AMS And Still River Systems

I recently attended a trade show in Houston for the Radiological Therapy industry. I was able to visit the booth of Still River Systems which has developed a unique, compact and relatively inexpensive Proton Beam Radiation Therapy tool. Still River Systems is still a privately held startup company. But some of its shares are owned by partner American Shared Hospital Systems (AMS).

AMS is a stock I have owned for a little over a year. It is a very small cap stock (around $12M total capital). There are 5M shares outstanding with a stock price today of $2.40. The stock is very thinly traded and bounces quite a bit as a result. A couple weeks ago it was less than $2. Last year it was over $6 while it was still issuing dividends at a yield over 6%, so was popular as an income vehicle.

But the middle of last year, AMS decided to drastically reduce its dividend and instead use its cash to make investments (which cratered its stock price). One of those investments is an ownership position in Still River Systems, more of which I will discuss shortly. but first more on AMS as it stands today, without the prospect of Still River being a home run investment.

AMS has cash and other net (shareholder's) equity on its books of almost $20M. With 5M shares, this means the tangible book value is $4/share. The stock is trading at about 50% of tangible book value! And this with a very good cash flow profile. AMS reported earnings on Tuesday and it reported: "Cash flow, as measured by earnings before interest, taxes, depreciation and amortization, increased to $2,657,000 for this year's second quarter and $5,025,000 for this year's first half, compared to EBITDA of $2,381,000 and $4,634,000 for the second quarter and first six months of 2007, respectively."

So, cash flow to stock price is almost a 1 multiple ($12M (P) to $10M (CF)): absolutely unheard of. 4 or 5 is a screaming buy. The cash flow is well secured as this is a long term lease business to a very good customer base of large hospitals. And again, Still River Systems, which apparently AMS continues to buy into, is not even reflected in these figures.

So, what is Still River Systems: I would refer you to their website for more information: www.stillriversystems.com. But I did meet one of the directors on Monday morning and he was guarded (as he should be at a show) but still enthusiastic. He somewhat discretely congratulated me for buying AMS as a way to buy into Still Rivers' future. They are going into the final stages of FDA "marketing approval" and expect to have equipment to market in mid-2009. AMS is purchasing, managing and installing their test systems (2 are installed and have been for some time). The results have all been very positive. Here is an article from late 2006 on the advatanges of compact PBRT technology. It is a bit dated, but still valid: http://medicalphysicsweb.org/cws/article/industry/25886

As the article comments, the low installed cost of the Still River Systems equipment is the key to its future success. They have developed a novel new way to deliver protons to cancer victims for therapy. The low cost of the systems will allow them to be deployed much more widely to hospitals and therapy centers. It should also permit Medicare reimbursement for the procedure which will open up a large new customer base. AMS, as a part owner, will control the distribution of those systems, which it does not now with the Leksell "Gamma Knife" systems it currently buys and leases. So, it is a double win: Still River Systems has a well funded partner with industry connections in AMS to rapidly expand its sales; while AMS should get preferential treatment and a share of the profit on every Still River System it buys and installs. Hard to beat this combo.

I can't offer any solid projections based on what I now know, only speculation, but this could easily be a 10 or 20 banger within the next 5-10 years (stock price of $20-40 / share based on $200M revenue / $50M cash flow).