Pouring Profits Into R & D;, Biotech Firm Seeks Payoff

Corporate Focus
by Anthony Palazzo

Its first time up to bat, Chatsworth-based radiopharmaceutical developer North American Scientific Inc. (Nasdaq: NASI) hit a solid single with brachytherapy seeds used in the treatment of prostate cancer. Up a second time with Apomate, a nuclear-imaging product that could aid doctors in treating lung cancer and heart attack victims, North American Scientific is swinging for the fences.

"We're very optimistic that Apomate could be a blockbuster product," said Chief Financial Officer Alan Edrick.

Apomate is a nuclear imaging agent that binds to dying cells inside the body. In November, North American Scientific launched Phase II/III clinical trials to study the agent's ability to rapidly assess early response to chemotherapy in patients with non-small cell lung cancer, the type of cancer most commonly associated with smoking.

This trial builds on earlier successes and will probably last through 2003, Edrick said. If all goes as planned, North American Scientific will seek Food and Drug Administration permission to market the product in 2003, he said.

Apomate is also being studied for use in cases of breast cancer and lymphoma, and for its potential to locate damaged heart tissue after heart attacks.

John Calcagnini, an analyst with CIBC World Markets in L.A., believes Apomate could generate sales of $193 million for North American in 2005. No small feat for a business that had less than $20 million in revenues in 2001.

Apomate is North American Scientific's "next big growth platform," Calcagnini said. "The bottom line is, here is a company that is expert in manufacturing radioactive sources for medical treatments," Calcagnini said.

(CIBC led a $45 million stock offering for North American Scientific in December 2000.)

To fund its Apomate drive, the company has been plowing profits from its existing business into research and development.

For the year ended Oct. 31, 2001, North American Scientific posted a loss of $2 million (20 cents a diluted share), compared with a loss of $6 million (87 cents) the previous year. The most recent year, however, includes $7.6 million in research and development costs, largely related to Apomate.

Revenues rose to $19.3 million from $17.5 million, illustrating the slowing growth of North American Scientific's existing brachytherapy business.

Brachytherapy involves the insertion of a radioactive "seed," about the size of a rice grain, inside cancerous tissue in the prostate.

North American Scientific introduced its brachytherapy seeds in January 1998, and its revenues soared from $3.4 million in the year ended Oct. 31, 1997, to $5.8 million the following year. In 1999, revenues more than doubled, to $12.8 million, before growth began to slow in fiscal 2000 and 2001.

"Seeds are continuing to become very popular treatment options," Edrick said, as an alternative to surgical removal of the prostate. However, competition has grown with the market. North American, whose seeds are marketed by Mentor Corp., is currently the third-largest producer, with a 15 to 20 percent market share, Edrick said.

There is some growth left in the business, as Europe has been slower to adopt the newer forms of prostate treatment, and North American recently received approval to market the product there. But the company clearly is pinning its future hopes on Apomate.

North American entered the imaging business with the purchase of Theseus Corp., which was developing Apomate, in October 2000.

While North America's prospects haven't changed much in the past year, the cost of placing a bet on Apomate's success has varied greatly. NASI, with the profitable seed business and $5.09 a share in cash, traded for as little as $8.73 in early November. Take away the cash, and investors were paying $3.64 a share, or about $39 million altogether, for the ongoing seed business and the future potential of Apomate.

The stock rose as high as $16.90, before falling again recently. As of the Feb. 6 close, North American Scientific shares were trading at $10.97.

"We've always been pretty volatile," Edrick said. "We don't believe the change in our stock price is attributable to any specific action."

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at tpalazzo@labusinessjournal.com.

Summary

Business: Developer of radiopharmaceuticals.
Headquarters: Chatsworth
CEO: L. Michael Cutrer
Market Cap: $110 million Dividend Yield: N/A*
Total Liabilities: $2.8 million P/E Ratio: N/A
Long-Term Debt: $0
* North American Scientific Inc. does not pay dividends.

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