Sunshine Heart at $10/share Price Target

C O M P A N Y N O T E

J a n u a r y 3 1 , 2 0 1 3

Sunshine Heart, Inc. (SSH) OverweightIntriguing 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. GundersonSr Research Analyst, Piper Jaffray & Co.612 303-6467, [email protected]

Changes Previous CurrentRating OverweightPrice Tgt US$10.00FY13E Rev (mil) — US$2.4FY14E Rev (mil) — US$8.7FY13E EPS — US$(1.88)FY14E EPS — US$(1.63)

52-Week High / Low US$22.90 / US$2.50Shares Out (mil) 9.2Market Cap. (mil) US$54.6Avg Daily Vol (000) 66Book Value/Share US$1.78Net Cash Per Share US$1.90Debt to Total Capital 0%Yield 0.00%Fiscal Year End Dec

Price Performance - 1 Year

Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12

20

15

10

5

0

USD

Source: Bloomberg

CONCLUSIONWe 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 TARGETClinical and regulatory risks, as well as competitive threats from alternative device andpharmacologic treatments of heart failure.

COMPANY DESCRIPTIONSunshine Heart is an early-stage medical device company, focused on developing,manufacturing, and commercializing C-Pulse Heart Assist System for treatment of CHF.

YEAR

2012E

2013E

2014E

REVENUE (US$ m)

Mar Jun Sep Dec FY FY RM

0.0A 0.0A 0.0A 0.0 0.0 NA

0.1 0.6 0.6 1.1 2.4 22.7x

1.6 2.1 2.2 2.8 8.7 6.3x

EARNINGS PER SHARE (US$)

Mar Jun Sep Dec FY FY 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

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 Analyst certification, found on pages 13 - 14 of this report or at thefollowing site: http://www.piperjaffray.com/researchdisclosures.

mailto:

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Company Note

INVESTMENT HIGHLIGHTS

SSH has developed a ventricular assist device (VAD) that is designed to enhance the

efficiency of the heart. The semi-implantable device like other VADs, requires an external

powerline, but uniquely uses a relatively simple counterpulsation technology to increase

cardiac output, coronary artery blood flow and reduce the heart’s pumping workload. The

C-Pulse does not come in contact with the blood stream, theoretically increasing the safety

profile of the product. We view SSH as having passed a number of development and

regulatory hurdles, and it is now poised to execute a pivotal trial in the US for FDA

approval.

Unique Product: We view the technology behind SSH’s C-Pulse™ as intriguing given the

device manages to enhance the heart’s pumping action without actually coming in contact

with the blood. A cuff is placed around the ascending aorta. The C-Pulse’s cycle alternately

inflates, increasing flow to the heart, and deflates, creating negative pressure pulling blood

from the left ventricle. The design allows for a higher pumping efficiency, without the

product actually touching the blood stream. Why is this important? Traditional VADs

(THOR and HTWR have the two best known) are inserted directly into the coronary

vasculature. With one end inserted in the ventricle and the other into the aorta—blood

passes through the pumping system inside these VADs and is propelled from the ventricle to

Exhibit 1 C-PULSE SYSTEM

Source: Company reports


Company Note

the aorta. The C-Pulse rhythm is coordinated through sensing leads, similar to those on a

pacemaker. This pulsatile balloon system can be contrasted to a mechanical device

interacting within the blood stream where higher levels of stroke have been measured with

the traditional VADs. Clogging of the pump mechanism from clotting has also been noted

in VADs. To minimize the problems with traditional VADs, physicians often use blood

thinning drugs which can reduce clotting, but the drugs can have sometimes dangerous side

effects. With the C-Pulse, the clotting and stroke rates are expected to be less than the other

VADs. And consequently fewer blood thinners will be used, resulting in fewer bleeding

complications. 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 than

replacing it, the device can be unplugged for short periods of time. We view the

convenience benefit of being able to shower or engage in other short duration activities as a

positive for patient QOL.

A Compelling Market for CHF Products: By treating heart failure, Sunshine Heart will be

participating in one of the largest underserved cardiology markets. Data from the American

Heart Association suggest there are 5.1 million Americans suffering from CHF. And

according 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 ambulatory

Class 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 IV

are 19.8%, 58.1%, 20.9%, and 1.2%, respectively). For assessing the market opportunity

for 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 prevalence

of 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 opportunity

should pass muster with most investor screens, with a $6-$12 billion adressable market

based 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 general

medtech average, and we view SSH as presenting a unique method for assisting the

pumping action of the left ventricle. We see clinical benefits related to the product being

located entirely out of the blood stream. Two key issues will dictate the future valuation

for SSH: timing of FDA approval and the efficacy and safety that can be established in the

clinical trials. We believe the current risk-reward for shares of SSH is positive and we

recommend purchase of the shares at current levels.

VALUATION

Valuation for a pre-revenue medical device stock is difficult. Generally we look at

comparable company revenue multiples and then discount a future theoretical valuation to

the present. For SSH, the best pure comparable is the early commercialization of HTWR.


Company Note

HTWR traded at EV/revenue multiple of 9.0x 2010, and ~7.0x when we launched coverage

in November of 2009, although actual revenue eventually far surpassed the estimates at that

time. Typically our high growth, unique technology medtech stocks trade in a range of 5-7x

EV/NTM revenue.

For SSH, we believe the European market could reach $30M+ in sales by 2017 and with

FDA approval in 2H17, related US commercial implants could contribute ~$10M more of

2017 revenue. Note that Heartware’s HVAD achieved $50M in revenues in its second year

post-CE Mark, but in an established market with reimbursement. We are adding an

additional two years of market building for the C-Pulse to achieve $44.8M in total

revenues, and note that the current focus in Europe is on data generation to support

reimbursement, rather than driving high implant volumes. The US market, with full PMA

approval and reimbursement could add another $100M of revenue by 2020.

While we see time risk and normal clinical risks, given our positive view on the technology

and the management team we are suggesting a 6.0x $44.8M FY17 revenue base discounted

Exhibit 2

V A L U A T I O N A N A L Y S I S ($ Millions)

Source: FactSet,Thomson One, Piper Jaffray Estimates

Exhibit 3

C O M P A R A B L E G R O U P V A L U A T I O N A N A L Y S I S ($ Millions)

Source: FactSet,Thomson One, Piper Jaffray Estimates

Enterprise CY10E Sales CY11E Sales

Ticker Company Price (11/13/2009) Value CY09E CY10E CY11E CY09E CY10E CY11E Growth % Growth %

HTWR Heartware $32.25 $320 $20 $36 $47 16.0x 8.9x 6.8x 80% 31%

CY14E Sales CY15E Sales

Ticker Company Last Price CY13E CY14E CY15E CY13E CY14E CY15E Growth % Growth %

SSH Sunshine Heart $5.93 $38 $3 $9 $21 14.7x 4.2x 1.8x 249% 132%

Consensus Revenue EV/ CY Sales

Enterprise CY14E Sales CY15E Sales

Ticker Company Last Price Value CY13E CY14E CY15E CY13E CY14E CY15E Growth % Growth %

DXCM Dexcom $15.06 $990 $128 $165 $221 7.7x 6.0x 4.5x 29% 34%

HTWR Heartware $90.34 $1,284 $186 $247 $324 6.9x 5.2x 4.0x 33% 31%

ELGX Endologix $15.24 $896 $132 $168 $200 6.8x 5.3x 4.5x 27% 19%

PODD Insulet $23.27 $1,267 $268 $323 $366 4.7x 3.9x 3.5x 21% 13%

HNSN Hansen Medical $2.42 $157 $28 $37 N/A 5.6x 4.2x N/A 33% N/A

Mean 6.4x 4.9x 4.1x 29% 24%

Median 6.8x 5.2x 4.2x 29% 25%

SSH SUNSHINE HEART $5.93 $38 $3 $9 $21 14.7x 4.2x 1.8x 249% 132%

Consensus Revenue EV/ CY Sales


Company Note

back 4 years at a 30% discount rate resulting in our $10 price target. Our 6.0x EV/sales

multiple is consistent with the high growth names in Exhibit 3. Our application of the

multiple to 2017 revenue implies a 4 year (2013-2016) discount period to arrive at a “present

value” price target. Progress on Sunshine’s US pivotal trial and data generation from the

European post-market surveillance study, should reduce clinical risks, resulting in better

visibility of US commercialization, and a lower discount rate.

UPCOMING CATALYSTS

For the near term the key investor milestones will be related to clinical trial advancement in

the US and Europe, and cash management. For the US we will watch enrollment progress

with “patient 1” in early 2013 and the ramp to 388 enrolled sometime in 2014-5. For

Europe, same start time, but expectations are for enrollment to be complete in roughly 18

months with interim looks at outcomes. With minimal revenues, the cost of running the

trials and the company will fall outside current cash on hand. SSH currently has $14.2M

million on hand and no long term debt. We estimate the cash burn at ~$3.5-$4.5M per

quarter, leaving SSH with about a year of cash remaining. SSH raised ~$19 million (net

plus over-allotment) in an August 2012 equity deal (3 million shares incl. a partial

shoe@$7/share). The Company announced a $25 million “as needed” equity based deal

with Aspire Capital in early 2013. Other potential sources of cash run the gamut from debt,

to strategic investments to distribution fees.

Exhibit 4

V A L U A T I O N M E T H O D O L O G Y

Source: Company reports, Piper Jaffray Estimates

CY17 Revenue 44.8$

Revenue Multiple 6.0x

269.0$

Discounted @ 30%

94.2$

Net Cash Assumption: -$

94.2$

Shares 9.2

Price Target 10$

Note: millions except revenue multiple


Company Note

BACKGROUND

Sunshine Heart is headquartered in Eden Prairie, MN and was founded in November 1999

and incorporated in Delaware in August 2002. Sunshine Heart’s common stock has been

publicly traded in the U.S. on the NASDAQ since February 2012, and in the form of CHESS

Depositary Interests, or CDIs, in Australia on the Australian Securities Exchange, or ASX,

since September 2004. The company has ~30 full-time employees.

The company is focused on developing, manufacturing, and commercializing the C-Pulse

Heart Assist System for treatment of Class III and ambulatory Class IV heart failure. The

C-Pulse Heart Assist System utilizes the scientific principles of intra-aortic balloon counter-

pulsation applied in an extra-aortic approach to assist the left ventricle by reducing the

workload required to pump blood throughout the body, while increasing blood flow to the

coronary arteries.

Evidence of C-Pulse safety and efficacy: SSH completed a 20 patient feasibility trial for the

C-Pulse under FDA guidelines. Results were presented at the 2011 and 2012 TCT meetings.

Efficacy data at 12-month follow-up included a mean NYHA class reduction of -1.2 (-1.0

denotes a responder to therapy), a mean Quality of Life (QOL) improvement of -24.6 (-7.0

demonstrates material improvement in patient QOL), and mean six minute hall walk

improvement of 46.8 meters compared to patient’s pre-implantation ability. Safety data

recorded no stroke or MI events, with one death due to repeat surgery to treat a sternal

infection which was unrelated to the device. The main notable adverse event was drive-line

exit site infections, which the company has since addressed with modifications to the

mechanism used at the exit site. At 12 month follow-up 3 of 20 patients(15%) were re-

hospitalized due to worsening heart failure, with two of those incidents related to non-

compliance to utilization rate protocol (20% utilization versus 80% per protocol; note:

product can be unplugged by the patient). Notably, median hospital stays of 8.1 days for

the minimally invasive procedure compare favorably to LVAD implantation hospital stays

which for reference ranged from 16-31 days in HTWR’s recently published HVAD BTT

Exhibit 5

Source: Company reports, Piper Jaffray Estimates

Estimated Date Event

1Q-2013 First U.S. Trial Enrollment

1Q-2013 First EU Trial Implant

1Q-2013 (Late March) 4Q12 Earnings/Cash burn

1Q-2013 (May) 1Q13 Earnings/Cash burn

Mid-2013 First Release of EU Data


Company Note

trial. Finally, use of inotropes was discontinued in four patients, while diuretic use was

reduced or discontinued in 12 out of 16 patients.

The results of the feasibility trial while encouraging, do not guarantee successful FDA

approval and commercialization. From an investment standpoint, we see some risk in trial

execution (as we do with almost all pivotal trials). Still, we view the preliminary data

positively. The physicians and SSH personnel involved in these trials are highly qualified

and experienced. The FDA protocol as we understand it, appears straightforward and

reasonable. The mechanism of action seems logical. We believe a European trial (see

details below) will help confirm the safety and efficacy of C-Pulse.

Pricing and Reimbursement: Currently, SSH management plans on charging for the C-Pulse

in its US pivotal trial. We estimate the price will be roughly $60K. In addition, the FDA

has cleared the C-Pulse as a category B device, meaning CMS payment is probable. As

noted in the CMS regulations:

“Medicare contractors are responsible for making the coverage determinations on all

FDA-approved Category B devices. Coverage decisions should be made for FDA approved

investigational device exemptions (IDEs), as they currently are made for FDA approved

devices, i.e., the contractor shall apply Medicare’s usual criteria and procedures

for making coverage decisions….”

We believe the C-Pulse will be paid under the same DRGs as current LVADs ( DRG 1 and

2), meaning a roughly $125k- $200k reimbursement level for the hospitals. Separate from

clinical trial costs, we believe most hospitals should be able to perform the procedures

profitably on most patients, given the lower cost of the device, (e.g. the HTWR HVAD was

roughly $85K in its trials) And, with the SSH trial enrolling less sick, Class III patients as

compared to Class IV for LVADs, the length of stay for C-Pulse patients is likely to be

shorter and the total cost of hospitalization less.

FDA timeline: Enrollment is expected to need 388 patients randomized 1:1 against optimal

medical treatment. As the statistics will be Bayesian, the total enrollment number will be

based on how long it takes to reach a pre-determined number of incidents. SSH

management is expecting enrollment to take 30 months. First patients could be enrolled in

the next several weeks, translating to 2H15 for completion of enrollment, one year safety

follow up in mid 2016, and possible FDA approval in late 2017. For comparison we note a

22 month enrollment period for HTWR’s Endurance trial. The Endurance trial for

destination therapy for Class IV heart failure was 450 patients randomized 2:1 to HTWR’s

HVAD vs. the control of an approved LVAD (most likely the HM2). Utilizing 50 centers,

enrollment began in August 2010 and was completed in early May 2012. SSH’s trial is a new

technology, for a new group of CHF patients and may take longer than the HVAD trial.

Another possible advantage for HTWR’s Endurance trial over SSH’s US pivotal is that all

Endurance patients received an LVAD of some sort, whereas in SSH’s trial, the control will

receive optimum medical treatment which may be viewed by the potential candidates as an

obstacle to enrolling in a device trial.

EU timeline: C-Pulse received CE Mark approval in July 2012. The 2013 strategy is to use

distributors for a limited commercialization that centers on a clinical trial similar to the US

protocol. Despite having regulatory approval, physicians and payors still need more

confirmatory efficacy and safety data as well as proper patient selection and post-operative


Company Note

care guidelines. Reimbursement is sparse for C-Pulse in Europe, but management intends

to tap into academic research budgets to conduct a 50 patient trial. The key heart centers

will be targeted, with emphasis on Germany, Italy and possibly UK centers to be enrolled.

We expect the first patients to enter the study in 1Q13. We anticipate full enrollment in

mid-2014. But unlike the US trial, we envision regular clinical data updates on the

European trial outcomes possibly in mid-2013, and beyond. These updates will also serve

as early check points for financial and strategic investors.

Heart centers focus on less sick patients: We anticipate transplant and VAD centers to

represent the majority of early C-Pulse implants. Still, in the clinical trials, new hospitals

will also be added. While CMS coverage and requirements will be important, by going

upstream to Class III CHF, we expect a younger patient group, more comparable to a BTT

population as opposed to the more sick, and heavy prevalence of Medicare patients within

a DT population.

Management: In our experience, the most critical factor for success at small companies is

management. For SSH, we have been impressed over the last three years with CEO Rosa.

He has taken low risk, measured steps to build this interesting idea into a $61 million

market cap company with ~$14M in cash on hand. CE mark has been granted and the US

pivotal trial is underway. The company has 30 full-time employees, and of the dozen or so

that we have met, we have been impressed with the quality and experience in their

cumulative backgrounds. Key medical advisors are a who’s who of CHF. The Board of

Directors is a mix of solid business/financial minds and successful serial medtech

entrepreneurs.

INVESTMENT RISKS

Clinical risks. 2013 and 2014 will be critical years for SSH from a clinical standpoint.

SSH’s 50 patient post-market surveillance study in Europe will provide investors a

subsequent look at key efficacy data. Both the EU trial and SSH’s US pivotal trial primary

efficacy endpoints will likely be defined as freedom from worsening heart failure resulting

in hospitalization, LVAD implant, heart transplant, and heart failure related death. While

the US feasibility trial results provided reasonable support for safety and efficacy, we are

always cautious on applying small trial results to larger populations. In addition, the US

pivotal trial with its 388 patient total enrollment represents a large trial for a company

SSH’s size to manage. The trial could present unforeseen enrollment and/or ongoing

management challenges.

Regulatory risks. Successfully navigating FDA’s PMA approval process has become a

difficult undertaking for any medtech company. The process can be long and slow, and is

often time fraught with delays and setbacks. Ultimate FDA approval of C-Pulse is not

guaranteed, and should SSH fail to eventually secure approval, commercial prospects for

the device would be limited to much smaller international markets.


Company Note

Competitive risks. The majority of Class III and Class IV heart failure patients still receive

pharmacological treatment and a smaller percentage are treated with LVADs and other

medical devices. Other medical device competitors that treat or may in the future treat

Class III or ambulatory Class IV heart failure patients are AbioMed (ABMD, West),

Berlin Heart, CardioKinetix, CircuLite, HeartWare (HTWR, West), Jarvik Heart,

MicroMed Technology, SynCardia, Terumo Heart, and Thoratec Corporation (THOR,

West). Several of these competitors are larger than Sunshine Heart, and have significantly

greater financial resources and brand recognition. The C-Pulse system has been implanted

in a limited number of individuals to date, and the efficacy and potential competitive

disadvantages of the C-Pulse System relative to these competitors are not fully known at

this time.

Financing/partnering risks. SSH currently has $14.3M of cash or roughly a year’s worth

of cash. The Company announced a $25 million “as needed” equity based deal with

Aspire Capital in early 2013. The likelihood exists that SSH will require additional capital

to complete the clinical trial and regulatory process. The company has already secured an

investment from an unnamed strategic medtech investor suggesting the potential for

partnering or a flat out purchase. However, the potential also exists for SSH to return to

the equity capital markets and dilute current investors.


Piper Jaffray

Thom Gunderson (612) 303-6467

Sunshine HeartIncome Statement

Fiscal Year ends December 31

in $ millions (except per share data)

FY FY Q1 Q2 Q3 Q4E FY E Q1E Q2E Q3E Q4E FY E Q1E Q2E Q3E Q4E FY E FY E FY E FY E

2010 2011 Mar-12 Jun-12 Sep-12 Dec-12 2012 Mar-13 Jun-13 Sep-13 Dec-13 2013 Mar-14 Jun-14 Sep-14 Dec-14 2014 2015 2016 2017

Revenues 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.6 0.6 1.1 2.4 1.6 2.1 2.2 2.8 8.7 12.2 17.9 44.8

Costs of revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.4 0.5 0.8 1.8 1.1 1.4 1.4 1.6 5.6 5.8 7.7 16.8

Gross Profit 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.5 0.5 0.7 0.8 1.2 3.1 6.3 10.2 28.0

Sales General & Administrative 2.6 5.4 1.9 1.6 1.5 2.1 7.1 2.0 2.3 2.1 2.3 8.6 2.4 2.9 2.9 3.4 11.6 13.0 14.3 28.1

Research & Development 6.2 11.2 2.2 1.8 1.8 2.3 8.1 2.3 2.8 2.4 3.1 10.7 3.2 3.7 3.8 3.5 14.2 14.6 14.7 16.0

Other - - - - - - - - - - - - - - - - - - - -

Total operating expenses 8.8 16.6 4.1 3.4 3.3 4.4 15.2 4.3 5.1 4.5 5.5 19.3 5.6 6.6 6.7 6.9 25.8 27.6 29.0 44.1

Operating Income (Loss) (8.4) (16.6) (4.1) (3.4) (3.3) (4.4) (15.2) (4.3) (5.0) (4.4) (5.2) (18.8) (5.1) (5.9) (5.9) (5.7) (22.7) (21.3) (18.7) (16.1)

Other income (expense), net 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net loss before income taxes (8.3) (16.3) (4.1) (3.4) (3.3) (4.4) (15.1) (4.3) (5.0) (4.4) (5.2) (18.8) (5.1) (5.9) (5.9) (5.7) (22.7) (21.3) (18.7) (16.1)

Income tax expense 0.7 0.1 - 0.7 - - 0.7 - - - - 0.0 - - - - 0.0 0.0 0.0 0.0

Net loss (excl. Non-recurring items) (7.6) (16.2) (4.1) (2.6) (3.3) (4.4) (14.4) (4.3) (5.0) (4.4) (5.2) (18.8) (5.1) (5.9) (5.9) (5.7) (22.7) (21.3) (18.7) (16.1)

Non-recurring items 0.0 - - - - - - - - - - - - - - - - - - -

Net loss (GAAP) (7.6) (16.2) (4.1) (2.6) (3.3) (4.4) (14.4) (4.3) (5.0) (4.4) (5.2) (18.8) (5.1) (5.9) (5.9) (5.7) (22.7) (21.3) (18.7) (16.1)

EPS (excl. Non-recurring items) ($2.63) ($2.98) ($0.66) ($0.42) ($0.42) ($0.48) ($1.96) ($0.45) ($0.51) ($0.44) ($0.48) ($1.88) ($0.38) ($0.44) ($0.43) ($0.38) ($1.63) ($1.18) ($0.99) ($0.82)

EPS (GAAP) ($2.63) ($2.98) ($0.66) ($0.42) ($0.42) ($0.48) ($1.96) ($0.45) ($0.51) ($0.44) ($0.48) ($1.88) ($0.38) ($0.44) ($0.43) ($0.38) ($1.63) ($1.18) ($0.99) ($0.82)

Weighted-average number of Shares used

in Basic and Diluted net loss per share 2.9 5.4 6.2 6.3 7.8 9.2 7.4 9.5 9.7 10.0 11.0 10.0 13.5 13.6 13.7 15.0 13.9 18.1 18.9 19.7

Growth Analysis (Yr/Yr)

Revenues NA NA NA NA NA NA NA NA NA NA NA 1301.8% 279.8% 264.8% 160.8% 270.7% 39.4% 47.2% 150.7%

COGS NA NA NA NA NA NA NA NA NA NA NA 1126.5% 217.3% 204.0% 96.4% 204.2% 4.8% 31.2% 119.2%

Gross Profit NA NA NA NA NA NA NA NA NA NA NA 2002.6% 514.9% 480.4% 376.2% 505.0% 100.5% 62.0% 174.3%

Operating Expenses NA NA NA NA NA NA NA NA NA NA NA 30.8% 30.8% 48.8% 26.5% 33.8% 7.0% 4.8% 52.3%

Operating Income NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

Net Income NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

EPS (excl. Non-recurrring items) NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

Margin Analysis

Gross Margin 100.0% NA NA NA NA NA NA 20.0% 21.0% 22.0% 23.0% 22.1% 30.0% 34.0% 35.0% 42.0% 36.1% 51.9% 57.2% 62.6%

Operating Margin -2107.5% NA NA NA NA NA NA -3730.0% -879.0% -738.0% -482.0% -799.0% -320.0% -276.0% -275.0% -203.0% -260.2% -175.6% -104.8% -35.8%

Net Margin -1895.0% NA NA NA NA NA NA -3730.0% -879.0% -738.0% -482.0% -799.0% -320.0% -276.0% -275.0% -203.0% -260.2% -175.6% -104.8% -35.8%

Percent of Sales

COGS 0.0% NA NA NA NA NA NA 80.0% 79.0% 78.0% 77.0% 77.9% 70.0% 66.0% 65.0% 58.0% 63.9% 48.1% 42.8% 37.4%

Sales General & Administrative 657.5% NA NA NA NA NA NA 1750.0% 400.0% 350.0% 215.0% 367.7% 150.0% 135.0% 135.0% 120.0% 132.9% 107.0% 80.0% 62.7%

Research and Development 1550.0% NA NA NA NA NA NA 2000.0% 500.0% 410.0% 290.0% 453.4% 200.0% 175.0% 175.0% 125.0% 163.4% 120.5% 82.0% 35.6%

Operating Expenses 2207.5% NA NA NA NA NA NA 3750.0% 900.0% 760.0% 505.0% 821.1% 350.0% 310.0% 310.0% 245.0% 296.3% 227.5% 162.0% 98.4%

Tax Rate -8.5% NA NA NA NA NA NA 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Current disclosure information for this company is located at http://www.piperjaffray.com/researchdisclosures. 1/31/2013


Piper Jaffray


Sunshine HeartBalance Sheet





Cash & cash equivalents 12.4 6.6 3.8 1.8 17.4 13.7 13.7 10.1 5.2 43.7 38.9 38.9 33.7 28.9 24.6 99.2 99.2 79.2 64.8 53.3

Accounts recievable, net 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.4 0.4 0.4 0.4 0.6 0.6 0.8 0.8 0.8 1.0 4.0

Other current assets 0.2 0.3 0.6 0.6 0.7 0.7 0.7 0.1 0.3 0.3 0.6 0.6 1.0 1.3 1.2 1.6 1.6 2.1 2.9 10.3

Total Current Assets 12.8 6.9 4.5 2.4 18.1 14.4 14.4 10.4 5.7 44.4 39.9 39.9 35.2 30.8 26.5 101.6 101.6 82.1 68.7 67.6

PP&E, net 0.1 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.4 0.3 0.2 0.2 0.2 0.1 0.1 0.0 0.0 (0.5) (1.7) (2.8)

Other assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Assets 12.9 7.4 5.0 2.9 18.6 14.9 14.9 10.8 6.1 44.7 40.2 40.2 35.3 30.9 26.5 101.6 101.6 81.5 67.0 64.8

Accounts payable 0.7 1.9 1.6 1.6 1.6 1.4 1.4 0.9 1.3 1.2 1.7 1.7 1.4 1.9 2.0 2.3 2.3 2.3 2.7 5.3

Accrued expenses 0.1 1.0 0.4 0.6 0.7 0.7 0.7 0.7 0.9 0.8 1.0 1.0 1.1 1.3 1.3 1.4 1.4 1.4 1.7 3.3

Other current liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Current Liabilities 0.8 2.8 2.0 2.3 2.3 2.2 2.2 1.6 2.2 2.1 2.7 2.7 2.5 3.3 3.4 3.7 3.7 3.7 4.4 8.6

Long-term debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other long-term liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Liabilities 0.8 2.8 2.0 2.3 2.3 2.2 2.2 1.6 2.2 2.1 2.7 2.7 2.5 3.3 3.4 3.7 3.7 3.7 4.4 8.6

Preferred stock

Common stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Additional paid-in capital 60.1 68.7 71.0 71.3 90.3 86.7 86.7 83.2 77.9 116.6 111.5 111.5 106.8 101.6 97.2 171.9 171.9 151.8 136.6 130.2

Foreign Translation Adj. & Retained Earnings (48.0) (64.1) (68.1) (70.7) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0) (74.0)

Total Stockholder's equity 12.1 4.6 2.9 0.6 16.3 12.7 12.7 9.2 3.9 42.6 37.5 37.5 32.8 27.6 23.2 97.9 97.9 77.8 62.6 56.2

Total Liabilities and Equity 12.9 7.4 5.0 2.9 18.6 14.9 14.9 10.8 6.1 44.7 40.2 40.2 35.3 30.9 26.5 101.6 101.6 81.5 67.0 64.8

Balance Sheet Data

Return on Avg. Assets -58.8% -179.1% -281.0% -727.0% -267.9% -86.0% -86.0% -113.3% -199.6% -70.7% -44.3% -44.3% -52.0% -62.2% -77.2% -35.4% -35.4% -25.4% -27.2% -25.6%

Return on Avg. Equity -62.7% -231.9% -463.0% -1599.1% -339.4% -99.2% -99.2% -132.9% -258.5% -77.3% -46.9% -46.9% -55.9% -68.2% -87.3% -37.5% -37.5% -26.5% -29.0% -29.3%

Gross Cash Per Share $4.29 $1.21 $0.62 $0.28 $2.24 $1.49 $1.87 $1.07 $0.54 $4.39 $3.55 $3.89 $2.51 $2.13 $1.81 $6.61 $7.13 $4.37 $3.43 $2.71

Net Debt (Cash) Per Share ($4.29) ($1.21) ($0.62) ($0.28) ($2.24) ($1.49) ($1.87) ($1.07) ($0.54) ($4.39) ($3.55) ($3.89) ($2.51) ($2.13) ($1.81) ($6.61) ($7.13) ($4.37) ($3.43) ($2.71)

Book Value Per Share $4.20 $0.85 $0.48 $0.10 $2.10 $1.38 $1.73 $0.97 $0.40 $4.28 $3.42 $3.74 $2.44 $2.04 $1.70 $6.53 $7.04 $4.30 $3.31 $2.85

Shares Outstanding 2.9 5.4 6.2 6.3 7.8 9.2 7.4 9.5 9.7 10.0 11.0 10.0 13.5 13.6 13.7 15.0 13.9 18.1 18.9 19.7

Total Debt/Total Assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total Debt/Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total Debt/Total Debt + Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Working Capital 12.0 4.1 2.4 0.1 15.8 12.2 12.2 8.8 3.5 42.3 37.2 37.2 32.7 27.5 23.1 97.9 97.9 78.4 64.3 59.0

Working Capital (ex-cash) (0.4) (2.5) (1.4) (1.6) (1.6) (1.5) (1.5) (1.4) (1.7) (1.3) (1.7) (1.7) (1.1) (1.4) (1.5) (1.2) (1.2) (0.8) (0.5) 5.7

Net Debt (Cash) (12.4) (6.6) (3.8) (1.8) (17.4) (13.7) (13.7) (10.1) (5.2) (43.7) (38.9) (38.9) (33.7) (28.9) (24.6) (99.2) (99.2) (79.2) (64.8) (53.3)



Piper Jaffray


Sunshine HeartCash Flow Statement





Net Income (Loss) (7.6) (16.2) (4.1)$ (2.6)$ (3.3)$ (4.4) (14.4) (4.3) (5.0) (4.4) (5.2) (18.8) (5.1) (5.9) (5.9) (5.7) (22.7) (21.3) (18.7) (16.1)

Adjustments:

Depreciation and Amortization 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1

Loss on disposal of plant and equipment 0.0 0.0 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Stock-compensation expense 0.1 0.9 0.3 0.3 0.3 0.3 1.2 0.3 0.3 0.3 0.3 1.1 0.5 0.5 0.5 0.5 2.0 2.4 3.0 3.0

Expense for warrants issued w/ service agreement 0.0 0.0 0.0 0.0 0.2 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Inc. (dec.) in cash flows from op assets and liabilities:

Accounts receivable (0.1) 0.3 0.0 0.0 0.0 0.0 0.0 (0.2) 0.0 (0.2) 0.0 (0.4) 0.0 (0.2) 0.0 (0.2) (0.4) 0.0 (0.2) (3.0)

Inventory 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 (0.3) 0.0 (0.3) 0.0 (0.4) (0.3) 0.1 (0.4) (1.0) (0.5) (0.8) (7.4)

Deferred revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 (0.3) 0.0 (0.3) 0.0 (0.4) (0.3) 0.1 (0.4) (1.0) (0.5) (0.8) (7.4)

Prepaid expenses and other assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.6) (0.3) 0.3 0.3 (0.4) 0.4 0.7 0.2 0.3 1.6 0.2 1.3 11.4

Accounts payable, accrued expenses, & other liabilities 0.5 2.0 (0.8) 0.2 (0.0) (0.1) (0.7) (0.5) 0.1 0.4 0.5 0.4 (0.2) 0.6 0.9 0.4 1.6 (0.7) 0.9 7.0

Other assets & liabilities (0.1) (0.2) (0.3) 0.0 (0.0) (0.0) (0.4) (0.0) (0.0) (0.0) (0.0) (0.1) (0.0) (0.0) (0.0) (0.0) (0.1) (0.1) (0.1) (0.1)

Net cash used in operating activities (7.2) (13.1) (4.8) (2.0) (2.9) (4.2) (13.8) (4.1) (5.5) (3.6) (4.8) (17.9) (5.2) (4.9) (4.2) (5.5) (19.8) (20.4) (15.4) (12.5)

Purchase of property, plant and equipment (0.0) (0.5) (0.1) (0.0) (0.0) (0.0) (0.2) 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.4 1.0 1.0

Acquisitions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net cash provided by (used for) investing activities (0.0) (0.5) (0.1) (0.0) (0.0) (0.0) (0.2) 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.1 0.4 1.0 1.0

Proceeds from issuance of long-term debt, net of issuance costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Principal payments of long term debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Proceeds from exercise of stock options and warrants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Proceeds from the issuance of common stock, net of offering expenses 11.9 7.6 2.1 0.0 18.6 0.5 21.1 0.5 0.5 42.0 0.0 43.0 0.0 0.0 0.0 80.0 80.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net cash provided by (used for) financing activities 11.9 7.6 2.1 0.0 18.6 0.5 21.1 0.5 0.5 42.0 0.0 43.0 0.0 0.0 0.0 80.0 80.0 0.0 0.0 0.0

Effect of foreign exchange rates on cash 0.6 0.1 0.1 (0.0) (0.0) 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net increase (decrease) in cash and cash equivalents 5.3 (5.8) (2.7) (2.1) 15.7 (3.7) 7.2 (3.6) (4.9) 38.5 (4.7) 25.2 (5.2) (4.9) (4.2) 74.5 60.3 (20.0) (14.4) (11.5)

Cash and cash equivalents at beginning of period 7.0 12.3 6.6 3.8 1.8 17.4 6.6 13.7 10.1 5.2 43.7 13.7 38.9 33.7 28.9 24.6 38.9 99.2 79.2 64.8

Cash and cash equivalents at end of period 12.3 6.6 3.8 1.8 17.4 13.7 13.7 10.1 5.2 43.7 38.9 38.9 33.7 28.9 24.6 99.2 99.2 79.2 64.8 53.3




J a n u a r y 3 1 , 2 0 1 3

IMPORTANT RESEARCH DISCLOSURES

Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Eachbox represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Notewritten during the past three years.

Legend:I: Initiating CoverageR: Resuming CoverageT: Transferring CoverageD: Discontinuing CoverageS: Suspending CoverageOW: OverweightN: NeutralUW: UnderweightAL On/AL Off: Placed on/removed from the Alpha List maintained by Piper Jaffray (AL use discontinued March 2010)NA: Not AvailableUR: Under Review

Distribution of Ratings/IB Services

Piper Jaffray

IB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [OW] 318 55.11 63 19.81

HOLD [N] 230 39.86 10 4.35

SELL [UW] 29 5.03 0 0.00

Note: Distribution of Ratings/IB Services shows the number of companies currently in each rating category from which Piper Jaffray and its affiliatesreceived compensation for investment banking services within the past 12 months. FINRA rules require disclosure of which ratings most closelycorrespond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell, but instead representrecommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight with sell. SeeStock Rating definitions below.

Analyst Certification — Thomas J. Gunderson, Sr Research AnalystThe views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part ofmy compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.



J a n u a r y 3 1 , 2 0 1 3

Research DisclosuresPiper Jaffray was making a market in the securities of Sunshine Heart, Inc. at the time this research report was published. Piper Jaffray will buy andsell Sunshine Heart, Inc. securities on a principal basis.

Rating DefinitionsStock Ratings: Piper Jaffray ratings are indicators of expected total return (price appreciation plus dividend) within the next 12 months. At timesanalysts may specify a different investment horizon or may include additional investment time horizons for specific stocks. Stock performanceis measured relative to the group of stocks covered by each analyst. Lists of the stocks covered by each are available at www.piperjaffray.com/researchdisclosures. Stock ratings and/or stock coverage may be suspended from time to time in the event that there is no active analyst opinionor analyst coverage, but the opinion or coverage is expected to resume. Research reports and ratings should not be relied upon as individualinvestment advice. As always, an investor’s decision to buy or sell a security must depend on individual circumstances, including existing holdings,time horizons and risk tolerance. Piper Jaffray sales and trading personnel may provide written or oral commentary, trade ideas, or otherinformation about a particular stock to clients or internal trading desks reflecting different opinions than those expressed by the researchanalyst. In addition, Piper Jaffray technical research products are based on different methodologies and may contradict the opinions containedin fundamental research reports.• Overweight (OW): Anticipated to outperform relative to the median of the group of stocks covered by the analyst.

• Neutral (N): Anticipated to perform in line relative to the median of the group of stocks covered by the analyst.

• Underweight (UW): Anticipated to underperform relative to the median of the group of stocks covered by the analyst.

Other Important InformationThe material regarding the subject company is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy anddoes not purport to be complete. This report is solely for informational purposes and is not intended to be used as the primary basis of investmentdecisions. Piper Jaffray has not assessed the suitability of the subject company for any person. Because of individual client requirements, it is not, andit should not be construed as, advice designed to meet the particular investment needs of any investor. This report is not an offer or the solicitationof an offer to sell or buy any security. Unless otherwise noted, the price of a security mentioned in this report is the market closing price as of theend of the prior business day. Piper Jaffray does not maintain a predetermined schedule for publication of research and will not necessarily updatethis report. Piper Jaffray policy generally prohibits research analysts from sending draft research reports to subject companies; however, it should bepresumed that the analyst(s) who authored this report has had discussions with the subject company to ensure factual accuracy prior to publication,and has had assistance from the company in conducting diligence, including visits to company sites and meetings with company management andother representatives.

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Sunshine Heart at $10/share Price Target

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