TORONTO, Sept. 6 /PRNewswire-FirstCall/ - MDS Inc. , a company providing products and services to the global life sciences markets, today reported its third quarter 2007 results. For the quarter, MDS reported revenues of $321 million, net income of $7 million and earnings per share from continuing operations of $0.07. Adjusted EBITDA rose to $56 million, up 167% from prior year, and adjusted earnings per share were $0.14, up from $0.01 in the prior year. Third quarter results were primarily driven by strong performance at MDS Analytical Technologies and continued improvement at MDS Pharma Services.
Quarterly Highlights - Delivered $321 million in revenues, up 24% from $258 million in prior year - Increased adjusted EPS to $0.14, up from $0.01 in prior year - Delivered adjusted EBITDA of $56 million, up 167% from $21 million last year - MDS Analytical Technologies delivered record performance at Molecular Devices with $55 million in revenues and $15 million of adjusted EBITDA - MDS Analytical Technologies delivered strong performance at Sciex with adjusted EBITDA of $21 million, up 40% from $15 million last year - MDS Pharma Services delivered their fourth consecutive quarter of improved profitability with $4 million of adjusted EBITDA versus a loss of $10 million in the prior year - MDS Nordion delivered a solid quarter with adjusted EBITDA of $23 million, up 10% sequentially, but down 8% from $25 million in a strong third quarter last year.
“I am pleased with the solid results that we delivered across MDS,” said Stephen P. DeFalco, President and Chief Executive Officer of MDS Inc. “The MDS Analytical Technologies team has been doing a great job of integrating our new business and MDS Pharma Services has improved profitability for the fourth quarter in a row.”
Operating Segment Results MDS Pharma Services % Change -------------------------- ($ millions) Q3 2007 Q3 2006 Reported Organic ------------------------------------------------------------------------- Revenue: Early-stage 62 63 (2%) - Late-stage 56 50 12% - ------------------------------------------------------------------------- 118 113 4% 3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ 4 (10) n/m n/m % 3 ------------------------------------------------------------------------- -------------------------------------------------------------------------
For the third quarter, MDS Pharma Services revenue increased 4% on a reported basis over the same period last year, and was up 3% organically after adjusting for foreign exchange impact. Our late-stage businesses continued to deliver strong growth at 12%. This growth was partially offset by a 2% decline in our early-stage business. While our results in early-stage continue to show some weakness, the return of certain bioanalytical and Phase I customers in the quarter was very encouraging. We are optimistic that this trend will continue in the next several quarters as we rebuild our relationships with these customers. Our average backlog for the third quarter was $420 million, up 5% from the prior year.
During the quarter, the team at our Montreal site made significant progress in helping our bioanalytical clients complete generic study audits required by the FDA. We believe substantially all of the site audit work for generic submissions has now been completed. Most of our efforts at this time are focused on follow-up questions and supporting the finalization of our customers’ remaining audit reports. We also continue to work with clients to support any required review of bioanalytical innovator studies from Montreal.
MDS Pharma Services continues to make progress implementing previously announced restructuring plans. During the third quarter, we completed the consolidation of our European bioanalytical operations from Sittingbourne, UK to Zurich, Switzerland. We have reduced our workforce while growing our revenues by 5% year to date. We have Lean Sigma initiatives and other activities underway to optimize our global network, enhance our productivity, and improve our ability to serve our customers.
MDS Pharma Services has recently hired industry experts in Phase II - IV, Information Technology, and Strategy and Corporate Development to enhance leadership in strategic growth areas. We also hired industry experts to support the expansion of our Development and Regulatory Services (DRS) business in Europe. MDS Pharma Services is now able to offer full-service DRS consulting services to support the development of new drugs and biopharmaceutical products for clients in Europe. MDS Pharma Services also continues to make strategic investments to support our global growth strategy. These investments include a 300-bed expansion in Phoenix, Arizona for our Phase I business and several new information systems to enable our pre-clinical and central lab businesses to serve our customers more effectively.
MDS Nordion % Change -------------------------- ($ millions) Q3 2007 Q3 2006 Reported Organic ------------------------------------------------------------------------- Revenue 76 79 (4%) (4%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ 23 25 (8%) - % 30 32 - - ------------------------------------------------------------------------- -------------------------------------------------------------------------
MDS Nordion revenues for the third quarter were $76 million, down 4% on a reported and organic basis compared to a strong quarter last year. Adjusted EBITDA was $23 million, down 8% as reported but flat organically, as productivity initiatives partially offset lower revenue and the impact of foreign currency. MDS Nordion revenue and adjusted EBITDA were up sequentially from the second quarter 2007 by 9% and 10% respectively.
During the quarter, MDS Nordion announced a new collaboration with the University of Ottawa Heart Institute, Canada’s largest cardiovascular health centre, to establish a Molecular Imaging Centre of Excellence to advance cardiology research. MDS Nordion will invest an estimated $2 million in this new Centre that will further cardiology research by using advanced imaging technology to conduct early disease detection and treatment assessment. MDS Nordion also experienced growth in revenues for its innovative liver treatment, TheraSphere(R), this past quarter. Demand for this product in Europe continues to accelerate as it has now been added to treatment formularies in certain European countries that enable doctors to be reimbursed.
MDS Analytical Technologies % Change -------------------------- ($ millions) Q3 2007 Q3 2006 Reported Organic ------------------------------------------------------------------------- Revenue 127 66 92% 11% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ 36 15 140% 73% % 28 23 - - ------------------------------------------------------------------------- -------------------------------------------------------------------------
The third quarter marked our first full quarter including the results of Molecular Devices. MDS Analytical Technologies delivered strong results this quarter with revenues up 92% to $127 million. Adjusted EBITDA of $36 million was up 140% reported, and up 73% organically over the same period last year. The Molecular Devices acquisition and healthy demand for our Sciex products in most of our markets drove solid results. We had good sales momentum with our high-end triple-quad and ion trap instruments. Sciex contributed $72 million in revenues and $21 million in adjusted EBITDA in the third quarter. Mass spectrometry end user revenue grew 10%. In the quarter, Molecular Devices contributed $55 million in revenues and $15 million in adjusted EBITDA. The integration of Molecular Devices and Sciex is proceeding well and we intend to meet or exceed the revenue and adjusted EBITDA targets of $190 million and $45 - $50 million in our first full year of ownership.
During the quarter, MDS Analytical Technologies introduced several new products to support continued growth in this business. The AquaMax(R) 2000 and AquaMax(R) 4000 series of microplate washers were launched this quarter. These liquid handling systems provide researchers with a highly flexible, easy to configure, multi-application instrument. Another new product introduced this quarter is a novel food testing methodology that enables simultaneous testing for melamine and cyanuric acid. This Applied Biosystems/SCIEX product will help public health laboratories and food manufacturers improve food safety.
Conference Call
MDS will be holding a conference call today at 9:00 am (EDT) to discuss third quarter 2007 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 September 4, 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 July 31, 2007 and its financial position as at July 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. We provide information and analysis in our MD&A comparing the results of operations for the current period to those of the same period in the preceding fiscal year and comparing our financial position to that at the end of 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”, “optimistic”, 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 use terms such as adjusted operating income; adjusted earnings before interest, taxes, depreciation and amortization (EBITDA); EBITDA margin; adjusted EPS; operating working capital; and backlog. These terms are not defined by GAAP and our use of such terms or measurement of such items may vary from that of other companies. In addition, measurement of both reported and organic growth is not defined by GAAP and our use of these terms or measurement of these items may vary from that of other companies. Where relevant, and particularly for earnings-based measures, we provide tables in this document that reconcile the non-GAAP measures used to amounts reported on the face of the consolidated financial statements.
Our executive management team assesses the performance of our businesses based on a review of results comprising these non-GAAP measures and GAAP measures. We also report on our performance to the Company’s Board of Directors based on these GAAP and non-GAAP measures. In addition, adjusted EBITDA and operating working capital are the primary metrics for our annual incentive compensation plan for senior management. We provide this non-GAAP detail so that readers have a better understanding of the significant events and transactions that have had an impact on our results and can view our results through the eyes of management.
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 figures for the prior period using the exchange rates that were in effect for the current period. We provide a reconciliation that shows the differences between reported and organic growth figures highlighting the variances caused by currency fluctuations and those caused by business acquisitions or divestitures.
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 as profit sharing and 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 including appropriate intercompany eliminations, 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 profitability for the Sciex division of MDS Analytical Technologies, in addition to the organic growth of our reported revenues, we also report growth in end-user revenues as reported by our joint venture partners. This figure provides management and readers with additional information on the performance of our global business, including trends in end customer demand and our performance relative to the overall market.
We are unable to provide the organic growth in this measure because we do not have access to the underlying currency data.
MDS Pharma Services measures and tracks contract backlog. Contract backlog is a non-GAAP measure that we define to include the amount of contract value (excluding amounts associated with the reimbursement of costs incurred as agent for a customer) associated with confirmed contracts that has not yet been recognized as revenue. A confirmed contract is one for which the Company has received customer acceptance in a manner that is customary for the type of contract involved. For large, long-term contracts, customer acceptance is generally evidenced by the receipt of a signed contract or confirmation awarding the work to MDS. For smaller and short-term contracts, customer acceptance may be documented in other ways, including email messages and oral confirmations. Only contracts for which such acceptances have been received are included in backlog and the amount of backlog for these contracts is measured based on the revenue that is expected to be earned by MDS under the contract terms. A contract is removed from backlog if the Company receives notice from the customer that the contract has been cancelled, indefinitely delayed, or reassigned to another service provider.
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 use 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.
Acquisition of Molecular Devices Corporation
On March 20, 2007, we completed the acquisition of Molecular Devices Corporation (MD), a leading provider of high-performance measurement tools for high-content screening, cellular analysis, and biochemical testing, in a $622 million cash transaction.
The acquisition was accounted for in our second quarter using the purchase method based on certain preliminary estimates relating to the value of the assets and liabilities of the acquired company. During the third quarter, we continued the work required to assign final values to the assets and liabilities acquired, and, we have adjusted the purchase price allocation reported in the second quarter to reflect the current estimates of value. The total cost of the acquisition was $622 million, including the cash cost of the tender offer, the cash cost to acquire outstanding in-the-money options held by MD employees, 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 $ 587 Cash paid to acquire vested options 27 Cash transaction costs 8 ------------------------------------------------------------------------- Total cost of acquisition $ 622 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Allocation of cost of acquisition: Net tangible assets acquired $ 36 Intangible assets acquired 221 Goodwill 365 ------------------------------------------------------------------------- Total $ 622 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Net tangible assets acquired includes $21 million of acquired cash. Additional details are provided in note 6 to the unaudited consolidated financial statements.
MDS Inc. Consolidated Operating Highlights Third Quarter Year-to-Date ------------------------------- ---------------------- % Change % Change ---------------- -------- 2007 2006 Reported Organic 2007 2006 Reported ------------------------------------------------------------------------- $ 321 $ 258 24% 3% Net revenues $ 844 $ 742 14% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operating income 13 5 160% (loss) (64) 30 n/m Adjustments: ------------ 3 2 Restructuring charges 44 4 - - Valuation provision 6 7 Mark-to-market on 1 - interest rate swaps 1 2 - - MAPLE settlement (3) 9 Loss (gain) on sale - (2) of businesses 1 (2) - - FDA provision 61 - Acquisition 11 - integration 14 - ------------------------------------------------------------------------- Adjusted operating 28 5 income 60 50 Depreciation and 28 16 amortization 65 45 ------------------------------------------------------------------------- $ 56 $ 21 167% 190% Adjusted EBITDA $ 125 $ 95 32% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA 17% 8% margin 15% 13% ------------------------------------------------------------------------- ------------------------------------------------------------------------- n/m = not meaningful
Consolidated revenues for the third quarter of 2007 were up 24% on a reported basis to $321 million compared to $258 million last year. Strong 9% revenue growth at Sciex, combined with $55 million of revenue from MD in the third quarter, pushed MDS Analytical Technologies revenues up 92%. MDS Pharma Services revenues increased 4% compared to the same period in 2006, as our late-stage MDS Pharma Services businesses continued their strong growth. MDS Nordion revenues were down 4% on a reported basis compared to the same period in 2006, as the prior year figures included the realization of deferred revenue associated with our Zevalin(R) contract, which expired in February 2007 and therefore had no impact in the third quarter of fiscal 2007.
On an organic basis, revenues grew by 3%, and adjusted EBITDA grew by 190%, which reconcile to reported growth as follows:
Adjusted Revenue EBITDA ------------------------------------------------------------------------- Reported growth 24% 167% Growth attributable to the acquisition of MD (21%) (71%) Impact of currency fluctuations on growth - 94% ------------------------------------------------------------------------- Organic growth 3% 190% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Operating income for the third quarter of 2007 was $13 million compared to $5 million reported for the same period in 2006. Excluding the impact of MD, operating income for the 2007 quarter was $17 million, as both MDS Pharma Services and Sciex experienced solid growth in operating income compared to the prior year. Excluding the $2 million of the Zevalin(R) deferred revenue in the prior-year period, MDS Nordion operating income was level with 2006.
Adjusted EBITDA for the quarter was $56 million, compared to $21 million last year and $37 million reported for the second quarter of fiscal 2007. Adjusted EBITDA increased 167% on a reported basis. MDS Pharma Services demonstrated continued steady improvement in adjusted EBITDA, reporting sequential improvement in adjusted EBITDA for the fourth consecutive quarter. MDS Analytical Technologies also had a strong quarter on an adjusted EBITDA basis, both before and after the impact of the MD acquisition.
Adjustments reported for the quarter include $11 million of costs related to the integration of MDS Analytical Technologies, $10 million of which relates to amortization of fair value increments recorded for inventory and order backlog as part of the purchase accounting for MD. As at July 31, 2007, the fair value increments related to inventory and order backlog have been fully expensed.
Selling, general, and administration (SG&A) expenses for the quarter totalled $74 million and 23% of revenues compared to $61 million and 24% last year. The increase reflects the addition of MD, and SG&A in the other businesses was level with last year.
We spent $21 million on R&D activities in the third quarter this year and expensed $9 million, compared to spending of $13 million last year, of which we expensed $5 million. The majority of the increase in R&D spendin
