MDS Inc. saw business boom last year as a nuclear reactor shutdown in Europe cut off its competitors' supplies of medical isotopes.
What a difference a year makes. As its competitors rework their supply chains, the company's MDS Nordion division has found itself cut off from its supply after the Federal government shut down an Ontario reactor in Chalk River this month following a heavy water leak.
The government estimates the shutdown could last at least three months. For each month the reactor is offline, the company expects to take a $4-million hit to its EBITDA (earnings before interest, taxes, depreciation and amortization). Investors have taken note – the company's shares have drifted 15 per cent lower since the reactor was shuttered on May 19.
“The company has three businesses, and with this news it means all three businesses are having trouble,” said Desjardins Securities analyst Maher Yaghi, who has a “hold” rating on the shares.
What are radioactive isotopes?
The reactor in Chalk River produces molybdenum-99 isotopes, which are injected into patients to help diagnose and treat diseases such as cancer. When operational, the reactor produces more than half of the world's supply, used to treat 27 million people each year.
One of the isotopes' primary uses is in treating tumours – the radioactive material is injected to the cancerous site, and as the isotope decays it releases energy that destroys the tumour. They are also used in diagnostic imaging – isotopes are injected into a patient and their emitted energy is then captured on film.
MDS said it is seeking alternative sources for isotopes, but with only four reactors in the world capable of cranking out the radioactive material its options are limited. It has been looking for other sources for some time, because its deal with Atomic Energy of Canada Ltd. at the Chalk River reactor expires in 2011.
“Beyond the 2011 licence expiry, we continue to see challenges for [MDS] in maintaining its global leadership position,” said Dundee Capital Markets analyst David Martin.
Isotopes account for up to 40 per cent of the revenue at MDS Nordion, which Jeffries & Co. analyst David Windley points out has been the best performing segment of the company's business in the last several quarters.
What else does MDS do?
The Mississauga-based life sciences company has three divisions.
MDS Pharma Services provides research services and undertakes clinical trials, while MDS Analytical Technologies designs high-tech diagnostic tools such as mass spectrometers and bio-analytical measurement systems.
MDS Nordion offers medical isotopes for molecular imaging, technologies for the sterilization of medical and other products, and contract manufacturing services for the radio therapeutics industry. It accounts for about 25 per cent of the company's earnings.
The company has been under pressure to spin off divisions since April, 2008, after activist shareholder Obrem Capital Management LLC, a U.S. hedge fund that owns about 6.6 per cent of the stock, launched a campaign by saying the company included "three fundamentally attractive" businesses that don't belong together. The company began a formal review of its operations in February.
Since Obrem first made its breakup proposal, both the markets and MDS's financial results have deteriorated. MDS has taken large writedowns at the pharma services division and it is now in a legal dispute with AECL over the nuclear reactors that produce medical isotopes.
Last summer, Obrem estimated that the three MDS businesses would sell for a total of more than $2.5-billion. This week, TD Newcrest analyst Lennox Gibbs took the break-up premium off his target price as he downgraded the shares to “hold.”
“We were never enthusiastic regarding MDS's breakup prospects but maintained a ‘buy' on the possibility of a modest premium for a near-term transaction,” he said. “We now see diminishing prospects for an expedited structural fix.”
What has its stock done?
The company's shares are down 30 per cent so far this year – and hit a 52-week low of $4.96 on Tuesday. The stock hit its 52-week high last May, at $18.94. The company earned $2-million in its last quarter, down from $19-million a year earlier.
Seven analysts follow the shares, according to Bloomberg, with one “buy” rating and six “holds.” Their average 12-month price target is $9.04.
According to StarMine, a service which tracks analyst estimates, analysts have lowered their expectations for the next quarter by 15 per cent in the last two months. In the same time, they've raised their expectations for the next 12 months by 5 per cent.
Three main factors are to blame for the company's sliding fortunes, said Mr. Yaghi. Early last year, laboratories around the world slashed capital spending and took a bite out of the analytics division. Earlier this year, pharmaceutical companies drastically reduced their outsourcing, dealing a serious blow to the pharma services division. The isotope shortage has taken the shine off Nordion, he said.
“The problem right now is all three businesses are having trouble and if you sold it would be at clear-out prices,” he said. “A lot of players bought the stock in October hoping for a breakup – these guys were betting on a premium, and they've re-evaluated the fundamentals.”
