Sunshine Heart, Inc. (SSH) announced today the pricing of its previously announced offering of 3,810,000 shares of its common stock at a price to the public of $10.50 per share in an underwritten public offering to raise $40M.
I have been asked, "Why raise capital now rather than wait until 1st quarter 2014?"
After all, the company is presently quite well funded and the share price has risen considerably on the back of recent announcements.
There are a number of key announcements expected through 1st quarter 2014. These announcements could quite easily be catalysts for significant increases in the share price as each announcement is made. Holding off on a stock offering could avoid unnecessary dilution.
Some possible reasons for a stock offering now:
I would be confident that SSH Management will have very sound reasons for the timing of this stock offering.
The reasons will be strategic, rather than a need for cash right now. They might include:
- Positioning to adopt a more aggressive approach to developing the market for C-Pulse;
- Providing a means for institutional investors to get on board;
- Taking money because it is presently on offer and available; and
- Preserving control and independence into the future.
I will address each of the above in more detail below, explaining why they are important considerations.
But first some background information on Sunshine Heart for those readers not familiar with this company.
Sunshine Heart's C-Pulse system:
The Sunshine Heart C-Pulse system is a medical device to treat congestive heart failure by assisting the natural heart's pumping function. To further explain:
The C-Pulse system is not blood-contacting and does not take over from the heart. It employs proven counter-pulsation technology, to reduce the workload of the heart, and to create additional blood flow to the heart muscle. This provides ongoing permanent support and allows a tired heart muscle some opportunity to rest and recover, in a measurable way (NYHA Heart Failure class improvement). For further information see here and here.
Some results from the C-Pulse 20-person feasibility study (Data sources: Prospectus filed with SEC August 10, 2012 and Sunshine Heart Corporate Presentation October 2012):
- NYHA Heart Failure Class improvement - 12 patients (60%) at 6 months. (Subsequent to completion of the feasibility study 2 patients became asymptomatic and were weaned off the device and another 2 are being considered for weaning);
- Re-hospitalizations at 6 months 5% (compares to recent trial published control group re-hospitalization rate of over 40% with similar patient population at 6 months);
- Medication Reduction: Diuretics -discontinued, reduced or unchanged for all patients; Inotropes - 4/4 patents successfully weaned (within 48 hours).
Following on the successful completion of the feasibility trial, the FDA has approved a 388-patient pivotal trial with targeted marketing approval in early 2017. The C-Pulse already has CE Mark approval for commercial sale in the EU.
Sunshine Heart's financial metrics compared to Heartware:
In considering reasons for the current stock offering, it is useful to draw some comparisons with Heartware (HTWR). Heartware also operates in the heart assist device space and has been very successful in raising large amounts of capital while minimizing dilution.
Sunshine Heart, in pursuing its objectives, had accumulated losses through end of 2012 of ~$79M. Additional losses of ~$9M were incurred in the six months through 30 June 2013. Cash balance at end of June 2013 was $21.5M. Issued shares increased by ~33% to 12.4M in the six months ended 30 June 2013. Market cap at 13 September 2013 was $137M.
Below are comparative figures for Heartware, whose product is the MVAD, a Left Ventricular Device (LVAD), which addresses the late stage NYHA Class IV CHF market.
Heartware, in pursuing its objectives, had accumulated losses through end of 2012 of ~$270M. Additional losses of ~$26M were incurred in the six months through 30 June 2013. Cash balance at end of June 2013 was $190M. Issued shares increased by ~12.4% to 16.4M in the six months ended 30 June 2013. Market cap at 13 September 2013 was $1.278bn.
Sunshine Heart's target market is over 15 times HTWR's target market. Both have CE Mark for their devices, allowing commercial sales in the EU and other countries accepting the CE Mark. Both have ongoing trials targeting Destination Therapy (DT) approval for their devices in the USA by early 2017. HTWR does have Bridge To Transplant (BTT) approval in the US, but revenue from these sales is insufficient to date to offset the huge and ongoing R&D and trial costs it is incurring.
More comprehensive detail on reasons for a Sunshine Heart stock offering:
1. Positioning to adopt a more aggressive approach to developing the market for C-Pulse:
In 2014, Sunshine Heart will be in a very similar position to Heartware in 2009.
In 2009 Heartware commenced commercial sales in Europe and was heavily involved in its clinical trial for Bridge To Transplant approval in the USA.
Table 1 below shows just how cash hungry Heartware has been in developing its markets, conducting clinical trials, and researching and developing next generation LVADs to compete with Thoratec (THOR).
To date, Sunshine Heart has adopted a conservative approach. But this stock offering could be a sign it is about to aggressively launch its development of the EU market, where it has approval for commercial sales, and perhaps accelerate its enrollments in its US Pivotal trial.
Sunshine Heart should be able to do this with a far lesser level of expenditure than Heartware because it does not have the R&D costs of HTWR and THOR in developing entirely new and different next generation devices (devices that require new trials with risk of failure).
But Sunshine Heart will need to increase expenditures well above past levels to aggressively promote in the EU market and to accelerate its US trial.
Table 1 - Heartware - Loss From Operations 2009 to 2012 and 1st Half 2013
2. Providing a means for institutional investors to get on board:
The importance of this cannot be overstated.
Once institutions are on board, the company has a group of shareholders with a commitment and the means to fund the company to its end objectives.
This can be seen with Heartware when it recently had no difficulty at all in raising in excess of $200M with minimal dilution.
In my recent article, "HeartWare Might Have Missed The Boat: A Hedging Strategy," I described how shareholders in Heartware might hedge their positions in the mechanical heart assist device space by also acquiring some shares in Sunshine Heart.
I described the difficulty for institutional shareholders in carrying out such a hedging strategy as follows:
There are 147 institutional shareholders in HeartWare holding 98.33% of the issued shares.
Only 10 of these institutions already have shares in Sunshine Heart. The value of their combined holdings in Sunshine Heart is roughly 5% of the value of their combined HeartWare and Sunshine Heart shareholdings. So they already have a hedge in place.
The remainder of the institutions would have to acquire between 2.6M and 10.4M shares in Sunshine Heart to implement the above strategy.
So for the majority of these institutions, who are not quick enough to buy on market, the only way to achieve this hedging strategy might be to participate in a capital raising for Sunshine Heart.
If enabling more institutional shareholders to get on board was the sole reason for the current stock offering, it would be a very good reason by itself.
3. Taking money because it is presently on offer and available:
It is a truism in the capital markets that when you need money, no one wants to give it to you. But there will be no shortage of offers of money when you do not need it.
Dave Rosa, CEO of Sunshine Heart, referred to this counter intuitive situation in a recent interview organized by PropThink.
It is, of course, not only a matter of not needing the money, but also being perceived as not needing the money.
4. Preserving control and independence into the future -
In the PropThink interview referred to above, Dave Rosa discussed the desirability or otherwise of sourcing funding through a partnership.
He said, in part:
My own personal philosophy is you control your own fate.
While partnership arrangements are apparently available, the stock offering is obviously the preferred option going forward. It will certainly keep things simpler if there is an acceptable buyout offer in the future.
If the stock offering takes away any investor concerns of SSH running out of cash, that is likely to have a positive effect on the share price.
Additional shares on issue plus a higher share price might lift SSH's market cap from micro cap to small cap level. That in itself could in turn be a further positive for the share price.
Caution: As always, please do your own research before any buy or sell decisions. Use of information and research in the article above is at your own risk.
Investing in micro cap companies is not suitable for all investors and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risks. Due to illiquidity, share prices can fall despite strong fundamentals and possible inability to raise sufficient additional cash to continue to fund ongoing operations is always a serious concern. Fuller details of risks associated with Sunshine Heart as identified by the company may be found with their form 10-12B/A registration filing with the SEC and their other SEC filings.