A search for isotopes

Nordion Inc. (TSE:NDN) has strong financials and a leading market share yet risk adverse investors are still uneasy about the company’s future, lowering its share price in 2011.

The Ottawa-based company, a market leader in producing nuclear isotopes for medicinal and sterilization purposes, has revenue growth of more than 42 per cent year-over-year and a handsome dividend yield of more than 4 per cent. Yet its stock value has fallen from $12 to about $9 this year.

Market bears are saying Nordion’s supplier of its staple product molybdenum-99, an isotope used in detecting heart disease and cancer, has an uncertain future. The 64-year-old National Research Universal (NRU) reactor in Chalk River, Ontario, is set to close in 2016.

“The fact that we know when (the reactor) is scheduled to be decommissioned creates a  lot of uncertainty around how they are going to get their moly after that day,” said Neil Maruoka, an analyst at Canaccord Genuity. “It’s probably the largest single issue facing the company.”


In 2010 Nordion’s supply of moly-99 was disrupted for 16 months for maintenance of the NRU reactor. Before the shut down, Nordion’s global market share ranged from 30 to 50 per cent said Alan Ridgeway, an analyst for Paradigm Capital Inc., in a recent Globe and Mail article. Hospitals adjusted by being frugal with their use of moly-99 and demand has yet to return to pre-2010 levels said Maruoka.

Research and development investments in new products like GammaFIT, a sterilization product, could lead to significant growth.

To ease concerns over the company’s supply chain Nordion began importing isotopes from a Russian reactor in 2010. However the reactor hasn’t been able to meet the demand for moly-99. Nordion is also involved in a lawsuit with the federal government which agreed to build two new reactors in 1996 as part of the MAPLE project. The reactors would guarantee the supply of isotopes for 40-years and Nordion sunk $350 million into the project but it was scrapped in 2008. Nordion is suing for $1.6 billion for breach of contract. The arbitration hearing has recently been postponed to the second quarter 2012.

Maruoka said Nordion is diversifying its business to mitigate the risk of disruptions to the sale of moly-99. He said the company functions in three segments: medical isotopes, like molly-99, sterilization technologies and therapeutics. Research and development investments in new products like GammaFIT, a sterilization product, could lead to significant growth and with the company’s current market value investors could look to Nordion as a solid buy-low candidate.


Nordion will begin selling GammaFIT,  a sterilization radiator that disinfects food, medical devices, or other packaged products in the first quarter 2012. GammaFIT is a smaller, more affordable radiator than the standard multi-million dollar devices sold by Nordion. The price tag could lead to more robust growth by attracting new markets said Maruoka.

Nordion’s real growth potential is in its targeted therapies segment where radioactive isotopes are added to drugs to treat patients.

Cobalt-60, or nuclear cobalt, is the fuel running radiators and Nordion is the market leader in cobalt-60 sales. The company usually buys large quantities of cobalt-60 from the NRU reactor but can also produce it using cyclotrons at its Ottawa facility. Nordion hopes GammaFIT will open up new markets for cobalt-60 sales in Latin-America and Asia the company indicated in its third quarter MD&A. Maruoka added that sterilization technologies provides steady cash flow and in 2011 the sale of these products increased by more than 11 per cent through three quarters. In 2011 revenue from the sale of sterilization technologies increased from $63.6 million to $68.9 million.

Nordion’s real growth potential is in its targeted therapies segment where radioactive isotopes are added to drugs to treat patients. TheraSphere is the company’s main therapeutic product used to treat liver cancer. Maruoka says the product has seen 50 per cent growth year-over-year in the past. The company is also testing TheraSphere Phase III, a therapy to treat a different form of liver cancer. Testing began in the third quarter 2011. This year Nordion’s targeted therapies segment has shown growth of 8 per cent year-over-year and sales increased in the third quarter from $7.3 million in 2010 to $11.5 million in 2011.


What sets Nordion apart from other business’ is its lack of competitors.

“There are no companies exactly within Nordion’s space,” said Maruoka.

Covidian, a U.S. company, does sell moly-99 and other medical isotopes but isn’t active in the sterilization or pharmaceutical industry.

Pharma companies produce and sell drugs that treat disease similar to Nordion’s therapy segment but they do not produce drugs using radioactive isotopes. In its sterilization segment, Nordion is only competing against small private businesses in the U.S because start up costs are expensive. The result is Nordion has a strong, or leading market share in each of its business segments.


In 2009 MDS Inc., a large health services company restructured its business by selling two thirds of its holdings. Danaher Corporation bought MDS Analytical Technologies for $650 million in cash in 2009 and MDS Pharma Services was later sold because it underperformed the company’s expectations, said Pooya Hemami, an analyst at Desjardins Securities.

“The opportunity for growth far  outweighs the downside risk.”

MDS Inc. then changed its name to Nordion Inc.

“Management wanted to concentrate on a unit that it knew well and it felt would be consistently profitable,” said Hemami.

Hemami said that Desjardins Securities sees Nordion as a “reasonable buy”. He believes Nordion has been under pressure since December 2010 and sees the supply-chain risk from the NRU reactor as limited. Hemami also suggests the MAPLE arbitration could lead to a significant payout for the company.

Maruoka said Canaccord Genuity is positive on Nordion stock.

“The opportunity for growth far  outweighs the downside risk,” he said.