Nordion Inc. (NDZ) is a global life sciences company that has continued to innovate annually even as global supply of medical isotopes continued to challenge the company. However, Nordion may have finally met its match via a company-changing development that puts a damper on its plan to replace the infamous NRU Reactor. The stock has since traded lower by 36% during the last two months, and appears to have few answers to its many questions.
Nordion and its competitor Covidien (COV) are, without a doubt, the global leaders in medical isotope production. Medical isotopes are necessary radioactive substances that are used in countless diagnostic procedures as well as treatments for cancer and other diseases. The production of these isotopes is a fast-paced logistical race to deliver the most common medical isotopes, such as Mo-99, from the nuclear reactor to the patients in need.
Nordion supplies the vast majority of Mo-99, the source of technetium-99, the most common isotope used to medical diagnostics. The catch is that in order to produce this medical isotope, a nuclear reactor must be utilized. This is where it gets tricky for Nordion, and its future: The company has faced supply issues for several years, but has survived by being able to create more effective medical isotopes via targeted therapies and such. However, most who follow the space have realized the looming threat of its largest and most significant reactor going offline, the NRU Reactor. Meanwhile, the company has been franticly seeking a solution, or a source of supply.
Aside from the possibility of lost revenue Nordion is seeking a replacement reactor because there are a number of companies with products/devices that rely on the production of Mo-99. For example, myocardial perfusion scans are very common, and companies such as General Electric (GE), with its Myoview® and other nuclear imaging devices of GE Healthcare use Tc-99m, which is created by the production of Mo-99. Scans such as this, and Cardiolite from Brystol-Myers (BMY) are used most often in the U.S., and physicians and hospitals use these scans as part of diagnostics for insurance and even legal purposes.
If the NRU reactor goes offline without a viable solution, it will cause noticeable problems throughout a number of industries. Even companies such as DuPont (DD) use Mo-99, for refrigerant, as do other refrigerants manufacturers. With that being said, how do you replace something so common yet so widely used by most Americans? You really can't. Yet much like healthcare diagnostics, America is the largest consumer of Mo-99, meaning we would be the most affected by any shortages, or a complete lack of supply following an offline NRU reactor. These fears, and the possibility of Nordion not finding a solution, has taken its toll on the company, as investors begin to realize that the future is looking grim.
In the last two months Nordion has lost 35% of its value, as investors' worst fears became reality. The company announced on September 10 that it had received the decision in confidential arbitration with Atomic Energy of Canada Limited (AECL) that the company was denied monetary damages relating to the AECL's cancelled construction of MAPLE facilities. The company has been attempting to obtain a long-term, safe supply of medical isotopes, and was hoping to have found this with the MAPLE facilities.
The unsuccessful monetary claim on behalf of Nordion may have led to the decline, but the big news is that Nordion still does not have a viable source of Mo-99 once the NRU Reactor goes offline. This will be a major hit to its fundamentals, along with being a major hit to the healthcare industry. Nordion was hoping that these proceedings would ultimately lead to further construction of the facilities, however it is obvious that Canada is not willing, nor does it want, to host medical isotope production.
The warning signs of this lack of direction were looming prior to this news. During the company's Q3 2012 conference call, the company's executive staff seemed almost defensive and provided no clear vision, as executives appeared frustrated by the questions being asked. At one point, Lennox Gibbs of TD Newcrest asked, "So, you don't really have a long-term view at this point, is that what you're saying?" And CFO Peter Dan's almost robotic response, "Again, just given the dynamics in this market it's something we can continue to monitor and we'll continue to provide update as they are available" was nothing to create optimism among shareholders.
The big question for investors is what happens from this point? The global state of isotope production is concerning to say the least. Japan has shut down its last operating nuclear power reactor, Quebec has announced that it's shutting down its only reactor, Canada is obviously unwilling to fund or rebuild its reactors, and the U.S. is limited.
Nordion does have a backup supply in Russia and tried to ease the pain with news that it was granted special permission to enter into a negotiation directly with the Research Institute of Atomic Reactors (RIAR) for Mo-99 supply. Nordion is attempting to negotiate an agreement with RIAR to supply Mo-99, as this partnership could meet a "small portion" of the demand. However the company is still seeking a more viable source.
My initial question was, "what happens from this point?" My belief is that we are beginning to see the start of a shift in power. Nordion is not well positioned to enter the U.S., which is one reason that Nordion has used the NRU Reactor for so many years. Up until this point, the U.S. has appeared almost unwilling to invest in nuclear energy. However, because of demand and need for the radioisotopes, it doesn't look as though we have much of a choice.
The University of Missouri Research Reactor is the most powerful of the reactors located at various universities throughout the country, is safe, and should be able to handle the majority of the country's Mo-99 demand. The reactor, in Missouri, is perfectly located to minimize logistical costs, and will be a big win for the company that earns its services once the NRU reactor goes offline and the U.S. is forced to produce medical isotopes on a large scale (probably within the next year).
Unfortunately, Nordion does not possess this relationship with MURR, but rather a small company called Advanced Medical Isotope Corp (OTC:ADMD) has a joint venture with the MURR reactor. This small company has appreciated by more than 90% in the last six months as the prospects for Nordion continue to decline. Advanced Medical's joint venture includes a propriety compact method to produce Mo-99, and the company also believes that it can meet half of the U.S. demand in a fairly short period of time.
Advanced Medical is well positioned to capitalize on a market that Nordion is in the process of losing. The company has a very experienced and knowledgeable staff that is not reflected in the company's valuation. The company's executives know the business, have a good grasp on demand, and are almost impeccably positioned to have a successful business that is similar to Nordion.
The consensus from most of the people who follow this industry and understand the operations is that Nordion will never be the same once the NRU reactor closes. It has already lost a significant amount of its valuation, but its plan to have partnerships with several different reactors not only increases its costs but also makes the logistics involved with producing Mo-99 nearly impossible.
Nordion shows a good presentation on its website entitled, "Two Days in the Life of Mo-99". This presentation shows how Nordion is always on a race against time to produce and then deliver the medical isotope, from Canada. So how can the company transport the same substances from Russia, or from some other country? The answer is that it can't? The reason Nordion has lost so much of its value is because the company apparently doesn't have an answer. The MURR reactor would have been a great fit, but Advanced Medical appears to now be in a position to capitalize on its possibilities, while others will likely take pieces of the market as a collective group to supply Mo-99. This may not be the conclusion that Nordion investors want to hear. But at this time, all facts indicate that this is the reality of the situation, and that Nordion's future does not look bright.