Radiation treatment

Benj Gallander and Ben Stadelmann
Friday, June 25, 2004

There are only a few stocks that we won’t buy based on the products that they sell — cigarette companies don’t make the grade, and we look askance at military hardware manufacturers.

On the flip side, it’s kind of fun being able to support the enterprises in our portfolio: Stride Rite makes great shoes for kids, and the lunch at Worldwide Restaurants’ Sizzler is tasty and filling enough even if we only spend the money we save at Zellers, a unit of the Hudson’s Bay Company.

Other corporations are very attractive as investments, but the idea of using their products or services dulls our enthusiasm. We really aren’t keen to have first (or second) hand dealings with funeral operators Service Corp. International and Stewart Enterprises.

The most recent addition to the Contra portfolio, Theragenics, bought at $5.11 (US), also falls into this category. Just the mention of the words “prostate cancer” is enough to make most middle-aged men shift uncomfortably in their chairs.

The disease hits about one in six men, and estimates suggest that 2,400 men in Canada will die of the affliction this year. Theragenics is a biotechnology company that makes a brachytherapy treatment for prostate cancer, using a radioactive palladium “seed” that attacks the tumour without the need for invasive surgery.

It’s been a tough business the last few years, with revenue declining from over $50 million (US) in 2001 to $35.6 million in 2003. That’s a far cry from the late 1990s, when sales were elevating sharply and the stock crested at over $30.

Not that treatment with the radioactive seeds hasn’t been effective — studies clearly show its efficacy, especially with improved methods for ultrasound-guided implantation — but physicians have also been getting similarly good results with other treatments such as external radiation, hormone therapy, chemotherapy, and the old standby, the surgical removal of the entire prostate gland. For slow-growing tumours in elderly men, doing nothing, or in medical parlance, “watchful waiting,” can make the most sense.

When there is little scientific evidence to favour one treatment over another, financial factors come to the fore, and Theragenics was hit hard by caps placed on US Medicare reimbursements in 2002. These limitations have eased somewhat, but tough competition continues to pressure margins.

A potential positive is that the US Congress has recently adopted a resolution urging physicians to discuss all the proven options available when treating prostate cancer.

Theregenics is dependent on its TheraSeed product line, based on the palladium-103 isotope, but it is trying to diversify. The company now also sells an iodine-based product, as well as specialized equipment for dealing with radioactive isotopes.

Research and development is concentrating on finding new medical applications for the technology, such as treating vascular disease and macular degeneration, a major cause of blindness in the elderly.

Despite these challenges, we see the company as a solid demographic play. Baby boomers are aging and that should lead to an upswing in revenue. Though many treatments work well, there is data to suggest that brachytherapy leads to fewer side effects and better quality of life.

Despite the worrying cash drain, the balance sheet remains in good shape with no long-term debt and cash of over $2 a share. Our initial sell target for the stock is $11.34, but so far it has drifted farther away from that goal, currently trading at $4.55. Hopefully Theragenics will not prove to be radioactive to our portfolio.