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IPO Update: Shockwave Medical Files Proposed Terms For IPO – Seeking Alpha

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Quick Take

Shockwave Medical (SWAV) intends to raise $75 million from the sale of its common stock, per an amended registration statement.

The company sells medical instruments to assist in removing calcified plaque in arteries and peripheral blood vessels.

SWAV is growing quickly from a low base but I have concerns about the high valuation management is asking investors to pay. I’ll look for a lower entry point post-IPO.

Company & Technology

Santa Clara, California-based Shockwave Medical was founded in 2009 to improve patient outcomes via their intravascular lithotripsy [IVL] system that uses sonic pressure waves for the treatment of calcified plaque in arteries.

Management is headed by President and CEO Doug Godshall, who has been with the firm since 2017 and was previously CEO at HeartWare.

Shockwave has developed IVL technology which uses ‘short bursts of sonic pressure waves, which are generated within the IVL catheter, travel through the vessel and crack calcium with an effective pressure of up to 50 atmospheres (a unit of pressure) without harming the soft tissue.’

Below is a brief overview video of the IVL system procedure and method of action:

Source: Shockwave Medical

Shockwave Medical’s products include:

  • 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.
  • The C2, representing an IVL catheter with two sonic wave emitters, intended for the treatment of coronary artery disease [CAD] was CE-Marked in June 2018. It is currently being sold in Europe.
  • The S4, representing an IVL catheter with four sonic wave emitters, intended for the treatment of PAD below the knee. Shockwave has acquired US 510[k] clearance and a CE Mark and is currently engaged in a limited market evaluation of the S4’s performance in the heavily calcified below-the-knee environment.

The firm has obtained an investigational device exemption and will be conducting a global clinical trial with its C2 catheter system to support pre-market application and Shonin submission in Japan for the treatment of CAD.

Investors in Shockwave Medical included Fidelity Management, T. Rowe Price, Sectoral Asset Management, Venrock, Sofinnova Partners, Deerfield, RA Capital Management and Ally Bridge Group.

Source: VentureDeal Venture Capital Database

In the US, Austria, Germany, and Switzerland, Shockwave markets its products through its own direct sales organization as well as through various distribution partners in other geographies.

Sales and marketing expenses as a percentage of revenue have dropped significantly as revenue has increased, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

2018

143%

2017

370%

Sources: Company registration statement, IPO Edge

Market & Competition

According to a 2018 market research report by Markets and Markets, the global lithotripsy device market was valued at $1.41 billion in 2018 and is projected to reach $1.76 billion by 2023, growing at a CAGR of 4.5% between 2018 and 2023.

The main factors driving market growth are technological advancements and a growing incidence of urolithiasis.

The North American region dominated the lithotripsy devices market in 2017 due to a large number of surgeries performed each year and the high prevalence of kidney stones.

Major competitors that provide lithotripsy devices include:

  • Boston Scientific Corporation (BSX)
  • Siemens (OTCPK:SIEGY)
  • Dornier MedTech
  • Cardiovascular Systems (CSII)
  • Medtronic (MDT)
  • Olympus America
  • DirexGroup

Source: Sentieo

Financial Performance

SWAV’s recent financial results can be summarized as follows:

  • Sharply growing topline revenue
  • Swing to positive gross profit
  • Swing to positive gross margin
  • Increased operating losses
  • Growing cash used in operations

Below are the relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2018

$ 12,263,000

613.4%

2017

$ 1,719,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

2018

$ 5,013,000

2017

$ (1,117,000)

Gross Margin

Period

Gross Margin

2018

40.9%

2017

-65.0%

Operating Profit (Loss)

Period

Operating Profit (Loss)

2018

$ (41,200,000)

2017

$ (30,865,000)

Cash Flow From Operations

Period

Cash Flow From Operations

2018

$ (41,465,000)

2017

$ (30,347,000)

Sources: Company registration statement, IPO Edge

As of December 31, 2018, the company had $39.6 million in cash and $23.2 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended December 31, 2018, was a negative ($43.4 million).

IPO Details

SWAV intends to raise $75.0 million in gross proceeds from an IPO of 5 million shares of its common stock at a midpoint price of $15.00 per share, not including customary underwriter options.

Certain existing shareholders have indicated an interest to purchase shares of up to $10.5 million in the aggregate representing up to 14% of the IPO. This is typical for a life science IPO and is a positive signal to prospective IPO investors.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $510.8 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 19.5%.

Per the firm’s filing, it plans to use the net proceeds from the IPO as follows:

for sales and marketing activities to support the ongoing commercialization of our IVL System, including, but not limited to, the expansion of our sales force, additional medical affairs and educational efforts and the expansion of our international sales presence;

for research and development and clinical studies; and

the remainder for working capital and general corporate purposes.

Management’s presentation of the company roadshow is not available yet.

Listed underwriters of the IPO are Morgan Stanley, BofA Merrill Lynch, Wells Fargo Securities, and Canaccord Genuity.

Valuation Metrics

Below is a table of relevant capitalization and valuation metrics:

Measure [TTM]

Amount

Market Capitalization at IPO

$384,241,275

Enterprise Value

$510,787,275

Price / Sales

27.48

EV / Revenue

36.53

EV / EBITDA

-7.09

Earnings Per Share

-$2.72

Total Debt To Equity

-0.19

Float To Outstanding Shares Ratio

19.52%

Proposed IPO Midpoint Price per Share

$15.00

Net Free Cash Flow

-$74,218,000

Sources: Company Prospectus, IPO Edge

As a reference, SWAV’s clearest public comparable would be Cardiovascular Systems (CSII); shown below is a comparison of their primary valuation metrics:

Metric

Cardiovascular Sys. (CSII)

Shockwave (SWAV)

Variance

Price / Sales

5.28

27.48

420.5%

EV / Revenue

4.24

36.53

761.6%

EV / EBITDA

205.89

-7.09

–%

Earnings Per Share

$0.05

-$2.72

–%

Sources: Company Prospectus, IPO Edge, Sentieo

Expected IPO Pricing Date: March 6, 2019.

An enhanced version of this article on my Seeking Alpha Marketplace research service IPO Edge includes my detailed commentary and opinion on the IPO.

Members of IPO Edge get the latest IPO research, news, market trends, and industry analysis. Get started with a free trial.

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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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