SILK Deep Dive

[TMFTypeoh]

Hey Fools,

Here are my notes on this newly public high-growth medical device company, Silk Road Medical (SILK).

What it does: New surgical product that is used to prevent stroke in high-risk patients.

Industry background: 800,000 Americans have a stroke each year with 140,000 deaths from the event. Fifth most common cause of death.

87% of strokes are “ischemic”, which is when blood flow to the brain suddenly becomes blocked.

A leading cause of ischemic stroke is carotid artery disease (CAD), which is the gradual buildup of plaque in the neck arteries that supply blood to the brain. If that plaque breaks away it can travel up to the brain and cut off critical blood flow, triggering a stroke

Best way to treat stroke is to prevent it from happening in the first place.

Two current stroke prevention options currently exist:

Option 1) Carotid endarterectomy (CEA). Decades-old procedure where surgeon opens up the neck with a large incision and manually removes the plaque from the artery before it can become dislodged.

Pros: Effective at reducing risk of stroke.

Cons: Procedure itself is very risky and highly invasive. The surgery can accidentally cause plaque to loosen and travel to the heart or brain, which can trigger a heart attack or stroke. The cranial nerve is also at risk of being damaged during the procedure.

Option 2) Transfemoral carotid artery stenting (CAS). Placing a stent over the plaque in the artery to keep it from becoming dislodged. Surgeons gain access to the neck by entering through the leg.

Pros: Minimally invasive. Lower-risk surgery.

Cons: Not as effective as a CEA at preventing stroke. Only used in a minority of cases today.

Silk Road Medical Solution

New procedure called a transcarotid artery revascularization (TCAR).

A small incision made in the patient’s neck. Blood flow in the neck artery is then reversed, the blood is filtered through a mesh, and then put back into the body through the leg. Once the dangerous plaque is removed, a custom stent is placed on top of the remaining plaque to keep it in place.

Pros: Minimally invasive. Much smaller scar. More effective at reducing risk of stroke than a CAE. Much lower risk surgery. Lower surgery time (cost-effective for doctors/hospital). Shorter hospital stay (saves healthcare system money).

Cons: Doctors need to be retrained, though Silk says its easy.

Video on how this works: https://silkroadmed.com/the-tcar-procedure/

Financials:

 	            2017	2018	        Q2 2019
TCAR procedures	   1,806	4,573	        2,000
Revenue	           $14.3 MM	$34.6 MM	$14.9 MM
Gross margin       64%	        69%	        75%
Net loss	   $19.4 MM	$37.7 MM	$12 MM

Cash balance: $118 MM as of June, another $189 MM raised in August

Key financial takeaways:
+Rev growth of 92% in the most recent quarter.
+Gross margin already 75% and growing
+Plenty of cash to fund expansion

Opportunity:
+168,000 carotid revascularization procedures (CEA + CAS) performed each year in the U.S. 2019 guidance implies 8,000 TCAR procedures ($62 MM in revenue) so <5% penetration.

+TAM $1 billion from displacing CEA + CAS just in U.S.

+4.3 million people in the U.S. have carotid artery disease. 427,000 new diagnosis each year.

+Benefits of TCAR might increase demand/use of stroke-prevention. 427,000 new cases = $2.6 billion TAM in U.S.

+Label expansion potential in vascular disease of the heart, aortic arch, and brain.

+Only about 10% of ischemic strokes happen in the U.S. TCAR procedure already has regulatory approval in Europe, but it hasn’t begun its international commercialization yet (likely waiting on reimbursem). Actively pursuing regulatory clearance in China and Japan.

Management / Ownership:
+Founded in 2007 by Dr. Tony Chou and Jack Lasersohn, both of whom work for healthcare-focused venture capital companies. Chou/Lasersohn are members of the Board. Personal holdings negligible, but the investment firms that they work for currently hold 62% of shares outstanding.

+CEO Erica Rogers, medical device veteran. Co-founded a company called Visiogen which was acquired by Abbott Medical Optics in 2009. Owns 3% of Silk Road’s shares outstanding

Valuation:

25x trailing sales
14x next year’s sales estimate

My thoughts:

Lots to like here – big TAM, early traction, high growth, hasn’t even started international launch, embedded optionality, high gross margin, plenty of cash.

Big negative is that TCAR is displacing an existing therapy, so it has competitors. Some doctors will be very reluctant to change. The valuation is also high, but what do you expect?

I might be opening up a small position soon. I think this is a fascinating business.

Brian

[remmdawg]

Lots to like here – big TAM, early traction, high growth, hasn’t even started international launch, embedded optionality, high gross margin, plenty of cash.

Big negative is that TCAR is displacing an existing therapy, so it has competitors. Some doctors will be very reluctant to change. The valuation is also high, but what do you expect?

I might be opening up a small position soon. I think this is a fascinating business.

Brian

Thanks for the intro to an interesting stock!

I am an emergency physician not a vascular specialist of any sort. But I can add my two cents.

Carotid vascular disease is estimated to account for about 14% of all strokes. Medical therapy can lower the risk. Surgical therapy can lower the risk further and to my knowledge, carotid endarterectomy (CEA) is still the preferred procedure. It was first introduced about 65 years ago! But due to the risks, it is only likely to benefit less than 6% of symptomatic patients with carotid vascular disease!

So there is a huge opportunity here. Unfortunately, with newer medical treatments it can take many years to sort out the longer terms risks and benefits. There is still the possibility of an even better treatment emerging. So this is still a risky proposition. But it is being rapidly adopted and this is likely to continue unless there is some unknown risk that develops. This growth might slow since some physicians may be hesitant or slow to adopt it.

The revenue growth looks good - 142% in 2018 and 78% projected in 2019. It’s still at only $61 million in sales projected in 2019 with a likely TAM of several billion. Although this current TAM does not seem massive, it is a significant opportunity. I’m hopeful that the approach could be adopted to other vascular procedures but I’m doubtful.

It’s on my watch list and I might take a small position. I don’t personally know any vascular specialists well but if I get the chance, I will get their opinion.

Dave

[mauser96]

those interested in SILK might want to read these two studies

https://www.ahajournals.org/doi/pdf/10.1161/STROKEAHA.111.66…
Conclusions—Patients with clinically manifest arterial disease or type 2 diabetes mellitus have a low risk of developing ischemic stroke, irrespective of its subtype and independent of the degree of ACAS stenosis .

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3626492/

[FBella2019]

SILK had a secondary stock offering of 4,200,000 shares supposedly as of Aug 13th. Secondary stocks were offered @39.50/share. SILK was priced $40.53 at the close of the market on Friday.
It could be the best entry point because of secondary offering and all the recent volatilities of the past week.
I would have considered a starting position if i had not promised to stay away from biotechs.
FBella

[TMFTypeoh]

I would have considered a starting position if i had not promised to stay away from biotechs.

SILK is a medical device company, not a biotech, so that’s not a problem

Brian

[TMFTypeoh]

Hi Dave,

Great feedback!

But due to the risks, it is only likely to benefit less than 6% of symptomatic patients with carotid vascular disease!

I’d love to hear from your surgeon friends whether or not they believe that TCAR will be able to boost this number significantly since it is so much lower-risk than CEA while still offering all of the stroke-prevention benefits.

This is a big part of the investing thesis.

Thanks!

Brian

[XMFLetItBe]

Hi Brian,

A couple of things to be aware of:

There are 2 types of ischemic strokes, one is when an artery in the brain becomes blocked from cholesterol deposits (this is the most common cause of ischemic stroke) and the other is embolic when a piece of clot or plaque travels from the heart or carotid artery to the brain and blocks a vessel. From this study was estimated about 15% of ischemic strokes were due to carotid artery disease.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3626492/

The other thing to keep in mind is currently not all carotid artery disease is treated only when it becomes symptomatic i.e. causing TIA or mini-strokes.

Carotid endarterectomy should be strongly considered for symptomatic patients with 70% to 99% stenosis and should also be considered for symptomatic patients with 50% to 69% stenosis if no other etiologic basis for the ischemic symptoms can be found.

This is a good overview:
https://newsnetwork.mayoclinic.org/discussion/treatment-opti…

Anyway just so you are aware the TAM may not be as large as you think when calculating potential.

Mary
Contributor Supernova Phoenix 2
Retired Family Physician (not a vascular specialist)

[IRdoc]

To be honest this sounds like more of a gimmick than a game changer. It might prove to be a little bit safer than carotid stenting but there are likely to be just as many complications from accessing the carotid artery directly. You need to find patients with non diseased common carotid arteries to make it safe. Many patients with ICA disease also have CCA disease. Puncturing the femoral artery is much safer.

There may be a subset of patients that have highly disease ICAs but non diseased CCA in whom this might be useful. Otherwise, it would seem to me that a carefully placed distal embolic protection device would be perfectly fine. The number of useful cases is likely far from the total market of carotid disease or embolic stroke.

As with other device companies, this one may depend on the company’s sales force to get doctors to try it out.

[SaulR80683]

those interested in SILK might want to read these two studies

Wow, mauser, that was a very nice find. Very interesting, especially the first one.
Thanks,
Saul

[SaulR80683]

After reading the deep dive, other posts, and the excellent articles recommended by Mauser and by Mary (TMFLetItBe), I have some observations.

It looks as if asymptomatic patients with even high grade blockage of the carotid (70% to 90%) are very unlikely to have a stroke. The risk is 0.5% per year, which comes out to one chance in 200 per year, and since most of these people are probably older people, their chances of dying from something else in the meanwhile is probably much higher. (As a rough estimate their “average” time until a stroke would be something like 100 years)

That limits the number of them who are candidates for the standard therapy to a percent approaching zero, and they are preferably treated with anticoagulants, statins, control of high blood pressure and obesity and stopping smoking etc.

I would think that that would also make them unlikely candidates for Silk as well, even though the side effects would be so much fewer. This hugely reduces the overall market size from talking about all the people with partial carotid stenosis seen on sonograms, as symptomatic ones are a small minority.

I would see that Silk would probably almost completely replace the current standard treatment after a reasonable number of years, but it won’t be overnight because of the inertia of older surgeons to change to a newer treatment from something they know very well. I would think that Silk would also enlarge the number of symptomatic patients who would be eligible for treatment because of the fewer side effects, more tolerable surgery, etc.

I therefore think that this is likely to be a reasonably good investment, but I wouldn’t get starry-eyed about it. A better treatment (even medicinal, like a better statin) could come along.

That is after a light evaluation on my part, with no expertise at all in the field.

Saul

[TMFTypeoh]

All the replies to this post show (yet again) why it is so great to share your thinking on these boards. The feedback you get is incredible.

That’s an excellent point, Saul. I’ll reach out to SILK’s investor relations team to see if I can get an interview with management. If they agree I’ll dive into the details about the true TAM and ask about alternatives.

I also want more clarity on the TAM of the other potential indications as well as the timing.

Brian

[remmdawg]

After reading the deep dive, other posts, and the excellent articles recommended by Mauser and by Mary (TMFLetItBe), I have some observations.

It looks as if asymptomatic patients with even high grade blockage of the carotid (70% to 90%) are very unlikely to have a stroke. The risk is 0.5% per year, which comes out to one chance in 200 per year, and since most of these people are probably older people, their chances of dying from something else in the meanwhile is probably much higher. (As a rough estimate their “average” time until a stroke would be something like 100 years)

That limits the number of them who are candidates for the standard therapy to a percent approaching zero, and they are preferably treated with anticoagulants, statins, control of high blood pressure and obesity and stopping smoking etc.

I would think that that would also make them unlikely candidates for Silk as well, even though the side effects would be so much fewer. This hugely reduces the overall market size from talking about all the people with partial carotid stenosis seen on sonograms, as symptomatic ones are a small minority.

I would see that Silk would probably almost completely replace the current standard treatment after a reasonable number of years, but it won’t be overnight because of the inertia of older surgeons to change to a newer treatment from something they know very well. I would think that Silk would also enlarge the number of symptomatic patients who would be eligible for treatment because of the fewer side effects, more tolerable surgery, etc.

I therefore think that this is likely to be a reasonably good investment, but I wouldn’t get starry-eyed about it. A better treatment (even medicinal, like a better statin) could come along.

That is after a light evaluation on my part, with no expertise at all in the field.

Saul

This seems like a good summary of the overall picture. As I pointed out, the current preferred surgical procedure (CEA) which Silk seeks to replace is only a recommended option in a SMALL MINORITY (less than 6%) of SYMPTOMATIC patients. Otherwise, medical therapy is the better approach. The degree of blockage is irrelevant if the patient is asymptomatic. In theory, Silk could expand the pool of symptomatic patients who could benefit from surgery. The benefit for a particular patient may not be reduced mortality but significantly reduced disability from a major stroke.

While I find it intriguing, I am also somewhat underwhelmed at this point by the likely TAM - at least in comparison to our other growth stocks, especially SAAS. We are talking about a small slice of an already minority of stroke patients (only 14% of strokes are due to carotid disease). Silk’s procedure will likely enlarge this small slice of the patient population but the amount is unknown. The TAM might be a few billion, maybe much less. The current valuation already assumes several years of hyper growth and by then, it may be butting up against its TAM or growth may slow due to a number of unknown variables. All it takes is a few shorter term or longer term poor outcomes to introduce major uncertainty. I’m leery of most medical investments due to these variables.

I think it’s a stock to keep on a watch list. If it looks like growth isn’t slowing in the next year and the TAM becomes clearer, it might be worth a small investment.

That’s my perspective as an emergency physician, FWIW.

dave

[XMFLetItBe]

In further reading on the subject it does appear that a large number of the procedures done currently for carotid artery stenosis are done on asymptomatic patients based on older studies where the benefit was compared to less intense medical therapy then practiced today - medical therapy in these trials was not up to current standards, with only a minority of patients receiving lipid-lowering therapy and blood pressure (BP) was also significantly higher than today’s standards. There is an ongoing study comparing Revascularization to current medical therapy which is more intensive - CREST 2 study.

https://www.acc.org/latest-in-cardiology/articles/2015/06/16…

http://www.indjvascsurg.org/article.asp?issn=0972-0820;year=…

So looks like a controversial area as currently don’t know if Revascularization offers benefit over current intensive medical therapy in these asymptomatic patients until studies complete but in the meantime the procedures will be offered as an option based on older studies although it looks like they may be trying to pick out those individuals at higher risk with imaging studies showing progression of plaque or transcranial ultrasound showing microemboli and such. At least that is what I gather from what I am currently reading. So a risk will be if CREST 2 studies do not show added benefit over current optimal medical therapy.

I do think the reverse filtering is a novel innovation that potentially could be utilized in other vascular procedures where emboli are a risk.

Mary
Contributor Supernova Phoenix 2

[sheila727]

I’m a stranger to this board, but this post was noted on a regular board of mine. I found it certainly intriguing at first glance, but I tend to distrust raves about equipment and devices. The regulations are much looser than for drugs, and many items get through that shouldn’t. So I took a look at the published data, and discovered this is certainly NOT the case here! TCAR is a major leap ahead.

First I want to provide a clear sense of what this device actually does, which also explains why TCAR is such a major advance. The existing procedures not only create a larger entry wound. But when they enter the carotid artery to clean out the plaque, or just to place a stent, there is substantial risk that as the procedure begins, small fragments of this plaque will break off into the bloodstream and get carried into the brain–where they may cause a stroke. There is also a risk of damage to the cranial nerve. TCAR not only greatly reduces the risk of damage to the cranial nerve. It prevents the possibility of plaque fragments escaping and causing damage. It reverses the direction of blood flow so escaping fragments can’t enter the circulation, and then it filters out the plaque before placing the stent.

The clinical trials here in the US were done at a number of our top academic medical institutions, like Harvard, Johns Hopkins, Cleveland, Wash U, etc. The data are terrific. And in addition, a study was done looking at the learning curve. It doesn’t take much time to become very proficient, and especially heartening is that the learning phase (about 15 cases) doesn’t diminish the safety or outcome. The sole difference is that it takes very slightly longer to perform until the surgeon is up to par. The study was just published: https://www.ncbi.nlm.nih.gov/pubmed/30718112.

=sheila

[JBlutarskyII]

This Cochran review outlines the clinical problem. It suggests that the efforts to make stenting effective have fallen short.

https://www.cochrane.org/CD000515/STROKE_catheter-balloons-a…

Open carotid endarterectomy is wise when the surgeon has experience and low complication rates, however the appeal of “less-invasive” surgery has caused enthusiasm for angioplasty in cardiologists, and radiologists. Results haven not been equal (see cochrane). SILK is intended to help those who are motivated to make carotid angioplasty less problematic. The problem they’re trying to solve is downstream emboli. Their solution is reverse the flow. They expect the majority of emboli will be filtered via their cannula system, providing dramatic examples. The concept is simple.

The ground-breaking work demonstrating effectiveness of open CEA surgery was done in the 1980’s by Henry Barnett and co-investigators in the NASCET trial, a rigorously controlled randomized multi-center study of around 1500 patients. The study had to be stopped early when it became clear that surgery was clearly superior for symptomatic, high-grade stenosis.

Today, there is a large cohort of non-surgical “procedure-ists” who are inspired to make stenting effective, and the numbers indicate they are trying hard. The degree to which execution of the solution is feasible is unclear, but it is somewhat telling that the company has not been acquired by Medtronic, Abbott, or Boston Scientific. They’ve had a presence for several years, and would seem to fit in well with one of those portfolios, if the projected growth was justified. As this is a VERY competitive landscape I’m genuinely curious where their M&A aspirations are.

Meanwhile, it is worth recognizing the efforts of Dr. Barnett and his team from London, Canada. The bedrock upon which the practice of open endarterectomy is built is firm. Remarkably, Dr. Barnett also led the study revealing the benefits of Aspirin on stroke prevention. He was one of the worlds leading stroke neurologists, and an inspirational guy to meet.

https://www.ahajournals.org/doi/10.1161/STROKEAHA.116.015868…

[SaulR80683]

I was wondering if this would be a potential competitor to Silk? Anyone more knowledgable than me?
Saul

ShockWave is a medical device company that has
created a system that radically improves treatment
of the calcified arterial plaque that causes
cardiovascular disease. The FDA approved the device
for use in peripheral artery disease (PAD) last year,
and the company is also going after the larger coronary
artery disease (CAD) market, as well as other applications.
Given the shortcomings of alternative procedures, I think
ShockWave has a great chance of finding a large
opportunity and perhaps even becoming the new standard
of care.

Better Than a Balloon
You’ve probably heard of angioplasty. It’s a
procedure in which arteries that have been occluded
by fatty deposits are widened to restore blood flow.
This works by inserting a tiny balloon through a
catheter and inflating it at the site of blockage, and
for many relatively simple cases, it works well.
Blood flow is increased and often further
maintained by placing a stent at the site, which
essentially keeps the artery propped open.

The problem arises in cases of more advanced
disease, when arterial plaque becomes calcified.
Conventional angioplasty is ineffective for these
hard lesions. Cardiovascular surgeons sometimes
try using high-pressure balloons to forcibly break up
the plaque enough to insert a stent, but that can
rupture the artery. Special balloons with wires or
blades to cut or score the inside of the artery can
help expansion, but they only address the intimal
(surface) calcification, not the medial (deeper)
instances. The same goes for another approach
called rotational atherectomy, which is kind of like a
Roto-Rooter for the artery, cutting or sanding from
the inside. And even when these approaches do
address the problem, they are difficult and risky,
with the potential to shed debris into the
bloodstream or cause other complications

ShockWave has developed a different solution using
lithotripsy, the same technology used to break up
kidney stones. By delivering an ultrasonic blast at
the site of a lesion, the ShockWave catheter can
break up calcium — even medial calcium inside the
vessel — without damaging the soft tissue. It
effectively delivers a pressure of more than 50
atmospheres, far more than any balloon could offer,
without rupturing the vessel.

Importantly, this is done using a familiar balloon
angioplasty technique that doesn’t require any
special changes to approach or workflow. The
surgeon simply does a low-pressure inflation,
delivers the lithotripsy from an attached portable
device, and then completes the inflation as she
would with a non-calcified lesion.

ShockWave’s intravascular lithotripsy (IVL) device
has been on the market for PAD since mid-2018 in
both the U.S. and Europe, and an ongoing study should
clear a launch in the CAD space in 2021.

An even larger potential market is aortic stenosis.
This condition occurs when the heart’s aortic valve
becomes calcified with age, causing it to narrow and
obstruct blood flow. ShockWave management believes
this is an opportunity worth more than $3 billion, and
because its procedure is relatively safe and uses a familiar
technique, it is accessible to a wider range of surgeons.

[gerrard87]

Abiomed is invested in, $15m. So its helpfull for the impella placements! Sound very promissing!

[TMFTypeoh]

I was wondering if this would be a potential competitor to Silk? Anyone more knowledgable than me?

Hi Saul,

Both companies are focused on improving blood flow in clogged arteries, so I understand why they might be viewed as competitors.

SILK is focused on a new technique that removes dangerous plaque from a neck artery by reversing blood flow and filtering it before putting it back into the body. They are displacing two decades-old sugeries that are invasive/dangerous (CAE) and ineffective (CAS).

If all goes well, they hope to expand into the heart, aortic arch, and brain.

SWAV is exclusively focused on calcium deposits, which occur in about 30% of patients with fatty deposits in their arteries. They use sonic waves to break up hardened arteries, but do not remove the calcium. They simply break it apart to help restore blood. Their technique is superior to high-pressure balloon and/or balloons with small razors in them because it is much safer (little risk of artery rupture/damaging surround tissue).

They have approval in the US for peripheral artery disease, and they hope to win approval in coronary disease (they have approval in Europe) as well as aortic stenosis, which is when the heart valves itself become calcified.

So SILK is focused on restoring blood flow by removing dangerous plaque from the body that could cause a stroke and putting a stent over it, while SWAV is focused exclusively on breaking up hardened calcium.

Could there be overlap eventually/competition eventually? Maybe – I could see a physician one day decided to either remove the plaque/calcium with surgery (SILK) or simply break up the calcium deposit (SWAV).

The good news is that both companies are displacing older technology/techniques and the market is massive. There’s plenty of room for both to grow, IMO.

Brian

[OGP82028]

Thanks for the great discussion.

Here is a video of the Shockwave procedure:
https://www.youtube.com/watch?time_continue=1&v=uNoXPHUk…

As I watch the video I wonder if the plaque would be more prone to rupture (compared to SILK and carotid endarterectomy) as the balloon is removed (since the shockwaves seem to fracture the plaque). It does seem to have utility for peripheral vascular disease where plaque rupture would be potentially less problematic. As the population ages and as we live longer and longer I could see the PVD market growing for less invasive procedures like SILK and Shockwave. For the aortic valve stenosis, in the shockwave technology, in theory, the little fragmented plaques breaking off could cause strokes.

Seems like they should combine Shockwave with SILK.

OGP

[IRdoc]

The sales rep’s claim, at least in the peripheral vascular space, is that shocking the calcium does not cause emboli. I would also venture to say that it is less likely calcium that is the problem than non calcified plaque, similar to what we see in the coronary arteries.

You could combine the two or add more and more devices for incremental benefit but then why bother reversing flow when you (theoretically) have no emboli? It makes things more and more expensive for little if any incremental benefit.

I am still not buying the fact that direct carotid puncture is safer than a femoral puncture. I have been involved with some studies for these needs devices. They take a select number of experts in the procedure (who often have a professional and/or financial stake in the procedure succeeding) who take extreme care then compare it to published literature where all sorts of people are doing the existing procedure.