ShockWave: Promising Technology Without CFO Generation

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About: ShockWave Medical, Inc. (SWAV)
by: Wilsonville Capital
Summary

ShockWave is a medical device company offering products to treat cardiovascular disease.

ShockWave M5 IVL catheter was CE-Marked in April 2018 and was cleared by the U.S. Food and Drug Administration in July 2018 for the treatment of peripheral artery disease.

ShockWave was able to sell shares to many institutional investors including Fidelity, T. Rowe Price Associates, among others.

If sales and marketing expenses continue to be larger than the total amount of revenues, ShockWave should not be profitable.

Being founded in 2009, the company should be at more advanced stage after 9 years.

Reporting 617% y/y revenue growth in 2018 and with a solid financial position, ShockWave Medical (SWAV) seems a name that will retain the attention of many institutional investors. Targeting a market opportunity that is larger than $3 billion, revenue growth may continue in the future. If the revenue growth is maintained in the following years, shareholders should benefit quite a bit.

Having mentioned this, the company is still not profitable, and value investors should pass on this name. The company has still not shown that it can report a good amount of revenue without making heavy marketing expenses. As a result, if the revenue growth does not continue, without free cash flow, the share price may decline quite a bit. Retail investors and very conservative market participants should pass on this one.

Source: Prospectus

Source: Prospectus

Business

Headquartered in Santa Clara, California, and founded in 2009, ShockWave is a medical device company offering products to treat cardiovascular diseases. The company presents its business trajectory with the following lines on its website:

Source: Company’s Website

The company’s leading medical device, called ShockWave M5 IVL catheter, was CE-Marked in April 2018 and was cleared by the U.S. Food and Drug Administration in July 2018 for the treatment of peripheral artery disease.

ShockWave has ongoing clinical trials of the company’s C2 catheter in the United States and Japan. According to the prospectus, ShockWave expects to have clinical data to launch the product in the US in the first half of 2021 and in Japan in the second half of 2021. The images below provide further details on this medical device:

Source: Company’s Website

The market opportunity for the medical device seems quite impressive. IVL System targets two indications, occlusive PAD and CAD. The lines below provide further details on these two diseases:

Our IVL System are occlusive PAD, the narrowing or blockage of vessels that carry blood from the heart to the extremities, and CAD, the narrowing or blockage of the arteries that supply blood to the heart.” Source: Prospectus

According to the National Institutes of Health, the number of people suffering from PAD seems to be at least 8 million. The market opportunity from PAD is equal to $2.9 billion, and it is expected to grow at 3% per year. The company believes that the total addressable market for the IVL System should be over $1.7 billion.

According to Millennium Research Group, Inc., the market opportunity for CAD is close to $10 billion. The American Journal of Cardiology notes that more than 30% of the patients treated widely using percutaneous coronary intervention suffer from calcified lesions. The company believes that the total addressable market opportunity of the IVL System to treat CAD is equal to $2 billion.

Clinical Data

ShockWave Medical executed five clinical studies for peripheral and coronary artery and cardiac valve diseases. A total of 179 patients have been treated, and the company is planning to conduct new studies with 2,000 people in the US and internationally. The image below provides further information on the trials made and those that will be made. Note that the company does not seem to release data in 2019.

Source: Prospectus

Balance Sheet

As of December 31, 2018, ShockWave reports an asset/liability ratio of 1.3x and $39 million in cash with financial debt of only $15 million. With these figures in mind, most investors will appreciate the company’s financial stability. ShockWave seems to have sufficient amount of liquidity to conduct its operations without selling a lot of equity or talking to financial institutions. The image below provides the list of assets:

Source: Prospectus

The list of liabilities shows term notes worth $15 million and total liabilities of $23 million. In addition, the company should not pay large amount of debt in 2019, only $3.18 million. The images below provide further details on the list of contractual obligations and the liabilities:

Source: Prospectus

Source: Prospectus

ShockWave financed its operations by selling large amount of convertible preferred stock. In December 2018, preferred stock was worth $152 million. The image below provides further details on the equity structure before the IPO goes live:

Source: Prospectus

Having mentioned the company’s convertible securities, investors should appreciate quite a bit that they are expected to be converted once the IPO goes live. As a result, investors will not have to worry about the potential stock dilution from the conversion of preferred stock. The lines below provide further details on these matters:

“Based on 22,263,196 shares of common stock outstanding as of December 31, 2018, and after giving effect to the automatic conversion of all of our outstanding convertible preferred stock into an aggregate of 227,778,008 shares of common stock upon the completion of this offering.” Source: Prospectus

Income Statement

While ShockWave reported revenue growth of 617% y/y amounting to $12.26 million in the year ended December 31, 2018, the operating expenses seem too elevated. With $53.4 million in total operating expenses in 2018, the net losses were equal to -$41 million. Most value investors should not appreciate these figures.

Growth investors may expect the company to continue its revenue growth and become profitable in the future. The company has its chances. However, being founded in 2009, the company should be at more advanced stage after 9 years. The image below provides further details on this matter:

Source: Prospectus

Negative Cash Flow From Operations

The CFO was negative in 2017 as well as 2018, equal to -$30 million and -$41 million, respectively. The image below provides further details on this matter:

Source: Prospectus

Taking into account the current amount of cash in hand, ShockWave should be able to operate for one or two years before running out of cash. It seems very relevant for investors studying the total amount of cash closely in the future. Keep in mind the following. If ShockWave runs out of cash, the company should sell further equity, which could lead to share price depreciation and destruction of shareholder value. This is the largest risk of medical device companies.

Use Of Proceeds

The use of proceeds is very beneficial as the company does not expect to use the money from the IPO to acquire shares from existing shareholders or pay debt. Money will be used for sales and marketing activities, research and development, working capital, and other general corporate purposes. The lines below provide further details on this matter:

Source: Prospectus

Shareholders

The assessment of shareholders is very beneficial. ShockWave was able to sell shares to many institutional investors including Fidelity, T. Rowe Price Associates among others. It is quite convenient as other investors may see it and may invest as well. The image below provides further details on the list of shareholders:

Source: Prospectus

No shareholder owns more than 50% stake. As a result, the Board of Directors is expected to be independent, which most investors should appreciate. Many other companies marketing and developing medical devices don’t have this beneficial feature.

Conclusion

With 617% y/y revenue growth in 2018, many institutional investors and solid financial position, ShockWave should retain the attention of market participants. With a large market opportunity, if ShockWave is able to maintain the same revenue growth in 2019, shareholders should benefit.

Those shareholders who decide to acquire shares should closely monitor the CFO, the amount of cash in hand, and the future revenue growth. These features should drive the price dynamics in the future.

With that, the company reports large losses, which should be monitored closely. If sales and marketing expenses continue to be larger than the total amount of revenues, ShockWave should not be profitable. With the current amount of liquidity, the company should continue to operate for one year or two before running out of cash. With all this in mind, the company seems speculative. Retail and conservative investors should stay away.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.