A US-based hedge fund is stepping up pressure on Canadian life sciences company MDS Inc to unlock shareholder value by divesting parts of its business, including the troubled contract research organisation (CRO) MDS Pharma Services.

The initiative comes from Obrem Capital Management, a New York-based company that in April said it had acquired 6.2 million shares, or a 5.1% stake, in MDS Inc and would be recommending a spin-off or sale of several of the Canadian company’s business units. Obrem has also been pushing for a significant share repurchase programme at MDS and for members of the company’s management and board of directors to buy up more MDS stock “to more closely align their interests with those of other shareholders”.

Despite positive interactions with MDS, Obrem has been “disappointed with the lack of action in response to our recommendations”, the hedge fund comments in a letter to the Canadian company’s management and board. It is now threatening to call a special shareholders’ meeting at which it would seek the removal of “one or more long-standing MDS board members, who we believe have done little to prevent significant value destruction” and would put the actions recommended above to shareholder vote.

In July MDS announced a restructuring plan involving total charges of around US$28 million to “drive improved profitability” at MDS Pharma Services and at MDS Analytical Technologies, the unit that supplies life sciences tools such as mass spectrometry. Announcing its third-quarter results in September, though, MDS further tempered its financial guidance for 2008, citing “slower than expected ramp-up of revenue” at MDS Pharma Services.

According to Obrem, the continued delay in the recovery of MDS Pharma, which is still feeling the reverberations from US concerns over bioequivalence studies conducted at two of its facilities in Quebec, is “particularly upsetting”. In the meantime, other CROs “have been reporting record profitability and results”, it notes.

Despite “the poor execution and missed opportunities of the past several quarters”, MDS’ assets appear to have retained substantial value, Obrem points out, adding that conversations with industry experts, competitors, and investment bankers “have given us comfort that the Company’s divisions are well positioned in attractive markets”. The fund therefore wants the MDS board immediately to “engage one or more reputable investment banking firms to help the Company explore strategic alternatives, including divesting individual business units”.

It would be difficult to sell the whole of MDS to a single buyer, “for the simple reason that this collection of assets does not belong together in the first instance”, Obrem believes. Its preference would be for “an expeditious sale of some combination of the legacy Sciex business, the Molecular Devices business, and the pieces of MDS Pharma Services, followed by a spin-off of MDS Nordion”. The last of these units provides medical isotopes for molecular and diagnostic imaging, sterilisation technologies for disease prevention, and radiotherapeutics for targeted therapy.

The easiest group of assets to divest, Obrem suggests, would be MDS Analytical Technologies, “which we think would attract numerous potential buyers, including several who already know the assets well”.