FDA probe continues to hit MDS Pharma's pocket

The fallout from a US Food and Drug Administration (FDA) probe continues to haunt MDS Pharma, dragging it into the red again during the second quarter.

The Canadian contract testing firm posted a whopping $80m (€60m) operating loss for the quarter, compared to operating income of $2m for the same period in 2006.

Most of the bleed has come from the company's Pharma Services business - at the centre of the FDA investigation - including a $61m provision to cover future costs to resolve the outstanding FDA issues.

"During the quarter, the team at our Montreal site continued to support the independent audit activities for our bioanalytical clients. Having completed approximately 70 per cent of the audits, MDS is now able to estimate the financial impact of customer accommodations related to the FDA review and has provided $61m in the quarter to fund the completion of these activities," the company said in a statement, adding that it expects to have the FDA audits "substantially complete" by the end of fiscal 2007.

The loss incurred also included a restructuring charge of $28m - in May MDS decided to continue the 'consolidation' of its Canadian operations by putting an end to some activities at its Montreal facility, cutting 160 jobs, and the decision came only three months after it undertook a similar scale-back process with its Quebec City plant.

In addition, MDS suffered a 12 per cent decline in its early-stage segment, "which continues to feel the impact of FDA-related issues at our Montreal site." A 22 per cent growth in the late-stage businesses was unable to offset the damage.

Meanwhile, MDS also suffered a "significant" contract cancellation at the end of the second quarter, and backlog was $450m, a figure that Desjardins Securities analyst Maher Yaghi called "essentially flat… Even the year-over-year growth trailed other contract research organisations", he wrote in an analyst note.

"The decline in the company's Pharma Services new bookings and the weak backlog quarter-over-quarter are of concern to us as they could be a prelude to some continued weakness from this business over the medium term," he wrote.

In addition he hinted that the firm may soon suffer fresh probes from some European regulators, who "may follow a similar path to that taken by the FDA ... however, at this point the company believes these reviews to be limited."

The company's two bioanalytical facilities in Montreal have been under scrutiny by the FDA after inspections by the regulator in 2003 found a range of problems with its pharmacokinetics testing procedures, including failure to identify and fix sources of contamination in bioanalytical tests, which measured drug levels in the blood of patients.

As a result, the FDA began a review in February 2005 of all the bioequivalence tests performed by the pharma services unit of MDS between 2000 and 2004, and in September last year, MDS voluntarily suspended its LC/MS services in order to undertake its own internal review.

In January this year, the FDA finally clarified a path for MDS' bioanalytical clients to "provide a route for closure" to the agency's review.

As part of the final stages of the regulatory action, the FDA has given MDS' clients until June to take one of the three following actions: repeat their bioequivalence studies, re-analyse their original study samples at a different bioanalytical facility, or independently audit original study results. The agency stressed it was a precautionary measure.

According to the FDA, more than 1,000 brand-name and generic drugs that have been approved or submitted for approval since 2000 may have included MDS data in their applications. While this will not result in the removal of any drugs from the market, it could delay approval of pending drug applications.