CryoLife: Take a little piece of my heart (and fix it)
It’s not much fun when you offer to give your heart to the apple of your eye and the transaction is declined. Oh, it’s painful, but usually nothing a long bubble bath or a series of cold, fermented beverages can’t wash away.
However, it’s a true matter of life and death when a transplant recipient’s body rejects actual donated heart tissue.
That’s why doctors and investors alike are excited by the launch of a new technique developed by Kennesaw, Ga.-based CryoLife, Inc. (NYSE:CRY) called SynerGraft that’s expected to significantly reduce transplanted heart valve rejection, not to mention boost revenues along the way.
This is big news for the $256 million market cap developer of biomaterials and surgical implant devices that knows a thing or two about rejection itself (more on that shortly).
Among its enviable arsenal of products, CryoLife offers: an increasingly profitable surgical adhesive called BioGlue, which alone generates around 45% of total revenues; a wound sealer called BioFoam, currently being modified for battlefield applications with military R&D funding; transplantable porcine heart valves; and vascular grafts of bovine tissue.
Besides these products, the company is also a well-known leader in the cryo-preservation and distribution of donated cardiovascular and vascular tissue for transplant. CryoLife was hit hard in 2002, though, when it was ordered by the U.S. Food and Drug Administration to recall and halt the production and sale of non-valved cardiac vascular and orthopedic tissue after reports of infections and injuries resulting from implanted tissues surfaced. The order prompted huge sell-offs of the stock.
Then, heartbreakingly, after just getting its circulation back with improved quality controls, third-party accreditation and regained FDA approval, CryoLife once again recalled and destroyed tissue inventories following an FDA inspection in 2005 — an event that attracted numerous class action lawsuits and liability claims.
Management began to right the ship with an aggressive recovery and product sales expansion plan in 2006. And now, after a return to profitability in 2007 and the long-awaited FDA approval of SynerGraft on Feb. 7, things are finally starting to look up.
Besting analyst EPS estimates by 66.7%, fourth-quarter net income swung to $2.65 million from a loss of $50,000 in the fourth quarter of 2006, while full-year 2007 income rose to $7.2 million from $365,000 in 2006. Overall fourth-quarter revenues jumped 19% and combined tissue processing revenues rose 49%.
The stock closed at $9.21 per share on Friday, up from its 52-week low of $6.20 but still a ways from its June 1 high of $15.20. The mean price target of the four analysts surveyed by Thomson Financial is $13 per share.
All the good news encouraged Jesup & Lamont analyst Ken Siri, who had followed the stock elsewhere in the past, to initiate coverage on March 18 with a “buy” rating and a $14 price target. He noted the company’s full pipeline of products and potential for revenue upsides.
Equally cheerful Piper Jaffray analyst Mark Mullikin has a $12 target on the “buy”-rated stock and said in a Feb. 21 report that SynerGraft-processed valves could command a 35% premium over rivals.
CryoLife does go up against some fierce competitors for its many products; however, it appears to have a leg up at least in the cryo-preservation of cardiac and vascular tissue segment now that it basically eliminated one competitor — RTI Biologics Inc. (Nasdaq:RTIX) — through an agreement that has CryoLife winding down its orthopedic-tissue processing and RTI reciprocally exiting its cardio-vascular tissue business.
Surgical adhesion competitors include Baxter Healthcare Inc. (NYSE:BAX), Johnson & Johnson (NYSE:JNJ) and Covidien Ltd. (NYSE:COV). St. Jude Medical, Inc. (NYSE:STJ), on the other hand, leads mechanical heart valve suppliers, Medtronic, Inc. (NYSE:MDT) leads porcine heart valve suppliers and Edwards Life Sciences Corp. (NYSE:EW) is the bovine pericardial heart valve leader.
The company’s long-term business plan includes a further expansion of BioGlue sales, as well as its preserved-tissue services. In fact, expectations are big for BioGlue’s sales potential in Japan once the product wins its expected approval there in the next few months.
Additionally, management has also stated its intention to watch for potential acquisition opportunities complementary to its product lines. With $17.4 million in cash and equivalents at the end of 2007 and the entrance into a $15 million credit facility on March 31, the company is certainly capable of investing in some growth.
Despite the potential for revenue upsides and renewed cheering by analysts, investors seem to have kept their excitement for CryoLife on ice as the volatile stock slowly inches up. You can’t really blame them for being cautious given the company’s past, and CryoLife does indeed face short-term execution challenges as it tries to expand margins through SynerGraft, not to mention the ever-present regulatory and supply risk.
But any way you slice it, CryoLife has undeniably emerged from some dark times and if sales keep on pumping, the door is wide open for this cold-hearted company to become one very heartwarming tale.
