Expert Financial Analysis and Reporting

Key Investment Points

I continue to be very bullish on the long term outlook for Cryoport. Listed below are some of the key points that investors should focus on.

• In past reports, I have emphasized that Cryoport sales stemming from support of commercial products was key to my projections for rapid sales growth. Almost all commercial sales currently stem from two CAR-T products-Novartis’s Kymriah and Gilead’s Yescarta. Combined sales of these products were sequentially down to $260 million in 3Q, 2020 from $269 million in 2Q, 2020. My expectation had been $308 million.
• Don’t be alarmed. I believe that much and perhaps all of this shortfall can be attributed to competitive CAR-T drugs in clinical development by several other companies. Some patients who would have received Kymriah or Yescarta were instead enrolled in clinical trials. Importantly, I believe that Cryoport is supporting clinical trials of almost all CAR-T drugs in development (both allogeneic and autologous). Hence, the effect on sales of commercial products is not a negative for Cryoport. It just switches revenues from commercial to clinical trial sales.
• There are a host of smaller biotech companies focused on the development of CAR-T therapies, both autologous and allogeneic. None have approved products, but most are in a position to launch a product in 2021 or 2022 if their ongoing trials are successful. These are Adaptimmune (ADAP), Allogene (ALLO), Atara (ATRA), bluebird bio (BLUE) Bellicum (BLCM), Cellectis (CLLS), Crispr (CRSP), Precision Biomedicines (DTIL), Fate Therapeutics (FATE) Legend (LEGN) and Poseida (PSTX). All are clients of Cryoport. Autolus (AUTL) is another small company in this space. It has not been revealed as to whether they are a client. To the extent that products in clinical trials take sales from Kymriah and Yescarta, it is most probably a wash for Cryoport.
• There are four major biopharma companies involved in CAR-T drug development. Novartis (NVS) and Gilead (GILD) have approved products and broad pipelines. Bristol-Myers Squibb (BMY) and Johnson & Johnson (JNJ) should have products approved in 2021. NVS, GILD and BMY are clients of Cryoport. The relationship with JNJ has not been revealed as to whether they are a client.
• In terms of cell therapy, I believe that we are barely into the first inning of the game to use a baseball metaphor. The first commercial products are CAR-T products targeted at late stage hematological cancers, a very tiny niche of the ultimate addressable market. The initial approvals are in late stage disease of just two of several types of hematological cancers; clinical trials are underway to expand usage into other hematological cancers and earlier stages of disease
• In the US, 90% of cancers are solid tumors and just 10% are hematological. We are now seeing CAR-T products targeted at solid tumors progress in clinical trials as well as products aimed at immunological diseases in which T-cells play a role.
• According to the American Cancer Society the incidences of hematological cancers in the US are as follows: lymphoma (85,720), leukemia (60,300) and myeloma (32,270). Kymriah and Yescarta are currently approved for late stage diffuse large B cell lymphoma (DLBCL) and pediatric acute lymphocytic leukemia. There are about 10,000 late stage DLBCL patients and 600 pediatric ALL patients. I estimate that Yescarta and Kymriah will treat 2,000 patients in the US this year. The late stage DLBCL market is only about 20% penetrated in the US, less in Europe and barely at all in the rest of the world.
• The first generation CAR-T products are autologous meaning that the patients own cells are taken from the body, genetically altered and then given back to the patient. This is a complex process that can take several weeks to complete and is not always successful. Development is now moving swiftly to the allogeneic CAR-T products obtained either from healthy human donors or from induced human pluripotent stem cells (iHSPC). I am super excited about iHSPV derived products, but this is too big of a subject to go into at this time. Allogeneic drugs are essentially off the shelf products available for immediate use (after lymphodepletion). They could dominate the CAR-T market in five years, in my opinion.
• There may also be enormous potential for another type of T-cell therapy, TCR, especially in solid tumors. There is also beginning to be intense interest in chimeric natural killer cells that work somewhat differently in attacking cancers. These might be used in combination with CAR-T or TCR cells or in sequence. I am extremely interested in drugs based on natural killer cells.
• Kymriah and Yescarta cost about $325,000 for a single course of treatment. and also require an intensive chemotherapy regimen to deplete the patient’s T-cells prior to administration. Side effects associated with both the CAR-T cells and lymphodepletion can in many cases result in hospitalization. In the extreme, the total cost of treating a patient can exceed $1,000,000. Kymriah and Yescarta lead to durable complete responses in about 30% to 40% of patients so this means that the cost of therapy per patient effectively treated is meaningfully greater.
• Because of the complexity of administration, the CAR-T drugs are almost always given in centers of excellence (major teaching hospitals, e.g.) In contrast, perhaps 60% to 80% of treatments for most chemotherapies are given in the community setting. Moreover in 2019, over 70% of all patients receiving CAR-T products were treated in just 17% of the accredited centers of excellence certified to administer these therapies. This concentration on such a small number of centers illustrates how very underpenetrated the DLBCL market is with CAR-T therapies.
• Current reimbursement is challenging as reimbursement procedure have not yet been made standard. This means that hospitals are at some risk of not being reimbursed in which case they could be on the hook for several hundred thousands of dollars if reimbursement is refused. Few hospitals can take such a risk.
• Medicare patients make up a large portion of the DLBCL patients. However, less than 13% of patients treated are on Medicare due to the reimbursement challenges. In January 2021, I am expecting that CAR-T drugs will receive a J-code for Medicare patients which makes reimbursement both easier and more assured. This should greatly expand usage into Medicare and have a major positive impact on sales.

Investment Perspective

The era of cell and gene therapy requiring cryogenic shipping support is in the first inning of a game that will play out over perhaps 40 years. Over coming years, I believe that this technology will emerge as a primary driver of biopharma research and sales. The first generation is based on CAR-T cells that are very primitive products. There is enormous potential to improve upon them. For example, CRSPR gene editing can introduce many edits to improve efficacy and safety and iHPSC can produce stable master cell lines that will allow off the shelf usage much like monoclonal antibodies. Unlike most drug products which remain essentially unchanged throughout their life cycles, cell therapies can evolve over time. Think of how mobile phones have evolved over time to the iPhone. I caution you not to think that the changes will be that rapid because the need for human trials greatly slows biological innovation relative to technology. Although the evolution will be slower, the process will lead to profound improvements over time, which will be measured in decades.

In drug development, it is always difficult to predict the winners. I previously listed  eleven biotechnology firms and four major drug companies that are actively developing CAR-T drugs. Not all will be successful. However, Cryoport is like the merchants who supplied picks and supplies to the 49ers in the California gold rush. It appears that almost all of the “CAR-T goldminers” will be buying “Cryoport cryogenic pick axes and supplies”. Cryoport is a way to invest in the industry as a whole.

We are just beginning to see a large number of clinical trials progress into pivotal phase 2 or 3 trials which can be the basis for product approvals. There are now over 1,000 clinical trials underway in cell and gene therapy (CAR-T is the major current focus) and this number could grow at 15% to 25% per annum for a number of years. Most of these trials will require cryogenic shipping and chain of compliance logistics support for which Cryoport has achieved a commanding first mover advantage. Its dominance in the space is made crystal clear in that it is supporting 66 (68%) of the 97 currently ongoing phase 3 trials. In virtually every case in which Cryoport supports a phase 3 trial, it will also support the product if approved.

Currently, Cryoport supports the only three approved and meaningful cell and gene therapy products using cryogenic shipping- the CAR-T products Kymriah, Yescarta and the just approved Tescarta. This support is projected to result in about $10.4 million of commercial revenues for Cryoport in 2020 which is  29% of sales before taking account the recent acquisitions of CryoPDP and MRE Biologicals. A consulting firm hired by Cryoport predicts that the FDA will approve over 80 products requiring cryogenic shipping by 2027. I don’t know exactly how they got to this number, but it sounds plausible and I would expect that Cryoport could support the vast majority of these. Cryoport estimates that it could receive about $2 to $28 million annually for each product it supports. This could result in an addressable market for CYRX of over $1.2 billion by 2027. It is not unrealistic to think that this could result in $700 million of annual revenues for Cryoport by 2027, if it can retain its dominant position.

So what are the risks? COVID could potentially be a short term risk. The emergence of the second wave of infections in the US and Europe could affect both clinical trials and commercial treatment by forcing hospitals to focus resources on COVID patients. This was not that much of a factor in the first wave as the infections seemed to go from one hot spot to another. This time the infections seem more widespread. On the other hand, the medical community has learned much about treating and preventing the spread of COVID. Because CAR-T cells must be shipped on commercial flights, the COVID induced sharp cutback in flights could be an issue. However, Cryoport has said that it has been able to make delivery of all client’s cells so far.

Bispecific antibodies are a competitive alternative to CAR-T cells. Wall Street analysts are wrestling with the issue of how they might affect CAR-T usage. The risk benefit comparison is difficult to gauge at this time. I don’t know, but historical experience suggests that they might be used sequentially as patients progress. A current major advantage of bispecifics is that they are off the shelf and don’t require lymphodepletion. Allogenic CAR-T therapy will also be off the shelf and widely available in the 2022 time frame.

Another point to consider is whether some company could develop an alternative way to ship cells that would not require cryogenic shipping. I am not aware of any such technology. However, this is America and there will be much effort to create such a technology. If this does emerge as a threat it will be in the distant future. The drug industry is very slow to adapt new technologies as they apply to manufacturing because even small changes can lead to medically meaningful changes in the properties of drugs. This is especially the case for cell therapies.

I am not as concerned that some company will duplicate the business model and effectively compete with Cryoport. Pharmaceutical companies are very loathe to make changes that could affect the quality of their products and a change in shipping temperature can alter the properties of cells or destroy them. Given that Cryoport has already established relationships with almost all of the key developers and has developed a strong reputation for quality and reliability, I doubt that any would switch from Cryoport to a new company.

Stock Price Behavior

It has been a wild and rewarding ride for Cryoport stockholders this year. Here are some highlights.

• The stock price at the close of 2019 was $16.88.
• During the early stages of the COVID pandemic it dipped only slightly to $14.58 on March 16.
• It was then perceived to be a company that would not be badly hurt by or possibly benefit from COVID and progressed dramatically to reach $34.14 on August 20.
• On August 21, CYRX announced the acquisition of CryoPDP and on October 1 announced the acquisition of MVE Biological Solutions. Importantly, the Blackstone Group provided much of the financing of the MVE acquisition and took a major equity position. The stock reached a high of $57.99 on September 2.
• As short term traders riding the price momentum exited the stock the price dropped to $51.37 on October 6.
• What appears to have been a coordinated short selling attack began on October 8 following a scathingly negative article on Seeking Alpha that had a price target of $10.
• The stock reached a low of $40.14 on October 30 probably as a result of the exiting of momentum traders and the short attack.
• The upward momentum for the stock may be reappearing as it is now trading at $50 as I write this report. My hypothesis is that major institutions that focus on dynamic growth stocks are accumulating the stock and this is abating the downward momentum on the stock.

Third Quarter Highlights

I didn’t know quite what to expect in the third quarter. Based on earnings reports from Novartis and Gilead, I saw that sequential sales of Kymriah and Yescarta in 3Q, 2020 were slowing and this led me to expect a comparable slowing in commercial sales for Cryoport which at this time are a direct function of Kymriah and Yescarta sales. Frankly, I didn’t quite know what to expect for clinical trial sales. Here are the actual results.

• Cryoport sales supporting Kymriah and Yescarta decreased sequentially by 8% from 2Q, 2020 to $2.4 million and were down 8% from 2Q, 2019. I had adjusted my estimate down to $2.5 million after seeing 3Q sales reports from Gilead and Novartis so this was in-line.
• Clinical trial sales of $6.0 million showed a sharp sequential increase from about $4.7 million 2Q and $4.6 million in 1Q. The year over year increase was 23%. My guesstimate for the quarter was $5.3 million so these sales were significantly better than expected. This supports my hypothesis that sales lost from support of Kymriah and Yescarta were picked up in clinical trials
• Reproductive sales had a sharp increase of 62% to $1.19 million in the quarter which was much better than my estimate of $0.74 million. This was catchup from 2Q when almost all fertility clinics were shut down
• Animal health was roughly flat at $223 thousand which compared to my estimate of $230,000.
• Global Bioservices at $1.35 million was up 15% and in line with my projection of $1.37 million.

Commercial Sales: Why the Apparent 3Q Disappointment and What Is the Outlook

Support of commercial products is the key to my very positive long term view on Cryoport so the decline in both year over year quarterly sales and sequential sales at a first glance is disturbing. What is going on? I can think of four reasons. The first is that COVID may be a factor, the second is reimbursement issues and the third is disillusionment with the benefit to risk for these products. The fourth and most likely would be that there are a huge number of clinical trials ongoing for both experimental allogeneic and autologous CAR-T products. Patients participating in these trials don’t have  to pay for treatment and there is reasonable evidence to suggest that new drugs in clinical development are as good or better than the two early autologous CAR-T therapies-Kymriah and Yescarta. I am inclined to think that the fourth issue is the most important and if so, this will continue to slow Kymriah and Yescarta sales in 2021.

To the extent that CAR-T drugs in development are stealing sales from Kymriah and Yescarta, it only switches revenues from support of commercial products to clinical trial revenues. Importantly, I believe that Cryoport is supporting clinical trials of probably almost all allogeneic and autologous cell therapies. Hence, the slowness in sales of commercial products is not a negative for Cryoport.

The Future for Cell Therapy

The era of cell and gene therapy is in the first inning of a game that will play out over perhaps 40 years. Over coming years, I believe that this technology will emerge as the primary driver of biopharma research and sales. We are just beginning to see clinical trials progress into pivotal phase 3 trials which will be followed by product approvals. There are now over 1,000 clinical trials underway in cell and gene therapy and this number could grow at 15% to 25% per annum for a number of years. Many of these trials require cryogenic shipping and chain of compliance logistics support for which Cryoport has achieved a commanding first mover advantage. Its dominance in the space is made crystal clear in that it is supporting 66 (68%) of the 97 currently ongoing phase 3 trials. In virtually every case in which Cryoport supports a phase 3 trial, it will also support the product if approved.

Currently, Cryoport supports the only two approved and meaningful cell and gene therapy products using cryogenic shipping- the CAR-T products Kymriah and Yescarta. This support is projected to result in about $12 million of commercial revenues for Cryoport in 2020 (29% of sales). A consulting firm hired by Cryoport predicts that the FDA will approve over 80 products requiring cryogenic shipping by 2027. I don’t know exactly how they got to this number, but it sounds plausible and I would expect that Cryoport could support the vast majority of these. Cryoport estimates that it could receive about $2 to $28 million annually for each product it supports. This could result in addressable market for CYRX of over $1.2 billion by 2027. It is not unrealistic to think that this could result in $700 million of annual revenues for Cryoport by 2027, if it can retain its dominant position.

How Much of a Threat are Bispecific Antibodies

Here are some key points to consider

• The drug industry is aggressively developing bispecific antibodies that are aimed at most of the same cancers targeted by CAR-T cells.
• Clinical trials of bispecifics may be taking sales from Kymriah and Yescarta. Because bispecifics don’t require cryogenic shipping, to the extent that they replace CAR-T drug usage, Cryoport’s revenues would be impacted
• It is unclear how much bispecific antibodies might affect sales of CAR-T drugs. Historical experience would suggest that they might be used in combination or more likely in sequence.
• I consider a potential threat from bispecifics as being more to the first generation CAR-T products. Genetic engineering can inject new genes into CAR-T cells that can enhance their safety and efficacy. We will look back on the early CAR-T drugs in a comparable way that we would view the early cell phones to the i-Phones. Bispecific antibodies can’t be engineered in the same way as CAR-T cells.