Sunshine Heart: A 'Buy The Dips' Pick That Could Pay Off

| About: Sunshine Heart, (SSH)

Investors of the developmental healthcare sector are well aware that cash raising events and dilutive financings are an established part of the process in bringing a new drug or medical device through the trial stages and to market. While few investors look forward to these events with heavy anticipation, given the potential for a rally to be stalled or for a share price to drop to the level at which an offering was conducted, these events are wholly necessary, given the design of today's health care and financial systems. That said, those who exercise patience and utilize an investing strategy that includes trading into the spikes and dips with a position of 'trading shares' - while also potentially building a core position with eyes towards the long term - could survive the tides largely unaffected, while potentially coming out on 'house money' by the time the developmental stage plays out.

Such a strategy also includes not going 'all in' on a particular stock when initiating a position for the first time. Buying in with just a fraction of what one plans as a total investment amount allows for additional buys later on down the road should the targeted share price dip. As noted above, stock offerings and other means of cash-raising for companies often contribute to share price slides, since the new shares are generally 'offered' as a discount to recent levels.

Last week Sunshine Heart (NASDAQ: SSH) announced a public offering of common stock pursuant to a previously-filed shelf registration. The pricing of the offering was $5.25, whereas company shares had been trading along steadily at roughly six bucks before the announcement. In turn, SSH traded down late last week to price levels right in line with the offering. Investors, after already having seen this stock trade from roughly the three dollar mark to nearly twenty over the past year, are left to decide whether or not the post-offering slide offers a decent accumulation point or whether there can be more pain in store as the company's technology edges its way through trials and - should encouraging results continue - ultimately to market.

While numerous risks still apply moving forward, as is always the case through the developmental stages (more on those risks below), there is reason to believe that Sunshine's latest dip could again have provided a nice accumulation point for investors looking to the play the end-result and the potential price catalysts that could be provided along the way. Those catalysts all revolve around the C-Pulse Heart Assist System, Sunshine's proprietary implantable medical device designed to treat Class III and ambulatory Class IV heart failure. Studies completed thus far have demonstrated that this device may not only halt the progression of heart failure, but also reverse the effects of the disease, too. Given the size of the target market and the distinct advantages that C-Pulse looks to have over the perceived competition, it's reasonable to believe that the SSH share price has ample room to appreciate in value, should the ongoing studies continue to produce positive results.

Let's take a quick snapshot of the market: According to statistics posted by the National Institutes of Health (NIH), heart failure is an all too common condition where the heart becomes unable to pump a sufficient supply of blood to meet the demands of the body. The condition is progressive, effecting over five million people in the United States alone, and leads to over a quarter million deaths per year. Over 1.5 million of these cases fall into the category of Class III heart failure - the ambulatory Class IV category adds even more to that total - where current treatments may temporarily relieve a patient's symptoms, but are not fully capable of controlling the effects or symptoms, or of even halting the progression of the condition.

Completed studies to date have indicated that implantation with the C-Pulse could provide superior results to the standards already on the market, leaving Sunshine with an ample opportunity to steal significant share of this multi-billion dollar industry, should C-Pulse advance to the commercialization points. In addition to potentially superior results in treating heart failure, C-Pulse also holds the advantage over competitors that its device is implanted outside of a patient's blood stream, unlike devices by firms such as Heartware International (NASDAQ: HTWR) and Thoratec (NASDAQ: THOR), for example. Devices implanted within the blood stream increase the risk of contamination, while the procedures behind their implantation - since they 'touch the blood' - are also considered much more highly-intrusive than that of the C-Pulse. Another key benefit to being implanted outside of the bloodstream is that it allows for more quality-of-life conveniences, such as the ability to disconnect the device when needed or necessary, during showering, for example.

Considering those points, the high amount of speculative interest in this company is highly justified and European regulators may have already taken notice.

Last year Sunshine Heart was granted a CE Mark approval in Europe for C-Pulse. The announcement of that milestone event, in part, led to the aforementioned run towards twenty last year and invigorated interest in the US trial that is now underway. Shares tapered back after the post-approval run, as investors and analysts largely consider FDA approvals as the 'holy grail' in the sector, with overseas approvals only garnering secondary attention. A post-approval trial is underway in Europe, however, and any move towards commercialization could help to alleviate the potential of large-scale offerings in the future. It should be noted, too, that last-week's offering was not of the 'over the top' type that would drive investors away in droves. Comparatively speaking to the norms of the sector, an offering of 2.5 million shares is relatively modest and responsible and supports the end-goal, which is the funding trials and ultimately receiving an FDA approval.

That said, investors are rarely enthusiastic when it comes to hearing news of stock offerings, but, as discussed in the lead-in, such events are the standard for the developmental sector. Sunshine has made no secret of its intentions to raise cash during the course of the current round of trials, so investors are not likely to be caught by surprise by last week's announcement. Moreover, those investors that may be building longer-term positions with the intent of seeing this story play out - as well as traders looking to take advantage of any dips - may appreciate the pullback in price that has materialized as a result of the offering. Sunshine has traded in a relatively stable range since its monumental run last year, and this offering may have just lowered the bottom end of the range a bit, but still provides a point where unfolding catalysts could return shares back to previously-traded levels, if news warrants.

Aside from the risks and share price reactions to these financing deals, some investors may also be concerned that the full results from the US trial are not expected for nearly another three years. That leaves a lot of time for an investor's money to sit idle while awaiting the key milestones. Even worse, investors could see their shares lose significant value, should Sunshine conduct additional offerings in the future. After all, even with a European approval in the books there are no indications that the company will be able to fund their trials without raising cash at times. Such concerns are justified and investors are correct to entertain all possibilities, hence the discussion during this article's open about not jumping 'all in' with initial investments and utilizing some 'trading shares' at opportune points in time while also potentially building a core position to play the longer-term catalysts. Until significant revenue is realized, this one will continue to trade on speculation and news catalysts, but that doesn't mean things will be boring in the meantime.

Other events and potential milestones exist that investors can monitor along the way. For one, it's likely that interim results could be discussed or released at certain progression points and one specific time period to keep an eye on is the mid-way point of the US trial. Previous financing agreements have hinted that there may already exist significant partnership or buyout interest in the C-Pulse system and current financing agreements keep the company financed through the mid-way point. With that in mind, it's worth speculating that C-Pulse could be shopped around at that time, assuming interim data looks solid.

Another possibility would be to see a bigger player in the sector - who may express more confidence in C-Pulse with solid interim results - jump on board as a partner and at least help fund the remainder of the trial. Such thoughts are purely speculation at this juncture, but are common to the sector and - just like the risk aspects - should also be entertained as possibilities.

As investors engage the possibilities of a device like C-Pulse on the market, there are some very optimistic estimates out there regarding Sunshine's future share price potential. Such speculations may seem unrealistic at the current point in time, but as trials progress attention is likely to come back on this company by a wider range of media outlets and analysts. For a while there last year it seemed as if everyone was covering Sunshine, small and large media alike, just based on the potential of C-Pulse alone. By the time attention comes back, however, those investors already holding shares may find themselves in a prime position to take advantage of the volatile moves that often develop in this sector as trial results and key milestones unfold.

While understanding the inherent risks of the sector - failure is always a possibility - and the overall potential of the C-Pulse in a multi-billion dollar market, Sunshine may be worth a look for a speculative investor with eyes towards the completion of the ongoing trials and an eventual date with the FDA. Interim events may also influence trading along the way, making a plan of 'buying the dips' and trading some trading shares a potential winning strategy. What will attract the longer term investors, however, is that a positive trial result, whether it still be years away or not, would likely send SSH shares higher by significant margins, given the still-rather-speculative market cap of the company - which at the current time either does not indicate investor confidence of trial success or is a reflection of the somewhat prolonged period of time until full trial results are expected.

In today's investing environment the 'buy and hold' crowd has been brushed aside by the traders, where the quick buck wins in favor of a patiently-unfolding story. In some instances, however, there is a case to be made for slowly accumulating a position of 'buy the dips' shares - while also playing the trading shares - in order to wait for the full story to evolve. Given the potential of C-Pulse in its target market and the solid results already demonstrated in multiple studies, a case can be made that Sunshine Heart is one of those 'buy the dips' plays, and right now we're in a dip.

Still a story worth watching.

Disclosure: I am long SSH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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