In 1995, 244,000 American men were diagnosed with prostate cancer. The American Cancer Society estimates that 317,000 males
will be diagnosed with prostate cancer in 1996, a 30% increase. A projected 41,400 men in the United States will die of the disease
this year. Among the most prevalent forms of cancer, only lung cancer causes more death in men.
One key facto behind the large growth of prostate cancer diagnoses over the next several years will be earlier detection of the disease
through the advent of the prostate specific antigen (psa) test. The psa is a sophisticated test that measures a substance emitted by a
normal prostate gland, and also measures cancerous tissue within the prostate. A psa test can indicate the presence of prostate cancer
as much as five years earlier than diagnosis by other means.
The majority of those diagnosed with prostate cancer are treated with either surgery or external radiation. Yet Theragenics has
developed a revolutionary treatment that cures prostate cancer, and men are just becoming aware of this life-saving alternative.
A huge boost in consumer awareness came from the May 13, 1996 cover story of Fortune magazine. Andrew Grove, the ceo of Intel,
was diagnosed with prostate cancer last year and wrote an exhaustive research treatise on his quest to find the best treatment.
This change in public perception toward prostate cancer--that surgery is not the only alternative--has created a significant buying
opportunity for investors. As patients strive to find all of their options in combating this disease, one virtually unknown company
with a proven treatment is poised to benefit: Theragenics.
Theragenics is involved in the production of TheraSeed. TheraSeed are rice-sized radioactive "seeds" comprised of the isotope
Palladium-103, which is used to treat prostate cancer. Implanting these radioactive seeds, either within or close to a tumor, is called
brachytherapy. It can be as effective as either surgery or external beam radiation. It also has several physical and economic advantages.
Because radiation oncologists place the seeds into and around the tumor, psa levels drop dramatically, according to research studies
conducted at the Radiotherapy Clinics of Georgia, Northwest Tumor Institute, and the Swedish Medical Center.
Brachytherapy results in lower incidences of impotence and in-continence. In addition, surrounding tissues are not damaged by the
centralized radiation, as can be the case with external radiation beams. Finally, the procedure is performed in an outpatient setting,
thereby eliminating the need for long, costly hospital stays.
Even in cases where the cancer has spread beyond the prostate capsule, seeding has shown its efficacy. Used in conjunction with
external beam radiation, studies show that seeding can dramatically reduce the psa level of the patient, and keep those levels down over
time. Whereas in some cases external beam or radical prostatectomy procedures result in temporary drops in psa levels, patients who
have received seeds have, in a large percentage of cases, shown cancer-free psa levels after several years.
Theragenics has a patent on its process of manufacturing seeds using Palladium-103. Although there is extremely promising seven-year
data on patients treated with Palladium-103, several factors that have heretofore limited the widespread adoption of this alternative
treatment, now serve as catalysts for the future growth of TheraSeed treatment.
First, while an increasing number of urologists seem to consider brachytherapy as a viable treatment, the impending publication of the
results of 10-year medical studies should greatly increase such favorable opinions.
Moreover, surgeons make considerably more money performing radical prostatectomy procedures (up to $3,500 per procedure) as
compared to a few hundred dollars for seeding, but with the huge success rate of TheraSeed, patients will start demanding the cheaper,
less-invasive procedure.
Although brachytherapy is currently chosen by fewer than 2% of prostate cancer patients, the potential is high for Theragenics'
brachytherapy to gain a 10% market share by the end of the century. That translates to 50,000 procedures at $3,200 per, or $160
million in revenue.
In response to this prospective demand, Theragenics plans to increase its internal manufacturing capacity significantly over the next year.
The Palladium used in TheraSeed is manufactured in a cyclotron, and the company will double its installed base of two cyclotrons over
the next year.
Theragenics has seen 21 consecutive quarters of profitability, and with more visibility for the company's treatment, earnings should
continue to accelerate.
SSR is forecasting earnings per share of $0.27 in 1996. Beyond 1996, there are two earnings models. A base case model that assumes
Theragenics supplies seeds for 2,000 more procedures per year going forward, yields earnings per share of $0.41 in 1997, growing
42% to $0.58 in 1998.
A more aggressive earnings model assumes that the company operates at full capacity in 1997 and 1998, leading to earnings of $0.66
and $1.37 respectively.
As the visibility for Theragenics' treatment improves over the next two years, earnings will come in between the base case and
aggressive estimate.
BUSINESS DESCRIPTION
Theragenics was incorporated in 1981 for the purpose of making therapeutic radiological devices that treat cancer.
To date, the company has internally developed two products, TheraSeed and TheraSphere. TheraSeed is a radioactive implant
designed for the treatment of localized tumors, and is mainly used for the treatment of prostate cancer, although it has been used to treat
cancers of the pancreas, lung, head, and neck, base of the skull, brain and eye. TheraSeed is being commercially distributed in the
United States.
Treatment of early stage prostate cancer with TheraSeed is a one-time, minimally invasive technique, usually performed under local
anaesthesia in an outpatient setting.
The seeds are loaded into long hollow needles which are inserted directly into the tumor in the prostate gland. TheraSeed pellets are left
in the body, emitting radiation for six to nine months. According to medical studies, TheraSeed offers the advantage of a much lower
incidence of impotence and incontinence.
TheraSeed is about one-half the cost of a prostatectomy.
Because no major surgery is involved, many TheraSeed patients are up and around within 72 hours, compared to recovery periods as
long as six weeks for radical surgery. Plus, the TheraSeed procedure is about one-half the cost of surgery.
TheraSphere are radioactive glass microspheres used in the treatment of both primary liver cancer and secondary liver cancer in cases
where the primary cancer has been or can be arrested. TheraSphere is being commercially distributed in Canada by Nordion
International under a sublicense from Theragenics. Additionally, Theragenics has granted to Nordion an exclusive worldwide sublicense
to manufacture and sell TheraSphere for any application.
The company's products are intended to permit a physician to introduce short-range, short-lived radioactive material directly into
cancerous tissue. The radioactive seeds destroy the cancerous tissue, while minimizing the effect on surrounding healthy tissue. Because
of this, the company's products are most effective on encapsulated, confined tumors. Each product is based on established physical
principles and has the simple objective of delivering sufficient radiation to kill the target cancer.
Palladium-103 is the radioactive isotope providing the therapeutic benefit in the company's TheraSeed product. The company currently
has two cyclotrons in operation that produce Palladium-103, with two more on order. The company is planning to buy a cyclotron (at a
cost of $4 million per) every three to six months. Theragenics goal is to have six cyclotrons up and running by the end of 1997. Plus,
Theragenics is exploring opportunities to use Palladium-103 in other potential products that could cure additional types of cancer.
Each cyclotron is capable of producing enough TheraSeed to treat approximately 1,700 prostate cancer patients. During 1995, the
company supplied enough TheraSeed to treat more than 2,600 men for prostate cancer.
TheraSeed is currently being used in 209 medical centers, up from 140 a year ago. The efficacy of the treatment plus its economic
benefit to the patient continues to drive demand. Theragenics holds a significant amount of patents on TheraSeed which do not expire
until the year 2111, so barriers to entry are high and competition is limited.
INDUSTRY OUTLOOK
Besides the widespread use of psa blood testing, the longer life span of males will contribute to growth in reported prostate cancer
cases.
While no organization breaks out the percentage of patients who are treated with a specific procedure, nearly all patients are treated
with either a radical prostatectomy or external beam radiation. In fact, only 4,000 patients were treated in 1995 with seed implants, or
only 1.6% of patients with prostate cancer.
Theragenics' business is poised to explode because of increased recognition in the medical community, as well as patients searching out
treatments.
MANAGEMENT
M. Christine Jacobs
President and ceo
Ms. Jacobs joined the company in 1987 as national sales manager. Since 1992, she has been president and chief operating officer, and
in 1993 she was promoted to chief executive officer.
Bruce Smith
Chief financial officer
Mr. Smith has been with the company since 1987, and has served in his present roles since 1989.
INSIDER OWNERSHIP
As a group, directors and officers at Theragenics own 5% of the company. Christine Jacobs owns 1.6% and Mr. Smith owns 1.1%.
Bellingham Industries, a British investment concern, owns 20.8% of the company.
RISKS
Will doctors forgo the huge profit margins of radical surgery in favor of the cost-effective outpatient treatment of TheraSeed? The entire
investment thesis behind Theragenics boils down to that question.
The education of the medical community of TheraSeed's efficacy and consumer demand should answer that question positively. But it
may take a while. Doctors are not known for making hasty decisions, and they are certainly not known for accepting lower fees when
faced with alternative treatments.
Intel's Andy Grove said that during his battle with prostate cancer, "It was especially difficult to get a good handle on the effectiveness
of radiation [seeds] because of the presumption by most urologists that surgery works best."
A likely scenario is that sometime down the line, a major health maintenance organization (hmo) will adopt TheraSeed as its treatment of
choice due to its cost structure. This will force a large part of the medical community to take notice, and increase demand for the
product instantaneously.
Until that time, Theragenics must rely on two things: directly educating the medical community through its own sales force, and additional
medical studies addressing the efficacy of TheraSeed by independent doctors and hospitals. In 1995, the Northwest Tumor Institute in
Seattle showed TheraSeed to be fully effective in treating localized, early-stage prostate cancer in its study group.
Because TheraSeed is radioactive, hospitals and doctors' offices have to be equipped to handle, and more importantly, store the
product. This means additional cost for the hospital, which in many cases means no sale. In addition, personnel must be trained in
handling radioactive substances, another incremental cost. Yet despite these additional costs, TheraSeed is still less than one-half the
cost of surgery or chemotherapy.
If a cyclotron malfunctions, and it has happened in the past, Theragenics suffers because this is a life-saving product. Production
downtimes are significantly harmful to the company's financial well-being. As the company purchases more cyclotrons of better quality,
this risk abates.
Last, the company will suffer some dilution over the next 24 months due to a proposed secondary offering aimed at raising $10 million
in order to purchase more cyclotrons.
COMPETITION
Theragenics' primary competition comes from alternative treatments to cancer, the most radical being surgery.
The closest radioactive competition comes from Amersham International, a British concern with $221 million in sales last year.
Amersham makes a pellet similar in shape to TheraSeed, but made from iodine-125, not palladium-103.
Palladium-103 is a faster acting isotope than iodine-125. Plus, Iodine's dose rate is one-third that of palladium and its half-life is three
times longer than palladium's. Theragenics believes "such properties represent significant competitive advantages for palladium in treating
certain types of cancer."
Amersham's product was used on 1,400 patients last year, a decrease from the year before, and it appears 1996 figures will be lower
again.
The main competitive threats to TheraSeed are surgery, chemotherapy, and external beam radiation.
Presently, surgery and external beam radiation comprise the vast majority of the prostate cancer treatment market. More than 240,000
American men were diagnosed with prostate cancer last year. Besides the 4,000 procedures supplied by Theragenics and Amersham,
the rest chose surgery or treatment.
By far, the most prominent choice among men with prostate cancer is surgery. This is done by removing the entire prostate gland, then
rebuilding the related internal organs. Unfortunately, the side effects of surgery usually involve incontinence and/or impotence.
Theragenics paltry market share bodes well for its future growth. As more hospitals and doctors recognize TheraSeed's efficacy, as
more hmos choose TheraSeed as their treatment of choice, and as more men become aware of their alternatives when it comes to
treating prostate cancer (doctors usually say surgery is the only choice), Theragenics' market share will grow tremendously.
PROJECTIONS
The company's impressive operating model will allow for strong earnings growth going forward. In the first quarter of 1996, the
company posted earnings per share of $0.07 on revenue of $2.8 million. For fiscal 1996, SSR is forecasting earnings per share of
$0.27 on revenue of $12.2 million. Based on the purchase of new cyclotrons, Theragenics will have the capacity to produce seeds for
10,000 procedures in 1997 and 20,000 in 1998.
At a minimum, the company could increase the number of procedures that it provides seeds for by 2,000 a year starting in fiscal 1997.
This would yield 1997 earnings of $0.41 and 1998 earnings of $0.58 in a base case scenario.
However, if brachytherapy is to gain more acceptance as SSR believes it will, and palladium continues to be the isotope of choice,
Theragenics could operate at a level close to capacity. The aggressive earnings forecast of $0.66 in 1997 and $1.37 in 1998 shows the
tremendous earnings power of Theragenics.
The company's balance sheet is strong with cash and short term investments of over $3 million. A $5 million credit facility from Bank
South coupled with cash from ongoing operations should enable the company to finance growth over the near term.
While the company's ability to be cash-flow positive is dependent on the timing of its purchase of cyclotrons, core operations are quite
healthy.
In fact, in the most recent quarter, Theragenics enjoyed a 31% net profit margin. Near-term margins may come under some pressure
from costs associated with increasing capacity, yet over the longer term new equipment and automation will enable the company to
realize more operating efficiencies.
The base case earnings estimate calls for a 27% net margin in 1996, expanding to 29% in 1998. This may prove conservative. The
overall operating margins will depend on how aggressive the company is in increasing its capacity. |
