Patheon fourth quarter revenues increase 0.9% to $177.7 million

Dec 17 2010

Patheon Inc. (TSX: PTI), a leading provider of contract development and manufacturing services to the global pharmaceutical industry, announced today its results for the fourth quarter and full year ended October 31, 2010.  Revenues for the fourth quarter were $177.7 million or 0.9 percent higher than the same period last year.  Excluding currency fluctuations, current year fourth quarter revenues would have increased by approximately 5.0 percent versus the same period last year.  Operating income for the period was $13.3 million, or 7.5 percent of revenues, down from operating income of $15.4 million, or 8.7 percent of revenues, in the same period last year.  Fourth quarter adjusted EBITDA was $28.6 million, up from $27.6 million in the comparable period last year.

Revenues for the full year were $671.2 million, up 2.5 percent from the prior period.  Excluding currency fluctuations, current year revenues would have been approximately 2.3 percent higher than the same period of 2009.  Operating income for the year ended October 31, 2010 was $27.6 million, or 4.1 percent of revenues, down from operating income of $36.3 million, or 5.5 percent of revenues, in the same period last year.  Full year adjusted EBITDA was $91.7 million, up from $74.0 million in 2009.  All amounts are in U.S. dollars unless otherwise indicated. 

In commenting on results, Peter T. Bigelow, Patheon's Interim Chief Executive Officer said, "Fiscal 2010 was a solid year that included a continuation of our quality track record, introduction of innovative new pharmaceutical development services, and development of broader strategic relationships with several customers that we believe will be a model for the business going forward.  We reported increased financial results and have put in place a stable, long-term capital structure to support the business.  We continue to absorb losses in our Puerto Rico business and, although we are continuing with our efforts to shut down Caguas and consolidate our operations into the Manati site, the consolidation is taking longer than expected due to customer regulatory filing time lines."

Mr. Bigelow added, "We continue to see encouraging customer activity in both our Commercial and PDS businesses.  Quote backlogs continue at very high rates by historic standards, and we are now seeing the number of quotes converting to business awards starting to grow.  This is expected to support revenue growth in the 12 to 18 month time frame."

Fourth Quarter 2010 Operating Results from Continuing Operations

Gross profit for the period increased 4.1 percent to $42.7 million. Gross profit margin increased to 24.0 percent in the fourth quarter 2010 from 23.3 percent in the fourth quarter of 2009.  The increase in gross profit was primarily due to stronger revenues in Europe, favorable foreign exchange impact on costs and favorable mix.  These were partially offset by higher depreciation, primarily due to the planned closure and associated accelerated depreciation of the company's Caguas, Puerto Rico facility, and higher supplies and maintenance costs.

Selling, general and administrative costs were $28.4 million, up $3.4 million or 13.6 percent from prior year.  The increase is primarily due to higher employee costs and depreciation, partially offset by the non recurrence of $1.8 million of Special Committee costs recognized in the three months ended October 31, 2009, and favorable foreign exchange impact.

Repositioning expenses for the three months ended October 31, 2010 were $1.0 million for project costs related to the Caguas closure and consolidation in Puerto Rico.  During the fourth quarter last year, the company incurred $0.6 million in connection with the ongoing shut down and transition of business out of the York Mills facility and manufacturing restructuring in Puerto Rico.

Operating income for the period decreased to $13.3 million or 7.5 percent of revenues from operating income of $15.4 million or 8.7 percent 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 October 31, 2010 of $0.9 million, compared to income of $5.8 million in the same period last year. 

Fourth Quarter 2010 Highlights of Business Segment Results

Commercial Manufacturing - Revenues from commercial manufacturing operations for the three months ended October 31, 2010 increased by 0.4 percent, or $0.6 million, to $144.8 million from $144.2 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 5.0 percent higher than 2009.

North American commercial revenues decreased $5.0 million, or 7.2 percent.   Had the Canadian dollar remained constant to the prior year rates, North American revenues would have 7.5 percent lower than 2009.  Decreased revenues were primarily the result of lower production in the Canadian and Puerto Rican operations.  Puerto Rican revenues in 2010 were lower than 2009 as a result of operational issues earlier in 2009 that pushed additional revenue into the fourth quarter of 2009.

European commercial revenues increased by $5.6 million or 7.5 percent.  Had European currencies remained constant to the rates of the prior year, European revenues would have been approximately 16.6 percent higher than the same period of 2009.  The increase is primarily due to higher revenue in Swindon from increased take-or-pay and deferred revenue recognition, partially offset by reduced volumes in Bourgoin.

Adjusted EBITDA from the commercial manufacturing operations for the three months ended October 31, 2010 increased by 9.4 percent, or $2.3 million, to $26.6 million from $24.3 million in the same period of 2009.  This represents an Adjusted EBITDA margin of 18.4 percent compared with 16.9 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 $4.7 million higher than the reported number in the current period.

North American operations reported a decrease of $1.3 million, or 15.8 percent in Adjusted EBITDA. The decrease in Adjusted EBITDA was primarily driven by lower revenues in the Canadian and Puerto Rican operations, partially offset by lower production costs in Puerto Rico and stronger results in Cincinnati.

European Adjusted EBITDA increased by $3.6 million, or 22.5 percent for the three months ended October 31, 2010. The increase is primarily due to increased revenues and favorable revenue mix in Swindon, partially offset by unfavorable foreign exchange from the weakening of the Euro against the U.S. dollar.

Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended October 31, 2010 increased by 3.1 percent, or $1.0 million, to $32.9 million from $31.9 million in the same period of 2009. Had the local currency rates remained constant to the prior year, PDS revenues would have been approximately 5.3 percent higher than the same period of 2009.

Adjusted EBITDA from the PDS operations for the three months ended October 31, 2010 increased by 7.7 percent, or $0.8 million to $11.0 million from $10.2 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.

Full Year- to-Date 2010 Operating Results from Continuing Operations

Revenue for the period was $671.2 million, up 2.5 percent from the prior period.  Excluding currency fluctuations, current year revenues would have been approximately 2.3 percent higher than the same period of 2009.  Revenues from commercial manufacturing increased 2.9 percent to $545.3 million from $530.0 million in the prior period. PDS saw an increase in revenue of 0.6 percent to $125.9 million from $125.1 million in the prior period.

Gross profit for the period increased 0.8 percent to $145.0 million.  Gross profit margin for the period decreased to 21.6 percent for the year ended October 31, 2010 from 22.0 percent in the same period last year.  The increase in gross profit is primarily due to higher volume and the recognition of prior years' Canadian research and development investment tax credits, partially offset by unfavorable foreign exchange impact on cost of goods sold, higher depreciation and higher lease expense.

Selling, general and administrative costs were $110.6 million, up $5.1 million or 4.8 percent from the prior year. The increase is primarily due to higher stock option amortization and other compensation expenses, unfavorable foreign exchange, and higher depreciation, partially offset by Special Committee costs of $3.0 million for the year ended October 31, 2010 compared to $8.0 million in the same period last year.  The year ended October 31, 2009, also included $2.0 million of transitional expenses for the opening of the new U.S. headquarters.

Repositioning expenses for the year ended October 31, 2010 were $6.8 million in connection with the Caguas closure and consolidation in Puerto Rico. During fiscal year 2009, the Company incurred $2.1 million in connection with the ongoing shut down and transition of business out of the York Mills facility, and manufacturing restructuring in Puerto Rico.

Operating income for the year ended October 31, 2010 decreased to $27.6 million or 4.1 percent of revenues from income of $36.3 million or 5.5 percent 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 year ended October 31, 2010 of $3.3 million, compared to income of $1.0 million in the same period last year.  The loss per share before discontinued operations was 2.6¢ compared to a loss of 10.0¢ a year earlier, after taking into account the dividends on the convertible preferred shares in 2009.  Dividends were recorded until July 28, 2009, the date when the preferred shares were converted to restricted voting shares by JLL.

Subsequent Event

In December 2010, Patheon and a major customer amended a manufacturing and supply agreement, in which both parties agree to a contract termination date in February of 2011, approximately two and a half years earlier than was originally planned.  The amendment reflects the customer's decision not to proceed with a product following receipt of a Complete Response letter from the FDA.  As part of the amendment, the customer will pay Patheon a reservation fee of €21.6 million, and as a result of the shortened contract life, Patheon will accelerate the 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. Recognition of revenue from the amendment will be materially comparable during fiscal year 2011 to amounts that would have otherwise been payable under the take-or-pay arrangement.

2011 Outlook

Patheon's first quarter financial results are typically the weakest of its fiscal year for reasons outlined in its MD&A for the year ended October 31, 2010 which is available on SEDAR at www.sedar.com.  In the first quarter of fiscal 2011, the company's results are expected to be favorably impacted by the amended customer contract noted above.  This will be partially offset by severance expense related to the departure of the company's President and CEO.