MISSISSAUGA, Ontario—Just three months after MDS Inc.retooled its contract research unit MDS Pharma Services to focus on early-stagediscovery and development, the company announced Sept. 2 that it will sell twoof its three business units in order to focus solely on medical isotopes.
In one transaction, MDS is selling its mass spectrometrybusiness, MDS Analytical Technologies, to Danaher Corp., an instrumentmanufacturer based in Washington, D.C., for $650 million in cash. Under theterms of the agreement, Danaher will acquire the MDS Analytical Technologiesbusiness, which includes approximately 1,100 employees operating in 10countries. MDS said it also intends to return approximately $400 million to$450 million of the sale proceeds to its shareholders.
Under a separate but concurrent arrangement, Danaher hasagreed to purchase the portion of AB SCIEX, the Applied Biosystems/MDSAnalytical Technologies mass spectrometry joint venture held by Life TechnologiesCorp.
The aggregate purchase price for the combined transactionsis $1.1 billion, including debt assumed and net of cash acquired. Thetransactions are subject to shareholder and regulatory approval and otherclosing conditions.
In a second transaction, MDS has put its MDS Pharma Servicesbusiness, which is focused on early-stage discovery operations through PhaseIIa, up for sale. According to MDS, the unit MDS has strength in bioequivalenceand bioanalysis studies and one of the largest Phase I bed capacities in theindustry. If MDS is unable to find a buyer, it will retain and invest inbuilding the business.
MDS also said it continues to seek a buyer for its MDSPharma Services Global Central Laboratories business, per an announcement madein June.
Once the recently announced transactions are complete, MDSwould focus solely on its MDS Nordion business, which provides medical isotopesfor molecular and diagnostic imaging, radiotherapeutics and sterilizationtechnologies.
According to a statement released by Stephen P. DeFalco,president and CEO of MDS, the strategic repositioning was made necessary by theeconomic downturn and the prolonged shutdown of Atomic Energy of Canada Ltd.'s(AECL) National Research Universal (NRU) reactor. These events "have createdsignificant challenges for our businesses," DeFalco said.
"MDS Nordion will remain focused on innovation and onbuilding its market leadership in the provision of medical isotopes formolecular and diagnostic imaging, radiotherapeutics and sterilizationtechnologies," he added.
MDS shares soared nearly 32 per cent to $8.45 on the TorontoStock Exchange following the news, a gain of $2.03 in heavy trading of morethan 2.7 million shares.
Morningstar Research Inc., a Canadian equity research anddata business, called MDS' decision to put the units up for sale "longoverdue."
"MDS' 'white flag' transaction helps to unlock some valuedespite what we believe is a fairly low price for its analytical technologiessegment—we've valued this unit on a stand-alone basis at close to $900million," wrote Alex Morozov, the associate director of Morningstar'shealthcare team. "Given the tough environment for the analytical instrumentindustry and likely pressure from its shareholders to break up the company, MDSmight have been forced to accept the best deal available. However, consideringthat it paid $615 million for the molecular devices business alone just twoyears ago, the decision to accept Danaher's bid (which essentially values thevery same unit at approximately $200 million) seems hasty."
Morozov added that MDS' pharma unit is also unlikely tofetch what the firm thinks it is worth, "given the company's struggles torestore its reputation after data mishaps a few years ago, but we've longmaintained that MDS would be best served by selling this business before itsvalue is permanently impaired."
"Several pieces of this unit have already beensold--late-stage clinical trials and central labs operations should net thecompany $100 million-plus," Morozov pointed out. "But the early-stage businessis the pharma unit's most valuable possession (the company is the third-largestearly clinical trial operator), and it should generate some interest on theopen market. There are still a number of question marks surrounding thecompany, but it is worth digging into for a speculative investor."
The economic downturn has also affected Danaher, whichannounced on the same day its plans to acquire MDS' businesses and close 30facilities and eliminate about 3,300 jobs in an effort to save about $220million annually. Last quarter's earnings results disappointed investorsbecause business fell 15 percent compared with the same quarter of last year.The company also reported operating earnings of 89 cents, which was down from$1.08 for the same period a year ago.
Danaher, which makes equipment ranging from Craftsman toolsto dental X-ray machines, said its acquired businesses will operate within itsMedical Technologies segment, joining its Leica, Radiometer, Sybron, and KaVobusinesses, and expand the segment's annual revenues by more than $650 million.AB SCIEX designs and manufactures mass spectrometers and sells into theresearch, applied and clinical markets. Typical applications include proteomicsresearch, drug development, food and environmental safety testing anddiagnostics testing. Customers include academic and research institutions,pharmaceutical development labs primarily supporting clinical trials, testingand reference labs and hospitals.
The acquired businesses will also increase Danaher's lifesciences and diagnostics annual revenues to more than $2 billion, said DanaherPresident and CEO H. Lawrence Culp Jr., in a statement.
"We are excited about the opportunity to acquire two leadingbrands in the life sciences instrumentation market, which will complement ourexisting Medical Technologies businesses and present an attractive valuecreation opportunity," Culp said. "AB SCIEX is the market leader in massspectrometry and its instruments address the needs of a broad scientificcommunity involved in many applications including the research, applied andclinical markets. Additionally, Molecular Devices is known for high-quality,innovative products in the segments it serves."
News of the acquisitions and further cutbacks appeared toboost the company's stock. Danaher shares gained 2.83 percent Wednesday toclose at $62.13.
Barclays Capital analyst Robert T. Cornell said in a clientnote the acquisitions announced Wednesday are "incremental positives" for 2010.He raised his price target to $70 from $69 and said he expects "meaningfulearnings leverage."