In a previous article I spoke about the medical device industry. In that article, I spoke about one branch of medical devices -- cardiac and orthopedic implants, but that only tells part of the story. Aside from the large implantable device industry, a large part of the segment includes imaging technology. GE (GE) and Siemens (SI) both form the core of this segment -- dominating all areas of imaging -- X-Ray, CT, MRI, PET scans, etc. However, aside from this part of the imaging world, we must also focus on the agents that scanners use to highlight anatomical and metabolic functions of the human body. One branch of these types of agents, use drugs laced with radioactive isotopes that collect metabolic data from the body, appropriately called radiopharmaceuticals. Many of the major pharmaceutical companies including Bayer (BAYRY) and Eli Lilly (LLY) have divisions dedicated to this field, with other players including GE, Covidien (COV), DraxImage (JUBILANT.NSE) Lantheus, Bracco, and Cardinal Health (CAH) having more extensive operations in this area. I will focus my comments in this article to the subfield of nuclear cardiology, which uses the aforementioned imaging agents to study patient cardiac functions. In this article I will examine, in some detail, the work these major players do in this area, and also examine some of the smaller players, and see how they fit into the larger picture.
Nuclear Medicine: A Background
Before we take a deep dive into the business elements, a brief background of nuclear medicine is in order.
In order for doctors to understanding a patient's condition they need to take a look inside their body to check out any problems. Doctors can do this by performing exploratory surgery, which due to its invasive and dangerous nature we obviously try to avoid. Doctors also can use X-Ray or CAT Scan, which sends photon beams into the patient, and form a chemical reaction with X-Ray film that creates an X-Ray image. An MRI machine works much differently, it uses a magnet to send radio waves into your body, which collect information, and then gets sent back to an antenna that collects and processes the images. Doctors can enhance these images by using contrast agents to highlight certain portions of the body.
These agents can take on many forms. From the simple iodine contrast, to as we will now see the more exotic radiopharmaceutical agent. As we mentioned above, radiopharmaceuticals are drugs laced with radioactive isotopes. These agents emit energy in the form of photons, which can then get read by special scanners called SPECT and PET scanners. Tc99m sestamibi, Tc99m tetrofosmin, and Thallium 201 Chloride are the most common agents used in nuclear medicine (and more specifically nuclear cardiology), and fluorodeoxyglucose or FDG is the most common agent used in PET scans. The main difference between SPECT or PET scans lies in how much information gets collected by the scanner. SPECT scanners collect a single photon and process that image (the 'S' in SPECT stands for single), whereas PET scanners collect two photons and process the information generated by both photons. Clearly, a PET scan because it collects more information will produce a higher quality image.
In 2000, the medical world experienced a breakthrough when scientists combined the PET scanner with a CT scanner, which allowed doctors to examine both the metabolic and anatomical functions of the body in one image. This greatly increased the visibility and clarity with which doctors could make decisions about patient health. This breakthrough moment sparked an increased interest in this area, with an increase in the amount of radiopharmaceuticals brought to market that could fully take advantage of this new technology. In the next section I will move to examine these developments, and the companies involved in these changes.
Molecular Imaging Agents: Current Trends
As mentioned, no major drug maker manufacturers PDG for PET scanning, but three major companies make radiopharmaceutical products for SPECT scanning. Covidien makes a Thalium 201 Chloride product, which has steadily lost market share to more powerful Tc99m products manufactured by Lantheus and GE. Additionally, Cardinal Health has a large business for the distribution and production of nuclear pharma products. However, despite the heavy involvement these companies have in the SPECT space, most of them have not developed a competing product in the PET space.
Lantheus marks the departure from this trend. Privately held Lantheus, which nonetheless files 10-Q's and 10-K's with the SEC, currently has a late stage PDG product, which seeks to improve on the current quality of care by improving image quality produced by the PET scan.
Another company making a major move in this space is FluoroPharma (FPMI.OB). FPMI currently has three drugs in various stages of clinical trials. The following table gives its four products at their respective stages of development:
Stage of Development
Since VasoPET and AZPET have not fully developed I will focus my comments on the two later stage drugs -- BFPET and CardioPET. FPMI plans to use both of these drugs for use in the field of nuclear cardiology. BFPET, in addition to beginning its phase II trial, has already received patent rights in Australia, and had two positive testings in China. BFPET began its Phase II trial in January 2013 and expects the trial to last 6 months. CardioPET has also began Phase II trials, which it commenced in March 2012.
BFPET and CardioPET, like the Lantheus drug, both provide a breakthrough in diagnostic ability by dramatically improving the image quality generated by the PET scan. Additionally, because of this higher image quality, doctors can offer patients a more personalized medical experience, which will increase the accuracy of the course of treatment. These factors will allow doctors to get better patient outcomes than the previous standard of care -- PDG.
BFPET when used in conjunction with stress tests, can help doctors distinguish between merely damaged (ischemic) and dead (infarcted) coronary arteries. The image quality produced by BFPET has so far been proven far superior to PDG.
CardioPET offers an even bigger breakthrough. As mentioned, in the case of BFPET, and with most nuclear imaging agents, patients must go through a stress test in order for the marker to work. However, many patients cannot undergo a stress test due to health concerns. Enter CardioPET, which allows patients who cannot undergo stress tests to have the benefit of high quality nuclear imaging. Whereas in the case of BFPET, Lantheus plans on offering a competing product, in the case of CardioPET, no other company has plans to bring a drug to market in the near future.
Importantly, we should note, these imaging agents do not require the same type of time to develop as their therapeutic brethren (p.3 in link). In the case of therapeutic pharmaceutical trials, patients must go through the course of treatment, which can take a lot of time, and must have long term follow ups to assess efficacy and safety. Radiopharmaceuticals on the other hand, have a short course of treatment, and follow up occurs immediately. This has the effect of cutting down dramatically the amount of time it takes to approve the drugs in half -- from 10 years to 5 years.
After learning about the scientific trends in the radiopharmaceutical market, let us now turn our attention to specific market trends.
Molecular Imaging: Market Trends
When evaluating the market for nuclear cardiac PET scanning we need to evaluate three items, in this order:
- The number of people affected with cardiac disease
- Those who have cardiac disease that undergo a "nuclear scan"
- The amount of those scans done by PET imaging
The answers, as you can find in FPMI's corporate presentation run as follows. Page numbers correspond to the pages in the corporate presentation.
- One in three adults have some form of cardiac disease (p.12)
- Out of that huge population, 15.5mm undergo undergo nuclear scans (p.10)
- 2.6mm out of that 15.5mm undergo cardiac PET scans (p.10)
The numbers presented above come from 2009, the most recent available data. In the two years preceding 2009 cardiac PET scanning grew at CAGR of 17% compared to 6% for the nuclear imaging field in general. Considering this growth in nuclear imaging in general, and PET scanning specifically, estimates project the market for radiopharmaceuticals to increase from $7bn to $15bn by 2015. (p.8)
Drilling this down a bit further, considering the numbers presented above come from 2009, and presumably the numbers have grown since then, and further the market should double between 2011 and 2015, I think we can estimate by 2015 an eligible market of close to 6mm.
FPMI's two drugs -- BFPET and CardioPET -- both should have strong market positions. BFPET is the only drug known under development addressing its market, and CardioPET is one of two drugs under development. Assuming a 75% adoption for BFPET and a 25%, and lastly assuming a roughly even split of patients between the two drugs, FPMI should have 3mm patients using its drugs.
FPMI estimates it can charge $600 per dose of its medicine, which works out to $1.8bn in revenue from its two drugs.
Granted, I am probably painting a bit of a rosy picture of FPMI's market opportunity, but even considering these admittedly rough numbers, we can get a strong sense of FPMI's market opportunity.
FPMI will not have any revenue until 2015, but will have some major regulatory milestones it will hit over the next few years that will catalyze the stock to rise or fall. Aside from these regulatory milestones, FPMI could prove an attractive takeout target for some major companies.
As mentioned, GE, as part of its GE Healthcare Unit has a major presence in the imaging space. In 2000, as interest in PET scanning increased due to the CT/PET invention, GE's radiopharmaceutical operation began to pick up steam. A major part of its effort in this area came when GE bought Amersham, a nuclear medicine company, for $14bn. We see from this large transaction the importance GE places on its nuclear medicine operation both from the device and pharmaceutical perspective, and how it might have the inclination to execute other transactions going forward.
However, we do not need to limit the list of potential acquirers to obvious players like GE, Bracco, or DraxImage. N one of the super major pharmaceutical companies, aside from LLY and Bayer have nuclear medicine units, and considering the positive growth trends, they might want to get involved in this growing segment.
Navidea: An Instructive History
Until now I have focused my comments on the scientific and economic background needed in order to understand the field of nuclear cardiology, I have not spent much time looking at other nuclear medicine development companies. As far as I can tell Navidea BioPharmaceuticals (NAVB) is the only other publicly traded development stage company trafficking in nuclear medicine. NAVB has three radiopharmaceuticals under development: Lymphoseek for lymphoma detection, AZD4694 for Alzheimer's disease detection, and RIGScan for tumor detection during surgery. All three of these drugs have had significant regulatory bumps over the years, most recently culminating with a rejection of NAVB's NDA for lymphoseek, despite the company's rosy projections in its most recent 10-K. Even with this history of shaky developments, and its most recent blow, NAVB has a $330mm market cap. FPMI, which admittedly has longer to go on the regulatory trail, but also has not had NAVB's hiccups, has a seemingly low market cap of $20mm.
FPMI's drugs also address a much larger patient population. As mentioned above, one out of every three adults have "heart problems", and a full 22mm of those get undergo nuclear imaging. NAVB's drug, on the other hand, only addresses a total population of 1.7mm new cases a year in the USA. Meaning, NAVB has much smaller potential market because not all 1.7mm of those patients will receive NAVB's nuclear imaging.
Considering these two factors -- more solid footing on the regulatory path, and a larger addressable market, I think we can confidently say that FPMI has strong short and long term possibilities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.