The Brooks West (BW) Piper Jaffray interview with DAL was interesting. I agree with BW that CRY is trying to diversify away from the legacy tissue business, a good thing for CRY. I agree too that CRY is going in a number of directions that may pay off at some level over time. My focus though is to discuss three things: “tissue”, the “HeRO Graft”, and touch on “PerClot”.
Tissue: If one goes back to the financial statements of 1999-2001, tissue was doing well until the Lykins event. Prior to that, sales were growing nicely and the tissue gross profit percentage was around 59%. This combination was a good one. Rapidly growing sales were coupled with the favorable 59% gross margin. I don’t know the ins and outs of why tissue margins are so low now, but let me speculate. I think perhaps that after the FDA intervened in 2001, that manufacturing costs went up significantly. This may have negatively affected sales because of the tissue products becoming higher priced. After all of this settled out, tissue margins have generally been running in 40% to 46% range for the past several years. When BW asked DAL if there was room for an expansion of the tissue gross margin, DAL said something roughly as follows: “…he saw no significant catalyst for their going higher”. This means that CRY has a BIG PROBLEM. This means that if you look at the ROIC versus the WACC for the tissue cost center, the tissue cost center is not…and worse…will not make any net operating income. DAL just confirmed this in his statement. Hence, CRY has, and will continue to have, a tissue cost center that will continue to tie up $50 million in capital, will continue to screw away 40% of total employee time (Gerbil Theory discussed previously), will continue to negatively affect sales in higher margin cost centers because gerbils are selling tissue, and where management just admitted they aren’t going to be able to turn this cost center around (because they can’t increase gross margins enough to make the cost center profitable). BW touched on this question, but he did not pursue it. BW permitted DAL to dribble out a rather ridiculous non answer. My suggestion to CRY is that they immediately increase tissue prices by 15% across the board. Then the cost center might become profitable. Alternatively, sales will go away and CRY can begin the process of winding down this unprofitable cost center.
HeRO Graft: The HeRO Graft product looks to me like it has potential. The margins here are high enough to make this cost center profitable. What CRY needs is sales growth. Specifically, CRY needs lots and lots of sales growth. For now let’s guess at sales of $7.5 million, $11 million, and $15 million for 2013, 2014, and 2015 respectively. IMO CRY needs to get these sales up to the $20-$40 million range to really make this dog hunt. Time will tell us how this works out.
PerClot: CRY has some plans for increasing sales outside of the U.S. This may work at some minimal level, only time will tell. However, the only BIG market for PerClot is in the U.S. DAL said CRY did due diligence before investing in PerClot. That is no surprise, because they would have committed a massive fiduciary violation if they hadn't. The question is how good their outside opinion was. Did CRY get a good outside patent opinion, or did they get the opinion SA of CRY wanted? Also, Medafor more or less now has super patent status, because someone challenged their patent and U.S. Patent Office upheld the Arista patent and in addition made it stronger. So, we aren't going to get a definitive answer here until after CRY gets FDA approval, until after CRY starts to sell PerClot in the U.S., and until after the courts determine the litigation outcome. This will more likely than not go to trial (think expensive $$$) because Medafor has the resources and determination to litigate this, and there is not likely to be any other way to resolve the matter. Other twists and turns could happen too I suppose. So we are just going to have to await the outcome here, whenever and whatever it is. Before I leave this subject though, IMO CRY could have had EPS numbers in the $0.50 plus range right now had SA not tried to put a “power play” on poor little old Medafor. What do you think CRY’s stock price would be currently, assuming these EPS numbers? Let’s flash back in time. As I recall, SA said during the last quarterly call that PerClot was about 4 to 5 times more absorbent than Arista. SA says a lot of things. He is a rhetorical “bull dung” machine, but he never backs himself up with hard science. Now I ask you, if you start with the premise that Medafor’s Arista (which SA used to say worked well) is a very absorbent potato starch product, how likely is it that a different highly absorbent potato starch product would be 4 to 5 times more absorbent? IMO, without any science to support my opinion, I think SA’s statement is patently absurd on its face.
Also, SA said something to the affect of Medafor losing a whole series of litigation cases. SA didn't support this statement whatsoever, so likely this is just more rhetoric from the “bull dung” machine. So was this just more SA rhetoric? Again, this is just my opinion, so do your own due diligence.
SA has to my knowledge never leveled with shareholders about the recent profitability of the tissue cost center. Since everything SA does and says seems to make me “wonder”, I will have to give serious consideration to starting to call him “Stevie Wonder” in future posts.
Note: CRY’s stock price is less than one-half of what it was in 1996. This is a fact. Thank you Stevie Wonder.
CRY stock price is maybe not less than one-half of what it was in 1996, but it is less than one-half of what it was in 2008. In any event, Stevie Wonder's CRY stock price performance isn't the world's fair. Do a Google finance search, type in CRY, go "All" and the historical stock chart will tell you the the tale of Stevie Wonder's wonderful presidency (sarcasm, yes). Yes sir, Mr. "Stevie Wonder "sir, how high should shareholders jump sir?