Description

BSDM develops, manufactures, markets and services systems that deliver focused electromagnetic energy for use in a variety of medical therapies and applications. Their objective is to commercialize their developed products and further expand the application of their technology into new markets. They pioneered the use of microwave thermal therapy for the treatment of the symptoms associated with enlarged prostate, and are responsible for much of the technology that has created a substantial medical industry using that therapy. Their longest-term development has been the application of focused electromagnetic energy for the treatment of cancer. It's been shown in many clinical trials that both radiation and chemotherapy are more effective when used in conjunction with hyperthermia. The company also believe that their technology has wide application for numerous other medical purposes -- everything from sleep apnea to hemorrhoids!


While some of their statements for their hyperthermia technology may sound more than a little promotional, especially for a BB stock that's been around for over 2 decades losing money, closer examination of the business reveals they may be onto something. Their foray into treating enlarged prostate symptoms with a version of their HT technology has yielded nice dividends. This perennially cash-poor company did not have the wherewithal to go it alone in this area, so they decided to spin out this division in late '97 and finance it with private equity capital. The resulting company, TherMatrx, was sold this year to publicly traded AMMD. After several rounds of financing, BSDM's TherMatrx equity ownership was diluted to 25%.



I have no idea how successful BSDM will be in selling their HT cancer treatment machines. They received FDA-approval late this year for their BSD-500 machine which treats surface and sub-surface tumors, so obviously the technology has shown some efficacy in treating cancer patients. The big development will come, however, when they receive FDA-approval for their top of the line product -- the BSD-2000, which treats deep tumors anywhere in the body. The Phase III trials have been completed and they will start the FDA application process in Q1 '05 (usually takes about a year). The BSD-2000 has been used in clinical applications in Europe (mostly Germany) and the results have been quite good to date. Siemens has worked with them and the machine with all the bells and whistles (ASP over $1M) is equipped with 3D-MRI functionality.



They also just shipped their first BSD-2000 to China, where the Chinese population is more amenable to fighting cancer with heat, as there is widespread use of the technology with over 1500 hyperthermia systems in use in that country. These are, however, much less sophisticated than the American-made product BSDM just shipped off. The first Chinese BSD-2000 will also be used in a hospital setting in order to obtain regulatory approval for the BSD-2000 from the Chinese government. Unlike the US, in China regulatory approval normally can be accomplished over several months of testing and review.





OK, nobody on this board is going to get excited about a company with virtually no sales and an uncertain technology, especially if it's been around for years and has little to show for it. In the past, the technology could not deliver effective heating of all sites (think microwave ovens here), particularly the deeper ones. Research and implementation have also been hampered by lack of noninvasive temperature measuring instruments. In addition, clinical applications apart from radiation have not been explored adequately. And hyperthermia is a procedure that consumes significant amount of time and manpower compared with radiotherapy or chemotherapy. So until recently, it was not possible to write a thermal prescription, but that obstacle has been overcome. Noninvasive thermometry is being developed, as the MRI's show that there is now virtually no variance in the fever-like temperature in the targeted tumor. Also the use of computer modeling has made tremendous strides in the past decade and helps with directing and controlling the heat. These new developments raise the expectations that hyperthermia will likely lead to improved loco-regional control of tumors, extending even to deep seated ones.



The company's valuation, however, makes the technology an even more interesting call option for investors. Historically, the company has never burned much cash, and doesn't plan on burning more than $2M/annually as they ramp up marketing to sell their first FDA-approved HT cancer treatment product. AMMD (the purchaser) and BSDM (the seller) have estimated that the sale price of TherMatrx will be around $160M. It's an unknown amount at this time because it was structured as an earnount of 4x sales for the period encompassing the last 2 quarters of this year and all 4 quarters of next year. Investors can monitor TherMatrx sales quarterly, which are the same as BSDM's portion of the sale price (i.e., 4x sale price * 25% ownership), by listening to the AMMD conference calls. On their last call, AMMD seemed particularly upbeat about their prospects of putting these boxes in urologists' offices and planned on significantly increasing their sales team. Interestingly, the faster these $10K boxes go in doc's offices, the more BSDM stands to make. Over 85% of the TherMatrx sale price come from disposable catheters (the razor blade) not the big box medical equipment (the razor). Every quarter, we want to see more boxes placed than the prior quarter. Even though, this increases AMMD's purchase price, it's small potatoes compared to the annuity-like stream of income these disposable catheters will produce. As both CEO's have stated, "he who gets his box in the doctor's office first, wins." AMMD has priced them at slightly lower levels than the competition.



BSDM's share of the sale will likely be somewhere around $40M (capped at $62.5M), and with a fully diluted sharecount of 21M shares and a current share price of $2.02/share, we aren't paying much for some good things happening in the future. It's important to note that all of BSDM's eggs are not in the cancer treatment basket, as they have dozens of uses for their technology in other areas. It's likely they would use the same successful approach as they did with TherMatrx, but it's also likely they would fund and maintain a larger equity position in any attractive spin-off.





The insiders own very close to half of this company (including their options) and have a vested interest in the stock doing well. One of Mr. Mead's stated goals is to move onto Nasdaq next year. The 3-month average volume of the stock has moved up to 22K a day and the balance sheet is the strongest it's ever been, so Nasdaq listing shouldn't be a problem in '05 (I think price will take care of itself as investors will begin to take notice of net cash levels and P/E ratios). The company had no debt and $9.7M in cash at fiscal year end (.46/share). They also reported .41 EPS because they received a $9M partial payment on the TherMatrx sale. Next fiscal year and the following, their fully diluted earnings per share should exceed this year's EPS, as they get the balance of the earnout. (Fiscal year ends Aug 31, so next year's earnout will be split between the next 2 fiscal years). It's likely that today's market cap will be comprised of 3/4 cash by the end of the earnout period and the final cash payment received in Q1 06.





Here's a Wall Street Transcript interview with CEO, Hyrum Mead...and I'll follow up in the thread with my Q&A notes with the CEO.

http://www.twst.com/ceos.htm

Catalyst

(1) Increased sales. Recently received FDA-approval for first HT cancer treatment system, the BSD-500.

(2) China's regulatory approval of their machines

(3) Quarterly recognition by investors that TherMatrx earnout is real

(4) NASDAQ-listing

(5) JV announcements of technology in non-cancerous treatment applications