Patheon second-quarter total revenues increase 4.8% to $175.4 million

Patheon Inc. (TSX: PTI), a leading provider of contract development and manufacturing services to the global pharmaceutical industry, announced today its results for the second quarter and six months ended April 30, 2010. Total revenues for the second quarter were $175.4 million or 4.8% higher than the same period last year. Excluding currency fluctuations, current year second quarter revenues would have increased by approximately 1.1% versus the same period last year. Operating income for the second quarter increased to $15.0 million, up from $13.4 million in the same period last year. Second quarter adjusted EBITDA was $30.0 million, up from $20.2 million in the comparable period last year. All amounts are in U.S. dollars unless otherwise indicated.

"We are seeing strong evidence of an improving pharmaceutical contract services business climate for Patheon," said Wes Wheeler, Patheon's Chief Executive Officer and President. "We are beginning to see stronger sales activity for our pharmaceutical development services (PDS) business, and significantly higher levels of quotation activity in the commercial side of the business. We attribute this to an improving economy, increased funding activity and progress with plant consolidations."

"I am also pleased with the progress we have made to strengthen our manufacturing platform, management team and financial position. Dr. Mark Kontny has joined our management team as President of Global Pharmaceutical Development Services and Chief Scientific Officer, and we successfully completed a refinancing of the company which has increased liquidity and given us a very stable capital structure with long-term debt maturities," said Mr. Wheeler. "I firmly believe that these actions have further solidified Patheon's position as a leading contract development and manufacturing provider."

Mr. Wheeler continued, "We announced that we have signed an expanded contract manufacturing agreement with Merck. The expanded agreement clearly positions Patheon as a preferred supplier to Merck. Products and services are being delivered from eight of our 11 global facilities. This contract is representative of the type of supplier relationships we expect to see with a broader group of customers."

"Our Puerto Rico operations delivered strong sales in the first half of the year, and we are meeting customer expectations from an operating perspective. However, the two sites operated at a loss in the first half and continue to be a drag on our EBITDA results. We are working to minimize the impact in the near term while we move forward with the site consolidation program. This project is on schedule for completion by the end of 2011 and will start to show benefits prior to the shutdown," said Mr. Wheeler.

Second Quarter 2010 Operating Results from Continuing Operations

Gross profit for the period increased 1.9% to $43.2 million. Gross profit margin decreased to 24.6% in the second quarter 2010 from 25.3% in the second quarter of 2009. This increase in gross profit was supported by the strengthening Canadian dollar, Euro and U.K. sterling versus the U.S. dollar on revenue, higher revenue in Europe, accelerated deferred revenue recognition, and realization of R&D investment tax credits. These were partially offset by unfavorable foreign exchange impact on the cost of goods sold, mix, higher depreciation and higher operating lease expense.

Selling, general and administrative costs were $27.2 million, down $1.0 million or 3.5% from prior year. The decrease is primarily due to non recurrence of Special Committee costs of $2.9 million recognized in the three months ended April 30, 2009, partially offset by unfavorable foreign exchange, and higher operating expenses.

Repositioning expenses for the three months ended April 30, 2010 were $1.0 million in connection with the closure and consolidation of the company's Caguas facility in Puerto Rico. During the second quarter last year, the company incurred $0.8 million of repositioning expense in connection with the shutdown of the York Mills facility.

Operating income for the period increased to $15.0 million or 8.6% of revenues from income of $13.4 million or 8.0% of revenues in the same period last year as a result of the factors discussed above.

Net income was $10.9 million, or 8.4 cents per share compared with a loss of $3.2 million, or 3.5 cents per share in the same period of 2009. Current period results reflect a $13.8 million release of a tax valuation reserve to the income statement during the second quarter of 2010, partially offset by refinancing expenses of $11.7 million. The valuation reserve, which relates to the Canadian operations, is no longer required in the view of the company due to recent performance and outlook of the Canadian operations. Prior year results include dividends on the convertible preferred shares of $3.7 million.

Second Quarter 2010 Highlights of Business Segment Results

Commercial Manufacturing - Revenues from commercial manufacturing operations for the three months ended April 30, 2010 increased by 5.2%, or $7.0 million, to $142.2 million from $135.2 million in the same period of 2009. Had local currencies remained constant to the rates of the prior year, commercial manufacturing revenues would have been approximately 1.6% higher than 2009.

North American commercial revenues increased $1.3 million, or 1.9%. Had the Canadian dollar remained constant to the prior year rates, North American revenues would have 0.4% lower than 2009. Higher revenues in Cincinnati as a result of accelerated deferred revenue, as well as favorable foreign exchange, were partially offset by lower revenues in Toronto.

European commercial revenues increased by $5.7 million or 8.4%. The increase is primarily due to the weakening of the U.S. dollar against the Euro and U.K. Sterling versus the prior year, and increased revenues in Monza, Swindon and Zug, partially offset by lower revenues in Bourgoin. Had European currencies remained constant to the rates of the prior year, 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 April 30, 2010 decreased by 4.1%, or $0.8 million to $18.8 million from $19.6 million in the same period of 2009. 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 $2.8 million lower than the reported number in the current period.

North American operations reported a decrease of $0.2 million, or 2.9% in Adjusted EBITDA. The decrease in Adjusted EBITDA was driven by a $3.2 million EBITDA reduction in Puerto Rico due to unfavorable product mix, higher utility and maintenance costs, lower revenues in Canada, partially offset by favorable foreign exchange contracts in Canada, and accelerated recognition of deferred revenue in Cincinnati.

European Adjusted EBITDA decreased by $0.6 million, or 4.7% for the three months ended April 30, 2010. Higher revenues for the period were more than offset by unfavorable mix, higher compensation costs and unfavorable inventory absorption due to product mix and timing of production.

Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended April 30, 2010 increased by 3.1%, or $1.0 million, to $33.2 million from $32.2 million in the same period of 2009. Had the local currency rates remained constant from the prior year, PDS revenues would have been approximately 1.0% lower than the same period of 2009.

Adjusted EBITDA from the PDS operations for the three months increased by 94.3%, or $8.2 million to $16.9 million from $8.7 million in the same period of 2009. The second quarter 2010 PDS Adjusted EBITDA includes $4.4 million in prior year 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 $2.4 million lower than the reported amount.

Six Month Year-to-Date 2010 Operating Results from Continuing Operations

Revenue for the period was $330.2 million, up 5.0% from the prior period. Excluding currency fluctuations, current year revenues would have been flat. Revenues from commercial manufacturing increased 6.9% to $270.3 million from $252.9 million in the prior period. PDS saw a reduction in revenue of 2.9% to $59.9 million from $61.7 million in the prior period.

Gross profit for the period decreased 7.4% to $67.8 million. Gross profit margin decreased to 20.5% in the first half of 2010 from 23.3% in the same period last year. This decrease was due to unfavorable foreign exchange impact on cost of goods sold, unfavorable mix, higher depreciation and higher operating lease expense. These factors were partially offset by a decrease in cost of goods sold due to the realization of prior year Canadian R&D investment tax credits and favorable foreign exchange on revenue.

Selling, general and administrative costs were $56.0 million, up $1.5 million or 2.8% from prior year. The increase is primarily due to unfavorable foreign exchange, offset by lower marketing expenses, as well as Special Committee costs of $3.0 million for the six months ended April 30, 2010 compared to $3.4 million in the same period last year.

Repositioning expenses for the six months ended April 30, 2010 were $3.4 million in connection with the Caguas closure and consolidation in Puerto Rico. During the six months ended April 30, 2009, the company incurred $1.3 million in connection with the shut-down of the York Mills facility.

Operating income for the period decreased to $8.4 million or 2.5% of revenues from income of $17.4 million or 5.5% of revenues in the same period last year as a result of the factors discussed above. This included a $5.9 million EBITDA reduction versus the prior year period in Puerto Rico due to unfavorable product mix, and higher utility and maintenance costs.

Net Loss for the six months was $ $0.2 million, or 0.1 cents per share compared with a loss of $12.6 million, or 13.9 cents per share in the same period of 2009. Current period results reflect a $13.8 million release of a tax valuation reserve to the income statement during the second quarter of 2010, partially offset by refinancing expenses of $11.7 million. Prior year results include dividends on the convertible preferred shares of $7.3 million. Dividends were recorded until July 28, 2009, the date when these preferred shares were converted to restricted voting shares.

Caguas Consolidation Estimate Adjustment

In December 2009, Patheon 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 estimated that this consolidation will result in total repositioning expenses of $7.0 million, of which $3.4 million was booked in the six months ended April 30, 2010. The consolidation project is moving forward on schedule towards a shutdown of the Caguas site by the end of 2011. However, based on ongoing revisions to these estimates, the company now believes that the total repositioning expense for the Caguas consolidation will be $9.0 million, due to additional severance and a new retention program.

2010 Outlook

Patheon continues to anticipate 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; foreign exchange rates, the timing in pharmaceutical development outsourced decision making, the timing of regulatory drug approvals, and the timing of integration activity related to recent major pharmaceutical mergers. The company has seen encouraging signs of market recovery and quotation activity since the beginning of calendar 2010, and remains cautiously optimistic.