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MDS to Dilute Ownership of MDS Proteomics: MDSP Says This Move is Part of Long-Term Plan

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MDS Proteomics will soon have to find some new benefactors. MDS Inc., the parent company of instrument-maker MDS Sciex as well as MDS Proteomics, and owner of 87 percent of the struggling proteomics company, announced on Sept. 4 in its third-quarter earnings report that it “does not intend to make any further investments in MDS Proteomics.” This leaves the future of MDSP — which had no revenues and CA$8 million ($5.8 million) in net losses in Q3 2003 — open to speculation.

The day of the earnings report release, Sharon Mathers, vice president of investor relations and corporate communications at MDS Inc., told ProteoMonitor’s sister publication GenomeWeb News that MDS Inc. hopes to deal with the MDS Proteomics issue “as quickly as we can,” and that “proteomics probably represents a different risk profile than we would normally like to be invested in.” (seeGenomeWeb 9-4-03) When asked if MDS Inc. would divest from MDSP, Mathers replied, “we may.” CEO John Rogers later denied that this last comment was true in a letter to the editor of GenomeWeb News. However, in response to repeated requests for clarification, Rogers declined to speak with ProteoMonitor. Mathers said, “John doesn’t feel that he is in a position to provide more detail around MDS Proteomics and MDS’ intentions with it than what was provided in my quotes in the interview [with GenomeWeb News] of last week.”

Although MDS Inc. is keeping mum, MDS Proteomics chief financial officer Anil Amlani was eager to explain the situation as he saw it. MDS Inc.’s position “has been consistent for a year and a half. The fact that MDS Inc. isn’t going to invest has never changed. That wasn’t the first time they said it. We don’t expect any money from MDS Inc. and it is not our plan to get any money from MDS Inc.” A perusal of earnings reports from MDS’ previous three quarters reveals no public announcement of MDS’ intentions to dilute ownership.

MDS Inc. — which has invested a total of CA$130 million [$94.8 million] in MDSP — has not invested in the division since “early 2002,” according to Amlani. Said Amlani, “When MDS Inc. incubates companies like ours, it expects [us] to get other sources of financing, which over time will dilute MDS Inc. We embarked on that strategy last year.” Amlani said that the five-year, $30 million deal that MDSP signed in January with West Chester, Pa.-based Cephalon, in which Cephalon took an equity stake in MDSP, was the first part of “the new plan” to “dilute” MDS Inc.’s ownership of the company. No mention was made of this plan in the original press release announcing the partnership.

In addition to its partnership with Cephalon, MDSP also has collaborations with IBM, which has invested $10 million in MDSP, and Abgenix, which has invested $15 million, as well as Agilent and Thermo Finnigan. MDSP also maintains a close relationship with MDS Sciex — for which MDSP tests out products before commercial release; with MDS Pharma — which “will probably do clinical trials for our products”; and with MDS Diagnostics. None of these in-house or outside collaborations will change, according to Amlani.

The Cephalon-MDSP deal, which Cephalon’s vice president for corporate communications, Robert Grupp, in January labeled the “largest investment in a technology partnership the company has ever undertaken,” consists of an agreement that MDSP will use its proteomics technologies to study the effects of Cephalon’s pre-clinical compounds on cellular activity (see PM 1-13-03). In return for these studies, Cephalon purchased from MDSP a $30 million, 5 percent convertible note due in 2010.

“The note is convertible into MDS Proteomics’ common stock at an initial conversion price of $22 per share, subject to adjustment if MDS Proteomics sells common stock at a lower price,” Grupp told ProteoMonitor this week in an e-mail. In addition, he said, “Our agreement was for MDS Proteomics to receive payments upon the successful achievement of specified milestones and to receive royalties on sales of products, which is still the case,” Grupp said. “Nothing has changed in the nature or terms of our collaboration with MDS Proteomics. In terms of the broader situation between MDS Inc. and MDS Proteomics, we would not want to comment. Our focus is on our specific collaboration with MDS Proteomics and its ability to deliver, and nothing has changed in that respect from our perspective.”

MDSP is counting on more deals like Cephalon’s to replace the void left by MDS Inc. Amlani estimated that MDS Inc.’s ownership of the company would decrease to 40 to 50 percent by 2005, at which point Amlani predicted that the IPO market would “open up” and MDSP would do an IPO. MDS Inc. will eventually dilute to 20 to 40 percent ownership of MDSP, but will never dilute out entirely, Amlani said.

Amlani divulged a three-part plan for surviving the MDS Inc. void. The first will be to perform pilot projects for big pharma, like the one MDSP is doing for Eli Lilly using its PhosMap technology to determine the effects of kinase inhibitors on Lilly’s kinase targets. “We are hoping that we will be able to convert some of these [projects] into pharma collaborations that will bring in equity up front,” Amlani said. The second part of the plan is to work with MDS Pharma and other pharma partners to look for cancer biomarkers. The last part is to “tap into private equity.” Amlani predicted MDSP’s profitability by 2005, although “we will have losses for a number of years because we’re investing in the product.”

According to MDS Inc., MDSP has enough cash on hand to survive until mid-2004 — mostly thanks to its Cephalon deal. MDSP’s losses have been over CA$7 million over the last three quarters. This does not concern Amlani. “We burn US$20 million per year, and have revenue of $1 million. But as we sign the pharma partners, our revenue will come in … we are a biotech — this is how everyone gets started.”

— KAM

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