BioLife Has More Room To Run

May.17.13 | About: BioLife Solutions, (BLFS)

BioLife Solutions, Inc. (NASDAQ:BLFS), headquartered in Bothell, Washington, has a main focus on the development and manufacture of biopreservation media products for cells, tissues and organs. Biopreservation media are solutions used to maintain the viability of biological material such as cells (including stem cells), whole blood, and tissues following removal from the body, during storage and transportation, and while undergoing handling, manipulation and processing by researchers engaged in regenerative medicine product development. Demand for biopreservation media is estimated to grow at an annual rate of almost 20% over the next several years. BioLife expects to benefit from the emerging field of regenerative medicine (including cell therapy and tissue engineering), which has recently experienced rapid growth, largely as a result of recent advancements and findings using stem cells to regenerate and repair tissues and organs, as well as to treat a number of diseases.

The company's current suite of biopreservation media products includes HypoThermosol, CryoStor, and generic BloodStor, which are marketed to regenerative medicine companies, hospital-based stem cell transplant centers, pharmaceutical companies, cord blood and adult stem cell banks, hair transplant surgeons, and suppliers of cells to the drug discovery, toxicology testing and diagnostic markets. The company also has a contract manufacturing business, which provides aseptic media formulation, fill and finish services.

The contract manufacturing business, which contributed $2.6MM of revenue in 2012 (including $1.2MM in Q4) and which we expect to generate over $3 million of revenue in 2013, has benefited from the signing of a key customer during 2011. We expect this to provide a source of near-term revenue and cash flow to help fund the further development and commercialization of the biopreservation business, which BioLife expects to provide the bulk of revenue and drive earnings for the long-term.

BioLife's strategy is to build greater visibility and awareness of the benefits of their biopreservation products compared to the "home-brews" that currently dominate the market. Key advantages such as extended shelf-life and higher preserved-cell yields translate into reduced input costs (i.e., lower COGS) and greater stability of finished products for customers in regenerative medicine, biobanking and drug discovery. BioLife will use this as part of their marketing message as they look to grow their direct and distributor customer base, which already encompasses ~500 organizations including some leading life sciences companies such as Life Technologies (NASDAQ:LIFE), Sigma-Aldrich (NASDAQ:SIAL), Cellular Dynamics and Athersys (NASDAQ:ATHX).

Revenue could potentially really ramp for the long term if development-stage therapies using BioLIfe's biopreservation media gain FDA approval and are commercialized. This would offer a significantly greater upside revenue opportunity for BioLife as well as a much more stable source of revenue than as a supplier in the R&D process. BLFS recently noted that their products are now being used in more than 50 clinical trial-stage cellular therapies and that they believe they hold the number one supplier position among companies offering pre-formulated cell and tissue storage and freeze media used in clinical trial stage cellular therapies to treat the leading causes of death and disability such as cancer, heart disease, stroke, and joint/movement disorders.

Biological Material Biopreservation

Biological material such as cells, whole blood, tissue and organs begin degrading and losing viability immediately following removal from the donor body. For instance, stem cells extracted from the umbilical cord must be preserved immediately and effectively to retain their viability for use in regenerative medicine. Chilling (hypothermia) is often used to reduce metabolism (i.e., chemical processes) and to help stabilize and reduce degradation of the biological material, but it can also have the unintended effect of causing cellular damage and death, especially during long periods of non-frozen shipment, and the freezing and thawing process. Immediately following removal, biological material are bathed or stored in biopreservation solutions (i.e., media) in order to maintain their viability and to protect cells from cellular and molecular damage during storage and transportation. Biopreservation media are also used by researchers engaged in regenerative medicine product development to maintain stability of cellular material during handling, manipulation and processing.

Depending on the biological material in question as well as the intended time until it will be used, optimum chilling temperature could range from just above freezing (35◦F to 46◦F) to cryogenic (< -240◦F).

The majority (estimated at ~80% of the market) of traditional biopreservation media used today consist of "home-brews" or in-house solutions, the ingredients for which may be supplied by third parties but mixed by the end-user. BioLife Solutions believes, based on independent testing, that their products offer certain advantages over these home-brews in terms of performance, reliability, shelf-life and in the overall preservation of the viability and stability of cells. Per BioLife, the superior performance of their products is mostly a result of the use of different ingredients relative to competing products as well as optimization of concentrations of ingredients. Namely, unlike many competing solutions, BioLife's products do not contain animal serum or proteins, which are facing increasing scrutiny from regulatory agencies due to the risk of xenographic disease transmission. BioLife also uses both DMSO (dimethyl sulfoxide), a common permeating cryoprotectant used for cryopreservation (i.e., deep freeze), as well as non-permeating cryoprotectants in its cryopreservation products while most competing products use only DMSO. Furthermore, aside from the cryoprotectants, BioLife's intracellular-like media ingredients are balanced specifically to protect cells during cold preservation conditions (similar to the design of organ transplant preservation solutions), in contrast to traditional home-brew cocktails and competing commercial media that are designed as isotonic solutions designed for normal body temperatures.

In addition to and unlike home-brew solutions, BioLife's products are pre-formulated and sterile-filtered using high-grade USP (U.S. Pharmacopeia) components and manufactured under CGMP (good manufacturing practice) manufacturing standards, helping to assure product consistency and quality. By contrast, the components of home-brews are often sourced from multiple vendors, are typically not USP-grade, and must be mixed on-site, all or any of which can contribute to issues with consistency and quality. And by using CGMP-manufactured products, this facilitates BioLife's current and prospective customers with quality and regulatory approvals that may be required when using the company's products in their product development and manufacturing processes. This is a particularly key advantage as regulatory agencies (i.e., FDA) will want to be assured that the quality and consistency of the biopreservation media used in clinical trials is similar to that used in the final approved product used for commercial production. BioLife's products offer this assurance, while almost all home-brews cannot.

BioLife's over two decades of molecular research, which focused on how chilling can damage cells, provided the backbone for their product development as well as the differentiation and value-added of their products versus competing biopreservation media. Specifically, BioLife's research enabled them to better understand how chilling influenced cell apoptosis (programmed cell death) and necrosis (traumatic cell death), which guided their R&D strategy towards development of biopreservation media that reduced preservation-induced cell stress. This ultimately resulted in the development of a new class of biopreservation media, which have shown an ability to significantly extend shelf life and stability of biological material. The initial product developed from this research was HypoThermosol, which helped form the basis for product extensions including the development of CryoStor and BloodStor. The products are covered with six issued U.S. patents, one issued European patent, and one issued Japanese patent. In addition, there are several pending U.S. and international patent applications.

Value-Added With Increased Biologic Stability…

Longer shelf-life and increased stability of preserved cells means lower input costs (from higher yields, less spoilage of source cells) and higher potency and stability of finished products for developers and manufacturers of cell therapy products. Extended shelf-life and stability equates to longer holding time, which also means that the sourced cells and finished product can travel greater distances and, therefore, have a greater viable geographic footprint. The ability to have a bigger geographic footprint is becoming ever more important as drug discovery (including clinical trials), drug manufacturing and distribution, and cell input sourcing are all experiencing significant growth in overseas areas such as Europe and Asia. In fact, Pharmaceutical Commerce, a publication focused on the processes involved in getting new drugs to market, recently published a study on cold chain shipping related to life sciences called "Biopharma Cold Chain Sourcebook 2010." In it they note that cold-chain shipping to/from Asia and emerging markets is forecast to grow by about 50% and 33%, respectively.

Markets

BioLife currently has over 500 customers and distributors in three main market segments; regenerative medicine, biobanking, and drug discovery. By some estimates (Axis Research Mind), the biopreservation media market is expected to grow from about $150 million in 2011 to $500 million by the year 2018.

Regenerative medicine, as defined by the National Institute of Health, is "the process of creating living, functional tissues to repair or replace tissue or organ function lost due to age, disease, damage, or congenital defects." It's focused on both regenerating damaged tissues and organs in the body, as well as growing tissues and organs in the laboratory and then implanting them in the body. The field has expanded greatly to also include cellular based therapies used to treat numerous diseases and disorders.

The field of regenerative medicine is growing very rapidly, largely as a result of recent advancements and findings using stem cells to regenerate and repair tissues and organs. Stem cells are being investigated for a variety of uses including diabetes, cardiac repair, bone regeneration, and brain injury repair. BioLife cites a study by MedMarket Diligence that estimates the worldwide market for regenerative medicine is growing at 20% per year. Another study, from Visiongain, also supports a robust outlook for regenerative medicine and predicts this market will grow from $1.4 billion in 2012 to $10 billion in 2020 (~28% CAGR).[1] BioLife expects to benefit from the emerging field of regenerative medicine and is positioning their HypoThermosol and CryoStor products as a better alternative to other branded biopreservation media and home-brews, the latter which are estimated to hold as much as 80% of the regenerative medicine market.

The regenerative medicine market segment is comprised of nearly 700 commercial companies and numerous other hospital-based transplant centers developing and delivering cellular therapies such as stem cells isolated from bone marrow, peripheral and umbilical cord blood as well as engineered tissue-based products. BioLife's initial focus relative to regenerative medicine is as a supplier of reagents to life sciences companies using stem cells and other biological material in research and development of novel therapies. BioLife notes that they have shipped their biopreservation media products to over 250 regenerative medicine customers, and estimates that their products are now incorporated in over 50 regenerative medicine cell or tissue-based products in pre-clinical and clinical trial stages of development. BioLife believes that they hold the number one supplier position among companies offering pre-formulated cell and tissue storage and freeze media used in clinical trial stage cellular therapies to treat the leading causes of death and disability such as cancer, heart disease, stroke, and joint/movement disorders.

As a supplier in the R&D chain, BioLife's revenue can be choppy, inconsistent and highly dependent on the progress and success of their customers' research projects. However, if and when these development-stage therapies gain FDA approval, the opportunity for BioLife could be as a direct supplier of their biopreservation media to their customers' commercial product development. This would offer a significantly greater upside revenue opportunity for BioLife as well as a much more stable source of revenue than as a supplier in the R&D process. Based on the company's internal research and cited in their recent public filings (i.e., 10-K), BioLife believes that annual revenue from a typical regenerative medicine customer could reach $1 million per year within three to five years following their product approval.

Biobanking refers to a repository that stores human biological samples for research. Over the past 20 years, biobanking of human specimens has become a central activity underpinning all aspects of biomedical research as well as the development of personalized medicine. Biobanking encompasses a wide range of specimen types and sample collection designs, ranging from population-based biobanking of specimens from healthy subjects in large, epidemiological cohorts to specific biobanking of diseased tissues obtained in the course of clinical interventions. Human tissue biobanking is of particular importance for implementation of novel biomarkers into clinical trials, as well as for the application of a wide range of new technologies to the discovery and validation of new, molecular patterns of disease.[2]

BioLife's biobanking customers include public and private cord blood banks, adult stem cell banks, tissue banks, hair transplant centers, and biorepositories. The company notes that since the launch in the third quarter of 2009, BloodStor continues to realize increased sales in the biobanking market. Sales of CryoStor and HypoThermosol in this segment also continue to increase as they displace home-brews. Recently, demand for HypoThermosol in the field of hair restoration (specifically for ex vivo storage of hair grafts) has accelerated and contributed to the overall increase in BioLife's product sales.

BioLife's contract manufacturing business provides aseptic media formulation, fill and finish services. During 2011, BioLife signed a multi-year contract manufacturing agreement with a new multinational customer. Specific terms of the contract (including the $ amount, term, or customer's name) were not released, although BioLife did indicate at the time that their contract manufacturing revenue should increase significantly in 2012 as a direct result of this new agreement. The initial revenue from this contract commenced in Q2 and just as management predicted, contract manufacturing revenue jumped shortly afterwards - to $341k in Q2 (+408%), to $1.1MM in Q3 (+939%) and to $1.2MM in Q4 (+3366%).

In March 2012, BioLife increased its leased space, doubling its leased footprint to over 21k sf, significantly increasing its manufacturing capacity to accommodate the new contract manufacturing deal as well as anticipated increased demand for its biopreservation products. BioLife completed the build-out of this additional manufacturing space during Q2 2012.

The contract manufacturing business, while providing a source of near-term revenue and cash flow and upping utilization of fixed assets and manufacturing space, is not necessarily expected to become a fundamental part of BioLife's long-term growth strategy. It does, however, offer a source of funding for the further development and commercialization of the biopreservation products business, which BioLife expects to provide the bulk of future revenue and drive earnings for the long term.

BLFS's products are also used in drug discovery. BioLife supplies biopreservation media to pharmaceutical companies and cell suppliers that grow and preserve various cell types, which act as the "guinea pigs" for testing new drug candidates. BioLife notes that their key customers in the drug screening segment include eight of the top ten largest cell suppliers and numerous pharmaceutical companies.

Q1 Results: New Revenue Record, 11th Straight Quarter of Sequential Revenue Growth

BioLife announced financial results for the first quarter ending March 31, 2013 on May 14th. Revenue set a new quarterly record, besting the previous record of $2.1 million set in Q4 2012. Q1 revenue of $2.2 million was aided by an unusually large contribution in the amount of $609k from licensing. Revenue increased 158% yoy and 6% sequentially. This now marks the 11th consecutive quarter of sequential revenue growth. BLFS was also cash flow positive (ex-changes in working capital) in Q1.

Contract manufacturing remained the main catalyst to revenue growth with product sales dipping slightly (7%). Contract manufacturing revenue was $781k in Q1 compared to $0 in the previous year period and continues to benefit from the multi-year contract manufacturing agreement that began generating revenue in Q2 2012. The other major contributor to revenue growth in the quarter was a ~$600k contribution from a new intellectual property license agreement with a "major regenerative medicine company," which BLFS consummated during the quarter. In a May 2013 press release, BLFS noted that they licensed specific areas of its IP to Janssen Research and Development. Also important to note is that despite the record revenue, indications are that it could have been even stronger, as management noted that product sales were lower than expected due to uneven ordering patterns -- suggesting later quarters (Q2, Q3?) may be the beneficiary. We continue to expect product sales to grow over the long term with meaningful near-term contribution coming from customers using HypoThermosol for clinical trial purposes as well as in the hair restoration field, where the biopreservation media continues to gain market share.

Q1 product sales to direct customers ($610k) were down 17% yoy but flat sequentially. Indirect customer sales ($160k) were up 73% yoy and down 23% sequentially. As we've noted in the past, given the inherent short-term volatility in product sales and sometimes uneven ordering patterns, we would not read much into the slight yoy contraction in total product sales. Importantly, and likely more representative of a long-term outlook for product sales, BioLife recently added headcount to its direct and indirect sales teams (as well as production personnel) in order "to manage growing demand and projections." BLFS's headcount recently increased from 16 people to 28 people to prepare for this anticipated greater demand.

Q1 gross margin was very strong at 52% (for comparison, it was 37% in Q4 and 41% for the full year 2012) compared to its 42% estimate and likely benefited significantly from the aforementioned $600k licensing revenue. Management continues to guide for 2013 GM in the range of 38% - 41%.

Management continues to do a nice job of managing operating expenses while at the same time significantly growing revenue. Operating expenses were $933k in Q1, or 43% of revenue, compared to its $879k, or 47% of revenue estimate. Net income and EPS for Q1 were ($7)k /($0.00), compared to our ($299)k /($0.00) estimates.

On the operational side of the business, management continues to be actively engaged in building greater awareness of their products. The company's Chief Technology Officer, Dr. Aby Mathew (a recognized expert in the field of biopreservation), has spearheaded this effort and represented BioLife at the 19th Annual Meeting of the International Society for Cellular Therapy in Auckland, New Zealand in April. Dr. Mathew made a presentation entitled "Roadmap for Cell/Tissue Stability Gap Analysis and Clinical Qualification of Biopreservation Excipients/Ancillary Reagents." In addition, BioLife's products were cited in various other oral and poster presentations during the conference. As we've noted in our ongoing coverage of BioLife, these awareness building efforts are key to driving education about the benefits of the company's preservation media and something that we believe will pay dividends in the form of greater interest in and uptake of their products.

Cash

Cash flow from operations was an outflow of $126k but ex-changes in working capital, cash flow from operations was an inflow of $120k. BioLife exited the quarter with $62k in cash and equivalents, down from $197k at the end of 2012. BioLife notes in the current 10-Q that, "We believe our current cash and cash provided by operations will satisfy our working capital requirements, debt obligations and capital expenditures for the foreseeable future."

2013 Company Guidance

Management's current guidance for 2013 remains mostly unchanged from that which the company provided with 2012 year-end results. Guidance for 2013 includes revenue in the range of $6.5MM-$7.0MM (implying growth of 15% - 24%), GM in the range of 38%-41% (compared to 40.5% in 2012 -- the potential contraction due to anticipated revenue growth from contract manufacturing), operating expenses increasing ~10%-20% and operating and net income improvements over 2012 (-$308k / -$512k).

BLFS expects revenue growth to be driven by increased sales to existing customers and distributors and the addition of new customers in the regenerative medicine market. They do not expect any additional licensing transactions similar to what they had in Q1.

Outlook

BioLife sells their biopreservation products directly to customers as well as indirectly through distributors. Approximately 80% of the $2.8 million in total revenue in 2011 came from product sales directly to customers. Contract manufacturing revenue had been immaterial but recently jumped as a result of the aforementioned contract signed in late 2011.

Q1 revenue of $2.2 million, represents y-o-y and sequential growth of 158% and 6%, respectively, and marks the eleventh straight quarter of record revenue. And while contract manufacturing has been the major revenue driver in 2012, product sales also continue to grow, increasing 23% in 2012.

We now model 2013 revenue of $7.1 million. We assume sales to the new contract manufacturing customer, which commenced in Q2 2012, help push contract manufacturing revenue to about $3.3 million in 2013. While we think it remains too early to assume BLFS will generate positive cash from operations from here on out, the last two quarters were clearly a good sign in that direction, as is management's recent guidance. If BioLife needs to raise additional operating capital in the near term, we believe this would likely continue to come from promissory notes.

BioLife's strategy to grow their customer base includes building greater visibility and awareness of the benefits of their biopreservation products compared to competitors', especially the various "home-brews" that currently dominate the market. This includes continuing to attend and present at industry conferences, active engagement and site visits with prospective customers by BLFS' Chief Technology Officer (a recognized expert in the field of biopreservation), maintaining current and building new distribution relationships, and a recent free-sample campaign whereby BLFS is giving away samples of HypoThermosol and CryoStor so prospective customers can test for themselves the superiority of the products compared to competitors'.

Our out-year (> 2014) revenue estimates are based on very general assumptions, including that contract manufacturing revenue can be maintained at the ~$3.5-$4.5 million annual level and biopreservation product sales are driven largely from continued increases in the customer base. If and when one or more therapies currently in clinical testing that are using BioLife's biopreservation media gain FDA approval, this could spark a significantly greater ramp in revenue. Management believes that each regenerative medicine product that reaches worldwide commercialization could be worth as much as $1 million-$2 million in revenue (three to five years after launch) to BioLife as the biopreservation media supplier. While we do not yet model any revenue contribution related to supplying an approved therapy, when there is greater visibility on the potential for that happening, we will update our model accordingly.

We model 2013 revenue and EPS of $7.1 million and ($0.02) and look for this to grow to $12.8 million and $0.01 in 2016. An increase in comp valuations over the last several weeks has had the effect of moving our price target from $0.70/share to $0.90/share. The shares are up over 300% since we initiated coverage of BLFS in July 2012, but we think they still remain undervalued and are maintaining our Outperform recommendation.

Risk Factors

> Cash position is tight and despite the potential of positive operating cash flow in 2013, BioLife may need to raise additional funds in the near term.

> The expected revenue growth in 2012 was largely from the contract manufacturing business, which is not only lower margin, it is a much less stable and predictable source of revenue than biopreservation media products sales.

> Our modeled revenue growth of biopreservation media beyond the current year is largely best guesses at this point based on growth in the customer base. Revenue could underperform relative to our model if the customer base does not grow at our assumed forecast or is less correlated to revenue growth than what we are assuming. As contract manufacturing revenue can be unpredictable, it's very difficult to gauge whether our estimates (particularly in the out-years) will prove accurate.

> Long-term viability of BLFS might require one or more therapies using BioLife's biopreservation media gaining FDA approval. While it's conceivable that this might happen over the next two years, it's also possible that it could take significantly longer or never happen at all.

> Balance sheet is highly levered with ~$10.6 million in debt and $2.9 million in accrued interest outstanding. This risk is at least somewhat mitigated by the fact that it is owned by a director of BLFS, who has obvious interests in amending terms of the debt when needed (as evidenced at various times in the past), and we presume that it will eventually be retired with or converted to equity.

> If and when the debt is retired with/converted to equity, depending on the conversion/equity sale price, it could potentially increase the share count very significantly and be highly dilutive to existing shareholders.

> BLFS is a micro-cap stock with limited liquidity. Micro-cap investments are inherently risky.


[1]Translational Regenerative Medicine: Market Prospects 2012-2022. Visiongain, August 31, 2012

[2]The role of the pathologist in tissue banking: European Consensus Expert Group Report. Generoso Bevilacqua, Fred Bosman, Thibaut Dassesse, Heinz Höfler, Anne Janin, Rupert Langer, Denis Larsimont, Manuel M. Morente, Peter Riegman, Peter Schirmacher, Giorgio Stanta, Kurt Zatloukal, Elodie Caboux, Pierre Hainaut Virchows Arch. 2010 April; 456(4): 449-454. Published online 2010 February 16. doi: 10.1007/s00428-010-0887-7

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