There has been alot of promise lately in the area of medical isotopes and their use in treating diseases through radiotherapy treatment. Below, I will hone in on three biotech companies that are showing promise in the area of radiotherapy treatments for use in treating cancer.
Advanced Medical Isotope Corporation (ADMD.OB) produces and distributes medical isotopes used in molecular imaging, therapy, and nuclear medicine to diagnose and treat diseases. The product line includes stable isotopes as well as radio pharmaceuticals. The radio chemicals include products such as F-18, an isotope for positron emission tomography (PET) imaging used for purposes such as cancer detection, heart imaging, and brain imaging. Radiotherapy, used in the treatment of cancer tumors, is making rapid progress and now includes radio chemicals that target tumors directly, thereby minimizing systemic damage as well as local damage to otherwise healthy tissue. Radiotherapy is often a last resort for cancer patients who have inoperable tumors that could respond when exposed to radioactive sources.
Founded in 2005, Advanced Medical Isotope Corporation is a microcap company with a current market capitalization in the region of $20 million. CEO and founder James Katzaroff has assembled a highly regarded team of experts in radiotherapy, nuclear medicine, and radioisotope production. The demand for medical isotopes is rising. In the United States alone, 18 million medical procedures using medical isotopes are performed every year, and the number is expected to increase at a rate of 10% annually. Currently, 10% of all non-PET radioisotopes used in the United States are manufactured in the country while the remaining 90% are imported. Local manufacturing of non-PET radioisotopes is highly fragmented, as no existing producers offer a wide range of products.
Molybdenum-99 and its derivative Technetium-99m are the most commonly used medical radioisotopes in the world. They are used in more than 50,000 diagnostic procedures in the United States every day. The isotopes face a huge threat, but also have a huge opportunity. The isotopes are currently being produced by aging reactors nearing the end of their effective lives and there seems to be no plans in replacing them. The NRU reactor in Canada is scheduled to shut down by 2015. If the shutdown goes according to plan, the world will lose about 50% of its total Mo-99 production. The company has entered into a joint venture with the existing Missouri University Research Reactor to provide up to 50% of the U.S. demand, and production is expected to start seven or eight years after commencement of the project. This represents a huge opportunity.
Advanced Medical Isotope recently signed a licensing agreement with Battelle, the largest independent research and development organization in the world. The agreement pertains to the development of high-dose radiation therapy (injectable radiogel technology) and includes eight associated patents. The new technology is a water-based biodegradable polymer that delivers yttrium-90 microspheres directly into cancer tumors. Yttrium-90 is an established medical isotope that has multiple applications in the treatment of cancer, so its track record has already been proven.
Radiogel will deliver the radioactive isotope directly into the tumor-- a dose of radiation sufficient to destroy the cancer cells. Radiogel is different from other treatments of cancer because of the use of liquid polymer that is injected into the site of the cancer. The liquid polymer quickly warms up to body temperature and forms a lattice at the injection site that traps the isotope within the cancer affected region. The treatment has the potential to irradiate tumors that cannot be removed surgically or treated effectively with other treatments. The company says that if they can introduce the therapy to the market by 2013, sales could reach $5 million to $15 million annually, with future sales potential in the range of $75 million to $100 million.
The company has the technical credibility and the licensing agreement in place to develop its new radiogel treatment. Although it cannot be evaluated in terms of conventional financial metrics, this company's stock has already seen a considerable appreciation partly because of the announcement of the licensing deal. While I see no short-term catalyst for immediate price appreciation, the stock looks promising in the long-term, and investors should watch closely for buying opportunities.
For investors desiring to have exposure to the growth prospects of the radiation therapy business but do not like the associated risks of investment in the sub-$20 million market cap ADMD, there are two other companies that should be considered. The first is Nordion (NDZ), the market leader which has its own plans to cope with the forthcoming radioisotope shortage. The company shed some businesses a couple of years ago to concentrate on three radiation-related business areas which it felt were the strongest: Sterilization, Medical Isotopes, and Targeted Therapies. Nordion has important competitive advantages, and there are a significant number of barriers to entry in this market. There are only a small number of nuclear reactor suppliers, which means that the supply of radiation products is constrained. Additionally, very few governments are likely to be receptive to building new reactors after the Japanese nuclear meltdown associated with the 2011 tsunami. Nordion has access to the existing nuclear reactors backed by extensive long-term supply contracts. Furthermore, the governments that operate nuclear reactors want to ensure that they are dealing with trustworthy customers with a good record of safe and secure transportation of radiation products, and Nordion has a long and exemplary record.
Nordion also sells to customers on the basis of long-term contracts similar to its nuclear reactor contracts. Building new nuclear reactors takes a long time. Cobalt-60, the isotope used for sterilization, must be exposed to high levels of radiation for years to reach the necessary radiation levels. Any competitor looking to enter the market must make a large upfront investment with the possibility of little to no return on the investment for many years. Additionally, the short half-life of many radiation products means that customers and suppliers cannot hold onto inventory, and there has to be a constant stream of supply. Nordion functions as a middleman, with significant expertise in radiation product transportation and logistics. It transports products directly from the reactor to the customer, with relatively little capital tied up in the business. The company does not need to make expensive investments in nuclear reactors to ensure a stable supply source.
The sterilization business sells expensive gamma sterilization machinery and radioactive compound cobalt-60 for use in the machines, and accounts for 40% of sales. Nordion is a pioneer in gamma radiation technology and has a dominant position in the small global market. Sales of cobalt-60 reached just $97 million in 2011, and account for 75% of sales in the market. The remainder of the market is not large enough to attract significant competition.
The medical isotope business accounts for a similar share of revenues but is expected to decline in the long-term as it is becoming less profitable due to price pressure. The company has an exclusive supply agreement with the aging Canadian NRU reactor, which is the only Mo-99 producing reactor in North America. Nordion does have an agreement with a Russian reactor that is expected to run at full capacity by 2016.
The targeted therapies segment accounts for 23% of Nordion's revenue, mostly from its liver cancer treatment, TheraSphere. TheraSphere is a radiation treatment used in cases of inoperable liver cancer. The radiation is targeted directly to the tumor, and because of the localization, patients can be given high dosages with only mild side-effects. Though acceptance has been slow, sales have grown at a compounded rate of 40% over the past five years. While TheraSphere is a slightly complicated treatment, it does have the advantage of being administered as an outpatient treatment without hospitalization.
I view Nordion as a strong investment opportunity because of the diversity of its business and the stability of its revenue streams, which provide attractive returns on its capital due to its strategic business model. I urge investors to conduct further research on the company and consider it as a possible investment candidate.
Another interesting company worth looking into for exposure to the radiotherapy treatment market is Spectrum Pharmaceuticals (SPPI). The company is having a good year primarily due to strong sales of its colon cancer drug, Fusilev. The company posted second quarter revenue growth of 51% year-over-year and net income of $18.1 million. This is significantly higher than the $7.2 million it earned last year during the same period. The company saw record sales of Fusilev: $56.6 million during the second quarter, versus $35 million in the same quarter of 2011. Spectrum now has $280 million in cash and cash equivalents on its balance sheet, and its $185 million of cash on hand is equivalent to around 20% of its current market capitalization.
Zevalin is another treatment produced by the company. The treatment operates in the radio immunotherapy area and uses an antibody that has been conjugated with radio isotopes. The treatment is administered as a combination of Rituxan and yttrium-90. Like Advanced Medical Isotope Corp.'s newly announced radiogel technology, Zevalin also utilizes yttrium-90 and has displayed impressive data from trials that demonstrate its efficiency. The recent labeling change in November 2011 did away with the requirement that patients would first get an "imaging dose" of Zevalin along with Rituxan and then undergo a subsequent imaging scan after a couple of days to check on drug distribution in the body. Before the labeling change, patients were not able to start treatment until one or two weeks had passed. This labeling change makes the treatment simpler and more affordable. Furthermore, in the case of really aggressive cancer, even the week or two saved by commencing treatment immediately could make a difference in the prognosis. The new data revealed by Spectrum shows promise, and indications show that it can be used on patients who have received stem cell transplants, the elderly, and those with limited chemotherapy tolerances.
Zevalin has faced all the problems associated with innovative, groundbreaking treatments, and has failed to meet its high initial expectations. When it was first approved, analysts had high expectations and forecast sales ranging from $100 million to $500 million. But actual sales have been well below expectations at just $28 million, primarily due to the high price and complications associated with administering the treatment. Spectrum is working to boost sales as the market still has huge potential. Despite these headwinds, the company has grown revenues at 60% annually, and many analysts believe that revenues will continue to grow by more than 25% in 2012 and 2013. The company is in the process of acquiring Allos Therapeutics (ALTH), which will give it access to Folotyn, a complementary treatment. Consensus estimates for 2012 and 2013 have been revised upward over the last two months. Additionally, Spectrum is not dependent on one product, unlike many other companies in the biotechnology space.
The stock is selling on a relatively low forward earnings multiple and therefore looks undervalued in the current context. The company is confident enough in itself that it considers an investment in its own common stock is in the best interest of its financial situation by recently authorizing up to a $100 million buyback of its common shares. The press release stated "Spectrum's Board of Directors and senior management have confidence in our Company's prospects and believe repurchases of Spectrum stock represent an attractive opportunity to enhance long-term shareholder value, stated Rajesh C. Shrotriya, M.D., Chairman, President and Chief Executive Officer of Spectrum Pharmaceuticals. This program gives us the opportunity to invest in our stock as we need to. We believe that the current share price represents a significant discount to the intrinsic value of the Company." If you are looking for exposure to the promising radiotherapy business, Spectrum is another solid company to consider.