Evaluating Sunshine Heart’s Recent Capital Raise

Last week, while most of PropThink’s research team was on vacation, Sunshine Heart (SSH) commenced a secondary offering that should net proceeds of approximately $37 million — more with full exercise of the over-allotment option — to the medical device developer, bringing the company’s cash balance to an estimated $54 million at the end of September. If the company continues burning at a rate of $17 million annually ($1.4 monthly), capital should last into the second half of 2016 and through the read-out of its ongoing Phase III trial of the C-Pulse device.

Following PropThink’s September 2nd  interview and Q&A with Sunshine Heart Chief Executive David Rosa, we noted to PropThink Premium subscribers that a capital raise was likely before the end of the year, although the possibility of another financing did not scare us out of the stock. While the raise came earlier than expected, given increased demand and an acknowledged need for cash in the next year, the equity financing seems justified and should take Sunshine Heart to within range of major inflection points in the next three years.

Piper Jaffray and Cowen and Company acted as joint book-running managers in the deal, and Lazard Capital Markets acted as co-lead manager for the offering. Assuming full exercise of the underwriter’s 571,500-share over-allotment option, Sunshine Heart will have a basic share count of around 16.766M.

The biggest question that we’ve been confronted with since the offering – why now? Recall that Sunshine Heart previously reported that two patients from the initial twenty patient feasibility trial had been successfully weaned from the therapy. Two additional patients have been identified as candidates for weaning, and in anticipation of more patients being targeted, the company is developing a formal weaning protocol. Sunshine Heart expects to release full weaning data at the 25th annual Transcatheter Cardiovascular Therapeutics scientific symposium on October 28, in addition to more data from the open-label European OPTIONS-HF trial. With this catalyzing event just a month away, why wouldn’t the company wait to raise at an even higher price following the TCT presentation?

There are then two schools of thought:

  1. The company is raising now knowing that the two additional patients targeted for weaning, and results from the European trial, aren’t as exciting as anticipated. The company is getting the raise in ahead of the markets’ negative reaction to this information.
  2. Sunshine Heart raised in recognition of demand and to remove the overhang of a financing risk from the stock ahead of this, and other, catalyzing events.

We fall into the second camp and believe that the raise is less onerous than some are making it out to be, ultimately a reflection of raising when there’s demand. Mr. Rosa noted on PropThink’s Sept. 2 conference call that he believed the company had optionality in regards to bringing in more capital, did not rule out an equity financing, and said:

Now, we’ve got a number of various institutions that have approached us to invest . . . Our investors don’t like dilution, yet I can tell you honestly that this is one-time where I have had a numbers of messages from investors saying you guys should be taking more money now.

Most buy-siders following the story understood that SSH needed cash within the next six months and would have expected to use any secondary offering for an opportunistic entrance – large investors were likely prodding Sunshine Heart to get the financing in ahead of these events. In fact, this may have been the last equity financing for Sunshine Heart before Phase III data for the C-Pulse Device in 2016.

Taking a step back, Sunshine Heart has the funding needed to complete the now-enrolling Phase III COUNTER-HF trial, has a war chest to support partnership or acquisition discussions if/when they take place, and carries a market capitalization of $180M, or an enterprise value of $126M. The stock is certainly getting pricier, but given upcoming catalysts, which we suspect will be positive, SSH remains a highly attractive holding in our view.

Since the offering priced on Thursday morning, SSH has twice tested the $10.50 level and held; on Monday, the stock closed at $10.93. PropThink readers will be familiar with our bullish stance on SSH since May of this year following the company’s last capital raise. We continue to like the risk/reward in Sunshine Heart through the end of this year, and for the next few years for those willing to tie up capital for the long-run. For those not already involved, making an entrance close to the $10.50 offering level – the same price at which participants in the latest offering entered – makes sense.

In our previous article we discussed why the upcoming data release would likely drive value for SSH.

In connection with SSH, PropThink has taken a long position.