Tuesday, October 21, 2014

Perma-Fix: From Nuclear Waste to Medical Isotopes - Part II

The last post left off with Dr. Louis Centofanti, the chief executive officer of Perma-Fix Environmental Services, Inc. (PESI:  Nasdaq), standing at the podium of the 8th International Conference on Isotopes sponsored by the World Council on Isotopes.  The health care executives in attendance at the meeting were eager to find out how a nuclear waste expert like Perma-Fix could help solve looming shortages in a very important radiological isotope called Technetium 99 or Tc-99m.  Tc-99m is extracted from a parent material called Molybdenum-99 or Mo-99.  All of the Mo-99 available today is made through fission of enriched uranium in an approved nuclear reactor, at least two of which are going off-line in the next two years. 

Perma-Fix is using its nuclear technology knowhow to develop a new production process that will ultimately yield the popular medical isotope.  However, the company has gone down an entirely different path from the conventional approach.  That path might allow Perma-Fix to reach the goal line in time to fill up at least part of the shortage in Mo-99 supplies.  Importantly, it may require a substantially lower capital investment than the many of other developers who have been attracted to this large market opportunity.

The Perma-Fix Mo-99 process does not require uranium at all.  Instead natural or enriched molybdendum is irradiated in a research reactor.  Potentially, this low-specific-activity Mo-99 could have a longer life than fission-produced Mo-99.  The Perma-Fix process also eliminates the need for management of waste materials that are generated in the conventional uranium fission process. 

Importantly, conventional Tc-99m generators can be used in the final processing step to separate Tc-99m from the Mo-99 Perma-Fix will produce.  The company can simply adjust the resin in the generator to Perma-Fix’s proprietary resin, which holds the Mo-99 molecules until they decompose into Tc-99m.  The company calls it Micro-Porous Composite Material (MPCM).  These means Perma-Fix can enter the market without disrupting the existing supply chain.  The company has successfully validated its Mo-99 through tests completed by the University of Missouri.

Perma-Fix expects to have the design for its prototype reactor completed by mid-2015.  The company has been working with the reactor at Poland’s Institute of Atomic Energy (IAE-POLATOM), which began producing Mo-99 using conventional processes in 2010.  POLATOM had been working with Covidien (COV:  NYSE), a provider of medical devices and supplies, until Covidien and its partner Babcock & Wilcox (BWC:  NYSE) gave up on developing a low-enriched uranium process for Mo-99 production.  POLATOM has completed additional tests on Perma-Fix’s, providing further validation of the Perma-Fix departure from uranium and fission.

To protect its innovations Perma-Fix has applied for several process patents.  The company recently received a patent allowance for its proprietary resin, MPCM.  It was approved in record time.  Perma-Fix expects the next regulatory step before the U.S. FDA or the European Medicines Agency to be relatively rapid.  The U.S. has a vested interest in seeing a timely solution to the Tc-99m supply problem, so Perma-Fix’s application for FDA approval could receive an accelerated review.   The company believes it could receive FDA approval in twelve to eighteen months after the application is submitted.

If all goes as planned, Perma-Fix could be near commercial stage with its Mo-99 production process by the end of 2016, perhaps even before some of the other new market entrants who are working on processes involving low enriched uranium.  Importantly, the company believes that it will require modest additional capital investment to complete its Mo-99 and get it regulatory approval.  

Concerning Capital

Perma-Fix management has found the environment in Poland so friendly for its development work that it even registered its subsidiary Perma-Fix Medical S.A. (PFM:  WE) as a public company.  PFM trades on the Warsaw Exchange under the symbol PFM with an implied value of $25 million.  It helps that the Warsaw stock market is growing and European Union policies have been very supportive of small biotechnology companies.  Perma-Fix’s Poland subsidiary raised approximately $1.8 million through a private placement of Series E common stock, after which Perma-Fix owns 69% of the Poland entity. 

The capital raise has helped fill up Perma-Fix’s bank account for the Poland subsidiary.  The company also came by an additional $1.3 million in cash through the sale of the company’s environmental consulting subsidiary, SY & Associates.  Altogether we estimate the company has approximately $2.0 million on its balance sheet after paying financing fees and covering operating expenses.  The company also got a break from its principal banking relationship that freed up approximately $2.4 million for working capital from insurance proceeds the company received at the end of the June 2014 quarter.

Valuation

Perma-Fix remains competitive with its legacy nuclear waste clean-up products and services.  The company’s financial profile may look strained based only on the last quarter balance sheet.  However, Perma-Fix has made considerable progress in extracting more value from its expertise by bringing to the market a new product, a medical isotope material.  The progress has been enough to bring new partners and investors to the company’s table and that is a solid recommendation for this small-cap company.  

The company’s stock recently bounced off a key level of support at the $3.75 price.  PESI had fallen off since the stock hit established a 52-week high at $5.86 in April 2014.  Currently, PESI is priced at 1.0 times book value and 0.80 times trailing sales.  Of course, under GAAP accounting Perma-Fix’s balance sheet does not reflect the value created by the Poland subsidiary.  Perma-Fix’s share of that is approximately $17.3 million, which does not seem to be reflected in the company’s market cap of $46.7 million.  Likewise, from the standpoint of sales it seems PESI investors are have not yet given Perma-Fix any credit for future sales of Mo-99. 

Valuation might also be somewhat frustrated by the practicality of trading the stock.  A beta measure of 2.35 suggests the stock might be too volatile for nearly everyone except those who are prepared to take a long position in the stock and hold the shares for an extended period of time.  Light trading volume near 32,000 shares per day also requires some patience to put on or take off positions.

Under the current conditions in the U.S. equity market it would be hard to characterize PESI as oversold from a technical standpoint.  Yet the stock may not fully reflect the fundamental progress Dr. Centofanti and his team have made perfecting technology and products that will take the business into a large new market. 

 
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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