Roderick de Greef – CFO Mike Rice – President & CEO.

Paul Knight - Janney Montgomery Jason McCarthy - Maxim Group Suraj Kalia - Northland Securities Dylan Dupuis - B. Riley FBR.

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 BioLife Solutions Incorporated Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Roderick de Greef, Chief Financial Officer. You may begin..

Thank you, Sonia. Good morning, everyone, and thank you for joining us for the BioLife Solutions conference call to review the operating and financial results for the second quarter of 2018. Earlier this morning, we issued a press release which summarizes our results for the three and six months ended June 30.

We also issued a press release announcing a $20 million investment in BioLife by cash and capital to support our growth strategy. 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 would 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 many 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 qualifies 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 of 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..

Thank you, Rod. Good morning everyone. Thank you for joining the call. We appreciate your interest in BioLife and are very pleased to report our best quarter yet with excellent top to bottom results. In Q2 we solidified our position as the sole source supplier of proprietary bio-preservation media products to the cell and gene therapy market.

Product demand from this segment drove over a 102% year over year revenue increased to 5.2 million. In the second quarter of 2018 we gained 48 new direct customers with 37 new cell and gene therapy customers in the high growth regenerative medicine segment.

Today we are supplying thousands of customers directly and indirectly through our network of domestic and international distributors.

To recap the regenerative medicine market segment, this is our most strategic market and is comprised of cell and gene therapy companies, hospital based stem cell transplant centers and contract development and manufacturing organizations such as [indiscernible].

The alliance for regenerative medicine just published its Q2 2018 data report which cites continued strong investments in this space with 4.1 billion invested in Q2 and nearly 8 million year-to-date. In Q2 regenerative medicine segment revenue was 3 million this was 58% of total revenue with 176% growth over Q2 last year and 42% growth over Q1.

New direct cell and gene therapy customers included Aduru [ph], AgenTus Therapeutics, BioReliance, Orca BioSystems, Refuge Biotechnologies and Senti Biosciences. To-date we believe our proprietary bio-preservation media products have been used in more than 300 customer clinical applications.

I'll remind our listeners that this number is likely higher due to the success of our distributors have demonstrated in getting our products imbedded in early stage clinical trials with most distributors we ship in bulk and they distribute to the end users so we don't have complete visibility on their reach.

This is especially the case with Stem Cell Technologies and MilliporeSigma, our two largest distributors. We estimate that each customer clinical application if approved and at full manufacturing scale represents annual revenue and a range of $500,000 to $2 million and we have several potential outliers that greatly exceed this annual revenue range.

Over the last several years we established a very strong position as the leading supplier of proprietary agents that are critical for successful cell and gene therapy manufacturing with the marquee [ph] customer base, sticky relationships, limited commercial competition and a phenomenal growth opportunity.

This year we expect three to five additional regulatory filings by our customers with the possibility for two additional approvals by the end of the year. I'd now like to talk more about our in-direct sales channel of domestic and international distributors.

In Q2 our distribution partners contributed 1.7 million in revenue or 33% of total revenue and this grew 146% over Q2 last year and 62% from Q1 it's clear that we have significant sales and marketing leverage from our channel partners. Key worldwide distributors include Stem Cell Technologies, MilliporeSigma, Thermo Fisher and VWR.

Based on distributor forecast we expect continued strong growth from our in-direct sales channel throughout 2018. To close the loop on segment sales drug discovery and bio-banking each contributed less than 5% of total revenue and we expect flat to lower full year 2018 revenue compared to 2017.

Before I talk about the press release we issued earlier today announcing a $20 million investment by Casdin Capital I will ask Rod to share our financial highlights for Q2 in the first half of 2018.

Rod?.

Thanks, Mike. As you noted bio-preservation media revenue for the second quarter of 2018 reached a record $5.2 million, representing a 102% increase over the second quarter of last year. For the six months ended June 30, revenue grew 83% to $9 million, up from $4.9 million last year.

The increase in revenue for both periods was primarily the result of higher direct sales to our customers in the regen med space and to our indirect distribution channel. The gross margin for the second quarter of 2018 increased 7 percentage points to 70% compared to 63% for the second quarter of last year.

For the first six months of this year, gross margin was 68% compared to 62% for the first six months of 2017. The increase in gross margin for both periods compared to 2017 was primarily driven by volume related reductions and cost of goods sold and higher blended product ASPs.

The gross margin for the second quarter demonstrates the operating leverage we can achieve on higher revenue levels. Operating expenses in Q2 totaled $2.4 million, compared to $1.9 million in Q2 of 2017. For the first six months of 2018 operating expense totaled 4.7 million compared to 3.8 million in the first six months of 2017.

The increase in operating expenses for both periods is primarily the result of higher performance based compensation expense and increased costs related to enhancing our quality management systems. The second quarter's operating profit was $1.3 million compared to an operating loss of $341,000 in the second quarter of 2017.

For the six-month period, operating profit totaled $1.4 million compared to an operating loss of $805,000 for the same period in 2017. I'm really pleased to report that for the first time in the company's history we have achieved full GAAP profitability.

For the second quarter net income attributable to common shareholders was $1 million or $0.05 per diluted share this compares to a net loss attributable to common shareholders for the second quarter of 2017 of $768,000 or $0.06 per share.

For the first six months of 2018 net income attributable to common shareholders was $943,000 or $0.05 per diluted share compared to a net loss of $1.6 million or $0.13 per share last year. EBITDA for the second quarter was positive $1.2 million compared to negative $514,000 in the same period last year.

For the six months EBITDA was positive $1.3 million compared to negative $1.1 million in the first six months of 2017. Cash flow from operations for the second quarter totaled $562,000 compared to cash used by operations of $103,000 in 2017.

For the six months cash flow from operations was $953,000 this year compared to cash used by operations of $272,000 for the same period last year.

The combination of cash flow from operations and proceeds from the exercise of outstanding warrants resulted in an ending cash balance at June 30, 2018 of 14.2 million compared to 2.3 million at the same time last year.

With respect to our outlook for the full year 2018, as we noted in our preliminary revenue release in early July we now expect bio-preservation media revenue to range between 18.5 million and 20 million representing 68% to 82% growth over 2017.

Given our results for the first six months of this year we are increasing our gross margin range to 68% to 70% for the full year compared to our previous expectation of 63 to 65 and up from 61% last year.

Based primarily on accelerated hiring plans to handle our revised revenue expectations, we now expect operating expenses for the full year to fall between 9.5 million and 10 million compared to our earlier guidance of 9 million to 9.5 million.

We maintain our expectation for continued full year operating profitability and corresponding increases in cash flow from operations and EBITDA. We also expect to achieve net income for the full year of 2018.

Finally as disclosed earlier this morning we have entered into an agreement to sell Casdin Capital 1.4 million shares at $14 per share for total proceeds of $20 million.

Other than standard legal fees there were no fees or other expenses related to this placement, shares issued to Casdin represent less than a 6% increase in our fully diluted share count and the willingness of Casdin to enter into a one year lock up on these shares underscores their long term fundamental investment strategy.

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

Thanks, Rod. Turning back to revenues to-date, I would like to take a few minutes to outline our vision to create an even more valuable enterprise. For some time now we've been evaluating various opportunities to acquire additional cell and gene therapy manufacturing tools and services companies or technologies to accelerate growth.

The tool supplier side of the region med space is highly fragmented. Today in the cell and gene therapy manufacturing workflow continuum we offer a bio-preservation media used to preserve source material and manufactured cell and gene therapies. Our share of the per dose spend on manufacturing tools ranges from about $100 to $500.

Executing our acquisition strategy could provide several benefits including revenue and profit increases, sales and marketing leverage, cost synergies and scale. We believe consolidation opportunities to acquire complimentary companies or technologies could increase our share of the per dose tool spend my 5X to 10X.

To help fund the initial phase of our M&A growth strategy as Rod mentioned we negotiated a $20 million with Casdin Capital this $20 million investment by Casdin in combination with our cash balance of approximately 15 million allows us the financial flexibility to initiate our strategy.

We're in the process of evaluating several opportunities that support this strategy and look forward to sharing announcements on our progress at the appropriate times. Collectively our management team and board members have significant M&A negotiation and integration experience so we're confident we can execute this strategy to scale the company.

In closing Q2 was an operational and financial success and continued evidence of our ability to efficiently manage the business in a period of sustained high growth. We feel confident to call the second half of 2018 will turn out and you heard Rod reaffirm and update our guidance.

We're excited and optimistic about the potential to drive additional growth in shareholder value. We would like to thank our long term and new shareholders for your interest and support of BioLife Solutions. Now I will turn the call over to Operator to take your questions.

Sonia?.

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

Mike, could you talk about your distributor channel, what visibility is there versus your direct channel and then additionally you had mentioned the 48 new direct customers in the quarter, what was that count in the first quarter of the year?.

So as I mentioned with the indirect partners our distributors there are four large distributors and again those are Stem Cell Technologies and Sigma who buy in bulk and distribute to their own customers and so in most cases we don't know where all the products are going although I will say that most of those distributors have updated us on the number of unique customers they've shipped product to for example in the calendar year 2017 Stem Cell technology shipped our products to more than 1000 unique customers or end users.

Additionally Sigma shipped our products to more than 600 unique users so that's just great reach, it's great leverage, it's a forced multiplier with their sales teams for sure.

On the direct side of course we know where everything goes and we're actually engaged in intensive customer and tech support and scientific support to make sure these customers in the cell and gene therapy space know how to use our products, how to reference the use of our products in their quarterly [ph] filings and interpret the results of their validations and so on and so forth.

In terms of the new customers in the trend, I believe that in the fourth quarter of last year I'll say in total it could have been over 20 or so and in Q1 perhaps 36 but more specifically and more importantly is number of new cell and gene therapy customers.

So in the first quarter of this year of those 36 new customers 19 were cell and gene therapy customers in the quarter we just concluded in Q2 37 customers were in cell and gene therapy so that rate is accelerating and it's evidenced done, the awareness for our products and the efforts of our marketing, our trade show activities, customers publishing data on the performance of our products.

So it's working..

And then lastly you've obviously raised capital, wonder what is the typical size of companies in the cell and gene therapy market.

Are they 1 million, are they 10 million? Could you talk to revenue size on these businesses Mike?.

Sure. So first and foremost our focus is clearly going to be on a revenue generating companies or at least companies that we can see a path to revenue in the short to mid-term for sure and in terms of the revenues of these companies 5 million to 10 million or more there could be someone on the outlier side which are much greater than that.

So you know you could envision a number of solid base hits and a few home run opportunities there that we're evaluating..

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

So I'd like to see how you view the cell therapy space, the first card [ph] keys are slowly and steadily gaining traction.

Do you expect approvals in the space to accelerate and how would this translate to growth for BioLife?.

So for all of us who follow this space you know we were clearly witnessing a fast tracked approval relatively fast track compared to the way that new cell and gene therapy development go in the previous several years but with [indiscernible] Spark Therapeutics' Luxturna, with GSK with Strimvelis so that was sort of the first wave and remember that at least a few of those were proven the basis of Phase 2 data which is really encouraging.

So we see only more of the same some of you may have heard of FDA Commissioner Gottlieb's remarks at the Bio Conference just a few months ago where he was outlining new fast tracked approval mechanisms and that now I think is now starting to be implemented so that will help as well so you know for sure we're seeing a friendly regulatory pathway in the U.S.

certainly in Japan and in Europe to some extent..

Okay. Thank you.

And then just another quick question on the potential for acquisitions that you mentioned before, so I just like to know if you can give us a little more detail on what kind of assets or technologies you would view as best complementing the current business model and how these could help drive growth going forward?.

Sure.

So without getting too specific because we shouldn't because it's a little early broadly speaking and I'll make a caveat about competition in a minute but broadly speaking we're interested in any tool or service that's used in the manufacturing of cell and gene therapies starting with the acquisition of source material whether it's [indiscernible] collection or some other biological material coming from the patient whether it's allogeneic or autologous all the way through to the transportation and administration of that dose or that therapy to the patient.

So those could be reagents, those could be containers, those could be devices there could be some ancillary services that are also high impact and high value and from suppliers that are very sticky.

So what we want to do is identify companies who are selling their complemented products into the same strategic market space that we are which is the regen space, the cell and gene therapy space and if we do that correctly then we think we can leverage sales teams, marketing activities, with an eye toward at least some cost synergies at the appropriate times and again if we're successful then we will in fact increase our share of the spend for tools in a per dose basis.

It's out there, the supplier side is very fragmented so there's an opportunity right now for us to get engaged and get after this growth strategy through smart M&A activity..

Our first question comes from Suraj Kalia of Northland Securities. Your line is open..

So what was the increase in ASP?.

It was about 3% year-over-year and very small increase sequentially..

Mike, you've articulated your strategy of increasing revenues per customer through this M&A strategy. Can you give us some markers of what and where revenues per customer currently stand so that we can gauge how the 5x to 10x revenues per customer, how your M&A strategies shapes overtime..

Sure. Happy to Suraj. So the current range is about $100,000 to $500,000 so how do we get there, it's really it's just the simple math it's the volume of BioLife product included in a manufactured dose or what used in the preservation of a given piece of source material times the price that customers pay per mil.

So really easy for us to think about that in terms of our current organic products and again with some of the companies that were identified and we are evaluating there could be a real opportunity to expand that to a 5x to 10x range..

Got it.

Mike, maybe I missed it but did you give an update on [indiscernible] ID trial?.

I did not Suraj but I can say that I believe that the FDA recently approved the initiation of dosing of patients in the Phase 3 colon in the Phase 3 Colen [ph] VAS trial for knee osteoarthritis and estimated enrollment of that again is somewhere around a 1000 patients or so.

So I believe they're just now getting underway and if I'm not mistaken the number of clinical centers in the U.S. where patients will be able to be enrolled perhaps as more than 50 and maybe at 60 different centers..

Got it. And finally Rod, what is the level of Casdin's ownership after this announcement this morning? Thank you for taking my questions..

I think they're right around 14% or 15%..

[Operator Instructions]. Our first question comes from Dylan Dupuis of B. Riley FBR. Your line is now open. .

So one question just about general strategy, there is obviously more economic opportunity going after later stage products and commercial stage products as opposed to earlier stage products but in terms of how you guys are using your resources do you see it as being a better use of research resources to go after those later stage products versus maybe the low hanging fruits of early stage products whether the C&G [ph] protocols are not quite as rigid?.

So the way we look at Dylan is that later stage cell therapy or gene therapy development perhaps Phase 3 for example most of the tools and services have been baked into the process of protocol and while it's not impossible for us to go after and capture some of those it's difficult.

You can imagine those trial sponsors are nervous about making any changes leading up to you know a final BLA submission. So our aim is to really try to catch as many as we can as early as possible and get our products our current preservation media products baked into their protocols and so they're carried through all the way.

It would be much easier for us to displace competing home group preservation media in a later stage trial than vice versa.

So the FDAs and the other regulatory around the world are very familiar with our products, the chemical composition, the formula, the preservation, efficacy data so and so forth and we believe that ultimately there will be direct and indirect pressure to move to a pre-formulated optimized preservation and here's just one example of why I think that.

So we're not really present to the paradigm of what I would call a pay per cure situation with cell and gene therapies where these companies have negotiated reimbursements based on political efficacy to be really blunt about, if the patient hasn’t cured or doesn't respond the companies don't get paid.

So what does that mean for BioLife? That means that these companies are really sensitive and aware that dead cells don't cure cancer for example so they need to make sure they're using the right tools whether it's media or containers or otherwise to make sure that as many cells as possible can actually survive the trip to the clinic and be infused to the patient to achieve or whatever therapeutic response they are after.

So I think over the next several quarters and years to come that pressure to make sure that customers are using the best tools and we have the best preservation platform out there is really going to help drive adoption..

Dylan, I'd like to add to that that you know with respect to your focus on earlier stage versus later stage products or companies you know we've worked pretty hard to achieve profitability for BioLife and so we're definitely sensitive when we look at potential transactions to not negatively impact the progress that we've made from a profitability perspective.

So there's definitely a bias towards revenue generating opportunities versus science projects..

And then one other question is kind of looking at some of your numbers, the 70% gross margin certainly pops out of the page for me, how much of that is driven by you guys been able to take advantage of your operating leverage versus say the average sales price increase or reduction of variable costs and then is this affecting at all where you see the gross margin kind of peaking out in the mid-70s?.

Yes so it's definitely a function of the increased volume which is being produced to support the increased demand for the product.

So you know we have stated in the past that we think that based on last year's revenue of 11 million that if we were to double that we would see margins in the low 70s to mid-70s we're right now annualized for the first time at about 20 million, we hit 70% so in terms of where I can go Dylan, I would really don't want to get into that.

I want to see the next few quarters as we maintain these levels of production and perhaps even increase them and see how that flows through the margin but fair to say that we have significant opportunity for margin expansion going forward..

Thank you. And we do have a follow-up question from Paul Knight of Janney Montgomery. Your line is now open. .

Hey, Rod and Mike when I look at this 24% op margin in the quarter I get the impression you want to you know invest a little bit in distribution etcetera.

So are you effectively trying to manage that to around slightly below where we're at?.

Well we don't have a specific target per se Paul, I think what we constantly look at is utilizing resources to see if they can if we increase resources in sales and marketing for instance if that's going to increase the revenue line.

So we're more focused on making sure that what we spend is going to have a positive impact versus trying to manage to any particular number..

Okay.

And what investments are you trying to make that you raised 0.5 million on that op expense line?.

Well it does include some people in the QC area, it includes some additional customer support people based on the increased activity on a revenue basis and then we are looking at different ways maybe some creative ways to actually start to build out the organic sales and marketing effort a little bit.

So certainly increased trade show activities things like that..

And where are you with manufacturing capacity today? Are you like running one shift at this juncture right?.

That’s correct. We're running one shifts and one clean room. We are in the process of opening up the second clean room and that there are costs associated with that that will definitely fall into the third and fourth quarters but I would say that we're running out at a roughly 20% to 25% of full capacity.

So I think there's plenty of runway from a production standpoint to meet the demand that we feel is coming down the line..

Thank you. Ladies and gentlemen this does conclude our question and answer session. I would now like to turn the call back over to Mike Rice for any further remarks..

Thank you, Sonia and thanks everyone. Good day..

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..