BioLife Solutions Inc (BLFS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BioLife Solutions First Quarter 2014 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

I'd like to turn the call over to your host, Paul Arndt with LifeSci Advisors. Please go ahead.

Thank you, Patrick. And good afternoon, everyone. Thank you for joining us this afternoon for the BioLife Solutions conference call and webcast to review the financial results for its 2014 first quarter ended on March 31st, 2014.

The Company issued a press release and filed a form 10-Q quarterly report today containing detailed results of the first quarter of 2014. This release is available on the Investor Relations page of the Company's website at www.BioLifeSolutions.com, as well as various financial websites.

As a reminder, this call is also being recorded and broadcast live on the Company's website. A replay of the webcast will be available through the same link for 90 days.

Before we get started, we'd like to remind you that during the course of this conference call, the Company might make projections and other forward-looking statements regarding future events or the future financial performance of the Company. These include, without limitations, statements regarding future operating results, growth opportunities and other statements that reflect BioLife's plans, prospects, expectations, strategies, intentions and beliefs.

These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. For a detailed discussion of these risks and uncertainties that affect the Company's business and that qualify to be forward-looking statements made on this call, we refer you to the Company's periodic and other public filings listed with the SEC, including the form 10-K for the fiscal year ended December 31st, 2013, the quarterly report form 10-Q filings and the form 8-K filed today.

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

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

Thank you, Paul. Good afternoon, everyone, and greetings from Bothell, Washington.

This is our first of what we intend to be many future calls to keep investors updated on our performance and business progress. Joining me today is Daphne Taylor, our CFO. Following our review of BioLife's first quarter 2014 performance, we'll be glad to take your questions.

First, I'd like to start off by saying that this was a cornerstone quarter for BioLife. We completed a transformational set of financial transactions that have substantially improved our balance sheet by eliminating all debt and closing a $15.4 million equity raise that will provide us with growth capital.

We're currently using some of this capital to expand our sales and marketing teams, attend additional scientific and trade conferences and launch new organic and externally-sourced products and services. The transactions also enable our up-listing to the NASDAQ Capital Market, which we believe will generate increased interest in our shares and improve liquidity for shareholders.

Our focus on increasing penetration in our three market segments of regenerative medicine, drug discovery and biobanking continues to result in more academic clinical centers and commercial companies adopting our best-in-class bio-preservation media products.

In the Regenerative Medicine space in Q1, we announced that Parcell Laboratories has adopted our CryoStor, clinical grade cell and tissue freeze media for use in future clinical trials of Early Lineage Adult, or ELA stem cell therapies, for which Parcell holds an exclusive worldwide license. Clinically, any ELA cell-based therapy has been developed and used commercially in approximately 3,500 surgical procedures for spinal fusion.

In addition to Parcell's adoption, Adaptimmune has adopted CryoStor in their current phase I/II clinical trial CT Antigen TCR-Engineered T Cells for Myeloma. This is a really exciting area of oncology care. I'm glad to tell you that Bluebird Bio is also a customer. Furthermore, our products are currently being evaluated by several of the companies in the space. So, we're well-configured to participate in the growth of this market.

You may have seen at the cancer immunotherapy field was selected by the editors of Science Magazine as the Breakthrough of the Year for 2013.

As you've seen from our press releases, our clinical grade bio-preservation media products have been incorporated into the freezing, storage, shipping and clinical delivery processes of over 100 hospital-approved and clinical trial stage cell and tissue-based products and therapies. So, we have many [shots on goal] here that we feel confident of our revenue potential as some number of our customers progress through clinical trials, obtain regulatory and marketing approvals and commence large-scale commercial manufacturing. We're also focused on continuing to develop our intellectual property portfolio for new bio-preservation tools.

In Q1, we were awarded a patent related to hypothermic preservation and storage of whole blood and blood components using HypoThermosol, our cell and tissue storage shipping medium. We'll also continue to prosecute a patent application related to enabling bulk freezing cells in multi-well plates, which if our product development proves successful, we believe could be a significant opportunity for BioLife.

Turning to our contract manufacturing services business, let me start by reminding you that in 2008, we made a strategic decision to invest in internal manufacturing and quality operations here at out Bothell campus. This was done to secure capacity to produce our proprietary bio-preservation media products and be in a position to fulfill customer demand as the regenerative medicine market continues to develop and grow over the next several years.

Since we made these investments, this resulted in us having excess capacity to utilize for strategic, highly aligned contract manufacturing opportunities. Over the last two years, we performed a significant amount of contract work for one customer in the organ preservation space. We believe we were one of several contract manufacturers for this customer.

This has been a low-margin customer for us but the business provided an opportunity for us to utilize the excess capacity of our best-in-class Bothell GMP production facility. The manufacturing and delivery of products to this customer has been based on purchase orders received. As previously disclosed, there was no certainty that this customer would continue to use our services after the fulfillment of any purchase order.

After we completed manufacturing products for the most recent PO in April, we received notice from this customer that they've decided to go a different direction with their solution manufacturing and they do not intend to give us any further significant POs. We were not expecting this notice. We did not receive any notice of breach from the customer. We believe we met all of the performance requirements in the agreement.

So, obviously we're disappointed by this customer's decision and [we're now] wondering how this will affect our future results of operations. The loss of this customer will be significant to our topline. With no further revenue beyond about $100,000 in Q2, based on our historical run-rate of about a million per quarter, this customer might otherwise have generated an additional $3 million in contract revenue for us this year.

We estimate that this $3 million in additional revenue, if it had been generated, would've generated gross profit of about $300,000. That will be a loss to us. Additionally, while we won't incur material costs to make the product, some of our overhead cost, specifically those related to the facility, will have to be absorbed by our other business. We estimate this cost to be about $700,000 for the rest of the year. This may be mitigated if these costs can be reallocated to other products, including our existing new core products or new contract manufacturing relationships.

Overall, we believe that the loss of this customer may have about a $1 million impact on our bottom line this year if unable to mitigate overhead cost, and if we assume we would've otherwise received about $3 million in additional revenue from this customer. Conversely, we also expect that the loss of this customer will result in an increase in overall gross margin percentage reflecting a reduction in materials and supplies acquired to make the products for them.

Now, under the agreement we had in place with this customer, we have a two-year non-compete tail after termination. During the tail period, we cannot manufacture or sell any solution that's approved for clinical organ preservation. In order to start the tock ticking on this tail period, today we provided this customer with notice of termination of the agreement, which is anticipated to be effective on or about November 5th, 2014.

The tail will not affect any of our existing business. Our products are not currently approved for clinical use in organ preservation, so the non-compete does not affect our core proprietary business. It also does not affect our ability to pursue other non-conflicting contract manufacturing opportunities in any way. And I'm glad to tell you that we are currently pursuing other CMO opportunities that could replace this lost revenue.

The loss of this customer is unfortunate, but contract [fill] work has been and remains an opportunistic strategy for BioLife and we're focused on finding new CMO opportunities where it's a good fit and the economics are attractive.

Our primary strategic focus has been and will continue to be to drive adoption of our core products. On that point, we just returned from a very successful ISCT meeting in Paris. This is the annual meeting of the International Society for Cellular Therapy. At the meeting, we introduced new aseptic packaging options for our products and also biologistex, a new cloud-based information service with an EVO control temperature container for cells and tissues.

The interest in the biologistex Web portal and new SAVSU technologies EVO smart shipper is really strong. We're working very hard to complete development and establish a solid supply chain so we can get inventory manufactured and ready for sale. We're also working with SAVSU to finalize the financial, technical and legal aspects of the biologistex service and products. We believe biologistex represents significant growth opportunity for BioLife. Biologistex is complementary to our [own] core products and we're now recruiting additional sales and marketing professionals to drive adoption of our entire tools portfolio.

Now I'd like to turn the call over the Daphne to go over our financial results for the quarter.

Thanks, Mike. And good afternoon, everyone. I'm glad to share the results of Q1 with you.

Revenue was $2.1 million in the first quarter, an overall decline of 4% from the first quarter of 2013. However, Q1 of last year included one-time license revenue of $609,000. Excluding the license revenue last year, product revenue increased by 33% in Q1 of 2014 compared to 2013.

Our proprietary solution revenue this quarter was, again, over a million dollars, increasing by 47% over the first quarter of 2013. This growth was directly related to the continued adoption of HypoThermosol, CryoStor and BloodStor in our strategic markets of regenerative medicine, biobanking and drug discovery.

Gross margin in Q1 was 44% compared with 52% in the first quarter of 2013. As I mentioned, the first quarter of 2013 included license revenue of $609,000, which had no corresponding costs. This increased our overall gross margin by 19% last year. Excluding the impact of the license revenue, gross margin as a percentage of revenue increased in Q1 2014 compared to the same period in 2013. Again, reflecting the strong growth in our higher margin proprietary product revenue.

We reported an operating loss in the first quarter of this year of approximately $400,000 compared to operating income of approximately $200,000 in the first quarter of 2013. Again, the first quarter of last year benefited from the one-time license revenue of $609,000 with no associated costs.

As Mike said, the financial transactions we completed this quarter transformed our balance sheet, resulting in us ending Q1 2014 with cash and cash equivalents of $12.8 million and zero debt. Compare that to cash of $156,000 at the end of last year and over $14 million in debt and interest.

We believe we are now well-positioned to take advantage of strategic growth opportunities. Our specific corporate goals for 2014 continue to include proprietary product revenue growth of 25% to 35% over last year, expanded adoption of SAVSU precision thermal shippers for cells and tissues, the introduction of new packaging alternatives for our bio-preservation media products, securing additional regen med customers and expanded adoption of HypoThermosol in the hair transplantation market.

We look forward to updating you on our progress with these goals throughout the rest of the year. I will now turn the call back over to Mike.

Thank you, Daphne.

I'd like to conclude our business update with some thoughts on BioLife moving forward in 2014 and beyond. None of us are pleased with the recent price of BioLife shares, but the entire team is focused on running and growing our business, taking care of our customers and executing the fundamentals that we believe will reward shareholders.

Our products make a real difference in drug discovery, biobanking and regenerative medicine. And we have a [more key] customer base. I believe strongly that BioLife could become a highly valued life science tools company. I want to thank you for your interest in BioLife and I hope to see some of you at upcoming investor conferences where I'll be presenting.

With that, we'll open the call for questions. Operator?

(Operator Instructions).

Our first question comes from David Musket with ProMed. Your line is open.

Thanks. Mike, can you go into this contract manufacturing situation a little bit more? I thought I was under the impression that that contract extended into next year. And to the extent that no POs are coming in, I'm surprised that it still had maintained exclusivity and non-compete clauses, et cetera.

Thanks, Dave. Good questions. So, the contract was a three-year agreement in the initial term, originally set to expire in December of this year. Our interest in proactively terminating the agreement is really based on an interest to give us the broadest freedom to operate.

So, there is a two-year tail for non-competition of basically products we were making or similar products that could compete with what we were making for this particular customer.

Yes, I heard you say that. What I'm confused about is if the contract didn't have any minimum purchase orders to maintain the non-compete or anything else -- so, in other words, they could've signed a three-year agreement giving you one PO and still had a tail for two years?

That's correct. In fact, over the two and a half or so year life of the contract, we did receive -- clearly, as you can imagine, you can see from the financials, decent purchase orders. But no doubt about it. [Because we went into] the agreement with full awareness of the non-compete.

So, what do you think is going on there? Is there business tailing off? Did they decide to just use somebody else to meet these needs? What happened there?

Yes, my sense is that they have analyzed probably the economics of all of the suppliers they were using and they decided to give our business to one of their other CMOs. That's the best I can speculate, at this point.

So, they didn't come back to you trying to negotiate with you on price or structure or something like that?

They have not, yet, Dave, no.

Okay. Separate question related to just I think -- well, on that same topic, the stock's been acting very badly -- much worse than the group. But do you think that word of this termination or this failure to have this contract somehow has made its way into the marketplace?

You know, Dave, it's a fair question. This is what I can tell all of you on the call. We just found out about this within the last just few days, week kind of range. And on the BioLife side, in terms of all the personnel here, they're bound by very strict confidentiality agreements. We have no reason to believe that anybody on our side leaked this information. I can't speak to the other party.

And you know the depression of BioLife share price had been going on for quite a while before we received news from this customer. So, I think what's going on with our share price is the sector in general is really not as [intuitive] as it might. My hope would've been that the investment community would look at BioLife as an embedded tools play, but a diversified risk in regen med because we have so many customers. And we don't carry the binary risk of a therapeutics company where a clinical trial passes and fails.

But who knows? This is conjecture, at this point. I do know we're being swept up into the regen med downturn. That sector needs some good news, and then perhaps other [boats] will rise. But that's what I can tell you, at this point.

Yes, thank you. I'm not -- I wouldn't want to see you spending an enormous amount of time looking for replacement contract manufacturing business. On the other hand, I'm just curious -- do you have any proposals out there? Are you aware of any opportunities that you can now bid on, now that you have the capacity? What's the situation there?

Yes, great question. Well, without getting into too much specific information, I can tell you that we are looking at a few opportunities. One could be very significant. It's early on in the vetting process.

I'll be traveling next week to this [perspective] customer's location to be personally involved in the vetting for all the key sort of criteria. Is it a real business opportunity for them, will it be for us; doing the whole alignment test and fit test -- what the product might be they want us to make for them and its alignment from a formulary basis; [batch] sizes and so on and so forth and what we're really good at and what we have the capacity to do.

But we're really strategic in looking at these, but also opportunistic. You know, we're not going to run the business to be a CMO. Nevertheless, we know the niche place that we can provide and do a really good job for customers and finding a replacement for this lost contract with a new deal, with better economics is clearly something I'm focused on.

Thank you. I'll get back in the queue.

Thank you. (Operator Instructions).

Our next question comes from Brian Marckx with Zacks Investments. Your line is open.

Hi Mike and Daphne. Can you tell us how much revenue the contract manufacturing customer that's exiting contributed in 2013?

Sure, Brian. I want to say it was perhaps 4.1, Daphne? Something like that?

Yes.

$4.1 million, in that neighborhood, yes.

Okay.

And it was disclosed in the filing. So, I want to say it's in that neighborhood.

Okay. In terms of the clinical trials that are using your bio-preservation media, how much insight do you have relative to probability or potential timing of approval of any of the products that are using it?

It depends, Brian, on the specific customer. When we get requests for the customer to cross-reference our drug master file, we get the name of the clinical trial and typically the phase. And past that, it's a bit of a crystal ball, which is anybody's crystal ball, in terms of when each customer will secure enough funding to commence the actual enrollment. And those are pretty good triggers for us to understand when we're going to start to receive purchase orders.

But it's not the sort of thing where we can sort of look at each customer discreetly and put a finger up in the wind to any degree to try to figure out when they might materialize. All we can do is look at the space, follow their own news and hope their science works and that they can be funded enough to continue to run their clinical programs. And we believe with over a hundred of these going on right now, several are going to make it. Some we know won't; that's the way it goes in medicine -- we all know that. But that's the specificity, or the lack of specificity we have into the space.

In terms of the product revenue growth guidance for the current year, can you help us with what's behind the assumptions of that? Is it clinical trial use? Is it the hair preservation market? Is it more than that?

Yes, good question. We know the historical growth and the core proprietary products has been clipping along at 20, 25 points, anyway. We have no reason to believe 2014 will be any less, particularly because we're introducing new packaging options; we're considering distributing some other products that fit the core products sort of segment as related tools. And so, we have confidence with that guidance that we gave in January about the growth in the core products.

Is that SAVSU packaging portion -- is that included in that guidance?

There might have been some modest or minimal allocation of that in the core product guidance.

Okay.

As biologistex and the EVO shipper continue to get developed and get seated in the marketplace, we'll have a much better opportunity to [run all of the] guidance on how that revenue line will materialize over the next post-launch quarters and years.

Okay. And I'm --

Really big market.

Yes. As far as the cash balance goes, so, you guys have a big cash balance. And you laid out a few things that you may be considering using the cash for. Can you provide any more kind of specifics, particularly given the size of the cash balance?

I think it's probably fair to say that sort of all-in for the 12-month period starting now, because we just started to be looking at folks. For the rest of this year, anyway, we think we're going to deploy a couple million dollars in sales and marketing; could be a little bit more. Depends on how fast we can find the right people and identify the additional trade shows that we want to go to. So, from a planning perspective, that's probably a decent number -- perhaps it's in the 2 million to 3 million range.

So, should we be kind of modeling out an additional 2 million to 3 million in selling expense in the current year, relative to 2013?

No. And I think it's premature for us to give you a lot of specific detail. But a fair amount of it will be in selling. We've got some R&D investments that we're thinking about making. And I think that the best thing for us to do is get the plan a little bit more set and then perhaps in the future, we can get some more specific guidance.

Okay. Okay. The last one is on gross margins. With the contract manufacturing customer gone and with, say, 25% to 35% product revenue growth, what can we kind of ballpark, as far as gross margins for the year?

Yes, so, we're still doing the analysis. And I think that'll be an important metric that we can use and update, but we don't have the estimate for you at this point, Brian.

Okay. All right, thank you.

You're welcome.

Thank you. (Operator Instructions).

Our next question comes from Vesselin Mihaylov from Newport Coast Securities. Your line is open.

Hi, Daphne and Mike. How are you?

Hi. Nice to hear from you.

[Good, thanks].

Thank you, thank you. So, my first question relates to the gross margins of the contract manufacturer that was lost. Should we conclude that historically, they were really never more than 10%? You're saying that you're losing 10% -- I'm sorry, you're losing $3 million in revenues and $300,000 in gross margins. Were these the historical gross margins of this business?

More or less, Vess; yes.

Okay. Now, I've been an investor in the Company for probably well over 10 years. And my recollection is that before you brought in this customer, the proprietary core product margins were as high as 63%. Can you recall whether that was the case and tell to the people on the call whether you're capable of achieving 60% or plus core product margins going forward?

Yes, Vess. That's a similar question to what Brian asked. And I think what we're going to do is we're going to scrub that and then we'll give you some guidance at the earliest opportunity.

Okay. But historically, do you recall them being, at one point, 60% plus? I'm not talking about projected ones. I'm talking about historical ones.

Yes, I think so; in that neighborhood, yes.

Okay. So, I would strongly urge you to try to resize the Company. Clearly, it would -- I'm talking about on the manufacturing side. If you were able to achieve 60% gross margins in the past on the core products, I think you should be able to do that going forward, especially with some of the equipment now available and [appreciated] and so on.

The biologistex expected gross margins -- can we -- I mean, clearly you're talking about attractive economics going forward and so on. Are you expecting to see gross margins north of, let's say, 20%, 30% from that business? Because let me venture to say, as a shareholder, that 10% is not attractive economics.

I mean, even the US government and Wal-Mart work on bigger gross margins. I'm talking about contractor research and development [that allows] for companies to [recoup] 10% at your operating line. And you were doing 10% at the gross line.

So, the biologistex business, is this expected to bring north of 20%, 30% over the long-term or not?

Yes, so Vess, I'm not going to answer your direct question. I'm going to say that we think this could be a really, really great opportunity for BioLife for any financial metric you want to consider. But it's a bit premature for us to start to talk about how we're modeling that. So, just give us a little time to complete some development, fully understand the cost and our relationship with our partner, and then we'll come back at the appropriate time and give some guidance on that potential revenue line, okay?

Okay, thank you. Now, can you please reconcile the following numbers for me? In your press release -- the prerelease, the one that came three weeks ago, you said that, quote-unquote, shipments experience 71% growth from proprietary products. And now we have 47% revenue growth from proprietary products.

Going forward, can you just use one of these metrics and, first of all, reconcile the 71% with the 47% so that I can get a clearer idea whether the Company's going in the proprietary area at 47% or 71%?

Yes, I'll ask Daphne to answer that, Vess.

All right, Vess, actually, the proprietary revenue growth from last year to this year was 47%.

And so, the 71% shipment growth -- are these revenues that have not been recognized yet?

It's a combination of different revenues. But the proprietary revenue itself is 47% growth.

Okay. So, let me ask you about -- like I said, I followed the Company; have been an investor for a very long time. You've always said that the addressable market for cryopreservation and storage along -- I guess the [DMSO] market is of the size between $400 million and $500 million annually and growing in the high single digits -- maybe faster.

So, if I do some math here, you're barely at one. You know, if you're competing head-to-head with that market, you're at 1% market share. So, so far, we've been growing anywhere from 30% to 50% [on product] growth on the proprietary side over the long period of time. Are you looking to really go ahead and capture significant market share? Are the economics of our solutions such that you can capture 5%, 6%, 7% -- 10% of that market rapidly, now that you have funding? Or is that market so price competitive and our products expensive or high-end that we should not really be modeling or thinking that you may capture such a high percentage?

Yes, really great analysis and great question, Vess. As you've heard me say before and if you follow our press releases and our presentations, you know that the number one competitor we face is not a commercial company; it's the use of these [home brew] solutions. And it depends on the market segment to which there's a listing for us to come in and offer a clinical-grade alternative that actually happens to work better.

So, clearly in the regen med space, that's where we have the most upside and the most listing for our value proposition, and the customer base that's really tuned to listen to moving away from the home brew. So, while we're being what we think is appropriate in our guidance on growth in the core business, there's no doubt that if the regulatory scrutiny across the board, but particularly in the regen med or clinical space, or to increase over the next year or years, then that would be a wonderful leverage for us.

Because the folks who are using the home brews and non-optimized formulations -- the ones that perhaps might not be made under GMP, they're going to have to find an alternative. And we're right there and we're so well plugged in to the space where we have a good sense of who's not using our products and really where to apply ourselves in marketing resources. But it really comes down to the pace of increased regulatory scrutiny.

Thank you. This ends our Q&A. I'll turn it back to management for closing remarks.

I'd like to thank you all again for joining the call. I look forward to updating you on our progress throughout the rest of the year. Have a great rest of the day.

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.