TORONTO, Dec. 13 /PRNewswire-FirstCall/ - MDS Inc. , a company providing products and services to the global life sciences markets, today reported its fourth quarter 2007 results. For the quarter, MDS reported total revenues of $338 million, net income of $15 million and earnings per share from continuing operations of $0.14. Adjusted EBITDA rose to $44 million, up 91% from the prior year, and adjusted earnings per share were $0.09, up from $0.02 in the prior year. On a year-over-year basis, the significant decline in the value of the US dollar negatively impacted adjusted EBITDA by approximately $15 million in the fourth quarter.
“I am pleased that we have delivered strong year-end results across MDS, finishing a year of significant improvements to support our global growth strategy,” said Stephen P. DeFalco, President and Chief Executive Officer of MDS Inc. “I am especially proud of this operational performance in a quarter of unprecedented currency headwinds.”
MDS Pharma Services net revenue increased 1% on a reported basis over the prior year, and was level with last year after adjusting for the impact of foreign exchange and divestitures. Adjusted EBITDA was $5 million versus a loss of $7 million last year, an improvement of $12 million year-over-year. Despite $4 million of unfavourable foreign exchange versus the third quarter, MDS Pharma Services delivered its fifth consecutive quarter of sequential improvement in profitability.
Our late-stage businesses continued to thrive and net revenues grew by 10% over the prior year. This growth was partially offset by a 6% decline in our early-stage business. While results in early-stage revenues continued to show some weakness, we are encouraged that Bioanalytical and Phase I customers continued to return this quarter. We saw their return reflected in the strength of new orders, especially with our Bioanalytical customers, where new orders increased 85% over this period last year and were up 33% from the third quarter. Our average backlog for the fourth quarter was $385 million, down 10% from the prior year, resulting from an increased conversion of backlog to revenue and a number of contract cancellations in our Phase II-IV business.
During the quarter, MDS Pharma Services continued to implement its restructuring plan. Our Montreal team transferred DMPK operations to Bothell, Washington and LC-MS operations to Lincoln, Nebraska. The Montreal team also largely completed the staff reductions at our St. Laurent facility, including most of the staff supporting the FDA site audits, which appear to be winding down as we enter 2008. We also consolidated our central laboratory operations in Europe. We have now implemented 80% of the restructuring initiatives announced earlier this year that are designed to put MDS Pharma Services on a profitable growth trajectory.
MDS Pharma Services is continuing to make strategic investments to accelerate top-line growth. We recently expanded our central lab operations in Beijing, China to meet the growing demands from pharmaceutical and biotech companies conducting clinical trials in China. The 300-bed expansion of our Phase I business in Phoenix, Arizona is scheduled to open in January 2008, and we are planning to roll out new information technology systems to enhance our services for our pre-clinical and central lab customers. MDS Pharma Services also launched a new brand campaign in November, which highlights our commitment to deliver “high-quality services on-time”.
MDS Nordion’s reported revenues for the fourth quarter were $76 million, level with the prior year and down 4% organically. Adjusted EBITDA was $21 million, level as reported and up 10% organically. Excluding deferred revenue associated with a supply agreement in 2006, revenues were up 3% compared to the fourth quarter of last year. This increase was fueled by the strength of the Canadian dollar and increased revenue from expanding our TheraSphere(R) markets. These gains were offset by declines in cobalt shipments and production irradiator systems.
During the quarter, MDS Nordion signed a 17-year contract for the supply of cobalt-60 with Rosenergoatom, the operating utility of Russia’s nuclear power plants. This contract expands upon an existing agreement for cobalt-60 that is used to sterilize hospital medical supplies. As a result of this agreement, MDS Nordion’s capacity will grow by more than 30 percent over the next 10 years, placing us in a strong position to meet expected growth in the sterilization market.
Subsequent to quarter-end, MDS Nordion signed an agreement with Best Medical International Inc., a provider of radiotherapy and oncology products, to divest its external beam therapy and self-contained irradiator product lines that have annualized revenues of $32 million. This sale is a key part of MDS Nordion’s growth strategy to focus its resources on being a leading innovator in molecular medicine. The transaction is expected to be finalized in the second quarter of 2008.
After quarter end, MDS Nordion received information from Atomic Energy of Canada Limited (AECL) that an interruption in the supply of medical isotopes is expected to extend into early to mid-January 2008. AECL advised MDS Nordion that this extension of the maintenance shutdown at the National Research Universal reactor is required to complete an upgrade of the electrical back-up system to address a regulatory issue. There is federal legislation pending to accelerate the start up of the reactor. MDS Nordion is concerned about the impact that AECL’s supply disruption is having on patients, and has been working with back-up suppliers to offset some of the impact. Based on the latest update from AECL, the financial impact of this extended interruption is currently expected to reduce MDS Nordion’s adjusted EBITDA by approximately $8 - $9 million in total for the first quarter of 2008.
MDS Analytical Technologies delivered strong results in our second full quarter, which included Molecular Devices, with revenues up 92% to $119 million. Adjusted EBITDA of $32 million was up 113% as reported and up 74% organically over the same period last year. Our results were driven by strong demand for Sciex mass spectrometry products in most of our markets and by our Molecular Devices business that we acquired earlier this year.
Sciex contributed $65 million in revenues and $21 million in adjusted EBITDA in the fourth quarter, up 40% from the prior year. Mass spectrometry end user revenue grew 4%. We continue to have strong sales momentum at Sciex with our high-end triple-quad and ion trap instruments.
Molecular Devices contributed $54 million in revenues and $11 million in adjusted EBITDA. We believe we will meet or exceed our projected 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 continued to drive innovation and growth with the launch of new products. We announced a significant advance in high-speed imaging technologies with the release of the MetaMorph(R) ICS (Integrated Confocal System), in partnership with VisiTech International. As well, MDS Analytical Technologies launched an automated toxicology testing application for drugs of abuse with its joint venture partner Applied Biosystems. The new Cliquid(TM) Drug Screen and Quant Software for Routine Forensic Toxicology application can deliver faster results, more thorough screening and ultimately, more accurate analysis.
Conference Call
MDS will be holding a conference call today at 9:30 am (EDT) to discuss fourth 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 5,500 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 supply 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.
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 October 31, 2007 and its financial position as at October 31, 2007. This MD&A should be read in conjunction with the consolidated financial statements and notes that follow, all of which have been prepared in accordance with Canadian generally accepted accounting principles. For additional information and details, readers are referred to the annual consolidated 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; new accounting policies and guidelines that impact the methods we use to report our financial condition; 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 net income; adjusted EPS; net revenue; 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 GAAP measures 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 GAAP measures and these non-GAAP measures. We also report on our performance to the Company’s Board of Directors based on these 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 two 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 after deducting 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 to us 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 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.
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.
Change in Presentation Related to Reimbursement of Out-of-Pocket Costs
MDS Pharma Services incurs certain out-of-pocket costs on behalf of its customers for which the Company has a right to reimbursement. These include stipends paid to study participants in early-stage clinical trials, courier costs associated with the delivery of study samples to central laboratories, and other out-of-pocket costs, mostly related to travel. The Company has the right to bill customers for reimbursement of these amounts but is generally not entitled to a mark-up or other form of profit margin related to these activities.
In financial reports filed for prior periods, the amount of the reimbursement was offset against the related out-of-pocket cost, and, because these amounts offset, neither a revenue nor an expense item was reported associated with this activity. During the fourth quarter, management determined that this presentation was inconsistent with competitor disclosures, generally prepared in accordance with US GAAP. In addition, management has determined that this presentation is consistent with Canadian GAAP. Therefore, we determined that it would be appropriate to present the financial statements contained in this interim report reflecting separate, but offsetting, revenue (reimbursement revenue) and expense items (reimbursed expenses) for these reimbursable out-of-pocket costs. We have revised the consolidated revenue and expenses reported for the current period and for the comparable period in 2006, along with the revenues and expenses reported for the MDS Pharma Services segment for these periods. In addition, consolidated revenues reported in the Quarterly Highlights table later in this MD&A have been similarly revised. This change has no impact on operating income, net income, earnings per share, cash flows, or any captioned item on the consolidated statements of financial position.
Throughout this report, when we refer to total revenues we mean revenues including reimbursement revenues. We use the term net revenues to mean revenues excluding such amounts. All revenue growth figures and adjusted EBITDA margin figures are based on net revenues. We use net revenues to measure the growth and profitability of MDS and MDS Pharma Services because the pass-through invoicing of reimbursable out-of-pocket expenses varies from period-to-period, is not a reliable measure of the underlying performance of the business, and does not impact net income or cash flows in any significant way. Management assesses and rewards the performance of MDS Pharma Services and the segment’s senior management team using metrics that are based on net revenues.
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. Through our three business segments, we are a leading global provider of pharmaceutical contract research services (MDS Pharma Services), medical isotopes for molecular imaging and radiotherapeutics (MDS Nordion), and analytical instruments (MDS Analytical Technologies). Each of these business segments sells a variety of products and services to customers in markets around the world.
Consolidated net revenues, which exclude reimbursement revenues associated with reimbursed expenses in the MDS Pharma Services segment, were up 22% on a reported basis to $318 million for the fourth quarter of 2007 compared to $260 million last year. The Molecular Devices (MD) division of MDS Analytical Technologies, which was acquired earlier this year, added $54 million of net revenue in the quarter, pushing net revenue growth for MDS Analytical Technologies to 92% compared to the fourth quarter of 2006. MDS Pharma Services net revenues increased 1% compared to the same period in 2006, as 10% growth in our late-stage businesses continued to be offset by declines in the early-stage businesses. MDS Nordion net revenues were level compared to the same period in 2006 on a reported basis, and up 3% excluding the impact of deferred revenue realized last year associated with our Zevalin(R) contract, which expired in February 2007.
On an organic basis, net revenues were down by 1% while adjusted EBITDA grew by 177%, which reconcile to reported growth as follows:
Operating income for the fourth quarter of 2007 was $25 million compared to $18 million reported for the same period in 2006. Excluding the impact of MD, which had an operating loss of $2 million after deducting $11 million in expenses for integration and amortization, operating income for the fourth quarter of 2007 was $27 million, an increase of 50% over the same period last year. All businesses experienced growth in operating income compared to the prior year.
Adjusted EBITDA for the quarter was $44 million, up 91% compared to $23 million reported for last year. On a year-over-year basis, the significant decline in the value of the US dollar negatively impacted adjusted EBITDA by $15 million due to both the foreign exchange impact on our operating activities and the impact of foreign exchange on certain monetary assets and liabilities. MDS Pharma Services delivered continued improvement in adjusted EBITDA, reporting sequential improvement in adjusted EBITDA for the fifth consecutive quarter. MDS Analytical Technologies also had a strong quarter on an adjusted EBITDA basis, with and without the impact of the MD acquisition.
Adjustments reported for the quarter include $5 million of costs related to the integration of MDS Analytical Technologies, including $2 million related to amortization of fair value increments recorded for deferred revenue from service contracts. Although we report this deferred revenue adjustment as an operating income adjustment in this non-GAAP measure, our GAAP-based income statement reports this amount as a reduction in revenues.
Other adjustments for the quarter include an additional $3 million of investment tax credits realized as we settled prior year claims associated with the MAPLE facility and a $2 million mark-to-market adjustment on interest rate hedges. We also released $4 million of restructuring reserves related primarily to severance costs for employees who left voluntarily prior to their planned termination.
In early August 2007, we invested in $17 million of asset-backed commercial paper that has since been affected by the recent liquidity disruption in that market. We recorded a valuation provision of $2 million as an adjusting item to reflect our estimate of the current value of that asset. The provision reflects management’s best estimate of the likely impairment based on a risk-adjusted estimate of expected future cash flows. Continuing uncertainties regarding the value of the assets, the nature and timing of future cash flows, and the outcome of the restructuring of this financial market may impact the amount that MDS will ultimately realize on this investment.
In October, we were advised that we were entitled to receive $5 million of bankruptcy proceeds resulting from the final liquidation of Protana Inc. (formerly MDS Proteomics Inc.). This recovery is included in other income and it has been treated as an adjusting item.
Selling, general, and administration (SG&A) expenses for the quarter totaled $92 million or 29% of net revenues compared to $59 million and 23% last year. The increase in SG&A of $33 million includes $17 million resulting from the addition of MD during the year. Also, the significant $0.12 drop in the value of the US dollar compared to the Canadian dollar following our July quarter-end resulted in consolidated foreign exchange losses from the translation of certain monetary assets and liabilities of $11 million, compared to a $1 million loss in the prior-year quarter.
We spent $22 million on research and development (R&D) activities in the fourth quarter this year and expensed $8 million, compared to spending of $14 million last year, of which we expensed $7 million. The majority of the increase in R&D spending comes from the spending in our new MD business.
Consolidated depreciation and amortization expense increased $8 million compared to the fourth quarter of last year. In the fourth quarter of 2007, we amortized $6 million of intangible assets acquired as part of the MD transaction. In total, we recorded $161 million of intangible assets related to acquired technology, reagents, and intellectual property that we currently estimate will be amortized over a weighted average useful life of 6 years. Capital expenditures for the quarter were $28 million, compared to $14 million in the fourth quarter of 2006.
Income from continuing operations for the quarter was $17 million, reflecting these strong results from our businesses and was up 21% compared to $14 million reported for continuing operations last year.
The loss from discontinued operations of $2 million for the fourth quarter this year reflects costs associated with the sale of our Canadian diagnostics businesses. Income from discontinued operations of $33 million for 2006 reflects the operating results of our Canadian diagnostics businesses for that period.
Earnings per share from continuing operations were $0.14 for the quarter, compared to $0.10 in 2006. Adjusted earnings per share from continuing operations for the quarter were $0.09 compared to $0.02 earned in the same period last year. Earnings per share from discontinued operations were a loss of $0.01 compared to income of $0.23 last year. Adjusted earnings per share for the two periods were as follows:
MDS Pharma Services net revenues grew 1% as a result of continued revenue growth from our late-stage businesses. Late-stage revenues grew 10% compared to the fourth quarter of 2006; however, this growth was largely offset by weaker early-stage revenues, which were down 6% compared to the same quarter last year. Weakness in revenues from bioanalytical and discovery/preclinical services more than offset otherwise strong growth in drug safety testing. Phase I revenues were level with the fourth quarter last year and are gaining momentum sequentially.
Organic growth in net revenue was nil for the quarter, which reconciles to reported growth as follows:
Early-stage contract awards were strong this quarter compared to last year; however, we experienced some order weakness and a higher than normal level of contract cancellations relating to compound failures and customer mergers affecting our late-stage businesses. Combined with the improved conversion of contract backlog, this weakness contributed to an overall decrease in average monthly pharmaceutical research backlog to $385 million, down 10% compared to the fourth quarter of 2006. We are encouraged by the strength of new bioanalytical orders, which doubled compared to the fourth quarter of 2006, as well as the improved quality of our period-end backlog resulting from our focus on bidding on contracts that enable us to achieve reliable profitability.
MDS Pharma Services broke even at an operating income level for the quarter, compared to a loss of $15 million for the same period last year. Operating income for the current quarter includes $3 million of investment tax credits (ITCs) resulting from the settlement of prior-year claims. MDS Pharma Services also experienced approximately $6 million of unfavourable foreign currency impact in the quarter compared to the prior year. Fourth quarter 2006 operating income reflects $8 million of spending on the US Food and Drug Administration (FDA) review of our Montreal bioanalytical operations. Spending on this matter during the fourth quarter of 2007 amounted to $6 million, and this was charged to the reserve established for this purpose.
Adjusted EBITDA for the fourth quarter was $5 million, up substantially from the $7 million adjusted EBITDA loss reported for the fourth quarter of 2006. Fiscal 20
