Shuttered isotopes manufacturer owes back taxes, awaits cleanup
Fifteen years ago, a manufacturing startup promised to bring good-paying, high-tech jobs to Denton. Today the lights are off inside the empty buildings. A security fence surrounds the lonely plant, high on a tree-covered hill. Cars and trucks whiz by in a shortcut between Loop 288 and Colorado Boulevard.
Trace Life Sciences made medical radioisotopes at the plant on Shady Oaks Drive, and at another location on Jim Christal Road. Medical radioisotopes are used to diagnose and treat disease. Iodine-123, for example, helps doctors see a patient’s thyroid and thallium-201, a patient’s heart. Iodine-131 can treat thyroid cancer. Copper-67 shows promise as a treatment for non-Hodgkin’s lymphoma.
In early 2009, work at Trace stopped. Medical Capital, its investor, was collapsing — a financial meltdown that triggered an investigation by the Securities and Exchange Commission. Medical Capital’s problems morphed into a criminal probe by the U.S. Department of Justice for an alleged Ponzi scheme, according to news reports, but Trace’s shutdown came despite demand for its products.
The company had just secured Food and Drug Administration permits it needed to make a full suite of medical radioisotopes. Analysts had predicted that production capability would eventually yield $200 million in sales each year.
The linear accelerator used to make some isotopes on Shady Oaks Drive was mothballed and continues to sit, radioactive, in a below-ground concrete tunnel. The cyclotrons used to make other isotopes sits radioactive in the building on Jim Christal Road, which was reported burglarized in 2010.
Online, Paul Crowe, the president of the company that now owns the facility, peddles company assets as disputes rage between him, an investor and the former principals of Trace, court records show.
Crowe, of Park City, Utah, said once he can secure enough money to reinvest in the plants, he will be able to reopen the business and pay off debts.
Meanwhile, the facility’s radioactive license application sits waiting at the Texas Department of State Health Services until new financial assurances are made and many other questions are addressed.
The department claimed Trace’s $216,870 original deposit for decommissioning the plant in March, according to documents obtained in an open-records request. The amount pales in the light of cleanup costs. Formal estimates put costs between $2.2 million and $4 million. An informal estimate in 2009 reached $7 million.
In 1993, when Congress pulled the plug on the Superconducting Super Collider — a massive underground proton accelerator for research in subatomic matter — American taxpayers had sunk about $2 billion into the project being built in Ellis County.
The federal government auctioned off the assets, and Denton-based International Isotopes Inc. picked up the linear accelerator for $5 million. Lon Morgan was an adjunct professor at the University of North Texas and founder of International Isotopes. He had brought the original deal to city leaders in 1997.
The company asked Denton for $709,000 to extend Shady Oaks Road and it would build the first plant in a new research park. Once the salvaged accelerator was converted from research to commercial use, the plant would manufacture medical isotopes.
The process of converting the accelerator and ramping up commercial production was fitful until a Canadian group, Trace Sciences International, bought the Denton plant in 2003. Morgan died in 2005.
Trace Sciences refinanced with Medical Capital in 2006.
The business began to grow and LEK Consulting, which analyzed the business for Morgan Stanley, determined that Trace could eventually reach $200 million in sales each year.
But negotiations to move Trace from Medical Capital to Morgan Stanley never got off the ground, according to Darren Brown, president and CEO of Trace. In September 2008, Medical Capital ousted Brown and installed its own team. One month later, Crowe sent a press release on PRNewswire saying that his company, NuView Life Sciences Inc., assumed management of the plant.
Tom Hauk had been the company’s radiation safety officer since 2004. He left two months after the takeover.
A radiation safety officer makes sure a company manages its operations in accordance with its license to have radioactive material and operate equipment. Even though Hauk, like any other radiation safety officer, is paid by the company, his lawful duty was to report company activities to state regulators.
After making medical isotopes, managing the radioactive waste is straightforward, Hauk said.
“The half-lives ranged from a couple of minutes to a couple of days,” Hauk said.
A half-life is the amount of time half the atoms in radioactive matter take to decay.
But the metal in the equipment is another matter. As soon as the company began manufacturing the isotopes, both the cyclotrons and the accelerator became radioactive, primarily with iron-59 and cobalt-60, said Richard Ratliff, manager of the radiation safety licensing branch for the Department of State Health Services.
Colbalt-60 is highly radioactive. Although exposure is rare, mishandling the material in places such as metal recycling yards has occurred, according to the Environmental Protection Agency. Then, the human health threat is considered significant, with the risk dependent on the quantity of material, the length of exposure and at what distance.
One famous case in 2000 saw 10 scrap-yard workers in Thailand exposed to high levels of radiation after they disassembled a radiation therapy device contaminated with cobalt-60. Within two months, three of the workers died from the exposure.
After the takeover at the Denton plant, a safety mechanism on the linear accelerator failed. The failure occurred when no one was in the room, Hauk said, or they would have been irradiated.
Hauk and others fought with management to shut down the product line.
“I don’t think they [NuView] understood the business or what radioactive material could do to people,” Hauk said. “I don’t think those guys should have ever been handed the keys.”
At one point, company brass didn’t want to pay to haul off some of the waste, Hauk said.
He had enough.
“As the safety officer, you can tell them what you want, but they can do other than what you suggest — and then it becomes an unsafe environment,” Hauk said.
Hauk called state regulators to tell them he didn’t have any confidence in the new management team.
Bradford Young made the isotopes on both the cyclotrons and the linear accelerator. He was there before the takeover and stayed past the time it closed.
He and a co-worker showed up for their shift at 3 a.m. April 14, 2009, to find the lights off and the doors wide open.
“It was like everybody ran out of there,” Young said.
They called a few people to find out what was going on, but no one answered their phone. A few hours later, the operations manager showed up and asked if anyone had let them know that the plant was closed.
Trouble had been brewing since the management change, Young said.
“Before, it was a good — good company morale — a great place to work,” Young said. “In one day, it was gone. Everyone was upset. It was like high school again.”
Young didn’t know what was going on at first. He was making iodine isotopes when the building was locked down on the day of the takeover.
“They told us to go home and not come in until they called us back,” he said. “I didn’t know what it was — some crazed employee or what.”
The NuView team was there the next day, he said, and they told the crew everything would be different. Production would increase.
Instead, production slowed from five days a week to one day a week, Young said.
“Customers dropped off like crazy,” Young said. “In the end, we were just making copper [isotopes] for one of NuView’s board members — for research — for free.”
He remembered one day, before Hauk left, when iodine isotopes sprayed back on him from the cyclotron. He asked that the equipment to be checked, particularly since a similar failure occurred with the accelerator, too.
“Paul Crowe told us it was not our choice, and he was going to make us run that machine,” Young said.
Young wasn’t going to get sprayed again, even if it meant getting fired. The standoff worked. The management suspended production and fixed the equipment, he said.
Later, however, another employee packaged isotopes under the wrong protective hood — a shortcut Young didn’t understand, since the isotope “puts out a lot of shine,” he said. “Alarms were going off all over. She had the whole building jumping.”
State inspectors got wind of it, but the employee was fired before they got there, Young said.
In the final weeks of the plant’s operations, paychecks got behind, Young said. He had to wait two years to get his last month’s pay, about $4,000, through the state.
“It was a very rough ordeal,” Young said.
Closing the plant was sad, Hauk said.
“They were doing really good things, helping people with cancer — it breaks my heart,” Hauk said, adding, “but thank goodness they didn’t continue to operate.”
Little happened after the staff was laid off and the plant was shuttered in 2009, ostensibly for the summer. Upgrades were supposed to get under way, according to documents sent to state regulators.
State inspectors came in June 2009 to check on plant security and found no violations. Crowe wrote to state regulators that summer, trying to keep current the plant’s most valuable asset — its radioactive license.
State regulators met in July and discussed concerns. Crowe and NuView had no standing with the Texas secretary of state as a business in the state. The regulators wanted more information about “upgrades” and “specialized operations” mentioned in Crowe’s letters. They questioned the timeframe and whether the current license and finance assurances were sufficient.
The regulators sent a letter, seeking an explanation of the ownership change. They inspected the plant again in July — an announced inspection. Crowe and NuView told the state they weren’t planning on filing for bankruptcy. They also told state regulators there were bridge loans to cover bills until operations could resume.
In August, four months after production stopped, the state made an unannounced inspection after seeing the company change its radiation safety officer three times in less than a year. When inspectors asked for some records, the newest safety officer couldn’t find them.
Readings taken in the doorways of the building in August 2009 showed radiation at background levels, according to Ratliff, the manager of the state’s radiation safety licensing branch.
Licensing officials changed the plant’s license to allow for storage only.
Meanwhile, state regulators knew that NuView wasn’t paying the plant’s bills. Denton Municipal Electric wrote in 2009 that the company owed $175,000 and asked for reassurance that, if the city turned off the power, there would be no threat to the public. DME got that written assurance in 2009, but the lights were on through 2010 and 2011.
In 2011, the utility again sought written reassurance over the consequences for turning off the power, including the possibility of triggering the loss of the company’s radioactive license.
The loss of electricity neither threatened the plant’s security nor the status of its radioactive license, Ratliff said.
NuView also has not paid city, school or county property taxes — a four-year-old bill that, as of September 2012, exceeds $1.3 million. The IRS also filed two tax liens totaling nearly $750,000 against Crowe and NuView.
Then, in December 2010, Crowe missed a key deadline to pay a deposit that would finalize the sale of the plant’s assets to NuView.
On Dec. 29, 2010, two days before the license issued to Trace Life Sciences was set to expire, NuView filed a renewal application and paid the $20,318 fee.
State regulators renewed the storage license.
Thomas Seaman, a federal receiver managing Medical Capital’s remaining assets, reported to the Securities and Exchange Commission in May 2011 that there was little to recover from the sale of the plants on Shady Oaks Drive and Jim Christal Road.
Because Medical Capital owned the original loans, Trace’s assets could have been used to satisfy some of Medical Capital’s creditors. The receiver sought his own estimate for cleanup. Arlington-based Foxfire Scientific told the receiver that the materials would net $105,000 to $150,000 at auction, but the linear accelerator and cyclotrons were worthless.
The only assets were the loans Medical Capital had made to Trace, Seaman wrote. He would terminate NuView as the manager of the plant, but Crowe told state regulators that NuView would remain in charge until the property sale was complete.
State law doesn’t allow a radioactive license to follow the property. The plant could be sold only to a person registered in Texas and licensed to possess radioactive material.
As a result, Crowe and NuView, holding a radioactive license originally issued to Brown and Trace, was the only one in position to bid on the property.
In December 2011, in a cashless transaction, he did.
NuView was brought in by Medical Capital to make improvements at Trace, but Medical Capital collapsed before that work really got started, Crowe said.
NuView was interviewed by the SEC as a part of the probe, Crowe said.
The company needs a $200 million investment to redo the Denton facility, he said.
“The equipment has been idle a long time,” Crowe said, adding that no radioactive waste has been produced there in the past 2 1/2 years.
The company already invested $2 million inside one of the buildings in the past year, he said.
To build a new plant would cost more than $125 million and take more than three years, he said.
The company has regrouped with a new business plan that begins with new outlets for raw materials, securing isotopes from nuclear power facilities in other countries, he said.
The company plan includes new products and its own distribution network, he said.
“We need new licensures and approvals from the FDA to allow us to begin again,” Crowe said.
The federal tax liens have been paid, and the legacy payables and new liens and debts “will be cured when we close on our financing at the end of the year,” Crowe said.
Once a new supply chain can be established and the facility is overhauled and recertified, he projected annual sales at $300 million to $350 million.
“We think in the last few years we’ve gotten our arms around the business and now have a model that makes a lot of sense,” Crowe said.
Communicating with state officials, regulatory compliance and just following the rules has been a part of that, he said.
“We’ve always been really transparent in the way we operate,” Crowe said.
He thinks the plant can be reopened by January 2013.
Darren Brown, president and CEO of Trace Science International, based in Ontario, Canada, has been in the medical isotopes business for nearly 30 years. After acquiring the Denton plant in 2003, he says now that refinancing with Medical Capital was a mistake, he said.
But he never anticipated someone doing an end run around the federal receivership. State regulators had both the authority and several opportunities to step in.
The first opportunity came during the takeover, Brown said. He knew it was Medical Capital’s prerogative to remove him as manager. But state rules for radioactive licenses require that regulators be alerted 30 days before a management change, not after.
Hauk had reported the breach of the plant’s security to the state that day, Brown said. But Medical Capital’s team had convinced a local judge near the close of business on a Friday that Brown was the problem and that the plant could be an imminent threat to the public. They secured a restraining order against Brown.
Brown said that threat was not credible.
“This was no different than a group of [foreign] nationals, led by a nefarious criminal, saying we’re now in charge, and the state saying that’s OK,” he said.
When the dust settled from his dramatic ouster, state regulators had a second opportunity to vet the new management team.
“They still didn’t do it,” Brown said. “That’s when Hauk quit.”
Regulators had another chance when Denton Municipal Electric wrote with its concerns, and yet another chance when the plant on Jim Christal Road was reported burglarized.
A chiller the size of a dump truck, copper piping and other metal had been removed from that plant, Brown said. He saw the damage when the federal receiver gave him a tour of the property. The receiver was offering the facilities to Brown — if he bought it back, it would satisfy some of Medical Capital’s creditors.
“Taking that chiller was no smash-and-grab,” Brown said. “That took several days. They hauled it off on the railroad spur.”
Brown didn’t pursue the receiver’s offer. In recent weeks, Brown wrote off about $1.8 million in losses at the Denton plant, settling a lawsuit between him and Crowe.
Pilot Point resident Tracey Lane was a company officer for Trace and, like Hauk, worked at the plant briefly after Brown was ousted. She left and went back to work for Brown at Trace Sciences International.
Lane came along on the tour with the federal receiver and saw both rodent damage and what appeared to be watermarks from flooding.
“I cried,” she said.
Today, an application for a new license to produce medical radioisotopes, sent not as NuView, but as U.S. Radiopharmaceuticals, has been pending since May with the Department of State Health Services. The licensing division evaluated the application and sent the company a letter with 19 questions that remain unanswered, state officials said.
Ian Horn, operations manager for the new company, didn’t find the questions troublesome.
“We’re preparing a formal response,” Horn said. “They just want a little more detail about how we’ll handle the isotopes.”
Because of the U.S. shortage of diagnostic and therapeutic material, Ratliff said the state is trying to work with the company. But the clock is ticking.
“The company has a business plan and hopefully it will come together by the first of the year,” Ratliff said.
After that, the state is prepared to examine its legal options, since the property cannot be used for anything else until it is cleaned up, Ratliff said.
The state has shored up its rules over the years to collect more from operators of radioactive equipment, he said.
U.S. Radiopharmaceuticals could be required to provide $7 million in financial assurances. When Trace first began manufacturing isotopes, it was not required to put up any kind of financial assurances as long as it did not produce beyond a certain level of waste.
Texas currently has about $1.5 million that can be used to clean up radioactive properties, Ratliff said.
PEGGY HEINKEL-WOLFE can be reached at 940-566-6881. Her e-mail address is email@example.com.