Sunshine Heart's (SSH) CEO John Erb on Q2 2016 Results - Earnings Call Transcript

| About: Sunshine Heart, (SSH)

Sunshine Heart, Inc. (NASDAQ:SSH)

Q2 2016 Results Earnings Conference Call

August 9, 2016 9:00 AM ET

Executives

John Erb - Chairman and Chief Executive Officer

Claudia Drayton - Chief Financial Office

Analysts

Suraj Kalia - Northland Securities, Inc.

Joshua Jennings - Cowen and Company

Jan Wald - Benchmark Company

Operator

Good day, ladies and gentlemen, and welcome to the Sunshine Heart Second Quarter 2016 Earnings Call. Before we get started, I would like to remark briefly about forward-looking statements.

Except for historical information mentioned during the conference call, statements made by the management of Sunshine Heart are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that are based on management’s beliefs, assumptions, expectations and information currently available to management.

Those risk includes, but are not limited to risks associated with the possibility that the Company’s clinical studies do not meet their enrollment goals, meet their endpoints or otherwise fail that regulatory authorities do not accept the Company’s application or approve the marketing of the Company’s products, the possibility that the Company may be unable to raise the funds necessary for the development and commercialization of its products that the Company may not be able to commercialize it product successfully that the company may not be able to successfully integrate acquired businesses that the company may not realize anticipated synergies and benefits from acquired businesses and the otherwise risk factors described under the caption Risk Factors and elsewhere in the Company’s filings with the Securities and Exchange Commission. By providing this information, the Company undertakes no obligation to update or revise any projections or forward-looking statements, whether as a result of new information, new developments or otherwise.

You should review the cautionary statements and discussion risk factors included in the Company’s press release issued today, the Company’s latest 10-K, subsequent reports as well as other filings with the Securities and Exchange Commission under the titles Risk Factors or Cautionary Statements related to forward-looking statements.

For additional discussion of risk factors that could cause actual results to differ materially from management current expectations and those discussions regarding risk factors as well as the discussion of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the Company’s website at www.sunshineheart.com.

During this call, management will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in the Company’s earnings press release and supplemental information. In addition, a replay of the call is provided through a link on the Investor Relations section of the Company’s website.

With that said, I would now like to turn the call over to John Erb, Sunshine Heart’s Chief Executive Officer and Chairman of the Board.

John Erb

Thank you, Operator. Good morning and welcome to Sunshine Heart’s second quarter 2016 conference call. With me today is Claudia Drayton, Sunshine Heart’s Chief Financial Officer. Following our prepared remarks, we’ll be happy to answer your questions.

Having just completed my first full quarter as CEO, I’d like to begin by stating that I continue to be excited and optimistic about the significant opportunities ahead of us at Sunshine Heart. We have a lot of good things happening at the Company and I’d like to spend the first part of today’s call updating you on two important initiatives.

First, I’ll discuss a revised clinical and product development strategy that we have recently announced. After that, I will discuss the strategic acquisition of Aquadex FlexFlow product line from a subsidiary of Baxter, which we announced yesterday. Following that I will provide my thought and perspective on current financial situations and plans.

First let me start with our revised clinical and product development strategy. For perspective it has been about two months since we had our annual shareholders meeting in May. At that time, we described some of the strategic changes we are beginning to make. Before I go any further I think it is very important to emphasize that the strategic changes being made are based on valuable insights learned from patients treated with C-Pulse therapy.

We have spent considerable time and effort collecting and analyzing the data and researching the most optimal strategic path forward. Based on this work we are moving ahead with the therapeutic strategy does focus on neuromodulation as we temporarily set aside counterpulsation.

The primary reason for driving this change is based on our OPTIONS-HF European post market trial. In that trial the hemodynamic effects observed indicated a mechanism of action not explained solely by the principal of counterpulsation. In our COUNTER-HF study similar effects were observed during C-Pulse programming which led physicians to initiate measurements to assess the neural effects of C-Pulse.

Preliminary data demonstrated the primary mechanism of action from C-Pulse was neuromodulation we believe this is due to the balloon cuff being placed on the ascending aorta. During therapy when the balloon cuff is inflated it stretches the walls of the aorta, we believe this causes mechanical activation of adjacent baroreceptors. This was an extremely important discovery that points us in a better direction compared to our previous clinical strategy.

We believe our new direction provide significant benefits including one a more cost effective way to develop a wholly implantable system. Two, a faster path to commercialization and three access to the broader heart failure market and potentially other indications.

For these reasons we believe a neuromodulation based therapy will ultimately be more impactful to both patients and physicians than our original C-Pulse system. We are confident that we are on the right track in fact we believe that the development and ultimate approval of fully implantable neuromodulation device can be achieved and half the time and at half the cost of our original system.

Our unique approach targets easy to find anatomical structures, which provide an immediate and measurable response when stimulated. In addition the mechanism of action is direct and well understood. Moving ahead we have identified the following clinical steps to achieve two primary objectives. First the company is pursuing a first-in-man acute study to demonstrate a hemodynamic response using a proprietary neuromodulation approach.

The study is expected to include approximately 20 patients and we utilize an external pulse generator and prototype electrodes. Enrollment is estimated to begin and end in the fourth quarter of 2016. Next following the completion of the first-in-man study we will pursue a clinical study that utilizes a proprietary fully implantable system. The purpose of this study will be to establish the facts and safety profile of our system. The study will include approximately 30 patients and the clinical endpoints we based on a six month follow-up period.

The results will be used to support CE Mark as well as an IDE/PMA submission with the FDA; patient enrollment is expected to begin in 2017. I am pleased with the progress we are making on both of these clinical initiatives with the acute study we have already identified clinical sites in Europe and the first clinical site is fully approved to begin the study, we have also added new clinical site at one of Australia’s Premier Research hospitals. We’re also in active discussions with some of the leading medical device companies in the neuromodulation space and negotiations are on track to secure mutually, beneficial partnerships.

Now let me shift gears. Yesterday we announced the acquisition of the Aquadex product line from a subsidiary of Baxter International; this is a highly strategic and financially compelling transaction and we are very excited about it. First let me describe what the Aquadex system does. Aquadex is a unique proprietary product that is used for the temporary ultrafiltration treatment of patients with fluid overload.

Ultrafiltration is a process that removes water and sodium from a patient in a manner similar to how the kidneys function fluid overload a condition that is prevalent in heart failure patients can lead to decompensation resulting in lengthy and costly hospitalizations.

Aquadex is primarily used to treat overload, fluid overload in congestive heart failure patients and may help reduce the length of stays and recurrent hospitalizations. My strong confidence in this product is based on the significant experience, knowledge and success I’ve had with Aquadex earlier in my career. I have seen firsthand the value of that Aquadex can deliver to patients, physicians and health care system.

The Aquadex system is highly complementary to our focus on treating heart failure patients. Aquadex not only allows us to strengthen our presence in the heart failure market. It will also help us build and expand our relationships with key physician groups which will be strategically beneficial as we pursue the development of our core neuromodulation technology.

The primary sales call point for Aquadex is the heart failure cardiologist, who will also be the primary referring physician for our neuromodulation system. In addition to being highly strategic the transaction is financially compelling as well, we have strategically identified and obtained a valuable and financially attractive asset.

Aquadex was not part of Baxter’s long-term strategic plans, but it is the perfect fit for our strategic direction. We were able to negotiate an excellent deal and the acquisition is expected to be accretive in the first year with a relatively quick payback period.

Exiting 2016, we estimate the quarterly revenue run rate will be annualizing at approximately $5 million and in 2017 we expect to exit the year with a quarterly revenue annualizing around $10 million. In terms of execution, we will strategically leverage our current team of clinical specialists which have been fully trained on this product and will allow us to start servicing customers and generating revenue immediately. I also want to emphasize that Aquadex will not in any way distract us from executing on our neuromodulation strategy.

Before I turn the call over to Claudia, let me provide some comments about our financial situation. I am pleased with the progress we have made in reducing cash burn rate. Operating expenses are down 35% from Q2 last year and more importantly we are executing on a 2016 budget that not only reduces our overall cash burn, but it does so while driving increased productivity throughout the organization.

In terms of the balance sheet, raising capital continues to be a top priority for us. We just recently completed an offering of convertible preferred stock in a private placement of warrants for gross proceeds of approximately $3.5 million. We expect to raise additional capital in 2017. In that regard, we remain focused and disciplined in identifying the best financing options for the Company and our shareholders.

As you can see, we are not sitting still. We are excited about the direction we are going. The entire team is focused on executing our strategy and we will continue to keep you regularly updated as we make meaningful progress.

I will now turn the call over to Claudia who can walk through our Q2 finance results. Following that, I will provide some closing comments before taking your questions.

Claudia Drayton

Thanks, John. Good morning everyone. Turning to the P&L, we did not record any revenue during the second quarter of 2016 as we announced that we have seized enrollment in the COUNTER-HF study in the first quarter of this year.

Operating expenses in the second quarter of 2016 totaled $4 million compared to $6.3 million in the second quarter of 2015, a decrease of about 35%. Operating expenses for the quarter reflects lower spending, resulting from the announcement in Q1 that we were no longer enrolling patients in the COUNTER-HF in OPTIONS-HF studies from the consolidation and streamlining of activities in all areas of the Company in an effort to increase efficiencies and reduce our cash burn and from reduced stock compensation expense.

Net loss from operations for the period was $4.2 million compared to a loss of $6.4 million for the second quarter of 2015. In terms of our cash position as of January 1, we began to repay principal amounts on our debt outstanding with Silicon Valley Bank, as the interest only period ended at the end of 2015. At the end of the second quarter, we had $12 million in cash and cash equivalents and $6.1 million in short and long-term borrowings.

In terms of our current cash position, there have been several major cash related items that occurred subsequent to quarter end. While we do not report inter quarter cash balances, I can highlight the major cash related items that have occurred thus far in Q3. One, we paid $4 million for the acquisition of Aquadex. Two, we also incurred approximately $1 million in fees related to the closing of this transaction. Three, we repaid a $6.1 million outstanding balance with Silicon Valley Bank plus associated fees, and four, we closed on a convertible preferred equity financing that provided gross proceeds of approximately $3.5 million.

Additionally, in conjunction with the Aquadex transaction, we also announced that we signed a new agreement for a $5 million debt facility with Silicon Valley Bank. And while we do not currently meet the minimum liquidity requirements to utilize the debt facility, we expect to do so as we raise additional capital in the coming months. In terms of modeling Q3 and Q4, we expect to begin generating revenue from Aquadex during this quarter and we expect to exit the year with a quarterly revenue run rate annualizing at about $5 million.

Regarding our operating expenses we expect to continue to show meaningful reductions versus last year even after some modest investment in our Aquadex product line. Our spending reduction is to continue to reflect the steps that we’ve taken to reduce our cash burn going forward and the impact of the revised clinical strategy that John discussed earlier.

In terms of financing we continue to evaluate our options and are carefully analyzing our capital needs based on our revised clinical strategy. As John discussed, we intend to raise additional capital in 2016.

I’ll now turn the call back over to John.

John Erb

Thank you, Claudia. Before opening the phone line up for questions, let me reiterate that I am excited and optimistic about our future. We know we have a lot of work ahead of us I believe we are moving in the right strategic direction. The entire management team is rising to the challenges in front of us and we are focused on delivering results. We are striving to be a transparent as possible and we will continue to provide you milestones to track our progress over the coming quarters. We believe this will allow us to continue to strengthen in our creditability over time.

With that, operator, we can open it up to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question is Suraj Kalia of Northland Securities. Your line is open.

Suraj Kalia

Good morning, everyone.

John Erb

Good morning, Suraj.

Suraj Kalia

So John, first and foremost congrats a number of initiatives you guys are working on. I mean I can - at least conceptually I can see the rationale for bringing CHF Solutions back to the tends. I guess John are you all in a position to give us some color on. It’s a $5 million annualized run rate can you talk about the number of reps, accounts I guess what kind of resources would be needed to sustain that $5 million. What would be needed to take and I don’t know pick a number from $5 million to $8 million or $10 million.

John Erb

Well, I think our first step is to get out and meet with our customers. Since Baxter has owned CHF Solutions or Gambro Ultrafiltration as it was called. They are basically began to disinvest they stopped the avoid trial. They moved all of their clinical sales reps into their renal business. So really for the last almost two years there has been no sales for supporting the business.

And there’s a strong group of physicians out there that believe strongly an ultrafiltration and obviously it’s diminished over time without having the support from the field sales organization and we will revitalize that with seven clinical specialists that have been trained and basically hit the ground running yesterday to start making contacts with that base business that generated about $4 million in revenue in 2015 for Baxter without any support and is on a run rate in 2016 of about the same amount. So the key there is to reach out to the customers let them know that somebody new is taking on the support and build the business from there.

Suraj Kalia

Fair enough. And John one final question of please forgive me if the sounds that are like an esoteric question I can certainly take it offline. You know that is a shift based on you know how you guys have parse through the data and are coming up with a mechanism of faction specifically on C-Pulse. So when you talk about neuromodulation a John you know and you’re not affecting the baroreceptors.

My understanding of baroreceptors as you know they have usually negative feedback mechanisms right you stretch the baroreceptors in the aortic arch out in the carotid’s for that matter and that’s how you get some sort of a down regulation of the sympathetic nervous system.

Counterpulsation through our C-Pulse would essentially be since it’s outside it’s a different mechanism of causing a change in the baroreceptors. I’m just trying to understand when you’ll talk about neuromodulation specifically related to C-Pulse. Neuromodulation for what is it related to hypertension is it any color you know or expand on that would be great. I completely accept it’s an esoteric question I can certainly take it offline. Thanks again.

John Erb

Certainly, Suraj. Well, we’ve planning on a couple of clinical trials here quickly to help answer some of that you know one of the first things we did which was a really physician initiated trial was to take a look at patients that actually had the C-Pulse implanted. And through a microneurography process actually look at their peripheral nerve traffic. And it was very obvious to these physicians that when C-Pulse was on the sympathetic nerve drive was greatly diminished, when it was off, if that drive jump backup.

So those are some of the clues that we will dig into. I mean we are initially focused on heart failure and the trials we will look at really is around blood pressure, heart rate and other markers. But that’s probably what our first-in-man trial acute study that we’re going to do this year, it will give us a lot of additional clues to how directly we’re going to affect that sympathetic drive.

Suraj Kalia

Thank you.

Operator

Thank you. Our next question is from Joshua Jennings of Cowen and Company. Your line is open.

Joshua Jennings

Hi, good morning, John and Claudia. Thank you. I just wanted to - congratulations on the Aquadex acquisition. I just wanted to get a sense of I haven’t dug into the ultrafiltration market particularly for heart failure. But can you just layout the competitive landscape for it, is Aquadex the ultrafiltration device for the - in case of heart failure indication in the U.S. market right now.

John Erb

Well, it’s really the only mechanical device that can be utilized by the heart failure cardiologist here in cardiology. There is CRRT, which is basically used by the nephrologist that is possible that you can ultrafiltrate from. Certainly there is a dialysis process that can ultrafiltrate. They’re much more aggressive and really take the education and training of the nephrologist to run that because of how much blood is withdrawn and how aggressive it can be. So this is a much gentler, milder way of removing fluid that is approved for the cardiologist to use.

Joshua Jennings

It’s less invasive in CRT as well as my understanding.

John Erb

That is correct. And I would say that the primary competitive product is diuretics. You know that’s the typical mode that physicians use to try to get fluid off when these patients are overloaded. And typically these patients get into Class III or the Class IV and the diuretics are being titrated to pretty heavy utilization, they’re less effective and it kind of begins at downhill battle. So this is an opportunity particularly when diuretics are not effective to be able to ultrafiltrate, remove the fluid.

Joshua Jennings

Excellent. And I just want to get a handle on and these are the - your first-in-man acute study can start enrollment and enrollment and completed by in the fourth quarter. But in terms of the device and the footprint, is this device [indiscernible] with the history of enrollment pace with the C-Pulse. Is this going to be, I mean how invasive is this procedure going to be in and just you know how quickly do you think and it sounded like a quick enrollment, how many patients are going to be in first-in-man acute and are there any hurdles to getting patient consent?

John Erb

No I don’t believe there will be - this would be much less invasive and it will be in conjunction with another procedure that the vascular surgeon will be performing to do this first-in-man 20 patients. We actually have had a cadaver lab where we’ve had physicians and you know we’ve identified the location of where we want to stimulate. Was it very easily identified the procedure itself is maybe 15 minutes to place. Overall a patient maybe there less than an hour, but it’s pretty straightforward.

Joshua Jennings

Great. And then just the same question for the 30 patient trial with a six month follow-up period. How is the patient going to have the device implanted? Is it going to be fully implantable for trial?

John Erb

Yes it will be a full implantable again minimally invasive less than an hour for the procedure.

Joshua Jennings

Great. And I was interested in your comments about the discussions with players in the neuromodulation space and you spoke about negotiations for partnerships. Can you give us any more color in terms of what types of partnerships would be agreeable for you and your team?

John Erb

Well, part of our strategy is to not reinvent the wheel and there’s a lot of good science out there, a lot of engineering that’s gone into developing neuromodulation different applications and rather than go raise huge amount of money, hire a whole bunch of experienced engineers we thought it would be more productive, more capital efficient to partner with the company. And we’ve been in discussions with several. The scope of it is soup to nuts, really, it’s really too early to be specific and I hope within the next not too many weeks, months to announce a partnership.

Joshua Jennings

Great. Thank you, John. Congrats on the progress.

John Erb

Thank you, Josh.

Operator

Thank you. The next question is from Jan Wald of Benchmark Company. The line is open.

Jan Wald

Good morning everyone, and congratulations on the progress.

John Erb

Thank you.

Jan Wald

I guess most of my questions have been asked. I guess one thing on the partnership, you say it’s too early to talk about it in any kind of detail, but is this kind of like a licensing arrangement that you’re looking at where you’re going to sort of own the technology, but somebody else is going to develop end market or are they going to help you develop in your market. I mean what’s your thoughts along those lines?

John Erb

Again Jan, we’re not far enough along that I can be specific around those discussions. We’ve certainly talked about each of those examples that you just named and we have not finalized on exactly the best path forward there.

Jan Wald

Okay. I guess my one real question is, my past experience suggest that neuromodulation is a really tough road to go in terms of clinical trials and specifically endpoints and a placebo effect. I think some companies in the past have tried to - had really good early clinical data against their pivotal trial and all of a sudden the placebo effect is sort of blown everything up. How do you - so neuromodulation may sound simple, but it’s been tough in the past. How do you feel about your approach you have going forward and specifically in the clinical sense?

John Erb

Well, I feel very optimistic about it, but we have to prove it out. We have made an effort to really study the area. We have looked hard at some of the other trials, trial design, product designs, electrode placements and all sorts of things to learn from learning’s of others to not make the same mistake or to improve. We feel like we have a proprietary system that will be developed. It will be a different placement than others have gone. So that’s - we’ve got to prove it out, but I do feel optimistic about being able to do that.

We’ve had conversations with all the - I should say all the neuro companies because there’s a lot of bottom out there, but several of the companies we’ve actually had conversations with BioControl and have learned a lot from how they would do things differently if they had a chance to do it over again. And not by any means do I say we’re duplicating something that BioControl did because we’re not, but we’re doing our best to learn from others that have gone down this path ahead of us and kind of avoid some pitfalls.

Jan Wald

Okay. Thank you very much.

John Erb

Thank you.

Operator

Thank you. Well, this ends the Q&A portion of today’s conference. I’d like to turn the call over to John Erb for any closing remarks.

John Erb

Very good. Well, I want to thank everybody on the call. Thank you for your support and your interest in Sunshine Heart. And again, I’ll just reiterate that we are excited about where we’re going and very optimistic about hitting those milestones. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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