June 5, 2008 / 12:22 PM / 9 years ago

MDS cuts outlook on weak medical instrument sales

TORONTO (Reuters) - MDS Inc MDS.TO reported a lower second-quarter profit on Thursday and reduced its 2008 outlook as the health sciences company faces softening demand for high-end medical instruments.

MDS, which specializes in analytical instruments, molecular imaging and contract research, lowered its outlook to reflect an expected drop in U.S. sales of specialized instruments and slower growth in its research division.

The news knocked MDS shares down as much as 10 percent on Thursday on the Toronto Stock Exchange. By early afternoon the stock was off C$1.47, or 7.9 percent, at C$17.13.

President Stephen DeFalco said MDS is seeing a shift in customer spending away from purchases of $250,000 or more, to lower-end equipment worth less than $100,000.

And a turnaround in the spending trends of the big pharmaceutical companies is not expected for the remainder of the year.

"As we were looking at our activity for all of '08, we certainly expected the market to not be at the same level of strength that we saw in '07, but we saw it turn fairly abruptly for us late in the quarter," DeFalco told Reuters.

"Our indicators are that it won't get back to normal here anytime in 2008."

As a result, MDS now sees revenue for 2008 in the range of $1.25 billion to $1.29 billion, down from its initial outlook of $1.25 billion to $1.3 billion. It also sees basic earnings per share in the range of 37 to 45 cents, down from a range of 45 to 53 cents.

Adjusted earnings per share are seen in the range of 27 cents to 33 cents, down from 37 to 43 cents.

"The reduction in earnings makes sense given what the trends are right now," said Maher Yaghi, an analyst at Desjardins Securities in Montreal.

"The question is how long is it going to be to get margins back in analytical technologies? It has been the pillar, supporting the company and question marks about margins in that business is very, very surprising to me and quite disappointing."

The revised outlook comes as MDS said it earned $11 million, or 9 cents a share, in the quarter, down from $737 million, or $5.35 cents, for the same time last year when it included a $792 million gain related to the sale of its diagnostic division.

When adjusted to exclude certain items including the gain and other charges, profit dropped to $7 million, or 6 cents a share from $15 million, or 11 cents in the year-earlier quarter.

Revenue rose 24 percent to $326 million from $263 million.

Analysts had expected, on average, revenue of $306.5 million and earnings per share of 10 cents on an adjusted basis, according to Reuters Knowledge.

RADIOISOTOPE PRODUCTION

MDS, a major supplier of radioisotopes used in cancer tests and other medical applications, offered no update on its plans following the Canadian government's decision to scrap a major new reactor program last month.

Atomic Energy of Canada Ltd. said in mid-May it was halting work on the Maple reactor, which was set to replace the aging National Research Universal reactor at Chalk River in eastern Ontario, where much of the world's supply of medical isotopes is produced.

DeFalco said MDS, whose Nordion division depends on the plant for its radioisotopes, was not consulted on the Maple decision, despite assurances in its contract with Ottawa.

But he declined to say whether the firm would take action over the issue.

"The situation is quite fluid," he said. "We'll be figuring out what to do next and evaluating all our options."

($1=$1.02 Canadian)

Reporting by Scott Anderson; editing by Rob Wilson

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