Sunshine Heart Inc. Could Revolutionize Heart Failure Treatment

The C-Pulse Heart assist system is designed to treat patients with Class III (moderate) and Class IV (severe) heart failure:

Class III – Patients are limited in daily activities. They are comfortable at rest, but are unable to do daily activities without becoming tired, short of breath or having heart palpitations.

Class IV – Patients are unable to do any physical activity without discomfort. They become tired, short of breath, and may have heart palpitations even while at rest. Any physical activity makes the discomfort worse.

Sunshine Heart’s C-pulse device has several potential advantages to differentiate it from the typical therapies currently offered. The system is unique because it is easily implantable and less invasive to the patient than alternative systems. The system is one of a kind in the way that it does not tap into the patients’ blood stream which would require the use of anticoagulant (anti-clotting) agents such as heparin or warfarin, reducing the risk of blood-clot or stroke. Devices which require use of these anti-coagulants to create the chance for many unwanted side effects that are common with their use.

Another advantage for the C-Pulse system in comparison to its competitor devices is it can be turned on and off at any time and can be safely disconnected from the patient. Certainly, to see the full benefits of the system, patients should have the system operating as much as possible. Sunshine Heart recommends that patients remain connected to the system for at least 20 hours a day, and that disconnection periods are kept as short as possible. However, the patient will enjoy the freedom to disconnect for certain activities such as showering. In addition, there is the peace of mind knowing there is no life-threatening danger in the event that the batteries run out, for example.

Partnership Opportunities and Competition

One thing an early stage company can attempt to do in order to more efficiently jump through regulatory hurdles as well as receive assistance with development costs is attract partners with a track record of success. When I noticed the headquarters of Sunshine Heart located in Eden Prairie, MN, I immediately thought of one of the world’s largest medical device companies twenty miles down the interstate in Minneapolis, Medtronic (MDT). If additional trials prove successful, it would seem natural for the relatively tiny Sunshine Heart to try to attract a business relationship with neighboring Medtronic.

Medtronic manufactures and sells device-based medical therapies worldwide. The company’s cardiac and vascular products include pacemakers, implantable defibrillators, coronary and peripheral stents, among many others.

Medtronic is no stranger to heart related devices. The company just had a press release regarding an FDA advisory panel recommending expanded indication for its devices in patients with AV block and reduced heart function. Within the press release, it also stated:

“The FDA now will consider the panel’s feedback as it reviews the request from Medtronic to expand treatment indications for its CRT-P and CRT-D devices to include New York Heart Association (NYHA) Class I, II and III heart failure, patients with pacemaker-indicated second or third degree AV block, or first degree AV block where a requirement for a high percentage of ventricular pacing is clear, and LV ejection fraction less than or equal to 50 percent.”

Certainly, the company is already heavily involved in the treatment of heart failure. However, nobody that we have found including Medtronic has a system quite like Sunshine Heart. One item noted on Sunshine’s website is the C-Pulse system may be used with other heart treatments such as cardiac resynchronization devices or implantable defibrillators. This is positive for the company as it can be used in conjunction with other competitor products versus the typical scenario where a drug or device needs to be chosen to replace something else. Any worldwide presence with a company such as Medtronic would create obvious exponential growth compared to a much slower and more methodical pace if Sunshine continued on its own.

Another huge medical device company similar to Medtronic is Boston Scientific (BSX). According to its website, there are two types of cardiac resynchronization systems (CRT) for treating heart failure.

• The CRT-P system paces both ventricles (the lower chambers of the heart) to make the heart pump more efficiently. Testing will ensure that the CRT system senses and paces effectively.

• The CRT-D system provides pacing therapy to make the heart pump efficiently and can defibrillate the heart when an arrhythmia occurs. Testing will ensure that the CRT system senses and paces effectively and can defibrillate ventricular arrhythmias effectively.

Obviously, the CRT devices shown are very similar to the ones listed in the Medtronic press release excerpt above. These have been the standard of care for some time and as with anything in medical technology, we should expect improvements. The Sunshine Heart device definitely looks like a significant improvement over these devices sold by even the most successful companies in the sector. The sensations during therapy delivery from the CRT-D system that Boston Scientific lists seem unacceptable:

• Antitachycardia pacing – You may not feel pacing therapy when it is delivered to your heart. You may have a feeling of fluttering in your chest. Most patients who receive ATP therapy say it is painless.

• Cardioversion – These low-energy shocks are stronger than pacing pulses. Many patients say cardioversion is mildly uncomfortable. It feels like a thump on the chest.

• Defibrillation – Many patients faint or become unconscious shortly after a very fast VT or VF rhythm starts. As a result, they do not feel these high-energy shocks. Of those patients who are conscious, some describe the shock like a “kick in the chest.” Usually, the shock comes suddenly. The sensation lasts for only a second. While many find the shock reassuring, other patients may feel anxious for a short time after shock therapy is delivered.

• Bradycardia pacing – These pacing pulses are very low energy and typically, patients do not feel them.

One company that could be viewed as a potential competitor to Sunshine Heart is Thoratec Corp. (THOR). The company has arguably the most experience in advanced heart failure therapy to date, and has recently initiated its push to extend LVAD device use to Class III heart failure patients. The company’s HeartMate II left ventricular assist device is currently indicated for the treatment of advanced, heart failure class IV patients. Thoratec may end up being positive for Sunshine as its marketing push could end up highlighting the advantages C-Pulse has over its device in the end. These include:

• Significantly smaller implant.
• Much less invasive procedure.
• Zero incidence of stroke.
• Ability to disconnect from the battery pack.

• Feasibility Trial

Sunshine Heart had a feasibility study using the C-Pulse system with twenty patients. On average, the group experienced one full heart failure class improvement with two “super responders” who were able to permanently wean from therapy altogether. As referenced earlier, the difference between classes in the category of heart failure is very significant. Between class four and class three, it can be the difference between the ability to rest comfortably or experiencing shortness of breath, heart palpitations and other unwanted symptoms all day.

Sunshine Heart reported many improvements for the patients involved in these trials, most importantly, quality of life. Also important is that there were no adverse events such as strokes, clots, bleeding or heart attacks. Again, Sunshine Heart avoiding the bloodstream with this device is one of the keys to avoiding these problematic events and reiterates its importance. Currently, there is no known competitive technology on the market that works outside of bloodstream such as this.

The company has previously reported that two patients from the initial twenty patient feasibility trial had been successfully weaned from the therapy due to improved results. In anticipation of future patients being targeted for weaning, Sunshine Heart is developing a formal patient weaning protocol. The proposed protocol is being reviewed with clinical advisors. Two additional patients have been identified as potential candidates for weaning from the therapy.

Next Steps to Commercialization

Sunshine Heart received unconditional FDA approval to commence the US pivotal trial in November 2012. The US pivotal trial will enroll 388 patients, randomized 1:1 to implantation with the C-Pulse system versus optimal medical therapy (OMT). The primary efficacy endpoint is freedom from worsening heart failure resulting in hospitalization, LVAD (left ventricular assist device) implantation, cardiac transplantation or death as compared to OMT at 12 months. The primary safety endpoint is all serious procedure and device-related adverse events as determined by clinical events committee at 12 months. In total, the trial will be conducted at 30-40 sites across the US. Management indicates there may be potential for a faster review process if the number of events is reached shortly after enrollment completion and if FDA consents that the safety endpoint of one year does not have be reached for all patients.

The C-Pulse system received CE Mark approval for European commercialization in July 2012. A post-approval study is currently underway at heart failure centers in Germany and Italy. Although European commercialization is not a huge catalyst for Sunshine Heart from a revenue perspective near term, it still gives the FDA some level of confidence that acceptance has been granted in another large market. The company will need the experience for jumping over regulatory hurdles in the future. A post-market study modeled after the US pivotal trial is currently underway in Europe. The study focuses on introducing C-Pulse at five important centers in Germany and Italy via two distributors. The 50-patient trial is currently commencing at select sites and is expected to run through 1H14. By the end of 2013, Sunshine expects to have centers in Germany, Italy and the United Kingdom enrolling patients in the post-approval trial.

Catalysts

According to a press release from the company, it expects to release full weaning data to-date at the 2013 Transcatheter Cardiovascular Therapeutics (TCT) conference on October 28th. We believe this event should attract both catalyst traders and biotech speculation investors which should add significant short-term upside to the stock.

In addition to the data release on October 28th, Sunshine will be speaking at the following conferences:

• Nov 8-10, 2013, Mechanical Circulatory Support Symposium
• Nov 22-24, 2013, One team one approach DGTHG + DGFKT
• Nov 28-29, 2013, British Society for HF, London, England
• Dec 4-7, 2013, European Mechanical Circulatory Support (EUMS) Summit, Paris, France

We also believe the above conferences will attract longer-term speculation investors who enjoy risk, so we expect further price appreciation from this.

Analyst Opinion

Summer Street Research Partners recently reiterated a “Buy” recommendation for Sunshine Heart stock while modifying its price expectation to $16/share. This was after the company completed a cash raise of $40 million which brings its balance to approximately $60 million. What we find interesting about this offer is that its warrant free, with an insider share lock-up for 90 days. Most small-cap company’s offerings include warrants, which almost always leaves a huge over-hang preventing the stock from moving higher. Sunshine’s offering is bullish because those who financed it are willing to just hold shares, which tells us they are bullish on the prospects of the company.

If an offering is done correctly, a developmental biotech can see nice appreciation, as was the case with Keryx Biopharmaceuticals (KERX). Earlier this year, Keryx engaged in an offering of around 8.2M shares at about $8.50. Currently, Keryx trades around $11 a share, so we can see an example of an offering that is positive. Keryx has an interesting treatment itself with its lead product Zerenex, which is an oral ferric iron-based phosphate binder designed for the treatment of elevated serum phosphorus levels, or hyperphosphatemia, in patients with chronic kidney disease.

Keryx also has its own catalyst event coming up at the American Society of Nephrology ((ASN)) Kidney Week 2013 annual meeting. The company will be presenting abstracts highlighting Zerenex progress and potential at the meeting.

Sunshine’s raise also provides the company sufficient cash to complete its US pivotal trial COUNTER-HF and the ability to conduct a controlled EU launch. From the September 20th research report, it reads:

“Using a comparative analysis, heart failure companies developing circulatory support products have traditionally traded between $200-300MM after presenting positive feasibility data. Given the positive feasibility data Sunshine Heart has presented and the recent initiation of a US pivotal trial, we believe a $250MM valuation is reasonable. With 16.38 million fully diluted shares outstanding, we value each Sunshine Heart share at $16.”

Conclusion

With the changing landscape due to The Affordable Care Act, Sunshine appears to have the right product at the right time. The highest re-hospitalization rates in the U.S. are due to worsening heart failure. The Affordable Care Act incentivizes hospitals to reduce HF re-hospitalizations, and C-Pulse plays right into this important standard.

In the near future, we expect patient performance and US trial milestone updates from Sunshine which will give a clearer direction on the chances of becoming a big winner for shareholders. Currently, the company remains below speculative value and we will continue to follow its progress.