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You Need This IPO On Your Radar

Brian Feroldi, The Motley Fool

In this week's Industry Focus: Healthcare, host Shannon Jones talks with medtech guru and fool.com contributor Brian Feroldi about two super exciting and promising medtech companies. First, they look at Novocure (NASDAQ: NVCR), the company behind an electric field "swimming cap" cancer treatment that has been having success with a notoriously hard-to-treat indication: glioblastoma multiforme. Find out why Novocure's recent FDA win is indescribably exciting for patients and investors, and what comes next.

Then, they shift gears to discuss a new IPO you've probably never heard of, but definitely should check out: Shockwave Medical (NASDAQ: SWAV). They'll dig into what the company does, how it is innovating with older therapeutic technologies in new and remarkably effective ways, what investors should watch out for with the stock, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on June 5, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, June 5, and we're talking Healthcare. I'm your host, Shannon Jones, and I am joined via Skype by a very special guest, our own medical device medtech champion, Brian Feroldi. Brian, let me just say, I'm always excited when you are on the show. You've just been such a huge advocate and really a champion for investors to really start paying attention and focusing on this space. I mean, this is really where you've seen the monstrous gains come from in 2018. So I'm always thrilled when I have you back because you always bring such interesting stocks to talk about. 

Brian Feroldi: I love digging into small medtech companies, they are certainly a favorite of mine. Always happy to talk about these companies. 

Jones: For our listeners, be sure to check out his coverage on fool.com. Brian writes like a beast. I don't know how you keep up with everything, between interviews, earnings coverage, updates from a lot of these companies. You can always check him out on fool.com. I highly recommend it. 

But for today's show, we're going to be giving you updates on a stock that we talked about earlier in the year, has been on an absolute tear since the start of the new year. And also, we've got an IPO that likely many of you have never even heard of, but should definitely be on your radar, and hopefully so after today's show.

Brian, let's kick things off with an update from a company we spoke about earlier this year. That's device maker Novocure, NVCR. You can say they've had a rather unorthodox approach to treating cancer, particularly when it comes to difficult-to-treat cancers -- the solid tumors, which are really the holy grail of cancer treatment today. The stock is up about 60% on the year vs. the S&P, which is up about 9.5%. That's even despite a pretty rocky pullback that happened in the spring. They just reported out news in May. 

Brian, before we dive into the updates, can you get any new listeners up to speed by just explaining how exactly their odd-looking yet very powerful device works? 

Feroldi: Yeah, sure. Novocure is a medical device company that fights cancer with electric fields. They make this funny-looking product that goes right on a patient's head, it looks almost like a swimming cap that has cords attached to a battery. The device actually emits low-dose electric fields that inhibit cell division in cancerous tumors. It sounds crazy, but they actually have the data to show that the device works. They've been growing very quickly for several years as this device has grown more and more popular with people who have glioblastoma multiforme, which is a deadly form of brain cancer. 

This company has done very well in its core markets, but the reason we're talking about them today is, just a few weeks ago, they announced that they won FDA approval for a second condition for their device. They now have the thumbs up from the FDA to treat a disease called mesothelioma, which is a cancer that lines the lungs, the stomach, and the heart, and it comes as a result of exposure to asbestos. 

The reason that this was newsworthy isn't because it's a huge market. Thankfully, mesothelioma is a rare disease, only about 3,000 or so diagnoses in the U.S. every year. The reason that we wanted to update our listeners on this is because it showcases that the technology does work in areas outside the brain. That opens the door down the road for this company to win FDA approval in a number of markets that are just massive -- lung cancer, pancreatic cancer, brain metastases, those indications could dwarf mesothelioma and brain cancer. So, a big positive here. 

Jones: Yeah, huge positive. Again, not newsworthy because of the market with this new approval, but it's really about validation of their tech. You talked about some of the potential indications that they have on tap in their pipeline -- lung cancer, pancreatic cancer, even ovarian cancer. These are indications where nearly 300,000 Americans are diagnosed each year in the U.S. alone. That's 24 times larger than the GBM indication, the aggressive form of brain cancer that you were mentioning. So, this is really important. 

I think another point to highlight is that with GBM, it is a very aggressive form of brain cancer, but it's also a very difficult to treat form of brain cancer. The prognosis is very, very poor for patients that have this. So, any improvement that has come because of their Optune system has been welcomed. So when you see a company like this with an innovative, odd-looking device, if you will, actually pushing the needle in huge unmet need areas, and going after really the most aggressive form of cancer out there, you snag approvals there, now you're also getting approvals in mesothelioma -- if anything, it's just another notch in their platform that says this technology actually works. 

I think this also bodes well from a coverage standpoint. Brian, you've written about this a little bit in some of your articles, too -- Medicare historically has not been able to cover Optune. They've basically refused its $21,000 a month price tag. They also got news in May that Medicare has a proposal out to potentially start covering this in most cases. Really, I think, not only is it the FDA approval, it's the coverage that's expanding, potentially in line with some of their commercial coverage that they're already offering. 

If anything, I get more excited the more we talk about this company, even though I was a skeptic at first. I can admit that, Brian.

Feroldi: Oh, I was, too. I thought that their tech was like hocus-pocus magic when I first learned about it. But the more I've dug in, the more I've learned, the more interested I've become. I think that the medical community feels the same way. I mean, this technology is so different from everything else that's out there. But the more data that they provide, the more patients they get on, and the more FDA approvals they win, it becomes harder and harder to ignore. Lots to be excited about here. 

Jones: Yeah, lots to be excited. Just to close out this first half of the show, they also reported first-quarter results. Revenue shot up 41% to $73 million, gross margin expansion by 800 basis points to 73%. Still have a net loss on their most recent quarter, as most companies do at this particular stage. But it's really good to see that loss narrowing, falling 41% to $12.2 million. It'll be really interesting to see how their Q2 stats fare. We'll be getting updates in the next couple of months from them shortly on that. And, they've got four Phase III pivotal trials right now in the pipeline. So, a lot to look forward to with this company. Of course, Brian, we'll be sure to keep all of our listeners up to date on the latest. 

Let's turn our attention to the company most people likely have not heard about, but I can tell you, it has been buzzing around the hallways here at Fool HQ. I've heard so much about this company. It's been on my list to actually do a show with you, Brian, on this company. That company is none other than Shockwave Medical, SWAV. Brian, despite its performance since it debuted on the market, this really still is a company that just hasn't gotten enough investor attention, investor love, I think. What can you tell us about its debut on the market a little bit earlier this year, and why you became interested in the stock? 

Feroldi: That makes sense. For our listeners, this is a company that came public in March of this year. That is right at the time when Pinterest, Lyft, Uber, Beyond Meat -- I mean, we've been spoiled with the number of IPOs we have. It makes complete sense how this company, which should have gotten a little bit more fanfare, has been just kind of brushed aside. But this company has been just red hot. The IPO priced at $17, which was above their range. They're currently trading about $58. So this has been a triple since it came public. 

To answer your question, the reason that this company was on my radar at all was because another medical device company that I deeply admire, Abiomed -- we've talked about them on the show before -- they actually took an equity position in this company prior to its IPO. They also helped get the IPO going. These two businesses are now working together. So, getting the thumbs up from a proven market winner like Abiomed was a big vote of confidence for this company in my book. 

Jones: Let's talk about their tech. What's amazing to me with Shockwave Medical is not necessarily that they invented something new. Rather, they took two different types of tech, put it together as one, and they've had some pretty astonishing results, to say the least. What can you tell us about how their tech works, and particularly how it can address many of the needs related to heart disease?

Feroldi: Shockwave is focused on the cardiovascular disease market. They sell an intravascular system that makes use of a technology that has been around for decades called lithotripsy. Millions of people in America and around the world have developed fatty deposits in their arteries. That can cause all kinds of problems, it restricts blood flow and doesn't allow blood to circulate around the body. So, when this happens, a very common procedure is to use angioplasty, which is when a tiny balloon is inserted through a catheter into the blocked artery, and then it's inflated to widen the artery at the point of the blockage and restore blood flow. Now, that technology has been around for a long time. It works very well. However, in about 30% of cases, the plaque that's blocking the artery becomes calcified, so it becomes basically rock-hard. In those situations, normal balloons don't work, so doctors have to use either very high-pressure balloons, or they even insert balloons that have blades in them to literally cut out, to score, the inside of the arteries, to relieve the extreme pressure from that calcium. And in very tough cases, in very blocked cases, where the calcium is just everywhere, they actually use a miniaturized drill to be inserted into the artery to literally drill out the calcium. As you can imagine, using scoring and a drill can be very risky. Not only can it damage the artery wall, but it can also cause debris and the calcium to be shed out and go into the bloodstream, and that can cause problems for the patient both upstream and downstream. 

Shockwave has an innovative solution here. They use a technology called lithotripsy, which has been used to break apart kidney stones for decades in patients. What they do is, they developed a device that is inserted with a balloon directly into the impacted artery. Then the device creates small sonic waves that actually break up the calcium deposits in the hardened arteries while leaving all the soft tissue that's around it unharmed. These sonic waves actually break up the calcium and allow blood flow to be restored in a much safer manner.

Jones: I think we should retitle this show All About Physics. That's really the simplicity of physics. I mean, you're talking about sonic waves; you're talking about, with Novocure, electricity. It's amazing to me, the simplicity of tech that's already out there, is now being applied in an innovative way for just huge need. Sometimes it's not about the expensive gene therapy that costs over $1 billion. Anyway, it comes down to the simplicity of technology, and that's what this company is all about. But really, it's their business model that also is really intriguing because they've got some reoccurring revenue streams that are built in as well. 

Feroldi: Yeah. Shockwave basically sells three devices. They sell the device itself, which is the lithotripsy generator, which is about the size of an Xbox. It plugs right into the wall. That connects to a connector cable that powers the actual catheter. And then Shockwave also sells the disposable catheter as well. This company is still pretty small from the revenue standpoint, but down the road, as those catheters get used more and more, they are disposed of after each treatment. So the business model will have a recurring revenue component built into it over time. That makes me excited as an investor. 

And to quickly put some numbers behind what this company has done, still very, very early on here in the stage. Last year, the total revenue for the full year was just over $12 million. Thankfully, that number is growing extremely quickly as more and more providers grow used to this technology. Last quarter, their revenue actually jumped 450% to over $7 million. They expect revenue for the full year to just about triple over 2018. So, growing very fast. 

Jones: I've seen some analysts pegging Shockwave's top line potentially surpassing $250 million by 2023, about a 20-fold increase over the next four to five years. Brian, where is this coming from? 

Feroldi: The big thing for investors to look at with any new technology is, OK, what's the potential here? Where they could be at the end is hopefully much bigger than where they are right now. They currently have regulatory approval to treat peripheral artery disease with this device, which is when blood flow is restricted in the limbs, usually in the leg. They have approval for this both in the U.S. and in Europe. Management pegs that opportunity there at about a $1.7 billion market. 

Now, a couple of other indications down the road could expand that number significantly. Right now, they do have the approval in Europe to treat coronary artery disease, which is the arteries that supply the heart with blood. You can use Shockwave's device on that in Europe. And they are currently marching down the path to get the approval there in the U.S., too. If everything goes well there, that could be another $2 billion opportunity for the business. 

And then, finally, another area that they think that this technology can be applied to is a treatment for aortic stenosis, which is, the heart valves themselves, when they become calcified. The heart valves can become narrowed and obstruct blood flow. And if they can win approval for that indication, that would add another $3 billion market on top of everything we already talked about. So, the numbers here could be huge in time. 

Jones: Shockwave right now is trading at about $58 a share. It has a market cap of about $1.6 billion. Brian, on the one hand, I think, as an investor, this is insanely expensive, especially looking at the revenues that you just mentioned earlier. On the other hand, though, you laid out the case for the total addressable market, which is key for any investor to be aware of. I mean, just in those indications alone, even if they only capture a small percentage of those therapeutic indications moving forward, I have to step back and think now could actually be the best time to get in on this stock, especially ahead of those multi-billion-dollar indications. 

Feroldi: Yeah, there's no doubt that buying this stock today is a bitter pill to swallow. I mean, like you said, revenue is expected to be about $33 million to $36 million for the full year, and they're trading at $1.6 billion. Literally 50 times full-year revenue estimates. That is an enormous premium. But, like we talked about, it makes sense why Wall Street has such high hopes for this business. Not only are they going down a potentially huge market, but they're already showing extremely fast growth. When Wall Street gets excited like that, stocks can just soar. 

The thing for investors to know is that this is going to be a volatile stock. I mean, this is priced at such a high value that investors can expect huge swings up and down. If you are interested in this stock, and you get to know it, we always recommend buying in thirds -- taking an initial position and then building it out over time as you see the company go along. But from what I've seen, I totally understand why Wall Street is very excited about this business. 

Jones: A lot to like here, but with volatility, not for the faint of heart. Starter position may be the way to go with this particular company. 

Brian, always a pleasure to have you on the show! We'll have you back on soon, hopefully, to give us some more good updates, more good stock tips, in the weeks and months ahead. 

Feroldi: Yeah, that sounds great! I look forward to hopefully seeing you at Fool Fest tomorrow! 

Jones: Yes, looking forward to that! And that'll do it for this week's show! Thank you so much for tuning in! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is being mixed by Austin Morgan. For Brian Feroldi, I'm Shannon Jones. Thanks for listening and Fool on!

Brian Feroldi owns shares of Abiomed, NovoCure, and Pinterest. Shannon Jones has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Abiomed. The Motley Fool recommends ShockWave Medical and Uber Technologies. The Motley Fool has a disclosure policy.