Interview with Anthony Armini, CEO of Implant Sciences Corp.

From The Wall Street Transcript (5/29/2000)

Anthony J. Armini has been the president, chief executive officer, and chairman of the board of directors since the company's incorporation. From 1972 to 1984, prior to founding the company, Armini was executive vice president at Spire Corp. From 1967 to 1972, Armini was a senior scientist at McDonnell Douglas Corp. Armini received his PhD in Nuclear Physics from the University of California, Los Angeles in 1967. Armini is the author of 16 patents and five patents pending in the field of implant technology and 14 publications in this field. Armini has over 30 years of experience working with cyclotrons and linear accelerators, the production and characterization of radiosotopes, and 15 years of experience with ion implantation in the medical and semiconductor fields.

TWST: Could we start with an overview and some history of Implant Sciences, to set the stage for our readers?

Armini: Let me begin by saying that we're not a start-up. We've been in business since 1984 and we have a technology that originated from the semiconductor industry called ion implantation. We started off focusing our efforts in the semiconductor and aerospace industries, but over the years, we discovered that these industries really didn't offer the growth opportunities we were looking for. It was just about six years ago that we found much larger market opportunities for our ion implantation technology in the medical device marketplace; specifically, in the orthopedic marketplace. Just three years ago, we found that this very same technology and equipment could be used to manufacture various radiation therapy devices known as brachytherapy. We believe this area of radiation therapy or brachytherapy offers very large and promising applications of our technology. In approximately just 30 days' time, we're going to launch our first new radiation therapy product, fully designed and manufactured by Implant Sciences, our I-PlantTM radioactive prostate seed for the treatment of early stage prostate cancer. We are also using this same technology in the treatment of cardiovascular disease to prevent restenosis or the blockage of an artery after balloon angioplasty. So right now, we're evolving into a radiation therapy company with a series of new products on the horizon.

TWST: So you've kind of left your original roots behind then?

Armini: Essentially that's right. We have leveraged our core technology in ion implantation for much larger market opportunities.

TWST: When you say the same technology, what is the technology?

Armini: Ion implantation is essentially the shooting of atoms into the surfaces of metals and various materials using vacuum equipment and technology. This is the same technology that is used to build semiconductors in the integrated circuit business. This technology and equipment can be applied to the medical device industry. For example, we shoot nitrogen atoms into the surface of orthopedic joint implants, artificial knees and hips, to make the surface more lubricious, thus increasing the life of the implant and reducing the need for revision surgery for the patient. In the manufacture of our radioactive prostate seeds, we shoot a special isotope, xenon, into the surface core of the seed, which we make radioactive in the final stages of manufacturing in a nuclear reactor. So it's really material science with numerous applications.

TWST: You mentioned orthopedic products. Are those on the market today?

Armini: Oh yes, since about 1994. We are partnered with major artificial joint manufacturers, Stryker Corp. and Biomet, in which we ion implant approximately 55,000 to 60,000 total joint replacements annually. We've been doing this for about five years and it's a relatively steady market that's been growing year to year. This market however, does not offer the growth potential that brachytherapy offers. I believe over the last four years, there are approximately 200,000 people walking around on artificial knees and hips that were treated with our ion implantation technology. We don't manufacture the actual artificial knee and hip; we provide the surface treatment to make it more lubricious for our customer.

TWST: So that's a fairly steady business at this point?

Armini: Yes, our surface treatment value-added services are growing at about 10%-15% a year.

TWST: Is there much growth potential?

Armini: It has limited growth potential but it continues to be a profitable business for us and has helped fund our future growth products. Most of our research and development and investments are in our radiation therapy business, for both permanent and temporary brachytherapy products.

TWST: In terms of the seeds, is it prostate cancer that you're addressing?

Armini: Exactly. Prostate brachytherapy is a fairly new technique. It's a procedure whereby you implant approximately 100 tiny radioactive pellets, called seeds, into the prostate gland. The procedure has shown great success for the treatment of early stage prostate cancer. There is 12-year data published that states there is about an 82% overall cure rate. The market has been doubling in size the last few years to about 40,000 cases annually. As I mentioned earlier, in just about 30 days we will be launching our I-PlantaTM radioactive prostate seed. Our manufacturing line is just about completed and all of our Food and Drug Administration (FDA) and other regulatory approvals are in place. So we believe we have the opportunity to gain a significant share of this market.

TWST: What is it that your product does better than what's currently available?

Armini: It's going to be a little bit better as far as the distribution of the radiation coming from the pellet. But we believe that the reliability of our manufacturing process, because we manufacture in a 'dryý method, is going to have fewer interruptions of supply. This is a perishable commodity, so to speak, in that it has to be delivered to the hospital within just a few days of the operation. And if it doesn't get there or the patient is not there at the same time, a week later this product is no good anymore. Our particular manufacturing process is what is called a 'dry' process. Other manufacturers use radioactive wet chemistry, which is a little bit messier to manufacture and less safe in the manufacturing process. We believe we will have a more reliable product with more reliable supply and customer service. Of course, we have a new US distributor that we recently partnered with: MedTec. MedTec is a very highly regarded strategic marketing partner that has demonstrated a commitment to improving cancer care technology and is a leading supplier of essential products to the radiation oncology community. MedTec currently has over 2,000 radiation oncology customers. They have consistently achieved record growth over each of the past five years and is an ISO 9001 certified engineering, manufacturing and sales organization. They also have other strategic partnerships with major radiation therapy equipment manufacturers such as Varian Medical Systems.

TWST: So that gives you some hope that your product can move into the marketplace fairly quickly then?

Armini: Absolutely. We've already received orders and we will be delivering soon.

TWST: From a doctor's perspective, why is this product better? Is it
easier to use or more effective?

Armini: This is becoming more of a patient-driven procedure. As patients are doing more research on their treatment options and the Internet is making this research easier, patients understand that brachytherapy seeding has significantly fewer side effects than other treatment options. The incidence o f incontinence and impotence are in the 5% range compared with the surgical removal of the prostate with incontinence and impotence complications in the 70% range. This is also an outpatient procedure with a very rapid recovery rate that gets the patient back to work in one to two days compared with surgery, which traditionally has a four to six week recovery time.

TWST: Are there other prostate seed products available?

Armini: Yes, there are. There are about three or four of them right now. The market has been growing by approximately 50% each year so we don't believe we have to take market share away from these other companies to gain a respectable market share.

TWST: How fast is the market growing?

Armini: I believe there were about 40,000 procedures in the US last year and about 30,000 the year before and 20,000 the year before that. So it is growing quite rapidly. The market today is estimated to be approximately $160 million and growing to about $400 million by 2002 just in the US. It's also just in its infancy stages in Europe. It is expected that the European opportunity, in just a few years, will mirror the growth of the US market.

TWST: Why isn't it done in Europe?

Armini: European countries have a different system of reimbursement and treat prostate cancer differently. Some countries currently don't treat it at all; but with the aging of the population as a whole and the prostate cancer screening test available ' the PSA test ' they are going to be catching these cancers earlier and earlier, which increases the opportunity for us. For stage one and stage two prostate cancers treated with brachytherapy, they are seeing an 82% or more cure rate with hardly any side effects of impotence and incontinence.

TWST: None of which are particularly attractive.

Armini: No, and surgery does not have a very good record when it comes to these complications.

TWST: We talked about the number of procedures and the rapid growth. In dollar terms, who is the biggest in the industry?

Armini: It's about a $160 million market today. For each one of these cases, and there are 40,000 cases annually and a set of 100 seeds for each case is about $4,000 to $5,000 per case.

TWST: This is a reimbursed procedure at this point?

Armini: Yes. It is fully reimbursed. And in fact, it's an outpatient procedure and you're just staying in the hospital for two or three hours and you can go home.

TWST: So that's very favorable from a medical point of view.

Armini: Yes. It is less invasive to the patient and employers are happy because their employees are back to work sooner. The cure rate for early stage prostate cancer is the same or better than surgery, with a significant reduction in complications, impotence and incontinence.

TWST: Let's talk about the other products you mentioned, which I understand are coronary brachytherapy products.

Armini: Yes, we currently have both permanent and temporary coronary vascular brachytherapy devices under development for the prevention of restenosis, reclosure of the artery following balloon angioplasty. Temporary coronary vascular brachytherapy is radiation delivered to the inside of an artery via a catheter to reduce the incidence of restenosis and additional interventional procedures. We are also developing permanent coronary stents with ion implanted radioactivity to again reduce the incidence of restenosis or reclosure of the artery after balloon angioplasty. We are currently working with Stanford University Medical Center and the Cleveland Clinic for preclinical studies this summer. Currently, there are more than 1.2 million coronary angioplasty procedures performed annually worldwide and about 30% of the procedures reclose in six months to a year. It has been found that radiation therapy immediately following the procedure has significantly reduced this reclosure rate. I believe that a competitor will have an FDA-approved device later this year. We believe our temporary brachytherapy source will be better received by the medical community because it has a lower radiation dose to the physicians and staff with the same efficacy to the patient.

TWST: When are these products likely to come to market?

Armini: I think the temporary brachytherapy device is still probably two to three years away. The radioactive stent is probably a year or two later or maybe longer. But in any case, we have at least a few years of growth ahead of us with our prostate seed, so our strategy is that we have a stepping stone effect. We have a near term product for prostate cancer treatment and then a little bit longer term with the temporary brachytherapy and then the radioactive stent is the furthest out. So it's a natural progression of product development programs.

TWST: Is there anybody else out with a radioactive stent product?

Armini: There is one other company in California, which is also developing a radioactive stent, but it is not yet approved.

TWST: Who's furthest along?

Armini: They are. They began their research first and they are also partnered with a major stent manufacturer, Johnson & Johnson.

TWST: How big is this marketplace?

Armini: The total vascular stent market is estimated today to be in excess of $2 billion. Stents cost about $1,200-plus each and there are in excess of 1.5 million stents used annually. So that's a large market just for the hardware, so to speak. If 30% of these need radiation treatment, you can see it is a significant market opportunity for us.

TWST: As we look out over the next couple of years, what kind of growth should investors expect from the company?

Armini: If we were only to get 10% of the prostate seed market over the next few years, our growth would still be significantly different than it is today. So we're talking about a significant amount of growth and we are setting our sights higher. Right now we're growing at about 15% or so, just on our base businesses. So this is going to be a very dramatic change in the slope and it's very close since we have our factory just about completed and are just staffing it up now. We have a June 30 year-end, so by this June 30, we'll close out the old business and the next fiscal year will start July 1 I think it's going to be a much different company when that year is over.

TWST: Do you have the capital you need to get to where you're going?

Armini: Yes. We had a successful IPO last June and raised about $8.5 million gross. That was based solely on getting this prostate seed product to market and we're just about ready to launch this product. So I think that was right on target, actually under target. We recently had another investment of $3 million into the company, a private placement from our seed distributor, MedTec. So we have more cash than we expected to have at this point, especially since we've already bought or built essentially all of the equipment we need to launch our seed product.

TWST: Do you have the management team in place to support what you need to do?

Armini: Yes we do. We needed to have a strong management team in place to have a successful IPO, which again was completed just about a year ago. Approximately two years ago we hired a VP and Chief Financial Officer and a VP of Marketing and Sales. These two key people have extensive experience in financing as well as in the medical device marketplace. Our VP and Chief Scientist has been with the company a number of years. We also have recently hired key people in the areas of manufacturing and materials management as well as quality systems. The people we are currently recruiting are primarily assembly workers for the seed assembly and testing process.

TWST: Where are you finding these assembly workers? It can't be easy in this environment.

Armini: It's not easy, but we're a growing entrepreneurial type company that offers exciting products that help mankind, and people find this attractive. We have a very good benefits package, including an employee stock purchase plan. Especially for the middle managers, we have been very liberal with stock options. We have hired over 25 people in the last eight months or so and have been able to obtain many individuals through our employee network. In this market we have to be very competitive salary-wise for assembly workers and we're going to have to draw them from other businesses in the area.

TWST: As CEO of the company, where are you spending your time right now?

Armini: I also function as the Chief Engineer. Right now, I'm spending much of my time on new product development and getting the production lines staffed and operational. I leave the financial, Wall Street and investor relations issues to my VP and CFO, Darlene Deptula-Hicks.

TWST: How would you describe the culture you've tried to develop at the company to allow for change?

Armini: We've always been a very innovative company in technology. We've got a large research department. We also have a very casual atmosphere; we hardly ever wear suits. I've tried to foster a 'can do' philosophy that we can do just about anything we set our minds to, unlike a large company where there is all kinds of bureaucracy and people telling you that you can't do certain things. There is no bureaucracy here and we have a very flat reporting structure that works well. So I think it's an entrepreneurial atmosphere and everybody is very excited about our growth potential and this excitement and culture is part of why we are able to attract people.

TWST: Do people believe you can do it?

Armini: Yes! Our employees believe in the products, understand the marketplaces and opportunities and know our competitors' strengths and weaknesses. We have very good participation in our employee stock purchase plan and have people from the janitor on up who own stock, so they must believe we can do it.

TWST: As you look at the company, when should investors anticipate that you could make some money?

Armini: We believe our technology offers us unique manufacturing advantages that should reflect in higher gross margins. I expect it will be a matter of a few quarters before we return to profitability. However, I'm anticipating that in our next fiscal year, with essentially a full year of production of the I-PlantTM seeds, that we should be profitable. We're not going to make a profit this year ending June 30; however, next year should be a good year. Currently our sales are approximately $4 million.

TWST: What kind of margins can you generate on these products?

Armini: Our competitors have gross margins in the 70% range. I almost didn't believe their margins. And as I said we believe we have a less expensive method of manufacturing.

TWST: Is this gross margin?

Armini: Yes, gross margin. This is kind of hard to believe, but this is a fairly complicated product to make and we have very innovative ways to make it, as opposed to other competitors who are using wet radioactive chemistry which you have to be very, very careful about spilling and there are safety concerns for your employees. It's also a very difficult process to automate. Our process is very automated and because we fabricate our own manufacturing equipment, it should make our process much less expensive. We have no need to buy expensive cyclotrons for the manufacture of radioisotopes like some of our competitors do.

TWST: Given that, what's the risk in this story? What can go wrong at this point?

Armini: I guess our area of exposure would be our ability to ramp up production faster if MedTec oversells the product from our initial volume agreements. This is the kind of problem you like to have if you have to have one. I'm very confident that our distributor can sell everything we can make and that's the indication they're getting from their customers.

TWST: What does your quarter look like at this point?

Armini: Remember you can't really order these seeds too far in advance. We have certain guarantees that they have to meet in the first few months. But again, it's our next fiscal year beginning July 1 where the company should look very different.

TWST: So you've got a backlog to start with?

Armini: That's right.

TWST: How do you feel about the value that the market is currently putting on your company?

Armini: I am not a market analyst. However, I believe our stock is very undervalued. I think once our seed sales begin, people will be much more comfortable with our story. In the meantime, we have to continue to work on getting the word out to the investment community.

TWST: People aren't paying any attention to it?

Armini: Right. The investment community has not really noticed Implant Sciences yet, but I expect they will in the coming months.

TWST: Is the biggest problem just lack of attention?

Armini: That's right.

TWST: If you were sitting down with some potential investors, what two or three reasons would you give them to go out and buy your stock today?

Armini: We have a very strong balance sheet, with a strong cash position and very little debt. At this time we have very little left to invest to realize commercialization of our prostate seed. Keep in mind, we are not a single product company, we have other near-term products under development. We are focusing on these brachytherapy market opportunities; prostate cancer and cardiovascular disease with radioactive stents and temporary brachytherapy catheters. I think radiation therapy as a field is just getting hot, no pun intended. Radiation therapy for treating cancer was actually discovered about 80 years ago and just recently, with the new techniques in software treatment planning and the 10-year studies available, radiation therapy is becoming very widely received. Now we're also focusing on non-cancerous applications, mainly radiation therapy for cardiovascular applications for coronary artery disease. I think that radiation therapy companies are going to thrive and I think that Implant Sciences has the
opportunity to be at the forefront.

For more information: Anothony J. Armini, Implant Sciences Corp., 107 Audubon Road, #5, Wakefield, MA 01880. Tel: 781-246-0700. Fax: 781-246-3561.

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