Temporary Setbacks At BioLife

Summary

• One of its acquired companies, Sterling, could not cope with the rapidly rising demand and this generated substantial one-off costs, marring the figures.
• However, underlying growth is very healthy, better actually than we expected.
• While the shares are still not cheap, they are a lot cheaper than they were even recently.
• When the problems are ironed out we think the shares can recover, although keep in mind this is a treacherous market.
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BioLife (NASDAQ:BLFS) is a company we have been following for years and the going has gotten a little rougher than we'd imagined. Management is clearly valuating growth over short-term profitability, and their acquisition strategy testifies to that.

The aim here is to add to customers' wallet space by being able to offer them a host of additional products and services. This has reduced gross margins as few in this space can compete with those of their original business (preservation media).

However, we still think that at some time in the future, the whole will start to be more than the sum of the parts, when all the acquisitions have been integrated seamlessly and problems ironed out.

Speaking about problems, one of their acquisitions this year, Sterling, could not cope with the rapidly rising demand and this generated substantial, but one-off costs although some of this will linger for one or two quarters more.

We should not forget that many of their business are growing fast and still have lots of runway, their logistical services evo perhaps in particular.

FinViz

Segments

For the record:

• Cell processing, which includes biopreservation media and Sexton products.
• Freezers and thaw systems platform comprised of CBS liquid nitrogen, freezers and Sterling mechanical freezers and ThawSTAR systems.
• Storage and cold chain services, which includes SciSafe storage services and evo cold chain management offering.

Growth

Here are the main growth vectors.

• Existing customers
• Expanding market and new customers
• Cross selling
• New products and services

Market growth

The number of new cell and gene therapy applications keeps on growing rapidly, from Research and Markets:

The cell and gene therapy market size was valued at USD 4.99 billion in 2021 and is expected to reach USD 36.92 billion by 2027, growing at a CAGR of 39.62 % during the forecast period

So the company is assured of a steady supply of new clinical trials with for new applications requiring preservation media and other products and services.

Existing customers

Their existing customers grow so they need more products from the company. This is especially interesting in the case of preservation media, as customers move through several clinical trial stages with each stage increasing demand for media.

Some of their customer products get cleared from the FDA and become commercial, which is when they become much bigger customers ($500K-$2M a year).

The company's biopreservation media is used in 8 approved therapies and their Sexton cell processing media and vials are used in 3 approved therapies so far, with another 10 applications running (Q4CC):

I want to say that we're in perhaps 10 of the 23 or so applications that are listed in 2022 and 2023 for which REG filings, approval filings will be made. So it's really strong

Cross selling

During 2021, 46 customers purchased at least one additional portfolio solution than they were previously using. For instance, one of their largest media customers is carrying ThawSTAR bioformat, will likely add the cryobag format this year. A large ULT freezer distributor is going to be adding the liquid nitrogen freezers as well.

New customers

From the Q4CC:

New Q4 customers by product line included 15 now using biopreservation media, 7 new ThawSTAR users, 11 new evo Cold Chain end users, 17 new cryogenic freezer customers, 159 new Sterling freezer customers, 14 new biostorage customers, and 12 new cell processing customers now using Sexton products. These 235 new customers in Q4 compared to 213 in all of 2020. For the full year 2021, we gained at least 700 new direct customers

That's quite a bonanza, we are inclined to argue and it makes us quite comfortable in the company's future, despite the current problems at Sterling (see below).

New products

The company is in the process of setting up a revenue center of service revenue and also has a roadmap for new evo products.

Let's now look at some of their businesses.

Media

Their biopreservation media business did particularly well in Q4 growing 64% y/y on the back of a large distributor increasing inventories, something which is continuing into Q1 but not expected to go beyond that. It's not just any distributor (Q4CC):

So this distributor is 1 of the 2 that I cited that, in combination with the other one, found more than 4,200 homes for our media products. So they're just completely wired in. They've got dedicated marketing resources for the BioLife portfolio... AB has done a masterful job helping those customers adopt and us seeing the media being incorporated into approved products. So just really phenomenal

They will soon add ThawStar as well to that lineup although one should also realize that this intimate distributor relationship does have a negative margin impact as they get a pretty hefty discount.

Sterling

Sterling couldn't cope with a ramp up in demand, which created three kind of problems:

The engine manufacturing process wasn't robust enough to cope with such a ramp and had to be thoroughly redesigned. Many critical components single sourced and could not scale fast enough. They are remedying this by qualifying additional suppliers.

So this rapid and unexpected growth exposed certain weaknesses in product design, manufacturing processes, supply chain and organization. They're taking measures like revamping manufacturing processes, qualifying additional suppliers and even replacing some management.

Investors should not overlook the fact that Sterling still added 159 new customers in Q4, so if they can overcome these issues the business seems pretty viable and able to grow fast.

Evo

This was their first acquisition and it's going gangbusters, which isn't a surprise as the company has a competitive advantage, part of which was mentioned on the Q4CC, it can maintain its thermal hold time longer than the competition, particularly in dynamic environments (the containers being tipped on their sides or upside down).

While all containers have a vent through which liquid nitrogen escapes (which degrades thermal hold times), apparently they have found a solution for that (Q4CC):

Well, the evo container can protect this and maintain the temperature.

Shipments were up 81% in 2021 to 4K shipments to 600+ unique destinations. Things accelerated last year after they got a big pharma company on board.

Now, a second big pharma company is evaluating evo and management is very optimistic they will make large inroads into the markets simply based on the quality of the service (Q4CC):

We believe most CGT companies will move to validate and approve more than one shipping container and logistics partner over the next few years, and that our evo platform will emerge as a leading selection.

They've also greatly expanded their specialist courier partner network (Q4CC):

That now includes World Courier, Quick International, Patheon, Thermo Fisher, Marken and Biocare. We expect to onboard another marquee courier partner for our evo network in the next few months.

The logistic tracking now has 4G support and new products coming.

Finances

• Q4 was quite robust in terms of revenue +153% to $37.3M with organic growth hitting a very respectable 64%
• Q4 media growth +64% (organic) on a big distributor restocking, which is continuing in Q1.
• Freezers and thaw systems revenue organic growth was 13%
• Storage and storage services platform revenue organic growth was 164% to $5.9M
• Covid related revenue was 15% of revenue in Q4.

So the star is storage and storage services (the latter is, evo), although it's growing from a small base.

Guidance

• FY2022 total revenue at $159.5M to $171M (+34% to +44%)
• Organic growth of 28% to 39%

Margins

Q4 adjusted gross margin down to 18% (from 54% year ago), mostly on the problems at Sterling. In Q4, there was $6.5M of unusual cost related to the Sterling product line, primarily due to a change in warranty ($4.9M), due to rapid growth (a doubling of demand on last year) causing supply chain and quality issues.

Management doesn't expect any further warranty claims in Q1 but it's still going to be a drag on gross margins in Q1 and Q2, when measures take hold and supply chain issues will lessen, for instance through second sourcing.

Apart from the problems at Sterling there were also some supply chain issues in other segments. Without all these issues, adjusted gross margin would have been 39% in Q4. FY2021 adjusted gross margin 33% (from 58% in 2020). From the Q4CC:

We believe we will see a positive impact on margin throughout 2022 due to an increase in average selling prices, leveraging operational overhead, a decrease in warranty expense for ULT freezers and realizing the benefits of our vendor efforts... we expect that to move into the low to mid-40s by the end of next year.

Adjusted operating expenses for Q4 of 2021 totaled $20.1 million on absorbing the OpEx of the acquired companies (SciSafe, Sterling and Sexton) and the opening of 3 bio repository facilities.

Cash

From the Q4CC:

Cash use in 2021 was primarily related to paying off $4.2 million of acquired debt in the Sterling acquisition; $14.6 million to purchase equipment, including $9.2 million to build out biorepository facilities and an increase of working capital of $5.1 million.

The company had $69.9M in cash, down from $90.5M a year ago.

Valuation

The shares are of course still very expensive on an earnings basis, given all the mishap at Sterling and having to absorb three acquisitions. On a sales basis, with $165M in sales guided for 2022 and 44.5M shares fully diluted still produces a rather lofty sales multiple of 6.5x. Analyst expect an EPS loss of $0.09 this year.

Data by YCharts

Conclusion

The emphasis on growth and the mishap at Sterling obscure the rapid progress of the company. Gross margins were always going to suffer from acquisitions, as few segments enjoy the margins of their original business (preservation media).

The company's market position is steadily growing and while it will take time to gel, their diverse product lineup as a result of multiple acquisitions is likely to pay off.

Growth is especially strong in their preservation media, storage and their logistical platform evo, and when the kings are ironed out of Sterling they can joy that party as the strong underlying growth was what unveiled the problems there in the first place. Margins will recover, especially in H2 and hence cash outflow will diminish substantially.

The shares are still not cheap, but they are a lot cheaper than they have been for quite some time and we think under $25 or so one could nibble, taking into consideration that this is a treacherous market.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BLFS either through stock ownership, options, or other derivatives. 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.