Must-know: AQR Capital Management’s 1Q14 positions

Part 3
Must-know: AQR Capital Management’s 1Q14 positions (Part 3 of 6)

Why AQR Capital initiates new position in Nordion

AQR Capital and Nordion

AQR Capital opened new positions in the quarter—the notable ones being Riverbed Technology Inc. (RVBD) and Nordion Inc. (NDZ). It sold off positions in LyondellBasell Industries (LYB), Marvell Technology Group (MRVL), and Vodafone (VOD).

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The fund started a new position in Nordion Inc. (NDZ) which accounts for 0.10% of its 1Q14 portfolio.

Nordion to be acquired by Sterigenics

At the end of March, Canadian medical isotopes supplier Nordion agreed to be acquired by Deerfield, Illinois-based Sterigenics, a sterilization services provider owned by private equity firm GTCR LLC, for $727 million or $11.75 per share. Sterigenics had to raise its buyout offer to $805 million or $13 per share due to an acquisition proposal from a unnamed third party. The transaction is expected to close in the second half of 2014.

Nordion’s business overview

Nordion is a global health science company that provides products and services for the prevention, diagnosis, and treatment of disease.

In January, 2013, Nordion announced a strategic review of its business with a view to enhance shareholder value
and create new opportunities. As a result of the restructuring, Nordion completed the sale of its Targeted Therapies business to BTG, an international specialist healthcare company, for $200 million. Its Specialty Isotopes business includes two segments: Sterilization Technologies and Medical Isotopes.

For the year ending October 31, 2013, Nordion’s consolidated revenues were $232.8 million compared to $244.8 million for previous year. The company generated $74.7 million in revenue for 2Q14—an increase of 33% from revenue of $56.1 million for the same period in 2013. Nordion had a generally accepted accounting principles (or GAAP) net income of $6.7 million in 2Q14, compared with a GAAP net income of $0.7 million in 2Q13.

Anticipates higher revenues for Sterilization Technologies

Nordion’s Sterilization Technologies segment focuses on the prevention of disease through sterilization of medical products and devices in their final packaging, as well as microbial reduction in food and consumer products. The company supplies gamma sterilization consumables and equipment—specifically, Cobalt-60 (Co-60) and production irradiators. Co-60 is a radioactive metal that emits radiation that sterilizes items by destroying any contaminating microorganisms.

Sterilization Technologies revenue for 2Q14 of $33.8 million increased by $13.6 million or 67% compared with 2Q13. The increase was in-line with the company’s previous outlook and was attributable to increased shipments of Co-60, higher sealed sources shipments, and a shift in customer mix to customers that pay a higher price for Co-60.

Nordion expects sterilization revenues to increase 35%–40% for fiscal 2014 due to increased Cobalt-60 shipments as a result of another Co-60 supplier discontinuing its supply.

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Medical Isotopes business faces supply issue beyond 2016

Nordion also supplies medical isotopes used for the diagnosis and risk stratification of patients at risk for coronary artery disease, and in oncology to detect, stage, and treat cancer. Its primary product in this segment is Molybdenum-99 (Mo-99) which decays into Technetium-99 (Tc-99m), a diagnostic that is utilized in approximately 80% of nuclear medical procedures worldwide.

Medical Isotopes revenue in 2Q14 of $40.9 million, increased by $18.1 million or 80%, compared with 2Q13 due to additional orders of Mo-99 received as a result of supply interruptions affecting some of Nordion’s competitors. Nordion said the primary reactor in Europe that supplies certain of the company’s competitors was shutdown in October, 2013, and returned to service in February, 2014. In addition, a competitor in South Africa that supplies Mo-99 returned to service in January, 2014, after its supply interruption that started in November, 2013.

Nordion’s principal source of such isotopes is the NRU reactor, which is operated by Atomic Energy of Canada Limited (AECL). The company faces a supply issue in the future and noted in its filing that, “we do not have an alternative supply of reactor-based medical isotopes, the largest and higher margin product line within Medical Isotopes, beyond 2016. The Canadian government has publicly stated that AECL will not produce reactor-based medical isotopes beyond 2016.” It added, “If the company is able to secure an alternative arrangement for the supply of reactor-based medical isotopes beyond 2016, such an arrangement would be associated with certain risks including significant capital expenditures, technical uncertainty with no guarantee of success, lower gross margins and commercial supply not being available before the company’s current supply ends in 2016.”

Nordion expects Medical Isotopes revenues to be approximately 5% higher, a 45% increase, in fiscal 2014 than the previous outlook announced on March 6, 2014.

 

 

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