Patheon declares third quarter 2009 results

Patheon (TSX: PTI) today announced results for the third quarter and nine months ended July 31, 2009. Total revenues for the third quarter were $164.4 million or 15.7% lower than the same period last year. Excluding currency fluctuations, current year third quarter revenues would have decreased by approximately 9.6%. Operating income for the period decreased to $3.7 million from $7.5 million in the same period last year. Third quarter adjusted EBITDA was $13.5 million, down from $24.7 million in the comparable period last year. All amounts are in U.S. dollars unless otherwise indicated.

The reduction in EBITDA this quarter was due to a disappointing decline in revenue, caused primarily by a recent setback in Puerto Rico operations, a slowdown in PDS new business, slower uptake from expected new commercial business and the impact of the strong US dollar versus last year.

Puerto Rico Operations - A significant portion of the year-over-year reduction in Adjusted EBITDA was due to Puerto Rico operations. Despite having customer product orders in hand, the Puerto Rico operations had difficulty releasing a sufficient volume of product lots due to efforts to optimize manufacturing parameters and difficulty meeting stringent release specifications for one product. All known technical issues have been resolved and output has significantly improved, which should result in improvements in the fourth quarter. Customer backlogs, which have grown in part due to increased demand, are expected to be eliminated by the end of the fourth quarter. Significant management, regulatory and operating improvements have been recently implemented, which should benefit future new business prospects and profitability.

PDS New Business - PDS revenues continued to be negatively affected by global softness in pharmaceutical development activity. Total revenue is down in the third quarter, which is the flow-through impact of weak new business awards in the first quarter. Despite these poor market conditions, Patheon has added 34 new customers during the first nine months of 2009, and is experiencing higher quotation win rates. The total number of PDS projects underway in the third quarter was the highest in the company's history, increasing by 17% to 428 over the same period last year. Unfortunately, the average value of these projects has declined due to a combination of increased price competition and pharmaceutical companies becoming more cautious with their development budgets. Patheon believes that this is a temporary, market driven situation, as sales of new business have recently shown a more encouraging trend.

Other Commercial Operations - Patheon's commercial manufacturing business outside of Puerto Rico reported lower year-over-year revenue and Adjusted EBITDA, a significant portion of which related to the foreign exchange impact of a stronger U.S. dollar. The Company had expected that new products under contract would more than cover normal business erosion. However, this new revenue has been slow to materialize due to delayed product approvals and disappointing prescription uptake for certain new products. These impacts have generally affected the North American sites, where most of the company's pipeline of new products have been developed.

Commenting on these results, Wes Wheeler, Chief Executive Officer and President of Patheon Inc., said, "The third quarter was disappointing, both due to the reported results and because the results don't fully reflect the progress we've made in restructuring the Company and lowering its cost base. We have improved our operating metrics, including on time delivery, to what we believe are industry-leading levels, streamlined processes and eliminated unnecessary overhead. We believe we are well positioned to show margin and earnings improvement as revenue growth recovers in the PDS sector and product approvals are achieved."

Third Quarter 2009 Operating Results from Continuing Operations

Gross profit for the third quarter of 2009 decreased to $29.8 million from $49.3 million in the third quarter of 2008. Gross profit margin decreased to 18.1% from 25.3% in the prior year, mainly due to reduced Puerto Rico output, product mix changes and lower volume on a relatively fixed overhead cost basis.

Selling, general and administrative costs were $25.9 million or 26.2% lower than prior year. The decrease is attributable to favorable foreign exchange rates, lower executive compensation, timing of marketing programs, and cost saving initiatives implemented this year. These savings were partially offset in the quarter by continued JLL Offer expenses of $2.8 million. Prior year was also impacted by the voluntary severance program in Cincinnati of $3.3 million, costs related to recruiting and relocation for executive management and operational and strategic initiatives.

Repositioning expenses for the three months ended July 31, 2009 were $0.2 million in connection with completion of the shut down and transition of business out of the York Mills facility. During the three months ended July 31, 2008, the Company incurred $6.7 million of repositioning expenses in connection with changes in executive management, a workforce reduction in Swindon and the manufacturing sites in Puerto Rico and Canada.

Operating income for the third quarter of 2009 decreased to $3.7 million from $7.5 million in the same period last year as a result of factors discussed above. Included in current period operating income are $2.8 million in expenses associated with the JLL Offer and $0.2 million in repositioning expenses as compared to repositioning expenses of $6.7 million in the prior year. The JLL Offer expenses consist primarily of fees for legal and financial advisors, Special Committee retainers, and meeting expenses. Loss from continuing operations of $1.7 million decreased from $2.2 million from the comparable prior year period.

The loss from continuing operations for the three months ended July 31, 2009 was $5.2 million, compared with a loss of $3.9 million in the same period last year. The loss per share from continuing operations, after taking into account the dividends on the convertible preferred shares, for the quarter was 9.7 cents compared with a loss of 4.3 cents a year earlier.

"We remain highly focused on our strategic and operational goals which blend an important mixture of operating excellence, high levels of service, regulatory compliance and cost reduction. Our restructuring programs are on track across all operating and functional units. When I look back at December 2007, I see 15% reduction in headcount on flat volume, and better operating metrics. Our global on-time delivery, right first time batches, inventory turns and client milestone attainment are at their highest ever. We are so confident in our key customer-facing KPIs that we recently rolled out a new performance based guarantee for new contracts. We are positioning Patheon as a premier, service-oriented, and reliable partner for our growing client base" said Mr. Wheeler.

Third Quarter 2009 Highlights of Business Segment Results

Commercial Manufacturing - Revenues from commercial operations for the three months ended July 31, 2009 decreased 15.5% to $132.9 million. Had local currencies remained constant to prior year, commercial manufacturing revenues would have been approximately 8.6% lower than 2008.

North American commercial revenues were $57.4 million, down from $70.2 million in 2008. Had the Canadian dollar remained constant to the prior year rates, North American revenues would have been approximately 16.9% lower than 2008. This reduction was primarily due to reduced customer demand for some products and to operating issues in Puerto Rico, as stated above. This was partially offset by higher revenue in the Cincinnati operations versus prior year. The Company expected new product introductions would more than cover normal business erosion in the quarter, however, the company continued to be negatively impacted by product approval delays and slower than anticipated prescription uptake for certain new products from Toronto, Cincinnati and Whitby.

The company's operations at its York Mills facility were officially shut down in July as scheduled. All products, required personnel and associated services have been transferred to Whitby. The combined operation at Whitby will result in a more efficient and productive business as revenue recovers.

European commercial revenues were $75.5 million or 13.3% lower than last year. Had European currency rates remained constant from the prior year, European revenues would have been approximately 2.0% lower than the same period of 2008. The decrease is due to lower volume in Bourgoin and Monza, partially offset by higher revenues from Swindon and Ferentino.

Adjusted EBITDA from the commercial operations for the three months ended July 31, 2009 decreased to $12.1 million from $21.6 million. 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 $1.0 million higher than the reported amount.

North American operations reported an Adjusted EBITDA decrease of $2.6 million, to a loss of $1.1 million. The decrease in Adjusted EBITDA was driven by operational issues in Puerto Rico and lower revenues in Canada, partially offset by higher EBITDA in Cincinnati.

European operations reported an Adjusted EBITDA of $13.2 million, a decrease of $6.9 million. This decrease was due to lower operating results in Monza and Bourgoin and strengthening of the U.S. dollar.

Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended July 31, 2009 decreased by 16.4% to $31.5 million. Had the local currencies remained constant to prior year rates, PDS revenues would have been approximately 14% lower than 2008. This reflects an industry-wide weakening of pharmaceutical development spending.

Adjusted EBITDA from the PDS operations for the three months ended July 31, 2009 decreased to $8.1 million from $13.9 million. Had local currencies remained constant to prior year rates and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA would have been approximately $0.6 million higher than the reported amount.

Revenues for the period were $479.0 million, down 12.1% from the prior period. Excluding currency fluctuations, current year revenues would have decreased by approximately 4.9%. Revenues from commercial manufacturing decreased 12.8% to $385.8 million from $442.4 million in the prior period. PDS also saw a reduction in revenues of 9.3% to $93.2 million from $102.7 million in the prior period.

Gross profit for the period decreased 10.9% to $102.9 million. Gross profit margin for the period increased to 21.5% from 21.2% in the first nine months of 2008. Margin growth resulted from favorable foreign exchange impact on operating costs, improved cost structure and lower inventory reserves.

Selling, general and administrative costs were $80.5 million or 11.8% lower than prior year. The decrease is attributable to favorable foreign exchange rates, lower bonus and equity based compensation and cost saving initiatives implemented this year. These expense reductions were partially offset by JLL Offer costs of $6.2 million, and $2.0 million of transitional expenses for the opening of the U.S. headquarters in North Carolina, which included severance and relocation expenses. Prior year was impacted by the voluntary severance program in Cincinnati of $3.3 million, costs related to recruiting and relocation for executive management and operational and strategic initiatives.

Repositioning expenses for the nine months ended July 31, 2009 were $1.6 million in connection with the completion of the shut down and transition of business out of the York Mills facility. During the first nine months of 2008, the Company incurred $17.3 million of expenses in connection with changes in executive management, and a workforce reduction in the Swindon, Puerto Rican and Canadian manufacturing sites.

Operating income for the nine months ended July 31, 2009 increased to $20.8 million or 4.3% of revenues from income of $6.9 million or 1.3% of revenues in the same period last year as a result of the items discussed above.

The loss from continuing operations for the nine months ended July 31, 2009 was $4.9 million, compared with a loss of $21.5 million in the same period last year. The loss per share from continuing operations, after taking into account the dividends on the convertible preferred shares, for the nine months ended July 31, 2009 was 17.5 cents compared with a loss of 23.7 cents a year earlier.

Webcast Conference Call with Analysts

Patheon Inc. will host a webcast conference call with financial analysts on its third quarter on Monday, September 14, 2009 at 10:00 a.m. (Eastern Daylight Time). The call will begin with a brief presentation, followed by a question-and-answer period with investment analysts. Interested parties are invited to access the live call, via telephone, in listen-only mode, at 1-647-427-7450 (Toronto and International) or toll free at 1-888-231-8191 (U.S., including Puerto Rico). Listeners are encouraged to dial in five to fifteen minutes in advance to avoid delays. A live audio webcast will also be available via the web at www.patheon.com. An archived version of the third quarter audio webcast will be available on www.patheon.com for three months.