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MDS Pulls Further Away from MDSP: Can MDSP Regroup and Remake It?


Nine months after MDS announced that it would cease investing in daughter company MDS Proteomics, MDSP has announced that it is remaking itself as a biomarker company — and filing for creditor protection — while MDS has agreed to swallow a CA$63 million ($46.3 million) loss as it further distances itself from the struggling company.

“During the [fiscal] second quarter it became evident that MDS Proteomics would not be able to raise new funding or to continue to operate as a going concern. It also became evident that our investment in this company was materially impaired,” MDS said in its fiscal second quarter earnings release statement this week. MDS’ fiscal second quarter ended April 30.

MDSP ran out of cash after failing to raise any funding since January 2003, when it signed a US$30 million R&D deal with West Chester, Pa.-based Cephalon, MDS said this week. These events follow in line with MDS’ warning last fall that MDSP would run out of cash by mid-2004, unless it found another funding source, or began to generate revenue. At that time, MDSP estimated its burn rate at US$20 million per year.

In September 2003, MDS announced that it would cease investing in MDSP and would “dilute” its ownership in the company to 40 to 50 percent by 2005 (see PM 9-12-03). This week, MDS announced that it would reduce that ownership to less than 50 percent by the end of the current quarter. The parent company also said that its common share interest in MDSP now has no value, and that it would accept a “[CA]$53 million write-down of goodwill and a [CA]$10 million dollar write-down of other long-term assets” from its MDSP investment. In addition, MDS will pay CA$15 million to retain rights to MDSP’s technology and certain tax assets.

As a result of the situation with MDSP, MDS reported an FY Q2 loss this year of CA$36 million, or CA$.25 per share. This compares with losses of CA$5 million, or CA$.30 per share in the year-ago period. The company’s revenues for the quarter were CA$460 million, up 5 percent year-over-year from CA$438 million in Q2 2003.

MDSP will convert all of its remaining debt, including debt from MDS, into equity in MDSP. The company will seek protection from liability to its creditors by filing under Canada’s Companies’ Creditors Arrangement Act. This Act is designed to give a company in financial trouble time to reorganize and try to avoid going out of business by allowing the company to apply for a court order stay that protects it from creditors, according to PriceWaterHouseCoopers-Canada’s webiste. Under the Act, MDSP need not gain the consent of all its shareholders before undergoing its restructuring plan — although MDS and some other debt holders have explicitly approved the plan.

This does not mean that MDSP has filed for bankruptcy, Anil Amlani, MDSP’s chief financial officer, told ProteoMonitor. “It’s not Chapter 11; It’s not like what goes on normally for an insolvent company. A judge says that the plan is fair … and basically the court sanctions it,” he said. Amlani said that MDSP expected to get the sanction order within the next six weeks. He added that with the restructuring plan in place, “We actually have [CA]$10 million in MDSP, [CA]$5 to $6 million in [a joint venture called] OptiMol[‘s] bank, and [CA]$15 million coming in from MDS through the tax loss and technology access fee, so funding is not going to be an issue for this company in the foreseeable future.” He said that the company had cut its staff from 221 employees to 72 in the past two years, and planned to get its burn rate down to CA$9 to CA$12 million annually by September.

When asked for comment on MDSP, MDS spokeswoman Naomi Nemeth referred ProteoMonitor to the company’s written statements, and to MDSP itself.

Gasping for Air

Last September, Amlani, told ProteoMonitor that the company planned to form more drug discovery R&D collaborations of the sort that it formed with Cephalon and another company, Abgenix, in order to fill the impending void left by MDS, and to get revenues flowing. The company would also work with MDS Pharma to look for cancer biomarkers, Amlani said at the time, and try to “tap into private equity.”

This week, Amlani told ProteoMonitor that MDSP had nixed the drug discovery collaboration part of the plan. “I think the market has moved [from drug discovery] to clinical settings, and I don’t think pharma or venture capital are putting any money at this time in the early stage,” he said. “To maintain the platform and keep it up is just very costly. And we think we can actually create a significant value by going into the biomarker space and have the pharma companies actually direct money to us.” He said that under the new plan, the collaborations with Cephalon and Abgenix “will fall away,” and no new research collaborations of that sort will be sought. “We didn’t see other pharmaceutical companies actually signing big deals with companies like ours to do research — research is expensive,” Amlani said.

The plan now, he said, is to redesign the technology that MDSP has already developed for drug discovery into a biomarker discovery platform that will be offered primarily as a service. “Our technology that we spent a lot of money on is actually terrific for biomarker application in a clinical setting,” he said. Adding to the strength of its technology, he said, is MDSP’s access to MDS Pharma Services. “MDS Pharma Services already has a captive 800 pharma and biotech customers for which it does CRO work,” Amlani said. “So the idea is applying our technology seamlessly with MDS Pharma Services’ technology to identify a marker, [and] convert it into an assay.” He said he hoped to entice pharma companies into funding the two MDS companies to identify biomarkers and develop assays for drug efficacy or disease progression.

The platform that MDSP intends to apply to these services utilizes a sample prep technology that it calls a “proteomic reactor.” This is a gel-free system that concentrates proteins by immobilization on a column before performing digestion or other biochemistry on them. “Instead of trying to do protein digestion or any chemistry on [the proteins] in a large volume, now you’re able to do that in nanoliter volume,” said Daniel Figeys, chief technology officer for MDSP. The result, he said, is greater sensitivity when the sample is run through a mass spec, compared with other sample prep technologies. The system is linked up with mass specs from MDS Sciex, as well as “other types of mass specs, especially Fourier-transform mass specs,” and the readout is analyzed by proprietary software. The system is automated to be high-throughput, Figeys added.

The company will also try to make some money by providing services to small biotechs using lead optimization technology that it developed through a joint venture it formed two years ago called OptiMol. MDSP formed OptiMol with a VC fund called the Canadian Medical Discoveries Fund on a 50-50 basis. CMDF put CA$15 million into the venture, and “we already have customers,” Amlani said. That CA$15 million has now been converted into equity with the rest of MDSP’s debt, he said, and the company has merged with MDSP. In other words, with MDS now holding less than 50 percent of MDSP’s shares, CMDF is now one of the shareholders picking up the slack. “Cephalon is going to have a big chunk and you’ll find that out soon, and CMDF will have a chunk; Abgenix is a shareholder; MDS is a shareholder; and IBM is a shareholder; and then there are small pieces for others,” he said.

In an attempt to tap a more immediate cash flow, the company will additionally offer gel-band analysis services under the auspices of a new unit called Protana Analytical Services. “That’s instant cash coming in pretty fast, and using existing technology we already have in place,” he said.

With his new plan in place, Amlani plans for the company to reach cash flow break even by the end of 2005. The company intends to complete its restructuring plan by the end of the current quarter. After a year and a half without revenues — and with its parent company extricating itself from the situation as quickly as it can — this may be an ambitious plan.


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