TORONTO, June 7 /PRNewswire-FirstCall/ - MDS Inc. , a company providing products and services to the global life sciences markets, today reported its second quarter 2007 results. For the quarter, MDS reported revenues of $273 million, net income of $736 million, and earnings per share of $5.35, up from $242 million, $14 million and $0.10 respectively over the same period last year. Earnings per share in the 2007 quarter were driven principally by the gain generated through the sale of MDS's diagnostic business. Adjusted EBITDA of $37 million was up from $36 million last year and adjusted earnings per share were $0.11 compared to $0.08 in the second quarter of 2006.
Quarterly Highlights - Completed repositioning to a global life sciences company - Closed the sale of the Canadian diagnostics business and recorded a $792 million gain - Completed a $441 million (C$500 million) substantial issuer bid - Completed the largest acquisition in the Company's history with the $624 million purchase of Molecular Devices Corporation - Recorded $61 million to cover FDA review related costs - Provided a $26 million restructuring charge for MDS Pharma Services - Delivered $273 million in revenues, up 13% over prior year - Earned adjusted EBITDA of $37 million, up from $36 million last year - Increased adjusted earnings per share to $0.11, up 38% over prior year
"I am pleased that we continued to make solid progress executing our strategy," said Stephen P. DeFalco, President and Chief Executive Officer of MDS Inc. "I am encouraged by the steady improvement at MDS Pharma Services and the strong start of our newly launched MDS Analytical Technologies business."
Operating Segment Results MDS Pharma Services % Change -------------------------- ($ millions) Q2 2007 Q2 2006 Reported Organic ------------------------------------------------------------------------- Revenue: Early-stage $60 $68 (12%) Late-stage 55 45 22% ------------------------------------------------------------------------- $115 $113 2% 0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $3 $3 - 100% % 3% 3% n/a n/a ------------------------------------------------------------------------- -------------------------------------------------------------------------
For the second quarter, revenue increased 2% on a reported basis over the same period last year, and was flat organically. Our late-stage businesses reported strong growth at 22%. This was offset by a 12% decline in our early-stage segment, which continues to feel the impact of FDA-related issues at our Montreal site. Average backlog for the second quarter was $450 million up 12% year-over-year.
During the quarter, the team at our Montreal site continued to support the independent audit activities for our bioanalytical clients. Having completed approximately 70% of the audits, MDS is now able to estimate the financial impact of customer accommodations related to the FDA review and has provided $61 million in the quarter to fund the completion of these activities. MDS Pharma Services expects to have the FDA audits substantially complete by the end of fiscal 2007.
MDS Pharma Services took another major step toward improving business performance in recording a $26 million charge to restructure and streamline our business. MDS Pharma Services will use these funds to optimize our global network through site consolidations, workforce reductions, and operational enhancements. These initiatives include consolidating our North American bioanalytical LCMS operations into Lincoln and the refocusing of our Montreal site on early clinical research, ligand binding services, development and regulatory services and global clinical development. We believe these actions will create a strong global foundation to serve our customers more effectively and position us well for future growth.
MDS Pharma Services is also making other investments to grow the business. Work continues on our 300-bed expansion in Phoenix and on new information systems for our pre-clinical and central lab businesses. We also continue to explore business development activities to accelerate our global growth.
MDS Nordion % Change -------------------------- ($ millions) Q2 2007 Q2 2006 Reported Organic ------------------------------------------------------------------------- Revenue $70 $72 (3%) (2%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $21 $22 (5%) 4% % 30% 31% n/a n/a ------------------------------------------------------------------------- -------------------------------------------------------------------------
MDS Nordion revenue for the second quarter was $70 million, down 3% on a reported basis and 2% organically compared to a strong quarter in 2006, when we benefited last year from a competitor's inability to ship product. Adjusted EBITDA was $21 million, down 5% as reported but up 4% organically, as declines in revenue were offset by productivity initiatives and effective cost controls.
During the quarter, MDS Nordion announced a number of developments related to the radiotherapeutic business including the establishment of four European Centres of Excellence for TheraSphere(R) and the signing of a collaboration agreement with Avid Radiopharmaceuticals, Inc. to support clinical studies for Avid's novel radiopharmaceuticals for the diagnosis and monitoring of Alzheimer's disease. TheraSphere use continued to expand as enrollment of patients grew in Europe and India.
MDS Analytical Technologies % Change -------------------------- ($ millions) Q2 2007 Q2 2006 Reported Organic ------------------------------------------------------------------------- Revenue $88 $57 54% 5% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ $20 $19 5% (32%) % 23% 33% n/a n/a ------------------------------------------------------------------------- -------------------------------------------------------------------------
MDS Analytical Technologies revenues, which included the results of Molecular Devices acquisition from March 20, 2007 to the end of the second quarter, grew 54% to $88 million. Mass spectrometry end user revenue grew 12%. Year-over-year performance reported for this business was fueled by our Molecular Devices acquisition and strong demand in most of our markets, particularly for 4000 series triple quad products and the Elan DRC products. Adjusted EBITDA of $20 million was up 5% reported, and down 32% organically, over the same period last year, which included $4 million in benefits related to R&D tax credits and foreign exchange.
In the quarter, MDS Analytical Technologies introduced a number of new products. A first-of-its-kind mass spectrometry platform designed to help pharmaceutical companies accelerate the drug compound screening process called FlashQuant(TM) was unveiled by the Sciex division and Applied Biosystems. As well, Applied Biosystems/MDS Sciex launched enhancements to the ProteinPilot(TM) software and the 4800 MALDI TOF/TOF(TM) mass spectrometer to support biomarker research.
Our new Molecular Devices acquisition also introduced the Neurotransmitter Transporter Uptake Assay Kit to enable the screening of three neurotransmitters through one single detection assay.
Asia remains a key region for MDS Analytical Technologies with continued strength in India and China for our products. We also continue to accelerate our manufacturing moves in Singapore and China to strengthen our competitive cost position.
Conference Call
MDS will be holding a conference call today at 10:30 am (EDT) to discuss the second 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 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 6,200 highly skilled people in 28 countries. Find out more at www.mdsinc.com or by calling 1-888-MDS-7222, 24 hours a day.
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.
The use of non-GAAP measures section in the MD&A outlines the definition of the terms 'organic' and 'adjusted' as used to explain 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS June 5, 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 April 30, 2007 and its financial position as at April 30, 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 period 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 reliable supply of raw materials, particularly cobalt and critical nuclear isotopes; the impact of the movement of the US dollar relative to other currencies, particularly the Canadian 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 laws, trade policies and regulations, and enforcement thereof; judicial judgments and legal proceedings; 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; the possible impact on our businesses from natural disasters, 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 addition to measures based on generally accepted accounting principles (GAAP) in this MD&A, we describe certain income and expense items that are unusual or non-recurring. These terms are not defined by GAAP and 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). Our executive management assesses the performance of our businesses based on a review of results calculated in this manner and 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 to acquisitions and divestitures. 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.
Substantially all of the business of the Sciex division of MDS Analytical Technologies 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 only our direct revenues and 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 for MDS Analytical Technologies, in addition to the organic growth of our revenues, we also report growth in end-user revenues. This figure provides information about the reported growth of the overall worldwide business associated with the sale of our products and related services and from which we share in the profitability. We are unable to provide the organic growth in this measure because we do not have access to the underlying currency data.
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.
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. On February 26, 2007, we completed a significant step in this strategic plan by selling our Canadian diagnostics business to Borealis Infrastructure Management Inc. MDS received net cash proceeds (after expenses and taxes) of $929 million and a $65 million non-interest bearing promissory note due in 2009. After paying transaction costs and income taxes, we have reported a gain of US$792 million in our second quarter, the details of which are (US$ millions):
------------------------------------------------------------------------- Net selling price $ 1,129 Less share attributable to minority interests (112) ------------------------------------------------------------------------- MDS's share of selling price 1,017 Less: Net book value of assets sold (82) Transaction costs (30) Income taxes (113) ------------------------------------------------------------------------- Gain included in income from discontinued operations $ 792 ------------------------------------------------------------------------- -------------------------------------------------------------------------
On January 29, 2007, we announced another significant step in our strategic plan with our intent to acquire Molecular Devices Corporation (MD), a leading provider of high-performance measurement tools for high-content screening, cellular analysis, and biochemical testing, in a $624 million cash transaction. This transaction closed and we recorded the acquisition of MD effective March 20, 2007. Under this agreement, MDS acquired all of the Common shares of MD for $35.50 per share. Following the acquisition, the MD business was combined with that of MDS Sciex to create MDS Analytical Technologies (MDS AT). The MDS Sciex and Molecular Devices brands will continue to be used by this new business unit.
This strategic acquisition marks a significant expansion for MDS. By acquiring Sunnyvale, California-based MD, with its strong brand recognition and leading-edge products and capabilities, MDS has strengthened its leadership position as one of the top global providers of life sciences solutions. We 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.
The acquisition has been accounted for using the purchase method. The total cost of the acquisition was $624 million, including the cash cost of the tender offer, the cash cost to acquire outstanding in-the-money options held by employees of MD and others, and cash transaction costs. The components of the purchase cost and the preliminary allocation of the costs are as follows:
------------------------------------------------------------------------- Cash paid for tendered shares $589 Cash paid to acquire vested options 27 Cash transaction costs 8 ------------------------------------------------------------------------- Total cost of acquisition $624 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Allocation of cost of acquisition: Net tangible assets acquired $71 Intangible assets acquired 182 Goodwill 371 ------------------------------------------------------------------------- Total $624 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net tangible assets includes $21 million of acquired cash. MDS Inc. Consolidated Operating Highlights Second Quarter Year-to-Date ------------------------------- ---------------------- % Change % Change ---------------- -------- 2007 2006 Reported Organic 2007 2006 Reported ------------------------------------------------------------------------- $ 273 $ 242 13% 1% Net revenues $ 523 $ 484 8% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income (80) 2 n/m n/m (loss) (77) 25 n/m Adjustments: ------------ 28 1 Restructuring charges 41 2 6 6 Valuation provision 6 6 Mark-to-market on (1) 2 interest rate swaps - 3 (3) 9 MAPLE settlement (3) 9 Loss on sale of 3 - businesses 1 - 61 - FDA provision 61 - Acquisition 3 - integration 3 - ------------------------------------------------------------------------- Adjusted operating 17 20 income 32 45 Depreciation and 20 16 amortization 37 29 ------------------------------------------------------------------------- $ 37 $ 36 3% (7%) Adjusted EBITDA $ 69 $ 74 (7%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA 14% 15% margin 13% 15% ------------------------------------------------------------------------- ------------------------------------------------------------------------- n/m = not meaningful
Consolidated revenues for the second quarter of 2007 were up 13% to $273 million compared to $242 million last year. Revenue from the newly acquired MD business from the date of acquisition to April 30, 2007 amounted to $29 million. Our late-stage MDS Pharma Services businesses continued their strong growth, offsetting weakness in early-stage revenues, where we continue to feel the impact from the US Food and Drug Administration (FDA) review. MDS Nordion revenues were down slightly on a reported basis compared with an unusually strong second quarter in fiscal 2006, when we experienced high shipments of key isotopes resulting from disruption at a key competitor. On a reported basis, and excluding the revenues from the MD business, MDS Sciex was up 4%. The MD business also experienced solid growth as revenues for the quarter were up 22% compared to a weak quarter in the same three-month period last year.
On an organic basis, revenues grew by 1%, driven principally by 5% organic growth at MDS Analytical Technologies. Revenues from MDS Nordion were down 2% organically but excluding the impact of unusual market conditions in the second quarter of 2006 MDS Nordion revenues grew 1% organically. MDS Pharma Services revenues were level with the prior year on an organic basis, as strong growth in late-stage revenues was offset by weak early-stage revenues.
We reported an operating loss for the quarter of $80 million compared to operating income of $2 million reported for the same period in 2006. The operating loss for the current year includes a $61 million provision to cover future costs to resolve the outstanding FDA issues associated with our Montreal-area bioanalytical businesses and a restructuring charge of $28 million, most of which relates to the MDS Pharma Services business.
Adjusted EBITDA for the quarter was $37 million compared to $36 million last year and $32 million in the first quarter of fiscal 2007. Adjusted EBITDA increased 3% on a reported basis, compared to a strong adjusted EBITDA figure for 2006 that reflects the impact of the unusual market conditions experienced by MDS Nordion last year and favourable prior year tax credit recoveries at MDS Sciex in 2006. Factoring in the impact of foreign exchange, adjusted EBITDA declined 7% organically.
Adjustments reported for the quarter include $61 million of costs that we expect to incur to reimburse clients of our Montreal-area bioanalytical facilities for audit and other costs that they will pay to comply with the FDA directive issued January 10, 2007. In addition, we have recorded $28 million of restructuring costs related mostly to ongoing profit improvement initiatives in MDS Pharma Services. Other adjusting items included a $3 million gain resulting from the realization of prior year investment tax credits related to our investment in the MAPLE project, a $6 million valuation provision on our interest in MDS Capital Corp., a $3 million loss resulting from the sale of certain businesses, primarily our Hamburg phase 1 facility, $3 million of integration costs incurred by MDS AT, and a $1 million mark-to-market gain on deemed ineffective interest rate swaps.
Selling, general, and administration (SG&A) expenses for the quarter totalled $67 million and 25% of revenues compared to $56 million and 23% last year. The increase includes the impact from the addition of MD partway through the quarter, and includes the cost of their sales and marketing network. In addition, SG&A for the 2007 quarter includes a foreign exchange loss of $4 million resulting from the significant weakness in the US dollar over the last few weeks of the quarter. In the fiscal 2006 quarter we reported a foreign exchange loss of $2 million.
We spent $16 million on R&D activities in the second quarter this year and expensed $7 million, compared to spending of $12 million last year, of which we expensed $1 million. The majority of the increase in R&D spending comes from the additional sp
