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Steep valuations and uncertainty about adoption have created a lot of volatility in the shares of HeartWare International (NASDAQ: HTWR ) and Thoratec (NASDAQ: THOR ) , the leading developers of ventricular assist devices or VADs that help seriously ill heart failure patients live longer, better lives. While these companies serve a patient population that is desperately in need of better therapy and can support over $1 billion in revenue, there has always been a bigger market in less seriously ill heart failure patients. Sunshine Heart (NASDAQ: SSH ) has advanced a very interesting approach for these patients into a pivotal U.S. study, while HeartWare has just recently acquired its own pathway into what could be a multibillion dollar opportunity.
The need is real
Congestive heart failure is a serious, progressive, life-limiting condition with few real treatment alternatives. Medications can slow the progression in the early stages, but only a heart transplant offers a real cure -- and the combination of too few donor hearts and too many very sick patients limits that opportunity. The ventricular assist devices developed by HeartWare and Thoratec, essentially implanted blood pumps that assist the heart, do help the most seriously ill patients. But these devices have cost, complication, and convenience issues that make them ill-suited for all but the very sick.
That leaves between 1 million and 2 million class 3/class 4a patients in need of help. Cardiac resynchronization therapy or CRT devices (biventricular pacing, with or without an ICD) offered by Medtronic, St. Jude Medical, and Boston Scientific largely own the class 3 market. But only about 25% to 30% of these patients are actually good candidates for the approach, and more than 30% fail to respond meaningfully at all.
Enter the alternatives
I'm intrigued by the approach that Sunshine Heart is taking. Building upon the concept of counterpulsation (which has been used in intra-aortic balloon pumps for almost half a century), Sunshine has developed the C-Pulse System. The C-Pulse uses a cuff placed around the ascending aorta to help the heart pump more effectively, with a pacemaker wire attached to maintain the proper rhythm. If you imagine a blood pressure cuff wrapping around the heart and basically using pulsing contractions to help pump blood, you're basically in the right zip code for how this approach works.
It's not a perfect system, as the device is powered by an external battery pack and requires a lead to pass from outside the body to inside, creating a pathway for infection. But the system only requires a minimally invasive implantation procedure, and the device does not contact the blood -- meaning no risk of causing clots. Initial results have been very encouraging -- 12 of 20 patients in the feasibility study were classified as "responders," and they saw a nearly one-point improvement in heart failure classification (from 3.1 to 2.2). Better yet, four patients from that study have done so well that they have been weaned off the device altogether.
Now HeartWare is stepping up. Earlier in December, HeartWare announced that it was acquiring CircuLite for $30 million upfront and up to $320 million in milestones and contingent payments. Relative to existing VAD therapies, CircuLite is more familiar than Sunshine's C-Pulse. CircuLite's Synergy system is basically a tiny blood pump, a device the size of a AA battery that can provide just over four liters a minute in blood flow. This is an invasive device (an inflow cannula goes into the left atrium and an outflow graft is attached to the subclavian artery) and it requires a mini-thoracotomy, but it is operationally similar to what HeartWare (and Thoratec) already do, and surgeons are already familiar with the implanted pump approach.
The Synergy is behind Sunshine's C-Pulse. While both devices are approved in Europe, the Synergy is awaiting a relaunch after some design modifications, while C-Pulse sales in Europe are likely to remain very low until a post-marketing study (OPTIONS HF) offers up its data. As for the U.S. market, Sunshine is already enrolling patients in its pivotal study (likely to finish in 2015 or 2016), while CircuLite is still looking to run its pilot feasibility study.
Interestingly, the Synergy has been priced in line with other VADs in Europe and payors (at least in Germany) have been willing to pay. In contrast, Sunshine has talked about an ASP around half that of VADs (in the neighborhood of $50,000).
The bottom line
I find it interesting that HeartWare chose to pay up to $350 million for CircuLite when Sunshine's market cap is less than $150 million and CircuLite's Synergy has had numerous development/design "challenges," particularly with the less invasive endovascular approach. You could argue this is a case of a company that is knowledgeable about the heart failure market scorning Sunshine's approach (and/or showing doubts of its efficacy and market potential), or you could argue it reflects meaningful undervaluation of Sunshine. Likewise, perhaps HeartWare approached Sunshine and Sunshine management is holding out for a valuation more akin to what Thoratec and HeartWare received at similar stages in their public lives.
At this point, I remain intrigued by both Sunshine's potential and valuation. Certainly there will be many hurdles and challenges for the company to overcome -- signing up clinical trial sites, enrolling patients, launching/marketing the device, and developing new versions (including a wholly implantable version). With that, it wouldn't be at all uncommon for the shares to drift in the absence of new data. On the other hand, if Thoratec or one of the CRT companies decides that this really is a valid approach, things could get very interesting very quickly.
I'm bullish on both HeartWare and Sunshine. HeartWare's valuation is still demanding, albeit not ridiculous by the standards of high-growth med-techs. Sunshine is a much, much riskier prospect today, but offers considerably more upside if the results of the feasibility study can be duplicated in an upcoming pivotal study.
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