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Molecular Devices Boosts MDS' Q2 Revenue While Restructuring Charges Hit Bottom Line

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Sales from recently acquired Molecular Devices helped MDS Analytical Technologies post a 54 percent gain in second-quarter revenue year over year.
 
While MDS officials said they were pleased with Molecular Devices’ performance in the quarter, they reiterated their earlier revenue guidance of $190 million for the acquired business during MDS’ first full year of ownership.
 
Meanwhile, an ongoing FDA review of the MDS Pharma Services unit led to $61 million in charges in the quarter. The firm also undertook a restructuring plan that includes layoffs and a decision not to re-open an LC/MS bioanalytical services operation in Quebec.
 
MDS Analytical Technologies, which was established in late March and combined the operations of MDS Sciex and Molecular Devices, generated second-quarter revenue of $88 million, a 54 percent increase over last year.
 
The quarter includes six weeks of revenue from Molecular Devices following MDS’ acquisition of the firm for $615 million (see BioCommerce Week 1/31/2007). Molecular Devices contributed $29 million in revenue for the quarter, a 22 percent increase over revenues as a stand-alone company during its second quarter last year. Excluding its operations, revenue for MDS Analytical Technologies was up 5 percent.
 
The acquisition provided MDS with Molecular Devices’ well-established line of products for the high-end cell analysis market and a sizeable sales force that MDS hopes will boost sales of its CellKey secondary screening tool.
 
The integration of Molecular Devices is “going very well and we feel very confident in achieving our goal of $190 million in revenue and $45 to $50 million in EBITDA in the first year of ownership,” Stephen DeFalco, MDS president and CEO, said during a conference call last week. He said the firm is seeing strong order rates and high single-digit growth from the Molecular Devices business.
 
“In the big picture, we’re quite happy with the order uptake of the Molecular Devices products, particularly some of the new products,” said DeFalco.
 
Molecular Devices has already launched five new products this year. Prior to the acquisition, Molecular Devices introduced the Arcturus XT Laser Capture Microdissection instrument and the Turbo Labeling Kit.
 
After the acquisition was completed, the firm launched the Neurotransmitter Transporter Uptake Assay Kit for screening live cell kinetic uptake of dopamine, norepinephrine, and serotonin; a Potassium Assay Kit; and a new aequorin option for its FLIPR Tetra fluorometric imaging plate reader.
 
However, DeFalco cautioned, “I would not take that 41 days of revenue and calendarize it. In general, in this industry there’s a ramp-up in the last month of the quarter because you’re buying capital equipment and budgets kind of open up at the end of the 90-day period. It was a particularly strong 41-day period, and I would go back to the guidance we gave of $190 million,” he said.
 
Mass spectrometry end-user revenue grew 12 percent, company officials also noted during the call. Revenue growth was “fueled by strong demand in most of our markets and particular strength with the 4000 series triple quad products and the Elan DRC products,” said DeFalco.
 
The 4000 Series mass spectrometers are sold through a joint venture of MDS Sciex and Applied Biosystems. During the second quarter, the joint venture also launched a new mass spec platform, called FlashQuant, which combines a triple quadrupole instrument with MALDI (see BioCommerce Week 4/18/2007). The new platform is aimed primarily at pharmaceutical labs conducting early-stage drug discovery research.
 
The Elan DRC ICP-MS products are sold through MDS Sciex’s joint venture with PerkinElmer and are targeted at semiconductor, geological, and environmental applications.
 
FDA Probe Takes a Toll
 
Overall, MDS posted second-quarter revenue of $272 million, up 13 percent year over year from $242 million, but up only 1 percent organically. Services represented 50 percent of revenue, consumables and reagents 25 percent, and instruments 25 percent.
 
The MDS Nordion unit, which makes radioisotopes and other nuclear medicine products, reported revenue of $70 million for the second quarter, down 3 percent year over year.
 
Revenue for the MDS Pharma Services unit increased 2 percent to $115 million from $113 million year over year. “We do see some continued softness in some areas of the business, particularly bioanalytic, with some spillover effect into clinical research as a result of the FDA situation in Quebec,” said DeFalco.
 
The unit has been the target of a US Food and Drug Administration review over the past few years regarding bioequivalence studies conducted at a couple of its Canadian facilities from 2000 to 2004.
 
Early this year, the FDA sent letters to sponsors of 217 approved and pending generic drug applications that contained data from studies conducted at the Montreal-area facilities that are the focus of the agency’s review. According to MDS, the FDA instructed the sponsors to repeat their bioanalytical studies, re-analyze their study samples at a different bioanalytical facility, or independently audit their original study results.
 

“We are upgrading our business development teams and working hard to help customers understand that the FDA concerns were explicitly limited to the bioanalytical business at only two sites in Quebec.”

MDS said that a vast majority of these sponsors have begun or expect to soon begin third party audits. The firm said that sponsors of only 6 percent of the 217 abbreviated new drug applications will repeat the studies without auditing the initial results.
 
In a lengthy statement accompanying the firm’s financial results, MDS said that it believes it is nearing a final resolution of the outstanding FDA issues.
 
“We are upgrading our business development teams and working hard to help customers understand that the FDA concerns were explicitly limited to the bioanalytical business at only two sites in Quebec,” DeFalco said during the conference call.
 
Overall, the MDS Pharma Services unit reported a $97 million loss for the quarter, reflecting charges of $61 million related to reimbursing customers for costs they will incur as a result of the FDA’s requirements. Those charges do not include any lawsuit settlement-related costs, and DeFalco said the firm “still doesn’t anticipate any issues on that front.”
 
MDS also took a $26 million restructuring charge during the quarter, which includes $17 million in severance costs and equipment write-offs of $3 million, among other charges. The firm anticipates another $6 million charges in the future related to further severance costs and withdrawal from certain leased facilities.
 
As part of the restructuring plan, MDS said that it would not re-open its LC/MS bioanalytical operations in the Montreal area and will reduce the size of its operations and its facility in St. Laurent, Quebec. DeFalco said that he expects the restructuring will result in savings of $30 million in 2008.
 
MDS has not given guidance for 2008 for the pharma services business, but DeFalco said, “We’re quite happy here with the sequential improvement in the business. This business on a quarterly perspective is up $14 million versus its run rate three quarters ago.”
 
Despite MDS Pharma Services’ problems, the parent company posted second-quarter net income of $736 million, or $5.35 per share, due to a $793 million gain from the February sale of its diagnostics services business to Borealis Infrastructure Management, booked as discontinued operations.
 
Excluding the discontinued operations, MDS had a loss from continuing operations of $57 million, or $.41 per share, compared with last year’s Q2 loss from continuing operations of $2 million, or $.01 per share.

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