BLFS - BioLife Solutions: A Complicated Tale

2023-11-29 15:06:19 ET

Summary

• BioLife Solutions, Inc. is trading near 52-week lows as its growth story has floundered and profitability remains uncertain.
• The company offers bioproduction tools and services for the cell and gene therapy industry, with recurring revenue streams making up about 65% of its revenue.
• The cell and gene therapy market is expected to continue growing, but BioLife's recent financial performance and management changes have caused concern.
• BioLife is in the process of divesting a low-margin business as well.  An analysis around this complicated story follows in the paragraphs below.

Life shrinks or expands in proportion to one's courage. ”? Anais Nin.

Shares of cell and gene therapy logistics concern BioLife Solutions, Inc. ( BLFS ) are trading near 52-week lows as the company’s growth story has floundered while its bottom line remains negative. The divestiture of its low-margin, no-growth freezer business should help the company reset, but it is unclear when the company will achieve profitability. With a new CEO replacing a 17-year veteran, it is somewhat a complicated saga right now. An analysis follows below.

Company Overview:

BioLife Solutions, Inc. is a Bothell, Washington-based manufacturer of bioproduction tools and services designed to improve processes in the cell and gene therapy industry and broader biopharma markets. The company provides seven main offerings that include cell processing, freezer and thaw systems, as well as storage and storage services. BioLife was founded as Trans Time Medical Products in 1987 and went public in 1989, raising net proceeds of $4.6 million at $105 per share (after giving effect to 1-for-five (2000) and 1-for-14 (2014) reverse stock splits). It later changed its name to Cryomedical Sciences, eventually landing on its current moniker in 2002. Shares of BLFS trade just under $13.00 a share, equating to a market cap of approximately $605 million.

Products

Management views its seven offerings through three revenue lines: Cell Processing; Freezers and Thaw Systems; as well as Storage and Cold Chain Services.

Cell Processing includes BioLife’s CryoStor freeze media and HypoThermosol hypothermic storage media, which are designed to preserve cells for the regenerative medicine market. These biopreservation media are embedded in more than 650 clinical applications. Cell Processing also houses the company’s Sexton human platelet lysates for cell expansion, CellSeal cryogenic vials, and automated cell processing machines that reduce the risk of human contamination. CryoStor is by far and away BioLife’s largest offering, providing 42% of the company’s 1H23 top line with revenue of ~$32.4 million. The Sexton tools are currently embedded in three approved therapies and ~140 clinical trials, each of which could provide annual revenue of $0.5 million to $2.0 million for every approval. Overall, Cell Processing accounted for 1H23 revenue of $37.7 million, or 49% of the company’s total.

Freezers and Thaw Systems is expected to shed BioLife’s two low-margin freezer offerings (cryogenic and ultra-low temperature freezers), which should be divested by YE23. That will leave only the company’s ThawSTAR product line, which consists of a series of automated thawing devices for frozen cell and gene therapies packaged in cryovials and cryobags. In 1H23, this revenue line was responsible for revenue of $26.9 million (~$13.1 million from its soon-to-be sold 780XLE Freezer), or 35% of total.

Storage and Cold Chain Services is comprised of biological and pharmaceutical materials storage and cold chain logistics that ensure materials are kept at constant temperature during transport. This offering, which includes six facilities in the U.S. and one in the Netherlands, was onboarded through BioLife’s acquisition of SciSafe in 2020. The revenue line also includes it cloud-connected biologics shipping containers (supported by a cloud app) that provide shipper open/close status, real-time geolocation, payload temperature, ambient temperature, tilt of shipper, humidity, and altitude information. (Think shipping of SARS-CoV-2 vaccines.) This revenue line contributed 1H23 revenue of $12.6 million, or 16% of total.

Although not always a razor-razorblade model, approximately 65% of BioLife’s revenue is derived from recurring revenue streams with the balance a result of equipment sales.

Market Opportunity

The cell and gene therapy market that BioLife primarily sells into has exploded and is expected to maintain outsized growth throughout the decade. According to Fortune Business Insights, the regenerative medicine market size was $28.6 billion in 2022 as is expected to grow at a 28.2% CAGR to $197.1 billion in 2030. At YE22, over 2,200 clinical trials employing regenerative medicine were ongoing with up to 14 PDUFA dates scheduled for 2023 (according to the Alliance for Regenerative Medicine). From these tailwinds, the logistics market for cell and gene therapy is expected to reach ~$14 billion by 2025, comprised of $5 billion from cell processing, $4 billion from lab freezers, and $5 billion from storage and cold chain.

The company’s largest competition comes from slightly larger Cryoport ( CYRX ) – which generated FY22 revenue of $237.3 million (versus $161.8 million for BioLife) – and in-house efforts of biopharma concerns.

Share Price Performance

With significant industry tailwinds, BioLife’s top line has grown at a substantial 81% CAGR from FY19 to FY22. This surge was aided by three acquisitions: SciSafe for a total consideration of $39.9 million in 2020; Stirling Ultracold for $234.9 million in 2021; and Sexton for $39.9 million in 2021. It was also aided by the pandemic, which created additional demand for its freezer and storage services.

All these levers of growth were cheered by the market, rallying shares of BLFS 723% from a pandemic-selloff low of $7.37 to a 25-year high of $60.67 in September 2021. The issue was that at that point in time BioLife was trading at 20.7 times FY21 revenue, a year in which it would lose $0.55 a share (non-GAAP). With inflation forcing the market to revalue high-growth money losers, it no longer cared that BioLife would add 822 customers in FY22 or that its revenue would grow 36% to $161.8 million, instead focusing on what would become a non-GAAP loss of $0.68 a share and Adj. EBITDA of only $3.6 million (versus $4.1 million in FY21). As such, its stock plummeted 83% to $10.40 a share by May 2022, subsequently dead cat bouncing above $26 as late as February 2023.

Q2 2023 Financials, Outlook, and Management Change

At the onset of FY23, management expected growth to continue, albeit at a slower pace, forecasting revenue of $195 million, up 21% from the prior year (based on a range midpoint). However, after the company reported its Q2 2023 financials on August 8, 2023, that outlook was clearly no longer attainable. BioLife posted a loss of $0.24 a share (non-GAAP) and Adj. EBITDA of negative $1.2 million on revenue of $39.5 million versus a loss of $0.14 a share (non-GAAP) and Adj. EBITDA of positive $1.2 million on revenue of $40.5 million in 2Q22, representing declines of 71%, 200%, and 3%, respectively. The top line was $3.8 million shy of expectations.

The biggest culprit was the Freezer and Thaw Systems product line, which declined 26% year-over-year to $13.9 million as pandemic related revenues fell 23%. Management announced that it planned to divest both its low-margin Stirling Ultracold and Custom Biogenic Systems freezer assets by YE23. Without the freezer business, the company’s 1H23 Adj. gross margin improved from 35% to 52%. BioLife also blamed global macro headwinds (resulting in less funding for biotechs), customer inventory destocking, and manufacturing bottlenecks for its subpar performance. As a result, BioLife was compelled to significantly lower its FY23 top-line outlook from $195 million to $151 million (based on a range midpoint).

On a positive note, high-margin Cell Processing 1H23 revenue was up 24% year-over-year to $37.7 million, while Storage 1H23 revenue was up 96% year-over-year to $12.6 million, after stripping out pandemic related revenue. That said, Q3 2023 Cell Processing revenue was forecasted to be down 30% sequentially, owing a combination of inventory destocking and an overall decline in customer demand.

On the whole, this news did not sit well with the market, which removed 29% of BioLife’s market cap in the subsequent trading session, with shares of BLFS closing at $13.11.

Then, a shake-up in the C-suite with the immediate ‘retirement’ of 17-year CEO Michael Rice followed on October 19, 2023, as well as an announcement that 3Q23 revenue was likely to reach $33.3 million (versus Street expectations of $32.7 million). However, the recently revised FY23 revenue outlook was guided towards ~$145 million instead of $151 million.

Third Quarter Results:

The company posted its third quarter numbers on November 9th. BioLife had a GAAP loss of 67 cents a share, more than a quarter a share worse than the consensus. Revenues fell just over 18% on a year-over-year basis to $33.3 million, in line with expectorations. Non-Covid revenue fell only 10% on a year-over-year basis. There was no Covid related revenue in the quarter.

Net loss for the quarter was $29.1 million but that included a $15.5 million non-cash long-lived asset impairment charge related to BioLife's freezer assets. Management now expects FY2023 to come in at the low end of its previous guidance of $144 million to $158 million.

Balance Sheet & Analyst Commentary:

BioLife has cash and investments of $21.8 million against long term debt of just under $21 million, according to the company's third quarter 10-Q . The company recently refiled a shelf registration, and I would expect BioLife to do a capital raise at some over the next few quarters or months.

Somewhat remarkably, the Street is still in BioLife’s corner. Since third quarter results were posted, six analyst firms including TD Cowen and Maxim Group have reissued Buy ratings on the stock. Price targets proffered range from $15 to $30 a share. Benchmark & Co. maintained their Hold rating on the equity. On average, they expect the company to lose $1.57 a share on revenue of $144.3 million in FY23, followed by a loss of $1.00 a share on revenue of $129.3 million in FY24.

Verdict:

It would appear there is a disconnect between Street analysts’ ratings and forecasts. According to their estimates, the company is no longer a high-growth concern, and it has zero shot of achieving profitability in FY24, but it is still rated a strong buy. Their enthusiasm reflects the company’s remaining high-growth, high-margin assets. And that is the reason why shares of BLFS currently trade at approximately four times FY24E revenue.

On the surface, the asset sale is a smart idea, shedding a low-margin, negative-growth business, freeing up management to focus on its high-growth, high-margin lines. EBITDA profitability would be ensured, but bottom-line profitability is likely unattainable in FY24 or FY25. There are significant secular tailwinds for BioLife Solutions, Inc. if it can execute, but the bet here is that the stock will continue to struggle as uncertainty reigns. The stock becomes more attractive at 2.0 to 2.5 times FY24E sales (post-divestiture). Until then, the recommendation is to avoid.

I'm sure the universe is full of intelligent life. It's just been too intelligent to come here .”? Arthur C. Clarke.

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