Shares of Sunshine Heart (SSH) were hit fairly hard this week, dropping to lows over the mid-week period that had not been seen for months. Given that the share price dip was sparked by investor concerns that may be quite unjustified, the potential for a rebound exists for the near term, and maybe even more so for the long term. Leading the charge to the downside may have been investor questions that surfaced this week regarding the company's cash position and potential competition that Sunshine's C-Pulse Heart Assist system, a device that has thus far proven to not only halt the progression of heart failure in patients with Class III and ambulatory Class IV heart failure, may face on the open market. Additional concerns were raised at the fact that C-Pulse would not even be slated to reach market in the United States until 2015, before which time the company could be susceptible to multiple rounds of financing that could result in severe dilution for retail investors.

While any concern by any investor is valid, given that skepticism and caution should be considered a normal part of any investor's due diligence, these particular concerns may be unjustified, given that they only address half of the story.

As the late Paul Harvey used to say with such delight, "And now for the rest of the story..."

Sunshine's C-Pulse system has relatively little - if any - competition on the market. What gives the C-Pulse a huge advantage over products marketed by Heartware International (HTWR) and Thoratec (THOR), for example, is that it is implanted outside of the bloodstream. That fact makes a C-Pulse implant relatively minimally invasive, when compared to other implants or procedures that entail the introduction of foreign bodies into the bloodstream. Maintenance and follow-ups are also much more routine and less-invasive for patients on the C-Pulse than those being treated by in-the-bloodstream devices. As the global healthcare community trends towards less-invasive and more effective treatments for commonly expensive ailments - such as heart failure - Sunshine may be positioned to take well advantage, given the early successes of the C-Pulse, which includes a North American feasibility trial that provides the basis for the upcoming US pivotal trial.

Additionally, Sunshine received a milestone approval earlier this year for the C-Pulse in Europe, so the precedent is already set that the device has delivered results positive enough to warrant an outright approval by medical authorities. It's also worth noting that some consider the market for heart failure to be even more robust in Europe than it is in the US and Sunshine is expected to register its first commercial sales for the device across the pond within the current quarter. While no product should be expected to become an instant blockbuster, any sales registered early in Europe would help alleviate investor concerns of massive dilution later on down the road. It's also expected that the upcoming commercial launch of the C-Pulse in Europe could coincide with the launch of the US trial, providing two milestone catalysts for the company over the near-term.

On the financing front, some investors have expressed over the past week that Sunshine is primed to fall victim of multiple rounds of dilutive financing as the US trial progresses over the next few years. These are valid concerns for any developmental company in the healthcare sector, as such companies generally always need money, but in this case the potential for sales in Europe should also be taken into consideration, as mentioned in the preceding paragraph.

Sunshine also recently conducted a financing deal that gave the company a solid cash position that will last until the midway-point of the upcoming US trial. This is a key item to consider because an amended S-1 filed by the company at the time of the said offering hinted that a large strategic investor has come on board to assist in developmental funding, a sign that the mid-way trial point could be used by the company and/or the strategic partner to make a move towards a partnership or - to speculate further - even a buyout. If a potential partner were to make a decision to jump in at the first signs of success during a major trial, the mid-way point would be a logical time to do so, and Sunshine may have had this in mind when assessing how much cash to raise with the most recent offering.

After a two percent drop on Thursday, Sunshine shares are trading in the low six dollar range again, well below the seven dollar price of the offering this summer. With the trial and potential sales catalysts still pending over the near-term, Sunshine could continue to attract investor interest through the winter months, while investors will also be watching to see how the C-Pulse gains traction on the European market over the coming quarters.

Also of note, Sunshine representatives will be presenting positive data from the already-completed North American feasibility study at the 24th annual Transcatheter Cardiovascular Therapeutics scientific symposium in Miami, Florida next week, providing another opportunity for new investors to be drawn to the company and its potential.

The heart failure market is a multi-billion dollar market and with a next-generation device that is implanted outside of the bloodstream, Sunshine could be positioned for success. The path to the US market for C-Pulse may still be years away, but as emphasized above, there are enough catalysts pending to keep investors interested early.

All investor concerns should always be duly noted in this sector, but both risk and potential need to be entertained in order to make a sound investment decision. There are risks involved, but Sunshine also has the potential to return some rewards to investors over the short and long term.

One to watch.

Disclosure: Long SSH.

Contact VFC's Stock House: vfc@vfcsstockhouse.com

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