Prepares to Take Control of Mo-99 Market and Trade with Large Gains
Nordion Inc. (NYSE:NDZ) is a company that is dependent upon the Canadian government, and is at the mercy of its decision as it relates to the future of its business. This fact has led its shares lower by more than 40% since September 7, as the company prepares to lose nearly $80 million in annual revenue, due to aging nuclear reactors and increased political policy. An American company, Advanced Medical Isotope Corporation (OTC:ADMD), will earn that business.
The medical isotope business accounts for 46% of Nordion’s total business. In terms of income or profit, nearly $27 million has been created from this one segment, which is equal to its adjusted net income for the first three quarters of the year. In other words, it’s a profitable business with a near 35% profit margin, and the loss of the company’s medical isotope business will be devastating to Nordion, and will be a blessing to the company that benefits.
Nordion’s financial information can be found by clicking here.
Nordion relies on the NRU reactor for medical isotope production. NRU is an aging reactor that will be shutting down in the near future. In the last two years, the reactor has already been shut down on several occasions for repair purposes, and has cost the company a great deal of potential revenue. It’s no secret that Nordion needs to find a solution to the NRU problem, and it had thought that a solution had been found with the MAPLE facilities. However, the Atomic Energy of Canada Limited (AECL) denied the construction and monetary damages to the company for the MAPLE facilities.
The company that is best positioned to take this space is Advanced Medical Isotopes Corporation (ADMD). The company has a great relationship/partnership with one of the only U.S. reactors that can handle U.S. demand, the MURR reactor, and has already said that it could meet 50% of the U.S. Mo-99 demand. Meanwhile, Nordion does not have a working relationship with this reactor, and once the NRU reactor closes, Nordion’s reserves are on other continents, therefore making logistical requirements nearly impossible.
To appropriately #$%$ Advanced Medical Isotopes’ imminent benefit from the closing of the NRU reactor and its revenue/profit potential you must take into consideration a few facts that will exist as a result of the transition. First, Nordion will not lose all of its presence, it does have reserves but will no longer be able to supply 90% of the U.S.’ Mo-99 demand. Judging by Advanced Medical Isotopes’ belief that it will control 50% of the market, it means that either A) other companies will take small chunks of the space or B) that Nordion will still control a sizable piece of the space. Either way, 50% of the space could exceed $50 million in annual sales, based on Nordion’s success.
Although Mo-99 is the most common medical isotope produced at the NRU reactor, to the U.S., Nordion does post revenue from the production of other isotopes. However, we must consider that there has been a significant shortage for several years, while the NRU reactor would go offline at various points and has had trouble operating at maximum capacity. Thus, a $50 million revenue expectation within the first three years of Advanced Medical Isotopes’ term as a supplier is based on appropriate supply to the U.S.
Advanced Medical Isotope will have higher costs associated with the MURR reactor going online for large production, yet because ADMD is centrally located in the U.S., its logistical costs will be lower long-term. If Nordion’s profit margin from this space is 35%, then ADMD should be able to achieve equal margins, or $17.5 million in profit within the first three years of mass production. With a 10x earnings multiple it puts the company with a worth of $175 million, a company that is currently valued at just $12.3 million!
In the last six months ADMD has rallied by more than 70% as the prospects for it controlling the Mo-99 market continue to look brighter by the day. Even if the company does not succeed in reaching $50 million in revenue with a profit margin of 35% in the first three years it still presents great upside compared to its current valuation. The company also has other catalysts such as its radiogel, and the potential sales from this product, I believe these estimates to be both fair and conservative. Overall I have a speculative “strong buy” on the stock and a two-year price target of $1.00, and because of its price, I see very little risk associated with the investment.