Description

Investment Summary

OpSens has reported disappointing top line growth for the past two years and investors have left the stock for dead, creating a compelling entry point, in our opinion.  While the stock sits at 52-week lows, the company’ growth trajectory is inflecting upward, benefitting from: (1) the doubling of its North American sales force; (2) the recent commercial launch of its potentially game-changing new product offering, SavvyWire; and (3) accelerated growth in the OEM business, driven by Abiomed (J&J).

We are one quarter past the SavvyWire launch and early signs are highly encouraging.  We believe OpSens revenues and gross margins will show material improvements in F2023 (August), and we expect the stock to follow. 

On an EV/Sales basis, OPS CN trades at about 2.5x our base case fiscal 2025 revenue estimate of C$80 million and 2x our bull case revenue estimate of C$101 million. 

Despite its small market cap, we regard OpSens as a strategic asset in the cardiovascular interventional market. As the company demonstrates meaningful revenue traction for SavvyWire and the overall business gains scale, we expect OpSens to garner significant strategic interest given its valuable IP (22 issued patents) and valuable product portfolio.

Our base case scenario implies two-year IRRs of 19% – 30% based on 4x to 5x 2025E revenue of C$80 million.  Our bull case scenario suggests a 55% to 65% IRRs, based on 5x to 6x 2025E revenue of C$103 million.

Background

OpSens is a Quebec City-based company whose expertise lies in successfully commercializing applications for its proprietary fiber optic sensors.  The company’s sensors measure temperature and pressure.  OpSens began operations by selling its fiber optic sensors to OEMs for incorporation within their product offerings.  Today, the company’s largest OEM customer Abiomed embeds an OpSens sensor in 80% of its Impella Heart Pumps.  Believing that it has the best miniature pressure sensing technology in the world (backed by its patent portfolio), OpSens developed its own product offerings with embedded sensors and has targeted the cardiovascular interventional market, where we believe the company enjoys a strategic position. 

OpSens has three products which are expected to drive growth for the company in 2023, 2024 and 2025. 

1. OptoWire.  The company’s historical flagship product OptoWire (guidewire with proprietary sensor) is used to help diagnose coronary artery disease.  We expect OptoWire revenue to grow from C$21.8 million in F2022 (August) to C$33 million in 2025, representing a 15% compound annual growth rate.  This growth rate reflects some benefit associated with bundling OptoWire with SavvyWire.      
2. SavvyWire.  SavvyWire is the company’s recently launched FDA-approved guidewire for the transcatheter aortic valve replacement (TAVR) market.  We believe the SavvyWire will be disruptive to the TAVR market and believe this 3 in 1 guidewire is poised to become the industry leader in TAVR.  We expect SavvyWire revenues to ramp from C$0 in F2022 to $42 million in F2025.  We forecast SavvyWire to be a 25% market share product in North America by 2025.
3. Abiomed (JNJ) / OEM.  OpSens has a number of strategic medical partnerships leveraging the company’s optical sensing technology, but the overwhelming majority of OEM revenues are driven by the sensors that OpSens supplies to Abiomed (recently acquired by J&J for $16 billion or 14x TTM revenue) for its Impella heart pump.  Abiomed uses the same sensor that OpSens utilizes in its OptoWire and SavvyWire.  We expect Abiomed / OEM revenues to grow from C$9.6 million in F2022 to C$25 million in F2025.    

In aggregate, we believe OpSens has a credible path to tripling its revenue from Fiscal 2022 (August) to Fiscal 2025, with revenue ramping from C$35 million to C$101 million (our bull case).  As the company demonstrates meaningful revenue traction, we would expect OpSens to garner significant strategic interest given its valuable IP and the increasing value of its product portfolio. 

OptoWire. The company’s historical focus has been the measurement of Fractional Flow Reserve (FFR) in the coronary disease market.  FFR constitutes the measurement of intra-coronary blood pressure.  OptoWire is a guidewire using OpSens’ Fidela optical sensor to measure pressure in the coronary arteries to determine degree of stenosis in the arteries and deliver a stent where required.  Based on management estimates, the coronary artery disease measurement market exceeded US$600 million in 2022 and continues to grow at a healthy rate.

The company utilizes a direct salesforce to sell Optowire in the US and Canada and sells through distributors in Europe (including the Middle East) and Japan. 

While Optowire has enjoyed solid growth in Canada and Japan respectively (achieving roughly 15% market share in each market in 2021), the company has struggled to penetrate the US market (3% market share) where medtech behemoths have leveraged their bundled offerings to dominate the market. 

Now that OpSens has two products in the market (and a North American salesforce that doubled in size in calendar 2022), we believe OptoWire should benefit from a pull-through effect as hospitals are incentivized to take OptoWire, if they want SavvyWire.

Longer term, management has an internal product roadmap that it believes will allow OptoWire to substantially improve its marketshare in the US market.  We expect OptoWire gross margins to exceed 60% in F2024 and beyond.

TAVR Market/ SavvyWire.  Aortic Valve Stenosis occurs when the heart’s aortic valve becomes diseased and narrowed, thereby preventing the valve from fully opening, which reduces blood flow from the heart to the aorta and rest of the body.  TAVR is a rapidly growing surgical treatment (superior to open-heart chest valve replacement) to address aortic valve stenosis.  Based on management estimates, sourced from iData Research Inc., 275,000 TAVR procedures are expected to be performed globally in 2023 with roughly half of those cases in North America and 30% in Europe.  Management estimates the market to grow to 400,000 procedures by 2028, representing a compound annual growth rate of 8%.  The TAVR guidewire market is expected to grow from roughly C$220 million to C$320 million by 2028.  OpSens is currently capturing premium pricing for its product offering.

SavvyWire is a potentially game-changing product for both OpSens and the TAVR market.  SavvyWire provides a 3 in 1 solution for TAVR, including: (1) stable aortic valve delivery and positioning; (2) continuous accurate hemodynamic real-time pressure measurement (connected to OpSens OptoMonitor) during the procedure; and (3) left ventricle pacing, using the same wire.  See video:

https://www.youtube.com/watch?v=LxkgTwT-cH8

SavvyWire eliminates steps in the TAVR procedure, simplifies workflows and is expected to drive improved patient outcomes.  We attended the Transcatheter Cardiovascular Therapeutics (TCT) Conference in Boston in September 2022 and were impressed by the positive feedback from high level KOPs in the TAVR field. See video for TCT KOL TAVR panel featuring SavvyWire:

https://www.youtube.com/watch?v=JmhAWun4vvM 

We were also impressed by the quality of new sales reps hired by the company that we met at TCT.

In addition to speaking with cardiologists, we have also listened to a couple of sell-side KOL calls, including one earlier this month, which have been quite bullish and highly supportive of management’s longer-term goals for 30%+ penetration for SavvyWire in North America.  The TAVR guidewire market is currently dominated by Medtronic (Confida) and Boston Scientific (Safari).        

OpSens only recently began broadening commercialization of SavvyWire, after receiving approval in Canada (Health Canada) and the US (FDA) in April 2022 and September 2022, respectively.  EU approval (CE Mark) is expected in calendar 2023, perhaps this summer. 

We believe gross margins for SavvyWire, at scale, will exceed 80%.

ABIOMED / OEM Market

OpSens has several strategic medical partnerships leveraging the company’s optical sensing technology, but the overwhelming majority of medical OEM revenues are driven by the sensors that OpSens supplies to Abiomed (recently acquired by J&J for $16 billion or 14x TTM revenue) for its Impella heart pump.  Abiomed uses the same Fidela sensor that OpSens utilizes in OptoWire and SavvyWire.  The Abiomed partnership was recently extended through 2028.  Besides organic growth, we believe there are two areas where Abiomed/JNJ could contribute to further growth: (1) Abiomed is expected to deploy multiple sensors in some of its Impella pumps in the future; and (2) there may be additional opportunities to incorporate OpSens sensor technology in other JNJ medical devices.  We estimate that gross margins for this segment exceed 80%. 

OpSens is working with other OEM’s in cardiology, and management believes at least one OEM has the potential to make a meaningful revenue contribution to the company over time.

Future Growth Opportunities

Industrial segment.  OpSens’ sensors have long been deployed for industrial applications.  The business is cash flow positive, having generated $3.6 million of revenue in F2022.  As one particularly notable opportunity, the company has been working on developing optical-based fuel monitoring systems (“OFMS”) for aerospace applications including civil aircraft, leveraging its pressure sensing technology.  The company has also explored applications for its sensors in the nuclear industry.  We believe there are meaningful potential opportunities for OpSens in industrial markets and believe the company would be well served to sell a 50% interest in this segment to large well capitalized strategic with the resources and distribution to be able to capture this opportunity. 

Expansions in cardiovascular intervention.  Several doctors have highlighted that the SavvyWire would be an ideal wire for mitral valve replacement.  Long term, this market opportunity is estimated to be potentially as large as TAVR today.  We expect OpSens to pursure clinical studies demonstrating the efficacy of the SavvyWire in mitral valve replacement procedures.  The company is also mapping out internal products which may involve the incorporation of two sensors.

Non-cardiovascular medical markets.  While it is likely beyond the scope of current management to expand beyond materially beyond cardiovascular intervention, there are many medical adjaciencies where pressure, in particular, and temperature sensing products could prove to be highly useful.  Under the ownership of a large well capitalized medtech company, we imagine these growth opportunities could be pursued and maximized.

Projections / Balance sheet

We have reproduced our base and bull case revenue projections below.

We expect gross margins to show a material ramp between 2022 and 2025, benefiting from growing contributions from high margin OEM and SavvyWire and improvements in OptoWire manufacturing processes.

Pro forma for a December 2022 capital raise of C$11.5, cash balances stood at an estimated $29 million as of November 30, 2022.  We expect cash balances to bottom between $10 and $15 million and look for the company to hit FCF breakeven at the end of F2024.

RISKS

Competition.  OpSens competes with medtech giants Boston Scientific, Medtronic and Abbot in the guidewire market.  Success is not guaranteed.

Execution.  Our projections involved execution risk.  They are not a lay up.

Catalyst

1) Continued commericalization of SavvyWire

2) Operating results - revenue growth and gross margin improvement

3) M&A - potential acquisition target

4) Expansion of product offerings into new customers, new segments