BioLife Solutions, Inc. (BLFS) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the BioLife Solutions Fourth Quarter and Full Year 2018 Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Roderick de Greef, Chief Financial Officer. You may begin.

Thank you, Sonia. Good afternoon, everyone, and thank you for joining us for the BioLife Solutions conference call to review the operating and financial results for the fourth quarter and full year of 2018. This morning, we issued a press release detailing our agreement to acquire Astero Bio Corporation. And earlier this afternoon, we issued a press release, which summarizes our financial results for the 3 and 12 months ended December 31, 2018. Both releases are 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. Before we get started, I'd 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 any 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 qualify as 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 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. Good afternoon, everyone. Thank you for joining the call. 2018 was a very strong year of execution and growth with revenue of just under $20 million. We grew the business almost 80% over 2017. Had our first full year of profitability and continue to make significant progress in driving the adoption of our proprietary, biopreservation media products in the cell and gene therapy market. I'll start with some comments about market dynamics and segment revenue and speak about our just announced agreement to acquire Astero Bio. After that Rod will present our Q4 and full year 2018 financial results and provide our initial guidance for 2019, including details around the expected financial impact of the Astero acquisition. I'll begin with some comments about the Regenerative Medicine Market segment. First, 2018 funding continued at a torrid pace with more than $13 billion invested in the space during the year. This is up 73% over 2017. There were more than 1,000 clinical trials underway at the end of 2018. Our Regen Med segment revenue was $11 million or 56% of total revenue and representing growth of 108% over 2017. We gained 84 new direct cell and gene therapy customers in 2018. We also processed 57 additional cross reference request for our FDA master files. This is up from 27 in 2016 and 47 in 2017. This is a mechanism for cell and gene therapy customers to notify the FDA that they plan to use our products in clinical trials. Notable new 2018 direct customers include ALAgene, Flask Works, Maverick, [indiscernible], Mustang, POSEIDA, Rapa, Refuge [ph], Semma, Community and WindMil. There is a new and very important dynamic occurring in the Regen Med space. The reimbursement environment for our prospects and customers is evolving into a pay on cure paradigm with payment predicated on a positive patient response to the therapy. We believe this dynamic will support broader adoption of our biopreservation media products, since this can de-risk the potential of delivering a non-viable dose to the patient. You've heard us say many times that dead cells don't cure cancer and the combined therapeutic and economic risk developers are facing should broad use of our products as a best practice in the manufacturer stores, distribution and administration of time and temperature sensitive cell and gene therapies. For the rest of 2019, some potential customer catalyst we are following include a conditional approval in Europe for Kiadis Pharma for ATIR101 adjunctive cell therapy for hematopoietic stem cell transplants. If approval is granted, Kiadis intends to launch ATIR101 in selected countries in Europe through its own commercial organizations starting in the second half of this year. Celgene expects to file a BLA with the U.S. FDA for Rivo-Cel [ph] in the second half of the year. Bellicum expects top line results from the BP-004 study in the second quarter of 2019 and intends to submit an MAA in Europe for Rivo-Cel in late 2019. Bluebird expects European approval of LentiGlobin in patients with TDT by the end of 2019. And finally, also with Bluebird, they anticipate filing for U.S. approval of LentiGlobin in patients with TDT by the end of 2019. Next, I will review our indirect sales channel performance. As you know, we have distribution relationships with four of the largest life science tools companies, STEMCELL Technologies, MilliporeSigma, Thermo Fisher and VWR. These four channel partners and a small group of OUS regional distributors contributed 6.4 million in 2018 revenue. This was 33% of total revenue with growth of 99% over 2017. So the indirect channel is operating efficiently and our partners are planting hundreds of seeds in the research and preclinical markets. Based on request from distributors for end users scientific, technical and regulatory support, we believe many end users may transition to become clinical trial stage and possibly commercial companies with approved cell and gene therapies. Turning to our agreement to acquire Astero Bio. We called it in Q3 last year, we articulated a strategy to identify and acquire a complimentary technologies used in the manufacture, storage and distribution of cell and gene therapies. Due to the fragmented tool supplier base, we believe there's a consolidation opportunity for BioLife to expand our bio production tools portfolio to gain increased share of the spend for tools used in the space. We're very pleased to announce the first deal in this M&A strategy. Astero Bio is a perfect fit that supports our goal of expanding our footprint and engagement level in our customers' manufacturing workflow. Let me tell you about the products. The team of Astero has developed a family of automated thawing devices that replace manual water baths used to thaw frozen cell and gene therapies, packaged in vials and bags. The brand is ThawSTAR and the products reduce the risk of administering a non-viable dose by providing consistent and accurate thawing, which is a sensitive step in getting the dose ready for the patient. Water baths are manual devices that require a user to manipulate the frozen product. There is also a contamination risk since the water in the bath is not changed out between uses. Water bath users can get distracted and leave the dose in the bath longer than acceptable. This can reduce the viability of the dose. Again, dead cells don't cure cancer and cell and gene therapy companies risk not getting reimbursed if the patient doesn't respond. It's the same pay on cure paradigm I mentioned earlier. So we see the ThawSTAR platform is a great addition to our tools portfolio that can mitigate therapeutic and economic risk for cell and gene therapy companies. We see tremendous synergies in sales and marketing and look to leverage all of our relationships with our customers in the cell and gene therapy space to broaden awareness of ThawSTAR. In our diligence on the deal, we received very positive feedback about automated thawing technologies from several buyer like media customers and industry consultants. Infinium Global Research estimates that the market for automated thawing devices, will see about 150 million by 2024, driven by growth in the number of cell and gene therapy research programs, clinical trials and approvals. Our goal is to drive adoption of ThawSTAR automated thawing products to become the de facto standard in the cell and gene therapy workflow. Finally, I'll say a few words about SAVSU, the Albuquerque based innovative cold chain and information management company that we hold a 44% ownership stake in. SAVSU is engaged with dozens of the leading cell and gene therapy companies to win startup customers and also to convert established clinical trial stage and commercial companies from existing suppliers with less innovative cold chain solutions. As you can imagine, the market is extremely competitive, so we can't disclose any additional customers or prospects names on this call. However, we remain very bullish on SAVSU's opportunity to capture significant share of the market for cloud connected cold chain transport solutions. We also look forward to leveraging the respective technical experience at SAVSU and Astero to continue to develop and offer innovative products using the cell and gene therapy workflow. Now I'll turn the call back over to Rod, to presenter our financial highlights for Q4 and the full year 2018 and our guidance for 2019 including the expected financial impact of the Astero transaction.

Thanks, Mike. Our biopreservation media revenue for the fourth quarter of 2018 reached a record $5.5 million, representing a 74% increase over last year's fourth quarter revenue of $3.1 million. For the full year, revenue grew 79% to $19.7 million, up from $11 million in 2017. The increase in revenue for both periods was primarily the result of higher sales of our CryoStor biopreservation media to our customers in the Regen Med space and to our distribution channel. The gross margin for the fourth quarter of 2018 increased to 69% compared with 59% in the fourth quarter of last year. For the full year of 2018, gross margin was 69% compared with 61% for 2017. The increase in gross margin for both periods was primarily driven by volume related reductions in cost of goods sold and higher blended product ASPs. Operating expenses in Q4 totaled $2.7 million, compared with $2.1 million in Q4. For the full year of 2018, operating expenses totaled $9.9 million, compared with $7.8 million for 2017. The increase in operating expenses for both periods is primarily the result of higher performance based compensation expense, increased sales and marketing expenditures, increased headcount to support our growth and increased costs related to enhancing our quality management systems. The fourth quarter's operating profit was $1 million, compared with an operating loss of $218,000 in the fourth quarter of 2017. For the full year of 2018, operating profit totaled $3.7 million, compared with an operating loss of $1.1 million for the same period in 2017. For the fourth quarter of 2018, net income attributable to common shareholders was $833,000 or $0.04 per diluted share, compared with a net loss of $664,000 or $0.05 per share in 2017. For the full year of 2018, net income attributable to common shareholders was $2.9 million or $0.14 per diluted share, compared with a net loss of $2.7 million or $0.21 per share last year. Adjusted EBITDA for the fourth quarter was $1.5 million, compared with $132,000 in the same period last year. For the full year of 2018, adjusted EBITDA was $5.5 million, compared to 444,000 in 2017. During 2018, we redeemed all of the outstanding shares of our Series A redeemable preferred stock for $4.3 million. Eliminating these Series A shares saves us $425,000 in annual cash dividend expense going forward. We ended 2018 with $30.7 million in cash, compared to $6.7 million at the end of 2017. We believe that our current cash balance when combined with continued positive cash flow from operations throughout 2019 and subsequent years will be more than adequate to fund both the upfront and contingent payments related to the Astero acquisition. With respect to our outlook for the full year of 2019, the guidance I'll go through includes the impact of the Astero transaction beginning in the second quarter. We expect total revenue for 2019 will be in the range of $27 million to $30 million, reflecting year-over-year growth of 37% to 52%. And we anticipate that Astero will contribute between $1 million and $2 million in revenue this year. Over the next several years, we believe that the Astero products could add 5 to 10 percentage points to our annual revenue growth rate and comprise up to 15% of our total revenue. Our blended gross margin for 2019 should range between 69% to 70%. Although we expect a small reduction in our gross margin going forward, as a result of the Astero product line, we believe that the impact will be approximately 100 basis points. Astero's products are manufactured by a California based CMO and currently have gross margins in the low-60s. With increased volumes, we believe the gross margin related to the following product line will climb into the mid-60s. 2009 operating expenses are expected to be in the range of $15.5 million to $16.5 million. Approximately half the increase over 2018 is related to the Astero transaction with the balance primarily related to increased headcount in the sales and marketing and quality areas of the company, as well as higher performance based compensation. Although the Astero purchase will reduce our operating margin somewhat this year, we expect to exit the year in Q4 with an operating profit margin of approximately 20%, which is slightly higher than our full year 2018 level of 18.5%. In subsequent years, we anticipate a sustained trend of increasing operating margins with Astero providing a positive contribution to our adjusted EBITDA within 12 to 18 months. I'd like to end my remarks with a summary of our share count. We currently have 18.7 million common shares issued and outstanding. Our non-affiliate warrant overhang was effectively eliminated during 2018 with only 208,000 of these warrants remaining. Adding insider options in warrants brings our current fully diluted share count to 26 million. Now I'd like to turn the call back over to Mike.

Thanks again, Rod. In summary, 2018 was an across the board success. We executed and delivered strong results. We're really excited and inspired about what we're focused on. I look forward to updating on our progress throughout the year. I'd like to thank our long standing and numerous new shareholders for your support of BioLife. Now I'll turn the call over to the operative to take your questions. Sonia?

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

Hey Rod. What do you have to do on the Astero distribution effort, do you have to add sales people? How is even of a plugin as it in general?

It's a pretty straightforward plugin, Paul. We do expect to add several sales people in 2019 in addition to the efforts of Sam Kent. And we also are looking to tie up with some distribution, could very well be the same kind of distributors we have. So it should be a fairly straightforward approach to the sales side of things.

And on the region medicine market for the year, it looks like the data regarding, people getting access to the master file, I guess you probably have better visibility than ever on some numbers. But can you talk about how many of your customers you're seeing in Phase III, Rod or Mike?

Okay. Take us an educated guest, Paul, I'll have to issue the same caveat as always, because some of these customers go through the distributors, there's always some visibility we don't have. So it's not a complete, you know, crystal ball. But, you know, we would say that in Phase III, you know, it's probably 15 to 30, call it that range.

And then with Astero, when we think about what is an ultimate potential on the operating margin, I know the gross margin, you said, 60-ish. What's the level of consumables? What can this business run at on off margin basis do you think?

Yeah. I think, Paul, the way we're looking at it is on a combined basis. Our view of this transaction is that we've purchased a product line and as opposed to a company per se, right. So we are going to fully integrate all of the operations into our operations. And so going forward, we're going to be looking at an operating margin as on a company wide basis. So that's why I made the comment I did by referencing our Q4, estimated Q4 exit 20%. And then we expect that to continue to climb you know, subsequent years on a quarterly basis.

Do you think ThawSTAR is a leading technology in that market?

This is Mike, Paul. We see several unique and differentiated innovative features within the ThawSTAR platform both in the algorithm and the way that it actually works and it's consistency of following. And we're also really excited about the bag format device ThawSTAR CB, which has some really unique competitive advantages over the other product or products that may be emerging or in the market.

Okay. Congrats on the corner.

Thank you, Paul.

Thanks, Paul.

Thank you. And then next question comes from Jason McCarthy of Maxim Group. Your line is open.

Hey guys. Thanks for the question and congrats on the quarter.

Thank you. Hi Jason.

All right. So I'd actually like to ask you something about the FDA policy statement from back in January 15, the one relating to cell therapy manufacturing. Let's see if you guys go a bit more in depth on that on how it could impact you guys?

Sure. So, our take away from that statement, Jason, was really centered around, you know, the wording and the positioning coming out of FDA that if cell and gene therapy developers are in late stage, but perhaps if identified a manufacturing gap or some process step that could be optimized, they don't necessarily have to assume that the FDA is going to require them to repeat a clinical trial. So the takeaway that is fantastic. That could mean that with either a small bridging study or some additional validation that can make that manufacturing change in a late stage and that's great news for us.

All right, that's helpful. Thank you. And then just one more quick one relating to Astero. I'd like to see if you guys could talk a bit more about how ThawSTAR interplays with the current BioLife cell therapy ecosystem?

You bet. So when we think about the call points and the decision makers who use and can make decisions on which preservation media to use, there's a lot of overlap. And particularly with our relationships with our cell and gene therapy customers, you know, we've got a great market customer base and a number of VP and C level and other high level relationships. So we believe that, you know, we can make an appeal to folks a little higher up in the food chain, some different stakeholders to really have a more holistic view at de-risking and trying to make sure that you know, these developers don't deliver a non-viable dose. From an altruistic sense, yes, they want to cure patients, but they want to get paid for it also. So these two techniques, preservation media in the form of CryoStor, HypoThermosol and also ThawSTAR, they are both appealing to the same pain points and the same risk mitigation, really, really complimentary and how to give overlapping in the value proposition.

All right. Thank you very much for taking my questions.

Thanks, Jason.

Thank you. [Operator Instructions] Our next question comes from Suraj Kalia of Northland Securities. Your line is open. And Suraj Kalia of Northland Securities, if your phone is on mute, please unmute. And again our question comes from Suraj Kalia of Northland Securities. This does conclude our question-and-answer session. I would now like to turn the call back over to Mike Rice, CEO for any closing remarks.

Thank you, Sonia. Thanks, everyone. We look forward to speaking with you when we report our first quarter results. Good afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.