Q2 2023 Cryoport Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to decline towards second quarter 2023 earnings conference call at this time.
In a listen only mode. Following the presentation, we will conduct a question and answer session.
At any time during this call you with claret immediate assistance. Please press star zero for operator as a reminder, this call is being recorded I will now turn the call over to your host Mr. Todd Thomas of Casey S. Strategic Communications. Please go ahead.
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 that these forward looking statements are reasonable as and when the however.
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 or future events or otherwise except as required by law.
Forward looking statements are subject to certain risks and uncertainties that could cause actual results events and developments to differ materially from our historical experience and our partner's expectations or projections. These risks and uncertainties include but are not limited to those described in item <unk> risk factors and elsewhere in our annual report on form.
<unk> 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.
My pleasure to turn the call over to Mr. Jerrell, Shelton, Chief Executive Officer of Cryo Port.
Jerry the floor is yours.
Thank you Todd good afternoon, ladies and gentlemen, we appreciate your joining our earnings call today with US. This afternoon is our Chief Financial Officer, Robert <unk>, Our Chief Scientific Officer, Dr. Mark Sawicki, and our Vice President of corporate development and Investor Relations Thomas Heinzmann.
As a reminder, we have uploaded our second quarter 2023 in review document to our website. It can be found under the Investor Relations.
The events and presentations section.
This document provides a review of our financial and operational performance and a general business outlook.
If you have not had a chance to read it I would encourage you to.
To download it at this time.
I would approve.
I will provide you with a brief update on the business and then we will move on to answering your questions.
Today, we reported second quarter revenue of $57 million, which was in line with the guidance that we had previously furnished.
Our second quarter results reflected significantly weaker than expected demand for capital equipment from China and lower than expected ramps from certain clients during the second quarter spar.
Specifically China's economic condition.
Significant drop in orders costs, a second quarter decline in MBE biological solutions, China derived revenue of 67% or five $8 million year over year for.
For the previous two years the Chinese market has represented approximately 23% of <unk> total revenue and 10% of <unk> overall revenue.
Based on our most recent conversations with our clients as well as third party sources. We expect these slowdowns to persist through the third and possibly the fourth quarter of this year.
Given this and after thorough consideration we revised our full year financial forecast with revenue now expected to be in the range of $233 million to $243 million for 2023 as previously communicated.
While this is disappointing in the short term.
We have been working actively to mitigate the situation and serve our clients' changing needs. Our leadership team has been meeting with key partners and distributors management has recently been to China to meet with our MBE team based they are along with key clients and distributors with the objective of reinforced.
Our strengths and our strengths in relationships.
As a part of this effort we have devised mitigation plans, we believe will help to build our in the long term market leading position.
I also want to be very clear that we have confidence in our corporate strategy and that our long term growth drivers are firmly intact. Despite the short term challenges we operate in a very resilient industry as life Sciences treatments are a critical need and we have a very pivotal role in serving this industry. We are.
We're a clear leader in providing solutions to support lifesaving cell and gene therapies and today's commercially approved therapies represent the tip of the iceberg. Despite any short term headwinds we expect to benefit from the continued growth of the cell and gene therapy industry, which is expected to grow.
So at a 10 year compounded annual growth rate greater than 20%.
In addition to the positive dynamics of the cell and gene therapy market, we are continuing to make strategic investments and form relationships to further enhance our growth prospects you can find further details on these investments and relationships in our second quarter 2023.
In review document, which I mentioned earlier.
We believe our growth prospects are stronger than ever and we will continue to cement our relations our leadership position in the cell and gene therapy industry as we move through current macroeconomic challenges that impacted our second quarter results.
We are resolved to further strengthen our business and continued to position crowd port for the long term and profitable growth.
This concludes my prepared remarks, now we will be happy to take your questions. Operator. Please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone Youll hear with retail comps acknowledging your request.
<unk> will be taken in the order received should you wish to cancel your request. Please press the star followed by the Q.
Your first question is from 'twenty photo.
Please ask your question.
So neat.
Hello.
Yes.
Sorry are you able to hear me.
Yes, we can okay, you have micro entrepreneur so.
For the first question I was just wondering if you could elaborate a little bit on the <unk>.
Investments, you're making for the business I thought it was a bit of a jump sequentially any.
G&A I'm wondering if that speculate to integra soccer other.
Specific investments Youre, making.
Yes, we're making a number of investments are absolutely correct. There are both in technology as well as building out our overall capabilities. One of them is integra sell where we're building out centres of excellence both in Europe in Belgium.
It's tied to the acquisition of cell matters in 2022 as well as the center of excellence in Houston, where we already have significant capabilities and we're building that out to include Integra, So solutions platform.
Both of those are expected to be fully operational.
24.
And these investments are really based on the market insight that we have which really includes detailed forecast from our cell and gene therapy company customers.
We're building out capabilities to expand market share as well as wallet share from our customer base.
Got it. Thank you and then for my other question I was wondering if you could offer a little bit of clarity about the the impact from one of your customers ramp.
Just wondering if thats something thats been resolved and that something.
Something we should take in consideration when thinking about the commercial.
Commercial therapy revenue for rest of the year.
Alright.
Obviously, if these guys gear up they have to have things like temporary shutdowns for.
Manufacturing purposes, and other things in the second quarter, we had a one of our.
Partners did have a shutdown for a period of time to do maintenance on it.
That's a transient issue yes it.
It was a planned shutdown for maintenance calibration and cleaning and they're back up and running right.
Got it thank you very much.
Youre welcome.
Okay.
Your next question is from David Saxon from Needham. Please ask your question.
Hi, good afternoon, and thanks for taking my question.
Maybe to start on on the guidance.
It looks like you lowered the guide by $32 million at the midpoint, that's excluding <unk>.
Quarter Miss but.
Guess multipart question here. So first can you can you just breakdown the components of.
How the guide going down.
I'm, assuming a lot of that is FTE.
But.
Let you fill in.
Details there.
And then second.
Second part of the question is just on the cadence in the back half I mean, it doesn't sound like.
And the trends in China are improving at all.
So should we think of.
You guys facing somewhere in that $10 million to $12 million headwind.
The third quarter.
Maybe you can offset that.
Should we shake out kind of in the low $50 million range.
For third quarter, and a lot of that follow up.
Yes.
The revised guidance that we had previously announced.
Obviously still intact, we took a very conservative approach to providing guidance whats kind of the knowledge and experience that we have from Q2 and that certainly does take into account the current.
Economic issues that and weak demand.
<unk> within China.
So that's already baked into the guidance for the full year, so definitely we expect.
From a guidance perspective, the <unk> revenue to come in even though a little bit lower than Q2.
I'm talking about guidance not in terms of what we may enter.
The IMC.
And then for the other businesses again, we took.
Our conservative approach, where we're looking into just gradual increases for the services side of our business.
Okay.
Okay.
Alright.
<unk>.
Low 50 that a good placeholder.
And then I'll just ask my follow up here.
Jerry.
You mentioned mitigation plans following the visit.
China.
Maybe some color on what initiatives you're working on.
And what kind of benefit you could see from that in the future. Thanks, so much.
Yes, there are a couple of things that we're working on it with China number. One is there is a general economic condition and so we're strengthening our operation there.
Operationally in.
But the most important thing is most likely two.
2025 initiatives underway to buy in China, and we're going to participate in that we will be manufacturing stainless products. There eventually.
I'll start off within six months of getting those products and sending them to China. So that they are manufactured in China and that will help us with market share there within two years, we'll be manufacturing and sourcing the materials in China building up that China, China operation we've needed to do this for some time. This this.
Economic pullback is just facilitated us and helped us accelerate that plan, but we have a vast market in China, we're going to be and it's a growing market and we're going to be claiming more more share in that market.
Robert do you want to comment on that.
Third quarter.
No I think the third quarter Youre right I think fear for your for your modeling I think yes, that's what I would assume.
Okay, great. Thanks, so much.
Youre welcome.
Thank you. Your next question is from Jon <unk> from UBS. Please ask.
Yes. This is Lucas on for John <unk> here at UBS.
I guess my first question is on <unk>.
Thinking about it since acquisition the performance has been a bit mix do you think cryo part currently has the right portfolio of assets or could there potentially be some opportunities.
To devise some things.
John we absolutely have the right portfolio of assets.
<unk> is a solid business is run by an excellent management team. It is the global leader throughout the world and it is poised to benefit from the mountain of new approvals that are coming in.
In cell and gene therapy that will drive yet very largely but it's a well run company fits in the portfolio very profitable produces cash flow it's a cut.
Company that you want to own and then <unk> is a solid company. So.
It's one of the assets that we think will benefit from what's coming yes.
Yes, maybe just to add to it.
2022, and we had over $22 million in free cash flow. It maintained good profitability levels, even in Q2 of this year in spite of the.
We can demand from the Chinese Mark yes.
And John I think you need to recognize it.
Our strategic importance to us I mean this.
We're the leader in cryogenic systems throughout the World in every region of the world cell and gene therapy will be.
Providing tons of mountains of approvals come in hundreds of millions of dollars of opportunity.
And the industry will be gearing up we have the number one source of supply for cryogenic systems and and that means also that we have the internal source that is the supply chain the supply of support for our other companies. So there is an insurance component to it as well as on <unk>.
Into market gain component.
Thank you that's good color and then I guess switching over to cryo port systems and some of the delays you saw there in the clinical trial business I mean were those more from large pharma emerging biotech or both.
No.
Did have an increase in clinical trial costs, this quarter, which was a nice step up versus last quarter.
But it takes time for those to ramp once they initiate the drawdown that we saw last quarter or as it relates to numbers was more heavily weighted to the smaller scale folks not that the large entities.
Yeah.
Thanks, Thats all I had.
Thanks Lucas.
Thank you. Your next question is from David Larsen from <unk>. Please ask your question.
Hi, beyond China in other regions of the World how is demand for NV E.
And I'm, assuming the slowdown in demand is really for the large freezers is that correct or not how is demand for the doers and small freezers in regions.
China, and Europe , and the U S. Thank you.
The demand for doors is primarily from a breeder community and it's strong.
It Hasnt fallen back that's the supply of protein so is solid.
The demand for freezers.
Around the world, It's a universal pullback with the biggest pullback being in China.
So yes, maybe I can just add a little bit of color to it if you look at yes.
China is by far the most significant.
In the EMEA region, we had decreased quarter over quarter last year about 15% in the U S about 9% so compared to the impact on China specific and to some extent Asia Pac.
The other two markets are still pretty solid.
Okay and then.
Gary It sounds like you've visited with China, and I'm, assuming you mean.
That with some folks and it seems like Youre investing even more in that region going forward Thats part of your mitigation strategy.
I'm kind of assuming that the only reason you'd be investing more as if you had some sort of a sense that.
There would be revenue coming from that area in the future.
I mean were there any sort of verbal commitments as part of Europe .
Ongoing and increased investments in that country, despite the economic challenges.
So one of the things you have to think about when you look at that is what's going on with the Celgene space. So China has equipped Europe as the number two entity for clinical activity in the LNG space and is actually projected in the next three years to eclipse, the United States and activity.
There is a significant substantial.
Pipeline and resource that's going to be required that we'll need cryogenic equipment for both the distribution and storage standpoint. So.
There's a lot of data behind it that supports that strategy.
Thanks.
And just to tag on to marks comments real quick there is a initiative in China in 2025 four.
Companies in China to buy equipment only made by companies in China and so that's one of the drivers we're already moving on is to manufacture MBE equipment in China for China to correct. So thats part of that initiative.
Okay, and then just one more question in this area.
These final largely a self contained region or will I think you mentioned like steel and other products that you'll be producing in China.
Are those also going to be supplying other regions like the U S and Europe will you be dependent on what's manufactured in China for the rest of the business or is it going to be largely self contained.
China, China is already on export.
Part of our company, we export out of China to EMEA and to the Americas, We look at all of our plants is it manufacturing at the same quality level.
All the all the products are.
Our interchange interchangeable so <unk>.
Quality is high and the reach is broad.
Just to remind you we have three manufacturing facilities two in the United States and one in China, and the United States facility in Minnesota makes the doers the aluminum doors for.
For the United States and around the World and then the ball ground, Georgia facility manufactures the freezers for the United States and EMEA, mostly.
That helps.
That's very helpful. Thanks, very much I'll hop back in the queue.
Thanks, Steve.
Thank you. Your next question is from <unk> Zhang from B Riley. Please ask your question.
Thank you for taking our questions as soon as most of my question has been answered about Jeremy can you maybe talk about the expansion opportunities for cryo PDP and do you see the opportunity or synergy with <unk>.
In China. Thank you.
So if I understand your question it was the opportunities and expansion of a crowd Pvp in China correct. That's.
Broadly on the <unk>.
Spanish opportunity for.
And then synergy with angry eating China.
Yeah, Yeah. So so we.
We are.
We're doing a wreck on order so we're doing our record order with crowd PDP in China.
We've looked at acquisitions, we know the opportunity is there.
We do some business there now both with cryo PDP and crop or it systems.
It accounts for $1 5 billion people in this world and.
The land and it operates.
The Chinese government operates very differently than any other part of the world and as Mark said there is an enormous opportunity. So you can expect some some future activity.
In China from Cryo, PDP and Cryo Port systems, There's no way, we can avoid that part of the world as Mark said.
The China is forecast to eclipse, the United States and cell and gene therapy.
In the next within the next decade.
Unquiet PDP. We're also looking forward just broader outside of China <unk>.
Activities and then something that we've talked about before is really <unk> strength in Europe and Asia Pac that.
That continues but also our intent to build out their U S capabilities. So that's actively.
In the works and we see a lot of synergy opportunities between <unk> systems and quiet PDP in particular with the.
U S customer base that corporate systems.
So all of this is working to build out to take advantage of those approvals that are coming our business. There is a lot like biologics, where the biologics history in it if you looked at biologics in 2010. It was around $40 billion today is 475 billion.
And revenue in it just sprung out and this is this is a similar situation. So we're preparing all of the time for the future we have seven potential approvals coming this year.
It's an exciting time.
Okay I'm corrected five two are equals two already approved this year or two already approved okay. Thank you.
Got it thanks for the clarification.
Thank you.
Thank you once again, ladies and gentleman that is star one should you wish to ask a question.
Our next question is from Richard Baldry from Roth.
Please ask your question.
Thanks.
Curious if you can give an update on the.
Mr Technical term, but the blood collection standardization initiatives.
Any timing for launch where youre standing on that.
Yes.
We're making great progress.
So the facilities in Houston, our construction complete where we've initiated the validation and qualification activities for the process as well as all the equipment.
The site in Belgium is running a month or two behind that both are anticipated to <unk>.
To be ready for launch and start to generate revenue in Q1 of next year.
They are running very very smoothly.
We've already similar to the bio services entity. When we opened those last year, we already have folks coming through from.
From our client base substantial number of them that are reevaluating the infrastructure of the facilities and the processes to fast track their audit processes, which we think will provide a very very strong quick start there. Once we once we opened for business next year.
I would like to remind you that all of these efforts.
Again preparing for the future of the market that we know is coming and when the market is coming like this there is there a need for standardization of Integra sale is built from market demand just not built just on a whim. So.
It's bill for its being built for scale.
Alright.
When you look at sort of the newer offerings across you're saying, it's whether that's the elite shippers.
Called the <unk> or even the craft portal to point out how.
How do you think that changes your go to market pricing is it is it sort of a new higher tier or does it just replace what's there is how do we think about the economics as you make those chests I'll turn it over to Mark in just a second.
To add to this but.
Elite line of shippers is composed of the crowd sphere.
The elite ultra coal ultra coal is at minus 80, it opens up the whole gene market to us because generally speaking not always but generally speaking.
Jean material gene therapies require minus 80 degrees Celsius, and that's what the elite Ultra coal is the elite Ultra coal also has features and benefits that no. One else has in the market by a long shot and it has a whole time twice as much as its nearest.
Competitor and then it has the all the monitoring that we provide along with the crowd portable control.
The logistics network and our fantastic logistics technician supporting the shipments.
It's a revolutionary product and it's one that this one this rep is using for example in their launch of.
Their new gene therapy, and then and then of course the crowd sphere is the other the other part of the elite line, but the elite lines stands out in a much.
A very in a very pointed way from other competitors in the marketplace do you want to add anything more I think Jerry covered it really well. If you guys are thinking about it from an economic standpoint, yes, there will be a slight premium associated with it.
No.
That you guys being one of them from a modeling standpoint may want to consider but as Jerry had mentioned these are premium products in the space. They.
They are meant to be Differentiators and.
Obviously, the ultra cold is a new product line for us and allows us to extend into the gene therapy space and capture aspects of the market that we didn't have accessibility to previously which will allow us to continue to build share overall.
Thanks, and can you maybe.
Sort of a same peel back on the cryo portal to point out.
Is it just a replacement or an upgrade and then maybe.
There is a decent step up on and acquisition integration costs in the quarter.
Kind of look underneath the hood on that to China.
The question on the integration costs over to Robert in just a moment, but.
Two.
To your.
Your question what was the question the craft portal to your question about the crop portal.
Two.
Portable to us.
As the only logistics management system to my knowledge in the industry.
CFR 21, part 11 compliant.
Validated it is it is it is it.
Sets us apart from anyone else in the industry in terms of information and security.
Speed and comprehensiveness and it also gives us a platform for expansion in adding other services in the future you want to add anything to that Mark yeah. So one of the things you have to think about when you're looking at the credit portal too as it does there is a couple of fundamental differences here first and foremost as it provides a readily made vehicle for integration with third party.
<unk> systems and competency so data is going to be a huge driver in this space moving forward and this provides the ability to more effectively transfer manage data and it also allows us to start to monetize the data that we have in our system. So we're going to be initiating and we already have in some cases the data services platform that will allow us to start the <unk>.
<unk> that data moving forward, which is which is a step change from the from the historical portal.
And then just to your second question related to the acquisition related costs, we did explore a strategic acquisition opportunities during the first half of this year, but ultimately decided not to move forward with that.
Cost that we had our.
Customary due diligence and market research activities.
Having said that we are actively looking at smaller tactical acquisition opportunities globally.
To what we have done in the past.
And then because thats, where we stand as of now.
Yes.
Yes.
Thanks.
Thank you. Your next question is from Brandon Couillard from Jefferies. Please ask your question.
Thanks, Good afternoon.
Couple of barn E.
Yeah.
The <unk> revenue decline.
Is that all unit volume or are you seeing some pricing pressure as well.
Typically within China, how sure you did it's macro or not.
Our local competition dynamic and third question what percent of the business was China in 2020, when you bought it.
I'll give the percentage to Brandon.
Vintages to Robert in just a moment, but but but we're certain that it wasn't competition. We have a we have a lot of intelligence going on around competition, especially in China. So.
We're.
Certain of that.
Yes.
China derived sales for a frenzy, where were in the 19% to 20% and I make that distinction of China derived because you look at the region. We looked at for this analysis really at our distributors our sales within China are stores outside of the China worthy and destination of the <unk>.
Product is China as well as our direct customers, whether it's in the U S or elsewhere, where they are in destination is China. So we tried to really capture all of the China impacting that number but about a little bit less than 20%.
Okay.
Second question just on the number of clinical trials in the second quarter I thought when we talked about the go you were actually seeing some some revenue impact from <unk> being terminated some calculation some re prioritization, which added a lot in the quarter.
Do you have to have the breakdown of number of terminations or completion versus gross ads and how do we kind of reconcile those two data points.
So we absolutely did in Q1 see a substantial number of terminated we actually had 37 terminations in Q1.
That number has dropped to 16 in Q2 from a termination standpoint.
So that <unk> 27 in Q1, obviously impacted the softness from a revenue standpoint, too because because those programs worth running.
We did have a nice added in the second quarter.
But those trials don't start full enrollment so you initiate those trials they come online, but they take a couple of quarters to really ramp and so that obviously bodes well for the future.
But it doesn't there is a lag period between Onboarding and obviously full.
Activity and revenue contribution.
Got you.
One.
Competitive recently.
<unk>.
We cleared a bed.
Late stage an approved cell.
<unk> companies are looking to.
Multi and dual source.
Providers like.
I would like to get it.
From your point of view on that dynamic and what that mix could really look like as you see on the graph.
50, 50 share or keeping a second vendor.
And maybe you will retain 20% of the business how do you see that trend that yesterday the ball forward.
Yes. So obviously, we will always have some competition in this space in particular cell and gene space is rapidly growing and will continue to expand at a rate that's disproportionate to the overall industry and this is going to run for the foreseeable future.
But I'll put our solutions up against anyone else in the space at any time.
Been very successful and captured nearly 70% of the market due to the fact that we are best in class. We have exemplary performance and we are building for scale.
So this reputation is unsurpassed and this allowed us to capture that 70% market share.
So we feel very confident that our that our solution will continue to dominate in the market both the clinical and the commercial markets for the foreseeable future.
Thank you.
Thank you.
We'll take questions at this time I will now.
Now I'll hand, the call over back to your speakers for any closing remarks.
Yes.
Thank you for your questions and our discussion in closing the second quarter was challenging but crowd forward is continuing to execute on these plans to position our company as a value added provider and vital resource serving the cell and gene therapy industry, which is poised for substantial growth.
As it transforms the way medicine is practiced.
We're doing so by making targeted investments.
Introducing important new services and products and forming key strategic relationships.
We believe all of these actions combined will make us stronger more efficient organization and ultimately support our company's long term growth we want to thank you for joining US today. We appreciate your continuing support and interest in our company. We look forward to updating you on our progress again next quarter when we report.
On our third quarter 2023 results good night.
Thank you ladies and gentlemen, the conference has now ended thank you all for joining you may all disconnect.