A Promising Path for Cancer Therapy
Growing public awareness of prostate cancer has been a boon to North American Scientific Inc., a maker of radioactive “seeds” used in a relatively new treatment for localized prostate cancer called brachytherapy.
Prostate cancer struck 180,000 American men last year and claimed 37,000 lives, intensifying the search for new and improved treatments for the disease.
Powered by brisk sales of its high-margin seeds--rice-sized iodine and palladium pellets used in brachytherapy--North American Scientific’s 1999 earnings of $3.4 million (on sales of $12.8 million) were a threefold increase over 1998.
The company earned $1.5 million in the third quarter ended July 31, and analysts are projecting net income of $5.7 million on $18.1 million in sales when fiscal 2000 ends Oct. 31.
The accounting firm Deloitte & Touche recently named North American Scientific to its Los Angeles “Fast 50,” a ranking of the fastest-growing high-tech firms in Southern California based on percentage of revenue growth from 1995-’99. And Ernst and Young hailed North American Scientific’s 44-year-old president and chief executive, Mike Cutrer, as one of the “Los Angeles Entrepreneurs of the Year” (in the health-care/life sciences category) in June.
Clearly, the company is chugging along nicely, but some analysts think greater glory lies ahead. Shortly, North American Scientific will acquire Theseus Imaging Corp., a Boston-based developer of a new imaging agent called Apomate. This radiopharmaceutical, which allows doctors to evaluate a patient’s response to chemotherapy, among other applications, could boost North American Scientific from a small medical device firm into a specialty pharmaceutical power, they say.
“That’s going to be a blockbuster,” John Calcagnini, an analyst with CIBC World Markets, said of Apomate.
Today, sales of the radioactive seeds are North American Scientific’s engine, accounting for 82% of company sales in the third quarter.
Three and a half years ago, the company was a $3.5-million industrial firm making reference sources used to calibrate instruments to detect radioactivity. The company has been profitable since fiscal 1993, its second year of operation.
But as a public entity, North American Scientific needed to push into new, larger business segments.
Cutrer targeted the fledgling brachytherapy seeds market because of the company’s expertise in radioactive sourcing.
Prostate cancer--the second-most prevalent form of cancer among men, behind skin cancer--has become a hot topic in recent years, as high-profile men, such as Gen. Norman Schwarzkopf, New York Mayor Rudolph Giuliani and Intel Corp. Chairman Andy Grove have gone public about their conditions. This openness has led to increased discussion about treatment options.
“We call that the ‘Betty Ford effect,’ ” Cutrer said.
Standard care for prostate cancer that hasn’t spread outside the gland is the surgical removal of the prostate. That frequently leaves patients incontinent or impotent, or both. So growing numbers of patients are opting for localized radiation treatments, which have similar efficacy rates to surgery, according to 10-year studies.
In brachytherapy, physicians inject tiny radioactive pellets, or seeds, that emit radiation directly into the tumors. This treatment costs less than surgery because the procedure is done on an outpatient basis.
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Last year, the company moved into its 24,000-square-foot corporate headquarters in an industrial park in Chatsworth. Here it manufactures its palladium brachytherapy seeds in a series of all-white halls and rooms that could pass for discarded sets from Stanley Kubrick’s “2001: A Space Odyssey.”
There’s an eerie quiet surrounding a fully-automated assembly line manned by a handful of technicians in lab coats and safety glasses. The company has 51 employees in all and a 16,500-square-foot facility in North Hollywood where it makes other products.
Less than four years ago, before brachytherapy became a popular treatment option, North American Scientific had only 12 employees. Cutrer, a chemist by training, has spent considerable energy attracting management and technical staff by offering stock options to all employees.
Cutrer, a low-key man, isn’t one for uttering bold statements about the company’s purpose or dreams of wealth and power. Instead, he quietly focuses on the bottom line. Colleagues say he delegates responsibility to key managers. “We have a lot of people here who like what they do,” Cutrer said.
Cutrer had never been an entrepreneur when he hooked up with scientist/venture capitalist Irv Gruverman a decade ago. Gruverman, now chairman of North American Scientific, helped Cutrer raise capital and Gruverman’s large reputation in the radiopharmaceutical field helped the enterprise gain credibility on Wall Street.
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In the world of radiopharmaceuticals, Gruverman is a star. He was executive vice president of a firm in the 1960s that commercialized Thalium 201, an isotope that allows doctors to determine locations of heart blockages. It became one of the world’s most widespread diagnostics.
Also on the North American Scientific board is Dr. Allan Green, an influential industry consultant and lawyer.
“This is a team with a great deal of experience in developing medical applications for radioactive isotopes,” CIBC’s Calcagnini said.
At present, analysts see continuing strong results from brachytherapy seeds as the treatment gains popularity. Leerink Swann & Co. analyst Navrose M. Alphonse estimates the U.S. brachytherapy market at $150 million, with an 18% to 20% annual growth rate.
Alphonse predicts North American Scientific’s seed sales will grow to $40.6 million by 2003, as marketing partner Santa Barbara-based Mentor Corp. makes further headway at the 5,000 U.S. hospitals with nuclear medicine capabilities.
Cutrer said brachytherapy is likely to be North American Scientific’s main revenue generator for at least two years. But after that, he’s looking to Theseus, and its product, Apomate, for greater returns.
North American Scientific is buying Theseus in a stock swap worth around $4 million. The deal also involves royalty payments to the founders, which include Gruverman and Green. The deal is expected to close by year’s end.
Apomate is a radiopharmaceutical agent used in imaging a biological process known as apoptosis, or programmed cell death. When used in evaluating the progress of chemotherapy, for example, it works like this: A doctor will inject a patient with Apomate, a special human protein that adheres to dying cells. A series of photographs of the tumor are taken with a nuclear medicine camera. Within a few days, the doctor can see if the bad cells are dying and, hence, if the treatment is working. At present, with chemotherapy, physicians have no way to tell.
A year ago, when North American Scientific announced the Theseus deal, Apomate hadn’t yet been tested on humans.
“It was a big risk,” Gruverman said. Since then, the company has invested $7 million to fund clinical trials, and results are highly encouraging. At present, there are three FDA-approved clinical trials protocols in varying stages of development.
With luck, the company expects to get the FDA’s go-ahead to start selling Apomate for use in determining cardiac rejection in heart-transplant patients by late 2001 or early 2002.
Apomate is also being evaluated for use to assess damage in patients after heart attacks, but those approvals aren’t likely until later.
If Apomate is approved, demand could be huge, considering how many patients suffer through nasty side effects from chemotherapy, such as nausea, hair loss and sometimes even death. Normally, it takes weeks or months of treatment with potentially toxic drugs before doctors know if a regimen is achieving the desired effect.
“It could change the way medicine is practiced today,” Cutrer said.
Leerink Swann & Co.’s Alphonse predicts that if no additional hurdles emerge on Apomate’s path to market, it has the potential to become a $400-million business within five years of its introduction.
It’s Apomate’s promise that has analysts recommending North American Scientific’s stock, which closed Monday at $22.25. Share prices are up 24% in the last three months, and 151% over the past year.
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Alphonse has set a one-year target price on the stock at $45 a share. The way he sees it, the stock is undervalued. Specialty pharmaceutical stocks currently trade at 40.8 times earnings. North American Scientific, still trading as a medical device company, is trading at 28 times earnings.
“My thesis is that as the news of Apomate comes into the market, you’ll start to see it [North American Scientific’s stock] trade up closer to those averages,” Alphonse said.
Of course, Alphonse’s optimism is based on the premise that Apomate will be a blockbuster, and at this point, that can’t be known. But if there is a snag there, North American Scientific’s management has other potential new businesses in its sights, most likely in new medical applications of radioactivity. “We are actively looking for new adventures,” Gruverman said.
