Debra Fiakas'  Instablog

Recently, I caught up with Dr. Louis Centofanti, CEO of Perma-Fix Environmental Services (PESI), a provider of nuclear waste treatment solutions. I had a chance to follow up on a conversation begun last summer before my July 2012 article "Perma-Fix: Innovator in Hazardous Waste." In that article I focused on the company's efforts to broaden its product offering both through internal innovation and acquisition. Security analysis is never a one shot effort, making it worthwhile to follow up on whether a company is delivering on its goals. It is also important to reassess risks in a security. So I put the following questions to Centofanti:

Q. Shares of Perma-Fix have been under pressure in recent months, particularly since report of the third quarter 2012 results. What do you think is causing investors the most concern? What did the investment community overlook in the quarter results?

A. Overhang concerning the Department of Energy budget has been the major concern. However, [DOE] cleanup activity is mandated by law and court orders. Therefore, we do not see DOE budgets dramatically impaired, even in a difficult fiscal environment. We are using this opportunity to gain market share and grow revenue by expanding our services business.

During the third quarter and heading into the fourth quarter of 2012, we have seen a sequential improvement in our Treatment Segment sales. That is reflected in improvements in both revenue and backlog which were up approximately 13.6% and 59.6%, respectively, compared to our second quarter of 2012. Within our Services Segment, the larger contracts continue to be delayed, but we are winning smaller contracts.

In the meantime, we remain focused on generating positive cash flow, reducing debt, controlling our costs and growing our revenue. Our balance sheet is extremely strong and we see the current market as an opportunity to gain market share.

Interestingly, a major private equity firm has made a bid for one of our largest competitors, Energy Solutions (ES), which suggests growing interest in the sector.

Q. Will the Energy Solutions deal make a difference in the competitive landscape?

A. We do not expect any impact on our relative competitive position if the Energy Solutions deal is completed. Right now the nuclear waste industry needs leadership. We believe we can offer leadership, given our solid reputation in the industry.

Q. What are investors missing in the Perma-Fix story?

A. We have tremendous staying power because our balance sheet is strong. Our business can be lumpy. Sometimes our customers are busy with construction projects or otherwise hold back waste disposal projects. Despite budget concerns, eventually the work has to be done. That is the nature of the nuclear waste business. Ample cash and low debt put us in a position to last through the periods when business is slow.

Q. Your balance sheet is strong, but investors do not seem to be giving you credit for that. What are they missing?

A. We have ample cash and low debt. I think investors see that. They might not realize that we own facilities for nuclear waste that are irreplaceable. From a duplication standpoint it could take as much as $400 million to build the same nuclear waste treatment capacity and it would be impossible to replicate the permits we have. We also have the expertise and knowhow to operate those facilities and generate earnings.

Q. Contributions from the recent acquisition of Safety and Ecology helped offset sluggish sales in other segments in recent quarters. Does Perma-Fix need to do more acquisitions to stoke the fires of growth?

A. Not at this time. Perma-Fix is concentrating on aggressive bidding on government, commercial and international contracts, as well as further strengthening the balance sheet. The acquisition strengthened our capabilities, which is allowing us to bid on a much broader scope of work.

Q. What new capability has Safety and Ecology brought to the mix?

A. The health physics group is extremely talented. We are committing resources to leverage the expertise of this group in developing treatment solutions. For example, we are developing methods to separate radioactive material from waste to reduce the amount that goes to into the landfill space. We are also getting acquainted with the Safety and Ecology clients and learning what new services we can offer them. We expect more cost savings and new revenue from this acquisition in the future.

Q. Your company received a notice from Nasdaq that the PESI bid price no longer meets requirements for continued listing. Of course, the company has some months to get back into compliance. Does the company have a 'game plan?'

A. We are not concerned about delisting. We believe that our performance will be reflected over time in the stock. We have a number of other tools in our arsenal that we could utilize if the Street continues to undervalue the stock. Most importantly, our balance sheet is extremely healthy and, with greater visibility, we have begun a much more active outreach program to meet with investors.

Q. New contracts could get investors' attention. Are there any contracts in your business pipeline that could be coming along in the near-term?

A. Between our own bids and those with partners, we are involved with over $600 million in bids. We can see the pressure building. While our customers do seem indecisive because of budgetary concerns, they cannot sit on nuclear materials forever. As we sit today, we see a lot of work ahead.

Q. In early December 2012, Perma-Fix staged the Nuclear Waste Management Forum. What was the highlight of the event?

A. This was the twelfth annual event for our customers and partners. The keynote speaker this year was Christine Gelles, the Associate Deputy Assistant Secretary for Waste Management from the DOE Environmental Management Headquarters. There were several other DOE managers from Oak Ridge, Hanford, Idaho and Los Alamos sites at the event as well. It is a 'user' event for our customers. It is building in importance in the industry. Attendance at our forum rivals national industry events.

Q. The last time we spoke we talked about your efforts to expand into production of isotopes for medical imaging. Recently the company licensed new technology in this area. How does that new technology fit into the mix? What recent progress has Perma-Fix made toward the medical isotope market?

A. Perma-Fix has signed an exclusive commercial license for a patent-pending column generator technology that produces radioisotopes not derived from 'fissioned' uranium. We had been working with a national laboratory over the past two years with each of us owning a part of the technology. This license agreement formalized an arrangement for Perma-Fix to use the technology in medical isotope production. It is an important step in reaching a market-ready product.

Technetium-99m is used in tens of millions of medical diagnostic procedures. It is called Tc-99 for short. It is usually derived from molybdenum-99 by fission of highly enriched uranium in nuclear reactors. We think our new technology is important and very timely because a key source of Tc-99 radioisotopes for medical imaging in North America is being closed down.

Perma-Fix's new Mo-99/Tc-99m production process encompasses the full production cycle. Unlike conventional methods, the new process produces Mo-99 using natural molybdenum irradiated in research or commercial reactors. We believe this offers important advantages over current production methods. These advantages include less radioactive waste and no fission product emissions during post-irradiation processing of Mo-99.

Perma-Fix is now focused on completing the final stages of commercial development. We are looking forward to announcing additional milestones.

Q. In a nutshell what is the opportunity for investors in Perma-Fix?

A. Perma-Fix is the clear technology leader in the nuclear waste industry. We are leveraging our technical expertise as we rapidly expand our services business, and continue to diversify into commercial and international customers. Our balance sheet is extremely strong, and it would be nearly impossible to replicate the technology, permits and facilities that we have assembled.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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. I have no business relationship with any company whose stock is mentioned in this article.

It is taken for granted - that little part of your eye making it possible to read a book, drive a car or distinguish the face of your mother in a crowd. The under-appreciated macula is found near the center of your retina and provides detailed central vision. Even if you and I are blissfully ignorant of it, the medical community is paying attention to the macula because it is under siege from the increasing incidence of diabetes.

As many 8% of the population or 25.8 million people in the U.S. suffers from diabetes. Another 79.0 million are considered "pre-diabetic" and could cause the incidence of this chronic disease to mushroom to an estimated 40.0 million people by 2015. Diabetics battle numerous side effects of their condition, including greater susceptibility to blindness brought on by diabetic macular edema or DME. DME is the swelling of the retina in diabetic sufferers due to the leaking of fluid from blood vessels within the macula. The lifetime risk for diabetics to develop DME is approximately 10%. That means a very large number of people are at risk. An estimated 1.6 million people have already developed DME - presenting a very large market opportunity for clever scientists with an effective treatment.

Clever Science

iCo Therapeutics (ICO.V) or (ICOTF.PK) is a Vancouver-based biotechnology company is targeting DME with its ICO-007 compound. A Phase II clinical trial is under way to evaluate whether ICO-007 could help to treat DME in people with diabetes. The study is being coordinated at the Wilmer Eye Institute of the Johns Hopkins University School of Medicine.

Laser treatment has been the standard of care for DME for over twenty-five years and has been effective in 25% to 30% of patients. In recent years, new drugs have been used alone or in conjunction with lasers. For example, Genentec's ranibizumab marketed under the name Lucentis works against the vascular endothelial growth factor (VEGF) that is thought to be one of the culprits leading to DME. This approach has yielded much improved results with as many as half of patients experiencing improved vision.

iCo Therapeutics believes ICO-007 can do much better. VEGF is only one of several factors that lead to the proliferation of weak blood vessels in the macula. Consequently, the anti-VEGF treatments are only partially successful in treating DME. Instead of focusing on one growth factor, ICO-007 interrupts a signaling process of several factors that could be the cause. Early test results show remarkable results and iCo Therapeutics is anxious to complete the Phase II clinical trial started in 2011.

The company is optimistic about its prospects in entering the DME market even when there are well-established therapies already in use, principally laser treatments and first generation anti-VEGF drugs. Not only does the company think their ICO-007 can compare favorably in terms of effectiveness and durability, they expect a significant cost advantage that should get support from the payer community. The annual cost of ICO-007 is estimated to be $10,000, while the Lucentis as an example anti-VEGF treatment costs approximately $24,000 per year.

iCO Therapeutics is a self-styled drug re-profiling company that leaves expensive research work to others and focuses on developing compounds closer to commercialization. Designed and discovered by ISIS Pharmaceuticals Inc., (ISIS), ICO-007 was in-licensed by iCo in 2005. The company's second drug candidate is ICO-008 or Bertilimumab, a compound also aimed at sight-threatening diseases that was originally developed by MedImmune now a part of AstraZeneca (AZN). iCo is also working on an oral delivery system for the antifungal Amphotericin B that could be used to treat life-threatening infectious diseases in care settings in developing countries where the usual intravenous infusion is not practical.

Hidden Assets

An early stage company, iCo Therapeutics reported $1.3 million in cash and equivalents on its balance sheet at the end of December 2011. We estimate the company needs approximately $160,000 per month in cash to support operations. The appearance of skimpy resources might dissuade some investors, but we note iCo's management team has been fairly nimble in making the most out of its assets.

Some of iCo Therapeutics assets do not show up on the Company's balance sheet. We think the company is flush with human capital. Both CEO and Director Andrew Rae and Chairman of the Board William Jarosz have significant capital market success, including raising funds, negotiating M&A deals and arranging partnerships. Another director Noel Hall offers strong professional connections within the biotechnology and pharmaceutical industry. Hall co-founded Aspreva Pharmaceuticals, which was acquired by Galencia Group in 2002, and has extensive experience gained while at The Wellcome Foundation (GlaxoSmithKline) and Abbott Laboratories.

All members of the team cannot be mentioned, but two of the company's scientific leaders have the experience to make a difference in realizing iCo Therapeutic's commercial goals. The company's chief medical officer, Dr. Peter Hnik, has been a practicing physician specializing in eye diseases. Hnik was associate director of clinical research at QLT, Inc. and was instrumental in designing and directing Visudyne clinical trials in diabetic retinopathy. The company's chief science officer is Professor Santa Jeremy Ono, a recognized authority in ophthalmology and immunology and has directed multiple research and development programs. Ono has a current appointment at Emory University and has previous posts at University College of London, UCL-Institute of Ophthalmology, Johns Hopkins University and Harvard University.

Smart Trade

With deep talent like this on the team, it is not surprising that iCo Therapeutics has negotiated a couple of smart trades. A licensing deal for ICO-008 was struck in 2010 with Immune Pharmaceuticals Ltd., a biotechnology company based in Israel. iCo will retain rights to ICO-008 for ocular applications and Immune will further develop the compound for systemic uses such as treating inflammatory bowel disease. iCo received $500,000 in cash and 600,000 Immune shares, up to $32 million in milestone payments as well as a royalty stream. The upfront cash consideration from Immune more than off-set covered iCo's original cash outlay of $400,000 for the license to ICO-008 (then called CAT-213) from MedImmune in 2006.

In September 2011, iCo entered into a research collaboration agreement with the Juvenile Diabetes Research Foundation (JDRF), a highly influential leader in the search for the treatment and cure for diabetes. The JDRF agreed to support the Phase II investigator-sponsored clinical trial of ICO-007 for treatment of DME. Such support not only stretched iCO's limited cash resources, but JDRF also brings valuable talent and expertise to the clinical trial process.

Next Step

iCo management wants more deals with similarly attractive economics and is actively searching for regional partnering candidates or strategic investors. Although a Phase II trial has been designed for ICO-008, development of ICO-007 is the top budget priority for the company. Any new capital raise will likely be used to take the next step following completion of the ICO-007 Phase II clinical trial next year.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

There are few alternatives to resolve the conflict between providing jobs and prosperity for China’s 1.3 billion citizens and protecting the environment in which they live.  Since coal is China most abundant energy source policy makers and China’s enterprise alike are hard at work developing ways to reduce pollution from burning coal.  AuraSource, Inc. (ARAO:  OTC/BB) believes it is developing a technology that could tilt the scales in favor of environmentally friendly growth.

AuroSource recently applied for China Patent Protections for its AuraFuel process that uses shock waves to pulverize coal aggregate into fine particle sizes.  The coal material can be mixed with water and chemicals to make coal water slurry, an alternative fuel for industrial and commercial boilers.   Burning pulverized coal suspended in water produces fewer particulates and toxic gases than burning coal aggregate.  It is easily transported in tanks or pipelines.  Coal water slurry has been included on the lists of acceptable alternative green fuels in several China municipalities that are prohibiting burning coal aggregate in the future.

The technology was originally developed by China-based Beijing Penchuang Technology Development Co., Ltd.  The use of shock waves produces finer particle sizes compared to ball mill processes, improving fluidity.  AuraSource has also found that the fine coal material helps accelerate chemical reaction processes.

AuraSource plans to license its AuraCoal technology, but has yet to record any license revenue.  The shock wave technology could be applied in other material grinding processes such as those used in making solid lubricants.

As a developmental stage company AuraSource is still burning cash to support operations  -  $1.0 million in the year 2010.  The company has just over $900,000 in cash on its balance sheet, suggesting that without a change in fortunes, AuraSource could run out of fuel itself by the end of 2011.  The company is not entirely dependent upon its AuraCoal to earn its living.  AuraSource is also working on technologies to extract fuel or dry gas from shale. 

AuraSource has plans for a plant near Qinzhou in the southern province of Guangxi.  Using low-cost oil shale from Indonesia, the company plans to use its AuraFuel technology to produe lightweight fuel oil and dry gas.  The carbon-rich waste can then be used as feedstock to produce coal-water slurry.  The project could cost as much as $80 million and management has been actively talking to investors in China and the U.S.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  ARAO is included in the Crystal Equity Research Beach Boys Index in the Alternative Oil and Gas Group.