CVRX - CVRx: Missing A Heartbeat

2023-06-16 16:40:37 ET

Summary

• I called CVRx a highly risky but potentially lucrative investment at the time of the IPO in the summer of 2021.
• The company has seen solid revenue growth ever since, although accompanied by substantial losses.
• Missing the primary endpoint in the key heart failure study raises some questions.
• I am not happy to buy into CVRx shares here but will keep an eye on the shares going forward.

When shares of CVRx, Inc. ( CVRX ) went public in July 2021, I concluded that the potential risks and rewards for the cardiovascular play were both high. The cardiovascular company traded at reasonable valuations given the opportunity in its end markets and the fact that the FDA has approved its product, yet commercial traction appeared to be lagging.

Ever since, the company has seen continued revenue growth, albeit accompanied by continued losses, raising some questions on the prospects here.

A Recap

CVRx is a commercial-stage medical device company which focuses on minimally invasive neuromodulation solutions for patients suffering from cardiovascular diseases. This is done through the Barostim™ platform technology, aimed to lever the power of the brain to address the imbalance of the Autonomic Nervous System, which causes heart failure and other cardiovascular diseases.

By sending electrical pulses to baroreceptors in the wall of the carotid artery, the system aims to improve symptoms for patients suffering from heart failure. The U.S. market potential is estimated at around $1.5 billion, with a similar size of the market seen in some key European markets.

The company obtained FDA breakthrough status designation back in 2015, driven by the strong clinical evidence, as the fact that this is a minimally invasive procedure and will reduce the total cost of care made that situation look promising in my eyes.

The company went public at $18 in 2021, and including the IPO proceeds the company should operate with a pro forma net cash position of around $130 million, that is, excluding the over-allotment option. The equity value of the firm only came in at $333 million, indicating that operating assets were only valued at around $200 million.

Despite the FDA approval, the company only posted a $6.3 million revenue number in 2019, on which a $10.2 million operating loss was reported. Sales fell to $6.1 million in the pandemic year 2020, as the company actually generated the (vast) majority from sales in Europe.

First quarter sales for 2021 rose 66% to $2.9 million, as the run rate came in at twice the sales numbers reported in 2020, although the operating losses inched up to $4.2 million. With shares having risen to $25 on the first day of trading, I was cautious despite the recently found operating momentum, on the back of the substantial losses and high sales multiples (after the FDA "approval" already rolled in back in 2015).

That said, the valuations were too low in absolute terms to rule out a potential home run, but I decided to not get involved given that sales were stagnant at low levels for years after the breakthrough designation received by the FDA.

Downhill, Now Recovering

After CVRX shares traded around the $25 mark in the direct aftermath of the public offering, shares quickly fell to just $5 in April of last year. Ever since, shares have seen a steady recovery to a high of $20 in February of this year, and after a recent setback to $10, shares now trade at $15.

Momentum on the topline continued in 2021, with second quarter sales improving to $3.1 million, increasing on a sequential basis, with third quarter sales coming in at $3.4 million. Early in 2022, the company posted annual revenues of $13 million as fourth quarter revenues came in as high as $3.7 million. This momentum was driven by growth in the U.S. business, in particular the heart failure segment. Despite the strong topline sales growth, operating losses more than doubled to $26 million amidst deleverage of growth and costs related to the IPO, of course.

The company outlined a solid guidance in terms of sales growth for 2022, with sales seen up to $20-$23 million, albeit that operating expenses were seen as high at $55-$61 million, suggesting a further increase in losses.

Early this year, the company delivered on this guidance with sales up 72% to $22.5 million as a fourth quarter revenue number of $7.2 million trends at a rate of nearly $30 million. Operating expenses came in around $60 million, and despite sky-high gross margins, operating losses came in at $42 million and change.

For 2023, the company guided for sales to increase to $35-$38 million, based on a first quarter revenue number of $7.1-$7.5 million, although full year operating expenses are seen between $76 and $80 million.

Shares plunged to $10 in February 2023 as the company announced that the primary result of the BeAT-HF post-market randomized clinical trials did not meet the primary endpoint, but the overall data suggested the effectivity of Barostim as an effective treatment option for people suffering from heart failure. The entire study was released in March, as shares traded at $12 in April when the first quarter results were released. First quarter sales of $8.0 million were stronger than guided for, as the company subsequently raised the lower end of the full year guidance by a half million.

Despite continued losses (around $12 million in the first quarter), the company still operated with a net cash position of nearly $90 million, sufficient to finance the current burn rate for two years. With 20.7 million shares now trading at $15, following a recent rally, the equity valuation stands at $310 million, for a $220 million enterprise valuation. Based on the full year outlook, the sales multiple has fallen to about 6 times. This looks rather compelling given the rapid pace of growth, although losses are still very substantial and show no sign of coming down already.

And Now?

The reality is that we have seen strong growth since the IPO, although accompanied by substantial losses. With shares trading flattish, in fact, down a bit, the sales multiples have come down a great deal. While there is still a substantial net cash position , investors have questions about the research results and the implication for Barostim label expansion.

With CVRx, Inc. stock having displayed quite a recovery already, I am a bit fearful here despite the lower sales multiples seen. Amidst all this, I am not tempted to get involved with CVRX shares, but after shares were off my radar for nearly two years, CVRx, Inc. deserves some more frequent coverage from here onwards.

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