Expert Financial Analysis and Reporting

Investment Thesis

Since the market low on March 23, Cryoport’s stock has increased from a low of $14.58 to a current price of $33.51, a 230% increase. The Company is selling at a market capitalization of $1.3 billion which is 31 times my estimate of 2020 revenue estimate of $41 million and 22 times projected 2021 revenues of $56 million. The Company could show a slight loss for 2020 and profits in 2021 should be minimal. Cryoport is one of my largest holdings which I bought and have held since my initial report issued on April 12, 2017. The long term fundamentals of this company are superb; it is a stock that I anticipate owning for the next five years. However, from a valuation standpoint the stock seems extremely high priced so you may be asking  yourself if you should take profits with the intention of buying the stock back later at a lower price.

I do not intend to sell or trim my position. As shown in the next table, my current sales model shows sales increasing from $41 million in 2020 to $117 million in 2024. The assumptions underlying this model are discussed in detail later in this report and are intentionally conservative. Importantly, they include no estimate of sales from COVID related drug and vaccine development or from acquisitions. I do expect contributions from each of these, likely large, but the amount is not possible to forecast at this point so I omit them from my sales model.

So, if I am right, we have explosive growth potential for many years counterposed by an extremely high valuation based on sales or earnings metrics. What should you do? I am not the Delphi Oracle and it is possible that there could be some profit taking near term that results in a meaningful stock price correction. However, it has been my experience that while the market sometimes gets carried away and over prices a stock, it can be more often than not pretty accurate at pricing emerging growth stocks. Also, it has been my experience that the strategy of selling the stock of a company you like very much with the intention of buying it back at a lower price, more can badly backfire. This may be because the stock unexpectedly (by you) continues to go up or because it declines as expected but you never pull the trigger to get back in. This is how dramatic, long term growth opportunities like Amazon and Google are missed.

Am I comparing Cryoport of Amazon and Google? Not in the scope of sales as I don’t anticipate that sales of Cryoport will ever approach a small fraction of the multi-billion levels of these companies. However, in terms of growth it may be comparable. One of the great mega-trends of our society is the use of living cells as drug therapies; the growth of drug development in this area is astronomical and Cryoport will grow apace of the anticipated explosion of sales. It currently has tremendous competitive advantages which have resulted in it providing support for 68% of current phase 3 trials in regenerative medicine. This percentage could actually increase over time. Importantly, if phase 3 trials lead to regulatory approval, in probably every case, Cryoport services are extended to commercial support.

A picture is worth a thousand words so here is my sales model for 2020 to 2024. I think that you will see the assumptions underlying these estimates as laid out later in this report look quite conservative. I have purposely left out any estimates for revenue contributions due to frenetic drug and vaccine development related to the COVID pandemic and also from acquisitions. I anticipate that both will contribute very significantly to sales over the next four years, but I can’t reasonably make any estimates. Beyond 2024, I would expect continued dramatic organic growth to continue; we are only in the first inning of drug development based on living cells.

 

Results for 2Q, 2020

The difficulty in estimating the effect of the COVID pandemic caused considerable uncertainty with my projections for the second quarter so it is difficult to compare reported results with expectations. However, the actual results were viewed as good given the COVID headwinds in the quarter. Cryoport reported $9.4 million in 2Q, 2020 revenues which was a sequential decline of 4% from $9.8 million in 1Q, 2020 and an 11% increase from $8.5 million in 2Q, 2019. Non-GAAP EBITDA was $2.5 million. Before COVID, consensus expectations for EBITDA was a small loss. While the reported non-GAAP EBITDA was meaningfully greater than that initial expectation, there was a non-recurring expense of $1.7 million that was attributable to analyzing potential acquisitions. Adjusting for this non-recurring factor, the EBITDA loss was a more acceptable $0.8 million. Management emphasized that every customer shipment was successfully handled on time in 2Q, 2020. Results of different businesses were as follows:

Clinical Trials Support (50% of revenues)

Some biopharma customers suspended trials or encountered enrollment delays which had a marked negative effect on the clinical trial business which accounts for about 50% of sales. Management reported that 56 of the 465 trials it was supporting at the end of 1Q, 2020 were suspended at one point in the quarter. These factors caused below trend line results as clinical trial revenues of $4.7 million increased sequentially by 1.5% from 1Q, 2020 and decreased 7% from 2Q, 2019.

Commercial Revenues (28% of revenues)

Commercial revenues are currently entirely driven by sales of the CAR-T drugs Kymriah and Yescarta. These drugs are used in late stage cancer patients who have failed multiple lines of therapy and have few or no options left so that usage was not that much affected. Combined sales of Kymriah and Yescarta were $269 million in the quarter which was a 15% sequential increase from 1Q, 2020 and a 50% increase from 2Q, 2020.

Along with other analysts, I was surprised that Cryoport sales stemming from support of Kymriah and Yescarta were $2.6 million in 2Q, 2020 which was a sequential decline of 10% from 1Q, 2020 even though manufacturers sales of Kymriah and Yescarta increased sequentially by 15%. This was attributable to Gilead opening a new manufacturing facility for Yescarta in Europe; previously they had been sending cells for European patients for processing at a plant in California. This transition from complex international shipments to more straightforward domestic shipments had a short-term impact on revenue. The year over year increase from 2Q, 2019 was 31%.

Other Sectors (22% of revenues)

The three other segments of Cryoport sales are animal health (3 % of total sales), reproductive (6%) and global bioservices (14%). Animal health sales of $257 thousand increased sequentially from 1Q, 2020 by 14% and were flat with 2Q, 2019 sales. Reproductive sales of $537,000 decreased sequentially by 30% and the decline from 1Q, 2019 was 20%. Global bioservice revenues of $1.3 million increased sequentially by 4% and were up 129% over the prior year. The latter business was acquired in 2Q, 2019 and recorded only partial revenues in that quarter.

Growth Prospects are Explosive

Cryoport came through the quarter with a relatively modest impact from the pandemic. As investors came to realize this, confidence returned for its explosive growth potential. During the quarter, the stock increased from a low of $14.58 to a current price of $33.51, a 230% increase. The stock price performance was also aided by the possibility that Cryoport could benefit from the frenetic biopharma industry effort to develop therapeutics and vaccines for COVID. It also raised $111million through a convertible offering to position the Company for acquisitions. It currently has cash of about 208 million. It is operating at about breakeven on cash flow, but should be turning cash flow positive.

Clinical Trials

The clinical trials business has bounced back from the slowing caused by the suspension of the 56 clinical trials. As noted previously, 53 of those trials have now resumed. In the 2Q, the number of clinical trials supported by Cryoport encouragingly increased to 491 up 6% sequentially from 1Q when 465 trials were being supported and up 19% from 413 in 2Q, 2019. For the commercially most important phase 3 trials, CYRX supported 66 trials in 2Q, 2020, up 6% sequentially from 62 in 1Q, 2020 and up 27% from 52 in 2Q, 2019. All of this points to a significant improvement in results in 2H, 2020 and beyond with COVID related trials potentially adding to results. There could be moderate headwind due to slowing in patient enrollment; this is difficult to project.

During the second quarter there was an explosion in biotechnology financings as investors perceived that going forward, the biotechnology industry would fare much better than most. Also, the image of the industry improved dramatically as biotechnology is perceived to be at the point of the spear in developing vaccines and treatments for COVID. The investment community showered the industry with cash. The Alliance for Regenerative Medicine estimated that year-over-year financing for the first half of the year was up 120%. This can be seen by looking at the current cash positions of companies involved in CAR-T; I discussed this in a recent blog- An Overview of Companies with a Major Presence in CAR-T Research.

From an historical standpoint, we are seeing unprecedented funding of companies whose lead products are primarily in early stage phase 1 and 2 clinical trials. The following table shows the cash positions of some of the companies involved in CAR-T research. Some are exclusively focused on CAR-T such as Allogene and others are involved in gene therapy and other technologies as well; e.g. bluebird bio and CRISPR. The cash balances are huge and this should translate into very  significant acceleration in the number and scope of clinical trials.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bear in mind that in addition to the emerging companies shown above, that three large pharma companies-Novartis, Bristol-Myers Squibb and Gilead- are the current industry leaders and are also investing heavily in CAR-T research. These companies also have enormous amounts of cash to invest in clinical trials. I also want to point out that while companies involved in CAR-T drug development are the most drug development area supported by Cryoport, it is not the only one. The Company is also supporting trials in gene therapy, stem cell therapy and COVID related trials.

Commercial Products Supported by Cryoport

The key driver of the Cryoport story is the support of commercial products as one commercial product can generate several times the revenues of a phase 3 clinical trial. Also, revenues are recurring for many years whereas a phase 3 clinical trial is a one-time event. Commercial sales are at a nascent stage and are driven by just two products, Kymriah and Yescarta; Cryoport might support over 100 products in not so many years. Kymriah and Yescarta have been somewhat disappointing to some analysts even though their combined sales could reach $1.1 billion this year (they were introduced in early 2018). Sales have been meaningfully constrained by their high price, reimbursement issues and dangerous side effects. The cost of one treatment for CAR-T cells alone is over $300,000 and the all-in cost due to the need to manage side effects can in some cases exceed $1 million. Physician management of these products requires a great deal of skill and infrastructure because of the complexity in managing side effects. This also makes for reimbursement challenges. Consequently, most usage is in major medical centers and not in the broad community setting.

Reimbursement issues have prevented a meaningful number of hospitals from providing CAR-T therapy.  A major reason is that they could be out over $1 million if a payor refused payment. However, the reimbursement situation may be improving. There is a draft proposal from CMS to create a J code for CAR-T products which could be implemented late this year or early next. If so, reimbursement will become much more predictable and should be a major boost to sales.

Novartis and Gilead are also performing clinical trials to broaden usage into earlier stages of cancers and different cancers from r/r DLBCL and pediatric r/r ALL- the current indications. Another factor is that Novartis has finally straightened out manufacturing issues that have limited shipments of Kymriah. All of these factors point to significant growth ahead for Kymriah and Yescarta. However, as the previous table listing the cash positions showed, there are host of companies developing products that could improve on the safety and efficacy of Kymriah and Yescarta. For example, allogeneic therapy could provide off the shelf products rather than the cumbersome autologous manufacturing process required for these drugs. Also, Kymriah and Yescarta are only effective against hematological cancers. A major focus of industry research is to broaden CAR-T usage into solid tumors. Hematological tumors account for 10% of incidence of all tumors and solid tumors 90% so expansion into solid tumors would be a big deal.

My Sales Model for Commercial Sales

Cryoport is anticipating a string of new product approvals by its customers. The Company expects to see 6 or more BLA/MAA filings this year and 17 or more next year. These represent either a new product introduction or a new indication for an existing product. Those companies for which a filing is expected this year are Atara, bluebird bio, Iovance (2), Orchard Therapeutics and Gamida Cell; these are all new products. The number of products and new indications for approved drugs supported by Cryoport in a few short years could be 30, 40, 50 or much more. This is what is so exciting about the Cryoport story.

Cryoport’s commercial business opportunities are growing so rapidly that it is very difficult to model. I have put together a model which I assure you is wrong. It essentially assumes that Kymriah and Yescarta meet no competition through 2024 and continue to grow strongly because of expanding indications and improving reimbursement. This won’t happen. As early as 2H, 2021, we could see CAR-T products with major advantages over these products enter the market and slow or erode sales of Kymriah and Yescarta. This should result in greater sales for CAR-T products as a class and also for Cryoport. However, this is almost impossible to model so you should look at the sales contribution from Kymriah, Yescarta and competitive products to be greater than the sales shown for Kymriah and Yescarta in the model. Hope I didn’t lose you there.

Gilead just received approval for Tecartis and I include it in the model. This is a CAR-T product targeted at relapsed/ refractory mantle cell lymphoma and relapsed/ refractory chronic lymphocytic leukemia. Neither Kymriah or Yescarta are approved for these indications. The commercial opportunity probably is somewhat less than but approaching the current addressable market for Kymriah and Yescarta. I would expect a more rapid uptake as it benefits from the learning curve on Yescarta in regard to marketing and reimbursement.

I am also including Bristol-Myers Squibb’s liso pro in my model. This product is very comparable to Kymriah and Yescarta in its indications. BMY maintains that liso pro is safer than these two products and can be used in the community setting as opposed to academic centers. If so, this could lead to a meaningful expansion of sales. The data supporting greater safety for liso pro is limited so at this point, I am assuming that it is not meaningfully differentiated on safety to be conservative.

The industry is on the verge of introducing a number of CAR-T products that target BCMA on multiple myeloma sales. Kymriah, Yescarta and liso pro are not effective in this indication. I think that the commercial opportunity over time will be as large as that for Kymriah and Yescarta. BMY should be the first to launch a BCMA targeted product with bb 2121, which was licensed from bluebird bio. There are a large number of competitive products that will enter the market shortly after bb 2121. The general consensus among analysts is that some of these competitive products will be meaningfully better than bb 2121. As a result, my model shows aggregate sales of BCMA products.

The next new product in my model is Ryoncil. This is a not a CAR-T product. It is a living cell product whose first indication is for steroid resistant, pediatric graft versus host disease. Ryoncil has a PDUFA date of September 30. The FDA has designated this as a breakthrough therapy. If approved, marketing could begin in late 2020. However, recently expressed concerns about quality assurance could delay approval. Cryoport is also supporting Zynteglo in Europe. I am expecting minimal sales from this product.

The sales model for commercially supported products in the next table ignores what could be  significant number of other new product launches and new indications for approved drugs because I have not yet identified many of these. It is a big job to do so. Hence, I think that my sales model is conservative.

 

COVID Trials Could Have a Major Additional Impact on Growth

Current Business Model

Cryoport currently operates in two business segments. The original business is Global Logistics Solutions and it entered the second, Global Bioservices through an acquisition last year. The Global Logistics Solutions segment provides temperature-controlled logistics solutions to the life sciences industry through its purpose-built proprietary packaging, information technology and specialized cold chain logistics expertise. The Company provides leading edge logistics solutions to the biopharma, reproductive medicine and animal health markets to ship, store and deliver biologic materials, such as immunotherapies, stem cells, CAR-T cell therapies, vaccines and reproductive cells for clients worldwide. The Global Bioservices segment provides a comprehensive temperature-controlled, sample management solution to the life sciences industry, including specimen storage, sample processing, collection, and retrieval. The spectrum of temperature-controlled solutions provided by the Company ranges from ambient, or controlled room temperature (15°C to 25°C), refrigerated (2°C to 8°C), to frozen and cryogenic (below 0°C to as low as −150°C). Cryoport is much more of a software company than a hardware company.

The pharmaceutical industry is in a head long rush to develop therapeutics and vaccines to combat COVID. Early this year, there were no clinical trials dealing with COVID. It is estimated that there are now more than 500 trials underway. This effort is heavily supported by governments throughout the world. There are a staggering number of trials underway or planned. The majority of these trials are with vaccines or antibodies as opposed to therapies based on living cells. The latter generally require cryogenic shipping whereas vaccines and antibodies require cold chain but not cryogenic shipping. From this standpoint, the COVID clinical trial explosion is not in what has been Cryoport’s wheelhouse. Shipping of vaccines and antibodies has not been done generally at cryogenic temperatures.

However, the business model of Cryoport is changing to finding opportunities to support products not requiring cryogenic shipping and also storage of products at all temperature ranges. Cryoport has important, differentiated and probably proprietary value to contribute through its software which covers every aspect of chain of compliance. This may allow Cryoport to fashion differentiated solutions for vaccines and antibodies not requiring cryogenic shipping. Instead of dealing with products being shipped to hundreds of patients, Cryoport may be looking at providing logistics involving hundreds of millions and billions of people throughout the world. At this point, I can’t really make any meaningful attempt at quantification. My intuition is that this will be a meaningful tailwind for Cryoport, but I can’t really say how with any precision.

I am not including any sales estimated for COVID related support because I can’t identify specific products with one exception. I just wrote a blog about the potential use of Mesoblast’s progenitor cells derived from mesenchymal stem cells in treating ARDS caused by COVID infections. See this link. As described in that blog, this could be a giant opportunity for Cryoport. I am awaiting data from a phase 3 trial before including any estimate for sales in my model; interim data will probably be released later this year.

Incremental Sales through Acquisitions

Cryoport has been primarily driven by organic sales growth, but it has now built an infrastructure that can support acquisitions. Its first acquisition was Cryogene in May 2019, which positions the company in the storage market as previously described. During the second quarter, Cryoport expensed $1.7 million that was related to the identification of potential acquisition targets and raised $111 million through a convertible offering to bring its cash position to $207 million, a strong financial base that can support acquisitions. I often compare Cryoport to Repligen. I note that Repligen has used an acquisition strategy that has resulted in a doubling of organic sales growth of 13% to 15% to the great benefit of shareholders. Can Cryoport do the same without stubbing its toe on a bad acquisition? We will likely soon find out.

 

Tagged as Cryoport, Cryoport Research Report August 2020 + Categorized as Company Reports, LinkedIn