Revisiting Sunshine Heart
Sunshine Heart (SSH) is a development stage company looking to establish a position within the $37 billion Congestive Heart Failure (CHF) market with its C-Pulse Left Ventricular Assist Device (LVAD). In a previous article, "Is Sunshine the Solution to Device Tax Blues", I discussed the company's unique opportunity within the CHF space, particularly in regards to the Obamacare Medical Device Tax that began this year. In this article, I wanted to get my thoughts out on recent catalysts with major implications for Sunshine's valuation.
Yesterday, the company released its first quarter results and corporate updates, which confirmed progress towards profitability. Although investors responded positively to the company's press release, the information contained within its updates leads me to believe that the 6% share price appreciation is only the beginning of what looks to be a very exciting year for its shareholders.
First quarter financial results better than expected
Beginning with Sunshine Heart's salient financials, major expenses increased as follows:
- SG&A expense totaled $2.0M in 1Q13 vs. $1.9M in 1Q12
- R&D expense totaled $2.4M in 1Q13 vs. $2.2M in 1Q12
This increase in expenditures should have been expected, especially as Sunshine Heart nears closer to the completion of development and clinical testing of its C-Pulse device. Surprisingly, these increases in expenditures failed to materialize as an increase in cash burn as shown by the following figures:
- Loss per share $(0.47) in 1Q13 vs. $(0.66) in 1Q12
- Cash used in operations was $4.1M in 1Q13 vs. $4.8M in 1Q12
These decreases in cash burn despite increases in SG&A and R&D expenses demonstrate the company's management's dedication in staying lean. This discipline will be instrumental as Sunshine Heart continues to enter what is sure to be its most cash intensive phase yet, the completion of its pivotal C-Pulse trial.
Sunshine Initiates Pivotal Trials
Conditions seem ripe for Sunshine's success, especially with the events stated on its corporate update. In addition to the reduction in cash burn, significant other milestones have been met. Beginning with overseas progress, the company completed the activation of its first site in its European (Where Sunshine's C-Pulse device already carried CE-mark approval) multi-center post-market study, OPTIONS HF, in February 2013.
"The site, German Heart Institute - Berlin (DHZB), is recognized as a worldwide leading institution for the treatment of late stage heart failure. On May 7, 2013, the first patient was successfully implanted at DHZB and the center is actively recruiting additional patients. The first implant was completed using Sunshine Heart's next generation cuff, which is pre-sutured and pre-marked, decreasing overall procedure time and increasing predictability for cuff securement. Sunshine Heart continues to move forward with site activation, at seven additional sites in Germany, Italy and the United Kingdom. Final activation for these sites is expected to be completed by September 1, 2013."
In addition to its European study, Sunshine Heart has also activated the Mid America Heart Institute-Saint Luke's Hospital as its first site for its U.S. C-Pulse pivotal trial named COUNTER HF. Moreover, "CMS has already granted reimbursement eligibility for use of the C-Pulse System (for the first facility)". With three additional centers currently in the activation process, it seems reasonable that CMS will extend reimbursement for the additional facilities (second site was activated on May 9), which should culminate in heavily mitigated costs for the company in its U.S. trial. As such, "The Company anticipates a range of enrollments, including control and C-Pulse implanted patients, to total 32 to 44 by year-end 2013."
Sunshine Secures Significant Anti-dilutive Financing
In prophylactic response to the hefty costs associated with testing, Sunshine Heart has taken and completed substantial actions serving to minimize its financing risk.
"On April 16, 2013, the Company announced completion of a $15.1 million public offering intended for use toward the completion of its European post-market study, which is expected in late 2014. The Company also obtained the ability to access another $24 million as a line of credit established in January, 2013 with Aspire Capital."
Moreover, it appears the $24 million line of credit is antidilutive to investors, according to the terms detailed in the quarterly filing:
"On January 15, 2013, we entered into a Common Stock Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $25.0 million in shares of our common stock (the "Purchase Shares" ) over a two-year period at purchase prices determined in accordance with the Purchase Agreement. Pursuant to the terms of the Purchase Agreement, we have filed and maintain a registration statement on Form S-1 with the SEC under which we have registered 3,000,000 shares of our common stock for resale by Aspire.
The Purchase Agreement provides that we may not issue and sell more than 1,856,616 shares, or 19.99% of the Company's outstanding shares as of January 15, 2013."
Currently capitalized at $61 million (as of Tuesday's closing price), the $24 million equates to roughly 40% of the company's current valuation, reflecting a 100% premium to current market price on the Aspire Capital line of credit.
C-Pulse System Demonstrates Breakthrough Potential in Congestive Heart Failure Treatment
In my previous article, I noted a particularly interesting aspect in the pilot study of 19 patients for the company's C-Pulse system. Congestive Heart Failure, beyond affecting 5.8 million people, is typically recognized as a progressive disease. Given that patients with CHF usually progress from stage 3 (marked limitation of any activity; the patient is comfortable only at rest) to stage 4 (any physical activity brings on discomfort and symptoms occur at rest), the pilot study remarkably stated that
"Overall patients showed a statistically significant improvement in heart failure status (1.2 Class improvement at 12 months) and quality of life measures. Two patients were permanently disconnected from the device after reporting no further heart failure symptoms and were discharged from a heart failure program."
Restating my previous article, "The class improvement is astounding, in that it demonstrates the potential to reverse the progressive nature of CHF to less serious stages of the same condition. This has major implications for the profitability of Thoratec (THOR) and HeartWare's (HTWR) offering. If Sunshine Heart's clinical trials continue to demonstrate reversal of CHF, C-Pulse can begin to be seen as prophylactic measure against stage 4 CHF. This would lead to a reduction of patients progressing to Stage 4, subsequently leading to the diminishment of Thoratec and HeartWare's market opportunity upon C-Pulse's commercialization."
The press release discreetly mentioned the following:
"Sunshine Heart is currently in discussions with physicians regarding the potential weaning of additional patients from the C-Pulse system, based upon significant improvements since the time of implant. To-date, two patients implanted in the Company's Feasibility study have been permanently weaned from the device. The Company expects to report on the status of these additional patients in the coming months, as appropriate."
This is the silver bullet marking the eventual demise of Thoratec and Heartware's competing LVAD products. If Sunshine Heart's C-Pulse device continues to demonstrate exceptional benefits for patients, it will solidify its image as a breakthrough in CHF treatment, which should drive adoption as the new standard of care.
Is it Sunshine's time to shine?
When you think of Sunshine Heart, think about Gilead Sciences (GILD), which transformed HIV therapy with new drug "cocktails" that replaced GlaxoSmithKline's (GSK) standard of care. When you think of Sunshine Heart, think about Celgene (CELG), which radically improved the quality of life for patients with leprosy with thalidomide. When you think of Sunshine Heart, think of Alexion (ALXN), which proved it was possible to profitably build a rare disease (less than 200,000 potential patients) drug company. What do these companies have in common? These are all companies that targeted unmet needs in very large indications (in terms of dollar amount), such as heart failure, with products that significantly benefited patient outlook. In doing so, they became companies currently valued at 10s of billions of dollars … companies that got there from 0.
In light of the information contained within Sunshine Heart's press release, 2013 is setting up to be a pivotal make-or-break year for the company. As information on its European and U.S. pivotal trials continues to come out, consider its potential as the next biotech company with a breakthrough product, it may be Sunshine's time to shine.
Sunshine Heart is a micro cap company. Investing in small and micro cap companies can be risky and is not suitable for all investors. As always, it's important that investors perform their due diligence and analyze the potential risks before initiating a position. Companies with small capitalizations typically face illiquidity, as such, investors should enter with eyes and ears wide open, as share prices can fall despite strong fundamentals. SEC filings are a great place to begin due diligence, here's the link for Sunshine Heart's filings.