Sunshine Heart (SSH) is an early-stage medical device company focusing on the commercialization of its C-Pulse Heart Assist System, an implantable, non-blood contacting, heart assist therapy for the treatment of moderate to severe heart failure. The system can be implanted using a minimally invasive procedure, and is designed to relieve the symptoms of heart failure through the use of counter-pulsation technology, which enables an increase in cardiac output, an increase in coronary blood flow and a reduction in the pumping load on the heart. Operating outside the patient's bloodstream, the extra-aortic approach of the technology offers greater flexibility, allowing patients to safely disconnect to have intervals of freedom to perform certain activities such as showering. The C-Pulse System may help maintain the patient's current condition and, in some cases, reverse the heart failure process, thereby potentially preventing the need for later stage heart failure therapies, such as left ventricular assist devices (LVADs), artificial hearts or transplants.
Heart failure is the leading cause of hospitalization in the U.S. Total costs to the healthcare system amount to more than $33 billion annually. In addition to the more than 5 million cases of heart failure in the U.S. (approximately 33 million worldwide), the number of confirmed cases is escalating at such an alarming rate that the U.S. National Heart, Lung and Blood Institute has characterized it as a "new epidemic." Adding to the challenge of treating heart failure (HF) is the progressive nature of the condition as a result of which patients' symptoms to worsen over time. Drug therapy is prescribed for many heart failure patients to relieve symptoms and enable them to maintain their quality of life. The progression of a patients' heart failure may be categorized according to the New York Heart Association (NYHA) as Class I through Class IV.
As heart failure progresses, drug therapy may become less effective. When a patient is unable to perform daily activities or mild exercise without experiencing symptoms, they are classified as NYHA Class III, otherwise known as moderate heart failure. Today, Class III patients with ventricular dysynchrony may receive pacemaker therapy. This is a $3 billion market in the U.S. Twenty-five percent of these patients will not show any improvement, and an additional twenty-five percent will show only marginal improvement. This leaves a large number of patients with Class III symptoms with few, if any, treatment options. Patients categorized as class IV or end stage heart failure may require a heart transplant or receive a left ventricular assist device (LVAD). The market for LVAD's in the U.S. is estimated at $400 million. In March 2012, the FDA gave Sunshine Heart the green light to move forward with an investigational device exemption (IDE) application. The company expects to submit an IDE application to the FDA sometime in the second half of 2012 for approval to initiate its pivotal trial. In July 2012, Sunshine Heart received the CE Mark for its C-Pulse System in Europe.
For the second quarter of 2012, Sunshine Heart reported an SG&A expense of $1.6 million and $3.5 million year-to-date, compared to $1.2 million and $1.8 million in 2011, respectively. R&D expense totaled $1.8 million in the second quarter of 2012, and $4 million year-to-date, compared to $2.4 million and $4.7 million in 2011, respectively. Net loss in the second quarter and year-to-date was $2.6 million and $6.7 million, compared to losses of $3.5 million and $6.3 million in 2011.
Sunshine Heart ended the second quarter of 2012 with a cash balance of $1.8 million. Subsequently, the company has closed a public offering of 2,875,000 shares of its common stock at a price of $7.00 per share. The net proceeds from the sale of shares by Sunshine Heart after underwriting discounts and other offering expenses total approximately $18 million. The company's cash burn rate for the first six months of 2012 was $6.8 million.
Equity analyst Canaccord Genuity provides a 'buy' rating and a price target of $11 on Sunshine Heart shares, primarily due to encouraging results of a North American feasibility trial for the C-Pulse Heart Assist system and a better financial position as key reasons to retain a positive outlook on the company's future. Sunshine Heart is expected to launch a U.S. trial within months to confirm the results of earlier studies. This milestone event could coincide with the first commercial sale of C-Pulse. The $11 price target from Canaccord is significantly higher than the $7 value of the stock offering finalized by the company, but Cannacord noted that the company's financial position is much stronger now than it was before the offering. The offering will enable Sunshine to last until the mid-way point of the U.S. trial, a key milestone in terms of predicting the future outcome of a mid-term trial analysis. An amended S1 following the aforementioned stock offering discloses that a major "strategic investor" was looking to come onboard during the offering, and it was also noted that the investor would also send an "observer" to Sunshine Heart's board.
Sunshine Heart recently received conditional approval from the FDA for an Investigational Device Exemption for its flagship C-Pulse Heart Assist System. Sunshine Heart plans to initiate a pivotal trial in North America in the fourth quarter of 2012. The company expects to receive revenues from trial sites for device implants as the FDA has granted CMS Category B3 status. Sunshine Heart estimates enrollment for the event-driven trial will take approximately 2.5 years.
Sunshine Heart is currently trading around $6.35, toward the low end of its 52-week trading range of $2.50 and $22.90. Investors interested in gaining exposure to potentially revolutionary new treatments for heart failure should watch Sunshine Heart closely for favorable developments surrounding its clinical trials to confirm the encouraging results of its C-Pulse Heart Assist System.
HeartWare International (HTWR) develops and manufactures miniaturized implantable heart pumps (ventricular assist devices) to treat Class IIIB/IV patients suffering from advanced heart failure. The HeartWare Ventricular Assist System features the HVAD pump, a small full-output circulatory support device (up to 10L/min flow) designed to be implanted next to the heart, thus avoiding the abdominal surgery generally required to implant competing devices. HeartWare has received the CE Mark for the HeartWare System in the European Union and TGA approval in Australia. The device is currently the subject of U.S. clinical trials for two indications: bridge-to-transplant and destination therapy. The HeartWare Ventricular Assist System has been designed to address many of the issues that have historically limited the clinical uptake of mechanical circulatory assist systems. At the core of the system is the HVAD Pump, a miniaturized centrifugal pump which is designed to be implanted within the pericardial space. The device has only one moving part and no mechanical bearings.
For the second quarter of 2012, HeartWare reported revenue of $29.1 million, which marked a 42 percent increase from $20.4 million in revenue for the same period of 2011. Revenue from international markets grew to $24.9 million in the second quarter of 2012, from $14.1 million on a year-on-year basis which was a 76 percent increase. Changes in foreign currency rates had a negative impact on revenue of approximately $1.9 million in the second quarter of 2012, compared to the second quarter of 2011.
During the quarter, HeartWare generated global sales for the HeartWare Ventricular Assist System of 318 units, up from 226 units in the second quarter of 2011. International markets contributed to 276 units sold and approximately 86 percent of second quarter revenue. Following the positive recommendation of the Circulatory System Devices Advisory Committee in April, HeartWare has been focused on working with the FDA as it finalizes its review of our Premarket Approval (PMA) application for U.S. commercialization of the HeartWare Ventricular Assist System as a bridge to heart transplantation. In May, the company announced the early completion of enrollment in its 450-patient ENDURANCE Destination Therapy study. Through the two-year patient follow-up period for the trial, the company has requested a Continued Access Protocol allocation for destination therapy from the FDA.
HeartWare's total operating expenses for the second quarter of 2012 amounted to $34.2 million, compared to $20.2 million in the same period of 2011. Research and development expense was $20.0 million for the second quarter of 2012, compared to $10.3 million in the same period of 2011, primarily attributable to the company's continuing clinical trial costs and research and development costs related to advancing pipeline technologies. Selling, general and administrative expenses were $14.2 million in the second quarter of 2012, compared to $9.9 million in the second quarter of 2011. Net losses for the second quarter of 2012 amounted to $22.8 million, or a $1.61 loss per basic and diluted share, compared to a $10.1 million net loss, or a loss of $0.73 per basic and diluted share, in the second quarter of 2011. For the six months ended June 30th, 2012, HearWare recorded a net loss of $41.6 million, or a $2.94 loss per basic and diluted share, compared to a $19.5 million net loss, or a loss of $1.40 per basic and diluted share, in the first half of 2011. On June 30th, 2012, the company had $131 million in cash, cash equivalents and investments, compared to $144.5 million on March 31st, 2012 and $163.2 million on December 31st, 2011.
An important difference between Heartware's product and Sunshine Heart's C-Pulse is in the method of implementation. The HeartWare Ventricular Assist System is implanted with the use of a sternotomy, an invasive surgical procedure that involves separating the sternum. This increases the risk of blood clots and the chances for infection. Sunshine Heart's technology is completely external to the circulatory system, and there is no need for open heart surgery or entrance to the pericardial space. Because the device does not come into direct contact with blood, there is no risk of clot formation.
Though HeartWare is at a more advanced stage than Sunshine Heart, it does appear that the latter has superior technology. HeartWare is currently trading around $84.64, between a 52-week trading range of $58.77 and $97.31. Interested investors should watch HeartWare closely for new developments surrounding sales of its HeartWare Ventricular Assist System. Strong sales and dips in share price to the $70 range could present new buying opportunities.
For more than three decades, Thoratec (THOR) has remained committed to innovating therapies for advanced heart failure patients. Today, Thoratec offers the widest range of options available to address acute, interim and chronic care needs. Thoratec also harnesses the experience and commitment needed to support these proven therapies. The company employs more than 800 people throughout the world. Thoratec is the world leader in mechanical circulatory support products, including the HeartMate LVAS and Thoratec VAD, with more than 20,000 devices implanted in patients suffering from heart failure. Thoratec also manufactures and distributes the CentriMag and PediMag / PediVAS product lines.
For the quarter ended September 29th, 2012, Thoratec reported revenues of $117.8 million, a 15% increase over revenues of $102.6 million in the third quarter of 2011. Net income on a GAAP basis was $24.3 million, or $0.41 per diluted share, compared to GAAP net income of $19 million, or $0.31 per diluted share year-on-year. Non-GAAP net income amounted to $29.2 million, or $0.49 per diluted share, compared to non-GAAP net income of $25.1 million, or $0.41 per diluted share in the same quarter of 2011. For the first nine months of fiscal year 2012, revenues were $363.2 million, an increase of 16% over revenues of $313.3 million in the same period of 2011. Net income on a GAAP basis was $70.6 million, or $1.18 per diluted share, compared to GAAP net income of $57.2 million, or $0.95 per diluted share, in the same period of the previous year. Non-GAAP net income was $86.6 million, or $1.45 per diluted share, compared with non-GAAP net income of $74.3 million, or $1.18 per diluted share, in the same period of 2011.
For the third quarter of 2012, Thoratec's HeartMate product line contributed $105.9 million in sales revenue, an increase of 21%, while the Centrimag product line contributed $7.5 million in sales revenue, an increase of 4%, including revenues of $0.9 million related to the acquisition of Levitronix Medical. The PVAD/IVAD product line contributed $3.8 million in sales revenue, a decrease of 47%. For the first nine months of 2012, the HeartMate product line generated $323.8 million in revenues, an increase of 19%, while the CentriMag product line generated $24.2 million, an increase of 43 percent, including revenues of $6.1 million related to the acquisition of Levitronix Medical. The PVAD/IVAD product line generated $13.4 million, a decrease of 39%. Cash and equivalents were $307.9 million as of September 29th, 2012, compared to $279.8 million as of June 30th, 2012 and $209.5 million as of December 31st, 2011.
In 2009, Thoratec attempted to consolidate its position by trying to acquire HeartWare. The FTC blocked what would have otherwise been a $300 million transaction on the grounds that the transaction would substantially reduce U.S. competition for LVADs. This would not be the case if Thoratec were to acquire Sunshine Heart, but only time will tell whether this is going to happen. In the meantime, I would not recommend investing in Thoratec because of the relatively high earnings multiple of around 25, compared to around 14 for other device makers such as Stryker (SYK) and Zimmer Holdings (ZMH).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.