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Sunshine Heart Funding Indicating Positive FDA Interim Analysis



February 24, 2015 • Analysis, Free • Tags: SSH
Heart failure device maker Sunshine Heart (SSH) announced that it has entered into a loan agreement with Silicon Valley Bank to receive up to $10.0 million in capital. This funding essentially eliminates the imminent financing risk around Sunshine Heart as the company now will have access to as much as $40M, including ~$30M cash balance and $10M loan. The available capital will be sufficient for the company through 2016. More importantly however, the terms of this deal indicate more positive catalysts are in store.
Loan Details
Sunshine Heart will receive an upfront $6M and two additional loans of $2M contingent on certain achievements.

• Receive $2M upon FDA approval for COUNTER interim analysis no later than June 30, 2015 (“Term B Loan”)
• Receive $2M upon 100 patients being enrolled in COUNTER trial no later than September 30, 2015 (“Term C Loan”)

The loan will mature on December 1, 2017 and have a fixed annual interest rate equal to 7%.
Interpreting Loan Term: FDA Approval for Counter Interim Analysis
Sunshine Heart has stated that the company expects to receive FDA interim analysis response on their COUNTER HF study on Class III patients by the end of Q1 2015. The $2M contingent on FDA approval implies that Sunshine Heart is either really confident or has received an unofficial positive ruling. Why else would the company agree to such terms?
To support this notion, investors must look at the little risk the FDA is taking by approving the interim study. For both parties, Sunshine Heart and FDA, the interim look would mean that the patient population for the trial would be cut in half, 194 enrollments rather than the original 388. There are 1.5M Class III heart failures in the US, yet no FDA approved treatment option. Approving a 194 interim patient study will yield comparable results to a 388 patient study, but in half the time. With a progressive disease that has no approved treatment option, time matters.
Under the interim look, the FDA would pass a conditional approval on the data of 194 patients initially to give the Class III HF population a viable treatment option. A post market study, with the full 388 patient data, could then be tested to validate the results and lead to a complete approval. This would make the most sense for both the FDA and Sunshine Heart.
Stage IV Treatment Not Sensible For Stage III Patients
Later stage Class IV patients are treated with blood contacting LVADs developed by Thoratec (THOR) and Heartware (HRTW). REVIVE-IT, a government sponsored trial, was testing Thoratec’s FDA approved HeartMate II on Class III HF patients. HeartMate, however, has been approved for Class IV HF patients. Earlier this month, the REVIVE-IT trial was put on hold by the FDA. Thoratec management shed light on the enrollment challenges with only one randomized patient enrolled despite over 2800 candidates being screened.
The FDA does not want great risk for heart disease patients in Class III, who would be susceptible to adverse events such as blood clots and stroke risk, both of which HeartMate has been linked to. In Class IV patients though, terminally ill individuals who are facing a life or death situation, these adverse events are the price of living. The same side effects would not be reasonable to the less serious Class III heart failure patients.
The trial hold dismisses the notion that LVADs will find a widespread audience in Class III HF patients. This leaves Sunshine Heart’s C-Pulse as the last standing viable non-blood contact device in trials for Class III heart failure patients. C-Pulse System is considered a minimally invasive device that does not come into contact with the blood, therefore lowering likelihood of blood clots and strokes. The strong precedent for an approved Class III device and adverse events stemming from Class IV LVADs lower the FDA’s risk in approving a COUNTER interim analysis.
Interpreting Loan Term: Enrolling Over 100 Patients in COUNTER Trial by September 30, 2015
Sunshine Heart concluded 2014 with 40 enrollments and 21 activated centers for the US COUNTER trial. Having 100 total enrollments by the end of September indicates that the company expects to enroll, on average, 20 patients per quarter. This is a bullish indicator as Q3 2014 & Q4 2014 saw 14 & 13 patients enrolled, respectively. As more centers are activated, the pace of enrollment will rise (below).

The above projection for 2015 enrollments has the following assumptions:

• Adding 1 new site per month, which the company guided in Corporate Update
• No enrollment for new sites during first two months due to training
• Each enrolling site is able to enroll 0.4 patients per month, a conservative rate because SSH management has forecasted5 patients/month/site
• 10% of new enrollments drop out

Given the figures for Q3/Q4 2014, Sunshine Heart enrolled about 0.4 patients per site each month. This figure is in line with the conservative assumption listed above. Assuming only 194 patients are required for enrollment; Sunshine Heart’s US trial would be fully enrolled by mid-2016. The above assumptions, by the way, indicate that Sunshine Heart will have approximately 118 total patients enrolled by September 2015, greater than the 100 patients required by the Silicon Valley Bank for the $2M loan installment.
Willingness to Take on Debt Rather Than Issue Equity Signify Shares Undervalued
“In the event the Bank funds either the Term B Loan or the Term C Loan, then by March 31, 2016, the Company must complete an equity financing resulting in unencumbered net cash proceeds in an amount of at least $20.0 million.” Source: 8K (Feb 18, 2015)
Sunshine Heart’s minimally dilutive debt route to raise funds is indicative that the company’s equity is currently trading at depressed levels. Otherwise, Sunshine Heart would have issued equity, the standard form of capital raising for development stage companies.
The capital announcement extends Sunshine Heart’s run rate another quarter, enough to show 4 consecutive quarters of enrollment growth and receive a reply from the FDA on interim analysis. During this time, the company expects its stock to be trading at higher levels due to receiving FDA interim analysis approval and showing enrollment growth, both value-adding events.
By meeting the two achievements above, Sunshine Heart will receive the aggregate $4M from the Silicon Valley loan. Afterward, Sunshine Heart has planned to complete a $20M equity raising by end of March 2016. It’s expected that the share price will be higher in the next 12 month for the company to consider an equity raise as the interim trial will be more than halfway through enrollments.
Risks
There is always the clinical risk that the FDA does not grant Sunshine Heart interim approval or that the company cannot achieve enrollment targets. Though I believe both are low, due to explanations above, such events would likely cause SSH to fall to 52 week low range $3.50, a 35% downside.
Sunshine Heart is entitled to make interest only payments on the Silicon Valley Bank until January 1, 2016.  After this date, the company is required to repay the advances in monthly installments of $445K, including interest. The planned $20M equity raising by the end of March 2016 is dilutive financing that is contingent on the loan. This capital will provide sufficient proceeds to repay the loan and fund corporate operations. The price of the expected March 2016 financing will presumably be around market price, therefore investors could be subject to market risk.
If the FDA interim analysis and enrolment goes as planned, Sunshine Heart stock could near double digits once again, presenting upside north of 70%. Later stage heart failure competitors are valued over 15x Sunshine Heart’s current valuation even though their target market is about 1/5th in size.