Patheon announces fiscal 2009 fourth-quarter and full-year financial results

Operating income increases in the quarter and for the year on lower revenues.

Patheon (TSX: PTI) a global provider of drug development and manufacturing services to the international pharmaceutical industry today announced results for the fourth quarter and full year ended October 31, 2009.

Total revenues for the fourth quarter were $176.1 million, 2.3% higher than the $172.1 million reported in the same period last year. Excluding currency fluctuations, current year fourth quarter revenues would have increased by approximately 1.5%. Operating income for the period increased to $15.4 million, up 73.0% from $8.9 million in the same period last year. Fourth quarter adjusted EBITDA was $27.6 million, up from $24.8 million in the comparable period last year. Operating income and adjusted EBITDA for the quarter include $1.8 million of Special Committee expenses related to the JLL Bid. All amounts are in U.S. dollars unless otherwise indicated.

Total revenues for the full year were $655.1 million, or 8.7% lower than the $717.3 million reported in the same period last year. Excluding currency fluctuations, current year revenues would have decreased by approximately 3.2%. Operating income for fiscal 2009 increased to $36.3 million, up 128.3% from $15.9 million in fiscal 2008, and full year adjusted EBITDA was $74.0 million, down $8.6 million or 10.5% from last year. These results were impacted by $8.0 million of Special Committee expenses related to the JLL Bid.

"The fourth quarter results reflect the work we have done to lower our cost base, increase production efficiency, maintain the highest quality standards and provide exceptional customer service," said Wes Wheeler, Chief Executive Officer and President of Patheon. "Our year was negatively impacted by industry market conditions, regulatory product approval delays, a slowdown in outsourcing decision making at major pharmaceutical companies due to the major industry mergers, operational issues in Puerto Rico and the aforementioned Special Committee costs. We have dealt with these challenges and believe Patheon is well positioned for profitable growth as the market recovers to historical growth rates."

"We are also now able to move on from the distractions and expense of the ongoing dispute between the company's Special Committee and JLL Partners over the last year, which was ended by signing a settlement agreement that received court approval on December 4, 2009," Wheeler added.

Patheon also announced last week its plan to consolidate its Puerto Rico operations into its manufacturing site located in Manati, and ultimately close or sell its plant in Caguas. This decision is expected to result in significant operating efficiencies and provide a strong platform for profitable growth in Puerto Rico.

Fourth Quarter Fiscal 2009 Operating Results from Continuing Operations

Gross profit for the fourth quarter of 2009 decreased to $41.0 million from $41.5 million in same quarter last year. Gross profit margin decreased to 23.3% from 24.1% in the prior year, mainly due to commercial product mix changes and lower PDS volume on a relatively fixed overhead cost basis.

Selling, general and administrative costs were $25.0 million or 16.7% lower than the $30.0 million reported in the prior year. The decrease is attributable to favorable foreign exchange rates, lower bonus and stock based compensation expense, timing of marketing programs and cost saving initiatives implemented this year. These savings were partially offset in the quarter by Special Committee costs of $1.8 million.

Repositioning expenses for the three months ended October 31, 2009 were $0.6 million in connection with the ongoing shut down and transition of business out of the York Mills facility and manufacturing restructuring in Puerto Rico. During the three months ended October 31, 2008, the company incurred $2.6 million of repositioning expenses in connection with a workforce reduction initiative in Swindon, and restructuring of operations in Puerto Rico and Canada.

The income per share from continuing operations, after taking into account the dividends on the convertible preferred shares, for the quarter was 4.5 cents compared with income of 44.2 cents a year earlier. The prior year included a gain on extinguishment of debt which accounted for 39 cents per share of income in 2008.

Fourth Quarter Fiscal 2009 Highlights of Business Segment Results

Commercial Manufacturing - Revenues from commercial operations for the three months ended October 31, 2009 increased 6.5% to $144.2 million from $135.4 million in the comparable period last year. Had local currencies remained constant to prior year, commercial manufacturing revenues would have been approximately 5.5% higher than in 2008.

North American commercial revenues were down $1.5 million from the prior period, or 2.1%. Had the Canadian dollar remained constant to the prior year rates, North American revenues would have been approximately 3.0% lower than 2008. This decrease was primarily due to a reduction in demand for some products, lower new product introductions, and product repatriations by some customers. This was partially offset by higher revenue in the Puerto Rico operations as a result of revenue that was pushed to the fourth quarter due to operational issues in the third quarter.

Revenues from the European operations increased by $10.3 million from the prior period, or 15.9%. Had European currencies remained constant to the rates of the prior year, European revenues would have been approximately 14.4% higher than the same period of 2008. The increase is due to higher volume in Bourgoin from new product introductions and increased revenue in Swindon, Ferentino, and Monza.

Adjusted EBITDA from the commercial manufacturing operations for the three months ended October 31, 2009 increased by 1.1%, or $0.2 million to $24.3 million from $24.1 million in the same period of 2008. This represents an Adjusted EBITDA margin of 16.9% compared with 17.8% 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 $4.5 million higher than the reported number in the current period.

North American operations reported a decrease of $3.6 million, or 30.2% in Adjusted EBITDA. The decrease in Adjusted EBITDA was driven by operational issues in Puerto Rico and lower revenues in Canada, partially offset by stronger EBITDA in Cincinnati primarily due to cost reduction initiatives.

European Adjusted EBITDA increased by $3.8 million, or 30.7% for the three months ended October 31, 2009. This increase was due to stronger operating results in Monza and Bourgoin combined with weakening of the U.S. dollar.

Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended October 31, 2009 decreased by 13.0%, or $4.8 million, to $31.9 million from $36.7 million in the same period of 2008. Changes in local currency had no material impact on PDS revenues versus prior period. This decline reflects a slowdown in demand for development services due to general market conditions.

Adjusted EBITDA from the PDS operations for the three months ended October 31, 2009 decreased by 19.8%, or $2.5 million to $10.2 million from $12.7 million in the same period of 2008. Changes in local currency had no material impact on PDS Adjusted EBITDA versus prior period. Reduced revenue on a relatively fixed cost basis, partially offset by cost savings initiatives impacted EBITDA performance.

Full Year Fiscal 2009 Operating Results from Continuing Operations

Revenues for the full year were $655.1 million, down 8.7% from $717.3 million reported for the full year in fiscal 2008. Excluding currency fluctuations, current year revenues would have decreased by approximately 3.2%. Revenues from commercial manufacturing decreased 8.3% to $530.0 million, from $577.8 million in 2008. PDS reported a reduction in revenues of 10.3% to $125.1 million from $139.5 million reported in 2008. Patheon believes that its 2009 revenues were impacted less than the overall industry revenue trend.

Gross profit for the period decreased 8.4% to $143.9 million, from $157.1 million in 2008. Gross profit margin for the period increased to 22.0% from 21.9% in fiscal 2008. This increase resulted from a favorable foreign exchange impact on operating costs, improved cost structure, and lower inventory obsolescence charges, partially offset by unfavorable mix and lower PDS volume on a relatively fixed overhead cost basis.

Selling, general and administrative costs were $105.5 million or 13.0% 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 the Special Committee costs of $8.0 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 a 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 year ended October 31, 2009 were $2.1 million in connection with the ongoing shut down and transition of business out of the York Mills facility, and manufacturing restructuring in Puerto Rico. During fiscal year 2008, the company incurred $19.9 million of expenses in connection with changes in senior and executive management, a workforce reduction initiative in Swindon and restructuring of the Puerto Rico and Canadian operations.

Operating income for the year ended October 31, 2009 increased to $36.3 million or 5.5% of revenues from income of $15.9 million or 2.2% of revenues in the same period last year.

The income from continuing operations for the year ended October 31, 2009 was $1.0 million, compared to $20.3 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, was 10 cents compared with income of 20.7 cents a year earlier. The prior year included a gain on extinguishment of debt which accounted for 39 cents per share of income in 2008.

First Quarter Outlook Discussion

Puerto Rico Consolidation - As previously announced, Patheon intends to consolidate its Caguas facility into the Manati site resulting in repositioning expenses totaling approximately $7.0 million, of which approximately $2.4 million will be booked in the first quarter of fiscal 2010. Patheon also expects to book an impairment charge of approximately $1.3 million in the first quarter of fiscal 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 the 2010-2011 fiscal year period.

Seasonal variability of results - Generally, the company's manufacturing and PDS revenues are lower in the first and fourth fiscal quarters. The company attributes this to several factors, including: (i) many clients reassess their need for additional product in the last quarter of the calendar year in order to use existing inventories of products; (ii) the lower production of seasonal cough and cold remedies in the first quarter; (iii) many small pharmaceutical and small biotechnology clients involved in PDS projects limit their project activity toward the end of the calendar year in order to reassess progress on their projects and manage cash resources; and (iv) the Patheon-wide plant shut-down during a portion of the traditional holiday period in December and January. During the fourth quarter of 2009, Puerto Rico had higher revenues as a result of operational issues in the third quarter that pushed revenues into the fourth quarter.

Special Committee costs and settlement amounts - Expense in the first quarter of 2010 related to Special Committee costs and the Settlement agreement between the Special Committee and JLL Partners is expected to total approximately $3 million.