Organic revenue growth of 10% in life sciences and adjusted EBITDA
up 69% organically TORONTO, June 8 /PRNewswire-FirstCall/ -- MDS
Inc. (TSX: MDS; NYSE: MDZ), a company providing a range of enabling
products and services to the global life sciences markets, today
reported its second quarter 2006 results. Quarterly Highlights -
10% organic revenue growth in life sciences - 28% growth in
adjusted EBITDA (69% organic) - Montreal bioanalytical issues
reduced EBITDA by $7 million - $0.12 in GAAP EPS, $0.22 in adjusted
EPS, up 22% - Appointed David Spaight as President, MDS Pharma
Services - Declared a quarterly cash dividend of $0.0325 per share
For the quarter, MDS's consolidated revenue was $369 million, up 9%
organically over the same period last year. Adjusted EBITDA was $69
million, up 69% organically, driven by strong results in the
isotopes, instruments and diagnostics businesses. Adjusted earnings
per share increased 22% to $0.22 compared to $0.18 in the same
period last year. Selling, general and administrative costs were
down $9 million over the second quarter of 2005. Financial
Highlights % Change ------------------- ($ millions) Q2 2006 Q2
2005 Reported Organic
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Revenue $369 $362 2% 9%
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Adjusted EBITDA: $ $69 $54 28% 69% % 19% 15% na na
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Adjusted EPS $0.22 $0.18 22% na GAAP EPS $0.12 $0.21 (43%) na
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MDS continued to execute its strategy to focus the Company on its
life sciences businesses. All MDS businesses, with the exception of
the bioanalytical business, delivered organic growth in revenues
and adjusted EBITDA relative to the second quarter of 2005. The
instruments, isotopes and diagnostics businesses all drove overall
performance, with organic adjusted EBITDA growths of 54%, 46% and
38%, respectively. The process of executing on a value maximizing
transaction for the diagnostics business continues and is expected
to result in a transaction in 2006. "This is our third quarter of
organic revenue and adjusted EBITDA growth at MDS despite
challenges with our bioanalytical business in Montreal," said
Stephen P. DeFalco, President and Chief Executive Officer, MDS Inc.
"Completing the FDA review in a high-quality way and concluding the
diagnostics transaction are my top priorities for the remainder of
2006," he added. Operating Segment Results MDS Pharma Services %
Change ------------------- ($ millions) Q2 2006 Q2 2005 Reported
Organic
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Revenue: Early-stage $78 $84 (7%) 1% Late-stage 52 53 (2%) 6%
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$130 $137 (5%) 3%
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Adjusted EBITDA: $ $3 - n/m n/m % 2% - n/m n/m
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MDS Pharma Services revenue for the second quarter increased 3% on
an organic basis over the same period last year. Revenues in the
sector continue to be impacted by the bioanalytical business in
Montreal. Excluding the bioanalytical business, organically,
revenue grew by 7% and EBITDA improved by $9 million. Backlog was
up 31% year-over-year to US$400 million and was up 8% sequentially,
as we continue to win late-stage global contracts. During the
second quarter, MDS focused significant resources on completing the
review of certain past studies in its Montreal bioanalytical
facility and invested $7 million in this effort. Under new
leadership, the speed and focus with which the bioanalytical review
is being conducted has improved significantly. MDS activities are
expected to take place over the remainder of the calendar year,
with continued impact on the cost structure of this business.
During the quarter, capacity expansions in our early-stage business
continued with a 42,000 square foot expansion in drug safety
assessment capacity in Lyon, a 50-bed phase one clinic expansion in
Lincoln, and the re-opening of the 55-bed phase one clinic in New
Orleans. In addition, the Company has initiated a 300-bed expansion
project in Phoenix to capitalize on North American demand for phase
one clinic capacity. The Phoenix expansion is slated for completion
in mid-2007. MDS Nordion % Change ------------------- ($ millions)
Q2 2006 Q2 2005 Reported Organic
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Revenue $83 $75 11% 23%
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Adjusted EBITDA: $ $25 $18 39% 46% % 30% 24% na na
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MDS Nordion revenue for the second quarter grew 23% year-over-year
on an organic basis, driven by the strength of the medical imaging
business. Results for the medical imaging business were positively
impacted as MDS Nordion stepped in to offset supply shortages
related to a competitor's voluntary recall of technetium
generators. EBITDA increased organically by 46% year-over- year in
the second quarter of 2006. During the second quarter, MDS Nordion
announced two molecular imaging agreements, one with Molecular
Insight Pharmaceuticals to manufacture and supply Zemiva(TM), a
molecular imaging pharmaceutical being developed for cardiac
ischemia, or insufficient blood flow to the heart and the other
with Bradmer Pharmaceuticals Inc. for the development and clinical
trial supply of Neuradiab, a monoclonal antibody conjugated to an
isotope used to treat glioblastoma multiforme, the most common and
deadly form of brain cancer. MDS Sciex % Change -------------------
($ millions) Q2 2006 Q2 2005 Reported Organic
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Revenue $66 $65 2% 8%
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Adjusted EBITDA: $ $22 $16 38% 54% % 33% 25% na na
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MDS Sciex revenue for the second quarter grew 8% year-over-year on
an organic basis. Organic EBITDA grew 54% year-over-year, driven by
new products introduced over the last 12 months, particularly the
API 4000(TM), API 5000(TM), 3200 Q TRAP(R), and 4800 MALDI
TOF/TOF(TM). Growth in Asia and increasing penetration in the
applied markets also positively impacted EBITDA. In the second
quarter of fiscal 2006, more than one-third of revenues were
generated from products introduced in the last 24 months. MDS
Diagnostic Services % Change ------------------- ($ millions) Q2
2006 Q2 2005 Reported
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Revenue $90 $85 6%
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Adjusted EBITDA: $ $29 $21 38% % 32% 25% na
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MDS Diagnostic Services revenue increased 6% year-over-year to $90
million. Funding negotiations with the Ontario Ministry of Health
concluded in the second quarter, resulting in a retroactive payment
of $4 million for services provided in the period between April 1,
2005, and January 31, 2006. EBITDA margins grew 750 basis points
(440 basis points excluding the retroactive payment) compared to
the second quarter of 2005. Corporate Last September, MDS announced
its new strategy to focus on its high- growth, global life sciences
businesses. The full transition to a global life sciences company
is expected to be completed by the end of calendar 2006 with the
conclusion of the alternate ownership structure for the Company's
remaining diagnostics business. MDS continues to focus on driving
operational performance improvements across each of its core
businesses. As we move through the second half of fiscal 2006, we
reconfirm the guidance provided last November that the life
sciences businesses are expected to deliver 6%-9% organic revenue
growth; 100 to 200 basis point improvement in selling, general and
administrative expenses; and 150 to 250 basis point improvement in
adjusted organic EBITDA margins. Capital expenditures are expected
to be in the $50 to $65 million range for fiscal 2006. The Board of
Directors declared a quarterly cash dividend of $0.0325 per share,
to shareholders of record as of June 20, 2006. The dividend is
payable on July 4, 2006. 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.
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 http://www.mdsinc.com/ and will also be
available in archived format at
http://www.mdsinc.com/news_events/webcasts_presentations.asp after
the call. About MDS MDS Inc. (TSX:MDS; NYSE:MDZ) has more than
8,800 highly skilled people in 28 countries. It provides a diverse
range of superior products and services to increase customers'
speed, precision and productivity in the drug development and
disease diagnosis processes. MDS is a global, values-driven life
sciences company, recognized for its reliability and collaborative
relationships that help create better outcomes in the treatment of
disease. Find out more at http://www.mdsinc.com/ or by calling
1-800-MDS-7222, 24 hours a day. MDS Forward Looking Statement This
document contains forward-looking statements. Some forward-looking
statements may be identified by words like "expects",
"anticipates", "plans", "intends", "indicates" or similar
expressions. The statements are not a guarantee of future
performance and are inherently subject to risks and uncertainties.
The Company's actual results could differ materially from those
currently anticipated due to a number of factors, including, but
not limited to, successful integration of structural changes,
including restructuring plans, acquisitions, technical or
manufacturing or distribution issues, the competitive environment
for the Company's products, the degree of market penetration of the
Company's products, and other factors set forth in reports and
other documents filed by the Company with Canadian and US
securities regulatory authorities from time to time. MANAGEMENT'S
DISCUSSION AND ANALYSIS June 7, 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 April 30, 2006
and its financial position as at April 30, 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), each of which is published separately and is available at
http://www.mdsinc.com/ and at http://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, 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, expectations,
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); adjusted 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. 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. We report our backlog in US dollars to reflect the
underlying currency of the majority of such contracts and,
therefore, reduce the volatility that would result from converting
the measure to Canadian dollars. 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 non-strategic 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 second quarter 2005 interim report, revenues for 2005 have been
reduced by $78 million and income from continuing operations has
been unaffected. Strategic initiatives On September 1, 2005, we
announced our strategic plan to pursue growth in the global life
sciences market and divest of assets that do not contribute to the
Company's areas of focus. During the second quarter, we completed
the sale of Calgary Laboratory Services for $21 million. Subsequent
to the end of the quarter, we finalized the sale of our
pharmaceutics operations in Tampa for $5 million. We continue to
actively explore alternative ownership structures for our
diagnostics business to maximize value for shareholders and at the
present time we are focused on negotiations with potential
purchasers. As well, we continue to review alternate strategies,
including the possibility of distributing our 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 calendar 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. This has resolved a significant uncertainty for
us and enables us to concentrate on further developing the medical
imaging business. Consolidated operating highlights Second Quarter
Year-to-Date ---------------------------- ------------------- %
Change % Change ---------------- --------- 2006 2005 Reported
Organic 2006 2005 Reported
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$369 $362 2% 9% Net revenues $734 $731 -
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29 38 (24%) Operating income 72 85 (15%) Adjustments: ------------
10 - MAPLE settlement 10 - 7 - Valuation provisions 8 -
Mark-to-market on 2 - interest rate swaps 2 - 1 (1) Restructuring
charges 3 -
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Adjusted operating 49 37 32% income 95 85 12% Depreciation and 20
17 amortization 38 33
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$ 69 $ 54 28% 69% Adjusted EBITDA $133 $118 13%
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Adjusted EBITDA 19% 15% margin 18% 16%
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Consolidated revenue for the second quarter of 2006 was $369
million, up 2% from the $362 million reported in the same period in
2005. On an organic basis, revenues grew by 9%, driven particularly
by 23% organic growth in our isotopes segment. Revenues from our
instruments business grew 8% organically and our pharmaceutical
services business realized 3% growth in revenue on an organic
basis, driven by the continued growth in all businesses except
bioanalytical. Diagnostics revenues grew 2% in the quarter, after
adjusting for the retroactive impact of the new Ontario fee
arrangement announced in April. Adjusted EBITDA of $69 million was
up 28% compared to last year and increased 69% on an organic basis.
Results in our isotopes business remained strong this quarter, and
we have seen a substantial improvement in our instruments business.
We are also delivering continued EBITDA margin improvement in our
diagnostics business, which is reporting an adjusted EBITDA margin
of 32% (29% after taking into account the retroactive fees in
Ontario), up 440 basis points from this time last year, excluding
the impact of the retroactive fees. The impact of the ongoing US
Food and Drug Administration (FDA) review of our Montreal
bioanalytical operations remained significant this quarter. The
direct costs we have incurred on the review, combined with
depressed revenues in this business, resulted in consolidated
adjusted EBITDA being down by $7 million year-over-year. Adjusted
operating income for the second quarter of $49 million was 32%
higher than the $37 million achieved in the second quarter of 2005.
Adjustments reported for the quarter include a $10 million charge
related to the exchange of assets associated with the MAPLE
settlement, a $2 million mark-to-market loss on interest rate
swaps, $1 million of restructuring charges, and an equity loss of
$7 million related to provisions associated with the restructuring
of MDS Capital Corp. and other investments. Including these
adjusting items, operating income for the second quarter was $29
million, down from $38 million for the prior year. Selling,
general, and administration (SG&A) expenses for the quarter
were $71 million, down 11% compared to the second quarter of last
year and down $13 million compared to the fourth quarter of 2005
when we announced a series of initiatives to realign our cost
structure to be more globally competitive. On a year-to-date basis,
our SG&A spending as a percentage of revenues is 170 basis
points lower than the average rate for fiscal 2005. During the
quarter, we spent $14 million on research and development (R&D)
activities and expensed $1 million this year, compared to $25
million and $9 million respectively in the same quarter last year.
Settlement of an audit of investment tax credits from a prior year
resulted in a $3 million reduction in the amount of net R&D
expense reported for the period. Consolidated depreciation and
amortization expense increased $3 million compared to last year.
The increase includes amounts related to our new common business
system, on which we began to record depreciation in the third
quarter last year. Capital expenditures for the quarter were $15
million, excluding adjustments associated with the settlement of
the MAPLE claims. Reported earnings per share from continuing
operations were $0.13 for the quarter, compared to $0.19 in 2005.
Adjusted earnings per share from continuing operations for the
quarter increased 22% and were $0.22 compared to $0.18 earned in
the same period last year. Adjusted earnings per share for the two
periods were as follows: 2006 2005 2006 2005
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Basic and diluted EPS from continuing operations - as reported $
0.13 $ 0.19 $ 0.32 $ 0.40 Adjustments: ------------ MAPLE
settlement 0.04 - 0.04 - Mark-to-market on interest rate swaps 0.01
- 0.01 - Restructuring charges - (0.01) 0.01 - Valuation provisions
0.04 - 0.05 - Quebec tax rate change - - 0.02 -
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Adjusted EPS $ 0.22 $ 0.18 $ 0.45 $ 0.40
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MDS Pharma Services Financial Highlights Second Quarter
Year-to-Date ---------------------------- ------------------- %
Change % Change ---------------- --------- 2006 2005 Reported
Organic 2006 2005 Reported
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Net revenues: ------------- $ 78 $ 84 (7%) 1% Early-stage $156 $172
(9%) 52 53 (2%) 6% Late-stage 103 103 -
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$130 $137 (5%) 3% $259 $275 (6%)
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Operating income (6) (6) - (loss) (10) (5) (100%) Adjustment:
----------- 1 (1) Restructuring charges - (1)
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Adjusted operating (5) (7) income (10) (6) Depreciation and 8 7
amortization 16 14
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$ 3 $ - n/m n/m Adjusted EBITDA $ 6 $ 8 (25%)
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Adjusted EBITDA 2% - margin 2% 3%
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Our pharmaceutical services business grew 3% on an organic basis,
and 5% including acquisitions. We continue to experience healthy
organic growth in all businesses except our bioanalytical business,
on which the impact of the ongoing FDA review remains significant.
As was the case in the first quarter, bioanalytical services is the
only revenue line that was not up organically year-over-year.
Excluding the bioanalytical business, organic revenue growth was 7%
in the quarter. Our early-stage businesses have benefited from
strong organic growth in pharmacology and early clinical research.
Drug safety assessment growth has moderated somewhat from the very
strong growth experienced in the last several quarters. We opened
the expansion of our Lyon facility in May and expect this will
faciliate further growth in this business over the coming months.
Late-stage revenues grew 6% organically, balanced between our
global clinical development and global central laboratory
businesses. These late- stage businesses have also continued to be
successful in winning new business and account for the growth in
our backlog this quarter. Our average monthly pharmaceutical
research backlog increased to US$400 million for the second quarter
of 2006, an increase of 31% when compared to the average for the
second quarter of fiscal 2005. Average monthly backlog (millions of
US dollars)
---------------------------------------------------------------
Fiscal 2004 - Quarter 1 $ 240 Quarter 2 265 Quarter 3 285 Quarter 4
300 Fiscal 2005 - Quarter 1 315 Quarter 2 305 Quarter 3 315 Quarter
4 340 Fiscal 2006 - Quarter 1 370 Quarter 2 400
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--------------------------------------------------------------- Our
review of our Montreal bioanalytical operations continued during
the quarter. During March, the FDA conducted an audit of the
facility, directing particular attention to the studies and
processes covered by the review and the conduct of the review
itself. At the conclusion of the FDA visit, we received
observations related to this audit. The observations identified a
number of issues pertaining to the effectiveness and management of
the review. We have continued to work diligently to address the
issues raised by the audit and to meet all FDA expectations. We are
committed to resolving all outstanding issues in a timely manner.
In order to enhance this effort, we have dedicated an experienced
project manager from outside the MDS Pharma Services division to
take over management of the review project. To enable us to
accelerate the activities related to the review in Montreal, we
have temporarily suspended all commercial bioanalytical liquid
chromatography/mass spectrometry operations in this facility and
work has been moved to our facility in Lincoln. To date, the impact
of the review on our other pharmaceutical services operations has
been limited. Nevertheless, the status of studies affected by the
FDA review has begun to generate a reaction among our clients.
Recently, a limited number of clients advised us that they received
letters from the FDA indicating that submissions containing data
from our Montreal and Blainville facilities would not be processed
for approval until FDA concerns are resolved. At this time, we are
unable to judge what impact, if any, this will have on our business
development activities. We are also not able to estimate the cost
we may incur, if any, related to this development. The decline in
bioanalytical revenues has moderated on an organic basis, primarily
because the impact of the review began to be felt in the Montreal
facility in the second quarter last year. Despite this, the
financial and operational impact of the review was significant in
the quarter. The EBITDA contribution of this business for the
quarter was $4 million less than for the same period last year, and
included $5 million of direct spending associated with the FDA
review. We incurred a further $2 million of special consulting
costs to oversee the response to the review and to advise our
Board. This $2 million cost is reflected in the Corporate segment.
Reported EBITDA was impacted by currency changes and the decreased
profits in our bioanalytical business. Excluding the impact of
currency and the drop in bioanalytical profits, adjusted EBITDA for
the segment rose $9 million, including $4 million of tax credits
realized as a result of the completion of on-going tax audits.
Adjusted EBITDA was up $4 million organically, and all business
units except Montreal bioanalytical contributed to growth in
adjusted EBITDA this quarter, with particularly good contribution
from our pharmacology and late-stage operations. Capital
expenditures in the pharmaceutical services segment were $9 million
compared to $4 million last year. Capital expenditures were related
principally to our ongoing expansion of our drug safety assessment
facility in Lyon, as well as an expansion of our operations in
Bothell. We are expanding our early clinical capacity to take
advantage of continued strong market demand in this service line.
We have increased our facility expansion plans and added a further
300 beds to our plans for our Phoenix clinic. In May, we reopened
the New Orleans site, restoring 55 beds to our network. We remain
committed to increasing our early clinical research capacity. When
our expansion in Phoenix is completed next year, we will have over
1,100 early clinical beds in North America. We believe this will
position us well as others in the industry are reducing capacity in
this market. The pharmaceutical industry continues to improve its
processes to address drug safety issues. Most recently, a study
being conducted by another industry participant in Europe involving
a monoclonal antibody resulted in severe adverse reactions in study
participants. European regulators have reacted quickly, increasing
the scrutiny of protocols and lengthening the approval time before
new studies can proceed. This action may have a short-term negative
impact on revenues. We have thoroughly reviewed our trial
procedures in light of this development. MDS Nordion Financial
Highlights Second Quarter Year-to-Date ----------------------------
------------------- % Change % Change ---------------- ---------
2006 2005 Reported Organic 2006 2005 Reported
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$ 83 $ 75 11% 23% Net revenues $165 $150 10%
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$ 11 $ 15 (27%) Operating income $ 35 $ 36 (3%) Adjustment:
----------- 10 - MAPLE settlement 10 -
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Adjusted operating 21 15 40% income 45 36 25% Depreciation and 4 3
amortization 8 7
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$ 25 $ 18 39% 46% Adjusted EBITDA $ 53 $ 43 23%
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Adjusted EBITDA 30% 24% margin 32% 29%
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Our isotopes business grew 23% year-over-year on an organic basis
in the second quarter, with continued strong performance from
medical isotopes. Other revenues were also up in the second quarter
this year, due to higher sales of production and self-contained
irradiator compared to the second quarter of 2005. During the
quarter, we continued to focus on meeting the demands of the
cardiac imaging market and worked, to the extent possible, to see
that no patient needing a cardiac scan was forced to cancel a
procedure due to a lack of the isotopes we produce. We stepped up
production early this year, when a major competitor announced a
voluntary recall of technetium generators, used primarily for
cardiac imaging, while they addressed sterility issues at their
primary manufacturing facility. We estimate that approximately $8
million of high-margin revenues were realized in the quarter from
this added production. Industry production capacity returned to
normal early in April, and accordingly, we do not expect to be able
to fully retain the increase in market share that we have enjoyed
over the first half of this year. The strength in medical isotopes
this quarter was partially offset by the impact from the continuing
drop in the value of US dollar. In addition, although the value of
the Euro appears to have stabilized, it remains well below its
value at this time last year. Organic growth in adjusted EBITDA was
46%, led by the strength in medical isotopes. The impact of
currency fluctuations continues to be a concern for this business,
as a significant portion of revenues is priced in US dollars and
Euros. Early in the second quarter, we were pleased to report the
completion of mediation with AECL related to the MAPLE reactor
project. The agreement reached with AECL provides the basis for a
productive on-going relationship between us and enables AECL to
move forward on the construction project. We have been relieved of
any obligation for capital costs related to the completion of
construction and commissioning of the reactors and the dedicated
production facility, and at the same time, we have achieved a level
of certainty regarding the cost of acquiring isotopes for sale in
the future that was not possible under the earlier agreement. Under
this agreement, MDS exchanged its interest in the project, along
with certain associated inventories, for $25 million in cash, a
non-interest bearing note due over four years beginning in 2008,
and a 40-year supply agreement containing terms that are similar to
those contained in the current supply agreement with AECL. Since
AECL has now assumed full ownership of the facility, they will be
responsible for capital costs associated with completing
construction and commissioning the reactors and for future
operating costs. MDS has retained a commitment to assist AECL to
defray the costs of any material and unusual regulatory changes,
should such a change occur during the life of the current or future
supply agreement. This commitment extends to cover any changes
required by international agreements or treaties related to the use
of highly enriched uranium for the reactors. Under the terms of the
agreement, AECL assumed all capital costs associated with
construction from November 1, 2005 onwards. As at October 31, 2005,
the carrying value for our interest in the project totaled $393
million. This carrying value included construction costs, as well
as interest costs that were capitalized during the construction
phase. During the first quarter of 2006, capital costs amounting to
$14 million were incurred on the project and we recorded these as a
capital expenditure as required under Canadian GAAP. As part of the
settlement, AECL assumed these costs and we reached a settlement
for certain earlier costs that we had capitalized prior to November
1, 2005. Also during the quarter, we updated certain tax credits
claims related to some of the costs incurred on the project. Taking
into account these adjustments, the carrying value of our interest
in the project was $370 million at the time of the settlement.
Under the settlement, we exchanged our interest in the reactor
project, along with related parts and supply inventories having a
carrying value of $53 million, for $25 million in cash, the
promissory note having a discounted present value of $44 million,
and the 40-year supply agreement. With the assistance of an
independent valuator we have determined that the fair value of the
supply agreement is $344 million, and accordingly, we recorded a
loss of $10 million resulting from this settlement in the second
quarter. There were no capital expenditures in the isotopes segment
in the second quarter, compared to $8 million last year, which
included spending on the MAPLE project. The cash flow impact
associated with the MAPLE settlement and project have been grouped
on a separate line in the cash flow statement this year due to the
unusual nature of these activities. The MAPLE agreement removes
significant uncertainties for us related to the capital cost of the
project and the cost to obtain reactor isotopes in the future. The
commissioning risk remains though, as many of the technical issues
have yet to be resolved. Nevertheless, there have been recent
positive developments, as AECL has received permission to begin the
process of powering up the first reactor to 2 MW for testing
purposes. In addition, the Canadian Nuclear Safety Commission is
considering extending the operating licence for the existing NRU
reactor to 2011, which would allow this reactor to continue to
supply us with isotopes while the commissioning of MAPLE proceeds.
We are pleased with the longer-term outlook for the isotopes
business. Demand for our primary medical isotopes remain strong and
our ability to maintain supply levels for the market in the face of
a significant production shortfall from a competitor demonstrates
our commitment to security of supply for our customers. We are also
encouraged by the granting of the CE Mark for our Equinox(TM)
cancer treatment equipment and for our Avanza patient positioning
treatment table. In February, we signed a six-year renewable
contract with Molecular Insight Pharmaceuticals, Inc. (MIP) to
manufacture and supply Zemiva(TM), a molecular imaging
pharmaceutical being developed for cardiac ischemia, or
insufficient blood flow to the heart. Zemiva(TM), currently in
clinical trials, is targeted for the emergency department setting.
This contract will enable us to build upon our strong development
partnership with MIP through the use of our significant development
and manufacturing capabilities to meet the commercial market needs
of Zemiva(TM). As a result of the contract, we will expand our Good
Manufacturing Practice (GMP) manufacturing capabilities at our
Vancouver facility to support the clinical program and commercial
supply of Zemiva(TM). More recently, we signed a three-year
contract with Bradmer Pharmaceuticals Inc. (Bradmer) for the
development and clinical trial supply of Neuradiab, a monoclonal
antibody conjugated to an isotope and used to treat glioblastoma
multiforme (GBM), the most common and deadly form of brain cancer.
In six clinical trials reported by Bradmer involving over 160
glioblastoma multiforme cancer patients, Neuradiab has demonstrated
a significant survival benefit over historical controls. This new
agreement with Bradmer further demonstrates our capabilities in the
growing field of radiotherapeutics. Business arrangements such as
those with Bradmer and MIP are consistent with our strategic
direction in this business as we focus on broadening our product
offerings in medical imaging and radiotherapeutics. Expertise in
radioisotope production and utilization is a key competency for
MDS, and we plan to leverage this knowledge in new product areas.
This expansion into new areas within the overall
radiopharmaceutical value chain will serve to offset softness in
the cyclotron isotopes market that has developed as
radiopharmaceutical manufactures have brought new capacity on
stream for in-house supply, reducing demand for outsourced product.
MDS Sciex Financial Highlights Second Quarter Year-to-Date
---------------------------- ------------------- % Change % Change
---------------- --------- 2006 2005 Reported Organic 2006 2005
Reported
-------------------------------------------------------------------------
$ 66 $ 65 2% 8% Net revenues $137 $139 (1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 16 $ 12 33% Operating income $ 31 $ 30 3% Depreciation and 6 4
amortization 10 7
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$ 22 $ 16 38% 54% Adjusted EBITDA $ 41 $ 37 11%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA 33% 25% margin 30% 27%
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-------------------------------------------------------------------------
In the second quarter, our instruments business grew 8% on an
organic basis, driven by the performance of our high-end triple
quad LCMS, ion trap, and TOF/TOF products. We were able to target
our manufacturing capacity on the high-demand products in the
quarter, and as a result, we kept up with the continued strong
market demand in this area. While demand in all markets is up,
there has been a noticeable increase in interest from, and sales
to, China and India, offsetting slower market growth in North
America and Europe. We noted in past reports that applied markets,
which include forensics, food testing and similar applications,
were fueling demand for mid-range products, and this trend became
more pronounced this quarter. We continue to view these markets as
attractive channels for our technologies. Reported EBITDA grew 33%
compared to fiscal 2005, and on an organic basis, adjusted EBITDA
growth was 54%. During the quarter, we finalized R&D tax credit
claims from prior years, resulting in the recording of $3 million
of investment tax credits not previously recognized. These credits
were recorded as a reduction in net R&D expenses for the
quarter. In addition, we have recorded a $1 million foreign
exchange gain on US-dollar denominated debt incurred in connection
with our acquisition of the MALDI-TOF business in 2004. Excluding
these items, adjusted EBITDA growth was 13% and the adjusted EBITDA
margin was 27%, an improvement of 200 basis points from last year.
Capital expenditures in the instruments segment (excluding
capitalized development costs) were $2 million, this year and last.
For the year-to-date, 40% of our revenues were generated from the
sale of products that we introduced in the last two years. This is
a strong indication of the importance of innovation and product
differentiation in this market, which we were able to achieve
because R&D remains a key strategic focus in our instruments
business. We are encouraged by the continued strength from our
high-end instruments and particularly by the growing interest in
this level of technology from China and India, both of which have a
rapidly growing presence in pharmaceutical development. We are also
seeing signs of improved growth in the proteomics market on which
our new products are well positioned to capitalize. We have
gradually ramped up activity in our new Singapore facility as we
prepare it to take on a greater role in our manufacturing value
stream. We recently completed ISO 9000 certification of the
Singapore plant. Cell-based assays, in particular label-free
formats catered to by our CellKey(TM) product line, are gaining
more attention in the market, although, as with any new technology,
adoption has been gradual. We are continuing to devote sales effort
to promote CellKey(TM) and we see interest in this new product
growing. MDS Diagnostics Financial Highlights Second Quarter
Year-to-Date ---------------------------- ------------------- %
Change % Change ---------------- --------- 2006 2005 Reported
Organic 2006 2005 Reported
-------------------------------------------------------------------------
$ 90 $ 85 6% 6% Net revenues $173 $167 4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 27 $ 19 42% 42% Operating income $ 44 $ 33 33% Adjustment:
----------- - - Restructuring charges 1 -
-------------------------------------------------------------------------
Adjusted operating 27 19 income 45 33 Depreciation and 2 2
amortization 4 4
-------------------------------------------------------------------------
$ 29 $ 21 38% 38% Adjusted EBITDA $ 49 $ 37 32%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA 32% 25% margin 28% 22%
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-------------------------------------------------------------------------
A new Ontario fee agreement was reached in April between the
Ontario Association of Medical Laboratories (OAML) and the Ontario
Ministry of Health (MOH), resolving uncertainty for our diagnostics
business that has existed since March 2005, when the previous
agreement expired. Under the terms of the new agreement, base fees
will be increased 2% in each year of the three-year term, beginning
April 1, 2005. The agreement also provides for adjustment funding
should certain industry volume thresholds be reached as a result of
accommodating the needs of long-term care patients and new
physicians, among other criteria. Under this arrangement, funding
adjustments could be made to a maximum of 0.8%, 2.9% and 4.9% over
the March 31, 2005 provincial funding cap, for the years ending
March 31, 2006, March 31, 2007, and March 31, 2008, respectively.
If earned, these funding adjustments would be paid annually to OAML
members according to their respective proportional shares of the
provincial funding cap. Completion of the new three-year fee
agreement in Ontario is a substantial step forward for our
diagnostics business. The agreement provides certainty about
minimum fees for the industry until March 2008, and provides for
increased fees to cover a portion of the incremental volumes that
clinical laboratories are experiencing as patient volumes grow. We
have been operating under the terms of the previous fee agreement
since April 1, 2005 and we have been performing the lab testing and
incurring the related costs associated with that work since that
time. As we do not recognize any fee increase until such time as a
fee agreement is signed, our results for the second quarter include
$3 million of base-level fee adjustments related to the period
prior to February 1, 2006. As the industry volumes for the year
ended March 31, 2006 exceeded the thresholds at which the
adjustment funding is payable, we also recorded $1 million of
adjustment fees in the quarter related to previous periods.
Excluding the retroactive fees included in income in the quarter,
adjusted EBITDA for diagnostics increased to $25 million compared
to $21 million reported last year, and our adjusted EBITDA margin
improved to 29% from 25% last year. We have maintained the margin
expansion begun last fall that is a direct result of the cost
realignment initiatives launched in September last year and the
LeanSigma projects that we currently have underway. Capital
expenditures in the diagnostics segment were $1 million in the
quarter this year. Corporate Financial Highlights Second Quarter
Year-to-Date ---------------- ---------------- 2006 2005 2006 2005
-------------------------------------------------------------------------
$ (19) $ (1) Operating costs before depreciation $ (28) $ (8)
Adjustments: ------------ 7 - Valuation provisions 7 - 2 -
Mark-to-market adjustment 3 - - - Restructuring charges 2 1
-------------------------------------------------------------------------
$ (10) $ (1) Adjusted operating costs $ (16) $ (7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In September 2005, we announced our intention to monetize our
investment in MDS Capital Corp. and other investments. During the
quarter, we recorded $7 million as our share of provisions and
other losses incurred as these investments are positioned for sale.
We continue to review disposal options for these holdings. From
time-to-time we enter into derivative contracts to hedge our
exposure to foreign currency exchange rates and interest rates.
During the fourth quarter of 2005, certain interest rate swaps
became ineffective for hedge accounting purposes and, as a
consequence, are now subject to mark-to- market accounting. In the
second quarter, we recorded a non-cash loss of $2 million on these
swaps. Corporate expenditures in the second quarter of 2005 were
abnormally low due to a high level of gains on foreign exchange in
the quarter and equity earnings from MDS Capital Corp., neither of
which was repeated this year. As noted previously, corporate
spending in the current quarter included $2 million of special
consulting costs associated with the FDA review. Interest expense
was $5 million for the quarter this year and $4 million for the
prior year. The increase from 2005 reflects the impact of gradually
increasing short-term interest rates and the imputed interest cost
on a government loan associated with the MAPLE project, on which we
are no longer able to capitalize the interest cost. Dividend and
interest income was $2 million compared to $3 million last year.
Income taxes As the retroactive lab fee increase in Ontario is
largely sheltered from tax, the effective tax rate for the second
quarter of 2006 was 19% compared to 22% for the same quarter of
last year. Discontinued operations The results of our discontinued
businesses were as follows: Second Quarter Year-to-Date
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Net revenues $ 18 $ 90 $ 57 $ 176 Cost of revenues (16) (75) (49)
(147) Selling, general and administration (4) (11) (8) (20)
Depreciation and amortization - - (1) (2)
-------------------------------------------------------------------------
Operating income (loss) (2) 4 (1) 7 Gain on sale of Source - - 28 -
Income taxes - - - (2) Minority interest - (1) (1) (2)
-------------------------------------------------------------------------
Income (loss) from discontinued operations $ (2) $ 3 $ 26 $ 3
-------------------------------------------------------------------------
Basic earnings (loss) per share $ (0.01) $ 0.02 $ 0.18 $ 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity and capital resources April 30 October 31 2006 2005
Change
-------------------------------------------------------------------------
Cash and cash equivalents $ 359 $ 265 35% Operating working
capital(1) $ 130 $ 84 55% Current ratio 2.1 1.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Our measure of operating working capital equals accounts
receivable plus unbilled revenue and inventory less accounts
payable, accrued liabilities, and current deferred revenue. Cash
and cash equivalents has risen $94 million since year-end and $77
million since January 31, 2006. Aside from operating cash flows,
the main components of the increase since January are the cash
received on the MAPLE settlement and from the sale of CLS. Accounts
receivable and inventories are both down from year-end. The
considerable reduction in inventories reflects the sale of $53
million of MAPLE inventories to AECL on closing of the agreement.
Accounts receivable and unbilled revenue fluctuations reflect
ordinary cycles in the businesses. Accounts payable are down
substantially, reflecting payment of normal year-end accruals,
restructuring costs, and the assumption by AECL of liabilities
associated with the MAPLE project. Excluding the cash provided by
the MAPLE settlement, cash used in investing activities (excluding
discontinued operations) was $16 million, reflecting capital asset
additions. Cash was provided by financing activities (excluding
discontinued operations) during the quarter of $5 million, due to
cash proceeds from shares issued under our various stock purchase
plans. In the second quarter of last year we repurchased 276,100
common shares for $5 million under our Normal Course Issuer Bid
(NCIB). We made no purchases under our NCIB during the current
quarter. Our liquidity needs can be satisfied from cash generated
from operations and short-term borrowings against our available
lines of credit. During 2005, we negotiated a $500 million,
five-year committed, revolving credit facility, which replaced our
previous $225 million credit facility. No funds were borrowed under
the facility as of April 30, 2006. We believe that cash flow
generated from operations, coupled with available borrowings from
existing financing sources, will be sufficient to meet our
anticipated capital expenditures, research and development
expenditures and other cash requirements in 2006. At this time, we
do not reasonably expect any presently known trend or uncertainty
to affect our ability to access our current sources of cash. We
remain in compliance with all covenants for our senior unsecured
notes and our bank credit facility. Contractual obligations
Subsequent to the end of the quarter, we renegotiated a substantial
commitment related to outsourced information technology support. As
a result, long-term obligations under these contracts of $211
million outstanding at the end of fiscal 2005 have been eliminated.
We are currently in negotiation with alternative providers for
these services and expect to enter into replacement agreements
during the third quarter. There have been no other material changes
in contractual obligations since October 31, 2005, with the
exception of those contained in the MAPLE settlement agreement,
described elsewhere in this document. There has been no substantive
change in any of our long-term debt or other long-term obligations
since October 31, 2005. We have not entered into any new guarantees
of the debt of other parties, nor do we have any off- balance sheet
arrangements. DATASOURCE: MDS Inc. CONTACT: Investor & Media
Inquiries, Sharon Mathers, Vice-President, Investor Relations and
External Communications, (416) 675-6777 ext. 4721,
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