SHOCKWAVE MEDICAL, INC. You should read the following discussion and analysis of our financial condition
and results of operations together with our condensed financial statements and
related notes included in this Quarterly Report on Form 10-Q and our audited
consolidated financial statements and related notes thereto contained in our
Annual Report on Form 10-K for the year ended
Overview
We are a medical device company focused on developing and commercializing products intended to transform the way calcified cardiovascular disease is treated. We aim to establish a new standard of care for medical device treatment of atherosclerotic cardiovascular disease through our differentiated and proprietary local delivery of sonic pressure waves for the treatment of calcified plaque, which we refer to as intravascular lithotripsy ("IVL"). Our IVL system (our "IVL System"), which leverages our IVL technology (our "IVL Technology"), is a minimally invasive, easy-to-use, and safe way to significantly improve patient outcomes. We are currently selling the following products in a number of countries around the world where we have applicable regulatory approvals:
Products for the Treatment of Peripheral Artery Disease ("PAD"):
• Our Shockwave M5 IVL catheter ("M5 catheter"), which was CE-Marked in April
2018 and cleared by the U.S. Food and Drug Administration ("FDA") in July
2018 for use in our IVL System for the treatment of PAD.
• The second version of our Shockwave S4 IVL catheter ("S4 catheter"), which
was cleared by the FDA in August 2019 and accepted by our EU notified body
in May 2020 for use in our IVL System for the treatment of below the knee
PAD.
Product for the Treatment of Coronary Artery Disease ("CAD"):
• Our Shockwave C2 IVL catheter ("C2 catheter") was CE-Marked in June 2018 and
cleared by the FDA in February 2021 for use in our IVL System for the
treatment of CAD.
We also have ongoing clinical programs across several products and indications,
which, if successful, will allow us to expand commercialization of our products
into new geographies and indications. Importantly, in
The first two indications we are targeting with our IVL System are PAD, the narrowing or blockage of vessels that carry blood from the heart to the extremities, and CAD, the narrowing or blockage of the arteries that supply blood to the heart. In the future, we see significant opportunity in the potential treatment of aortic stenosis, a condition where the heart's aortic valve becomes increasingly calcified with age, causing it to narrow and obstruct blood flow from the heart.
We have adapted the use of lithotripsy to the cardiovascular field with the aim of creating what we believe can become the safest, most effective means of addressing the growing challenge of cardiovascular calcification. Lithotripsy has been used to successfully treat kidney stones (deposits of hardened calcium) for over 30 years. By integrating lithotripsy into a device that resembles a standard balloon catheter, physicians can prepare, deliver, and treat calcified lesions using a familiar form factor, without disruption to their standard procedural workflow. Our differentiated IVL System works by delivering shockwaves through the entire depth of the artery wall, modifying calcium in the medial layer of the artery, not just at the superficial most intimal layer. The shockwaves crack this calcium and enable the stenotic artery to expand at low pressures, thereby minimizing complications inherent to traditional balloon dilations, such as dissections or tears. Preparing the vessel with IVL facilitates optimal outcomes with other therapies, including stents and drug-eluting technologies. Using IVL also avoids complications associated with atherectomy devices such as dissection, perforation, and embolism. When followed by an anti-proliferative therapy such as a drug-coated balloons or drug-eluting stents, the micro-fractures may enable better drug penetration into the arterial wall and improve drug uptake, thereby improving the effectiveness of the combination treatment.
We market our products to hospitals whose interventional cardiologists, vascular
surgeons and interventional radiologists treat patients with PAD and CAD. We
have dedicated meaningful resources to establish a direct sales capability in
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For the three months ended
Since inception, we have incurred significant net losses and expect to continue
to incur net losses for the foreseeable future. To date, our principal sources
of liquidity have been the net proceeds we received through the sale of our
common stock in our public offerings, private sales of equity securities and
payments received from customers using our products. As of
Impact of COVID-19 pandemic
The global COVID-19 pandemic presents significant risks to us and has had, and continues to have, far reaching impacts on our business, operations, and financial results and condition, directly and indirectly, including, without limitation, impacts on: the health of our management and employees; our manufacturing, distribution, marketing and sales operations; our research and development activities, including clinical activities; and customer and patient behaviors.
Access to many hospitals and other customer sites continues to be restricted to essential personnel, which negatively impacts our ability to promote the use of our products with physicians. Additionally, many hospitals and other therapeutic centers have in the past suspended, and may suspend or continue to suspend in the future, many elective procedures, resulting in a reduced volume of procedures using our products. Our customer behavior is impacted by the prevalence of COVID-19 and changes in the infection rates in the locations where our customers are located.
Quarantines, shelter-in-place and similar government orders have also impacted and may continue to impact, our third-party manufacturers and suppliers, and could in turn adversely impact the availability or cost of materials, which could disrupt our supply chain.
We have taken a variety of steps to address the impact of the COVID-19 pandemic, while attempting to minimize business disruption. Essential staff in manufacturing and limited support functions have continued to work from our Santa Clara headquarters following appropriate hygiene and social distancing protocols. To reduce the risk to our employees and their families from potential exposure to COVID-19, all other staff in our Santa Clara headquarters have been required to work from home. We have restricted non-essential travel to protect the health and safety of our employees and customers.
We are continuing to monitor the impact of the COVID-19 pandemic on our employees and customers and on the markets in which we operate, and will take further actions that we consider prudent to address the COVID-19 pandemic, while ensuring that we can support our customers and continue to develop our products.
The ultimate extent of the impact of the COVID-19 pandemic on us remains highly uncertain and will depend on future developments and factors that continue to evolve, including the ability of various regions to effectively manage COVID-19, the extent of the continuing resurgence of COVID-19, the efficacy and extent of distribution of vaccines, and the impact of mutations of COVID-19. Most of these developments and factors are outside of our control and could exist for an extended period of time even after the pandemic might end.
Components of Our Results of Operations
Product revenue
Product revenue is primarily from the sale of our IVL catheters.
We sell our products to hospitals, primarily through direct sales representatives, as well as through distributors in selected international markets. For products sold through direct sales representatives, control is transferred upon delivery to customers. For products sold to distributors internationally and products sold to customers that utilize stocking orders, control is transferred upon shipment or delivery to the customer's named location, based on the contractual shipping terms. Additionally, a significant portion of our revenue is generated through a consignment model under which inventory is maintained at hospitals. For consignment inventory, control is transferred at the time the catheters are consumed in a procedure.
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Cost of product revenue
Cost of product revenue consists primarily of costs of components for use in our products, the materials and labor that are used to produce our products, the manufacturing overhead that directly supports production and the depreciation relating to the equipment used in our IVL System that we loan to our hospital customers without charge to facilitate the use of our IVL catheters in their procedures. We depreciate equipment over a three-year period. We expect cost of product revenue to increase in absolute terms as our revenue grows.
Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, the cost of direct materials, product mix, geographic mix, discounting practices, manufacturing costs, product yields, headcount and cost-reduction strategies. We expect our gross margin percentage to increase over the long term to the extent we are successful in increasing our sales volume and are therefore able to leverage our fixed costs. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which, if successful, we believe will reduce costs and enable us to increase our gross margin percentage. While we expect gross margin percentage to increase over the long term, it will likely fluctuate from quarter to quarter as we continue to introduce new products and adopt new manufacturing processes and technologies.
Research and development expenses
Research and development ("R&D") expenses consist of applicable personnel, consulting, materials, and clinical trial expenses. R&D expenses include:
• certain personnel-related expenses, including salaries, benefits, bonus,
travel, and stock-based compensation;
• cost of clinical studies to support new products and product enhancements,
including expenses for clinical research organizations, and site payments;
• materials and supplies used for internal R&D and clinical activities;
• allocated overhead including facilities and information technology
expenses; and
• cost of outside consultants who assist with technology development,
regulatory affairs, clinical affairs and quality assurance.
R&D costs are expensed as incurred. In the future, we expect R&D expenses to increase in absolute dollars as we continue to develop new products, enhance existing products and technologies, and perform activities related to obtaining additional regulatory approvals.
Sales and marketing expenses
Sales and marketing expenses consist of personnel-related expenses, including salaries, benefits, sales commissions, travel, and stock-based compensation. Other sales and marketing expenses consist of marketing and promotional activities, including trade shows and market research. We expect to continue to grow our sales force and increase marketing efforts as we continue commercializing products based on our IVL Technology. As a result, we expect sales and marketing expenses to increase in absolute dollars over the long term.
General and administrative expenses
General and administrative expenses consist of personnel-related expenses,
including salaries, benefits, bonus, travel, and stock-based compensation. Other
general and administrative expenses consist of professional services fees,
including legal, audit and tax fees, insurance costs, outside consultant fees
and employee recruiting and training costs. Moreover, we expect to incur
additional expenses associated with operating as a public company, including
legal, accounting, insurance, exchange listing and
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Results of Operations
Comparison of the Three Months Ended
The following table shows our results of operations for the three months ended
Three Months Ended
March 31,
Change Change
2021 2020 $ %
(in thousands, except percentages)
Revenue:
Product revenue $ 31,900 $ 15,197 $ 16,703 110%
Cost of revenue:
Cost of product revenue 7,892 5,651 2,241 40%
Gross profit 24,008 9,546 14,462 151%
Operating expenses:
Research and development 10,277 11,890 (1,613 ) (14)%
Sales and marketing 23,992 10,411 13,581 130%
General and administrative 7,226 6,224 1,002 16%
Total operating expenses 41,495 28,525 12,970 45%
Loss from operations (17,487 ) (18,979 ) 1,492 (8)%
Share in net loss of equity method
investment (5,523 ) - (5,523 ) (100)%
Interest expense (312 ) (277 ) (35 ) 13%
Other income (expense), net (235 ) 504 (739 ) (147)%
Net loss before taxes (23,557 ) (18,752 ) (4,805 ) 26%
Income tax provision 44 23 21 91%
Net loss $ (23,601 ) $ (18,775 ) $ (4,826 ) 26%
Product revenue
Product revenue increased by
The following table represents our product revenue based on product line:
Three Months Ended March 31,
Change Change
2021 2020 $ %
(in thousands, except percentages)
Peripheral $ 16,141 $ 9,081 $ 7,060 78 %
Coronary 15,308 5,767 $ 9,541 165 %
Other 451 349 $ 102 29 %
Product revenue $ 31,900 $ 15,197 $ 16,703 110 %
Peripheral product revenue increased by
Coronary product revenue increased by
Other product revenue increased by
We sold to a greater number of customers in
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geographic areas in which our products are shipped, was
Cost of product revenue and gross margin percentage
Cost of product revenue increased by
Research and development expenses
The following table summarizes our R&D expenses incurred during the periods
presented:
Three Months Ended
March 31, Change Change
2021 2020 $ %
(in thousands, except percentages)
Compensation and personnel-related costs
2,519 4,588 $ (2,069 ) (45)%
Materials and supplies 27 852 $ (825 ) (97)%
Facilities and other allocated costs 1,032 697 $ 335 48%
Outside consultants 467 499 $ (32 ) (6)%
Other research and development costs 134 1,278 $ (1,144 ) (90)%
Total research and development expenses
R&D expenses decreased by
Sales and marketing expenses
Sales and marketing expenses increased by
General and administrative expenses
General and administrative expenses increased by
Other income (expense), net
Other income (expense), net decreased by
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quarter and the timing of the maturities of marketable securities. The decrease
in other income was partially offset by the decrease in other expense of
Share in net loss of equity method investment
The increase in share in net loss of equity method investment of
Liquidity and Capital Resources
To date, our principal sources of liquidity have been the net proceeds we
received through the sales of our common stock in our public offerings, private
sales of our equity securities, payments received from customers using our
products and to a lesser extent proceeds from our debt financings. On
On
We have a number of ongoing clinical trials and expect to continue to make
substantial investments in these trials and in additional clinical trials that
are designed to provide clinical evidence of the safety and efficacy of our
products. We intend to continue to make significant investments in our sales and
marketing organization by increasing the number of
Our future capital requirements will depend on many factors, including:
• the cost, timing and results of our clinical trials and regulatory reviews;
• the cost and timing of establishing sales, marketing, and distribution
capabilities;
• the terms and timing of any other collaborative, licensing, and other
arrangements that we may establish including any contract manufacturing
arrangements;
• the timing, receipt, and amount, of sales from our current and potential
products;
• the degree of success we experience in commercializing our products;
• the emergence of competing or complementary technologies;
• the cost of preparing, filing, prosecuting, maintaining, defending and
enforcing any patent claims and other intellectual property rights; and
• the extent to which we acquire or invest in businesses, products or
technologies, although we currently have no commitments or agreements
relating to any of these types of transactions.
We believe that our cash, cash equivalents and short-term investments as of
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Cash Flows
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
March 31,
2021 2020
(in thousands)
Cash used in operating activities $ (17,303 ) $ (24,189 )
Cash provided by investing activities 27,086 4,325
Cash (used in) provided by financing activities (3,200 ) 3,930
Net (decrease) increase in cash, cash equivalents
Operating activities
During the three months ended
During the three months ended
Investing activities
During the three months ended
During the three months ended
Financing activities
During the three months ended
During the three months ended
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Contractual Obligations and Commitments
During the three months ended
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have,
any off-balance sheet arrangements as defined in the rules and regulations of
the
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with
With the exception of the accounting of equity method investments and license
revenue as discussed in Note 2, herein, there have been no significant changes
in our critical accounting policies and assumptions associated with the greatest
potential impact on our consolidated financial statements as disclosed in our
Annual Report on Form 10-K for the fiscal year ended
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