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Thesis

Early detection of chronic diseases has been a growing trend within the healthcare sector, and it's easy to see why. The benefits are obvious. If diseases such as cancer and heart disease are diagnosed in their early stages, not only are they infinitely easier to treat, but more importantly they are incredibly cheaper to treat, on the order of billions of dollars. To throw some figures out there, the medical care costs of people with chronic diseases account for over 75% of the U.S.'s $2 Trillion medical care costs, in addition, 5% of the population are responsible for over 49% of total healthcare expenses.

A majority of these costs result from patients with late-stage chronic diseases such as coronary artery disease and cancer. Fortunately, with imaging systems such as CT, MRI, PET, SPECT, and X-Ray scans-- these debilitating conditions can be detected in their early phases. For the sake of clarity, my article will be focusing on the PET scan market.

PET scans, along with SPECT scans, fall into a category of imaging systems that utilize radiopharmaceuticals (radioactive compounds), which enable technicians to view and analyze the metabolic activity (the functioning components) of targeted area(s) of the body. These procedures, in addition to anatomical images provided by CT/MRI/X-Ray scans, allow for an accurate diagnosis of any conditions that may be afflicting the patient.

However, with Medicare reimbursement cuts looming on the horizon for cancer related PET scan procedures, over 2,000 PET scan imaging centers will need to find new methods of monetizing their expensive equipment. With cancer diagnosis being the primary focus for the majority of the estimated 12 million PET procedures done per year, these centers will scramble for radiopharmaceuticals that target indications that fall outside of the cancer spectrum.

In doing so, FluoroPharma (OTCQB:FPMI) stands to benefit from this impending shift in healthcare coverage. FluoroPharma is a clinical trial stage company currently developing novel radiopharmaceuticals that aim to vastly improve the current standard of detection for major conditions such as coronary-artery disease (CAD).

Given the technical nature of the radiopharmaceutical industry, my article begins with a rough overview of the science behind radiopharmaceuticals in order to help contextualize why I believe FluoroPharma bears all the markings of a perfect storm -of a company that stands to benefit from current market trends, and therefore, why it may prove to be the ARM Holdings (ARMH) of the Medical Imaging Industry.

A Quick and Dirty Introduction to Radiopharmaceuticals

There's a specific reason why scans utilizing radiopharmaceuticals exist: a CT/MRI/X-Ray scan can provide a crystal clear image of the human body and its component organs, however, as my doctor humorously put to me: "They (CT/MRI/X-Ray) can't tell me if the body is dead or alive." In other words, PET/SPECT procedures illustrate the functional status of the organ being scanned.

The radiopharmaceuticals, and their corresponding isotopes; despite sharing radioactivity as a common feature, have different chemical profiles that lend to individual strengths in regards to the detection of various conditions. As a result, when new nuclear compounds are developed, not only are they patentable, but they are also allowed to be qualified as new drugs through the FDA approval process.

Unlike typical pharmaceuticals, these radiopharmaceuticals are easily synthesizable in many facilities. As a result, when a radiopharmaceutical with demonstrated improvements over current standards is developed... Imaging facilities will rapidly adopt the new compound in order to maintain a competitive edge with other facilities, or the status quo at the very least.

In order to illustrate why PET/CT facilities may switch over to FluoroPharma's F-18 based nuclear compounds, a cost-benefit analysis of the various isotopes currently utilized is necessary.

The isotopes most commonly used in nuclear imaging are: Nitrogen-13 (N-13), Oxygen-15 (O-15), Fluorine-18 (F-18), Rubidium-82 (Rb-82), and Technetium-99m (Tc-99m). There are many other isotopes, however for the sake of clarity, I've named the isotopes that are most salient for this overview. For simplicity's sake, I have left out isotopes that have begun to phase out in favor of more efficacious alternatives, for example, Thalium-201 used to be known as the gold standard for nuclear cardiography in the 80s, however with the introduction of Technetium-99m, Thalium-201 fell out of vogue in favor of the new isotope. With the sole exception of Technetium-99m, all of the isotopes listed are used for PET scan imaging as opposed to SPECT scan imaging.

The key trait that differentiates isotopes used in PET and SPECT scans lie in their molecular weight; typically PET scans utilize "lighter" radioactive molecules that can be more easily synthesized with biologically active compounds such as sugar (FDG, for example). This has a twofold result. Not only do the compounds have a short half-life (resulting in less overall radiation), but in addition, the nature of the "lighter" isotopes lend towards the creation of new compounds that can be tailored towards the targeting of specific organs. Moreover, because of their lower molecular weight, the isotopes utilized in PET scans are more easily acquirable, which prevent the possibility of isotope shortages.

A shortage occurred for Technetium-99m in the late 2000s that resulted from maintenance shutdowns in key facilities that produced Molybdenum-99 (Technetium-99m's precursor element). As a result, despite ramped up production from other facilities around the world; Quebec reported 27,000 cancer and heart tests delays; 20-40% delays at a hospital in Austria, not to mention the United States, which currently still utilizes half of the global Molybdenum supply. In fact, in response to the shortage, many facilities made the switch back to the less effective Thalium-201 compounds, created by both Lantheus (Privately held) and Covidien (COV), an isotope with lower image quality and higher radiation.

Although the majority of imaging procedures are currently SPECT scans, current trends imply a necessitated shift towards PET scans, here's why:

PET vs. SPECT- Why PET Will Win

The primary difference between PET (Positron Emission Tomography) and SPECT (Single-Photon Emission Computed Tomography) is in the level of detail that can be obtained from the procedure. The difference results from the core processes behind both procedures: SPECT scans trace the activity of a single photon, whereas PET scans trace the activity in pairs of photons, thus allowing for greater depth of information.

Despite the obvious benefit, the underlying process behind the PET/SPECT difference lends to additional qualities that signal towards an impending shift to PET dominance. For example, the pairing of photons in PET scanning helps reduce the random nature of radioactivity, the reduction of "noise" as well as the shorter half-life's of the isotopes has allowed for powerful advances in imaging such as, "improved image quality, the possibility of performing shorter scans, multiple field-of-view scanning, and improved temporal resolution" in comparison to the currently dominant SPECT scans.

Commenting upon the "shorter scans", PET scans take much less time than SPECT scans, for example: Whereas a SPECT scan takes anywhere from 4-8 hours to complete, a PET scan will only take 35-40 minutes (only 10 for simply the scan itself) for completion.

At the same time, the doubled nature of the photons in PET scans results in higher photonic energy, which results in improved tissue penetration. The improved tissue penetration provides another advantage over SPECT imaging by addressing the current trend in obesity. SPECT scans, which currently dominate cardionuclear scanning face an issue where radioactivity is attenuated (obstructed) by the increased mass present in breast, chest, and diaphragm for overweight/obese patients.

In short, here's why PET will beat out SPECT:

  1. The Obesity Trend: With 68.8% of the US currently overweight, obese, or extremely obese (33.1%, 35.7%, and 6.3% respectively), this trend necessitates an increased adoption of PET scan procedures in order to combat the signal reduction from excess body mass.
  2. Heavy Isotope Shortages: With the majority of SPECT scans contingent on a supply of Technetium-99m (The isotope of choice for Bone Scans, Myocardial perfusion (Heart) scans, Sestamibi parathyroid (Thyroid) scans, Brain Scans, White blood cell scans), a shortage like the one experienced in the 2000s can have disastrous repercussions for both imaging facilities and patients. The shift back to the inferior Thalium-201 adopted by many imaging facilities, implies that these facilities are ready to transition to PET scans as a prophylactic measure against future Tc-99m shortages.
  3. SPECT Overcrowding: Despite the limited supply of Technetium-99m, current estimates states that annually, roughly eight million nuclear cardiology (SPECT) studies take place with Tc-99m, in contrast to 100,000 PET scans within the United States for cardiac indications. The huge difference in volume represents a transitional opportunity for many imaging facilities looking to differentiate themselves from competing imaging centers.
  4. Reduction in Time: Because a PET procedure is much faster than a SPECT procedure (Six times faster in the worst case scenario (40 minutes vs. 4 hours), almost 14 times faster in the best scenario (35 minutes vs. 8 hours)), this allows for the possibility of more scans schedulable per day, resulting in higher productivity.

Why Fluorine-18 Compounds Will Continue to Dominate PET Scans

Of the isotopes utilized in PET scans (N-13, O-15, F-18, Rb-82), fluorine-18 proves to be the clear winner. Beyond the obvious, where FDG (Fluorodeoxyglucose, fluorinated glucose) accounts for over 95% of all radiopharmaceuticals utilized in PET and PET/CT scanning, there's a clear reason why F-18 will continue to be the dominant isotope in PET scanning: Half-life.

Briefly returning to a difference undiscussed in the PET vs. SPECT section, one of the advantages that SPECT held over PET was the longer half-lives associated with the isotopes used by SPECT. Typically heavier isotopes have longer half-lives, which allowed for the related nuclear compounds to be prepared commercially off-site, and shipped when needed, leading to a reduction in overall costs.

However, the short half-lives of most isotopes utilized in PET scans requires on-site preparation through the usage of generators/cyclotrons, which contribute to the high price-tag associated with PET scanning...In contrast to its brethren PET isotopes (N-13's half-life is ~10 minutes, O-15's half-life is ~2 minutes, Rb-82's half-life is 1.27 minutes!), Fluorine-18's half-life is roughly 110 minutes- allowing for off-site commercial production and subsequent shipping for usage in imaging facilities.

Why Cardiac PET Scans Represent the Future of PET Scans

Cardiac PET scans currently represent only a small percent of the ~12 million PET procedures conducted annually, however figures from Zack's research report point towards continuing and accelerating within the Cardiac PET market.

  1. "Bio-Tech Systems notes in a June 2011 report that U.S. sales of SPECT and PET radiopharmaceuticals reached $1.2 billion in 2010 and are expected to grow to $6.0 billion by 2018 (~22% CAGR)."
  2. "Bio-Tech Systems estimates that U.S. sales of FDG (i.e. - current most commonly used PET cardiac tracer) will grow at about 14% annually from $300 million in 2009 to $880 million in 2017"

As mentioned earlier, a shift from oncology to cardiology related PET procedures seems to be foreshadowed with the looming cuts in cancer related PET scan Medicare reimbursement. The oversaturation in oncology related PET scans can be seen in FluoroPharma's corporate presentation:
(Click to enlarge)

Moreover, as seen in the image below, it appears that the transition from SPECT to PET is already in progress, probably in response to the Molybdenum-99 shortage in the 2000s (The shortage sent its per tonne price from $10,000/tonne in 2003 to $103,000/tonne in 2005).
(Click to enlarge)

Let's take a step back and examine what the Cardiac PET market is attempting to address.

The Size of Heart Disease Within the US

In 2010, the total cost of cardiovascular disease in the U.S. was ~$444 Billion (16.6% of the total spent on healthcare in the U.S.), consisting of heart conditions, stroke, peripheral artery disease, and high blood pressure. The majority of the total cost of cardiovascular disease results from its latter stages, typically after a heart attack, where costs balloon from direct medical costs such as ambulance, diagnostic tests, hospital charges, surgery, drugs, testing and cardiologist appointments, not including indirect costs such as lost productivity and death.

Moreover, as one would expect from current trends (such as obesity), the total costs of cardiovascular disease are on the rise, as shown on the graph, expected to skyrocket to $818 Billion by 2030.
(Click to enlarge)

Returning to the Cardiac PET scanning market with this in mind, given that 12.9 million Cardiac SPECT scans took place in 2009, and that the size of the cardiovascular market is projected to more than double from $358 Billion in 2015 to $818 Billion in 2030, one can expect a minimum of 28 million cardiac PET/SPECT scans a year by the year 2030. Moreover, given the current trend of obesity within the US, we can also expect an accelerating shift towards PET scans over SPECT scans in response to the signal attenuation present in overweight individuals. This leads me to believe that FluoroPharma's $15 Billion projection for PET scan procedures in 2015 is very conservative especially given the opportunity present in the expected growth rate for cardiovascular disease in addition to the SPECT to PET transition necessitated by obesity trends.

Enter FluoroPharma

Of the multiple trends elaborated upon in this article, one company is poised to capitalize on all aforementioned trends. Trading under the ticker FPMI, FluoroPharma is a clinical trial phase company, with two of its four products currently in Phase II trials.

Drug

Mechanism of Action

Potential Indications

FPMI Revenue Opportunity (Assumed Market Share %)

Pipeline Stage

CardioPET

Illustrates Heart Activity

ACS/CAD/Prostate Cancer

$.8--2.2 Billion (21-41% @ $600/dose)

Phase II

BFPET

Measures Blood Flow

Coronary Artery Disease

$.9--3.2 Billion (40-90% @ $600/dose)

Phase II

VasoPET

Detects Inflamed Plaques

Coronary Conditions

$510 Million (100% @ $600/dose)

Pre-Clinical

AZPET

Detects Amyloid Deposits

Alzheimer's Disease

N/A

Pre-Clinical

i. These figures are taken directly from FluoroPharma's presentation.

Both of FluoroPharma's drugs that are currently in Phase II primarily target the most common form of cardiovascular disease (CVD) in the U.S.: Coronary Artery Disease. Easily the most costly flavor of CVD, of the $448.5 Billion in total costs for CVD, CAD is responsible for $156.4 Billion.

CardioPET and BFPET, a fluorinated fatty acid and a fluorinated positively charged molecule respectively, offer a more focused analysis of cardiac tissue in regards to the metabolic activity (intake of energy via. Fatty acids (CardioPET)) and the blood flow (BFPET) in comparison to the current PET standard: FDG.

Here are the reasons why FPMI stands to benefit:

  1. Obesity and Cardiovascular disease go hand in hand: given SPECT's diminished performance in overweight/obese individuals (The ones most at risk for developing CVD), FPMI's PET compounds will provide a more efficacious solution for early screening.
  2. All of FluoroPharma's compounds utilize the F-18 isotope: this is a huge benefit, especially in establishing a competitive advantage over competing radiopharmaceuticals utilizing short-lived isotopes (With half-lives under 10 minutes) such as N-13, O-15, and Rb-82. As a result, FluoroPharma's F-18 compounds will be cheaper and more accessible than other PET compounds, which must be prepared in an expensive on-site cyclotron/generator.
  3. FPMI holds key patents protecting exclusivity of F-18 labeled compounds for Cardiac indications.
  4. FluoroPharma is well positioned to take a lion's share of the Cardiac PET market upon its launch. Despite competitor Bracco releasing their CardioGen-82 before FluoroPharma, the expensive generator will impede necessary SPECT to PET transition given prohibitive entry costs.
  5. Entry Point: By the time FPMI's CardioPET and BFPET enter the market (2015/2016 being the earliest), both the PET and the Cardiac PET markets should be greatly expanded, given the factors stated previously.
  6. Radiopharmaceutical Development Timeline: Because of the immediate nature of PET scan results, efficacy for radiopharmaceuticals can be quickly demonstrated. Moreover, given that widespread usage of F-18 based compounds already, presumably safety end points will also be easily demonstrable. Finally, with imaging studies, there is no patient follow-up, resulting in an accelerated clinical study in comparison to typical pharmaceutical trials.

Valuating FluoroPharma Risks

Given FluoroPharma's position as a development-stage company, investors face the obvious biotech risks:

  1. FDA Approval Risk
  2. Financing Risk

With not one, but two compounds currently in early Phase II testing, FluoroPharma stands in a position where it has a few options. Unless another company acquires FPMI, they must either establish a partnership for one or both of their radiopharmaceuticals, or conduct another round of financing in the future in order to complete clinical testing. With $1.3 Million currently sitting on their balance sheets (As of Q4 2012, I assume it's much lower now due to the initiation of both Phase II trials), the amount of cash may be just enough to hold FPMI off until the release of their next catalyst via preliminary data from their Phase II trials.

FDA Approval is contingent on two factors: the demonstration of FPMI's compounds efficacy and their safety profiles. Fortunately, if precedent is any indication, BFPET's positive testing in China and years of FDG utilization within PET scans, seem to constitute a preliminary litmus test in regards to the compounds' future efficacy and safety profiles.

Why FluoroPharma May Be The Next ARM Holdings

FluoroPharma's story, on a macro level, uncannily mimics a lot of the features present in ARM Holdings prior to its massive appreciation post-2008. The following is a list of shared parallels:

  1. SPECT to PET & Cellphones to Smartphones: In many regards, the transition between the two standards are identical: Both Smartphones and PET scans debuted as an improvement over the former standards of SPECT and Cellphones. As prohibitive costs lowered for smartphones, many made the switch from cellphones to smartphones, which is similar to what is currently occurring in the SPECT/PET market.
  2. Simply Design: Just as ARMH provides the microchip designs that power modern smartphones--FluoroPharma will provide the radiopharmaceutical design/recipe necessary for production in imaging facilities. As such, this effectively eliminates production costs (overhead) upon launch, while still resulting in a sizable royalty for every dose/chip created.
  3. Half-life & low power consumption: ARMH's energy efficient chip design leveraged the processing capabilities of the smartphone while addressing salient concerns such as battery life. FluoroPharma's compounds as well, leverage the diagnosing capabilities of the PET scanner while minimizing availability and cost concerns through the implementation of F-18's long half-life (relative to other PET isotopes.)
  4. Answering Salient Trends: ARMH's chip design were/are designed to answer the shift of digital content from the Internet to the mobile paradigm. In the same manner, FluoroPharma addresses the consequent growth in cardiovascular disease resulting from the increase of overweight/obese individuals

FluoroPharma, currently valued at roughly 80 cents/share with a market capitalization of $20 Million appears to be greatly undervalued, especially given its positioning within current healthcare trends. A Zack's analyst, Brian Marckx, arrives at a current valuation of $52 Million by utilizing a highly conservative DCF model with the following figures: Estimated 2019 revenue of $155 Million (Knocked down from $1.7 Billion) with a 2.5x price/sales multiple with a discount rate of 25%/year. I'm in complete agreement with the 25%/year discount rate proposed by Brian, especially given a development-stage company's inherent FDA approval/commercialization risk. However, I'd like to point out that the $155 Million revenue projection for 2019, which implies a <2% and <4% adoption of CardioPET and BFPET respectively, still results in a share price of $2.35/share. Which currently represents a potential 193% gainer left on the table at extremely conservative estimates.

Source: ARM Holdings' Biotech Twin: FluoroPharma