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CYRX: Record Revenue, Again. Readying To Support Immunotherapy Launches

By Brian Marckx, CFA


Q3 2017:  Record Revenue, Again. Readying For Support of Immunotherapy Launches… 

Cryoport (NASDAQ:CYRX) reported Q2 financial results and provided a business update (we missed the earnings call due to a timing conflict).  While revenue slightly missed our number, operating and net income, along with EPS were just about dead-on with our respective estimates.  Results, from both an operational and financial perspective, remain very strong.  Highlights on the operational side include the launch of a 2-8°C (temperature range) shipping solution (dubbed ‘Cryoport. Certified. Cool.’, or C3) as well as the addition of 20 new (net) clinical trials during the quarter.  

2-8°C represents a relatively enormous portion (i.e. several times the size of the cryogenic tranche) of the overall cold chain shipping segment and, as such, C3 could offer meaningful market expansion opportunity for Cryoport.  Relative to the clinical trial roster, CYRX now supports a total of 195 clinical trials, 20 of which are in phase III, with another 82 in phase II.  

On the financial side, the major highlight was Q3 marking the 12th straight quarter that revenue set another new high.  In addition, gross margin, at 53.5% was also a new record.  And while operating loss has ticked up ever-so-slightly during the last two quarters (although is vastly improved yoy), that is something that we had anticipated given certain investments in people and infrastructure aimed at beefing up capacity and capabilities as the company readies for the support of major commercial launches and additional clinical trial activities.  

While little-to-none of the related benefits of the recent build-out have yet to be realized, that is expected to change in the relatively near-term as revenue from support of commercialized products begins to make a much more significant contribution.  This includes the widely anticipated initial launches of immunotherapies Kymriah (Novartis) and Yescarta (Kite/Gilead), which received FDA approval in September and October, respectively.  As a reminder, CYRX will support commercialization of both products.  Just the initial indications from these two products could represent $15M or more in annual revenue for CYRX – and label expansion (NVS already filed for their first expanded indication) would likely greatly increase the related revenue potential.

Additionally, new clinical trial support contracts, progression of clinical trials that CYRX already supports to later stages (i.e. larger patient enrollment), anticipated additional near-term BLA filings and the likelihood that Cryoport scores additional commercialization-support contracts all bode well for continued, and perhaps even steeper, growth of their biopharma segment.  As such and coupled with projected further widening of gross margin, we continue to expect to see sustained improvement in operating loss.     

Q3 revenue, at $3.0M, was up 52% yoy but about 4% below our $3.1M estimate.  While up just 3% sequentially, this is still a new record.  Importantly, the bread-and-butter biopharma segment was the catalyst in driving both yoy and sequential growth – in fact biopharma was the only segment that posted sequential (as well as yoy) growth.  

Compared to our estimates, all three of the itemized segments missed our respective numbers by single digit percentages; biopharma: $2.35M A vs. $2.43 E, Δ = -4%, reproductive medicine: $409k A vs. $441k E, Δ = -7% and animal health: $248k A vs. $263k E, Δ = -6%.   

Relative to biopharma, revenue increased 65% yoy and 5% sequentially.  This segment, which now accounts for 78% of total revenue, up from an average of 69% in 2016 and 76% in 1H 2017, continues to be the main driver of the top-line.  Through the first nine months of 2017, biopharma revenue increased 76% yoy, compared to 58% growth in total revenue.  Onboarding of new biopharma clients and clinical trials has been the major catalyst driving revenue of this segment.  CYRX has consistently grown the total number of clinical trials that they support at any given time and added a net 20 trials in Q3 and 67 during the first nine months of 2017.  They now support a (record) total of 195 clinical trials, up from 172 in Q2 and ~100 in Q3 2016.  

As we noted in our update in August, the 33 clinical trials that CYRX added in Q2 appear to be the greatest quarterly increase since CYRX began publicly reporting this metric in early 2015.  Given the historical very high correlation between biopharma revenue and the number of clinical trials supported (with one-quarter lag), we are anticipating very strong biopharma revenue for Q4 – we currently model biopharma revenue of $2.87M in Q4, implying yoy and sequential growth of 86% and 22%, respectively.    

Relative to animal health, Q3 revenue was $248k – while up 33% yoy, this is a contraction of 6% on a sequential basis.  Nonetheless, animal health, which accounts for about 9% of total revenue, has performed relatively well as compared to the prior year with revenue up 25% through the first nine months of 2017.  A variety of influences have benefitted this business including the recent addition of clinical trials, CYRX’s partnership with Zoetis and growth in demand for veterinary vaccines and certain regenerative medicines.  More recently, the international relocation of cell banks for a new European customer (Boehringer-Ingelheim) was cited as a significant contributor to animal health revenue.  Management also noted that an increase in the number of clinical trials as well as onboarding of new vaccine trials, which are anticipated to commence in the near-term, should steepen revenue growth from this segment going into next year.

Relative to reproductive medicine, Q3 revenue was $409k – up 12% yoy, although down 4% sequentially.  This segment posted 19% growth in 2016 and added another 17% through this first nine months of this year.  The catalysts and (partially offsetting) headwinds have remained fairly constant as of late.  The catalyst side includes a very frothy domestic IVF market which has been furthered stoked by Cryoport’s targeted marketing campaigns.  This helped push domestic revenue up by 62% in Q3.  Headwinds mostly encompass adverse changes to medical tourism-related regulations in certain countries – which contributed to a 55% decline in international revenue.  Nonetheless, we think this business has some room to grow given CYRX’s active measures to accelerate activity of the segment which included the deployment of additional shippers, targeted awareness-building campaigns and the new CryoStork Next Flight Out service, which launched earlier in 2017.  In an effort to further leverage growth of the domestic IVF market, in October the company launched, a dedicated website for CryoStork.  

Gross Margin, OpEx
Q3 gross margin was 53.5% - which is not only an all-time high, it’s 570 basis points wider than the previous best (47.8% in Q2 ‘17) and well ahead of our 48.0% estimate.  Gross margin has improved 1,320 basis points over the last 12 months.  Margin improvement has been attributed to a combination of pricing increases and operational efficiencies leveraged with higher business volumes.  While we continue to expect fairly regular widening of gross margin, we note that it may show some q-to-q volatility and may dip below this current high.  Nonetheless, we model gross margin to average 54% throughout 2018 and believe management’s goal of eventually reaching 60% is realistic.    

Meanwhile, operating expenses were $3.6M, largely inline with our $3.5M estimate.  This is up from $3.3M in Q2 and an average of $3.1M in 1H.  But as noted earlier, the increase was anticipated as a result of recent investments in personnel and capacity and capabilities-related additions and improvements.  Q3 operating expenses equaled 120% of revenue – which is also an increase from Q2 (112%) and 1H (112%), although we expect this to temper on continued revenue growth catalyzed by the benefits of these investments – for example, (the non-capitalized portion of) costs related to infrastructure build out and facilities expansion to support commercialized products (e.g. NVS, GILD immunotherapies) should be rapidly recouped and speed improvement in operating loss in relatively short-order following product launch.  
Cash used in operating activities was $965k and $2.4M ($862k and $2.6M ex-changes in working capital) in the three and nine months ending 9/30/2017.  Capex, consumed another $234k and $1.3M (which included the purchase of shippers and Smart Pak II monitoring systems) over those same periods.  Cash balance at the close of Q3 was $15.4M.  Subsequent to quarter end, warrant and options exercises brought in an additional $980k.  The balance sheet remains debt-free. 

We maintain our $9.50/share price target.  See below for free access to our updated report on CYRX. 


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