Expert Financial Analysis and Reporting

Investment Conclusions

Along with most investors interested in Cryoport, I am expecting and awaiting a sharp upward inflection in sales as the CAR-T products gain traction in the market. Novartis’ Kymriah and Gilead’s Yescarta are both in early stages of their launches- Kymriah for pediatric r/r ALL and Yescarta for r/r DLBCL. In its conference call discussing 4Q, 2017 results, Gilead went into some detail on the Yescarta launch. I thought that I would summarize some key takeaway points.

• Oncologists are excited about the efficacy of Yescarta and I expect that most eligible r/r DLBCL patients will be treated.
• Gilead says that by mid-year it will have trained enough hospitals to address 80% of the eligible r/r DLBCL population.
• Reimbursement does not seem to be an issue due to the dramatic efficacy of Yescarta.
• I would expect that by late 2019 or 2020 that Yescarta will be approaching peak sustainable sales and guidance from Cryoport suggests that this could lead to $8 to $10 million of annual revenues.
• Yescarta for treating r/r DLBCL is for Cryoport is just the tip of a very big iceberg of opportunities. Yescarta may present numerous other opportunities of the same $8 to $10 million magnitude through treating hematological cancers other than r/r DLBCL.
• In addition to Gilead, Cryoport will also be supporting Novartis and Celgene, the number two and three companies in the CAR-T space. This further magnifies the CAR-T opportunity as each over the course of several year could provide sales potential of the same magnitude as Gilead.
• I see no viable competitors to Cryoport and the leading companies have chosen to go with Cryoport cryogenic solutions other than in-house. This suggests that most other regenerative medicine drug developers will also elect to go with Cryoport.
• The field of regenerative medicine requiring cryogenic shipping solutions is at the very early stage of development; CAR-T drugs are only a part of the opportunity.
• I continue to think that Cryoport has explosive growth potential and that the stock has tremendous potential.

Update on ZUMA-1 Trial

GILD presented updates on the ZUMA-1 trial which was the pivotal study that led to approval of Yescarta in r/r DLBCL. These were published in the December issue of the New England Journal of Medicine (NEJM). All patients in that study have now been followed for at least one year and the median follow-up is 15.4 months. After a single infusion of Yescarta, Gilead says that 42% of patients continue to respond to therapy and that 40% still have a complete response (CR) which means that the cancer is undetectable with imaging.

The ZUMA-1 trial enrolled patients who had exhausted therapeutic options. The trial did not have a control arm, but historical data suggests that median overall survival for these patients is about six months. A CR is suggestive that the cancer has been eradicated. It is based on imaging scans that can determine if tumor masses have been eliminated, but they may not detect micro-metastases that can cause the cancer to ultimately return. This updated data is highly encouraging, giving reason to hope that 40% of patients have been cured or at least are experiencing much longer survival. Gilead says that it will have two-year data from the ZUMA-1 study later this year.

How Will Physicians React to the ZUMA-1 Trial?

Some might question how aggressive oncologists might be in using CAR-T. To address this, let me give you a real-life example of how oncologists treat cancer patients who have failed prior therapies. I have a beloved 88-year-old uncle who was diagnosed with chronic myelogenous leukemia five years ago. He was just recently hospitalized as his leukemic white cells were expanding so rapidly that red blood cells were being crowded out; he became anemic and weak. There are three drugs that control CML and as the first drug fails, patients go on to a second and then a third. My uncle now no longer responds to the third.

His oncologist told him that they had done everything that they could do and generally prepared him for the worst. They said that the white leukemic cells would continue to expand until the point that they blast (explode in number) and that would be the end. My uncle took this news with remarkable composure and grace, much more so than his family. Even though the situation seemed hopeless, the oncologist prescribed a blood transfusion that would provide red blood cells to temporarily treat the anemia. Still, the oncologist did not give up and walk away. He decided to give my uncle an unapproved drug that reduces white blood cells, but also reduces red blood cells. This may prolong the period of time until the white cell blast occurs, but by reducing red blood cells will require frequent transfusions.

The reason I go over this story is that it gives an important insight into how oncologists think. They will fight to the last to keep their patients alive by whatever measures they have at hand. A philosophical argument can be made that at some point oncologists should stop heroic treatments and allow terminally ill patients to die. However, as illustrated in this example, the oncologist will only make this decision if the patient directs him to. Barring this, the oncologist will take every measure possible to keep a patient alive.

I tell this story because I think it gives an important insight into how aggressively oncologists will embrace CAR-T therapy. As in the case of my uncle, they are dealing with patients who no longer respond to drug treatment and have perhaps six months to live. With Yescarta, they are given a dramatic new therapy that based on current ZUMA-1 data can prolong the lives of a meaningful percentage of people and might be a cure in some cases. Even though Yescarta has significant side effects, I think that oncologists will be aggressive in using it and most of the r/r DLBCL patients will be offered and receive the drug.

Other Trials Underway with Yescarta Promise More Revenue for Cryoport

Cryoport has guided that at peak sales for Yescarta, that Cryoport could realize $8 to $10 million of revenue. This does not take into account ongoing trials that could expand Yescarta use into other hematological cancers and into earlier stages of cancer. Here are some examples:

• ZUMA-7 is a phase 3 randomized study comparing Yescarta to the standard of care in second-line treatment of patients with diffuse large B-cell lymphoma. Data are expected in 2020.This is a much larger opportunity than r/r DLBCL so that if this trial is successful, it might be the case that the sales potential for Cryoport is greater than in the treatment of r/r DLBCL.
• ZUMA-6 is a phase 1/2 combination study of Yescarta with atezolizumab (an anti-PD-L1 antibody) for treating r/r multiple myeloma. This should be a new opportunity at least as meaningful as r/r DLBCL.
• A phase 1 study of a KITE-585, a new and different CAR T-cell product, targeted at r/r multiple myeloma.
• The ZUMA-3 study is investigating KTE-C19 in adult r/r ALL This is a product similar to Yescarta but manufactured through a different process.

Future CAR-T Sales Opportunities for Cryoport beyond Yescarta in r/r DLBCL

The previous section is not anywhere near a complete list of the CAR-T trials underway at Gilead and it gives the promise that Cryoport will have multiple $8 to $10 million sales opportunities as in the case with r/r DLBCL.

Novartis is not as transparent as Gilead, but it also pursuing multiple indications for Kymriah and the sales opportunity for Cryoport is probably comparable to Gilead.

There are numerous other companies pursuing CAR-T. The collaboration of Celgene and bluebird bio is moving rapidly on a product for r/r multiple myeloma. Celgene recently acquired Juno and will probably emerge as the number three company behind Novartis and Gilead.

CAR-T products are only the start of the regenerative medicine development effort that will require cryogenic shipping solutions. There could be 5 to 7 BLA/EMAs filed in the next year or so including both CAR-T and other products.

I do not see any company that can effectively compete with Cryoport and it is clear that the current industry leaders have chosen to go with Cryoport rather than trying to develop an in-house solution. I would expect most other companies to take the same strategy. You can see why I am so excited about Cryoport.

The Current Launch

Rolling out Yescarta is not a simple process. While the single infusion used to administer it might suggest that Yescarta would be easy to use and would experience a relatively quick uptake, it is not that simple. Prior to the CAR-T infusion, patients who are eligible for treatment must be screened and identified. They are then given chemotherapy to deplete the number of regulatory and effector T-cells. Both chemotherapy and CAR-T infusions can cause serious effects that can require hospitalization. Because of these and other factors, hospitals have to put together teams of professionals to administer a CAR-T infusion. Don’t think for a minute that a patient walks into a hospital or physician’s office, receives an infusion and walks away.

When Might Sales Inflection Start?

Gilead stated that it is actively working on training and certifying additional centers on the risk, evaluation and mitigation strategy and the Kite Konnect process. By mid-2018, they anticipate there will be enough centers certified to treat 80% of Yescarta-eligible patients. The reimbursement issue for the high priced Yescarta is proving less of an issue than I had feared due to the dramatic efficacy and medical support for this drug. Reimbursement procedure seems to have been worked through and are not a significant hurdle as so often is the case in new product launches.

I think that by the end of 2018 and possible sooner the sales run rate for Cryoport should increase dramatically. In the case of Yescarta used for r/F DLBCL, the peak market penetration could be reached in late 2019 or 2020 and with that Cryoport could achieve $8 to $10 million of annual sales from just this indication.