We have all learned the basics of supply and demand. The more supply that's present the cheaper a product becomes. The ideal situation is for a producer to have an equal balance of supply and demand to avoid unnecessary costs and to maximize profit. The worst situation is to have heavy demand but lack of supply, as producers realize lost profits and the potential customers go elsewhere.
The nuclear medicine industry isn't your typical story of supply and demand, although it may be one of the best. In nuclear medicine, the isotopes being produced are necessary and crucial for patients, as well as the industries in biotechnology that use the isotopes for various drugs and diagnostic tests. Yet despite its importance, global politicians are demonstrating an "ignore the problem" approach and are allowing very important nuclear reactors, the sources for most of these isotopes, to go offline.
The next three years will be important for nuclear energy in the U.S. It's estimated that 90% of the medical isotopes used in the U.S. are imported from reactors in other countries. In the U.S., we consume the largest share of the global isotope market, with 18 million procedures that use medical isotopes. The problem is that most of these large reactors are scheduled to be shut down in the next few years due to aging. We have seen as nuclear reactors are shut down, countries are electing to use alternative energy, which leaves a massive demand for the millions of medical procedures and or diagnostics that use medical isotopes on a yearly basis. Just recently, Japan shut down its last operating nuclear power reactor, to turn its focus on clean energy. And Quebec's new government recently confirmed that it's shutting down its only nuclear reactor. In some ways, this is apples to oranges, but it still shows the speed at which countries are choosing to find alternatives to nuclear energy.
The good news is that, with other countries shutting down reactors, it leaves room for the U.S. to take control of the situation. In the U.S. we are reliant upon nuclear medicine and have no choice but to create the demand. As a result, jobs would be created, medical procedures could become cheaper, and then we lessen our dependence on foreign supply. There is a chance that Canada will build new reactors or perform maintenance to old reactors; but at this point, the space looks wide open
Nordion (NYSE:NDZ) and Covidien (COV) are current leaders in the space. The two companies account for nearly all of the United States' isotope production. Nordion does not produce isotopes itself, but uses the NRU reactor in Canada, which is scheduled to be shut down in the next four years. The reactor is currently operating at full capacity, yet the demand is greater due to a shortage in other regions. The company has had to evolve over the years with more efficient means of producing medical isotopes-- in other words, getting more bang for the buck. Nordion has become the world leader in cobalt-60, which is used to produce gamma radiation, and also in the creation of targeted therapies with yttrium-90. Therefore, Nordion is a diversified company; but if the NRU reactor were to close, it would be a huge hit to the company. The company does have a backup isotope supply in Russia; but in terms of supplying the U.S. (its largest market), the costs would drastically rise if the NRU reactor closes because of the logistics involved in transporting and producing various isotopes.
Covidien is a near $30 billion medical equipment and supply company, with a business that stretches far beyond medical isotope production. Much like Nordion, Covidien sources its isotopes from reactors in Poland, France, South Africa, and Belgium. The company has a very large presence throughout the globe in medical isotopes, although many of its projects are still in development and years from being complete. The company has done a good job adapting to policy by trying to convert processing facilities to low-enriched uranium from highly enriched uranium, thus becoming more efficient. The company has tried diligently to stay ahead of the curve, but still faces the same problems regarding reactors, supply, and demand. Covidien hopes that its new innovating "tiny reactors" project with Babcock & Wilcox (BWC) will aid in supplying some of the molybdenum-99 (Mo-99) that will be lost with the closing of NRU. However, with less capacity it will be very difficult to supply an isotope that is so widely used.
In my search for a company that could benefit from closing reactors and one that has the means to supply the U.S. with a commonly used isotope, I found Advanced Medical Isotope Corporation (OTCPK:ADMD). The company is small, and its success will be dependent on Canadian policy and its impact on isotope production. However, ADMD is perfectly positioned to benefit from the shortage of Mo-99, which is the most commonly used medical isotope, along with its derivative, technetium-99m. The NRU reactor, used by Nordion, produces most of the country's Mo-99 and its derivative. Therefore, once the reactor closes, it could leave a gaping hole in the U.S. supply line. The Petten reactor could pick up some of the slack; however, it's nearly 50 years old and has had its share of problems, including being temporarily closed in 2009 to fix corroded pipes. Both Covidien and Nordion are attempting to correct the issue. Covidien will try with its tiny reactors, but won't be able to meet the full demand. Nordion will attempt with its overseas supply, but with increased costs, and the inability to reach certain locations in the isotopes' short lifespan.
ADMD is surprisingly similar to both companies, and just so happens to have fallen into the perfect situation. ADMD does not own a reactor, but has close ties to Missouri University Research Reactor (MURR). By using a reactor for production purposes, the company would have a similar business model to Nordion, which involves large returns on invested capital along with requiring very little additional capital. The company's joint venture with MURR entails a propriety compact method to produce Mo-99 and believes that it can provide half of the U.S. demand. Finally, the company also plans to expand its presence in Positron Emission Tomography (PET), a $1 billion industry growing at over 25% annually, as well as other fast-growing isotope markets that are widely used in the U.S. The company already has the technology, is producing revenue, and is well positioned to capitalize on the massive shortages that will occur, but must be addressed in the U.S.
When making an investment decision, it is important to gauge the health of certain sectors and determine its outlook based on known information. Right now we know that the NRU reactor will soon close if drastic updates to the reactor do not occur. A nuclear reactor is not intended to last forever, and eventually must be replaced. Both Covidien and Nordion have been effective at innovating to meet demand and to create a better product with less supply. But as supply continues to dwindle, the price for diagnostic procedures and treatments for conditions, such as heart disease and cancer, will rise. With 30 million worldwide procedures, this is a necessary product and a problem that cannot be ignored. And since the U.S. is highest in demand, it becomes our duty to supply the product. The problem is identifying the shift in power. Both Covidien and Nordion have controlled this space for many years, and there aren't many companies positioned to replace either in this particular market. It's possible that nothing changes and Canada makes the moves to update its facilities. However, the U.S. simply cannot wait and hope that the Canadian government will fund and rebuild crucial reactors, because these reactors are too important to our healthcare system. Hence, U.S reactors, such as MURR, must become active, and new innovating techniques to produce Mo-99 will go into effect. At that time, companies that are best positioned will benefit, as will patients, the healthcare system, and the U.S. economy. All these factors are dependent on the country producing such an important isotope rather than relying on production from outside. Advanced Medical Isotope Corporation is an OTC.BB company and the associated risk must be considered prior to any investment in the company.
Disclosure: I am long COV, OTCPK:ADMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.