Patheon Reports First Quarter 2009 Results

Patheon (herein referred to as "the Company") recently announced results for the first quarter ended January 31, 2009 with revenue of $147.2M, 10.4% lower than last year (2.9% lower in local currencies). Operating income increased by $7.9M to $3.9M from an operating loss in the same period last year of $4.0M. The loss from continuing operations substantially improved, decreasing by $10.3M from the prior year, and Adjusted EBITDA increased to $12.8M from $10.0M in the prior year quarter. All amounts are in U.S. dollars unless otherwise indicated.

"The improvement in profit performance this quarter reflects our 2008 restructuring activities and rigorous cost containment efforts. These improvements were achieved in our seasonally weakest quarter where revenues were down compared to the prior year largely as a result of the stronger U.S. dollar versus our other major sales currencies," said Wes Wheeler, Chief Executive Officer and President of Patheon Inc.

First Quarter 2009 Operating Results from Continuing Operations
Despite lower revenue on a year-over-year basis, gross profit for the period increased 18.6% to $30.7M. The improved cost structure, combined with favorable foreign exchange impact on operating costs and lower inventory provisions, more than offset the impact of lower revenues. Gross profit margin for the period increased to 20.9% from 15.8%.

Selling general and administrative costs were $26.3M or 4.4% lower than prior year. Favorable foreign exchange rates were partially offset by higher marketing expenses and professional fees, as well as $0.5M associated with the Special Committee that was formed to assess JLL Patheon Holdings LLC.'s unsolicited proposed offer to acquire any or all of Patheon's outstanding restricted voting shares that it does not own. SG&A was also impacted by $1.2M of transitional expenses for the opening of the US headquarters in North Carolina, which included severance and relocation expenses.

Repositioning expenses for the first quarter of 2009 were $0.5M compared to $2.4M in the previous year. Current period expenses related to the ongoing shut down and transition of business out of the York Mills facility. The Company expects this transition to be completed by the end of the fiscal third quarter.

Operating income for the period increased to $3.9M from a loss of $4.0M in the same period last year as a result of the higher gross profit and lower repositioning expenses. The loss from continuing operations for the three months ended January 31, 2009 was $1.5M, compared with a loss of $11.7M in the same period last year. The loss per share for the quarter was 5.6 cents compared with a loss of 12.9 cents a year earlier.

First Quarter 2009 Highlights of Business Segment Results
Commercial Manufacturing - Revenues from Commercial Manufacturing operations for the three months ended January 31, 2009 decreased by 12%, or $16.2M, to $117.7M from $133.9 M in the same period of 2008. Had the local currencies remained constant to the rates of the prior year, Commercial Manufacturing revenues would have been approximately 4% lower than 2008.

Revenues from North American operations declined 16% to $55.3M in the quarter primarily due to lower customer demand from the Cincinnati and Whitby operations partially offset by higher revenue in Puerto Rico. Had the Canadian dollar remained constant to the rates of the prior year, North American revenues would have been approximately 12% lower than 2008.

Revenues from the European operations decreased by $6.0M or 9% compared to prior year. Had European currencies remained constant to the rates of the prior year, European revenues would have been approximately 3% higher than the same period of 2008. Stronger local currency revenues from the Swindon and Bourgoin operations were the primary drivers for the increase.

Adjusted EBITDA from the Commercial Manufacturing operations for the three months ended January 31, 2009 increased by 42%, or $4.5M to $15.2M from $10.7M in the same period of 2008. This represents an Adjusted EBITDA margin of 12.9% compared with 8.0% in the same period last year. Had the local currencies remained constant to the rates of the prior year and after eliminating the impact of all foreign exchange gains and losses, Commercial Manufacturing Adjusted EBITDA would have been approximately $1.8M higher than 2008.

North American operations reported an increase of $1.8 M, or 53% in Adjusted EBITDA compared to prior year. The improvement in Adjusted EBITDA was driven by Puerto Rico, as a result of higher revenue and cost improvements, partially offset by weakness in the Canadian and Cincinnati operations. Puerto Rico Adjusted EBITDA was $0.1M in the quarter.

European Adjusted EBITDA increased by $2.7M, or 37% for the three months ended January 31, 2009. This increase was due to higher Adjusted EBITDA at Swindon as a result of favorable foreign exchange and revenue mix and improved operating performance.

Pharmaceutical Development Services (PDS) - PDS revenues for the three months ended January 31, 2009 decreased by 2%, or $0.8 M, to $29.5M from $30.3M in the same period of 2008. Had the local currencies remained constant to the rates of the prior year, PDS revenues would have been approximately 5% higher than 2008. This increase was primarily due to strength in the North American PDS business.

Adjusted EBITDA from the PDS operations for the three months ended January 31, 2009 decreased by 2%, or $0.1M to $5.8M from $5.9M in the same period of 2008. Had the 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 $0.7M lower than 2008.

Update on Carolina Facilities
As previously announced, the Company elected to close its Carolina facility in Puerto Rico and as of January 31, 2009, no further products were manufactured, packaged or shipped from the facility. As a result of the closure, $3.3M of severance and other closure costs were accrued during the three months ended January 31, 2009.

Update on Announced Intention by JLL to make an unsolicited offer
On December 8, 2008, JLL Patheon Holdings LLC ("JLL") announced its intent to make an unsolicited offer to acquire any or all of the outstanding restricted voting shares of the Company that it does not own. As no offer has been made, there is no need for shareholders to act at this time. If an offer is made, the Company expects to issue a Directors' Circular in which the Board will provide its perspective on any such offer.

The first quarter results issued by the Company today are consistent with the information previously provided to BMO Capital Markets in connection with the preparation of its independent valuation report dated February 19, 2009.

Outlook Discussion
The Company indicated in its MD&A for the year ended October 31, 2008 that it anticipated a slight decline in revenues for the first quarter of 2009 versus the same quarter last year due to the strengthening of the U.S. dollar. Adjusted EBITDA was expected to be comparable with the first quarter of 2008, reflecting the normal seasonality in the business due to the December holiday shutdowns and customer purchasing practices around the calendar year-end. These forecasts were qualified as being subject to the strength of the U.S. dollar relative to the Canadian dollar, euro and pounds sterling. Revenues reported in the first quarter of 2009 were lower than first quarter of 2008 by $17.0M, representing a decrease of 10% (2.9% in local currencies). Adjusted EBITDA reported in first quarter of 2009 was higher than first quarter of 2008 by $2.8M, representing a 28% increase.

About Patheon
Patheon Inc. (www.patheon.com) is a leading global provider of contract development and manufacturing services to the global pharmaceutical industry. Patheon prides itself in providing the highest quality products and services to more than 300 of the world's leading pharmaceutical and biotechnology companies. Patheon's services range from preclinical development through commercial manufacturing of a full array of dosage forms including parenteral, solid, semi-solid and liquid forms. Patheon uses many innovative technologies including single-use disposables, liquid-filled hard capsules and a variety of modified release technologies. Patheon's comprehensive range of fully integrated Pharmaceutical Development Services includes pre-formulation, formulation, analytical development, clinical manufacturing, scale-up and commercialization. Patheon can take customers direct to clinic with global clinical packaging and distribution services and Patheon's Quick to Clinic™ programs can accelerate early phase development project to clinical trials while minimizing the consumption of valuable API. Patheon's integrated development and manufacturing network of 10 facilities, and 6 development centers across North America and Europe, strives to ensure that customer products can be launched with confidence anywhere in the world.

Use of Non-GAAP Financial Measures
References in this Press Release to "Adjusted EBITDA" are to loss from continuing operations before repositioning expenses, interest expense, foreign exchange losses reclassified from other comprehensive income, refinancing expenses, gains and losses on sale of fixed assets, gain on extinguishment of debt, income taxes, asset impairment charge, depreciation and amortization. "Adjusted EBITDA margin" is Adjusted EBITDA as a percentage of revenues.

Since Adjusted EBITDA is a non-GAAP measure that does not have a standardized meaning, it may not be comparable to similar measures presented by other issuers. Readers are cautioned that these non-GAAP measures should not be construed as alternatives to net earnings (loss) determined in accordance with GAAP as indicators of performance. Adjusted EBITDA is used by management as an internal measure of profitability. The Company's major credit facilities also have certain covenant calculations that are based on Adjusted EBITDA. The Company has included these measures because it believes that this information is used by certain investors to assess financial performance of the Company, before non-cash charges and large non-recurring costs. Please see Note 5 of the consolidated interim financial statements for an Adjusted EBITDA bridge.

SOURCE: Patheon Inc.