Treatment could turn into winner for both addicts and investors.

FOR drug and alcohol addicts who can scrape up $15,000 but are disinclined to check into a traditional rehab center, it may seem like a good bet to go to a two-weekend outpatient program at a Prometa Center.

But for investors in Prometa's parent company, West Los Angeles-based Hythiam Inc., the bet is a little less clear. Even the four Wall Street analysts covering the stock temper their "buy" recommendations with several caveats.

"This is what I call a binary stock--it's either going to be a winner or the company is going to go out of business," said Gene Mannheimer, a San Diego-based health care equity analyst at Caris & Co.

The company has steadily grown over the past two years, even while lacking clinical trials that would burnish its legitimacy, and solid U.S. patents that would protect it from copycats.

Prometa advocates a three-pronged approach for treatment: medication, nutrition and counseling. Prometa's advocates are passionate about the treatment's potential to revolutionize substance-abuse treatment.

"Crack addicts can't sit in front of a crack bag and not light up, so getting a crack addict not to think about crack is a feat," said Dr. Matthew Torrington, who became medical director of the company's flagship Prometa Clinic in Santa Monica this year, after witnessing what be considers astounding results in patients he had referred to a Prometa-licensed doctor. "The meds aren't a magic bullet, but I've seen them make a difference."

Hythiam's business model is both a strategic strength and a potential Achilles' heel. Until recently, the company didn't manage its own outpatient treatment centers. The focus was on licensing the Prometa name and treatment protocol to about 45 doctors, outpatient clinics, government agencies, and an increasing number of inpatient facilities. The company collects a fee for every patient treated.

There are two potential hazards to Hythiam's growth.

The first is that the company could be accused of promoting an unproven technology. Until results from the first controlled clinical trial were released this summer, the company had to rely on anecdotes and data compiled by some of its licensees.

A second risk for the company lies in protecting its intellectual property. The company had some success in Europe and last month won a Mexican patent for its cocaine treatment, but has yet to gain key patents in the United States, likely to be its largest market.

Three-pronged approach

The protocol involves administering three generic medications and prescribed nutritional supplements in a specific sequence over two weekends--about three weeks apart--with behavior modification therapy in between. The goal is stop the cravings and side effects of withdrawal long enough to enable the counseling and group therapy to take hold.

The U.S. Patent and Trademark Office earlier this month turned down Hythiam's application relating to the treatment protocol for alcohol abuse, but has yet to rule on the drug abuse treatment patents.

Analyst Glenn Garemont at First Albany Capital told investors not to be surprised by the initial rejection since there is some history of use of one of the drugs for alcohol abuse. He expects the company to eventually win on appeal.

The potential payoff for Hythiam investors is substantial. The market for alcohol and substance dependence treatment is large, with at least 22.2 million people in the United States alone needing treatment as of 2003, according to a federal study. Only 1.9 million of them received treatment at a specialized facility.

Treating chemical dependency can be extremely difficult because traditional programs may not get to the root physiological cause of an individual's cravings. In addition, severe withdrawal symptoms from an abstinence-based program can cause a patient to backslide. An estimated 50 percent of those treated for alcohol dependence relapse within three months, according to studies.

Hythiam wasn't required to get U.S. Food and Drug Administration approval before treating patients since the three medications it uses were approved years earlier for other uses. Once a drug is approved, a doctor can prescribe it for so-called "off-label" uses.

Studies under way

Dr. Walter Ling, director of UCLA's Integrated Substance Abuse Program, who launched a double-blind placebo-controlled study of the Prometa methamphetamine protocol in June, expects to report his results in a year or so. In his study, neither patient nor doctor will know until after the treatment whether the patient received medication or a placebo. The company has funded a similar study for its alcohol program at a university in South Carolina.

"Some of (Prometa's) approach is pretty common sense, but their use of medication to affect lasting changes without the patient having to keep taking it is different," said Ling, adding that Hythiam approached him last year with a grant, but did not dictate the study's design. "I don't do flakey stuff, but their approach is intriguing enough for an old guy like me to see if it works."

At least two of Ling's proteges, including Torrington, became believers once they tested the protocol on their own patients while Ling was designing his study.

Hythiam has been measuring its success by adding licensees and convincing government and private payers to cover part of the patient's costs. The stock took 5.2 percent jump on Oct. 18 after the company announced its first third-party reimbursement agreement with an undisclosed government-funded payer in the Western United States.

"Right now we're building the infrastructure for next year," Chief Executive Terren Peizer said.

Peizer has been involved in health care startups for several years, but is often best known as a former co-worker of Michael Milken's at Drexel Burnham Lambert who cooperated with federal authorities in their prosecution of the former junk bond king in 1987. Peizer went on to help found or nurture several health care companies, including Los Angeles-based Clearant Inc., whose share price is around 30 cents.

With only one quarter of $100 million revenues under its belt, Mannheimer said there's concern that market is valuing Hythiam more like a biotech than a health care services business.

"The fundamentals aren't there yet, but the potential is," he said.

YEAR (Dec. 31)                       2005         2004

Revenue (millions)                  $1.16        $0.19
Total Expenses (millions)           26           12
Operating g Loss (millions)        (24.9)       (11.9)
Net Loss (millions)                (24.0)       (11.8)
Loss Per Share                     $(0.77)      $(0.47)

SUMMARY

Business: Drug and alcohol treatment
Headquarters: Los Angeles
CEO: Terren Peizer
Market Cap: $304 million Dividend Yield: N/A
Total Liabilities: $6.2 million P/E Ratio: N/A
Long-Term Debt: 0