Description

Executive Summary

I believe Cryoport is an attractive long-term investment, with the ability to compound upwards of 20% per year for the next several years given its leading position as a cold-chain logistics provider for the growing cell and gene therapy (CGT) market.  Cold-chain logistics are critical to the market and Cryoport’s business is very sticky as it represents a low/modest percentage of the revenue/cost of production of CGT therapeutics, with significant downside to customers from a regulatory standpoint should something go wrong.  Though the business operates at just a small positive EBITDA margin today, the significant expected revenue ramp and high incremental margins should help CYRX scale profitability rapidly over the coming years.  This investment is obviously not without risk and is meant for long-term investors.  Much still has to be figured out for the CGT market, including reimbursement, manufacturing constraints, etc., but it is undeniable that there is significant interest and investment in the space and that it is primed to be one of the chief therapeutic modalities long-term.  Ultimately, CGT therapeutics represent cures, not just treatments – it is my belief that the market will find a way.

Why does this exist?

·  This is a small cap growth stock.  Need I say more?  This investment requires patience and this environment and the pressures it puts on professional money management does not allow for patience.

·  This is a more off-the-radar and evolving industry.  For many investors, a lot of the buzzwords associated with this stock are too scary or forces this into the “too hard” bucket of investments.

·  Biotech spending and particularly emerging biotech spending/investment has taken a major step back in the last 12-18 months.  With that said, the investment levels have come off record highs and there are still numerous late-stage trials underway.  Relative to the number of approved therapies, the pipeline is many multiples of today’s market.

·  This stock is volatile.  If you are looking to grind higher at 1% a month, this won’t be it.

Capitalization

Business Description

Cryport’s business can be broken down into four key parts:

·  Cryoport Systems – This is the bread and butter of the business.  Over time, this should be the highest margin and have the highest growth.  This business is a lease/rental model where customers pay per shipment and Cryoport provides the dewar shipper and associated logistics support via its tracking software.  Typically, Cryoport would be responsible for the initial collection shipment to a manufacturer and the manufactured product shipment to the patient.  The dewar then gets recycled at a CYRX collection facility until it awaits its next mission.  Shipments can be anywhere from $1000 to $3500 per shipment, depending on if freight is included in the price.  This segment’s benefit to customers is its audit capability, technology in its dewars, and general experience with the FDA, BLA filings and other regulatory needs.

·  MVE – This is the manufacturing arm of the business that was purchased in October 2020.  MVE has approximately 65% market share of dewar production globally, and this was partially purchased to ensure reliable supply for Cryoport Systems as the industry grows.  This business largely sells freezers and shippers, primarily to biopharma and reproductive medicine customers.  As more and more biologic material is being created over time, it creates the need for more storage and shipping solutions.  There is less upward flexibility on gross margin here given the strong market share, but the dominant position is strategic for the Company and it should continue to grow mid to high single digits over time.

·  CryoGene – This is a biostorage business, with a facility in Houston about 10 minutes away from MD Anderson.  Biostorage businesses are decent margin because material from clinical studies typically go there and pretty much never come out.  Customers pay a recurring rental charge.  This is a localized business that will require additional facilities in hotbed research areas, as material is not typically shipped far away.

·  CryoPDP – This is a specialty logistics provider that competes with World Courier, UPS Marken, etc.  This isn’t a great business and I believe the acquisition of CryoPDP was really done to get more facilities and because there are certain instances where Cryoport Systems believes it is easier to handle the logistics themselves.

Industry Drivers/Background

To invest in Cryoport is really to invest in a good ship with a sticky and necessary product in a rising tide.  The industry here will prove to be the answer, though the benefit of an investment in Cryport is that one does not need to get individual biotech outcomes correct.  First, a quick primer:

Cell and Gene Therapy: Cell and gene therapy have the potential to be a transformational event in healthcare.  Unlike most therapeutics today which typically treat symptoms, cell and gene therapies target the disease itself, allowing for the potential of a total and permanent cure for the underlying condition.  These therapies essentially hack the basic building blocks of human life – cells and genes – to reverse conditions such as cancer or genetic conditions present in patients. 

·  Gene therapy – This is what it sounds like.  Using a vector (fancy name for a vehicle/delivery mechanism, and usually a virus), patients are given DNA, RNA or genes that have the codes to create targeted proteins that attack the root cause of disease.  Once in the body, the codes are “executed” and the magic of protein production goes to work.  The gene therapy typically either replaces a mutated gene with a healthy one, knocks out/deactivates a mutated gene that isn’t working correctly, or introduces a new gene into the body that helps treat a disease.  As an example, a condition like sickle cell disease, which is caused by a genetic mutation, can now be potentially cured through various gene therapy techniques.

·  Cell therapy – Cell therapy is when the therapy consists of injected new cells into the body.  This is typically done to replace diseased or damaged cells, to inject new immune cells to fight disease, or to modulate the function of a patient’s existing cells.  In terms of the buzz words you’re most likely to hear, stem cells and CAR-T are most prevalent.  CAR-T is the process of using engineering immune cells from a patient to remove disease or dysfunctional cells.  Stem cells are cells in the body that are able to morph into almost any other cell type in the body.  Stem cells are primarily used to generate new tissue or promote repair of existing tissue.

There are two primary types of cell therapy, autologous and allogeneic.  In a nutshell, autologous therapy is truly personalized, with the patient also serving as his/her own donor.  Blood is harvested from the patient, sent to the manufacturer to develop the therapy, and then reinjected into the patient.  All cell therapy today is autologous.  Allogeneic therapies allow for an independent donor to provide enough donor material to typically make up to 75 treatments.  Longer term, the expectation and hope is that most therapies will be allogeneic.  This is much more efficient for manufacturing and is far easier for a patient, as an off-the-shelf finished dose can easily be transported to a patient.  Allogeneic therapies should lead to increased dosing/patients which should drive logistics revenue, as well as potentially new sources of revenue such as storage and labeling, as finished doses will likely be kept with providers like Cryoport.

The cell and gene therapy space today is one of the hottest areas of new investment and growth in the healthcare sector.  Although it will take time and approved therapies are still very small, it is expected that the FDA will be approving numerous therapies over the next five years and beyond.  According to public comments by the FDA, it is expected that there will be between 10-20 approvals per year by 2025, with the FDA expanding staff and streamlining the approval process to meet the growing applications in the space.  Although investment has declined more recently, both clinical trial counts and total dollars invested still remain quite high. 

The following is a snapshot of Cryoport’s expectations for the industry and approvals over the coming years:

Cryogenic temperatures are required to keep biological material in a stable state for longer periods of time, preserving the original cell structures.  In the case of cell and gene therapy, any alteration to the cellular structure means the treatment may not be effective or could even harm a patient.  As a result, manufacturers and the FDA view cryogenic logistics as a critical piece of the CGT industry and approvals.

Cryoport’s Competitive Advantage / Prospects for Growth

Cryoport’s position in the industry is relatively simple.  They are considered the standard when it comes to cryogenic transportation of cell and gene therapy compounds, ranging from initial collection (less frequent) to final delivery and dosing to the patient, which is the real value-add.  In my research, Cryoport has been described as “Kleenex”, i.e., when you talk about cryogenic transport it is used as the standard even when companies happen to be using other companies.  There is some competition in the space, but this is the type of industry where a brand name and track record of the incumbent make it very difficult for new entrants to have much success.  In a nutshell, Cryoport’s advantage and growth prospects come from:

·  As mentioned above, CYRX is a name brand in the industry.  It would be one of the first call’s a biotech would make, and even leading logistics players such as UPS (Marken) and World Courier have partnerships with CYRX as opposed to doing it themselves.  According to industry experts, Cryport has a dominant share in cryogenic logistics, with some estimating above 80% of customers use Cryoport in one way or another.

·  CYRX is in a large number of clinical trials and continues to gain share.  Although Cryoport is not specifically written into a Biologics License Application for drug approval, it is a critical part of the standard operating procedures of any cell or gene therapy.  This makes it unlikely that a biotechnology partner would switch away from CYRX after it has selected it for trials and initial commercial production.

·  CYRX has leading technology for cryogenic dewars and distribution facilities clustered around the primary production locations worldwide.  They have invested millions of dollars in perfecting the software that tracks the dewars and all relevant information critical to the FDA (temperature, when it is opened, who opens, etc.).  This logistics and tracking software is a huge benefit to biotechnology customers that require lots of detail to ensure the product arrives in its expected condition on time.  Essentially, Cryoport has tried to optimize the assets it owns (software and dewars) and largely stays out of the lower margin transportation logistics business, where it relies on partners such as UPS, FedEx, World Courier, and others.

·  CYRX services represent a tiny fraction of the revenue of any therapy, which can range from $400k - $2mm / dose.  As a percentage of manufacturing cost, logistics is higher, and I estimate it is about 10% of total manufacturing cost per dose.  In either case, trying to change a solution that works or recreating this from scratch seems very unlikely when the cost is so low.

Valuation/Projection

I originally toyed with the idea of putting a longer-term forecast in this write-up, but the reality is that it would mostly be garbage in/garbage out and I think it would give people a false sense of security.  This won’t be a straight line.  A lot of the growth here could be lumpy depending on particular therapeutics that are approved, when they are approved and their patient populations.  What I do think though is that this business should scale over time as revenue ramps, and I would not be surprised to see mid to high 20s EBITDA margins over time, with minimal capex.  With a very long growth runway, I do not think it would be crazy for this to eventually trade at a high teens or low 20s EBITDA multiple, which would be significant upside from today’s price.  What is more intriguing to me is that although I think this business could grow rapidly over the next three to five years, I believe the runway for CGT extends well beyond that time period.  What do you pay for a company with secular growth that could conceivably grow and hold on to a dominant position for 10 or even 15 years, albeit with obvious execution risks?  I do not know exactly, but I think if the Company is successful in generating its stated revenue expectation per therapy, the equity here will do incredibly well over time.

Although the Company is re-evaluating its long-term guidance currently, I do not expect a material change from its previously stated goal of $650mm - $700mm in annual revenue by the end of 2025.  If they do anything close to that, the stock will be much higher.

Food for Thought

I normally don’t think too much about what other investors might be involved in a situation, especially because my goal is to be early and right.  In this case though, Blackstone’s life science arm helped finance the acquisitions of MVE and CryoPDP.  They continue to own a significant amount of stock and have a representative on the board.  I am told by the Company that before making the investment, Blackstone got fully under the hood, doing a deep dive on the industry, CYRX’s long-term prospects and the benefits of the acquisitions.  This was not some overnight deal.  They could definitely be wrong of course, but it is nice to know somebody with access to private information did real diligence and chose to invest here.

Separately, it is nice that the balance sheet is relatively clean and they do have a stock buyback in place.  In 2022 they purchased about 1.6mm shares of their stock at an average price of $23.63.

Conclusion

Cryoport has all the hallmarks of a very good business – dominant market share, a sticky and price insensitive customer base, a large and secularly growing end market, few viable alternatives, low capital intensity, and serving a critical need that is likely only going to be served by somebody with experience (i.e., the incumbent wins).  What doesn’t it have?  Demonstrated profitability.  Given that the Cryoport Systems revenue is driven by regulatory approvals and we are in the infancy of approvals, my bet is that over time the incremental margins from shipment growth will lead to a nicely profitable business over time.  In 2019, prior to the recent acquisitions, the Company was largely just Cryoport Systems and achieved gross margin of 51% on just $34mm of revenue. 

Risks

·  CGT is still in its infancy.  CYRX’s success depends on continued approvals and more patients being treated which will drive more shipment volume.

·  One risk to the business is scale.  Because much of the value is in delivering finished goods from a manufacturer to a patient, the Company should not have to build a significant number of new distribution facilities.  As allogeniec therapies gain share, CYRX should benefit even more, as finished product will be housed at CYRX facilities on an ongoing basis, reducing the strain on its distribution network.

·  Any company going through this kind of growth is likely to experience a misstep or growing pains along the way.

Catalyst

·  Continued growth and demonstration of scaling EBITDA margin will likely be received well.

·  More regulatory approvals of CGTs.

·  I would not be shocked if there is some M&A interest in this at some point.  UPS has already purchased Marken, but if they want to really invest in this space and have access to the industry’s growth, CYRX would be the logical target.