The hiring of two new Senior VPs with impressive resumes shows investigational medical device maker Sunshine Heart, Inc. (NASDAQ:SSH) has what it takes to attract top industry talent. On June 16, SSH appointed Brian Brown to Senior Vice President of Operations and Technology (see announcement here). Brian was formerly Vice President of Cardiovascular Research and Development (R&D) at Boston Scientific (NYSE:BSX). This was announced only a month after the appointment of Kimberly Oleson to Senior Vice President of Clinical Affairs. Ms. Oleson was formerly Vice President of Global Clinical Operations at Medtronic (NYSE:MDT). With a market cap of around $90M, only one device in multiple stages of development, and no history of revenues; SSH is an unlikely place to find such industry heavyweights.
SSH is currently conducting a US pivotal trial (COUNTER HF) for its C-Pulse Heart Assist System, a medical device addressing Class III and ambulatory Class IV heart failure patients (see shareholder presentation). Exciting preliminary results from a completed pivotal study shows the device's potential for significant improvement over the current ineffective treatment and provides the speculator with a sizable risk-reward ratio favoring the long-term holder of the stock. SSH has received thorough coverage by Seeking Alpha author Robert Honeywill whose articles provide a thorough analysis of the product, the potential market, and the competition (find his articles here for those who want to catch up). Although Mr. Honeywill's articles provide very lofty revenue projections the articles are well researched and I find it difficult to argue with his reasoning, but remind readers of the speculative nature of SSH's future and Mr. Honeywill's projections. In this article I want to discuss the challenge that small medical device companies face when taking a product from concept to market, the specific risks that threaten SSH's success, and discuss how the new Senior VPs' expertise will help SSH conquer industry challenges moving forward.
Small Companies Face Oversized Industry Challenges
Medical device companies thrive on their ability to compete in the future, using novel ideas to improve existing devices or to invent entirely new devices that prolong or improve human life. Devices that fill an unmet medical need provide huge benefits to society and huge profits to a company and its shareholders. One such device that fits this category is MDT's Pacemaker, which revolutionized the implantable medical device field and is an example of excellent marketing of innovation. MDT's recent development of the pacemaker technology makes it a leader in the device miniaturization field as well, with the first human implant of its investigational Micra Transcatheter Pacing System (TPS) completed in late 2013. The Micra TPS is a mini-pacemaker, one tenth the size of the conventional pacemaker, and according to a MDT press release (here) is "comparable in size to a large vitamin." This type of innovation is really only achieved by a large company after a successful product is achieved.
The initial breakthrough is the key to success for a medical device company, but innovation is not cheap to bring to market. Remember that MDT was a small company once with humble beginnings selling other companies' devices, until the founder was approached by a doctor with a need. A power outage killed a patient who was dependent on that era's pacemaker, which plugged into a wall socket, and the need for a battery powered pacemaker turned MDT into an industry giant. But times have changed for the small company and a great idea is not the only thing you need to succeed, you also need a huge cash pile.
To remain competitive in a field that includes industry giants such as MDT, Johnson & Johnson (NYSE:JNJ), and BSX medical device companies spend huge amounts of cash on research and development (R&D), clinical trials that may be unfruitful, and massive marketing campaigns (not to mention law suits and other problems BSX has experienced in recent years). This discourages small companies from pursuing big ideas for fear of economic ruin. For obvious reasons, top talent in these fields are attracted to the lofty salaries, huge stock options, and diversity of projects with endless budgets that large industry leaders offer; and typically avoid small companies with promising investigational devices because of lack of revenues, low job security, and huge risk of failure. At the start a small company is disadvantaged in the industry due to lack of quality personnel, and those that achieve FDA approval are typically left with little money to market the product. These companies can only hope to be bought out by one of the giants, and miss out on the bigger rewards that they deserve for doing all of the difficult work.
SSH's Current Major Risks
A major risk for SSH and its shareholders is slow initial enrollment in the pivotal trial which may lead to extending the trial longer than the 2017 projection given by management on its website and during its Q1 CC. Using simple, well-reasoned math SA author Stephen Simpson wrote an excellent and very timely article describing the potential for the pivotal trial to extend many years beyond SSH's projections. Only 3 people were enrolled during the first 6 months of a trial with an end goal of 388 patients enrolled for an entire year. Unfortunately the full article is only available to SA PRO subscribers at this time. SSH only has cash to cover expenses through the end of 2015 and will require substantial fundraising or a change in trial design in the worst case scenario. A "profound" 16% drop in SSH's share price occurred shortly after the article was published.
Financing woes are not surprisingly a top risk for SSH and worries will increase with the costs of funding the COUNTER HF study to completion, the recent hiring of new senior staff members, and expected increases in R&D surrounding the fully implantable C-Pulse, which is still a long way from human trials. SSH may be forced to raise funds by issuing stock at an unfavorably low price if an announcement of either a significant increase in rate of patient enrollment in the COUNTER HF study or a stellar performance from the EU post-market study (OPTIONS HF) is not made before the end of FY14. The company filed for a secondary shelf offering of $100M, $40M of which may or may not be used at some point in the future. The type of fundraising could include offering stock, warrants, or debt; or any combination of the three. SSH's current market cap is around $90M. If there is no positive news to move the stock in the future, the share price is likely to drop. Any dilution of shares at or below the current price would be a major blow to current shareholders, leaving them a less favorable risk-reward ratio.
Lack of revenues is also a major risk for SSH. The C-Pulse received CE Mark in 2012 and it has since been able to sell the device in the countries that recognize that mark. However it is unlikely that the C-Pulse will produce significant revenues in the EU until completion of the COUNTER HF study. The EU market is large, but the CE Mark only determines that the product is safe and does not test the efficacy of the product. This severely limits the claims that SSH can make regarding the usefulness of its flagship product when marketing in the EU, and in my opinion it is unlikely that a doctor will implant a device into someone's body without a sizable number of previous implants demonstrating efficacy in a setting such as the COUNTER HF. SSH's revenues will likely remain low for a few more years despite its ability to sell the product in a sizable market. However, overwhelming positive results from the ongoing COUNTER HF and OPTIONS HF studies could spark significant revenue in the EU.
Professional Background and Future Expectations of New Senior VPs
In this section I discuss the past achievements of each new Senior VP and assess how these skills may benefit SSH and its shareholders in the future.
Kimberly Oleson will manage SSH's Counter HF and OPTIONS HF studies for the C-Pulse. From SSH's press release, Ms. Oleson is a biostatistician considered "the strategist responsible for building [Medtronic's] first centralized clinical operations organization" which develops "methods related to total product lifecycle risk management and clinical trial risk management." She has been "involved with over 400 clinical trials in her career" and "has co-authored 10 peer-reviewed publications and is credited with 4 issued/filed patents." Most important to SSH, Ms. Oleson's work at MDT resulted "in the global commercial release of multiple medical therapies" in several fields. Ms. Oleson's resume speaks for itself and having her leading SSH's ongoing studies provides me with a high level of confidence in FDA approval of the C-Pulse.
Looking more closely at Ms. Oleson's publications and patents shows just how suited she is to complete SSH's current studies. Ms. Oleson's LinkedIn page lists her patents, publications, and achievements. Two of her patents are for "Establishing risk based study conduct," a concept that she and a co-author outlined in two articles published in the December 2013 issue of The Monitor, a professional journal distributed to members of the Association of Clinical Research Professionals. The following are the abstracts to the articles:
- A Rationale for Risk-Based Approach to Clinical Trial Conduct and Monitoring Practices: For more than a decade, industry has recognized the need to transform clinical study conduct to reduce the costs, time, and risk involved in innovation. With the release of the U.S. Food and Drug Administration draft guidance on "Oversight of Clinical Investigations: A Risk-Based Approach to Monitoring" and the European Medicines Agency reflection paper on risk-based quality management in clinical trials, sponsors are encouraged to revisit traditional monitoring practices and to employ a scientific method for forecasting an appropriate level of monitoring intensity based upon trial risk factors. By using quality tools to establish the level of risk associated with the investigational product, trial complexity, criticality of study population, and site performance factors, the frequency and intensity of monitoring can be adjusted.
- Application and Key Concepts for Quality Risk Management in Medical Device Clinical Trials: Changes in the external landscape have resulted in demands for increased levels of clinical evidence and rigor in the build-up to medical therapy commercialization, including a growing complexity in the global regulatory standards and patient safety concerns tied to such activity. "Real-world" clinical evidence is rapidly becoming the new expectation for therapy adoption. Collectively, these changes have shaped the need for improved clinical trial rigor and risk management that commensurately increase the cost of clinical trials. Industry sponsors-particularly for medical devices-must adapt current practices in favor of new applications of risk mitigation during clinical trial conduct and quality risk management throughout the total product lifecycle. Using audience polling data collected from a 2013 Association for Clinical Research Professionals Global Conference workshop, this paper reflects current thinking on the application of quality risk management for medical devices, recommends methods for industry sponsor implementation, and identifies top challenges in executing total product lifecycle risk management.
The first abstract discusses the rationale for using the risk-based approach, which basically is a method of ranking the risks associated with clinical trials to reduce the costs and time involved, by achieving the optimal frequency and intensity of patient monitoring. Applying these concepts seem paramount to SSH completing the COUNTER HF study in a timely fashion and at the lowest cost. The second article demonstrates that Ms. Oleson understands the current "external landscape" of medical therapy commercialization, and according to the abstract she presents the current industry thinking on applying "quality risk management" and "identifies top challenges" during execution. The key part is that she recommends methods for how companies can implement the risk management strategies. Ms. Oleson is clearly a leader in the field of clinical research and her understanding of risk management may lead to reductions in cost, time, and risk for SSH's current and future clinical studies.
Brian Brown will manage R&D for the C-Pulse and will also be responsible for manufacturing operations. From SSH's press release: Mr. Brown is a former engineer and manager for SciMED Life Systems, a medical device developer that was bought by BSX in 1994. He had an extremely successful 10 year career at BSX where he most notably worked on a team that developed and launched the Taxus Stent, the "largest / most successful product launch in the history of medical devices," as boasted on his LinkedIn page. The Taxus stent captured 70% market share. SSH's new VP holds 53 patents "in stent geometries, nitinol, balloon catheters, thrombectomy catheters, infusion catheters, and ePTFE processing" and is a two time winner of BSX's Patent of the Year Award recognizing patents with the greatest impact on the business.
Mr. Brown likely sees a major opportunity with the C-Pulse considering his demonstrated ability to develop a technology to fit a new, unmet need and produce major revenues. In my opinion he has his eyes set on the fully implantable C-Pulse, which is a much more elegant design than the clunky battery pack design that comes with the original. The current design leaves a lot of room for improvement and I think Mr. Brown is up to the challenge.
Mr. Brown will also be key in developing new technologies for the SSH pipeline. A large part of his job at BSX was "technology scouting / assessments, and due diligence, followed by partnerships, acquisitions and the integration of numerous companies…Linking engineering resources with physicians in the hospital environment can improve the identification of unmet needs, and expedite the feedback as prototypes are developed." Of course development of new technologies would require that SSH can successfully market the C-Pulse and generate revenues in order to exist without being bought out. Long-term success of the C-Pulse will require numerous upgrades to the design based on feedback from physicians, and SSH hired the perfect VP to bridge the gap between engineer and physician. I like the long-term outlook of Brian Brown leading SSH's R&D.
SSH has numerous challenges to overcome to finish the COUNTER HF on time and without encountering unanticipated costs that could lead to shareholder dilution. The medical device industry is an extremely difficult environment for a small company to be innovative, and bringing a novel technology to market requires a company to overcome major risk of failing at each step along the way. To help it succeed, SSH has successfully hired top talent in key areas of clinical research and R&D. The expertise SSH gained with its new VPs positions it for successful COUNTER HF and OPTIONS HF studies and future improvements in design, which will increase the marketability of the C-Pulse.
The ability to successfully hire the two new Senior VPs shows SSH's long-term vision and dedication to success for the C-Pulse, and in my opinion SSH does not intend on being bought out in the future, but will market the C-Pulse with the intention of growing it to a company that can compete with the industry giants. A previous article on SA hypothesized that the hiring of Kimberly Oleson was meant to position SSH for a future buyout by MDT. However, I think that the addition of Brian Brown is further indication that SSH has a product that top industry talent wants to be associated with. SSH's ability to pull key leaders away from industry giants speaks highly of management's understanding of its needs in-house and excellent reputation in the medical device community. I like the prospects for SSH's long-term success and suggest that its stock is worth considering for purchase. However, those less risk tolerant may wish to wait until positive news from the COUNTER HF and/or OPTIONS HF is announced, but positive news will surely be a catalyst for the stock.
Disclosure: The author is long SSH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.