TORONTO, March 9 /PRNewswire-FirstCall/ - MDS Inc. , a company providing a range of enabling products and services to the global life sciences markets, today reported its first quarter 2006 results.
Quarterly Highlights - 5% organic revenue growth in life sciences - 10% organic growth in adjusted EBITDA - MAPLE mediation concluded successfully - Montreal bioanalytical issues reduce EBITDA by $10 million - $15 million or 260 basis point sequential decline in SG&A - $0.38 in GAAP EPS, $0.23 in adjusted EPS
For the quarter, MDS’s consolidated revenue was $365 million, up 4% organically, over the same period last year. Adjusted EBITDA was $64 million, up 10% organically, driven by strong results in the isotopes and diagnostics businesses. Adjusted earnings per share were $0.23 compared to $0.22 in the same period last year. Selling, general and administrative costs declined from the fourth quarter by $15 million or 260 basis points to 19% of revenues.
Financial Highlights % Change --------------------------- ($ millions) Q1 F2006 Q1 F2005 Reported Organic ------------------------------------------------------------------------- Revenue $365 $369 (1%) 4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $64 $64 - 10% % 18% 17% NA NA ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EPS $0.23 $0.22 5% NA GAAP EPS $0.38 $0.21 80% NA ------------------------------------------------------------------------- -------------------------------------------------------------------------
In the quarter, MDS continued to focus significant resources on completing the review of certain past studies in its Montreal bioanalytical facility and increased expenditures on these activities to $6 million. Over the past year, MDS has conducted a review of bioequivalency studies performed in Montreal over the 2000-2004 period and identified those requiring further assessment. As anticipated, there are a number of follow-up activities that will take place over the remainder of the fiscal year, with continued impact on the cost structure of this business. In total, lower revenue in the Montreal bioanalytical business combined with the cost of the review, reduced EBITDA in the first quarter by $10 million compared to the first quarter of 2005.
MDS continued to execute its strategy to focus the Company on its Life Sciences businesses. In the quarter, the Company completed the sale of Source Medical, substantially completed its 700 person reduction in headquarters and management staff, and continued with the process to find an alternate ownership structure for the Company’s diagnostics business. Subsequent to the quarter, MDS reached a mediated agreement with respect to the MAPLE project. All of MDS’s businesses, with the exception of the bioanalytical business, delivered organic growth in revenues and adjusted EBITDA relative to the first quarter of 2005. Diagnostic and medical isotope businesses drove overall performance with organic adjusted EBITDA growth of 25% and 63% respectively.
“MDS was able to deliver organic growth in Life Sciences revenues and adjusted EBITDA, despite continued challenges with our bioanalytical operations in Montreal,” said Stephen P. DeFalco, President and Chief Executive Officer, MDS Inc. “I am encouraged by the improvement in selling, general and administration expenses over the fourth quarter of 2005 as we build a more competitive, streamlined cost structure.”
Operating Segment Results MDS Pharma Services % Change --------------------------- ($ millions) Q1 F2006 Q1 F2005 Reported Organic ------------------------------------------------------------------------- Revenue: Early-stage $78 $88 (11%) (1%) Late-stage 51 50 2% 13% ------------------------------------------------------------------------- Total $129 $138 (7%) 2% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $3 $8 (62%) - % 2% 6% NA NA ------------------------------------------------------------------------- -------------------------------------------------------------------------
Pharmaceutical research services revenue for the first quarter increased 2% organically, over the same period last year. Excluding the bioanalytical business, organically, revenue grew by 10% and EBITDA improved by 33%.
Backlog was up 17% year-over-year to US$370 million and was up 9% sequentially, as we continue to win late-stage global contracts. The Company continued the Montreal bioanalytical FDA review in the quarter at a cost of $6 million. This increased cost, and revenues significantly lower than last year offset adjusted EBITDA growth in all other markets, and accounted for the decline in EBITDA from $8 million in the first quarter last year to $3 million this quarter.
There are encouraging signs that our Global Clinical Development (GCD) line of business is gaining traction from its strategic therapeutic focus on oncologic/hematologic and metabolic diseases. Nearly half of GCD new business wins came from these areas in the first quarter of 2006. These successes have been accompanied by opportunities to bid on larger, high-value studies in these therapeutic areas.
MDS Nordion % Change --------------------------- ($ millions) Q1 F2006 Q1 F2005 Reported Organic ------------------------------------------------------------------------- Revenue $82 $75 9% 19% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $28 $25 8% 63% % 34% 33% NA NA ------------------------------------------------------------------------- -------------------------------------------------------------------------
Isotope revenue for the first quarter grew 19% year-over-year on an organic basis, driven by the strength of the medical imaging business. Results for the medical isotope business were positively impacted due to a competitor’s voluntary recall of its technetium generator line used in cardiac imaging. EBITDA increased organically by 63% in the first quarter of 2005. The new Equinox cancer therapy system was launched during the quarter. The completion of the MAPLE mediation and a supply agreement with Molecular Insights Pharmaceuticals, Inc. were announced subsequent to the quarter.
MDS Sciex % Change --------------------------- ($ millions) Q1 F2006 Q1 F2005 Reported Organic ------------------------------------------------------------------------- Revenue $71 $74 (4%) 1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $19 $21 (10%) - % 27% 28% NA NA ------------------------------------------------------------------------- -------------------------------------------------------------------------
Analytical instrument revenue for the first quarter grew 1% year-over- year on an organic basis. Organic EBITDA was level with last year but declined 10% as reported from $21 million to $19 million, due principally to currency. Our new products sold extremely well, particularly the API 5000(TM), the 4800 MALDI TOF/TOF(TM) and the 3200 Q TRAP(R), and demand in the quarter outstripped our ability to supply these products. MDS Sciex shipped the first CellKey(TM) system produced at the new Singapore facility in the quarter.
MDS Diagnostic Services % Change ------------- ($ millions) Q1 F2006 Q1 F2005 Reported ------------------------------------------------------------------------- Revenue $83 $82 1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $20 $16 25% % 24% 20% NA ------------------------------------------------------------------------- -------------------------------------------------------------------------
MDS Diagnostic Services revenue increased 1% year-over-year to $83 million. EBITDA margins grew 460 basis points to 24% in the first quarter of 2006, largely due to successful implementation of LeanSigma initiatives. Funding negotiation with the Ontario Ministry of Health continued in the first quarter and it continues to be our expectation that, when concluded, any increases will be retroactive to March 31, 2005.
Corporate
Last September, MDS announced its new strategy to focus on its high-growth, global life sciences businesses. During the first quarter, a number of items were concluded in executing this strategy. MDS successfully divested its interest in Source Medical for $79 million and the retail business of MDS Capital and entered into an agreement to sell its interest in Calgary Laboratory Services. The evaluation of alternate ownership options for the Company’s remaining diagnostics business is proceeding well and is expected to be announced in the first half of 2006 and completed by the end of fiscal 2006.
MDS continues to focus on operational effectiveness in each of its core businesses. A $15 million, or 260 basis point, reduction in selling, general and administration expenses in the quarter compared to the fourth quarter of last year reflects the impact of the Company’s efforts to reduce layers of management, expedite decision making and enhance our global competitiveness.
Following the completion of the diagnostics transaction, MDS intends to change to US dollar/US GAAP reporting. With over 95% of revenues in Life Sciences sourced from outside of Canada, US dollar/US GAAP reporting will be a more natural reporting convention for the Company, and one that will provide shareholders with greater transparency of operating results and ease of comparability with global life sciences peers.
The use of non-GAAP measures section in the MD&A outlines the use of the terms ‘organic’ and ‘adjusted’ in reflecting 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.
Annual Shareholder Meeting and Conference Call
MDS will hold its Annual Shareholder Meeting at 4:00 pm ET today at the Design Exchange, 234 Bay Street, Toronto, Ontario, Canada. This meeting will also be broadcast live at www.mdsinc.com. MDS will be holding a conference call today at 10:30 am to discuss the first 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.
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 the diagnosis and treatment of disease. MDS is a global provider of pharmaceutical contract research, medical isotopes for molecular imaging, radiotherapeutics, and analytical instruments.
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 8, 2006
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, 2006 and its financial position as at January 31, 2006. 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 2005 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.
Caution regarding forward-looking statements
This MD&A is intended to provide readers with the information that management believes is required to gain an understanding of MDS’s current results and 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.
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. We may make such statements in this document, in other filings with Canadian regulators or the United States Securities and Exchange Commission, in reports to shareholders or in other communications. These forward-looking statements include, among others, statements with respect to our objectives for 2006, 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, expectation, anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, management of liquidity and funding and operational risks; the strength of the Canadian and United States economies and the economies of other countries in which we conduct business; the impact of the movement of the Canadian dollar relative to other currencies, particularly the US dollar and the Euro; the effects of changes in monetary policy, including 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 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 impact 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.
Tabular amounts are in millions of Canadian dollars, except per share amounts and where otherwise noted.
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.
Discontinued operations
All financial references in this document exclude those businesses that we consider to be discontinued. Our discontinued businesses include our generic radiopharmaceuticals operations, our US laboratory operations, certain early-stage pharmaceutical research services operations, and our interests in Source Medical Corporation (Source) and Calgary Laboratory Services Partnership (CLS). All financial references for the prior year have been restated to reflect this treatment. From the amounts reported in our first quarter 2005 interim report, revenues for 2005 have been reduced by $74 million and income from continuing operations has been reduced by $1 million.
Segmented reporting
In light of our new strategic plan and our decision to find an alternative ownership structure for our diagnostics businesses, we have revised our definition of reportable segments effective this quarter, with retroactive effect. We now consider each of our underlying businesses to be a separate reportable segment and we have revised our financial statements and our MD&A to reflect this.
In our reports for prior periods, we allocated costs incurred centrally and for the benefit of all business units to our two reportable segments pro-rata, based on revenues. We have now realigned our allocation method for these costs to charge each business unit for the cost of services consumed. Costs that benefit the corporation generally and which cannot be assigned to a specific business unit are recorded in a separate segment as “Corporate and other”, along with certain other income and expense items. The new allocation method has been applied for both current and prior periods.
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. Since that time, we have completed the sale of our interest in Source for cash proceeds of $79 million, recording an after-tax gain of $28 million. We have entered into an agreement to sell our interest in CLS for cash proceeds of $21 million, which we expect will close in the second quarter of 2006. We are also well advanced in discussions to sell certain non-core pharmaceutical research services businesses and we expect to complete our exit from these businesses by the end of this fiscal year. In addition, MDS Capital Corp. completed the sale of its retail funds management business.
We have now substantially completed the majority of our restructuring initiatives, including the elimination of over 700 positions, with an emphasis on senior management, administrative and support staff.
We are actively exploring alternative ownership structures for our diagnostics business to maximize value for shareholders and at the present time we are engaged with a number of possible buyers for the business. As well, we continue to review alternate strategies, including the possibility of distributing the interest in this business to shareholders in a tax-efficient manner. We expect that we will complete a transaction affecting this business before the end of this fiscal year.
On February 22, 2006, we announced the successful completion of our mediation process with Atomic Energy of Canada Limited (AECL) regarding our MAPLE isotope production facility project. Under the terms of the agreement, title to the facility has been transferred to AECL in exchange for a cash payment of $25 million and a 40-year supply agreement that will come into effect once the facility is operational. Importantly, under the terms of this agreement, MDS will have no continuing obligation for the capital costs of the facility, and will not be responsible for future operating costs. The long-term supply agreement provides for payments to AECL for the supply of isotopes on the basis of a percentage of revenues. Although this percentage is modestly higher than what we currently pay AECL for isotopes supplied by the National Research Universal Reactor (NRU), we believe that we will be able to mitigate the impact of this increase with increased sales volumes, price increases, and production efficiencies. The essential terms of the existing supply agreement will carry forward to an interim agreement and remain in effect while AECL completes the MAPLE facility.
When we entered into mediation discussions with AECL we were facing considerable uncertainty regarding estimated total costs to complete the project and projected future operating costs. In completing this settlement, we achieved our goal of shielding MDS shareholders from further capital costs associated with completing and commissioning the facility. We have also created a more economically viable relationship going forward, as we will avoid substantial operating cost increases related to the operation of the facility in the future. AECL will be focused on their primary strength of owning and operating the facilities, while we will focus on marketing, selling and distributing the isotopes.
Consolidated operating highlights % Change 2006 2005 Reported Organic ------------------------------------------------------------------------- Net revenues $ 365 $ 369 (1%) 4% ------------------------------------------------------------------------- Operating income $ 43 $ 47 (9%) Adjustments: Restructuring charges and other expenses 3 1 ------------------------------------------------------------------------- Adjusted operating income 46 48 (4%) Depreciation and amortization 18 16 ------------------------------------------------------------------------- Adjusted EBITDA $ 64 $ 64 - 10% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA margin 18% 17% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Consolidated revenue for the first quarter of 2006 was $365 million, down marginally from the $369 million reported in the same period in 2005. On an organic basis, revenues grew by 4%, driven particularly by 19% growth in our isotopes segment. Revenues from our instruments business grew 1% organically and our pharmaceutical services business realized 2% growth in revenue on an organic basis, driven by the continued growth in all businesses except bioanalytical. Diagnostics revenues grew 1% in the quarter.
Adjusted EBITDA of $64 million, level with the prior year was up 10% on an organic basis. Strong results in isotopes and a substantial improvement in the EBITDA margin earned by our diagnostics business were the principal contributors to this organic growth. The impact of ongoing issues in our bioanalytical operations was significant this quarter, as we doubled our expenditures conducting the US Food and Drug Administration (FDA) review. These costs, combined with depressed revenues in this business, resulted in EBITDA being down by approximately $10 million year-over-year. Had we achieved the same level of EBITDA in bioanalytical that we achieved in the first quarter last year, we would have reported adjusted EBITDA growth of 31% organically.
Adjusted operating income for 2006 of $46 million was slightly below that achieved in the first quarter of 2005. Adjustments include stock option expenses related to the accelerated vesting of options for certain former executives who left MDS last year and a valuation provision related to a long-term investment. Reported operating income for the first quarter was $43 million, down from $47 million for the prior year, as currency and the ongoing costs of our bioanalytical review offset the growth in other areas.
Operating income for the quarter included $1 million equity gains from MDS Health Ventures, partially offsetting the impact of unusual items. We also recorded a $28 million after-tax gain on the sale of Source, although this gain is included with the results from our discontinued operations.
Selling, general, and administration (SG&A) expenses for the quarter were down substantially compared to the fourth quarter of 2005 when we announced our restructuring. SG&A for the quarter was $69 million compared to $84 million in the fourth quarter, and down slightly compared to the first quarter last year, including $2 million spent on our Sarbanes-Oxley (SOx) compliance program in the quarter. The drop from the fourth quarter reflects the impact of the initiatives undertaken at the end of last year to realign our cost structure and to be more globally competitive. The majority of these initiatives began to have effect in November 2005. SG&A expense for the current quarter was 19% percent of revenues compared to 22% in the fourth quarter last year. The magnitude of the drop since year-end is partially reflective of the higher than usual SG&A expenses in the fourth quarter. We made good progress in the quarter towards our goal of reducing our overall SG&A rate by 150 basis points over the course of 2006.
We remain committed to our high level of investment in research and development (R&D). During the first quarter, we spent $15 million on R&D activities and expensed $6 million this year, compared to $23 million and $7 million respectively in the same quarter last year.
Consolidated depreciation and amortization expense increased $2 million compared to last year. The increase is principally related to depreciation on our new common business system, on which we began to record depreciation in the third quarter last year. Capital expenditures for the quarter were $27 million, including capital costs associated with MAPLE incurred during the first quarter.
Results from discontinued operations include the after-tax gain resulting from the sale of our interest in Source, along with the ongoing operations of our other discontinued busin
