CryoLife, Inc. (CRY, $19.05):
“Can CryoLife Buy Its Way Into Europe?”
By: Tim Donovan, AIM Student at Marquette
University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and
expresses my own opinions. I am not receiving compensation for it and I have no
business relationships with any company whose stock is mentioned in this
article.
- CryoLife, Inc. (NYSE: CRY) is a medical devices company involved in the processing and distribution of implantable tissues used in cardiac and vascular surgeries.
- CryoLife generated $180.4MM in revenue throughout 2016 from the sales of its extensive portfolio including products such as BioGlue, BioFoam, On-X, PerClot, and several more in the area of cardiac and vascular tissue preservation.
- On October 10, 2017 CryoLife entered into an agreement to purchase Germany-based JOTECH AG for a total of $225MM (75% cash, 25% stock). The acquisition is set to close by the end of 2017.
- JOTECH is focused on the development of endovascular stent grafts as well as cardiac and vascular grafts with a focus on aortic repairs. Over the past 5 years JOTECH has seen a CAGR of 17%.
- The acquisition provides CryoLife access to a $2B global market for endovascular stint grafts. The market it projected to grow to $2.5B by 2021.
Key Points:
CryoLife has an
impressive portfolio of products from both development and acquisition. Since
its inception it has grown a list of 11 products, including some duplicate
versions for international sales. Having expanded into Canada, Europe, and
parts of Asia, they still derive 76% of overall revenues from the United
States. With increased competition inside of the United States, international
expansion is becoming a viable option to sustain overall growth for the company.
With its current
focus on sealants and tissue regeneration, the company has looked for other
markets to break into. With international expansion and product line growth in
mind the company announced the acquisition of Germany-based biotechnology company
JOTECH. This privately held company focuses on the manufacturing of
endovascular stent grafts for aortic repair. This segment of medical devices
has a potential addressable market of $2B. This inorganic introduction into
this industry will give CryoLife an opportunity to not only partake in the
aortic repair business, but also expand its footprint in Europe. A main driver
that pushed the business into Europe were the costs of selling through
international distributors. By having a wholly owned subsidiary in Germany,
CryoLife will have an easier opportunity to try out a direct sales method to
people throughout continental Europe. In the last quarter the company announced
that it is now selling directly to customers in Canada, Belgium, Luxemburg, and
the Netherlands, with the hopes of one day having a direct market in the rest
of the continent.
While this
acquisition provides an opportunity to move further into the European market,
it comes at a cost. $225MM was the settled purchase price for JOTECH. Of this
75% will be cash, and the remaining 25% will be stock. The stock portion of the
acquisition represents $56.75MM, or 2,682,403 shares of common stock. The
company expects this recent acquisition to provide a CryoLife an EPS CAGR of
above 20% over the next 5 years.
Despite
significant opportunity in the European countries, CryoLife could face some
difficulties in this expansion. With limited experience in European markets
CryoLife will be taking a large stake in a part of the world they are not
accustomed to. If they are unable to successfully transition into the European
market the overall profitability of this acquisition will be strained or even
eliminated.
What has this stock done lately?
2017 has not fared
as well on CryoLife as expected. Posting 9 month revenues of $136.9MM fell
short of expectations, representing a 1.13% change YoY. Despite slower top line
growth management was able to improve efficiencies, raising their gross margin
to 67.4% up from 64.7% in 2016.
Despite
significant movement throughout the year CryoLife is trading up 0.26% since the
beginning of January. Throughout this time it has seen troughs as low as $14.60
in April, and peaks as high as $23.85 in October.
On Monday October
30th Cryolife announced Q3 EPS of $0.08, falling $0.01 short of the
targeted $0.09. On top of this their revenues came in at a modest $44MM,
representing a -2.8% change YoY. This resulted in a missing of revenue
projections by $1.65MM. Having significant exposure in the Florida and Texas
markets, recent hurricanes in September and October have resulted in around
$1MM in lost revenue during this period. On top of this they had a delay in the
receipt of Ascending Aortic Prosthesis, resulting in a $1.1MM repurchase of inventory
from third-party distributors.
YTD Price - Source: FactSet
Price Relative to Russell 2000 - Source: FactSet
Key Takeaways:
CryoLife has seen
some headwinds in their domestic operations. Increased competition and lagging
revenue growth numbers have pushed the company to make alternative moves. With
the acquisition of JOTECH, CryoLife has an opportunity to drive sales abroad in
both their existing market segment, as well as their recently acquired aortic
repair segment.
Going forward I
believe that a direct selling method in Europe along with an introduction into
a new market segment will help stimulate further top line growth for CryoLife.
Despite this opportunity, they need to still remain focused on domestic sales
to maintain market share within the United States. This teamed with the risk of
international expansion still pose some threats to CryoLife. Due to a balance
of risk and reward, I recommend that CryoLife, Inc. remain held in the AIM
Small Cap Portfolio while their international expansion plays out.
