Cryoport Inc (CYRX) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Cryoport Second Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Todd Fromer of KCSA Strategic Communications. Please go ahead.

Good afternoon. 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 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, 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 experiences 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.

I would now like to turn the call over to Mr. Jerry Shelton, Chief Executive Officer of Cryoport. Jerry, the floor is yours.

Thank you, John. Good afternoon, ladies and gentlemen, and thank you for joining us today. With me this afternoon is our Chief Commercial Officer, Dr. Mark Sawicki, and our Chief Financial Officer, Mr. Robert Stefanovich. Later during this call, Dr. Sawicki will provide you with his comments on our sales and marketing activities, and Mr. Stefanovich will detail our financial results for the quarter.

Our performance continues to be strong. As of the end of the second quarter of 2018, Cryoport is responsible for supporting 258 clinical trials and the first 2 FDA-approved commercial CAR-T therapies from Novartis and Gilead's Kite. The ongoing ramp of new clinical trials and reported revenue from our commercial agreements drove a 59% revenue increase in the second quarter for our company compared to the same period in the prior year and 54% increase over the first 6 months of 2017.

Novartis and Gilead's commercial ramps are progressing at an increasing but measured pace. Both companies are supremely focused on certifying points of care centers to ensure that these novel and critical therapies are administered properly and that all protocols and procedures are understood and adhered to. Additionally, both companies mentioned in their recent and respective second quarter earnings calls that they are expecting European approval this current quarter. We are working diligently with both of these companies as they make ready for their respective European commercial launches.

I will provide more detail on our progress on the biopharma market as well as in the reproductive medicine and animal health markets shortly, but first I would like to talk about some of the investments that we are making in our infrastructure to ensure that we are well positioned to scale our operations throughout the remainder of 2018 and beyond.

As many of you know, the regenerative medicine market, which is a core driver of our growth and our focus, is undergoing rapid advancements as the ongoing research, development, investment and more recently global expansion of transformational treatments and cures gain space. This year alone, global financings in regenerative medicine total over $7.9 billion, up over 79% year-over-year. Cryoport's advanced temperature control logistic solutions are critical to ensure these delicate therapies maintain their efficacy and reach patients safely. By entrusting Cryoport with their invaluable commodities, our clients are demonstrating a high level of confidence in the effectiveness and reliability of our industry leading logistic solutions which as you might expect, results in high loyal client relationships and a very high client retention rate.

As Cryoport becomes more integrated into its clients' drug development and delivery processes, we're no longer viewed by many of our clients as simply a logistics company. But instead, as an integrated piece of the manufacturing and commercialization process and a valued distribution partner. This influences how clients position us in the business workflow and it's creating new and different expectations for the type of partner they expect us to be. Now more than ever, we have a clear visibility of Cryoport's exciting near and long term growth pathway and it is therefore becoming increasingly important for us to invest in building out the company's infrastructure to support the integrated role and anticipate growth. This has been a major focus for us during the first half of 2018 and I am pleased to report that we are making significant progress in expanding and improving our competencies along our business, including our quality assurance system, sourcing, engineering, cost accounting, logistics solutions, and information technology to name a few. We're also bolstering our personnel, not just in our headquarters in Ervine, California, but also in our 2 newly opened logistics centers in anticipation of a higher level of global logistics demand.

We moved quickly to open these 2 new state-of-the-art global logistics centers, one of which is located in Livingston, New Jersey and the other in Amsterdam, The Netherlands. Both facilities are operational and supporting customers with official openings scheduled for the month of October. The processes for opening new facilities is not trivial. Besides the buildout, staffing, training and permitting, very rigorous plant certifications and audits have been passed and completed. This additional infrastructure is the beginning of further planned development that will drive our global expansion and position us to ramp our clients' agreement as anticipated therapy approvals in the European Union and the United States take place. It should also be noted that the demand we're experiencing from existing customers reaches beyond the United States and Europe to the Asia Pacific region where we also are currently in various stages of planning to further expand our global footprint.

We're always focusing on improving our technology and expertise at every opportunity and ensuring that Cryoport maintains its competitive edge and reputation for best in class service, whether that is through the quality, experience, technology or the dedicated customer service that Cryoport delivers. Although we distinguish our services primarily through our trade secrets and elaborate know-how, we have 4 patent pendings on new products that will be launched later this year or next.

As our credentials grow, so do our partnerships with other industry leading companies. As an example, World Courier, which is a part of AmerisourceBergen, has partnered with Cryoport to integrate our full suite of temperature control solutions into its global network. This integrated platform includes Cryoport's complete chain of compliance solutions to biopharmaceutical companies, ensuring full traceability of equipment, processes and handling of cells and gene therapies while in transit. While we have been working with World Courier for several years now, this expansion of our relationship is another indication of the need for the quality systems and solutions that only Cryoport can provide for commercialized therapies. The partnership means that Cryoport's complete suite of temperature control logistic solutions will now be offered through World Courier's global network of more than 140 company-owned offices operating across 50 countries. Partnering with World Courier will enable a greater number of pharmaceutical companies to easily access our logistic solutions plus the must-have information we provide through our advanced information technology.

Now I'll go into detail about our specific achievement in the biopharma market during the second quarter 2018 and how we are positioning for longer term growth. Biopharma revenue rose 73% year-over-year and contributed 83% of our total revenue for the second quarter which was over $3.8 million. Revenue from our commercial agreements with Ys and Km accounted for approximately $446,000 of this. When these products are fully rolled out and patient numbers have reached capacity, we expect to generate significantly higher revenue from these therapies. As stated by the companies, this ramp will be ongoing for the next several years as they continue to expand their indications and geographic availability. We are already seeing positive updated from both Novartis and Gilead as to their progress.

We're also pleased I think the continued growth of the number of clinical trials we support driven by new clients and expanded relationships with our existing client base. In the 21 of 2018 we increased the total number of clinical trials we support by a net of 22, bringing the total number of clinical trials supported to 258 up from 172 this time last year and from 236 at the end of the first quarter of this year. Of the trials we currently support, 34 are in Phase 3.

In addition, 5 BLA or EMA filings have occurred thus far in 2018 and we expect another 4 BLA or EMA filings to occur before year's end based on internal information and the forecast from the Alliance for Regenerative Medicine. This is complemented by 20 regenerative medicine advanced therapy designations known as RMATs that have been granted so far this year with Cryoport supporting the majority of them. An RMAT designation is a special designation given to sponsors of cell and gene therapies if their product is intended to treat serious of life threatening diseases and there is preliminary clinical evidence that it can address unmet medical needs. As defined in the 21st Century Cures Act, an RMAT is an award by the United States Food and Drug Administration that allows for faster, more streamlined approvals of regenerative medicine products within the United States.

Now turning to animal health, our revenue increased 7% year-over-year. Animal health is a good market for Cryoport, but our corporate focus has been primarily on the biopharma market where there is a transformational growth with enormous opportunity. We know that the animal health market will continue to benefit from our solutions and we will more rigorously pursue growth in that market as our priorities permit.

Similarly, we see substantial upside in the reproductive medicine market. In the second quarter of 2018, we reported a 17% revenue growth year-over-year as demand for assisted reproductive technology within the United States continues to drive demand for our solutions. We're continually on the lookout for ways in which to innovate, expand our markets and grow revenue.

As announced earlier this week, we are planning to launch our new CryoStork insurance program shortly. We believe that this is a great complement to our industry leading logistic solutions which provide express transportation across the United States for the full spectrum of reproductive health commodities such as embryos, sperm, eggs and reproductive tissue. With many couples struggling with infertility and approximately 6.7 million women in the United States unable to bear a child per the American Society of Reproductive Medicine, we're proud to expand our range of solutions for the reproductive health market. We expect increasing clinical adoption of our services which will drive further growth.

Now for more detail and information on our sales and marketing activities, initiatives, successes and outlook, I'll turn the call over to Dr. Mark Sawicki, our Chief Commercial Officer. Mark?

Thank you, Jerry. It's a pleasure to have the opportunity to speak with you today. Cryoport operates at the cutting edge of the life sciences industry, and in many cases facilitates future directionality of systems, processes and regulatory requirements in support of regenerative medicine distribution on a global scale. The emergence of regenerative medicine is a viable therapy class, has amplified the focus on current clinical product distribution standards and the need to enhance requirements. To that end, both the Alliance for Regenerative Medicine and the Foundation for the Accreditation of Cellular Therapy have instituted review bodies reviewing all aspects of the collection, manufacture, transportation and administration of regenerative medicines.

Cryoport has played an instrument role in the development and implementation of safer, more controlled systems which are currently being adopted as standard practice in the industry. The latest of these is our emerging chain of compliance process requirements for regenerative medicine distribution which are rapidly becoming a standard for ensuring product integrity. Chain of compliance provides complete traceability of the equipment, processes and logistics handling used in managing the environmental control of the therapy while it is in transit. Enhanced compliance standards are now being employed by an increasing number of Cryoport clients and we anticipate this trend to accelerate in the coming months.

Given the rapid development of the regenerative therapy market, as discussed on the last earnings call, we have been preparing for a substantial increase in the number of clinical trials as well as commercial products we can support within our infrastructure. As Jerry mentioned earlier, in support of this increase in demand from developers of the next era in medicine, we are launching 2 new state-of-the-art logistic centers. One in Livingston, New Jersey in the United States and the other one in Amsterdam, The Netherlands.

Moreover, our entire service e portfolio will be offered out of these facilities, including our cryogenic and Cryoport Express C3 or Cryoport Certified Cool platform for 8 degrees Celsius. For several years now, one of our key biopharma strategies has been focused on securing agreements to support clinical stage therapies so that when these products move through the clinical phases towards commercializing, and the logistics requirements rise, we are the first-choice logistics provider. Of the trials we currently support, the net number of Phase IIIs jumped to 34 in the most recent quarter. On their recent second quarter 2018 earnings call, Novartis reported $16 million of sales for Kymriah compared to $12 million in the first quarter, and stated that, while it is early, the launch for children and young adults with B cell ALL is going well.

Furthermore, as we already mentioned on our last earnings call, Kymriah has been approved by the FDA for its second indication, the treatment of adult patients with relapsed or refractory large B cell lymphoma or ineligible for or relapsed after autologous stem cell transplant.

On June 29th, Novartis announced that it has received a positive opinion from the Committee for Medicinal Products for Human Use, also known as CHMP in Europe, for both indications of MK that already has US approval. The CHMP is the European Medicines Agency Committee responsible for human Medicines and this marks the first CMHP opinion for CAR-T cell therapy in 2 distinct indications, BLBCL in adults and B cell ALL in children, bringing Novartis closer to making Kymriah available to the EU to patients who are critical need of the new treatment options.

Additionally, Novartis has filed for Kymriah commercial approval in Japan, Australia, and Canada. As a reminder, our current agreement with Novartis covers any expansion of services for Kymriah as well as any other future indications including global approvals.

Now moving onto Gilead, Gilead reported second quarter sales of Yescarta of $68 million compared with $40 million in the first quarter of 2018. It also reported that it has completed the authorization of more than 60 cancer centers which cover approximately 80% of the Yescarta eligibility patients in the United States. And is continuing to work on authorizing additional centers while also working with centers to enhance patient flows and educating community oncologists about cell therapy and helping them to connect their patients to cancer centers for appropriate treatment.

Last month, Gilead also announced that the CHMP adopted a positive opinion for Yescarta approval in the END USER for relapsed or refractory DLBCL. Gilead a expects the European Commission to grant marketing authorization in the current quarter and is already preparing for the European launch with plans to complete the authorization of more than 20 centers in the EU but the end of 2018.

Additionally, Gilead is opening a 117,000 square foot manufacturing facility in Amsterdam that is proximal to our new Amsterdam facility. As I think Novartis, our current commercial agreement covers this potential expansion of services. As you can see, we are still in the very early stages of the ramp of these first 2 commercial CAR-T cell therapies and there is a very clear path to accelerated revenue growth ahead of us.

We are very proud of our role supporting Gilead and Novartis as they bring their cell therapies to a wider range of patients around the world and we are encouraged by their early progress with the rollouts.

Beyond Gilead and Novartis, [Bluebird] Bio announced on July 26 that their LentiGlobin gene therapy was granted accelerated status by the European Medicines Agency for the treatment of transfusion dependent beta thalassemia or TDT. The EMA previously granted priority medicines or prime eligibility in orphan medicinal product designations to LentiGlobin for the treatment of TDT. LentiGlobin is also part of the EMA's adaptive pathways pilot program which is part of the EMA's effort to improve timely access for patients to new medicines.

The US Food & Drug Administration also granted LentiGlobin orphan drug status and breakthrough therapy designation for the treatment of TDT? Bluebird Bio announced that they intend to file an NAA for LentiGlobin in TDT with the EMA later in 2018.

Turning to animal health, as mentioned previously we have recently onboarded a number of new companion animal clinical trials that tend to have lumpy revenue s early in their clinical development as well as a number of larger laboratory moves supporting another large animal health entity. We anticipate that a number of these will start to ramp in the coming 2 its which will positively impact our revenues in these areas.

Finally, within our reproductive medicine market, we are excited to announce the launch of our CryoStork insurance product. CryoStork insurance will enable expectant parents to insure their reproductive materials against the risk of damage and loss when being moved between clinics. Our sales strategy for this insurance product will be aimed at both the intended parents and the fertility clinics. We currently have relationships with approximately 400 clinics. These clinics will recommend, and in some cases require, expectant parents to utilize out solutions as part of the IVF process. For clinics, the CryoStork insurance product helps them to minimize risks. For expectant parents, they can have added financial security during their IFV treatment. And for Cryoport this represents an additional revenue stream that we can bring to market relatively quickly. We anticipate rapid adoption of this service throughout our clinic network and client base as it is unique to the marketplace.

Thank you. Now I will turn the call back over to Jerry.

Thank you, Mark. Now for a detailed financial report on our second quarter, I will turn the call over to our Chief Financial Officer, Mr. Robert Stefanovich. Robert, the floor is yours.

Thank you, Jerry. Good afternoon, everyone. I will review the financial results for the 3 and 6-month periods ended June 30, 2018, provide some additional comments, and then turn the call back to Jerry.

For the 6-month period, net revenues increased by $3 million or 54% to $8.7 million compared to $5.6 million for the same period in the prior year. Biopharma, our largest market, increased by 68% over the prior year period to $7.2 million from $4.3 million in the first half of 2017. As a result of the continuing increase in the number of Cryoport's clients utilizing our services, increase in clinical trials supported for these clients, and the commencement of the commercial launched of Yescarta and Kymriah.

Our revenue from animal health decreased 3% to $518,000 for the first half of 2018 compared to the same period of 2017, primarily as a result of a temporary pause in the trial conducted by one of our animal health customers in the first quarter, which has since resumed.

Revenue in the reproductive medicine market increased by 19% over the prior year period to $1 million. This increase was driven by the 26% increase in revenues in the US market and partially offset by a 1% increase in revenues in the international markets. We continue to see growing demand for comprehensive and reliable solutions in this market and intend to build out our leadership position.

Gross margin for the 6-month period ended June 30, 2018 was 54% or $4.7 million compared to 47% or $2.6 million for the prior year. This increase in gross margin by over 7 percentage points is primarily due to the economies of scale from the increase of business volume allowing us to leverage our technology-based business model.

Operating expenses increased by $2.7 million for the 6-month period ended June 30, 2018, or 33% as compared to the prior year. This increase is primarily a result of building out our organization in support of the expected increase in business volume, recruiting fees, noncash stock-based compensation expense, and startup costs for the new logistics center in Livingston, New Jersey and Amsterdam, The Netherlands.

We're reported no interest expense for the 6 months ended June 30, 2018, compared to interest expense in the prior year quarter of $16,000. Net loss for the 6 months ended June 30, 2018 was $5.2 million or $0.19 per share compared to a net loss of $3.6 million or $0.18 per share for the same period of 2017. The net loss for the 6-month period ended June 30, 2018 includes a onetime noncash charge of $0.9 million as a result of the warrant tender offer completed in February of this year. Adjusted earnings before interest, tax, depreciation and amortization, EBITDA, for the 6-month period ended June 30, 2018, continued to improve by approximately $400,000 to a negative $1.4 million compared to the same 6-month period in the prior year. Even with the ongoing investments we are making to build out our organization and to enhance our global footprint through our new logistics centers.

Now moving to our quarterly results, for the second quarter, net revenue increased by $1.7 million or 59% to $4.6 million compared to $2.9 million for the prior year second quarter. This quarter was driven by our success in the biopharma market where revenues increased by 73% over the prior year quarter from $2.2 million to over $3.8 million. The increase in the number of clinical trials and the ramp in revenues from the 2 commercial therapies we are currently supporting are the growth drivers for this quarter and are expected to drive future revenue acceleration as clinical trials advance and are commercialized and commercial therapies ramp and are launched in new geographies or for additional indications.

Our revenue from animal health increased 7% to $279,000 for the quarter compared to the same period of 2017. (Inaudible) continues to be our largest client in this market and we are currently in the process of renewing our agreement with them.

Revenue in the regenerative medicine market increased by 17% over the prior year second quarter to $499,000. This increase was primarily due to an increase in the US market of 23% driven by the continued success of our marketing campaigns as well as the expansion of our suite of logistic solutions such as CryoStork. Revenues from the international market increased by 2%.

Gross margin for the second quarter of 2018 was 54% or $2.5 million compared to 48% or $1.4 million for the prior year quarter. This increase in gross margin by over 6 percentage points is primarily due to the economics of scale from the increase in our business volume. As we have mentioned in previous calls, our target margin is 60%. Having said that, bringing new logistic centers online, such as our logistics centers in Livingston, New Jersey and Amsterdam, The Netherland, may impact margins temporarily as logistics operations fully ramp.

Operating expense increase by $1.7 million for the 3-month period ended June 30, 2018, or 53% as compared to the prior year. This is primarily due to a result of building out our organization in support of the expected increase in business volume, startup costs for the new logistics centers in New Jersey and The Netherlands, and noncash stock-based companion expense.

We continue to invest in building up our organization and expertise to meet the growing demand of our solutions and expected ramp in business. Net loss for the second quarter of 2018 was $2.5 million or $0.09 per share compared to a net loss of $1.9 million or $0.08 per share for the second quarter of 2017.

Adjusted EBITDA for the 3-month period ended June 30, 2018 continued to improve to a negative e $0.8 million compared to a negative $0.9 million for the same 3-month period in the prior year.

We ended our quarter with a strong cash position and are debt-free, reporting $20 million in cash and cash equivalents as of June 30, 2018, compared to $15 million as of December 31, 2017. The increase in cash and cash equivalents was primarily a result of the aforementioned warrant tender offer with net proceeds of $4.6 million, and regular exercises further bolstering our cash balance and allowing us to execute on our plans for 2018 and beyond.

Overall, we are very well positioned and funded to continue to execute on our strategy and drive organic growth.

Lastly, we filed our quarterly report on Form 10-Q with the SEC today. With that, I will turn the call back to Jerry. Jerry?

Thank you for your financial report, Robert. We appreciate the support of our loyal and long-term shareholders. At all times our priority is to build a successful, sustainable business that will bring value to all our stakeholders. In June we were pleased that Cryoport was added to the Russell Indexes. We consider that recognition and acknowledgement of the progress we have made election on our mission and the strong support we have received from the investment community, some of whom are on the call today. Being included in the Russell Indexes provides additional liquidity for our stock and a broadened shareholder base. Approximately $9 trillion in assets under management are benchmarked as invested in products based on the Russel Indexes which underscores the importance of these indexes to the financial markets. We also continue to work to further increase our exposure to institutional investors. To that end, we will be attending investment conferences held by both Cowen and Janney during the third quarter, in addition to regularly conducting non-dealer roadshows. We have an excellent investment story to tell. Cryoport's solutions are mission critical to our biopharma customers. Our demand is stronger than it has ever been. We had multiple new commercial agreements on the near-term horizon and opportunities to expand existing relationships globally. We've also established a pipeline of clinical trials in various stages that will fuel our long-term growth for many years to come. the Cryoport team has established an industry leading brand, erected high barriers to entry in terms of infrastructure, technology, and know-how and built a strong balance sheet upon which to continue growing our company organically and through acquisitions when possible. It's an honor to lead our capable team of people and it is an exciting time to be an investor in Cryoport.

Operator, please open the floor for questions.

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

Is this coming from incremental new customers or is it multiple trials from the same customers?

I'll let Dr. Sawicki answer that question.

It's a combination of both. So we do have strong new client acquisitions which are contributing new trials to that total portfolio of volume as well as existing clients contributing that 258 trials.

Great. And then if I think about the operating loss, I guess it was really attributable to the facility expansions in New Jersey and Amsterdam, would that be the right way to think about it?

Yes, I'm going to turn that one to Robert Stefanovich.

Yes, Paul, you're absolutely right, it's a combination. If you look at the operation expenses that we have, a part of that is the startup costs for The Netherlands and to some extent to Livingston, New Jersey. And then we also had additional stock-based compensation expense. As outlined in the Q, that is embedded into the operating expense. That's a noncash item.

And then last, Jerry, if you could talk about where do you think you are in the competitive position in the marketplace. Are you increasing your 120,000 datapoints? Is that like building a bigger mote? Where do you think you are with potential competition that might be out there?

Well Paull, I think we're in the strongest position ever. As I mentioned, for example in terms of momentum, we filed for 5 new patents. And one of those is a new product demand, 2 of them are effectiveness, and 2 of them are revolutionary to the industry. So in terms of competitive positioning in the marketplace, we're reconfirmed every day and we work very, very hard to maintain that. We never have an arrogance about our competitive advantage, we're always working to make sure that we're sensitive to the market, and especially sensitive to our individual clients and their needs and that we're moving ahead on every front. So if you look at our packaging, our information technology and our logistics expertise, we do nothing but improve that on a daily basis, certainly on a quarter basis. And so I think we're in an excellent position. We don't see any new competition on the front, we don't see any strengthen competition. And as you saw recently, we signed a strategic agreement I think World Courier whereby World Courier took on all the Cryoport solutions giving them the strength of our chain of compliance story, our chain of compliance methodology that wouldn't be available to them otherwise. So that's an AmerisourceBergen company, that's the company that has infinite assets that they could put to work, but they chose Cryoport as opposed to trying to build it themselves. the shoe it for a reason. Because of the competitive advantages that we have.

Our next question comes from Richard Baldry with Roth Capital.

The 2 new facilities that are up and launched, I assume the European one is probably not through putting yet because we haven't had approvals there. But is the New Jersey facility actually through putting actual services as we talk right now?

Actually, the New Jersey facility was approved officially today. Both facilities are through putting and we will have a measured ramp up making sure that everything is working the way we know that it's designed to work. And that we confirm that everything is working the right way. So they both are working, they both are approved by our clients and by our quality assurance team here at Cryoport.

So in terms of the costs to get those launched, are there -- they folds into the COGs line I guess and maybe somewhere in the G&A as well. Are there any one-time things that got them up and launched in the quarter that would kind of call away? Or is it more of sort of a steady state now that they're up and running, this is the new level for those?

I'll turn that to Robert Stefanovich.

Yes, just a few comments on that, Rich. IN terms of the facilities being up and running, this is really just now happening. So it's really not reflected in the second quarter. We did have obviously startup costs associated with that. The one hard cost is the $300,000 that are embedded in our operating expense startup cost as well as capitalized assets in the range of $200,000, $250,000. Plus bringing in the additional shippers, Cryoport Express shippers that include our SmartPack condition monitoring system. But if you really look at those 2 operating centers, it's really ow starting and we will see ramps. So it's not included in the second quarter.

Could you talk about any sort of intermediate term plans for additional facilities maybe in Asia or somewhere else to support the clinical trials that you're working with now? Or the feature approvals being sought by clients you've got commercially?

Yes, Rich, that's a very good question and certainly that's in our planning purview. But our emphasis right now has to be on getting these 2 new logistics centers up and running appropriately and satisfactorily. Buy your question is absolutely in our purview and in our planning horizon.

You sort of talked a little bit about the fact that your partners are viewing you differently as things evolve, maybe as you move into the commercialization phase. Maybe take about like what specifically that means. Is it that they're understanding more how important this is to the process? Or is it something about the volumes as you retire volumes that's changing, that makes them sort of come back to you and have some different needs over time?

Yes, Rich, that's a very good question and it's certainly an evolving arena. And I'm going to turn that Dr. Sawicki who is right on the frontline with these people all the time.

So what we're seeing is our clients are increasingly coming to us for guidance from a regulatory standpoint. So this chain of compliance competency that' we've been working on is a perfect example of that. What it is, is it's us starting to dictate within the marketplace what that standard should be. And this is largely predicated on client requests and observations in conjunction with their clinical activity and their commercial launches feedback from both the FDA and the European Medicines Agencies. And it all comes back to a higher threshold from a quality standpoint for commercial products versus clinical products in the space. And there's not much tolerance for the traditional status quo logistics distribution competencies that have been in the market for this period of time. So yes, we are absolutely becoming an indispensable aspect when it comes to helping them from a guidance standpoint and dealing with the FDA and European Medicines Agencies in conjunction with commercial activity.

Just last, sort of a check question on the stock-based competition stepped up. Was there any sort of one-time milestone type things in there? Or is this sort of a new level we should think about as a steady state forward?

For your planning purposes and modeling purposes, assume kind of steady state with the amounts that we have. So there weren't any milestone type of vesting features in the Q. Generally, our stock options are pretty plain vanilla in terms of the vesting schedule.

Our next question comes from Jason Seidl with Cowen and Company.

I want to go back to the facilities and maybe ask the question a different way. In terms of s revenue standpoint, Jerry, what's the scalability of these facilities for the Cryoport network?

Jason, are you saying what's the potential scalability of these facilities?

Yes, in terms of a revenue basis. Ballpark.

Okay. So we build these facilities on a modular basis and we build them on a scalable basis I should say. On a scalable basis in that we build them out at approximately 7,500 -- out of a footprint of about 7,500 square feet, give or take a couple of hundred square feet. And then we also negotiate for leases of the first right of refusal and leases of the adjacent property so that we have the room to expand as we need to expand. While we don't give out specifics for each individual in terms of the actual revenue, because of course part of that depends on what we're supporting and the mix. We're scalable and we did build them out for supporting these to, to begin with, these first 2 commercial therapies, both Europe and the United States, Yescarta and Kymriah, and other indications that those therapies might be approved for. So they're scalable and we feel that they can support, for example Kite is building 100,000 square foot plant within a mile of our Amsterdam operation, that's why we placed it in the position that it's placed in. And they are scalable, but we can't give out specific numbers. I think it would rob be a mistake for each of our logistic cents.

It's clear that there's some room to grow and I didn't think your placement of the Amsterdam facility was a happy accident, but it sounds like there's some good growth to come. I want to touch a little bit on the chain of command product because that intrigues me. Because somebody else brought up sort of where you are in the competitive landscape and whether it gives you even more of an advantage out here. Does anybody else have anything that's close to this product?

Well actually, Jason, we have that phrase trademarked. And no, they don't. I'll let Mark go into more detail about what is included in our chain of compliance. Because it's an extremely important concept and one that the industry is warming to very, very quickly.

As we started taking a look at this, based on the feedback that was coming back from the regulatory authorities, in particular in conjunction with both the Novartis and the Gilead Kite launches, there was come commonality in regards to theme related to an enhanced regulatory footprint around this compliance competency. And what the compliance competency is, is it's an enhanced traceability of all of the equipment and processes which are related to different of these therapies. So what we're doing in essence is, we're putting the same regulatory scrutiny on our equipment and processes as you would see in a GMP biologics manufacturing footprint. And this has never been done in the logistics space. And the reason that we have the ability do it is we have our unique informatics platform, our CryoPortal, which we have been able to collect and cross reference all of the data that is coming into that system into a single unified data base that is fully integrated. Most other parties have their track and trace from a scan code basis in database A, their data capture from their data loggers in database B, their incoming order management process may even be in a third database, and they have no way to cross reference them. And they don't have any traceability competency down to the serial level on any equipment in their infrastructure. While we do all of those things and we can integrate them together. So that's something very, very favorable from the FDA and European Medicines Agencies. So they are the ones who are really honestly starting to drive this competency and it does put us in a very unique position. I hope that answers your question.

It does, very much so. It sounds like it's a big advantage for you guys. Well listen I'll turn it over to somebody else. I appreciate the time as always, gentlemen.

The next question comes from Sean Hannan with Needham and Company.

I want to see if I can start on the topline with some variables you had mentioned a little bit earlier. So as you folks observe the revenue ramps at the 2 really approved biopharma clients of yours with Kymriah and Yescarta, as you observe those ramps and as you observe them to treat specialized facilities and hospitals, can you give us an update here that might be a little bit more specific in terms of how are you modifying your expectations of timelines say for Gilead or Novartis with those specific therapies to hit those targeted $8 million to $10 million in revenues? Because it seems like they're at a little bit of a different pace, albeit it we're at different price points. But I think that an updated perspective would be useful, particularly given that we're on the edge of EMA approval.

Yes, Sean, I'm going to make a few comments, then I'm going to turn it over to Mark Sawicki to give you a more detailed answer to your questions. But I want to start off but saying first of all, we're dealing with revolutionary therapies. These therapies have never before been done and these companies are taking great care, great care to make sure that those points of care are qualified and that the inoculations take place and that the therapies are exactly right. They don't want any setbacks, they don't want any problems. And they're being very responsible. So we are highly respective of that. Is the ramp a little bit off where we expected? Yes, it is. But that's to be expected. This is biology that we're working with. It's data driven and data is being collected and care is being taken and a responsible approach is being taken as well. So with that, I'll turn it to Mark for more finite answer.

Thanks, Jerry. So as we take a look at this and we look at activity ongoing within our 2 commercial clients, they continue to take a the very, very aggressive stance in the marketplace. I think publicly they've disclosed enhanced manufacturing competencies. Jerry talked about the Kite facility in Amsterdam. Novartis has announced additional manufacturing capacity coming online in Europe as well. Very aggressive plans, both of them have publicly acknowledged their launch profiles in Europe. So I don't think that we're going to see a material difference in that ramp. It's just going to -- I would still feel very confident that that topline is an appropriate number. It' just that as these things come online, we're going to see that ramp just aggressively modify maybe geographically more so than anything on a significant delay or anything else along those lines.

Okay. Well let me ask a different way, because I just feel I need a little bit more information. Because we're a few quarters into the experience and albeit yes, it's a new one and it's a learning process for everybody. But do we feel from a Cryoport standpoint, as you guys are making your internal investments, either hard capital in facilities and the support whether it be Livingston or over in Amsterdam. Or also then say in personal and other efforts. We clearly, within Cryoport are going to have some views around and adjustments around when do we think we can hit these types of numbers. Because that's going to support your investment path as well. So at this point, are we talking about the ability that we should be able to get into the range in conception the year 2020 or 2021? Or is it possible that it's a little further out than that?

I think first of all, there's a lot of data available on both the Kite and the Gilead Kite website and through their calls as well as through Novartis. As for our planning, we feel that our planning is on target. We didn't build facilities for them to be vacant or hire people for them to be idle. There is some orchestration to take place and there is load to place on these facilities and ramp up and times and so forth, as I mentioned earlier. But we feel that we're on schedule and we are coordinated with the manufacturers. We talked, I mean we have dedicate program managers and we have fluid conversation lines going all of the time. So we feel confident that we're on the right pathway and we made the right decision in terms of building out our capacity. And our planning. Mark, would you like to add anything to that?

No, I think that's accurate. While we can't provide specific guidance on what their ramp schedules look like because it's proprietary in nature, what Jerry had mentioned is true, we're working very, very closely with both parties in ensuring that we have the right assets in place at the right time. And we haven't gone through an aggressive buildout of 2 new facilities with the expectation that that volume is distant in timeframe.

Understood. Okay. All right. Let me switch gears for a moment into talking a little bit around the OpEx. It sounds like what was addressed for an earlier question, stock comp levels should be remaining dollar point relatively static. Even as I pull that out and I look at the level of OpEx spend, shod we continue to see incremental ramp ups from here as just in a general nature continue to grow your business as well as expand your efforts bringing on new clients. To what degree should we be seeing that? Or is there some element of a dollar spend we're able to maintain here? If you can help us to understand the path of this OpEx through the end of the year at least, I think that would be really helpful.

Sean, I'm going to turn this to Robert in just a moment, but again, I'm going to make a general comment or 2. You can expect some lumpiness in our OpEx now and in the future because we build facilities and they don't instantly have volume coming through them, revenue associated with them. So we have to build in advance. So there will be some lumpiness there. While we're forecasted, or not forecasted, well forecasted the margins that we've talked about in the past are absolutely the margins that we believe, well we know, are in sight. And that's 60% gross margin and 30% operating profit. But on the road to that, you'll see some lumpiness as we build out the infrastructure, the network, the logistic network, not only in the United States but around the world. Robert, would you like to add to that?

Yes, just a few comments. Like you said, we already mentioned some of it. If you look at the operating expense excluding stock-based compensation expense and also including the startup costs that we have during the second quarter which were about $200,00 including the operating expense, then you start really looking at the true quarterly operating expenses that we had outside of those 2 items. So then you look at that and you compare that for instance to even the second quarter of last year, it's only an increase of about $420,00 or $430,000 and that's really the increase in organizational structure that we had. So you go and look at the second half of this year, we did already a lot of the buildout of the organizational structure, so we have the sales team in place, we have the quality organization in place and theory supportive staff. So where you may see additional increases is really more strategic to support the growth, the logistics management and the logistics centers. So when you look at operating expenses going forward, I wouldn't expect a significant increase in operating expenses compared to the second quarter of this year.

Our next question comes from Brian Marckx with Zacks Investment Research.

One on biopharma revenue. It looks like the dollar amount increased from Q1 and excluding the commercial revenue it looks like was the greatest increase on a quarter-over-quarter basis that you've ever had. Is there anything particularly unique in the Q2 biopharma number?

I think there is, and I think it has to do with our business development team, so I'll let Mark answer that in more depth.

Yes, Brian, so our team has worked really, really hard on capturing as much market share as possible. And we've been targeting acquisitions of as many clinical trials as possible. We have a bolus of new programs that have been brought on and new clients that have brought new trials in that are now starting a second and third trial. So we feel very strongly that that's not a one-time event, but that's going to help contribute moving forward to obviously our revenue growth.

And then in terms of pricing, just general pricing, have you been able to take some pricing increases as well?

Mark, why don't you answer that?

What we're doing, obviously we're always driving towards improving margins through accretion and base pricing. But we're also significantly diversifying our revenue stream beyond just our traditional core assets. We put a large program management organization in places now which drives direct revenue on a headcount basis. We've instituted our consulting business which is now starting to contribute notable revenue as well. And those are just the beginnings. So we do believe that will also contribute to an average enterprise value of a given client in the coming quarters.

Relative to the World Courier arrangement, is your CryoPortal integrated with their system similar to the way it was with FedEx and UPS?

It will be. There is an integrative aspect to that. And all of that is outlined in the announcement so there's no new news here. But hat is a part of it, yes. We made our entire suite of solutions available to World Courier and we think that's going to bode well for both World Courier and certainly for Cryoport.

And Jerry, in terms of timelines for full integration, do you have an idea of hen you think that may be completed?

Full integration with World Courier? Well we've worked with World Courier for a number of years. We formalized and extended our relationship and that's what this is all about. So that integration should be finished in this quarter.

Our next question comes from Len Yaffe with Stoc*Doc Partners.

I'd like to add that I think another validation of what you're undertaking is the fact that Regeneron just announced this past week they were investing significantly in Bluebird Bio including the purchase of $100 million in stock, way above the current market price of the stock and developing 6 targets I think them. So I think that they recognize that this is a long way to go. What I was wondering was 2 things. One is, as the Kymriah and Yescarta sales grow sequentially, what type of proportionate increase until other products get approved should we expect in your revenue base given that it could depend on sales in the US versus not the US? And then the second question for Rob would be, could you give us some sense, given the scaling out in anticipation of years/decades of significant new products coming to market, what this means to, roughly, not exactly at all, would be breakeven quarterly revenue level for Cryoport?

First of all, Len, thank you for your comments there in the beginning. I want to turn it Mark to answer the first question and then to Robert for the second.

Len, as much as I'd love to give you guidance in regards to what that looks like for both products. I'm going to have to steer you back to both the Novartis and Gilead announces or their earnings and projected ramps. It's not in our place to speculate and put that data out. I'm just going to reiterate that we've built out 2 new facilities to support these and we still feel very bullish on their prospects. But I'm not going to go beyond that at this point in time. Robert, do you want to comment on the second?

Yes, Len, just to be -- as Jerry mentioned earlier, we're building out our organizational structure to support and really to leverage positioning in the market space. With that said, if you look at cash flow breakeven range, we're looking at currently we have $24 million to $28 million in annualized revenue. And as we further build our organization and we see the ramps from these commercial launches, we'll probably have a more accurate picture as to when to expect breakeven. At some point we'll also start giving forecast to the market space, but given the dynamics in the market space right now and our positioning, it's a little bit too early for us to do so.

Thank you. This concludes today's teleconference. You may disconnect our lines at this time and thank you for your participation.

Thank you, everyone. Thanks for joining us.