Expert Financial Analysis and Reporting

Overview

I wanted to give subscribers a quick overview of the just completed equity offering and the surprising 15% surge in the stock price after the deal was announced. This note is a quick synopsis. I am working on other reports that will include a model for sales and earnings, potential price targets and other issues. However, this will require considerable time and effort and I wanted to get a brief note out quicker. I continue to believe that this is one of the most exciting growth stories in biopharma and the best is yet to come. I continue to believe that the stock has dramatic upside over the next few years. Coming articles will add considerably more details on my thinking.

Comments on Equity Offering

For those biotech investors who thought that they had seen everything, the stock behavior of Cryoport on January 20, 2021 was a new experience. The Company announced an equity offering of $200 million and the stock traded up $7.47 from the price prior to the announcement or 12% to $71.65. On January 21, the offering was priced at $66.00 and amazingly the stock ended the day at $73.75. I don’t recall ever seeing anything close to this before. It has been axiomatic in biotech land that the announcement of a stock offering causes a modest and sometimes significant sell-off. In this case, the stock increased from $64.18 before the announcement of the offering to a close of $73.75 on the day the offering was completed, an increase of 15%. What gives?

But first, let’s consider the offering and the use of proceeds. Underwriters were authorized to raise $200 million through issuing new shares and to sell an additional 15% in the green shoe bringing the total gross proceeds to $230 million. The offering was priced at $66.00. The $200 million amount gave rise to 3.8 million new shares and the additional amount from the green shoe added 0.6 million shares. This increased the fully diluted share count to 49.8 million, a 10% increase. After underwriting fees, net proceeds to the Company will be $234.5 million. It is important to note that after this equity offering and the acquisitions of CRYOPDP and MVE that the fully diluted share count only increased from 39.1 million to 49.8 million, a very acceptable 27% increase in my opinion.

The joint managers of the underwriting were Morgan Stanley, Jefferies, SVB Leerink and UBS Investment Bank. I think that the imprimatur of being banked by these firms is very important to the stock. Cryoport originally came public through a reverse merger into a shell company. This is kind of like a scarlet letter as many large investors are suspicious of this process because not infrequently it has been used in stock manipulation schemes. The Morgan Stanley name and reputations of the other investment banks erases this stigma. This should also significantly expand research analyst coverage  and very meaningfully expand awareness of Cryoport to institutional firms who were previously unaware of the Cryoport story. To date, Cryoport has been covered by smaller investment banks and usually by transportation analysts who might cover railroads or shippers like FedEx. They did not understand the dynamics of the cell and gene therapy industry that drives Cryoport's business. Hopefully, this will change.

The Company ended 3Q, 2020 with $90 million of free cash so this equity should bring the cash position to about $325 million. I am estimating 2020 revenues of $173 million; this is a pro forma number that includes full year results for the CRYOPDP and MVE which were purchase acquisitions that were closed on October 1, 2020. When I initiated coverage in April 2017 with a buy at a stock price of $2.25, Cryoport had trailing 12 month revenues of less than $9 million and $14 million of cash. Management has done a superb job and the best is yet to come. I am kind of proud of my recommendation also.

I totally agree with this financing decision which results in a fortress balance sheet. I see three main benefits to this very strong cash position:

• The first is that it assures current and future clients that Cryoport is a well-financed, rock solid company with which they can feel confident in trusting cryogenic shipping and logistics services that are critical to clinical and commercial development of their drugs.
• Secondly, there is a tsunami of cell based therapies in clinical development that will require cryogenic shipping and logistics support. Companies involved in cell based therapies are awash with cash to conduct clinical trials and to use an overworked baseball metaphor, we are just seeing the first batter in the first inning of commercialization of cell based therapies which have much larger potential sales contributors than clinical trials. This may require significant spending on infrastructure build out.
• Thirdly, it gives Cryoport the ability to make acquisitions. I see a close parallel between Cryoport and the bioprocessing company Repligen, a company that I have long followed. The latter has been able to make bolt-on acquisitions that increased its organic sales growth rate from 12% to 15% to reported sales growth of 25% to 30%. I think that the organic sales growth rate of Cryoport will be significantly higher than 12% to 15% and that it is possible that acquisitions could meaningfully increase reported sales growth as was the case with Repligen.

The Reason for the Surge in Stock Price

But why did the stock price go up so dramatically? As of October 1, 2020 Cryoport completed the purchase acquisition of CRYOPDP and MVE Biological Solutions. In an 8-K issued on January 20, 2021, management gave preliminary estimates for 4Q, 2020 sales for both legacy Cryoport and the two new acquisitions. Before the two acquisitions, the Company has two operating segments, Cryoport Systems and Cryogene. Guidance was issued for these and also for CRYOPDP and MVE Biological Solutions. Management estimates that

• Cryoport Systems will report revenues of $11.1 to $11.2 million and Cryogene will report $1.4 million.
• Revenues for MVE Biological Solutions between $22.6 million and $23.0 million.
• CRYOPDP revenues between $12.6 million and $12.9 million.

Cryoport Systems has been the growth driver and my primary focus. I am looking for explosive growth going forward, but I was a little concerned about the potential effect of COVID on both clinical trial and commercial revenues. However, the results far exceeded my expectations:

• The 4Q, 2020 estimate of $11.1 to $11.2 million represents a 39% to 40% year over year increase from $8.0 million in 4Q, 2019. This stunning growth was the reason for the stock surge. Because 12% of Cryoport Systems revenues stem from reproductive and animal health which generally show much slower growth, this may mean that support for cell and gene therapy clinical trials and commercial operations grew even faster.
• There was a sequential increase of $1.3 million or 13% from 3Q, 2020.
• My estimate for revenues for Cryoport Systems in 4Q, 2020 was $9.0 million.
• My estimate for Cryogene was $1.5 million slightly more than the guidance of $1.4 million.

In looking at the company as a whole, 4Q, 2020 revenues with the two new acquisitions is expected to be $47.7 to $48.5 million, as compared to $9.0 million for 4Q, 2019 reported last year for legacy Cryoport. This indicates that total revenues for 2020 will be about $173 million on a pro forma basis.

Cryoport said that at this time they are not able to able to estimate the operating loss for the year, but it is expected to be substantial due to purchase price adjustments associated with the acquisitions of CRYOPDP and MVE Biological Solutions. However, on a non-GAAP basis I would not be surprised to see breakeven or a slight profit for 4Q, 2020 and FY 2020.