Nordion Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Nordion Inc. (NDZ)

Nordion (NYSE:NDZ)

Q4 2012 Earnings Call

January 28, 2013 10:00 am ET


Ana Raman - Director of Investor Relations

Steve M. West - Chief Executive Officer, Director, Member of Technology Committee and Interim Chief Operating Officer of Targeted Therapies

G. Peter Dans - Chief Financial Officer and Senior Vice President


Stephanie Price - CIBC World Markets Inc., Research Division

Lennox Gibbs - TD Securities Equity Research

Neil Maruoka - Canaccord Genuity, Research Division

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Alan Ridgeway - Paradigm Capital, Inc., Research Division


Good morning, ladies and gentlemen. Welcome to the Nordion Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Ms. Ana Raman, Investors Relations. Please go ahead, Ms. Raman.

Ana Raman

Thanks, Jade. Good morning, and welcome to Nordion's Fourth Quarter Fiscal 2012 Earnings Call and Webcast. On the call this morning are our Chief Executive Officer, Steve West; and our Chief Financial Officer, Peter Dans. The format for our call will be that Steve and Peter will provide their perspectives, and then we'll open up the lines for questions to analysts. Slides have been posted to our website to accompany this webcast.

Our fourth quarter news release was issued this morning before markets opened. We also filed our 2012 annual report, management discussion and analysis, audited financial statements, annual information form and management proxy circular on SEDAR, as well as the 40-S on EDGAR. These documents can also be accessed from our website at

We also filed our amended and restated credit facility, which is now available on EDGAR. Please note, per Slide 2, today's comments do contain forward-looking information, and actual results may differ materially from expected results because of various risk factors. These factors are described in Nordion's year-end news release and annual filings. Results have been prepared under U.S. GAAP, and all amounts mentioned are in U.S. dollars, except when otherwise noted.

Turning to Slide 3, we have included certain non-GAAP measures. These include adjusted net income and adjusted earnings per share. These non-GAAP measures exclude certain items and are intended by management to provide investors with a meaningful, consistent comparison of the company's core operating results. This information should be considered as a supplement to, not a substitute for, the corresponding financial measures prepared in accordance with GAAP.

During our fourth quarter, we announced an organizational realignment that resulted in changes to our segments. As a result of this realignment, the results reported in our 2012 financial statements and MD&A reflect our new segment structure. We continue to report our operations as 3 business segments: Targeted Therapies, Sterilization Technologies and Medical Isotopes, as well as certain corporate functions and activities reported as Corporate and Other.

The primary change to our segment reporting is that Contract Manufacturing, previously reported under Targeted Therapies, is now reported in the Medical Isotopes segment. This leaves TheraSphere as the only product reported under Targeted Therapies. Prior years have been restated to reflect this change. Financial supplements have been posted on our website, providing additional detail of our restated segment earnings. With that, I'll turn it over to Steve.

Steve M. West

Thank you, Ana, and good morning to everyone joining us today. Nordion ended its 2012 fiscal year with a solid Q4 as the company's consolidated revenue and gross margins strengthened sequentially. We reported Q4 revenue of $74.7 million, relatively flat compared to the same period last year.

Turning to Chart 6. For the 2012 fiscal year, we generated revenue of $244.8 million, which was down 11% from revenue of $274 million in 2011. Today, we announced that Nordion has initiated a review of strategic alternatives. Jefferies & Company has been engaged to advise and assist in this review. The review is in its early stages. Throughout the process, we plan to remain focused on operating the business and executing our planned business strategies. Our intention is to work through this process in a measured and responsible manner with a view of enhancing shareholder value and creating new opportunities for the company.

In December, we announced that we were postponing the reporting of our quarterly and annual results to seek amendments to our credit facility. I'm pleased to announce that we recently entered into an $80 million amended and restated senior secured credit facility agreement. The amended credit facility supports Nordion's liquidity and can be used for general corporate purposes.

Several key milestone events occurred in Q4. On September 10, Nordion announced that we were unsuccessful in our claim for specific performance or monetary damages related to AECL's canceled construction of the MAPLE facilities. Due to this outcome and the potential payment of a portion of AECL's arbitration costs, the internal investigation announced in August, pension funding obligations and moly-99 revenue and supply considerations, the board made the difficult decision in Q4 to suspend Nordion's quarterly dividend and cancel its share buyback program.

Subsequent to our 2012 year end, Nordion received AECL's submission relating to arbitration costs of $46 million. As a result of the tribunal's decision, which favored AECL, Nordion may be responsible for a portion of AECL's costs. Therefore, we accrued for a portion of the costs in our fourth quarter.

We have assessed the legal merits and financial implications of AECL's submission. We expect to respond with our cost submission in early 2013, during which the tribunal is expected to hold proceedings to hear both parties during our second fiscal quarter of 2013. Nordion expects a decision to be rendered regarding AECL's arbitration-related costs after the proceedings.

The arbitration panel's decision left it open to Nordion to pursue its core claim under the 1996 Isotope Production Facilities Agreement or IPFA, which was preserved under the 2006 Interim and Long Term Supply Agreement or the ILTSA. Last week, we confirmed that we are pursuing our rights under the IPFA and filed an amended statement of claim with the Ontario Superior Court of Justice against AECL.

Taking into consideration the analysis of the decision by the arbitrators, the amended claim no longer includes the government of Canada. In addition, the damages have been substantially reduced from $1.6 billion to $243.5 million.

Based on the current schedule, we expect documentary productions and discoveries to begin in 2013 and that this matter will not be set for trial before mid-2014. We believe we have a strong case for negligence and breach with the IPFA against AECL.

Also in the fourth quarter, Nordion conducted an organizational realignment, which took us from a functional organization model to a business unit model that includes 2 distinct business units, Targeted Therapies and Specialty Isotopes, which include Sterilization Technologies and Medical Isotopes. This change, made effective on November 1, we expect will better allow us to seize opportunities and address our customers' unique requirements across our diverse businesses.

In October 2012, Nordion and JSC Isotope agreed that the current moly-99 supply agreement structure was no longer appropriate. We jointly terminated the Russian moly-99 supply agreement that we had entered into in September 2010. In its place, we received permission to enter into negotiation directly with Russia's Research Institute of Atomic Reactors, or RIAR, for the supply of moly-99.

Now please turn to Chart 8 of the presentation, and I'll turn to our fourth quarter segment results, starting with TheraSphere. TheraSphere revenue for Q4 fiscal 2012 of $12 million increased by 10% compared with Q4 of 2011. Full-year revenue of $48.5 million increased by 14% compared with fiscal 2011. This year-over-year sales growth was primarily due to adoption by new clinics, and today, TheraSphere is used in approximately 200 sites in 14 countries around the world, which translates to 31 new sites worldwide that ordered in 2012.

Today, our top 10 TheraSphere customers account for greater than 30% of doses administered. Fluctuations in these larger accounts can have an impact on the overall revenue performance of our product, and they are a normal part of the growth of a high-value niche product. In response to this, we embarked on a two-pronged program focused on deepening existing customer relationships and diversifying our global customer base. We ramped up training and education programs for interventional oncology teams, and our training programs are focused on increasing adoption and use within our existing loyal accounts.

Strategically, we are focusing effort and investment in Europe, the Middle East and Asia, building our capabilities over the long term as we see strong growth opportunities in these markets. In our 4 centers of excellence worldwide, more than 257 physicians were trained. North America, Europe and the Middle East grew this highly successful program.

Our commitment to manage the diversity and breadth of our customer accounts globally and create a solid foundation of training depth in our existing accounts is planned to remain a priority in 2013.

We continue to make investments in TheraSphere's growth. Today, in addition to the 3 Phase III trials, there are 16 investigator-initiated studies underway. Together, the effort investment in support of these trials is expected to expand approved indications in the U.S., demonstrate improved effectiveness of the certain existing treatment options to drive adoption growth in Europe and Asia and expand our European reimbursement.

We expect the level of activity associated with these trials to increase during fiscal 2013, and this is due to the greater number of clinical sites being initiated, as well as a ramp-up in the number of patients being screened for eligibility and enrolled.

We continue to see some challenges with the STOP-HCC trial, which we are actively assessing and addressing. TheraSphere has been used for a number of years in the U.S. and remains available under the Humanitarian Device Exemption in the United States during the clinical trials. We are also in the process of initiating sites outside of the U.S., including Canada, France and Germany, which we believe may provide increased patient enrollment.

We are progressing in our European ESP trial, a randomized multicenter Phase III clinical trial, to evaluate the safety of -- and efficacy of TheraSphere versus Sorafenib. The focus of ESP is on the treatment of patients with portal vein thrombosis associated with unresectable hepatocellular carcinoma, which is the most common form of primary liver cancer.

TheraSphere continues to fill an unmet global need for a targeted liver cancer treatment. Liver cancer is responsible for 695,000 deaths annually around the world and is the fifth most common cancer worldwide. With limited treatments for liver cancer available, TheraSphere offers liver cancer patients and their families hope. Dr. Jörg Schlaak, Deputy Head of the Department of Gastroenterology and Hepatology at Essen University Hospital in Germany, has noted that unlike other treatments, this procedure can be performed in about 1 hour with a brief hospital stay, and it is well tolerated with side effects that are not as severe as those associated with other liver cancer therapies.

TheraSphere has become the standard of care for Essen's HCC patients. To realize TheraSphere's significant potential, we expect to increase our support for TheraSphere, reinvesting in medical affairs, sales and marketing and initial investments in the Asia market in 2013.

We've been pleased to see the growth of TheraSphere over the past few years. We recognize that in order to create sustainable value for this product, additional staffing and investments are required. With our focus on increased investment in 2013, we see exciting opportunities for Nordion in TheraSphere growth.

Turning in a solid performance this quarter, we believe TheraSphere continues to offer attractive opportunities, expansion and sustainable growth in the future.

Now let's turn to our Sterilization Technologies segment. Sterilization Technologies revenue for fourth quarter 2012 of $32.3 million was relatively flat compared with the same period in 2011. Strong cobalt revenue of $31 million, slightly offset by lower Sterilization-Other revenue during the quarter. Our fiscal 2012 Sterilization Technologies revenue of $95.4 million was down 12% compared with 2011. This decrease was primarily due to the fact that we did not sell any production irradiators in 2012, combined with slightly lower volumes of cobalt-60 shipments.

During fiscal 2012, we signed multiyear contract extensions with 3 of our major customers to supply cobalt-60. We have now entered into long-term contracts with customers who account for approximately 2/3 of our 2012 cobalt-60 volumes.

Providing us with visibility into customer demand, the majority of the contracts also provide for increasing revenue over the course of the contract term. Our sales team, focused on growing the use of gamma in the U.S. and Europe, are fostering the development of new gamma sterilization applications. As well, we are working to foster cobalt-60 demand in emerging markets like Latin America and Asia-Pacific, including China, through market development and education.

Now let's turn to our Medical Isotopes business. Medical Isotopes revenue for Q4 2012 was $30.3 million, down 1% compared with Q4 of 2011. Our reactor and Cyclotron isotopes revenues were up 13% and 10%, respectively, in the quarter. Our Contract Manufacturing, which is now reported under Medical Isotopes, was down 64% this period. The decrease in Contract Manufacturing compared to fiscal 2011 was due primarily to fewer third-party products overall, including the impact of the interruption in CardioGen-82 manufacturing, which we have not manufactured since Q1 of 2011. We continue to engage in discussions with Bracco.

For the full year, Medical Isotopes revenue was $101 million, down 18% compared to fiscal 2011. This was due mainly to decreases in sales volume of moly-99 to our largest customer and pricing factors. There were also unplanned interruptions in supply from the NRU reactor, which occurred in Q2 and Q3 this past fiscal year. All 3 product lines in Medical Isotopes were down on an annual basis.

Now we made some progress with key Medical Isotope customers in Q4. In October, we extended our contract for an additional 2 years through 2015 with our largest Medical Isotopes customer, Lantheus Medical Imaging, for the supply of moly-99. Nordion expects to supply moly-99 on a weekly basis to Lantheus, and the multiyear contract reflects specific pricing for each year of the contract.

In Contract Manufacturing, Nordion signed a 2-year extension through 2014 of its agreement with GlaxoSmithKline Inc. relating to the supplier manufacture of Bexxar. Nordion has been contracting with GSK for the last 9 years.

Overall, Medical Isotopes supply chain, particularly for moly-99, is extremely complex and continues to face short- and long-term challenges. While major reactors are in the process of exiting the business and conversion activities to new sources of supply are slowly ramping up, global nuclear medicine community may once again be faced with uncertainty of supply. This situation presents both a challenge and an opportunity for Nordion.

Nordion has demonstrated the capacity and flexibility to react to short-notice orders and supplies the majority of all spot orders when customers are confronted with an outage or disruption in their supply chain. The prime reactor in Europe used to supply certain of our competitors is currently shut down. We continue to receive additional orders as a result of this shutdown. However, its duration of the shutdown is unknown at this time.

While we continue to manage our ongoing Medical Isotopes supply and customer demand. In the past 2 years, we expect the NRU reactor to shut down for approximately 1 month in 2013 for planned maintenance. The maintenance is currently scheduled to occur in the spring starting in April and is expected to conclude a month later. We will be working with our customers to assist them in finding a bridge for their demand during this planned maintenance.

In the coming year, we plan to navigate these challenges and seek opportunities while we optimize the value of the Medical Isotopes business.

So in conclusion, in 2012, Nordion delivered profitability and progress across our key business segments. We experienced growth and made inroads into emerging markets with TheraSphere. Sterilization Technologies maintained global leadership position, signed long-term customer agreements and demonstrating continued excellence in operations and logistics. And our Medical Isotopes business continued to play an important role in the global health care supply chain.

Our organizational realignment has positioned us to better execute on our operational priorities with focus and clarity for each of those business segments. We are confident that this new structure will enable us to seize market opportunities and service our customers and build shareholder value.

Now to provide you with more details on our Q4 financial results and our outlook for 2013, I will turn the call over to Peter Dans, our CFO. Peter?

G. Peter Dans

Thanks, Steve, and good morning, everyone. Today, I'll focus on the fourth quarter results and provide an outlook for 2013. To start off, I'm on Chart 12. Nordion achieved revenue of $74.7 million in our fiscal fourth quarter, which was relatively flat compared with $74 million in the same period last year. We experienced a GAAP net loss of $43.5 million and a loss per share of $0.70, compared with a GAAP net income of $6.9 million and $0.11 per share in the fourth quarter of 2011.

On an adjusted basis, we achieved net income of $21.4 million, up 14% compared with net income of $18.7 million in the fourth quarter of 2011. This translated to adjusted earnings per share of $0.34, up 13% compared with Q4 2011.

The net income in the fourth quarter was significantly impacted by an income tax expense of approximately $32 million and litigation accruals of approximately $24 million. The income tax expense was primarily due to an increase in the valuation allowance as we will not -- as we likely will not realize all of our net deferred tax assets in the foreseeable future.

Gross margin percentage strengthened this past quarter to 59%, up from 57% in the previous comparable period in 2011. This was primarily driven by the revenue growth we experienced from TheraSphere and a strong cobalt quarter. I would like to point out that our Targeted Therapies and Sterilization Technologies businesses had the highest quarterly gross margins in the past quarter compared with the previous quarters in the past 2 years.

Our consolidated basis -- on a consolidated business segment basis, earnings were up 6% to $29.5 million in Q4 2012 versus the same period in the previous year, driven by solid performance across our high-margin products: TheraSphere, cobalt and reactor isotopes.

Moving to Chart 13. Targeted Therapies revenue, which now only includes TheraSphere, grew 10% in the fourth quarter of 2012 versus 2011 due to an increase in sales volumes. Targeted Therapies segment earnings were up 28%, reflecting the relatively fixed nature of TheraSphere costs over certain volumes.

On an annual basis, TheraSphere revenue grew by [indiscernible] To $48.5 million in 2012, up 14% compared with 2011, which was below our original guidance of 30% growth but in line with the revised guidance of 15% growth. 2012 gross margin percentage was 72%, up from 70% in 2011.

For 2013, we expect TheraSphere to grow in the mid-teen percentage range. Our growth remains solid from what we believe is an increase in confidence in the product in clinical adoption in the current installed base of customers. This level of growth has eased from the 30% to 40% growth we saw in 2010 and 2011 due to the higher revenue base from which we are working, as well as our increased focus on clinical trial execution.

In 2013, we also expect to significantly increase our investments in TheraSphere and SG&A to continue to build our capabilities and strengthen our position. We are planning to make investments in medical affairs, sales and marketing, as well as initial investments in the Asian market. Additionally, we expect R&D spending to increase, including a ramp-up in our clinical development program for TheraSphere and our phase -- 3 Phase III clinical trials, for which we expect to spend in the range of $6 million to $8 million in 2013. As a result of these investments, we expect Targeted Therapies will incur a segment loss in fiscal 2013.

Moving to Chart 14. Sterilization Technologies revenue was relatively flat in the fourth quarter of 2012 compared to 2011. Cobalt revenue increased to $31 million during the quarter, up 10% from $28.1 million in the same period last year due to higher cobalt-60 shipments. The increase in cobalt revenue was offset by lower Sterilization Technologies revenue, as we had sold the production irradiator in the fourth quarter of 2011. Segment earnings for Sterilization Technologies were up 15% due to increased revenue of cobalt-60, which is a higher-margin product in that segment.

For 2013, we expect Sterilization Technologies revenue to be approximately the same as in fiscal 2012, with a slight decrease in cobalt-60 volume largely offset by higher price. Consistent with our revenue profile in 2012, we anticipate that cobalt-60 revenue in the second half of 2013 will be significantly higher than in the first half. Currently, we do not have any orders for production irradiators in 2013.

Now moving to Chart 15. The Medical Isotopes segment, which now includes reactor isotopes, Cyclotron isotopes and Contract Manufacturing, contributed revenue of $30.3 million and segment earnings of $11.3 million in Q4 2012, both down 1% compared with 2011. Reactor isotope revenue, which represents the majority of Medical Isotope revenue, increased by 13% to $24.8 million. The increase in revenue was primarily due to revenue recognition of a $4 million payment received from a customer due to shortfalls in moly-99 volumes below minimum contractual commitments. This was offset, however, by an overall decrease in moly-99 volume and pricing.

For 2013, we expect Medical Isotope revenue to decline approximately 20% compared with 2012. As the revenue decline is primarily driven by moly-99, a higher gross margin product, Medical Isotopes' gross margin is also expected to decline due to the change in product mix while we maintain a similar level of fixed cost.

Next, moving to Chart 16. Last week, we entered into an $80 million amended and restated senior secured credit facility agreement, which replaced the $75 million credit facility agreement from June 2011. The credit facilities consist of a $20 million revolving credit facility and a separate facility of up to $60 million to be used for the issuance of letters of credit. The latter facility will be fully secured, including a pledge of cash collateral. This credit facility is for a 1-year term, which may be extended on mutual agreement by the lenders for successive subsequent periods.

We believe that the revolving credit facility supports Nordion's effort to maintain financial flexibility and liquidity. We plan to use the revolving portion of the credit facility, if required, for general corporate purposes. We expect, however, to fund our pension and the Canadian Nuclear Safety Commission's facilities decommissioning requirements with the issuance of cash-collateralized letters of credit.

During 2012, Nordion worked on several issues, including our internal investigation, arbitration with AECL, as well as other legacy MDS litigation matters. These items accounted for a significant portion of our 2012 costs. Although 2012 costs were substantial, Nordion maintained a solid balance sheet through the fourth quarter. Total cash and cash equivalents at the end of the quarter increased to approximately $109 million, and we continue to carry effectively no debt and to hold a significant deferred tax asset of $57 million to offset future federal cash taxes.

In 2013, we currently estimate the internal investigation and remediation costs will be approximately $10 million, while the legal costs associated with determining AECL's arbitration cost and our pursuit of our legal claim against AECL will be around $2 million. We expect the arbitrators to make a determination of the AECL cost award following the hearings, which we expect would take place in our Q2 2013. In addition, our pension funding costs remain significant in this low interest rate environment.

Our consolidated revenue and segment earnings outlook for 2013 indicate lower levels than 2012. However, we continue to expect solid cash generation from Sterilization Technologies and positive earnings in Medical Isotopes, while we continue to invest in TheraSphere to support continued growth. We at Nordion are working towards providing meaningful total returns to shareholders. We are focused on good corporate governance, delivering quality products to our customers and executing our planned business activities throughout the strategic review process.

This concludes my financial review. Jade, we can now open up the lines for questions.

Question-and-Answer Session


[Operator Instructions] We have a question from Stephanie Price from CIBC.

Stephanie Price - CIBC World Markets Inc., Research Division

On the strategic review, can you give us a bit more of an understanding of where you are in the process and if you have any indications of interest from any parties?

Steve M. West

No, unfortunately, as we said in our press release and as I reiterated in my comments this morning, we are in the early stages, and I think it would be inappropriate for us to make any further comments. And we, frankly, don't intend to be providing any updates until we would be making any kind of material disclosure.

Stephanie Price - CIBC World Markets Inc., Research Division

Okay. Maybe just a quick follow-up. Do you have any sort of timeline for the process?

Steve M. West

It's in its early stages and that's where it sits right now.


The next question is from Lennox Gibbs from TD Securities.

Lennox Gibbs - TD Securities Equity Research

Just with respect to the cobalt-60 supply chain where Chantilly recently shut down permanently and there seem to be plans for extensive shutdowns at Bruce and Pickering. What risk do these disruptions create with respect to your ability to sustain historic output over the short, medium, long term?

Steve M. West

Thanks for your question. So I guess the first way I think about that is you kind of alluded to planned shutdowns. They're not really disruptions. I think we have always a very good line of sight to our suppliers, providers and their plans, which is very helpful because it enables us to plan in the long term as well, so it's always a measured planning process is -- for us. We're always also looking at balancing supply and demand. And as you know, this business has very long timelines attached to either bringing on new supply or even in terms of the cost of demand. So we are always in discussion. We always continue to evaluate the inherent risk to supply. And I would say, at this moment in time, we are continuing to evaluate that. There is nothing that we see that I would -- impacting certainly in the short term, and this is something we've been managing for 40-odd years, and we continue to evaluate our can-do [ph] supply both in Canada, supply in Russia and other opportunities.

Lennox Gibbs - TD Securities Equity Research

What about the medium term, Steve? Let's say you were talking 3, 4 years out, would you still say that you don't see much risk to being able to sustain historic output?

Steve M. West

I think if I were to look at that timeframe, Lennox, I think we're a little more focused on demand as being more of managing our business than we would be in a specific supply situation. And that's where I would kind of look at in terms of if there's any variance. We just need to make sure that there's good strong global demand. And as far as we know, the current capacity globally, ourselves and others in this business, isn't likely to change materially, and I think that's how the market perceives the situation as well.


The next question is from Neil Maruoka from Canaccord Genuity.

Neil Maruoka - Canaccord Genuity, Research Division

Just on the Sterilization Technology, your outlook doesn't include any contribution from GammaFIT. Does this say anything about the progress so far this year? And do you expect to see some GammaFIT orders in fiscal 2013? What's really the upside to that outlook?

Steve M. West

Yes, so we are -- we are working hard on the GammaFIT pipeline, and I would anticipate that we will be getting GammaFIT orders. I'm not sure if we'll get them in 2013. The sales cycle for any production irradiator tends to be somewhat lengthy, generally 2 years or more. With something like GammaFIT as well, it's a product that is targeting a bit of a new segment. It's not necessarily traditional customer for larger-scale production irradiators. We are -- part of the strategy of GammaFIT was to actually increase demand for cobalt. So certainly, our sales team has a pipeline, and we are in conversations. Personally, I would like to think that we're going to be successful in 2013. That doesn't -- that wouldn't translate into revenues in 2013, but certainly, I'd like to think that our sales team will be able to land an order. We'll have to see.

Neil Maruoka - Canaccord Genuity, Research Division

Okay. And just a follow-up on Sterilization again. The margins were clearly stronger this quarter than what we've seen in the recent past. What were the key drivers there?

Steve M. West

Yes, that's primarily because we didn't sell production irradiators, and that reflects more of cobalt-60 in the mix.

G. Peter Dans

And one other thing, just to add on to that, Neil. We did, through the years, see improvement in terms of pricing and as well customer mix, so we finished out the year stronger in that regard as well.

Steve M. West



We have a question from Doug Miehm from RBC Capital Markets.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Peter, in your prepared remarks, I may have missed this, but did you say that there was going to be a loss in the Targeted Therapies business this year relative to the $14 million reported this year?

G. Peter Dans

Yes, that's correct, Doug. So with TheraSphere, and Steve can probably add to my comments, but we've made a decision that we're at the point where we want to make some significant investments in TheraSphere really to drive its long-term potential and growth. And that investment's going to come across the board in terms of increases in selling and marketing, things such as medical affairs, as well as our R&D and clinical trial investment. And as also mentioned, it will include some initial work in terms of moving into Asia, which, again, we believe a significant market opportunity for TheraSphere going forward.

Steve M. West

Yes. And I'd just add to Peter's remarks, Doug, in the sense of -- we've now reached a point with this product where, frankly, historically, we have not put the levels of investment into it that would be commensurate with this type of product that others would have done. And if you compare our current infrastructure, resource cost and the number of people we have driving this product, it's significantly lower than, frankly, the opportunity -- the long-term opportunity that presents itself. And so I don't really characterize TheraSphere as, today, being purely an EBITDA driver as a product. What we're looking for is long-term growth, long-term penetration, successful enrollment in our clinical trials and also, being able to avail of the market opportunity that exists outside of the United States, as well as outside of primary liver cancer. So our strategy is to -- we know this product. It's got good differentiation. It has some unique features to it; for example, it's microembolic. And we think that we need to invest in TheraSphere growth in, in particularly, Europe and Asia, which we haven't done historically.

Neil Maruoka - Canaccord Genuity, Research Division

Okay. Just as a follow-up to that one, and then another question. As we look at 2014 then, more than likely, the cost to run the clinical trials should be ramping up fairly significantly. And as you're still spending this much money, can we assume that you're going to run at a loss for at least a couple of years? That's the follow-up for that one. And my second question is just on -- when I keep reading about commercially reasonable efforts and AECL with respect to moly-99, given what's going on -- you've launched a lawsuit now against the government agency. Could they turn around, say, "moly-99 is not meeting commercially reasonable efforts," and just shut the whole program down tomorrow?

Steve M. West

Okay, Doug, so there's 2 questions there. But I'll take the follow-up, then I'll answer the second one. So I think the characterizing of the next couple of years -- obviously, for TheraSphere, there's a hump to get over. I mean -- and in resourcing this program, I would characterize 2013 in terms of bringing on medical affairs, commercial, clinical and regulatory resources to support the program. You'll see that in 2013. Clinical trials will be ramping up. They'll be ramping up in 2013, and that sort of velocity will carry through to 2014. I think your characterization of the next couple of years of a loss or close to a breakeven is accurate, and that's how we would see it. On the second thing, on Medical Isotopes and AECL, our view is currently that we would anticipate continuing to receive product from AECL and NRU through to 2016.


[Operator Instructions] The next question is from Lennox Gibbs.

Lennox Gibbs - TD Securities Equity Research

So back to the moly business for a sec. So clearly, Lantheus signed, so congrats on that. But speak to other material contracts that may expire during 2013 and also speak to how you might incentivize clients to enter contracts, given the fact that you're facing this supply cliff in 2016.

Steve M. West

Well, Lennox, you raised a critical issue of, well, visibility beyond 2016, and this is one of the significant headwinds that we face with our clients is being able to provide them with a long-term supply strategy. And we recognize that, so we are working on that. And we never talk about it because all of those conversations are commercial, but it has been a struggle, and it will be a struggle. But again, we see the whole industry, frankly, challenged a little bit on supply, obviously, with the current outage taking place in Europe that was an unplanned shut down. There's quite a bit -- as of yet, we don't have any visibility on when Petten is going to return to service. I think the whole industry is a little challenged on supply. And I think the way the customers think right now is relatively short term for sure and multi-supply contracts that don't run for multiyears or maybe 1 or 2 years, but we're not seeing the typical 5- to 10-year contracts that we had because everybody's concerned about what that supply means, and it's a moving set of goalposts.

Lennox Gibbs - TD Securities Equity Research

Right. But do you actually have material contracts that expire in 2013?

G. Peter Dans

From a material contract perspective, Lantheus is our largest, and then we have a number of smaller contracts that mature over various periods. So we don't see that as being a major issue.

Steve M. West

No. And we were able to renew a contract this year with a key customer in Latin America, for example, so that was a good win for us.


The next question is from Alan Ridgeway from Paradigm Capital.

Alan Ridgeway - Paradigm Capital, Inc., Research Division

I'd just like to further understand the investment a little bit in the Targeted Therapies business. Can you guys speak to the Asian markets, what might be required from a regulatory perspective there?

Steve M. West

Yes. I'll do my best, Alan, on that. So we think about the Asian markets that -- for TheraSphere, that are significant. The current existing markets for radioembolic treatment are South Korea, Taiwan, Singapore, Hong Kong. I mean those are the primary markets rather than some of the other countries, so we are focused on getting our registrations there. So we are pursuing medical device sort of registrations in those markets. The biggest market, of course, by far, in terms of number of cases is China, and we are evaluating our method of entry into China from a regulatory standpoint. That's quite complex regarding this kind of device, but we're in that process right now, working with external consultants and some knowledge that we have. The other issue, of course, is always -- so there's 2 pieces to this puzzle: one is regulatory and labeling and, I guess, supply chain logistics; the second is reimbursement, back to what is the addressable market in each of those places. I was in China fairly recently, evaluating some of these issues, talking to interventional oncologists, visiting hospitals. I mean, my view is that reimbursement in China, particularly in the larger cities, particularly on the Eastern Seaboard, where there are very large cancer centers, many times larger than what we're used to in Europe or North America, that reimbursement and insurance will slowly start to mature. People do take out medical insurance now in China, the emerging middle classes. So we will see reimbursement opportunities in China. It will be direct. It might be out of the wallet, but I do believe there's opportunities there. One of the other things that we consider, too, about TheraSphere in those markets is that TheraSphere has a 12-day shelf life, and our view is that one of the biggest challenges in -- particularly in China is logistics and being able to get product into and then around the country. And we feel that TheraSphere, with its 12-day shelf life, gives us ample opportunity to be able to manage that supply chain effectively. So the global economy is moving east. The incidence of primary liver cancer is extremely high in Asia. Frankly, it's sad to say, but the rising incidence of colorectal cancer from lifestyle changes is also increasing in China and other parts of Asia. So it's a very important market in the long term, and we believe now is the time for us to prepare for the opportunities there.

Alan Ridgeway - Paradigm Capital, Inc., Research Division

Okay. And then, maybe just to follow up. Where do you see potential opportunity in Europe? And is there any way you guys can sort of push sales without stepping over any regulatory -- or without stepping on any regulatory issues in the U.S.? And I'll just leave it at that.

Steve M. West

So we always are very clear that regulatory and commercial are very separate. And certainly, in our organization, we address regulatory issues through a separate group that do not take commercial considerations into account. In Europe, I think the biggest -- there's a couple of challenges that we have that we need to get over. Number one is clinical data. Even though we have registration in Europe for full liver neoplasia, in working with oncologists, you got to have good clinical data. There's not good clinical data for radioembolic products, period -- good Phase III data. There's good safety data for sure, but oncologists look for strong clinical data. And frankly, that data supports reimbursement. And one of the things that we have recently done is we've hired a senior individual, a VP-level, globally experienced reimbursement market access individual. This individual actually used to work with the NHS in the U.K. and came to us from a global large pharma. And so that's an example of the kind of investment that we are making so that we can build a market access department to work with various payers and insurers in Europe to secure better coverage. I hope that answers your question.


The next question is from Doug Miehm.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Two questions. Number one, with respect to the strategic review, I realize that can include asset sales, et cetera, et cetera, but is it within the purview of the review that you'd also be looking at potential acquisitions?

Steve M. West

We're going to look at all options, Doug, for the company that will create accretive shareholder value.

Douglas Miehm - RBC Capital Markets, LLC, Research Division

Okay. And the second one just had to do with -- you're spending $10 million this year on the internal investigation. And I was just wondering, have you given any consideration or you've had advice in terms of, if this were to turn out negative at the end of it, what type of -- who, which groups, and what type of penalties can be assessed to the company as a result of the investigation.

Steve M. West

We're currently unable to determine as to whether there will be any potential regulatory or enforcement action, Doug, resulting from this investigation. We could be subject to fines, which could be material. But at this moment in time, I would say that our costs are based upon our remediation compliance programs, and the investigation is being conducted by outside legal counsel. But we are focused on compliance right now, and we'll just have to see.


There are no further questions registered at this time. I would now like to turn the meeting back over to Ms. Raman.

Ana Raman

Thanks, Jade. This brings us to the end of today's fourth quarter fiscal 2012 earnings call. If you have additional questions, please feel free to follow up with me. Thank you.


The conference call has now ended. Please disconnect your lines at this time, and we thank you for your participation.

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