Wednesday, July 19, 2006

Calls of Note Part 3

- Wachovia is cautious on Radiation Therapy Services (NASDAQ:RTSX) after Medicare chief Herb Kuhn made comments that could create speculation that radiation oncology reimbursement could be cut when the Deficit Reduction Act provision for diagnostic imaging cuts are implemented in 2007. The DRA specifies that freestanding diagnostic imaging centers will be paid no more than hospital outpatient departments for certain diagnostic imaging procedures. Specifically, Mr. Kuhn was asked, Could you please tell me if radiation therapy is included in these cuts. Mr. Kuhn responded, Yes, that is included under DRA. As the firm understands it, Mr. Kuhn gave no further clarification to his answer.

Firm notes they are not very concerned by the CMS comments. They suspect that Mr. Kuhn was referring to diagnostic imaging procedures performed in a radiation oncology center, but excluding diagnostic and screening mammography. Given the DRA wording, they believe that the imaging cuts most likely will be applied to diagnostic imaging procedures only (and not to therapeutic procedures utilizing imaging technology). As the firm has noted in the past, RTSX derives less than 2% of its revenue from diagnostic imaging procedures noted in the DRA.

Believes that RTSX shares could trade between $36 and $40 over the next 12 months. Maintains Outperform.

Notablecalls: Expect to see some pressure on RTSX stock. Nothing drastic, though.

- Merrill Lynch reiterates Buy rating and $40 tgt on Osi Pharma (NASDAQ:OSIP) as they believe there is likely to be upside to ex-US Tarceva sales projections when Roche reports on Thursday, expenses related to the eye business may be aggressively cut when OSI reports earnings at the end of July, and Genentech's recent report of US Tarceva sales, suggests the drug is doing better than expected.

Firm projects sales of $52 - 53 MM, which is above consensus of about $48 MM. Importantly though, ex-US sales may be even stronger than it seems because Tarceva is not even being sold yet in Italy or the UK because those countries have not yet approved pricing. They expect pricing approvals there to occur by 4Q06, which should provide further upside to ex-US sales.

Notablecalls: OSIP looks like it wants to go higher from here. Would risk $0.50.

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