Nordion Continues To Prepare Investors For A New-Look Company

| About: Nordion Inc. (NDZ)

The changes taking place at Nordion (NYSE:NDZ) are not for the better good of its long-term performance; in fact, desperation appears to be setting in. The stock has now lost nearly 40% of its value since the end of August, and the company appears to be preparing for a period where its isotope business is no more, or at least drastically reduced. There is however a small chance that the company keeps this segment; but judging by its recent moves, I would bet that segment of the company will soon cease to exist as we know it.

First, for a little history lesson: There are more than 18 million procedures performed annually that use medical isotopes. This space is almost solely controlled by both Nordion and Covidien (COV). The most common and most produced medical isotopes are molybdenum-99 (Mo-99) and its derivative,technetium-99m (Tc-99m); and the NRU reactor in Canada accounts for most of this production.

The NRU reactor is a Canadian reactor that is operated by Nordion, however it is old and is close to shutting down. The company has been trying diligently and desperately to find a solution to this problem-another source, if you will, to produce the ever-so-important isotopes. The lack of stability surrounding the NRU reactor has greatly affected Nordion, and the company had placed its hopes in Atomic Energy of Canada Limited (AECL), in desperate hopes that the organization would approve the construction of the MAPLE facilities, which could have been a viable source of Mo-99 production.

The big defeat came when the AECL denied the construction of the MAPLE facilities, pushing shares of Nordion lower by 40%, and now leaving it with few options. In terms of business and lost revenue, under perfect conditions, Nordion's isotope business produces around $100 million annually. However, because of outages and instability issues, the production has allowed for just $80 million over the last 12 months. Yet still it contributes nearly half of the company's total revenue and almost all of the company's profit. Consequently, the loss of this business will be almost catastrophic to the short-term performance of this company, but is a problem that shareholders have now apparently priced into the stock.

So the big question is: What happens with the Mo-99 production? With 80% of all isotope related procedures using Mo-99, it having a short useful life after production, and no viable reactor to produce the isotope, who will assume responsibility? To answer this question you must understand that the U.S. has attempted to avoid the loss in production of radioisotopes while at the same time phasing out or eliminating the safety concerns of using highly-enriched uranium (HEU), also known as weapons grade uranium, the source of a bulk of our current radioisotopes. However, with the threat of America losing a major source and with America having one of the only reactors large enough to handle such large demand through the University of Missouri Research Reactor (MURR), it does appear that production will come to America.

Last June, the Obama Administration endorsed amendment S. 99 of the American Medical Isotopes Production Act of 2011 to minimize global commerce in HEU in order to reduce risks of nuclear terrorism and nuclear proliferation, and to ensure a reliable supply of medical radioisotopes derived from Mo-99 by fostering domestic production without HEU. In layman's terms, this means two things: It means that neither Nordion nor Covidien qualify for endorsement under this act due to both utilizing high levels of HEU, and that the U.S. would be willing to allow production if only low levels of HEU could be produced.

The current stance of government brings me to my next point, and it's an unusual one. The bulk of this market could be dominated by an ever-so-small company called Advanced Medical Isotope Corp (OTCPK:ADMD). Now, before you think that this is just an attempt to sell you on a small company you must know that I do not normally invest in small capitalization development-phase companies which are typically speculative with a low reward/risk ratio, but the facts are overwhelming in this case.

There are two reasons that Advanced Medical Isotope could control Mo-99 production: 1) The company has patent rights to use electron beam accelerators to create the isotopes with low levels of HEU. 2) It has a strong relationship with the only reactor capable of producing large amount of Mo-99 in the U.S., which is the MURR reactor. For the last year Advanced Medical Isotope has been positioning itself for this opportunity, and has publicly said that it can handle 50% of the U.S. Mo-99 demand, giving the company a great opportunity.

Advanced Medical Isotope might be a small company, but it has a very prestigious staff of professionals who have been preparing for this day. The company was smart in this decision because, when you sort through the space, there is simply no other company with the relationships, the patents, or the knowledge to benefit from the lost business at Nordion. In terms of upside, if Advanced Medical Isotope earns 50% of Nordion's Mo-99 business, which is 80% of all isotope production, then we're talking about revenue of roughly $40 million annually.

The bottom line is that the medical isotope space is facing a bit of a crossroad, and the U.S. will step up to the plate because we consume most of the world's Mo-99 product. Covidien will remain relevant, but is a $28 billion diversified business, that would have to form new relationships, develop new products, and reorganize its structure to produce an extra $75 million annually. I suppose it's possible, but the company hasn't appeared too aggressive in its initiatives with partner Babcock & Wilcox (BWC), in an attempt to supply Mo-99 through "tiny reactors". The problems are that these tiny reactors have much less power and could not supply such a large demand and have faced numerous issues in early development. However, the partnership could perhaps supply the additional 50% of demand that MURR will not produce.

Covidien does not seem too concerned with the medical isotope business, nor is it making significant moves to capitalize on the demand. Back on December 26th the company announced the acquisition of privately-held CV Ingenuity for an undisclosed amount. The newly acquired company's key asset is a Drug Coated Balloon platform for treating peripheral arterial disease, but it is an investigational-phase platform.

Covidien's recent acquisition suggests that it is moving in a completely different direction away from medical isotopes. Think about it: Covidien is a large healthcare company and could easily attack and dominate a much larger chunk of the globe's Mo-99 demand that will be lost by Nordion, but instead it's acquiring a company that concentrates on vascular disease, one that aims to "allow" for "natural vessel healing". In the end, I see no other solution: The MURR reactor will be activated to produce Mo-99 on a large scale, with low levels of HEU, and Advanced Medical Isotope Corp-with its partnership- could very likely be the company to benefit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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