Is Silk Road Medical a Buy?

Silk Road Medical (SILK 0.28%), a medical device maker focused on stroke prevention, came public in 2019 with little fanfare. That's a shame, because this company is growing extremely rapidly as it commercializes a new type of surgical procedure that helps greatly lower the risk of stroke. In this episode of Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi discuss in detail Silk Road Medical's technology, financials, and opportunity.

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This video was recorded on Oct. 23, 2019.

Shannon Jones: All right, our second IPO is none other than Silk Road Medical, that is ticker symbol SILK. Brian, this is another fascinating company. What can you tell us about what they do and ultimately what problem they are attempting to solve for?

Brian Feroldi: Sure. Silk Road Medical is in the stroke prevention market. For listeners who are unacquainted, a stroke is most commonly caused when blood flow to the brain suddenly becomes blocked for some reason. The most common cause is carotid artery disease, which is when artery plaque that's in the neck breaks away, travels up to the brain, and causes blood flow to get cut off. That obviously is a big problem. To put some numbers around it, 800,000 Americans have a stroke each year. That leads to 140,000 deaths. This is actually one of the leading causes of deaths. The best way to treat a stroke is to prevent it from happening in the first place. There are a few treatment options that are currently available, but Silk Road Medical is pioneering a new way that fixes some of the things that have prevented the other two from being successful.

Jones: Yeah. Stroke is, I'll just say, Brian, the fifth most common cause of death. So it's definitely up there. But as you were saying, when it comes to preventing stroke, there are two treatment options, two common treatment options. But both, I guess, come with their own pros and cons.

Feroldi: Yes. The first treatment option that surgeons have for stroke prevention is an invasive surgical procedure called carotid endarterectomy. We're just going to call that CEA from here on out to make it easy on us.

Jones: Fair enough, Brian.

Feroldi: But this is when a surgeon makes a big incision into the patient's neck and manually scrapes away the plaque that is in the neck. If they can get the plaque out, it will prevent it from breaking away and going up to the brain. The good news about this procedure is that it's very effective. If a surgeon can go in there, remove the plaque, it does a great job at minimizing the chance that the patient will go on to have a stroke. The bad news is, this procedure is highly invasive and very risky. When the surgeon opens up the neck and is scraping away the plaque, that in itself can sometimes trigger a stroke or a heart attack, because the plaque is being loosened right then and there and it's going directly up into the brain. This is something that surgeons will do, but it is not a great option specifically because the procedure itself is so risky. 

The second option was developed more recently, and it is a minimally invasive procedure called transfemoral carotid artery stenting, and we're just going to call that CAS. This is when a surgeon enters the body through the leg and snakes up into the neck, and they place a stent over the plaque. It goes in the artery, and the stent expands. That is designed to hold the plaque in place so that it doesn't break away. The upside of a CAS is that it's way less invasive than a CEA. You're going into the leg. It's minimally invasive. That's all good. The downside is that this procedure is not nearly as effective at preventing the stroke as the CEA is, and the reason is, the plaque is still in the body and it's being held in place, but you're not removing it from the body. 

One option, been around for a long time, very invasive but very effective. Second option, more recent, much less invasive but much less effective. 

Silk Road Medical has figured out a way to combine the best of these procedures, take the best parts of both and combine them together to make an option that's both safe and effective. They call this new procedure transcarotid artery revascularization. We're going to call that TCAR from here on out. A TCAR is when a surgeon makes a small incision into the patient's neck, and then a product called the ENROUTE neuroprotection system then taps into the artery's blood flow and actually reverses the blood flow away from the brain. It literally goes into the neck and almost sucks the blood backwards out of the body. The blood is then filtered through a mesh screen that collects any of the loose plaque. Then, the blood is reinserted into the patient's body through their leg. So, by pulling the blood away from the brain, then cleaning out this plaque, it minimizes the chance that any plaque will flow up into the brain. By filtering it, you can take all of that dangerous plaque, get it out of the body, and you can do so through a minimally invasive procedure. 

This technology has proven to be both extremely safe for the surgery itself, and yet it's as effective as the highly invasive CEA. Very, very interesting technology.

Jones: You were talking a little bit about the risk. Pretty remarkable, the risk of having a stroke in the first 30 days after having this TCAR procedure is 1.4% vs. 2.3% for that first procedure, the CEA one that you mentioned, Brian. But really, the benefits don't necessarily stop there. This is a surgery that happens much faster, does reduce the actual length of time that the patient is in the hospital. You talked about the huge scar of the CEA. I'd encourage any of our listeners to check that out. It's essentially almost from your chin all the way down to your collarbone, a huge scar. But with TCAR, it's a very small incision. Much less invasive than the procedures that are out there. What we've seen, Brian, growth with this particular procedure and this particular technology is growing through the roof.

Feroldi: Yeah. This has been on the market for a couple of years. Surgeons performed 1,800 TCAR procedures last year. That number is going to grow to over 8,000 this year. This is definitely taking off for all the benefits that we talked about previously in the show. For perspective, about 168,000 carotid revascularization procedures are performed each year just in the U.S. That translates into about a $1 billion opportunity for just the stroke prevention procedure.

But Silk Road believes that this technology could also be used in other disease states down the road. They're currently researching how they could use it for diseases of the heart, for the aortic arch, and of the brain. But, a $1 billion market opportunity within the U.S. just within its current labeling. Massive room for growth.

Jones: Massive room for growth. Very exciting potential. But how are they doing financially right now, Brian?

Feroldi: Very similar to TransMedics, it's still very early stages for this company. Their revenue in 2017 for the full year was about $14 million. The current estimate for this year is $61 million, so about a 4X in two years. Last quarter, top line growth was 92%. Another impressive number financially about this company is that even though their sales are just getting started gross margin for their device is 75% and growing. Very fast sales growth, very high gross margin. I think listeners should know at this point that's a combination that we love to see as Fools. Net loss last quarter was $12 million. That's a completely acceptable number. This is a company with $300 million in cash after their IPO. They can fund themselves for many, many years, even if their cash burn doesn't move at all. 

This is a very fascinating business. Wall Street is onto this growth story. They've priced it appropriately. It's more than 20 times sales. But the upside here, just like with TransMedics, could be enormous. The potential here is huge.