CHF Solutions, Inc (CHFS)

[Tommy]

$SSH - Sunshine Heart: Potential '10 To 100 Bagger' Revisited - Part II

Nov 27 2013, 07:08 |http://seekingalpha.com/article/1865591-sunshine-heart-potential-10-to-100-bagger-revisited-part-ii?source=email_rt_article_readmore

Disclosure: I am long SSH. (More...)

C-Pulse - The 'Platinum" Standard

Readers of my article, "Sunshine Heart's C-Pulse: The 'Platinum' Standard", would know I believe the Sunshine Heart (SSH) C-Pulse system could become the cornerstone in establishing a therapy/ies that would allow CHF patients to keep their natural heart, with that heart operating adequately.

The C-Pulse alone has been shown to effectively halt and reverse CHF progression in its 20 patient feasibility study. To date, 4 patients have shown sufficient recovery to be weaned off the device, and a further patient is undergoing the weaning process.

Compare this with this article (here and supported here) advising:

Regardless of treatment, one-fifth of those diagnosed with CHF will die within one year and one-half will be dead within five years. Only about 20 percent survive much longer than 8 to 12 years -- a prognosis worse than most cancers. For those that do survive, quality of life is often severely compromised.

This was to be a 2 part series

Concerns from long term investors over the falling Sunshine Heart market price per share necessitate me addressing this issue prior to proceeding with what will now be Part III (Part I see here).

There is not much point in putting a huge value on a huge opportunity unless investors believe in the huge opportunity.

There is a great article on Seeking Alpha from Author Brad Thomas about "Scared money never wins". I will expand on that further below.

But first, let us look at the fantastic progress Sunshine Heart is achieving.

What is truly remarkable is that Sunshine Heart has the potential to be highly profitable on quite low implant numbers.

Table 1 - Sunshine Heart Indicative Timelines for Commercialization

As per Table 1 above, it is possible Sunshine Heart could be selling its fully implantable C-Pulse 2 in the EU by 2016 (or even earlier).

As per Note 8 to Table 1, I find it quite incredible that not one Analyst on the 3rd Qtr conference call asked about the timeline for C-Pulse 2 in the EU, and the potential that could provide for significant early revenues in this market.

Fully implantable is the "Holy Grail" in MCS devices. As per Table 1 timeline, Sunshine Heart is well positioned to be selling the C-Pulse 2 fully implantable system at an early date in the EU.

The possibility of no more stock offers

Table 2 below, illustrates how Sunshine Heart could quickly reduce cash burn on the back of quite low sales in the EU, as reimbursement is sequentially established in individual countries in Europe. Heartware (HTWR) has followed a similar strategy, but its far higher cost structure has so far prevented it becoming cash flow positive.

Table 2 - C-pulse Projections Scenario 1 - Minimal Numbers of Implants

The targets for numbers of implants, per the above table, are quite modest, and yet under this scenario Sunshine Heart could become cash flow positive by 2018.

Furthermore, there are warrants exercisable at $6.40 in December 2014 that will yield $7.7M in cash, and further warrants yielding $3.1M additional cash in 2016.

With these additional funds from warrants, it might be that Sunshine Heart will not need to make another stock offering. Sunshine Heart might, however, avail itself of some of the $24M Aspire facility, which expires early 2015, as a safety buffer.

Table 3 below provides details of the sale prices and cost assumptions utilized in the projections per Table 2 so readers can judge the reasonableness of the projections.

Table 3 - Sale prices and cost assumptions for C-Pulse projections

Scenario 2 - Sunshine Heart - Profit and cash flow positive by 2017

Projections per Table 4 below, indicate that Sunshine Heart could be both profit and cash flow positive by 2017 on the basis of what should be highly achievable implant numbers in the EU.

By 2018 Sunshine Heart could be earning ~$60M in operating income from the relatively low number of implants per the projections. Such a level of income would surely result in a Sunshine Heart market cap in excess of $1Bn by 2018.

The low total cost of ~$200,000 per implant operation, compared to an LVAD implant at over $400,000, will be a major advantage in the EU.

A study carried out in the UK, published by ncbi.nlm.nih, and entitled -Cost-effectiveness of the implantable HeartMate II left ventricular assist device for patients awaiting heart transplantation, provides a clear indication, that the significantly lower costs associated with a C-pulse device, compared to an LVAD, will be a huge advantage to Sunshine Heart in the EU market.

With a fully implantable device, the projection of implants of 500 (just 0.014% of the EU target market) in 2017 looks highly achievable.

Table 4 - C-pulse Projections Scenario 2 - Highly achievable target

Concerns at slow start up of the COUNTER HF pivotal trial are misplaced

Just a couple of points on the issue of slow enrolments to date -

1. Modifications awaiting approval by FDA in 4th Qtr -

a. PIL extension to reduce exit site infections;

b. Improvement in electrical signal from heart to device.

Thoratec (THOR) and Heartware have been commended for delaying or modifying trials for similar good reasons. Why shouldn't the slow start pending these improvements be seen as a positive for Sunshine Heart?

2. Enrolment of centers -

a. The target has been lifted from 22 to 35, and it is the number of centers that will drive implant numbers;

b. With 1 implant every 2 months, 35 centers would be capable of implanting 204 patients in one year. That is more than the total implants of 194 patients required under the pivotal trial. Catching up from the slow start should not be too difficult;

c. It is particularly encouraging that some centers that initially declined are now seeking to enrol. According to Mr Dave Rosa, CEO of Sunshine Heart, this change of mind is due to highly esteemed centers joining in the trial.

How big can Sunshine Heart grow and how fast?

I believe worldwide, C-Pulse implants will eventually exceed 300,000 per year, and the market cap will rise to tens of $billions.

Table 5 below is from my article, "Sunshine Heart: Profitability And A 'Light Bulb' Moment" and shows how that number of over 300,000 is derived.

Table 5 - Projections of annual sales potential in the US & EU

At 300,000 the number of implants would be 150 times the 2,000 implants in 2018 per Scenario 2 in Table 4 above.

I have painted a conservative picture in Table 4 of C-Pulse implants reaching 2,000 in number by 2018.

I think readers will readily understand and accept the 2,000 implants per year by 2018, whereas a figure of 300,000 sometime in the future is likely to create disbelief for many.

Even at 2,000 implants per year, the future for Sunshine Heart looks very profitable. It is quite easy to understand and accept that this small company could achieve those numbers. It is also easy to review the assumptions and accept the projected results in Table 4 and conclude that a market cap of in excess of $1Bn is achievable on sales of 2,000 implants per year and growing.

Having accepted the number of 2,000 implants, how do we progress to accepting the higher long term projection of 300,000 per year resulting in a projected valuation in the tens of $billions?

How does a small company like Sunshine Heart grow to that size, and how long will it take?

C-Pulse will grow faster with a Johnson & Johnson or a Medtronic at the helm

In a 200 person survey of CHF sufferers, commissioned by Sunshine Heart, it was revealed only 1 in 3 knew about LVADs. On that basis, knowledge among CHF patients of C-Pulse would likely be extremely low.

In my article, "Johnson & Johnson: At The Crossroads - Part II", I described the strengths that Johnson & Johnson (JNJ) has to execute rapid growth of an opportunity such as the Sunshine Heart C-Pulse.

Having a Johnson & Johnson on board would not only provide execution capability. It would also likely increase immensely the awareness of C-Pulse as a treatment for CHF. That is very important for rapid uptake.

I will explore further, in Part III of this series, the option of Sunshine Heart going alone, versus a takeover by, or a partnership with, a large medical device company such as Johnson & Johnson or Medtronic (MDT).

Impact of the falling SSH share price on long term "Value" investors

Do I feel concerned and apprehensive when I see the market share price falling like it has over the past fortnight or so? Yes, I certainly do.

Should I feel concerned and apprehensive?

Some excerpts from a recent article by Brad Thomas are informative in this regard -

Ignore Mr. Market - Scared Money Never Wins

Graham explained (in The Intelligent Investor):

"You are neither right nor wrong because the crowd disagrees with you. You are right because the data and reasoning are right."

Ignore the Crowd, Focus on Fundamentals

Some more equally interesting thoughts come from Michael Pettis in his article, "When Are Markets 'Rational'"?

Michael argues it is the actions of speculators that contribute to a disconnect between fundamental value of shares and market price. But, he says this is a contribution to an efficient market, because without such disconnects the opportunities for "value" investors would dry up.

Conclusions

Even on very low implant numbers the data and reasoning indicate Sunshine Heart C-Pulse will be very profitable; and
I can only conclude the present low price for SSH shares should be seen as an opportunity for "value" investors, rather than a concern.

Caution: As always, please do your own research before any buy or sell decisions. Use of information and research in the article above is at your own risk.

Investing in micro cap companies is not suitable for all investors and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risks. Due to illiquidity, share prices can fall despite strong fundamentals and possible inability to raise sufficient additional cash to continue to fund ongoing operations is always a serious concern. Fuller details of risks associated with Sunshine Heart as identified by the company may be found with their form 10-12B/A registration filing with the SEC and their other SEC filings.