By Douglas Murphy-Chutorian, MD

In general, successful micro-cap companies labor on for years before achieving any recognition (i.e. analysts and investors) for their efforts.  Meanwhile, these inexpensive stocks might rise 100% or more in share price, as it takes only a little interest to move the needle.  And should the company emerge into the spotlight of sell-side analysts and hedge fund investors, substantially bigger gains are possible.  On the other hand, failure to execute on the business plan leads to anonymity and disregard.

This periodic publication will attempt to identify the hidden gems among publicly-traded healthcare microcap stocks with a higher than usual likelihood of success.  The write-ups are intentionally concise and not exhaustive to better focus on the key factors that favor the company’s growth prospects.

Isoray (ISR) has FDA-cleared products that are radioactive seeds used in cancer treatment.  Heretofore, these seeds were made with radioactive iodine.  Now, ISR has substituted radioactive cesium, which has considerably shorter half-life than iodine.  The shorter half life of an isotope allows patients to go home sooner without fear of irradiating their families because the radiation has dissipated. Also, the release of the radiation faster means the cancer gets more dose in less time which may improve outcomes.  See data below from the company’s web site.

The seeds are incorporated into many types of delivery systems, for example, bioabsorbable surgical sutures that can be sewn in place and absorbed by the body without the need for removal.  In the case of iodine, some concern exists should the seeds migrate and irradiate other parts of the body.  Shorter half life of cesium means this is less of a risk.

Cesium-I3I has delivered 90% of the intended dose 33 days post implant, compared to 32% of the I-125 dose. Cesium-I3I has delivered 99.8% of the dose at 90 days, when bioabsorbable sutures/mesh have most likely dissolved, compared to 65% of dose delivered for I-125. Cesium-I3I delivers uniform and symmetrical radiation penetration for a homogeneous lung implant.

For the first 26 days after implant, the dose rate from Cs-I3I is greater than from I-125. After 26 days, the dose rate from I-125 implant exceeds that of Cs-I3I. With Cs-I3I, radiation safety precautions can be discontinued much sooner than with I-125.

ISR initially launched its product in the prostate cancer market and now does about 1,500 cases per year.  However, the company believes the use of cesium in breast cancer where it might reduce trips to the hospital from 5 to 1 is a more important application.  Also, the product is being used in lung surgery where recurrence of tumor might be reduced from 20% to 3% or less.

ISR’s most recent press release details an agreement with Hologic (HOLX) for rights to a FDA-cleared in-dwelling catheter device for brain cancer therapy.  ISR has made a liquid form of its radioactive cesium which it hopes to instill in the catheter placed near the brain tumor.  HOLX’s core focus is women’s health.  The brain cancer product came with the acquisition of a breast cancer catheter product and doesn’t fit with HOLX.  Of interest, the brain cancer catheter had sales of $8 million in 2007.

Currently, ISR does about $5 million in annual revenue, has a burn rate of $300,000 per month and has $2 million in cash.  Price per patient is about $4,000.  Its largest expense is the monthly contract purchase of bulk radioactive cesium, but its products only use a fraction of what is bought.  Gross margins are minimal but will improve steadily as revenue grows. Breakeven is projected by sell-side analyst at $8 million revenue by 2011. Market cap is $33 million.  Only one analyst covers the stock.  The stock price is currently $1.45 with a 52-week high of $2.06 per share.

It is apparent that ISR will need to raise additional capital in 2010, which usually depresses the stock price.  However, ISR has a slew of potential positive news events related to new customers, increased sales and more clinical data which could raise the stock price both prior to and after the effect of an equity offering.

The sales goals are simply to hire more salespeople to convince more surgeons and radiation oncologists at existing customer sites to employ cesium instead of iodine in more tumor types.  Also, the sales team is trying to start up new customer sites.

In conclusion, ISR is a micro-cap that one might tuck into the stock portfolio and hold for a year or two waiting for its sales to grow and for it to be discovered by the Street.  In the interim, one owns a revenue-generating company with low burn rate, FDA clearance to market its products for all tumor types, growing sales presence and a solid, dependable management team.  Also, ISR might be an interesting tuck-in acquisition for a number of larger companies.

Charts source: http://www.isoray.com/lung_cancer_treatment.asp

Disclosure: Long ISR at the time of writing.

The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. No one should act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Filed under: Healthcare Stocks

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