Roderick de Greef - CFO & Secretary Michael Rice - President, CEO & Director.

Jason McCarthy - Maxim Group Dylan Dupuis - B. Riley FBR, Inc..

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Third Quarter 2018 BioLife Solutions, Inc. Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference may be recorded. I would now like to turn the conference over to Chief Financial Officer, Roderick de Greef. Sir, the floor is yours..

Thank you, Hughui. 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 2018. Earlier this afternoon, we issued a press release which summarizes our results for the 3 and 9 months ended September 30.

The release is 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 bank for 90 days.

Before we get started, I'd 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 qualify as 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 as of the day 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, and good afternoon, everyone. Thank you for joining the call. We appreciate your interest in BioLife and are very pleased to report another quarter of strong and profitable growth. Revenue from biopreservation media product sales reached a new record of $5.3 million, an increase of 79% over the third quarter of 2017.

Continuing a trend over the last several quarters, revenue growth was driven by increase sales to cell and gene therapy customers in the regenerative medicine market and to our domestic and international network of distributors. Notably, Q3 was our second consecutive quarter with net income of more than $1 million.

The business is on track, growing and profitable. I'll also note that there were no customer safety stock orders in Q3. In the third quarter 2018, we gained 25 new direct customers with 15 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. I'd like to continue with some detail on the regenerative medicine market segment. Q3 revenue from our regent med segment was $2.9 million or 54% of total revenue and representing growth of 80% over Q3 last year.

This is our most strategic opportunity. The alliance for Regenerative Medicine recently issued its Q3 2018 data report. Total funding for Regen Med companies was nearly $3 billion in Q3 with nearly $11 billion year-to-date.

I'm glad to report that concurrent with this robust funding, we continue to gain new preclinical and clinical trial stayed cell and gene therapy customers.

Of the 15 new customers we gained in Q3, some noteworthy names include Elo-Plex Bio, cells for cells, CCRM, Eurfins, Fat Therapeutics, Flask Works, Wrap-up Therapeutics, Sigilon Therapeutics and Sorrento Therapeutics.

We look forward to future disclosures and adoption of our progress in these customer clinical trials and potential approved cell therapy products. I should remind you that we are very sticky relationships with our Regen Med customers.

Once our proprietary products are validated in a clinical manufacturing process, which typically includes cross-reference to our FDA master file and citation in IND and BLA filings, we continue to provide very engaged customer support and don't anticipate losing customers to commercial non-optimized products or previously used homebrew preservation cocktails.

To the contrary, we typically see our products used and follow on clinical trials of additional cell therapy candidates being developed by our customers. For example, as you know, every dose of the YESCARTA from KITE Gilead is frozen in a CryoStor cell freeze media. CryoStor is also used in KITE's other current clinical trials.

To date, we believe our proprietary biopreservation media products have been used in more than 300 customer clinical applications, and we had confirmation of several additional clinical applications throughout this year. We plan to update this total in Q1 after our outreach to our distributors is complete.

I'll remind our listeners at him with most distributions, 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 STEMCELL Technologies and MilliporeSigma, our two largest distributors who respectively distributed our products more than 700 and 600 unique end customers in 2017.

We estimate each customer clinical application if approved and at full manufactory scale, represents annual revenue in the range of $500,000 to $2 million and we have several potential outliers that greatly exceed this annual revenue range.

It's really important to note that a very small portion of our current Regen Med segment revenue and an even smaller portion of total revenue comes from approved cell therapies. The point being, we're not dependent on approved customer cell therapies to drive our growth this year or in the near term.

We call that we are guiding 2018 revenue growth in the range of 72% to 82% over 2017. We don't believe that revenue from approved customer cell therapies will have a material impact on our revenue growth for 3 to 5 years.

So the drive to point home, the slower-than-anticipated adoption of approved cell therapies will not materially affect our expected revenue growth in 2019 or 2020. We have a broad and marquee base of clinical trial stage cell and gene therapy customers that are generating significant product demand and revenue before they obtain regulatory approval.

And as I mentioned, we see strong pull-through as our products are embedded in follow-on clinical trials after first use. The upside revenue growth phase when we have a number of customers with approved cell and gene therapies is still yet to come.

Next I'll make some brief comments about our indirect sales channel of domestic and international distributors. In Q3, our distribution partners contributed $1.9 million in revenue or 36% of total revenue, and this grew nearly 150% over Q3 last year.

We continue to leverage worldwide sales teams and marketing activities of our indirect channel partners. Key worldwide distributors include, STEMCELL Technologies, Millipore Sigma, Thermo Fisher and VWR. We believe our distributors are serving nearly 2,000 end customers so many seeds are being planted for future growth.

Now I'd like to provide an update on SAVSU Technologies, a very innovative cold chain management tools company that BioLife owns 44% of. Many of you have been following SAVSU's progress over the last year and the innovations their design team has made to the traditional and generic liquid nitrogen doers or shipping containers.

Rod and I are on the board of SAVSU. To recap SAVSU's market opportunity, as you might know, apheresis collections and other starting biologic materials and manufactured cell and gene therapies are both time and temperature sensitive.

These are personalized medicines that in many cases are the final treatment option and a reason for hope by patients suffering from cancers and other diseases and disorders.

The team at SAVSU basically looked at all of the deficiencies of traditional liquid nitrogen shipping containers and through knowledge of thermodynamics and design expertise, introduced into the cell and gene therapy market a revolutionary family of next generation shipping containers branded as evo.

These are smart, connected to a cloud app and they offer users sniffing benefits of better thermal performance, ease-of-use and enhanced data monitoring and management.

Other patent pending innovations SAVSU is bringing to the market include accessories to better protect biologic payloads from damage during shipment and enhanced testing methods so users can be assured containers are ready for use.

A key differentiator of SAVSU relative to other supplies is their ability to customize or shipping container hardware configurations specific to each customers, payload requirements and temperature profiles.

The new SAVSU corporate office will include a state-of-the-art robotic design and fabrication lab that will really showcase SAVSU's technical expertise and manufacturing capabilities to current and prospective customers and partners.

SAVSU has a very differentiated and highly leverageable go-to-market strategy compared to other suppliers in the market.

SAVSU's approach is to partner with the leading specialty couriers such as World Courier, Marken and Quick, by supplying their best-in-class products to the couriers who then, through their combined world-wild sales teams and support depots, market SAVSU products to cell and gene therapy companies.

The couriers also service the SAVSU shipping containers to get them ready for reuse and a rental fleet model. The key point here is SAVSU is leveraging the worldwide infrastructure of its courier partners and their growth is not dependent on significant CapEx for numerous facility build-outs and ongoing OpEx to support regional service depots.

It's also becoming clear as interest in SAVSU gross that the data back end and user cloud-based app are much more valued in addition to the hardware innovations in the containers. I'm glad to say that the investments BioLife made under the previous JV structure in software dev are helping to drive preference for SAVSU over competing offerings.

There is an emerging ecosystem comprised of cell and gene therapy companies, the specialty couriers, cell manufacturing orchestration platforms such as [indiscernible], clinicians, regulators and insurers all of whom have an interest in specific shipment data and aggregated data.

SAVSU's evo.is was built and is supported by the latest software tools and platforms and we envision that the number of data-sharing partnerships will emerge over the next several months.

On the customer adoption front, earlier this week, SAVSU issued a press release announcing that it will be supplying its proprietary evo technologies to AveXis, a gene therapy company acquired earlier this year by Novartis for nearly $9 billion.

SAVSU's courier partnerships are generating significant interest in SAVSU products and today, SAVSU is providing technical support of evaluations and validation by 30 leading cell and gene therapy companies.

Many of these profit companies are BioLife media customers, and we continue to leverage our industry relationships to make introductions for SAVSU. We expect additional announcements by SAVSU related to product adoption in the Regen Med segment during the next few quarters.

Finally, regarding the M&A strategy, we announced on our Q2 call, I'd like to take a few minutes to revisit our vision to create an even more valuable enterprise. For some time now, we have 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 Regen Med space is highly fragmented. Today in the cell and gene therapy manufacturing workflow continuum, we offer biopreservation media used to preserve source material and manufacture cell and gene therapies. Our share of the per-dose spend and manufacturing tools ranges from about $100 to $500.

Executing our requisition project provides several benefits, including revenue and profit increases, sales and marketing leverage, cost synergies and scale. We believe consolidation opportunities to acquire complementary companies or technologies could increase our share of the per-dose tool spend by 5x to 10x.

We're in the process of evaluating several opportunities and we'll keep you updated when appropriate. Now I'll ask Rod to share our financial highlights for Q3 in the first 9 months of 2018..

Thanks, Mike. As you noted, biopreservation media revenue for the third quarter of 2018 reached a record $5.3 million representing a 79% increase over the third quarter of last year. For the 9 months ended September 30, revenue grew 81% to $14.3 million, up from $7.9 million last year.

The increase in revenue for both periods was primarily the result of higher direct sales to our customers in Regen Med space and to our indirect distribution channel. The gross margin for the third quarter of 2018 increased to 70% compared to 63% in the third quarter of last year.

For the first 9 months of this year, gross margin was 68% compared to 62% for the same period in 2017. The increase in gross margin for both periods compared to 2017 was primarily driven by volume-related reductions in cost of goods sold and higher blended product ASPs.

Operating expenses in Q3 totaled $2.5 million compared to $1.9 million in Q3 of 2017. For the first 9 months of 2018, operating expenses totaled $7.2 million compared to $5.7 million in the first 9 months of 2017.

The increase in operating expenses for both periods is primarily the result of higher performance-based compensation expense, increased sales and marketing managers and increase cost related to enhancing our quality management systems.

The third quarter's operating profit was $1.2 million compared to an operating loss of $32,000 in the third quarter of 2017. For the 9-month period, operating profit totaled $2.6 million compared to an operating loss of $838,000 for the same period.

For the third quarter, net income attributable to common shareholders was $1.2 million or $0.05 per diluted share. This compares to a net loss attributable to common shareholders for the third quarter of 2017 of $425,000 or $0.03 per diluted share.

For the first 9 months of 2018, net income attributable to common shareholders was $2.1 million or $0.10 per diluted share compared to a net loss of $2.1 million or $0.16 per diluted share last year. EBITDA for the third quarter was positive $1.2 million compared to negative $234,000 in the same period last year.

For the 9 months, EBITDA was positive $2.5 million compared to negative $1.4 million in the first 9 months of 2017. Cash provided by operations for the third quarter totaled $809,000 compared to $74,000 in the third quarter of 2017.

For the 9 months, cash provided by operations was $1.8 million this year compared to cash used by operations of $198,000 in the same period last year.

The communicating of cash flow from operations, proceeds from the exercise of outstanding warrants, and the $20 million equity investment made by Casdin Capital, less our incremental $5 million investment in SAVSU, resulted in an ending cash balance at September 30 of $32.4 million compared to $6.7 million at December 31, 2017.

With respect to our outlook for the full year of 2018, we affirm the guidance we have previously provided. As we noted in our preliminary revenue release in early October, we expect revenue to range between $19 million and $20 million, representing 72% to 82% growth over 2017.

We expect our gross margin for the full year to come in between 68% to 70% compared to 61% in 2017. 2018 operating expenses are expected to range between $9.5 million and $10 million and we expect full year operating profitability, net income and positive cash flow from operations. We will provide guidance for 2019 on our next earnings call.

Throughout the year, we've had a number of warrant exercises in addition to the shares placed with Casdin Capital last year so I'd like you and my remarks the summary of our current share count. We now have 18.5 million common shares issued and outstanding.

Since the beginning of this year, the non-affiliate warrant overhang, which totaled 2.8 million warrants has effectively been eliminated, and we now have only 209,000 of these warrants outstanding. Adding insider options in warrants brings our current fully diluted share count to 25.9 million. Now I'd like to turn the call back over to Mike..

Thanks, Rod. In closing, we delivered another strong and profitable quarter in Q3. The business is on track, profitable and growing. And our revenue will not be negatively impacted by adoption rates approved cell therapies. Q4 order volume and frequency are both robust setting the stage for a strong finish for 2018.

Our M&A activity continues as we look to add complementary and accretive businesses to consolidate the cell and gene therapy tool supplier market. We see a bright future for BioLife, our customers and shareholders. I'd like to thank our long-term and new shareholders for their interest in support of BioLife.

Now I'll turn the call back over to the operator to take your questions.

Hughui?.

[Operator Instructions]. And it looks like our first question in queue will come from the line of Jason McCarthy with Maxim Group..

So I was wondering if you could provide a little bit more detail on the customer base and in particular if you could kind of breakdown and just rough estimates of what stage of development customers are at, like what proportion is preclinical, early clinical or electrical, et cetera..

Sure. I can give you some sort of estimate. So we estimate that there are probably 15 to 20 or more Phase III trials our products are used in. In Phase II, there is a large chunk there and an equally large chunk in Phase I in preclinical.

So Jason, throughout the year, we've done a really good job compressing the sales cycle, and we have been acquiring new cell and gene therapy customers at a much faster clip, including a lot of the very innovative and well-funded high-profile, what I would call, second-generation CAR T or T cell companies so that's how it breaks down..

Okay.

And then relating to SAVSU, can you actually discuss some of the potential synergies of offering media shipping and logistics from a single company should you choose to exercise the option to purchase?.

Excellent commentary and observation, Jason. Yes, that's clearly a driver in our incremental investment and our option to eventually acquire the company should we decide to do so.

While the call points and decision-makers aren't necessarily identical amongst cold chain management containers and media, there is a lot of synergy there in the conversations, because they're all tools related to preserving this very precious biologic source material and the final manufacturing cell and gene therapy products.

So strong degree of overlap and synergy and an opportunity for us to leverage existing leaderships in one part of a company to identify the decision-makers than another part related to the other part of the offering. So yes, great comment..

Our next question in queue will come from line of Dylan Dupuis with B. Riley..

So I just was hoping you guys can comment a little bit more on the SAVSU AveXis deal and how this might influence the potential decision to acquire the remaining outstanding shares or outstanding equity in SAVSU?.

Well I'll just start and talk a little about what we know publicly about AveXis' potential geographic regulatory approvals. And Rod, perhaps you could perhaps just recap a bit about the option and when we might choose to do that and why the decision will we made at that time.

So what we learned is in reading public information about AveXis is that they filed a BLA in the U.S. in the month of October. I believe, a few months ago or more, they filed an MMA in the EMA, and they have a pending or current regulatory filing in Japan.

The net of all of it is, if they can be approved in each of those 3 geographies by, call, at the end of June or the first half of next year. And so once those approvals are gained, we'll have better insight in working with our colleagues at SAVSU to understand the adoption rate how revenue might ramp.

Rod?.

So Dylan, I think you recall, the purchase option we have was 18 months from the day we signed the deal. So we have about 15 months or so left to take advantage of that option. It is a fixed price so we're not worried about that changing or moving away from us in any way.

So the fundamental driver with respect to the timing of making that final acquisition is 100% related to, at what point will consolidating their financial statements, the immediately accretive or very accretive in the near-term so that's really the driver from the timing perspective.

As Mike said, we're on the board, we're very clear about what's happening and how things are unfolding. And if the revenue or adoption of the technology goes more quickly than we think then - and that - it's reflected in their financial statements, we'll pull the trigger then.

If it takes a little bit longer, we'll do it then and that's why he negotiated an 18-month window as opposed to anything shorter..

[Operator Instructions]. Our next question in queue will come from line of Paul Knight with Janney..

This is Mike on for Paul.

First question, what's the capacity utilization at your Seattle facility and further, where do you see operating margin headed when that facility is at full capacity?.

Yes. So I think it's fair to say that we're running at somewhere in the neighborhood of 20% to 30% capacity. We just recently opened up our second clean room here of the 2 that we have.

So when you say operating margin or do you mean gross margin with respect to climbing the capacity ladder there?.

Both..

Okay. So I think we don't want to guide too far out into the future, Mike, but what we have said in the past when we were doing $11 million is that we were doing in the low 60s, mid-60s, we said if we could double revenue into the 20s that we would see a margin in the neighborhood of 70 to 72.

And I think the last two quarters clearly demonstrate that, that's possible. If you asked me where it could go if we're doing $30 million, $40 million or $50 million, I think you'd be looking in the mid-70s and potentially a little bit higher. That would be an overall objective.

From an operating margin perspective, I think the range of 30 to 35 is achievable depending on the revenue level that we have in a couple of years out..

Okay. Thanks, Rod. And then, Mike, lastly, there seems to be a bill of a Phase II clinical trials in Regenerative Medicine.

Do you see we're approaching an inflexion point where we could see a wave of Phase III trials or Phase II trials move into Phase III?.

Yes, good question, Mike. Hard to say. Don't have a good complete visibility on that.

What I would do is just refer you back to the remarks by FDA Commissioner, Gottlieb, from as far as bio at the last conference and more recently about an interest to accelerate approvals and his prognostication that we could have 3 or 4 approved products on the market within the next year or so.

And so I think that's all good for anybody downstream of a Phase III. It will all help, but again, it's all data-driven science and approvals so fingers crossed.

I think the unique opportunity where BioLife is that because we have so many customers targeting similar indications, we have many shots on goal and any single customers, clinical trial failure will be mitigated, because we'd have another couple of customers right behind them or at the same time targeting the same clinical indication..

[Operator Instructions]. Gentlemen, at this time, I'm currently showing no further questions in the queue. I'd like to turn the program back over to Mike Rice for any additional closing comments..

Thank you, Hughui. Thanks, everyone. Good afternoon..

Thank you to all of our participants for joining us. This does conclude today's conference. Thank you for your participation. You may now disconnect and have a wonderful day..