PATHEON REPORTS FIRST QUARTER FISCAL 2011 RESULTS

Mar 10, 2011, 08:00 ET from Patheon Inc.

TORONTO, March 10 /PRNewswire-FirstCall/ - Patheon Inc. (TSX: PTI), a leading provider of contract development and manufacturing services to the global pharmaceutical industry, announced today its results for the first quarter ended January 31, 2011.  Revenues for the first quarter were $175.7 million or 13.5 percent higher than the same period last year.  Excluding currency fluctuations, current year first quarter revenues would have increased by approximately 10.3 percent versus the same period last year.   Operating income for the period was $14.3 million, or 8.1 percent of revenues, up from an operating loss of $6.6 million, or (4.3) percent of revenues, in the same period last year.  First quarter adjusted EBITDA was $29.5 million, up from $9.3 million in the comparable period last year.  Income before discontinued operations for the first quarter was $0.7 million, compared to a loss before discontinued operations of $10.7 million in the comparable period last year. 

In commenting on results, James C. Mullen, Patheon's Chief Executive Officer said, "The improvement in first quarter results reflects benefits from early expiry of a customer contract in the UK this quarter, as was previously disclosed.   We also saw continued improvement in most of the North American commercial business, while results in the European commercial and our development services business were not as robust.  Our quality track record remains strong and the development of broader strategic relationships with several customers continues.  We are also encouraged that the market dynamics for outsourced manufacturing and development services continues to be encouraging, but is moving at a slower pace than we would like. "

Mr. Mullen added, "The fundamental reasons for the industry to outsource the development and manufacturing of pharmaceutical products remain the same.  Pharmaceutical companies are under heavy pressure to optimize their resources in the face of cost pressures.  We are well positioned to meet the future outsourcing demand with our focus on supply security, financial stability, ability to manufacture multiple dosage forms, geographic breadth and competitive pricing.  I am confident that as the trend evolves we are well positioned to capture our share of the business."

First Quarter 2011 Operating Results from Continuing Operations

Gross profit for the three months ended January 31, 2011 increased $18.4 million, or 74.8 percent, to $43.0 million, from $24.6 million for the three months ended January 31, 2010.  The increase in gross profit was due to higher revenue, and an increase in gross profit margin to 24.5 percent for the three months ended January 31, 2011 from 15.9 percent for the three months ended January 31, 2010.  The increase in gross profit margin was primarily due to the previously disclosed reservation fee and higher deferred revenue amortization at our Swindon facility.  This was partially offset by the non-recurrence of $2.8 million of prior years Canadian research and development investment tax credits recognized in first quarter of 2010, higher inventory provisions, and higher depreciation primarily due to the closure of the Caguas facility and the associated accelerated depreciation. 

Selling, general and administrative expenses for the three months ended January 31, 2011 decreased $1.0 million, or 3.5 percent, to $27.8 million, from $28.8 million for the three months ended January 31, 2010.  The decrease was primarily due to lower special committee costs of $3.0 million that were booked in the first quarter of 2010, partially offset by higher compensation expenses of $2.1 million, of which the majority related to the former CEO's severance costs and higher bonus expense.

Repositioning expenses for the three months ended January 31, 2011 decreased $1.5 million, or 62.5 percent, to $0.9 million, from $2.4 million for the three months ended January 31, 2010.  The decrease was due to lower expenses in connection with the Caguas closure and consolidation in Puerto Rico in the three months ended January 31, 2011 compared to the three months ended January 31, 2010 in which part of the initial project repositioning accruals were recorded. 

Operating income for the three months ended January 31, 2011 increased $20.9 million, or 316.7 percent, to $14.3 million (8.1 percent of revenues), from operating losses of $6.6 million (-4.3 percent of revenues) for the three months ended January 31, 2010 as a result of the factors discussed above. 

The company reported income before discontinued operations for the three months ended January 31, 2011 of $0.7 million, compared to a loss before discontinued operations of $10.7 million for the three months ended January 31, 2010.  The income per share before discontinued operations for the three months ended January 31, 2011 was 0.6¢ compared to 8.3¢ for the three months ended January 31, 2010. 

First Quarter 2011 Highlights of Business Segment Results

Commercial Manufacturing - Revenues from commercial manufacturing operations for the three months ended January 31, 2011 increased by 16.1 percent, or $20.6 million, to $148.7 million from $128.1 million in the same period of 2010.  Had local currencies remained constant to the rates of the prior year, commercial manufacturing revenues would have been approximately 12.5 percent higher than 2010.

North American commercial revenues increased $5.1 million, or 9.0 percent.   Had the Canadian dollar remained constant to the prior year rates, North American revenues would have been 9.4 percent higher than 2010.  The increase was primarily due to higher revenues across all sites.  

European commercial revenues increased by $15.5 million or 21.6 percent.  Had European currencies remained constant to the rates of the prior year, European revenues would have been approximately 15.2 percent higher than the same period of 2010.  The increase is primarily due to the amendment of a manufacturing and supplies agreement with a significant customer in the United Kingdom.  The amendment reflects the customer's decision not to proceed with a development-stage lyophilized cephalosporin sterile product following receipt of a complete response letter from the FDA.  As part of the amendment, the customer is paying Patheon a reservation fee of €21.6 million.  In addition, as a result of the shortened contract life, Patheon is accelerating related deferred revenue recognition and will be relieved of its obligation to repay certain customer-funded capital related to the original manufacturing and supply agreement.    During the first quarter, recognition of the reservation fee was approximately $17.6 million and related accelerated deferred revenue recognition was approximately $15.3 million.  This was partially offset by lower revenue in other European sites as prior year included launch volumes on several new product introductions.

Recognition of revenue from the reservation fee will be materially comparable during fiscal 2011 to amounts that were recognized in the prior year under the original take-or-pay arrangement, but will now be weighted to the first half of fiscal 2011.  We expect to recognize final additional amounts from the amended agreement of approximately $16.7 million in Patheon's fiscal second quarter.

Adjusted EBITDA from the commercial manufacturing operations for the three months ended January 31, 2011 increased by 290.1 percent, or $26.4 million, to $35.5 million from $9.1 million in the same period of 2010.  This represents an Adjusted EBITDA margin of 23.9 percent compared with 7.1 percent 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 $2.5 million higher than the reported number in the current period.

North American operations reported an increase of $1.0 million, or 200.0 percent in Adjusted EBITDA. The increase in Adjusted EBITDA was primarily driven by higher revenue and lower selling, general and administrative expenses stemming from lower compensation related costs partially offset by unfavorable inventory provisions.  Included in the North American Adjusted EBITDA is a loss in the Puerto Rico operations of $2.7 million, down slightly from the three months ended January 31, 2010.

European Adjusted EBITDA increased by $25.4 million, or 295.3 percent for the three months ended January 31, 2011. This increase is primarily due to the recognition of the reservation fee related to the amended manufacturing and supply agreement in the United Kingdom and associated deferred revenue amortization, partially offset by reduced revenue across other European sites.

Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended January 31, 2011 increased by 1.1 percent, or $0.3 million, to $27.0 million from $26.7 million in the same period of 2010. Had the local currency rates remained constant to the prior year, PDS revenues would have been flat with the same period of 2010.

Adjusted EBITDA from the PDS operations for the three months ended January 31, 2011 decreased by 52.7 percent, or $3.9 million to $3.5 million from $7.4 million in the same period of 2010.  Had local currencies remained constant to the rates of the three months ended January 31, 2010 and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA for the three months ended January 31, 2011 would have been approximately $0.6 million higher. PDS Adjusted EBITDA for the three months ended January 31, 2010 included $2.8 million in prior years' Canadian research and development investment tax credits that were recognized in the three months ended January 31, 2010. Additionally, compensation related costs, primarily bonus and salaries, were $1.5 million higher in the three months ended January 31, 2011 compared to the three months ended January 31, 2010.

2011 Outlook

Patheon's first quarter financial results are typically the weakest of its fiscal year.  However, this year's first quarter and first half results will be positively impacted by the previously discussed benefit from the early termination of the customer contract outlined in previous disclosures and this press release.

Conference Call

In conjunction with the company's earnings announcement, the company will be holding its Fiscal 2010 annual and special meeting of shareholders at 10:00 a.m. (EST).  Patheon representatives will provide a brief overview of Fiscal 2010 results and Fiscal 2011 first quarter results as part of the meeting and will take questions from those investors in attendance and, via the Webcast, from analysts and institutional investors who are not able to attend the meeting.  The Fiscal 2011 first quarter financial results news release will be issued at approximately 8:00 a.m. (EST) on Thursday, March 10, 2011.   

Interested parties are invited to access the live meeting and conference call, via telephone, in listen-only mode, toll free at 1-888-231-8191 (U.S., including Puerto Rico) and 1-647-427-7450 (Canada and International).  Listeners are encouraged to dial in five to fifteen minutes in advance to avoid delays.  A live audio will also be available via the web at http://www.patheon.com. (Please note that Windows Media Player or RealPlayer is required).

A telephone replay of the conference call will be available between Thursday, March 10, 2011 and Thursday, March 17, 2011 by dialing 1-800-642-1687 (toll free) or 1-403-451-9481, and by entering identification number 45029866, followed by the number key.  The conference call will also be archived at http://www.patheon.com.

About Patheon

Patheon Inc. (TSX: PTI) is a leading global provider of contract development and manufacturing services to the global pharmaceutical industry.  The company provides the highest quality products and services to approximately 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.  The company uses many innovative technologies including single-use disposables, liquid-filled hard and soft capsules and a variety of modified release technologies.  Its 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 projects to clinical trials while minimizing the consumption of valuable API.  The company's integrated development and manufacturing network of 11 facilities, and eight development centers across North America and Europe, ensures 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 income (loss) before discontinued 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 and other non-cash expenses. "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 income (loss) determined in accordance with GAAP as indicators of performance.  Adjusted EBITDA is used by management as an internal measure of profitability.  Agreements that govern the terms of the company's debt 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 its financial performance, before non-cash charges and certain costs that the company does not believe are reflective of its underlying business.  An Adjusted EBITDA reconciliation of these amounts to the closest Canadian GAAP measure is located under "Selected Annual Financial Information" of the company's MD&A.

Caution Concerning Forward-Looking Statements

This press release contains forward-looking statements which reflect management's expectations regarding the company's future growth, results of operations, performance (both operational and financial) and business prospects and opportunities. All statements, other than statements of historical fact, are forward-looking statements. Wherever possible, words such as "plans", "expects" or "does not expect", "forecasts", "anticipates" or "does not anticipate", "believes", "intends" and similar expressions or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved have been used to identify these forward-looking statements.  Although the forward-looking statements contained in this press release reflect management's current assumptions based upon information currently available to management and based upon what management believes to be reasonable assumptions, the company cannot be certain that actual results will be consistent with these forward-looking statements.  Current material assumptions relate to customer volumes, regulatory compliance and foreign exchange rates.  Forward-looking statements necessarily involve significant known and unknown risks, assumptions and uncertainties that may cause the company's actual results, performance, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements.  These risks and uncertainties include, among other things: international operations and foreign currency fluctuations; customer demand for Patheon's services; regulatory matters affecting manufacturing and pharmaceutical development services; impacts of acquisitions, divestitures and restructurings; global economic environment; exposure to complex production issues; substantial financial leverage; interest rate risks; potential environmental, health and safety liabilities; credit and customer concentration; competition; rapid technological change; product liability claims; intellectual property; significant shareholder; supply arrangements; pension plans; derivative financial instruments; and dependence upon key management personnel and executives. For additional information regarding risks and uncertainties that could affect our business, please see the "Description of the Business - Risk Factors" section in our Annual Information Form, and the "Risk Factors" section in our MD&A for the quarter ended January 31, 2011, both of which are available on SEDAR at www.sedar.com. Although the company has attempted to identify important risks and factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors and risks that cause actions, events or results not to be as anticipated, estimated or intended.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.  Accordingly, readers should not place undue reliance on forward-looking statements.  These forward-looking statements are made as of the date of this press release and, except as required by law, the company assumes no obligation to update or revise them to reflect new events or circumstances.


CONSOLIDATED STATEMENTS OF INCOME (LOSS)    
(unaudited)    
  Three months ended January 31,
  2011 2010
(in millions of U.S. dollars, except loss per share) $
     
Revenues 175.7 154.8
Cost of goods sold 132.7 130.2
Gross profit 43.0 24.6
Selling, general and administrative expenses 27.8 28.8
Repositioning expenses 0.9 2.4
Operating income 14.3 (6.6)
Interest expense, net 6.3 3.6
Impairment charge - 1.3
Foreign exchange loss (gain) 0.6 (0.4)
Other 0.1 (0.4)
Income (loss) from continuing operations before income taxes 7.3 (10.7)
Provision for income taxes 6.6 -
Loss before discontinued operations 0.7 (10.7)
Loss from discontinued operations (0.2) (0.4)
Net loss for the period 0.5 (11.1)
Net loss attributable to restricted voting shareholders 0.5 (11.1)
     
Basic and diluted loss per share    
     From continuing operations $0.006 ($0.083)
     From discontinued operations ($0.002) ($0.003)
  $0.004 ($0.086)
     
Average number of shares    
  outstanding during period - basic and diluted (in thousands) 129,168 129,168

CONSOLIDATED BALANCE SHEETS      
Unaudited      
  As of January 31,   As of October 31,
  2011   2010
(in millions of U.S. dollars) $   $
       
Assets      
Current      
   Cash and cash equivalents 49.8   53.5
   Accounts receivable 136.0   139.9
   Inventories 75.1   73.3
   Income taxes receivable 7.3   5.7
   Prepaid expenses and other 14.2   9.5
   Future tax assets - short term 10.8   9.0
Total current assets 293.2   290.9
       
Capital assets 472.5   478.3
Intangible assets 0.9   1.4
Future tax assets 5.2   11.2
Goodwill 3.5   3.4
Investments 4.9   5.3
Other long-term assets 19.5   18.4
Total assets 799.7   808.9
       
Liabilities and shareholders' equity      
Current      
   Short term borrowings 0.7   2.0
   Accounts payable and accrued liabilities 147.0   156.7
   Income taxes payable 0.4   0.4
   Deferred revenues - short term 24.5   26.7
   Current portion of long-term debt 1.4   3.5
Total current liabilities 174.0   189.3
       
Long-term debt 274.9   274.8
Deferred revenues 21.2   19.2
Future tax liabilities 32.8   29.7
Other long-term liabilities 21.2   22.9
Total liabilities 524.1   535.9
       
Shareholders' equity      
   Restricted voting shares 553.8   553.8
   Contributed surplus 10.1   10.0
   Deficit (330.2)   (330.7)
   Accumulated other comprehensive income 41.9   39.9
Total shareholders' equity 275.6   273.0
Total liabilities and shareholders' equity 799.7   808.9

Patheon Inc.      
CONSOLIDATED STATEMENTS OF CASH FLOWS      
Unaudited      
       
  Three months ended January 31,
  2011   2010
(in millions of U.S. dollars) $   $
       
Operating activities      
Income (loss) before discontinued operations 0.7   (10.7)
     Add (deduct) charges to operations not requiring a current cash payment      
    Depreciation and amortization 14.9   13.1
    Impairment charge -   1.3
    Other non-cash interest 0.3   0.1
    Change in other long-term assets and liabilities (2.1)   (0.3)
    Future income taxes 8.0   (3.5)
    Amortization of deferred revenues (22.6)   (1.7)
    Stock-based compensation expense 0.1   0.2
    Other -   (0.4)
  (0.7)   (1.9)
     Net change in non-cash working capital balances related to continuing operations (6.2)   (2.4)
     Increase in deferred revenues 14.2   11.2
     Cash provided by operating activities of continuing operations 7.3   6.9
     Cash used in operating activities of discontinued operations (0.2)   (0.8)
Cash provided by operating activities 7.1   6.1
       
Investing activities      
     Additions to capital assets (9.8)   (10.2)
     Net increase in investments -   (0.6)
     Investment in intangibles -   (0.1)
     Cash used in investing activities of continuing operations (9.8)   (10.9)
Cash used in investing activities (9.8)   (10.9)
       
Financing activities      
     (Decrease) increase in short-term borrowings (1.3)   2.4
     Increase in long-term debt -   8.1
     Repayment of long-term debt (0.1)   (6.0)
     Cash (used in) provided by financing activities of continuing operations (1.4)   4.5
Cash (used in) provided by financing activities (1.4)   4.5
       
       
Effect of exchange rate changes on cash and cash equivalents 0.4   (1.7)
       
Net decrease in cash and cash equivalents during the period (3.7)   (2.0)
Cash and cash equivalents, beginning of period 53.5   22.3
Cash and cash equivalents, end of period 49.8   20.3
       
Supplemental cash flow information      
Interest paid 0.1   3.5
Income taxes paid, net of refunds -   -

SOURCE Patheon Inc.