Patheon third quarter revenues increase 5.8% to $172.7 million

Patheon Inc. (TSX: PTI), a leading provider of contract development and manufacturing services to the global pharmaceutical industry, announced today:

• Details of Patheon's new corporate strategy, including an initial heavy focus on strengthening  the company's core operations; and,
• Revenues for the third quarter of 2011 were $172.7 million or 5.8 percent higher than the same period last year.   Excluding currency fluctuations, revenues would have been approximately 0.2 percent higher than in the same quarter last year.  The loss from continuing operations before income taxes was $3.2 million compared to a loss from continuing operations before income taxes of $1.0 million in the same period last year. Adjusted EBITDA was $11.9 million compared to $23.7 million in the same period last year.  The change in adjusted EBITDA versus the prior year is primarily due to non-recurrence of take-or-pay revenue from the U.K. commercial operations and reduced volume in France, partially offset by stronger performance in Puerto Rico.

The new corporate strategy, building upon Patheon's strong industry reputation, includes:

• Reassessing Patheon's global footprint to enhance capacity utilization and efficiently focus ongoing capital investment on core, strategic businesses;
• Accelerating operational excellence programs in both the Commercial and Pharmaceutical Development Services ("PDS") businesses to increase efficiency, lower cost and better serve Patheon's  customers;
• Evolving the existing commercial sites to function as centers of excellence that will focus on specific technologies or production types; and,
• Investing in the PDS business and expanding its presence in early drug development services.

As part of the strategic global footprint review, Patheon is considering strategic alternatives for the Swindon U.K. commercial business, and has received indications of interest for the site.  It is not contemplated that Patheon's U.K. PDS operations would be part of any potential transaction.  In addition, Patheon is in the process of transferring its Zug, Switzerland European headquarters operations to the company's continuing U.K. operations, and intends over time to consolidate its Burlington, Ontario lab facility into its Toronto operation.  In connection with the Burlington consolidation, Patheon intends to seek strategic alternatives for its clinical packaging operation which operates out of this facility.  These initiatives are expected to result in additional cost reduction. Costs related to the Zug transfer and Burlington consolidation are not expected to have a material impact on Patheon's financial results.

Commenting on the new strategic plan implementation, James C. Mullen, Patheon's Chief Executive Officer said, "The development of a comprehensive strategy to stimulate growth and increase profitability included a thorough review of our markets, our market position, and our prospects for the future.  Our review confirms that we have built a leading position in our industry and that macro trends are working in our favor.  But to capitalize on this position, it is clear that we must aggressively improve the performance of our core operations.  This is being accomplished by a combination of our existing team and outside consulting support. "

Mr. Mullen added, "We will create the premier, customer-focused, contract pharmaceutical development and manufacturing organization in the world.  This should enable attractive earnings and cash flow to reinvest in the business and grow over the long-term."

Third Quarter 2011 Operating Results from Continuing Operations

Gross profit for the third quarter was $27.4 million compared to $34.4 million for the same period last year.  The change in gross profit was primarily due to unfavorable foreign exchange impact related to the weakening of the U.S. dollar, higher supplies and maintenance and a reduction of take or pay revenue in the United Kingdom, partially offset by prior years' research and development investment tax credits in the quarter, and impact of higher volumes.

Selling, general and administrative expenses for the three months ended July 31, 2011 increased to $31.7 million from $26.1 million for the three months ended July 31, 2010.  The increase was primarily due to higher consulting fees largely related to the new strategy and operational initiatives, and higher compensation expenses. The unfavorable foreign exchange impact on selling, general and administrative expense versus the prior year is approximately $1.9 million.

Operating loss for the three months ended July 31, 2011 was $6.2 million compared to operating income of $5.9 million for the three months ended July 31, 2010 as a result of the factors discussed above.

Third Quarter 2011 Highlights of Business Segment Results

Commercial Manufacturing - Revenues from commercial manufacturing operations for the third quarter of 2011 were $138.7 million compared to $130.2 million in the same period last year.  Had local currency exchange rates remained constant to the rates of the same quarter of 2010, Commercial manufacturing revenues for the third quarter of 2011 would have been approximately $8.2 million lower than the reported third quarter revenues.

Adjusted EBITDA from the commercial manufacturing operations for the third quarter of 2011 was $11.5 million compared to $17.9 million in the same period of 2010.  Had local currency exchange rates remained constant to the rates of the three months ended July 31, 2010 rates and after eliminating the impact of all foreign exchange gains and losses, commercial manufacturing Adjusted EBITDA for the third quarter of 2011 would have been approximately $0.5 million lower than reported.

Pharmaceutical Development Services ("PDS") - PDS revenues for the third quarter of 2011 was $34.0 million compared to $33.1 million in the same period of 2010. Had the local currency rates remained constant to the third quarter last year, PDS revenues for the three months ended July 31, 2011 would have been $0.1 million lower than the same period of prior year.

Adjusted EBITDA from the PDS operations for the third quarter of 2011 was $9.3 million compared to $11.3 million in the same period of 2010.  Had local currencies remained constant to the rates of the third quarter last year, and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA for the third quarter of 2011 would have been approximately $0.4 million higher than reported. PDS Adjusted EBITDA for the three months ended July 31, 2011 included $0.7 million of prior years' research and development investment tax credits compared to $2.8 million in the same period of fiscal 2010.

Corporate - Corporate costs in the third quarter of 2011 were $8.9 million compared to $5.5 million in the same quarter last year due to higher consulting fees related to the strategic and operational review, and higher compensation expense.

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

Revenue for the period was $518.4 million up from $493.5 million, an increase of 5.0 percent from the prior period. Commercial manufacturing revenues for the nine months ended July 31, 2011 increased to $425.8 million from $400.5 million, or 6.3 percent, from the same period of fiscal 2010. PDS revenue for the nine months ended July 31, 2011 was $92.6 million compared to $93.0 million in the same period of fiscal 2010.

Gross profit for the period increased to $102.3 million from $102.2 million in the same period last year. The change in gross profit was due to favorable mix resulting from the reservation fee and higher deferred revenue amortization at our Swindon facility, offset by unfavorable foreign exchange impact on cost of goods sold related to the weakening of the U.S. dollar, increase in supplies and maintenance, increase in inventory reserves, increased depreciation expenses from accelerated depreciation in Puerto Rico and impact of prior years' research and development investment tax credits.

Selling, general and administrative expenses were $84.3 million in the first nine months, up from $82.1 million from prior year.  The change was primarily due to higher costs related to legal and consulting fees, the former CEO's severance and higher stock based compensation, partially offset by costs associated with the special committee of independent directors of $3.0 million for the nine months ended July 31, 2010. The unfavorable foreign exchange impact of sales, general and administrative expense versus the prior year was approximately $2.6 million.

Repositioning expenses for the nine months ended July 31, 2011 decreased by $2.4 million due to lower expenses in connection with the Caguas closure and consolidation in Puerto Rico compared to the same period last year, as the prior period included the initial project accruals.

Operating income for the period increased to $14.6 million from income of $14.3 million in the same period last year as a result of the factors discussed above.

Net loss before discontinued operations for the nine months was $10.9 million, or 8.4¢ per share compared to a net loss of $2.4 million, or 1.9¢ per share in the same period of 2010.

2011 Outlook

Patheon expects results from operations in the fourth quarter of 2011 will be stronger than those of the third quarter, but will be impacted by continuing consulting expense related to the implementation of Patheon's strategic plan and operating efficiency initiatives.