Nordion Inc. has a dividend yield of more than 4 per cent, gross margins that have topped 50 per cent, and a toehold in a promising cancer treatment. At least a couple of analysts think the stock is worth $14, not the $9 it’s trading at these days. So what makes the stock so radioactive to investors?
OK, that’s a bad joke, because Nordion is in the business of processing nuclear isotopes for medical and sterilization purposes. The whole company is radioactive – and that’s a good thing, even if questions about the company’s long-term business have pushed down its valuation.
First, a little history from analyst Alan Ridgeway of Toronto’s Paradigm Capital Inc., who initiated coverage in September with a “buy” rating and that $14 target price. Once a part of the Crown corporation Atomic Energy of Canada Ltd., the company was sold to MDS Health Group two decades ago. After a few split-ups and spin-offs, MDS Nordion became known simply as Nordion.
Today, the company gets about 40 per cent of its revenue from its medical isotopes business, with another 40 per cent coming from its sterilization technologies segment, which uses isotopes for medical-device sterilization. The targeted therapies business does contract manufacturing of radiation-based treatments, called “radiopharmaceuticals,” and is also home to Nordion’s liver cancer treatment called TheraSphere.
Much of the current uncertainty with Nordion comes from its legacy business of medical isotopes, used for imaging that helps in the diagnosis of heart disease and cancer. Nordion’s most important medical isotope is molybdenum-99, produced at just six nuclear reactors in the world. For most of is history, Nordion has processed all the Mo-99 produced at the National Research reactor in Chalk River, Ont.
A 16-month shutdown at the National Research reactor, and the ensuing disruption to Nordion’s business, illustrated the need for the company to diversify its supply. (From a global market share that ranged from 35 per cent to 50 per cent, Nordion fell to about 20 per cent during the shutdown, but has now recovered to about 30 per cent, Dr. Ridgeway believes.)
To that end, the company is contracting with a Russian nuclear reactor for additional Mo-99. Last month, the Canadian Nuclear Safety Commission renewed the license for the Chalk River reactor through October, 2016, but the future of the Canadian supply is uncertain in the long term.
Dr. Ridgeway has factored these things into his analysis, which is based on his estimates of the company’s future cash flows. He assumes the Canadian government will shut down the Chalk River reactor in 2016, with Nordion then relying fully on Russia for its Mo-99 supply. “In our opinion, Nordion shares are undervalued due to the market’s focus on the perceived risk associated with the medical isotope business. We would argue that the risk is not as high as believed.”
It is Nordion’s sterilization technologies business, in fact, which provides half the company’s value in his analysis, much more than the medical isotopes segment. Nordion has installed more than half of the irradiation sterilizers in the world, Dr. Ridgeway says, and supplies about 70 per cent of the world’s demand for the irradiation isotope Cobalt-60. It is a “razor blade model,” he says, in which Nordion benefits from sticky, recurring sales.
While Nordion’s two biggest divisions offer just single-digit sales gains, its TheraSphere product – approved in Canada, Europe and some Middle Eastern and Asian countries while undergoing clinical trials in the U.S. – provides Nordion with a growth story. The company expects TheraSphere sales to grow about 40 per cent annually, which would put it at about $40.7 million (U.S.), about 15 per cent of the company’s revenue, in the next fiscal year.
Douglas Miehm of RBC Dominion Securities Inc. also has a “outperform” rating on the stock and a $14 target price, based on his discounted cash flow analysis. “We continue to believe that Nordion is underappreciated based on its cash generating abilities,” he says, adding that its dividend yield of about 4.5 per cent makes it an “attractive opportunity for investors.”
You could even say it glows.