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APPENDIX
I – MDS INC. AUDIT COMMITTEE CHARTER
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APPENDIX
II – DEFINITIONS6
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The
following are registered trademarks of MDS Inc. or its
subsidiaries:
MDS;
Nordion; Sciex; ELAN®; API 5000™; API 4000™; API 3200™; API 2000™; QSTAR® Elite;
QSTAR® XL Hybrid; 4000 Q TRAP®; 3200 Q TRAP®; 4800 MALDI TOF/TOF™; GenePix®;
MetaMorph®; SpectraMax®; FlexStation®; FLIPR®.
The
following are registered trademarks belonging to the companies
indicated:
ZEVALIN®
Molecular Insight Pharmaceuticals, Inc.
BEXXAR®
GlaxoSmithKline
MDS
INC.
ANNUAL
INFORMATION FORM
INTERPRETATION
In
this
Annual Information Form (“AIF”), “we”, “us”, “our”, “MDS”, and “the Company” are
used to refer to MDS Inc., its subsidiaries and joint ventures. In
this AIF, all references to specific years are references to the fiscal year
ended October 31. All references to “$” or “dollars” are references
to US dollars, unless otherwise specified.
Certain
terms and abbreviations used in this AIF are defined in Appendix II -
Definitions.
ITEMS
AFFECTING THE COMPARABILITY OF FINANCIAL INFORMATION OF PRIOR YEARS
All
financial references in this document exclude our discontinued generic
radiopharmaceuticals operations, our U.S. and Canadian laboratory operations,
certain early-stage pharmaceutical research services operations, and our
interests in Source Medical Corporation (Source) unless otherwise indicated.
All
financial references for the prior years have been restated to reflect this
treatment.
MDS
historical
ly
prepared its consolidated financial
statements in accordance with Canadian GAAP and provided reconciliation to
US
GAAP. The Company has now adopted US GAAP effective with the reporting of
its
fiscal 2007 annual results as its primary reporting standard for its
consolidated financial statements. MDS has adopted US GAAP to improve the
comparability of its financial information with that of its competitors,
the
majority of whom are US-based multinational companies. All figures for prior
years have been revised to reflect the adoption of US GAAP as our reporting
standard. All financial statements and
Management’s Discussion and Analysis
(
MD&A
)
previously
filed by the Company
including those filed for interim reporting purposes during 2007, were prepared
under Canadian GAAP.
DOCUMENTS
INCORPORATED BY REFERENCE
The
following sections of the MDS 2007 Annual Report Financial Review (2007
Financial Review) are incorporated by reference into this AIF:
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1.
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The
audited consolidated financial statements of MDS Inc. for the years
ended
October 31, 2007, October 31, 2006 and October 31, 2005, reported
on by
Ernst & Young LLP, Chartered Accountants (2007 Financial Statements)
on pages 30 to 37 of the 2007 Financial Review; and
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2.
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Management’s
Discussion and Analysis of financial condition and results of operations
of MDS Inc. for the fiscal year ended October 31, 2007 (2007 MD&A)
contained on pages 1 to 29 of the 2007 Financial Review.
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3.
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Management’s
Proxy Circular dated January 7, 2008 with respect to the March
6, 2008
Annual Shareholders meeting.
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CAUTION
REGARDING FORWARD-LOOKING
INFORMATION
From
time
to time, we make written or oral forward-looking statements within the meaning
of certain securities laws, including the Securities Act (Ontario) and the
“safe
harbour” provisions of the United States Private Securities Litigation Reform
Act of 1995. This document contains such statements, and we may make
such statements in other filings with Canadian regulators or the United States
Securities and Exchange Commission (SEC), in reports to shareholders or in
other
communications, including public presentations. These forward-looking
statements include, among others, statements with respect to our objectives
for
2008, 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”,
“optimistic”, 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 operational risks; the strength of the Canadian and United States’ economies
and the economies of other countries in which we conduct business; our ability
to secure a reliable supply of raw materials, particularly cobalt and critical
medical isotopes; the impact of the movement of the US dollar relative to
other
currencies, particularly the Canadian dollar and the euro; 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 timing and technological advancement of new products
introduced by us or by our competitors; the impact of changes in laws, trade
policies and regulations, and enforcement thereof; judicial judgments and
legal
proceedings; 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; new accounting
policies and guidelines that impact the methods we use to report our financial
condition; uncertainties associated with critical accounting assumptions
and
estimates; the possible impact on our businesses from natural disasters,
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.
1.
CORPORATE STRUCTURE
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1.1
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Jurisdiction
of Incorporation
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The
Company was incorporated on April 17, 1969 under the laws of the Province
of
Ontario under the name Medical Data Sciences Limited. The Company
changed its name to MDS Health Group Limited in April of 1973 and to MDS
Inc. in
November 1996. The Company was continued under the
Canada Business Corporations
Act
(CBCA) in October 1978 and remains subject to that
statute.
The
head
office of MDS, and its principal place of business, is located at 2700 Matheson
Boulevard East, Suite 300, West Tower, Mississauga, Ontario, Canada, L4W
4V9.
Significant
operating subsidiaries and partnerships are defined as those
companies/partnerships that contribute 10% or more of the consolidated revenues
or consolidated operating income of the Company or account for 10% or more
of
the consolidated total assets of the Company. The significant operating
subsidiaries and partnerships of the Company are set forth below.
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MDS
(Canada) Inc., a Canadian (CBCA) corporation;
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MDS
Analytical Technologies (US) Inc., a Delaware corporation;
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MDS
Pharma Services (US) Inc., a Nebraska corporation;
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MDS
Pharma Services Central Lab S.A.S., a French corporation;
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MDS
Pharma Services S.A.S., a French corporation;
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MDS
Pharma Services France S.A.S., a French corporation;
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MDS
Pharma Services GB Limited, a UK corporation;
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MDS
Pharma Services Switzerland AG, a Swiss corporation;
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Molecular
Devices Limited, a UK corporation;
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PerkinElmer
Sciex Instruments partnership, an Ontario partnership; and
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Applied
Biosystems/MDS Analytical Technologies partnership, an Ontario
partnership.
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With
the
exception of the two partnerships in which MDS has a 50% interest, MDS
beneficially owns, directly or indirectly, 100% of the shares of the above
named
subsidiaries.
The
entities outlined above are consolidated in the financial statements of MDS
and
are referred to hereafter as subsidiaries, with the exception of PerkinElmer
Sciex Instruments and Applied Biosystems/MDS Analytical Technologies, each
of
which is accounted for on an equity basis.
In
addition to the active operations described above:
As
at
October 31, 2005, the Company owned a 50% interest in Source, a Canadian
corporation. On November 22, 2005 the Company sold its 50% interest
in Source to its partner, Cardinal Health Inc. (see Section 2.1 - General
Development of the Businesses of MDS: Overview).
Until
February 26, 2007, the Company conducted the majority of its diagnostics
business through the following partnerships:
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MDS
Laboratory Services, L.P., a partnership established under the
laws of
Ontario in which MDS held an indirect 99.6% interest, and
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Metro-McNair
Clinical Laboratories Limited Partnership (Metro-McNair), a limited
partnership established under the laws of British Columbia in which
MDS
held a 75% interest.
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On
February 26, 2007, the Company sold its interest in its diagnostics business,
including its interest in these partnerships, to Borealis Infrastructure
Management Inc. (see Section 2.1 - General Development of the Businesses
of MDS:
Overview)
In
addition to its subsidiaries, the Company owns a 99.6% non-controlling equity
interest in LPBP Inc., an Ontario corporation, through which it held its
former
indirect interest in the Ontario businesses of MDS Diagnostic Services and
a 45%
interest in Lumira Capital Corp. (formerly MDS Capital Corp.). Lumira
Capital Corp. is described under the heading
3.6
-
Significant Investees.
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2.
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GENERAL
DEVELOPMENT OF THE BUSINESSES OF MDS
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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 research services, medical isotopes for molecular imaging,
sterilization, radiotherapeutics, and analytical instruments.
MDS
operates in three business units within the life sciences industry: MDS Pharma
Services; MDS Nordion, and MDS Analytical Technologies.
In
September 2005, we announced our strategic plan to pursue growth in the global
life sciences market and dispose of assets that do not contribute to the
Company’s areas of focus. The announcement also referred to our
restructuring plan to reduce overhead and better align resources and
infrastructure costs.
During
fiscal 2005, we discontinued certain early-stage businesses within our
pharmaceutical research services business, a business unit of the life sciences
segment, and, consistent with our strategic plan, our interests in Source
Medical and Calgary Laboratory Services (CLS) were classified as discontinued
operations. In November 2005, the Company sold its interest in Source to
Cardinal Health Inc. for C$79 million, and in April 2006, the Calgary Health
Region exercised
its
option to acquire the Company’s partnership interest in CLS for C$21 million,
(see Section 2.4.3 - Divestitures and Discontinuances).
On
February 26, 2007, the Company completed another significant step in this
strategic plan by selling its remaining Canadian diagnostics businesses to
Borealis Infrastructure Management Inc. for gross proceeds of C$1.3 billion,
(see Section 2.4.3 - Divestitures and Discontinuances)
In
line
with the Company’s strategic plan, on March 20, 2007, MDS finalized the
acquisition of Sunnyvale, California-based Molecular Devices Corporation
(MDC),
a leading provider of high-performance measurement tools for high-content
screening, cellular analysis, and biochemical testing for $621 million (see
Section 2.4.2 - Acquisitions).
In
the
first half of fiscal 2007, MDS initiated efforts to further optimize the
global
footprint of MDS Pharma Services. During 2007, the Company finalized
the sale of its Phase I clinical facility in Hamburg, Germany, transferred
its
LCMS bioanalytical, and drug metabolism and pharmacokinetics (DMPK) operations
from Montreal, Canada to its Lincoln, USA and Bothell, USA sites, respectively.
The Company also consolidated central laboratory operations from Hamburg,
Germany into Baillet, France and transferred bioanalytical operations from
Sittingbourne, UK to its Zurich, Switzerland site. To further
accelerate growth, the Company has invested in new customer-facing IT systems,
expanded central laboratory operations in Beijing, China and initiated a
300-bed
expansion at its Phase I facility in Phoenix, USA. The latter opened
in January 2008.
The
Company has three life sciences business units: MDS Pharma Services, which
provides pharmaceutical research services; MDS Nordion, which provides molecular
imaging, sterilization and radiotherapeutics; and MDS Analytical Technologies,
which designs, manufactures and sells analytical instruments and combines
newly
acquired Molecular Devices (MDC) with the Sciex division of MDS.
In
1981,
MDS entered the analytical instruments business with the acquisition of
SCIEX
(acronym
for SCIentific EXport). In 2007, MDS expanded its analytical
instruments business with the 100% acquisition of MDC.
In
1992,
MDS acquired an initial 83% interest in Nordion International Inc. (Nordion)
from the Canadian Development Investment Corporation pursuant to a privatization
initiative by Atomic Energy of Canada Limited (AECL), thereby expanding its
operations into medical isotope manufacturing and
distribution. Commencing in 1995, the Company increased its ownership
interest in Nordion to 100%.
In
1995,
MDS began acquiring pharmaceutical research services organizations and expanded
the services offered to the pharmaceutical development
industry. Several smaller acquisitions led to the fiscal 2000
acquisition of Phoenix International Life Sciences Inc., a public company
based
in Montreal, Canada with additional operations in the United States and
Europe. These pharmaceutical research services businesses
collectively operate globally under the name MDS Pharma
Services.
2.1.2
Diagnostics
Until
February 2007, the Company also operated in the healthcare industry primarily
through its Canadian clinical laboratory operations, MDS Laboratory
Services. The Canadian laboratory business was the largest operator
of private sector clinical laboratories in Canada. Services provided
by the company included clinical laboratory testing for physicians and
non-hospital healthcare institutions, management of hospital laboratories
under
contract and other support services for clinical diagnostics. The sale of
the
Canadian laboratory business to Borealis Infrastructure Management Inc. was
closed on February 26, 2007 as disclosed in Section 2.4.3 – Divestitures and
Discontinuances.
2.1.3
Customers
Customers
of the Company’s life sciences businesses include a broad range of manufacturers
of medical products including pharmaceutical manufacturers, biotechnology
companies, manufacturers of medical supplies and devices, plus academic and
government institutions. These customers are located in virtually all
major international markets.
Through
its former Canadian diagnostics business, the Company provided products and
services directly to healthcare providers, including physicians and
hospitals.
No
single
customer accounted for more than 10% of the consolidated revenues of the
Company
for the fiscal year ended October 31, 2007.
The
Company’s business and customer base are global. Revenues earned
outside of Canada, reflecting export sales, along with revenues earned by
operating units based outside of Canada, made up approximately 90% of net
revenues for 2007. Export sales from Canada alone made up 41% of net
revenues for 2007.
2.1.4
Employees
As
at
October 31, 2007, MDS had approximately 5,500 employees in 29
countries.
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2.2
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Recent
Industry Developments
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MDS
has
benefited from the significant and rapid changes that are affecting the life
sciences industry. These changes include:
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(i)
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rising
healthcare costs;
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(ii)
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intensifying
cost containment pressures;
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(iii)
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rapid
growth in demand for services due to aging population bases;
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(iv)
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rapid
innovation in technology, increasing the availability of sophisticated
treatment options;
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(v)
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greater
productivity in drug discovery and development;
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(vi)
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growing
consumer awareness of healthcare choices; and
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(vii)
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growing
awareness within emerging and developing countries of the benefits
of
adequate healthcare systems and the improving ability to pay for
improved
healthcare solutions.
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New
technologies have profoundly affected the life sciences market. These
new technologies, in part, have led to more focused research spending and
continued corporate mergers of significant size within the pharmaceutical
industry, as pharmaceutical companies strive to maintain or obtain a competitive
edge by providing new and improved services or by introducing new products
to
market. Consolidation of this industry is expected to continue, and
is likely expected to affect product development budgets and may lead to
more
focused research spending by the merged entities, including more concentration
of spending budgets within therapeutics areas.
These
mergers are, at least in part, a response to the loss of patent protection
on a
significant number of large market drugs expected over the next few
years. Off-patent drugs often lose more than half of their market
share to generic alternatives in less than one year. To replace these
lost revenues and sustain the levels of growth enjoyed in the past,
pharmaceutical companies must either increase research and development spending
or improve the effectiveness of existing spending. Major
pharmaceutical companies are also acting aggressively to protect existing
patent
positions and to extend patent coverage to different formulations.
A
string
of recent adverse events affecting a number of large market pharmaceutical
products has placed added scrutiny on the drug approval process in the
US. There are increasing calls for more regulation of the approval
process as a result. The impact of this on the rate and cost of drug
innovation is uncertain.
There
is
growing activity between pharmaceutical companies having large research budgets
and smaller biotechnology companies that have smaller budgets but rich pipelines
of possible new discoveries. Advances in biotechnology, genomics, and
proteomics have created a better understanding of how diseases function both
at
a molecular level and as part of a biological system that biotechnology
companies are seeking to exploit. Large pharmaceutical companies are
increasingly providing funding to these smaller companies in return for rights
to further develop and market products resulting from these discoveries,
or
buying these smaller companies outright.
The
surge
in development activity, coupled with a drive to reduce costs and accelerate
development time, has driven growth in outsourcing of research activities
by
pharmaceutical manufacturers to specialized pharmaceutical research services
organizations and an increased use of new analytical technologies that seek
to
provide improved efficiency and results. High throughput screening,
and the technologies that make this possible, increase the number of new
drug
leads that can be investigated, enabling drug companies to identify promising
candidates earlier. More importantly, researchers can eliminate an
unpromising candidate before a large investment is made in further
development.
It
is
anticipated that these technological advances may lead to more targeted,
personalized and effective medicines. In addition, these technologies
are expected to lead to more accurate
diagnosis
at an earlier disease stage, which will in turn lead to treatment that is
more
effective. A number of new developments also promise better disease
prevention alternatives.
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2.3
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Business
Strategy of MDS
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The
Company’s strategy is to focus on the global life sciences markets to drive
growth and deliver value to customers and shareholders. The life
sciences markets are some of the fastest growing markets in the world, driven
by
long term trends in population demographics and the way therapeutics are
developed and disease is treated. The Company is focused in the areas
of pharmaceutical research services through MDS Pharma Services, molecular
imaging, sterilization and radiotherapeutics through MDS Nordion, and life
sciences instruments and tools through MDS Analytical
Technologies. MDS expects to supplement organic growth in its three
life sciences businesses with selected technology and business
acquisitions.
MDS
Pharma Services (see Section 3.2) is growing its global pharmaceutical research
services capability with a focus on building global scale and uniform quality
and procedures. The segment is the sixth largest contract research organization
(CRO) globally, and one of the largest CROs in early-stage research (Discovery
through Phase IIa). The current focus of MDS Pharma Services is on improving
the
growth and profitability of this segment across its businesses and
regions.
MDS
Nordion (see Section 3.3) is the largest global provider of nuclear isotopes
used in molecular imaging and sterilization. Securing reliable sources of
supply
for key isotopes and building safe, dependable logistics capability are key
strategic objectives for this core business. MDS Nordion is also focused
on
identifying new uses for medical isotopes and building the necessary
manufacturing and development capabilities to be the provider of choice for
companies that are developing new products with isotopic
applications.
MDS
Analytical Technologies (see Section 3.4) is focused on developing and providing
customers with state-of-the-art life sciences tools. This segment relies
heavily
on leading-edge research and engineering as well as extensive expertise in
molecular and cell biology and chemistry to develop instruments that have
a
clear advantage over competitive offerings. MDS Analytical Technologies consist
of two channel brands, Sciex and Molecular Devices (MDC). Sciex,
focused on high-end mass spectrometers, takes its products to market
predominantly through partnerships with companies who have primary
responsibility for marketing, sales, and after-sales support. MDC
markets its high-performance bioanalytical measurement systems through its
global sales channel, which added important distribution capability to MDS
during 2007.
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2.4
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Financial
and Other Developments
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Factors
affecting the comparability of the Company’s financial data for fiscal years
2005 through 2007 include the following:
2.4.1
Capital Structure
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In
December 2002, the Company completed a private placement of $311
million
of senior unsecured notes (Senior Unsecured Notes). The Senior
Unsecured
Notes bear interest at
rates
between 5.15% and 6.19% per annum and have maturities ranging
from
December 2007 to December 2012.
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In
2005, the Company negotiated a new C$500 million, five-year committed,
revolving credit facility which replaced the Company’s previous C$225
million credit facility. As at October 31, 2007, the facility
was undrawn.
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On
April 9, 2007, MDS completed a substantial issuer bid and repurchased
approximately 22.8 million Common shares for $441 million at a
price of
C$21.90 per share. As a result of this issuer bid, MDS reduced
the number
of Common shares outstanding from approximately 144 million to
122
million.
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2.4.2
Acquisitions
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During
2005, MDS acquired SkeleTech Inc., a therapeutically focused CRO
providing
pre-clinical discovery and development services in bone and central
nervous systems biologies, for consideration of $6 million. The
purchase
agreement included a provision for contingent consideration of
$2 million,
payable to the vendors if certain profitability levels were attained
in
fiscal 2006. During 2006, a payment for $1 million was made to
the vendors
under this agreement.
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On
March 20, 2007, MDS finalized the acquisition of Sunnyvale,
California-based Molecular Devices Corporation (MDC), a leading
provider
of high-performance measurement tools for high-content screening,
cellular
analysis, and biochemical testing. The total cost of the acquisition
was
$621 million, including the cost of the tender offer, the cost
to acquire
outstanding in-the-money options held by MDC employees, and transaction
costs. Upon completion of this acquisition, MDS established a new
business
unit, MDS Analytical Technologies, which combines MDS Sciex with
MDC. MDS
filed a form 51-102F4 with respect of this acquisition on June
4, 2007.
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2.4.3
Divestitures and Discontinuances
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In
2005, the Company’s management announced its commitment to a plan to
divest a number of business operations that were no longer core
to the
Company’s strategy. During 2005, the Company’s interest in
Source was classified as a discontinued operation, and as stated
previously, in November, 2005, the Company disposed of its interest
in
Source. In addition, during 2006, the Company’s partner in CLS
exercised its right to buy out the Company’s partnership interest.
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In
2005, the Company approved a plan to divest of its Pharmaceutics,
Fermentation Biopharmaceutics/Biosafety, and
in vitro
Pharmacology
operations within the MDS Pharma Services business unit. These
businesses have also been classified as discontinued operations.
During
2006, these businesses were either sold or shut down.
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In
February 2006, MDS and AECL reached an agreement on disputes related
to
the MAPLE facilities (Facilities), which resulted in MDS exchanging
its
interest in the Facilities for a
long-term
isotope supply contract (See Section 3.3. – MDS Nordion; NRU and MAPLE
Facilities)
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On
October 5, 2006, the Company entered into a series of agreements
to sell
its remaining Canadian diagnostics businesses, MDS Diagnostic Services,
to
Borealis Infrastructure Management Inc. for gross proceeds of C$1.3
billion. The sale was completed on February 26, 2007.
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Subsequent
to fiscal 2007 year-end, on November 29, 2007, MDS Nordion signed
an
agreement with Best Medical International Inc. to divest its external
beam
therapy and self-contained irradiator product lines.
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3.
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NARRATIVE
DESCRIPTION OF THE BUSINESSES OF MDS
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3.1
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Reportable
Industry Segments
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The
Company operates under the following three business units:
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MDS
Pharma Services
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This
business unit provides research services and is one of the world
leaders
in pharmaceutical research services, from pre-clinical development
to
Phase IV clinical trials, for innovative and generic pharmaceutical
companies and for biotechnology companies, as well as consumer
product and
drug delivery companies.
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MDS
Nordion
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This
business unit is a leading global provider of medical isotopes
for
molecular imaging, technologies for the sterilization of medical
and other
products as well as contract manufacturing for the radiotherapeutics
industry.
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MDS
Analytical Technologies
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This
business unit focuses on the research, design, manufacture and
marketing
of state-of-the-art life sciences tools such as high-end mass
spectrometers through its Sciex brand and high-performance bioanalytical
measurement systems through its Molecular Devices
brand.
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Prior
to
February 26, 2007, as disclosed in Section 2.4.3 – Divestitures and
Discontinuances, the Company was, through various operating business units,
the
leading provider of diagnostic laboratory services in Canada.
Prior
to
the sale of Source Medical in November 2005, as disclosed in Section 2.4.3
–
Divestitures and Discontinuances, the Company was a partner in the largest
provider of distribution services for medical products in Canada, supplying
hospitals and alternative care sites.
3.2 MDS Pharma
Services
MDS
operates as a global contract research organization (CRO) through MDS Pharma
Services. MDS Pharma Services is one of the top global CROs and has been
highly
rated for customer service and quality by CenterWatch, a leading industry
publication. MDS Pharma Services is a full-service provider of drug discovery
and development services to the pharmaceutical, biotechnology and generic
industries. MDS Pharma Services operates as a CRO in 28 countries.
Industry
Background
During
the 1970’s, integrated pharmaceutical companies conducted the majority of
research leading up to development of pharmaceutical products in-house. At
that
time, the only significant function that was contracted out was pre-clinical
toxicology screening.
The
drug
development process is extremely expensive due to the cost of the infrastructure
required to support the full range of processes necessary for drug development
and the long period of time required to achieve full regulatory approval
of a
new compound. On average, it takes 10 to 12 years and over $800 million to
bring
a new pharmaceutical from discovery through Phases I to III of clinical trials
and make it available to consumers. Since patent protection for new products
extends for only 17 to 20 years, the profitability of a new compound can
be
greatly enhanced by reducing the total cost of development and by shortening
the
elapsed period over which development occurs.
As
a
result, companies began to outsource to meet the occasional surge in internal
demand that could not be addressed with in-house capabilities. In an
effort to reduce both time and costs, major drug companies began outsourcing
portions of the development work to companies that provide specialized research
services. These companies have become known as Contract Research Organizations
or CROs. Individual CROs tend to specialize in particular stages of the drug
development process and, therefore, develop expertise in those areas. Reliance
on CRO expertise can enable the pharmaceutical companies to achieve cost
efficiencies and to shorten the research time for that stage of the development
process while avoiding capital investments.
The
decision by MDS to enter the CRO business in 1995 was influenced by a number
of
key trends that were beginning to affect the industry. The Company believes
that
these trends remain in place. In particular, corporate mergers and cost
containment pressures at pharmaceutical companies are expected to continue
to
lead to downsizing of in-house research and development capabilities and
pharmaceutical companies are anticipated to continue to focus increasingly
on
marketing and product distribution. Outside suppliers will increasingly be
relied upon to provide services previously secured from in-house departments.
Aside from reducing infrastructure costs for the pharmaceutical companies,
outsourcing is expected to lead to reduced cycle time for development.
Outsourcing this activity may also lead to development of drug candidates
which
have a small market and might have been ignored by larger pharmaceutical
companies which require large-market drugs to cover the costs of their marketing
and distribution channels.
Globalization
of pharmaceutical markets driven by ongoing mergers of major international
pharmaceutical companies has influenced the selection of a CRO. Those with
an
international presence and the ability to conduct trials in multiple
jurisdictions have greater chances of becoming preferred suppliers. The growth
of the biotechnology industry is also significantly
influencing
the growth of CROs, as many smaller biotechnology companies elect not to
build
the infrastructure to conduct the various phases of the development of their
products in-house.
A
general
overview of the drug development process is provided in the diagram
below:
Overview
of
Business
Headquartered
in King of Prussia, Pennsylvania, MDS Pharma Services is focused on being
a
full-service provider of drug discovery and development services to the
pharmaceutical, biotechnology, and generic industries. MDS has provided services
to pharmaceutical manufacturers since 1992, beginning as a centralized support
laboratory providing testing services in connection with Phase III clinical
trials. MDS is now one of the largest and most integrated CROs in the
pre-clinical and early clinical segment of the market and a developing
competitor in late-stage clinical trials.
The
pharmaceutical research process can be broken down into three primary
components: laboratory-based research, clinic-based testing, and out-patient
based testing. MDS includes most laboratory-based research and clinic-based
research in early-stage and the Company has been the leading competitor in
this
phase of research based on the installed base of mass spectrometers and on
the
number of available clinic beds. The Company’s significant capacity in each of
these areas enables it to take on client work on very short notice and to
develop the necessary expertise in these fields to participate in the most
complex studies.
Key
service lines for this business include:
|
Ø
|
Preclinical,
in which the Company’s vast library of assays is applied to study the
effects of compounds on living organisms and in-vitro targets and
in which
advanced understanding of drug safety and toxicology is obtained
under
strict Good Laboratory Practices (GLP) regulated conditions.
|
|
Ø
|
Bioanalysis
in which advanced technology and analytical science is applied
to
biological fluids to gain an understanding of the drug’s absorption,
distribution, metabolism and elimination.
|
|
Ø
|
Early-stage
clinical or first-in-man testing (Phase I), in which new investigational
drugs are tested for the first time in healthy volunteers to assess
drug
safety and to determine how the drugs are processed by the body.
|
|
Ø
|
Late-stage
clinical or traditional clinical trials (Phase II – IV), in which
investigational drugs are tested in volunteers exhibiting the condition
the drug is intended to determine the relative efficacy of the
drug under
study.
|
|
Ø
|
Central
laboratory, a support service for late-stage trials, through which
samples
taken from study participants are run against standard assays to
determine
the safety and effectiveness of the drug.
|
Significant
pre-clinical and early clinical operations are in Montreal, Canada; Lincoln,
USA; Phoenix, USA; Bothell, USA; Belfast, Northern Ireland; Zurich, Switzerland;
Lyon, France and Taipei, Taiwan. These facilities include clinic
locations and laboratories, as well as other development
facilities.
Management
of late-stage clinical trials on behalf of clients is conducted globally.
Significant clinical offices include King of Prussia, USA; Irvine, USA; Paris,
France and Winnersh, United Kingdom, along with smaller offices in a number
of
other countries. In addition, the Company has central laboratory
locations in Toronto, Canada; Neptune, USA; Baillet, France; Beijing, China
and
Singapore.
MDS
Pharma Services is dependent on staff with highly specialized
skills. Individuals with requisite the credentials are recruited on a
global basis. Globally, approximately 3,400 employees work in MDS
Pharma Services.
Strategy
MDS
Pharma Services is currently one of the leading CROs in the
world. Management expects to continue to expand its global
capabilities through organic growth and through acquisition while expanding
profitability and enhancing the ability to serve customers through LeanSigma
and
other operational improvements. The acquisition strategy of the Company is
to
focus on targets that extend leadership in key fields and build on existing
strengths in order to enhance the services we offer our
customers. Acquisitions may add capabilities, scale or geographic
reach in our key lines of business. Where operations do not meet the
Company's expected returns, or they do not fit with the strategic markets
in
which the Company has chosen to compete, MDS has sought to divest these
businesses. During 2006, MDS sold or closed a number of smaller,
non-strategic lines of business.
Competition
The
growth of the pharmaceutical research services industry has been dependent
on
the increase in outsourcing by pharmaceutical and biotechnology companies.
The
market has experienced
high
growth rates and has become highly competitive. Competition for individual
research contracts often includes in-house research departments of
pharmaceutical and biotechnology companies, as well as universities, teaching
hospitals, and other CROs. Industry consolidation and globalization have
affected pharmaceutical companies as well as CROs resulting in the use of
fewer,
larger CROs. The Company believes that outsourcing will continue to
grow as an economically attractive alternative to in-house
research.
Companies
active in this industry, including MDS, may improve their competitive position
by building scale, which enhances the ability to service clients with consistent
global quality in their preferred location or in a more timely fashion, and
internal operating efficiencies, which translates into sound and predicable
execution and opportunity to expand profitability. In addition, we
believe that our expertise and capabilities result in a unique offering that
contributes to our competitive position. MDS Pharma Services’
strength in Pharmacology, Phase I and Bioanalytical Sciences and its broad
configuration, allows it to integrate its offerings under complete drug
development programs to help biotech firms move their compounds through the
development stages more rapidly by having one provider take compounds through
multiple stages of development.
The
majority of competitors have been
focused primarily on later stages of the drug development process (Phase
II-IV
clinical
research
).
Late-stage competitors include several multinational companies such as Quintiles
Transnational Corp.
,
Parexel International, Corp., PPD, Inc., and PharmaNet Development Group,
Inc. Early-stage (preclinical to Phase IIa) competitors include
Covance, Inc. and Charles River Laboratories Inc. Some of the Company’s CRO
competitors are significantly larger than MDS and may have greater financial
and
technical resources.
Through
MDS Nordion, MDS is a world leader in medical isotopes for molecular imaging,
development and manufacturing of radiotherapeutics and
sterilization. Exports of these materials to over 60 countries
account for more than 95% of total sales by this business.
Industry
Background
In
molecular imaging, isotopes are used because of their ability to assist in
diagnostic procedures such as single photon emission computed tomography
(SPECT)
and positron emission tomography (PET). When formulated with chemical compounds
that are attracted to or accumulate in particular types of tissue, these
isotopes can aid physicians in the identification and treatment of certain
diseases. Certain other isotopes can be used to deliver direct radiation
therapy
to cancerous cells using the same principles of targeted therapy.
Entry
into both the molecular imaging and sterilization businesses require significant
capital investment, extensive process development and access to limited supplies
of raw materials. The manufacture of raw isotopes is dependent upon the
availability of capacity in acceptable types of nuclear reactors and cyclotrons.
Processing facilities such as those operated by MDS are centralized, capital
intensive, and expensive to operate. In addition, due to the nature of the
materials handled by the facilities, government and environmental regulation
are
significant factors in the business.
Processing
raw isotopes into a form suitable for the intended use is highly complex.
Many
isotopes used for molecular imaging have a limited half-life. This imposes
constraints on the manufacturing process and the logistics procedures needed
to
deliver refined product to an end-user. Security of supply is a key customer
concern due to the short lifespan of the products; hence, efficient and safe
transportation systems are vital components of the business. The logistics
system at MDS can process isotopes, deliver them to manufacturers and then
on to
hospitals or treatment centres within only a few days.
Molecular
imaging is a growing market. Aging populations worldwide are expected to
increase demand for the procedures which medical isotopes make possible.
In
addition, considerable research is underway to identify new uses for existing
isotopes.
Sterilization
of medical products is a relatively mature industry with 4%-7% market growth.
Alternate applications for this technology are continuously under investigation.
The United States Food and Drug Administration (FDA) has approved the use
of
irradiation for microbial control of pathogens (e.g.:
E.coli
) and as a quarantine
treatment for fruit and vegetables to eliminate agricultural pests. To date,
the
commercial use of irradiation has largely been limited to spices, some red
meat,
poultry and certain fresh fruits and vegetables.
Overview
of
Business
MDS
manufactures, processes and repackages isotopes to produce products that
include:
|
Ø
|
medical
isotopes that are used alone or coupled to target molecules for
use in
clinical research, diagnosis of cardiac function and other diseases
and
treatment of diseases such as cancer;
|
|
Ø
|
medical
isotopes for the treatment of cancer; and
|
|
Ø
|
industrial
isotopes for the sterilization of disposable medical products and
for
treating food.
|
In
addition, the Company manufactures and sells products and equipment, such
as
large scale production irradiators, for the sterilization of disposable medical
products and food.
MDS
is
the world's principal supplier of Cobalt-60 (Co
60
).
The
majority of raw Co
60
material is produced under long-term supply contracts with nuclear
power
suppliers such as Bruce Power, Quebec Hydro, Ontario Power Generation and
Rosenergoatom (the utility operator responsible for Russia’s nuclear power
plants). MDS further processes the raw Co
60
into a
finished form for commercial use at its Ottawa, Canada facilities. The resulting
processed material, or gamma source, is delivered to customers using approved
transport containers and procedures. Customers include major sterilization
contractors, as well as large medical product manufacturers who maintain
their
own in-house sterilization facility.
MDS
also
markets related equipment and services such as industrial scale
irradiators. Delivery or construction of this equipment is usually
accompanied by an initial shipment (“loading”) of a gamma source. Resupply or
replenishment of the gamma source is required from time to time as the
radioactivity level of the initial loading declines over time at a rate of
approximately 12% per year.
Isotopes
used for molecular imaging are handled and processed in much smaller quantities
than those used for industrial irradiation. MDS purchases reactor-produced
isotopes, principally from
AECL,
such as Molybdenum-99 (Mo
99
),
Iodine-131 (I
131
),
Iodine-125 (I
125
)
and
Xenon-133 (Xe
133
)
in an
unfinished, non-purified form, and transports them to its own facilities
in
Ottawa, Canada for further processing. MDS also manufactures cyclotron-produced
isotopes such as Iodine-123 (I
123
),
Thallium-201 (Tl
201
),
Palladium-103 (Pd
103
)
and
Yttrium-90 (Y
90
)
at its
facilities in Vancouver, Canada and Fleurus, Belgium, and refines these
materials in its adjacent processing facilities. In addition, MDS also has
a
joint venture with the University of Liege in Belgium to manufacture and
distribute an isotope used in PET imaging.
The
purified forms of these isotopes are incorporated by pharmaceutical companies
into radiopharmaceuticals used to diagnose and treat numerous serious disease
states, such as coronary artery disease and cancer. Mo
99
decays
into Technetium-99 (Tc
99
m),
which is the most widely used diagnostic isotope in the world. Approximately18
million scans are performed each year and 80% use a Tc
99
m
radiopharmaceutical. This number is expected to grow as the population in
developed countries ages and as the use of molecular imaging in the management
of coronary artery disease expands. MDS is the world’s leading supplier of
Mo
99
.
NRU
and MAPLE
Facilities
The
Company’s principal source of Mo
99
is the
existing NRU reactor located in Chalk River, Canada, which is owned and operated
by AECL. To provide greater security for the future supply of Mo
99
and
other reactor-produced radioisotopes commonly used in nuclear medicine, MDS
contracted with AECL in 1996 for the construction and operation of two dedicated
reactors and a processing facility (Facilities) to produce such isotopes.
Under
the original agreement, MDS would have owned the reactors and, once completed,
AECL would have operated them on a fee per service basis for MDS.
As
a
result of construction deficiencies, cost overruns and other technical
regulatory issues, completion of the Facilities has been delayed significantly.
The deficiencies, regulatory issues, significant delays, and cost overruns
led
to a dispute between the Company and AECL. Both MDS and AECL agreed
to a mediation process to resolve the dispute and a mediator was appointed
in
February of 2005.
The
mediation process between the parties was successful and in early 2006 the
Company entered into an agreement with AECL related to the MAPLE
Project. The agreement reached with AECL provides the basis for a
productive ongoing relationship and enables AECL to move forward to successfully
complete the project. Under the Agreement, ownership of the
Facilities was transferred to AECL, along with certain associated inventories,
for C$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 existing supply agreement with AECL related
to
the NRU reactor.
Since
AECL has now assumed full ownership of the Facilities, they are responsible
for
capital costs associated with completing the project and commissioning the
reactors 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 supply
agreement. This commitment extends to cover any changes required by
international agreements or treaties related to the procurement of highly
enriched uranium in the reactors. The Company has also
retained
certain legal rights in the event that the Facilities have not met certain
performance criteria by October 31, 2008, including regulatory approvals
and
operating requirements.
Final
completion and commissioning of the Facilities will entail an extended
regulatory and quality control review process for our customers, including
steps
to determine that the products produced in the new facility meet the same
quality standards as those produced in NRU.
The
new
Facilities, once operational, should enable MDS to provide its customers
with a
stable and secure supply of key medical isotopes and strengthen MDS’s
competitive position in medical isotope supply, as they are the only reactors
dedicated solely to medical isotope production. All other reactors engaged
in
medical isotope production are multipurpose reactors. Our current agreement
with
AECL, as well as limited back-up supply arrangements, are intended to provide
a
secure supply of isotopes to our customers.
In
August
2006 the Canadian Nuclear Safety Commission (CNSC) granted a new operating
license for the Chalk River facilities that extends to October 31,
2011. Continued sourcing from the NRU reactor is intended to provide
a stable and secure supply of these key isotopes while the new Facilities
are
being completed.
Facilities
that are able to handle and process isotopes in the manufacture of
radiopharmaceuticals are complex and strictly regulated. MDS has added an
80,000
square foot manufacturing facility at its Ottawa, Canada site that is utilized
on a partnership basis in the development, and later, the direct manufacture
of
radiotherapeutics. Examples include ZEVALIN® and BEXXAR® Both products are based
on monoclonal antibodies and are used to treat non-Hodgkin’s Lymphoma (NHL).
ZEVALIN uses Y
90
as the
active agent while BEXXAR uses I
131
.
Growth of development and manufacturing opportunities is expected, since
drug
manufacturers may not wish to incur the capital cost or regulatory delays
associated with building their own facilities. MDS also manufactures and
distributes radiation therapy equipment and Co
60
is the
radiation source for this equipment.
MDS
Nordion is dependent on staff with specialized skills and knowledge necessary
to
operate a highly regulated processing facility for radioactive
materials. Some technical and production employees of MDS belong to
the Public Service Alliance of Canada, a collective bargaining agent
representing, among others, certain employees of the Government of Canada.
Certain other employees belong to the Communications, Energy and Paperworkers
Union of Canada. Labour relations are judged to be good with both
unions. Globally, MDS Nordion employs approximately 760
people.
Strategy
MDS
has a
leading position as an international supplier of key isotopes. Revenue growth
for isotopes generally has historically been in line with the overall increase
in healthcare spending and population growth, both of which have an impact
on
the growth in the utilization of diagnostic tests and the use of disposable
medical products. Sales of medical isotopes do not follow any notable seasonal
or other cycles and demand is relatively constant. The short half-life of
the
isotopes used for medical purposes limits the ability of any market participant
to build significant inventories.
Security
of supply is a significant objective for the majority of the Company’s
customers. The Company has developed a strong supply and logistics network
to
meet these demands. Current
activity
and investment by AECL in the NRU and the MAPLE Facilities, are intended
to
solidify the Company’s position as a reliable source of supply. In addition, the
Company is developing new and complementary lines of business based on its
expertise with isotopes. For example, the cancer treatment market is expected
to
develop rapidly over the next several years, particularly in emerging economies.
Many of these countries are now able to afford modern cancer therapies and
are
expected to make significant investments in this technology as their healthcare
systems develop.
Competition
There
are
significant capital and logistics investments required to successfully compete
in the molecular imaging market, making the Company’s established position a
competitive advantage. Since Mo
99
is the
most significant isotope on world markets, the majority of competition faced
by
the Company is in this product. Major competitors are Institute National
des
Radioelements (IRE) of Belgium, the NTP Radioisotopes (Pty) Ltd. (a wholly
owned
subsidiary of Nuclear Energy Corporation of South Africa) and the Nuclear
Research and Consultancy Group of the Netherlands.
Competition
in the sterilization market is different from the medical isotopes market
due to
the substantially different half-life of the products. Co
60
is
often bought and sold in large quantities and can be produced by any of several
nuclear power reactors around the world. While delivery and logistics expertise
remains an MDS advantage, the most significant competition in the sterilization
market and Co
60
supply
comes from Reviss Services Ltd. which acquires cobalt from Russian sources.
Competition for sterilization spending also comes from alternative technologies,
the most significant of which are Ethylene Oxide (EtO) and electron-beam.
The
Company believes that gamma-based sterilization technologies continue to
enjoy
advantages over these competitive technologies in some applications. In
addition, there is a significant installed base of industrial irradiators
that
should ensure that gamma irradiation remains a key technology in this
market.
Isotopes
used for sterilization tend to be somewhat more cyclical, due primarily to
the
length of time required to convert Cobalt-59 (Co
59
)
into
Co
60
and the limited number of facilities in which this can be done
economically. During 2007, the Company took steps to increase its
supply of cobalt, signing an extension to its 2005 long-term contract with
Rosenergoatom. This 17-year extension should provide for a 30%
increased supply of Co
60
to MDS
Nordion by 2016.
3.4 MDS
Analytical Technologies
MDS
provides life sciences tools through its MDS Analytical Technologies business
unit. This business unit consists of two highly recognized brands,
Sciex and Molecular Devices (MDC). Sciex designs and manufactures
high-end mass spectrometers and MDC designs, manufactures and markets
high-performance bioanalytical measurement systems.
Industry
Background
In
recent
years, research in the life sciences industry has accelerated. This
expansion of research activity has yielded discoveries that are currently
fuelling a revolution in our understanding of human health and disease. With
a
better understanding of biology at the level of genes, proteins and cells,
researchers hope to discover the underlying causes of human disease and
determine ways to treat them.
Drugs
typically fight illness by binding to proteins, known as “targets”, and modify
their behaviour to reduce their disease-causing effects. Once a
protein’s link to a disease is understood, the task of finding a drug that acts
on the protein and treats the disease is undertaken primarily by pharmaceutical
and biotechnology companies. Drug manufacturers typically own
libraries of potential drug candidates comprising hundreds of thousands,
or even
millions, of chemical compounds from which they screen against known
targets. As life sciences research continues to unveil new targets,
the task of screening large libraries of compounds against these targets
represents both a great opportunity and a technological challenge for
pharmaceutical and biotechnology companies.
Drug
compounds that progress and become potential drug candidates for in-man use
are
rigorously tested, among other factors, for safety, absorption, distribution,
metabolism and excretion (ADME), efficacy and pharmacokinetics. High
sensitivity as well as high resolution instruments are necessary to quantify
and
analyze the physical and biological properties of substances and
metabolites.
In
the
race to develop new and improved drugs to treat diseases, our customers are
constantly looking for the latest in instruments, software, consumables and
services to increase productivity and provide high-quality data that enables
decision-making in the high-cost drug discovery and development
process.
Overview
of
Business
MDS
first
entered the analytical instruments industry in 1981 with the acquisition
of
Sciex, and in 1988 introduced the first liquid chromatography mass spectrometer
for use on organic compounds to take advantage of the significant opportunities
that exist in drug discovery and pharmaceutical research services outsourcing
for drug development companies.
To
strengthen its leadership position as one of the top global providers of
life
sciences solutions, MDS acquired MDC in 2007. MDC brings to MDS
a portfolio of high-performance measurement tools for high-content screening,
cellular analysis, and biochemical testing. MDC’S flagship product
lines such as SpectraMax® and FLIPR® are considered industry standard
instruments in liquid handling and high throughput screening
respectively.
MDS
supplies the life sciences industry with high-sensitivity mass spectrometers
under the Sciex brand name. Sciex mass spectrometers are marketed
through partnerships with Applied Biosystems (Canada) Limited (Applied
Biosystems) and PerkinElmer Canada Inc. (PerkinElmer) to a global customer
base;
sales outside of Canada account for more than 95% of revenues from MDS’s Sciex
products. Total revenues earned from these partnerships during 2007
were $205 million. For both partnerships, MDS Analytical Technologies
is responsible for manufacturing and has primary responsibility for research
and
development. The Company’s partners are responsible for marketing, sales and
service. The partnerships are structured so that each partner shares equally
in
the full profit margin generated once a piece of equipment is sold to an
end-user.
MDS
has
been a major innovator of technologically sophisticated mass spectrometry
instrumentation. In each of its product lines, MDS has been a
pioneer. Accomplishments include the introduction of the first triple-quad
mass
spectrometers, inductively coupled plasma mass
spectrometers,
and techniques for detecting ultra-trace amounts of small or large molecules
by
atmospheric pressure ionization (electrospray). Most of these
products have evolved through multiple generations and continue to hold
significant shares of their market segments.
The
pharmaceutical and biotechnology markets are the major users of technology
based
on the principles of liquid chromatography coupled with mass spectrometry
(LC/MS) for detecting organic compounds. Early models of this
equipment revolutionized many of the processes that were fundamental limitations
in the search for new drugs or biotechnology products. Productivity and
sensitivity improvements remain the primary basis for product differentiation
for MDS equipment.
MDS
Analytical Technologies and its partner Applied Biosystems are the market
leader
in high-sensitivity LC/MS equipment and have consistently delivered
technological innovation within this industry. This innovation is a result
of
significant research and development spending each year.
A
smaller
portion of the Company’s mass spectrometry market is outside of the
pharmaceutical industry and relies on similar equipment for the detection
of
inorganic compounds. For this group of customers, the Company produces the
ELAN®
Inductively Coupled Plasma Mass Spectrometer (ICP/MS) that provides high
sensitivity with extremely high specificity for a wide range of elements
in the
analysis of a single sample. The range of market areas that are addressed
with
the ELAN® is broad and includes environmental monitoring (drinking and
wastewater analysis), toxicology (role of trace metals in human disorders),
semiconductors (trace impurities), and the nuclear industry (impurities in
uranium). These machines are marketed on a worldwide basis through a partnership
with PerkinElmer.
The
following table summarizes the mass spectrometers offered by the Applied
Biosystems/MDS Analytical Technologies and PerkinElmer Sciex Instruments
joint
ventures
|
Instrument
Name
|
Joint
Venture Partner
|
|
API
5000™ LC/MS/MS System
|
Applied
Biosystems
|
|
API
4000™ LC/MS/MS System
|
Applied
Biosystems
|
|
API
3200™ LC/MS/MS System
|
Applied
Biosystems
|
|
API
2000™ LC/MS/MS System
|
Applied
Biosystems
|
|
QSTAR®
Elite LC/MS/MS System
|
Applied
Biosystems
|
|
QSTAR®
XL Hybrid LC/MS/MS System
|
Applied
Biosystems
|
|
4000
Q TRAP® LC/MS/MS System
|
Applied
Biosystems
|
|
3200
Q TRAP® LC/MS/MS System
|
Applied
Biosystems
|
|
4800
MALDI TOF/TOF™ Analyzer
|
Applied
Biosystems
|
|
ELAN®
DRC II ICP-MS System
|
PerkinElmer
|
|
ELAN®
DRC-e ICP-MS System
|
PerkinElmer
|
|
ELAN®
9000 ICP-MS System
|
PerkinElmer
|
MDS
also
offers a full range of high-performance bioanalytical tools including automated
systems for pharmaceutical screening and a variety of general-purpose research
instruments under the MDC brand, which are grouped into two families;
bioresearch and drug discovery.
Bioresearch
products include: microplate detection products, GenePix®, MetaMorph®, Laser
Capture Microdissection, Cellular Neurosciences, Liquid Handling and Threshold®
product lines. Our microplate detection products consist of the
SpectraMax® and FlexStation® lines of advanced microplate readers; they address
the increasing need for the acquisition and processing of large quantities
of
biochemical and biological data. The GenePix® family of products is a
complete line of instruments and software for analyzing Microarrays, which
enable the high-throughput identification of large number of genes. Our laser
capture microdissection products help researchers to visualize and extract
individual cells or groups of cells from tissue samples with minimal
damage. For cellular neurosciences research, the Company offers a
range of products for voltage recording, current and voltage clamping and
patch
clamping. As well, our liquid handling systems offer a complete line of
state-of-the–art microplate washers and other related tools, including cell
harvesters, to the bioresearch product family. The Threshold® system
emerged from a need by biopharmaceutical companies for more sensitive and
reproducible methods to detect contaminants in biopharmaceuticals during
the
manufacturing and quality control process.
Our
drug
discovery products are used to screen large numbers of chemical compounds
to
assess their effects on disease targets. Drug discovery products
include: FLIPR® system and reagent kits, automated electrophysiology systems,
high-throughput imaging systems and the Analyst system and reagent
kits. Since its introduction in 1995, the FLIPR system has become the
industry standard for the automated testing of compounds in live
cells. FLIPR instrumentation is complemented by FLIPR reagent kits,
which use a proprietary technology to reduce the number of steps involved
in
live cell testing. Automated electrophysiology products are automated
systems that obtain the same high-quality information from cells as conventional
patch clamping, but at a much faster rate and requiring far less operator
skill. To efficiently visualize cellular events, our high-throughput
imaging systems provide automation of image capture and analysis to allow
tens
of thousands of microscopic cellular assays to be performed in a single
day. The Analyst family of products provides industry-leading
flexibility and throughput for a wide range of biochemical assays.
MDC
also
provides services to its installed base of customers on both a contract and
time
and materials basis as well as a variety of post-warranty contract options
for
all instrument offerings.
MDS
Analytical Technologies’ business is dependent on a staff with highly
specialized skills and knowledge in various branches of physics, chemistry
and biology. Individuals with the requisite credentials are recruited on
a
global basis and their knowledge is further developed by in-house
training. Over 1,200 people work at MDS Analytical Technologies
globally.
Strategy
The
Company’s strategy is to be the leading global provider of top-of-line life
sciences research and analysis solutions, with a particular focus on the
application of this technology within the drug discovery and development
process.
MDS
Analytical Technologies’ products are designed to outperform competitive
products based on sensitivity and speed. We invest in research and
development to continually fuel our pipeline of new innovative products to
help
accelerate the complex process of discovering and developing new drug
compounds. Expertise in engineering, molecular and cell biology and
chemistry contributes to the recognition of strong brands.
MDS
Analytical Technologies’ products are sold into global markets. The
Sciex brand products are also sold globally but through our partnerships
with
Applied Biosystems and PerkinElmer. The current key markets are the US, Western
Europe and Japan, reflecting the sophistication of the drug development industry
in each of those areas. The fastest growing global markets include
China and India.
Competition
The
Company’s principal competitors in the life sciences tools market include Waters
Corporation, Thermo Fisher Scientific, Inc., Bruker Daltonics, Inc., Agilent
Technologies, Inc. and Invitrogen Corp., all of which operate in the global
market. Competition includes other manufacturers selling similar
technology and also companies that sell competing but different technologies
for
certain applications.
Since
technological superiority is a key product differentiator, MDS Analytical
Technologies, along with our partners, takes all necessary actions to protect
and defend our intellectual property. The Company owns numerous
United States, Canadian and foreign patents and have patent applications
pending
in the United States, Canada and abroad. In addition to our patent
portfolio, we possess a wide array of unpatented proprietary technology and
know-how. We also own numerous United States, Canada and foreign
trademarks and trade names for a variety of our product names, and have
applications for the registration of trademarks and trade names pending in
the
United States, Canada and abroad. We believe that patents and other
proprietary rights are important to develop and maintain the competitive
position of our business.
In
2006,
MDS leased and built out a 10,000 square foot manufacturing facility in
Singapore in an effort to improve the cost base of its instrumentation and
materials and position the Company to take advantage of the increasing
importance of the Asian market with respect to future sales
growth. To date, the manufacturing of three high volume mass
spectrometer product lines have been transferred to Singapore and the site
has
been expanded to 20,000 square feet.
The
majority of MDS Analytical Technologies’ infrastructure, manufacturing and
research and development reside in North America: Concord, Canada and Sunnyvale,
USA. However, in addition to the Singapore facility the Company has
manufacturing operations in Shanghai, China as well as a global network of
sales
offices throughout Europe, Asia and Latin America.
The
operations of MDS Analytical Technologies to a certain degree have been and
could be impacted by the cyclical nature of the pharmaceutical industry,
the
investment cycle in the biotech industry and the government regulation of
environmental issues.
Until
2006, the Company also operated in the healthcare industry primarily through
its
Canadian clinical laboratory operations, MDS Diagnostic Services. The
Canadian laboratory business was the largest operator of private sector clinical
laboratories in Canada. Services provided by the company included
clinical laboratory testing for physicians and non-hospital healthcare
institutions, management of hospital laboratories under contract and other
support services for clinical diagnostics.
The
Canadian diagnostics business was determined not to be consistent with the
Company’s strategic focus and was sold to Borealis Investment
Management. This transaction was completed on February 26, 2007 as
disclosed under “2.4.3 – Divestitures and Discontinuances”.
|
|
3.6
|
Significant
Investees
|
3.6.1
Lumira Capital Corp. (formerly MDS Capital Corp.)
Lumira
Capital Corp., in which MDS has a 45% interest, is a venture capital and
fund
management company focused on the healthcare and life sciences
industry. Lumira Capital Corp. earns management fees from the
management of investment funds, including incentive fees based on the overall
success of the funds. In 2006, Lumira Capital Corp. sold its retail
funds management business.
The
following were the principal operating facilities of the Company as at October
31, 2007:
|
Location
of Facility
|
Type
of Facility
|
Owned/
Leased
|
Business
Unit
|
Approx.
Sq. Footage
|
|
Ottawa,
Canada
|
Manufacturing
Plant
|
Owned
|
MDS
Nordion
|
483,300
|
|
Montreal,
Canada
|
Research
Laboratory and Clinical Trials Facility
|
Leased
|
MDS
Pharma Services
|
321,500
|
|
Concord,
Canada
|
Manufacturing
Plant
|
Owned
|
MDS
Analytical Technologies
|
147,500
|
|
Lyon,
France
|
Research
Facility
|
Owned
|
MDS
Pharma Services
|
134,200
|
|
Lincoln,
USA
|
Clinical
Trials Facility
|
Owned
|
MDS
Pharma Services
|
130,200
|
|
Sunnyvale,
USA
|
Manufacturing/Office
|
Leased
|
MDS
Analytical Technologies
|
114,600
|
|
Tempe,
USA
|
Clinical
Trials Facility
|
Owned
|
MDS
Pharma Services
|
104,500
|
|
Bothell,
USA.
|
Research
Laboratory
|
Leased
|
MDS
Pharma Services
|
95,600
|
|
Mississauga,
Canada
|
Corporate
Offices
|
Leased
|
MDS
Corporate
|
84,800
|
|
Union
City, USA
|
Manufacturing
/Office
|
Leased
|
MDS
Analytical Technologies
|
76,200
|
|
Mississauga,
Canada
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
63,000
|
|
Vancouver,
Canada
|
Manufacturing
Plant
|
Leased
|
MDS
Nordion
|
54,800
|
|
Phoenix,
USA
|
Clinical
Trials Facility
|
Owned
|
MDS
Pharma Services
|
51,100
|
|
King
of Prussia, USA
|
Corporate
Office
|
Leased
|
MDS
Pharma Services
|
47,100
|
|
Zurich,
Switzerland
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
40,200
|
|
Neptune,
USA
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
39,700
|
|
Taipei,
Taiwan
|
Research
Laboratory
|
Owned
|
MDS
Pharma Services
|
39,500
|
|
Irvine,
USA
|
Corporate
Office
|
Leased
|
MDS
Pharma Services
|
39,100
|
|
Paris,
France
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
37,600
|
|
Fleurus,
Belgium
|
Manufacturing
Plant
|
Leased
|
MDS
Nordion
|
36,200
|
|
Hamburg,
Germany
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
30,500
|
|
Belfast,
N. Ireland
|
Clinical
Trials Facility
|
Owned
|
MDS
Pharma Services
|
28,500
|
|
Downingtown,
USA
|
R&D
|
Leased
|
MDS
Analytical Technologies
|
27,900
|
|
Baillet,
France
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
26,400
|
|
Beijing,China
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
24,200
|
|
Baillet,
France
|
Clinical
Trials Facility
|
Owned
|
MDS
Pharma Services
|
23,091
|
|
Singapore
|
Manufacturing
Plant
|
Leased
|
MDS
Analytical Technologies
|
20,000
|
|
Shanghai,
China
|
Manufacturing
|
Leased
|
MDS
Analytical Technologies
|
18,900
|
|
Winnersh,
UK
|
Office
|
Leased
|
MDS
Analytical Technologies
|
14,000
|
|
Blackhorse,
USA
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
13,500
|
|
Mississauga,
Canada
|
Corporate
Head Offices
|
Leased
|
Corporate
|
13,400
|
|
Winnersh,
UK
|
Clinical
Trials Facility
|
Leased
|
MDS
Pharma Services
|
12,500
|
|
|
3.8
|
Research
and Development
|
The
Company carries on various research and development (R&D) programs largely
focused on product development at MDS Analytical Technologies and to a lesser
extent at MDS Nordion. Accounting for R&D is described in Note 3
to the 2007 Financial Statements, which are incorporated by reference into
this
AIF.
|
|
3.9
|
Environmental
Compliance
|
The
Company has established a series of policies to facilitate compliance with
applicable environmental laws and regulations. The policies require
that business units conduct regular environmental assessments of company
activities, establish remedial and contingency plans to deal with any incidents,
and establish processes to report to senior corporate management and to the
Board through the Environment, Health & Safety Committee of the Board on the
environmental status of the Company and its subsidiaries. MDS uses an
independent third party environmental auditing firm to conduct regular
regulatory audits of MDS operations. MDS believes its approach to
environmental compliance meets the regulated requirements and it is not expected
that this policy will have a significant impact on capital expenditures,
consolidated earnings, or our competitive position.
|
|
3.10
|
Other
Business Matters
|
3.10.1
Risk Factors
The
businesses in which MDS operates are subject to a number of risks and
uncertainties discussed below and under the heading “Risks and Uncertainties” in
the 2007 MD&A on pages 21 to 23. Additional risks and uncertainties not
presently known to the Company or that the Company does not currently anticipate
will be material, may impair the Company’s business operations. If any such
risks occur, the Company’s business, financial condition and results of
operation could be materially adversely affected.
If
we do not
introduce new products in a timely manner, our products could become obsolete
and our business, financial condition and results of operation would
suffer.
We
sell
many of our products in industries characterized by rapid technological change,
frequent new product and service introductions, and evolving industry standards.
Without the timely introduction of new products and enhancements, our products
could become technologically obsolete over time, in which case our business,
financial condition and results of operation would suffer. Our new product
offerings will not succeed if we are unable to:
|
·
|
accurately
anticipate customer needs;
|
|
·
|
innovate
and develop new technologies and applications;
|
|
·
|
successfully
commercialize new technologies in a timely manner;
|
|
·
|
price
our products competitively;
|
|
·
|
source,
manufacture and deliver high quality products in sufficient volumes
and on
time; or
|
|
·
|
differentiate
our product offerings from our competitors’ product offerings.
|
Developing
new products may require significant investments before we can determine
the
commercial viability of the new product. If we fail to accurately anticipate
our
customers’ needs and future activities, we may invest heavily in research and
development of products that do not become commercially viable.
In
addition, some of our licensed technology is subject to contractual
restrictions, limiting our ability to develop or commercialize products for
some
applications. For example, some of our license agreements are limited to
the
field of life sciences research, and exclude clinical diagnostics
applications.
Changes
in trends in the pharmaceutical and biotechnology industries could adversely
affect our operating results.
Industry
trends and economic and political factors that affect pharmaceutical and
biotechnology companies and academic and government entities that sponsor
clinical research, also affect our business. For example, the practice of
many
companies in these industries and government organizations has been to hire
companies to conduct large development projects. Research and development
budgets fluctuate due to changes in available resources, mergers of
pharmaceutical and biotechnology companies, spending priorities and
institutional budgetary policies. Our business could be adversely
affected by any significant decrease in life sciences research and development
expenditures by pharmaceutical and biotechnology companies, as well as by
academic institutions, government laboratories or private
foundations. In addition, numerous governments have undertaken
efforts to control growing healthcare costs through legislation, regulation
and
voluntary agreements with medical care providers and pharmaceutical companies.
If future regulatory cost-containment efforts limit the profits that can
be
derived on new drugs, our clients might reduce their drug discovery and
development spending, which could reduce our revenue and have a material
adverse
effect on our results of operations.
Our
business,
financial condition, and results of operation could be subject to significant
fluctuation, and we may not be able to adjust our operations to effectively
address changes we do not anticipate.
We
cannot
reliably predict future sales and profitability. Changes in competitive,
market
and economic conditions may require us to adjust our operations, and we may
not
be able to make those adjustments or to make them quickly enough to adapt
to
changing conditions. A high proportion of our costs are fixed and thus, small
declines in sales could disproportionately affect our business, financial
condition, and results of operation in any particular quarter. Factors that
may
negatively affect our quarterly sales and operating results
include:
|
·
|
lack
of demand for, or market acceptance of, our products;
|
|
·
|
competitive
pressures resulting in lower selling prices;
|
|
·
|
adverse
changes in the level of economic activity in regions in which we
do
business;
|
|
·
|
adverse
changes in industries on which we are dependent, such as the
pharmaceutical and biomedical industries;
|
|
·
|
changes
in the portions of our sales represented by our various products
and
customers;
|
|
·
|
delays
or problems in the introduction of new products;
|
|
·
|
our
competitors’ announcement or introduction of new products, services or
technological innovations;
|
|
·
|
increased
costs of raw materials or supplies;
|
|
·
|
delays
or problems sourcing product inputs, especially in circumstances
where
there are limited suppliers; or
|
|
·
|
changes
in the volume or timing of product orders.
|
We
may not be
able to successfully execute acquisitions or license technologies, integrate
acquired businesses or licensed technologies into our existing business,
or make
acquired businesses or licensed technologies profitable.
We
may be
unable to complete the acquisition of promising business acquisitions or
license
technologies for many reasons, including:
|
·
|
competition
among buyers and licensees,
|
|
·
|
the
need for regulatory and other approvals,
|
|
·
|
our
inability to raise capital to fund these acquisitions,
|
|
·
|
the
high valuations of businesses and technologies, or
|
|
·
|
restrictions
in the instruments governing our indebtedness, our Senior Unsecured
Notes
and our credit facility.
|
In
addition, any business we may seek to acquire or technology we may seek to
license may be unprofitable. Accordingly, the earnings or losses of
any such business that is acquired or technology that is licensed may dilute
our
earnings. We may also encounter other difficulties in integrating
acquired businesses or licensed technologies into our existing operations,
such
as incompatible management, difference in information or other systems or
cultural differences.
We
may not be
able to successfully obtain financing to fund potential
acquisitions
Our
rate
of growth may be limited by the pricing and availability of any proposed
acquisition target and other factors not within our control. To
finance our acquisitions, we may have to raise additional funds, either through
public or private financings. If we are unable to obtain such funding
or can do so only on terms unacceptable to us, we may miss opportunities
to
grow.
If
we are unable
to renew our licenses or otherwise lose our licensed rights, we may have
to stop
selling products or we may lose a competitive advantage.
If
we
lose the rights to a patented or other proprietary technology, we may be
forced
to stop selling products incorporating that technology and possibly other
products. We may need to
redesign
our products, thereby losing a competitive advantage. Competitors could
in-license technologies that we fail to license and erode our market
share.
Our
licenses typically subject us to various economic and commercialization
obligations. If we fail to comply with these obligations, we could lose
important rights under a license, such as the right to exclusivity in a market.
In some cases, we could lose all rights under the license. In addition, rights
granted under the license could be lost for reasons out of our control. For
example, the licensor could lose patent protection for a number of reasons,
including invalidity of the licensed patent, or a third party could obtain
a
patent that curtails our freedom to operate under one or more
licenses.
If
we do not
compete effectively, our business will be harmed.
We
encounter aggressive competition from numerous competitors in many areas
of our
businesses. The basis of this competition includes, but is not
limited to, the following:
|
·
|
reputation
for on-time quality performance and regulatory compliance;
|
|
·
|
expertise
and experience in specific areas;
|
|
·
|
scope
of service offerings;
|
|
·
|
strengths
in various geographic markets;
|
|
·
|
technological
expertise and efficient drug development processes;
|
|
·
|
ability
to acquire, process, analyze and report data in an accurate manner;
|
|
·
|
ability
to manage large-scale clinical trials both domestically and
internationally;
|
|
·
|
expertise
and experience in market access services; or
|
If
we do
not compete effectively our business will be harmed. In addition, we
anticipate that we may also have to adjust the prices of many of our products
to
stay competitive.
Changes
in
governmental regulations may reduce demand for our products or services or
increase our expenses.
We
compete in markets in which we, or our customers, must comply with federal,
state, local, and foreign regulations, such as environmental, health and
safety,
and food and drug regulations. Because of the high cost to develop, configure,
and market our products to meet customer needs created by these regulations,
any
significant change in these regulations could reduce demand for our products
or
services or increase our costs of producing these products.
Healthcare
reform
and changes to government policies related to healthcare spending may reduce
demand for our products and services or the prices we are able to
charge.
If
government reimbursement policies were changed, it could have a significant
impact on spending decisions of certain of our customers. In recent
years the United States Congress and US state legislatures have considered
various types of health care reform in order to control growing health care
costs. Similar reform movements have occurred in Europe and
Asia. Implementation of healthcare reform legislation containing
costs could limit the profits that can be made from the development of new
drugs. This could adversely affect research and development
expenditures by pharmaceutical and biotechnology companies which could in
turn
decrease the business opportunities available to us both in the United States
and abroad.
Patent
protection
for our proprietary products, processes, and technologies may be difficult
and
expensive and may not result in sufficient protection for our
technology.
We
have
applied or intend to apply for additional patents to cover our newest products.
We may not obtain issued patents from any pending or future patent applications
owned by or licensed to us. Of the US and foreign patents we currently hold,
the
claims allowed may not be broad enough to protect our technology. In
addition, competitors may design around our technology or develop competing
technologies. Intellectual property rights may also be unavailable or
limited in some foreign countries, which could make it easier for some of
our
competitors to capture increased market position.
Third
parties may
seek to challenge, invalidate or circumvent issued patents owned by or licensed
to us or claim that our products and operations infringe their patent or
other
intellectual property rights.
In
addition to our patents, we possess an array of unpatented proprietary
technology and know-how and we license intellectual property rights to and
from
third parties. The measures that we employ to protect this technology and
these
rights may not be adequate. Moreover, in some cases, the licensor can terminate
a license or convert it to a non-exclusive arrangement if we fail to meet
specified performance targets.
We
may
incur significant expense in any legal proceedings to protect our proprietary
rights or to defend infringement claims by third parties. In addition, claims
of
third parties against us could result in awards of substantial damages or
court
orders that could effectively prevent us from manufacturing, using, importing
or
selling our products in the United States or in any other country and could,
depending on the quantum of damages awarded, have a significant adverse affect
on our financial results.
Our
results of
operations will be adversely affected if we fail to realize the full value
of
our intangible assets.
As
of
October 31, 2007, our total assets included approximately $583 million of
net
intangible assets. Net intangible assets consist principally of the value
of the
long-term isotope supply agreement, acquired technology, brands and licenses,
net of accumulated amortization. We test these items on an annual basis for
potential impairment by comparing the carrying value to the fair market value
of
the reporting unit to which they are assigned.
Adverse
changes in our business or the failure to grow our life sciences businesses
may
result in impairment of our intangible assets, which could adversely affect
our
results of operations.
Restrictions
in
our Senior Unsecured Notes and bank credit facilities and other debt instruments
may limit our activities.
Our
Senior Unsecured Notes issued in fiscal 2003 as well as our credit facility
contain restrictive covenants limiting our ability to engage in certain
activities. The note purchase agreement governing our Senior
Unsecured Notes includes restrictions on our ability and the ability of our
subsidiaries to:
|
·
|
pay
dividends on, redeem or repurchase our shares(see Section 4.2 –
Dividends);
|
|
·
|
incur
obligations that restrict the ability of our subsidiaries to pay
dividends
or other amounts to us;
|
|
·
|
guarantee
or secure indebtedness;
|
|
·
|
enter
into transactions with affiliates; or
|
|
·
|
consolidate,
merge, or transfer all or substantially all of our assets and the
assets
of our subsidiaries on a consolidated basis.
|
We
are
also required to meet specified financial ratios under the terms of the note
purchase agreement relating to our Senior Unsecured Notes. Our failure to
comply
with these financial restrictions may result in an event of default under
the
note purchase agreement, which could result in acceleration of our indebtedness
under our Senior Unsecured Notes and require us to prepay our Senior Unsecured
Notes before their scheduled due date. Future debt instruments to which we
may
become subject could also contain similar provisions.
Our
business could suffer if we are unsuccessful in negotiating new collective
bargaining agreements.
Certain
Company sites employ personnel subject to collective bargaining
agreements. If we are unable to negotiate acceptable agreements with
the association(s) representing our employees upon expiration of existing
contracts, we could experience strikes or work stoppages. Even if we
are successful in negotiating new agreements, the new agreements could call
for
higher wages or benefits paid to members, which would increase our operating
costs and could adversely affect profitability.
The
carrying value of our venture capital investments could be in excess of fair
value due to market conditions
We
have
certain venture capital investments in biotechnology companies. We
monitor our investees’ capacity to raise and spend funds and to develop a
commercial market for their products and services as well as their regulatory
approval experience. We initially record investments on our books at
cost and adjust these values to fair value, when available, by a change to
other
comprehensive income. There exists a risk that the carrying value of
such
investments
could be in excess of fair value due to market conditions and this could
result
in provisions related to these investments.
We
are subject to
a number of market risks.
We
are
exposed to market risks, relating to both foreign exchange rates and interest
rates. We briefly describe several of the market risks we face
below.
Foreign
Exchange
Risk
As
a
global company, we are exposed to changes in foreign exchange rates including,
but not limited to, the following:
|
·
|
Because
a significant portion of costs from our Canadian-based operations
are
denominated in Canadian dollars, volatility in exchange rates can
have a
material impact on our financial results. Costs incurred in foreign
currencies, when translated into United States dollars for financial
reporting purposes, can fluctuate due to exchange rate movements.
|
|
·
|
Our
foreign subsidiaries, on occasion, invoice third-party customers
in
foreign currencies other than the functional currency in which
they
primarily conduct business. Movements in the invoiced currency,
as
compared to the functional currency can result in either realized
or
unrealized transaction losses that directly impact our cash flows
and our
results of operations.
|
|
·
|
Our
manufacturing and distribution organization is multinational in
nature
resulting in a variety of intercompany transactions that are billed
and
paid in many different currencies. Our cash flows and our results
of
operations are therefore directly impacted by volatility in these
currencies.
|
|
·
|
The
cash flow needs of each of our foreign subsidiaries vary over time.
Accordingly, there may be times when a subsidiary is on the receiving
side
or the lending side of a short-term advance from either us or another
of
our subsidiaries. These advances, being denominated in currencies
other
than a particular entity’s functional currency, can expose us to
volatility in exchange rates that can adversely impact both our
cash flows
and results of operations.
|
|
·
|
In
order to repay debt or take advantage of tax saving opportunities,
we may
remit cash from our foreign locations to Canada. When this occurs,
we are
liquidating foreign currency net asset positions and converting
them into
Canadian or US dollars. Our cash flows and our results of operations
may
therefore be adversely impacted by these transactions.
|
Interest
Rate
Risk
Our
Senior Unsecured Notes bear interest at fixed rates between 5.15% and 6.19%
per
annum and have various terms between five and twelve years. At
October 31, 2007, one quarter of our Senior Unsecured Notes is subject to
floating rates as a result of interest rate swap agreements that we entered
into. Interest rate volatility can have a direct impact on both our
short-term cash flows and earnings.
Our
insurance
coverage may not be adequate in all circumstances and there can be no assurance
that such coverage will continue to be available at rates and on terms
acceptable to the Company.
We
maintain a global liability insurance policy covering all of our operating
units. The policy provides coverage for normal operating risks and
includes liability coverage of up to C$35 million for MDS Analytical
Technologies and C$100 million for MDS Pharma Services and MDS
Nordion. We also maintain a global policy covering property and
business interruption risks with a total insured value of C$1.8 billion and
directors’ and officers’ insurance having a limit of $120
million. There is no certainty that the amount of coverage is
adequate to protect us in all circumstances or that we will be able to acquire
such insurance on an ongoing basis at rates acceptable to us.
From
time to time during the normal course of business, the Company and its
subsidiaries are subject to litigation.
Material
litigation that is not covered by our insurance policies could have a material
adverse impact on our results and our financial position.
Our
operations
may be subject to review by drug approval authorities and the outcome of
any
such review could lead to corrective action by the Company.
Our
facilities devoted to pharmaceutical development are subject to regular
inspection by the FDA, Health Canada and other foreign regulatory
agencies. Our customers also are subject to periodic review by drug
approval authorities, principally the FDA in the United States. In
addition, the terms of a typical CRO contract provide that our customers
can
request that our facilities be subjected to the same levels of review by
the
authorities. Our clinical laboratories are subject to significant
government regulation. In Canada, all laboratories are subject to
periodic government inspection and proficiency testing by government
agencies.
Our
failure, or any of our customers' failure, to pass an inspection conducted
by
the FDA, Health Canada or any other regulatory body could result in disciplinary
action leading to increased cost and/or reduced customer demand that would
have
a material adverse affect on our business, financial condition or results
of
operation.
Our
operations
might be affected if there was a disruption to air or ground
transportation
Our
business relies heavily on both air and ground transportation, including
the
highly regulated, time sensitive transport of isotopes. Any material
disruption to air or ground transportation systems could have a material
adverse
effect on our business. Contingency plans might not be effective or
sufficient to avert such material adverse effect.
Our
business
depends on the continued and uninterrupted performance of our information
technology systems and the communication systems that support those systems,
including the Internet.
Our
business depends, in part, on the continued and uninterrupted performance
of our
information technology systems. Sustained system failures or
interruptions could disrupt our ability to perform many of the functions
that
are critical to our business, including transportation
of
our
medical isotopes, reporting clinical test results, processing laboratory
requisitions and timely billings. Our business, results of operations
and financial condition could be adversely affected by a system
failure.
Our
computer systems are vulnerable to damage from a variety of sources, including
telecommunications failures, malicious human acts, and natural
disasters. Additionally, unanticipated problems affecting our systems
could cause interruption in our information technology systems. Our
insurance policies may not adequately compensate us for any losses that may
occur due to any failures in our information technology systems.
We
are subject to
a number of risks due to the fact that we carry on business in several
countries.
Our
operations are subject to the risks of carrying on business in several countries
in North America, Europe, Asia and Latin America. Accordingly, our
future results of operations could be adversely affected by a variety of
factors
including, but not limited to:
|
·
|
changes
in a country’s or region’s political or economic conditions, particularly
in developing or emerging markets;
|
|
·
|
possible
restrictions on the transfer of funds;
|
|
·
|
longer
payment cycles of foreign customers and difficulty of collecting
receivables in foreign jurisdictions;
|
|
·
|
trade
protection measures and import or export licensing requirements;
|
|
·
|
differing
tax laws and changes in those laws including investment tax credits,
or
changes in the countries in which we are subject to tax;
|
|
·
|
differing
cultural and business practices associated with foreign operations;
|
|
·
|
difficulty
in staffing and managing widespread operations;
|
|
·
|
differing
labor laws, including being subject to certain European regulations
relating to work counsels and changes in those laws;
|
|
·
|
differing
protection of intellectual property and changes in that protection;
or
|
|
·
|
differing
regulatory requirements and changes in those requirements.
|
We
are dependent
upon the services of key personnel.
Our
success depends, to a significant extent, upon the continued service of our
executive officers and key management and technical personnel, particularly
our
scientific and technical staff, and our ability to continue to attract, retain
and motivate qualified personnel. The competition for these employees
is intense. The loss of the services of one or more of our key
personnel could have a material adverse effect on our operating
results. The investment required to retain key staff, including
ensuring that compensation packages are competitive, could have an impact
on
the
profitability of our business. We do not maintain any key person life insurance
policy on any of our officers or employees.
If
we are unable to attract suitable participants for our clinical trials, our
business might suffer.
The
clinical research studies we run rely upon the ready accessibility and willing
participation of subjects. Our Phase I clinical research activities
could be adversely affected if we are unable to attract suitable and willing
participants on a consistent basis.
Our
cost of
research could increase in the event certain tax credits were to become
unavailable.
Research
and development we conduct in Canada, both for our own account and for defined
groups of arm’s length customers, is eligible for tax
credits. Elimination or significant reduction of these tax credits
would have a material impact on the cost of our research and development
which
would have a material adverse effect on our business, financial condition,
or
results of operation.
Changes
in the
regulatory environment could adversely affect our business.
Future
regulatory changes could impair our ability to offer the products and services
we now provide. Such regulatory changes could make the provision of
these services too expensive to be attractive to clients, could hamper the
delivery of products or services to clients, or could cause clients to reduce
the amount of outsourcing they are prepared to do resulting in a material
adverse effect on our business, financial condition, or results of
operation.
Certain
of our
businesses are exposed to attention from special interest groups and are
subject
to related political risks.
Among
our
products and services are those that contain or require as raw materials,
nuclear materials, and drug safety services. From time to time, these
have garnered negative attention from special interest groups and are therefore
at risk of disruption as a result of such attention. A significant
disruption could have a material adverse effect on our business, financial
condition, or results of operation.
Failure
to gain
FDA acceptance of Study Review could have a continuing material adverse effect
on the financial results of MDS Pharma Services bioanalytical
operations.
During
2004, 2006 and 2007, MDS Pharma Services received written communication from
the
FDA related to certain generic bioequivalence studies carried out at MDS
Pharma
Services’ bioanalytical laboratory facilities in Montreal, Canada.
The
communication resulted from inspections carried out by the FDA in 2003 and
2004,
a subsequent FDA audit in March 2006, and the FDA’s review of our responses to
the audit and related communications. The communications from the FDA
outlined concerns in certain studies about unexpected results in a limited
number of study samples, the standard procedures in place at that time to
investigate the root cause of the unexpected results and the policies and
procedures in place to address such results.
In
January 2007, the FDA issued statements that outlined steps that customers
of
our Montreal bioanalytical facilities would be required to take to resolve
any
outstanding issues. The FDA directed sponsors of approved and pending
generic drug submissions (ANDA) containing study data produced in these
facilities during the period between January 2000 to December 2004 to take
one
of three actions to address FDA concerns about the accuracy and validity
of
these bioanalytical studies: 1) repeat their bioanalytical studies; 2)
re-analyze their original study samples at a different bioanalytical facility;
or 3) independently audit original study results. In addition, the
FDA wrote to sponsors of innovator submissions and requested that they advise
the FDA of any submissions containing data from those facilities from the
affected period. If our clients’ studies fail to gain FDA clearance
it could impact our ability to attract and retain work and have a material
adverse effect on the financial results of MDS Pharma Services bioanalytical
operations
The
terms of MDS
Pharma Services’ contracts entitle clients to cancellation rights, which, if
exercised, could adversely affect our business, financial condition, and
results
of operation.
A
majority of the revenue earned by MDS Pharma Services’ business are under
contracts which typically run several months for drug discovery through Phase
I
clinical trials and as much as several years for Phase III/IV clinical
trials. Terms of most contracts entered into by MDS Pharma Services
entitle clients to cancellation rights that may be exercised by the client
in
the event of regulatory delays or if unexpected results are encountered at
any
stage of the development program. The cancellation of contracts could
have a material adverse effect on MDS Pharma Services’ business, financial
condition and results of operation.
We
could be
subject to claims as a result of product failure in clinical trials
testing.
During
clinical trials testing, we will typically administer pharmaceutical products
owned and developed by others to individuals acting as test
subjects. The terms of the contracts we enter into with the sponsor
of the product vary and do not prevent individuals to whom the products have
been administered from filing claims against us even though we may be
indemnified in these circumstances. Furthermore, the indemnity
obligations established under these contracts are not secured and it is possible
that the indemnifying party may not have the financial ability to meet its
obligations to us in the case of an adverse event.
We
could be
subject to claims as a result of our administration of clinical
trials.
In
conducting the tests and other procedures that form a part of the clinical
trials process, we may be subject to claims related to alleged negligence
or
misconduct pertaining to the services we perform. These risks may
also include the medical malpractice of medical personnel operating Phase
I
clinical facilities. In addition, we could potentially be subject to
claims for negligence or misconduct on the part of third-party investigators
engaged by us on behalf of clients.
Certain
of our
products depend on the availability of the supply of key
components.
A
number
of our products include materials for which there is a limited source of
supply. There can be no assurance that we will be able to continue to
acquire the necessary materials at an acceptable price. If we are
unable to acquire the necessary materials at an acceptable price, it could
have
a material adverse effect on our business, financial condition and results
of
operation.
Labour
disruptions within the companies that supply our isotopes could have a material
adverse affect on our financial results.
We
are
dependent upon suppliers for our source of isotopes. The majority of
our isotope suppliers employ unionized personnel. Any labour
disruptions could have a material adverse effect on our business, financial
condition, and results of operation.
We
are dependent
upon access to nuclear power reactors to install or remove cobalt and such
access is dependent upon third parties.
We
purchase Co
59
as a
commodity. The processed Co
59
is
inserted into nuclear reactors for approximately 18 to 60 months to convert
it
to Co
60
. Access
to these nuclear reactors to either install or remove cobalt is determined
based
on the routine maintenance schedule for the reactor facility. Any
significant change in a maintenance schedule could have a material impact
on the
availability of Co
60
in any
given year which could have an adverse effect on our business, financial
condition, and results of operation.
An
interruption in the supply of reactor-produced isotopes could have a material
adverse effect on our financial results.
As
noted
earlier, to provide greater security for the future supply of molybdenum-99
and
other reactor-produced radioisotopes commonly used in nuclear medicine, we
contracted with AECL for the construction and operation of two special purpose
reactors and a processing facility to produce such isotopes.
Completion
of the MAPLE project is currently seven years behind schedule and to date
AECL
has been unable to resolve certain technical and regulatory issues to the
satisfaction of the CNSC. At this time, we do not have sufficient
reliable information from AECL to predict with any reasonable degree of accuracy
if or when commercial production will commence from the MAPLE
Facilities.
In
the
absence of the MAPLE Facilities, we depend upon the NRU reactor operated
by AECL
in Chalk River, Canada for the supply of a majority of our reactor-produced
radioisotopes. The NRU reactor is 50 years old. In
November and December 2007, the NRU reactor had an extended, unplanned shutdown
related to a regulatory matter. There is no assurance that the NRU
reactor will not experience other planned or unplanned
shutdowns. Further prolonged planned or unplanned shutdowns would
have an adverse effect on our business, financial condition, and results
of
operation which could be material.
Potential
changes
to the regulation of the export of medical isotopes could cause supply
disruptions.
Certain
purchased medical isotopes are produced in reactors and are by-products of
the
decay of the uranium fuel in the reactor. AECL obtains the majority
of its uranium from the United States. The U.S. Department of Energy
(DOE) strictly controls exports of highly-enriched uranium
(HEU). Delays in obtaining HEU could cause supply disruption for
certain isotopes. Currently the DOE must approve each shipment of
HEU. There is political pressure by the US Government on medical
isotope manufacturers
to convert to
low-enriched uranium (LEU). Any conversion to LEU, should such
conversion become technologically, commercially and
economically
viable, could require significant additional capital investment to convert
both
reactors and related processing facilities and could impact the profitability
and potential viability of our isotope business.
Operating
licenses related to handling and storage of radioactive materials could be
subject to cancellation by the CNSC under certain
circumstances.
All
of
our facilities that handle or store radioactive materials are government
regulated and inspected. Failure to obtain future operating licenses
could adversely affect our business, financial condition, or results of
operation.
Our
business, financial condition and results of operation would be harmed if
our
isotope processing facility suffered a business interruption or was shut
down
for any reason.
Our
sole
site for processing and delivery of reactor based isotopes in North America
is
located in Ottawa, Canada. Any event including, a labor dispute, a
natural disaster, fire, power outage, security, regulatory, public health
or
other issue that resulted in a prolonged business disruption or shutdown
of this
facility would have a material adverse affect on our business, financial
condition or results of operation.
Our
operations
are exposed to risk of material environmental liabilities.
Certain
of the materials we handle can have a significant and pernicious impact on
the
environment. As a result, we are exposed to risk of costs associated
with environmental clean-up, as well as exposure to claims from others who
have
suffered a loss as a result of an environmental spill.
Our
business,
financial condition and results of operation could be harmed by cyclical
downturns affecting certain of the industries into which we sell our analytical
instruments.
Some
of
the industries and markets into which we sell our products are
cyclical. Industry downturns are often characterized by reduced
product demand, excess manufacturing capacity and erosion of average selling
prices and profits. Significant downturns in our customers’ markets
and in general economic conditions could result, and have resulted in the
past,
in a reduced demand for several of our products, adversely affecting our
business, financial condition and results of operation.
A
portion of our
business is carried on through partnerships with third
parties.
Essentially
all sales of Sciex products are made through partnerships with Applied
Biosystems and PerkinElmer. The relationships are governed by
partnership agreements that define the rights and responsibilities of each
party. While each partnership is for a fixed term, both agreements
extend automatically in the absence of any notice to terminate the agreements.
Sciex focuses primarily on the development and manufacturing of analytical
instruments while our partners focus primarily on marketing, sales, and
service. Failure by either partner to carry out its respective
obligations could adversely affect Sciex’s business, financial condition, or
results of operation.
3.10.2
Legal Proceedings and Regulatory Actions
From
time
to time during the normal course of business, the Company becomes party to
legal
proceedings. At the present time, the Company is not a party to
proceedings that alone or in aggregate represent claims that could, in the
judgment of management, be material to the Company and its subsidiaries on
a
consolidated basis. In addition, during the year, the Company was not subject
to: any penalties or sanctions imposed by a court relating to securities
legislation or by a securities regulatory authority; an penalties or sanctions
imposed by a court or regulatory body that would be considered important
by a
reasonable investor; or any settlement agreements relating to securities
legislation or with a securities regulatory authority.
3.10.3
Interest of Management and Others in Material Transactions
No
director or executive officer of MDS nor any associate or affiliate of any
of
the foregoing, and, to the knowledge of the directors and executive officers
of
MDS, no person or company that is the direct or indirect beneficial owner
of, or
who exercises control or direction over, more than 10 percent of our Common
shares or any of such person or company’s associates or affiliates, has had an
interest in any material transaction entered into by the Company since November
1, 2002.
3.10.4
Transfer Agent and Registrar
The
transfer agent of the Company is CIBC Mellon Trust Company, Toronto,
Canada.
3.10.5
Material Contracts
The
following are the only material contracts, other than contracts entered into
in
the ordinary course of business, which have been entered into by the Company
within the most recently completed financial year, or were entered into before
the most recently completed financial year and are still in effect, deemed
to be
material:
|
|
(a)
|
The
Note Purchase Agreement governing our Senior Unsecured Notes issued
on
December 18, 2002. The Senior Unsecured Notes bear interest at
rates
between 5.15% and 6.19% and have various terms between five and
twelve
years, (See Section 2.4.1 – Capital Structure).
|
|
|
(b)
|
A
C$500 million, five-year committed, revolving credit facility provided
on
July 14, 2005, (see Section 2.4.1 – Capital Structure).
|
|
|
(c)
|
Interim
and Long-term Supply Agreement between Atomic Energy Canada Limited
and
MDS (Canada) Inc., (see Section 3.3 – MDS Nordion: MAPLE Facilities).
|
|
|
(d)
|
Asset
purchase agreement between MDS Inc. and Borealis Infrastructure
Management
Inc., dated October 4, 2006, (See Section 2.4.3 – Divestitures and
Discontinuances).
|
|
|
(e)
|
Agreement
and plan of merger by and among: MDS Inc. Monument Acquisition
Corp., and
Molecular Devices Corporation, dated January 28, 2007, (see Section
2.4.2
– Acquisitions, and Section 3.4 – MDS Analytical Technologies: Overview of
Business).
|
The
terms
of our Senior Unsecured Notes and credit facility are typical for debt
instruments of this nature (see 3.10.1 - Risk Factors).
3.10.6
Experts
The
2007
Financial Statements have been audited by Ernst & Young LLP, Box 251, 222
Bay Street, Toronto, Ontario, M5K 1J7. During fiscal 2007, MDS’s Audit Committee
obtained written confirmation from Ernst & Young LLP confirming that they
are independent with respect to the Company within the meaning of the Rules
of
Professional Conduct of the Institute of Chartered Accountants of
Ontario.
|
4.
|
SELECTED
CONSOLIDATED FINANCIAL INFORMATION
|
|
|
4.1
|
Summary
Annual Information (Year to October 31)
|
|
(amounts
in millions except per share amounts)
|
2007
|
2006
|
2005
|
|
|
|
(revised
1
)
|
(revised
1
)
|
|
Consolidated
Statements of Income
|
|
|
|
|
(US
GAAP)
|
|
|
|
|
Total
revenues
|
$1,210
|
$1,060
|
$982
|
|
Operating
income (loss)
|
$(108)
|
$(56)
|
$(76)
|
|
Income
(loss) from continuing operations
|
$(33)
|
$22
|
$(29)
|
|
Net
income
|
$773
|
$120
|
$(7)
|
|
Earnings
per share – basic
|
$5.87
|
$0.83
|
$(0.05)
|
|
Earnings
per share – diluted
|
$5.86
|
$0.83
|
$(0.05)
|
|
|
|
|
|
|
Consolidated
Statements of Financial Position
|
|
|
|
|
(US
GAAP)
|
|
|
|
|
Total
assets
|
$3,018
|
$2,343
|
$2,238
|
|
Long-term
debt
|
$384
|
$394
|
$394
|
|
Total
shareholders’ equity
|
$1,897
|
$1,354
|
$1,175
|
|
Weighted
average shares outstanding
|
$132
|
$144
|
$142
|
|
Long-term
debt/shareholders’ equity
|
15%
|
28%
|
34%
|
|
Current
ratio (excludes assets for sale)
|
1.6
|
2.4
|
1.70
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
(US
GAAP)
|
|
|
|
|
Cash
from continuing operating activities
|
$178
|
$25
|
$48
|
|
Capital
assets purchased
|
$71
|
$51
|
$102
|
|
Cash
from discontinued operations, net
|
$871
|
$165
|
$52
|
|
Net
issue (repayment) of long-term debt
|
$(18)
|
$(7)
|
-
|
|
1
Figures
for 2006 and 2005 have been revised to conform to the fiscal 2007
consolidated financial statement
presentation.
|
The
declaration of dividends is at the discretion of the Board of
Directors. Both the Company’s credit facility and Senior Unsecured
Notes contain provisions which could restrict the amount of any dividend
payment. However, as noted below, the Company has discontinued the
payment of dividends.
Prior
to
October 2004, dividends were declared payable in April and
October. Effective for the October 2004 dividend, the Company adopted
a policy of paying quarterly dividends. Pursuant to the policy,
dividends, when declared, were paid in January, April, July and
October. In the past three years, MDS has paid the following cash
dividends:
|
Fiscal
Year
|
Aggregate
Dividend Amount
per
Common Share
|
|
2005
|
C$0.1300
|
|
2006
|
C$0.1300
|
|
2007
|
C$0.0325
|
On
October 5, 2006, the Company announced that it would discontinue paying
dividends following completion of the sale of the diagnostics
business. The final dividend was declared on December 12, 2006 and
was paid January 8, 2007 to shareholders of record on December 20,
2006.
MDS
uses
a combination of equity and long-term debt to finance its
business. The Company has one class of Common shares authorized and
outstanding. As at October 31, 2007, there were 122,578,331 Common
shares outstanding.
The
Common shares entitle the holder thereof to receive notice of, to attend,
and to
vote at all meetings of holders of Common shares. Each Common share
entitles the holder thereof to one vote per share and to share rateably in
the
assets of the Company on liquidation or dissolution.
The
Company’s share capital has been restructured or converted several times from
Common shares in 1973 to Class A Common and Class B Non-Voting in 1980 and
back
to Common shares in March of 2000. Under the terms of the 2000
conversion, each Class A share was converted into 1.05 Common shares and
each
Class B non-voting share was converted into
1.0
Common share.
The
Company’s shares have been split on a two-for-one basis four times, on the
following dates: September 26, 1980, July 13, 1983; March 15, 1990; and,
November 15, 1996. In addition, on September 14, 2000, the directors
of the Company declared a one-for-one share dividend paid on October 10,
2000 to
shareholders of record on September 26, 2000. This share dividend had
the same effect as a two-for-one stock split.
MDS
currently has a normal course issuer bid (NCIB) in place to purchase up to
4,506,236 Common shares that expires on July 2, 2008. As at October
31, 2007, no Common Shares had been purchased previous to the
NCIB. During fiscal 2005, the Company repurchased 799,000 Common
shares for cancellation at an average price of C$16.67 under the terms of
an
NCIB in place in 2005. The Company repurchased no Common shares for
cancellation under an NCIB in 2006 or 2007, but rather in the second quarter
of
2007, the Company conducted a substantial issuer bid and repurchased
approximately 22.8 million Common shares at a price of C$21.90 per share
on
April 9, 2007.
The
Company has issued Senior Unsecured Notes payable totalling $311 million,
has
secured financing for the MAPLE facilities construction project in the form
of a
non-interest bearing government loan, and has various other forms of long-term
credit, mostly associated with the purchase of specific assets. At
October 31, 2007, the value of all of the Company’s outstanding debt was $384
million. In addition, the Company has available C$500 million of
undrawn committed term credit facilities.