Tuesday, December 11, 2018

A Current AIM Program Small Cap Equity Holding: CryoLife, Inc. (CRY) by: Jianxin Ren. "CryoLife Poised to Restore Life to Their Stock Price"

CryoLife, Inc. (CRY, $30.49): “CryoLife Poised to Restore Life to Their Stock Price”
By: Jianxin Ren, AIM Student at Marquette University

 Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

CryoLife, Inc. (NYSE: CRY) is a leading company in the manufacturing, processing, and distribution of medical devices and implantable human tissues used in cardiac and vascular surgical procedures focused on aortic repair. The company was founded by Steve Anderson in 1984 and is headquartered in Florida.

• Comparing to the third quarter of 2017. CryoLife increased 47% to $64.6 million in total revenues in the third quarter of 2018.

• CryoLife acquired JOTEC AG, a Swiss entity that they converted to JOTEC GmbH. And then, CryoLife merged with their Swiss acquisition entity, JOTEC GmbH.

• In November 6, 2017, CryoLife announces that enrollment has started in the Company’s BioGlue clinical trial in China. To gain approval to commercialize BioGlue in China, the result of this clinical trial will be used as the sample to submit to Chinese Food and Drug Administration (CFDA).

Key points:

Business development is still one of CryoLife’s major strategy. In order to grow their business, CryoLife keeps seeking potential acquisitions, distribution right, or licensing of enterprises or technologies that can be helpful for their current products, services, and infrastructure and enhance their capacity in the cardiac and vascular surgery areas. As a result of pursuing potential acquisitions, the companies that were bought by CryoLife are JOTEC and On-X. Along with acquisitions, they also try to license new non-core products to business partners for further development. CryoLife can receive outside funding to continue commercial development by licensing their products.

In June 19, 2018, CryoLife made an announcement about Marna Borgstrom joining its Board of Directors effective immediately. According to Pat Mackin, Chairman, President, and Chief Executive Officer, “Marna has nearly 40 years of escalating senior leadership experience at Yale New Haven Health System, where she was an integral part of the system's strategy and evolution into a multi-unit health system as the current CEO.” As an experienced leader with a deep understanding of the healthcare industry, Marna Borgstrom could help the company be more profitable and bring in advanced management experience.

            CryoLife also adopted new accounting standards in January 1, 2018. The new accounting standards give them an instruction about how to recognize revenue, including a five-step model to identify when revenue recognition should be appropriated. Based on ASC 606, CryoLife can recognize revenue when they determine the transfer the control of promised goods to their customers. Under the new accounting standards, CryoLife has been able to recognize more of their retained earnings.

            The proprietary product of CryoLife is BioGlue which can be used in cardiac, vascular, pulmonary, and general surgical applications. BioGlue can provide a tensile strength which is 4~5 times stronger than fibrin sealants. It starts to polymerize within half a minute and reaches the required strength in under 2 minutes.

What has the stock done lately?
Since reporting earnings on August 7th, the stock price of CryoLife has gone down from $32.65 to $30.49 which represents 6.62% decrease. The tariffs that are happening right create more volatility to the macroeconomic environment. Although, CryoLife’s stock price did not perform well in the past few months, it has still generated a considerable return for investors in the long run.
Past Year Performance:
CryoLife is currently on a downward trend, but its stock price has increased from $20.35 to $30.49 over the past year which represents 49.83% in value growth. The main drivers of the increasing stock price include successful acquisitions and strong financial performance. On-X revenues increased 36% in the third quarter in 2018 than the third quarter 2017. During the same period of time, JOTEC has 32% increase.

Source: FactSet

CryoLife’s third quarter showed a positive revenue growth rate and margin. The gross margin that is reported in Q3 was 66.1%. Because of two large meaningful acquisitions and improvement in the management team, I assume the company is going to expand its gross margin in the next few years. The takeover also has a positive impact on On-X, increasing ~10% market share in the U.S. by benefiting from CRY’s large salesforce. Although CRY’s stock price went down recently due to macro factors, it also provides a good opportunity for investors to entry.

Source: FactSet