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Commonstock says Buy The Dip. I say Buy The Rise. My
$SWAV Pitch
I didn't realize the cut-off for the Buy the Dip competition was yesterday but whatever. Sill posting!

Being that this is the literal first actual due diligence I have ever written, I figured why not write it about a medical company I don't understand very well but am very bullish on. Who knows, maybe I'll learn some things along the way. Here goes nothing!

Also, I encourage any cardiologists or anyone with better knowledge of the technology or financials to please correct anything I get wrong in the comments. The best way I learn is by making a mistake!


Who is Shockwave Medical?
Shockwave Medical developed and and commercialized intravascular lithotripsy (IVL) technology.

WAIT. Don’t click away yet. Stick with me for this part. The financials are worth the wait.

What is intravascular lithotripsy? Let’s break it down.

Intravascular: Situated in, occurring in, or administered by entry into a blood vessel (per Merriam-Webster’s).

Lithotripsy: An electrical current that creates a spark within water, vaporizing it, which create pressure waves at the speed of sound that pass safely through soft tissue to break kidney stones into smaller pieces. It’s worth noting the most common form of kidney stone is a calcium stone, calcium coincidentally being a common for of atherosclerosis which is the buildup of plaque in blood vessels

Ok, so IVL is the use of an electrical current that causes a momentary spark that creates a pressure wave that breaks up calcium buildup in arteries while safely passing through the thin membrane that lines the inside of the heart and blood vessels. This treatment allows stents to be placed in areas that would have been difficult or impossible to be stented using other treatment methods.

Shockwave has gained FDA and CE approval for IVL treatments of peripheral and coronary artery disease while treatment of aortic stenosis is in the clinical development stage.

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Is IVL safe? Well, I’m not the kind of person who can read a clinical study and understand it but my wife, who is a doctor and published author herself, thankfully is one of those people. She kindly perused several studies and confirmed that the data does indicate that IVL is safer for the patient over existing methods such as PTA (Percutaneous transluminal angioplasty, colloquially known just as angioplasty). Shockwave’s site has several different visualizations of their products safety and efficacy.

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What are the financials?
You made it. Thanks for sticking around (or skipping ahead). Prepare to see revenue and margin growth that will knock your calcium off.

The development and refining of IVL began in 2009 and gained initial FDA approval in 2017, the year they first recognized revenue, a whopping $1.7MM. From then through 2021, their revenue CAGR was over 240%, with 2021 bringing in over $237MM.

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As revenue has soared, gross margins have flourished with 2021 coming in at 85% and Q1’22 at 86.2%, an increase from 75.3% in Q1’21.

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Operating margins on a TTM are 10.7% and came in at 16.4% in
Q1’22, again an incredible improvement from past quarters and years.

You want profits? They have that as well. On a TTM basis,
Shockwave has profits of $29MM, good for a 9.8% net profit margin. They are
also free cash flow positive over the LTM and dilution, while high early on as
can be expected from an unprofitable medtech company who IPOs, was just 6.1% in
2021 over 2020.

Another metric that matters to me is revenue per employee.
This can be a greater indicator of hiring just to say you hired without
actually adding to the bottom line. A good example of the latter is Appian
($APPN) who grew employee count 109.3% from 2017 to 2021 while revenue grew
108.9%. Non-retail companies should be able to grow revenue exponentially faster
than headcount. So how did Shockwave do? Pretty, pretty, pretty good, despite
ramping up head count, primarily in sales and marketing to sell their newly
approved treatments.

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What’s the valuation?
While Shockwave is by no means cheap, they are trading near their own LTM and NTM lows for P/S and EV/S. P/FCF is 324 although I wouldn’t use this metric just yet as they just became FCF positive.

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The balance sheet is solid with long-term debt of $9MM vs cash and equivalents of $66.3MM.

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How’s inside ownership?
From the Co-founders, nope, not really. The original co-founders of Shockwave are Daniel Hawkins, businessman, John Adams, electrical engineer, both of whom are described by the company as serial entrepreneurs. They came up with the technology for IVL while working in a medtech incubator so t’s not entirely surprising they developed it and moved on. They added Stanford cardiologist Todd Brinton, head of Stanford’s biodesign program and also an entrepreneur, as a third co-founder later on. Brinton stuck around until Dec 2018 before moving on to become the Chief Scientific Officer and VP of Edwards Lifesciences ($EW). Hawkins transitioned from CEO to Sr. Advisor in May 2017 and started a new company, Avail Medsystems, in Aug 2017. He stayed on as a Sr. Advisor until Nov 2020. Adams is a mystery as my googling didn’t turn up much. Since none of the three are insiders, I haven’t been able to determine if any still hold shares in SWAV.

As of Q1’22, directors and executives owned 3.9% of the company, with Doug Godshall, the current President and CEO, accounting for 1.6% of that and Dr. Frederic Moll, a board member, accounting for another 1.1%. The inside ownership is a bit disappointing but at least they have an experienced team who has been with the company for most of its post-FDA run. The CEO joined in May 2017 while and CFO joined in April 2016.

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Who are the competitors?
So… ummm… nobody? According to Endovascular Today, Shockwave is the only company with IVL products on the market. This is their tech. That would make them not just the first mover and top dog in the IVL field but the only moved and the only dog in this field that.

What’s the TAM?
Shockwave puts their current TAM at over $8.5B, of which they’ve captured less than 3%. That TAM includes Japan, where they just received regulatory approval in in March of this year, and China, where they just received regulatory approval in May of this year. Management stated on their recent conference call that they expect to recognize sales in both countries this year and have begun ramping up sales and marketing teams in both countries.

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In a January 2022 report by DelveInsight on the Lithotripsy Devices Market, it was noted that technological advancements in lithotripsy is expanding the global market and bringing in procedures that previously weren’t within the lithotripsy domain.

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Gaining regulatory approval in new markets, the increase in heart disease worldwide, the continued improvement and efficacy of the IVL technology, and expanding its use cases, I could easily see their TAM growing well beyond their current estimate.

On heart disease in particular, the coronary segment was their main growth driver in 2021, accounting for 68% of their revenue after being just 36% in 2020 and 2019 each.

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Meanwhile, the US accounted for 79% of their revenue after being between 50-60% the previous three years. Assuming successful launches in Japan and China this year, I’m hoping to see APAC be broken out as its own geographical category in 2023 and then new markets come in sight to continue expanding their TAM.

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How has the stock performed?
Sorry friends but there’s no dip to buy here, at least not right now. Not only has Shockwave thumped SPY and QQQ over the past 3 years, it’s also a green stock in the past year while SPY and QQQ are firmly red.

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What’s my position?
As of June 30, SWAV was my 22nd highest position by total cost basis, which puts it in the top 20% of my portfolio. I first purchased shares in August 2021. I increased my share count by 60% in February, 13% in March, and another 16% in May. My average cost per share currently sits at $172.91. Shockwave has easily been a benchmark beating position for me so far, but take that with a big grain of salt as I’ve only held for ~11 months. Considering my time horizon is decades, my returns vs my benchmarks over such a short timeframe should carry little weight.


What am I watching going forward?
To keep my thesis intact, management needs to keep growing revenue without needing to expand headcount to absurd levels. Revenue per employee is a metric I watch for that. Intuitive Surgical ($ISRG) is a good comp in my book and they are around $600,000 in revenue per employee.

I’ll also be watching their IR page for progress of their clinical trials and news of any regulatory approvals in new countries or expanding the type of procedures IVL can be used for in existing countries.

Lastly, I need to see Japan and China take off. Failed adoption wouldn’t be a company destroyer as the US can hold it owns in heart disease but APAC is a significant portion of their estimated TAM. If management bungles this, it would be a severe blow to my trust in their ability to execute.


That's it?
They close their investor presentations with the below slide which I enjoy so I just had to include it.

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Nathan Worden's avatar
Still worth posting! Great pitch!
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