Expert Financial Analysis and Reporting

Investment Perspective

Cryoport is in the very early stages of corporate development and has only minimal sales ($9.8 million on a trailing twelve months basis). It is still too small to catch the eyes of large investors. Also, it is not well understood as it has a very unique business model that requires both a grasp of biopharm drug development and logistics. To date, the analytical coverage on the Company is comprised of analysts with limited understanding of biopharm who have not yet grasped how electrifying and promising is its business model. I think Cryoport is poised for explosive growth that will capture the attention of large institutional investors. As they analyze the company, I believe that they will come to share my view that this is an extremely exciting, unique, emerging growth story. The combination of skyrocketing sales and earnings growth and almost total lack of representation in institutional investors’ portfolios promises strong stock performance in the coming years.

This report was prompted by the reporting of second quarter earnings which I will discuss in a moment. If you are not familiar with the company, I recommend that you read my April 12, 2017 initiation report Cryoport: Initiating Coverage of this Highly Unique Health Care Company with a Buy (CYRX, Buy, $2.25)  I recently updated my thinking on the price target in a July 26, 2017 report Cryoport: Upping 2020 Price Target from $14.50 to $20.00 (CYRX, Buy, $6.89). Note: access to these reports requires a subscription to my SmithOnStocks.com website.

Very Strong Second Quarter Results in Line with My Expectations

Cryoport’s press release of August 9 gives a good rundown of the second quarter. The exceptionally strong performance was in line with my expectations so that I am not going to spend much time on repeating the numbers and metrics presented in the press release. Here are some highlights:

• Corporate revenues increased 52% to $2.9 million.
• The driver of company revenues is biophama (76% of sales) whose sales increased 69%. Sales of reproductive medicine and animal health each increased 15%.
• The Company added 19 new clients and 33 new clinical programs bringing the total number of trials supported to 172.
• Of these 172 trials, 17 are in phase 3 development.
• The operational cash burn was $0.8 million. I expect that the $12.9 million of cash on the balance sheet is far in excess of what is needed to reach cash flow breakeven.

2018 Will Be A Transformational, Breakout Year

Sales of Cryoport primarily have been driven by providing logistics support for biopharma products in clinical development. The Company has provided rough guidance that products in phase 1 development can give rise to $15,000 to $75,000 of annual revenues, phase 2 of $75,000 to $150,000 and phase 3 of $200,000 to $1,000,000. The real commercial payoff begins when products gain approval and are commercialized as annual revenues can range from $2 to $20 million. Novartis just received approval for its CAR-T drug CTL-019 for the treatment of relapsed/ refractory acute lymphocytic leukemia (r/r ALL) and Kite should receive approval for its CAR-T product Axi-Cel for relapsed/ refractory diffuse large B cell lymphoma (r/r DLBC) in late 2017.

Cryoport has provided guidance that annual, worldwide revenues from CTL-019 could reach $8 to $10 million at their peak. The r/r ALL market in the US is about 650 patients and I expect that because of the life-saving efficacy of the drug that almost all patients will receive the drug so that I look for a quick uptake. I think that peak sales could be reached in 2020 or even 2019. The market for r/r DLBCL is about 7,500 patients in the US, but the efficacy is not as remarkable as was seen in r/R ALL. Management has not given exact guidance on sales potential other than to say that it could match or exceed the $8 to $10 million projected for r/r ALL. Again, I would expect peak penetration in 2020 or even 2019.

CTL-019 and Axi-Cel both target CD-19 expressing cancer cells and this mechanism of action makes them effective against a broad number of hematological tumors- leukemias and lymphomas. These products are very similar and at this point I have seen no data that differentiates the two drugs. This means that Kite will also target r/r ALL and Novartis will target r/r DLBCL. These companies also will be going head to head in a number of other leukemias and lymphomas. Because Cryoport provides logistics support for both, it is largely indifferent as to which company does better in any indication.

Let me now make an important point. Essentially, CTL-019 and Axi-Cel are the same drug marketed by two companies. There will be multiple indications for these drugs as r/r ALL and r/r DLBCL are just the first two and based on guidance from Cryoport we can expect peak sales of $8 to $10 million or possibly more in each indication. Importantly, Kite and Novartis are also studying these drugs in these additional indications:

• mantle cell lymphoma
• adult ALL
• chronic lymphocytic leukemia
• indolent non-Hodgkin’s lymphoma
• earlier stage, second line DLBCL

Each of these indications have population sizes larger than the 650 for r/r ALL and some address bigger patient populations than the 7,500 for DLBCL. Does this mean that each of these indications could lead to an additional $8 to $10 million of revenues in the early 2020s which would total up to $40 to $50 million? I have seen no efficacy data in any of these indications and until then I can’t really make a guess as to what the sales potential might be. Still, it seems highly probable that there will be substantial revenues from these five additional indications.

Investors can see that the contribution from sales of CTL-019 and Axi-Cel (remember these are essentially the same drug) could range from $16 million (for the first two indications) to perhaps as much as $70 million (for seven indications) in the early 2020s.  Beyond this Cryoport reports that it is supporting 17 phase 3, 73 phase 2 and 82 phase 1 trials. It provides no data on the drugs or clients involved in these trials and given the high mortality rate for clinical trials, only a few drugs being studied in these trials will ultimately be successfully developed. However, we have seen the potential of CTL-019 and Axi-Cel and if just a handful of drugs in development are successfully brought to market, there could be enormous revenue potential. You can see why I am so excited about this company.

Cryoport’s Business Model

When I first looked at Cryoport’s business strategy, it was love at first sight. It has developed a first mover, business model for providing cold chain logistics and real time monitoring for high value life science products requiring cryogenic temperatures during shipment. The emergence of pharmaceutical products based on using living cells (Cryoport refers to these as regenerative therapies) has spurred the growth of a new area of cold chain logistics. These therapies must be suspended at temperatures below minus 150° Celsius (minus 238° Fahrenheit) and maintained at that temperature as they are transported on a global basis between clinical and manufacturing sites, a process that can take several days.  Examples of biological specimens that require continuous cryogenic temperatures throughout transportation to prevent degradation and loss of efficacy include:

• Pharmaceutical products based on live cells such as CAR-T and other genetically engineered T-cells, gene therapy products, cancer vaccines, and others,
• Stem cells.
• Other types of vaccines,
• Eggs, semen and embryos used for in vitro fertilization,
• Biological specimens used for diagnostic purposes e.g. determining PD-L1 expression in tumor cells, and
• Infectious agents such as viruses (Ebola, HIV).

This presents both a technological challenge to create storage devices for shipping and then the logistical and real time monitoring expertise to assure that the product being shipped does not change because of a temperature deviation between the time it is picked up and delivered. Cryoport has achieved a commanding, leadership position in this area. The Company was initially formed to develop novel cryogenic shipping containers (dewars) and then evolved into creating a sophisticated and comprehensive IT driven, logistics solution for dewar transportation beginning about five years ago.

Logistical handling is an integral part of the clinical process needed to gain regulatory approval of regenerative therapies and is equally critical to maintain integrity of products after they are commercialized. Regulatory agencies will require data that shows that shipping of the product does not alter the characteristics of the product. This requires thorough documentation of what happens during the chain of custody and chain of condition. A temperature deviation can affect the efficacy of the products that are being shipped, which could therefore change the dynamics of a clinical trial or affect patient outcomes.

The logistics methods used will be an integral part of the Biologic License Application (BLA). This is very important because once this is established, if the Company sponsor were to try to decide to change its logistics system, regulatory agencies require evidence that the alternative way of shipping meets all of the data endpoints that Cryoport provides and thus doesn’t alter the therapy’s characteristics. This requires extensive work and possibly additional studies. Because of this, once Cryoport solutions are successfully incorporated into the clinical trial process, it will likely continue to be used as products go commercial and through the life cycle of the product with minimal chance of losing the business to a competitor or an in-house solution.

Cryoport is in a very early stage of development and its future is joined lockstep with that of regenerative medicine, some of whose leading research efforts are based on engineering living cells to create drug therapies. The best known initial programs are engineering T-cells (Kite, Juno, Novartis and 20+ other companies) and gene therapy (Spark, bluebird and many others). Regenerative medicine seems destined to have the same impact on biopharma as recombinant and monoclonal antibody technologies that have created such phenomenal success stories as Amgen, Biogen and Genentech.

Let me use an analogy to demonstrate this. Let’s categorize the whole field of regenerative medicine as analogous to an emerging biotechnology company. The latter starts with an idea for a developing a drug. It then begins a clinical trial program that starts with phase 1 and 2 clinical trials in which the Company tries to determine safety dosage and the types of patients for whom the drug might provide benefit. It then uses the information to conduct a phase 3 clinical trial in an effort to demonstrate in a statistically significant manner that the drug is safe and effective in a proscribed disease state. It then seeks regulatory approval and if gained, will introduce the drug to the market. The profits from this initial product success then funds another drug development effort and then another and another.

On a purely hypothetical basis and intended only to suggest magnitude and trend, the clinical progression through commercialization might create shareholder value as measured by market capitalization in an emerging biotechnology company as follows:

• Pre-clinical: $50 million
• Phase 1 and 2: $150 million
• Phase 3: $300 million
• Two years after successful commercial launch: $1 billion
• Successful launch of a second product: $3 billion and so on

By this analogy, Cryoport (and the field of regenerative medicine as a whole) would be in phase 3 of its corporate development. Remember that Cryoport is not developing drugs for its own account, but rather is providing logistics solutions for a highly meaningful percentage of companies in regenerative medicine. Its success in providing solutions for any single product will produce step-ups in value creation as previously described.

Obviously, the value of providing logistics is much less than for successfully developing a drug. On the other hand, Cryoport does not have the binary risk of drug development and benefits from industry wide drug development. I compare Cryoport providing logistic services to regenerative medicine companies to merchants providing picks and shovels to gold miners in the 1849 gold rush. The point I am trying to make is that regenerative medicine and Cryoport are poised to enter the commercial stage of product life cycles and there is the potential for dramatic increases in shareholder value if my analogy holds.