BioLife Solutions, Inc. (BLFS) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2017 BioLife Solutions Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Roderick de Greef, Chief Financial Officer. Please go ahead.

Thank you, Charlotte. Good afternoon everyone and thank you for joining us for the BioLife Solutions conference call to review the operating and financial results for the second quarter of 2017. Earlier this afternoon, we issued a press release which summarizes our results for the three and six months ended June 30. This release is available on the Investor Relations page of our website at biolifesolutions.com. As a reminder, this call is being recorded and broadcast live on our website. A replay of the webcast will be available through the same link for 90 days. We have also posted an updated investor presentation on our website. Before we get started, I would like to remind everyone that during this call, we will make projections and other forward-looking statements regarding future events or the future financial performance of the company. These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. For a detailed discussion of the risks and uncertainties that affect the company's business and that qualifies forward-looking statements made on this call, I refer you to our periodic and other public filings filed with the SEC. Company projections and forward-looking statements are based on factors that are subject to change and therefore, these statements speak only of as of the date they are given. The company assumes no obligation to update any projections or forward-looking statements except as required by law. Now I'd like to turn the call over to Mike Rice, President and CEO of BioLife.

Thanks, Rod, and good afternoon everyone. We appreciate your interest in BioLife and we are very pleased to report on and discuss our continued strong operating and financial results. We had a very strong quarter in Q2. We are on track to make 2017 a remarkable year for BioLife, our customers and shareholders. Revenue from our strategic market segments was strong with our third consecutive quarter with over $1 million in revenue from the regenerative medicine segment. Total revenue was $2.6 million, a 29% year-over-year increase and Q2, 2017 was our eighth consecutive quarter of record biopreservation media revenue. We gained 28 new customers in Q2 with 11 in the regen med market. I'll start off by recapping the unmet needs in biopreservation of living cells and tissues and explain specifically how our biopreservation media products address these issues and are enabling the commercialization of hundreds of novel cell based therapies, targeting all major disorders and diseases. For background, the use of living biologic materials such as cells, tissues and organs is growing rapidly in several high growth market segments, including drug discovery, biobanking and regenerative medicine, which is comprised of cell therapy companies and engineered tissue products. Common to all these applications, is a critical need to ensure that the biologic materials are effectively preserved after removal from the body during transport and up to the point of administration to a patient. Poor preservation leads to limited or no therapeutic efficacy. So shelf life is a critical parameter. Apart from a limited number of ambient shipping examples, hypothermic preservation at refrigerated temperatures or cryopreservation in the frozen temperature range are the dominant modalities used to move biologic materials across time and space. These are effective methods to reduce the need for oxygen and nutrients to extend shelf life and enable worldwide distribution. But there is a catch, hypothermic storage and cryopreservation are stress environments, that manufacture cell products are very sensitive to temperature excursions. Additionally returning cold biologic material to room temperature or warmer is also stressful. Before we created a product category of clinical grade biopreservation media traditional biopreservation formulations were used with limited results. These home brew formulas, still in use to a large extent today offer reasonable results for non-clinical applications. However due to non-optimized formulas, the type and lower quality components used, limited release testing and need to make small batches internally, they don't really fit the requirements of cell therapy manufacturers. Our value preposition, which has driven broad adoption of our biopreservaton media products in the regen med market has five key attributes, that differentiate us from home brew cocktails and other suppliers. First, our products are engineered to protect cells and tissues from preservation induced injury and death, both of which could render the material ineffective. Dr. A. B. Mathew, our Chief Technology Officer is a co-developer of our patented formulas and he is without a doubt a leading expert in biopreservation in cells and tissues intended for use in drug discovery, biobanking and regenerative medicine. AB and a small group of colleagues were some of the first researchers to identify preservation-induced molecular cell stress pathways and their discoveries led to the development and optimization of our product formulas. So there is a strong scientific basis for our IP and a rationale for why our products work much better than home brews and other non-optimized storage and freeze media. Second, our pre-formulated products are manufactured using the highest grade components we can source. Third, our production and quality systems are certified to ISO-1345 for medical devices and are aligned with selected key requirements of several other guidances related to clean room design, aseptic or sterile filling of liquid products and good manufacturing practices or GMPs for medical devices. Fourth, every production batch of our products is subjected to a robust set of release criteria, including sterility and endotoxin, component concentrations and a preservation efficacy assay. Fifth and last but certainly a key adoption driver, Dr. Matthew and our team of scientists and field application specialists provide a very high level of detailed technical support to help new and existing customers optimize their biopreservation protocols to maximize results. We provide top notch training, and education to our customers which forms a very sticky relationships and a high likelihood that once adopted at an initial customer application, we can expect to have our products used in their additional development and clinical projects. Let me apply our value proposition to the cell therapy manufacturing workflow. Many of you have seen various graphics and heard the terms needle-to-needle, vein-to-vein or bench-to-bedside, related to the collection or acquisition of source material, manufacturing of cell therapy product and getting this back to the clinic for patient infusion or injection. Improved preservation efficacy or yield of source material enabled by using our products reduces costs for our customers as more products can be made. And just as important, improving shelf life and yield of a manufactured cell product can reduce cost as fewer cells are needed to achieve the desired therapeutic effect. I should point out that our products are much more expensive than non-optimized home brew alternatives, yet the percentage of the per dose COGs for a cell therapy attributed to our products is a very small. So we don't see customers moving away from our products after adoption considering the high value we have. Regen-med customers in a preclinical stage through Phase 3 could generate perhaps $10,000 to $100,000 in annual revenue as they progress along that development schedule. It's upon regulatory approvals that things get very meaningful for us. We use a simple formula that multiplies the estimated number of shipments of source materials using our products or the number of doses shipped using our products by the liquid volume of our product in the shipment by the price per mill paid by the customer to arrive at a range of anticipated annual revenue once a cell therapy product is approved and our customer is fully ramped up in production. We believe the range is $500,000 to $2 million in annual revenue for each cell therapy application we are embedded in. Of course there will be outliers on the low and high end of this range depending on the addressable patient population for the clinical application, the infusion or injection volume and how fast our customers can gain traction with providers and payers. Since we also sell to distributors it's difficult to maintain an accurate total of regen made applications our products that have been used in. However, based on direct customer communications and cross-references to our FDA master files, we estimate the total to be more than 250. At this point I should remind you that recently our first cell therapy customer obtained the regulatory approval. This is Kolon Life Science, in Korea and their product is Invossa, a cell mediated gene therapy for knee osteoarthritis. I'll direct you to the press release we issued on July 13 for more details. We're very proud to have our CryoStor Cell Freeze media embedded in their manufacturing process. And have an opportunity to work with Kolon and TissueGene, their U.S. partner and the developer of Invossa for the last several years. This is a remarkably huge worldwide patient population, with some estimates at 150 million potential patients. Other sources estimate the addressable patient population in Korea at 5 million. So we look forward to Kolon's commercialization efforts in Korea and their and TissueGene's plan to seek regulatory approvals in other countries. I'd also like to remind our listeners that we are a critical supplier to Kite Pharma and our CryoStor freeze media is embedded in Kite's manufacturing process. If you're following Kite, you know that they have a late November PDUFA action date for the BLA submitted earlier this year and have recently filed in Europe and announced additional IND filings for more clinical trials. Other key customers in the regen med segment include Adaptimmune, Asterias, [indiscernible], and bluebird bio, CapriCor, Dana-Farber, Cellerent, Celyad, City of Hope, Fred Hutch, TamitoCell [ph], Numatics, Kiadis Pharma, Lanza, Mayo, PCT, PharmaCell, Reneron [ph], Sodio [ph], Tissue Gene and Wushi. We're pleased to see that our products have become a standard for Biopreservation in the regen med space. We're a picks and shovels tools supplier with an incredible customer base and the opportunity for significant growth. As you may have seen we announced supply agreements over the last year or so with several cell therapy customers including Adaptimmune Celyad, Cooke [ph] and Kite that have other confidential agreements we can't disclose. These are evidence of the critical supplier role we play with these customers. We look forward to announcing several additional supply agreements throughout the rest of this year. As I mentioned, our supply agreements include a forecast requirement from our customers so we should have better visibility on their product demand to help shape our revenue projections over the next few years. I'll wrap up my comments by letting you know that our sales to the biobanking and drug discovery markets were on track in Q2. Though not as high growth as the regen med space these segments are still important to us and we continue to gain new customers. Finally, regarding our distributor channel our partners continue to increase demand and we're on track for our best year ever in our indirect sales channel. Now I'll turn the call back over to Rod to present our financial highlights for Q2.

Thanks Mike. As you've noted our biopreservation media revenue for the second quarter of 2017 reached a record $2.6 million, representing a 29% increase over the second quarter of last year. For the six months ended June 30, revenue grew 28% to $4.9 million from $3.8 million last year. The increase in revenue for both periods was a result of higher direct sales to our customers in the regen med space and to our indirect distributor channel. The gross margin for the second quarter of 2017 increased seven percentage points to 63% compared to 56% last year. For the six months of this year, gross margin was 62% compared to 57% in 2016. The increase in both periods compared to 2016 was primarily driven by increased manufacturing efficiencies and higher blended product ASPs. Operating expenses in Q2 totaled $1.9 million, a decrease of 28% compared to $2.7 million in 2016. For the first six months of 2017, operating expenses totaled $3.8 million, a 27% decrease from $5.3 million in 2016. The decrease in operating expenses for both periods is primarily the result of a restructuring of our joint venture with SAVSU Technologies which occurred at the end of last year. The operating loss for the quarter was $341,000, which was a 79% decrease from $1.6 million last year. For the six month period, the operating loss was $805,000 or 75% below last year's operating loss of $3.1 million. The net loss for the second quarter was $768,000, which represents a 43% decrease compared to $1.4 million last year. Net loss for the six month period was $1.6 million compared to $2.6 million in 2016. I would like to point out that the net loss for the three and six months periods include a non-cash charge of $260,000 and $489,000 respectively related to the equity method accounting treatment of our ownership in SAVSU Technologies. We expect to continue to incur a quarterly non-cash charge in this range related to our investment in SAVSU for at least the balance of 2017. We are pleased to announce that for the second quarter, we achieved positive adjusted EBITDA of $59,000, compared to a negative $969,000 last year. First six months of 2017 adjusted EBITDA was positive $15,000 compared to negative $2 million in 2016. With respect to our outlook for the full year of 2017, we reaffirmed the revenue guidance we've released in January and expect that our biopreservation media will 20% to 25% over last year and exceed $10 million for the full year. Based on the results for the first six months, we are increasing our gross margin guidance and now expect a range of 58% to 62% for the full year compared to our previous expectation of 55% to 60%. We now expect operating expenses for the full year to fall in the range of $8 million to $8.5 million down from our previously provided range of $8 million to $9 million. Having reached positive adjusted EBITDA this quarter, we now expect to realize positive adjusted EBITDA for the full year of 2017. Now I'd like to turn the call back over to Mike.

Thanks again, Rod. In closing I believe that 2017 will be a very positive inflection point in BioLife's history. I am honored to lead our team and have an opportunity to work with our dedicated customers who are committed to improving the quality of life for millions of patients. All of us in BioLife feel fortunate to play a role and helping to bring our customers' life-saving therapies to the market. Thanks again for your interest in BioLife solutions. Now we'll turn the call over to the operator to take your questions. Charlotte?

Thank you. [Operator Instructions] Our first question comes from the line of Paul Knight from Janney Montgomery. Your line is now open.

Hi, Mike, congratulations.

Hi, Paul.

You give this range of 500,000 to 2 million per regen of medicine therapy. I know that's kind of been what you have talking about, but is your confidence higher in that range, do you think it's possible to be on the upper end of the range, is there any change in your thinking about this range for therapy.

Yeah, good question Paul. No change in our thinking and again a little bit too early to try to revise it up or down. But we know have the Kolon approval, that is just one data point, but as you have heard Rod say and me say overtime, it's not light switch effect, as soon as there is an approval there will be a ramp depending how fast customers can get squared away with payers and to start to drive prescribing behavior on the part of physicians. So at this point we are going to stick with the range that what we have already guided to.

The Adaptimmune agreement and you have heard - what is the length or the term on these agreements you are typically seeing?

10 years.

Okay and the - is that the regenerative medicine category that's giving you the 500 to 2 million range or is it each customer has that potential?

Yes, thanks for asking. It's important that we clarify that. We believe that every single regen med application that our products are embedded in has the potential to generate annual revenue in a range from $500,000 to $2 million.

Yes. And then Ron on regarding your financial metrics, you obviously you're EBITDA positive to a slight degree. What's your goal is, you goal to keep driving that upward or you operate along near breakeven or is it your goal is to reach a given level of op margin or EBITDA margin?

Yeah, we are pleased that we achieved this milestone earlier than we had anticipated. In terms of the rest of the year we see that number climbing and so we have adjusted our overall guidance to a full year adjusted EBITDA number, which we are confident we can reach. We don't have particular target set, we'd want to share at this point. I think next year, for our guidance in 2018 we will be in a better position to do so as things settle down but we're confident that we expect to see as revenue increases based on the excellent operating leverage we have, both on the COG side and on the OpEx side we expect that adjusted EBITDA number to continue to increase.

Okay, thank you very much.

Thank you.

Thank you. Our next question comes from the line of Gabrielle Zhou of Maxim Group. Your line is open.

Hi, guys. It's Gabrielle Zhou, congratulations on the quarter.

Thank you, Gabrielle.

Just quick question in terms of your manufacturing capacity. So how flexible are you given the fact that now Kolon has the market approval and Kite and Novartis approval might come in imminent?

So I'll start, maybe Rod can finish. Of the bat Gabrielle we have no issues and no worries whatsoever that we would have any problem fulfilling Kolon's demand. Rod, do you want to talk about potential margin expansion based on how much more product we can make in the plant.

Sure I think as Mike said we have plenty of capacity, significant multiple of what we are producing today and as we start to fill that capacity, based on the mix between the variable and the fixed cost structure that we have in our manufacturing area we do see the opportunity for some significant gross margin expansion, to the tune of have somewhere between five and ten percentage points over time.

Great. Thank you.

Thank you.

Thank you. And at this time I am not showing any questions in the queue.

All right, Charlotte. I think we can conclude. Thanks again everyone, Good afternoon and good evening.