NDZ has been featured in previous write-ups here on VIC.  It has been the subject of much discussion and many dramatic rises and falls in fortunes (and valuation).  We return to the company now as a value opportunity created by the severely disappointing outcome of the company’s lawsuit against the Canadian government in November 2012.  This caused a dramatic reduction (35% in one day) in the company’s share price.  Subsequently, the company announced that it had retained Jefferies to explore a sale of the company.  Based on a basic sum of the parts analysis, the value of the company in a moderately successful sale appears to be approximately $10, roughly a 50% premium over the current price.  This ascribes zero value to the star-crossed Mo-99 business after 2016.  Additional value of up to $4 per share could come from the follow-up lawsuit filed against the Canadian government.

(1) Cobalt Business value = $315M

Co-66 is used in the sterilization of most single-use medical equipment.  In short, radiation from the cobalt kills any living bacteria or other organisms.  It can do this through sealed packaging, a huge benefit to manufacturers.  The industry has been growing at a low single digit rate for many years, and is projected to continue to do so for the indefinite future.   It is essentially a razor / razorblade business, with a huge installed base of expensive razors (which Nordion also manufactures) and razorblades (the cobalt) that, due to unavoidable radioactive decay, require partial replacement every year.  Because it deals with radioactive material, the barriers to entry are enormous, with significant technical know-how requirements coupled with massive regulatory hurdles.  In addition, NDZ has tied up much of the available global supply of radioactive cobalt and major customers in long-term contracts.  Its small market size (under $200 million in revenues) further reduces the attractiveness for any potential new entrants. 

This is a good industry to be an incumbent in, and NDZ has an estimated 80% market share.   In 2012 this division recorded $39 million of EBITDA.  Its high barriers to entry and extremely steady, predictable cash flows make it an ideal private equity target.  Applying a mid-range 8x EBITDA multiple would value the segment at $315M.

2)  Therasphere value = $220M

Therasphere is an innovative treatment option for inoperable liver cancer.  It works by delivering targeted radioactive seeds to the cancer site.   The product has one primary competitor, SirSpheres, which are produced and sold by an Australian listed company called Sirtex.  Therasphere has demonstrated several years of double-digit growth and enjoys gross margins of approximately 80%.  It has gained significant traction in the United States and several other countries in Europe and elsewhere.  The technique is potentially applicable to multiple other cancer categories, and by some estimates represents in excess of a $5 billion market opportunity.

Currently Nordion is in the midst of conducting multiple clinical trials to gain full treatment approval in the US (it is currently used under HDE status, which limits its use and profitability). This will drive significant long-term growth, but negatively impact current and short-term future EBITDA margins.  Outside of the US, Therasphere enjoys fuller approval status in the EU, and other venues on a country-by-country basis.   

Conversations with multiple physicians has led us to conclude that from an implementation and efficacy standpoint, Therasphere is highly comparable, if not slightly advantaged vs Sirtex.  On the other hand, Sirtex is fully approved by the FDA for certain applications, and is conducting its own set of clinical trials for additional indications.  Sirtex has recently traded for 6-6.5x revenue.  Using a discounted 4x multiple of 2013 projected revenues results in a value of $220m for this segment.

3) Molybdenum 99 = $50m

The multiple issues concerning Nordion’s Mo-99 business have been the source of significant investor interest over the past several years, and we will only cover the basics here.  Nordion obtains this radioactive isotope from a 1950’s era Canadian reactor (the NRU), and then processes and sells it to a small set of global customers (primarily to a US-based company called Lantheus).  Until an unplanned shutdown in 2009, NRU and NDZ had historically provided approximately 40% of the world’s supply of Mo-99.  Since then, its share has diminished by roughly half.  The rest of the world’s supply comes from a small handful of reactors across the globe, almost all of which are equally aged, though significantly smaller than the NRU.  The Mo-99 decays into an isotope called Tc-99, which has an extremely short half-life of less than one week.  The Tc-99 is then used in a wide range of medical imaging applications (for example, cardio stress tests), for which there are few substitute procedures of equivalent efficacy.  The short half-life of the Tc99 makes stockpiling impossible.

The aging NRU reactor is currently licensed to run through 2016, and at that time Nordion may very well find itself out of this business.  However, there is some run-off value here for the cash generated in the interim.  In recent weeks, the world’s other large-scale reactor (Petten in the Netherlands) has experienced an extended unplanned shutdown.  Our conversations indicate that this is likely to last through the summer, and potentially longer.   As a result, Nordion has seen increased isotope volumes vs its earlier expectations.  Prices for the isotope have not yet started to rise significantly, but industry executives are concerned that an extended outage could cause a repeat of the 2010 industry crisis where prices tripled.  This situation should generate small incremental upside for Nordion.  In addition, the company produces additional isotopes (e.g. strontium) used in other clinical applications (about $20m annually).  While the possibility exists that some post-2016 solution could be found to extend the business segment, we will value this option at zero.

Discount rate:     10%
DCF value         $50m

4) Net Cash = $15m

NDZ’s net cash position brings a bit of additional value.  In order to properly assess this, one needs to carefully review the company balance sheet and relevant footnotes for asset and liability items that are likely to result in cash to/from the company.  While some of these items are subject to future modification, below is our assessment of the most recent balance sheet.  Note that we are counting the pension liability at the full current deficit value here.  Minor increases in interest rates could materially diminish this amount.  Also, we are significantly discounting the value of the deferred tax asset, due to uncertainty of the value retained by a purchaser in a sale.

Net Cash: $15m

5) Ongoing Lawsuit

In November of 2012, NDZ lost a long-standing lawsuit against the Canadian government for its aborted construction of the $350m MAPLE reactors, the unsuccessful completion of which essentially doomed the fate of Nordion’s Mo-99 business.  After the arbitration verdict was announced, Nordion subsequently filed an additional suit against the government, seeking $250m in damages.  Litigation is expected to commence in 2014.  While we ascribe no value to this lawsuit, it is certainly of significant merit, and a potential free option for an additional $4 per share of value.

6) Risks

The largest risk facing our thesis is that the company is not successful in finding suitable bids for its business units.  This is difficult to predict but our conversations indicate that: (1) the multiple positive characteristics of the cobalt business should attract a well-qualified field of private equity buyers and (2) the Therasphere business should be a nice product add-on for a large range of strategic pharmaceutical companies.  Further, the company’s largest shareholders (the top 5 own roughly 40%) have been consistent in their stated desire to make the sale happen.  However, the businesses do involve highly regulated materials, which could limit the number of potential purchasers.