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Investors should wait to buy shares of Sunshine Heart (NASDAQ:SSH) at a time when the company will have to beg for capital.

In its August 2012 raise, Sunshine Heart raised too little money. The company raised $20,125,000 by selling stock at $7 per share. This cash infusion represents most of the company's book value because its June, 30, 2012, quarterly filing listed $2,404,000 in cash and $2,900,000 in total assets, leaving many a shareholder thoroughly diluted.

The combined $22,529,000 in cash might seem like a lot of money, but it's not much for a company in this space. The Company's operating cash outflows were $13.1 million in 2011 and $7.2 million in 2010. This spending rate is before extensive testing. Developing a medical device from concept to regular commercial production of such complexity can cost upwards to $300 million. Since Sunshine Heart will literally require heart surgery for testing, investors should conservatively expect these trials to take a long time and its cost to rise significantly.

Sunshine Heart will most likely have to tap the capital markets within a short period of time, further diluting its current shareholder value. This is based on a good outcome - winning FDA approval. A bad outcome is liquidation.

Another consideration that should give investors pause is the fact that there are other companies that already have similar devices that are approved products and much less speculative.

Heartware International (NASDAQ:HTWR) supplies heart pumps and ventricular assist devices. Thoratec (NASDAQ:THOR) is another stock which competes in this space by providing its own pulsating left ventricle assist device and a blood pump which is also used to supplement blood flow.

These stocks are highly-valued relative to many other companies which sell surgical implants such as Stryker (NYSE:SYK) and Zimmer Holdings (NYSE:ZMH):

Ticker

Company

P/E

P/S

P/FCF

HTWR

Heartware International

NA

12.68

NA

THOR

Thoratec

25.34

4.4

14.86

SYK

Stryker

14.33

2.34

19.12

ZMH

Zimmer Holdings

14.55

2.44

12.07

Investors would be better served by buying shares of Stryker and Zimmer Holdings at these price levels. Cardio-assist devices are hot right now, but there is no reason to pay such high valuations when other companies in the industry are trading at roughly half their valuations.

Sunshine Heart recently won an Investigational Device Exemption from the FDA, the clinical trials (up to three years), FDA review (three months to two years) and pre-marketing approval (one to two years) lie ahead. The company is realistic about this wait, and wrote on page one of its 2011 10-K"

"We expect to complete our pivotal trial in 2015 and do not anticipate marketing our product in the U.S. before 2016."

Since cash will be depleted long before the company can make sales, investors that are still interested in Sunshine Heart should recognize that there will be many future opportunities to acquire shares. Speculators interested in Sunshine Heart must ask the question "Is now is the right time to buy?" The answer is clearly no: the company is bathing in the afterglow of its recent share offering and Investigational Device Exemption. Savvy investors should wait for the company to be in desperate need for cash or to be suffering from a setback. That would be a much more attractive time to either buy shares at a lower price in the secondary market or to buy them directly from the company in a new share offering.

Source: Not Enough Cash For Sunshine Heart