Seeking Alpha
Long/short equity, growth, long-term horizon, biotech
Profile| Send Message|
( followers)  

The demand for medical isotopes continues to rise. In the US alone, 18 million medical procedures annually use medical isotopes and estimated to grow 10% per year. The global radiopharmaceuticals market was valued at $3.8 billion in 2012 and should reach $5.5 billion by 2017. Over 10,000 hospitals worldwide use radioisotopes in medicine, and about 90% of the procedures are for diagnosis. Every year, medical professionals worldwide carry out more than 30 million procedures using the most widely used medical isotope, technetium-99m (Tc-99m), which is derived from its parent isotope, molybdenum-99 (Mo-99), sourced at five aging nuclear reactors around the world.

Isotopes must be harvested regularly and cannot be stockpiled due to shelf life; Mo-99 has a shelf life of 67 hours. The giant Irish healthcare company, Covidien (NYSE:COV), and the Massachusetts-based Lantheus are the two major U.S. suppliers that convert Mo-99 to Tc-99m. But the medical isotope industry is changing, as some of the more established isotope manufacturers have begun to focus on other segments of the medical industry to grow their businesses, while other isotope manufacturers have added radiotherapy treatments to their portfolio of products.

COVIDIEN SPINS OFF ITS ISOTOPE BUSINESS

Mallinckrodt, headquartered in Hazelwood, MO, is the pharmaceutical business of Covidien, and the largest global supplier and manufacturer of the medical isotope technetium-99m (Tc-99m), and supplies generators to produce Tc-99m. The company is also an industry leader in radiopharmaceuticals, along with being the largest U.S. supplier, by prescription, of opioid pain medications and manufacturer of active pharmaceutical ingredients. Mallinckrodt produces Mo-99 at its nuclear facilities in Petten, Netherlands, and the Maria Research Reactor in Poland.

In 2012 the Mallinckrodt generated approximately $2.1 billion in sales, with about two-thirds coming from the U.S. market. And this year Covidien plans on completing its spinoff of Mallinckrodt creating a separate and independent company. After the split, Mallinckrodt will operate two segments: specialty pharmaceuticals and global medical imaging. Covidien will retain all of its medical device products, which accounted for $8.11 billion of the company's $11.85 billion in revenue.

The market seems to like the direction that Covidien is headed; the stock is up over 15% year to date, closing on Monday April 22th at $66.15 per share, down $0.40. Earlier this month, Deutsche Bank raised its price target on Covidien from $70.00 to $75.00 per share. Last month analysts at Jefferies & Co. raised their price target from $66.00 to $75.00, and analysts at S&P Equity Research gave Covidien's stock a "strong-buy" rating, and raised its price target from $72.00 to $76.00 per share.

Covidien is a $31.32 billion market cap company. Stockholders of record on Thursday, April 4th will receive a dividend of $0.26 per share. This represents a $1.04 dividend on an annualized basis and a yield of 1.52%. The company reported operating income of $2.41 billion in fiscal 2012, versus $2.38 billion the previous year. For fiscal 2012, diluted GAAP earnings per share from continuing operations were $3.92, versus $3.79 in 2011. This is a well-run and profitable company to have in one's portfolio, and I think that the spilt will be beneficial for both companies, Covidien and Mallinckrodt. The split will enable both companies to focus on its strengths and continue to build up its business. I agree with the analysts that Covidien is a "buy," as it probably will be when it becomes publicly traded.

CARDINAL HEALTH - LARGEST NUCLEAR PHARMACY

Covidien is one of two companies that supplies the medical isotopes used by Cardinal Health (NYSE:CAH), the $14.79 billion market capitalization pharmaceutical and medical products company. Cardinal health is the leading provider of unit-dose radiopharmaceuticals in the U.S., dispensing and delivering more than 12 million time-critical, patient-specific doses to hospitals and clinics annually. The company operates nearly 160 nuclear pharmacies and cyclotron facilities that process isotopes into injectable form and then delivers the radiopharmaceuticals for use in nuclear imaging and other procedures.

Last month Cardinal Health completed its $2.1 billion acquisition of the direct to home medical supply distributor, AssuraMed, which had revenues of $1 billion in 2012 and serviced more than 1 million patients nationwide. Cardinal sees Home Health as a growing segment of the industry, especially with the coming Affordable Care Act and the aging population, which brings more prevalent chronic diseases; plus the need to keep treatment costs down will create a need for more home care in years to come.

Analysts at Argus on Monday April 15th restated its "buy" rating on the stock with a price target of $51.00, while analysts at Credit Suisse last month gave the stock an "outperform," but lowered its price target from $54.00 to $51.00. Also last month analysts at UBS AG gave Cardinal a "buy" rating, but cut its price target from $52.00 to $50.00, while analysts at Goldman Sachs cut their price target from $50.00 to $48.00. Cardinal Health has set its fiscal 2013 guidance at $3.42-3.50 EPS. Cardinal has a PE of 12.92, which is low for the wholesale drug segment, having an industry average PE of 15.7. Cardinal's stock closed on Monday April 22th at $43.38. Cardinal Health is a good company in a business that will continue to increase due to the Affordable Care Act, and entering a higher profit business, like home health, can only help its bottom line. I think the stock now has a good entry point and I see it as a "buy."

ADMD STEPS UP ITS EXPOSURE IN THE U.S. AND GLOBAL EMERGING MARKETS

Advanced Medical Isotope Corporation (OTCPK:ADMD), a small company out of Kennewick, WA, is positioning itself to be a major player in the production and distribution of highly profitable medical isotopes. ADMD recently stepped up its exposure in the production and manufacturing of medical isotopes on a global scale when it signed a strategic alliance with the Swiss company GSG International GmbH. GSG specializes in the development, installation and handling of radionuclide material, including Mo-99 and Tc-99. This move could have far reaching potential for ADMD as there is great need and great profit in medical isotopes. For example, Nordion (NYSE:NDZ), one of the leading suppliers of medical isotopes, showed first quarter medical isotopes sales of $25.52 million, and earned $6.9 million, realizing a profit of 27%.

ADMD, with its new alliance, will have exclusive sales and distribution rights of GSG's Mo-99 and related Tc-99 generators and kits in both North and South America and China. ADMD will also have the ability to obtain additional rights in other territories. This alliance could become quite lucrative for ADMD as the demand for radiotherapy products in Asia and emerging markets have heated up. And companies that manufacture radiotherapy equipment are now focusing on these markets, which means there will be a greater need for medical isotopes and kits. With mature markets, such as the U.S., dominating the space, and Europe with radioisotope sales estimated to be $1.1 billion in 2012, it is expected to see Mo-99/Tc-99 usage grow from 2010 to 2020 at an annual rate of 1.8%. Emerging markets, including South America and Asia (excluding Japan and South Korea), are expected to see growth at 3.8% annually.

In Asia there are between 6 and 8 million procedures annually that require medical isotopes, and demand is expected to increase due to a rising rate of cancer and increasing number of treatment centers. Though the World Health Organization questions the numbers, in China it is estimated that 70% of the patients with cancer required radiation therapy, which has become one of the most effective modalities for cancer treatment in China. Even Batan is looking to grab a piece of the Chinese isotope, as Batan Teknologi is boosting production of radioisotopes, estimating sales reaching roughly $100 million to China annually. Though not all for medical use, Brazil imports $54 million in radioactive chemical elements and isotopes each year, and is estimating a growth rate of 125% over the next five years. ADMD is attempting to position itself strongly in the mix with its alliance with GSG, and if successful in even garnering a small percentage of the market, it could be worth millions in profits, and the company may look to expand its alliance with GSG by sharing manufacturing facilities, irradiating medical devices, and nuclear waste cleanup.

In perhaps taking a page from the more established companies like Covidien or even Nordion, ADMD has also branched to developing a novel cancer treatment with its radiotherapy product, RadioGel, which it acquired in a licensing deal with Battelle. In February the company announced it began the initial step in the FDA's pre-market review process by submitting RadioGel to the FDA and requested a collaborative meeting. RadioGel is an injectable radiotherapy, utilizing medical isotopes yttrium-90 (Y-90) microspheres to target certain cancer cells. This treatment is very unique, as RadioGel starts out as a water based polymer, then is administered via a needle directly to the tumor. The polymer quickly begins to warm to body temperature transforming the liquid into a lattice gel that encapsulates the Y-90 isotopes around the targeted tumor. The Y-90 irradiates the cancer cells within the targeted tumor, as the lattice gel traps most of the radiation from the Y-90, preventing it from escaping to surrounding healthy tissue. This allows for a maximized dose of cancer killing Y-90 while minimizing side effects.

Though this novel radiotherapy treatment can be injected through the skin, the treatment can be used in other applications during surgery, as Dr. Robert Schenter, ADMD's chief scientific officer, explained on the versatility of RadioGel: "We expect the RadioGel to become a therapeutic agent that provides physicians with the ability to effectively treat tumors that cannot be removed surgically or that cannot be treated by any other means." The company intends to develop RadioGel for various cancer treatments including breast, liver, kidney and pancreas, and sees potential sales could reach between $75 million and $100 million. And if ADMD can gain FDA approval and get RadioGel to market sometime in 2013, the company could see sales between $5-$15 million.

As stated earlier in the article, ADMD is a very small company; it has a market cap of $8.07 million. However, if RadioGel or its alliance with GSG proves fruitful, this company should see its capitalization rise significantly. And for the company to become successful it is going to have to generate working capital to sustain itself. At the end of February the company announced that it issued 3.33 million shares of the company's common stock at $0.15 per share, plus warrants exercisable until March 1st, 2015, to purchase up to 5,000,000 shares of ADMD's common stock at $0.175 per share in cash, to Brookline Special Situations Fund. In return ADMD received gross proceeds of $500,000 and net proceeds of $450,000 after brokerage commissions. That announcement caused the stock to drop, and even with the new alliance with GSG, where the company will expand its scope into Europe, Asia and emerging markets as an international company in the production and distribution of medical isotopes and medical isotope technologies, the stock has not yet recovered. ADMD closed on Monday April 12th, at $0.10 per share. I think a lot rides on RadioGel and its approval from the FDA, and if ADMD receives an approval, patient investors could be well rewarded. But ADMD is still a small development- stage company and does carry a high risk.

CONCLUSION

It is clear that radiotherapies is an expanding industry in the medical field, and given the coming Affordable Health Act, millions of new patients will be receiving tests that require medical isotopes. For that reason alone I like Covidien and Cardinal Health as long-term investments. But if one wants a higher risk/reward stock, ADMD may be worth a closer look.

Source: Profits Can Be Found In The Expanding And Challenging Medical Isotope Business