With over 190 comments on this series so far, including 97 comments on Part III alone, it is worth summarizing matters of interest so far.
WHY I WRITE ABOUT SUNSHINE HEART C-PULSE
I have been asked why I write about Sunshine Heart (NASDAQ:SSH) C-Pulse.
My overriding objective is to create awareness of this new C-Pulse technology and provide knowledge about the benefits to any and all persons, including physicians and patients, whose lives are touched by heart failure.
For the first time, HF patients in the US have the promise of a therapy that has been shown to actually halt and in some cases reverse the worsening of heart failure. That promise is anticipated to be first delivered on a commercial basis in the EU in 2014 where C-Pulse already has CE Mark approval. US HF patients might have to wait until 2017 or thereabouts, unless they participate in the current FDA approved pivotal trial aimed at obtaining marketing approval in the US.
THE NEED FOR AWARENESS AND EDUCATION
Most early stage heart failure patients do not understand the present virtually inevitable progressive nature of the disease and the stages of progression to late stage heart failure, as evidenced in this study -
However, most lacked a clear understanding of why they had developed heart failure, what it was, and what this implied for them.
In a survey conducted for Sunshine Heart, only 1 out of 3 HF patients were aware of LVADs which have been in use for decades with well over 15,000 implanted. I can only imagine the low level of awareness of Sunshine Heart C-Pulse with implants to date of around 30.
Sunshine Heart Management are certainly aware of this need to raise awareness and provide education. From a recent interview,
According to CEO David Rosa, the biggest challenge the company faces is making patients and physicians aware of the therapy, which uses a balloon-like device to help the heart pump blood.
"There's a lot of untapped market potential out there," Rosa said. "A lot of patients are not aware of these devices. The investment community knows about us, we really need to increase the awareness among patients and doctors."
The company has also announced the appointment of a PR firm experienced in the medical field to aid in promotion.
UNCERTAIN RATE OF UPTAKE OF SUNSHINE HEART'S C-PULSE
C-Pulse delivers tried and proven counter-pulsation therapy that has been in use for over 50 years, so I see virtually no risk there. Taking it outside the bloodstream eliminates the risk of thrombosis and stroke present in intra-aortic balloon counter-pulsation (IABP) therapy.
C-Pulse materials are also tried and proven safe for implantation in many other existing applications over a long time period. Peripherals, including the proposed TET power system for the fully implantable, are well established technologies.
I see C-Pulse, from a technology and materials point of view, as very low risk for an early stage medical device. Feasibility results and early results in the EU support that view.
In the world of investing, uncertainty equates to risk. And of course, there remains considerable uncertainty as to the level of uptake this early stage microcap, Sunshine Heart, might achieve for its C-Pulse product.
As explained further below, it is my personal belief that C-Pulse will follow a similar path to the pacemaker and achieve implant numbers in the hundreds of thousands.
HOW MANY C-PULSE IMPLANTS PER YEAR AND BY WHEN?
These are key questions, the answers to which are critical to placing a financial value on Sunshine Heart and its C-Pulse.
Rather than try to make a specific forecast of just how many C-Pulse might be sold yearly and by when, I have provided below two "ready reckoner" tables.
Table 1 is based on C-Pulse only ever achieving market penetration of up to two (2) in every one thousand (1,000) patients per year out of its target market of 5.2 million heart failure (NYSE:HF) patients in the US and EU. This is a very pessimistic and, in my opinion, a very unlikely scenario. But, as shown in Table 1, the potential market cap at 2 in 1,000 patients is ~$3.5bn, around 18 times the current market cap.
Table 2 is based on C-Pulse achieving the much higher rates of target market penetration of which I believe it is capable. At the upper bound shown in Table 2, it still only requires C-Pulse to achieve market penetration of 6 in every 100 patients out of its target market of 5.2M HF patients in the US and EU. At that level, Table 2 indicates a market cap in the region of $100bn (~500 times the current market cap). That is the almost unbelievable potential of C-Pulse. I discuss this "belief" aspect further below.
With the above tables readers can make their own judgment of what yearly sales levels might be achievable, and by when, to arrive at future yearly profit and market cap estimates for Sunshine Heart.
Of course, as Sunshine Heart makes progress and the wider community of investors becomes aware of and develops greater belief in C-Pulse's potential, the market will start to price in growth and profitability ahead of when it occurs (witness HeartWare (NASDAQ:HTWR) with a market cap of ~$1.6bn while still in loss making mode and with an ongoing incomplete destination therapy trial).
While the potential financial rewards from an investment in C-Pulse are quite stunning, the above projections mean little unless there is belief in the product and its likely degree of success in its target market.
I provide below information on heart failure and its treatment because greater knowledge in this area is key to a better understanding of the financial opportunity presented by C-Pulse.
ABOUT HEART FAILURE AND ITS CURRENT TREATMENT
Akin to a death sentence -
"Regardless of treatment, one-fifth of those diagnosed with CHF will die within one year and one-half will be dead within five years. Only about 20 percent survive much longer than 8 to 12 years - a prognosis worse than most cancers. For those who do survive, quality of life is often severely compromised."
Optimal Medical Therapy (OMT) -
Current medical therapy generally only slows the rate of worsening of the HF condition.
Blood contacting Mechanical Circulatory Support (NYSE:MCS) -
There are mechanical circulatory support devices that provide long term support for HF patients. These include the LVADs from Thoratec (NASDAQ:THOR) HeartMate II and HeartWare HVAD devices. But these are considered to be dangerous and burdensome devices for patients.
Dangers of LVADs -
Their blood contacting nature results in a percentage of patients dying from stroke from blood clots. Research has also shown that in 100% of patients these blood contacting devices (including HTWR/Circulite Synergy) will cause Acquired Von Willebrands syndrome which in turn causes excessive bleeding in a proportion of patients receiving an LVAD. In this study (see here),
Ten of the 37 patients experienced bleeding complications after CF-LVAD placement.
Any stoppage of the device is an immediate life threatening eve,nt.
Burdensome nature of LVADs -
The constant need to: stay connected 100% of the time, ensure backup batteries are charged, take care of the percutaneous interface lead (PIL) exit site to avoid infection and take precautions to waterproof the controller and batteries when showering are very burdensome on the very sick patients who receive an LVAD implant.
ABOUT SUNSHINE HEART C-PULSE
Non blood contacting heart assist device
Sunshine Heart's C-Pulse has no known competitive technology outside the blood stream.
Sunshine Heart's C-Pulse system
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.
C-Pulse Feasibility Study
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 5 patients (25% of cohort) became asymptomatic and were weaned off the device);
- 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 addressing NYHA Class III and ambulatory Class IV CHF patients with targeted marketing approval in early 2017. The C-Pulse already has CE Mark approval for commercial sale in the EU.
Rest and the "Lance Armstrong" effect
To recover between stages, a Tour de France rider benefits from rest and, in the much-publicized case of Lance Armstrong, additional oxygen rich red blood cells via transfusion.
Of all longer term mechanical heart assist devices it is only C-Pulse that actively increases perfusion of the heart muscle with up to 67% of additional oxygen rich red blood cells.
It is my personal opinion this is likely the single most important factor in 5 of 20 patients (25%) being able to be weaned off C-Pulse due to improvement in heart function.
Bringing hibernating myocardium back to life
After the shock of a heart attack or a virus or other condition affecting the heart, the heart is unable to pump as much blood. It would appear some of the heart muscle then goes into hibernation to avoid dying because not enough blood is available for all of the muscle to function. Now of course, hibernation cannot last forever and unless the heart muscle can recover sufficiently to re-vascularize these sections they will die.
C-Pulse uniquely forces up to 67% additional blood flow back into the heart muscle while the heart is at rest. This is hugely important as mentioned in this article:
"Moreover, when the reduction in Myocardial Blood Flow (MBF) is large at rest, even a "small" increase of MBF with revascularization may improve patient outcomes but to a greater degree."
This provides a greater understanding of how the C-Pulse might have been so effective in reversing HF in 5 of 20 patients in the feasibility trial. C-Pulse increases MBF by up to 67% while the heart is at rest when the degree of benefit is greatest.
C-Pulse reduces the workload of the heart and so provides a measure of rest
As the C-Pulse balloon deflates, it reduces pressure in the aorta as the next contraction of the heart's left ventricle pumps oxygenated blood through the aorta to the body. Not only does this increase the amount of blood the failing heart is able to pump, but it greatly reduces the effort of the heart to pump blood.
To understand the enormous benefit of this, think of a bike rider first stepping down on the pedal to start the bike in motion in an uphill direction. That is similar to what the heart's left ventricle does with each contraction, ~60 to 100 times a minute, to force oxygenated blood around the body. Inertia has to be overcome as well as the backward pressure of gravity when pushing uphill.
C-Pulse's reduction of pressure in the aorta reduces backward pressure and makes the workload for the heart more akin to a bike rider pushing off downhill thus increasing blood flow and allowing a measure of rest through reduction in effort. (Caution to readers: the author is not medically qualified and this is therefore presented as the understanding by a layman of a complex process.)
FINALLY IT COMES DOWN TO BELIEF
In comments to my recent article I was asked,
Given the relatively small sample size of testing, what have you seen to give you the confidence that it (C-Pulse) both works and will be approved?
To which I replied,
My confidence is based on the following -
1. Intra-aortic Balloon Counter-Pulsation Technology (IABP) has been in use for over 50 years as part of essential first line treatment of acute heart failure;
2. IABP continues to be used because it is a very effective therapy;
3. The limitation of IABP is it is extremely thrombogenic and has to be delivered in a hospital setting where strict protocols are observed to help prevent clotting and strokes;
4. Because of its stroke risks (even greater than LVADs) use of an IABP is usually limited to no more than 7 days;
5. Dr William Peters hypothesized that if balloon counter-pulsation therapy could be delivered in an extra-aortic manner the risks of stroke would be avoided and patients would be able to benefit from its use as long term therapy;
6. The 20 patient feasibility trial appears to strongly support Dr. Peters' hypothesis with 12 of 20 patients showing improvement in NYHA Class HF and 5 (25%) able to be weaned off the C-Pulse device after they became asymptomatic. This is unheard of with optimal drug therapy which at best generally only slows the worsening of HF;
7. Even though the feasibility trial numbers were small the results were outstanding and could not, in my opinion, be put down to a statistical anomaly; and
8. C-Pulse is a mechanical device, so very large numbers in trials are not critical as they are with drugs. This is because drugs act differently on patients of different ethnicity and with other differing genomic and phenomic attributes. Large numbers need to be trialed with drugs to identify potential side effects (witness Vioxx which was marketed to millions before unwanted side effects surfaced).
9. For a mechanical device side effects are not an issue in the way they are for drugs. Similar results should be expected in a larger trial as for the small feasibility study. Early reports from the implants in Europe are positive with one German patient declaring the improvement in his condition was "a miracle" after he received his implant. I expect more of the same as more and more patients are implanted and I do not expect any unwanted side effects to suddenly emerge (because C-Pulse is a mechanical device outside the bloodstream and not a drug, nor does it require drugs as ancillary therapy).
10. C-Pulse is already approved in the EU with CE Mark allowing commercial sales. The only reason commercial sales have not yet commenced in EU is the awaiting of reimbursement approval expected in February 2014.
11. C-Pulse has to show a reduction in re-hospitalization rates compared to the control group in its pivotal trial to gain approval in the US. A repeat of the results of the feasibility trial in the pivotal trial, which I would think is highly likely, should result in approval in the US.
12. Finally, I never cease to be amazed at the confidence analysts and others have in drugs in Phase 2 trials with billion dollar market caps. These drugs and other such therapies have possibly ten's of times the risk of failure in getting to market as compared to C-Pulse.
13. Finally, C-Pulse delivers well established valuable therapy, in a safe manner, and its component parts are well tried existing medical grade materials so there should be no DePuy type issues.
MORE ON THE PROJECTIONS IN TABLES 1 AND 2
The projections in Tables 1 and 2 are for a mature stage Sunshine Heart that is close to or has reached maximum yearly sales levels. Therefore the costs do not include the additional costs incurred in the growth phase of a business. The PE ratio of 16 reflects a business that has completed its growth phase and is now in a lower growth stage.
One reader might believe that C-Pulse will only ever reach a level of say 8,000 implants per year in which case that reader would assign a future market cap of ~$2.6bn making it a potential "13 bagger." Just how good a "13 bagger" would depend on the reader's view of how many years it would take for C-Pulse to achieve 8,000 implants per year.
Another reader might be far more optimistic and believe that C-Pulse will reach a level of over 300,000 implants per year in which case that reader would assign a future market cap of ~$100bn making it a potential "500 bagger." That is the very exciting potential of C-Pulse.
The number of years it will take for C-Pulse to achieve its maximum yearly implants level, whatever level that might be, will be greatly impacted by whether Sunshine Heart continues to go it alone.
DIFFERENT PATHS TO ULTIMATE LEVELS OF MARKET PENETRATION
As indicated in Part II of this series, I will explore further, in Part V of this series, the option of Sunshine Heart going it alone, versus a takeover by, or a partnership with, a large medical device company such as Johnson & Johnson (NYSE:JNJ), Medtronic (NYSE:MDT), or even Boston Scientific (NYSE:BSX).
For this purpose, I will make detailed projections by year for both a "go it alone" case and a "takeover/partnership" case to give some indication of which case might best benefit Sunshine Heart investors.
Beyond that, and based on the above proposed projections, I plan to write further articles addressing the potential impact on each of JNJ, MDT and BSX of an acquisition of Sunshine Heart and exploitation of its C-Pulse device.
1. C-Pulse will achieve numbers comparable to pacemaker implants in time -
In Part II of this series, I provided detailed assumptions for C-Pulse implants for HF patients in the US and EU to eventually reach over 300,000 per year. That does not include potential implants for treatment of angina and other potential uses for the device.
2. C-Pulse will grow faster with a Johnson & Johnson or a Medtronic at the helm -
Whether a takeover by a larger medical device manufacturer would be of overall benefit to SSH shareholders will be explored in Part V of this series.
Caution: The information above is not intended to replace the advice of a doctor. I disclaim any liability for any decisions you might make based on this information.
Additional 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.