ShockWave Medical: Transformative Potential, But Much Upside Is Already Baked In

Summary

• ShockWave has the potential to transform the treatment of peripheral arterial and coronary artery diseases.
• Robust clinical data for intravascular lithotripsy therapy from CAD III and PAD III data will help push up IVL adoption rates.
• The company is reducing its losses and carries a strong balance sheet.
• The question is - at a price-to-sales multiple of 62, how much more can the stock grow in the next one year?

Investment Thesis

Lately, ShockWave Medical (NASDAQ:SWAV) seems to be falling out of favor with the investors. Although the stock has gained 206% in the last year and 18.5% YTD (year-to-date), the stock is down 13.5% from its high of $142.05 as of January 19, 2021. ShockWave's fourth-quarter revenues jumped 59% YoY (year-over-year) to $22.7 million and beat the consensus estimate by $2.6 million, but the company missed consensus earnings by $0.01.

But, this downtrend does not signify any fundamental weakness. In fact, there remains a strong and durable demand for ShockWave's IVL (Intravascular lithotripsy) therapy, as a safe, effective, and cheaper way to remove calcium that blocks the arteries in coronary artery and peripheral artery diseases. IVL is an already proven technology that involves sonic pressure waves and has been used successfully for 30 years to safely remove kidney stones. This technology is now repurposed to crack the calcium in the arteries, without damaging the surrounding soft tissue.

Shockwave is staring at an addressable market opportunity of over $6.0 billion. Canaccord analyst, William Plovanic, sees high penetration scope for the company for M5 IVL product in large bore access, S4 in BTK, and now C2 in coronary artery disease.

ShockWave has successfully proven the efficacy, safety, and cost-effectiveness of the IVL platform in several clinical trials.

The recently announced results from DISRUPT PAD III trial demonstrated the superiority of IVL therapy to angioplasty in successfully opening peripheral arteries with severely calcified lesions prior to stenting. IVL also scored better on several metrics of efficacy and safety such as a reduction in diameter stenosis, arterial dissections, and bailout stenting.

ShockWave has also announced positive results from Disrupt CAD III trial, which highlighted the efficacy and safety of IVL in opening the blood vessels in severely calcified coronary artery lesions, prior to stenting. Based on CAD III data, the company has secured FDA approval for IVL to treat severely calcified cardiovascular disease in the U.S.

ShockWave is now gearing up for the coronary launch of IVL in the U.S., which is expected to emerge as a key growth driver. The company already has significant real-world evidence of the success of IVL in coronary artery disease, from international markets. This, in turn, can help in increasing adoption in the U.S. The company is also expecting a Japanese launch for its IVL technology in coronary artery disease in the first half of 2022.

While elective procedures got delayed during the peak of the pandemic, the treatment of coronary artery disease and peripheral artery disease cannot be delayed indefinitely. Hence, we can expect much of the warehoused demand to come back in the coming months, thanks to the rapid pace of vaccination and the development of innovative therapies for COVID-19. This will help ShockWave regain much of its lost growth in future months.

In December 2020, CMS (Centers for Medicare and Medicaid Services) announced four new codes for reimbursement of IVL procedures in outpatient settings and eight codes for IVL procedures in ambulatory surgery centers. The acceptance of IVL in PAD disease bodes well for future penetration and reimbursement of IVL in CAD disease in the U.S.

A Look into Future Financial Performance

While all these pros are worthy of notice, the fact that the company is trading at 33.3x forward sales makes it a tough pill to swallow. The valuation of ShockWave is quite rich. Hence, we need to also look deeper into the financials to make sense of this fundamentally strong yet seemingly expensive stock.

Although fourth-quarter revenue growth was quite stellar, the question remains whether the company can continue its topline growth trajectory in future quarters.

In fact, analysts are seeing a material acceleration in quarterly topline growth at least till the first quarter of 2022. Subsequently, the projected growth rates show a downward trend, yet the numbers still reflect a company in the high-growth zone. Declining growth rates mostly arise from a higher denominator base in previous quarters.

Analysts also expect the company to dramatically reduce its losses and inch towards positive net income in future quarters.

ShockWave Medical can soon become a profitable enterprise, considering rapidly increasing topline and relatively slow pace of increase in expenses. The company's gross margins have improved from 41% in fiscal 2018 to 69% in fiscal 2020.

Finally, the company has built a strong balance sheet. At end of fiscal 2020, the company had cash and cash equivalents of 202 million, while the total debt was only $25 million. Assuming fiscal 2020 operating expenses of $133.5 million as a proxy for the company's annual cash burn, ShockWave Medical is in no urgent need of raising extra capital.

The company's debt-to-equity ratio is 11.1%, which is lower than the average of 18% for the medical device sector. The Altman Z score is 54.6 shows that the company is reasonably safe from going bankrupt.

Conclusion

Although there are many factors in favor of ShockWave Medical, the price is a tad bit high. There are several other medical device companies such as Inari Medical (NARI), Abiomed (ABMD), Align Technology (ALGN), and Silk Road Medical (SILK) with transformative technologies, huge market potential, and higher gross margins. Some of these are even profitable on a net income basis. Yet, all these are trading at much lower price-to-sales multiples compared to ShockWave Medical.

There is much scope for ShockWave Medical to grow in 2021. However, whether that growth will translate into higher share prices is to be seen, since much of the upside seems already baked in. I remain skeptical whether investors can manage to make significant gains from this stock in 2021. Then again, with the current stock market movements being quite removed from fundamentals, anything is possible.

I believe that retail investors with average risk-appetite sit on the fence for now. Instead, they should consider buying it in case the stock corrects by around 15% to 20%.

Analyst’s 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.