Expert Financial Analysis and Reporting

Perspective

Cryoport in a period of five days announced two strategic acquisitions, first of CryoPDP and then MVE Biological Solutions, that have dramatically improved the long term outlook of the Company. The year end 2020 sales run rate will be quadrupled from $41 million to about $174 million when these acquisitions close. They are also immediately accretive to EBITDA and net income. The market obviously liked these acquisitions. On the day before the CryoPDP acquisition was announced, the stock closed at $36.68 and now is trading at $55.50. The fully diluted market capitalization assuming that the acquisitions both close is now $2.6 billion and the stock is trading at 15 times the projected sales 2020 yearend run rate of $174 million.

Key Points:

• Cryoport has explosive growth potential in its core business of cryogenic shipping. The addressable market has been projected to reach $1.2 billion by 2027 and CYRX could achieve sales of $700 million or perhaps more if it maintains most of its current market share as I think likely.
• These two strategic acquisitions have dramatically expanded its global footprint and broadened its product line offering into other temperature controlled shipping ranges. This makes CYRX much more formidable and positions it as the dominant company in the drug product temperature controlled shipping, storing and logistics space.
• The giant investment firm Blackstone provided about $272 million or 85% of the funding for the acquisition of MVE and now owns 18% of fully diluted shares. Blackstone is not just an investor; it is a strategic partner that backstops Cryoport with enormous financial and strategic resources.
• Cryoport has recognized that cell and gene therapy is now expanding swiftly from autologous products toward allogenic and induced human pluripotent stem cell products that will be off the shelf products. These require cryogenic storage as well as shipping. These two acquisitions position Cryoport to be the first mover and dominant company in the rapidly emerging global cryogenic storage business.
• Cryoport as a micro-cap stock whose market capitalization was too small for large institutional investors. Now, the much larger size of the company and its explosive growth outlook might inspire their interest. Blackstone’s cache could catalyze their buying.
• In making these acquisitions, the Company will use $106 million of its own cash leaving it with a cash position of $102 million. It has only increased the fully diluted share count from 38.3 million to 46.6 million. These acquisitions are both accretive and were made on very favorable terms from a shareholder standpoint
• The stock has run up dramatically and could retrace part of its move but on the other hand new institutional buying could continue to drive the stock higher. I don’t know. However, I believe that this stock is positioned for dramatic growth and will be a very strong stock in the coming decade. I remain a buyer.
• The most obvious worry is valuation. Cryoport is selling at 15 times pro forma sales projections for 2020. The closest, albeit imperfect, peer company to Cryoport is Repligen in my opinion. It is selling at 20 times projected 2020 sales. By this relative metric, Cryoport is not wildly overpriced. I’ll leave you to judge whether it is overpriced on an absolute basis.
• I would not be surprised to see Cryoport do an equity offering of perhaps 4 million shares to give it a bullet proof balance sheet with cash of over $300 million and the additional backing of Blackstone. If so, this could cause some short term weakness in the stock, but I think that it would be a well-received offering and the stock might very well trade up afterwards,  

First Mover Status in Cryogenic Shipping Has Really Paid Off

I was initially attracted to Cryoport because of its first mover status in cryogenic shipping and it has executed brilliantly since I initiated coverage in August 2017. In 2017, revenues were about $12 million, by 2019 they had nearly tripled to $34 million and not counting sales contributions from these acquisitions are projected to reach $41 million in a COVID-19 impacted 2020. Management was prescient in recognizing that cell and gene therapy drugs would emerge as a driving force in biopharma research that would lead to enormous demand for shipping products at cryogenic temperatures. Although a small company, Cryoport moved swiftly and effectively to become the number one provider of cryogenic shipping equipment and logistics to the life sciences industry. This has led to spectacular sales  growth and accompanying stock performance.

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.

The Rationale for These Two Strategic Acquisitions

Cryoport in a period of five days has announced two strategic acquisitions, first of CryoPDP and then of MVE Biological Solutions, that have dramatically changed the size and enhanced the long term outlook of the Company. The “old” Cryoport prior to the acquisitions was projected by me to have sales of $41 million in 2020. The acquisition of CryoPDP should bring the pro forma yearend sales run rate by $50 million and MVE should further boost it by another $83 million. So we are now invested in a company with a yearend 2020 sales run rate of $174 million. Given the dynamic outlook of the “old” Cryoport, some investors may ask why Cryoport would make any strategic acquisitions. It is extremely unlikely that they could acquire any company to match the dazzling growth potential. Indeed CryoPDP and MVE have only been growing at low double digit rates.

Cryoport determined that it needed to make certain strategic moves in order to better serve its clients and maintain its dominant position in cryogenic shipping. It established objectives to broaden its global footprint and to extend service offerings into products requiring temperature controlled shipping at temperatures higher than cryogenic. It also recognized that new gene and therapy products would require not just cryogenic shipping but also cryogenic storage at treatment sites or distribution centers.

Cryoport was working to achieve these three goals, but as a small company it had limited resources to build the needed infrastructure would also take considerable time. These acquisitions have allowed the company to reach these strategic objectives some years earlier than if it had built the infrastructure on its own.

Global Footprint

The “old” Cryoport was primarily US focused with 85% of sales in the US, but its clients operate globally and Cryoport needs to be alongside them. These two acquisitions allow Cryoport to shave years from the building of infrastructure needed for a broad global presence. My report on the acquisition of CryoPDP goes into more detail on how it substantially broadens the global footprint, if you are interested.

Full Service Provider

These acquisitions make Cryoport a full service provider, enhancing its value to clients. It is now positioned as a dominant company in not just the cryogenic space but across all temperature ranges. While cryogenic shipping is the most important service offered to clients, CYRX can now support  products and research materials at other temperature ranges making it a one-stop shop.

Storing will Become an Important Business

MVE Biologics Solutions is the leading worldwide manufacturer of equipment needed to transport products requiring temperature controlled shipping and also for safely storing these products at their point of use where it is estimated to have about a 58% market share.  MVE is a hardware focused company whereas Cryoport and CryoPDP are software and logistics driven. It adds a new dimension to the company especially in the emerging business of temperature controlled storing.

Consider what is happening in the CAR-T field. Product development is moving from autologous cell therapy in which T-cells are harvested from a patient, shipped to a manufacturing site and then returned to the patient for treatment. The shipping of cells is done at cryogenic temperatures. CAR-T is now moving toward allogeneic therapies and therapies based on induced human pluripotent stem cells. This will allow batches of treatments to be manufactured at a single time to treat a large number of patients. Like autologous therapy, these cells must be shipped cryogenically to treatment sites as off the shelf products. However, there will be the added need to store these products at cryogenic temperatures at the treatment sites until they are needed. Cryoport believes that MVE as the leading provider of the equipment needed for cryogenic storage equipment positions Cryoport to serve this emerging need.

Decisions by clients on logistics increasingly will have to be interwoven with decisions on storage. As Cryoport’s management did in anticipating the emergence of cryogenic shipping for cell and gene therapy, I think they are equally early and prescient in judging that clients will want to deal with a company that can handle logistics for products shipped at all temperatures and that operates on a global basis. In addition, the ability to incorporate storage capability creates an end to end product solution. To my knowledge, no other company has put together such a comprehensive approach. I think that once again Cryoport has emerged as first mover in this much larger space in which cryogenic shipping is just one, albeit critical, component. MVE ensures tha Cryoport will be able to supply the equipment demand that will be needed to support the newly expanded global network.

Competition

This is America and competition springs up quickly to challenge any successful business model. Other companies will certainly attempt to take on Cryoport. History teaches that companies which achieve great success too often become complacent, feel invulnerable and underestimate the potential for other companies to enter the market and take significant market share or even obsolete them. If there is the tiniest wedge in a company’s business model, we can be sure that some competitor will try to exploit it. A decision to just focus on the current strength in cryogenic shipping could become a weakness in a few years.

While there are formidable barriers to entry in cryogenics shipping, it is inevitable that Cryoport will face challenges. Broadening the product line and adding storage capability and global infrastructure makes it much more difficult for a competitor to challenge CYRX. The “new” Cryoport has a huge client base including virtually every major biopharma company, global reach, an extremely broad product offering, strong innovation capabilities and deep financial resources.

Cell and gene therapy clients are selling and developing products that require the full range of temperature controlled shipping. A potential competitor could begin a challenge by building a strong business in non-cryogenic temperature ranges to gain an important relationship with clients. They could then offer the advantage of one stop shipping at all temperature ranges that might provide them an entry into cryogenic shipping. This would likely be a challenge from a large company with broad global logistics capabilities. While these acquisitions don’t forestall such a move, they go far toward blunting it.

Cryoport is Mission Critical to Drug Developers

Drug developers large and small are expert at developing and marketing drugs. Logistics is not something that they are good at nor is it something they want to manage in-house. Cryoport can offer these companies an invaluable service. It can safely take a drug from its manufacturer, maintain and validate chain of compliance during shipment to the site of treatment and safely store it until it is given to a patient.

A single treatment of cells usually costs hundreds of thousands of dollars and a fluctuation in temperature during shipping or storage can destroy their viability so Cryoport is offering an extremely valuable service. Of course, if a drug manufacturer is going to be so dependent on a service provider, they have to have great confidence in the company they are dealing with, in terms of track record, ability to create solutions, operate on a global basis and be financially stable. The new Cryoport brings all of this to its clients. I think that this establishes Cryoport as the dominant company in the space and has a platform that will be difficult for even the largest of companies to challenge.

Blackstone, MVE and Cryoport

The investment firm Blackstone played a critical role in the acquisition of MVE. This is an asset purchase for $320 million that will be paid for in three components:

• Cryoport will provide $48 million,
• Blackstone will provide $25 million of cash through the purchase of Cryoport stock at a price of $37.0075 per share.
• Blackstone will purchase $250 million of Perpetual 4% Series C Convertible Preferred stock of the Company, with a purchase price of $1,000 per share which is convertible at $38.6152.
• This transaction with Blackstone upon closing creates the equivalent of 7.1 million new shares. As of June 30, 2020 Cryoport had 38.3 million fully diluted shares outstanding so this brings the fully diluted share count to 45.4 million.
• The 4% coupon on the preferred will be paid in kind, i.e. Cryoport shares, so that this will result in the issuance of about 284,000 new shares annually. Cryoport can and almost certainly will require conversion in two years so that this will add about 568,000 new shares.
• Blackstone will own over time about 8.3 million shares or roughly 18% of Cryoport.

Blackstone is making a huge bet here. It is worth listening to the reasons as explained in the press release by Ram Jagannath, Senior Managing Director of Blackstone who said.

"Life sciences and logistics are two of Blackstone's highest-conviction investment areas and we're excited to back an industry-leader at the cross-section of these fast-growing sectors. Together, Cryoport and MVE Biological Solutions offer a unique combination of industry knowledge, client coverage, engineering and innovation. Through Cryoport's acquisition,  we believe MVE Biological Solutions will deliver strong growth as the demand for its solutions from cell and gene therapy customers continues to increase. This acquisition provides multiple value creation opportunities for Cryoport and MVE Biological Solutions that offer additional revenue growth upside, including the development of new product innovations, opportunities to grow with key distributors in the U.S., and the opportunity to increase direct customer sales and distributor relationships globally. This strategic acquisition allows Cryoport to continue to increase services for cell and gene therapy customers, providing mission-critical solutions helping improve patient outcomes and save lives."

The extensive commitment makes Blackstone more than an investor in Cryoport; in effect they are a strategic partner with an 18% ownership interest. Blackstone brings with it enormous financial resources as it has $571 billion under management and a cache that affords Cryoport great credibility. If I read their intent correctly, they see Cryoport as the pre-eminent provider for all (not just cryogenic) cold chain solutions for the life sciences industry with unrivaled global coverage. With MVE and its own internal competence, Cryoport also has advanced engineering capabilities (probably unrivaled) that should lead to a steady flow of innovative new products. This is at a time when life sciences are experiencing explosive worldwide growth and concurrent need for the type of services provided by the new Cryoport.

I think that Blackstone also adds another key element to the Cryoport story. As a major participant in all forms of investments including venture capital and private equity, they will see almost every investment opportunity in the space Cryoport is occupying. I think that this will greatly facilitate Cryoport’s ability to make small tactical acquisitions, not of the size of CryoPDP and MVE, that can be folded into Cryoport’s global infrastructure. Small companies with limited global reach could see sales expanded enormously when folded into Cryoport. I have seen this strategy work beautifully in the case of Repligen in which tactical acquisitions have increased the rate of growth from an organic rate of 12% to 15% to 20+%. Of course, Blackstone has the capability as shown in the case of MVE, to write very large checks so that acquisition potential will not be constrained by lack of access to cash. Also, no client in the world will doubt the financial strength of Cryoport with Blackstone standing behind them.

The acquisition of MVE provides pronounced strategic benefits. It further entrenches Cryoport with its customers, adds new revenue streams, secures the future source of cryogenic shippers and storage equipment and expands their customer base. MVE has become the global leader in cryogenic life sciences equipment and a leading manufacturer of storage systems which are complex and hard to duplicate. These are not simple tanks. They require significant innovation. This also secures Cryoport’s manufacturing and innovation for its dewars as MVE has been manufacturing the dewars for several years. Cryoport’s engineering team has worked continuously with MVE’s engineers to assure that their cryogenic shippers are the most advanced in the market.

MVE will be immediately accretive as can be seen from EBITDA of $25 million in 2018 and $29 million in 2019. Sales were $80 million in 2018 and $83 million in 2019.

Things to Worry About

The most obvious worry is valuation. Cryoport is selling at 15 times pro forma sales projections for 2020. The closest, albeit imperfect, peer company to Cryoport is Repligen in my opinion. It is selling at 20 times projected 2020 sales. By this relative metric, Cryoport is not wildly overpriced. I’ll leave you to judge whether it is overpriced on an absolute basis.

While the potential for Cryoport has been enormously expanded through the acquisitions of CryoPDP and MVE, investors have to have concerns that Cryoport has bitten off more than it can chew. The yearend sales run rate has been increased from $41 million to $174 million. The management that so successfully built Cryoport is a relatively small team that can’t be expected to exert hands on control of the new acquisitions. Hence, the new company will be run as a holding company with four parts, the original Cryoport and the three acquisitions-Cryogene, CryoPDP and MVE. Investors will be dependent on four management teams that they have no experience with. History teaches that disparate management teams brought together by acquisition don’t always work well together. This will also put enormous pressure on the operating systems on which Cryoport depends for day to day operations.

I also have a worry if my hypothesis proves correct that there will be an enormous demand for onsite storage systems for COVID-19 vaccines and therapeutics. This could potentially tax the ability of MVE to meet demand and cause great disruptions.

That said, I think that Cryoport management has shown itself to be extremely capable with an uncanny ability to anticipate major trends. I have confidence in them based on my experience. Bottom line, I think that these acquisitions will very likely be seen as a brilliant move that will catapult the company from an exciting growth stock with a narrow focus on cryogenic shipping to the dominant service provider for temperature controlled shipping and storage to the life sciences industry. Instead of aspiring to a market capitalization of several billions, I think that its market capitalization could reach tens of billions of dollars in the next decade.