Cardiovascular Systems, Inc. (NASDAQ:CSII) is a medical device company focused on developing and commercializing innovative solutions for treating vascular and coronary disease. The company's Orbital Atherectomy Systems (OAS) are catheter-based platforms capable of treating a broad range of plaque types in leg and heart arteries, including calcified plaque, which addresses many of the limitations associated with existing treatment alternatives.

Business Overview

Cardiovascular Systems, Inc. has two primary product categories: Peripheral and Coronary. The Peripheral OAS are used to treat peripheral artery disease (PAD), while the Coronary OAS are used to treat coronary artery disease (CAD). The company also offers various support products within both the peripheral and coronary spaces.

In the peripheral segment, the company's micro-invasive devices use small access sheaths that can provide procedural benefits, allow physicians to treat PAD patients in even the small and tortuous vessels located below the knee, and facilitate access through alternative sites in the ankle, foot and wrist, as well as in the groin. The Coronary OAS is a catheter-based platform designed to facilitate stent delivery in patients with CAD who are acceptable candidates for percutaneous transluminal coronary angioplasty or stenting due to de novo, severely calcified coronary artery lesions.

Cardiovascular Systems, Inc. serves a growing patient population globally through an expanding distribution and sales network. Sales of the company's approved products in Japan have been made through its exclusive Japan distributor, Medikit Co., Ltd. (Medikit). In December 2022, the company entered into a distribution agreement with Otsuka Medical Devices Co., Ltd., which became the exclusive Japan distributor effective February 1, 2023 upon the expiration of the Medikit distribution agreement. Sales of the company's products in the rest of the world, which primarily includes certain countries in Southeast Asia, Europe, Latin America, the Middle East and Canada, are made through a network of distributors and sales agents.

Financials

For the fiscal year ended June 30, 2022, Cardiovascular Systems, Inc. reported annual net income of -$36,933,000, annual revenue of $236,222,000, annual operating cash flow of -$24,272,000, and annual free cash flow of -$28,492,000.

In the most recent quarter ended December 31, 2022, the company reported net revenues of $61,453,000, a 3.9% increase from the prior year period. U.S. peripheral revenues decreased 1.6% to $38,452,000, while U.S. coronary revenues increased 8.8% to $23,001,000. International revenue was $5,124,000, compared to $3,664,000 in the prior year period, driven by increased adoption in Europe and Canada, and the commencement of sales into other territories, as well as an increase in deferred revenue recognized.

Gross margin for the quarter ended December 31, 2022 was 70.0%, compared to 69.4% in the prior year period. The increase in gross margin was primarily due to a $2.8 million reserve in the prior year period related to the voluntary recall of the WIRION device. Excluding this item, gross margin decreased primarily due to increased sales of lower margin products, as well as increased inflationary costs and freight costs.

Selling, general and administrative expenses for the quarter ended December 31, 2022 were $41,642,000, an increase of 3.1% from the prior year period, driven by costs associated with incentive compensation expense, travel-related expenditures and legal expenditures. Research and development expenses increased by 7.4% to $9,533,000, primarily due to increased costs on the ECLIPSE clinical trial, initiation of the Japan Kaizen clinical study and timing of costs associated with the development activities of the company's percutaneous ventricular assist device.

For the six months ended December 31, 2022, the company reported net revenues of $121,126,000, a 3.1% increase from the prior year period. U.S. peripheral revenues decreased 1.1% to $77,236,000, while U.S. coronary revenues increased 5.1% to $43,890,000. International revenue was $9,770,000, compared to $6,992,000 in the prior year period.

Gross margin for the six months ended December 31, 2022 was 71.0%, compared to 72.4% in the prior year period. Excluding the $2.8 million reserve in the prior year period related to the voluntary recall of the WIRION device, the decrease in gross margin was primarily due to increased sales of lower margin products, as well as increased inflationary costs and freight costs.

Selling, general and administrative expenses for the six months ended December 31, 2022 were $86,117,000, an increase of 4.7% from the prior year period, driven by costs associated with incentive compensation expense and travel-related expenditures. Research and development expenses decreased by 1.6% to $18,589,000, primarily due to timing of international commercialization expenses and project spend.

Liquidity

As of December 31, 2022, Cardiovascular Systems, Inc. had cash, cash equivalents and highly liquid marketable securities of $132,002,000. The company believes its current cash, cash equivalents and marketable securities will be sufficient to fund working capital requirements, capital expenditures and operations for the foreseeable future, including at least the next twelve months.

The company has a senior, secured revolving credit facility with Silicon Valley Bank, which it intends to extend. As of December 31, 2022, no amounts were outstanding under the revolving credit facility.

Risks and Challenges

Cardiovascular Systems, Inc. has faced various challenges, including the ongoing impact of the COVID-19 pandemic, labor shortages and turnover in the healthcare workforce, an increasingly competitive environment, and reimbursement pressures in the office-based lab setting. The company has observed fluctuations in procedure volumes due to the spread of COVID-19 variants and the resulting impact on hospitalizations.

Additionally, the company is subject to the risks and uncertainties associated with the medical device industry, such as regulatory approvals, clinical trial results, intellectual property protection, and competition from other treatment alternatives.

Outlook

For the third quarter of fiscal 2023, the company expects to continue growing revenue, driven by increasing the number of physicians using the devices it sells; increasing the usage per physician; the use of new and improved products, such as the Scoreflex NC scoring balloon, JADE balloons, ViperCross Microcatheters, and the 2.00 Max Crown for Peripheral OAS; and continuing expansion into new geographies. However, the company notes that ongoing factors such as staffing and supply shortages and competitive and reimbursement pressures may continue to have an adverse impact.

The company expects selling, general and administrative expenses for the third quarter of fiscal 2023 to be higher than the amounts incurred in the three months ended December 31, 2022. Gross margin in the third quarter of fiscal 2023 is expected to be similar to the three months ended December 31, 2022, and research and development expense is expected to increase from the three months ended December 31, 2022.

Conclusion

Cardiovascular Systems, Inc. is navigating a challenging environment, with the ongoing impact of the COVID-19 pandemic, labor shortages, competitive pressures, and reimbursement challenges. However, the company is focused on driving revenue growth through increased physician adoption, new product introductions, and geographic expansion. While the company's financial performance has been impacted by these headwinds, it maintains a strong liquidity position and is working to address the various risks and challenges it faces. Investors will want to closely monitor the company's progress in executing its strategic initiatives and managing the evolving market dynamics.