Good day everyone and welcome to today's Cryoport Incorporated Third Quarter 2019 Earnings Call. At this time all participants are in listen-only mode. Later you have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note this call may be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Todd Fromer, Managing Partner at KCSA.

Thank you, operator. Before we begin today, I would like to remind everyone that this conference call contains certain forward-looking statements. All statements that address our operating performance, events or developments that we expect or anticipate occurring in the future are forward-looking statements. These forward-looking statements are based on management's beliefs and assumptions and not on information currently available to our management team. Our management team believes these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experiences and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Item 1A risk factors and elsewhere in our annual report on Form 10-K filed with the Securities and Exchange Commission, and those described from time to time in other reports, which we filed with the Securities and Exchange Commission. I would now like to turn the call over to Mr. Jerrell Shelton, Chief Executive Officer of Cryoport. Jerry, the floor is yours.

Thank you, Todd. Good afternoon, ladies and gentlemen. Thank you for joining us today. With me this afternoon is our Chief Financial Officer, Mr. Robert Stefanovich; and our Chief Commercial Officer, Dr. Mark Sawicki. As a reminder, we have uploaded our third quarter 2019 in-review document to our website. It can be found in the Investor Relations section under Events and Presentations. This document provides a review of our recent financial and operational performance and the general business outlook. If you have not had a chance to read it, I would encourage you to go to the website and download it. On this conference call, we will provide you with a brief general update and then we'll move to the question-and-answer session where we will address your queries regarding our company's results. Now for the update and some granularity. Just a few days ago, we announced our partnership with Lonza, a Swiss-based global company, which is the world's leading, most trusted integrated solutions provider to the pharmaceutical biotech and consumer health markets. This agreement makes Cryoport the preferred partner to Lonza in certain supply chain functions for patient materials on a global basis. Lonza is supporting 150 cell and gene customers. It is one of the largest companies we have signed a partnership with to date. As we analyze our new partnership with Lonza, we think the financial opportunity to Cryoport will equate to $25 million to $30 million in new revenue in the next five years. We believe that the partnership -- this partnership is another clear validation of the utmost trust that the world's best life sciences providers place in Cryoport's supply chain solutions. Moving to our financial results. In the third quarter of 2019, our revenue increased 81% to $9.6 million as compared to the same period…

[Operator Instructions] We'll take a question from Paul Knight of Janney Montgomery. Your line is open.

Hey, Jerry, could you -- I know you mentioned there is 54 customers in Phase III. And then later in the press release you talk about 95 according to the Alliance for Regenerative Medicine. Is it fair to say that you have 54 of the 95? Or is there something in that data that kind of is not quite that easy -- straight forward?

Paul, that's a good question. I'm going to turn that over to Mark Sawicki, who is more -- who is closer to that data than I am.

Yes. So it's a reasonable correlation. It may not be letter to letter the exact same number but I would say it's an expectation that's appropriate when -- if you're looking at it from a modeling standpoint.

And Jerry, as we now move further into your corporate history in a quarter like this with the commercial success being pretty big. Can you talk -- what are you seeing as barriers to entry to what you do? Has that -- what's changed in the last quarter or two in your mind as you look at how good of a spot and how tough it would be to replicate what you do?

Paul that's another good question. We continue to strengthen. Our market of course is growing. It's a very -- it's an expanding universe in many, many ways. So we know we're going to get competition in various sorts over time but our strength is growing all of the time. And it's being recognized such as our partnership with Lonza. It starts with our Cryoportal Logistics Management system flowing through to the -- to our Cryoport Express Shippers. We're announcing the first new advanced therapy shipper in the world. This -- and it will be -- we have announced it and it will be rolling out in December. We -- and then it moves from there to other IT like the SmartPak II Condition Monitoring System which talks with the Cryoportal Logistics Management System in near real-time. It actually talks with it. We can communicate and actually monitor in detail. Our expertise is consistently growing on the inside. We have products and services. So the point is that we have a system and it's more than just any one thing at Cryoport. It's the system that sets us apart from everyone else in the world. So to replicate it, it will take -- it would take -- to replicate Cryoport it would take a lot of time and a lot of money. So that's where I think we are -- I think we're in a great position.

And then the last one for me would be the Lonza transaction, obviously a very prestigious firm in the industry, and you're guiding in this comments $25 million to $30 million over the next five years. How do you get to those numbers? It would seem to me that, if you have an approved therapy and they can achieve the $10 million goal per therapy it would seem like $25 million to $30 million is kind of conservative. So what's your rationale behind that $25 million to $30 million?

Paul, it is a conservative number. And as you know, we tend to be on the conservative side. We don't want to disappoint anyone in terms of the outlook. We don't want to overstate our position. We're solid. So we took our base with Lonza today. We extrapolated that based on growth factors. But as far as going to any specific therapies certainly, if there's a blockbuster one blockbuster alone can be $30 million to us. So we are – we definitely are on the conservative side Paul.

Okay. Thank you.

Thank you.

We'll take our next question from Puneet Souda of SVB Leerink.

Hi, guys. This is Wes Dupray on for Puneet. And thanks for taking our questions here. And I guess just kind of building off Paul's first question regarding trials. I know that there's some market share gain especially in Phase 2 trials. It looks like you guys added at five, while the market was down 23, at least according to the data in the release. Can you kind of just talk about where this – what's driving this incremental share? Is it just turnover and Phase 1 is rolling into Phase 2? And is that also being seen in Phase 3 as well? Thanks.

I want to push that question over to Mark Sawicki, Puneet for an answer.

Yeah. So there is a couple of things that we can look at here from the perspective of looking at obviously how we relate to the overall share in the space and our representation on it. First and foremost is, we are the leader in the space, when it comes to distribution of these types of therapies. And as the leader obviously folks seek us out in many cases versus us having to go out and pound the pavement and identify opportunities to drive programs into our portfolio. We're also extremely sticky. So we have a pre-existing long-standing set of relationships where as those clinical trials mature or new clinical trials come online they automatically initiate with their existing relationship with us. And so we have a captive market so to speak to capture and pull that share. So when you look at those factors as well as obviously our advantages as it pertains to our solution as a whole, it provides an attractive space for our clients to continue to work with us. And honestly, that's one of the biggest reasons we continue to hold share.

Great. Thank you. And then I guess moving to commercial you guys have made some good progress this year especially this quarter. So I guess looking into 2020 as new therapies get to the approval line any additional facility expansion that's needed? Anything in Europe to support ZYNTEGLO? And I guess just – what are your expectations for the two current products ramping next year as well?

Well, the two current products will – certainly, will continue to ramp in and they're coming along very nicely. Then of course, we'll have ZYNTEGLO and we expect that there'll be more. But we can handle all of that within our current system. We won't need to expand in order to handle those volumes.

Okay. Great. And then I guess just final one on the Lonza partnership earlier this week. Can you just maybe give us a little bit more information on the nature of the partnership? I guess, what's the customer overlap? And I guess what does it mean for Cryoport? And how does the Cryogene expansion factor in here? I mean, I know Cryogene is centered in Houston and Lonza has a marquee facility there. So I guess, what are the additional benefits and what additional investment is going to be needed in the future? Thank you.

Well. So, I'm going to let Mark answer the first part of that in terms of the Lonza partnership that we're talking about. And then – and Cryogene certainly will play a role, but there are other aspects to that as well that – so I'll let him answer that part and then we'll come back to other – the second part of your question.

Yeah. Fundamentally, the relationship itself is a global agreement. So it covers all of the Lonza facilities, all of their cell and gene facilities, as well as it gives them option from a support standpoint for any non-cell and gene facility as well within Lonza network. And the short answer is in essence anything that is related to cell and gene that moves from one location to another we will be supporting. And so it's a significant opportunity from our perspective. Obviously, it conveys a nice advantage for our existing mutual clients, but it also provides a significant advantage for cross-referrals and to build out our portfolio as well as theirs with relationships that they may have that we don't or vice versa.

So then the second part of that question Puneet in terms of Cryogene and in terms of build out in the future. Cryogene is already playing a role with Lonza today and they will continue to play an expanded role. But we – and we will also be building out our infrastructure. I've talked about this on other calls and we are currently in process of leasing more property and building properties out and at the appropriate time we'll announce those. So we'll be building out for organic growth. And then certainly, we're on the lookout for appropriate acquisitions as well.

Great. Thank you. I appreciate the color.

We'll take our next question from Andrew D'Silva of B. Riley FBR. Your line is open.

Hey, good afternoon. Thanks for taking my questions and congrats on the progress. Just not to beat a dead horse, but on the Lonza partnership really curious on how it expands your reach with existing partnerships that already utilize Lonza? I'm sure there's a lot of – or at least some overlaps. And so if you could give an example of say a customer that you previously had that was using Lonza's manufacturing facility and ways that this partnership enhances your existing partnership there. And then, as it relates to the expansion down in Houston that's strictly for the logistics side it's not tied to Cryogene's legacy biostorage business? Correct.

Wait a minute – which expansion in Houston were you referring to? Our expansion in Houston? Andrew you there?

Yes, yes your expansion in Houston. Can you hear me?

Yeah, yeah, yeah. All right. So Mark do you want to start off with that?

Yeah. So there's a couple of factors. Let me kind of walk through what the advantages to our mutual client base is. For us, there's a couple of things. First and foremost in the short term it provides us with the ability to expand the scope of what we are doing with those clients which may include other temperature ranges like our C3 2-8°C product as well as storage at the Cryogene and our new bioservices competencies as they come online. But it also provides our client base and Lonza and ourselves with progression, which provides more regulatory focus on those mutual programs. It gives us more rapid scalability as well as them from a support standpoint for our client base, especially those that are moving into late clinical. And in some cases in our minds, it can provide some opportunity for acceleration of some of the regulatory events that lead to filing activity through some of the integration work that we'll be doing with Lonza as well as our mutual client base.

Okay. Great. And can you maybe just elaborate a little bit on the comments that were in the report that you put out related to the Cryoshuttle business. I'm assuming that means you can start recognizing some sort of like almost courier-style revenue versus the legacy business, which is really more on the logistics back-end side?

Yeah, we can do all those things. We can provide a better service to our clients they are within the – an hour and half of our facilities. There will be less handing off and less touching of our shippers. We'll know – we'll have more surety about the delivery of the – of our shippers and so forth. We also – we actually will support couriers and support their services as well because as you know many carriers use strangers or they use part-time help. And so we can support that as well. The Cryoshuttle is another revenue stream. This is the beginning. We have one Cryoshuttle in each operation and we'll scale that as volumes continue to increase and as our network of supply chain centers grows.

Okay. And how should we think about revenue associated with that? I know that on the courier side of things it can be a pretty large chunk of total….

It's just beginning Andrew. So we'll have to postpone the answer to that question until we have more experience but -- because it's just beginning.

Okay. Great. And my last question you noted 68 new clients in your report. Just curious what you define as a new client? Would it be just a brand new entity? Or would it be subsidiaries within existing companies that you already work with? I just want to understand that metric a little better.

Mark do you want to take that?

Yes I'm happy to. But what did you -- what number are you referring to? I'm sorry I didn't catch the first part of it?

Yes. In your third quarter end review you noted that there were already 68 new clients year-to-date and I was...

Year-to-date, right. Okay. Yes. So we define a new client very simply it's -- a new client as an organization that has not worked with us in the past and it's restricted to the biopharma space. So we're not including a one-off transactional relationship with the University of Maryland for example. So it would be finite biotech contract manufacturing CROs and others that are tangible in the space and have not worked with us in the past.

Okay. Good. Good. That's what I was worried about. Perfect. That's great. Congratulations on the progress and good luck closing out the year.

Thank you.

We'll move next to Brandon Couillard of Jefferies.

Thanks. Good afternoon. Staying with Lonza, is the $25 million to $30 million is that cumulative? Or is that let's say a year five number? And when do you expect those revenues to start becoming material in 2020?

It's a cumulative, conservative estimate Brandon and we expect that to be on a ramp -- on a continuous ramp. So we're already getting some benefit from it and that will continue to accelerate.

Okay. And then on YESCARTA and KYMRIAH your percentage revenue capture as a total -- as a percentage of total end drug sales ticked up quite a bit to about 1.3% in the third quarter. Can you just sort of elaborate on some of the drivers of that? How you were able to better monetize those relationships and the additional runway that may be left to continue to sell those clients more services related to those two drugs?

Mark?

Yes. So just one second here. So we have seen an increase in the percentage. It's been a steady increase. And typically when we see that increase in share when it comes to a given relationship it's due to the expansion of the types of business that we're doing with these clients. So it'll move beyond just strictly a transactional shipment. It'll move into consulting support, program management support maybe logistics support and some other componentry along those lines. So that's the premise as to what you see a diversification on a per-shipment basis.

Okay. And then last one. Jerry you've raised capital twice in the last year. Just curious, why you think a buyback authorization right now for where you stand in your sort of growth phase is the best use of capital?

Well our best use of capital will be -- is our organic growth, I mean and supporting the organic growth and building out our infrastructure. And then of course you have to finance the growth of the business in general accounts receivable and inventory and that sort of thing. So we're in a good position right now to do -- to execute. And so I think we're -- I think that's -- we're fine right now. We won't need to be back -- I don't foresee going back to market right now.

And to your question related to the share repurchase program we put in place. That was really adding a vehicle that the Board approved. At certain thresholds and certain times that may become attractive to us and beneficial to the shareholders. Not at this point in time, but we wanted to have that availability for us to do that should that moment arise.

It's really a management tool.

Very good. Thank you.

We'll move next to Richard Baldry of Roth.

Sort of asking similar questions but in a different way. One of the commercial therapies had sort of sideways to narrowly down revenue quarter, but you continued to grow pretty strongly through that. So -- and I'm wondering how connected their growth and yours -- obviously long term it has to be connected but what mechanisms kind of separate that on a short-term basis?

Right. So from a long-term basis, we're very optimistic about both programs. We -- both of these guys are investing significant amounts of money in the success of the space with a lot of new brick and mortar. They're putting new facilities up on a global basis. And then if you look at the earnings releases from both parties, Gilead noted on their Q3 call that they expect the reimbursement from the NTAP that started on October 1st to have a positive impact on, on obviously the volumes that they're supporting and ultimately the revenues associated with that. From a visibility standpoint, we have recurring discussions with both parties and I can't give you obviously feedback on what those entail. But from our perspective, we remain very bullish on both from an opportunity of increasing revenue over the next quarters and years.

Okay. And then when I look into the OpEx side and then back out sort of the onetime charges it looks like that the growth you said of $1.7 million year-over-year would leave the June to September operating expense line very flat. So I'm sort of surprised given the overall very fast rate of growth that you can even do that for a single quarter. So can you talk about how much leverage you do see on the OpEx side? Was there anything anomalous between whatever Q1 Q2 Q3 that allowed that to be pretty flat between Q2 and Q3 that we might not see short term?

Robert will answer that question Rich.

Yes, you're absolutely right. When you pull out the non-cash charge and you look at the operating expense we've been pretty disciplined in terms of maintaining the infrastructure that we need and keeping the costs down. We want to drive positive EBITDA growth. At the same time, we will continue to build out our infrastructure in 2020 and build out the organization but we try to do that together with the expected revenue ramp. So yes, you can see some increase in operating expenses going forward, but it will be moderate as we've done in the past as well.

And maybe asking almost the same question in a different way? Revenues sequentially were up $1.1 million and adjusted EBITDA was up $900,000 roughly. So that translation is obviously extremely high. I think long term we can't probably count on that, right? But again, was there any onetime-oriented things there or just a catch-up period where some of your invested expenses you could go more sideways on than not even while that revenue ticked up? Thanks.

So, again, I think what -- if you look at the quarters forward, what you will see is, you will see some additional investments in our infrastructure. We talked a little bit about expansion in Houston as well as expansion of other areas and setting up our bioservice capabilities. So, yes you will see a little bit more burden going forward. So, you can't extrapolate that out just from this one quarter in terms of the correlation between revenue growth and positive adjusted EBITDA. But at the same time, we'll continue to drive that positive adjusted EBITDA and we'll continue to be very disciplined in terms of how we grow our infrastructure.

Thanks.

We'll move next to Steve Unger of Needham.

Hi, thanks. Just a couple of questions. On the gross margin expansion, I was just curious, is that essentially the ramp in commercial revenues? Or are you getting better gross margins out of the Cryogene acquisition?

Rich, you're going to see our gross margin fluctuate between 50%, 55% for a while. Our target is still 60%. It remains at 60%. It will be at 60%. But you're going to see some fluctuations as we build out our infrastructure. For more, Robert, do you have other things to say about that?

No I think you're right. If you look at the kind of adjusted growth -- gross margins for the quarter and they're at 52%, 52.3% for this quarter. And ultimately, we expect it to go up. But Jerry's absolutely right, you'll still see some fluctuation as we build out the infrastructure globally.

Got it. And then...

And then in terms of Cryogene. Cryogene obviously as Jerry mentioned early on in his opening comments, Cryogene is moving forward as we expected. Their current run rate is $4.7 million in revenues. They are profitable as a division. So, that compared to their 2018 revenue of $3.9 million is close to a 20% growth rate. So, we're very happy about the acquisition and the integration of Cryogene into the organization.

That's great. And then in looking at the market data, were you guys surprised by the sequential decline in the Phase II number of trials and what should we make of that as far as sort of what's going on as far as the development pipeline?

I'll let Mark comment on that in just a moment, but I don't make too much of it. There are going to be ups and downs. I mean nothing is in a straight line. There are going to be some ups and downs and there will be some variations. Nothing has happened to this industry in a negative way whatsoever. You have trials -- our clinical trial numbers, remember are net number, so we take the -- it's a net of what comes in and what falls out. And so sometimes, you're going to have -- you're going to be going one way or another. But overall that trend continues to be up and will continue to be up. We definitely are in an exploding universe. Mark, do you want to add any other color to that?

No, you're absolutely right, Jerry. It's very normal for -- obviously to see some fluctuation along these lines, but the long-term inclination is for a continued increase in the space. We project from our perspective that this space in 15 years may constitute up to one-third of the overall market from a pharmaceutical product standpoint and there's others in the market that also second that. What we see is obviously, you have some of the later stage trials that have been halted or failed during the quarter. We'll have -- you'll see others that come in and backfill it. And so, kind of their ratios will change based on -- it costs a lot more to run a Phase II or Phase III trial than it does a Phase I trial. So, those numbers will fluctuate.

Got it. Okay. And on NTAP, I know that went into effect October 1 and I thought I'd give it a try. Has there been any impact that you can see on the market from that coming into effect for the commercial therapies on the market?

Mark, I don't see it but what do you think?

It's far too early. I mean, if you look at the cycle times of these products, they're upwards of a month anyway. So, it's too early. You're going to have to wait a few more months.

Okay. Okay, that's fine. Just thought I'd give a shot. And just lastly, on the accelerated vesting of the options, I was just curious how many shares that represented?

It was about 1.6 million shares.

And that's simply an accelerated vesting. It was an incentive that we put in a couple of years ago and it worked. And so, we were pleased with the fact that it worked.

Yes. And just to add to that. So the charge -- that onetime noncash charge that we took this quarter would have been charges that we have been taking over the next couple of years, so all of that expense moved into this quarter. And so, over time, you'll see a drop off in some of the stock-based compensation expense.

Great, helpful, thank you.

At this time, I'd be happy to return the call to CEO, Jerrell Shelton for closing remarks.

Thank you, very much for joining us today. We really appreciate the opportunity to discuss our recent achievements and our future objectives with you. Every quarter, we make further progress advancing our leadership position in the regenerative medicine market. This quarter was no exception. We increased our market share, secured a partnership with Lonza, reported strong revenue growth and made meaningful progress growing our presence in the bioservices market through our Cryogene acquisition. We're building a strong global supply chain network and we are uniquely positioned to meet the global demands of our biopharma clients, both in clinical and commercial settings. Most importantly, we're encouraged by the reports coming from the Alliance for Regenerative Medicine and from our own dialogue within the industry, which indicate that there will be a number of significant events such as BLA and MAA filings and commercializations to drive our revenue growth in 2020 and beyond. We really appreciate you joining us today and the opportunity to answer your questions. Until our next meeting our earnings call that is we bid you a good evening.

This does conclude today's Cryoport Incorporated third quarter 2019 earnings call. You may now disconnect your lines and everyone have a great day.