Did CryoLife's Revenue Miss Overshadow Its Big Deal?

The company plans to boost its growth prospects through a $225 million acquisition of Jotec, but disappointing earnings news drove its shares down anyway.

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CryoLife has struck a $225 million cash-stock deal that is expected to boost the company’s growth prospects, but the news was not enough to buoy shareholder confidence in the company's stock on Wednesday.

The plans to acquire Jotec, a German company that makes endovascular stent grafts, and cardiac and vascular surgical grafts, focused on aortic repair. CryoLife also reported a third-quarter revenue miss by about $2 million, which was largely attributable to recent hurricanes in Texas and Florida. The company's shares [NYSE: CRY] dropped 14.16% ($3.30) Wednesday to close at $20.

"We believe this acquisition will enable CryoLife to deliver sustained, high single-digit revenue growth, while also diversifying our revenues into a significantly larger addressable market," said Pat Mackin, chairman and CEO of CryoLife. "Jotec has a technologically differentiated product portfolio addressing the $2 billion global market for stent grafts used in endovascular and open repair of aortic diseases. Their advanced product portfolio has allowed them to achieve a 17% revenue CAGR over the past five years, significantly outpacing the growth in the overall European market."

Mackin said the acquired portfolio is expected to continue growing in the double digits outside the United States for at least the next five years. The company also will be able to leverage its global infrastructure and accelerate its ability to sell directly in Europe, he added, "and will foster considerable cross-selling opportunities between the CryoLife and Jotec product portfolios."

The transaction will also drive gross margin expansion and accelerate CryoLife's trajectory toward 20% or higher operating margins, Mackin said, which should position the company to deliver non-GAAP earnings per share at a compound annual growth rate of at least 20% over the next five years. 

CryoLife agreed to pay 75% of the purchase price in cash and 25% in company stock issued to Jotec's shareholders. The company plans to finance the deal with new $255 million senior secured credit facilities, consisting of a $225 million institutional term loan and a $30 million undrawn revolving credit facility, $56.25 million in common stock, and available cash on hand. The deal is expected to close later this year.Canaccord Genuity medical device analyst Jason Mills called the deal a "bold move" that could materially augment the scale of CryoLife's business and vastly improve the company's long-term growth prospects.

"For several quarters now, we have opined that the company's best opportunity to materially improve both top-line growth and margins – thus its long-term earnings trajectory – was through a strategic, synergistic, and sizeable M&A deal," Mills said.

He added that the company has already made moves to hone its focus on cardiac and vascular surgery, scale up its direct sales force both domestically and abroad, and invest more in internal R&D and clinical/regulatory infrastructure. He pointed out that the deal makes sense because all of Jotec's business is outside the United States, which is where CryoLife has the most work to do to scale up its product portfolio and direct sales presence.

"All that having been said, we would be remiss if we didn't recognize, and express some disappointment in the Q3 miss communicated alongside this deal," Mills said.

CryoLife said its third-quarter revenues were adversely affected due to the impact of the recent hurricanes on its business in Florida and Texas, which accounts for about $1 million of the roughly $1 million revenue miss. The company's earnings also were hurt by the continued delay in obtaining re-certification of the company's AAP. The company's revenue for the quarter ended up being about $45.1 million, compared to the expected range of $46.5 million and $47.5 million. The company also will have to buy back inventory previously sold to some of its distributors as it plans to distribute product through the combined company's direct sales channel rather than through those distributors. That will result in a $1.1 million third-quarter revenue reversal, CryoLife explained, which will bring its revenues for the quarter down to $44 million.

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