MDS struggles as Pharma Services' revenue drops

By Dr Matt Wilkinson

- Last updated on GMT

Related tags: Mds inc., Mds pharma services

Beleaguered life science tools and services company MDS Inc, has recorded disappointing third quarter results, with revenues from its Analytical Technologies and MDS Pharma Services divisions missing forecasts.

While things had been looking up for the Canadian company’s Pharma Services division after the FDA probe into its bioanalytical services operation in Montreal were brought to a close, its Analytical Technologies groups has been suffering from a ‘softening’ of sales of high-end instruments.

However, the company’s financial results for the quarter have not be helped by the Pharma Services group taking longer than expected to convert new business orders into tangible revenue due to a backlog of work.

MDS’ third quarter revenues fell to $321m, some 3.5 per cent down on the $333m recorded by the firm in the same period in 2007.

The decrease in revenue along with increased costs of services, up from $83m during the same period in the prior year to $98m, meant that the company’s operating loss increased to $22m for the quarter, up dramatically from the $4m loss recorded during the same period last year.

In July, the company announced a $28m restructuring plan to improve its bottom line that involved cutting some 210 jobs, primarily from its Pharma Services business, in a bid to reduce costs by over $20m a year.

The company recorded a net loss for the quarter of $10m, compared to a $7m net profit during the same period last year.

MDS’ earnings per share (EPS) from continuing operations for the quarter were a loss of $0.08, compared to earnings of $0.06 during the same period last year. The poor results will no doubt lend weight to the calls form various shareholders to break up the company into its constituent parts as they believe they would be worth more than the conglomerate as a whole.

MDS Pharma Services recorded net revenues of $122m for the quarter, up 3 per cent compared to the $118m posted during the same period last year.

“MDS Pharma Services continues to see strong new business wins which have resulted in a record backlog, however the conversion to revenue and earnings growth is taking longer than expected, which is not where we want to be.”​ said Stephen DeFalco, CEO of MDS Inc.

The early-stage segment helped drive the growth, accounting for 56 per cent of the group’s revenues and masking a decrease in revenues from late-stage services.

The company attributed the growth in its early-stage business to increased Phase I activity at our new Phoenix facility and increased demand in bioanalytical services.”

The decrease in the late-stage business was ascribed to “delays in the start of projects”​ which led to a 19 per cent increase in order backlogs compared to the same period last year.

This led to the division posting an operating loss of $31m, up a staggering 600 per cent compared to the $5m recorded for the same period last year.

MDS’ nuclear medicine division, MDS Nordion, recorded a 5 per cent drop in revenues for the quarter, with the division posting revenues of $72m.

However, despite the drop in revenue operating income increased to $20m, from the $18m recorded during the same period last year.

The division has become embroiled in a lawsuit with Atomic Energy of Canada, Limited (AECL) and the Canadian government, after work on two reactors used to manufacture radioactive material for healthcare applications was halted. The venture, which MDS had invested significantly in, would have secured the long-term availability of medical isotopes.

The lawsuit involves a claim for $1.6bn in damages against AECL for negligence and breach of contract and against the Government of Canada, for inducing breach of contract and for interference with economic relations.

MDS’ Analytical Technologies group recorded a 9 per cent drop in revenues to $104m for the quarter, compared to $114m recorded in Q3 last year.

This led to an operating loss for the group of $9m, down slightly on the $10m posted during the same quarter during the prior before.

While direct sales of mass spectrometers (MS) increased around 5 per cent, the company shipped lower volumes through its joint venture with Applied Biosystems that brings in the majority of MS sales.

This will no doubt add credence to the media speculation that following the sale of Applied Biosystems to Invitrogen, its share of the Applied Biosystems / MDS Sciex joint venture may be offloaded.

According to DeFalco, “the change of control of our partner does give us certain rights under our agreement. We are assessing all possible options with a view to what is best for MDS shareholders.”

He continued by saying that: “MDS is going to continue to focus on serving our customers in mass spec, both in the short and long term. We are working with them day-to-day in making sure we get those product announcements out, those product launches done, and that their customers feel an extra special hug during this period.”

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