Radiation Therapy Services: Healthy for your portfolio?
According to the American Cancer Society, one in three Americans will develop some form of cancer in their lifetime.
Radiation Therapy Services Inc. (Nasdaq: RTSX) is a national operator of radiation therapy centers with 1,240 employees that has treated cancer patients for 24 years. With 80 locations in 16 states (many under the name of 21st Century Oncology), the company's facilities provide treatments to some 1,600 patients daily, offering them a broad spectrum of conventional and alternative radiation therapy services. Radiation Therapy Services also runs the Radiation Therapy School for Radiation Technology, a training center for oncology radiation therapists in Cape Coral, Florida.
The company has been profitable for ten years running, showing 30% annual earnings growth over the past five years. However, last month Wachovia Securities downgraded the stock to “market perform” from “outperform” amid fears that Medicaid may lower reimbursement rates on procedures that are performed at its clinics. (The company had been rated a “buy” since December 2006.)
Wachovia analyst William Bonello said he believes Radiation Therapy Services shares will trade in $29 to $32 range over the next 12 months, with potential to rise into the mid-to-high 30s if Medicare reimbursement concerns are exaggerated. (Medicare's current assumption for radiation therapy equipment is 50%, but some estimates put a new proposed assumption high as 70%.) According to Bonello, each percentage point increase in the assumption rate would negatively impact earnings by $0.03 per share.
Radiation Therapy Services treats patients using top-notch technology; it also offers continuing education programs that make it easier for hospitals and other clinics to embrace the newer technology. Radiation Therapy Services employs technologies such as linear accelerators that use high-intensity beams to precisely zap almost any cancer cell it encounters. Another breakthrough technology used by Radiation Therapy Services is prostate seed implants (brachytherapy), wherein radioactive seeds the size of rice grains are permanently implanted directly into the prostate gland. The procedure generally allows patient to return home the same day and return to regular routines within 48 hours.
Until relatively recently, radiation was a fairly blunt tool that killed or severely damaged everything around the diseased cell, making it difficult to treat tumors hidden deep in the body. As recently as the 1990s, some cancer radiation treatments could be as frightening as the disease itself, often leaving patients suffering from skin burns and even organ and spinal cord damage. But over the past decade or so, companies such as Radiation Therapy Services have transitioned to specially-engineered high-energy x-ray equipment with integrated imaging systems that have the ability to target the patient's tumor with fewer harmful side-effects.
Proton-beam therapy is among the latest and most advanced treatments being offered to cancer patients with small, well defined tumors who are at the greatest risk of having sensitive organs damaged by radiation. The treatment uses rays of atomic particles rather than x-rays to pinpoint tumors and avoid burning the body's normal tissues.
The challenge for clinics and hospitals is the large investments that must make in devices called synchrotrons, which produce the proton beams. In most cases, new buildings must be constructed to house the huge gadgets, which are too large to be fitted in most existing facilities. Also, the cost of treating patients is roughly three times that of ordinary x-ray radiation treatments.
While the latest proton technology is prohibitively expensive (and many years away from becoming the standard) for all but a handful of treatment centers that currently use the machines, chances are Radiation Therapy Services will continue to grow and gain market share while waiting to outfit its centers with the less expensive prototypes that are currently being developed.
Though some critics have raised questions about the economics of radiation therapy, insurance reimbursements for the treatments tend to be higher than for some other therapies. And while a typical 40-session radiation treatment program costs about $20,000, a comparable year-long drug regimen can cost $40,000 or more for only a single medication.
Further, despite some concerns over Medicaid reimbursement in the near term, fees for the already expensive radiation treatments are expected to rise 1% a year between 2008 and 2010, according to analyst Randall Scherago of First Albany Capital.
Radiation Therapy Services shares now are trading at around $26.71, not far above their 52-week low of $24.99 (their 52-week high is 34.94). Analysts put a median one-year target of $36.64 on the stock.
The firm's debt-to-equity ratio of 1.5 is on the high side compared with the industry average of 0.84. The stock routinely trades in low volumes and roughly 50% of shares are insider owned.
With about 1.5 million new cases of cancer annually—rising every year with a growing number of aging Baby Boomers—cancer kills over half-a-million Americans each year. Despite the grim statistics, the Journal of the National Cancer Institute reported that while cancer cases continue to increase, the number of cancer deaths has dropped over the past two years, with the decrease being attributed to more advanced treatments and earlier detection through the use of technology like that used by Radiation Therapy Services.
Though the company has flown beneath the radar of many investors, with solid growth prospects and a new CFO at the helm, Radiation Therapy Services appears well positioned to capitalize on the ever-growing number of cancer patients and a wave of innovations in radiation therapy.
Some institutional investors are cautiously upbeat. "I have been bullish on this cancer treatment stock, as the company has good growth and strong fundamentals. But the stock has been mired in a downtrend that has been troubling. It is sometimes painful watching and waiting for a stock to bottom, but I have held off adding to this position until I see some signs of stabilization," Jordan Kahn, CFA, Senior Portfolio Manager at Beverly Hills, CA-based Summit Wealth Management and former investment analyst at the Chicago Trust Company wrote in his blog on June 22.
