I have written on Cryoport (NASDAQ:CYRX) before, highlighting the total lack of a moat in the base business. Since that report the company has made two acquisitions, in competitive deals, that show the multiple is massively out of whack with what other buyers are willing to pay. In addition the sell side has run the stock up on the theory that CYRX will be a beneficiary of the COVID 19 vaccine distribution effort. This narrative is without merit, Pfizer (PFE) and the CDC have completely discredited the Sellside analysts interpretation here.
Below I will highlight that CYRX has morphed from an oddball ultra cold storage shipping service into a leveraged appliance manufacturer. The upside risk of vaccine distribution is extremely low, and that the likely outcome is that shareholders wake up next year with the realization that they own an appliance company trading at ~92x EBITDA. The downside scenario is significant.
Let’s Not Bury the Lede
CYRX has been repeatedly implicated buy the sell side as a beneficiary of the distribution of vaccines for COVID-19. This is likely because of the reality that the PFE effort needs to be shipped and maintained at -70C. The Moderna (MRNA) vaccine candidate has displayed stability data at -20C and is thus no longer part of the CYRX story, and the other major candidates are stable at even more reasonable temperatures.
Unfortunately for CYRX, PFE recently gave a full webcast about their clinical candidate and included the photo of a cardboard shipper that does not require the liquid nitrogen that CYRX is famous for… but instead simply utilizes dry ice. Perhaps the cardboard box contract exists as an opportunity but I suspect that PFE can handle this simple task on their own
Source: PFE webcast
Furthermore the CDC has informed the universe that they do NOT advise the purchase of ultra-cold storage refrigerators. Instead they highlight that the shipping containers shipped from PFE et.al. should just be refilled with dry ice.
Source: CDC Guidance
According to the healthcare investment bank SVBLeerink the vaccine distribution is a critical justification for the recent acquisitions.
Source: SVBLeerink report from August 25th, 2020
Which is consistent with the questions asked by the SVBLeerink analyst on the last earnings call.
Source: CYRX Transcript
And the B. Reilly FBR analyst got involved with the COVID hype as well, asking a ridiculous question about a “gene therapy COVID vaccine”.
Source: Cryoport, Inc. (NASDAQ:CYRX) CEO Jerrell Shelton on Q2 2020 Results – Earnings Call Transcript
One might be asking “where did these analyst get this idea?
CYRX has not been shy about talking up its potential role in vaccine development, the quotes above are from the Q2 2020 earnings call (when the company produced only ~$9m in revenue). However, if we look at the Q1 2020 earnings call we see the company planting the seed of participation in the pandemic with the sell side analysts.
Source: Cryoport, Inc. (CYRX) CEO Jerrell Shelton on Q1 2020 Results – Earnings Call Transcript
Base Business Description
CYRX core business is a logistics service to pharma companies that need Crygenic shipping. That is defined by, and limited to, products that need to be shipped at –150 degrees Celsius (according to the most recent 10Q). They have branched out to other cold shipping products as the number of products which require their liquid nitrogen shippers is insufficient to generate real growth. However, products shipped below 0 and above -80 have been successfully shipped by FedEx, DHL and others for years making it hard to differentiate their service.
In the most recent quarter this business did not display impressive growth (10.9% growth off of a ~$8.5M base, so like~$900k of sales growth for the year)
Note these numbers are not in $000’s
If we dig in one layer deeper we see that the company acquired Cryogene Partners, a Texas general partnership doing business as Cryogene Labs (“Cryogene”) in May of 2019, a business that added $1.3M in sales for the June Quarter… so base growth could have been negative without the acquisition.
In the past few months CYRX has made two significant acquisitions.
- On August 21st the company acquired CRYOPDP “a leading global provider of innovative temperature-controlled logistics solutions to the clinical research, pharmaceutical and cell and gene therapy markets, headquartered in Paris, France” for ~$58M in cash. CryoPDP is not expected to grow in 2020 so it appears that CYRX has bought a second no-growth company in this transaction. However, at 1.2x sales the purchase price reflects the lack of growth.
- On August 24th the company acquired the “MVE cryobiological storage business” from Chart industries, INC for $320M in cash. To fund the acquisition CYRX spent $45m in cash, issued $25M in equity and a $250M convertible preferred bond (~4%) to Blackstone. CYRX is now a net debt company.
First, both of these deals were likely competitive. CryoPDP was owned by a European private equity firm and Chart Industries (as a public company) is unlikely to have sold a portion of its business without conducting a process with bankers. So we can assume that CYRX was the top bidder which places a market value on these businesses near (or below) purchase price.
The multiples were telling
According to Jefferies the CryoPDP business is not growing (the CYRX base business also doesn’t grow without acquisitions) and that in a acquisition from a private equity firm (which I assume was competitive) that slow to no growth business was worth 1.2x sales. This valuation should map directly to the CYRX base business as well, considering they are largely similar.
Source: Jefferies Report from August 21st, 2020
The MVE acquisition seems to be made at roughly a 4X sales multiple and CYRX does not claim it is growing, analysts project roughly a 4% Trailing Twelve Month (TTM) growth rate.
The Long and SHORT
CYRX has a base business that does not grow organically, they have bought a European business that also is not expected to grow, they have bought a cryogenic shipper manufacturing business that has not grown historically.
Lets start with a proper share count. The company excludes some options and warrants from its reported share count. As of June 30th CYRX reported 38,281,087 shares and excluded 4,536,585 stock options as well as 190,977 warrants. I’m going to count the convert as debt so we won’t add those shares into the dilution for now, the fully diluted share count I will use is 43,008,649 shares outstanding.
The balance sheet (as of June 30th) had 208.2M in cash and short term investments ($4.84/share) against $111M in convertible debt (-2.58) for a net cash position of about $2.26/share.
- CryoPDP took ~$58M of cash off the balance sheet (-1.38/share)
- The MVE acquisition took an additional $45M of cash off the balance sheet (-1.05/share)
- The MVE acquisition was funded by a $25M equity tranche and a $250M debt tranche for a net debt addition of $225m (-5.23/share)
The company has taken its net cash position of $2.26/ share and subtracted (-$7.63/share), they have successfully transformed the balance into a net debt position of (-$5.37/share)… so we start over $5 in the hole
The base business is not growing nor is the new European business that mimics the company’s business here in the states so I think it is fair to put the market multiple that CYRX placed on the CryoPDP business on their own base (1.2x Rev multiple). Which suggests that the combination of the CryoPDP business (~$58M) plus the ~$40M the CYRX was on track to do in 2020 is worth ($40+$58 = $98, $98*1.2x = $117.6) about $2.73/share of value
- Valuation update (-$5.37/share from the balance sheet) + $2.73/share in value = (-$2.36/share) in value
MVE is also not growing, according to Jefferies it was purchased for about 4x sales (~$80M in rev) and will double the sales of CYRX. But also comes with a lower margin profile (~35% EBITDA margin). So the MVE acquisition will generate roughly $28M in EBITDA next year. given that it is not growing and has no role in vaccine distribution (and if it did that money would likely accrue to Chart Industries) I think a 12x EBITDA multiple is fairly healthy and that comes very close to the purchase price ($336M estimated vs $320M paid). $336M divided by our 43,008,649 shares outstanding comes to $7.81 per share in value for MVE.
- Valuation update (-$2.36/share) + $7.81/share = $5.81/share in value
Source: Jefferies note from August 26th, 2020
At $49/share (as of 10/5/20) holders are pricing in a massive upside in the current business. With our revised share count the company currently sits at a $2.1 Billion market cap with over $230M in net debt for a total enterprise value of ~2.3 Billion or 92x EBITDA projection for next year. In fact even IF you thought the company was going to receive a one time boost from vaccine distribution (let call it $100m in pure profit) that would only add ~$2.35/share to the $5.81/share price calculated above ($8.16/share total EV). I have a $10 price target on the stock to give wiggle room for the off chance that the company participates in vaccine distribution and to give some space for unforeseen synergies.
The point of this exercise is to point out that CYRX is not really a vaccine distribution play, and that even if it was there is no downside protection for shareholders at these prices.
Disclosure: I am/we are short CYRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am/we are short CYRX, BLFS. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. Additional disclosure: This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.