By William Sterling
Nuclear medicine plays an integral part in today’s modern medicine, and it is also big business. In the U.S. and Europe alone, 28 million medical procedures use radioactive isotopes, and those numbers are expected to increase 10% annually. Over 10,000 hospitals worldwide use radioisotopes, with roughly 90% used for imaging to obtain information and find abnormalities in the structure and function of the body. These procedures previously would have required surgery or other diagnostic tests. Radiopharmaceuticals are medical isotopes along with a carrier molecule, and these radiopharmaceuticals can be injected into the body to deliver the isotopes to the targeted area where they can then be used to obtain information, from a cardiac stress test to targeting and delivering medicines to destroy certain cancer cells. The isotope technetium-99m (Tc-99m), the most widely used isotope in nuclear medicine with some 30 million procedures a year, accounts for 80% of all nuclear medicine procedures worldwide. Tc-99m is also used to diagnose and treat patients with medical issues, including heart disease and cancer.
The problem is the recipe to make Tc-99m requires another isotope; molybdenum-99 (Mo-99), and acquiring Mo-99 has become a political “hot potato.” First off, the handful of nuclear reactors used to harvest Mo-99 are 43 to 52 years old, and two of them—the Osiris reactor in Saclay, France and Canada’s NRU reactors—are scheduled to be to shut down in 2015 and 2016. The other problem is these reactors produce highly enriched uranium (HEU), otherwise known as “bomb grade” uranium. And due to terrorism, that becomes a big issue—an issue so big that many governments are insisting that medical isotopes no longer be developed with HEU, but with low grade enriched uranium (LEU). Last June the Obama administration endorsed amendment S. 99 of the American Medical Isotopes Production Act of 2011 to minimize global commerce in HEU in order to reduce risks of nuclear terrorism and nuclear proliferation, and to ensure a reliable supply of medical radioisotopes derived from Mo-99 by fostering domestic production without HEU. These issues have created a problem for the world’s two biggest suppliers of medical isotopes, Covidien plc (NYSE:COV) and Nordion Inc. (NYSE:NDZ), considering they get their isotopes from old reactors that produce HEU. The Amendment has also allowed a handful of smaller companies to enter the isotope market. Below are three companies, one of the giant suppliers and two of the small start-up isotope companies, hoping to step up and become a major player in the isotope business.
Covidien plc (NYSE:COV) is a leading global health care product manufacturing company based in Dublin, Ireland and, as stated above, is one of the largest producers of medical Isotopes. The company receives its isotopes from nuclear reactors in Poland, France, South Africa, and Belgium, and has already taken steps to begin a conversion to create medical isotopes from HEU to LEU; but the conversion is years away. To meet the future needs for medical isotopes, Covidien was looking into developing new reactors with Babcock & Wilcox (NYSE:BWC), the Charlotte, North Carolina based nuclear component and service provider, using LEUs that would run on uranium in a liquid form and would have one ten-thousandth the power output of a commercial reactor. Unfortunately, last October both companies announced its decision to scrap the project sighting that the time and costs involved would be greater than originally estimated. For Covidien its medical isotope business is just one cog in the wheel of this large company, so the stock should see little (if any) negative effects of scrapping the project or if it experiences a slowdown in its isotope production due to the political climate or the time involved of converting the reactors from HEU to LEU.
Covidien is a $27.65 billion market cap company. Last month it declared an accelerated quarterly cash dividend of $0.26 per share intended to be in lieu of the quarterly dividend, which would have been declared this January. The company reported $1.02 earnings per share for 4th quarter of 2012, beating the analysts’ consensus estimate of $1.00 by $0.02. It also had revenue of $3.0 billion for the quarter, compared to the consensus estimate of $2.98 billion. Covidien reported a total net income for 2012 of $1.91 billion, or $3.92 per share, up from $1.87 billion, or $3.76 per share, in fiscal 2011. Revenue rose to $11.85 billion from $11.57 billion. On January 2, 2013, Citigroup reintegrated its “buy” rating with a target price of $64.00 per share. According to Citigroup analysts, “The company is now the third-largest pure play in the med tech space in terms of sales and in the top 10 overall. Covidien’s higher-growth businesses also carry higher margins, which have created more OM expansion than the peer group, and we expect this trend to continue. Covidien also has the unique advantage within our coverage universe of having a domicile outside the United States which means there is no geographic restriction on cash usage.” Separately, Goldman Sachs reiterated a “neutral” rating to investors on Monday, raising the target price up $1.00 to $63.00 per share, while Zacks also maintained its “neutral” rating in a research note to investors on December 27th, with a $60.00 price target, but also noted, “The company raised its commitment to return more than 50% of its free cash flow to shareholders via dividends and share repurchases.” Last November, Brean Murray initiated coverage on Covidien with a “buy” rating and a target price of $66.00 per share. Covidien stock closed Thursday January 3rd at $58.48, up $0.08. For 2012 the stock rose almost 30%; however, the downturn in the US and European economy may put pricing pressures on the company which could slow down the stock’s growth. This is a solid company with a good dividend, and a strong long-term hold in one’s portfolio.
Advanced Medical Isotope Corp. (OTC:ADMD), a nano-cap company based out of Kennewick, Washington, has a strong upside potential to be one of the larger suppliers of medical isotopes in the U.S. It is doing so by working with national laboratories and universities to implement proprietary technologies to produce needed medical isotopes. In May 2010, the company entered into a license agreement with the University of Missouri for the patent rights to use electron beam accelerators to create radioisotopes Mo-99 and Tc-99m that, as stated earlier, accounts for 80% of all the
nuclear medical procedures worldwide. ADMD is the only company in the U.S that uses the PULSAR Isotope Production system, which is a compact linear accelerator (LINAC) and is designed to produce the full spectrum of PET imaging radioisotopes for diagnostic and therapeutic applications used in PET imaging. Basically the LINAC replaces the large and demanding cyclotron systems for the production of medical isotopes. In a move to increase its U.S. isotope production, last December ADMD announced it formed a partnership with Safety by Design, PC, of Colorado to develop medical isotope products with Colorado State University. These medical isotopes are in high demand in the Rocky Mountain area, but are in short supply. ADMD’s intent is to remedy that situation by producing isotopes using the 1-megawatt TRIGA Reactor operating at the Denver Federal Center.
Though ADMD is developing what appears to be a solid and growing medical isotope manufacturing company in the U.S., the other product it acquired has begun to garner interest. In a licensing agreement with Battelle Memorial Institute, which operates the Pacific Northwest National Laboratory, ADMD acquired the rights to develop its technology of an injectable radiotherapy that targets cancer cells. This therapy is called “radiogel” and has the capability of propelling ADMD well beyond its isotope production business. Radiogel utilizes a water-based polymer containing yttrium-90 (Y-90) microspheres, and is administered not with a catheter, but with a needle injected directly into the tumor, thus eliminating the need for surgery in many cases. Interestingly, once the polymer is injected the solution warms to body temperature and polymerizes turning into a gel, forming a lattice, which traps the Y-90 in the targeted tumor. High-energy beta particles from the Y-90 irradiate the cancer cells within the targeted mass; but because it’s trapped in the lattice, very little radiation escapes. This enables the therapy to maximize the radiation dose to cancer cells while minimizing radiation dose and associated side effects in nearby healthy tissues. What makes radiogel versatile is that not only can it be injected through the skin, but also it can be injected during a surgical procedure and when a cancer tumor cannot be surgically removed. Radiogel technology is in its early stages of development, but has the potential to be a blockbuster therapy. ADMD is a $14.35 million market cap company. Its stock rose over 90% in 2012 and, with its U.S. isotope production; I see no reason why this company shouldn’t continue to grow. Currently its stock is at $0.19 per share and I believe with its upside potential it is still an excellent entry price.
Positron Corporation (OTC:POSC), a nano-cap molecular imaging healthcare company based out of Fisher, Indiana, early last month announced it completed its first commercial processing, sale, and shipment of strontium-82 (Sr-82) to a North American pharmaceutical company through its subsidiary it acquired in November 2011, Manhattan Isotope Technology, LLC. The strontium-82 was produced from target material it received from one of its foreign suppliers for target irradiation. Strontium-82 is used exclusively to manufacture rubidium-82 (Rb-82) generators—the most convenient Positron Emission Tomography (PET) agent in myocardial perfusion imaging. Jason Kitten, President of Manhattan Isotope Technology and Positron’s Director of Radiopharmaceutical & Radioisotope Production, commented, “This API shipment is a culmination of our company’s expertise, research & development efforts, dedication to our isotope program and the efficiencies of MIT’s Sr-82 production facility. Positron’s commitment to Rb-82 based cardiac PET continues by addressing the single largest factor limiting its growth, strontium-82 production. By building upon the current production base and increasing capacity, Positron will bring diversity and confidence to Sr-82 supply, thus providing further assurance that this technology will be a dependable, reliable modality for the nuclear cardiology community.” Last year the company received a U.S. patent for its semiconductor detector used in high precision measuring of coordinates and detection of ionization particles and has a number of potential applications in medical imaging, radiotherapy, and experimental physics. The company states that it was originally an R&D technology company, but over the last few years has evolved into a comprehensive full “nuclear cardiology solution” provider and is securing a supply of key medical isotopes for radiopharmaceuticals that apply to both PET and SPECT imaging.
Though there is a need for isotope manufacturing and Positron appears to be moving forward, it is a nano-cap company and its stock sells for $0.01 per share, and though volume can be high, it doesn’t seem to move the price past $0.01. The market cap for the company is at $14.4 million. At this time I’d keep an eye on the company and wait for some positive news that might move the stock forward.
When investing in companies that develop isotopes, Covidien is the safest bet; it is a giant diversified company and has good dividend. But for possibly more “bang for one buck”, I’d look at the smaller up- and-coming isotope manufacturers. Clearly, the U.S. is serious about using LEUs to product medical isotopes, and that only enhances the few companies now producing isotopes in the U.S. My choice is Advanced Medical Isotope Corp. as the best bet for growth due to its existing isotope production and its medical therapy radiogel which, if successful, has the potential to be the next $100 million therapy.
Disclosure: Long COV, ADMD.