Description

Endocare’s primary product is the Cryocare CS system for the treatment of prostate cancer, as well as other types of cancer, through cryoablation therapy (it freezes the tumor). It is FDA approved and receives Medicare and managed-care reimbursement for primary and salvage treatments of cancer. It has over 8-years of compelling clinical data (10 years is often the magic number), attractive economics to both insurers and users, and over the last year has begun to convert a number of high use urologists from using the prevalent brachytherapy (radiation seed therapy) procedure to cryotherapy (thanks in part to a nerve sparing approach which has even lower occurrences of impotence than brachytherapy). Prostate cancer is the leading form of cancer in men, afflicting 220,000 men in the US in 2003. Very few of these new cases were treated with cryoablation therapy, of which most are performed on Endocare’s systems. Brachytherapy is the newest and most popular treatment, followed by external beam radiation therapy, radical prostatectomy surgery, and watchful waiting. Most of the approximately 3,000 prostate cancer procedures performed on the Company’s devices in 2003 (in the US) were for salvage cases, which were probably treated with radiation several years back. The other approximately 500 procedures were for other forms of cancer. The Company’s devices are currently at a run-rate of at least 5,000 US procedures per year.
The hair on this Company is almost fully shed. Previous management focused only on maximizing sales growth through forcing the Company’s $250,000 Cryocare systems on as many urologists as possible. To meet their growth targets, they also overstated sales and earnings, leading to the Company’s delisting almost a year ago. Since then, new management was brought in focused on cleaning up the operations and fine tuning the business model - (i) asset divestiture program almost completed, (ii) re-audits to be completed shortly followed by a re-listing application, (iii) refocus from selling systems to selling individual procedures through training doctors and marketing to cancer patients, which earn up to $5,000 per procedure, and (iv) expand customer markets of Cryocare system to treatment of other cancer types, such as interventional radiology treatment of bone, lung and liver cancers, each has similar potential to prostate cancer market.
Currently, the Company’s system is the most popular treatment for salvage cases of prostate cancer (the most difficult type of cancer to treat). On the downside, even if broad adoption never occurs, the existing installed base of the Company’s systems and trained doctors could achieve a run-rate of at least 8,000 US procedures per year some time next year, mostly from the salvage market which will continue to grow rapidly, and $0.50 per share in fully-taxed EPS (also $1.00 per share in NPV tax savings from NOLs).
In addition to gaining traction in the primary market for treating prostate cancer, it is getting encouraging signals from medicare for its system’s interventional radiology treatment of bone, lung, and liver cancers, each market containing the same economic opportunity as the prostate cancer market.
My fund currently have a long position in this security.

Catalyst

- Completion of reaudits: All the 10K’s out of the way, now simply have to deliver 2003 10Q’s, which should be done any day.
- Relisting: Will file immediately after audits are completed.
- AUA Coverage: National American Urology Association Convention next month will provide a lot of coverage for all the good clinical data and studies coming out on this procedure.
- Growth in Salvage Market: Brachytherapy begins to show a lot of relapses after 5 years. Brachytherapy got big 5 years ago, so it should be feeding many more salvage cases to cryotherapy this year.