Description

Executive Summary

I believe Biolife Solutions (BLFS, the “Company” or “Biolife”) is a compelling long investment that should compound well above the market for the next several years.  Biolife is a tools provider for the emerging cell and theme therapy space, providing myriad solutions ranging from cell processing, shipping/logistics solutions and storage, with an emphasis on the cryogenic space.  The Company is rapidly growing into what should be a high margin, predominantly recurring revenue business with significant runway for growth.  Although there are plenty of risks given the infancy of the CGT market, over time my expectation is that Biolife’s products will see significant growth and rise in profitability.  Given the long runway and important position in this growing industry, I believe the future potential of Biolife adequately compensates investors for that risk.

Capitalization

Business Description

Biolife Solutions operates with three primary business segments:

·  Cell processing (42.4% of 2022 revenue) – This is the bread and butter of the business.  It is the fastest growing segment and is largely recurring revenue, as customer that use these products typically write them into their procedures and use them in every manufacturing run/process.  The segment is comprised of two key product categories – biopreservation media and automated cell processing.

o   Biopreservation media are solutions that help prevent cell damage in the complex processes related to CGTs and cryogenic temperatures in particular.  Although some biotechnology companies use home-brew solutions, the reality is these solutions were largely formulated for traditional biologics.  Biolife’s solutions are basically Petrie dishes custom-tailored to CGTs.

o   Cell processing solutions includes tools and systems for cell expansion, automated cell processing machines and purpose-built vials used in CGT therapies.

In both product categories, it is expected that commercial therapies will produce between $500k - $2mm of annual revenue.

·  Cryogenic freezers and accessories (41.3% of 2022 revenue) – This is exactly what it sounds like.  The Company sells cryogenic freezers and thawing devices used in the laboratory setting for CGT therapies as well at large biostorage facilities for longer term storage.  Note, it was announced on 5/10/23 that they are evaluating strategic alternatives for the large freezer business, as it hasn’t really worked out well for them and they haven’t been able to realize the synergies expected.  This isn’t terrible for Biolife, as this means they will have an even higher percentage of disposal/recurring revenue in the future, and the capital intensity should decline.

·  Storage and cold chain services (26.5% of 2022 revenue) – This business operates seven total facilities (six in the US) that ensure specimens from customers are kept at optimal temperatures from the moment they leave a customer’s possession until their return to another stage of processing/analysis.  Additionally, the Company has a cryogenic smart-shipper business to ensure samples and products from CGT customers are tracked and transported at optimal temperatures.  This piece of the business competes primarily with Cryoport System’s business.

The schematic below from the 10K is helpful in understanding where Biolife’s products add value for customers:

Industry Narrative

As with Cryoport, Biolife’s attractiveness is heavily predicated on the industry growth outlook for cell and gene therapy.  That tide should lift all boats, or at least the boats that are mostly agnostic to individual winners and losers.  As opposed to regurgitating the drivers here, I’d refer people to the CYRX write-up.  In summary though, I am expecting that cell and gene therapy becomes a significant treatment modality over time, with many more commercially approved therapies launching over the next ten years.  It is definitely going to be lumpy and there are important variables that need to get sorted out for there to be significant increases in patients treated, but I do believe it will happen over time.

BLFS Cell Processing Business Characteristics and Competitive Advantage

Although the other segments are decent businesses, the key strength of BioLife Solutions in my opinion is the company’s cell processing business.  Cell processing is a good business for the following reasons:

·  Low priced-solution vs. revenue and costs of end product – The Biolife cryopreservation media and cell processing solutions represent a fraction of the revenue potential and total cost of a commercial approved cell or gene therapy.  BLFS expects to make between $500k - $2mm per year on their products that support commercial therapies.  A single commercial therapy dose today can range in price from $400k to $2mm.  Needless to say, assuming there is any value to the products, this is not the first place one looks to cut costs if you are a successful biopharma company.

·  Standardization and risk mitigation – BLFS’ products help to create standardization across the cell and gene therapy development spectrum.  The primary competitor today is a home-brew, which can be different across all biopharma and is typically some sort of saline solution that is not purpose-built for ultra-low temperatures and thaw cycles common in cell and gene therapy.  Additionally, as the FDA continues to scrutinize all aspects of cell and gene therapy, have a standardized and validated product like Biolife’s helps to reduce any potential regulatory delays. 

·  Sticky customer base – Biolife continues to have a large share of clinical trials in development, which is important given the sticky nature of its products.  Typically, when a biopharma customer chooses BLFS, they use them throughout the life cycle of the drug.  Switching, especially for little monetary benefit, makes little sense.  It is admittedly difficult to switch from existing home-brew users, however, BLFS’ share of incremental clinical trials today is much higher than its overall share of outstanding clinical trials, suggesting the company is making inroads in convincing biopharma customers to standardize around its biopreservation products.  Further, Biolife is typically specifically written into BLA filings, making it part of the approval process.

·  Recurring revenue model – The cell processing business is almost exclusively a recurring revenue business model with very high incremental margins.  Each manufacturing run/dose requires BLFS products, so EBITDA dollars and margin should expand significantly as the industry grows.

Valuation

Biolife’s long-term target calls for $250mm of revenue, 50% gross margin and an expected 30% EBITDA margin exiting 2024.  That is expected to be from a business that is greater than 60% consumables.  This is of course a lofty target vs. 2023 expected results, but they continue to affirm that target and maintained it as of 5/10/23.  Any disposal of the freezer business means this target will shift, however, though revenue may decline I would expect margins to improve.

I believe that incremental margins for biopreservation media is 70% or higher which is what the Company was doing prior to the recent acquisition spree of the freezer and logistics business.  The question then is what’s the right multiple?  This should be a business that requires low maintenance capital expenditures, should be highly recurring for approved commercial therapies, and should have a very long runway for growth.  I do not think a low 20s type of EBITDA multiple (close to EBIT in this case) is crazy.  If you project the growth in consumables out over a very long period, that will be very cheap on a nearer-term basis.  In summary, if the Company does anywhere close to these numbers, the stock is very cheap and will compound at very high rates if given the requisite patience.

Food for Thought

·  Management elected to take compensation in stock when the price dipped to the teens last year. 

·  Haven’t backed away from longer term target at all, even with weakness in biotech funding levels

·  Not all management teams admit defeat on an acquisition and pivot to do the right thing.  I think it says a lot about their willingness to do whatever is necessary to create value for shareholders.

Risks

·  As already mentioned, CGT is in its infancy.  Things could be slower to develop, there could be negative ramifications if the technology proves to have negative side effects, and new technology could prove to be a better treatment modality over time.

·  The funding environment for biotech continues to be difficult.  Weakness could lead to cancelled or delayed clinical trials, which would obviously impact everyone in the industry.

·  Any manufacturing or regulatory hiccup at BLFS would likely be a significant challenge to overcome, as customers may be reluctant to go back to BLFS products.

Catalyst

·  Continued growth of cell processing and a ramp in EBITDA margin. 

·  I would not be surprised if this were ultimately acquired by a tools company.  Disposal of the freezer business makes that easier.