Isoray: Impressive 98% Success Treating Prostate Cancer

| About: IsoRay, Inc. (ISR)

Recently, I started consulting for a company that has the closest thing to a cure for prostate cancer that I have ever seen, and I have been aggressively accumulating shares. Although I may be biased, the more I learn about this company, the more convinced I am that its products may become the next standard of care for many types of cancer. The company is Isoray (ISR), and it manufactures and sells a powerful new cancer treatment utilizing a new isotope, Cesium 131, in seed and liquid brachytherapy (a highly effective and improved form of radiation therapy).

According to Dwight Babcock, the CEO of Isoray,

Cesium 131 is probably the biggest advancement in 20 years in low-dose radiation therapy and brachytherapy. We have submitted for publication our five-year results. In prostate alone our five-year history shows we've achieved 100% success with low-risk prostate cancer and 98% success at five years for low and intermediate risk patients. These results are superior to any other low-dose radiation isotope or any other modality such as prostatectomy (cutting the entire prostate out) and/or external radiation therapy.

A 98% to 100% cure rate for prostate cancer is phenomenal. The cure rate for a prostatectomy or external beam radiotherapy is about 89%, and the side effects are horrendous. With Isoray's technology, the side effects are short-lived and minimal. Patients have literally played golf the day following the procedure.

Brachytherapy involves the precise placement of radiation sources directly at the site of the cancerous tumor, as opposed to to EBRT (external beam radiotherapy) in which high-energy x-rays are directed at the tumor from outside the body, killing good cells along the way. An important feature of brachytherapy is that the irradiation only affects a very localized area around the radiation sources. Exposure to radiation of healthy tissues further away from the sources is reduced, so there is less collateral damage.

Also, if the patient moves or if there is any movement of the tumor within the body during treatment, the radiation sources retain their correct position in relation to the tumor. These characteristics of brachytherapy provide advantages over EBRT - the tumor can be treated with very high doses of localized radiation, while reducing the probability of damaging healthy tissues around the tumor.

A course of brachytherapy can be completed in less time than other radiotherapy techniques. This can help reduce the chance of surviving cancer cells dividing and growing in the intervals between each radiotherapy dose. With brachytherapy, the procedure is done once, typically on an outpatient basis, whereas with external beam radiotherapy, patients need to return every day for 30 to 45 days in order to receive treatment. Brachytherapy makes treatment accessible and convenient and enables most patients to tolerate the procedure very well.

Isoray takes brachytherapy to a whole new level by using its patented Cesium 131 seeds or liquid as the radiation source. This offers many advantages over the traditional iodine and palladium radiation isotopes. These two isotopes both have lower energy than Cesium 131 and have a much longer half-life. In other words, Cesium 131 delivers its dose much more rapidly to the cancer site than the others do. Cesium half-life is only 9.7 days whereas iodine's half-life is 59 days. Isoray improves a person's ability to receive the cancer killing agent much more rapidly and then have it become inert much sooner in the body.

Because of iodine's long half-life, it is common for a patient to experience side effects six months to nine months after the treatment, whereas with Cesium 131, the side effects are minimal and disappear within 60 to 90 days. For patients, that's a huge improvement.

Another important fact is that Medicare and private insurance cover Isoray's products so it has no limitations in receiving reimbursement. Isoray offers the type of solution Obama Care needs in offering a lower cost alternative with superior results for the patient. Those of us who have been involved in biotech companies know that reimbursement can make or break a company.

After achieving success in the prostate cancer area, Isoray, is now marketing products into other areas as well, including lung, head and neck, brain, eye, and colon cancer, and is developing solutions for breast and esophagus cancer. Isoray has a big advantage in these new markets because in many cases it will be calling on the same physicians the sales reps already know from the prostate market. This expansion into new areas will provide the revenue growth that will drive Isoray to profitability.

Just how big is the market for Isoray? There were an estimated 1,479,350 new cases of cancer diagnosed in the U.S. in 2010:

Prostate – 217,730

Lung – 222,520

Head and Neck – 52,540

Brain – 22,020

Eye – 2,480

Breast – 209,000

Colon – 102,900

Isoray has FDA approval in ALL these markets, and the company's annual revenue potential exceeds $150 million. Revenue should begin to ramp up as the medical community discovers the benefits of Isoray's products. For example, a Silicon Valley hospital has found that Cesium 131 brachytherapy can reduce a lung cancer patient's recurrence rate from 20% down to 1%. That's a huge improvement.

After several conference calls with Dwight Babcock, Isoray's CEO, I learned some additional details that were encouraging:

Number 1: Isoray has only penetrated about 4% of the market, giving it huge upside potential.

Number 2: Cesium 131 brachytherapy works better, and produces fewer side effects than any of the existing solutions.

Number 3: This type of therapy is less expensive than most other forms.

Number 4: Isoray is expecting to reach profitability in about 15 months, and believes the company has enough cash to get to that point, (i.e. no more dilution).

Number 5: Isoray only has 26 million shares outstanding. The company has done a good job of keeping dilution to a minimum.

Number 6: The company's margin has more than doubled in the past year, and should continue to improve.

Number 7: Isoray has a monopoly on the Cesium 131 brachytherapy market. Its seven issued patents and FDA approval for seven types of cancer make the barrier for entry almost impossible.

Number 8: Doctors using Isoray products have treated over 7,000 prostate cancer patients with no serious side effects.

Number 9: The company has been able to reduce expenses from $1.25 million a month down to $200,000 a month.

Number 10: The recently acquired GliaSite catheter (FDA approved) was bringing in $5-$6 million annually for its original owner, Hologic (HOLX). If Isoray can capture half of that amount with the GliaSite catheter, it will add 50% to its annual revenue. Isoray expects to book revenue this year for its GliaSite catheter.

Number 11: Isoray's recent deal with the M.D. Anderson Cancer Center will add about 10% to Isoray's annual revenue.

In addition, there are two near-term events that could push the stock price higher:

First, Isoray is expecting a significant revenue increase in Q1 of 2012. The company's revenue has been flat, so any increase in revenue will be viewed positively by Wall Street. A 30% share price spike on improved revenue would not be surprising.

Second, the company will be publishing the results of its five-year study sometime before the end of this year. The data that has been released thus far have been excellent, and this report could have a positive effect on the share price.

But, here's the icing on the cake: with a $21 million market cap, Isoray is an ideal buyout candidate. Some of the big Pharma companies such as Merck (MRK), Bristol-Myers Squibb (BMY), and Pfizer (PFE) could really benefit from Isoray's products. As some of you know, my first medical device company was sold to Johnson & Johnson (JNJ), and in my experience, Isoray is just the type of company that big Pharma is looking for. Isoray has a best in class, highly efficacious, low-cost product that could benefit from the marketing and distribution machinery of a larger company. I don't like to buy a company based on buyout speculation, but in this case that possibility makes a nice sweetener.

What are the risks with a microcap company like this?

First, another company could develop an equal or better solution than Cesium 131, which would put competitive pressure on Isoray. While I don't expect this in the near term, it certainly bears consideration.

Also, the CEO could take a job with another company. Dwight Babcock is an exceptional CEO, and I would imagine he has other attractive job offers. If he were to leave Isoray, the immediate effect on the share price would be negative. However, this seems highly unlikely. My impression is that he is very enthusiastic about Isoray and has no plans of leaving. He owns a lot of stock options so it's in his best interest to continue to develop this company.

Finally, in a thinly traded stock like this, you will need to be patient in order to buy or sell. On the plus side, once Wall Street becomes aware of this company and begins buying shares, the share price should move up rapidly.

In general, the pluses far outweigh the minuses. Isoray is not some start-up with no revenue, no completed clinical studies, hoping for FDA approval. Its product line is FDA approved, and the company owns a strong patent portfolio. It just completed a five-year study on prostate cancer and the results were spectacular. Isoray is already generating significant revenue, and is nearing profitability.

Isoray shares are way too cheap. With all this company has going for, I think the shares are worth at least 50% more than today's share price. If this company becomes profitable within 15 months, we should be looking at a share price well above $3.

Isoray owns the patents to a technology that could become the next big thing in cancer treatment. A 98% to 100% success rate is extremely impressive, especially when you consider the reduced side effects, and lower cost. Isoray's achievements can no longer be ignored by patients, the medical community, or investors.

Disclosure: John Ford is a general business consultant for Isoray Incorporated and a shareholder. For disclaimer and SEC rule 17 b disclosure information, please click here.