TORONTO, March 8 /PRNewswire-FirstCall/ - MDS Inc. , a company providing a range of products and services to the global life sciences markets, today reported its first quarter 2007 results. With the announcement of its intention to acquire Molecular Devices Corporation and the closing of the sale of its laboratory services business and the subsequent launch of its C$500 million share buyback, MDS begins a new chapter in the Company’s history.
Beginning with the current quarter, the Company has adopted the US dollar as its reporting currency. Further details on the translation method of previously reported periods can be found in the MD&A. All amounts unless otherwise stated are in US dollars.
Quarterly Highlights
For the quarter, MDS’s revenues, adjusted EBITDA and reported EPS were $250 million, $32 million and $0.10, respectively. Adjusted EPS was $0.05 versus $0.14 last year.
- 4% organic revenue growth - Adjusted EBITDA of $32 million, down from $38 million last year - St. Laurent FDA related review costs were $4 million - Announced the intention to acquire Molecular Devices Corporation for $615 million - Subsequent to the quarter announced the close of the MDS Diagnostic Services transaction and launched the C$500 million share buyback.
“I am pleased with the results of our first quarter, particularly in light of the challenging year over year comparisons in our isotopes business and the costs associated with our FDA issues. I am encouraged by the path that the FDA has laid out for us to conclude the bioanalytical issue in Montreal and by the positive momentum we are seeing in other parts of the MDS Pharma Services business and look forward to continued improvements as we move through 2007,” said Stephen P. DeFalco, President and Chief Executive Officer of MDS Inc.
Operating Segment Results MDS Pharma Services % Change --------------------------- ($ millions) Q1 2007 Q1 2006 Reported Organic ------------------------------------------------------------------------- Revenue: Early-stage $66 $67 (1%) (4%) Late-stage 55 44 25% 23% ------------------------------------------------------------------------- $121 $111 9% 7% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $1 $3 (67%) (49%) % - 3% n/a n/a ------------------------------------------------------------------------- -------------------------------------------------------------------------
MDS Pharma Services’ performance began to show signs of improvement with an $8 million improvement in adjusted EBITDA relative to the fourth quarter of 2006. For the first quarter, revenue increased 9% on a reported basis over the same period last year. The revenue growth was driven by 25% revenue growth in our late-stage businesses. There was continued softness in our bioanalytical and early clinical research services business. Backlog at the end of the first quarter was $450 million, up 5% over the fourth quarter of 2006 and up 22% year-over-year. In the quarter, MDS continued expansion of its 300 bed Phoenix early clinical research facility, which is expected to open mid-2007.
In January, the FDA outlined a path that should enable MDS Pharma Services and its customers to bring closure to issues associated with bioanalytical studies conducted in our St. Laurent and Blainville facilities. As a result, MDS has terminated the five-year retrospective review and has redirected efforts to supporting clients with independent audit activities. In the quarter, MDS Pharma Services incurred $3 million in costs related to this effort.
MDS Pharma Services continued to take steps to improve the overall performance of the business focusing on improved project selection and pricing, site and process optimization, and productivity initiatives. During the quarter, the Company completed its closure of the phase one clinic in New Orleans, sold a local Spanish clinical development business and completed negotiations for the February 1, 2007 sale of an early clinical business in Hamburg.
MDS Nordion % Change --------------------------- ($ millions) Q1 2007 Q1 2006 Reported Organic ------------------------------------------------------------------------- Revenue $67 $70 (4%) (3%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $21 $24 (12%) (5%) % 31% 34% n/a n/a ------------------------------------------------------------------------- -------------------------------------------------------------------------
MDS Nordion revenue for the first quarter was $67 million, down 4% on a reported basis compared to the prior year. Strong revenues were generated by cobalt shipments and TheraSphere(R). These revenues did not offset the decline in cardiac imaging revenues over 2006 when we benefited from a competitor’s inability to ship product. Adjusted EBITDA was $21 million.
During the quarter MDS Nordion announced a number of developments related to its TheraSphere(R) product, including FDA approval for the use of TheraSphere(R) to treat primary liver cancer patients with portal vein thrombosis. As well, the Company began treating patients with TheraSphere(R) in India and in four European centres of excellence.
MDS Sciex % Change --------------------------- ($ millions) Q1 2007 Q1 2006 Reported Organic ------------------------------------------------------------------------- Revenue $62 $61 2% 4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $15 $16 (6%) 8% % 24% 26% n/a n/a ------------------------------------------------------------------------- -------------------------------------------------------------------------
MDS Sciex revenue for the first quarter grew 2% on a reported basis year- over-year, led by solid performance in our high-end triple quad products as well as growth in the markets for our products in India, China and Europe. End- user revenues in the markets served by our joint ventures grew 10% in the quarter. The API 4000, API 5000, 4800 and the new products for the applied markets continued to perform well. Adjusted EBITDA of $15 million was down 6% reported, up 8% organically, over the same period last year. In the quarter, MDS Sciex launched the Amino Acid 20/20 Analyzer, a new laboratory system that employs mass spec in the analysis of amino acids.
Corporate
After the quarter, MDS announced the appointment of Doug Prince as Executive Vice-President Finance and Chief Financial Officer for the Company. Doug joins MDS after an extensive financial and operations management career with PerkinElmer and General Electric. He will join MDS effective March 12, 2007.
The use of non-GAAP measures section in the MD&A outlines the definition of the terms ‘organic’ and ‘adjusted’ as used to reflect the operating performance of the Company. We use certain non-GAAP measures so that readers have a better understanding of the significant events and transactions that have had an impact on our results. We provide a reconciliation of these non- GAAP measures to our GAAP financial results in the accompanying MD&A.
Conference Call
MDS will be holding a conference call today at 10:00 am (EST) to discuss the fourth quarter results. This call will be webcast live at www.mdsinc.com and will also be available in archived format at www.mdsinc.com/news_events/webcasts_presentations.asp after the call.
Annual and Special Meeting
MDS will be holding its annual and special shareholders meeting today for shareholders of record at 4:00 pm EST in Toronto. The AGM will be webcast live at www.mdsinc.com and will also be available in archived format at www.mdsinc.com/news_events/webcasts_presentations.asp.
About MDS
MDS Inc. is a global life sciences company that provides market-leading products and services that our customers need for the development of drugs and diagnosis and treatment of disease. We are a leading global provider of pharmaceutical contract research, medical isotopes for molecular imaging, radiotherapeutics, and analytical instruments. MDS has more than 5,600 highly skilled people in 28 countries. Find out more at www.mdsinc.com or by calling 1-888-MDS-7222, 24 hours a day.
MDS Forward Looking Statement
This document contains forward-looking statements. Some forward-looking statements may be identified by words like “expects”, “anticipates”, “plans”, “intends”, “indicates” or similar expressions. The statements are not a guarantee of future performance and are inherently subject to risks and uncertainties. The Company’s actual results could differ materially from those currently anticipated due to a number of factors, including, but not limited to, successful integration of structural changes, including restructuring plans, acquisitions, technical or manufacturing or distribution issues, the competitive environment for the Company’s products, the degree of market penetration of the Company’s products, and other factors set forth in reports and other documents filed by the Company with Canadian and US securities regulatory authorities from time to time.
MANAGEMENT’S DISCUSSION AND ANALYSIS March 7, 2007
Following is management’s discussion and analysis (MD&A) of the results of operations for MDS Inc. (MDS or the Company) for the quarter ended January 31, 2007 and its financial position as at January 31, 2007. This MD&A should be read in conjunction with the consolidated financial statements and notes that follow. For additional information and details, readers are referred to the annual financial statements and MD&A for 2006 and the Company’s Annual Information Form (AIF), all of which are published separately and are available at www.mdsinc.com and at www.sedar.com. In addition, the Company’s 40-F filing is available at www.edgar.com.
Our MD&A is intended to enable readers to gain an understanding of MDS’s current results and financial position. To do so, we provide information and analysis comparing the results of operations and financial position for the current year to those of the same period in the preceding fiscal year. We also provide analysis and commentary that we believe is required to assess the Company’s future prospects. Accordingly, certain sections of this report contain forward-looking statements that are based on current plans and expectations. These forward-looking statements are affected by risks and uncertainties that are discussed in this document, as well as in the AIF, and that could have a material impact on future prospects. Readers are cautioned that actual events and results will vary.
Caution regarding forward-looking statements
From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions of the Securities Act (Ontario) and the United States Private Securities Litigation Reform Act of 1995. This document contains such statements, and we may make such statements in other filings with Canadian regulators or the United States Securities and Exchange Commission, in reports to shareholders or in other communications, including public presentations. These forward-looking statements include, among others, statements with respect to our objectives for 2007, our medium-term goals, and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions. The words “may”, “could”, “should”, “would”, “suspect”, “outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”, “forecast”, “objective”, and words and expressions of similar import are intended to identify forward-looking statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause our actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, management of operational risks; the strength of the Canadian and United States economies and the economies of other countries in which we conduct business; our ability to secure a sufficient quantity of raw materials, particularly cobalt; a reliable source of supply of critical nuclear isotopes; the impact of the movement of the Canadian dollar relative to other currencies, particularly the US dollar and the Euro; changes in interest rate policies of the Bank of Canada and the Board of Governors of the Federal Reserve System in the United States; the effects of competition in the markets in which we operate; the timing and technological advancement of new products introduced by us or by our competitors; the impact of changes in the laws and regulations and enforcement thereof; judicial judgments and legal proceedings; our ability to obtain accurate and complete information from, or on behalf of, our customers and counter parties; our ability to successfully realign our organization, resources and processes; our ability to complete strategic acquisitions and joint ventures and to integrate our acquisitions and joint ventures successfully; changes in accounting policies and methods we use to report our financial condition, including uncertainties associated with critical accounting assumptions and estimates; operational and infrastructure risks; other factors that may affect future results including changes in trade policies, timely development and introduction of new products and services, changes in our estimates relating to reserves and allowances, changes in tax laws, technological changes, natural disasters such as hurricanes, the possible impact on our businesses from public health emergencies, international conflicts and other developments including those relating to terrorism; and our success in anticipating and managing the foregoing risks.
We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to the Company, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.
Use of non-GAAP measures
In this MD&A we describe certain income and expense items that are unusual or non-recurring. These terms are not defined by generally accepted accounting principles (GAAP). Our usage of these terms may vary from the usage adopted by other companies. We identify the impact of these amounts on operating income and on earnings per share (EPS). We provide this detail so that readers have a better understanding of the significant events and transactions that have had an impact on our results.
In addition, terms such as adjusted operating income; adjusted earnings before interest, taxes, depreciation and amortization (EBITDA); EBITDA margin; adjusted EPS; and backlog are not defined by GAAP, and our use of such terms or measurement of such items may vary from that of other companies. Where relevant, and particularly for earnings-based measures, we provide tables in this document that reconcile non-GAAP measures used to amounts reported on the face of the consolidated financial statements.
We also discuss the results of our operations, isolating variances that relate to changes in exchange rates and acquisitions. We use the term “organic” to describe the results presented in this way. To isolate the effect of currency movements, we eliminate the impact of foreign currency hedging activities in both the current and prior periods and recalculate the base figures for the prior period using the exchange rates that were in effect for the current period.
The majority of MDS Sciex’s business is conducted through joint ventures. Under the terms of these joint ventures, we are entitled to a 50% share of the net earnings of the worldwide business that we conduct with our partners in these joint ventures. These earnings include a share of the profits generated by our partners that are paid to the joint ventures but which do not qualify as revenues for the joint ventures.
Under Canadian GAAP, we report our share of revenues from the joint ventures and, consequently, we do not report our share of all end-user revenues, despite the fact that these other businesses contribute to our profitability. In order to provide readers with a better understanding of the drivers of adjusted EBITDA growth for MDS Sciex, in addition to the organic growth of our revenues, we also report growth in end-user revenues, which reflects the reported growth of the overall worldwide business associated with the sale of our products and from which we share in the revenues.
For our pharmaceutical services business, we provide information about contract backlog. Backlog measures are not defined by GAAP and our measurement of backlog may vary from that used by others. While we believe that long-term backlog trends serve as a useful metric for assessing the growth prospects for our business, backlog is not a guarantee of future revenues and provides no information about the timing on which future revenue may be recorded.
Tabular amounts are in millions of United States dollars, except per share amounts and where otherwise noted.
Discontinued operations
All financial references in this document exclude those businesses that we consider to be discontinued. Our discontinued businesses include our diagnostics businesses, certain early-stage pharmaceutical research services operations, and our interest in Source Medical Corporation (Source). All financial references for the prior year have been restated to reflect this treatment. From the amounts reported in our first quarter 2006 interim report, revenues for 2006 have been reduced by $71 million and income from continuing operations has been reduced by $15 million.
Change in reporting currency to US dollars
MDS has historically measured and presented its financial statements in Canadian dollars and in accordance with Canadian generally accepted accounting principles (“GAAP”). Effective November 1, 2006, we adopted the US dollar as our reporting currency. A significant portion of revenues, expenses, assets and liabilities are denominated in US dollars, the global character of the Company’s operations has increased dramatically following the divestiture of the diagnostics business, and the majority of the companies with which we compete report their financial results in US dollars; consequently, we believe that investors will gain a better understanding of our operating results when they are presented in US dollars. We will continue to report our financial results for fiscal 2007 in accordance with Canadian GAAP; however, beginning this quarter, we are providing a reconciliation of our net income under Canadian GAAP to that which we would report under US GAAP.
When there is a change in reporting currency, Canadian accounting standards require that financial statements for previous years be presented using a translation method that retains the Canadian dollar as the currency of measurement. For comparative purposes, we have prepared US dollar historical financial statements by translating the previously reported Canadian dollar amounts using the following methods and exchange rates:
Revenues, expenses, and cash flows - translated into US dollars using the weighted-average exchange rate for the applicable quarters. Assets and liabilities - translated into US dollars using the exchange rate in effect at the end of the applicable period. Share capital - share capital as at October 31, 2001 was translated into US dollars using the exchange rate in effect on that date. Subsequent share capital transactions were translated into US dollars using the exchange rate in effect when the transaction occurred. Retained earnings - retained earnings as at October 31, 2001 was translated into US dollars using the exchange rate in effect on that date. Net income transactions for the period from November 1, 2001 to October 31, 2006 were translated into US dollars as described above. Other transactions affecting retained earnings, principally as a result of dividend payments and share repurchases, were translated into US dollars using the exchange in effect when the transaction occurred. Introduction
MDS is a global life sciences company that provides market-leading products and services that our customers need for the development of drugs and the diagnosis and treatment of disease. We are a leading global provider of pharmaceutical contract research, medical isotopes for molecular imaging, radiotherapeutics, and analytical instruments.
Strategic initiatives
On September 1, 2005, we announced our strategic plan to pursue growth in the global life sciences market and divest of assets that do not contribute to the Company’s areas of focus. During fiscal 2006, we completed a number of transactions in pursuit of this renewed focus, culminating in the announcement on October 5, 2006 of the sale of our remaining Canadian diagnostics businesses to Borealis Infrastructure Management Inc. for gross proceeds of CDN$1.3 billion, which includes amounts ultimately paid to holders of minority interests in these businesses.
On February 26, 2007, we announced the closing of this transaction. Under the terms of the final agreements, MDS received net cash proceeds (after expenses and taxes) of CDN$1.0 billion and a CDN$75 million promissory note due in 2009. After paying costs of the transaction, taxes, and distributions to our minority partners in these businesses, we expect to report a gain of approximately US$0.8 billion in our second quarter.
Also on February 26, 2007, and coinciding with the completion of the sale of the diagnostics businesses, we announced the launch of a substantial issuer bid. Under the bid, we are proposing to repurchase up to CDN$500 million of our Common shares (US$425 million). We expect this bid to close in early April.
In our September 2005 announcement, we reconfirmed our commitment to focus on building our life sciences businesses. On January 29, 2007, we announced our intention to acquire Molecular Devices Corporation (MDC), a leading provider of high-performance measurement tools for high-content screening, cellular analysis, and biochemical testing, in a $615 million cash transaction. Under this agreement, MDS proposes to acquire all of the Common shares of MDC for $35.50 per share. The Boards of Directors of both companies unanimously approved the merger agreement and we commenced a cash tender offer for all of the outstanding shares of MDC on February 13, 2007.
This strategic acquisition marks a significant expansion for MDS. By acquiring Sunnyvale, California-based MDC, with its strong brand recognition and leading edge products and capabilities, MDS will strengthen its leadership position as one of the top global providers of life sciences solutions. We will now offer systems that provide high-content screening, and cellular and biochemical testing for leading drug discovery and life sciences laboratories in pharmaceutical, biotechnology, academic, and government institutions.
Upon completion of this acquisition, we plan to establish a new business unit, led by the current President of MDS Sciex, Andy Boorn that will combine the MDC and MDS Sciex businesses. This combined organization will have more than 1,100 employees, including over 250 scientists and engineers.
We expect to close this transaction in the second quarter and we will begin integration activities as soon as the transaction closes.
MDS Inc. Consolidated operating highlights % Change --------------------------- 2007 2006 Reported Organic ------------------------------------------------------------------------- Net revenues $ 250 $ 242 3% 4% ------------------------------------------------------------------------- Operating income $ 3 $ 23 (87%) Adjustments: Restructuring charges 13 1 Gain on sale of investment (2) - Mark-to-market on interest rate swaps 1 1 ------------------------------------------------------------------------- Adjusted operating income 15 25 (40%) Depreciation and amortization 17 13 ------------------------------------------------------------------------- Adjusted EBITDA $ 32 $ 38 (16%) (2%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA margin 13% 16% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Consolidated revenue for the first quarter of 2007 was up 3% to $250 million compared to $242 million last year. Strong growth in MDS Pharma Services, driven by growth in its late-stage businesses, offset a decline in revenues from MDS Nordion in the quarter compared to the first quarter of 2006. On an organic basis, revenues grew by 4%, driven particularly by 7% growth in MDS Pharma Services. Revenues from MDS Sciex grew 4% organically, and MDS Nordion was down 3% organically but excluding the impact of unusual market conditions in the first quarter of 2006 MDS Nordion revenues grew 8% organically.
Adjusted EBITDA of $32 million was down 16% from last year and down 2% on an organic basis. Adjusted EBITDA was impacted by the non-recurring isotopes revenues earned last year and continued costs in MDS Pharma Services related to the self-review of bioequivalence studies conducted at our St. Laurent facility from 2000 through 2004 (the Retrospective Review). While we suspended this review at the end of the quarter in response to actions taken by the US Food and Drug Administration (FDA), costs incurred in the first quarter of 2007 totalled $4 million compared to $5 million in the same quarter last year.
Adjustments reported for the quarter include restructuring costs totaling $13 million, of which $8 million relates to ongoing profit improvement initiatives in MDS Pharma Services. Other restructuring costs amounting to $5 million were incurred in the quarter as we neared completion of the transition of our information technology infrastructure and support to a new provider. Other adjusting items included a $2 million gain realized on the sale of our debt interest in Hemosol Corp. and a $1 million mark-to-market loss on deemed ineffective interest rate swaps.
Selling, general, and administration (SG&A) expenses for the quarter totalled $53 million and 21% of revenues compared to $48 million and 20% last year.
We spent $13 million on R&D activities in the first quarter this year and last and we expensed $5 million in the first quarter for both years.
Consolidated depreciation and amortization expense increased $4 million compared to last year. The increase is principally related to depreciation on our expanded pre-clinical facility in Lyon, France, our new US central laboratory, and our new manufacturing facility in Singapore. Capital expenditures for the quarter were $8 million. In the first quarter of fiscal 2006, we reported capital expenditures of $22 million, reflecting spending on new facilities in MDS Pharma Services and expenditures related to the MAPLE facility.
Results from discontinued operations for this year include only the results of our remaining Canadian diagnostics businesses, as all other discontinued business were sold or closed during 2006. The first quarter results from discontinued operations for 2006 include these businesses, along with the results of our other discontinued business and include the after-tax gain resulting from the sale of our interest in Source.
Reported earnings per share were $0.10 for the quarter, compared to $0.33 in 2006. Adjusted earnings per share from continuing operations for the quarter were $0.05 compared to $0.14 earned in the same period last year. Earnings per share from discontinued operations were $0.12 compared to $0.23. Adjusted earnings per share for the two periods were as follows:
2007 2006 ------------------------------------------------------------------------- Basic and diluted EPS from continuing operations - as reported $ (0.02) $ 0.10 Adjusted for: Restructuring charges 0.08 0.01 Loss (gain) on sale of long-term investment (0.01) 0.01 Tax rate changes - 0.02 ------------------------------------------------------------------------- Adjusted EPS $ 0.05 $ 0.14 ------------------------------------------------------------------------- ------------------------------------------------------------------------- MD
