Patheon second quarter revenues decrease 3.1% to $170.0 million

Patheon Inc. (TSX: PTI), a leading provider of contract development and manufacturing services to the global pharmaceutical industry, announced today financial results for the second quarter ended April 30, 2011, including the following:

• Revenues for the second quarter were $170.0 million or 3.1 percent lower than the same period last year.   Adjusted EBITDA was $14.3 million compared to $30.0 million in the same period last year.  Loss from continuing operations before income taxes was $6.4 million compared to income from continuing operations before income taxes of $0.9 million in the same period last year.
• Revenues for the first half of 2011 were $345.7 million up from $330.2 million, an increase of 4.7 percent from the prior period.  Adjusted EBITDA for the first half was $43.8 million, up from $39.4 million in the comparable period last year.  Income from continuing operations before income taxes was $0.9 million compared to a loss from continuing operations before income taxes of $9.8 million in the same period last year.
• A major factor in the second quarter year-over-year decline in profitability relates to weakness in the U.S. dollar, resulting in $8.8 million of negative currency impact on Adjusted EBITDA in the second quarter versus the same period last year.

In commenting on the second quarter results, James C. Mullen, Patheon's Chief Executive Officer said, "The Commercial production forecast for the remainder of fiscal 2011 has strengthened and we have a strong book of business in Pharmaceutical Development Services (PDS).  We expect underlying operating performance in the second half to improve significantly from second quarter levels. "

The second quarter results reflect an unusual level of contract cancellations and delays in the PDS business during the first half of 2011.  Patheon's Commercial business was also negatively impacted by operating performance issues and production delays at several of Patheon's Commercial sites, partially offset by income related to the previously disclosed contract termination at Patheon's Swindon site, which related to a cephalosporin sterile facility in the U.K. that had been dedicated under the contract.  Patheon has recently entered into agreements with two customers for the facility, one of which involves a reservation fee.

Mr. Mullen said, "We are actively addressing the Commercial production challenges of the second quarter, which included higher than normal inventory write-offs at several sites, as well as increased overtime at two sites related to a major new product launch, and significant increases in market demand for an existing product.  This has led to some orders shifting into the second half of the year."

He added, "Our PDS business experienced an unusual level of contract cancellations and delays during the first half related to customer regulatory approval and clinical trial outcome issues, as well as industry M&A activity.  This created short term weakness in demand at some of our PDS sites, which had staffed for a higher level of activity.  Contract cancellations are not typically a major PDS issue, and we have not seen further material issues over the last few months."

Second Quarter 2011 Operating Results from Continuing Operations

Gross profit for the second quarter was $32.0 million compared to $43.2 million for the same period last year.  The change in gross profit was due to lower revenue and a reduction in gross profit margin due to non-recurrence of $8.6 million in prior years' investment tax credits and accelerated deferred revenue recognized in fiscal 2010.  In addition, gross profit margin was reduced by higher inventory provisions, increased depreciation due to accelerated depreciation related to the closure of the Caguas facility, and negative foreign exchange impact.  These were partially offset by $9.4 million related to the customer contract amendment in the U.K., and the related reservation fee and accelerated deferred revenue, versus take or pay revenue booked in the prior year.

Selling, general and administrative expenses for the three months ended April 30, 2011 decreased to $24.8 million from $27.2 million for the three months ended April 30, 2010.  The decrease was primarily due to lower incentive compensation, travel and entertainment, offset by unfavorable foreign exchange rates.

Operating income for the three months ended April 30, 2011 was $6.5 million compared to $15.0 million for the three months ended April 30, 2010 as a result of the factors discussed above.

The company reported a loss before discontinued operations for the second quarter of 2011 of $11.1 million, compared to income before discontinued operations of $11.3 million for the same period last year.  Reported income taxes increased in the second quarter by $15.1 million to $4.7 million compared to the same quarter last year, which had an income tax benefit of $10.4 million.  Actual cash taxes paid in the second quarter of 2011 were $0.7 million.  The loss per share before discontinued operations for the three months ended April 30, 2011 was 8.6¢ compared to income of 8.7¢ for the three months ended April 30, 2010.

Second Quarter 2011 Highlights of Business Segment Results

Commercial Manufacturing - Revenues from commercial manufacturing operations for the second quarter of 2011 were $138.5 million compared to $142.2 million in the same period last year.  Second quarter revenue included $9.4 million related to the customer contract in the U.K. versus the same quarter last year.  This was more than offset by lower revenues across other sites, and the non-recurrence of $4.2 million of accelerated deferred revenue recognized in Cincinnati in the prior year quarter.

Adjusted EBITDA from the commercial manufacturing operations for the three months ended April 30, 2011 was $17.0 million compared to $18.8 million in the same period of 2010.  Adjusted EBITDA for the second quarter included the benefit of the contract amendment in the U.K. , and a $1.8 million Adjusted EBITDA improvement in Puerto Rico, which was more than offset by non-recurrence of the Cincinnati deferred revenues and lower revenues at some other sites.

Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended April 30, 2011 was $31.5 million compared to $33.2 million in the same period of 2010. The change in revenue reflects the impact of contract cancellations and delays noted above.

Adjusted EBITDA from the PDS operations for the second quarter of 2011 was $7.3 million compared to $16.9 million in the same period of 2010.  The reduction was due to lower revenues and non-recurrence of $4.4 million of prior year Canadian research and development investment tax credits that were recognized in the same quarter last year.

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

Revenue for the period was $345.7 million up from $330.2 million, an increase of 4.7 percent from the prior period. Commercial manufacturing revenues for the six months ended April 30, 2011 increased to $287.2 million from $270.3 million, or 6.3 percent, from the same period of fiscal 2010. PDS revenues for the six months ended April 30, 2011 were $58.5 million compared to $59.9 million in the same period of fiscal 2010.

Gross profit for the period increased to $74.9 million from $67.8 million in the same period last year. The increase in gross profit was due to higher volume and an increase in gross profit margin.  Gross profit margin increased because of favorable mix related to the reservation fee and higher deferred revenue amortization at Patheon's Swindon facility, partially offset by $4.1 million of unfavorable foreign exchange versus the prior year, higher depreciation, the impact of prior years' investment tax credits booked in fiscal 2010, and inventory write-offs.

Selling, general and administrative costs were $52.6 million, down from $56.0 million from prior year.  The improvement was primarily due to the non-recurrence of costs of a special committee of independent directors of $3.0 million in the first half of 2010, and reduced compensation.  This was partially offset by $1.1 million of costs related to the former CEO's severance and unfavorable foreign exchange.

Repositioning expenses for the six months ended April 30, 2010 decreased $1.9 million due to lower expenses in connection with the Caguas closure and consolidation in Puerto Rico in the first half of 2011 compared to the same period of fiscal 2010, as the prior period included the initial project accruals.

Operating income for the period increased to $20.8 million from income of $8.4 million in the same period last year as a result of the factors discussed above.

Net loss before discontinued operations for the six months was $10.4 million, or 8.1¢ per share compared to income of $0.6 million, or 0.5¢ per share in the same period of 2010.