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Is Silk Road Medical a Buy?

By Mark Prvulovic - Feb 6, 2020 at 10:26AM

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Less than a year after it went public, should investors be excited about this stroke-prevention biotech?

One biotech initial public offering (IPO) that piqued investors' interest last year was a stroke-prevention company that's quickly become a Wall Street darling. Silk Road Medical (SILK 1.17%) went public in April 2019, and despite what's been a bit of a tumultuous past few months, its stock ended January up over 25% from when it first started trading.

While the company seems to have a promising future ahead of it, nothing is guaranteed in the turbulent world of biotech. Let's take a moment and look through the company's details and see whether the stock is a good investment or not.

A 3D image of a person suffering from a stroke holding their head.

Image source: Getty Images.

Understanding strokes

A stroke occurs when there's a blockage in the arteries providing blood to the brain. Cells in the brain start to die within minutes without fresh blood, with strokes often leading to significant complications such as brain damage. Most often, strokes happen when the blood vessels leading to the brain get clogged with plaque deposits, which makes it easier for them to become blocked due to passing blood clots. These types of strokes are referred to as ischemic strokes, and while there are other types, ischemic strokes account for more than 87% of all stroke cases.

Nearly 800,000 people suffer a stroke each year in the U.S., and 140,000 of them die as a result. As such, there's a major market for companies that can come up with new treatments to help patients who are at high risk.

Current treatment methods

There are two main types of stroke treatments used by surgeons today. The first is a carotid angioplasty, where a doctor puts a thin, metal-mesh tube known as a stent inside a patient's artery. Once a surgeon gets the stent in the area where there's a plaque buildup, the stent inflates like a balloon, crunching the plaque and allowing more blood to flow in the area.

A second, much more invasive, type of procedure is known as a carotid endarterectomy. In this case, surgeons cut directly into the main arteries in the neck, the carotid artery, and manually scrape away at the plaque deposits in the neck. While effective, the problem is that this procedure is understandably quite risky. The carotid artery provides blood directly to the brain, and there are cases where a piece of freshly broken plaque goes directly in the brain, likely causing a stroke in the process.

Depiction of a stent mesh being inserted inside an artery.

Image source: Getty Images.

What Silk Road Medical offers

Silk Road Medical has developed a new, safer procedure called a transcarotid artery revascularization (TCAR). A device manufactured by Silk Road, known as the ENROUTE neuroprotection system, is inserted via a small incision in the neck. This device ends up reversing the blood flow in the artery leading to the brain, filtering the blood through a mesh that collects loose plaque particles. This plaque-free blood then gets reintroduced via the patient's leg.

The idea is that by reversing the blood flow from the brain, loose plaque won't accidentally trigger a stroke, as is possible in patients undergoing a carotid endarterectomy. Silk Road Medical's new technology allows surgeons to perform a much easier procedure than what's currently available to stroke patients.

Silk Road expects that the global market for this new TCAR procedure would total $2.6 billion per year, which is pretty substantial given the company's revenues only came in at $17.0 million during its most recent third financial quarter.

There's a fair bit of clinical evidence supporting the effectiveness of the TCAR procedure as well. Multiple studies comparing the effectiveness of TCAR to regular treatments showed a significant reduction in the chance of strokes, with some studies showing a 39% reduction for patients using TCAR.

Current labeling restrictions

While all this seems to suggest an optimistic future for Silk Road's TCAR procedure, investors need to remember that the U.S. Food and Drug Administration (FDA) has still limited the company from applying its technology to all patients at risk of a stroke. There are a number of safety restrictions that the agency demands for patients using the TCAR procedure, such as having at least five centimeters of healthy, clear carotid artery tissue to work with.

In terms of financial impact, these restrictions end up significantly reducing the company's current market scope. Out of the $2.6 billion market potential Silk Road has predicted, $1.0 billion of that comes from the 160,000 or so patients undergoing conventional stroke procedures, while the other $1.6 billion comes from potentially untreated patients. Out of the $1.0 billion figure, Silk Road is only approved to treat high surgical risk patients, around 111,000 or a $665 million annual market.

The remaining 57,000 patients who are considered to have only a standard surgical risk, which represents $340 million in annual revenue, are still off the table until the company secures expanded approval from the FDA. Although it wouldn't be surprising to see the agency grant this widened approval, nothing's set in stone yet.

Looking at the financials

Silk Road Medical has a market cap of $1.45 billion, but the company's annual revenue remains fairly small despite its size. The company's most recent third-quarter results saw sales reach $17.0 million, which is up 77% in comparison to Q3 2018 but still isn't enough to make a profit. Operating expenses grew by 77% as well, hitting $20.3 million in Q3 2019, while Silk Road's net loss for the quarter came in at $8.0 million.

However, the company does have a pretty solid cash position. With $112.3 million in cash and cash equivalents, Silk Road can finance itself for a long time without needing more funds, and the company is growing its revenue at a solid rate. Long-term debt is also at $44.7 million, which isn't that high in comparison to the company's liquid, short-term assets.

  Market Cap Revenue Operating Expenses Net Income/Loss Cash and Equivalents Debt Price-to-Sales Ratio
Silk Road Medical $1.45 billion $17.0 million ($20.3 million) ($8.0 million) $112.3 million $44.7 million 24.8x

Source: Silk Road Medical

While the stock might seem pricey given its market cap and its modest present sales, in comparison to some of its peers, it's not that bad. When looking at the similarly sized ShockWave Medical, Silk Road trades at a cheaper premium. ShockWave has a price-to-sales (P/S) ratio of 30.7, compared to Silk Road's 24.8. If you're looking for a company that's cheaper, one of the only comparable stocks out there would be TransMedics Group, a small-cap stock with a $370 million market cap, and a P/S ratio of 14.9.

Is Silk Road Medical a buy?

The general investment thesis surrounding Silk Road Medical seems pretty strong. Although the company is reporting a loss at present, revenues have been surging and show no sign of slowing down, and the company's cash position remains healthy.

TCAR procedures are becoming increasingly popular as well. Around 1,806 procedures were reportedly performed in 2017. Since then, the figure has been growing exponentially, reaching 4,573 by 2018, and is estimated to have eclipsed 8,000 in 2019. The underlying technology remains extremely promising.

Although the company is somewhat hindered in its addressable market due to current FDA label restrictions, there's still plenty of upside for Silk Road in the next few years. Even if it's a little pricey, Silk Road remains a good buy, although I wouldn't go overboard in how many shares you buy at the current price point. In a perfect world, I'd wait for a dip in the price before picking up shares.

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Stocks Mentioned

Silk Road Medical, Inc Stock Quote
Silk Road Medical, Inc
$39.63 (1.17%) $0.46
ShockWave Medical Stock Quote
ShockWave Medical
$197.69 (6.27%) $11.67
TransMedics Group, Inc. Stock Quote
TransMedics Group, Inc.
$31.30 (-1.88%) $0.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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