SWAV - After Years Of Frustration Cardiovascular Systems Bows Out With A Buyout

Summary

• After years of struggling to make real progress in its core atherectomy businesses, CSII is selling out to Abbott for $20/share in cash.
• Abbott is acquiring an established but likely slower-growing atherectomy business that has been disrupted by ShockWave's entry into the peripheral and coronary markets.
• CSII has multiple intriguing products in its R&D pipeline that could generate hundreds of millions of dollars in revenue, including intravascular lithotripsy, thrombectomy, and drug-coated balloons.
• It's unclear today how competitive CSII's technology in these growth markets will be, and Abbott will have to execute against well-established rivals.
• This is a good risk/reward opportunity for ABT shareholders, while CSII shareholders at least get more value than the market was likely to provide for at least a few years.

Decelerating revenue growth and weakening margins are a dangerous combination for small-cap med-techs, as they will often fall off the radar for investors and subsist on weak forward multiples. Cardiovascular Systems ( CSII ) has some interesting irons in the fire, but execution has been inconsistent, and the pandemic certainly did them no favors, and competitors have been stepping up their game in the atherectomy space.

In that context, then, I think the $20 cash bid from Abbott ( ABT ), while not top-dollar, is a reasonable exit for shareholders. For Abbott, it’s a relatively low-risk opportunity to acquire a surprisingly deep R&D pipeline that could inject some life into what has been a lackluster Vascular business.

The Deal

Cardiovascular Systems announced on February 8 that it had accepted an all-cash bid from Abbott for $20/share or a total equity value of $890M. Given the lack of overlapping products, I would expect no antitrust issues.

Abbott’s offer was a 50% premium to CSII’s closing price before the deal and equates to about 3.3x forward revenue for calendar 2023. While high single-digit to low double-digit revenue growth from a med-tech would normally merit a multiple closer to 4.5x-4.75x, the reality is that CSII has been challenged not only by disruptions tied to the pandemic, but also competitive disruptions from the likes of ShockWave Medical ( SWAV ) that have stirred up the peripheral atherectomy market and impacted CSII’s revenue growth and margin leverage.

Why Abbott Would Do The Deal

Abbott’s acquisition history is a curious one. While the company will periodically target high-growth, high-multiple deals, it also has a history of searching for lower-risk turnaround/fix-up deals with much more reasonable premiums. The CSII deal is initially more of the latter, but it definitely has some upside potential from the R&D pipeline, provided the products prove themselves in trials and that Abbott can market them effectively.

In the short term, Abbott gets access to a peripheral and coronary atherectomy business annualizing at around $250M and expected to reaccelerate as clinical staffing issues improve and as the market settles down. While CSII had at one point enjoyed double-digit growth on the back of its rotational atherectomy technology, new entrants and treatment alternatives, particularly intravascular lithotripsy from ShockWave Medical, have significantly altered the market and impacted CSII’s growth prospects.

ShockWave’s approach has definitely had a big impact upon the market, but it’s not game over for CSII and other players in the atherectomy space (including AngioDynamics ( ANGO ), Boston Scientific ( BSX ), and Philips ( PHG )). I do believe there is still underlying core growth potential in the mid-to-high single-digits, as peripheral atherosclerosis is still undertreated and Abbott could boost the growth rate by taking this technology international. Moreover, with Abbott’s own vascular business growing only at a mid-single-digit rate now, they will be incentivized to maximize the value of this established business.

The real value, in my opinion, is the R&D pipeline.

CSII is looking to answer ShockWave with its own intravascular lithotripsy system, and given an attractive crossing profile and enhanced deliverability (meaning it's easier to get the device where it needs to be, even in severely occluded vessels), the device should be competitive. I believe Abbott’s ownership will enhance the odds of success here, with the peripheral device expected to reach the market in 2025 and the coronary version in 2026, and the addressable market is measured in the billions of dollars.

CSII also has a mechanical thrombectomy device in development, potentially making it a rival to Inari ( NARI ) and Penumbra ( PEN ) down the road in deep vein thrombosis and pulmonary embolism markets that could be worth several hundred million dollars a year in revenue (and an addressable market close to $1B).

Two other opportunities worth watching are CSII’s drug-coated balloon (or DCB) for peripheral procedures and a circulatory support product. The drug-coated balloon will be the first in the U.S. to use everolimus in peripheral vessels, and this drug has been shown to be effective in drug-eluting stents, and the lack of bioresorbable polymers or nanoparticles could make the CSII DCB safer. By the time this product is ready for commercialization (2026), the addressable market likely will be several hundred millions of dollars. The circulatory support product is a more distant opportunity (2027), but could be another $300M-plus opportunity that will fit in with existing coronary product salesforces.

The Outlook

Given the hundreds of millions of dollars of addressable market opportunity, it’s pretty clear that investors were not assigning much value to Cardiovascular Systems’ portfolio, which I believe speaks to a lack of confidence in the ability to execute. I don’t think that will be as much of a problem under Abbott; while Vascular has been something of a laggard, I believe that’s due more to lack of reinvestment in R&D (and M&A) than executing on sales and marketing for the products in the portfolio.

To be clear, this isn’t a layup for Abbott. Growth in the traditional mechanical atherectomy market is going to take consistent execution, and it remains to be seen how competitive these pipeline products will be against what will be very well-established rivals like Shockwave, Inari, and Penumbra by the time they launch. It may well be the case that the market has it basically right and CSII’s portfolio just isn’t good enough to make a meaningful dent in these growth markets.

Even so, I think this is a risk worth taking for Abbott. The deal likely won’t destroy value just on the long-term opportunity in coronary and peripheral atherectomy, and if the pipeline projects hit big, the returns on the deal will be strongly positive.

The Bottom Line

I expect more than a few frustrated CSII shareholders to be upset with this deal, particularly those who believed in the pipeline. That said, I think management’s ability to execute and maximize the value of those opportunities was fairly in question and I think Abbott can step in and build value. All told, I think this is a low-downside/high-upside deal for Abbott and while certainly not maximizing the potential value for CSII shareholders, it’s a deal that gives them a reasonable return relative to the ongoing uncertainty of execution and success in new markets with established rivals.

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