Next Generation Frozen Shipping - Initiating at Outperform - Analyst Blog

Brian Marckx, CFA

We have initiated coverage of CryoPort, Inc. (CYRX) with an Outperform rating and price target of $3.85 per share. See below for access to our full 20 page report on the company.

BUSINESS

CryopPort, Inc. has developed what it believes is a “game-changing solution to the challenge of shipping biological materials” which require a frozen condition. CryoPort’s offering includes CryoPort Express Shipper, a proprietary liquid nitrogen container with long holding periods and CryoPortal, a web-based ordering, tracking and monitoring system.

CryoPort’s cold chain frozen shipping system targets customers in the life sciences industry which ship biological specimens such as vaccines, blood, cancer tissue and stem cells that must be kept at extremely low temperatures during transport, often over several days or even weeks, in order to prevent cell death.

Currently, the vast majority of frozen biological material is shipped using dry ice, which has a relatively short holding time and is handling-intensive, among having other drawbacks. CryoPort’s container addresses all the deficiencies of dry ice, but more importantly, combined with their web portal, provides life sciences companies a self-contained outsourcing solution to their frozen shipping needs. There are a select number of other companies which offer liquid nitrogen shipping containers, but none, to our knowledge, that offer the combination of a next-generation container and robust service infrastructure similar to CryoPort’s Express solution.

The annual market specific to CryoPort’s offering is estimated at $400 – $500 million and projected to grow at about 20% over the next several years. Market growth is largely being driven by more clinical trials moving overseas, which often require long shipping and extended holding times.

In 2010 CryoPort signed separate agreements with Federal Express (FedEx) and DHL Express (DHL) which provide customers with preferred pricing. These carrier collaborations also greatly enhance and expand the company’s marketing message, efforts and reach. CryoPort commenced roll-out of its shipping system in late 2010 but due to unanticipated delays with integrating IT systems with FedEx and slower than expected immediate acceptance among potential customers, the launch has been somewhat anti-climactic.

Since then, management has ramped up their marketing efforts including meeting with prospective customers, making presentations at life sciences events, hiring additional sales staff and training FedEx’s sales people. Despite the slower than anticipated initial ramp in client flow, by all accounts customer feedback has been overwhelmingly positive which should help to accelerate the rate of acceptance going forward. FedEx also appears to be a big believer in CryoPort’s system, noting in a January 2011 press release that, “It is truly a complete solution that enhances the current services we provide our health care customers, giving them an even greater peace of mind”.

OUTLOOK
Revenue through the first nine months of fiscal 2011 (December 2010) of $375k was clearly disappointing relative to what management’s expectations were coming into 2010. CryoPort attributed the lackluster performance to a combination of delays in getting their IT infrastructure integrated with FedEx’s, getting FedEx’s sales people thoroughly trained and a lower than anticipated rate of acceptance from potential customers. While systems integration has since been finalized, significant revenue growth will not likely materialize until the other two remaining hurdles have been cleared.

While it is very difficult to gauge where CryoPort is with getting FedEx’s team up to speed, CryoPort noted on their December 2010 update conference call that they have been making joint calls to potential customers. Based on this, along with our discussions with management, we believe meaningful progress is being made in getting FedEx’s sales reps trained.

Increasing the rate of customer acceptance will likely be a significantly longer process. CryoPort has noted that feedback from customers that have tried their system has been overwhelmingly positive and customer retention has been very “sticky” (i.e. – once a customer tries it, they continue to use it). So the issue does not appear to be lack of customer satisfaction, but instead of getting a prospective customer to give it a try. Based on management’s recent comments, they did not anticipate the lengthy process and significant amount of red-tape (i.e. – prospective customers needing to get approvals from multiple different lines of management in order to change their shipping procedures) that can be involved in recruiting new customers. CryoPort believes that they are making progress in getting all the requisite approvals from new potential customers and expects the rate of customer acceptance to begin to significantly accelerate over the next six months.

Our “Outlook” for the company is based on several assumptions, including the degree and speed of resolution of these remaining hindrances to sales growth. As a result, if reality proves to differ significantly from our current assumptions, so may the company’s financial performance relative to our model.

Revenue
Revenue came in at $100k in the most recent quarter (12/31/2010). We expect revenue to remain relatively flat through the end of fiscal 2011 (March 31, 2011) as a result of FedEx reps still climbing the learning curve and red tape tie-ups with prospective customers.

CryoPort has noted that gaining all the requisite sign-offs from prospective customers can take 60 – 90 days. With CryoPort and FedEx continuously making sales calls, a meaningful amount of this business should start to roll in early fiscal 2012. Based on our rough estimates, CryoPort’s containers are currently being used in about 300 shipments per month. Our model assumes this increases to 700 shipments per month in the quarter ending 6/30/2011.

Assuming the partnership with DHL gets off the ground during the first half of calendar 2011, FedEx reps are fully up to speed and progress on trudging through customers’ red tape continues to be made, we think CryoPort could be making as many as 5,500 shipments per month in the quarter ending 3/31/2012. This is more conservative than management’s estimate of approximately 10,000 – 12,000 shipments per month by the end of calendar 2011.

Our longer term revenue forecasts are predicated on faith that CryoPort can continue to increase rate of customer acceptance, based largely on greater visibility of the benefits of CryoPort’s system over traditional frozen shipping processes. CryoPort appears to have a significantly better system of shipping frozen materials – a better mousetrap often does not result in rapid acceptance, however. Staying the course is often viewed as a safer bet than trying something new for fear that the “something new” will provide no meaningful benefit, cause disruptions or be costly. It is easier for customers to adopt the new way of doing things (i.e. – CryoPort Express) after it has been tested and proven (i.e. – “let someone else be the guinea pig” mentality). We think it is reasonable to assume that customers will jump on board at a more rapid pace as the benefits of CryoPort’s offering are proven over time.

Our model assumes that CryoPort’s target markets grow at an annual rate of 20% over the next several years (this may prove conservative based on independent estimates of growth of the entire cold chain shipping market) and represent approximately 8.3 million shipments per year in 2015. Our 2015 revenue estimate of $92.6 million assumes CryoPort makes about 700,000 shipments in that year, representing about 8% of its total target market. A greater rate of acceptance or their market growing faster than our estimates could prove our estimates conservative. And based on the large size of the market, even a relatively small positive divergence in market share relative to our estimates, could have a very meaningful beneficial impact to CryoPort’s revenue and EPS. We think the next twelve months will give us much greater insight into what the longer term may look like for CryoPort – and we will update our estimates if appropriate.

EPS
CryoPort’s business model is fairly scalable. Typical of scalable businesses CryoPort has suffered through operating losses during early periods as meager revenue from low utilization has failed to cover fixed costs. The upside is that relatively low variable costs can result in very rapid acceleration in profitability as utilization picks up.

Through the end of the current fiscal year we expect utilization to remain relatively flat compared to the previous recent quarters. Operating expenses will likely reflect CryoPort’s recent ramped-up sales and marketing efforts. We think this pushes net loss and EPS to $1.62 million and ($0.08) in fiscal Q4. For the full fiscal year ending March 31, 2011 we look for EPS of $0.45.

We think utilization will greatly ramp up beginning in the first half of fiscal 2012 and model CryoPort to fully cover COGS (which includes depreciation on the containers) beginning with the quarter ending December 31, 2011. While we believe utilization will not be high enough to fully cover operating expenses during fiscal 2012, we think EPS greatly improves and grows to ($0.21).

We model CryoPort to make 186k shipments in fiscal 2013 and with operating expense growth significantly trailing that of revenue, we think 2013 could mark the first full fiscal year of positive EPS at $0.05. We think CryoPort can grow this to $0.50 by 2015. As noted above, however, based on the rate of customer acceptance and growth of the market, this may prove to be conservative.

For a free copy of the full research report, please email scr@zacks.com with CYRX as the subject.

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