North American Scientific sees payoff in new strategy.

OVER the past three years, North American Scientific Inc. has acquired three companies in order to expand into some of the newest areas of radiopharmaceuticals.

But none of that mattered much last month when the company announced it would have to extend the phase 2 clinical trials for one of the new products it is developing.

The news sent shares in the Chatsworth-based company plummeting 75 percent to $7.69 on Oct. 14, the day after the announcement, compared to a previous high of more than $11, although shares climbed back to the $9 range by the end of the last week.

Taking a beating for testing setbacks comes with the territory in the biosciences industry, but at North American, the recent Wall Street reaction overshadowed a larger repositioning of the company that has been underway since 2000 and one that shows signs of finally paying off.

"We were projecting $14 or $15 million in revenue this year and next year we were anticipating a rate of $20 million," said L. Michael Cutrer, CEO of North American. "Now with NOMOS, we're probably looking at something like $58 million."

NOMOS Corp. is the latest in a string of acquisitions designed to position North American as a vertically integrated provider of products and services for radiation oncology. The just-announced deal is expected to close early next year.

In addition to NOMOS, North American Scientific also acquired Theseus Imaging Corp. in Worcester, Mass. in 2000 and, last August, the company bought Radiation Therapy Products, a Seattle firm.

Along with brachytherapy seeds, a therapy used to treat early stage prostate cancer and North American's first entry into the radiopharmaceutical field, these acquisitions are designed to position the Chatsworth company as a vertically integrated supplier to the industry.

Building In-house

At the same time, North American moved this year to build its own sales and marketing team instead of the distribution agreement it has had over the past five years with Mentor Corp.

"So what's happened now is we have more or less reinvented ourselves," said Cutter. "The reason we weren't doing better from a revenue standpoint, we did take a hit as we transitioned (the sales team). But we got our transition team up and running and we acquired NOMOS, which will help drive revenue going forward."

North American's most recent quarterly results reflected a decline in revenues to $3 million from $5.3 million in the like period a year ago due to the transition to an in-house sales team and the R&D costs for Hynic-Annexin V, the product now in clinical trials.

The company recorded a loss for the period, which ended July 31, of $2.8 million or $0.28 per share, compared with a loss of $350,000 or $0.03 per share for the comparable period in 2002.

"The Annexin program, we're spending about $1.6 million in the third quarter, on $3 million in sales, so it's not insignificant," said Cutrer. "This year we also incurred the cost of the sales and marketing force, and so earnings and operational costs are not representative of where we expect to be."

The payoff on the NOMOS acquisition should begin as early as next year.

NOMOS invented what's known as "intensity modulated radiation therapy," a form of cancer treatment that concentrates the dose of radiation on the tumor itself, with less impact to the surrounding tissue. Because the radiation can be delivered so accurately to the exact site of the tumor, higher doses can be used, promising greater success in the treatment of the cancer.

Market growth expected

IMRT currently accounts for only about 20 percent of the treatments used for prostate, head and neck cancers as well as any tumors where sensitive surrounding tissue such as optic nerve or the brain must be protected from high levels of radiation. But it is expected to grow dramatically.

"Because of its accuracy, it has been projected that it could be as much as 80 percent of external treatment options," Cutrer said.

North American Scientific Inc.
Stock Prices

[GRAPHIC OMITTED]

YEAR (Oct. 31)                        2002        2001

Revenue (millions)                   $20.8       $19.3
Cost of Sales (millions)               7.6         6.9
Operating Expenses (millions)         15.5        13.7
Operating Loss (millions)            (5.0)       (5.0)
Net Loss (millions)                  (5.2)       (2.0)
Loss Per Share                     ($0.51)     ($0.20)

Quarterly Net Income (millions)

[GRAPHIC OMITTED]

SUMMARY

Business: Radiation Oncology
Headquarters: Chatsworth
CEO: L. Michael Cutrer
Market Cap: $94.2 million Dividend Yield: N/A *
Total Liabilities: $4.2 million P/E: N/A
Long-Term Debt: 0

* North American does not pay dividends.