THERAGENICS CORP - 10-K Annual Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ________

COMMISSION FILE NO. 0-15443

THERAGENICS CORPORATION^®

(Exact name of registrant as specified in its charter)

Delaware	58-1528626
(State of incorporation)	(I.R.S. Employer Identification Number)

5203 Bristol Industrial Way Buford, Georgia	30518
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:

(770) 271-0233

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common stock, $.01 par value, Together with associated Common Stock Purchase Rights		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive Proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

Yes x No o

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, as determined by reference to the closing price of the Common Stock as reported on the New York Stock Exchange on July 2, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was $133,875,461.

As of March 7, 2005 the number of shares of Common Stock, $.01 par value, outstanding was 30,023,202.

Documents incorporated by reference: Proxy Statement for the registrant’s 2005 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2004, is incorporated by reference in Part III herein.

Part I

Item 1. BUSINESS

General

Theragenics Corporation^® (“Theragenics™” or the “Company”), incorporated under Delaware law in 1981, is the manufacturer of TheraSeed^®, a rice-sized, FDA-cleared device used to treat solid localized tumors, primarily prostate cancer, with a one-time, minimally invasive procedure. Theragenics™ is the world’s largest producer of palladium-103, the radioactive isotope that supplies the therapeutic radiation for its TheraSeed^® device. Physicians, hospitals and other healthcare providers, primarily located in the United States, utilize the TheraSeed^® device. The TheraSeed^® device has also been approved for marketing throughout the member countries of the European Union by obtaining its CE Mark. Sales of the TheraSeed^® device in Europe have not been significant. The majority of sales are channeled through third-party distributors. The Company also sells its TheraSeed^® devices directly to physicians.

The Company’s website address is http://www.theragenics.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through its website by clicking on the “Investor Relations” page and selecting “SEC Filings.” These reports will be available as soon as reasonably practicable after such material has been electronically filed with, or furnished to, the SEC. These reports are also available through the SEC’s website at http://www.sec.gov. The information on these websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this Form 10-K.

Early in 2003 the Company diversified its product line with the purchase of the U.S. iodine-125 prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik GmbH (BEBIG), formerly distributed by Isotope Products Laboratories (both subsidiaries of a publicly traded German company, Eckert & Ziegler AG). The purchase gives Theragenics™ exclusive U.S. manufacturing and distribution rights to an FDA-cleared iodine-125-based medical device for the treatment of prostate cancer. Theragenics™ began distribution of the iodine-125-based medical device early in 2003, and subsequently began to produce I-Seed (the Theragenics™ iodine-125-based medical device) early in 2004, utilizing the automated production equipment procured in the business acquisition. The Company sells the I-Seed device directly to physicians, hospitals and other healthcare providers. The non-exclusive distributors of the TheraSeed^® device have no distribution rights for the I-Seed device. Non-exclusive rights to distribute the TheraSeed^® device in Europe were granted to BEBIG as part of the transaction. The Company believes that the ability to provide both TheraSeed^® and I-Seed devices enhances the Company’s ability to market to direct customers who seek a single source for both palladium-103 and iodine-125 brachytherapy seeds. The product line and equipment purchase will not affect the Company’s existing non-exclusive distribution agreements for the TheraSeed^®device.

From May 1997 to August 2000, substantially all TheraSeed^® devices were sold through an exclusive distributor. Notice of termination of that exclusive distribution agreement was received in August 2000, ending Theragenics™ contractual requirement to use an exclusive distributor. The contract was subsequently terminated in January 2001. The Company currently sells its TheraSeed^® devices directly to physicians and through two non-exclusive third party distributors, a reduction from the four in place at the beginning of 2003. During 2003, one of the non-exclusive distributors of the TheraSeed^® device acquired two of the other three non-exclusive distributors of the TheraSeed^® device. One of the remaining two distributors has exercised its option to extend its distribution agreement with the Company through December 2006. The domestic and international distribution agreements with the other distributor allow each party the right to give notice of non-renewal of the agreements at the end of December 2004, which would be effective December 31, 2005. During December 2004, the Company was notified by this distributor that it would not be renewing its distribution agreements, and accordingly such agreements would terminate effective December 31, 2005.

In 1998 the Company received regulatory approval for the marketing of the TheraSeed^â device throughout the member countries of the European Union by obtaining its CE Mark. Sales of the TheraSeed^â device in Europe were not significant in any of the three years in the period ended December 31, 2004.

The U.S. Department of Energy (DOE) has granted Theragenics™ access to unique DOE technology, known as plasma separation process or PSP, for use in production of isotopes, including palladium-102 (the “PSP Operation”). The Company has constructed a facility in Oak Ridge, Tennessee to house the equipment, infrastructure and work force necessary to support the production of isotopes, including palladium-102, using this DOE technology. The building and the PSP became operational during the latter half of 2002. The Company also has access to and has made investments in other unique DOE resources.

In connection with the Company’s ongoing program targeted at diversifying its future revenue stream, the Company continues to explore new applications for PSP technology. Among other things, the PSP technology enables the Company to conduct feasibility runs designed to validate isotope usage in various diverse industries and potential markets. The Company is active in the Federal budget process, and is working to ensure that the PSP's capabilities are known to Federal agencies such as the Departments of Defense and Energy.

During 2004 the Company’s Oak Ridge operations enriched palladium-102, which can be activated in a nuclear reactor to produce palladium-103. The enriched palladium-102, along with access to specialized reactor and related capabilities, could potentially supply the palladium-103 radioisotope to support TheraSeed^® production, if necessary. In addition, the production of palladium-102 allowed the Company to study the PSP and its interaction with palladium-102 in order to calibrate the PSP and determine predictable yields generated by the PSP.

The Company’s diversification program also includes a clinical trial using a palladium-103 device, called the TheraSource^® Intravascular Brachytherapy System, designed to prevent restenosis or renarrowing of arteries following treatment of peripheral vascular disease by percutaneous transluminal angioplasty. Following the approval of the Investigational Device Exemption granted by the U. S. Food and Drug Administration (FDA) in August 2002 to initiate the TheraP clinical trial, Theragenics™ began a clinical trial using a palladium-103 device (patent pending) early in 2003. Theragenics™ closed enrollment in the TheraP trial early in the second quarter of 2004 at 20 patients. Eighteen patients have progressed to the six-month endpoint and two patients have elected to discontinue follow-up in the trial. None of the twenty patients treated with the TheraSource^® device has experienced a device-related adverse event. The Company is currently assessing the results of the trial to determine the most appropriate course of action going forward.

During the second quarter of 2004, the Company filed an Investigational Device Exemption (IDE) with the FDA to begin a human clinical trial for the TheraSight^®Ocular Brachytherapy System, a device intended to treat exudative (wet) age-related macular degeneration (AMD), a disease that leads to loss of eyesight and in some cases complete blindness. The IDE was approved by the FDA on July 29, 2004, and enrollment commenced in the fourth quarter of 2004 to test the safety and feasibility of the TheraSight^® device. The Company has patents pending on the TheraSight^® device and plans to run the trial at six separate clinical sites and expects to treat approximately 30 patients. The first three patients were treated in the TheraSight^® Trial at Emory Eye Center in Atlanta, Georgia.

The Company has also identified potential opportunities, utilizing its cyclotrons, for production of radiochemical products, which are typically used in medical nuclear imaging procedures. During 2004, the Company began regular shipments to customers of two radiochemicals, produced on the Company’s cyclotrons. The Company has received a Drug Master File for these products from the FDA, which will potentially allow access to a wider range of customers. The Company also continues to assess the markets for other radiochemicals it is able to produce using the existing cyclotrons.

The Company is also searching for, reviewing and evaluating external opportunities for diversification in the form of joint ventures, partnerships, and/or acquisitions of technologies, products and companies.

Industry Overview

Prostate Cancer

Excluding skin cancer, prostate cancer is the most common form of cancer, and the second leading cause of cancer deaths, in men. The American Cancer Society estimates there will be about 232,090 new cases of prostate cancer diagnosed and an estimated 30,350 deaths associated with the disease in the United States during 2005.

Prostate cancer incidence and mortality increase with age. Prostate cancer is found most often in men who are over the age of 50. More than seven out of ten men diagnosed with prostate cancer are over the age of 65. According to the American Cancer Society, approximately one man in six will be diagnosed with prostate cancer during his lifetime, although only one man in thirty-three will die of this disease.

Weak or interrupted urine flow, an inability to urinate, frequent urination and pain during urination can all be signs of prostate cancer. Additional symptoms can include blood in the urine, continual lower back pain in the pelvis or pain in the upper thighs. However, it should be noted that these symptoms are nonspecific and can be caused from non-malignant conditions.

According to the American Cancer Society, approximately 86% of all prostate cancers are found in the local and regional stages (local means it is still confined to the prostate; regional means it has spread from the prostate to nearby areas, but not to distant sites such as other organs). The 5-year survival rate for men with prostate cancers found in the local and regional stages is nearly 100%. According to the American Cancer Society, the survival rate for all stages of prostate cancer combined has increased from 67% to 97% over the past 20 years.

In addition to age, other risk factors are linked to prostate cancer, such as genetics. Men who have relatives that have been affected, especially if the relatives were young at diagnosis, have an even higher risk of contracting the disease. Researchers have discovered changes in certain genes, influenced by DNA mutations inherited from a parent, may cause some men to be more inclined to develop prostate cancer. It has also been suggested that environmental factors such as exposure to cancer-causing chemicals or radiation may cause DNA mutations in many organs, but this theory has not been confirmed.

Another factor that may contribute to prostate cancer is diet. A diet high in fat may play a part in causing prostate cancer. The American Cancer Society suggests that Lycopenes, found in vegetables and certain fruits such as tomatoes, grapefruit and watermelon, and the mineral selenium found in fish, meat, poultry, cereals and vegetables such as mushrooms and asparagus, seem to lower prostate cancer risk. An increase in prostate cancer may also be related to a diet high in calcium and low in fructose (fruit sugar).

The prostate is a walnut-sized gland surrounding the male urethra, located below the bladder and adjacent to the rectum. The two most prevalent prostate diseases are benign prostatic hyperplasia (BPH) and prostate cancer. BPH is a non-cancerous enlargement of the innermost part of the prostate. Prostate cancer is a malignant tumor that begins most often in the periphery of the gland and, like other forms of cancer, may spread beyond the prostate to other parts of the body.

The American Cancer Society recommends that men without symptoms, risk factors and who have a life expectancy of at least ten years, should begin regular annual medical exams at the age of 50, and believes that health care providers should offer as part of the exam the prostate-specific antigen (PSA) blood test and a digital rectal examination (DRE). The PSA blood test determines the amount of prostate specific antigen present in the blood. PSA is found in a protein secreted by the prostate, and elevated levels of PSA can be associated with either prostatitis (a noncancerous inflammatory condition) or a proliferation of cancer cells in the prostate. Transrectal ultrasound tests and biopsies are typically performed on patients with elevated PSA readings to confirm the existence of cancer.

A tumor found by a prostate biopsy is usually assigned a grade by a pathologist. The most common prostate cancer grading system is called the Gleason grading system. A Gleason score, which ranges from 2 to 10, usually is used to estimate the tumor’s growth rate. Typically, the lower the score, the slower the cancer grows. Most localized cancers of the prostate gland are associated with an intermediate score ranging from Gleason scores 4 through 6.

Staging is the process of determining how far the cancer has spread. The treatment and recovery outlook depend on the stage of the cancer. The TNM system is the staging process used most often. The TNM system describes the extent of the primary tumor (T stage), whether the cancer has spread to nearby lymph nodes (N stage), and the absence or presence of distant metastasis (M stage). The TNM descriptions can be grouped together with stages labeled 0 through IV (0-4). The higher the number, the further the cancer has spread. The following table summarizes the various stages of prostate cancer.

Stages	Characteristics of prostate cancer
T1 or T2	Localized in the prostate
T3 or T4	Locally advanced
N+ or M+	Spread to pelvic lymph nodes (N+) or distant organs (M+)

Treatment Options

In addition to brachytherapy, treatment options for localized prostate cancer include radical prostatectomy (RP), external beam radiation therapy (EBRT) which includes intensity modulated radiation therapy (IMRT), cryosurgery, hormone therapy, watchful waiting, and finasteride, a drug commonly prescribed to treat benign enlargement of the prostate and male baldness. Some of these therapies may be combined to address a specific cancer stage or patient need. For example, the TheraSeed^Ò device has been used in combination with EBRT to treat some locally advanced cases of prostate cancer. When the cancerous tissue is not completely eliminated, the cancer typically returns to the primary site, often with metastases to other areas. The following is a summary of treatment options for prostate cancer other than seeding.

Radical Prostatectomy is the most common surgical procedure. Radical Prostatectomy (RP) involves the complete removal of the prostate gland and has been used for over 30 years in treating early-stage, localized tumors. RP typically requires a three-day average hospital stay and a lengthy recovery period (generally three to five weeks). Possible side effects include impotence and incontinence.

External Beam Radiation Therapy (EBRT) involves directing a beam of radiation at the prostate gland from outside the body to destroy tumorous tissue and has been a common technique for treating many kinds of cancer since the 1950s. EBRT has typically been reserved for early-stage prostate cancer in locally advanced cases where the patient is an inappropriate surgical risk. Patients are usually treated five days per week in an outpatient center over a period of six to eight weeks. Rectal complications resulting from damage to the rectal wall caused by the radiation beam as it travels to the prostate are the most common side effects. Other possible side effects also include incontinence and impotence, but these side effects generally occur with less frequency than they do following RP.

Newer forms of external beam radiation include three-dimensional conformal radiation therapy (3DCRT), Intensity Modulated Radiation Therapy (IMRT) and conformal proton beam radiation. Three-dimensional conformal radiation utilizes computerized mapping and a fitted plastic body mold to keep the patient still so the radiation can be aimed more accurately at the prostate. The objective of 3DCRT is to minimize the risk of damage to healthy tissue caused by radiation. However, long-term results are needed to confirm this theory. Intensity Modulated Radiation Therapy (IMRT) is an advanced form of 3D therapy. In addition to aiming beams from several directions, the intensity (or strength) of the beams can be adjusted to decrease the dose of radiation reaching the sensitive normal tissues while delivering a uniformly high dose to the cancer. Conformal proton radiation therapy uses a similar approach, but instead of using x-rays, this technique focuses proton beams on the cancer. Protons typically cause little damage to tissues and may be able to deliver more radiation to the prostate. While preliminary results are promising, proton beam radiation is expensive and there are very few proton beam devices in the U.S. at this time.

Cryosurgery involves placing several hollow probes (needles) into the prostate using transrectal ultrasound and killing the cancer by freezing the entire prostate. Patients usually remain in the hospital for one to two days. There will be some bruising and soreness of the area where the probe was inserted. Side effects of cryosurgery may include damage to nerves near the prostate that may cause impotence and incontinence, damage to bladder and intestines, and a fistula (an abnormal opening) between the rectum and bladder. Current techniques using ultrasound guidance have only been available for a few years and outcomes of long-term (10- to 15-year) follow-up must still be collected and analyzed. For this reason, according to the American Cancer Society, most doctors do not include cryosurgery among the options they routinely consider for initial treatment of prostate cancer.

Ancillary Therapies, primarily consisting of hormone therapy and chemotherapy, are used to slow the growth of cancer and reduce tumor size, but are generally not intended to be curative. Ancillary therapies are often used during advanced stages of the disease to extend life and relieve symptoms. Side effects of hormonal drug therapy include increased development of breasts, impotence and decreased libido. In addition, many hormone pharmaceuticals artificially lower PSA levels in patients, which can interfere with staging the disease and monitoring its progress. Side effects of chemotherapy include nausea, hair loss and fatigue. Drug therapy and chemotherapy require long-term, repeated administration of medication on an outpatient basis.

Watchful Waiting, while not a treatment, is recommended by some physicians in certain circumstances based on the severity and growth rate of the disease, as well as on the age and life expectancy of the patient. The aim of watchful waiting is to monitor the patient, treat some of the attendant symptoms and determine when more active intervention is required. Watchful waiting requires periodic physician visits and PSA monitoring.

In addition to the treatment options described above, other forms of treatment and prevention may be developed and tested in clinical settings.

The Theragenics™ Solution

Theragenics™ produces TheraSeed^Ò, an FDA-cleared device for treatment of all solid localized tumors and currently used principally for the treatment of prostate cancer. In the prostate application, TheraSeed^Ò devices are implanted throughout the prostate gland in a minimally invasive surgical technique, with transrectal ultrasound guidance. The radiation emitted by the seeds is contained within the immediate prostate area for the purpose of killing the tumor while attempting to spare surrounding organs of significant radiation exposure. The seeds, whose capsules are biocompatible, remain in the prostate after delivering their radiation dose. The TheraSeed^Ò device is best suited for solid localized tumors.

Management believes the TheraSeed^Ò device offers significant advantages over RP and EBRT. Recent multi-year clinical studies indicate that seeding offers success rates for early-stage prostate cancer that are comparable to or better than those of RP or EBRT and is associated with reduced complication rates. In addition, the TheraSeed^Ò treatment is a one-time outpatient procedure with a typical two to three day recovery period. By comparison, RP is an inpatient procedure typically accompanied by an average three day hospital stay and a three to five week recovery period, and EBRT involves six to eight weeks of daily radiation treatments.

The TheraSeed^Ò device is a radioactive "seed" approximately 4.5 millimeters long and 0.8 millimeters wide, or roughly the size of a grain of rice. Each seed consists of biocompatible titanium that encapsulates the radioactive substance palladium-103. The half-life of palladium-103, or the time required to reduce the emitted radiation to one-half of its initial level, is 17 days. The half-life characteristics result in the loss of almost all radioactivity in less than four months.

The Company also offers the I-Seed device. This iodine-based device was acquired as part of the purchase of the U.S. iodine-125 prostate brachytherapy business from BEBIG during 2003. While Management believes that palladium-103 continues to have certain advantages over iodine-125, including (i) higher dose rates; (ii) a shorter half life, which shortens the duration of some radiation induced side effects by two-thirds; and (iii) reduced radiation exposure to medical personnel in treatment follow-up, the purchase of the iodine product line enables the Company to compete more effectively for those direct customers who prefer to buy both seeds from a single source. The non-exclusive distributors of the TheraSeed^® device have no distribution rights for the I-Seed device.

The I-Seed device is also a radioactive "seed" approximately 4.5 millimeters long and 0.8 millimeters wide, or roughly the size of a grain of rice. Each seed consists of biocompatible titanium that encapsulates a ceramic substrate containing the radioactive substance iodine-125. The half-life of iodine-125, or the time required to reduce the emitted radiation to one-half of its initial level, is approximately 60 days. The half-life characteristics result in the loss of almost all radioactivity in approximately 20 months.

Treatment Protocol

Prostate cancer patients electing seed therapy first undergo a transrectal ultrasound test or CT scan, which generates a two-dimensional image of the prostate. With the assistance of a computer program, a three-dimensional treatment plan is created that calculates the number and placement of the seeds required for the best possible distribution of radiation to the prostate.

Once the implant model has been constructed, the procedure is scheduled and the seeds are ordered. The number of seeds implanted normally ranges from 50 to 150, but the number of seeds varies with the size of the prostate. The procedure is usually performed under local anesthesia in an outpatient setting. A transrectal ultrasound probe is first positioned in the rectum to guide needle placement and seed location. Correct needle placement is facilitated by a template, or grid, that covers the perineum (the area between the scrotum and rectum through which the needles are inserted). This template is attached to the transrectal ultrasound probe. Implant needles loaded with seeds are assigned to the appropriate template holes as indicated in the treatment plan. Each needle is guided through the template and then through the perineum to its predetermined position within the prostate under direct transrectal ultrasound visualization. The seeds are implanted as the needle is withdrawn from the prostate. When all seeds have been inserted, seed placement is verified through a transrectal ultrasound image, CT scan, fluoroscope or MRI. An experienced practitioner typically performs the procedure in approximately 45 minutes, with the patient often returning home the same day.

Seeding has been used as a treatment for prostate cancer for more than 20 years. Twenty years ago, seeds containing the radioactive isotope iodine-125 were implanted in prostate tumors under open surgery. However, this technique fell into disfavor because the seeds were often haphazardly arranged resulting in radiation not reaching all of the targeted cancerous prostate tissue. Compounding this was the fact that often an unintended radiation dose was delivered to healthy surrounding tissues, particularly the urethra and rectum. Clinical results indicate that the computer modeling, advanced imaging and other techniques used in seeding today have significantly ameliorated these drawbacks.

Clinical Results

Strong Efficacy Results. Clinical data indicates that seeding offers success rates for early-stage prostate cancer treatment that are comparable to or better than those of radical prostatectomy (RP) or external beam radiation therapy (EBRT). A number of published studies on the use of seeding in the treatment of early-stage prostate cancer have been very positive.

A twelve-year study published in the Volume 4, Issue 1 (2005) edition of the journal Brachytherapy, revealed that high-risk prostate cancer patients treated with brachytherapy using palladium-103 experienced greater success than patients treated with radical prostatectomy. The study was conducted by Dr. Jerrold Sharkey of the Urology Health Center in New Port Richey, Florida, Dr. Alan Cantor, et al and retrospectively reviewed 1,707 prostate cancer patients, treated from 1992 to 2004, 80% of whom were treated with brachytherapy and 20% of whom were treated with surgery. The study reported that high-risk patients treated with seeding showed an 88% cure rate compared to a 43% cure rate obtained from surgery at 12 years. The results for intermediate-risk patients reflected a success rate of 89% with seed therapy compared to a 58% success rate with surgery at 12 years and for low-risk patients the success rate for seeding was 99% compared to a 97% success rate with surgery at 10 years.

A twelve-year clinical study published in the 2004 Supplement of International Journal of Radiation Oncology, Biology and Physics, reported that the relative survival rate is 84% for low risk cancer patients, 78% for intermediate risk cancer patients and 68% for high risk cancer patients. The study was conducted by Dr. Lou Potters, et al. of the New York Prostate Institute and included 1,504 patients treated with brachytherapy between 1992 and 2000.

A study published in the January 2004 issue of International Journal of Radiation Oncology, Biology and Physics, reported that brachytherapy, radical prostatectomy, high-dose external beam radiation therapy and combined therapies produced similar cure rates. The study was conducted by Dr. Patrick Kupelian, Dr. Louis Potters, et al. and included 2,991 patients with Stage T1 or T2 prostate cancer. Of these patients, 35% of patients underwent surgery, 16% received low-dose EBRT, 10% received high-dose EBRT, 7% received combination therapy and 32% received brachytherapy. After five years, the biochemical relapse-free survival rate was 83% for brachytherapy, 81% for radical prostatectomy, 81% for high-dose EBRT, 77% for combination therapy and 51% for low-dose EBRT.

In the June 2002 issue of Current Science, Inc., a study by Dr. Jerrold Sharkey, Dr. Alan Cantor, et al. compared the effectiveness of brachytherapy and radical prostatectomy in 1,305 men with stage T1 and T2 prostate cancer. From 1993 to 2002, data from the treated patients were reviewed and classified by initial PSA level and Gleason scores. According to the publication, “The results failed to show any superiority of prostatectomy over brachytherapy with palladium-103 (the TheraSeed^® device) with respect to time until relapse indicated by PSA level increase. In fact, any differences between treatments favor brachytherapy, particularly for intermediate and high-risk groups.”

A nine-year clinical study published in the March 2000 issue of International Journal of Radiation Oncology, Biology and Physics, reported that 83.5% of the patients treated with the TheraSeed^® device were cancer-free at nine years. The study was conducted by Dr. John Blasko of the Seattle Prostate Institute and included 230 patients with clinical stage T1 and T2 prostate cancer. Only 3% experienced cancer recurrence in the prostate.

Seeding treatment in combination with EBRT has also recorded impressive results in the treatment of higher risk prostate cancer patients.

An eight-year clinical study published in the January 2005 issue of International Journal of Radiation Oncology, Biology and Physics, reported biochemical progression-free survival rates of 98.2%, 98.4% and 88.2% for low-, intermediate-, and high-risk patients, respectively, who underwent brachytherapy using either palladium-103 or iodine-125 and supplemental EBRT or androgen deprivation therapy (ADT). The study was conducted by Dr. Gregory Merrick, et al., of the Schiffler Cancer Center and included 668 patients who underwent brachytherapy between April 1995 and January 2001 followed by EBRT and/or ADT.

Results from a 10-year study conducted by Dr. Datolli and Dr. Wallner published in the International Journal of Radiation Oncology, Biology and Physics in September 2002, were presented at the October 2002 American Society of Therapeutic Radiology and Oncology (ASTRO) conference confirming the effectiveness of the TheraSeed^® device in patients with aggressive cancer who previously were considered poor candidates for seeding. The 10-year study was comprised of 175 patients with Stage T2a-T3 prostate cancer treated from 1991 through 1995. Of these patients 79 percent remained completely free of cancer without the use of hormonal therapy or chemotherapy.

In their paper published for the Seminars in Surgical Oncology 1997, Drs. Blasko, Ragde, Grimm, et al. presented an eight-year actuarial local and distal disease-free rate of 91% and 83%, respectively for 231 patients who were considered to represent higher risks of locally advanced prostate cancer and were treated with a combination of palladium-103 or iodine-125 seeding and a modified dose of EBRT.

A study by Dr. Michael Dattoli of University Community Hospital, Tampa, Florida, and Dr. Kent Wallner of Memorial Sloan-Kettering Cancer Center, New York, New York, published in the International Journal of Radiation Oncology, Biology and Physics in July 1996 found a three-year actuarial freedom from biochemical failure (based on PSA scores) of 79% among 73 patients with clinically localized, high risk prostate cancer who were treated with EBRT in combination with palladium-103. This compares favorably to results reported for patients treated with conventional dose EBRT alone. These locally advanced cases are significant because typical RP protocols would not classify them as suitable for surgical treatment.

Reduced Incidence of Side Effects. Because the TheraSeed^Ò device delivers a highly concentrated and confined dose of radiation directly to the prostate, healthy surrounding tissues and organs are typically spared excessive radiation exposure. This typically results in fewer and less severe side effects and complications than may be incurred with other conventional therapies.

A five-year study, using either palladium-103 or iodine-125 seed devices, published in the August 2001 edition of International Journal of Radiation Oncology, Biology and Physics promotes brachytherapy treatment for early-stage prostate cancer in men under 65 while indicating lower incidence of side effects such as incontinence and impotence. According to Dr. Gregory Merrick of Schiffler Cancer Center in Wheeling, West Virginia, the findings from the study involving 76 patients ranging in ages between 48 and 62 years who received seed implants between the period of 1995 to 1999 are encouraging “because it shows younger men that they can survive cancer with a significantly lower incidence of side effects.”

Doctors Gregory S. Merrick, Kent E. Wallner and Wayne M. Butler, in their paper “Permanent Interstitial Brachytherapy for the Management of Carcinoma of the Prostate Gland”, published in the Journal of Urology in May 2003, summarized the permanent prostate brachytherapy literature, including biochemical outcomes, quality of life parameters and areas of controversy. The result of this study included the statement that “Using various planning and intraoperative techniques the majority of the brachytherapy literature demonstrates durable biochemical outcomes for patients with low, intermediate and high risk features.” The paper concluded that continued refinements in brachytherapy planning and implementation techniques, postimplantation evaluation and continued elucidation of the etiology of urinary, bowel and sexual dysfunction should result in further improvements in biochemical and quality of life outcomes.

Lower Treatment Cost. The total one-time cost of seeding is typically lower than the cost of RP, which usually requires a three-day average hospital stay, and EBRT, which requires a six-to-eight week course of treatment.

Production

With the exception of rhodium-103 (Rh-103), all raw materials used in the production of the TheraSeed^® and I-Seed devices are relatively inexpensive and readily available from third party suppliers. Rhodium-103 is readily available on the open market.

Palladium-103 is a radioactive isotope that can be produced by neutron bombardment of palladium-102 in a nuclear reactor, or by proton bombardment of Rh-103 in a cyclotron. Following the production of palladium-103 from Rh-103 in a cyclotron, the palladium-103 is harvested from the cyclotron and moved through a number of proprietary production processes until it reaches its final seed form.

The Company has produced palladium-103 using Company-owned cyclotrons since 1993. The Company currently has fourteen cyclotrons in production, and has no current plans to purchase additional cyclotrons. The Company's cyclotrons were designed, built, installed and tested by a company specializing in the construction of such equipment.

Cyclotron operations constitute only one component of the TheraSeed^Ò device manufacturing process. Because the production of the TheraSeed^Ò device is highly sensitive and labor intensive, Management has been focusing attention and effort on automating and otherwise improving aspects of the Company's manufacturing process. Certain portions of the Company’s production processes were automated during the past seven years. Through automation, Management believes it can continue to improve efficiency, further reduce radiation exposure to personnel and provide additional production capacity for the TheraSeed^Ò and I-Seed devices.

The Company began production of the I-Seed product early in 2004. The automated production equipment was acquired as part of the purchase of the U.S. iodine-125 prostate brachytherapy business from BEBIG during 2003.

Since 1997, the Company’s quality control system related to its medical device manufacturing has been certified as meeting all the requirements of the International Organization for Standards’ ISO 9001/EN46001 Quality System Standard.

The Company constructed a facility in the Oak Ridge, Tennessee area to house the equipment, infrastructure and work force necessary to support the production of isotopes, including palladium-103, using unique plasma separation process (PSP) technology being leased from the U.S. Department of Energy. PSP technology is a method of separating relatively large quantities of specific non-radioactive isotopes from specific elements. The PSP technology enables current and future feasibility runs designed to validate isotope usage in various diverse markets and industries. Although the PSP technology was initially acquired to allow for increased manufacturing capacity of palladium-103 to support TheraSeed^® production and other R&D activities using palladium-103, the technology may allow for expanded use of palladium-103 or other isotopes in other applications.

Marketing

From May 1997 until August 2000, Indigo Medical, Inc. (Indigo), a Johnson and Johnson Company, held the exclusive worldwide rights to market and sell the TheraSeed^® device for prostate cancer under a Sales and Marketing Agreement with Theragenics™ (the “Agreement”). Under the Agreement, Indigo had the responsibility for the exclusive marketing and training related to the TheraSeed^® device. In August 2000 Indigo exercised its option and gave notice of termination of the Agreement. As a result of Indigo’s notice of termination, Theragenics regained the right to directly market and distribute its TheraSeed^® device for the treatment of prostate cancer to physicians and third-party distributors. Subsequent to Indigo’s notice of termination, the Company executed non-exclusive distribution agreements with four companies for the distribution of the TheraSeed^® device. The non-exclusive distribution agreements for the distribution of the TheraSeed^® device gave each distributor the right to distribute the TheraSeed^® device in the U.S., Canada and Puerto Rico for the treatment of prostate cancer and other solid localized cancerous tumors. Two of these non-exclusive agreements gave the distributors the option to distribute the TheraSeed^® device internationally.

Currently, the Company has non-exclusive distribution agreements in place with two companies for the distribution of the TheraSeed^â device, a reduction from the four distributors in place at the beginning of 2003. The Company’s current two distributors for TheraSeed^® are C.R. Bard and Medi-Physics, Inc. (formerly d/b/a Nycomed Amersham and now part of Oncura, a company formed by a merger of the brachytherapy business of Amersham plc and Galil Medical Ltd. and referred to herein as “Oncura”). During 2003, C.R. Bard acquired two of the other three non-exclusive distributors of the TheraSeed^® device. Total sales to the two existing and the two previous non-exclusive distributors represented approximately 81%, 81% and 83% of product revenue for the years ended December 31, 2004, 2003 and 2002, respectively, with sales to two of the four non-exclusive distributors each exceeding 10% of total revenue for each year. C.R. Bard, which accounts for the majority of distributor sales, has exercised its option to extend its distribution agreement with the Company through December 2006. The domestic and international distribution agreements with Oncura allow each party the right to give notice of non-renewal of the agreements at the end of December 2004, which would be effective December 31, 2005. During December 2004, the Company was notified by Oncura that it would not be renewing its distribution agreements, and accordingly such agreements would terminate effective December 31, 2005

Beginning in 2002, the Company engaged marketing and advertising specialists with experience in healthcare and direct-to-consumer marketing, and expects direct-to-consumer activity to continue during 2005. The Company also expects to continue other activities in an attempt to support its brand name and increase demand for the TheraSeed^® device, including advertising to physicians, clinical studies aimed at showing the advantages of the TheraSeed^® device in the treatment of prostate cancer, technical field support to TheraSeed^® customers, and other customer service and patient information activities. During 2002, a small direct sales force comprising brachytherapy specialists was formed to promote and support the TheraSeed^® brand. This sales force was expanded during 2003 and 2004 and will continue to be utilized during 2005.

During 2004, the Company entered into a three-year exclusive strategic alliance with International Urology Network (IUN). This will provide group purchasing services to over 3,500 of IUN’s community-based urologists for the Company’s TheraSeed^® and I-Seed devices. IUN is a diversified physician services organization specializing in the support of community-based practices, offering its members a variety of value-added services that enable practices to remain efficient, effective, and to continue to deliver quality patient care.

Patents and Licenses; Trade Secrets

The Company holds nine United States patents directed to radiation delivery devices for therapeutic uses, including palladium and iodine delivery devices, processes for making such devices, and containers for storing and shipping such devices, and has several additional United States patent applications pending that also relate to this subject matter. The Company also has some corresponding issued patents in Australia, Canada, Mexico and New Zealand, as well as some corresponding pending patent applications in Australia, Canada, Japan, the European Patent Office (representing up to 24 European Countries), New Zealand, and South Africa, as well as one pending Patent Cooperation Treaty patent application currently designating more than 120 countries. The Company also has an issued United States patent relating to the use of isotopes and isotopic compositions for secure identification of various articles of commerce, as well as corresponding pending patent applications in Canada and the European Patent Office. In addition, the Company has six pending United States patent applications relating to other new products and services related to the business of the Company. The Company considers the ownership of patents important, but not necessarily essential, to its operations. The Company also uses a strategy of confidentiality agreements and trade secret treatment to provide primary protection to a number of proprietary design modifications in the cyclotrons, as well as various production processes.

The Company also holds a worldwide exclusive license from the University of Missouri for the use of technology required for producing the TheraSphere^Ò device. Theragenics™ holds the rights to all improvements developed by the University of Missouri on this technology. The Company, in turn, sublicenses exclusive worldwide rights to this technology and all improvements to Nordion International, Inc. Pursuant to its licensing agreement with the University of Missouri, the Company is obligated to pay the University the greater of a fixed annual amount or a percentage of the gross sales amount derived from sales of the TheraSphere^Ò device.

The Company holds an exclusive license to patents for technology concerning methods for delivery of the TheraSphereÒ device in several countries, including the United States, Canada, Australia, Argentina, South Africa and the countries of the European Patent Convention, and has an exclusive license to some additional patent applications on file in other countries, including Japan. The Company exclusively sub-licenses this technology to Nordion International, Inc. for worldwide use.

The Company also relies to a significant degree on trade secrets, proprietary know-how and technological advances that are either not patentable or which the Company chooses not to patent. In particular, the Company has designed certain modifications to its cyclotrons as well as various production processes that it deems to be proprietary. The Company seeks to protect non-patented proprietary information, in part, by confidentiality agreements with suppliers, employees and consultants.

Seasonality

Although effects from seasonality cannot be identified in relation to a specific quarter or quarters, Management believes that holidays, major medical conventions and vacations taken by physicians, patients and patients’ families, may have a seasonal impact on sales for the TheraSeed^® and I-Seed devices.

Research and Development

Research and development (R&D) expenses were $9.6 million, $7.5 million, and $6.5 million in 2004, 2003 and 2002, respectively. R&D expenses have related primarily to the peripheral vascular and macular degeneration programs, as well as development efforts to improve the Company’s proprietary production processes, and include the cost of palladium-103 utilized in R&D initiatives (see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations, 2004 compared to 2003 and 2003 compared to 2002”).

Competition

The Company competes in a market characterized by technological innovation, extensive research efforts and significant competition. In general, the TheraSeed^® and I-Seed devices compete with conventional methods of treating localized cancer, including, but not limited to, radical prostatectomy (RP) and external beam radiation therapy (EBRT) which includes intensity modulated radiation therapy (IMRT), as well as competing permanent devices. RP currently represents the most common medical treatment for early-stage, localized prostate cancer. EBRT is also a well-established method of treatment and is widely accepted for patients who represent a poor surgical risk or whose prostate cancer has advanced beyond the stage for which surgical treatment is indicated. Management believes that if general conversion from these treatment options (or other established or conventional procedures) to brachytherapy treatment does occur, such conversion will likely be the result of a combination of equivalent or better efficacy, reduced incidence of side effects and complications, lower cost, other quality of life issues and pressure by health care providers and patients. In addition, a third-party study commissioned by the Company indicated the direct historical correlation between fair reimbursement for brachytherapy and the number of brachytherapy procedures performed (see also Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Medicare Developments”).

Several companies produce and distribute palladium-103 and iodine-125 seeds, which compete directly with the TheraSeed^® and I-Seed devices. Management believes that Theragenics™ has competitive advantages over these companies including, but not limited to: (i) its proprietary production processes that have been developed and patented; (ii) its record of reliability and safety in its manufacturing operations; (iii) the time and resources required for competitors’ production capabilities to ramp up to commercial production on a scale comparable to Theragenics™; (iv) outsourcing of the Company’s cancer information center to healthcare specialist, Telerx, a subsidiary of Merck Pharmaceutical and (v) its direct sales force, the non-exclusive distribution agreements that the Company currently has in place, and the strategic alliance with International Urology Network, which allow it to leverage multiple distribution channels and access multiple marketing approaches and philosophies.

At any point in time, Management of Theragenics™ and/or its non-exclusive distributors may change their respective pricing policies for the TheraSeed^® or I-Seed (in the case of Theragenics™) device in order to take advantage of market opportunities or respond to competitive situations. Responding to market opportunities and competitive situations, including but not limited to competitor selling tactics, could have an adverse effect on the prices of the TheraSeed^® or I-Seed device and/or could have a favorable effect on market share and volumes, while failure to do so could adversely affect market share and volumes although per unit pricing could possibly be maintained.

In addition to the competition from the procedures and companies noted above, many companies, both public and private, are researching new and innovative methods of preventing and treating cancer. In addition, many companies, including many large, well-known pharmaceutical, medical device and chemical companies that have significant resources available to them, are engaged in radiological pharmaceutical and device research. These companies are located in the United States, Europe and throughout the world. Significant developments by any of these companies could have a material adverse effect on the demand for Theragenics’™ products.