March 6, 2008 / 1:27 PM / in 10 years

MDS profit rises slightly, but backlog a concern

TORONTO (Reuters) - MDS Inc MDS.TO posted a slightly higher first-quarter profit on Thursday, but the Canadian health sciences company’s results failed to meet market expectations.

Its shares dropped more than 1.5 percent to C$16.25 in a down day on the Toronto Stock Exchange, with market concern focused on a declining backlog at its key Pharma Services division.

The company said it earned $17 million, or 14 cents a share, for the quarter ended January 31, up from $16 million, or 11 cents a share, a year earlier.

On an adjusted basis, its EBITDA was $40 million, up from $30 million, while its adjusted earnings per share fell to 5 cents from 7 cents a year earlier.

The company said adjusted earnings per share were hit by an 8 cents a share charge related to its acquisition of Molecular Devices, which was completed in 2007.

Revenue for the quarter was $296 million, up 22.8 percent from $241 million.

Analysts had expected earnings per share of 6 cents and revenue of $316.8 million, according to Reuters Knowledge.

Revenue at MDS’s Pharma Services division, which does contract research work for drug companies, were slightly higher at $146 million, up from $144 million for the same period a year earlier.

The company said new orders in that business increased to $177 million and contract cancellations were $37 million, leaving a quarter-ending backlog of $395 million.

The offset between the growing new orders and declining backlog is a concern, said Maher Yaghi, an analyst at Desjardins Securities in Montreal.

“The Pharma Services backlog is still weighing on investors’ minds. We are seeing an increase in new orders and that is quite positive, however it’s being lost in the shuffle by the cancellations that the company has received, so it’s not being converted to backlog,” Yaghi said.

“The backlog is not building to support higher expected revenues in the future.”

Revenue at the company’s MDS Nordion medical isotopes and radiopharmaceuticals division dropped 10 percent to $60 million, hit by an isotope supply disruption late in 2007.

Last month, the company said it expects revenue to rise by 12 percent to 16 percent to between $1.35 billion and $1.41 billion in 2008, up from $1.21 billion in 2007.

It forecasts adjusted earnings per share for 2008 at 37 cents to 43 cents, up from 34 cents in 2007.

President and Chief Executive Stephen DeFalco told Reuters he was still comfortable with this estimate.

“This was a good solid start to the quarter and we feel good about 2008 as we go forward,” he said. “These are somewhat tumultuous economic times around the world and we feel quite confident as we look at our mix of revenue and the strength of our businesses.”

“I think we are looking right now and feeling pretty good about how our year is shaping up.”

($1=$0.98 Canadian)

Reporting by Scott Anderson; Editing by Peter Galloway

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