Diverse Stocks In Modern Radiotherapy

 |  Includes: ADMD, ARAY, ARVCF, GE, RHHBY
by: Cris Frangold

The advancement of modern radiotherapy used in the treatment of cancer tumors has been moving quickly in recent times. Several companies are exploring ways to treat cancer tumors without harming the surrounding tissue. In this article, I will focus on three diverse biotech companies that are breaking through the technology barriers in this fast paced field.

Advanced Medical Isotope Corporation (OTCPK:ADMD) is unlike the majority of small biotech companies, which often pursue a single drug or treatment. The company is focused on two separate but related areas of business. It is already established in the manufacturing and distribution of medical isotopes with applications in imaging, therapy, and nuclear medicine as well as radio chemicals such as F-18, an isotope used in positron emission tomography (PET) imaging for cancer detection, and imaging of the heart and brain. Radiation therapy is making rapid advances as the treatment can be targeted towards tumors and cancerous tissue while minimizing the effect on surrounding healthy tissue. It is often the only option for cancer patients whose tumors cannot be surgically removed. With these diverse uses of radioisotopes, a focus on their supply is a very sound business model for the coming years.

There is a considerable market opportunity in medical isotopes because of the very real possibility of major supply shortages in the years to come. To understand the implications of this shortage, one must understand that isotopes are the basic ingredient in the use of nuclear medicine for diagnosis and treatment. Annually, medical isotopes are used in 18 million procedures in the U.S. and 30 million procedures globally with over 10,000 hospitals using the isotopes. Many of these isotopes are produced by aging nuclear fission reactors that are nearing the end of their useful lives and are not going to be replaced. These isotopes require specific kinds of reactors for their creation -- the reactors used for generating electrical power cannot reliably produce these isotopes.

The most commonly used medical isotopes are molybdenum-99 and its derivative, technetium-99m, currently used in more than 50,000 diagnostic procedures every day in the U.S. alone. The NRU reactor in Canada, which produces about half the total molybdenum-99 produced globally, is scheduled to shut down by 2015. There is no current replacement for this production in North America. Advanced Medical Isotope Corporation is in a good position to take advantage of the shortage because it has entered into an agreement with the Missouri University Research Reactor. The company should be in a position to provide 50% of the U.S. demand, and production will start over the next seven to eight years.

The second area in which the company is focusing is in the area of targeted radiation therapy for solid tumors. The treatment is called injectable radiogel therapy and is a delivery system for yttrium-90, which is an established and approved medical isotope that is used in a number of cancer treatments. The company has a licensing agreement with Battelle, a global independent research and development firm. The agreement gives Advanced Medical Isotope Corporation the license to eight key patents. Radiogel uses a water-based biodegradable polymer that delivers microspheres of yttrium-90 directly into cancer tumors. The liquid polymer, which is injected into the tumor, uses body heat to form a lattice which confines the isotope inside the tumor and reduces its affect on surrounding healthy body tissue. This would greatly benefit cancer patients who cannot be surgically treated. The company expects to have the treatment marketed by 2013 with annual sales estimated between $5 million and $15 million, and peak potential sales in the range of $75 million to $100 million.

The company has a highly respected team of specialists as well as a proven track record in manufacturing medical isotopes. Like all biotechnology investments, this is a high-risk investment because there are many factors like regulatory approvals that the company cannot control. Additional risk is also added due to the nature of the company's securities being traded on the OTCBB with its more limited liquidity and greater potential for upside and downside price manipulation. But I believe these risks are minimized by diversification into the medical isotope supply and a likely clinical candidate through its newly-acquired radiogel technology. Advanced Medical Isotope is an established isotope producer and has set its sights on exploiting the upcoming molybdenum-99 shortage with its MURR joint-venture. The technology that it has licensed for radiogel therapy is from an organization that is highly respected for the quality of its work. Success in either venture could be a huge catalyst for this $17 million market cap company.

Accuray (NASDAQ:ARAY) is another biotechnology company that operates in the area of radiation treatments for oncology. The company's leading edge technologies are the CyberKnife and TomoTherapy Systems, which are designed to deliver radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy, and adaptive radiation therapy. Over 600 of their systems have been installed in well-known hospitals throughout the world. The company's latest innovation in the TomoTherapy system is the availability of VoLO Technology, a new treatment planning system that integrates advanced graphics processing technology and a new calculation algorithm to provide more efficiency, and its ability in developing even the most complicated radiation plans. The enhancement is the first of its kind in the field of planning for radiation oncology treatment. The technology provides medical personnel with the power to develop highly flexible, personalized plans for each patient in minimal time. It also creates a platform for physicists and dosimetrists to work interactively and develop the best intensity-modulated radiation therapy (IMRT) treatment plans for the most difficult cases.

The acquisition of TomoTherapy seems to have been motivated by Accuray's desire to expand into more conventional and readily marketable products. But TomoTherapy had unsatisfactory profit margins caused by issues relating to reliability and uptime with the Hi-Art systems. Accuray has started to make progress in improving the service margin structure of the acquired TomoTherapy business, but fixing the reputation and the acceptance of the Hi-Art platform is going to take a while. But the management has made genuine progress in integrating the acquisition and fixing its problems.

Accuray's results for the second quarter show a decline of 23% in product revenues, while service revenues went up by 17%. The withdrawal of Siemens (SI) from the linac market already seems to be generating incremental equipment sales for Accuray. Product gross margins dropped slightly to 56%, but service margins improved to 13%. These margins were insufficient to generate an operating profit, although the loss per share was lower than consensus estimates. The company could possibly be an acquisition target of Fujifilm or General Electric (NYSE:GE), which are aggressively building up their healthcare businesses.

I believe Accuray's technology is solid, but there is much to be done on the marketing front. $70 million in orders with tight margins for a $440 million market capitalization company is not sufficient to bring in the kind of success that generates returns for investors. Accuray must work much harder at convincing customers that it has much to offer when compared to the competition. I recommend watching this company closely to take advantage of any favorable developments in the future.

The entire radiotherapy business got a big shot in the arm when two well-established companies, Areva (OTCPK:ARVCF) and Roche Holding AG (OTCQX:RHHBY), announced that they would come together to develop a new radioimmunotherapy platform for treating cancer. The partnership combines the skills of Roche in engineering antibodies with Areva's expertise in developing radioactive isotopes. This will provide a boost in the use of radioisotopes in cancer treatment because it will utilize the Lead-212 radionuclide combined with highly specific antibodies for the targeted radiation of cancer cells while reducing the exposure of healthy tissue. Areva had already started a phase 1 trial in July 2011 using Lead-212 and a monoclonal antibody. The trial is scheduled to last for two years, and no interim data is available. Lead-212 is a promising and unique isotope that operates at short range with an energy level that minimizes the exposure of healthy parts of the body.

Roche Holding AG does not have any major patent cliff problems over the next few years. The company maintains a strong position in leading markets as well as a healthy drug pipeline. The company reported encouraging results for the second quarter that were ahead of consensus estimates. Revenues rose by 4%. The main contributors from the pharmaceutical business were Avastin, Herceptin and Rituxan. Operating profit rose by around 5%. The company is already established globally in biologics, especially in the areas of oncology and the treatment of macular/retinal disease.

The company has seen its share of disappointments, and the failure of Dalcetrapib, an inhibitor for cholesterol, reinforced the thesis of many analysts that Roche was not particularly good at developing drugs outside the oncology space. Similarly, it has transformed its plans for hepatitis C treatment to focus on emerging markets. I think this makes sense given the potential of these markets and the strong market position of the company; but some analysts see this as an admission that it is giving up in the U.S. because of the competition. I think there is still value in Roche Holding AG as a long-term investment. Not enough credit is given to the non-oncology drug development pipeline, and a blockbuster here would do wonders for the bottom line. The hepatitis C indication could very well provide the shot in the arm the company needs not only for its bottom line, but to gain more analyst and investor support for this already impressive company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.