Q1 2013 Earnings Call Transcript
Transcript Call Date 03/06/2013

Operator: Good morning, ladies and gentlemen. Welcome to the Nordion First Quarter Results Conference Call.

I will now like to turn the meeting over to Ms. Ana Raman, Investor Relations. Please go ahead, Ms. Raman.

Ana Raman - Director, IR: Thanks Jason. Good morning and welcome to Nordion's first quarter fiscal 2013 earnings call and webcast. On the call this morning are our Chief Executive Officer, Steve West; and our Chief Financial Officer, Peter Dans. The format for our call will be that Steve and Peter will provide their perspectives and then we'll open up the lines for questions to analysts. Slides have been posted to accompany this webcast.

As per Slide 2, which contains our caution on forward-looking statements, please note that today's comments do contain forward-looking information, so actual results may differ materially from expected results because of various risk factors. These factors are described in Nordion's quarterly and year-end filings, which are available on SEDAR, EDGAR, and the Company's website. Results have been prepared under U.S. GAAP and all amounts mentioned are in U.S. dollars, except when otherwise noted.

Turning to Slide 3, we have included certain non-GAAP measures. These include adjusted net income and adjusted earnings per share. These non-GAAP measures exclude certain items, and are intended by management to provide investors with a meaningful, consistent comparison of the Company's core operating results. This information should be considered as a supplement to and not a substitute for the corresponding financial measures prepared in accordance with GAAP.

Our first quarter news release was issued yesterday after market close. You can find it on our website at www.nordion.com.

With that I will turn it over to Steve.

Steve M. West - CEO: Thank you, Ana, and good morning to everyone joining us today.

Nordion generated solid first quarter results across our three business lines. So revenues of $53.7 million were up slightly compared to the same period last year. In Q1, TheraSphere generated revenue of $12 million which is 9% up over the same period last year. Sterilization revenue of $16.4 million increased 2% compared with Q1 2012. Medical Isotopes saw revenue of $25.2 million. While this was a decrease of 0.7 or 2.6% compared with Q1 of 2012, Medical Isotopes volumes were above our expectations for the quarter.

We announced in January that Nordion initiated a review of strategic alternatives with the assistance of Jefferies. Now that review is still in its early stages, we believe it's an important step in evaluating appropriate strategic options and creating future opportunities for Nordion. Nordion remains focused on our operations, customers and execution of our planned business strategies as we progress through this review.

In the quarter, we were pleased to announce Grant Gardiner has been appointed as Senior Vice President, General Counsel, and Corporate Secretary and Grant will serve as our legal officer responsible for all global legal matters, effective March 18, 2013. Grant has a strong background in leading cross-listed publicly traded companies through complex legal governance and compliance landscapes. He joins us from his previous leadership role as Assistant General Counsel at BlackBerry formerly known as Research In Motion and is expected to play an important role in the execution of our strategic priorities.

Also in Q1, we confirmed that we are pursuing our rights under the Isotope Production Facilities Agreement or IPFA and filed an amended statement of claim with the Ontario Superior Court of Justice against AECL for damages of $243.7 million. Based on the current schedule, we continue to expect documentary production and discoveries to begin in 2013, and this matter will not be set for trial before mid-2014. As stated, we believe we have strong case for negligence and breach of the IPFA against AECL.

Now as well last week, Minister Oliver announced that in the coming months, the Government of Canada will engage in a competitive procurement process to restructure the management and operation of Atomic Energy of Canada Limited nuclear laboratories. This follows the Government of Canada's request for expression of interest process undertaken last year. The announcement is not expected to impact our current supply from AECL.

We are in agreement with Minister Oliver that Chalk River laboratories are key asset to Canada's nuclear industry, and we are pleased that the government is supporting Canada's nuclear industry through access to science and technology facilities and expertise.

For many years, Nordion has and continues to play key part in the Medical Isotopes supply chain. Supply of Medical Isotopes is a critical part of the Canadian and global healthcare system. Our priority remains providing a reliable source of Medical Isotopes to the healthcare community.

Now please turn to Chart 6 in the presentation and I'll turn to our first quarter segment results starting with TheraSphere. TheraSphere revenue for Q1 2013 of $12 million increased by $1 million or 9% compared with the same period last year, primarily due to adoption in new clinics. In Q1 we brought on six new sites in Europe and Middle East and four in the United States. We anticipate growth to be lower for the first quarter of 2013, with expected growth in the second half of fiscal 2013 to be stronger than in the first half of this year, and we continue to forecast annual growth in the mid-teen percent range.

U.S. TheraSphere growth in the first quarter was solid. However, we experienced some softness in Europe, primarily due to reimbursement challenges in Germany. We are currently working with Germany's reimbursement bodies as well as our customers to resolve these challenges. As part of our global growth plan, Nordion is establishing further distribution in Europe and the Middle East. During the first quarter we made progress in setting up new distributors which should be active later in the year, and we anticipate these distributors to support growth in subsequent quarters. Additionally, we're also working on reimbursement in key European markets supported by our new market access function.

We just announced a new and improved global TheraSphere.com website providing liver cancer patients with localized resources and treatment center listings and offering physicians easy access to clinical trial information, publication data, our new iPad app and our unique preceptor program. Physicians will also benefit from the sites online ordering for standard and custom doses of TheraSphere.

Now we will still continue to make progress in the Asian market. Last quarter we mentioned that we plan to make investments in the Asian market, including Hong Kong, Taiwan, Singapore and South Korea, and we expect to receive registration in these countries in late 2013 or in 2014.

On the clinical trial front, Nordion stopped HCC trial designed to demonstrate the efficacy of TheraSphere in patients with unresectable hepatocellular carcinoma has initiated sites outside of the U.S. in Canada and Europe and has experienced traction in our patient enrollment in these geographies. We are also currently examining ways to support enrollment in our ePOP trial which is designed to evaluate safety and efficacy of TheraSphere in patients with metastatic colorectal carcinoma of the liver with failed first line chemotherapy.

Decision of patient feedback indicates support for TheraSphere has demonstrated through our continued growth. Now we intend to make the planned and necessary investments in this product to unlock it's treatment potential and its value in the market.

Now let turn to our Sterilization Technologies segment which is on chart 7. Sterilization Technologies revenues Q1 was $16.4 million, up 2% compared with the same period last year. Cobalt revenue of $15.4 million decrease by 2% from last year due to the timing of shipments to our customers and our customer mix in each respective period. Sterilization other revenue of $1.1 million positively offset the decrease in Cobalt revenue due to an increase in refurbishment work performed on existing production of irradiators.

I view Sterilization Technologies as a stable and long-term business. It is characterized by high barriers to entry in terms of supply of Cobalt-60 regulatory and licensing requirements and the logistical requirements due to the nature of its nuclear base material. Nordion has been in the gamma industry now for over 40 years and has effectively managed its long-term supply over this period. Nordion has long-term contracts in place with three supplies that operate nuclear power generators in which Cobalt-60 is irradiated. These include Bruce Power and Ontario Power Generation, both based in Ontario, and Russia's JSC Isotope. Each of these suppliers has several reactors that irradiate Cobalt for us.

We employ a multifaceted strategy in response to changes in the supply landscape. We work closely with CANDU reactor operators and monitor refurbishment schedules with current partners as well as new production capacity opportunities. Cobalt deliveries are adjusted as required within the boundaries of long-term supply agreements, and we have already achieved diversified production outside of the CANDU platform through the development of supply in Russia. Our global reach and our technological expertise enable us the potential to add additional capacity through conversion of other CANDU reactors that are not currently producing Cobalt or through the conversion of other nuclear plant designs as we have done previously in Russia.

As a pioneer in the gamma industry, Nordion is viewed as both a market and as a thought leader. Nordion personnel lead key industry groups that advocate the gamma technology. Scott McIntosh, our Chief Operating Officer of Specialty Isotopes serves as a Director of the International Irradiation Association, which is a not-for-profit organization that supports the global irradiation industry. Paul Gray, who is our VP of Global Logistics severs as the Chairman of the Gamma Industry Processing Alliance, which is an association representing large-scale gamma irradiation facilities and Cobalt-60 suppliers across North America. This level of involvement allows us to shape the discussion and create meaningful relationships with other leaders in the market. We implement a high-touch approach with our customers through regular conversations and direct research to understand their need and the demand for our products. So Sterilization continues to be a solid performing business thanks to the hard work of talented and dedicated team.

Now let's turn to Medical Isotopes, which is on Chart 8. Medical Isotopes revenue for Q1 of 2013 of $25.2 million decreased by $0.7 million or 2.6% compared with Q1 of 2012. Contract manufacturing revenue increased in this past quarter and more than offset decreases in reactor and cyclotron isotope revenues. While year-over-year revenue decreased for the business, it performed well above our expectations for the quarter, mainly due to the stronger-than-expected revenue from reactor isotopes, resulting from the ongoing outage of the prime reactor in Europe that supplies our competitors.

Our operational team has been working very closely with the team at AECL who operate the NRU reactor to address customer needs during this outage. We've demonstrated Nordion's capability to quickly address spot orders of holders of Moly encouraging customers to turn to Nordion for supply to offset the gap in their supply chains.

Now while the duration of this outage is still uncertain, we are continuing to provide a quick turnaround of this needed supply to customers worldwide. So, the decline in medical isotopes revenue in 2013 is now expected to be in the mid-teen percent range due to the benefit we are seeing from this outage first as an approximate 20% decline that we forecasted in Q4 2012.

Our medical isotopes team led by our new General Manager, Tom Burnett has demonstrated agility and customer focus in addressing this situation. Now as in previous years AECL has announced that the NRU act will undergo a 30 day shutdown planned maintenance, this is scheduled for mid-April to mid-May. According to AECL this shut down remains on schedule and we continue to anticipate supply interruption during that period.

As the plant shutdown straddles second and third quarters we expect to see a revenue reduction in each of those quarters. And we are working closely with our customers during this planned outage to increase demand.

So, in conclusion, I'm pleased with our first quarter results. Nordion remains a strong brand in the global healthcare marketplace due to a knowledgeable and experienced employee base, quality products, strong customer relationships and world-class facilities. But we still have work to do and continue to make the investments necessary to capitalize on opportunities and enhance value for our shareholders.

And now, to provide you with more details on the Q1 financials, I will turn the call over to Peter Dans.

Peter Dans - CFO: Thanks Steve and good morning everyone. I'll start with Chart 10. Nordion achieved revenue of $53.7 million in our first fiscal quarter, up 1% compared to revenue of $53 million in the same period last year. We had a GAAP net loss of $0.3 million which was $0.6 million favorable compared to the previous year, resulting in nil earnings per share for our fiscal first quarter of this year.

On an adjusted basis, we achieved net income of $4.1 million, down 42% compared to $7.1 million in the first quarter of 2012. This translated to an adjusted earnings per share of $0.07, down from $0.11 per share last year. Gross margin percentages this past quarter were 52%, relatively flat to Q1 2012.

On a consolidated business segments basis, earnings were down 32% to $9.1 million in Q1 2013 due to higher TheraSphere spending, higher pension costs across all three segments, and an unfavorable foreign exchange impact due to the strengthening of the Canadian dollar relative to the U.S. dollar. As you may recall, a significant majority of our SG&A expenses are denominated in Canadian dollars.

We now move to Chart 11. Targeted Therapies revenue grew 9% in the first quarter of 2013 versus 2012 due to an increase in sales volumes mainly from the adoption of TheraSphere at new centers. We anticipated relatively lower growth in the first quarter, with growth forecasted to strengthen in the second half of the fiscal year as we begin to bring new distributors online.

Targeted Therapies segment earnings was down 54% year-over-year, reflecting higher TheraSphere sales and marketing activities as well as increased general and administrative support functions, such as health market access to support reimbursement efforts and clinical and medical affairs. We continue to expect TheraSphere growth in the mid-teen percentage range on an annual basis.

Now moving to Chart 12. Sterilization Technologies revenue increased by 2% in the first quarter to $16.4 million, with the increase in revenue from refurbishment work performed on existing production irradiators positively offsetting the decrease in Cobalt-60 revenue. Segment earnings for Sterilization Technologies decreased by 21% to $3.5 million, mainly due to higher pension-related costs. Sterilization Technologies revenue for 2013 is expected to be approximately the same as in 2012, and we are on track to this guidance.

Moving to Chart 13. The Medical Isotopes segment contributed revenue of $25.2 million, which was down 2.6% compared to the same period last year. Reactor isotope revenue, which represents the majority of Medical Isotopes revenue, decreased by 3% to $20.4 million. The decrease was lower than management initially expected due to additional orders received as a result of ongoing shutdown of a primary reactor that supplies our competitors. Accordingly, we have revised our annual revenue forecast for the business from approximately a 20% decline in revenue to a decline in the mid-teen percentage range.

Cyclotron isotope revenue was 8% lower than last year due to lower demand for Iodine-123 which is used to help diagnose thyroid disease. And contract manufacturing revenue increased 6% as a result of higher sales price.

During the quarter, we completed the wind-up of U.S. pension plan associated with the former MDS Pharma Services business we sold in 2010. As a result of the wind-up, we recorded a loss of approximately $7 million and made a pension settlement payment of $5.5 million.

Our balance sheet remains solid with $88 million of cash and cash equivalents as of January 31. The cash balance was down $22 million from Q4 2012 primarily due to an increase of $36 million in restricted cash that was used for collateral for letters of credit under our credit facility. Partially offsetting this use of cash, we received approximately $24 million in one-time receipts this past quarter relating to tax refunds, a partial payment of a note receivable, and a payment related to certain litigation matters. We continue to manage our financial liquidity prudently, making appropriate investments to support improvements to the operational performance and to grow our business.

This concludes my financial review. I'll now turn it back to the operator, so we can open the lines for questions.

Transcript Call Date 03/06/2013

Operator: Lennox Gibbs, TD Securities.

Lennox Gibbs - TD Securities: This is with respect to TheraSphere. FDA REGs state that an HUD cannot be sold for a profit, but you booked to profit this quarter and you've done so for just over the last several years. Can you clarify your compliance standing relative to the U.S. REG please? And then explain how are you going to manage U.S. profitability until such time as TheraSphere receives the PMA.

Steve M. West - CEO: You are absolutely correct in your – in the interpretation of an HUD or HDE device in the United States. As you know, we don't segment out our numbers when we report by geography, so I would point out to you that the numbers that we report for our global operations and are not restricted to the United States.

Lennox Gibbs - TD Securities: So are you saying that you are reinvesting or have been reinvesting all of your U.S. revenues and therefore the profits we are seeing are ex-U.S.?

Steve M. West - CEO: Yeah. I mean, the requirement for an HDE under the HUD is that – the HDE is meant to be an opportunity for a company to provide a product or therapy to patients in need while it securing in this case, a premarket authorization. Under the terms and conditions of that, Lennox, companies are not expected to make a profit but are allowed to utilize, for example, their R&D costs, and so to give an example, the clinical trial costs for the HCC trials are allowed to be amortized off against any profits that would have been made otherwise.

Lennox Gibbs - TD Securities: So just to be clear then, so you have been reinvesting all of your U.S. revenues and out of the profits that you've been seeing are U.S. origin?

Steve M. West - CEO: As you will know, Nordion strives to ensure that it's a compliant organization and we do self-report to the authorities in the United States on an annualized basis regarding this.

Lennox Gibbs - TD Securities: So on a go-forward basis, to be clear, you won't be booking – how are you going to manage U.S. profitability then until such time that TheraSphere gets the PME? We should assume then that there will be no U.S. profitability, is that correct?

Steve M. West - CEO: We don't segment out reporting profitability by geography, and obviously we strive to maintain compliance with all the regulatory requirements.

Operator: Neil Maruoka, Canaccord Genuity.

Neil Maruoka - Canaccord Genuity: Just a quick question on the pension costs that were allocated across the segments. The segment earnings were under pressure a little bit, SG&A costs were higher across all segments. Can you provide some additional granularity on the higher pension costs for this year? What proportion of the guided $7 million increase is non-cash and how will the value adjustments that seem to impact the longer-term cash funding costs?

Peter Dans - CFO: So Neil, I'll take that. So in terms of the incremental costs we're seeing in Q1 that does relate to $7 million we provided guidance for at the end of the year. And again, these are cost that we report from an accounting perspective. Our funding as I think you are aware is done on a different basis where we look at the pension plan from the solvency perspective. So, this amortization of cost doesn't affect the cash funding that we have to make, but it is driven by similar factors in that with the declining interest rates that we've seen over the past number of years that’s driven up the accounting costs as well as the cash funding.

Neil Maruoka - Canaccord Genuity: And so the adjustments that these accounting costs, will they impact the longer term cash funding cost for the pension in your view?

Peter Dans - CFO: No. So, again they are disconnected from – in some respects we have been funding higher than our accounting costs, so in some respects it's really the accounting catching up partially with the funding that we've been doing in the past, but the two are separate in terms of how they are calculated and this expense will not affect future funding requirements.

Neil Maruoka - Canaccord Genuity: And just a follow-up on – I guess more related to Lennox' question. You guided to net loss in the Targeted Therapies segment this year. Can you give us a better idea of how the marketing costs are expected to evolve over the course of the year?

Peter Dans - CFO: So from a marketing cost perspective, again, we expect both the selling and marketing cost to ramp up during the year as we continue to invest particularly outside of North America, in terms of Europe, Middle East as Steve mentioned before, as well as some initial investments we are making in Asia, as well we'll have the clinical trial ramp-up during the year. So both of those factors, we expect, will drive down profitability as we go through the year despite the growth on the revenue line.

Steve M. West - CEO: Yeah, and I'll just kind of supplement and build on Peter's answer and perhaps also continue to build on the question that Lennox asked. When we think about investing in TheraSphere, there are two elements to this; one is our clinical program and the investments that were required to fund that both in the United States and overseas, and I would point out that any costs associated with that program related to our HCC trials can be amortized against profitability that we would be generating, so that includes sites in Asia and Europe as well. And then secondly, we have what I consider to be more strictly commercial situation where we're investing, because we do have, as you know, registrations for liver neoplasia outside of United States, which covers all liver, but covers both primary and metastatic colorectal mets to the liver. So, again, historically we have not funded very significant investments in sales and marketing in Europe and ROW, and as we indicate towards the end of the year as we bring on incremental resources in those markets, we do expect to receive recognition of that through improved revenues and growth.

Operator: Douglas Miehm, RBC Capital

Douglas Miehm - RBC Capital Markets: Just getting to TheraSphere, you just reported a 9% increase and you're hoping to see mid-teens this year. So you're obviously going to have to be between 15% and 20% and it looks like just given what happened last year, you're going to have some more difficult comps, and you suggest that you're obviously going to have very strong growth potentially here. I guess my question then is, you mentioned something about distributors in the U.S. helping you out that way, but where is most of this growth going to be coming from? Is it going to be in Canada, in the United States, is it going to be outside of North America? Can you give us a few more details on what's going on there and if in fact you think you can meet mid-teens growth?

Steve M. West - CEO: I think there's a misunderstanding. There's no distributors in the United States, Doug. The distributors are actually being appointed outside the United States in jurisdictions where either it is impractical for us to set up direct or the legislation sometimes very often requires a distributor, some of which is either related to the nuclear component of a product or simply to the med-tech industry. So the distributor network that we continue to expand is really ROW. And the growth that we're expecting outside of the United States is very much in Europe. It's in some key markets; for example, in the Middle East and areas like that. So that's why we're sticking to our guidance because we see that. We also see a pretty good – we have a very good pipeline in some of our existing markets; for example, in Germany in TheraSphere. So we are in the process now working with a variety of institutions that we anticipate will be using TheraSphere in the not-too-distant future, but currently are not accounts of ours today and we have very, very good visibility on that. As for Canada, Canada primarily for us I think is more of a clinical trial initiative versus the commercial one.

Douglas Miehm - RBC Capital Markets: I guess next question then is, how do you benchmark yourself then against your competition, specifically in the space when they are growing so quickly. They just reported a few days ago and showing exceptional unit growth.

Steve M. West - CEO: Well, I'm not going to talk about competitors or specifics around their numbers and I think, of year around that is what was released recently and that’s have been previously announced, that wasn't exactly new news. But couple of things; first of all, there is not a director comparison in the sense that they – their growth is very open in colorectal metastatic cancer in the United States which we will do not have a label, so we are restricted obviously to HCC in the United States. For product of this type, Dough, I don't think we should be measuring it on a quarterly growth trajectory. I mean it's much more around the market growth, are we growing above market, below market, are we actually creating market growth ourselves. And my view is very simply that this is a product that has very, very good opportunities going forward for us globally. We need to build clearly a clinical Phase III data to support reimbursement outside the United States and to support our PMA submissions into United Nations. But as our product is growing and we believe will continue to grow in the mid-teens, I think, that's a reasonable target for us, and we consider that to be sort of a longer-term perspective rather than looking it on a quarterly basis.

Operator: David Krempa, Morningstar.

David Krempa - Morningstar: Can you give an update on the internal investigation in terms of timing and costs what you guys expect going forward?

Peter Dans - CFO: So in terms of the internal investigation, again, as per disclosure, it's ongoing at this point in time. From a cost perspective, we did record just over $4 million in the first quarter. However, our guidance for the year remains at $10 million as our current cost estimate for the investigation as well as the remediation type actions we are taking in terms of strengthening our policies and procedures and processes within the Company, so no real updates from that perspective this quarter.

David Krempa - Morningstar: And then are you still putting decisions about your cash, whether it's a dividend or the share buyback, is it on hold until the results of that are in or do you feel more comfortable now that you could reinitiate the dividend?

Peter Dans - CFO: Again, we continue to manage our cash and look at investments in the business. The one thing I would point out from a dividend and share buyback perspective, our latest credit facility we put in place does restrict us from making those types of payments. So it's not something that we're going to be assessing in the short term, but it's something we would consider longer-term, once we get through a number of uncertainties that we've outlined earlier. Hopefully that helps.

Operator: Varun Choyah, CIBC.

Varun Choyah - CIBC: I've got a question on the supply of isotopes for the Sterilization business. You mentioned some of the reactors are – you can retrofit some of the power reactors, if need be, (to kind of help) increase supply. How long is that process when you retrofit a power reactor for it actually produce the Cobalt isotope?

Steve M. West - CEO: I think there are two elements to that. The first is I'd characterize as sort of the negotiation discussion phase to bring on a new reactor with a new supplier. As you know, most of these reactors are fundamentally in the business of producing electricity, and so this is an ancillary activity. And then depending upon the reactor and the design of the reactor, it takes two to three years probably to get to a point where there's an opportunity during a shutdown to do the necessary engineering changes. And then after that, depending upon the reactor, it will take some time for the first batch of cobalt to be cooked that could vary, as I say, depending from sort of the 18-month, two-year timeframe, which is probably more typical of a CANDU reactor as opposed to, say, some of the Russian reactors, which take a little longer and it can be up to five years before you are getting the Cobalt specific activity. So it does take years and you have to plan for it obviously in a long range way and that's what we have done for the past 40 years. And we have a very good line of sight on us and overall Cobalt discharges many years out, and we plan accordingly.

Varun Choyah - CIBC: And as a follow-up question regarding the GammaFIT initiative for late – to make these irradiator more affordable. Can you provide an update regards to like any sort of uptake as it pretty much a long-term plan here for the market or what are you seeing there?

Steve M. West - CEO: Yes, it is a long-term sales cycle for sure. And also it is in some sense is a new market. We created the capability that really didn't exist previously. So we're targeting a new customer segment, and that was the whole idea of course was to work with people that may not had the capacity to invest in a large irradiator but we would be able to work with the (same more) modular design. So, in any production capital, sale cycle it's generating so the 18 months to 2 year timeframe and that’s what I'd expect for the GammaFIT. And we do have a pipeline I guess I can say that we have a pipeline, and we are not in a position to announce anything right now, but our sales team is working on a variety of opportunities and it's pretty much where we expected from the launch.

Operator: Thank you. There are no further questions registered at this time, I'd like to return the meeting over to Ms. Raman.

Ana Raman - Director, IR: Thanks Jason. This brings us to the end of today's first quarter 2013 earnings call. If you have additional questions, please feel free to follow-up with me. Thank you.

Operator: Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.