Investment Thesis

We believe that ShockWave Medical (NASDAQ:SWAV) has key differentiators and drivers in their flywheel that have the potential to make a remedial breakthrough in peripheral vascular interventions. The company has grown its collection of high-quality data, having now published over 100 papers on their intravascular lithotripsy hypotheses for peripheral vascular interventions, where the data has been compiled from testing over 2000 patients (SWAV Management).

Data Source: Author’s Bloomberg Terminal

Intravascular lithotripsy (“IVL”) has gained significant recognition recently, particularly on the back of data results presented at the “VIVA20” vascular therapies conference this weekend just passed. Here, the company demonstrated superior results over percutaneous transluminal angioplasty (“PTA”) as a pre-treatment for patients with calcified peripheral artery lesions. Further advantages of SWAV’s hypothesis can be seen over atherectomy in the treatment atherosclerosis, as this procedure remains largely under-utilised due to safety and lack of trained cardiologists. IVL is a superior device and methodology that can be used by all cardiologists, with minimal training and little adverse safety issues.

Thus, with these factors in mind, IVL is a system that has enormous commercial potential in the interventional cardiology space, especially for calcium-based interventions in peripheral vascular disease. The company therefore is insulated from competitors at this point, have gained traction from since their IPO last year. We hold a bullish outlook on the long-term prospects of the company, and see several upcoming catalysts as key inflection points on share price.

Catalysts for Long-Term Price Change

There has been an absence of disruption and innovation in calcium treatments for peripheral vascular conditions over the last 15-20 years. Since SWAV has introduced IVL, the general response from the cardiologist community has been overwhelmingly positive. It must be recognised that average life expectancies are the highest on record, and that diabetes incidence and prevalence in the western world has increased exponentially over the last 30-40 years. Those diagnosed with diabetes are also living longer, and therefore the presentation of patients with calcification of peripheral vessels is drastically increasing, with the incidence nearing 30%. Current standards for treatment of calcification in the peripheral vessels of these patients is complex, and successful outcomes are challenged by the risk profile and techniques that limit use of atherectomy and other procedures.

SWAV’s CAD III study is an investigational device exemption trial, understanding the coronary artery applications for IVL. The specifics are investigating IVL’s effectiveness in pretreatment of de novo calcified stenotic coronary artery lesions, prior to stenting. The wide geographical patient population addresses patient diversity, being conducted in 47 sites across the US and Europe. Management highlighted the the CAD III study incorporated some fo the most complex calcified lesions that have ever been studied at this level. The data observed in the trial met the priority endpoint of in-stent delivery in the absence of adverse cardiac events, showing the IVL meets both goals of safety and efficacy. Furthermore, the success in this study aligns with the complexity in patient presentations that are seen clinically. Therefore ,there is a high likelihood of accelerated growth in cardiologist accounts and re-usage within these segment of IVL’s application.

Additionally, the PAD III study is currently the largest RCT of calcification-type peripheral lesions on record. In fact, its the only lab-adjudicated study to investigate calcified lesions. Therefore, the company are investigating a segment that is often left out of other study regimes. The study met all endpoints, where it showed that IVL is superior in its procedural advantages. This includes less need for stenting in the first place, and therefore lower adverse outcomes and safety concerns, compared to balloon dilation, prior to drug coated balloon insertion. Additionally, the study showed clear advantages of IVL over PTA. This includes a reduction in residual stenosis, less need for post validation, and especially a significant reduction in vascular dissection and provisional stenting over the latter. This data is likely to be looked favourably on by the cardiologist society, as patient outcomes are set to greatly improve on the back of this.

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We see especially high uptake potential in IVL on the back of both PAD III and CAD III data, that has seen overwhelming positivity since data readouts over the weekend. The consistency in safety and efficacy in the technology has been proven, in our view. IVL is already being rapidly adopted in many other applications, resonating highly with clinicians wanting to provide the best possible outcomes from their interventions. This is especially true considering a patient-centred focus, where safety remains at the highest priority of the treating clinician. Therefore, we see high uptake and utilisation of IVL in this segment, resulting in an accelerated growth phase for SWAV over the coming years. Furthermore, the expertise in IVL insulates the company and reduces competitive forces. Pricing competition will therefore likely remain benign, and the company has licensing and royalty potential, that may deliver long-tailed asset returns on the back of a wider commercial reach.

The company is now focused on setting a 1:1 ratio of territory managers to clinical specialists, which gives excellent coverage and commercial potential. This move also allows flexibility to build on the launch of additional devices that are commercially available now, such as the C2 coronary IVL catheters, plus the M5 and S4 above-knee catheters. Management have highlighted there are ~100 people in the field to build the launch of the coronary artery segment. This allows management to increase the breadth of focus, on expanding reach in the entire peripheral vascular segment via their IVL technology. Reimbursement has been structured on the back of new technology add on payments (“NTAP”), and we believe that the IVL segment is restrained to a device, rather than a device and service. Thus, a new basket of codes has been set to go into effect in January 2023, however, in terms of coronary reimbursement, management have indicated that the application for the NTAP will result in an additional payment in October next year, if successful.

Guidance is murky from management at this stage, however we believe that top-line growth can be expected YoY, with cumulative revenues at ~$151 million by the end of FY2021. We see gross profits increasing over this period also, although management have provided little colour on this from the Q3 earnings call. Nonetheless, the stage is set for SWAV, and further guidance can be expected at the end of this year. Here we look forward to providing more lengthy modelling, however at this stage it is more appropriate to focus on what is more tangible over the coming single year.

Data Source: SWAV SEC Filings; Author’s Calculations

Data Source: SWAV SEC Filings; Author’s Calculations

Performance & Credit Summary

The company recorded $19.6 million on the top in the Q3 exit, a 73% YoY increase. Peripheral vascular utilisation was almost back at 100% by the end of September, according to management. IVL sales are also being reflected in iliac artery procedures, for access and in various symptomology, alongside other superior knee indications. In the US, revenues were $11.1 million, again over 70% YoY increase in this region. The product winners were for the M5 and S4 IVL catheters, which accounted for ~63% of total revenues this quarter. The C2 coronary catheter accounted for another 35% of sales, of which all are recorded internationally, as the company is awaiting C2 approval in the US.

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ChartData by YCharts

The company left the quarter with $215 million in cash and equivalents, and the runaway on this should be sufficient for the next 2 years. The Altman Z-score of 34 supports this view also. On a short-term solvency basis, the company has 2x coverage on short-term obligations from liquid assets, and more than enough liquidity excluding inventory from that equation. They also have an available line of credit of 2 million available. Interest is not well covered from EBITDA level earnings however, thus some of the cash will be contributed there.

Furthermore, total debt to capital is 9.53x, and the debt ratio is around 9%, on the lower side. The company has kept leverage low at this point, relying on equity capital for financing operations. We see this in the equity to assets figure of 84%. This trend will likely continue until the company reaches profitability, where lenders will likely pay more attention to financing for the company. However, there are no foreseeable drains or pulls on liquidity in the near-term. Plus, with no meaningful debt maturities the company is well capitalised in our view, as assets cover liabilities by 6.5x. Thus, the balance sheet is quite robust for a company in SWAV’s lifecycle.

Data Source: SWAV SEC Filings; Author’s Calculations

Valuation

Shares are trading at 14x book value and ~48x top-line earnings. SWAV has -$0.51 in free cash per share, on a FCF yield of -3.4%. Cash per share is $6.29 and book value per share is $6.92, whilst there is ~$0.60 in revenues per share. The company has a diluted market cap of $2.072 billion, with $215 million in cash and $25 million in debt. Therefore, we value the company on an enterprise value level at $1.899 billion. Thus, the company has $70.24 in EV per share, which is on the higher side, and is trading at 46x EV from top-line sales. Taking a fair value of the company’s assets, we see a fair value of the total assets of $148 million. Thus, FV of assets to shareholder equity is ~60x. Additionally, the fair value of assets per share is $4.35.

Data Source: Author’s Calculations

Building an appropriate DCF model for SWAV is difficult at this stage, due to headwinds from Covid and minimal guidance from management impacting visibility on free cash earnings and revenue growth. More colour is set to be provided at the end of FY2020 and in Q1 2021. Thus, it is appropriate to use a sum of the parts methodology to provide a robust valuation at this time. This gives a good foothold on the tangible value of shares, which is reflected in clear figures from the company’s standing. Using this methodology, see a fair value and price target of $88.40 on today’s trading, around 3% upside ($6.92 book,+$6.29 cash,+$0.60 sales, +$4.35 FV asses,+$70.24 EV= $88). Further colour on valuation can be provided a little further in the future. However, the valuation looks attractive, and combined with the key differentiators in SWAV’s markets, we believe shares look attractive on this valuation also.

Investors can view the potential in pricing outcomes should shares continue along the current trajectory, on the chart below. This is crucial information for longer-term investors, in their decision making on entry and reallocation scale for SWAV shares. Thus, we encourage longer-term investors to have a good look at the chart below, to understand the potential in price distribution over the coming quarters.

Data Source: Author’s Bloomberg Terminal

Further Considerations

On the charts, shares have trended in a narrow ascending channel since the selloff in March. The longer-term level of support has been clearly defined, and shares have been tested 4x at this level since that period. There was a gradual run-up in prices from July, however prices reverted back to the support level in October, before breaking away again to the high of today. Shares are now butting the top of the upper resistance level in the channel, and look set to break that line should the current near-term trend continue. Investors can see this distribution in pricing activity YTD on the chart below.

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Data Source: Author’s Bloomberg Terminal

Shares breached the RSI 70 line heavily and maintained in overbought territory back in August to September. In spite of this, the longer-term trend has maintained its strength. Momentum was unaffected at that time, and shares have continued their gradual ascent north, before momentum regained speed back in October, driving prices north to the high of today’s trading. Based on the strength of the trend and poor autocorrelation between pricing outcomes and RSI ranges, coupled with the recent uptick in momentum, we firmly believe that the current investor sentiment is bullish. Therefore, we see further upside based on this information.

Furthermore, empirical evidence has clearly demonstrated the correlation in earnings surprises and the effects on pricing activity in the medium-term. Evidence has shown that investors reward companies who beat consensus, and the upward effect on pricing activity generally lasts around 13-26 weeks. Thus, we believe further upside is likely on the back of this also. Investors can see this activity in momentum, RSI ranges and pricing outcomes, on the chart below.

Data Source: Author’s Bloomberg Terminal

In Short

SWAV is a company that has several key differentiators in their portfolio that insulate them from competitors, and are likely to provide a remedial breakthrough in the cardiology sector. We see high uptake and utilisation of the key IVL catheters over the coming periods, on the back of surgeon preference and the risk/safety profile in favour of SWAV’s devices. Whilst further colour is required from management on upcoming guidance, we believe that the market will continue to reward SWAV shares, who have seen +154% upside over the single-year period to date. Considering the positive data released over the weekend at the VIVA20 conference, there is a high likelihood that further recognition of SWAV’s peripheral vascular hypotheses is on the cards.

We see a fair value of ~$88 using a sum of the parts valuation methodology. From this, we believe that further upside is likely from today’s trading, considering a strong Q3 and earnings surprise that may yet to be fully reflected in share price. SWAV is one for the future in our view, and this is a story that we are enjoying seeing rollout over time. Management are strong, and there is equal strength on the balance sheet that can be put to good to use, to maintain and increase commercial potential. There are headwinds from Covid-19 uncertainty, however these are not long-term, which is the kind of time horizon we have for SWAV anyway. We encourage investors to consider the risks in investing in early-stage medical device companies. However, we are bullish on the long-term outlook of the company, considering all of the points raised in this report. We look forward to providing additional coverage.

Disclosure: I am/we are long SWAV. 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.



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