After hitting the addiction treatment scene a little over two years ago with a protocol aimed at treating the physiological elements of the disease of addiction, Hythiam has generated a lot of interest and attention, as well as a fair degree of skepticism. Hythiam says its Prometa protocol, formerly marketed as the HANDS protocol, substantially reduces craving in patients suffering from alcohol, cocaine and methamphetamine addiction, as well as producing other beneficial physiological effects that lead to quicker recovery of cognitive functions, especially during the early often acute phase of patient treatment.

In late March, Hythiam released a paper by one of Prometa’s licensees, Dr. Raymond Johnson of Naples, FL, who had earlier presented the preliminary Prometa outcomes data at the Florida Society of Addiction Medicine’s annual conference. After treating over 50 patients with Prometa - a combination of nutritional supplements and several FDA approved medications used off-label and administered intravenously - Dr. Johnson found that a majority of patients showed “immediate, dramatic gains in functional improvement, which for clinical purposes constituted remission of their disease.” The rest of the patients showed improvement that was considered “clinically effective in quite an exceptional way.”

After mulling Dr. Johnson’s paper, investors began piling into Hythiam shares the day after the study was made public, driving the stock’s price sharply higher. Trading around $6.75 before the Johnson paper hit, Hythiam shares “gapped” up to open at $8.00 a share on March 28, climbing steadily higher during the day to reach a peak of $9.15 a share. The stock closed up about 30 percent from pre-Johnson paper levels at $8.71, making Hythiam one of the biggest gainers on the Nasdaq market on enormous volume of 3.7 million shares, about 10 times the average daily trading volume in the company’s shares over the prior three months.

“We have seen about a doubling in the number of investor inquiries about Hythiam over the past few weeks,” said analyst Gene Mannheimer, who follows Hythiam as SVP Equity Research at brokerage Caris & Co. “It was somewhat bewildering that the stock moved a day after the Johnson report, but Hythiam has until now been a largely undiscovered stock, which may account for the market’s inefficient reaction to the news.”

In the ensuing days following their March 28 jump, Hythiam shares continued climb on heavy volume, reaching an alltime high on April 3rd of $9.80, which gave the company on that day an astounding market value of almost $400 million. Mannheimer says that when compared to the operating fundamentals of the company - Hythiam posted just $1.2 million in revenues last year and an operating loss of $25 million - Hythiam shares are clearly overvalued. But he points out that Hythiam stock trades in almost the exact same manner as do biotech and early stage pharma shares. “Hythiam stock, like the stock of these types of companies, trades largely on expectations and anticipation. These are event driven stocks that primarily derive their value from what investors think of the promise of their pharmacological and medical treatments, perceptions of that promise to a large extent being determined by clinical trial result announcements.”

By giving Hythiam such a high valuation relative to its financial fundamentals, investors are clearly signaling they see a lot of promise for Hythiam and its Prometa protocol. Some analysts do too, including UBS Securities’ Donald Hooker, who estimates that Hythiam will not achieve profitability until 2009, but nevertheless anticipates the company’s stock price will reach $15 a share in within the next year.

Part of what’s behind Hooker’s optimism is his assessment of the enormous market opportunity for Hythiam. Culling data from SAMHSA’s latest National Survey on Drug Use and Health (NSDUH) , UBS estimates that the total market opportunity for Prometa could be as high as $8 billion annually. Assumptions from the NSDUH were based not on the data series’ estimates of those who need treatment, about 23 million, but on the harder much smaller figures recording those who admit they need treatment or are actively seeking it, 1.5 million and 1.2 million respectively. Of course, the market opportunity will only exist for Hythiam if the Prometa protocol is shown definitively to be efficacious in treating alcoholism and addiction to stimulants like cocaine and methamphetamine.

On that score, some investors, and especially clinicians, still remain skeptical. Appearing on Jim Cramer’s very popular CNBC investment show Real Money in early April, Hythiam CEO Terren Peizer outlined the upcoming studies he believes will prove the efficacy of Prometa, pointing out that “double blind placebo” studies, the most scientifically rigorous kind that clinicians and investors demand before definitively deciding on efficacy, are indeed forthcoming. Jim Cramer concluded the segment by saying he was skeptical, but that he would keep an open mind about Hythiam until the double blind placebo study clinical trials are in, asserting he would likely purchase the stock if results were positive.

But to get those results, Cramer and other investors, as well as industry clinicians, are going to have to wait a while. According Caris & Co.’s Mannheimer, results from a controlled, randomized Prometa clinical trial being undertaken by Cedars-Sinai Medical Center in Los Angeles to determine the protocol’s effectiveness with alcoholics are not expected until late 2006 at the earliest. And a UCLA clinical trial, to be conducted by renowned addictionologist Dr. Walter Ling, is not expected to make results public until the second half of 2007, according to Mannheimer. He also says a double blind placebo clinical trial on alcohol being done at the University of South Carolina won’t likely yield results until the first half of 2007.

An announcement, based on an “open label” study being conducted by famed researcher Dr. Harold Urschel, will soon be made public, possibly at the end of April or in early May, according to Peizer. But the study is not the hard core “double blind placebo” scientific evidence that most clinicians and many investors require as a condition for dropping their skepticism.

Nevertheless, Hythiam is also working with a number of state courts systems, including Louisiana and Washington, to determine the effectiveness of Prometa to treat the huge numbers of meth addicts that are clogging judicial systems nationwide. The state of Idaho, where officials have announced that methamphetamine has become the state’s number one substance abuse problem, has also agreed to work with Hythiam. Says State Supreme Court Justice Daniel Eismann: “The drug court system represents a good venue for conducting a pilot such as this one [with Prometa] on behalf of the state. Our existing system of monitoring drug use through regular drug testing is a proven one. As a result, we can share detailed outcomes information with other state agencies in Idaho and throughout the country.” Hythiam is clearly hoping that positive outcomes within state court systems will help it in getting the public sector to sign long-term contracts for the use of Prometa.

And while all the clinical testing is going on, Hythiam is building and testing its marketing plan, no doubt waiting for the clinical trial results to initiate a full court press marketing initiative. Last summer, Hythiam hired a high powered branding consultant, launching the new brand name Prometa.

And the company is also engaged in consumer print and radio tests in the Los Angeles area and in South Florida. During an all-day meeting with Wall Street analysts and investors in January, Hythiam unveiled a plan to approach the estates of a number of celebrities who had fatal encounters with the disease of addiction, including the estate of the famed and highly talented comedian Chris Farley. Hythiam marketing officials said they wanted to initiate a billboard campaign with pictures of the celebrities around a theme that addiction is a physiological phenomenon whose treatment is medical.

In early April, Hythiam announced it had reached an agreement with the estate of Chris Farley, which is administered by Farley’s mother, to use the comedian’s image in a billboard campaign. Hythiam paid the estate $25,000 for the right to use the image. The first Hythiam billboard graced with Farley’s picture appeared in Los Angeles in early April on a high traffic stretch of Sunset Boulevard near the Chateau Marmont Hotel, where another famous Saturday Night Live comic, John Belushi, died of an accidental overdose in 1982.

The announcement by Hythiam of the Farley billboard created intense interest from the media, with stories appearing in newspapers nationwide, including USA Today and the Los Angeles Times. Television interest was also extensive, with Terren Peizer invited to appear on the Today Show on NBC. Peizer made his appearance on the show the morning of April 3rd, sending the company’s stock that day to its all-time high price of just under $10.

The decision by Hythiam to approach the estates of dead celebrities whose demise was caused by addiction, with the resulting Farley billboard, is no doubt a controversial one. Some media critics have labeled the campaign tasteless, a shameless effort on Hythiam’s part to exploit the tragic deaths of addicted celebrities strictly for commercial gain.

But Chris Farley’s brother Tom, who runs the Chris Farley Foundation in Madison, WI, says that the money had little to do with the decision to allow the use of his brother’s image. Farley told the Los Angeles Times that what was important to him was the way in which the Hythiam campaign attempted to “change perceptions” about addiction. Terren Peizer agrees, saying that one of the main purposes behind the billboard is to draw the public’s attention to the fact that addiction is a medical disease, not a moral failing.

The Sunset Boulevard billboard is just one of a series of five that will go up in the Los Angeles market over the near term, with several panels also planned for the Burbank airport, as well as campaigns on the radio and the Internet. The Internet campaign will be built around a new web site, www.overcomeaddiction.com.

The Chris Farley billboards are obviously targeted at a youth audience, where drug abuse rates are higher. Peizer said that hopefully other, older celebrities can be used to target different demographics. At the analyst meeting in January where Hythiam discussed its billboard campaign plan, one investor suggested to the company that it use Judy Garland in a targeted campaign aimed at the gay community. He pointed out that Garland is hugely popular among gays and that they are increasingly large abusers of methamphetamine, for which Hythiam claims its Prometa protocol is particularly effective. While agreeing that the gay community is certainly a demographic which could benefit from Prometa, Hythiam wouldn’t say whether or not it had approached Garland’s estate. JW