1 Dates June 5th 2022 Aria Chen, Nathan Nguyen, Philicia, James Ward 2 Dates EXECUTIVE SUMMARY Recommendation As a team, we recommend that Shockwave Medical goes with a domestic market focus. Since the IVL catheter is already an innovative product for the company, a marketing focus around this makes more sense in the short run. As more customers and potential patients are reached via marketing strategies, Shockwave Medical will have an increase in sales revenue. Revenues will eventually lead to a profit where the money could be reinvested into the company to conduct research. This will keep the business relevant within the industry going forward. Strategic Alternatives Shockwave Medical has two main directions they could take to grow their company further. The two options include a market focus or a research focus. Besides our recommendation of focusing on the domestic market, other options could be explored. Shockwave Medical could focus on growing the company internationally or improve their products instead. Research could be used to create new product offerings or innovations. Implementation In order to increase market share in the domestic market, Shockwave will need to invest in three areas, which are supply chain, professional network, and marketing. Effectiveness and quality are Shockwave’s competitive advantages, so producing the IVL catheter in-house is critical to ensure quality consistency. Shockwave will build its relationship with cardiologists and medical schools to gain market recognition. Lastly, through marketing efforts on traditional media and digital platforms, Shockwave will be able to build trust and increase preference from hospital customers and patients. The resulting gains will be reinvested to scale up operations and keep up the product innovation. Risk Assessment and Contingency As a smaller company, both consolidation and acquiring necessary resources and persona can have a major impact on Shockwave. In order to navigate being a small company in an industry with many large players and mergers, Shockwave must use its innovation and unique product line to its advantage. As part of the contingency plan, Shockwave will market itself and continue operating as a company that offers high quality healthcare products that are not inimitable or offered by industry competitors. Financial Impact Financial data from 2017 - 2021 is sourced from Mergent Online Databases. Further forecasted data has been estimated relative towards implementation planning. Revenue streams are projected as a 6% growth rate on top of previous years growth rates as an average. Costs within each financial statement respectively are adjusted with a 3% growth rate on top of previous years average growth, with a concentration in marketing expenses. Balance sheet pro forma reflects the overall view of projections from operating and administrative activities. Ensuring overall business health post implementation is digestible when viewing the forecasts and offer large but limited line of sight on specific line accounts. Income statement pro forma reflects the general revenue stream from sales and adjusted cost as a percentage of concurrent sales forecasted. Cash flow pro forma reflects relative operating, investing, and financing activities in implementation. 3 Dates STRATEGIC ALTERNATIVES & RECOMMENDATION Strategic Alternatives Shockwave Medical has two main directions they could take to grow their company further. The two options include a market focus or a research focus. The market focus option revolves around building up market share to grow the business. To do this, the company can enter new markets or build new relations within the industry. The second option revolves around a research focus. The main goal of a research focus is to grow the company by offering new products or improving existing products. To do this, Shockwave can create new products, find new treatments, or improve its existing products. Alternative 1: Domestic Marketing The first alternative for Shockwave Medical is to focus on the domestic market. Since the company is located in Santa Clara, California, the domestic focus will be within the United States. As a growing company, it is essential to build up a strong market share and reputation in one location before moving on elsewhere. Shockwave Medical already has multiple versions of their IVL catheter approved by the US Food and Drug Association (FDA). This already makes the current products a valid option for doctors and hospitals across the country. The goal of this plan is to gain a larger market share domestically. This will increase the revenues of the company due to more sales. Expenses of this plan include the extra cost of goods sold needed for the increase in sales as well as the increase in marketing expenditures. The products offered by Shockwave Medical will not change, but new customers will be reached through marketing. With a focus on marketing, new doctors and hospitals will acknowledge and decide to use the company's superior IVL technology. Also, potential patients will learn about the new IVL technology by Shockwave and prefer that treatment compared to prior angioplasty methods. Alternative 2: International Market Another alternative revolving around marketing is to focus on the international market. Shockwave Medical already has a customer base within the United States and parts of Europe. However, there are many other parts of the globe where the IVL technology could be introduced to gain a market share internationally. For example, the company can start working with Japanese doctors and hospitals to get their product approved and then sold within Japan. An increased international market share will allow greater sales once approved. However, costs will still occur in the short run before the product is approved. New countries would be interested in the innovative IVL products, but it takes time and money before sales will occur. The marketing expenses will be similar to alternative 1, but this plan will revolve around working with innovative international doctors and visiting international medical conferences. This will eventually lead to clinical trials across the globe to get the product approved by each country. Only after the product is approved will sales be recognized. The risk of this plan is expanding the time Shockwave Medical is operating at a loss and whether or not the IVL products will catch on in the new international markets. 4 Dates Alternative 3: Product Offerings The next alternative Shockwave Medical could pursue revolves around a research focus on new product offerings. With the current state of the company, there is only one main product offered and the company is operating at a loss. This option will allow new medical products to be offered by the company and grow its market influence and reputation. For example, Shockwave makes IVL catheters for angioplasty, so they could create their stents to be used during the treatment. They could also offer other medical tools and devices. This can turn Shockwave Medical into a one-stop shop for doctors and hospitals looking for medical supplies. This option will not have an immediate change in the company's revenues. However, if enough profitable products are sold, revenue could increase drastically down the road. Most of the expenses will include the research and costs needed to develop and sell the new products. This plan will change Shockwave Medical’s objectives and push for new customers and segments. The goal will be to grow the company’s size drastically going forward. The risk for this alternative is that the new products have the potential to not perform well in the market. Alternative 4: Treatment Research The last alternative for Shockwave Medical also revolves around research, but this plan will be focused on innovative treatments and products. The company is already known for its innovative mindset and this plan will double down its research to help create more value within the industry. For example, Shockwave Medical is currently researching how they can treat Aortic Valve Disease which is the buildup of calcium in the aortic valve instead of the arteries. The main expenses for this plan will involve hiring more researchers and the research they conduct. Again, revenues will not be seen right away but will start after some time. The new treatments and innovative products will bring value to the company and solidify its relevance within the industry. The customer segments and product offerings will depend on what the research is, but market share would be expected to rise. The main risk of this plan is that despite all the money you put into research, there is a chance it leads to nothing. Limitation A trend within the medical supplies industry is that many smaller companies are consolidating with bigger companies. This is due to the heavy costs a medical company will have during its start-up. The bigger companies provide the resources and foundation to make it easier for these companies. The problem with Shockwave Medical is that based on their contract with the bank, consolidation is not an option for the company. Unless a discussion is had to change this rule, Shockwave Medical is limited on its options when it comes to merging or being acquired by another company. Recommendation As a team, we recommend that Shockwave Medical goes with alternative 1, or the domestic market focus. Since the IVL catheter is already an innovative product for the company, a marketing focus around this product makes more sense in the short run. Also, we chose to recommend the domestic strategy instead of the international strategy. This is because the product has a lot more potential for market share within the United States and the product is 5 Dates approved by the FDA already. The biggest problem with the international market is that many countries have not yet approved the product and the markets are less clear when it comes to how well the product will sell. Marketing the IVL catheter within the United States will boost the company’s sales and eventually allow the company to earn a profit. Throughout the last decade, Shockwave Medical has been working hard to research and prepare its IVL technology for use in the public realm. With the product FDA approved along with existing relations with doctors, the product is ready to be implemented all over the United States. Marketing the product will increase the company’s market share and lead to more sales revenue. The main expenses of this plan revolve around the extra costs of production as well as the marketing plan itself. The marketing plan will consist of hiring new employees and other costs such as advertisement fees. The main focus is to build attention and reputation for Shockwave Medical products. All doctors and hospitals within the United States should know about the new technology so both the customers and the patients prefer IVL technology. The new marketing plan will not be targeting a new segment or offering a new product but reaching new customers. As the IVL catheter becomes available for use to the public, the potential customers expand drastically. More doctors will build a relationship with Shockwave Medical due to the focus on industry networking. Also, more hospitals will want to purchase the product to ensure the best quality treatment for their patients. Lastly, many potential patients will hear about the safety and effectiveness of the IVL catheter via traditional and digital marketing. After a few years, the marketing plan will allow the company to start making a profit. With these additional sources of revenue, the company could then reinvest these earnings into the company. The money could be used to push marketing internationally or put back into research. We recommend research as a priority to keep Shockwave Medical relevant within the medical industry going forward. IMPLEMENTATION PLAN Supply Chain Reputation and effectiveness play key roles for companies operating in the medical device industry. Since Shockwave’s IVL products are known to be effective and have the best quality, it’s important to build trust with quality consistency. Shockwave primarily manufactures the IVL catheters in-house in its Santa Clara facilities. However, in 2021, the company entered a contract manufacturing agreement with a third-party contract manufacturer to produce a portion of its demand. This may damage the product quality due to various unforeseeable factors. Therefore, the company should produce the IVL catheters in-house to ensure quality. The financial resources to support the scale-up of production will be from the expected increase in revenue. Currently, Shockwave does not have long-term contracts with suppliers of raw materials as they order on a purchase order basis. This is concerning because, when demand increases as a result of implementing this strategy, they may not have enough material to supply the demand. To 6 Dates avoid supply shortages and reduce the negative financial impact of price fluctuation, Shockwave needs to make a one to three-year short-term contract with the raw material suppliers. Professional Networks After having better control over the supply chain to ensure product quality, increasing awareness and exposure will be the next step. First, Shockwave needs to build relationships with leading experts in the cardiovascular field. Shockwave’s sales representatives will need to deliver the IVL catheters to cardiologists and medical schools, which we identified as the target market, all over the country for free. By providing the devices for cardiologists and students and professors in medical school to use, not only will they provide feedback to help product development, they will recommend the products to their peers during medical conferences. Additionally, sending the devices to medical schools that have cardiovascular programs helps Shockwave to build early relationships with graduate students, or future cardiologists. They will mention Shockwave’s product in their academic research papers. Besides, based on the effectiveness of Shockwave’s products, once the graduate students become cardiologists or surgeons, they will recommend the products to the hospital they work at. Expanding this professional network paves the way for Shockwave to gain market share. Marketing Educational Marketing After building the network and gaining support from leading experts in the field, Shockwave needs to invest in marketing, and there are three ways the company can do to increase awareness. The first one will be educational marketing. Shockwave will hire more sales representatives and sales managers who have substantial and applicable medical device experience, especially in the vascular field. They will be traveling to hospitals and medical schools to market the products directly, offer demonstrations and training, and educate them on the benefits of using Shockwave’s products. Besides, it needs to increase people’s awareness of cardiovascular diseases by being involved in related webinars, organizations, and medical conferences. Traditional Marketing In terms of traditional marketing, we believe Shockwave needs to pay for advertisements in medical publications, such as magazines and newspapers. The recognition from cardiologists will be the selling point. The company can also post flyers in hospitals they worked with. This method will increase market acceptance. Digital Marketing Digital marketing will be efficient in promoting the IVL catheters. Shockwave can pay for advertisements on news channels, medical websites, and social media, which will help in building brand value and recognition. Shockwave’s products already have a successful record in treating cardiovascular disease, so we recommend Shockwave interview patients who have been treated by the IVL catheters, and then post the stories or videos on the company website and social media accounts. This will build trust and increase people’s preference for Shockwave’s products. 7 Dates Investment in R&D and Production Once Shockwave puts its name out through marketing efforts, its market share will increase, leading to more demand. The increase in market share will allow the company to capitalize on current trends, so revenue is expected to increase. By having more financial resources, the company will be able to invest in research and development for complementary products. Additionally, since the company will produce the devices in-house, it needs to make investments to scale-up production. The Balanced Scorecard We have created a balanced scorecard to measure the success of implementing this strategy. By setting goals for different organizational aspects, we believe that Shockwave will progressively improve the overall organizational performance. Financial: ● Increase sales by 6% annually ● Keep annual cost growth to be 3% Customer: ● Reach 25% of cardiologist in the US over the next three year ● Supply up to 50% of US hospitals by the end of year three Internal Processes: ● Reduce product defect rate by 20% ● Scale up production level to meet growing demand Learning & Growth: ● Reach a 90% employee retention rate ● Keep employee satisfaction rate to be above 80% Financial For the financial aspect, our objective is to improve gross margin, which will be measured by annual growth in sales and annual increase in cost. The increase in revenue will mainly be driven by the increase in market share. Cost may increase slightly since we recommend Shockwave to produce devices in-house, but we expect the cost growth to be slower once the company reinvests its revenue into production. Customer It’s important to understand the business’s performance in the targeted segments. Therefore, to consolidate and expand the customer base, Shockwave’s goal is to expand its professional network and increase hospital customers. Internal Processes The objective for internal processes is to be consistent with quality and able to meet the growing demand. Therefore, we recommend Shockwave to take annual assessment on its manufacturing process to reduce product defects, as well as invest in manufacturing equipment to scale up the production capability. 8 Dates Learning & Growth To increase employees’ organizational commitment, Shockwave will tie compensation to operating performance. Sales representatives will also be encouraged to be creative in approaching the target market, allowing them to feel a sense of initiative and entrepreneurship. With the goal to increase employee competency, Shockwave will provide training and learning opportunities to sales representatives, as well as collecting employee feedback to improve the operating system. FINANCIAL PROJECTIONS Our forecasted financial statements are using actual annual data provided by Mergent Online Databases. Actual years of operation are 2017, 2018, 2019, 2020, and 2021. Further forecasts are estimations of projections relative towards historical data recorded from ShockWave Medical. Balance Sheet Pro Forma Assets Accounts receivables are projected with a assumed 6% increase on top of previous years average growth rates of roughly 34%, totaling ~40% in growth. This estimation is consistent throughout the sales segment of the financial statements. The increase of 6% stems from targeted gross profits margins to be 3% with accounted marginal marketing cost. Sales in previous years are on average 53% of total total inventory held, and this assumption was held with projected accounts receivables. Property, plant, and equipment should have a constant growth rate of the previous average growth rate, due to the nature of marketing expenses having little effect on real estate, manufacturing plants, building spaces, etc.. The current three year projections are only within the first few years of marketing growth, there are possibilities of expansion as a result of marketing success, into production efforts for example. Liabilities & Equity Accounts payable and liabilities are projected to be roughly 3% as a byproduct of marketing expenses, as they could consist of advertising space, credit lined marketing campaigns, or debt financing for general marketing expenses that may not be within budget. Equity is not within current standing of actual value of current equity, rather calculated relative towards displayed assets and liabilities using Assets = Liabilities + Equity. Net working capital is also displayed to compare previous years operational efficiencies and forecasted efficiency with marketing implementation. There should be exceptional growth in assets over liabilities which allows us to prevent defaulting and engage in reinvesting into the business plan. Income Statement Pro Froma Income statement will show information specifically related towards operations to focus on sales and expense effects on the strategic implementation. Sales are to be a 6% increase on top of previous years average growth rates, and cost of goods sold are predicted using previous years cost of goods sold as a percent of total sales generated, previous years had ~36% on average. Research and development are at a constant growth rate as marketing campaigns barely reflect research and development expenses. While there can be some incremental increase in research 9 Dates and development for marketing purposes, we forecast there would be little value in adding this cost due to only being a three year forecast. Sales and marketing expenses are projected with previous years average growth rates with an additional 3% increase in cost specifically to this account in accord with current strategic plan. Generally total costs outweigh revenues streams and we see gross profits to be losses from 2017 to 2022 and we can finally see positive gross profits. Generally the reasons behind these excess costs are due to high research and development costs that are by nature in the medical manufacturing industry, in order to stay relevant and maintain a comparative advantage in technologies to other competitors. Statement of Cash Flows Pro Forma Cash flows from operating, investing, and financing activities have been posted from previous years, and are forecasted with average growth rates from those years, and operating cash flows have an additional 3% increase in cash flows. Operating Activities Operating cash flows consistent with marketing expenses and cash outflows in order to increase expenditure in first year implementation plans, alongside positive cash inflows from generated revenue streams from marketing efforts. Investing Activities Investing activities are kept constant with historical averages, and financing activities are also kept constant at historical averages. While these implementation years are new there will be time before any immediate and major investment occurs to expand marketing efforts. Financing Activities & Conclusion Financing tools will not be in place until further development of marketing strategy progresses. We can calculate the total cash flows from all active and gain forecasted total cash flows from predicted years, 2022, 2023, and 2024. With this we can find the terminal value using a terminal growth rate of 6%, just as our revenue growth rate reflects, to then calculate the present value of the total cash flows that will be generated in these forecasted years with the marketing implementation in place. Cash Flow Parameters Some cash flow parameters to address are the asset discount rate using a 12% discount rate for the present time value of money. Along with a 6% assumed terminal growth rate at which the firm will have a large enough growth to overcome overall loss profits. We calculated the book value of the current present value of the share price, and while it is significantly lower than current market value, the book value of a calculated stock is lower than market value. We can interpret this as the market over estimating the firm, or seeing high potential in their product. 10 Dates RISK ASSESSMENT & CONTINGENCY Small size A major risk that could impact the performance of Shockwave Medical is its smaller size. Shockwave Medical is in the initial growth period, the second stage in a business life cycle. Shockwave may have a hard time acquiring the necessary resources or people to further develop the new strategy. Additionally, in comparison to its competitors, Shockwave has smaller scaling and lower brand awareness. Thus, if the business can no longer grow, the products can become obsolete. To combat its small size, Shockwave could use the new marketing plan to its advantage. Because Shockwave is unique in its IVL products, quality, and innovation; these qualities can be marketed in order to bring in more traction and show the company's strengths in comparison to its competition. Consolidation As a smaller company, consolidation can have a major impact on Shockwave. A trend for companies within the medical wholesale industry is to consolidate. Mergers of multiple companies have caused bigger enterprises to form within the industry market. Because financial resources, connections, and power can take over a developing position in the market, Shockwave must be aware of their market share and how they operate in comparison to the market leaders and bigger enterprises. A bigger company is less likely to be heavily impacted by regulations or shifts within the market as they are more equipped and prepared (in most cases) to adapt. Also, prestige and finances allow the ability to quickly develop and approve new products. Due to current bank contracts, Shockwave cannot consolidate or acquire any new businesses. This does not mean that Shockwave cannot partner with samoa;r companies to create temporary partnerships that promote lower profit margins and sustainability needs. Taxes Part of the Affordable Care Act (ACA) in 2010 was to implement an excise tax on certain medical device products. This excise tax increased the cost of production for the manufacturers of many of these devices. The 2.3% tax imposed on producers was suspended in 2016 and later repealed in 2020, but already hurt profits in the industry. With effects already underway in the industry, taxes have a major impact on the types of products and limits how far Shockwave can go in regards to innovation. If newly developed products have had a higher tax in the past, in the long run it is often not worth it to pursue, especially being a smaller company. Government Regulations Similar to excise tax, regulations always have an impact on companies within the industry, no matter the size. With the repeal of the tax recently, it is no longer a current threat but legislation 11 Dates can bring a shift in the industry’s future. In this industry, regulations are harder to navigate around for small to medium size companies and can also affect jobs/employment. As Shockwave’s marketing plan develops there will be opportunity for global expansion. Global regulations surrounding agency clearances could have a major impact. For a company to sell or gain attention within the industry, it must provide a well-tested and safe product. To do this, you must go through agencies, such as the FDA, for clearance. The impact becomes larger internationally as each country needs to be able to approve the product. To reduce the impact of regulations, Shockwave should do thorough market research of the new countries they wish to scale in and what types of products are approved and unapproved, before undergoing operations. 12 Dates Exhibits: Balance Sheet Pro Forma: Income Statement Pro Froma: Statement of Cash Flows Pro Forma: Statement of Cash Flows Parameters: 13 Dates Works Cited Ali, A., Nef, H., Escaned, J., Werner, N., Banning, A., Hill, J., Bruyne, B., Montorfano, M., Lefevre, T., Stone, G., Crowley, A., Matsumura, M., Maehara, A., Lansky, A., Fajadet, J., Mario, C. “Safety and Effectiveness of Coronary Intravascular Lithotripsy for Treatment of Severely Calcified Coronary Stenoses.” Ahajournals, 25 Sept. 2019, www.ahajournals.org/doi/10.1161/CIRCINTERVENTIONS.119.008434#d1e2156. 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