As an investor in small capitalization healthcare companies, I understand the risks associated with investments in development phase and early marketing phase companies. The risks can be compounded in investments in OTCBB companies with less liquidity and greater propensity for share price manipulation. I have been following a small healthcare company with a unique mixture of products being marketed and an upcoming clinical candidate in development that could give the company much investor attention in the coming weeks ahead. Advanced Medical Isotope Corp. (OTC:ADMD) is an $11 million market capitalization company that appears to have a lot happening behind the scenes. The company specializes in the production and distribution of medical isotopes and medical isotope technologies. It is attempting to fill likely upcoming holes in the production of radioisotopes commonly used in diagnostic and therapeutic applications in the U.S. through partnerships to develop and distribute the isotopes via safe and productive reactors as well as cyclotrons. Adding a bit of speculative interest to this small company, ADMD acquired the rights to a therapeutic radiogel on April 10th, 2012. The radiogel is a water-based polymeric suspension of yttrium-90 (Y-90) which is designed to be injected as a liquid into targeted cancer tumors. Upon warming to body temperature, the suspension thickens into a gel, trapping the high-energy radioisotope in the tumor where it provides targeted radiotherapy treatment to kill cancer cells. Not only is the Y-90 placed at the site of the tumor where it can be most effective, but the radioisotope remains at the tumor which minimizes systemic exposure to the radioisotope and keeps the safety profile solid.
Since the company is largely in the development phase for many of its projects, I understand why investor interest was a bit low in late 2012, although its market capitalization was only about $20 million then. However, the stock’s recent descent to trade at only $0.12 per share with an $11 million market capitalization seems a bit perplexing to me and is forcing me to reconsider a long position that I abandoned through a $0.17 stop limit in Q4 2012. A March 26, 2013 press release prompted me to more closely evaluate the company’s investment potential. The press release noted a “strategic alliance with GSG International GMbH to collaborate in the joint development of technologies for the production of medical isotopes and the marketing and distribution of related isotopes, equipment and services.” This alliance would endeavor to distribute molybdenum (Mo-99) and Technetium-99 generators and kits worldwide, with ADMD having distribution and sales rights to the large makets of the United States, China and South America.
This recent press release, combined with the company’s low market capitalization prompted me to contact CEO James Katzaroff about the company’s future and what its plans are for 2013 and beyond. He was gracious enough to answer some key questions pertaining to the new alliance that I thought the investment community could find useful when considering the company as an investment. Following are Mr. Katzaroff’s responses:
(CF) What is the value of the GSG alliance for ADMD and for its shareholders? Can you please describe what this agreement is about in a bit more detail?
(J. Katzaroff) Gamma Service Group (GSG) has been around for 20 years and is well known for making high quality equipment for Mo-99 isotope production. The company has access to generator equipment as well as many other items for use in the nuclear medicine field. GSG is also working on manufacturing the generators and Tc-99m disposable kits to go along with the equipment that the company already markets. It also specializes in building customized hot cells and irradiators. The company generates an impressive $45 million in revenue with nine affiliated companies, and ADMD has the right to sell this equipment and related kits in various geographies. We are in discussions with several of these units for major collaborative efforts.
ADMD has secured rights to distribute in China as well as North and South America for all technologies and products related to Mo-99. In addition, ADMD would be able to compete for distribution in the rest of the world. One of the big problems in the U.S. in the past few years have been an uncertain and sometimes diminished supply of Mo-99 which is critical for medical applications for medical diagnostics and therapeutic applications. GSG has outstanding relationships with Mo-99 producers throughout the world, particularly the reactors in Russia which are gearing up to be able to produce on a global scale.
The dollar amount expected to come from Mo-99 sales in Russia this year may be a little over $8 million, with that reactor working only at reduced capacity. As additional reactors in Russia are gearing up to Mo-99 production, redundancy and reliability is critical for global acceptance of Russian Mo-99. The sales are projected to grow 7x over the next two years. Of course, testing and approval for sales here in the U.S. are critical factors. What everybody wants is reliability.
(CF) Nordion Inc. (NYSE:NDZ) and Covidien (NYSE:COV) are generally considered to be the headliners as investment candidates in medical isotopes. Could you give us a projection on isotope sales in the short term and long term associated with ADMD’s GSG agreement?
(J. Katzaroff) Total market in world is 12,000 curies/week of Mo-99, and about half of that is used by the U.S. when it can be obtained. The current pricing of long term contracts appears to be $400-$600 per curie, and with shortages, spikes could be as high as $1700/curie. This translates into $350-$400 million annual revenue. A 10% share of the U.S. isotope market alone would be worth around $18-20 million per year. Not to be left out of the equation, investors should also note that China’s booming growth will likely increase its demand for medical isotopes, likely rivaling that of the U.S. demand in coming years. In all scenarios, a reliable source of isotope supply could easily obtain a significant part of this pie.
(CF) What about transporting from Russia to here with isotopes decaying so rapidly?
(J. Katzaroff) The half life of Mo-99 is about 6 days, which makes it transportable from or to anywhere in the world. This is typically a non-issue regarding source of production.
(CF) With nuclear proliferation being high on the international agenda, what about the potential ban on highly enriched uranium for any medical isotope production? How could that impact the supply?
(J. Katzaroff) This is one of the critical issues the U.S. has been dealing over the last few years. HEU (highly enriched uranium) is banned in the US as it is essentially bomb material. However, not every county has made this decision. Russia is changing from HEU to LEU (low enriched uranium) sometime in the near future. One of the differences between HEU and LEU for radioisotope production is that the latter adds cost and time, which some of the countries may not be willing to sacrifice.
(CF) What do you need to accomplish before you can start selling this in U.S.?
(J. Katzaroff) ADMD will obtain samples from the Russian reactors soon for a 3 month testing process. The FDA will test three separate batches which can be done simultaneously. ADMD could possibly have three sets in in the next few weeks to begin processing. This initial testing and validation is required before these products can be sold in the U.S.
(CF) So far we have only focused on the isotope and generator business, what about other products that GSG and ADMD are collaborating on?
(J. Katzaroff) As I mentioned before, this is quite a far-reaching alliance between the two parties where we want to be able to leverage each other’s capabilities. That includes, but is not limited to, joint manufacturing facilities, irradiating medical devices, nuclear waste cleanup, and moving forward on intellectual property pursuits, including our patents on turning nuclear waste into medical isotopes.
(CF) Mr. Katzaroff, I certainly appreciate you taking time out of your busy schedule to answer some questions for shareholders. It appears that Advanced Medical Isotope Corporation is making wise decisions not only for its future profitability, but also for its investors’ interests. I look forward to seeing your company continue to grow and potentially help fill a very real market need for radioisotope production. With shares trading down at the current range of about $0.12, the upside could be promising if events transpire as you noted in the near future. Thanks again, and I hope to be able to speak with you later in the year as ADMD forges ahead.
ChemistFrog is a degreed chemist who currently resides in Georgia. He writes predominantly on small capitalization pharmaceutical companies that are undervalued, oversold or trading under the radar. His unique writing style comes from a varied background of his work experiences as a chemist working in food safety, water quality, pesticides, food additives, paints, plastics and pharmaceutical precursors. Initially writing solely for the purpose of performing research for his own investments, ChemistFrog has advanced to writing in many venues including his own website at http://chemistfrog.com, Seeking Alpha, Market Playground and others. ChemistFrog offers a free newsletter that interested readers may subscribe to at his website. Before making any final investment decisions on any company’s presented in ChemistFrog’s writings, we advise you to perform additional research to confirm all facts.