Contract research organisation (CRO) MDS Pharma Services continued its slow climb back to financial health in the fourth quarter of 2007, breaking even at operating level while its net revenues inched ahead 0.8% to$123 million.

The improved operating performance, which was despite a hit of around $6 million from currency exchange and the weak dollar, compared with a $15 million operating loss in the fourth quarter of 2006, when MDS Pharma’s reputation was being battered by US concerns about bioequivalence studies conducted at two of its facilities in Canada. The longer-term impact of these concerns, and the subsequent audits of MDS pharmacokinetic studies requested by the US Food and Drug Administration (FDA) in January 2007, could be seen in the CRO’s full-year results, which included a $118 million operating loss against a $39 million loss for the whole of fiscal 2006.

The full-year picture was more encouraging in terms of adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA), which stripped out restructuring charges and a US$61 provision made in the second quarter to cover client costs for the FDA-requested pharmacokinetic review. Adjusted EBITDA for fiscal 2007 were $13 million compared with a $11 million loss for the previous fiscal year. In the latest quarter, adjusted EBITDA were $5 million against a $7 million loss in Q4 2006, marking MDS Pharma Services’ fifth consecutive quarter of sequential profit improvement in EBITDA terms.

The modest growth in net revenues for the fourth quarter was down to MDS Pharma’s late-stage businesses, where revenues were 9.6% ahead at $57 million. In the full year, late-stage revenues improved by 16.8% to $223 million. These gains were largely offset, though, by the quality control problems in the slightly larger early-stage operations, where fourth-quarter and full-year revenues respectively dropped by 5.7% to $66 million and 5.2% to $254 million. Net revenues for fiscal 2007 overall were $477 million, up by 3.9%.

The CRO’s Canadian parent, MDS Inc, said the decline in early-stage revenues for the fourth quarter reflected a weak performance from bioanalytical and discovery/preclinical services, which undercut otherwise strong growth in drug safety testing. Phase I revenues were flush with the fourth quarter of 2006 and “are gaining momentum sequentially”, it added. MDS also said it was encouraged by the strength of new bioanalytical orders, which doubled against the fourth quarter of fiscal 2006, and by the improved quality of its period-end backlog, “resulting from our focus on bidding on contracts that enable us to achieve reliable profitability”.

Restructuring plan
MDS Pharma Services continued to implement its restructuring plan during the fourth quarter, largely completing a redundancy programme at its facility in Montreal, Canada, including a “substantial reduction” of staff supporting the FDA audits and other audits being conducted by the CRO’s clients. The six-month time limit imposed by the US agency for audits of abbreviated new drug applications (ANDAs) is now up, and MDS believes it has “substantially completed” all of the necessary site audits for generic drug clients.

The company also continues to receive a “limited” number of study audit requests from innovator companies, following the FDA’s call for information on new drug applications (NDAs) containing data from bioanalytical studies conducted between January 2000 and December 2004 at MDS Pharma Services’ St Laurent and Blainville facilities in Quebec, Canada. These requests are likely to persist “in low numbers” over the coming months, MDS Pharma added. The CRO said it was “satisfied with the progression” of discussions with European regulators about the work done for the FDA, although it could not assess the “potential impact of possible foreign regulatory actions, if any, at this time”.

MDS Pharma reported significant progress in consolidating its central laboratory operations in Europe, with the closure of its UK facility in Sittingbourne now complete. During the fourth quarter the CRO also tied up the transfer of certain operations from Montreal, Canada to its US facilities in Bothell, Washington and Lincoln, Nebraska. To date, around 400 employees in total have been lost through restructuring and MDS Pharma has used up $15 million of the reserve established for this purpose in the second quarter of 2007. That leaves a reserve of $11 million and “we anticipate further headcount reductions affecting 100 positions in the first half of next year”, the CRO noted.

Of the $61 million set aside to reimburse client costs for the FDA-requested pharmacokinetic review, $11 million has been used to date, partially offset by a foreign currency translation gain on the US dollar-denominated components of the cost estimate. MDS Pharma is still awaiting reimbursement bills for the majority of the generic and innovator study audits completed in its facility. “Based on information currently available, we believe that the remaining reserve of $55 million will be sufficient to cover any agreements reached with clients for study audits, study re-runs, and other related costs,” it stated.