MDS to sell off most remaining business units, focus on medical isotopes

TORONTO - Canadian life sciences company MDS Inc. (TSX:MDS) plans to sell off most of its major divisions, pay back long-suffering shareholders and focus on its troubled Nordion medical isotope unit.

TORONTO - Canadian life sciences company MDS Inc. (TSX:MDS) plans to sell off most of its major divisions, pay back long-suffering shareholders and focus on its troubled Nordion medical isotope unit.

The moves, announced early Wednesday, essentially reverse the company's strategy over the last few years to sell its lab division, expand into diverse businesses such as high-end research equipment and focus on the United States and other global markets.

Investors welcomed the news, pushing MDS's sagging stock price nearly a third higher on the Toronto Stock Exchange.

The company has been under pressure from shareholders over its low stock price and has been undergoing a strategic review for months, initiated by Jim MacDonald, a key shareholder who was named chairman last November.

MDS chief executive Stephen DeFalco said Wednesday the ongoing shutdown of the government-owned nuclear reactor in Chalk River, Ont., has caused significant challenges to Nordion. The MDS division depends on the National Research Universal reactor, known as the NRU, for the radioactive materials used in brain scans, cancer tests and other medical imaging procedures at hospitals around the world.

DeFalco said Nordion's troubles resulted in the decision to split up the company to recognize the value of the other parts of MDS's business.

"One of the realities of doing business in the global economy is the need to be agile and nimble to respond to changing realities," DeFalco said in a conference call.

"The challenges faced by MDS as a result of the recent global economic downturn and (Atomic Energy of Canada's) prolonged shutdown of the NRU are unparalleled and have been exceptional. In light of these challenges, we believe this new course and repositioning of MDS is in the best interest of the company and its shareholders."

DeFalco also said in an interview that Nordion can be a solid stand-alone company.

"We like Nordion a lot," he said. "Nordion has been a good, strong, steady, profitable performer for 10 years. We think it's a very viable stand-alone business and very well-positioned going forward."

He said it's not well known that Nordion includes other activities besides the medical imaging that's dependent on isotopes.

If events unfold as MDS hopes, the company will sell off its other major business units - Analytical Technologies and Pharma Services - and downsize its corporate head office in the Toronto area by about 110 positions while about 50 will be offered positions in the remaining business unit.

As for DeFalco's role, he said "there's no immediate changes planned to the board of directors or the executive team at this time."

MDS will sell its Analytical Technologies business for $650 million to Washington, D.C.-based Danaher Corp. (NYSE:DHR). MDS intends to return between $400 million and $450 million of the money it gets from the sale to shareholders through a share buyback.

Owners of the company's stock have long pressed for strategies to boost the share price, once well over $20. But MDS stock has dropped to about a third of where it was two years ago as the company faced challenges such as the recession, a U.S. regulatory investigation into one of its Canadian labs, weak financial results and troubles with the Nordion unit caused by the isotope supply problems.

Desjardins Securities analyst Maher Yaghi described the $650-million sale price for MDS Analytical as "attractive" compared to his valuation of the unit at US$388 million (approximately C$428 million).

"We believe the stock will react positively to the Analytical Technologies sale, and consider the developments announced (Wednesday) as steps in the right direction," Yaghi commented.

"We continue to believe, however, that increased clarity on the NRU reactor issue will be necessary to finally unlock the full value of the Nordion unit in our valuation."

Yaghi maintained his "hold" rating on MDS's stock and placed the target price under review.

In an unrelated announcement Wednesday, Danaher said it will speed up an ongoing restructuring by slashing about 3,300 jobs and 30 facilities.

The Washington-based company, which makes Sears' Craftsman hand tools, dental X-ray machines and microscopes and employs 50,000 people, has been cutting costs since last year.

Danaher president and chief executive Larry Culp said it's too early to say whether the MDS business will be affected by future layoffs, but he does plan to keep its headquarters in their current location of Concord, Ont., just north of Toronto.

"I think we'll need to deal with those (employment) decisions down the road once we actually own the business, but I think our view is this is a business in which we want to invest. Certainly the core headquarters location there in Concord is important in that regard, as are the sales and services resources around the world," Culp said in an interview.

MDS bought Analytical Technologies - a California company formerly known as Molecular Devices - for about the same price as it's now selling for a few years ago. However, the credit crunch made it difficult for buyers to finance the purchase of high-end spectrometers and other expensive equipment made by the company.

That deal was the first major move by MDS after the $1.3-billion sale of its lab division, Canada's largest, to a unit of the OMERS pension fund. At that time, MDS used some of the money for a special $500-million share buyback.

Much of the rest was used to finance the US$615 million purchase of Molecular Devices, a company based in Sunnyvale, Calif., in early 2007.

MDS shares soared 30.2 per cent to close at C$8.36 on the Toronto Stock Exchange on Wednesday, a gain of $1.94 in heavy trading of more than 3.2 million shares. Danaher stock gained US$1.71 or 2.8 per cent to close at US$62.13 on the New York Stock Exchange.

MDS said it is actively seeking a buyer for its MDS Pharma Services business, which helps other companies discover and develop new drugs, but if an acceptable transaction can't be completed it will continue to own the business.

Meanwhile, MDS downgraded its third-quarter forecasts due to further softening in customer demand for some of its services and by the extended downtime at the NRU reactor. MDS said it expects to report net revenues in the range of $190 million to $195 million.

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