Introducing SWAV

ShockWave Medical, Inc. (Nasdaq: SWAV), a medical device company, engages in developing and commercializing intravascular lithotripsy technology to treat calcified plaque in patients with peripheral vascular, coronary vascular, and heart valve diseases worldwide. 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.

This is a stock I have been recently pounding the table for on the lonely MF SWAV message board. I decided last week to post my SWAV analysis on Saul’s board but after the Q2 ER on Monday (two days ago). This would give me higher or lower confidence to bring SWAV to this board. And I wanted to see the revenues reaccelerate after a mediocre Q1. Given their revenue history choppiness due to Covid, it was hard to confidently extrapolate from past quarters. 2021 Q1/Q2 were reopening outliers. The level of scrutiny on this board is high and exceptionally good. But I am not sure how much medical devices belong on this board which is pretty SaaS oriented. SWAV jumped 25% in the last 5 days. But some of us longer term holders got a nice spiffy pop.

I loaded up on SWAV back in 2021 when Saul recommended Inari for a short period and then sold. Inari is focused on treating venous thromboembolism by removing blood clots. But all the time I was comparing Saul’s NARI analysis to SWAV… and I decided SWAV was a better company. Both had triple digit growth rates and a proven product. But SWAV had IMO much less friction for training and adoption. And a strong international expansion market plan. This is because it entered the market as an adjunct, not replacement for stents. Key to this was the C2 coronary product that can clear out the calcium before placement of the stent. Both companies had >100% revenue growth rate and gross margins exceeding 80%. I fortunately chose ShockWave and have finally been rewarded after a lot of ups and downs and a real ugly 2022 on my other stocks (like many on this board).

SWAV has three primary products:
• C2 catheters for treating coronary artery disease; The C2, representing an IVL catheter intended for the treatment of coronary artery disease [CAD] was CE-Marked in June 2018. It is currently being sold in US and Europe. The CAD III and PAD III IVL studies have shown superior efficacy and safety results above current standard practices.
• M5 catheters for treating above-the-knee peripheral artery disease; The M5, representing an IVL catheter with five sonic wave emitters, intended for the treatment of peripheral artery disease [PAD] above the knee in the US and internationally. It was CE-Marked in April 2018 and approved by the US FDA in July 2018
• S4 catheters for treating below-the-knee peripheral artery disease. It serves interventional cardiologists, vascular surgeons, and interventional radiologists through sales representatives and sales managers, and distributors. The S4 is intended for the treatment of PAD below the knee. ShockWave has acquired US 510[k] clearance and a CE Mark.

It seems like the fools have missed this one as they push NVCR, not SWAV. It is not even in their top 10 -20 recommended stocks on any of their recommendation portfolio services. Shame, shame. This is the one stock that has recovered completely from the early summer stock market whack. I started buying at MF recommendation spring 2020 at $29/share and more in 2021/22.

I am asking the same question as you are; can the stock go higher? It has a 25 PS and +300 P/E so these are nosebleed levels in a very depressed market. People sell fast these days in a very jittery market. We saw SWAV pull back hard during the whack to $130 so I was like a deer in the headlights. There must be something I do not know? Turns out it was just a jittery market. So I started buying more at $139-190. But what has a recession have to do with SWAV’s revenue other than market volatility? I think they are pretty well insulated from consumer sentiment, inflation rate, GDP, energy/food prices, war, etc. But not insulated from Covid outbreaks, …hopefully all behind us. IVL adoption has a low friction with TVAR doctors. IVL procedures are rapidly rising and international expansion is going well especially in Asia. They are selling products in almost 60 countries, and saw healthy sales growth. And they are starting sales in Japan and added a partner in China recently that adds an additional $1.5B to the TAM.

The international team expanded from 19 to 40 people in 2021 as we continue to add to our sales and marketing teams. We now have employees based in 11 countries, including Japan, India, and across Europe.

Cross selling strategy. Initial C2 sales require the M5 and S2 products in a ‘platform package’ with training for all three. They are successful cross selling their BTK and ATK products to buyers of the #1 cardiac CAD C2. Next is aortic in 2023.

My Q2 analysis mostly posted on the other board:
https://ir.shockwavemedical.com/static-files/84cb0382-3ad6-4…

• Q2 2022 Performance1 Revenue growth of 116% year over year
• U.S. revenue grew by 133% to $100.1 MM
• International revenue grew by 59% to $20.7 MM Positive net income
• Continued improvements in gross margin, product mix and operating efficiencies Balance Sheet (as of June 30, 2022)
• Cash, cash equiv. and short-term investments: $224.9 MM
• Debt outstanding: $17 MM

SWAV is my only 2022 winner and largest position. I think this one can run higher on steady performance. I would like to see a better break down of sales by product. But international was said in call to be 70-80% coronary, 20-30% peripheral. So perhaps a similar breakout in US which is about 70% of total sales. But much higher growth going forward is expected from international than US.

I just listened to ER call and Q&A. They are getting into China through a partner (a huge market). And Japan approval expected in September is now in December. So they up’ed their 2022 guidance for the second time.

They beat my 2022 Q2 forecast number of $110M with $120.7M. And they returned accelerated QOQ growth of 22%. Net Income now up to $25M so no cash problems going forward as they are cash flow positive. All cash is re-invested into the business. What is not to like?

QOQ
Q3 2021 - 14%
Q4 2021 - 23%
Q1 2022 - 10%
Q2 2022 - 22%

Q3 2022 - 14% $130M my extrapolation
Q4 2022 - 22% $170M my extrapolation

2022 $535M my extrapolation

Shockwave Medical projects revenue for the full year 2022 to range from $465 million to $475 million, which represents 96% to 100% growth over the Company’s prior year revenue. This compares to previous revenue guidance of $435 million to $455 million.

So their year-end 2022 forecast is really soft. I hope they are sandbagging like in the past ERs. IMO They will achieve $455M even if they only sell the same $120M in Q3 and Q4 as Q2. In other words, flat sales. This is not likely per the call.

Call Q: Q3/Q4 forecast indicates flat revenue per our model. Are you having worries or just being conservative?
Call A: Q3 is the slowest procedure month per the industry but they expect Q3 growth higher than Q2. And they expect Q4 to be strong. Both Q3 and Q4 above consensus.

Call Q: What is the China and Japan cadence?
Call A: Full 2023 launch for Japan given expected December approval (had hoped for September). China is a full launch but hard to estimate revenue given provincial differences on re-imbursement.

Their Q2 ER conference call on their web site.
https://edge.media-server.com/mmc/p/hdzzwabk

SWAV growth seems safe and a likely takeover target in any market downdraft. That would be very disappointing as I see SWAV as a long-term hold with a huge appreciation potential. But this gives some downside protection. SWAV is my highest conviction stock and largest holding at 20%. With their forecast 83-92% YOY growth, and a 25 PS and 80% margins, net income now positive; I see the current price as a strong buy. But I may buy some downside protection given the fast runup and another expected Fed hammer coming soon.

-zane

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It was previously introduced here:
https://discussion.fool.com/shockwave-medical-swav-34940181.aspx…

(using search function on right side of messages, or bottom, if on mobile device).

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Hi Zane,

thanks for posting this and congrats for getting such a strong outcome, specially in this market.

I have been in and out of SWAV (havent had much success making money), partly because of NARI experience… and knowing well that catheters in general gets competed hard…

I agree SWAV looks very promising to sustain growth and their coronary take off is strong…

Given the run up in the price due to Q2 results, one major concern is that Q2 numbers reflected a lot of demand pushed out from Q1 to Q2 (due to the fact that there was large wave of covid in 1Q)… and therefore, Q3 could see more normal demand (with seasonal slowdown on top)… agree that Q4 onwards, revenue should continue to grow… however, it is much harder to guess / feel strongly about this type of product on where the ceiling is…
I hear management saying they are just 5% penetrated even in their current accounts (i.e. doctors who already use their product) and lot of greenfield… yet my experience with medtech is growth slow down in revenue growth comes sudden, mostly because sweet spot for usage of such product is much smaller than management like investors to believe… (in some cases, even management is trying to figure out)…

So I am interested in buying more but these prices certainly holds me back because it gives no cushion for any type of slow down in growth

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nilvest,
The TAM is certainly a real risk as is the recent fast run up. I cannot pound the table for SWAV at the current price $189 like I did last month. In fact today I am trying to figure out some protection on my recent gains in this jittery market.

Right now I think SWAV will continue to have revenue acceleration in 2023 to new/improved products and international penetration. Improvements address experimentation in catheter diameter, length, and wave frequency. New products address the new segments. New country launches in Japan and China. China could be real big through their partner but albeit at lower margins. Of course China is always a crap shoot in so many ways. And I have not seen any serious challenge to their patents so this strength is an unknown. Japan should be a slam dunk as they always do a lot more than kick the tires when they approve something for sale. And other countries growth shows improvement. Lastly, any hard pullback in the stock price should make SWAV an acquisition target. Normally this should give it a floor but not necessarily in the current fickle market.

Look at the TAM see page 10 of the recent investor presentation.
https://ir.shockwavemedical.com/static-files/84cb0382-3ad6-4…

SWAV provides a very detailed picture of their growth prospects in each product segment. And they project very positive efficacy and good outcomes numbers. They get into percentages of calcification of each segment, and each segment calls out the number of procedures. Remember they are focused on calcified arteries only. Coronary represents about 2M procedures (30% calcified of 6M procedures). Adding all the other segments you get about another 1.5M annual opportunities, mostly Peripheral Artery Disease (PAD). So yes there seems to be an opportunity cap on their TAM given their current R&D focus. But it seems large at $8.5B and no real competition yet. So at their state $8.5B TAM and current 0.5B annual sales, it seems they have green fields ahead at least for several years. And new lower cost manufacturing is coming on line next year in Costa Rica. This is enough opportunity for me and distributes some of my portfolio from my heavily dominated SaaS investments.

-zane

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  1. Checkbox: Is it a cloud stock?
    NO

  2. Checkbox: Is it a SaaS stock?
    NO

  3. Checkbox: has it recurring revenue?
    NO

Enough said…

The Arguments are always the same when a healthcare stocks crashes here. (Example ABMD and NARI)

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Cloud/SaaS - agreed.

Recurring revenue - absolutely they do. Over 99% of SWAV’s revenues are from the sale of consumables, the disposable catheters that are used in peripheral and coronary procedures. In fact, the company in many cases gives away their generators, to allow new customers to begin to scale up.

Allows them a gross margin that’s expanded to 86% in most recent reporting. That’s pretty extraordinary for a ‘hardware company’. I’ve enjoyed following this stock for several years now, would value its inclusion in the discussion in this community if there’s general consensus that it fits the ethos.

Luke.

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Luke - I wouldn’t call a hardware and consumables business a recurring revenue business. Almost all medical equipment and most medical device companies have a hardware and consumables component, (or if not component then servicing and maintenance contracts). It’s basically a razor and blade business model - like Gillette, which is not recurring. It has a low margin low frequency component and high margin high frequency component but not a subscription based contracted recurring revenue model:-

When patients cannot or do not have procedures (elective or otherwise), revenues stop
When the patient pool is exhausted revenues stop
When clinicians either are not onboarded to this standard of care or move to another standard of care despite the hardware sale, revenues stop
When hospitals and clinics hit their capacity limit sales expansion stop
When the life of the machine ends revenues stop

Of course razor and blade has an attractive model going for it but it isn’t recurring.

Ant

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I’m not saying swav is a good company or not but I would like to point at that all of the below is true of SAAS companies as well

When patients cannot or do not have procedures (elective or otherwise), revenues stop - ppl stop hosting on cloudflare or there or no new projects for down.

When the patient pool is exhausted revenues stop - same for any business with customers, there’s a somewhat defined TAM

When clinicians either are not onboarded to this standard of care or move to another standard of care despite the hardware sale, revenues stop - same is true for any project management software or security software. That’s how monday/sentinal/crowdstrike started and took on the incumbents like Palo alto

When hospitals and clinics hit their capacity limit sales expansion stop - same is true or SAAS, when they meet thier server capacity or something else they’ll have to invest in new hardware or space or offices not u like a hospital there will be a large capital expense to host more patients/clients when they hit thier max.

When the life of the machine ends revenues stop - same is true of any product? We often talk about J or S shaped curves.

That being said medical sales are def not a gaurunteed recurring revenue based for predictable revenue unlike a software subscription that you pay for x licenses/users for 3 years etc and that’s the only main difference.

Even with many medical hardware/device sales - there is an exclusive contract for 2-5 years meaning that hospital system cannot use other competitors, similar to restaurants either serving only coke or Pepsi products. So there is some security/reassurance for the medium term Outlook from that. (Again not sure if this is true for saas).

I don’t think we need to ignore ALL medical companies but evaluate them as they come to light and make an individual decision.

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Couple typos but meant to say “Again not sure if this is true for swav” - with regards to exclusive use contracts