Years of research and development have culminated this morning with the announcement that the Food & Drug Administration (FDA) has approved Sunshine Heart's (SSH) Investigational New Device (IDE) application for C-Pulse, a device which proposes to solve the leading cause of hospitalization in the United States. To be precise, C-Pulse is being developed for the treatment of Stage III Heart Failure, which accounts for 25%-30% of heart failure cases or 1.5 million patients. The news, among other things, is a major de-risking event for shareholders and investors in the company. I use the term "among other things" because the breadth of the market, the need for a robust therapy, and encouraging data from Sunshine Heart's feasibility trial suggest the IDE approval is about more than just "news." This is a major milestone which will inevitably lead investors to assign a higher valuation to the company and force analysts to revise their models upwards, in order to reflect the company's success.
Sunshine Heart is a compelling opportunity in a space where its nearest peer, Heartware International (HTWR), is assigned a $1.37 billion valuation. Heartware manufactures miniature left ventricular assist devices (LVADs) for Class IV Heart Failure, which is about 1/7 the size of the Class III market. As with Sunshine Heart's C-Pulse device, Heartware's LVAD is approved in the European Union (EU) for "bridge to transplant therapy in stage IV patients." But here's the catch: in the 137-patient trial that supported this approval, 11 patients who received Heartware's device had ischemic strokes (per a disclosure in the annual report). It is not known how this compares to other technologies in this class because stroke data was not tracked in the control registry of patients receiving other LVAD devices. This means Heartware's product carries safety concerns, particularly in relation to stroke rate. Data from Sunshine Heart's feasibility study with C-Pulse showed improvement in heart failure patients' functional class at 12 months. There were no stroke or thrombus events (source).
To further the case that Heartware's product is unsafe, particularly when compared with Sunshine Heart's C-Pulse device, an important distinction arises from the method in which the respective devices are implanted into patients. Heartware's LVADs are implanted via sternotomy, which is an invasive procedure that involves separation of the sternum. Due to the turbulent movement of blood there is an increased risk of blood clots. There is also increased risk of infection because of the outside drive line. Sunshine Heart is taking a different approach. Because the technology is completely external to the circulatory system, there is no need for open heart surgery or entrance to the pericardial space to place the device. The device does not come into direct contact with blood, which is important because there is no risk of clot formation. This, of course, is evidenced by the strong safety data from Sunshine Heart's feasibility trial.
What's interesting, then, is what drives a $1.29 Billion wedge between the two companies ... either Heartware is grossly overvalued or the market is implying tremendous upside for Sunshine Heart. But before we move on and make the case for C-Pulse, there's another name you need to know to really understand the upside here that I'm implying.
Thoratech (THOR). In 2009, the market-leader for LVADs (yes, left ventricular assist devices) attempted to consolidate its position by bidding for Heartware. The FTC blocked what would have otherwise been a $300 million takeover (in today's dollars). The reasoning was that "the transaction would substantially reduce U.S. competition for LVADs." This would be an unlikely case if Thoratech were to bid for Sunshine Heart. As it happens, Thoratech's growth has slowed, but operations continue to yield considerable cash flow. Not to be suggestive, but Thoratech could buy Sunshine Heart 4x over at its current price. The opportunity for a robust device in Class III heart failure therapy and the C-Pulse's safety profile make it an ideal takeover target, not just for Thoratech, but larger device manufacturers like Boston Scientific (BSX), which, by the way, recently saw a heart device of its own approved by the FDA [As a side note, the device that was approved is an external defibrillator developed by Cameron Health, which was acquired by Boston Scientific earlier this year for $1.35 billion].
In Class III Heart Failure, patients are at increased risk of death and lead a very poor quality of life. It's characterized with "marked limitation of activity and the development of fatigue, palpitations, and dyspnea with very limited physical activity," according to the New York Heart Association.
Standards of treatment include medications and cardiac re-synchronization therapy (CRT), though these treatments are limited by the practical realities of treating heart failure. For instance, patients are placed on several medications that must be taken at specific times during the day. Some of the medications have side effects that make compliance even more difficult. Many patients are unable to tolerate the doses of medications that have been demonstrated to have a meaningful effect on morbidity and mortality for heart failure [Thus, these medications are benign for those patients]. Studies also suggest at least one-third of patients are not compliant with medication regimens; this leads to de-compensation and hospital admission. The other option, CRT, involves implantation of a pacemaker that sends impulses to the right and left sides of the heart in an attempt to better coordinate the pumping action of the heart muscle. Current research suggests that 30% of patients do not respond to CRT. Furthermore, many patients with stage III heart failure may not qualify for device placement due to the unique characteristics of their case.
Sunshine's Heart's C-Pulse is the closest solution for Class III Heart Failure available today. This makes the company a compelling takeover target. IDE approval for C-Pulse from the FDA is a major de-risking event that makes Sunshine Heart an attractive investment opportunity. Importantly, this news follows on the tail of approval of the device in the EU and a successful raise of over $20MM to fund the final stage of development before submitting to the FDA for marketing approval in the United States. Sunshine Heart is targeting a market worth no less than the "obesity" markets targeted by Vivus (VVUS), Arena (ARNA), or Orexigen (OREX). In fact, the roadmap to commercial development is relatively straightforward and far less muddled with competition.
What tends to happen to once "hot" stories is that investors rotate out of those names and into new and exciting opportunities. For a myriad of reasons, I can't help but think that the FDA has just given Sunshine Heart the thumbs up to start one of the most exciting studies this year; perhaps even this decade.