Patheon's first-quarter fiscal 2010 total revenues up 5.2%

Outsourcing activity beginning to show positive signs of improvement

Patheon (TSX: PTI) a global provider of drug development and manufacturing services to the international pharmaceutical industry today announced results for its first quarter ended January 31, 2010. All amounts are in U.S. dollars unless otherwise indicated.

Total revenues for the first quarter were $154.8 million, 5.2% higher than the $147.2 million reported in the same period last year. Excluding currency fluctuations, current year first quarter revenues would have decreased by approximately 1.0%. The operating loss for the period was $6.6 million compared to operating income of $3.9 million in the same period last year. First quarter adjusted EBITDA was $9.3 million, down from $12.8 million in the comparable period last year. The operating loss and adjusted EBITDA for the quarter include $3.0 million of Special Committee expenses related to the JLL Bid (vs. $0.5 million in the same quarter last year) which was resolved in December 2009. The operating loss in the quarter also included $2.4 million of repositioning expense related to the previously announced decision to consolidate the Puerto Rico operations into the Manati site.

"Our commercial operations performed reasonably well despite several disappointing supplier-related delays. However, PDS revenue was somewhat lower as we continued to see soft market demand, which appears to be consistent with the rest of the industry. New commercial business has been slow in coming due primarily to pending post-merger decision making at large pharmaceutical companies," said Wes Wheeler, Chief Executive Officer and President of Patheon. "However, since the beginning of calendar 2010, we have seen an encouraging increase in new sales activity as improved funding has become available for development stage companies. We have also begun active discussions in connection with the pending rationalization programs which will flow from the 2009 pharmaceutical industry merger activity."

"We are seeing a clear trend toward strategic relationships between pharmaceutical companies and a small number of substantial outsourcing companies such as Patheon," said Mr. Wheeler. Patheon entered into a new five-year supply agreement with Sanofi-Aventis during the quarter and is currently in discussions with various other large pharmaceutical companies.

First Quarter Fiscal 2010 Operating Results from Continuing Operations

Gross profit for the first quarter of 2010 decreased to $24.6 million from $30.7 million in same quarter last year. Gross profit margin decreased to 15.9% from 20.9% in the prior year. This decrease was due to $2.4 million of higher depreciation in part because of accelerated depreciation in connection with the planned Caguas closure, production delays due to customer-supplied material shortages that impacted revenues, unfavorable foreign exchange impact, and lower PDS volumes on a relatively fixed overhead cost basis. These factors were partially offset by a decrease to cost of goods sold due to realization this quarter of prior period Canadian R&D investment tax credits.

Selling, general and administrative costs were $28.8 million in the first quarter of 2010 vs. $26.3 million in the prior year. The increase is primarily due to Special Committee costs of $3.0 million for the three months ended January 31, 2010 compared to $0.5 million in the same period last year. Selling, general and administrative costs absent Special Committee costs were lower due to lower employment costs and marketing expenses, offset by unfavorable foreign exchange movement.

As previously disclosed, repositioning expenses for the three months ended January 31, 2010 were $2.4 million in connection with the Caguas closure and consolidation in Puerto Rico. During the three months ended January 31, 2009, the company incurred $0.5 million in connection with the shut down and transition of business out of the York Mills facility.

The loss per share from continuing operations for the quarter was 8.3 cents compared with a loss of 5.6 cents a year earlier.

First Quarter Fiscal 2010 Business Segment Results

Commercial Manufacturing - Revenues from commercial operations for the three months ended January 31, 2010 increased by 8.8% to $128.1 million from $117.7 million in the comparable period last year. Had local currencies remained constant to prior year, commercial manufacturing revenues would have been approximately 2.0% higher than in the same period in 2009.

North American commercial revenues increased by $1.2 million from the prior period, or 2.2%. Higher revenues in Cincinnati were offset by lower revenue from Canadian operations. Had the Canadian dollar remained constant to the prior year rates, North American revenues would have been flat to 2009.

Revenues from the European operations increased by $9.2 million from the prior period, or 14.7%. The increase is primarily due to new product introductions and weakening of the U.S. dollar against the Euro and Sterling. Had European currencies remained constant to prior year rates, European revenues would have been approximately 3.5% higher than the same period of 2009.

Adjusted EBITDA from the commercial manufacturing operations for the three months ended January 31, 2010 decreased by 40.1%, or $6.1 million to $9.1 million from $15.2 million in the same period of 2009. This represents an Adjusted EBITDA margin of 7.1% compared with 12.9% in the same period last year. Had local currencies remained constant to prior year rates and after eliminating the impact of all foreign exchange gains and losses, commercial manufacturing Adjusted EBITDA would have been approximately $0.9 million higher than the reported number in the current period.

North American operations reported a decrease of $4.7 million, or 90.4% in Adjusted EBITDA. The decrease in Adjusted EBITDA was driven by customer-related material supply issues in Puerto Rico, lower revenues in Canada and unfavorable product mix, partially offset by stronger EBITDA from stronger top-line favorability in Cincinnati. Due to the fixed cost nature of Patheon's business, operating results are relatively sensitive to changes in revenue. The vendor supply issues in Puerto Rico have been resolved and first quarter volume shortfalls are expected to be recovered during fiscal 2010.

European Adjusted EBITDA decreased by $1.4 million, or 14.0% for the three months ended January 31, 2009. The decrease is primarily due to unfavorable mix and foreign exchange.

Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended January 31, 2010 decreased by 9.5%, or $2.8 million, to $26.7 million from $29.5 million in the same period of 2009. This decline was primarily due to lower overall demand for development services due to general market conditions. Had local currencies remained constant to prior year, PDS revenues would have been approximately 13.2% lower than in the same period of 2009.

Adjusted EBITDA from the PDS operations for the three months ended January 31, 2010 increased by 27.6%, or $1.6 million to $7.4 million from $5.8 million in the same period of 2009. The first quarter 2010 PDS Adjusted EBITDA includes $2.8 million in prior period Canadian R&D investment tax credits that were realized this quarter. Had local currencies remained constant to the rates of the prior year and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA would have been approximately $1.1 million lower than the reported amount.

First Quarter and Subsequent Initiatives

Patheon has announced a series of new initiatives and events:

- Subsequent to the end of the quarter, Patheon and Orexigen Thereputics Inc. announced a long-term agreement for commercial manufacturing of Contrave(R) (naltrexone HCL sustained release (SR)/bupropion HCL SR) as well as development of future formulations of Orexigen products. - During January, Patheon signed two five-year manufacturing agreements with Sanofi-Aventis, an international pharmaceutical company. These agreements pertain to products manufactured in our Swindon, UK and Bourgoin, France facilities, and extend our longstanding relationship with Sanofi-Aventis to provide high quality outsourced manufacturing services. - In December, Patheon successfully released the first commercial shipments of SUMAVEL DosePro (sumatriptan injection) to Zogenix, a specialty pharmaceutical company, in anticipation of its planned U.S. commercial product launch scheduled in January 2010. This new, needle-free drug product/delivery system is a first of its kind technology, and its successful production is the culmination of joint manufacturing process and equipment development between Patheon and Zogenix. Aseptic drug filling, final product assembly and packaging of SUMAVEL DosePro are performed exclusively by Patheon in its Swindon facility with components and assemblies from around the world designed specifically for use in the DosePro technology. - In December, Patheon also announced its plan to consolidate its Puerto Rico operations into its manufacturing site located in Manati and ultimately close or sell its plant in Caguas. The company estimates this consolidation will result in total repositioning expenses of $7.0 million, of which $2.4 million was booked in the three months ended January 31, 2010. Patheon also booked an impairment charge of $1.3 million during the first quarter of 2010 in connection with the consolidation plan. The consolidation will be completed by the end of fiscal 2011, and will also result in accelerated depreciation of Caguas assets of approximately $7.0 million during fiscal years 2010 and 2011. Because the business in the Caguas facility is being transferred within the existing site network, its results of operations are included in continuing operations. - In November 2009, the company completed the expansion of its manufacturing facility in Ferentino, Italy by adding a PDS development center. The facility is dedicated to the manufacture of sterile products including aseptically filled, terminally sterilized liquids and lyophilization. It also includes development and quality control laboratories. The expansion doubles PDS manufacturing capabilities for clinical batches, and analytical laboratory capabilities to support the expected subsequent increased volume of projects.

2010 Outlook

Patheon anticipates that full fiscal year 2010 Revenues and Adjusted EBITDA (ignoring Special Committee costs in both periods) will exceed comparable results from the prior year. The extent to which 2010 results are achieved and will exceed 2009 is dependent on, among other things, the timing and pace of recovery in pharmaceutical development outsourced spending, timing of regulatory drug approvals, pace of customer decision making processes and integration activity related to recent major pharmaceutical mergers. Patheon has seen encouraging signs of market recovery and quotation activity since the beginning of calendar 2010.

SOURCE Patheon Inc.