Len Zehr's  Instablog

CEO Steve West

Nordion (NYSE:NDZ TSX:NDN), the last man standing after the breakup of the MDS health sciences conglomerate,  has its eye on building a bigger portfolio of targeted therapeutics to complement its TheraSphere liver cancer therapy.

“One of our strategic goals is to expand our product portfolio in this area,” CEO Steve West says in an exclusive interview with BioTuesdays.com, noting that TheraSphere, which consists of millions of tiny, glass beads (20 to 30 micrometers in diameter) containing radioactive yttrium-90, was in-licensed by Nordion years ago.

“Nordion is more of a commercialization engine than an early-stage research and development engine. And I believe there are opportunities for similar kinds of things with other products that will be more strategic to us than perhaps to other companies that own them right now,” he adds.

Nordion has a leading position in attractive markets for prevention, diagnosis and treatment of disease, with three operating divisions that focus on processing and distribution of radioactive isotopes.

In addition to targeted therapies to treat disease, Nordion is a global leader in the supply of cobalt-60 used to sterilize medical devices and supplies, and food for the prevention of disease. It also processes medical isotopes, including molybdenum-99, the most commonly used isotope in many diagnostic procedures worldwide.

Leading Position in Attractive Markets

“All three businesses have very significant barriers to entry and generate pretty good cash flow,” he points out. “The legacy businesses, which are prevention and diagnosis of disease, have a lower growth profile, while targeted therapies, have a very high growth profile,” he says, adding that TheraSphere revenues grew 58% to $11.5 million in the third quarter this year.

“We recommend accumulating the stock at these levels,” Canaccord Genuity analyst Neil Maruoka said in a report on Sept. 14, as “we anticipate that investors will be attracted to potential earnings momentum and the stable 4.5% yield in the near-term.” The stock closed at $8.66 on Friday, down from $8.90 when the report was published. He rates the stock a “buy,” with a 52-week price target of $14.

For the third quarter this year, Nordion had revenues from continuing operations of $66.8 million, up 39% from the same period last year. Income from continuing operations reached $4.7 million or 7 cents a share, compared with a year earlier loss of $8.7 million, reflecting a 10-month shut down for repairs of the National Research Universal (NRU) nuclear reactor at Chalk River, Ontario. Nordion relies almost exclusively on the NRU for its supply of medical isotopes.

“We’ve had a lot of publicity in Canada around supplies from the NRU reactor. It’s a business that is strategically challenged by supply. The whole industry is challenged by supply, so it’s not just a Nordion issue,” Mr. West contends, adding that the NRU has been up and running for a year now and has been very reliable.

In 2008, the Canadian government and Atomic Energy of Canada Ltd. (AECL) unilaterally discounted development of the new MAPLE reactor project to replace the NRU. Nordion had contributed more than $350 million toward the project at that point. It filed for arbitration against AECL and sued the Canadian government and AECL for $1.6 billion in damages.

Arbitration hearings are expected to end this year, with a decision due in 2012. “Nordion believes it has a strong, meritorious case,” Mr. West says.

Mr. Maruoka writes that while it is unlikely that an arbitrator will force AECL to complete its commitments to the MAPLE project, “we do believe that a positive decision relating to damages could result in a possible windfall for [Nordion] investors.”

To offset a Canadian government decision to be out of the medical isotope business by 2016, Nordion in September, 2010, entered into a supply agreement with a subsidiary of Rosatom, a state corporation in Russia that operates several nuclear reactors, for a supply of molybdenum-99 until 2020. The accord also will explore and define areas of collaboration for the supply and marketing of isotopes produced in Russia. Rosatom shipped its first sample to Nordion last December.

Asked how Nordion plans to assure supply of medical isotopes beyond 2016, Mr. West says that’s a “big issue for the industry, not just for us. By 2016, we believe Russia should be able to provide up to 20% of the world’s requirements of molybdenum-99 and then we’ll see what happens with the NRU.”

Mr. West was referring to an NRU application to extend its operating license to 2016. “It’s just a coincidence that these licenses are granted in five-year tranches and this one would cover 2011 to 2016. So, when the government says it doesn’t want to be in the medical isotope business after 2016, that doesn’t mean that the NRU won’t operate beyond 2016. Or that the NRU could not be part of an isotope supply chain. What the government is indicating that it doesn’t want the rest of the world to rely on the NRU forever.”

Noting that the government earlier this month closed the sale of the CANDU nuclear reactor part of AECL to SNC-Lavelin (TSX:SNC), he says “my expectation is the government now will turn its attention to Chalk River, and then we’ll get a bit more visibility on what the future of Chalk River is from a strategic perspective. And today, this is not clear.”

In its gamma sterilization division, Nordion plans to launch in the current quarter its GammaFIT irradiator, which represents a modular approach to marketing and installing irradiators. Nordion currently sells its irradiators for around $4 million each and the customer needs to spend another $4 million to $6 million for the infrastructure that goes around the device.

“We haven’t announced pricing for GammaFIT but our goal is to make the price of entry much lower for customers in developing markets so that they can get into gamma sterilization without the large footprint,” he says. “As time goes on, they will be able to expand the GammaFIT to become a full-scale irradiator.”

Cobalt-60

Nordion generates some $100 million of revenue annually from gamma sterilization with a profit margin in the mid-40% area. It obtains cobalt-60, which has a half-life of 5.3 years, from nuclear reactors in Canada and Russia. “It’s a razor-razor blade business model,” he says.  “The razor is the installation of the irradiator and related equipment, and the razor blade is isotope cobalt-60, which our customers buy from us.” There are about 180 gamma irradiation systems around the world and Nordion supplies about 140 of them.

Mr. West says there is an expansion potential for gamma sterilization in Asia in the next few years, especially in China and India, as they get into medical device manufacturing in a big way. “We already sell to those markets but I would expect a much higher growth trajectory going forward than in developed markets today,” he predicts.

As Asian healthcare systems develop and insurance reimbursement matures, “you will see more and more medical devices being made in Asia for Asia, not necessarily exported to other countries,” he adds. “We expect to see an increasing demographic demand for these devices going forward.”

In addition to Nordion’s TheraSphere, the company also is a contract manufacturer for Bexxar, a radiotherapeutic, and CardioGen-82, a cardiovascular PET imaging agent, which currently has been recalled from the market. Radiopharmaceuticals are designed to target the disease from within the body with a higher concentration of radiation directed to the tumor, minimizing both damage to surrounding healthy tissue and unpleasant side effects.

TheraSphere already has approvals in Europe, Canada, parts of Asia and the Middle East, and authorized under the FDA’s Humanitarian Device Exemption (HDE) in the U.S. TheraSphere is reimbursed in the U.S., Belgium, Germany and Italy.

Last March, the FDA approved Nordion’s applications for two pivotal clinical trials of TheraSphere in primary and metastatic liver cancer. The STOP-HCC trial will evaluate some 400 patients with unresectable hepatocellular carcinoma (HCC), the most common form of inoperable primary liver cancer, at 40 sites around the world. The EPOCH trial will evaluate some 350 colorectal cancer patients whose disease has metastasized to the liver at 30 sites.

How is TheraSphere® administered?

The overall cost of the trials is expected to range between $15 million and $20 million each over five years, with $2 million to $3 million earmarked for each trial in 2012.

Mr. West says the objective of the trials would be to move TheraSphere from its HDE status and obtain two premarket approvals (PMAs) as a medical device that supports or sustains human life in patients with primary and metastatic liver cancer.

“One of the unique aspects of these trials as opposed to a standard pivotal trial is that the product’s safety profile is well understood, it is already reimbursed, and is in use in all the primary liver cancer centers in the U.S.,” he adds. “So, we don’t have an issue of persuading doctors to enroll patients with this therapy; it’s already established and accepted by the interventional radiology and hepatology communities.”

Nordion also is considering another pivotal trial of TheraSphere outside of the U.S., primarily in Europe, with potentially some clinical sites in Asia, Mr. West says. “Even though we have full registration for liver neoplasia, which covers any tumor in the liver, the issue we face is that we don’t have clinical data of a Phase 3 nature that supports registration.

Clinical data from these trials would enable the company to build on the strong growth and adoption in the European market, provide strong scientifically-supported comparative data aligned with world renowned key opinion leaders’ efforts in TheraSphere adoption, pursue expanded reimbursement in Europe and provide a base for expansion into Asia.

“The irony is the product is registered in Europe but in order to have clinicians move patients to the therapy, they clearly need clinical data. Similarly, reimbursement in Europe is not homogeneous and very often can be driven at a local level. So, we need strong clinical data to support the product and So frankly we just don’t have it. But all of these trials will help.”