May 11, 2007
Mapping The Proton Path
Overview of the proton beam radiation therapy industry

Proton beam offers certain theoretical advantages over other modalities of stereotactic radiosurgery (i.e. gamma knife and linear accelerators) because it makes use of the quantum wave properties of protons to reduce doses to surrounding tissue beyond the target to a theoretical minimum of zero.
Neurosurgery at the Massachusetts General

The upfront cost, around $100M, as well as the operational costs are the primary reason why there are so few proton facilities. In the US reimbursement rates from insurance providers is only slightly higher than conventional radiation therapy making it difficult for centers to recover their investment.
Massachusetts General Hospital Cancer Center


Overview & Focus

Proton Beam Radiation Therapy (PBRT or simply ‘proton beam’) is widely regarded as being superior to that of conventional (x-ray) radiation therapy in treating various forms of cancer. However, with only a handful of proton beam units currently installed in the United States versus hundreds of x-ray based units, the lower cost x-ray platform has proven resilent to the proton beam challenge. This may be about to change.

With the cost of installing proton beam units showing some signs of decreasing, and/or with alternative financing options potentially enabling medical institutions to acquire the proton advantage with less upfront costs/risks, there is the expectation that the installed base of proton beam units will increase significantly in the future. To play on a phrase popularized during the 1990s – ‘technology replacement cycle’ – the expectation is that PBRT will prove a logical upgrade to x-ray based technologies.

The goal here is to identify the companies and technologies that may be involved in this replacement cycle. The opinions below are intended to provide an introduction to the industry and are not a recommendation to buy or sell any of the companies discussed.


The Proton Beam Radiation Evolution

Robert Wilson first proposed the use of Proton radiation for medical purposes in 1946. In 1954 Proton treatment was introduced at the Berkeley Radiation Laboratory… http://www.protonbob.com

Not including the UC San Francisco Department of Radiation Oncology (which deals only with ocular tumors), there are currently only 5-proton beam units installed in the United States.  Along with the 5-currently in operation, there are 2-sites under construction, and 1-site waiting to break ground.  Finally, there are 4-other sites that are either being planned, awaiting further funding, or FDA approval. Multiple sources peg the length of time from breaking ground to completion at approximately 36-months.

Legend Date: Completion or forecasted completion date of PBRT unit. Cost: Estimated installation costs taken either from direct sources or official press releases.   Company: Company that installed and operates PBRT unit.

Date Name - Location Cost Company 1 1990 Loma Linda University Medical Center na Optivus 2 2002 Francis H. Burr Proton Therapy Center na IBA 3 2004 Indiana University Cyclotron Facility na IBA 4 2006 M.D. Anderson Proton Therapy Center $125 million Hitachi 5 2006 University of Florida Proton Therapy Institute $125 million IBA 6 2009 University of Pennsylvania $140 million IBA 7 2009 Oklahoma ProCure Treatment Center $ 95 million IBA 8 2009 Hampton University $189 million IBA

Participating Vendor Companies

With technological advancements potentially arriving quickly, the competitive makeup of the industry could change materially in the coming years. Quite frankly, new or alternative treatment methods – many of which are difficult to speak competently on – could arrive and seriously derail the x-ray-to-proton replacement cycle from ever taking shape.  These limitations noted, here is the competitive field today and some notes on each.

 
1. IBA Particle Therapy Inc.
The clear leader in providing proton beam machines in the U.S. and Worldwide.  IBA has constructed more than 50% of the proton beam units in operation today, and the company generated approximately 19% of revenues from proton beam related activities in 2006.

2. Varian Medical Systems Inc. (ACCEL Instruments)
With only one installed unit in Switzerland – which was not manufactured/installed completely in-house - Varian’s ACCEL proton solution is green. However, given that Varian acquired ACCEL only a few months ago the company’s aggressive and financially supported approach to landing contracts could soon pay off.  The company is looking to land 2 proton deals by the end of 2007 and ‘many dozen’ of deals over the near term.  Although touting that demand for its proton beam solution has been significantly larger than anticipated, to date the company has announced only one letter of intent (a deal that is awaiting more funding).

3. Hitachi & Mitsubishi Electric
A global leader with one unit installed in the U.S., Hitachi’s ‘pro-beam’ solution is aimed at large scale projects. Mitsubishi has two proton beam units already installed in Japan and the company has teamed up with the Shizuoka Cancer Center aspiring to create new PBRT systems. While neither of these diversified companies seems to be aggressively staging a strategy to enter into the U.S. proton beam market, both companies are worth monitoring.

4. Still River Systems
The brainchild of radiation physicist Kenneth Gall, physicists at MIT's Plasma Science and Fusion Center are currently developing the proton beam technology that Still River plans to license.  Still River is, on paper, a proton beam-dream team, with management arriving from highly regarded positions in the industry, including CEO Mark Buntaine who has guided two start-ups into takeovers in the past and most recently worked at Varian.  Unfortunately, the company’s Clinatron-250 has no FDA approval and industry insiders are skeptical of the company’s claims. The Still River story is that it will build a machine that can fit inside of a single room and it will cost between $15-$20 million.

5. Optivus
While it is impossible to count Optivus out, the company’s inability to install any further units after its historic 1990 installation at Loma Lunar is reason enough to believe that something is amiss.  Optivus continues to service its existing installation and, as per the company, has ‘an impressive operations track record’. Nevertheless, the lawsuit battles launched against IBA in 2000 continue to linger and the speculation is that Optivus is not a cost competitive proton player (The lawsuit related to a contract that Optivus lost with the University of Florida – a contract that IBA won).


While other companies participate and garner revenues from proton beam related activities (i.e. Seimens, GE) these five represent the primary proton beam vendors.


Conclusions: The Race To A Proton Reality

Having already entered into a position in American Shared Hospital Services (which owns an 8% stake in Still River) it is obvious that we are currently rooting for the most speculative proton beam vendor to succeed. It should be remembered that Still River is indeed ‘speculative’: in theory a smaller and less expensive proton beam machine could revolutionize the industry, but the reality is Still River’s developmental timeline has already – according to AMS’s Craig Tagawa – proven ‘premature’.

The advantage in owning IBA is that the company is not only the clear leader of the group, but it could also be the first public company to produce an attractive recurring revenue model. While IBA does not provide details on recurring revenues relating to proton beam related activities, director of business development, Paul-Emmanuel Goethals, notes “it is obviously small for the moment [recurring revenues from PBRT], but might be bigger in the future due to operation & maintenance contracts”. Looking out say 10-years, there is the potential for IBA to produce an attractive model based upon recurring revenues.

As for ACCEL, if the company starts successfully installing proton beam units, as management expects, Varian’s conventional radiation therapy offerings (which compete with the protonless Elektra) could be cannibalized. In other words, Varian is a long way from becoming a pure proton beam play.


In summary, the word ‘race’ is applicable in that as more proton beam units get successfully installed demand for PBRT solutions will, eventually, decline. And while by most accounts proton beam technologies will not reach a saturation point for many years, it is nonetheless probable that the Microsoft and Intel-like companies within the industry will emerge well beforehand.

The road to PBRT will be beneficial to cancer patients and, potentially, investors as well.  After taking some time to better depict the competitive landscape, the hope is to better focus an investment platform(s) as developments take place.


Disclosure: Brady Willett and Todd Alway own shares of American Shared Hospital Services.  They do not have an investment interest in any of the other mentioned companies.

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