MDS Inc.

MDS Inc.

March 10, 2005 07:00 ET

MDS Reports First Quarter 2005 Financial Results


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: MDS INC.

TSX SYMBOL: MDS
NYSE SYMBOL: MDZ

MARCH 10, 2005 - 07:00 ET

MDS Reports First Quarter 2005 Financial Results

TORONTO, ONTARIO--(CCNMatthews - March 10, 2005) - MDS Inc.
(TSX:MDS)(NYSE:MDZ) -

Revenues grow as foreign exchange and cost of change initiatives impact
performance

MDS Inc. (TSX:MDS)(NYSE:MDZ), the global health and life sciences
company, today reported its first quarter 2005 results. As expected, the
Company recorded growth in revenues that was offset by the negative
impact of a strong Canadian dollar and the cost of change initiatives.

First Quarter Year-over-Year Financial Highlights:

- Revenues increased by 3% to $443 from $431 million, excluding the
impact of foreign currency, revenues grew 7%.

- Operating income declined from $61 million to $49 million.

- Basic earnings per share of $0.21 compared to $0.20, and earnings per
share from continuing operations before MDS Proteomics and other items
of $0.21 compared to $0.30.

- Declared a quarterly cash dividend of $0.0325 per common share.

- Repurchased 522,900 shares at an average price of $16.29 through the
Company's normal course issuer bid.

The continued depreciation of the US dollar has had a significant
negative effect on our life sciences performance in the first quarter,
despite gains realized on our hedges. For the quarter, the declining US
dollar impacted revenues by $18 million, operating income by $12 million
and earnings per share by $0.06 per share.

"Our performance was in keeping with our expectations for the quarter.
Despite overall revenue growth, our operating results were negatively
impacted by the continued strength of the Canadian dollar relative to
the US dollar and the cost of implementing our organizational change
initiatives in the quarter." said John Rogers, President and CEO, MDS
Inc.

Operating Highlights

Life Sciences segment revenues increased 3% to $293 million up from $285
million in the prior year's quarter. The weakness of the US dollar
relative to the Canadian dollar continued to have a negative impact on
our results in this segment. Operating income in the quarter was $35
million compared to $57 million in the prior year.

- Pharmaceutical research services revenues grew 14% over the prior year
from $126 million, to $144 million (17% on a currency neutral basis).
Backlog grew 31% to $315 million, up from $240 million in the first
quarter of 2004. In the last month of the quarter we did experience some
expected weakening in the bioanalytical business, which we believe will
persist until we have the FDA review behind us.

- Isotopes revenues were $75 million compared to a strong first quarter
in 2004 of $86 million.

- Analytical instruments revenues were $74 million compared to $73
million in the first quarter last year and up 21% over the fourth
quarter of 2004. For the quarter, sales were up 6% on a currency neutral
basis. In January, MDS Sciex and its partner Applied Biosystems
introduced its latest API analyzer, the API 5000 which offers
unparalleled sensitivity and accuracy for drug discovery.

Health segment revenues increased 3% from $146 million to $150 million.
Operating income was $14 million in the quarter. The allocation of $2
million in change initiative costs to the Health segment offset a 7%
increase in operating income in this segment.

- Canadian laboratories revenues grew 1% to $100 million, with growth in
both Ontario and Alberta being offset by reductions in BC.

- Distribution revenues grew 6% to $50 million.

Corporate

The Board of Directors and senior management continue to be actively
engaged in the process of recruiting a candidate for the Chief Operating
Officer role. This role is key to the succession planning process for
the Company and is expected to be filled over the next few months.

The Board of Directors declared a quarterly cash dividend of $0.0325 per
Common share, to all shareholders of record as of March 18, 2005. The
dividend is payable on April 1, 2005.

Outlook

"Fiscal 2005 is an important year as we move towards the completion of
our organizational initiatives. While we are anticipating revenue growth
across most of our businesses, foreign exchange and the cost of
implementing our change initiatives will continue to have a material
negative impact on our operating results through the balance of the
year." said John Rogers. "More than ever, it is critical that we focus
on the completion of our change initiatives which will enhance our
performance in 2006 and beyond." he added.

MDS will hold its Annual Shareholder Meeting at 4:00 pm EST today at the
Design Exchange, 234 Bay Street, Toronto, Ontario, Canada. This meeting
will also be broadcast live at www.mdsintl.com at 4:00 pm EST. MDS will
be holding a conference call today at 10:00 am. This call will be
webcast live at, www.mdsintl.com, and will also be available in archived
format at www.mdsintl.com/news_present.asp after the call.

MDS Inc. (TSX:MDS)(NYSE:MDZ) has more than 9,000 highly skilled people
in 25 countries providing a diverse range of superior products and
services to increase our customers' speed, precision and productivity in
the drug development and disease diagnosis processes. We are a global
health and life sciences company, recognized for our reliability and
collaborative relationships. Please refer to our website at
www.mdsintl.com to find out more about how we help create better
outcomes in the treatment of disease.

This document contains forward-looking statements. Some forward looking
statements may be identified by words like "expects", "anticipates",
"plans", "intends", "indicates" or similar expressions. The statements
are not a guarantee of future performance and are inherently subject to
risks and uncertainties. The Company's actual results could differ
materially from those currently anticipated due to a number of factors,
including, but not limited to, successful integration of structural
changes, including restructuring plans, acquisitions, technical or
manufacturing or distribution issues, the competitive environment for
the Company's products, the degree of market penetration of the
Company's products, and other factors set forth in reports and other
documents filed by the Company with Canadian and US securities
regulatory authorities from time to time.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL
POSITION

This section of the quarterly report contains management's analysis of
the financial performance of the company and its financial position and
it should be read in conjunction with the consolidated financial
statements. Readers are cautioned that management's discussion and
analysis ("MD&A") contains forward-looking statements and that actual
events may vary from management's expectations. Readers are encouraged
to consult the MDS Annual Report and Annual Information Form for fiscal
2004 for additional details regarding risks affecting the business.

In our MD&A and elsewhere we refer to measures such as backlog and
unusual items that are not defined by generally accepted accounting
principles ("GAAP"). Our use of these terms may not be consistent with
the way these terms are used by others. Where possible, in particular
for earnings per share measures, we provide tables or other information
that enables readers to reconcile between such non-GAAP measures and
standard GAAP measures. While these measures are not defined by or
required by GAAP, we provide this information to readers to help them
better understand the significant events, transactions, and trends that
affect our businesses.

All financial references in this document exclude the discontinued
generic radiopharmaceutical and US Laboratory operations, and therefore
reflect our continuing operations, unless otherwise noted. The results
for prior periods have been restated to conform to this presentation.

Overview

Revenue for the first quarter of fiscal 2005 climbed 3% over the same
period last year, taking into account the discontinuation of our US
laboratories business. For the first quarter, the average rate of
exchange between the Canadian and US dollars was $1.21 this year
compared to $1.31 last year and our effective translation rate on
revenues was $1.29 versus $1.41. The declining US dollar, combined with
the reduced protection afforded by our hedge portfolio, resulted in a
drop in revenues of $18 million. Adjusting for this, revenue growth was
7%.

Operating income for the quarter was $49 million, a decrease of $12
million or 20% over the same period last year. Excluding the impact of
MDS Proteomics on operating income for the first quarter last year,
operating income is down $23 million, or 32%. The drop in the effective
US dollar conversion rate for the quarter, resulting from the decreasing
effectiveness of our hedge portfolio, was a major factor in this
decline, as operating income dropped $12 million from this cause alone.
In addition, we increased our investment in change initiatives by $7
million this quarter compared to last year. Excluding these two items,
operating income was $68 million.

(Tabular amounts are in millions of Canadian dollars, except where
noted.)



Summary of First Quarter Consolidated Results 2005 2004 Change
---------------------------------------------------------------------
Revenues $ 443 $ 431 3%
Operating Income $ 49 $ 61 (20%)
Basic earnings per share $ 0.21 $ 0.20 5%
---------------------------------------------------------------------
---------------------------------------------------------------------


Details of items affecting the period-to-period comparability of
operating income and earnings per share are provided in the following
tables.



First Quarter
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Operating income from continuing operations before
MDS Proteomics and other items $ 49 $ 72

MDS Proteomics-Operations - (11)
---------------------------------------------------------------------
Operating income from continuing operations $ 49 $ 61
---------------------------------------------------------------------
---------------------------------------------------------------------

First Quarter
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
EPS from continuing operations before
MDS Proteomics $ 0.21 $ 0.30
MDS Proteomics - (0.08)
---------------------------------------------------------------------
EPS from continuing operations 0.21 0.22
Discontinued operations - (0.02)
---------------------------------------------------------------------
Basic EPS $ 0.21 $ 0.20
---------------------------------------------------------------------
---------------------------------------------------------------------


Segment results

First
Quarter 2005 2004
---------------------------------------------------------------------
Operating
Operating Operating Income Operating
Revenues Income Margin Revenues (Loss) Marging
---------------------------------------------------------------------
Life
Sciences $ 293 $ 35 12% $ 285 $ 57 20%
Health 150 14 9% 146 15 10%
---------------------------------------------------------------------
443 49 11% 431 72 17%
Proteomics - - - - (11) n/m
---------------------------------------------------------------------
$ 443 $ 49 11% $ 431 $ 61 14%
---------------------------------------------------------------------
---------------------------------------------------------------------

n/m equals not meaningful


Life Sciences

Review of operations-Revenues from Life Sciences businesses for the
quarter were:

First Quarter 2005 2004 Change
---------------------------------------------------------------------
Early-stage research $ 95 $ 89 7%
Late-stage research 49 37 32%
---------------------------------------------------------------------
Pharmaceutical research services 144 126 14%
---------------------------------------------------------------------
Gamma sterilization 16 23 (30%)
Nuclear medicine 51 53 (4%)
Therapy systems 8 10 (20%)
---------------------------------------------------------------------
Isotopes 75 86 (13%)
---------------------------------------------------------------------
Analytical instruments 74 73 1%
---------------------------------------------------------------------
$ 293 $ 285 3%
---------------------------------------------------------------------
---------------------------------------------------------------------


Revenue growth in our Life Sciences businesses was modest this quarter
compared to the same quarter last year. Strong revenue growth in our
pharmaceutical research services businesses offset currency related
weakness in our isotopes and instruments businesses.

Pharmaceutical research service revenues increased by 14% in the first
quarter compared to the same period last year. Adjusted for the value of
the US dollar, revenue growth from these businesses was 17%. The
performance was led by our late-stage businesses, where our central
laboratory revenues were up 54% and our global clinical development
revenues were up 21%. These businesses also continued to deliver solid
growth in backlog, as detailed in the table below.

Early-stage revenues grew 7% for the quarter, and both
discovery/preclinical and early clinical research were strong
contributors. Bioanalytical revenues were down 11% over the prior year
and 4% compared to the fourth quarter of 2004.

The impact of the December 21, 2004 untitled letter from the US Food and
Drug Administration ("FDA") on revenue for the quarter is difficult to
assess. To date, we have seen only a minor effect on cancellation rates
in bioanalytical work and therefore little impact on the level of
revenues reported for the current quarter. We have, however, begun to
experience a lower success rate on bioanalytical proposals. More
importantly, there has been a decrease in the number of studies upon
which we are invited to submit a proposal. We attribute this to prudence
on the part of our clients who wish to obtain a better understanding of
the outstanding issues identified in that letter. Our efforts are
therefore focused on achieving this resolution.

On February 2, 2005, and as part of our ongoing dialogue with the FDA,
MDS met with the Agency to present and discuss a plan to review
bioequivalence studies conducted at our Montreal Bioanalytical facility.
During the meeting, the FDA indicated that they concurred with the
overall approach of the review plan, with some minor modifications that
we have incorporated.

The review plan presented to the FDA provides a standardized mechanism
for conducting a comprehensive review of bioequivalence studies
conducted at the facility between 2000 and 2004. The studies will be
reviewed in order of priority, based on specific criteria described in
the plan, and appropriate review processes and quality assurance checks
will be instituted. The need for detailed additional analysis or
corrective action, if any, will be determined as results of the
individual study reviews are obtained.

We have devoted dedicated resources to this review and began the process
in February. We will provide the FDA with periodic updates on the
progress of the review and remain committed to complete cooperation with
the FDA in the execution of this plan.

Due to the comprehensive nature of the review, it is not possible at
this time to accurately project when the review will be completed or the
cost of completing the work. We are confident that the allocation of
dedicated resources will enable the diligent and effective execution of
the plan, yet at the same time allow the facility to conduct ongoing and
future customer studies at the site with minimal disruption. The cost of
this review will be reflected as an operating cost for the period in
which it is incurred.

Throughout this challenging period, we have maintained our focus on
ensuring our customers understand the nature of the issues raised and
the steps we are taking to satisfy the needs of the FDA. We are
confident that we will meet all requirements of the Agency.

Outside of our bioanalytical business, our sales momentum remains
strong. During the quarter we added $15 million to our contract backlog,
with this growth coming from late-stage contracts. It is important to
note that backlog in bioanalytical work accounts for substantially less
than 10% of total contract backlog due to the short-term nature of these
contracts. As a result of the reduction in the number of proposals we
have made in this area, our bioanalytical backlog has dropped; however,
backlog in other early-stage work has held steady.



Average Backlog (millions of US dollars)
---------------------------------------------------------------------
Fiscal 2003-Quarter 1 $ 200
Quarter 2 220
Quarter 3 240
Quarter 4 230
Fiscal 2004-Quarter 1 240
Quarter 2 265
Quarter 3 285
Quarter 4 300
Fiscal 2005-Quarter 1 315


Backlog measures are not defined by GAAP and our measurement of backlog
may vary from that used by others. While we believe that long-term
backlog trends serve as a useful metric for assessing the growth
prospects for our business, backlog is not a guarantee of future
revenues and provides no information about the timing on which future
revenue may be recorded. We report our backlog in US dollars to reflect
the underlying currency of the majority of such contracts and to reduce
the volatility that would result from converting the measure to Canadian
dollars.

Despite the decline in our hedge rate for the quarter from $1.54 to
$1.37 revenues from medical isotopes remained strong, down just 4%.
Revenue from gamma sterilization was down 30% over the strong revenue
recorded in the year earlier period. Shipments of cobalt during the
final quarter of 2004 were at record highs and therefore some
normalization was expected in the current quarter. This business unit
remains on track for annual revenues well above those achieved in 2003,
and is expected to approach the record level of cobalt revenues achieved
in 2004.

Reported analytical instrument revenues were up 1% compared to the first
quarter of 2004 as growth in this division was hampered by the drop in
our hedge rate. Revenues were up 21% sequentially compared to the fourth
quarter last year. Included in revenues for the quarter were sales of
MALDI-TOF instruments totaling $6 million.

The impact of the drop in the US dollar obscures the continued strong
sales of instruments. For the quarter, customer shipments were up 5%
overall, reflecting the impact of the MALDI-TOF product line, and
continued strength in the important triple-quad market. We introduced
the new, more sensitive, API 5000 in mid January and expect to build
sales of these new units in the second quarter. The API 5000 is
currently in demonstration labs and has been well received by our
customers.

The MDS Sciex/AB joint venture has built an impressive portfolio of
patents around mass spectroscopy and has a track record of defending the
portfolio aggressively against competitors. In the past two years, we
recorded a total of $53 million in gains from patent infringement
settlements with Waters Corporation. During the fourth quarter of 2004,
we initiated a claim against Thermo Electron Corporation ("Thermo") for
infringement of these same patents. In February, we received a statement
of claim from Thermo, alleging the API 5000 infringes a Thermo patent.
We are currently investigating the validity of the claim and the patent.

Operating income for the segment was $35 million at a margin of 12%,
down from $57 million and 20% in the first quarter last year and in line
with fourth quarter results. The impact of the US dollar on export
revenues has a significant flow-through effect on operating income, as
the vast majority of costs incurred by our Life Sciences businesses are
denominated in Canadian dollars. The reduced amount of hedges, combined
with the lower exchange rate reflected in our portfolio, caused a $12
million decrease in operating income for the segment. The segment's
share of the increase in our ongoing investment in change was $5 million
and this accounts for the majority of the remaining decrease.

Capital expenditures - Purchases of capital assets in Life Sciences
amounted to $18 million for the quarter compared to $21 million last
year.

Included in capital expenditures for the quarter is $10 million related
to the MAPLE facility. Construction costs for this project, as well as
Atomic Energy of Canada Limited's ("AECL") current estimates of
operating costs, significantly exceed initial estimates. Financial
responsibility for construction cost over-runs and portions of pre- and
post-commissioning operating costs are the subject of a dispute with
AECL.

During the third quarter of 2004, we were advised by AECL that a
technical problem was experienced during an operating test, and the
shut-off rod safety system, which forms a central part of the emergency
shutdown system of the MAPLE reactor, failed to function within its
specifications. The investigation of this incident has determined that a
minor electrical problem was at fault and we have been advised by AECL
that the situation has been resolved.

We continue to be disappointed with AECL's performance in resolving
technical and regulatory issues on this project. AECL has advised us
that they remain confident that, in time, all technical issues will be
resolved and the reactors and associated processing facility will
receive the requisite regulatory approvals. At this time, we do not have
sufficient, reliable information from AECL to predict with any
reasonable degree of accuracy when commercial production will commence
in the new facilities.

Segment outlook - Currency fluctuations, especially the weakness in the
US dollar, remain an important challenge for our Life Sciences
businesses. Revenue growth in the Life Sciences segment will continue to
be constrained by the US dollar. We are expecting a 6% decline overall
in the effective rate this year, similar in size to the drop in the
effective rate we realized in 2004. The impact on operating income is
expected to be more significant this year as the rate used to translate
export revenues for businesses not based in the US is expected to drop
8% compared to a 5% decrease in 2004. These market dynamics will keep
operating margins lower than those seen in recent years.

Although it is difficult to estimate how long it will take to complete
our review of bioanalytical procedures in our Montreal facility, we
expect the major impact of this work during the next two quarters. We
believe that normal operations of the facility can be maintained and
that business development activities will be successful in restoring
revenue growth for this business unit.

Our current portfolio of hedges extends to cover the majority of
expected 2005 Canadian export revenues at a rate of $1.38. We continue
to monitor the forward markets and have secured additional hedge
contracts in recent weeks. Our existing portfolio also provides limited
protection in fiscal 2006 at current market levels.

Health

Review of operations - Revenues from Health businesses in the quarter
were:



First Quarter 2005 2004 Change
---------------------------------------------------------------------
Diagnostics $ 100 $ 99 1%
Distribution 50 47 6%
---------------------------------------------------------------------
$ 150 $ 146 3%
---------------------------------------------------------------------
---------------------------------------------------------------------


Revenues in our Canadian diagnostic business increased slightly this
quarter compared to the same quarter last year. Revenues increased in
Ontario and Calgary in the quarter; however, these increases were
largely offset by the negative impact of the 20% fee reduction by the
Province of British Columbia ("BC"), that became effective July 1, 2004
and the loss of the Saskatchewan contracts last Spring. The effect of
the BC fee cut was partially offset by continued growth in patient
volumes in the province.

Our Distribution business continued to perform well, with revenues up 6%
over the prior year. This business continues to deliver a modest but
reliable operating margin and a respectable return on our investment.

Operating income for the Health segment was $14 million, down slightly
from last year. Operating income includes the segment's share of change
initiative spending. Excluding the increase in this investment, the
segment operating income was $16 million, a 7% increase over the prior
year.

Capital expenditures - Health businesses purchased $3 million of capital
assets during the quarter compared to $7 million for the quarter last
year.

Segment outlook - We expect continued solid performance from the Health
businesses, although overall operating income for the year is expected
to be lower than last year due to the BC fee cut and spending on change
initiatives.

Corporate

Net interest expense of $4 million is down slightly from last year,
reflecting the decreased cost in Canadian dollars of interest on our US
dollar Senior Unsecured Notes.

Our effective tax rate for the quarter was 27% compared with 41% last
year. Tax expense for the quarter is net of $4 million of tax savings
realized through LPBP Inc. Adjusted for the impact of the LPBP tax
benefit, our tax rate for the quarter was 36%, a rate we expect to
maintain over the balance of 2005.

The recent Canadian Federal budget proposed tax rate reductions in
future years. The proposed reductions have no impact in the current
year, except that the changes will require a revaluation of our
long-term tax assets and liabilities, resulting in a $2 million
reduction in net tax liabilities. Under Canadian GAAP, this adjustment
will result in a decrease in tax expense that will be reflected in
income in the period in which the Federal budget passes third reading in
Parliament.

For the quarter, selling, general and administrative expenses ("SG&A")
were $78 million compared to $74 million last year. Spending on SG&A is
up slightly from last year at 18% of revenues. SG&A includes the $7
million higher level of investment in various change initiatives
announced last year, including work on our common business system and
our evolution towards a shared-services approach for support services.

SG&A for the quarter includes $1 million spent on Sarbanes-Oxley
compliance, bringing the total to date on the project to close to $2
million. We welcome the recent announcement that this deadline is to be
deferred as it will allow us to more effectively integrate our changing
support services with processes required to achieve Sarbanes-Oxley
compliance.

Research and development ("R&D") spending in the quarter of $9 million
is down $2 million from last year, reflecting the discontinuance of our
involvement in MDS Proteomics.

Discontinued operations

During the quarter, we ceased manufacturing generic radiopharmaceuticals
and began the process of closing the portion of our Belgian facility
dedicated to this use. During the quarter, we utilized $3 million from a
reserve established in 2003 to cover severance costs at the facility. We
estimate that remaining reserves are sufficient to meet expected
liabilities. Operating costs incurred in the facility during this final
shutdown period will be recorded in the loss from discontinued
operations until the shutdown is completed. Revenues from this business
were $2 million for the quarter.

Negotiations continued in the quarter with respect to our exit from our
remaining US laboratory. We expect to reach an agreement to sell or
close the facility by the end of the second quarter. Revenues from this
business were $9 million for the quarter and the business was marginally
profitable. Income from this business is included with the loss from the
discontinued radiopharmaceutical operations.

Liquidity and capital resources

Our cash position at January 31, 2005 was $288 million, down slightly
from $296 million at October 31, 2004. Operating working capital was
$147 million, an increase of $9 million from October, due to a reduction
in accounts payable and accruals.

Cash flow from operating activities for the quarter was $32 million,
compared to an outflow of $3 million in the first quarter last year. The
negative operating cash flow for the prior year reflected a net cash
usage of $60 million for working capital resulting from a build up in
accounts receivable and a reduction in accounts payable.

Investment and financing activities for the quarter required a total of
$42 million, including $4 million of outflow related to the new
quarterly dividend payment on January 1, 2005, and $8 million spent to
repurchase shares under our Normal Course Issuer Bid. In the first
quarter of 2004, we received $32 million from Biogen Idec Corporation to
buy-out certain minimum purchase commitments they had. Excluding this
cash inflow, cash used in investing and financing activities in the
first quarter last year totaled $41 million.

There has been no material change in any contractual obligations since
the end of fiscal 2004.

Outlook

Our results for the quarter were lower than last year but were largely
in line with our projections. Continued US dollar weakness, combined
with strong competition in the US-dominated life sciences markets, will
limit our ability to adjust our pricing in those key markets, which will
affect our results for the foreseeable future.

The continuing uncertainty associated with the FDA review of our
Montreal facility will have an impact on our pharmaceutical research
business this year. We have devoted resources to this project and we
will move the review plan forward as quickly as we can. At this time, we
cannot predict the full year impact of either reduced revenues or higher
operating costs associated with the plan.

To address these challenges we are investing in change initiatives that
are intended to make MDS a more effective and more efficient company.
These investments are significant, both in terms of the dollars spent
and of the efforts made by our employees. As with all change, the
benefits can be achieved only after the cost is incurred. We are
incurring these costs now and it is affecting our bottom line. We are
beginning to see the positive aspects of these changes and remain
committed to delivering at least $40 million of savings on an annualized
basis by the end of 2005, although ongoing costs of change will exceed
these savings this year.

Changes in accounting policy

During the quarter, we adopted Accounting Guideline AcG-15,
Consolidation of Variable Interest Entities. The Guideline establishes
specific criteria to determine if a non-controlled investee is a
variable interest entity and, if so, if the investee should be
consolidated. Adoption of the Guideline had no impact of the Company's
results or financial position.

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3) (a), if an
auditor has not performed a review of the interim financial statements,
they must be accompanied by a notice indicating that the financial
statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company
have been prepared by and are the responsibility of the Company's
management.

The Company's independent auditor has not performed a review of the
financial statements of the comparative quarter, ended January 31, 2004.



CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)

---------------------------------------------------------------------
As at January 31 with comparatives
at October 31
(millions of Canadian dollars) 2005 2004
---------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 288 $ 296
Accounts receivable 312 318
Unbilled revenue 78 71
Inventories 180 182
Income taxes recoverable 18 16
Current portion of future tax asset 14 14
Prepaid expenses 31 24
---------------------------------------------------------------------
921 921

Capital assets 815 805
Future tax asset 119 123
Long-term investments and other 164 160
Goodwill 663 665
Other intangible assets 54 54
---------------------------------------------------------------------
Total Assets $ 2,736 $ 2,728
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 305 $ 335
Deferred revenue 118 98
Income taxes payable 53 49
Current portion of unrealized
benefit of future tax asset 13 13
Current portion of long-term debt 6 6
---------------------------------------------------------------------
495 501

Long-term debt 493 488
Deferred revenue 38 44
Unrealized benefit of future tax asset 78 82
Other long-term obligations 35 34
Future tax liabilities 62 60
Minority interest 17 22
---------------------------------------------------------------------
$ 1,218 $ 1,231
---------------------------------------------------------------------
Shareholders' equity
Share capital (note 2) 834 833
Retained earnings 621 600
Currency translation adjustment 63 64
---------------------------------------------------------------------
1,518 1,497
---------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 2,736 $ 2,728
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes



CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(see note 3 - Discontinued Operations)

---------------------------------------------------------------------

(millions of Canadian dollars, Three months ended January 31
except per share amounts) 2005 2004
---------------------------------------------------------------------
Net revenues $ 443 $ 431
Cost of revenues (288) (268)
Selling, general and administration (78) (74)
Research and development (9) (11)
Depreciation and amortization (17) (17)
Restructuring charges - net (note 4) (1) -
Equity earnings (1) -
---------------------------------------------------------------------
Operating income $ 49 $ 61
---------------------------------------------------------------------

Interest expense (6) (7)
Dividend and interest income 2 2
---------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interest 45 56

Income taxes (12) (23)
Minority interest - net of tax (2) (1)
---------------------------------------------------------------------
Income from continuing operations 31 32

Loss from discontinued operations -
net of tax (note 3) (1) (4)
---------------------------------------------------------------------
Net income $ 30 $ 28
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per share (note 5)
Basic $ 0.21 $ 0.20
Diluted $ 0.21 $ 0.19
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes



CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)

---------------------------------------------------------------------
Three months ended January 31
---------------------------------------------------------------------
(millions of Canadian dollars) 2005 2004
---------------------------------------------------------------------
Retained earnings, beginning of period $ 600 $ 572
Net income 30 28
Repurchase of shares (5) -
Dividends - cash (4) -
---------------------------------------------------------------------
Retained earnings, end of period $ 621 $ 600
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes



CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

---------------------------------------------------------------------

Three months ended January 31
---------------------------------------------------------------------
(millions of Canadian dollars) 2005 2004
---------------------------------------------------------------------
Operating activities
Net income $ 30 $ 28
Items not affecting current cash
flow (note 7) 19 29
---------------------------------------------------------------------
49 57
Changes in non-cash working capital
balances relating to operations
(note 7) (17) (60)
---------------------------------------------------------------------
32 (3)
---------------------------------------------------------------------
Investing activities
Acquisitions - (2)
Purchase of capital assets (21) (28)
Other (1) (1)
---------------------------------------------------------------------
(22) (31)
---------------------------------------------------------------------
Financing activities
Repayment of long-term debt - (1)
Increase (decrease) in deferred income and
other long-term obligations (5) 23
Payment of cash dividends (4) -
Issuance of shares 4 4
Repurchase of shares (8) -
Distribution to minority interest (7) (4)
---------------------------------------------------------------------
(20) 22
---------------------------------------------------------------------
Effect of foreign exchange rate changes on
cash and cash equivalents 2 (3)
---------------------------------------------------------------------
Decrease in cash position during the period (8) (15)
Cash position, beginning of period 296 260
---------------------------------------------------------------------
Cash position, end of period $ 288 $ 245
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash position comprises cash and cash equivalents
See accompanying notes.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in millions of Canadian dollars, except where
noted)


1. Accounting Policies

These consolidated financial statements of MDS Inc. ("MDS" or "the
Company") have been prepared on a basis consistent with the Company's
annual financial statements for the year ended October 31, 2004, except
as disclosed below, and should be read in conjunction with the
accounting policies and other disclosures in those annual financial
statements. These financial statements do not include all of the
disclosures required by generally accepted accounting principles
applicable to annual financial statements.

Change in accounting policy

In 2004, the Accounting Standards Board of the CICA issued Accounting
Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15"),
which applies to fiscal years beginning on or after November 1, 2004.
AcG-15 establishes specific criteria to determine if an investee is a
variable interest entity and if the equity-holder should consolidate the
investee's results. This guidance was introduced to harmonize the
Canadian accounting treatment with the United States ("US") accounting
treatment.

The adoption of AcG-15 has had no impact on the Company's operations and
financial position. The Company will analyze these investments on a
quarterly basis.

2. Share Capital

The following table summarizes information on share capital and related
matters at January 31, 2005:



---------------------------------------------------------------------
(number of shares in thousands) Outstanding Exercisable
---------------------------------------------------------------------
Common shares 141,693 n/a
Stock options 8,093 2,525
---------------------------------------------------------------------
---------------------------------------------------------------------


During the quarter, the Company repurchased and cancelled 522,900 Common
shares.

3. Discontinued Operations

The results of discontinued operations in the quarter were as follows:



Three months to January 31
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Revenues $ 11 $ 30

Loss from discontinued operations - net of tax $ 1 $ 4
---------------------------------------------------------------------
---------------------------------------------------------------------


The Company has paid $3 million of severance costs, relating to the
Belgium facility, which were charged to the outstanding provision
remaining at the end of fiscal 2004. The closure of this business is
proceeding, and the Company expects to complete its exit in the current
year.

The earnings per share impact of discontinued businesses is as follows:



Three months to January 31
--------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------
Earnings per share, continuing operations $ 0.21 $ 0.22
Loss per share, discontinued operations - (0.02)
--------------------------------------------------------------------
Basic earnings per share $ 0.21 $ 0.20
--------------------------------------------------------------------
--------------------------------------------------------------------


4. Restructuring Charges

The Company has continued to utilize the reserves established in prior
years relating to change initiatives affecting support services, senior
management reductions, and system implementations. Following is a
summary of the provisions as of January 31, 2005:



---------------------------------------------------------------------
Restructuring Reserve Balance
Charge (workforce at January 31,
reductions) Cumulative Drawdown 2005
---------------------------------------------------------------------
Cash Non-Cash (1)
---------------------------------------------------------------------
Restructuring
charge at
October 31, 2003 $ 17 $ (16) $ 1 $ 2
April 30, 2004 4 (4) - -
October 31, 2004 10 - - 10
January 31, 2005 1 (1) - -
---------------------------------------------------------------------
$ 32 $ (21) $ 1 $ 12
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Included in non-cash drawdowns is the impact of foreign exchange.

The remaining balance is expected to be paid in the current calendar
year.

5. Earnings per Share

a) Dilution

Three months ended January 31
---------------------------------------------------------------------
(number of shares in millions) 2005 2004
---------------------------------------------------------------------
Net income available to Common shareholders $ 30 $ 28
---------------------------------------------------------------------
Weighted average number of Common shares
outstanding - basic 142 141
Impact of stock options assumed exercised - 2
---------------------------------------------------------------------
Weighted average number of Common shares
outstanding - diluted 142 143
---------------------------------------------------------------------
---------------------------------------------------------------------


b) Pro Forma Impact of Stock-Based Compensation

Compensation expense related to the fair value of stock options granted
prior to November 1, 2003 is excluded from the determination of net
income and is, instead, calculated and disclosed on a pro forma basis in
the notes to the consolidated financial statements. Compensation expense
for purposes of these pro forma disclosures is determined in accordance
with a methodology prescribed in CICA Handbook Section 3870 "Stock-Based
Compensation and Other Stock-Based Payments". The Company used the
Black-Scholes option valuation model to estimate the fair value of
options granted.

For purposes of these pro forma disclosures, the Company's net income
and basic and diluted earnings per share would have been:



Three months ended January 31
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Pro forma net income available to
Common shareholders $ 28 $ 26

Pro forma earnings per share - basic $ 0.20 $ 0.18
- diluted $ 0.20 $ 0.18
---------------------------------------------------------------------


During the quarter, the Company granted 950,850 options (2004 - 935,000)
at an average exercise price of $17.81 (2004 - $19.65). These options
have a Black Scholes value of $6.19 per share, based on the following
assumptions:



---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Risk-free interest rate 3.8 % 5.5 %
Expected dividend yield 0.7 % 1.0 %
Expected volatility 0.342 0.350
Expected time to exercise (years) 5.25 5.25
---------------------------------------------------------------------
---------------------------------------------------------------------


6. Post Employment Obligations

The Company sponsors various post-employment benefit plans including
defined benefit pension plans, retirement compensation arrangements,
defined contribution plans and plans that provide extended health care
coverage to employees. All defined benefit pension plans sponsored by
the Company are funded plans. Other post-employment benefits are
unfunded. Post employment benefit expense for the year-to-date was $1
million (2004 - $1 million).



7. Supplementary Cash Flow Information

Non-cash items affecting net income comprise:

Three months ended January 31
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Depreciation and amortization $ 17 $ 18
Minority interest 2 1
Future income taxes 2 10
Equity earnings - net of distribution 1 -
Other (3) -
---------------------------------------------------------------------
$ 19 $ 29
---------------------------------------------------------------------
---------------------------------------------------------------------

Changes in non-cash working capital balances relating to operations
include:

Three months ended January 31
--------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------
Accounts receivable and unbilled revenue $ (2) $ (48)
Inventories 1 32
Accounts payable and deferred revenue (12) (43)
Income taxes 2 8
Foreign exchange and other (6) (9)
--------------------------------------------------------------------
$ (17) $ (60)
--------------------------------------------------------------------
--------------------------------------------------------------------

8. Segmented Information

Three months ended January 31
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Life Prote- Life Prote-
Sciences Health omics Total Sciences Health omics Total
---------------------------------------------------------------------
Net revenues $ 293 $ 150 $ - $ 443 $ 285 $ 146 $ - $ 431
Operating
income (loss) 35 14 - 49 57 15 (11) 61
Revenues by
products and
services:
Medical
isotopes 75 86
Analytical
equipment 74 73
Pharmaceutical
research
services 144 126
Clinical
laboratory
services 100 99
Distribution
and other 50 47
Capital
expenditures
- net 18 3 - 21 21 7 - 28
Depreciation and
amortization 14 3 - 17 12 4 1 17
---------------------------------------------------------------------
---------------------------------------------------------------------


9. Financial Instruments

As of January 31, 2005, the Company had outstanding foreign exchange
contracts and options in place to sell up to US$204 million at a
weighted average exchange rate of C$1.38 maturing over the next 9
months. The Company also had interest rate swap contracts that exchanged
a notional amount of US$80 million of debt from a fixed to a floating
interest rate.

Foreign exchange and interest rate swap contracts are treated as hedges
for accounting purposes. The carrying amounts and fair values for these
derivative financial instruments are as follows:



Three months to January 31
---------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------
Net asset (liability) position:
Currency forward and option
contracts $ (1) $ 28 $ - $ 44
Interest rate swap and option
contracts $ - $ 2 $ - $ 1
---------------------------------------------------------------------
---------------------------------------------------------------------


10. Comparative Figures

Certain figures for the previous year have been reclassified to conform
with the current year's financial statement presentation. In addition,
segmented information for 2004 has been restated to reflect the
discontinued operations reported.

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    MDS Inc.
    Investor Relations: Sharon Mathers
    Vice-President, Investor Relations
    (416) 675-6777 x 2695
    smathers@mdsintl.com
    or
    MDS Inc.
    Media Relations: Mike Nethercott
    Vice-President, Corporate Marketing and Communications
    (416) 675-6777 x 4656
    mnethercott@mdsintl.com