Medical Firm Gets Shot in Aim From Key Acquisition.

Chatsworth-based North American Scientific Inc. is gaining admirers on Wall Street.

With the company's recent moves to branch out from its core business of radiation therapies used to treat prostate cancer, analysts have in recent months boosted their ratings and investors are taking note.

The company's stock has shot up from $9 a share in February to around $22 a share through most of August. As of last week, it was trading at about $26 a share.

While the company continues to see revenue growth of around 30 percent a year, analysts say the recent stock boost comes from North American's announcement earlier this year that it would acquire Theseus Medical Imaging, maker of apomate, a product that when fully approved is expected to determine a patient's response to cancer chemotherapy or early signs of rejection of a heart transplant.

"The Theseus Imaging deal put us on the radar screen for Wall Street," said L. Michael Cutrer, the company's president and chief executive. "From a market perspective, it's expected to be a multibillion-dollar industry."

Apomate is now in clinical trials in the United States and promising early results were published this summer in Britain's top medical journal, The Lancet. The chemical is injected into the patient and, using standard hospital imaging equipment, shows the extent of cell damage in a patient's heart or other organs, allowing doctors to gauge a patient's status within hours or days rather than the weeks or months the process can take now.

"It's all new and could change the way medicine is practiced," Cutrer said. "We believe it will possibly be available at the end of next year for organ transplants."

Key product drives growth

The three analysts polled by Zack's Investment Research rank North American a strong buy.

"The stock's performance is really tied to apomate," said John Calcagnini, senior medical device analyst for CIGI World Markets. "In the long inn, the real ace in the hole, the blockbuster, is apomate."

Analyst Charles Olsziewski, senior vice president of research at PaineWebber Inc., upgraded the stock to a "buy" in June, with a target price of $32 within the next 12 months.

"One reason is the consistent and steady growth in their core business," Olsziewski said of the upgrade. "But now they are entering their next phase of diversification with this acquisition. Apomate is very significant."

Cutrer said the company expects to complete the acquisition of Theseus by late September.

While Wall Street applauds the diversification move, North American is also seeing continued growth in its core products.

The company reported net income of $1.4 million (21 cents per share) for the third quarter ended July 31, compared with net income of $981,000 (14 cents) for the like period a year ago. Revenues were $4.5 million vs. $1 million.

Over its 10-year existence, North American has become a recognized player in the field of radiation therapies for cancer and other diseases. Cutrer started the company in 1990 as a maker of standardized radiation products sold to hospitals and medical laboratories for use in nuclear medicine. The radiation products are also used in the industrial and environmental sectors, where they can measure the thickness of materials or the geological composition of a certain geographical area.

In 1997, North American began its move into the therapeutic radiation market when it was granted FDA approval to make brachytherapy products used in the treatment of prostate cancer. Brachytherapy products are radioactive seeds or pellets, which are implanted into the prostate with thin needles to treat cancerous tissue.

Radioactive isotopes 

The company's brachytherapy product line is now the biggest revenue generator for North American and the reason for the company's 30 percent average annual revenue growth rate.

"The company has been very successful in the brachytherapy market," Calcagnini said. "They are generally regarded as experts in the development and manufacturing of radioactive isotopes for multiple indications."

The company is, however, facing increased competition in the radioactive seed business from new entrants to the market Syncor International Corp., UroMed Corp. and UroCor Inc., according to Olsziewski.

North American controls between 10 percent and 15 percent of the brachytherapy market. Cutter said the competition has yet to mount any significant threat to North American's market share.

"It remains to be seen," Cutrer said. "We think we're well positioned for the increased competition. We have a high profit margin on our products."

Cutrer said the company is pushing to increase its market share in brachytherapy to 30 to 40 percent.

"We're continuing to diversify more in the area of therapeutics and diagnostics," Cutrer said. "The market opportunities are there."