In a recent article,"Sunshine Heart: Ironically, A Cash Crisis May Result In Better Outcomes For Shareholders", I explored the possibility that Sunshine Heart (NASDAQ:SSH) with its C-Pulse therapy might become the subject of takeover bids. I also noted that the value to any potential acquirer would depend on the ability of that acquirer to best exploit the opportunity.
Novartis is arguably best able to exploit the C-Pulse opportunity
For a variety of reasons, Novartis (NYSE:NVS) is top of my list of companies likely and best able to exploit the opportunity represented by C-Pulse therapy. My previous article looked at what benefits would accrue to Sunshine Heart shareholders in the case of a takeover bid. This article looks at the benefits that potentially would accrue to Novartis and its shareholders from an acquisition of Sunshine Heart with its C-Pulse. And more particularly, why Novartis might be the one to recognize the opportunity represented by Sunshine Heart C-Pulse.
I will address these benefits under the following headings -
- Novartis concentrated approach to cancer therapies could be applied to heart failure therapies
- There is something special about both Entresto and C-Pulse
- Entresto and Sunshine Heart's C-Pulse are complementary and not competing therapies
- Novartis, by owning C-Pulse and Entresto, could transform and dominate heart failure treatment
- Novartis can develop the multiple therapeutic options possible with C-Pulse
- C-Pulse could reduce concerns about Entresto's potential longer term side effects
- Novartis has the marketing power to promote C-Pulse synergistically with Entresto
- Novartis can influence Cardiologists and HF patients attitudes to treatment of Heart Failure
- Novartis estimated Earnings Before Interest and Tax (EBIT) excluding C-Pulse
- C-Pulse could provide long term revenue and profit growth for Novartis, above and beyond Entresto
- Novartis concentrated approach to cancer therapies could be applied to heart failure therapies
Novartis' CEO, Joseph Jimenez, has been expanding Novartis' inventory of oncology therapies, in innovative deals as described in this Forbes article, "Is This How We'll Cure Cancer?" The article provides some valuable insights into the thinking of Jiminez.
- "Among the therapies acquired by Novartis are chimeric antigen receptor T-cells, or CARTs. If the receptor sees cancer, not only does it kill it, it starts dividing, creating a cancer-killing army inside the body.... I've told the team that resources are not an issue. Speed is the issue, says Novartis Chief Executive Joseph Jimenez, 54. I want to hear what it takes to run this phase III trial and to get this to market. You're talking about patients who are about to die. The pain of having to turn patients away is such that we are going as fast as we can and not letting resources get in the way."
- "the biggest hurdle facing efforts to develop new cancer cures might be economics, not science. "What you know is not going to happen is the ability to stack therapies on top of each other at the current price and expect people to pay," he (Jiminez) says. " The whole oncology pricing structure needs to be rethought because it s reached the level that is not going to be sustainable for the long term. "
- "In April (2014) he (Jiminez) did a deal that essentially traded Novartis' unprofitable vaccine and consumer businesses and up to $9 billion in cash to GlaxoSmithKline in return for Glaxo's cancer drugs, ...The same day, he sold his veterinary business to Eli Lilly. He calls it "precision M&A"-bartering for the divisions you want, instead of bidding $100 billion for another rival..."
- "He (Jiminez) expects "a new brutal world" for health care companies as countries around the world are forced to double health care spending because of age and illness over the next ten years. "He has a team actively exploring new ways of pricing cancer drugs, in which several medicines are sold for the price of one, or health systems or insurers pay based on how many patients are cured."
If Mr Jiminez were to adopt a similar approach for HF as he is doing for cancer, then surely he would want to add C-Pulse therapy for later stage HF patients to complement the Entresto therapy for early stage HF. In fact there is something to be said for elevating HF therapy above that for cancer therapy. For a start,HF has been described as, "More 'malignant' than cancer? Five-year survival following a first admission for heart failure". So it is just as worthy to consider speed of development of HF therapies as an issue, as it is for cancer therapy.
The cost of both Entresto and C-Pulse therapies are a mere fraction of the cost of cancer therapies, so they will not be the same potential burden on the health system. In addition, both Entresto and C-pulse reduce re-hospitalization for HF thus providing an actual cost benefit to the health system.
Resources and speed of Pivotal trial enrollment have been major issues for Sunshine Heart. Mr Jiminez' attitude, in relation to cancer drug development, that resources will not be allowed to be an issue and that speed is the major issue is what is needed to be applied to getting C-Pulse to PMA and the C-Pulse fully implantable model (FIM) in human trials. The economic benefits of speeding the process are huge and those benefits can accrue to Novartis.
2. There is something special about both Entresto and C-Pulse
The special thing about Entresto is it employs a new and unique mode of action not found in any drug previously approved for heart failure therapy. In this video on "Novartis (NVS) Entresto, "PARADIGM-HF - The Experts' Discussion", published by New England Journal of Medicine, Professor John McMurray reviewed the cornerstones of current therapy, the three foundations of pharmacological treatment, being Ace Inhibitors, Mineralocorticoid Receptor Antagonists, and Beta Blockers (with alternative Angiotensin Receptor Blocker in case of patients with side effects from Beta Blockers). Dr Packer explains that all of the above drugs target a number of maladaptive elements in heart failure by inhibition. He goes on to explain the body makes its own adaptors, peptides. A number of peptides that have vasodilator effects, antagonise vasoconstriction, reduce cardiac fibrosis and create favourable renal effects. All of these peptides are broken down by an enzyme called Neprilysin. So Neprilysin inhibition potentiates actions of vasoactive peptides beneficial in heart failure. It is further discussed in the video that natriuretic peptides enhance vagal activity/parasympathetic nerve activity. As well as reducing hospitalizations, compared to current Enalapril therapy, Entresto also showed a 20% reduction in cardiovascular death and a 16% reduction in all cause death. While it is known Entresto works, and on the balance of probabilities, the reasons why it works, the exact mechanism of action cannot be proven.
The special thing about C-Pulse is it has been found to have a second mode of action, a powerful neurohormonal activation mechanism, in addition to counterpulsation therapy. Like Entresto, C-Pulse is known to work, with 5 (25%) of its feasibility study patients becoming asymptomatic for HF, and even better clinical results being achieved in the EU post market trial. But unlike Entresto, it is possible to actually demonstrate how it works. This is possible through the ability to switch C-pulse on and off and measure hemodynamic, baroreceptor activity, and other measures while C-Pulse is switched on and off during calibration of the implanted device. The C-Pulse was designed to provide counter-pulsation therapy in a similar manner to the intra-aortic balloon pump (IABP), but outside the bloodstream. This was to avoid the dangerous blood clots, stroke and bleeding that plague devices in the bloodstream, such as the IABP and the LVADs from St Jude's (NYSE:STJ) HeartMate II and III and HeartWare's (NASDAQ:HTWR) HVAD and MVAD. Medical researcher interest in the C-Pulse is growing due to the surprisingly good functional outcomes for heart failure patients implanted with the device, far greater than might be expected from an IABP. Sunshine Heart's Chief Scientific Officer, Dr. Georgakopoulos, is gathering data on the mode of action of the C-Pulse and the therapeutic benefits it provides that enable such good functional improvements in patients. His video presentation on Hemodynamics to C-Pulse clinical trial investigators in May 2015 and his slide presentation and address to analysts and investors at the TCT Conference in October 2015 revealed some of what is being learned about how the therapy is so effective. The IABP is necessarily placed inside the descending aorta distal to the sub-clavian artery and proximal to the renal arteries to avoid occlusion of these arteries. Being outside the aorta, the C-Pulse does not have these restrictions on placement and is in fact positioned on the ascending aorta proximal to the aortic root. And what continuing research is finding is this unique positioning results in magnification of its therapeutic effects far beyond that available from an IABP. The ability to turn the device on and off during optimization is uniquely allowing real time observation of strong baroreceptor activation (achieves neuromodulation), and measurement of hemodynamic effects of the device, in a manner that is not possible with a drug.
IN SUMMARY -
Both Entresto and C-Pulse therapies have this neuromodulation effect. Entresto possibly has only a mild effect but any neuromodulation effect translates into benefits for HF patients, as observed in the Paradigm-HF trial. C-Pulse has a highly significant neuromodulation effect, observable by measurements and observations while turning C-Pulse on and off during optimization of the implanted device. The neuromodulation effects of C-Pulse translate into HF patient recovery (patients become asymptomatic for HF) for a significant proportion of patients. The analysis in Table 1 below illustrates how with increasing knowledge, selection of the most suitable patients could result in high success rates for patients becoming asymptomatic for HF.
3. Entresto and Sunshine Heart's C-Pulse are complementary and not competing therapies
While there were some later stage patients in the Entresto (LCZ696) Paradigm HF trial, it mainly targeted early stage NYHA Class II and Class I clinically stable HF patients with mild HF. In the video referenced above, Dr Packer expressly explains these patients' HF will continue to have meaningful progression to later stages of HF. The aim of Entresto is to slow this progression, but there is no claim it will stop the progression. These patients will be receiving optimal doses of medication and they will eventually enter the treatment gap where there is no currently approved therapy available in the US. This is where C-Pulse therapy, once it receives PMA following completion of its Pivotal trial, can be added to optimal drug therapy, to fill the treatment gap and halt and even reverse the progression of HF.
I emailed, Dr Georgakopoulos, Sunshine Heart's Chief Scientific Officer, to obtain his opinion on this question of potential competition between C-Pulse therapy and Novartis Entresto. Here is his reply,
There is really no concern about Entresto impacting C-Pulse prospects, current or future. Please see below for details supporting this.
1. The study population for PARADIGM was 70% Class II, 24% Class III and 1% Class IV. The goal was to target HF patients very early in the HF progression. Also, of the Class III/IV patients which would be potential candidates for C-Pulse based on inotrope use, there were 5.4% in the Enalapril group (229/4212) and 3.9% in the LCZ (161/4187). It's clear that there is no overlap at all with C-Pulse patient population and sicker patients still required inotrope use with the absolute value of 3.9% reduction compared to enalapril which is very moderate effect. There was also a non-significant statistical effect (despite the very large population) of number of patients eventually requiring a medical device between the two arms. Also, the mortality rates, are increasing linearly, are expressed as relative reduction but the absolute reduction is small and patients still experienced a large number of primary events with LCZ, even in predominantly Class II. Conclusion, there is no overlap with current population and these patients will continue in their HF progression and will eventually be C-Pulse candidates.
2. Early stage HF patients were selected because LCZ cannot be combined with an ACE as it causes severe angioedema and hypotension. Healthier patients allowed for the ability to discontinue ACE and have a run-in period for LCZ to achieve the dose. This effectively limits them to Class II/early Class III as sicker patients are too unstable to tolerate this process.
4. Novartis, by owning C-Pulse and Entresto could transform and dominate heart failure treatment
Novartis, with both Entresto and Sunshine Heart's C-Pulse in its armory, has the potential to transform and dominate heart failure treatment from the early stages of NYHA Class I and II all the way through to the later stages of NYHA Class III and ambulatory Class IV. Table 2 below gives some idea of the comparative efficacy of C-Pulse and Entresto.
It can be seen from Table 2 above there is a huge difference in efficacy between C-Pulse and Entresto. But Entresto comes in tablet form that can be taken orally. Entresto also specifically targets only those HF patients whose heart failure is stable and mild. Entresto is not intended for a heterogeneous mix including unstable HF patients. Entresto therapy is intended to keep these stable, mild HF patients stable and out of hospital for a longer period than current therapy, and at the same time reduce mortality. Despite a reduction in mortality compared to Enalapril the annualized mortality in the Paradigm HF trial was ~7% (5% to 8%). This is still a very poor prognosis illustrating just how serious even stable, mild HF really is.
C-Pulse requires an implant of a device that currently entails a percutaneous interface lead (PIL) exiting through the skin. Earlier stage patients with mild heart failure in NYHA Class I and II will be appropriately treated with Entresto. Entresto will not halt HF progression and as the HF starts to have serious limiting effects on the patient there should be a natural progression to C-Pulse for NYHA Class III and ambulatory Class IV HF patients. I believe this will only come about in large numbers when the C-Pulse fully implantable model (FIM) enables the PIL to be dispensed with (but see qualification further below re HF-PEF patients). The C-Pulse FIM is due to be implanted in humans for the first time in the EU in 2016. It was always intended that the product to be commercialized would be an FIM, thus eliminating the percutaneous interface lead (PIL). Discussions have been initiated with the FDA regarding expedited access pathway to market for the FIM.
FIRST-IN-CLASS FROM NYHA CLASS I TO AMBULATORY CLASS IV -
Entresto is the first-in-class angiotensin receptor neprilysin inhibitor therapy (or ARNI), which has been approved in the US and Europe for patients suffering from symptomatic chronic heart failure and reduced ejection fraction (or HFrEF) (see here). As a medical device to treat NYHA Class III HF, C-Pulse is first-in-class in the EU and after the current Pivotal trial achieves PMA in the US it will be first-in-class in both the US and Europe. By acquiring C-Pulse, Novartis would potentially control first-in-class HF therapies covering all NYHA Classes from early stage Class I to late stage ambulatory Class IV.
5. Novartis can develop the multiple therapeutic options possible with C-Pulse
Potential therapeutic options already identified for C-Pulse include:
- Heart failure with reduced ejection fraction (HF-REF);
- Heart failure with preserved ejection fraction (HF-PEF)
- Pulmonary arterial hypertension; and
Heart failure with reduced ejection fraction (HF-REF) is the target of the current US Pivotal trial. What I believe the market has not caught onto yet, is this strong neuromodulation effect of C-Pulse opens up a much wider population of HF patients able to benefit from C-Pulse therapy. This includes HF patients with preserved ejection fraction (HF-PEF). C-Pulse is not a blood pump. If, after activation of the neurohormonal system and optimisation of the cardiac and arterial hemodynamics by C-Pulse, a damaged heart is still pumping less than adequate amounts of blood, then full recovery would not be expected. But in a HF-PEF patient the pumping ability of the heart is preserved. I hypothesize that the neuromodulation effect of C-Pulse in HF-PEF patients could result in close to 100% success rates for these patients becoming asymptomatic for HF as cardiac output should not be an issue. I emailed Dr Georgakopoulos, Sunshine Heart's Chief Scientific Officer, in relation to the potential applicability of C-Pulse to HF-PEF patients and here is his reply,
You are spot on in your assessment. We have had several discussions internally about this population, including increasing the EF cutoff to 40% in the post market study. A physician in the UK indicated there is an enormous unmet need in this population as most trials tend to exclude these patients. As far as 'pure' HFpEF which many define as EF>50-55%, the potential mechanism of action of C-Pulse involving neuromodulation and the arterial system would be the ideal target. Another unappreciated mechanism in these patients is the potential chronic myocardial ischemia which may be contributing much of the passive stiffness in the heart (see here). From discussions with cardiologists, the biggest hurdle is many of them are still not comfortable with the idea of implanting a device with a driveline in this patient population despite the fact that they are as symptomatic and have the same survival as patients with reduced EF. As we develop a fully implantable version, I think there is tremendous potential to study these patients since there are currently no approved devices or pharmacologic compounds.
My own thoughts are the PIL model might even be a preferred option for HF-PEF patients if it is determined there is a high likelihood of an early recovery, because there is less hardware inside the body (TETS and controller and pump) to either be explanted or left there after recovery in case the condition returns. Animal trials for the applicability of C-Pulse to treating Pulmonary Arterial Hypertension have already been commenced (see here). Angina pain is caused by the coronary arteries receiving insufficient blood flow. C-Pulse has been shown to increase perfusion of the coronary arteries by over 60% and has been identified as a therapeutic option for angina once the fully implantable model becomes available.
In addition to all of the above, I believe over the months ahead we will see an expansion of the targets for C-Pulse therapy. Many HF patients have multiple co-morbidities including kidney disease and diabetes. Researchers in these areas will almost certainly want to investigate the neuromodulation effect of C-Pulse on the Renin/Angiotensin system and on perfusion of peripheral arteries. Positive results of animal studies in these areas are included in this Sunshine Heart C-Pulse presentation.
6. C-Pulse could reduce concerns about Entresto's potential longer term side effects
C-Pulse therapy being a follow on therapy to Entresto could provide a means of overcoming certain concerns about Entresto's potential longer term side effects. Some reports on this article from Arthur M. Feldman, MD, PhD, et al, on Entresto published in JAMA on December 7, 2015 could easily alarm Physicians and heart failure patients as to the risk of Alzheimer's onset from taking Entresto. The truly relevant passage from the article is,
These studies raise the theoretical concern that long-term administration of a neprilysin inhibitor has the potential for neurological and ocular complications in humans.
Put that in the context of the 20% reduction in mortality with Entresto, and a long term theoretical risk of Alzheimer's onset is of lesser relevance in a decision to take Entresto. Conversely, taking Entresto could help to prevent the real and present danger of vascular dementia onset, due to insufficient blood flow to the brain from a failing heart. For a balanced and unbiased review of this subject I recommend reading, "Inhibiting Neprilysin Is Good for the Heart: What About the Brain?", from the Alzheimer networking organization, AlzForum.
Finally, it needs to be understood the above concerns around side effects are in relation to long term administration of Entresto, and also for sicker patients where the blood brain barrier might be compromised and more easily crossed. If Novartis has C-Pulse therapy available to switch patients to, as their HF progresses, then these concerns might be largely eliminated.
7. Novartis has the marketing power to promote C-Pulse synergistically with Entresto
Novartis has the marketing power with Cardiologists and other treating physicians to promote C-Pulse alongside Entresto in a way not possible for either Sunshine Heart or for many other potential bidders for Sunshine Heart. For heart failure patients everywhere, possibly the most critical fact to emerge from the Novartis Entresto trial, was not the success of the drug, but the continuing poor prognosis for heart failure patients, whether or not on Entresto. This has to change. From the following insightful comments by Dr Packer, from the video referenced above, his concern for heart failure patients, and their need for Entresto to at least partially slow progression is very clear.
But there is something else which I think is very, very important. Remember who was in this trial. Patients in this trial were clinically stable patients generally speaking, with mild heart failure. These were patients that almost all Physicians, if they saw in the office on a daily basis, or a weekly basis, monthly basis, whatever, would say, "You know, you're doing just fine. You are getting great therapy, your quality of life is very reasonable, and you know, your risks of something happening are being reduced by the drugs you are taking." We studied that kind of patients, patients that Physicians see every single day. And what Physicians need to understand is, that apparent clinically stable patient is not that stable. And they still have a very meaningful rate of progression, no matter how you record progression: quality of life progression; hospitalization progression; mortality progression. And so it is really important to reduce the risk of worsening over time, even if patients are clinically stable and it looks like they are doing well.
Novartis are making a significant contribution to creating awareness and education about heart failure through the keepitpumping web-site where it is disclosed, among other statistics, " Heart failure causes 2 to 3 times as many deaths as advanced cancers like bowel and breast cancer". The number of "actions to raise heart failure awareness" for the web-site currently number close to 4.4 million and this number is growing at a rapid rate. Over a million in the EU have either signed up to the web-site or connected on social media with a far lesser number of ~120,000 in the US. The foregoing numbers dwarf anything Sunshine Heart could hope to achieve in creating awareness.
8. Novartis can influence Cardiologists and HF patients attitudes to treatment of Heart Failure
The attitudes of Oncologists and cancer patients to treatment of cancer versus the attitudes of Cardiologists and HF patients to treatment of Heart Failure are worlds apart and for no apparent good reason.
In Sunshine Heart 3rd qtr 2013 conference call, former Sunshine Heart CEO, Dave Rosa, said if he were an Oncologist and told a patient their leg had to come off they would agree. But the LVAD companies struggle to get around 6,000 to 7,000 patients implanted per year out of a population of late stage HF patients, numbering 200,000 to 250,000, and then mostly only when in imminent threat of death. Cancer treatment mostly causes pain and discomfort and a worsening of quality of life during treatment stages, ahead of a period of hopefully some remission. There is generally a continuum of aggressive, often patient debilitating treatment, until a stage of palliative care is reached. HF drug treatment actually relieves pain and discomfort and preserves reasonable quality of life until optimal drug dosages are reached. The progression of the disease then continues, through a stage where there is a treatment gap with no approved therapy to treat, until it reaches late stage where the available therapies are heart transplant, LVAD or palliative care.
Novartis Entresto has shown in the Paradigm HF trial that it can extend the period of reasonable quality of life ahead of reaching the point of treatment gap. Imagine the reception a new cancer drug would get, if it extended life by 20%, did not cause pain and suffering in treatment sessions, but actually maintained reasonable quality of life. With C-Pulse, 60% of the patients in its feasibility trial showed improvement in NYHA Class and 25% actually became asymptomatic for HF. What reception would there be for a cancer drug that did that? What is it about Cardiology compared to Oncology that results in such a conservative approach by Physicians in respect of the former and such an aggressive approach by Physicians in respect of the latter?
Just by way of example and illustration -
- Cancer is discovered in a patient's liver. The Oncologist's response is to cut out the diseased portion of the liver, in what is quite a serious operation, to prevent further spread of the disease.
- Excess pressure develops in the brain of a patient who has suffered some form of brain trauma. The Neurosurgeon's response is to drill a hole into the brain space and insert a tube to drain fluid and relieve pressure to avoid brain injury. This is a serious operation with infection risks associated with a tube into an opening into the brain (not dissimilar to a PIL for a C-Pulse but with consequences of infection dramatically greater).
- Severity and presence of diastolic abnormalities in postinfarction patients provide prognostic information. In patients with a recent myocardial infarction, diastolic dysfunction with a restrictive filling pattern is associated with a high occurrence of in-hospital HF and indicates a poor prognosis regardless of EF or other patient factors (see link to paper under 5. above). Cardiologists' response per 5. above -
From discussions with cardiologists, the biggest hurdle is many of them are still not comfortable with the idea of implanting a device (C-Pulse)with a driveline in this patient population despite the fact that they are as symptomatic and have the same survival as patients with reduced EF.
Out of each of the above examples, the implant of a C-Pulse device is arguably the least invasive, lowest risk surgery, with potentially significant benefit to the patient, and yet Cardiologists in the EU where C-Pulse is approved are apparently showing reluctance to go down this path. Novartis with its integral involvement in both cancer and HF therapy is possibly in a unique position to influence attitudes towards HF and bring them more into line with attitudes towards aggressively fighting cancer. HF is certainly a more winnable war with a combination of Entresto and C-Pulse therapy available to treat the great majority of the HF population.
IN FAIRNESS TO CARDIOLOGISTS -
Cardiac surgeons operate on patients referred to them by cardiologists, performing complex bypasses and heart transplants and repairing heart valves, defects and aneurysms. And hundreds of thousands of pacemakers and ICDs are implanted each year. So it could not be said that Cardiologists have any aversion to surgery for patients where indicated. In the US, C-Pulse is not even available except in the Pivotal trial. In the EU, where C-Pulse has CE Mark approval, it is possible that tiny Sunshine Heart just does not have the profile to convince Cardiologists that this new therapy, with limited implants to date, is one they should recommend to their patients .A Novartis acquisition would likely change that situation overnight.
9. Novartis estimated Earnings Before Interest and Tax (EBIT) excluding C-Pulse
Table 3 below is a projection of EBIT (including non-core items) for Novartis for the next 8 years out to 2023, without C-Pulse.
It should be noted that EBIT growth for 2016 over 2015 of 19.1% includes the impact of the following assumptions. Management, in the 3rd quarter conference call indicated Alcon profitability will be addressed and I have assumed profitability will be restored to 2013 levels by Management actions in 2016. I have assumed "non core" items will be halved in 2016 compared to 2015 levels and will stay at these levels throughout the forecast period. I have assumed revenue growth in 2016, excluding Entresto, in mid single digit range in line with Management short term guidance for 4th quarter 2015. For Entresto, I have assumed $500M sales in 2016 followed by progressive sales growth to annual sales of $4.7 billion by 2023. This is close to the $5billion this drug has been forecast to achieve, so by 2023, I am inherently assuming further annual sales growth from Entresto will be minimal. Amounts for amortization of intangibles and "non core" items are assumed to be fixed, so EBIT margins increase at a greater rate throughout the projections than revenue percentage increases.
For 2017 onward the impact of restoring Alcon profitability and halving "non core" expenses is no longer applicable and EBIT margins are projected to come back to ~6% to 7% excluding Entresto and ~8% to 9% including Entresto for years 2 to 5 of the projections. Beyond that the EBIT margins, in the absence of new "blockbuster" products, are assumed to fall back to ~6% as Entresto sales start to peak and no longer contribute to high growth.
10. C-Pulse could provide long term revenue and profit growth for Novartis, above and beyond Entresto
10.1 C-pulse Projected Earnings Before Interest and Tax (EBIT) for the next 8 years 2016 to 2023
Table 4 below is a projection of EBIT for C-Pulse for the next 8 years out to 2023.
The projections in Table 4 above assume Novartis will pour resources into C-Pulse in 2016 to 2018 years to achieve US Pivotal trial completion by early 2017 and PMA in the first half of 2018 as covered in greater detail in my article,"Sunshine Heart: Ironically, A Cash Crisis May Result In Better Outcomes For Shareholders" referred to above. In fact, an amount of $500,000 per patient randomized is allowed for on top of a base annual spend of $30M. While this might seem an excessive allowance, it is not just for trial enrollments. It also allows for educating Cardiologists so once PMA is achieved there can be a rapid adoption of the therapy in the second half of 2018. It allows for completion of the in human trials of the fully implantable model (FIM) and accelerated FDA approval of the FIM to tie in with PMA for the PIL model, which will be replaced by the FIM model for commercial sales projected to commence in the second half of 2018.
10.2 Novartis projected Earnings Before Interest and Tax (EBIT) including C-Pulse for the next 8 years 2016 to 2023
Table 5 below is a projection of EBIT for Novartis, including C-Pulse projected EBIT per Table 4 above, for the next 8 years out to 2023.
It can be seen from Table 5 above, Novartis could absorb a Sunshine Heart acquisition, including associated time and costs for completion of the current C-Pulse Pivotal trial, with inconsequential impact on financial performance in 2016 and 2017. Based on the assumptions in Table 4 above, C-pulse could lift EBIT growth for Novartis into the 9% to 11% range in the years 2018 to 2021, with continuing higher EBIT growth rates beyond that time period.
Summary and Conclusions:
There is a good case for Novartis and Sunshine Heart to work together to educate Physicians treating HF patients, and the patients themselves, that while things might seem serene on the surface, there is an undercurrent progressing them towards ultimate death. Accepting the status quo is not in the interests of HF patients, and certainly not the approach taken by Oncologists treating cancer. Between them, Novartis with Entresto and Sunshine Heart with its C-Pulse have the capability to transform treatment of and significantly prolong the life of heart failure patients, while enjoying a reasonable quality of life. Novartis and Sunshine Heart can do this because they have the two therapies that will provide Cardiologists with the means to greatly improve the treatment of HF patients from early NYHA Class I to late stage ambulatory Class IV.
Mature corporations usually have a preference for acquisitions where there is not only potential future growth, but there is already revenue and profit generation. They see this as lower risk and more particularly it does not dilute earnings while waiting for the growth to take place. A good recent example is St Jude's acquisition of Thoratec for $3.4 billion. St Jude possibly could have acquired Sunshine Heart for far less than that amount. Sunshine Heart, in my opinion, has hugely greater potential than Thoratec. Sunshine Heart addresses a target market ~20 times the size of that for Thoratec and HeartWare combined. Sunshine Heart has no known competitors and a technologically relatively simple product not requiring huge R&D expenditures and lending itself to volume manufacture. Thoratec shares its target market with one major competitor, with others in the wings. It is constantly in a game of leap frog with competitors attempting to develop the best and safest product in a field of technologically complex products with extremely fine tolerances contributing to volume manufacturing difficulties. But Thoratec came with solid current earnings and acceptable earnings growth potential, so the acquisition is not expected by St Jude to adversely affect its future earnings growth rate and that would have been a major consideration in that acquisition.
The Joseph Jiminez factor
Sunshine Heart does not fit the model of the above described type of acquisition. Nor does Novartis' CEO, Joseph Jiminez, fit the model of the CEO who would pursue that type of acquisition. In fact Joseph Jiminez spurns that type of acquisition and targets specific therapies that value add to existing therapeutic assets. As per the Forbes article referenced above, his philosophy on acquisitions is what he calls,
"precision M&A"-bartering for the divisions you want, instead of bidding $100 billion for another rival...
Acquisition of Sunshine Heart would be an easy "bolt on" division for Novartis. It could be integrated with not much more than some changes in the organization charts (an exaggeration perhaps, but not greatly so). And as per the projections per Table 5 above, Novartis growth prospects with Entresto over the next few years make it easy to absorb a Sunshine Heart acquisition with inconsequential effect on earnings growth.
At the start of this article I listed 10 reasons why Novartis might want to acquire Sunshine Heart. At the end of the day there might be just one overriding compelling reason why Novartis might acquire Sunshine Heart, and why I have Novartis at the top of my list of potential acquirers - C-Pulse Could Be To Jiminez What Gleevec Was To Vasella.
How much might Novartis pay for Sunshine Heart?
The question of how much Novartis, or any bidder, might pay for Sunshine Heart is a difficult one, but nonetheless needs to be addressed.
The current market cap of Sunshine Heart is a mere $23M, and I believe it can be safely said Novartis would have to pay more than that amount.
In 2009, Thoratec bid $282M for HeartWare, three years ahead of its MVAD device receiving FDA approval for Bridge-T o-Transplant in the US on November 20, 2012. Subsequent to Bridge-T o-Transplant approval HeartWare market cap rose as high as $1.6 billion, even though it still had not achieved Destination Therapy approval (and is currently still awaiting Destination Therapy approval). Thoratec abandoned its bid to acquire HeartWare for $282M, due to Federal Trade Commission (NYSEARCA:FTC) objections.
As mentioned above, Sunshine Heart C-Pulse has a target market ~20 times the size of that for Thoratec and HeartWare combined, and a number of other advantages. On that basis, and based on the Thoratec bid for HTWR, I believe any offer for Sunshine Heart would be not less than ~$400M (~$21 per share). I would, in fact, expect bids to go higher than that, together with substantive additional earn-out provisions.
Value of Sunshine Heart to Novartis
As per my previous article referred to above, the value to an acquirer can be different to the value to the seller, due to an acquirer's greater ability to exploit the opportunity. Table 6 below is a calculation of value of C-Pulse in the hands of Novartis.
Table 6, reflects the assumptions per Table 4 above with tax calculation at 30% rate to arrive at Net income after tax. At a discount rate of 26% the value to Novartis at acquisition would be ~$3.4 billion. At an internal discount rate of 15% the value to Novartis at acquisition would be ~$7 billion. It can be seen that Novartis could easily pay a sizeable sum for Sunshine Heart without paying too much.
For those readers who might believe the projections of implants above are optimistic, I can only repeat what I said in my previous article referred to above,
"There is every reason to believe, following FDA approval, the number of Sunshine Heart C-Pulse devices implanted will show rapid growth, as pacemakers have done in the past and continue to do so, and reach the hundreds of thousands per year. The decision for a patient will be akin to accepting the need for a pacemaker and having it implanted in a minimally invasive operation. With the fully implantable C-Pulse II, it will be far less critical a decision than for bypass surgery, which patients readily accept. What also has to be said is, once approved, C-Pulse can be expected to be listed under "Medical Procedures and Surgery" on the National Institute of Health's guidelines for heart failure treatment. I think it is not generally understood how much easier it was for HeartWare's device to gain acceptance in trials due to it being just a smaller and potentially better device than the Thoratec device, which was already encompassed in the NIH guidelines. Once C-pulse is in the guidelines, cardiologists will need to heed the words of Dr. Milton Packer in this video,
We studied that kind of patients, patients that Physicians see every single day. And what Physicians need to understand is, that apparent clinically stable patient is not that stable. And they still have a very meaningful rate of progression, no matter how you record progression: quality of life progression; hospitalization progression; mortality progression. And so it is really important to reduce the risk of worsening over time, even if patients are clinically stable and it looks like they are doing well."
For all of the reasons given above, I believe the projections of C-Pulse FIM implant numbers, 6 years post PMA approval by FDA, as shown in Table 6 above, will in time prove to be quite conservative in the same way as the early Pacemaker forecasts.
The potential acquisition of Sunshine Heart Inc with its C-Pulse is one of those rare opportunities that only come along maybe once in a decade or two. Novartis is uniquely positioned, and has the right philosophy towards acquiring therapies, to make such an acquisition.
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