Biotech Buzz Post No. 7 - SSH

“Had I been present at the creation, I would have given some useful hints for the better ordering of the universe” - King Alfonso X of Castile (1221-1284)

Sunshine Heart (Nasdaq: SHC) – The Aussie success story from the frozen plains of Minnesota

Around three years ago I made my first ever visit to the United States. I’ve got to tell you – as an Aussie who has had a lifelong love affair with America to the point where I’ve read about thirty biographies of the country’s Presidents and can tell you the capital of Montana without thinking about it (it’s Helena) -  this was a big deal. My eyes were bugging out of my head the whole week because I was seeing things like Central Park in New York or Bunker Hill in Boston and having to remind myself that I was actually there and not just dreaming about it. The other good thing about going to America is that you meet lots of Americans, and one of the people that impressed me most on this October 2010 trip was Dave Rosa.

Dave is the CEO of the medical device company Sunshine Heart (Nasdaq: SSH), from Eden Prairie, Mn., a place that CNN Money ranked as America’s 3rd best small city in 2012. Before I tell you about Dave and his company let me give you a tip about the Twin Cities, that is, Minneapolis and St Paul, Mn. This Aussie thought he knew America, but for some reason had it in his head that the Twin Cities were kind of wedged up tightly against each other on opposite sides of the Mississippi like Albury and Wodonga on the Murray River here in Australia. No way. Sure, they sit next to each other, but Minneapolis and St Paul are both sprawling megalopolises with downtown areas 14 km apart. So if you want to spend the day in the Twin Cities and not just go to the Mall of America, be prepared to spend a lot of time inside a cab. I was staying, the night I got to Minnesota, at the Hilton in St Paul. Eden Prairie, so I learned the next day, was 40 km away. My next tip relates to the cab itself. A lot of the cabs in the Twin Cities are driven by migrants from Somalia, so it pays to know a little about that country in order to make small talk, as I had to do on the 42 km drive from Eden Prairie to Fridley, where Medtronic (NYSE: MDT) have that magnificent palace of theirs. Which brings me to my third tip - you get better service if you tell them you’re going to Medtronic. In fact, they’re happy to wait for you while you go in for your meeting, particularly if you tell them your next stop is MSP, that is, Minneapolis-St Paul International Airport. My guess is that was another 40 km as well.

The great thing about investing in a medical device company from Minnesota is just that – it’s Minnesota, which I reckon must have the best work ethic and entrepreneurial spirit of any state outside of Utah because it has, so I learned that balmy October day (it doesn’t freeze up there until Thanksgiving, and thank heavens because I had left my overcoat back in New Jersey), a remarkable number of Fortune 500 companies – in 2012 there were 19, which is 3.2% of the total for a state with only 1.7% of the US population. Moreover the Twin Cities have turned in recent decades into a centre of excellence for medical devices thanks to Medtronic (NYSE: MDT, No 164 on the Fortune 500) and St Jude Medical (NYSE: STJ, No 437) so if you’re a start-up company looking to develop a new device you can generally find the people and the capital to get started if the business plan makes sense.

Which brings me to Sunshine Heart. I knew I was on to something good when Dave Rosa took my call at home about 10 PM and said he was happy to make time to see me early the next day since I had come all the way from Sydney. I told you these people work hard (not that they don’t have fun in Minnesota - Dr Steve Oesterle of Medtronic assured me that the first place a decent play goes after Broadway is Minneapolis). Listening to Dave the next day out in Eden Prairie I had my instincts confirmed, and not just because he looks remarkably like one of my favourite actors, Robert De Niro. What impressed me was that finally this poor company I had followed was moving ahead - after about six years of going nowhere fast.

You see, Sunshine had actually been an ASX-listed company. It had been started in Melbourne by a Kiwi heart surgeon named Will Peters to develop a heart assist device called the C-Pulse. The idea behind C-Pulse was aortic counterpulsation – you wrap a cuff around the ascending aorta and wire it up to the heart so that it can inflate and deflate in response to the heart’s electrical impulses, with the inflation happening between the beats of the heart. Peters et. al had good evidence that this kind of counterpulsation could take the load off a failing heart, so long as the squeeze was more like a gentle thumbprint that wouldn’t wear out the aortic tissue over time. Peters got backing from a couple of VC houses here in Australia and in 2004 the stock went public on our Exchange, but with a US CEO based in California. It seemed to me at the time a very straightforward exercise to get the C-Pulse on the market. The device was not blood-contacting and therefore wouldn’t come with the kind of clot risks that LVADS had, and you wouldn’t kill the patient if you switch it off for whatever reason. In short, there was nothing complicated about C-Pulse that I could see and no shortage of NYHA Class III heart failure patients – the kind that haven’t reached Death’s Door (NYHA Class III) yet but are shambling down the corridor in that direction – to recruit into a pilot trial. Indeed, America probably has 1.5 million right now, and Europe another 3 or 4 million. And that was the competitive advantage. HeartWare (Nasdaq: HTWR) and, before them, Thoratec (Nasdaq: THOR) had given us magnificent patient outcomes in Class IV with LVADs, but all those Class III patients were still being managed by drugs, ICDs and CRT-Ds. This was a cost-effective Next Big Thing for those patients.

So what went wrong? In a word, it took forever for clinical work on C-Pulse to yield anything of use. An initial first-in-man study implanted a few patients and was able to prove that you could take heart failure patients down by one class with the C-Pulse, but the actual pilot trial didn’t get started until 2009. When my new friend David Rosa joined the company in October of that year they had only recruited four patients out of 20, a full five years after this stock started trading on the ASX. Basically Sunshine had been allowed to go public without the C-Pulse system having been optimised – the first-in-man study had seen the battery and device driver being hauled around in a suitcase-sized box. And the system they were trialling in the pilot wasn’t fantastic either – it could actually be worn on the body but was large and noisy and weighed 3.6 kilos. Enter Dave Rosa. He’d been VP of Global Marketing for cardiac surgery and cardiology for St. Jude Medical so he knew a thing or two about cardiologists and how they work. A few phone calls later and key sites were busy recruiting by the time I met Dave. Later on back in Sydney I met one of the folks doing the implanting - Sanjeev Aggarwal, MD of the Mid America Heart Institute in Kansas City (the place that gave us that remarkable 1999 study on the effects of remote, intercessory prayer on patient outcomes) and he was a big fan of C-Pulse. So it was fair to say that Sunshine was where it should have been in 2005. Indeed, they were even moving ahead on the fully implantable version of C-Pulse they should have at the beginning.

Which brings us to the 20-patient pilot, which had fully recruited by 2011 and did what I had expected it to do all along. Six months out from baseline the 20 patients had seen an average NYSA class drop of 1.1. They had improved their six minute walk by 24 metres. And their quality of life as measured by the ‘MLWHF score’ (the Minnesota Living with Heart Failure questionnaire) had improved threefold. At twelve months the gains on NYHA Class and MLWHF score had been maintained, and the six minute walk had doubled again. One patient did so well he went, as I understand it, all the way from Class IV back to Class I. So it’s fair to say that this thing worked like a dream. However when I wrote up the story in late 2011 Sunshine stock was only capped on ASX at A$56m.

There was, however, an easy solution to this problem. List on Nasdaq (which it did in February last year) and then raise the capital in the US where they genuinely get how good a 1-class reduction in NYHA Class can be in terms of cost-effectiveness in the management of heart failure. After that you can get moving towards the US pivotal. Sunshine raised US$21m at US$7.00 per share in August last year. It delisted off ASX in May 2013, which was kind of sad because I felt like I was losing an old friend. But it’s great for Sunshine, whose stock is now above US$11, helped by the fact that last November the FDA gave the company unconditional approval to initiate a pivotal. That 388-patient trial, called COUNTER HF, is now enrolling and is expected to fully recruit by 2015. This trial is randomising 1:1 between C-Pulse and ‘Optimal Medical Therapy’. If all goes well C-Pulse may be approved in the US market by 2017. The device is already approved in Europe, having gained its CE Mark in July 2012, and Sunshine is now running the OPTIONS HF post-market EU study in order to get the data required for reimbursement over there.

So how much would you expect to pay for Sunshine now? Its market capitalisation at yesterday’s close on Nasdaq is US$146m, around triple what it was when I was formally covering it. There’s an easy lesson here for US investors – if you want to get some good drug or medical device programmes, come down to Australia and if your timing is right you can probably get whatever you’re after for a song. For an American starting up a company, the moral of the story is that you can come Down Under for a few years to incubate your venture with some Aussie public risk capital and then take it back to the US for the genuine Big Money. However if I have my way that somewhat unhappy situation will change. We may like Americans, but we don’t like being short-changed by our friends across the Pacific, and now that the mining boom is over I reckon we’re about to get a whole lot more sophisticated on pricing our valuable Life Science assets.

Stuart Roberts, Australian Life Sciences consultant, with global focus
Nisi Dominus Frustra

+61 (0)447 247 909

sroberts2164@gmail.com

Twitter @Biotech_buzz

About Stuart Roberts. I started as an analyst at the Sydney-based stockbroking firm Southern Cross Equities in April 2001, focused on the Life Sciences sector from February 2002. Southern Cross Equities was acquired by Bell Financial Group in 2008 and I continued at Bell Potter Securities until June 2013. Over the twelve years to 2013 I built a reputation as one of Australia's leading biotech analysts. I am currently consulting to the Australian biotech industry. Before joining Southern Cross Equities I wrote for The Intelligent Investor, probably the most readable investment publication in Australia. I have a Masters Degree in Finance from Finsia. My hobbies are jazz, cinema, US politics and reading patent applications filed by biotechnology and medical device companies.

Previous Australian Biotechnology Buzz posts:
ImmunoCellular Therapeutics (NYSE MKT: IMUC), 27 August 013
Immunomedics (Nasdaq: IMMU), 21 August 2013
Inovio Pharmaceuticals (NYSE MKT: INO), 24 August 2013
Merrimack Pharmcaceuticals (Nasdaq: MACK), 26 August 2013
Oncolytics Biotech (Nasdaq: ONCY),  22 August 2013
Regulus Therapeutics (Nasdaq: RGLS), 23 August 2013
Sunshine Heart (Nasdaq: SSH), 28 August 2013

Disclaimer. This is commentary, not investment research. If you buy the stock of any biotech company in Australia, the US or wherever you need to do your own homework, and I mean, do your own homework. I'm not responsible if you lose money.