BLFS - BioLife Hit By An Inventory Correction

2023-08-30 08:58:51 ET

Summary

• BioLife is facing setbacks due to a difficult funding environment, inventory corrections, and a decline in COVID-related revenues.
• The company's acquisitions have negatively impacted margins and cash flow.
• Management plans to divest the freezer business, which is expected to improve financials and the balance sheet and will provide an impetus for the stock.

We thought that BioLife ( BLFS ) would get an impulse from the announced plans to divest their freezer (Sterling and CBS) as Sterling has been plagued with problems from the start and dragged gross margins down, the opposite happened in the form of a number of setbacks:

• The funding climate for GCT companies, especially those that are in the clinical stage, is faced with a more difficult funding environment, so they are cutting back.
• A large commercial customer of BioLife's media products is rationalizing its inventories, and there is a wider inventory correction in the sector.
• Covid related revenues have dried up.

Basically, there is a cyclical downturn, and that led to a 3% decline in revenues y/y (which would have been a 7% growth apart from the Covid revenue). It's getting worse for Q4 as management guides that 30% below Q2 before a 40% sequential recovery takes place in Q4.

Divesting the Freezer Business

That seems like an excellent idea to us as the share price of the company hasn't really moved in years with the company embarking on an acquisition spree:

And the ensuing dilution eating up the progress:

What's more, the company's margins have been negatively impacted by the acquisitions. Gross margin used to be well above 60% when BioLife was only a preservation media company:

And so has cash flow, although the worst seems behind us, at least for now:

This is extremely frustrating in light of the fact that all the while, the company's legacy, high-margin preservation media products kept on raking in new customers, growing revenues well in the double digits (until this quarter) and generating 60%+ gross margins.

Without all these acquisitions, the company would have been much more profitable with a much smaller share base and EPS, and hence stock valuation would have been a multiple where it is today.

Management seems to finally realize that as well, in the earnings PR they provided the following table:

Just getting rid of those freezers would do wonders for the company's margins and hence profits, not to mention the balance sheet.

But they are at least intent on selling the freezer business which is their lowest margin business that has been plagued by problems and low or negative growth, so when successful this should improve financials as well as the balance sheet considerably.

Management argued on the Q2CC that they have solved numerous problems with Sterling, mostly quality and supply chain issues, but this hasn't prevented the business from slumping again with revenue declining 26% in Q2 to $13.9M, despite the customer wins (see below).

Customer Wins

Financials

We've dealt with the financial trends above (and the earnings PR provides a detailed account). The company reduced FY23 guidance:

• Revenue $144-$158M, a decrease of 11% to 2% y/y.
• Excluding COVID-19-related revenue, this would be a decrease of 3% to an increase of 6%.
• Cell processing platform: $65-$74M, down from $89-$93M in the previous guidance, a big decrease of 5% to an increase of 8% over 2022.
• Freezers and Thaw Systems platform: $53.0-$56.0M, a decrease of 21% to 16% compared to 2022. Excluding COVID-19-related revenue, y/y decrease of 18% to 13%. Previous guidance $72.5-$79.0M.
• Storage and Storage Services platform: $26.0-$28.0M, a decrease of 2% to an increase of 6% over 2022. Excluding COVID-19-related revenue, year-over-year growth of 61% to 74%. Previous guidance estimated revenues to be $26.5-$30.0M.

Really serious downgrades of guidance for cell processing and Freezers. Not surprisingly, the stock price took a considerable hit.

The company is looking to add storage sites, at least that part of their business is still going strong, as is the evo shipping business. It is also looking for an additional site for media production to derisk environmental disruptions and accommodate anticipated demand. The facility will come online by the end of 2025.

Valuation

• 43.5M shares
• 312K options (there are 3.02M out-of-the-money options)
• $23.57M long-term debt
• $48.1M in cash
• FY23 revenue (midpoint of guidance): $151M

At $12.5 per share, the company has a market cap of $547.5M and an EV of $522M, so the shares still trade at a considerable 3.45x EV/S.

Discussion and Conclusion

We give you some reasons why we still see a bright future for the company and better times for the stock price, although not immediately:

• The company provides solutions that are a must-have for customers as they reduce risk (any damage to tissues, and they become unusable).
• The downturn in media is a cyclical destocking event, this will recover, and the company has a very strong competitive position here; they count "the vast majority of commercial and clinical stage CGT players as our core customers... BioLife and Sexton Cell Processing products have been used in or are planned to be used in over 800 customer clinical applications" (Q2CC). One can add at least 24 already in Q3.
• The CGT market is still in the very early innings of what is a long-lasting secular growth story.
• The media business has inbuilt growth from current customers as they automatically increase demand when moving to larger trials and demand jumps on FDA approval and commercialization (commercial stage customers generate $500K-$2M/y from media alone).
• Finances and the balance sheet will improve markedly after selling the freezers, and growth is also likely to be positively impacted.
• Their evo shipping business keeps on winning customers (17 in Q2, and looks well-placed to win a big pharma company with two approved therapies in Q3).
• There are cross-selling opportunities, with for instance SciSafe penetrating existing customers from other lines

The main risk we see is time, we don't know when the destocking cyclical downturn ends, although investors might take note of management's prediction of Q4 revenue guidance as recovering a whopping 40% from Q3, which therefore very much seems to be the through point (Q2CC):

our sense is that this is getting worked through right now, and we've got better visibility now, and we don't believe that we're going to have swings destocking swings of this magnitude that we're going to have to talk about in the future quarters, okay?

One should also keep in mind that they don't have a good grip on where demand is going (Q2CC):

it's not uncommon for us to get updates to demand which are vastly different from what may have been communicated even as recently as a couple of weeks. So we're doing the best we can to get our arms around that.

On the other hand, much of the destocking and demand tapering is caused by just one (large) customer (and a few more in Q3) which is going through an inventory rationalization process.

But there is another catalyst in the form of selling their freezer business. This is planned for H2/23 and should give the stock a nice impetus, so we think that the shares are beginning to get attractive here again.

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