I think, is now starting to be implemented, so that will help as well.

So, for sure, we?re seeing a friendly regulatory pathway in the U.S., certainly in Japan, and in Europe to some extent.

Okay. And then just another quick question on the potential for acquisitions that you mentioned before. So I?d just like to know if you?d give us a little more detail on what kinds of assets or technologies you would view as best complementing the current business model, and how these could help drive growth going forward.

Sure. So without getting too specific, because we shouldn?t, because it?s a little early. Broadly speaking, and I?ll make a caveat about competition in a minute. But broadly speaking, we?re interested in any tools or service that?s used in the manufacturing in cell and gene therapies, starting with the acquisition of source material, whether it?s a apheresis collection, or some other biologic material coming from the patient, whether it?s allogeneic or autologous, all the way through to the transportation and administration of that dose or that therapy to the patient.

So those could be reagents, those could be containers. Those could be devices. There could be some ancillary services that are also high impact and high value, and from suppliers that are very sticky. So what we want to do is identify companies who are selling their complementary products into the same strategic market space that we are, which is the regen med space, the cell and gene therapy space.

And if we do that correctly, we think we can leverage the sales teams, the marketing activities, with an eye toward at least some cost synergies at the appropriate times. And, again, if we?re successful, then we will, in fact, increase or share of the spend for tools on a per-dose basis.

It?s out there, and the supplier side is very fragmented, so there?s an opportunity right now for us to get engaged and get after this growth strategy through smart M&A activity.

Our next question comes from Suraj Kalia of Northland Securities.

So, Rod, what was the increase in ASP per liter?

It was about 3% year-over-year. And very small increase sequentially, less than that sequentially.

Got it. Mike, you?ve articulated your strategy. You?re increasing revenues per customer through this M&A strategy. Can you give us some markers of what and where are revenues per customer currently stand so that we can gauge how the 5 to 10X revenues per customer ? how your M&A strategies otherwise shape up over time?

Sure. So the current range is about $100 to $500 dollars. So how do we get there? It?s really ? it?s simple math. It?s the volume of BioLife product included in a manufactured dose, or what?s used in the preservation of a given piece of source material times the price the customer pays per mils.

So, really easy for us to think about that in terms of our current organic products. And, again, some of the companies that were identified and we?re evaluating, there could be a real opportunity to expand that to a 5 to 10X range.

Got it. Mike, maybe I missed it, but did you give an update on Kolon?s ID trial?

I did not, Suraj. But I can say that the ? I believe that the FDA recently approved the initiation of dosing of patients in the phase three Kolon Invassa trial for knee osteoarthritis. And the estimated enrollment of that, again, is somewhere around 1,000 patients or so.

So I believe they?re just now getting underway. And if I?m not mistaken, the number of clinical centers in the U.S., where patients will be able to be enrolled, perhaps, is more than 50. It may be 60 different centers.

Got it. And, finally, Rod, what is the level of Casdin?s ownership after this announcement this morning?

I think they?re right around 14% or 15%.

(Operator Instructions) Our next question comes from Dylan Dupuis of B. Riley FBR

So one question, just about, I guess, general strategy. There?s obviously more economic opportunity going after later stage products and commercial stage products as opposed to earlier stage products. But in terms of how you guys are using your resources, do you see it as being a better use of resources to go after those later stage products versus maybe the low-hanging fruit of early stage products where the [besieging] protocols are not quite as rigid?

So the way we look at it, Dylan, is that later stage cell therapy and gene therapy development, perhaps phase three, for example, most of the tools and services have been baked into the process and protocol. And while it?s not impossible for us to go after and capture some of those, it?s difficult.

You can imagine those trial sponsors are nervous about making any changes leading up to a final BLA submission. So our aim is to really try to catch as many as we can as early as possible, and get our products, our current preservation media products baked into the protocols, and so they?re carried through all the way.

It would be much easier for us to displace competing homebrew preservation media in a later stage trial than vice versa. So the FDA and the other regulators around the world are very familiar with out products, the chemical composition, the formula, the preservation efficacy data, so on and so forth. And we believe the ultimately, there will be direct and indirect pressure to move to a preformulated, optimized preservation, and here?s just one example of why I think that.

So we?re all now really present to the paradigm of what I would call a pay-procure situation with 17 therapies, where these companies have negotiated reimbursement based on clinical efficacy. To be really blunt about it, if the patient isn?t cured or doesn?t respond, the companies don?t get paid.

So what does that mean for BioLife? That means that these companies are really sensitive and aware that dead cells don?t cure cancer, for example. So they need to make sure they?re using the right tools, whether it?s media or containers or otherwise, to make sure that as many cells as possible can actually survive the trip to the clinic and be infused to the patient to achieve or invoke whatever therapeutic response they?re after.

So I think over the next several quarters and years to come, that that pressure to make sure the customers are using the best tools ? and we have the best preservation platform out there ? is really going to help drive adoption.

Dylan, I?d like to add to that, that with respect to your focus on earlier stage versus later stage products or companies, we?ve worked pretty hard to achieve profitability for BioLife. And so we?re definitely sensitive when we look at potential transactions to not negatively impact the progress that we?ve made from a profitability perspective.

So there?s definitely a bias towards revenue-generating opportunities versus science projects.

All right. And then one other question. Just kind of looking at some of your numbers, the 70% gross margin certainly popped off the page for me. How much of that is driven by you guys being able to take advantage of your operating leverage versus, say, the average sales price increase or reduction of variable costs?

And then, is this affecting at all where you see gross margin kind of peaking out in the mid-70s?

Yes. So it?s definitely a function of the increased volume, which is being produced to support the increase demand for the product. So, we have stated in the past that we think that based on last year?s revenue of $11 million, that if we were to double that, we would see margins in the low 70s to mid-70s.

We?re right now annualized for the first time at about $20 million. We hit 70%. So in terms of where it can go, Dylan, I really don?t want to get into that. I want to see the next few quarters as we maintain these levels of production and, perhaps, even increase them, and see how that flows through the margin.

But fair to say that we have significant opportunity for margin expansion going forward.

And we do have a follow-up question from Paul Knight of Janney Montgomery.

Hey, Rod and Mike, when I look at this 24% margin in the quarter, I get the impression you want to invest a little bit in distribution, et cetera. So are you effectively trying to manage that to around slightly below where we?re at?

Well, we don?t have a specific target per se, Paul. I think what we constantly look at is utilizing resources to see if they can ? if we increase resources in sales and marketing, for instance, if that?s going to increase the revenue line.

So we?re more focused on making sure that what we spend is going to have a positive impact versus trying to manage to any particular number.

Okay. And what investments are you trying to make that you raised as a half million on that op expense line?

Well, it does include some people in the QC area. It includes some additional customer support people, based on the increased activity on a revenue basis. And then we are looking at different ways, maybe some creative ways to actually start to build out the organic sales and marketing effort a little bit. So certainly, increased trade show activity, things like that.

And where are you in manufacturing capacity today? Are you, like, running one shift at this juncture, right?

That?s correct. We?re running one shift and one clean room. We?re in the process of opening up the second clean room. And there are costs associated with that that will definitely fall into the third and fourth quarters. But I would say that we?re running at a roughly 20% to 25% of full capacity. So I think there?s plenty of runway from a production standpoint to meet the demand that we feel is coming down the line.

And, ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Mike Rice for any further remarks.

Thank you, Sonia, and thanks everyone. Good day.

Ladies and gentlemen, thank you for participating in today?s conference. This completes the program. You may all disconnect. Everyone, have a great day.

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