Nordion’s Q1 shows shifting profile amid isotope supply concerns

Published in the Ottawa Business Journal newspaper and website.
March 21, 2011

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Steve West.
Steve West.
Photo courtesy of Nordion Inc.

Diversification will be the name of the game for Nordion Inc. in the coming years, both the company and its observers say, with the health sciences firm’s first-quarter earnings exhibiting the delicate balance between its emerging opportunities and lingering concerns about how it will stabilize its main isotope processing business.

Nordion’s stock climbed to $11.99 on the Toronto Stock Exchange before the release of its first-quarter financials earlier this month, which showed the company had an income from continuing operations of US$23.43 million, or 35 cents per share, and revenues of $69.98 million. That’s compared with a loss from continuing operations of $43.32 million, or 36 cents per share, a year earlier, on revenues of $45.47 million.

But since then, the stock has come back down to earth, as the strong earnings and 27-per-cent reduction in selling, general and administrative costs, to $16.15 million, were tempered by the fact that revenues missed analyst expectations of $76 million.

Still, Nordion CEO Steve West is upbeat on the potential of the company’s options, including the TheraSphere targeted liver cancer therapy, which contributed to a 20.8-per-cent increase in revenues for the targeted therapies division, to $17.82 million.

“It’s clear that as we talk about Nordion … there’s a significantly emerging level of interest in TheraSphere,” he said, adding that the product is now the third-largest in its portfolio in terms of revenues. “It’s been lost a bit in the shuffle in previous years, but it’s definitely a component of our core strategy.”

The product is already being reimbursed by public health-care systems and U.S. HMOs, or health maintenance organizations. And now that it’s received U.S. Food and Drug Administration approval for new TheraSphere trials, Mr. West said Nordion will be able to seek even more validation for the therapy.

Another area that could be both a concern and an opportunity is that of Nordion’s diversifying customer base. “Prior to all the events (surrounding the National Research Universal reactor’s multiple shutdowns), a lot of businesses relied on a single-source supply of isotopes. As the supply chain has gone through the instability related to aging infrastructure and reactors, everyone realized that was too fragile of an arrangement, so people are moving to dual- or more sources of supply,” said Mr. West.

“A sizable backup supply is something we’ve never had before, so to have that flexibility in our supply chain gives us a second string to our bow.”– Steve West, Nordion CEO.

That could be an issue for Nordion as traditionally strong customers begin shopping around for other isotope suppliers, but some say it could also be a positive development.

“When you talk about customers looking to diversify away from Nordion, that works both ways, as there are only a limited number of processors out there,” said Neil Maruoka, an analyst with Canaccord Genuity, who noted Nordion is in a position to supply the molybdenum-99 medical isotopes to distributors working with the company’s competitors, due to excess capacity at the NRU and potential backup supply from Russian partners.

Mr. Maruoka, who has a “buy” rating and a $14.50 target on Nordion’s stock, said there’s a lot of additional upside to getting those new distributor deals, especially as molybdenum-99 prices have risen in the wake of the NRU shutdowns and issues with Nordion rival Covidien’s supplying reactor in Europe.

Mr. West noted Nordion must first see the outcome of a planned month-long NRU outage beginning in May before seeking such agreements.

“It’s somewhat awkward for us to persuade customers to sign up any more than they currently have (with the upcoming shutdown) … there’s not that level of credibility,” he said. “Once the NRU comes back after the outage, and there’s a reasonably good indicator of performance, then we will be able to go back to either get a greater share of existing customers, or to bring on those we don’t have but who need to diversify.

“But they’ll be nervous until we can provide that reliability and greater sense of comfort.”

Nordion is also working on securing fresh backup isotope supply from Russian partner Rosatom, which Mr. West said he believes will deliver about 20 per cent of global demand “in the fullness of time.” That will likely take some of the pressure off if the half-century-old NRU experiences more problems.

“A sizable backup supply is something we’ve never had before, so to have that flexibility in our supply chain gives us a second string to our bow, and it’s a value proposition we can bring to the marketplace,” said Mr. West. “The difference with Russian supply is that it’s much newer, unlike the aging infrastructure here or in Europe or South Africa, so there’s a more robust supply capability.”

Rosatom is an important piece of the puzzle, with RBC Capital Markets analyst Douglas Miehm commenting in an earnings preview research note that “were any situation to arise that would prevent Rosatom from fulfilling its agreement, (Nordion) would be negatively impacted.”

Canaccord Genuity’s Mr. Maruoka added that a successful Rosatom deal should provide some comfort to investors that molybdenum-99 supply “won’t completely drop off a cliff” if and when the NRU is decommissioned in 2016.

However, the first-quarter earnings report indicated Nordion won’t be able to get commercial quantities of the isotopes from its Russian suppliers by the NRU’s May shortage. As well, Mr. West emphasized that Rosatom is only supposed to be a backup to a fully functional NRU.

He added: “I’m not sure the NRU will be decommissioned in 2016, and really I think this is an issue that’s alive and well for the whole industry, not just for Nordion or (NRU operator Atomic Energy of Canada Ltd.) The industry recognizes the need to replace it with something with more flexibility and backup capacity.”
Nordion and the rest of the nuclear medicine space will be looking at the issue in the interim, although it’s too early to say how it will work out, Mr. West said.

“As time goes on, some of the options will be validated from feasibility to capability, and then we’ll have a better sense of what’s going to replace the existing infrastructure.”

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