Description

Symbol: CTE (ASX)

Stock Price: 0.43 AUD

Shares Out.: 48,809,563

Market Cap: $20,988,122

Net Cash:   $4,800,000

EV: $16,188,112

FY22e Revs: $9,000,000

FY22e FCF: $1,800,000

EV/Revs: 1.8x

EV/FCF: 10.5x

Overview

Cryosite is a small Australian clinical trials logistics provider with a bumpy history that is now hitting its stride with consistent growth, clear focus on its most profitable segment, and strong FCF. Management took steps to focus on their more attractive business segment, clinical trials logistics, and their efforts are starting to pay off.  Shares trade for 1.8x my estimate of 2022 clinical trials logistics revenue ($9M) and 10x my estimate for FY22 EV/FCF (1.8M), which is a significant discount to peers that have been acquired at 4-5x revenues. 

Cryosite was the first umbilical cord blood storage provider in Australia but as demand waned and the business prospects worsened, they exited that business in 2017 in order to focus on their promising and faster growing clinical trials services segment.  To make matters worse, they also got into legal trouble when trying to sell the cord blood storage business, which I’ll cover more later, that resulted in a fine and plenty of bad PR.  Investors were far from pleased with these issues and shares dropped from .40-.50 per share in 2014 to well under .10 per share in 2018-2019.  All the while their small clinical trials logistics business was growing, and in 2017/2018 the company diverted all investments toward this segment.

Since 2019, the clinical trials logistics business has grown revenue 20% per year, swung to profitability, and is now generating significant FCF.  I believe this growth will likely continue as pharmaceutical development involving temperature-sensitive biologics is on the rise globally and Australia is one of the most attractive markets to conduct phase 1 and 2 trials.  Also, Cryosite is the last remaining independent provider of clinical trials logistics as a number of their competitors have been acquired.  Another very interesting development has been the uptake of new annual cord blood storage contracts as the old 18 year contracts for original cord blood storage customers began expiring.  The first 18 year contracts only started expiring in 2020, but management was surprised at the number of customers willing to pay for new annual storage fees going forward.

Key Characteristics

• Capital-light business model beginning to generate significant FCF

• Clinical Trials Revenue growing 20% per year and likely to continue

• Sticky customer base with 10-15yr+ customer relationships

• ~40% of revenue is recurring (cold storage)

• Significant industry growth tailwinds as the only independent cold chain pharma logistics provider in Australia (which is one of the most attractive countries for Phase 1 and Phase 2 trials globally)

• Trades at a significant discount to Fair Value (1.8x EV/Revs vs. 4.6x EV/Revs for comps)

• Generating roughly $200k/yr in high-margin, incremental revenue from expiring cord blood storage contracts that could continue growing at roughly $100k/yr

Cryosite is a growing, capital-light business with attractive reinvestment opportunities and a management team that is executing.  Management has successfully pivoted away from the legacy cord storage business towards their clinical trials logistics business, delivering 20% annual growth and reaching solid profitability.  As management continues capitalizing on pharmaceutical biologics research tailwinds globally and the attractiveness of Australia for clinical trials, Cryosite is in a position to continue growing their high margin revenue streams, expand operating margins, and deliver strong shareholder returns.

Business

Cryosite provides outsourced clinical trials logistics services to customers in research, medical, pharmaceutical, veterinary, and biotechnology industries.  Cryosite was one of the first companies in Australia to begin serving this market and has long-standing relationships with many large customers in these industries in Australia.  Given the high-value nature and fragility of the biologics they help transport and store for customers, their experience and reputation are a significant competitive advantage.  The amount their customers spend on logistics is likely on a small percentage of their overall development budget, yet is one that can lead to significant financial losses for a project if biologics aren’t transported or stored under specific conditions.  Because of this dynamic, customers are likely much more interested in selecting an experienced and trusted partner than trying to save 10 or 15% on logistics costs and selecting a partner with less experience.

Cryosite’s clinical trials revenues are roughly 40% cold storage, which are recurring, with the other 60% attributable to sourcing and logistics.  The previously abandoned cord blood storage business is now providing a growing $200k or so in annual recurring revenues, which according to management is growing an incremental $100k per year due to high uptake as old 18 year contracts expire.  

Financials

Cryosite’s balance sheet might not look strong at first glance, but this is nearly entirely due to misleading accounting treatment prescribed to their 18 year deferred revenues and costs from the old cord blood storage business.  Due to this accounting rule, Cryosite’s balance sheet has $18.9M of deferred revenues and $11.9M of deferred costs that should essentially be ignored as they will continue to decrease over time as the 18 year cord blood storage contracts expire.  Nearly all of the cash revenues (large majority were just upfront payment for 18yr storage) and cash costs associated with these 18 year storage contracts occur at the beginning of the contract.  The only ongoing costs associated with cord blood storage are minimal overhead, the utilities associated with the facility housing the storage tanks, and refilling them with LiN (Liquid Nitrogen).  For this reason, the revenues and expenses associated with Cord blood storage on the income statement should be ignored as well.

After adjusting for the misleading deferred balances due to the cord blood storage contracts, the balance sheet is much cleaner and it's easier to see their substantial net cash (4.8M at 11/30/21) and strong balance sheet.

Gun Jumping Fiasco

Unfortunately, in their attempt to sell the cord storage business, Australia’s competition regulator brought the first-ever case against them for “gun jumping”, i.e., when acquisition parties coordinate prior to actual completion of the transaction.  This fiasco cost Cryosite some bad PR and killed the cord storage sale but they were able to recover the regulatory fine (~$1M) from the law firm that had advised them on the transaction.

I don’t believe anything nefarious was intended by the company as they likely simply weren’t aware of this law since it had never been prosecuted before.  Ironically, the company is likely better off with the sale not going through as the uptake rate once the old 18 year cord blood storage contracts expire has surpassed management’s expectations and provided a nice growing high-margin revenue stream going forward.

Industry and Comparable Transactions

The two most prominent publicly traded companies in the space are Cryoport (CYRX) and BioLife Solutions (BLFS), each of which have been aggressive in acquiring small players in the cold chain logistics space across the globe.  The market highly values each business and believes strongly in their future growth potential, with shares of CYRX trading at 8x LTM Revenues and BLFS trading at 10x LTM Revenues.  I won’t begin to argue Cryosite is worth anywhere near those multiples as it’s much smaller, not growing as fast, and not a global market leader, but it is important to recognize the value ascribed to their future prospects.  

The market for cell and gene therapy development as well as other biologic drug development is very large and will likely continue to grow for many years.  The results of some of these therapies are very impressive and are close to outright cures, but the implementation and supply chain behind them is much more complex, leading to the extremely high drug prices for patients and insurers.  All of these reasons are behind the very large and growing opportunity for drug developers, CROs, CDMOs, and other key suppliers in the space.

Some of the relevant acquisitions, seen below, made by Cryoport and BioLife Solutions over the past 2 years provide good comparables for what a company like Cryosite might be worth to an acquirer.

The overall average of the above purchase price multiples is 4.6 EV/Revs with the two likely best comps right in the middle of that range.  Even if Cryosite were valued at a sizable discount to these comps at 3.5x EV/Revs, the stock would be at 0.75 per share, or upside of 74%.  Pegging fair value is hard for a small company like Cryosite, but the stock is quite cheap on an absolute basis as well with cash making up nearly 25% of the market cap and EV/FCF at only 10x or so, very attractive for a growing company with high margins, sticky customers, competitive advantages, and strong tailwinds like Cryosite.

Summary

Shares of Cryosite present a GARP investment opportunity at a significant discount to Fair Value with .10 per share in cash providing further downside protection.  Management has executed on their strategy of pivoting fully towards the clinical trials business and the results are beginning to show up on the financials.  I believe shares are worth close to .75/sh, or upside of 70%+, based on comparable transactions, with further upside possible if revenue growth continues or accelerates.

Risks

• Insiders own a large stake (45-50%) and could take advantage of minority SHs, with one director, Andrew Kroger, owning 41.5%

• Company is very quiet and will likely not seek to expand investor outreach

• This is a low-float micro-cap security with limited liquidity and is likely only suitable for individuals or small funds

Disclosure: My personal accounts and/or funds I manage may have long positions in Cryosite Limited (ASX:CTE) common stock, which I may buy/sell at any time.

Catalyst

• Continued execution growing the clinical trials segment resulting in growing earnings and FCF
• Possible interest from strategic acquirer
• Investors realizing the impact of misleading deferred accounting balance treatment on the BS