CryoLife Swings to Profit on Strong Product Sales

Growing shift to higher margin medical device products spurs growth

Source: Company's Website
Source: Company’s Website

CryoLife Inc. (NYSE: CRY) announced its Q2 FY16 and H1 FY16 financial results on July 25th, 2016. Headquartered in Kennesaw, Georgia, CryoLife is a leader in medical device manufacture and distribution, and in the processing and distribution of implantable living human tissues for use in cardiac and vascular surgeries. CryoLife markets and sells products in more than 80 countries worldwide. The Company operates in two segments: Medical Devices and Preservation Services. The Medical Devices segment sells BioGlue, BioFoam, PerClot, CardioGenesis cardiac laser therapy, Hemodialysis Reliable Outflow (HeRO) Graft, and ProCol Vascular Bioprosthesis (ProCol). The Preservation Services segment includes external services revenues from the preservation of cardiac and vascular tissues. The company also provides cardiac laser therapy products, which include laser console system and single-use, as well as fiber-optic hand-pieces for the treatment of coronary artery disease in patients with severe angina; and On-X heart valves for aortic and mitral indications. Read more about CryoLife’s financial results below.

Q2 FY16 financial highlights

CryoLife’s Q2 FY16 revenue jumped 33% to $47.1 million as compared to $35.5 million in the year-ago quarter, primarily driven by the acquisition of On-X Life Technologies in January 2016, along with revenue increases in cardiac and vascular tissues and BioGlue. Non-GAAP revenues for Q2 FY16 grew 9% versus the comparable period last year, primarily driven by strong performance of its Product segment.

Source: Company's Presentation
Source: Company’s Presentation

Product revenues increased 10.3% to $23.9 million, driven by higher sales of CardioGenesis cardiac laser therapy (up 62.1% to $3.5 million), PhotoFix, and ProCol. While PhotoFix sales amounted to $437 million, Procol sales surged more than 100% on a Y-o-Y basis to $397 million. BioGlue and BioFoam revenues inched up 0.9% to $16.5 million during the reporting quarter. However, PerClot revenues fell 11% to $1.1 million during Q2 FY16.

Preservation Services revenue declined 2.9% to $15.9 million from the year-ago quarter. However, tissue processing revenues grew 3% to $15.5 million in the quarter under review, mainly due to an increase in average service fees.

CryoLife’s gross margins expanded 570 basis points on a Y-o-Y basis to 66.6% during Q2 FY16 mainly due to an increase in total revenues as well as lower cost of products and preservation services. Operating margin during the quarter under review increased to 12.1% as compared to 5.1% in the year-ago quarter, driven by improved top-line performance and a higher gross margin base.

During Q2 FY16, CryoLife’s R&D expenses as a percentage of revenues inched up 80 basis points to 6.4%, while general, administrative, and marketing expenses as a percentage of revenues fell 220 basis points to 48% versus the same period last year.

Lastly, strong revenue growth and higher margins had a positive impact on CryoLife’s bottom-line, helping the Company swing to GAAP profits of $2.3 million, or $0.07 per basic and fully diluted common share, in Q2 FY16 versus net loss of $502,000, or ($0.02) per basic and fully diluted common share, in Q2 FY15. Q2 FY16 non-GAAP net income grew to $4.3 million, or $0.13 per fully diluted common share, compared to non-GAAP net income of $1.3 million, or $0.04 per fully diluted common share in Q2 FY15.

H1 FY16 financial highlights

CryoLife’s revenues for H1 FY16 jumped 30% to $90.1 million compared to $69.4 million for H1 FY15, driven by the acquisition of On-X, along with revenue increases in vascular tissues and BioGlue. The Company’s non-GAAP revenues grew 9% as compared to the year-ago period.

CryoLife’s GAAP net income for H1 FY16 was $4.9 million, or $0.15 per basic and fully diluted common share, compared to net loss of $776,000, or ($0.03) per basic and fully diluted common share, for H1 FY15. The Company’s non-GAAP net income amounted to $7.6 million, or $0.23 per fully diluted common share, in H1 FY16 compared to non-GAAP net income of $1.5 million, or $0.05 per fully diluted common share for H1 FY15.

Other highlights

On the clinical front, CryoLife received FDA approval for the updated protocol for the PerClot IDE trial and expects to restart patient enrollment later this year, on track for potential FDA approval in the first half of 2019.

Acquisitions

Source: CryoLife
Source: CryoLife

CryoLife completed the acquisition of On-X Life Technologies for $130 million in January 2016. This deal will provide CryoLife access to the $220 million mechanical valve market. On-X aortic valves have been implanted in over 200,000 patients and is the only mechanical valve to receive FDA labeling requiring an international normalized ratio (INR) level of only 1.5-2.0. A lower INR requirement indicates lesser medication and a reduced risk of complications, which is a significant differentiator and distinct competitive advantage for CryoLife. On-X has clocked 13% revenue CAGR over the past four years. Most importantly, the acquisition will enhances CryoLife’s global sales force and broaden its distribution efforts.

CryoLife also sold its HeRO Graft product line to Merit Medical Systems Inc. (NASDAQ: MMSI) for $18.5 million in cash in February 2016. These developments are expected to bode well for the company over the long run.

Source: CryoLife
Source: CryoLife

Guidance for full year FY16

CryoLife expects full-year FY16 revenues in the range of $180-$182 million. Product revenues as well as tissue processing revenues are expected to increase in mid to upper-single digits year over year. Gross margin in FY16 is expected to be roughly 64%, while R&D expenses are projected at $13-$15 million. Non-GAAP EPS is expected to range between $0.32-$0.34 for full year FY16.

Stock Performance

C5CryoLife’s stock stood at $14.29, gaining 1.71%, at the close on Thursday, July 28th, 2016, having vacillated between an intraday high of $14.40 and a low of $14.06 during the session. The stock’s trading volume was at 441,366 for the day. The Company’s market cap was at $465.57 million as of Thursday’s close.

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