Bothell Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of BioLife Solutions Inc earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

* Michael P. Rice

BioLife Solutions, Inc. - President, CEO & Director

BioLife Solutions, Inc. - CFO & Secretary

H.C. Wainwright & Co, LLC, Research Division - Research Analyst

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst

Good afternoon, ladies and gentlemen, and welcome to the Q3 2019 BioLife Solutions, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Roderick de Greef, Chief Financial Officer. You may begin.

Roderick de Greef, BioLife Solutions, Inc. - CFO & Secretary [2]

Thank you, JP. Good afternoon, everyone, and thank you for joining us for the BioLife Solutions conference call to review the operating and financial results for the third quarter of 2019. Earlier this afternoon, we issued a press release which summarizes our financial results for the 3 and 9 months ended September 30, 2019. We also issued a press release this afternoon announcing our asset purchase of Custom Biogenic Systems or CBS.

As a reminder, during this call, we will make certain projections and other forward-looking statements regarding future events or the future financial performance of the company. These statements are subject to risks and uncertainties that may 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, 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.

During this call, we will speak to non-GAAP or adjusted results and guidance. Reconciliations of GAAP to non-GAAP or adjusted financial metrics are included in the press release we issued this afternoon. These non-GAAP or adjusted financial metrics should not be viewed as an alternative to GAAP. However, in light of our M&A activity, we believe that the use of non-GAAP or adjusted metrics provides investors with a clearer view of our current financial results when compared to prior periods.

Now I'd like to turn the call over to Mike Rice, President and CEO of BioLife.

Michael P. Rice, BioLife Solutions, Inc. - President, CEO & Director [3]

Thank you, Rod, and good afternoon, everyone. Thank you for joining the call. I'm very pleased to discuss our Q3 results and activities. We have a lot to share, so I'll jump right in.

I'll start by sharing our vision of success for BioLife and our next major milestone we're focused on. First, some history. Over the last nearly 15 years, we built BioLife into a leading supplier of critical biopreservation media products used in cell and gene therapy manufacturing. We created the product categoryclinical-grade biopreservation media and worked very hard to convince developers in the cell and gene therapy space that traditional preservation cocktails and methods are not robust enough to best ensure commercial success. Our proprietary and optimized CryoStor and HypoThermosol media products have now been used in more than 400 customer clinical applications. Once we scaled our media business and reached profitability in 2018, we began to seek complementary growth opportunities. We, of course, considered a number of internal R&D projects, but on balance, a long time to market and then transposition we hold with CryoStor and HypoThermosol caused us to identify external opportunities to scale the business even faster and to take advantage of the current roll-up environment for bioproduction tools.

Earlier this year, we acquired Astero Bio and gained the ThawSTAR automated thaw product line. Later, we acquired the remainder of SAVSU Technologies that we didn't own and added the evo Cold Chain management system to our portfolio.

Our outlook for these initial acquisitions is very positive. And coupled with our just announced acquisition of Custom Biogenic Systems or CBS, we've defined our next major milestone for success as reaching $100 million in revenue. The vision of success we're focused on looks like this: BioLife will scale to become an even more deeply entrenched partner to cell and gene therapy companies by offering a diversified and differentiated portfolio of novel products and services that can improve quality by reducing risk in the manufacture, preservation, storage, delivery and thawing of these biologic therapies. I'll have more to say about CBS later in the call, so now I'll provide some comments about our existing business.

Turning to Q3 revenue. We experienced a soft quarter due to 2 customers ordering less media products than anticipated. Our media revenue and current total revenue is highly concentrated from less than 100 customers with about 50 generating the lion's share. This concentration is a primary driver for our M&A strategy to derisk our reliance on a concentrated customer base and a limited product portfolio.

In Q3, a large distributor had a significant sequential decrease in order volume due to it being the start of their fiscal year and a changeover to a new ERP system. On a positive note, we expect total 2019 calendar revenue from this distributor to nearly double from 2018. Also, one large therapy -- one large cell therapy contract manufacturer had a significant sequential decrease in order volume. We attribute this to the cyclical nature of contract work and the CMOs' dependence on end-user customer order patterns, which can be affected by the pace of enrollment in their clinical trials. Together, these 2 customers accounted for a nearly $1 million sequential revenue decrease from Q2. So far in Q4, order volume from these customers has returned to typical levels. But again, it's worth repeating that from time to time, we expect to experience sequential swings like this. And we're obviously working hard on the M&A front to expand our portfolio to not only derisk but also grow top line revenue.

Our other internal metrics for assessing how our regen med franchise is performing were on track in Q3. We gained 41 new direct cell and gene therapy customers, and we processed 18 new FDA master file cross-reference requests supporting customer use of CryoStor or HypoThermosol in pending human clinical trials of cell and gene therapies.

Integration of the Astero thaw products is on track. And to date, we've shipped over 200 ThawSTAR products, with most of these to the cell and gene therapy market segment. Progress continues on our new ThawSTAR CB automated thaw product for biologic materials frozen in bags. We plan to formally introduce ThawSTAR CB at the Phacilitate Cell and Gene Therapy Conference in Miami in January.

Updating you now on adoption of the evo Cold Chain management system. We continue to win new customers, including Adaptimmune, Autolus, Janssen, KBI Pharma, Mustang Bio, Nanjing Legend and Tessa Therapeutics. Product validations by several leading cell and gene therapy companies continue, and we look forward to sharing some new customer wins when appropriate. It's clear we've emerged as a new competitor in the cold chain management segment of cell and gene therapy manufacturing. As such, we're being put through a very robust qualification process by several multibillion-dollar worldwide biopharma companies, we believe, much more so than incumbent suppliers as our technology is truly innovative and is expanding the conversation to include quality aspects that prospective customers have not thought of before.

Our indirect network of distributors continued to perform well in Q3, generating 36% of total revenue, with 38% growth over Q3 last year. Key worldwide distributors for our media products include MilliporeSigma, STEMCELL Technologies, Thermo Fisher and VWR.

Turning now to our other significant news of the day. We announced the acquisition of nearly all of the assets of privately held Custom Biogenic Systems or CBS. CBS, based in a Northern Detroit suburb, is a leading designer, manufacturer and supplier of advanced liquid nitrogen freezers and related racks and accessories. We started a dialogue with CBS' CEO and founder in June of this year and immediately recognized several potential benefits of an acquisition, including adding a meaningful amount of revenue from the sale of complementary products, the ability to leverage our relationships in the cell and gene therapy space to accelerate adoption of CBS products and an opportunity to improve quality and reduce cost in our evo Cold Chain products by vertically integrating a U.S.-based supplier.

Recall that our vision is to supply products to our cell and gene therapy customers along as much of the longitudinal workflow as possible. With the acquisition of CBS assets, we now plug into the following workflows. Starting with the acquisition of source material, this includes preservation, cold chain transport, cryogenic storage and thawing before manufacturing. And now continuing with the manufactured biologic product, we play in the following work processes: preservation, cryogenic storage, cold chain shipment and on-site thawing before patient administration.

CBS is a great fit, and we look forward to integrating their operations into BioLife to realize the synergies we identified. CBS has several marquee customers in the cell and gene therapy space, and we see tremendous leverage to scale the business.

I'd like to make one last comment about our M&A strategy. While we've been very active this year and would not rule out some additional activity next year, our focus for 2020 will be on integrating the businesses we acquired.

Now I'll turn the call back over to Rod to present our financial highlights for Q3, some additional detail on CBS and our updated guidance for 2019 and preliminary revenue guidance for 2020. Rob?

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Roderick de Greef, BioLife Solutions, Inc. - CFO & Secretary [4]

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Thanks, Mike. Before reviewing our third quarter financial results, I'd like to make a few comments about our acquisition of CBS, which we announced earlier today. We purchased substantially all of the assets of CBS for $11 million in cash and issued 234,000 unregistered common shares having a value of $4 million. We have structured an earnout over 5 years whereby the owner of CBS could realize another $15 million in cash or stock if certain new product-related revenue levels are exceeded. We anticipate that CBS will have full year 2019 revenue of between $10 million to $11 million and a modest but positive adjusted EBITDA. We expect to realize $1 million to $2 million of incremental revenue contribution to our P&L for the balance of 2019.

Based on the introduction of a new line of liquid nitrogen freezers in 2020, we expect solid revenue growth over 2019. And although our gross margin will realize additional compression in the near term, based on the margin profile of capital equipment, we fully expect the acquisition will be accretive on an adjusted EPS basis and provide a positive adjusted EBITDA contribution in 2020.

Moving to our quarterly results. Total revenue for the third quarter of 2019 reached $6.6 million, representing a 25% increase over last year's third quarter revenue of $5.3 million. This quarter's revenue included $324,000 of sales related to the automated thaw products we acquired last April and $211,000 of evo-related revenue, which was acquired in early August. Biopreservation media revenue for the third quarter of 2019 was $6 million, up 15% compared to last year and lower than expected based on 2 customers ordering approximately $1 million less than expectations. As Mike mentioned, order volume from these 2 customers in Q4 is back in line with our internal expectations but unlikely to make up the order shortfall we realized in Q3.

Total revenue for the 9-month period in 2019 was $19.1 million, up 34% over revenue of $14.3 million in 2018. The adjusted gross margin for the third quarter of 2019 was 69.2% compared with 69.7% in the third quarter of last year. The slight decrease in gross margin reflects the lower margin profile of the automated thaw and evo product lines. Adjusted gross margin for the 9 months was 71% compared to 68.5% in 2018.

Adjusted operating expenses for Q3 totaled $4.5 million compared with $2.5 million in Q3 of 2018. The increase in adjusted operating expenses is primarily the result of the acquisitions of Astero and SAVSU and secondarily to increased head count necessary to support our overall growth and higher performance-based compensation. Adjusted operating expenses for the 9-month period in 2019 totaled $11.6 million compared with $7.2 million in 2018.

Adjusted operating profit for the third quarter of 2019 was $106,000 compared with $1.2 million in the third quarter of 2018. Adjusted operating profit for the 9-month period was $2 million compared to $2.6 million in 2018.

Adjusted net income attributable to common shareholders for the third quarter of 2019 was $215,000 or $0.01 per diluted share compared with $1.2 million or $0.05 per diluted share in 2018. For the 9-month period in 2019, adjusted net income attributable to common shareholders was $2.4 million or $0.10 per diluted share compared with $2.5 million or $0.12 per diluted share in 2018.

GAAP net income and EPS for the 3- and 9-month periods included a onetime gain on the acquisition of SAVSU of $10.1 million and $0.40 and $0.41 per share, respectively. Adjusted EBITDA for the third quarter totaled $925,000 compared to $1.7 million in the same period in 2018. And for the 9-month period, adjusted EBITDA was $4.3 million compared to $4 million in 2018.

With respect to our current outlook for 2019, we have updated the guidance we provided in August of this year, which includes the impact of acquiring Astero beginning on April 2, SAVSU from August 8 and now CBS from November 12. We expect total revenue for 2019 will be between $27.5 million to $31.5 million, reflecting year-over-year growth of 39% to 60%. This includes $1.2 million from the thaw product line, $500,000 from the evo technology and $1 million to $2 million from CBS.

Our adjusted gross margin for 2019 should be between 68% to 69%. Based on the acquisitions of SAVSU and CBS, we do expect the near-term compression of our gross margin of between 6 to 8 percentage points, ultimately climbing back into the mid-60s with increasing product revenue.

We expect 2019 adjusted operating expenses to be in the range of $16.5 million to $17.5 million. We expect that the additions of SAVSU and CBS will add between $1.2 million to $1.5 million in additional quarterly operating expenses above the $4.5 million we realized in Q3.

Finally, we expect to be positive on the operating, net income and EBITDA lines on an adjusted basis for the full year of 2019.

I would like to end my remarks with a summary of our share count. We currently have 20.7 million common shares issued and outstanding and a fully diluted share count of 27.2 million.

Now I'd like to turn the call back over to Mike.

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Michael P. Rice, BioLife Solutions, Inc. - President, CEO & Director [5]

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Thanks, again, Rob. In summary, I'm very bullish on the potential to grow BioLife to our next interim milestone of reaching $100 million in revenue. Our preliminary revenue guidance for next year has us more than halfway to this goal. The opportunity in the cell and gene therapy space is tremendous. We have a very solid reputation in the space as a trusted supplier. We worked very hard building customer relationships that have rewarded us with growth and the satisfaction of playing a part in helping our customers bring life-changing and life-saving biologic-based therapies to the clinic. I'd like to thank all of our shareholders for your support of BioLife.

Now we'll turn the call back over to the operator to take your questions. JP?

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from the line of Jason McCarthy of Maxim Group.

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Unidentified Analyst, [2]

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It's Dave on the line for Jason. So I don't think I quite caught this here. Could you please repeat how many new customers did you guys get in the third quarter? Was it 41? I just wanted to make sure I heard that correctly.

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Michael P. Rice, BioLife Solutions, Inc. - President, CEO & Director [3]

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Yes. This is Mike. 62 total, 41 in the cell and gene therapy space.

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Unidentified Analyst, [4]

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62 total.

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Michael P. Rice, BioLife Solutions, Inc. - President, CEO & Director [5]

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62, 6-2 total with 41 in the cell and gene therapy segment.

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Unidentified Analyst, [6]

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Okay. Great. And then if you could please just shed some more color on, in your opinion, what the synergies are between the Custom Biogenic Systems freezing and cryogenic equipment and SAVSU's evo smart containers, I'd appreciate that.

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Michael P. Rice, BioLife Solutions, Inc. - President, CEO & Director [7]

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Sure, Dave. Good question. So here's how it goes. CBS' product line is for stationary freezing containers that would be at cell and gene therapy manufacturing sites, biorepositories, clinics and whatnot. The SAVSU evo line of dry vapor shippers and the other products are for transport at cryogenic temperatures and other temperatures of biologic therapies that are both time-sensitive and temperature-sensitive. So one is stationary. One is for movement across time and space.

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Roderick de Greef, BioLife Solutions, Inc. - CFO & Secretary [8]

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We believe that rather than sourcing the evo hardware from abroad, that we have the opportunity to have the products made in Detroit at CBS because fundamentally, the technology around building what is essentially a can and a can is absolutely doable at CBS.

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Operator [9]

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Our next question comes from the line of Paul Knight of Janney.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [10]

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Mike, on the $1 million, was it 2 customers? And what was going on in each of those 2 customers if it was 2?

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Michael P. Rice, BioLife Solutions, Inc. - President, CEO & Director [11]

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Yes, Paul, correct. The softness in Q3 media was a result of 2 customers that together accounted for a nearly $1 million sequential decrease in order volume. One customer was a distributor who was transitioning into a new ERP system. Concurrently with that, Q3 is their Q1 of their fiscal year. So that's kind of a normal reload process. So those 2 dynamics were the reason there for the softness in their order volume.

The other customer, Paul, is a cell and gene therapy CMO or a contract manufacturing organization. And the CMOs, they're really at the mercy of their end customers and the clinical trial enrollment for those customers, which dictate how much product they're going to buy from any of the bioproduction tool suppliers that are supplying them critical reagents, manufacturing tools and whatnot.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [12]

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