It’s been a while since we wrote about Cryoport. At that time, the shares of CYRX were on an absolute tear and it had become the largest position in the Tailwinds Select Portfolio, by quite a margin. As such, sticking with our discipline, we reduced the position by 50%.
The price at that time was $9.26 per share, which was a rather wonderful 343% return on investment over the 5 1/2 months that we’d held the stock. It certainly seemed like an appropriate time for a well-deserved victory lap.
Since then, CYRX shares have retreated about 20%. Meanwhile, the Tailwinds Select Portfolio has increased by approximately 25%. The combined effect of these two movements has reduced the position value of Cryoport to being one of the smaller weightings in the Portfolio.
Therefore, on December 4th, we have decided to take some of the proceeds achieved during the sale of Fusion Telecommunications on November 30th and double our position in Cryoport.
Increased Confidence in Cryoport’s Moat…
The doubling of our position in CYRX was not strictly a function of the relative position weighting…true, it was a smallish position, but there had always been a fear in the back of my mind related to the competitive positioning of Cryoport in the long term. After all, they are a shipping company. It’s not like they have a monopoly on sending products from Point A to Point B, right?
I expressed my thoughts during a recent call with company management. More specifically, I asked what prevents their clients from switching to another logistics partner? And, what is going to keep competitors out of this industry? The answers to these questions completely allayed any competitive concerns that I had regarding Cryoport and is what prompted the doubling of the position size.
Cryoport has numerous clients, but the most important at this time are Novartis and Kite (being acquired by Gilead), as their respective launches of new CAR-T therapies represent tremendous growth for the Company over the next few years. What prevents a customer like Novartis from switching to a new logistics partner when their current contract expires in 3 years? There are several things that would make this extremely unlikely.
First, when a drug is approved by the FDA, the approval covers not only the medication itself but the manufacturing involved and the logistics providers who deliver the drug. Cryoport not only signs a contract to deliver the drug, but they are written into the FDA application and approval process. Therefore, in order to change shippers, Novartis (or any other client) would need to submit a new application to the FDA. I won’t go into more detail here…I think it’s sufficient to say that submitting a new application is costly, time-consuming and the last thing a drug company would voluntarily undertake.
Remember also that these therapies are incredibly expensive. Novartis drug is estimated to cost around $450,000 for a program. The logistics side of this is negligible compared to the overall revenue received. In other words, a cheaper logistics solution is really not important to these companies…what’s most important is a trusted logistics partner.
Which is what leads to the other question about future competitors. There are none at this time that offer the complete suite of a shipping and software solution that tracks and monitors each shipment in real time, thus ensuring the safety of the drug.
There are a lot of companies that can deliver a product. There are also a handful that can deliver cryogenically frozen products. There is only one that has the software in place to monitor and ensure safe delivery of an untainted product. In order for competitor to enter the space, they would need to invest in, and develop, a similar logistics solution.
This is possible, but it will take years and millions. And, when it is completed, do you think they would have customers? All approved products are locked into their FDA approved shipping solution. A competitor would have to start going after phase 1 or 2 trial customers, which are clients that are years away from meaningful revenues.
It makes little sense to make the investment in competing with Cryoport if you can’t even generate revenue for several years after you have a product. As well, even with a competitive shipping solution, do you think a drug company shipping medication, and needing their shipping solution to pass FDA approval, and knowing that shipping is a rather de minimis cost, would risk all this for a slight margin benefit on the shipping side? Not very likely.
The end result of all this is that our understanding of the “moat” around Cryoport’s business has been greatly increased. And, this confidence in their fundamental business is what has given us the confidence to increase our position. CYRX stock has been a big winner in 2017; we believe this trend could continue for a lot longer.
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