Excitement from proof-of-concept stage drug companies like Aduro Biotech (NASDAQ: ADRO), Advaxis (NASDAQ: ADXS) or Receptos (NASDAQ: RCPT) could spill over into the lesser-known Sunshine Heart (NASDAQ: SSH), whose device is in a pivotal study for the treatment of late-stage heart failure - a disease with prognosis as poor as the most aggressive cancers and no effective treatment options. The market opportunity is perhaps as large as ~$90 Billion.
Part of the reason Aduro/Advaxis have performed amicably is that their approach to treating cancer is novel and potentially offers a favorable safety profile, particularly when compared to standard of care. Receptos' Phase 2 studies in Ulcerative Colitis and Relapsing Multiple Sclerosis suggest similar advantages [with Receptos' drug-candidate] over existing treatment options. But even when we factor out impressive cash reserves in either of these names, we're left with a large gap in enterprise value between 4 companies at a similar stage of development, each with a novel approach to treating aggressive disease in huge market opportunities.
We believe that Sunshine Heart's valuation is grossly unjustified and will increase substantially over the next 12 months as the Company approaches full-enrollment in their pivotal study and commercialization of their heart failure device in Europe - where it is approved (CE-mark).
Recent Events
Per protocol, Sunshine Heart halted enrollment in their pivotal study last month after patient deaths in the active arm totaled greater than 3. Importantly, an independent clinical events committee ruled that these patient deaths were not related to the Company's device. Patients enrolled in the late-stage heart failure study often have co-morbidities that may lead to death.
The Company reported after-hours on Thursday that the FDA was expected to allow enrollment of patients again shortly. This creates an important catalyst for shares in the near-term.
The halt could effectively add 2 months to the enrollment timeline, depending on traction. However, this could be offset with the addition of new centers screening for patients and improved enrollment conversion. Sunshine Heart has activated 22 centers as of March 31 and is approved for up to 40 to participate in the study. Enrollment numbers have largely depended on center participation, and activation of new centers is expected to have a buoying effect on enrollment. Sunshine Heart’s VP of patient recruitment, Molly Wade, has stated that ~20% of patients screened enroll in their pivotal study and that this conversion is expected to improve:
We have developed new material to aid physicians in discussing the potential benefits of the C-Pulse System to their patients. These materials are currently going through centers institutional review board. In addition Dr. Bill Abraham has been instrumental in speaking with centers who had difficulty enrolling their first patients. After Dr. Abraham spoke with two of the three centers, how he positions C-Pulse therapy to patients, two of those three centers enrolled their first patient in the following month. So we are confident that we are making a lot of progress on increasing that enrollment rate up from that 20%.
Both factors could positively influence full-enrollment timeline, estimated at mid-2016.
Why Recent Events Should Not Materially Affect Valuation
Even under the most conservative of assumptions, Sunshine Heart is grossly undervalued. If the Company were to commercialize their heart failure device by 2018, and assuming peak sales commensurate with 3% market share by 2020, and discounting at 50%, we end up with a present value of $355 Million. We think that a potential acquirer would model a first-to-market device for Class III heart failure at >3% market share at peak, and potentially at a higher price point than [the assumed] $59,000 price tag given its long-term savings to the healthcare system. We also believe that the pace of enrollment will pick up substantially to ~35 per quarter and potentially put Sunshine Heart’s device on the market in late 2017. When we factor out cash, Sunshine Heart has an enterprise value (EV) of ~$50 Million versus our present value calculation (above) at $355 Million and EVs in the billions for both Aduro and Receptos.
Why Own Sunshine Heart Now?
We believe Sunshine Heart has weathered a number of hampering events, including headwinds with reimbursement for devices in the pivotal study, slow [initial] patient enrollment, and not the least of which a halt following non-device related patient deaths.
Re-start of enrollment is a looming catalyst. The Company was not held back from screening for patients to offset the enrollment pause. This could create a backlog of eligible patients that could quickly enroll upon recommencement of enrollment.
New sites being activated and improved conversion of screened patients is a boon to overall enrollment numbers over the next several quarters. Q1 2015 would have put the Company on track for 4 consecutive quarters of improved enrollment numbers and we believe this momentum will carry over into Q2 and 2H 2015. Improved communication between the Company’s principal investigators and centers participating in the study is likely to favorably influence the enrollment curve. If enrollment picks up substantially through year-end, the most common bear thesis –slow enrollment – is dispelled.
Lastly, we believe Sunshine Heart’s demonstrated ability to address and resolve headwinds in a reasonable timeframe is a testament to the caliber of management at the Company. An observer might point out, however, that this isn’t particularly surprising for a group that joined Sunshine Heart from the ranks of the largest U.S. device companies. We believe that this factor will play an important part in shareholder value-creation over the next 12 months.
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Legal Disclaimer: This research note has been prepared by One Equity Research, LLC on behalf of Sunshine Heart, as part of research coverage services. One Equity Research has received ten thousand dollars and may receive up to twenty thousand dollars per month for ongoing coverage of Sunshine Heart. An affiliate of One Equity Research, LLC holds an ownership interest in Sunshine Heart. This research note is not an offer or solicitation to buy or sell the securities of Sunshine Heart. The report is for information purposes only, and is not intended to (and is provided explicitly on the condition that it not) be used as the sole basis to make any investment decision. Investors should make their own determinations whether an investment in any particular security is consistent with their investment objectives, risk tolerance, and financial situation.