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Sunshine Heart at $10/share Price Target

Sunshine Heart at $10/share Price Target

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Piper Jaffray report for Accredited Investors Only
Piper Jaffray report for Accredited Investors Only

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Published by: marketstockanalyst on Feb 05, 2013
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COMPANY NOTEJanuary 31, 2013
Sunshine Heart, Inc. (SSH)Overweight
Intriguing Technology For Attractive Market: Initiate at Overweight
PRICE: US$5.93TARGET: US$10.00
30% discount rate on 6.0x CY17 Sales of $44.8M (assuming 9.2M shares outstanding)
Thomas J. Gunderson
Sr Research Analyst, Piper Jaffray & Co.612 303-6467, thomas.j.gunderson@pjc.com
ChangesPreviousCurrent
RatingOverweightPrice TgtUS$10.00FY13E Rev (mil)US$2.4FY14E Rev (mil)US$8.7FY13E EPSUS$(1.88)FY14E EPSUS$(1.63)52-Week High / LowUS$22.90 / US$2.50Shares Out (mil)9.2Market Cap. (mil)US$54.6Avg Daily Vol (000)66Book Value/ShareUS$1.78Net Cash Per ShareUS$1.90Debt to Total Capital0%Yield0.00%Fiscal Year EndDec
Price Performance - 1 Year 
Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-1220151050
USD
Source: Bloomberg 
CONCLUSION
We are initiating coverage of Sunshine Heart with an Overweight rating and a $10/sharetarget price. SSH has developed a type of ventricular assist device (VAD) that is designedto enhance the efficiency of the heart for patients suffering from heart failure. We viewSSH as having passed a number of development and regulatory hurdles including IDEapproval for a pivotal trial in the US for ultimate FDA approval. Overall we like the VADmarket; it is large, underserved, and technological advances are providing clear benefit.Two key issues will dictate the future valuation for SSH: timing of FDA approval and theefficacy and safety that can be established in the multi-center trials. All in, we believethe current risk-reward for shares of SSH is positive and we recommend purchase of theshares at current levels.
Unique Product And Benefits.
We are intrigued with SSH's C-Pulse™ device giventhe device's minimally invasive approach to enhancing the heart's pumping action,while implanted outside of the blood stream. This approach avoids complications withstroke or thrombus which have emerged with traditional VADs, and represents a keyclinical benefit. An additional benefit relates to up front and total cost of treatment,with an anticipated ~$60K ASP relative to LVADs which are priced at $100K+, shorterhospitalization times, and a lower incidence of re-hospitalization post-implant.
Expansive Market Opportunity.
According to the American Heart Association thereare 5.1 million Americans suffering from CHF. Clinical literature puts the proportionof NYHA Class III heart failure at ~20% of that number or roughly ~1.0M potentialpatients. Assuming a 10-20% applicability hurdle for potential implants, based oncomorbidities, cost/reimbursement, and a $60K ASP, we project a $6-$12 billionaddressable market for C-Pulse.
Catalysts Ahead.
Near-term catalysts include initial patient enrollment in US andEuropean clinical trials expected in 1Q13. Importantly, additional clinical data shouldbe forthcoming from SSH's 50 patient European post market surveillance study bymid-year 2013. Management has estimated a ~2.5 year enrollment period for their 388patient US pivotal trial. However, with site reimbursement by CMS and most privateinsurers, and relatively few competing trials, that timeframe may prove conservative.
Valuation.
We assign our high growth/unique technology 6.0x EV/NTM Salesmultiple to our estimated FY17 sales of $44.8M, and we apply a 30% discount rate toaccount for clinical trial uncertainty to arrive at our $10 price target.
RISKS TO ACHIEVEMENT OF PRICE TARGET
Clinical and regulatory risks, as well as competitive threats from alternative device andpharmacologic treatments of heart failure.
COMPANY DESCRIPTION
Sunshine Heart is an early-stage medical device company, focused on developing,manufacturing, and commercializing C-Pulse Heart Assist System for treatment of CHF.
YEAR
2012E2013E2014E
REVENUE (US$ m)
MarJunSepDecFYFY RM
0.0A0.0A0.0A0.00.0NA0.10.60.61.12.422.7x1.62.12.22.88.76.3x
EARNINGS PER SHARE (US$)
MarJunSepDecFYFY P/E
(0.66)A(0.42)A(0.42)A(0.48)(1.96)NM(0.45)(0.51)(0.44)(0.48)(1.88)NM(0.38)(0.44)(0.43)(0.38)(1.63)NM
Page 1 of 14Sunshine Heart, Inc.Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be awarethat the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report asonly a single factor in making their investment decisions. This report should be read in conjunction with important disclosureinformation, including an attestation under Regulation Analystcertification, found on pages 13 - 14 of this report or at thefollowing site:http://www.piperjaffray.com/researchdisclosures.
 
 
Company Note
INVESTMENT HIGHLIGHTS
SSH has developed a ventricular assist device (VAD) that is designed to enhance theefficiency of the heart. The semi-implantable device like other VADs, requires an externalpowerline, but uniquely uses a relatively simple counterpulsation technology to increase
cardiac output, coronary artery blood flow and reduce the heart’s pumping workload
. TheC-Pulse does not come in contact with the blood stream, theoretically increasing the safetyprofile of the product. We view SSH as having passed a number of development andregulatory hurdles, and it is now poised to execute a pivotal trial in the US for FDAapproval.
Unique Product:
We view the technology behin
d SSH’s C
-
Pulse™ as intriguing given thedevice manages to enhance the heart’s pumping
action without actually coming in contactwith the blood. A cuff is placed around the ascending aorta. The C-
Pulse’s cycle alternat
elyinflates, increasing flow to the heart, and deflates, creating negative pressure pulling bloodfrom the left ventricle. The design allows for a higher pumping efficiency, without theproduct actually touching the blood stream. Why is this important? Traditional VADs(THOR and HTWR have the two best known) are inserted directly into the coronaryvasculature. With one end inserted in the ventricle and the other into the aorta
 — 
bloodpasses through the pumping system inside these VADs and is propelled from the ventricle to
Exhibit 1 C-PULSE SYSTEM
Source: Company reports
 
Page 2 of 14Sunshine Heart, Inc.
 
 
Company Note
the aorta. The C-Pulse rhythm is coordinated through sensing leads, similar to those on apacemaker. This pulsatile balloon system can be contrasted to a mechanical deviceinteracting within the blood stream where higher levels of stroke have been measured withthe traditional VADs. Clogging of the pump mechanism from clotting has also been notedin VADs. To minimize the problems with traditional VADs, physicians often use bloodthinning drugs which can reduce clotting, but the drugs can have sometimes dangerous sideeffects. With the C-Pulse, the clotting and stroke rates are expected to be less than the otherVADs. And consequently fewer blood thinners will be used, resulting in fewer bleedingcomplications. In short, not touching the blood directly should be safer. In addition to the
“no touch” benefit, because C
-Pulse is enhancing the normal heart beat, rather thanreplacing it, the device can be unplugged for short periods of time. We view theconvenience benefit of being able to shower or engage in other short duration activities as apositive for patient QOL.
A Compelling Market for CHF Products
: By treating heart failure, Sunshine Heart will beparticipating in one of the largest underserved cardiology markets. Data from the AmericanHeart Association suggest there are 5.1 million Americans suffering from CHF. Andaccording to the CDC, over 1 million hospitalizations are attributed to CHF annually.CHF can be further subdivided in Classes I-IV. The current VADs are directed at the sickest
patients, Class IV. SSH’s C
-Pulse product is designed for Class III patients and ambulatoryClass IV, a larger, less sick population (note: according to an article by Dr Ali Ahmed et al,the proportions of patients in New York Heart Association (NYHA) classes I, II, III, and IVare 19.8%, 58.1%, 20.9%, and 1.2%, respectively). For assessing the market opportunityfor CHF products, we have chosen to use the prevalence of CHF, rather than incidence.The high emergency, outpatient, and inpatient metrics for CHF along with the high rate of physician office visits for the disease lead us to using prevalence. For SSH, on a prevalenceof 5.1 million, the number of potential Class III C-Pulse candidates would be ~1.1 Million.At our roughly $60k estimate for C-Pulse pricing, a $66B total US market opportunityshould pass muster with most investor screens, with a $6-$12 billion adressable marketbased on comorbidity, cost/reimbursement and other patient exclusion factors.We like the VAD space based on a multi-year growth outlook that is well above the generalmedtech average, and we view SSH as presenting a unique method for assisting thepumping action of the left ventricle. We see clinical benefits related to the product beinglocated entirely out of the blood stream. Two key issues will dictate the future valuationfor SSH: timing of FDA approval and the efficacy and safety that can be established in theclinical trials. We believe the current risk-reward for shares of SSH is positive and werecommend purchase of the shares at current levels.
VALUATION
Valuation for a pre-revenue medical device stock is difficult. Generally we look atcomparable company revenue multiples and then discount a future theoretical valuation tothe present. For SSH, the best pure comparable is the early commercialization of HTWR.
Page 3 of 14Sunshine Heart, Inc.

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