Patheon third-quarter total revenues decrease 0.7% to $163.3 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 third quarter and nine months ended July 31, 2010. Total revenues for the third quarter were $163.3 million or 0.7% lower than the same period last year. Excluding currency fluctuations, current year third quarter revenues would have increased by approximately 3.9% versus the same period last year. Operating income for the third quarter increased to $5.9 million, up from $3.7 million in the same period last year. Third quarter adjusted EBITDA was $23.7 million, up from $13.5 million in the comparable period last year. All amounts are in U.S. dollars unless otherwise indicated.

In commenting on results, Wes Wheeler, Patheon's Chief Executive Officer and President said, "We are beginning to see increased demand for our pharmaceutical development services (PDS) business. New business awards in the third quarter were the strongest we've seen in two years. We're also experiencing historically high quote activity in our commercial manufacturing business, but decision making timelines in the pharmaceutical industry continue to be very slow. We are encouraged by the potential for current quote activity, which appears to largely be driven by recent industry mergers and internal restructuring programs, to provide a source of solid growth over the next 12 to 18 months."

"The Company's operating performance improvement is due in part to reduced losses at our Puerto Rico operations, which had experienced significant operational issues in the third quarter last year. However, Puerto Rico continues to operate at a loss due to high Puerto Rico energy costs and the inefficiencies of operating two sites. We are working to minimize the near term impact, but consolidating the operations into our Manati site is the key to sustained profitability in Puerto Rico. We have signed a letter of intent for the sale of the Caguas site, and the consolidation plan is progressing well towards its scheduled completion at the end of calendar 2011," said Mr. Wheeler.

Third Quarter 2010 Operating Results from Continuing Operations

Gross profit for the period increased 15.4% to $34.4 million. Gross profit margin increased to 21.1% in the third quarter 2010 from 18.1% in the third quarter of 2009. The increase in gross profit was primarily due to stronger revenues in Puerto Rico and Swindon, favorable foreign exchange impact, favorable mix, and lower supplies and maintenance. These were partially offset by higher depreciation primarily due to the planned closure and associated accelerated depreciation of the Caguas facility.

Selling, general and administrative costs were $26.1 million, up $0.2 million or 0.8% from prior year. The increase is primarily due to higher employee costs and depreciation, partially offset by the non recurrence of Special Committee costs of $2.8 million recognized in the three months ended July 31, 2009, and favorable foreign exchange impact.

Repositioning expenses for the three months ended July 31, 2010 were $2.4 million for additional severance and project costs related to the Caguas closure and consolidation in Puerto Rico. During the third quarter last year, the company incurred $0.2 million in connection with the shut down and transition of business out of the York Mills facility.

Operating income for the period increased to $5.9 million or 3.6% of revenues from income of $3.7 million or 2.3% of revenues in the same period last year as a result of the factors discussed above.

The company reported a loss before discontinued operations for the three months ended July 31, 2010 of $3.0 million, compared to a loss of $5.2 million in the same period last year. Included in this loss are $6.1 million of costs associated with the Caguas consolidation project, including repositioning, impairment and accelerated depreciation expense.

Third Quarter 2010 Highlights of Business Segment Results

Commercial Manufacturing - Revenues from commercial manufacturing operations for the three months ended July 31, 2010 decreased by 2.0%, or $2.7 million, to $130.2 million from $132.9 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 3.1% higher than 2009.

North American commercial revenues increased $5.3 million, or 9.2%. Had the Canadian dollar remained constant to the prior year rates, North American revenues would have 8.5% higher than 2009. Increased revenues were primarily the result of improved production in Puerto Rico and favorable foreign exchange, partially offset by lower revenues in Whitby.

European commercial revenues decreased by $8.0 million or 10.6%. Had European currencies remained constant to the rates of the prior year, European revenues would have been approximately 1.1% lower than the same period of 2009. The decrease is primarily due to reduced volumes in Bourgoin due to the decision of a client to repatriate certain products to its own facilities for strategic purposes.

Adjusted EBITDA from the commercial manufacturing operations for the three months ended July 31, 2010 increased by 47.9%, or $5.8 million, to $17.9 million from $12.1 million in the same period of 2009. This represents an Adjusted EBITDA margin of 13.7% compared with 9.1% 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 an increase of $7.7 million, or 700% in Adjusted EBITDA. The increase in Adjusted EBITDA was primarily driven by increased revenues in Puerto Rico and Toronto, and favorable foreign exchange forward contracts in Canada. The Puerto Rico operations performed significantly better in the third quarter of 2010 than the same quarter last year, which was characterized by production problems. However, the Puerto Rico operations did generate an EBITDA loss of $3.2 million in the current period due to the inefficiencies of operating two sites in Puerto Rico. The planned consolidation of the two sites by the end of 2011 is expected to allow the Puerto Rico business to generate positive EBITDA.

European Adjusted EBITDA decreased by $1.9 million, or 14.4% for the three months ended July 31, 2010. The decrease is primarily due to unfavorable foreign exchange from the weakening of the Euro and U.K. Sterling against the U.S. dollar.

Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended July 31, 2010 increased by 5.1%, or $1.6 million, to $33.1 million from $31.5 million in the same period of 2009. Had the local currency rates remained constant to the prior year, PDS revenues would have been approximately 7.6% higher than the same period of 2009.

Adjusted EBITDA from the PDS operations for the three months ended July 31, 2010 increased by 39.5%, or $3.2 million to $11.3 million from $8.1 million in the same period of 2009. 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 the same as the reported amount. This increase was due to higher revenues and cost controls.

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

Revenue for the period was $493.5 million, up 3.0% from the prior period. Excluding currency fluctuations, current year revenues would have been approximately 1.6% higher than the same period of 2009. Revenues from commercial manufacturing increased 3.8% to $400.5 million from $385.8 million in the prior period. PDS saw a reduction in revenue of 0.2% to $93.0 million from $93.2 million in the prior period.

Gross profit for the period decreased 0.7% to $102.2 million. Gross profit margin decreased to 20.7% in the first nine months of 2010 from 21.5% in the same period last year. This decrease was due to unfavorable foreign exchange impact on cost of goods sold, unfavorable mix, higher depreciation due in part to the planned Caguas shutdown, and higher lease expense. These factors were partially offset by a decrease in cost of goods sold due to the recognition of the Canadian research and development investment tax credits.

Selling, general and administrative costs were $82.1 million, up $1.6 million, or 2.0% from prior year. The increase is primarily due to unfavorable foreign exchange, higher depreciation, and employment expenses, partially offset by Special Committee costs of $3.0 million for the nine months ended July 31, 2010 compared to $6.2 million in the same period last year. The nine months ended July 31, 2009 also included $2.0 million of transitional expenses for the opening of the new U.S. headquarters.

Repositioning expenses for the nine months ended July 31, 2010 were $5.8 million in connection with the business consolidation in Puerto Rico. The total repositioning expense for the Caguas consolidation is expected to be approximately $9.0 million. During the nine months ended July 31, 2009, the company incurred $1.6 million in connection with the shut down and transition of business out of the York Mills facility.

Operating income for the period decreased to $14.3 million or 2.9% of revenues from income of $20.8 million or 4.3% of revenues in the same period last year as a result of the factors discussed above.

The company recorded a loss before discontinued operations for the nine months ended July 31, 2010 of $2.4 million, or 1.9 cents per share compared with a loss of $4.9 million, or 17.5 cents per share in the same period of 2009. Prior year results include dividends on the convertible preferred shares of $11.1 million. Dividends were recorded until July 28, 2009, the date when these preferred shares were converted to restricted voting shares by JLL.

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.