There are only a few stocks that we at Contra the Heard won't buy because of the products they sell -- cigarette companies don't make the grade, and we look askance at military hardware manufacturers. On the flip side, it's kind of fun being able to support the enterprises in the portfolio: Stride Rite Corp. makes great shoes for kids and the lunch at Worldwide Restaurant Concepts Inc.'s Sizzler is tasty and filling enough just using money saved at a Hudson's Bay Co.'s Zellers store.
Other corporations are very attractive as investments, but the idea of using their services dulls enthusiasm. We really aren't keen to have first-hand (or second-hand) experience with funeral operators Service Corp. International and Stewart Enterprises, Inc.
The most recent addition to the Contra portfolio, Theragenics Corp. bought at $5.11 (U.S.), also falls into this category. Just the mention of prostate cancer is enough to make most middle-aged men shift uncomfortably in their chairs. The disease hits about one out of six men and estimates suggest that 2,400 men in Canada will die of the affliction this year.
Theragenics is a biotech that makes a brachytherapy treatment for prostate cancer, using a palladium radioactive "seed," which attacks the tumour.
It's been a tough business the past few years, with revenues declining to $35.6-million in 2003 from more than $50-million in 2001. That's a far cry from the late 1990s, when sales were elevating sharply and the stock crested at over $30. Not that treatment with the radioactive seeds hasn't been effective -- studies clearly show its efficacy, especially with improved methods for ultrasound-guided implantation -- but physicians have also been getting similarly good results with other treatments such as external radiation, hormone therapy, chemotherapy, and the old standby, surgical removal of the entire prostate gland.
When there is little scientific evidence to favour one treatment over another, financial factors come to the fore, and Theragenics was hit hard by caps placed on U.S. Medicare reimbursements in 2002. These limitations have eased, but tough competition continues to pressure margins. A potential positive is that the U.S. Congress has adopted a resolution urging physicians to discuss all the proven options available when treating prostate cancer.
Theragenics is dependent on its TheraSeed product line, based on the palladium-103 isotope, but it is attempting to diversify. The company now also sells an iodine product, as well as specialized equipment for dealing with radioactive isotopes. Research and development is concentrated on finding new medical applications for the technology, such as treating vascular disease and macular degeneration, a major cause of blindness in the elderly.
Despite these challenges, we see the company as a solid demographic play. The boomers are aging and that should lead to an upswing in revenue. Though many treatments work well, there are data to suggest that brachytherapy leads to fewer side effects and better quality of life. Despite the worrying cash drain, the balance sheet remains in good shape with no long-term debt and cash of more than $2 a share. Our initial sell target for the stock is $11.34, but so far it has drifted farther away from that goal, currently trading at $4.39. It is hoped Theragenics will not prove to be radioactive to our portfolio.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.