Silk Road Medical Inc. (NGS: SILK). We see solid long-term growth opportunities for Silk Road given the safety and efficacy advantages of the company’s TransCarotid Artery Revascularization treatment over more traditional procedures. The company is also expanding its salesforce and continues to train physicians to use the TCAR procedure, which should help to drive growth in 2021. Based on SILK’s risk profile and relatively high valuation, we see the stock as appropriate for risk-tolerant investors.
While sales growth slowed in 2Q20, procedural volume for SILK’s implants rose over the course of the quarter, with 385 procedures in April, 658 in May, and 900 in June. At a recent investor conference, management also said that volume continued to improve early in the third quarter.
The TCAR procedure utilizes catheter-delivered technology and implants developed by Silk Road.
On August 5, the company posted a 2Q20 net loss of $10.4 million or $0.32. Revenue rose to $15.1 million from $14.9 million in 2Q19.
The 2Q gross margin was 65%, down from 75% a year earlier, reflecting the impact of higher production costs, temporarily idled manufacturing operations, and lower demand. Management expects the gross margin to expand as sales volume improves.
EARNINGS & GROWTH ANALYSIS
We expect procedural volume to increase in 2H20, helped by the company’s salesforce expansion and physician training efforts. Based on these factors, we are narrowing our loss estimates to $1.30 from $1.60.
FINANCIAL STRENGTH & DIVIDEND
On SILK is Medium-Low. At the end of 2Q20, the debt/equity ratio was 35.5%.
We expect SILK to focus its capital allocation on R&D, product development, and the expansion of commercial operations. We also expect management to allocate resources to M&A in order to expand the TCAR franchise.
Investors in SILK face risks. The stock has a $2.8 billion market cap. As such, it is likely to be more volatile than large-cap medical device stocks. Silk Road also faces competition from larger companies that make devices that help treat carotid artery disease. In addition, due to the pandemic, the company has largely transitioned to online sales and marketing activities. This shift could slow adoption of the TCAR procedure and weigh on sales growth.
The TCAR procedure involves threading a balloon catheter into the carotid artery from an incision near the groin to expand the narrowed artery. In parallel with the catheter procedure, another device is deployed to temporarily reverse blood flow to the brain in the treated artery in order to prevent any broken off clots from moving to the brain.
Valuation based on P/E is meaningless given our loss estimates for this year and next. However, given the large addressable market for TCAR procedures, both in the U.S. and overseas, we think the company has solid growth opportunities. Despite near-term pressure from COVID-19 on hospital procedural volumes, we see a strong long-term growth profile for SILK.