It's Still Not Too Late To Get On Board Of The BioLife Solutions Train

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About: BioLife Solutions, Inc. (BLFS)
by: Shareholders Unite
Summary

We argued that the company is a ground-floor opportunity on the regenerative medicine revolution, which is just in the early innings.

The company is winning dozens of new customers a quarter, increasing the pool of possible regulatory approvals and the accompanying prospect of a step up in revenues.

Already profitable and cash generating, the shares aren't all that expensive.

BioLife Solutions (BLFS) is a stock to benefit from the early innings of regenerative medicine revolution with multiple avenues for growth ahead if it.

Not only does it continue to gain new customers involved in clinical trials, but this also increases the pool of customers which eventually receive regulatory approval after which they generate much more significant amounts of revenues.

Then, the company is already profitable and generating cash flow, which it uses for acquisitions, buying into complementary products which generate revenue and/or cost synergies.

BioLife is one of our favorite companies and we hold 500 shares (at $12) since October last year in the SHU portfolio, so sitting on decent profits.

This is one of the best growth stocks around, in our opinion and one of those stocks you buy once and then forget about it, sort off as you simply let it run. The graph shows as much:

Chart Data by YCharts

Basically, what you get when buying the stock is 50%+ growth, margin expansion, profitability, and positive cash flow, and little in the way of competition with a very large runway ahead.

The latter isn't difficult to see, much of the runway for the company is provided by the regenerative medicine market, which is only just starting. Not everybody might be familiar with that concept, from Wikipedia:

Regenerative medicine is a branch of translational research in tissue engineering and molecular biology which deals with the "process of replacing, engineering or regenerating human cells, tissues or organs to restore or establish normal function".

What BioLife offers is the best freeze (CryoStor) and preservation (HypoThermosol) media on the market (the company has a trove of third-party evidence in support), so it's well positioned for the growth of regenerative medicine.

To get an idea of the potential, one has to realize that most (in fact nearly all) of their customers still are in the diverse stages of clinical trials. While that generates considerable demand for its preservation media, the real demand materializes once solutions become FDA approved and move out into the world of existing approved therapies.

That is not going to happen for all of their customers, but that pool is growing at a very impressive pace as regenerative medicine is still in the very early innings.

Testifying to this, almost all of the present growth of the company comes from the company gaining new customers, and this isn't likely to slow anytime soon as the market itself is growing rapidly (research and markets):

The regenerative medicine market is projected to reach USD 38.7 billion by 2024 from USD 13.3 billion in 2019, at a CAGR of 23.8% during the forecast period.

Management expects the company to benefit from the increasing pay on cure paradigm, with payment predicated on a positive patient response to the therapy. As dead cells don't cure, customers (Q1CC):

We believe this dynamic will support broader adoption of our proprietary bio-preservation media products and automated thawing devices since these can de-risk the potential of delivering a non-viable dose to the patient.

The company gained 25 new customers in Q1 with 19 being new direct cell and gene therapy customers.

Acquisitions

And the company is embarking on using that cash flow in order to acquire producers of complementary products and services. This will allow the company to gain an increasing share of customer spend and offer cost and revenue synergies.

At present, there are two companies which BioLife has acquired (or partly acquired):

The company took another 13% ($5M) stake in SAVSU last year with the option of buying the rest (56%) of the company for $23M or 1M of its shares, whatever is more.

Management is simply waiting to execute this transaction until SAVSU becomes accretive, which it very well might become pretty soon as over 30 companies are evaluating its products.

The integration of Astero is progressing smoothly with expectations for a $1-$2M revenue contribution this year. This could ramp up as within BioLife the company has a much wider sales and distribution apparatus available. Speaking about Astero's (Q1CC):

we believe these products could add five percentage points to 10 percentage points to our annual organic revenue growth rate and compromise - comprise up to 15% of total revenue in 2021.

Management is on the lookout for more of these producers of complementary products and there are plenty of opportunities out there given the market fragmentation.

The ultimate goal is to increase the per-dose spend from the $100-500 today and increase this 5-10x, all the while cementing its market position.

Q1 Results

From the 10-Q:

The Q1 results were a fraction off expectations, but revenue still managed to grow at 51% and that was against a Q1 2018 quarter which was very strong due to a one-off safety stock order of $380K.

Management already sees a rebound from this customer in Q2 and expects this to continue for the rest of the year, so there are no reasons for concern here.

A nice surprise was the whopping 200% increase the company sold through its four international distributors (STEMCELL Technologies, MilliporeSigma, Thermo Fisher, and VWR), reaching $3.1M in sales, that's a major acceleration.

Guidance

The company guides 2019 revenues rising between 37% and 52% to $27-30M with gross margins at 69-70%, taking a small (100bp) hit from the Astero acquisition.

Operating cost will rise to $15.5-16.5M (up from $9.86M in 2018), with Astero responsible for half the rise. Despite this rise, management expects the company to exit Q4 with a 20% operating margin, still higher than the 18.6% in 2018.

Margins

Chart Data by YCharts

There is sustained margin expansion although the GAAP operating margin has moved back a few quarters on the Astero acquisition ($208K) and a one-time expenses (a $8K consulting fee and a $150K severance package). Gross margin benefits from higher volume as well as higher ASPs.

Cash

Chart Data by YCharts

Cash generation is positive and rising, the company has $3M in cash and no debt. Over the last five years, there has been a considerable amount of dilution, mostly due to the SAVSU acquisition and stock-based compensation, at 9% of revenue, isn't negligible.

Chart Data by YCharts

Valuation

Chart Data by YCharts

In our previous article, we argued that the valuation was pretty steep, but actually on a forward sales basis, the valuation isn't all that extreme, especially if the company can keep on growing close to 50% a year.

Analysts expect EPS to come in at $0.13 this year, rising to $0.37 in 2020 which implies a very high multiple, but we don't think this is all that relevant at this stage.

It's already pretty nice the company is already profitable and generating cash so early in its growth cycle, and that is one of the main attractions of the stock. Meanwhile, we're off the lows but still not close to the all-time high set last year:

Conclusion

We think the shares are attractive here. It's difficult to see how the company's growth trajectory can be significantly derailed with their markets still in the very early innings and the company raking in new customers.

The only real way we can conceive this happening is a competitor coming up with better preservation media.

When more of their clients get regulatory approval, revenues are set to get another shot in the arm, as at present, they only have a couple of customers with approved therapies, a fraction of their client base, which in itself is growing.

We called this a ground floor opportunity in earlier articles and we conclude here that there is still time to get on board, as the valuation is far from prohibitive for a company with its market position and prospects, healthy balance sheet, and cash generation.

Disclosure: I am/we are long BLFS. 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.