CHF Solutions, Inc. (NASDAQ: CHFS)
CHF Solutions, Inc. (NASDAQ: CHFS) is an early-stage medical device company focused on commercializing the Aquadex FlexFlow system for Aquapheresis® therapy. The company’s objective is to improve the quality of life for patients with heart failure and related conditions. CHF Solutions is a Delaware corporation headquartered in Minneapolis with wholly owned subsidiaries in Australia and Ireland. The company has been listed on the NASDAQ Capital Market since February 2012.
The stock has been very active during recent past and is continuously trading with strong & above average volumes. CHF recently announced that it has begun the process of transitioning the manufacturing of the Aquadex FlexFlow System from an indirect subsidiary of Baxter International, Inc.(NYSE: BAX), a global leader in the hospital products and dialysis markets, to CHF Solutions’ facility in Eden Prairie, Minnesota.
The company expects to begin manufacturing its Aquadex FlexFlow system products in the fourth quarter of 2017. As per management, bringing the manufacturing of the Aquadex FlexFlow system products in-house will give CHF greater control and flexibility in managing its operations. Over time, they expect that this will result in improved gross margins as volumes and capacity utilization increases.
It said, under the Commercial Manufacturing and Supply Agreement, CHF Solutions will continue to purchase raw materials and finished goods from an indirect subsidiary of Baxter until February 1, 2018.
The Company recently announced its quarterly earnings data for second quarter ended June 30th, 2017. During the quarter, CHF made important progress on many fronts. Revenue grew 18% in Q2, 2017 over pro forma Q2, 2016 as it focuses on increasing the penetration in its largest hospital accounts by increasing utilization of the Aquadex FlexFlow system in multiple locations within the hospitals. The net loss for the period was $2.5 million, compared to a net loss of $4.2 million for the second quarter of 2016, a 40% improvement from last year.
In terms of guidance for remainder of 2017, revenue is expected to accelerate during the year and the business is likely to pay off. The company is presently on rapid growth trajectory & continues to focus on its account penetration goals with the addition of a growing direct salesforce and a focused effort to reengage with dormant accounts that stand to realize improved patient care and cost efficiencies with its Aquadex system. Additionally, In-house manufacturing provides numerous advantages for CHF Solutions and enables better control over supply chain and potential margin improvements as well.
With the recent developments, analyst have revised their outlook on the stocks: The stock currently has an average rating of “BUY” and a consensus price target of $3.25, suggesting above 350% gain from recent levels. Considering present valuation, CHF is at a favorable risk reward position.
About the Company: CHF Solutions, Inc. (NASDAQ:CHFS) is an early-stage medical device company focused on commercializing the Aquadex FlexFlow system for Aquapheresis® therapy. The Aquadex FlexFlow system, is indicated for temporary (up to eight hours) ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy, and extended (longer than 8 hours) ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy and require hospitalization. All treatments must be administered by a healthcare provider, under physician prescription, both of whom having received training in extracorporeal therapies. The company’s objective is to improve the quality of life for patients with heart failure and related conditions.
About Aquadex FlexFlow System: Aquadex is a unique proprietary product that is used for the temporary ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy.
Ultrafiltration is a process that removes water and salt from a patient in a manner similar to how the kidney functions. Fluid overload is a condition that is prevalent in heart failure patients, which can lead to decompensation resulting in lengthy and costly hospitalizations.
Aquadex FlexFlow System consists of three primary components: The console pump, which has a $28,500 list price; a one-time use disposable blood circuit set with a list price of $900; and a small duallumen peripheral catheter that simultaneously withdraws blood and returns filtered blood to the patient’s arm.
Potential market size:
Heart failure is one of the leading causes of death in the United States and other developed countries. The American Heart Association estimates that 5.7 million people in the United States age 20 and over are affected by heart failure, with an estimated 870,000 new cases diagnosed each year and 670,000 emergency department visits. Congestive heart failure is the highest U.S. chronic health care expense category.
There are over 1 million patients hospitalized per year in the US for acute heart failure and approximately 90% of these patients present with symptoms of fluid overload. Aquadex has been shown in randomized, controlled clinical trials to remove more fluid than diuretics and to reduce both the length of stay in the hospital and repeat hospitalizations.
There are two market segments for treating fluid overload with the Aquadex FlexFlow:
1) Inpatient Care — Given to a patient admitted to a hospital, extended care facility, nursing home or other facility. Long term care is the range of services typically provided at skilled nursing, intermediate-care, personal care or eldercare facilities.
2) Outpatient Care — Any health care service provided to a patient who is not admitted to a facility. Outpatient care can be provided in a doctor’s office, clinic, or hospital outpatient department. Target customers for the Aquadex FlexFlow include large academic hospitals specializing in advanced treatment of chronic heart failure, other large hospitals with heart failure related admissions and clinical practices with transplant or LVAD programs.
Key growth drivers of the Aquadex product line in the large, underserved heart failure market:
- Existing Installed Base: There is a large established customer base to re-engage and revitalize in over 300 US hospitals that have already implemented the aquapheresis therapy at some point in the past.
- Under-penetrated In-patient Market: There is a large underpenetrated in-patient market with over 1 million US hospital admissions each year for heart failure and over 5,000 US hospitals treating heart failure patients.
- Under-served Outpatient Market: There is a significant and growing need for outpatient treatment to prevent hospital readmissions due to fluid overload. Hospitals are under financial pressure to reduce the length of stay of the heart failure admission but yet need to avoid the costly Medicare penalties assessed when a heart failure patient is readmitted within 30 days of the initial hospital discharge.
- Untapped Large OUS Market: There is a market for the Aquadex System outside the US that is significant and CHF only recently began to re-engage these efforts.
- Differentiated Technology: Aquadex FlexFlow System is a very differentiated technology with published clinical trials showing many clinical benefits over the current standard of care, IV diuretic drugs.
- Hospital Economic Drivers: CHF is well aligned with the market dynamics created by the Affordable Care Act that is forcing hospitals to reduce the heart failure hospital length of stay while reducing readmission rates.
Other Key development in the recent past:
During the quarter, CHF announced that Stanford University received approval from the FDA for an IDE clinical trial using the Aquadex FlexFlow System to treat pediatric patients. In addition during the quarter, it changed company name from Sunshine Heart, Inc. to CHF Solutions, Inc.
The company also announced the hiring of Mr. Jim Breidenstein as Chief Commercial Officer to begin building a US direct sales force. It increased direct sales team from 4 reps in Q2-17 to 10 reps today.
On the manufacturing front, CHF recommissioned its own manufacturing cleanroom in June 2017 and transferred manufacturing equipment from Baxter at the end of July 2017.
CHF is currently in the process of installing and validating that equipment in its Eden Prairie facility. Management expects the manufacturing transfer to ultimately have a favorable impact on gross margins by alleviating the markup over standard cost charged by Baxter for manufacturing product. The timing and magnitude of gross margin improvements will depend on manufacturing capacity utilization.
Completed an underwritten public equity offering for net proceeds of approximately $8.0 million. Reduced operating expenses by 31% compared to the same quarter of 2016. Ended quarter with cash on hand of $5.6 million.
2nd quarter 2017 Financial Results:
Revenue for the quarter was $864,000, a growth of 18% over the second quarter of 2016 on a pro forma basis. The growth was driven mainly by a 22% growth in the sale of circuit sets and consoles, which make up 85-90% of the company’s sales on any given period.
In terms of operating expenses for the second quarter, they totaled $2.7 million, a decrease of about $1.2 million, or 31% improvement from the same period last year. The decrease in expenditures reflects continued efforts to consolidate and streamline activities in all areas of the company, including lower clinical spending.
The net loss for the period was $2.5 million, compared to a net loss of $4.2 million for the second quarter of 2016, a 40% improvement from last year.
Regarding cash position, in April 2017, CHF closed an underwritten public equity offering for net proceeds of approximately $8.0 million. Its operating cash utilization for the first six months of the year was $5.7 million, an improvement of 38% from the same period a year ago. It ended the quarter with approximately $5.6 million in cash and cash equivalents and no debt.
The amount and timing of cash requirements will depend on the progress and success of the company’s clinical development programs, regulatory and market acceptance, and the resources it devotes to research and commercialization activities.
Key risk factors and potential stock drivers:
The company is exposed to risk of the potential for dilution. The company is going to need incremental capital and existing holders are probably going to have to take a hit to proportionate share value due to any incremental share issuance.
Competition from medical device companies and medical device divisions of health care companies, pharmaceutical companies and gene- and cell-based therapies is intense and expected to increase. CHF’s ability to compete effectively depends upon its ability to distinguish Aquadex FlexFlow from its competitors and their products.
CHF’s business strategy significantly depends on its ability to grow Aquadex Business. If it is unsuccessful at manufacturing, marketing and selling Aquadex FlexFlow, operations and potential revenues might be adversely affected.
Notwithstanding, incremental improvements in existing pipeline; the company’s meaningful value (on a longer run) would still be far fetched in its targeted therapies.
The company’s ability to ramp-up profitability while sustaining its revenue growth would be one of the key stock driver over the near to medium term. The company must regulate its increasing development costs.
On Thursday, August 10th, 2017, CHFS is trading at $0.650 (down -9.72%) on an above average volume of 3.03 million shares exchanging hands. Market capitalization is $6.40 million. The current RSI is 43.92
In the past 52 weeks, shares of CHFS have traded as low as $0.51 and as high as $28.80.
At $0.65, shares of CHFS are trading below its 50-day moving average (MA) at $0.71 and below its 200-day MA at $3.98
The present support and resistance levels for the stock are at $0.64 & $0.78 respectively.
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