Patheon announces first quarter results



    Website: www.patheon.com

    TORONTO, March 9 /CNW/ - Patheon (TSX:PTI), a global provider of drug
development and manufacturing services to the international pharmaceutical
industry, today announced its results for the first quarter ended January 31,
2007. (All amounts are in U.S. dollars unless otherwise indicated.)

    Financial Results

    First Quarter Ended January 31, 2007
    Compared With First Quarter Ended January 31, 2006

    
    -   Revenues increased 9% to $171.7 million;

    -   EBITDA before repositioning expenses in the first quarter was
        $23.2 million (13.5% of revenues) compared with $14.0 million (8.9%
        of revenues);

    -   Repositioning expenses, relating primarily to workforce reduction and
        the expansion of the Company's manufacturing efficiency review
        process, were $3.7 million ($2.9 million after tax);

    -   The net loss for the quarter was $2.6 million (2.8 cents per share),
        compared with a net loss of $11.5 million (12.4 cents per share) a
        year ago.

    "Our revenues and EBITDA before repositioning expenses improved
significantly during the first quarter," said Riccardo Trecroce, Chief
Executive Officer, Patheon Inc. "We achieved strong revenue growth in
prescription manufacturing and pharmaceutical development services, which have
grown to represent almost 90% of our total revenue base. Our earnings also
improved, due mainly to efficiency gains at several Canadian sites,
particularly Whitby, higher volumes at our Carolina, Puerto Rico site relative
to last year, and solid growth at our PDS operations in Canada, Cincinnati and
Swindon."
    The Company's net income was impacted by repositioning expenses of
$3.7 million in the first quarter, comprising $1.1 million in severance costs,
$1.6 million in professional fees relating to the expansion of its
manufacturing efficiency review process, and $1.0 million in costs relating to
work on the Board's strategic alternatives review. Net income in the first
quarter of 2007 was also impacted by interest expense of $7.7 million compared
with $5.1 million in the same period a year ago, and an income tax charge of
$1.8 million compared with a recovery of $1.1 million in the first quarter of
last year.

    Strategic and Operating Performance Initiatives

    "With last week's announcement of the proposed US$150 million investment
by JLL Partners, we took a significant step towards improving our capital
structure," said Mr. Trecroce. "This investment will allow us to move forward
with renewed momentum and greater financial flexibility.
    "We remain highly focused on improving our operating performance," Mr.
Trecroce continued. "Initiatives under our Performance Enhancement Program are
well underway throughout our global organization and are already having a
positive impact on profitability, as demonstrated by our first quarter
results."
    During the quarter, the Company further reduced the size of its global
workforce by approximately 300 positions, or about 5%, to about 5,300 full-
time equivalent positions as at January 31, 2007. Virtually all of the
reductions took place at the Company's North American sites, and were achieved
through retirements, attrition and terminations with severance packages.
    The Company also made significant progress on its manufacturing
efficiency review initiative during the quarter. The initiative is nearing
completion at the Company's Toronto Region, Cincinnati, Carolina and Swindon
sites, where it is expected to result in sustained process improvements and
higher productivity.
    Patheon has continued to implement its global procurement program,
leveraging the Company's global purchasing power to negotiate contracts that
will continue to reduce operating and raw material costs.

    First quarter operating results

    First-quarter revenues increased by $13.8 million, or 9%, over the same
period a year ago. Revenues from Rx manufacturing services grew by
$14.2 million, or 13%, reflecting higher volumes at the Canadian, European and
Puerto Rico operations. Revenues from pharmaceutical development services
(PDS) revenues increased by $5.0 million, or 23%, due to strong growth at the
Toronto Region, Cincinnati and Swindon PDS operations. These gains were
partially offset by a decline of $5.4 million, or 23%, in revenues from over-
the-counter (OTC) manufacturing services, primarily due to a decision by
clients in Whitby and Cincinnati to repatriate products back to their own
manufacturing networks.
    Consolidated EBITDA before repositioning expenses of $23.2 million in the
first quarter represented an increase of $9.2 million, or 66%, compared with
the same period a year ago. The EBITDA margin before repositioning was 13.5%
in the first quarter, compared with 8.9% in the first quarter of 2006.
    In Canada, EBITDA before repositioning expenses from commercial
manufacturing operations was $8.5 million, or $6.0 million higher than the
same period a year ago. The improvement reflects efficiency gains at Whitby
Operations, combined with higher capacity utilization at the other operations.
In addition, the profitability of the Canadian operations during the first
quarter of 2007 was not significantly impacted by foreign exchange, as the
Canadian dollar strengthened relative to the U.S. dollar by only 1% compared
with the first quarter of 2006.
    EBITDA before repositioning expenses from U.S. operations was
$4.8 million - a $2.1 million improvement over the same period a year ago. The
improvement was primarily due to higher capacity utilization at the Carolina
site, which in the first quarter of 2006 had been impacted by a voluntary shut
down in production following receipt of an FDA warning letter. These gains at
Carolina were partially offset by lower volumes at Caguas during the first
quarter of 2007.
    In Europe, EBITDA before repositioning expenses from the commercial
manufacturing operations was $5.4 million, or $1.5 million lower than the same
period a year ago. The decline reflects a change in the mix of products during
the quarter, lower technical transfer service revenues, and lower pre-launch
revenues for the cephalosporin lyophilisation product in Swindon compared with
a year ago.
    EBITDA before repositioning expenses from global pharmaceutical
development services was $7.4 million, or $2.8 million higher than the same
period a year ago. The increase reflects improved revenue growth across all
operations.

    Outlook

    Revenues for the second quarter of 2007 are expected to be approximately
the same as in the first quarter of 2007. Revenues are expected to be slightly
higher across the network with the exception of the U.S. operations, where we
are experiencing lower client demand for products currently being manufactured
at those operations.

    FORWARD-LOOKING STATEMENTS

    Cautionary Note

    This news release contains forward-looking statements which reflect
management's expectations regarding the Company's future growth of operations,
performance (both operational and financial) and business prospects and
opportunities.

    PLEASE REFER TO THE CAUTIONARY NOTE AT THE END OF THE MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
("MD&A") ATTACHED TO AND FORMING PART OF THIS NEWS RELEASE.

    WEBCAST CONFERENCE CALL WITH ANALYSTS

    Patheon Inc. will host a webcast conference call with financial analysts
on its first quarter results on Friday, March 9, 2007 at 11:00 a.m. (Eastern
Standard Time). Representing Patheon on the call will be: Riccardo Trecroce,
Chief Executive Officer; Nick DiPietro, President and Chief Operating Officer;
John Bell, Chief Financial Officer; and Shelley Jourard, Director, Corporate
Communications. The call will begin with a brief presentation, followed by a
question-and-answer period with investment analysts. Interested parties are
invited to access the live call, via telephone, in listen-only mode, at (416)
644-3416 (Toronto and International) or toll free at (800) 732-6179 (U.S.,
including Puerto Rico). Listeners are encouraged to dial in five to 15 minutes
in advance to avoid delays. A live audio webcast, with a slide presentation,
will also be available via the web at www.patheon.com. An archived version of
the Q1 webcast will be available on www.patheon.com for three months.

    ABOUT PATHEON

    Patheon (TSX:PTI; www.patheon.com) is a leading global provider of drug
development and manufacturing services to the international pharmaceutical
industry. Patheon operates a network of 14 facilities in the United States,
Canada and Europe, employing more than 5,300 people and serving a client base
of 250 pharmaceutical and biotechnology companies.



    Consolidated Statements of Loss

    (unaudited)

                                               Three months ended January 31,

                                              2007         2006     % change
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars,
     except per share amounts)                   $            $
    -------------------------------------------------------------------------

    Revenues                               171,695      157,944         8.7%
    Operating expenses                     148,461      143,932         3.1%
                                        -------------------------------------
    Earnings before the following:          23,234       14,012        65.8%
                                        -------------------------------------
    (as a % of revenues)                     13.5%         8.9%

    Repositioning expenses (note 5)          3,701            -
    Depreciation and amortization           10,470        9,811         6.7%
    Amortization of intangible assets        2,181        3,423       -36.3%
    Interest                                 7,723        5,103        51.3%
    Debt prepayment charges (note 9)             -        1,643
    Amortization of deferred
     financing costs                             -          325
    Write-off of deferred financing
     costs (note 9)                              -        6,332
                                        -------------------------------------
    Loss before income taxes                  (841)     (12,625)       93.3%
    Provision for (recovery of) income
     taxes                                   1,795       (1,115)      261.0%
                                        -------------------------------------
    Net loss for the period                 (2,636)     (11,510)       77.1%
                                        -------------------------------------
                                        -------------------------------------
    (as a % of revenues)                     -1.5%        -7.3%

    Loss per share
      Basic                             (2.8 cents) (12.4 cents)       77.4%
                                        -------------------------------------
      Diluted                           (2.8 cents) (12.4 cents)       77.4%
                                        -------------------------------------
    Average number of shares
     outstanding during period:
      Basic (in thousands)                  92,951       92,846         0.1%
                                        -------------------------------------
      Diluted (in thousands)                92,951       92,846         0.1%
                                        -------------------------------------

    see accompanying notes



    Consolidated Balance Sheets

    (unaudited)
    (See note 1 - Going Concern Uncertainty)              As at        As at
                                                     January 31,  October 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                            $            $
    -------------------------------------------------------------------------

    Assets
    Current
      Cash and cash equivalents                          36,826       50,723
      Accounts receivable                               110,853      121,956
      Inventories                                        79,605       75,962
      Prepaid expenses and other                          5,258        6,800
                                                     ------------------------
    Total current assets                                232,542      255,441
                                                     ------------------------

    Capital assets                                      491,504      494,088
    Intangible assets                                    39,266       41,447
    Deferred costs                                        7,189        9,717
    Future tax assets                                    24,307       21,827
    Goodwill                                              2,936        3,077
    Investment                                              630          586
                                                     ------------------------
                                                        798,374      826,183
                                                     ------------------------
                                                     ------------------------

    Liabilities and Shareholders' equity
    Current
      Bank indebtedness                                  10,909        3,829
      Accounts payable and accrued liabilities          129,115      142,781
      Income taxes payable                                3,947          879
      Current portion of long-term debt (note 8)        268,966      283,717
                                                     ------------------------
    Total current liabilities                           412,937      431,206
                                                     ------------------------

    Long-term debt (note 8)                              60,574       62,071
    Other long-term liabilities                          26,083       25,681
    Deferred revenues                                    23,286       23,366
    Future tax liabilities                               34,857       33,128
                                                     ------------------------
    Total liabilities                                   557,737      575,452
                                                     ------------------------

    Shareholders' equity
      Share capital                                     400,721      400,721
      Contributed surplus                                 3,874        3,829
      Retained deficit                                 (192,536)    (189,900)
      Accumulated other comprehensive income             28,578       36,081
                                                     ------------------------
    Total shareholders' equity                          240,637      250,731
                                                     ------------------------
                                                        798,374      826,183
                                                     ------------------------
                                                     ------------------------

    see accompanying notes



    Consolidated Statements of Changes in
     Shareholders' Equity

    (unaudited)

                                               Three months ended January 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                            $            $
    -------------------------------------------------------------------------

    Share capital
                                                     ------------------------
      Balance at beginning and end of period            400,721      400,594
                                                     ------------------------
    Contributed surplus
      Balance at beginning of period                      3,829        2,901
      Stock options                                          45          340
                                                     ------------------------
      Balance at end of period                            3,874        3,241
                                                     ------------------------
    Retained earnings (deficit)
      Balance at beginning of period                   (189,900)      98,250
      Net loss for the period                            (2,636)     (11,510)
                                                     ------------------------
      Balance at end of period                         (192,536)      86,740
                                                     ------------------------
    Accumulated other comprehensive income
      Balance at beginning of period                     36,081       38,106
      Transition adjustment (note 1)                       (762)
      Other comprehensive income (loss) for the period   (6,741)      17,683
                                                     ------------------------
      Balance at end of period                           28,578       55,789
                                                     ------------------------
    Total shareholders' equity at end of period         240,637      546,364
                                                     ------------------------

    see accompanying notes



    Consolidated Statement of Comprehensive Loss
    (unaudited)

                                               Three months ended January 31,
                                                                        2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                                         $
    -------------------------------------------------------------------------

    Net loss for the period                                           (2,636)
                                                                  -----------
    Other comprehensive loss, net of income
     taxes (note 10)
      Change in foreign currency losses on
       investments in subsidiaries, net of
       hedging activities (2006 - gain
       of $17,683)                                                    (4,505)
      Change in losses on derivatives
       designated as cash flow hedges                                 (2,509)
      Losses on cash flow hedges reclassified
       to statement of loss                                              310
      Gains on interest rate hedges
       reclassified to statement of loss                                 (37)
                                                                  -----------
      Other comprehensive loss for the period                         (6,741)
                                                                  -----------

    Comprehensive loss for the period                                 (9,377)
                                                                  -----------
                                                                  -----------

    see accompanying notes



    Consolidated Statements of Cash Flows
    (unaudited)
                                               Three months ended January 31,
                                                           2007         2006
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                            $            $
    -------------------------------------------------------------------------

    Operating activities
      Net loss for the period                            (2,636)     (11,510)
      Add (deduct) charges to operations not
       requiring a current cash payment
        Depreciation and amortization                    12,651       13,234
        Write-off of deferred financing costs
         (note 9)                                             -        6,332
        Amortization of deferred financing costs            681          325
        Employee future benefits                            471         (786)
        Future income taxes                                (224)       2,315
        Amortization of deferred revenues                  (486)        (497)
        Other                                               276          498
                                                     ------------------------
                                                         10,733        9,911
      Net change in non-cash working capital
       balances related to operations                    (6,252)      (2,147)
      Increase in deferred revenues                           -        9,614
                                                     ------------------------
    Cash provided by operating activities                 4,481       17,378
                                                     ------------------------

    Investing activities
      Additions to capital assets - sustaining           (3,117)      (2,740)
                                  - project - related    (4,947)     (11,180)
      Decrease in investments                               116            -
      Increase in deferred pre-operating costs           (1,065)        (518)
                                                     ------------------------
    Cash used in investing activities                    (9,013)     (14,438)
                                                     ------------------------

    Financing activities
      Increase (decrease) in bank indebtedness            6,942      (13,596)
      Increase in long-term debt                          9,370      283,580
      Repayment of long-term debt                       (24,470)    (287,352)
      Decrease in restricted cash                             -        7,805
      Increase in deferred financing costs                    -       (2,765)
                                                     ------------------------
    Cash used in financing activities                    (8,158)     (12,328)
                                                     ------------------------

    Effect of exchange rate changes on cash and
     cash equivalents                                    (1,207)         122
                                                     ------------------------

    Net decrease in cash and cash equivalents
     during the period                                  (13,897)      (9,266)
    Cash and cash equivalents, beginning of period       50,723       22,507
                                                     ------------------------
    Cash and cash equivalents, end of period             36,826       13,241
                                                     ------------------------
                                                     ------------------------

    see accompanying notes



        Notes to Unaudited Consolidated Financial Statements for the
                     Three Months Ended January 31, 2007
             (Dollar information in tabular form is expressed in
                         thousands of U.S. dollars)

    1.  Accounting policies

    Going Concern Uncertainty

    The accompanying unaudited consolidated financial statements of Patheon
    Inc. (the "Company") have been prepared on a going concern basis, which
    contemplates the realization of assets and the discharge of liabilities
    in the normal course of business for the foreseeable future. As at
    January 31, 2007, the Company had a working capital deficiency of
    $180,395,000. The deficiency includes the reclassification of
    $250,801,000 of debt from long term to short term (see note 8). The
    Company's ability to continue as a going concern is uncertain and is
    dependent upon the successful completion of the review, of strategic and
    financial alternatives (see note 12). If the Company is not able to
    implement a long term improvement in its capital structure, it
    anticipates that it will be in default of the covenants under the North
    American loan facilities as at April 30, 2007.

    These financial statements do not give effect to any adjustments which
    would be necessary should the Company be unable to continue as a going
    concern and, therefore, be required to realize its assets and discharge
    its liabilities in other than the normal course of business and at
    amounts different from those reflected in the accompanying financial
    statements.

    Basis of Presentation

    The accompanying unaudited consolidated financial statements have been
    prepared by the Company in accordance with Canadian generally accepted
    accounting principles on a basis consistent with those followed in the
    most recent audited consolidated financial statements except for the
    adoption of Canadian Institute of Chartered Accountants ("CICA")
    accounting standards Section 3855 "Financial Instruments - Recognition
    and Measurements", Section 3861 "Financial Instruments - Disclosure and
    Presentation", Section 3865 "Hedges" and Section 1530 "Comprehensive
    Income" as noted in Changes in Accounting Policy below.

    These consolidated financial statements do not include all the
    information and footnotes required by generally accepted accounting
    principles for annual financial statements and therefore should be read
    in conjunction with the audited consolidated financial statements and
    notes for the year ended October 31, 2006.

    The preparation of the consolidated financial statements in conformity
    with Canadian generally accepted accounting principles requires
    management to make estimates and assumptions that affect: the reported
    amounts of assets and liabilities; the disclosure of contingent assets
    and liabilities at the date of the consolidated financial statements; and
    the reported amounts of revenue and expenses in the reporting period.
    Management believes that the estimates and assumptions used in preparing
    its consolidated financial statement are reasonable and prudent, however,
    actual results could differ from those estimates.

    Changes in Accounting Policy

    Effective November 1, 2006 the Company adopted the CICA Handbook Section
    3855 "Financial Instruments - Recognition and Measurement", Section 3861
    "Financial Instruments - Disclosure and Presentation", Section 3865
    "Hedges" and Section 1530 "Comprehensive Income". The adoption of the new
    standards resulted in changes in accounting for financial instruments and
    hedges as well as the recognition of certain transition adjustments that
    have been recorded in accumulated other comprehensive income. The
    comparative interim consolidated financial statements have not been
    restated except as noted below. The principal changes in the accounting
    for financial instruments and hedges due to the adoption of these
    accounting standards are described below:

    Financial Assets and Financial Liabilities
    ------------------------------------------

    An investment in shares of a publicly traded company have been designated
    as held for trading and are accounted for at fair value, with changes in
    the fair value being recorded in the consolidated statement of loss.
    Prior to the adoption of the new standards, this investment was accounted
    for on a cost basis, as adjusted for an other than temporary decline in
    value.

    All other financial assets are accounted for on an amortized cost basis
    and financial liabilities are accounted for on an accruals basis,
    consistent with prior accounting policies, except deferred financing
    costs of $3,178,000 at October 31, 2006, that were previously reported in
    deferred costs, are now netted against the carrying value of the related
    debt and amortized into interest expense using the effective interest
    rate method. Prior to the adoption of the new standards, the amortization
    of deferred financing costs was reported as a separate line in the
    consolidated statement of earnings (loss).

    In 2006, the Company cancelled its interest rate swaps that were used as
    a hedge against changes in interest payments on floating rate debt.
    Deferred gains from the cancellation of these interest rate swaps that
    were previously recorded in accounts payable and accrued liabilities are
    now recorded in accumulated other comprehensive income.

    Derivatives and Hedge Accounting
    --------------------------------

    The Company enters into forward foreign exchange contracts to hedge its
    exposure in foreign denominated cash flows and holds foreign currency
    denominated debt as a hedge against the carrying value of its equity
    investment in certain foreign currency denominated operations.

    Prior to the adoption of the new standards, the Company accounted for
    derivatives that met the requirements of hedge accounting on an accruals
    basis. Under the new standards all derivatives, other than those
    contracts that are entered into for the Company's own expected
    requirements, are recorded at their fair value.

    The effective portion of changes in the fair value of cash flow hedges
    and hedges of net investments in foreign operations are recognized in
    other comprehensive income. Amounts accumulated in other comprehensive
    income are reclassified to the statement of earnings (loss) in the period
    in which the hedged item affects the earnings (loss). Any gain or loss in
    the fair value relating to the ineffective portion of the hedge is
    recognized immediately in the consolidated statement of earnings (loss).
    For the three month period ending January 31, 2007, $113,000 of losses
    were recorded in the consolidated statement of loss.

    Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
    ----------------------------------------------------------------------

    Comprehensive income (loss) is composed of the Company's net loss and
    other comprehensive income (loss). Other comprehensive income (loss)
    includes foreign currency translation gains and losses on net investments
    in self-sustaining operations net of hedging activities, changes in the
    fair value of derivative instruments designated as cash flow hedges and
    the reclassification to net loss of deferred gains on interest rate
    swaps, all net of income taxes.

    On transition to the new accounting standards, deferred after tax gains
    from interest rate swaps of $656,000 and after tax losses on the fair
    value of cash flow hedges of $1,418,000 were recorded in accumulated
    other comprehensive income. Accumulated other comprehensive income also
    includes gains on net investments in self sustaining foreign operations,
    net of hedging activities previously recorded in cumulative translation
    adjustment. As a result, the previously recorded cumulative translation
    adjustment account has been eliminated and the balances have been
    included in accumulated other comprehensive income. On transition to the
    new standards, the comparative amounts of other comprehensive loss for
    the period only reflect the amounts previously recorded in the cumulative
    translation adjustment account.

    2.  Share capital

    The following table summarizes information on share capital and related
    matters at January 31, 2007:

                                                    Outstanding  Exercisable

    Common shares                                   92,950,688
    Common share stock options                       3,894,481     3,827,814

    3.  Segmented information

    The Company is organized and managed as a single business segment, being
    the provider of commercial manufacturing and pharmaceutical development
    services.

    Canadian and foreign operations consist of:

                                         Three months ended January 31, 2007
                                               Manufacturing Location
                                       --------------------------------------
                                        Canada       USA    Europe     Total
                                             $         $         $         $
    -------------------------------------------------------------------------
    Revenues:
      Canada                             7,441       238       372     8,051
      USA                               38,978    59,207     3,823   102,008
      Europe                             8,143       432    50,996    59,571
      Other geographic areas               679        56     1,330     2,065
    -------------------------------------------------------------------------
    Total revenues                      55,241    59,933    56,521   171,695
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets                     122,029   140,966   228,509   491,504
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                             2,936         -         -     2,936
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                         Three months ended January 31, 2006
                                               Manufacturing Location
                                       --------------------------------------
                                        Canada       USA    Europe     Total
                                             $         $         $         $
    -------------------------------------------------------------------------
    Revenues:
       Canada                           10,036       253       289    10,578
       USA                              33,377    55,313     2,026    90,716
       Europe                           10,005       261    44,316    54,582
       Other geographic areas            1,214        81       773     2,068
    -------------------------------------------------------------------------
    Total revenues                      54,632    55,908    47,404   157,944
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets                     126,887   170,884   188,644   486,415
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                             3,034   184,325         -   187,359
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Revenues are attributed to countries based on the location of the
    client's billing address, capital assets are attributed to the country in
    which they are located, and goodwill is attributed to the country in
    which the entity to which the goodwill pertains is located.

    Revenue information by service activity is as follows:

                                       Three months ended January 31,
                                       --------------------------------------
                                          2007                2006
                                             $                   $
    -------------------------------------------------------------------------
    Commercial manufacturing -
     prescription                      126,227       73%   112,039       71%
    Commercial manufacturing -
     over-the-counter                   18,477       11%    23,895       15%
    Development services                26,991       16%    22,010       14%
    -------------------------------------------------------------------------
                                       171,695      100%   157,944      100%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    4.  Stock-based compensation

    The Company has an incentive stock option plan. Persons eligible to
    participate in the plan are directors, officers, and key employees of the
    Company and its subsidiaries or any other person engaged to provide
    ongoing management or consulting services to Patheon. The plan provides
    that the maximum number of shares that may be issued under the plan is
    7.5% of the issued and outstanding common shares of the Company at any
    point in time. As of January 31, 2007, the total number of common shares
    listed and reserved at the TSX for issuance under the plan was 6,858,427,
    of which there are stock options outstanding to purchase 3,894,481 shares
    under the plan. The exercise price of common shares subject to an option
    is determined at the time of grant and the price cannot be less than the
    weighted average market price of the common shares of Patheon on the
    Toronto Stock Exchange during the two trading days immediately preceding
    the grant date. Options generally expire 10 years after the grant date
    and are also subject to early expiry in the event of death, resignation,
    dismissal or retirement of an optionee. Options generally vest over three
    years, one-third on each of the first, second and third anniversary of
    the grant date.

    The fair value of stock options is estimated at the date of the grant.
    There were no options granted during the three months ended January 31,
    2007. The weighted average fair value for the stock options granted for
    the comparable three months ended January 31, 2006 was $1.85. The fair
    value of stock options is estimated at the date of grant using the Black-
    Scholes option pricing model.

    Stock-based compensation expense recorded in the three months ended
    January 31, 2007 was $45,000 (2006 - $340,000) for options granted on or
    after November 1, 2003.

    5.  Repositioning expenses

    During the first quarter of 2007, the Company incurred a number of
    expenses associated with its performance enhancement program, which is
    intended to identify operational improvements and cost reduction
    initiatives. The related expenses include costs associated with a
    reduction in the work force and consulting fees from external specialists
    who are assisting in identifying operational improvements.

    During the first quarter of 2007 the Company also incurred professional
    fees and other costs, in connection with its review of strategic and
    financial alternatives (see note 12).

    The following is a summary of expenses associated with these initiatives
    (collectively "repositioning expenses") for the three months ended
    January 31, 2007:

                                                                           $
    -------------------------------------------------------------------------
    Performance enhancement program:
      -Employee-related expenses                                       1,144
      -Consulting and professional fees                                1,604
    Strategic alternatives review                                        953

    -------------------------------------------------------------------------
                                                                       3,701
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at January 31, 2007, $5,512,000 of the repositioning expenses are
    unpaid and are recorded in accounts payable and accrued liabilities. This
    includes amounts accrued during the 2006 fiscal year. Repositioning
    expenses paid during the three months ended January 31, 2007 amounted to
    $8,372,000.

    6.  Other information

    Foreign exchange

    During the three months ended January 31, 2007, the foreign exchange gain
    was $1,754,000 (2006 loss - $252,000).

    Employee future benefits

    The employee future benefit expense in connection with defined benefit
    pension plans and other post retirement benefit plans for the three
    months ended January 31, 2007 was $1,679,000 (2006 - $409,000).

    7.  Financial instruments

    The Company utilizes financial instruments to manage the risk associated
    with fluctuations in foreign exchange rates. The Company formally
    documents all relationships between hedging instruments and hedged items,
    as well as its risk management objective and strategy for undertaking
    various hedge transactions.

    The Company's Canadian operations have entered into foreign exchange
    forward contracts to sell an aggregate amount of US$81,000,000 as at
    January 31, 2007. These contracts hedge the Company's expected exposure
    to U.S. dollar denominated cash flows and mature at the latest on
    October 29, 2007 at exchange rates varying between $1.0856 and $1.1712
    Canadian. The mark-to-market value on these financial instruments as at
    January 31, 2007 was an unrealized loss of US$3,559,000 which has been
    recorded in accumulated other comprehensive income in shareholders'
    equity.

    As at January 31, 2007, the Company has designated $204 million of US
    dollar denominated debt as a hedge against its equity investment in its
    operations in the U.S.A. and Puerto Rico. The exchange gains and losses
    arising from this debt are recorded in accumulated other comprehensive
    income in shareholders' equity.

    8.  Long-term debt

    During 2006, certain of the financial covenant tests included in the
    Company's North American loan facilities were amended to ensure that the
    Company remained in compliance. The amended covenants cover a six-month
    period ending on March 31, 2007.

    If the Company is not able to implement a long term improvement in its
    capital structure as a result of its review of strategic and financial
    alternatives (see note 12), it anticipates that it will be in default of
    the covenants under the North American Loan Facilities as at April 30,
    2007 and the lenders could demand repayment of all amounts outstanding
    under these credit facilities. Accordingly, in accordance with Emerging
    Issues Committee Abstract 59 the Company has re-classified $228,728,000
    of debt from long-term to short-term, representing the long-term portion
    of debt outstanding under the North American Loan Facilities. Any future
    default under the Company's North American Loan Facilities would cause a
    cross default under a lending facility in its UK subsidiary. Accordingly,
    the Company has also reclassified $22,073,000 of related debt from long-
    term to short-term.

    9.  Debt prepayment charges and write-off of deferred financing costs

    During the first quarter of 2006, the Company incurred charges of
    $1,643,000 in connection with the cancellation and prepayment of certain
    of its North American credit facilities. The Company also wrote off
    $6,332,000 in related deferred financing costs in the first quarter of
    2006.

    10. Other comprehensive loss

    The amounts disclosed in other comprehensive loss for three months ended
    January 31, 2007 are net of income taxes. The change in foreign currency
    losses on investments in subsidiaries, net of hedging activities, is net
    of an income tax benefit of $1,692,000. The change in losses on
    derivatives designated as cash flow hedges and the losses on cash flow
    hedges reclassified to the statement of loss are net of an income tax
    benefit of $770,000. A full valuation allowance reserve has been set up
    against this benefit. The gains on interest rate hedges reclassified to
    the net statement of loss are net of an income tax benefit of $20,000.

    11. Related party transactions

    Revenues from companies controlled by a director and significant
    shareholder of the Company were in the amount of $59,000 for the three
    months ended January 31, 2007. These transactions were conducted in the
    normal course of business and are recorded at the exchanged amount which
    management believes to be at fair value. Accounts receivables at
    January 31, 2007 include a balance of $222,000 resulting from these
    transactions.

    At January 31, 2007, the Company has an investment of $369,000
    representing an 18% interest in two Italian companies whose largest
    investor is an Officer of the Company. These newly formed companies will
    specialize in the manufacturing of cytotoxic pharmaceutical products.

    12. Review of strategic and financial alternatives

    On September 11, 2006, the Company announced that its Board of Directors
    had established a special committee to evaluate a range of strategic and
    financial alternatives for the Company. As a result of this review, on
    March 2, 2007 the Company announced that it had entered into a definitive
    agreement with JLL Partners, under which JLL Partners Fund V, LP ("JLL
    Partners") will purchase US$150 million of convertible preferred shares
    of the Company through a private placement. The Company intends to use
    the net proceeds of the offering, expected to be approximately
    US$138 million, to pay down a portion of its outstanding debt under its
    existing North American credit facilities.

    JLL Partners' investment is conditional on the Company concurrently
    refinancing the remaining portion of its long-term debt under its North
    American loan agreement or entering into an amendment to the existing
    credit agreement with its North American lenders in light of the reduced
    level of debt. The purchase is also subject to approval by the Toronto
    Stock Exchange and approval by a majority of the Company's shareholders.
    The Company intends to seek shareholder approval at its Annual and
    Special Meeting of Shareholders on April 19, 2007. Subject to these
    approvals, the Company is targeting to close the transaction before
    April 30, 2007.

    13. Comparative amounts

    Certain other comparative amounts have been reclassified to conform to
    the current period presentation.



                                Patheon Inc.
         Management's Discussion and Analysis of Financial Condition
                          and Results of Operations

    The following management discussion and analysis of financial condition
and results of operations ("MD&A) of Patheon Inc. ("Patheon" or "the Company")
for the three-month periods ended January 31, 2007 and 2006 should be read in
conjunction with the Company's consolidated financial statements and related
notes contained in this interim report. This MD&A is dated as of March 9,
2007.
    The purpose of this 2007 first quarter report is to provide an update to
the information contained in the Company's Management's Discussion and
Analysis for the Year Ended October 31, 2006, which contains a more
comprehensive discussion of Company's strategy, capabilities to deliver
results, risks and key performance indicators. Management assumes that the
reader of this document has access to the MD&A for the Year Ended October 31,
2006. This document and other information can be downloaded in portable
document format (PDF) from the Company's web site at www.patheon.com or from
the SEDAR web site for Canadian regulatory filings at www.sedar.com. To
request a printed copy, the reader may also contact Patheon's transfer agent,
Computershare Trust Company of Canada, at 1-800-564-6253 or via email at
service@computershare.com, or Patheon at www.patheon.com.

    Use of Non-GAAP Financial Measures

    Except as otherwise indicated, references in this MD&A to "EBITDA before
repositioning expenses" are to earnings before repositioning expenses,
depreciation and amortization, interest, debt prepayment charges, write-off of
deferred financing costs, and income taxes. "EBITDA margin before
repositioning expenses" is EBITDA before repositioning expenses divided by
revenues. EBITDA before repositioning expenses and EBITDA margin before
repositioning expenses are measures of earnings or earnings margin not
recognized by generally accepted accounting principles in Canada ("Canadian
GAAP"). Since each of these measures is a non-GAAP measure that does not have
a standardized meaning, it may not be comparable to similar measures presented
by other issuers. Prospective investors are cautioned that these, and other
non-GAAP measures should not be construed as alternatives to net earnings
determined in accordance with Canadian GAAP as indicators of performance. The
Company has included these measures because it believes that this information
is used by certain investors to assess financial performance.

    Overview of Patheon

    Patheon is focused exclusively on providing commercial manufacturing and
pharmaceutical development services to pharmaceutical, biotechnology and
specialty pharmaceutical companies located primarily in North America, Europe
and Japan. Patheon serves its international clientele from its operating
facilities in North America (including Puerto Rico) and Europe.
    Patheon commercially manufactures prescription ("Rx") and over-the-
counter ("OTC") products in solid, semi-solid and liquid dosage forms.
Conventional dosage forms include compressed tablets, hard-shell capsules,
powders, ointments, creams, gels, syrups, suspensions, solutions and
suppositories. Sterile dosage forms include liquids and powders filled in
ampoules, vials, bottles or pre-filled syringes. Sterile lyophilized products
are also manufactured in both vials and ampoules.
    Patheon provides manufacturing services for a broad range of products in
many dosage forms and packaging formats in accordance with client
specifications. Depending on the particular client, Patheon may be responsible
for most or all aspects of the manufacturing and packaging process, from
sourcing excipient raw materials and packaging components to delivering the
finished product in consumer-ready form to the client. Typically, Patheon's
clients supply the active pharmaceutical ingredients ("API") used in the
production process.
    The pharmaceutical development services provided by Patheon include most
of the pharmaceutical development services typically required by companies
conducting clinical trials and preparing for full-scale commercial production
of a new drug.
    At January 31, 2007, there were a total of 174 client products in the
Patheon's pharmaceutical development services ("PDS") pipeline, including
seven drug candidates at the New Drug Application ("NDA") stage. This compares
with a total of 152 client products a year ago. No new products being
developed on behalf of clients received regulatory approval during the first
quarter of 2007.

    Vision and Strategy

    Patheon's vision is to be the leader in pharmaceutical manufacturing.
Patheon strives to be the preferred manufacturing and pharmaceutical
development services partner to the global pharmaceutical industry. Patheon's
strategy is focused on providing "best-in-class" manufacturing and development
services effectively balancing high product quality and reliability of supply
with cost.
    Patheon expects that stronger manufacturing and development relationships
will continue to emerge between pharmaceutical companies and service companies
as the pharmaceutical industry continues to re-evaluate its internal
manufacturing capabilities and streamlines its external service-provider
network. The Company is using its position as a comprehensive provider of
commercial manufacturing services to establish and maintain long-term and
strategic relationships with clients on a global basis.
    Prior to 2006, a key aspect of Patheon's strategy was a plan to expand
capacity, expertise and capabilities through acquisitions, positioning the
Company to be the preferred manufacturing services partner to the
pharmaceutical industry. This led to the acquisition of several pharmaceutical
manufacturing facilities and the entry into long-term manufacturing
relationships in conjunction with certain of these acquisitions. More recently
Patheon has focused on growing the business internally by expanding the level
of business from existing clients, attracting new clients, and entering into
commercial manufacturing agreements for newly approved products for which the
Company has provided development services.
    In implementing its strategy, the Company will continue to maximize
capacity utilization and improve efficiency, broaden its services to include
other specialized manufacturing capabilities and seek to increase the
percentage of more profitable products manufactured at its facilities. In
addition, the Company will seek to expand its PDS capabilities in North
America and Europe to better serve the needs of the global pharmaceutical
industry. Pharmaceutical development services are an important source of new
business for commercial manufacturing of prescription pharmaceuticals.

    Key Performance Drivers

    In Patheon's MD&A for the Year Ended October 31, 2006, several key
performance drivers were identified for the Company: (i) generating higher
quality revenues by increasing the percentage of higher margin Rx
manufacturing and pharmaceutical development services; (ii) improving capacity
utilization at the Company's sites which have a large fixed-cost base in the
short term; (iii) improving operating efficiencies through a performance
enhancement program with initiatives focused on a global procurement program,
a workforce reduction program and a manufacturing efficiency review process;
and (iv) mitigating the impact of changes in the foreign exchange trading
relationship between the Canadian and U.S. dollar, since the Company's
contracts in North America are primarily denominated in U.S. dollars, but the
operating expenses of its six Canadian sites are primarily denominated in
Canadian dollars. An update on our interim performance relating to these key
issues is provided in the section below entitled "Results of Operations".

    Recent Developments

    Financing Arrangements and Strategic Alternatives

    During 2006, the Company entered into amending agreements with lenders
under its North American loan facilities because of concern that the Company
would not be in compliance with its debt-to-EBITDA ratio and fixed charge
coverage financial covenants. The financial covenants were amended for a six-
month period ending on March 31, 2007. The Company was in compliance with the
amended terms and conditions of its North American loan agreement as at
January 31, 2007.
    On September 11, 2006, the Company announced that its Board of Directors
had established a special committee to evaluate a range of strategic and
financial alternatives for the Company. As a result of this review, on        
March 2, 2007 the Company announced that it had entered into a definitive
agreement with JLL Partners, under which JLL Partners Fund V, LP ("JLL
Partners") will purchase US$150 million of convertible preferred shares of the
Company through a private placement. The Company intends to use the net
proceeds of the offering, expected to be approximately US$138 million, to pay
down a portion of its outstanding debt under its existing North American
credit facilities.
    JLL Partners' investment is conditional on the Company concurrently
refinancing the remaining portion of its long-term debt under its North
American loan agreement or entering into an amendment to the existing credit
agreement with its North American lenders in light of the reduced level of
debt. The purchase is also subject to approval by the Toronto Stock Exchange
and approval by a majority of the Company's shareholders. The Company intends
to seek shareholder approval at its Annual and Special Meeting of Shareholders
on April 19, 2007. Subject to these approvals, the Company is targeting to
close the transaction before April 30, 2007.
    If the US$150 million private placement transaction and refinancing of
the remaining portion of the long term debt under its North American loan
agreement is not completed, the Company anticipates that, in the absence of
any further amendments, it will be in default under its North American loan
agreement as at April 30, 2007 and the lenders could demand repayment of all
amounts outstanding under these credit facilities. As at February 28, 2007,
$237.7 million was outstanding under these facilities ($233.0 million as at
January 31, 2007). In addition, any such default would constitute a default
under certain lending facilities of the Company's U.K. subsidiary, allowing
the lender under these facilities to immediately demand repayment of all
amounts outstanding under these facilities. As at February 28, 2007,
$29.2 million was outstanding under these facilities ($29.8 million as at
January 31, 2007).
    The Company is still able to borrow under its amended $60 million North
American revolving loan facilities. As at February 28, 2007, $32.2 million was
borrowed under these facilities ($27.3 million as at January 31, 2007). The
maximum amount that may be borrowed under these facilities varies from        
time-to-time and is a function of borrowing base calculations prescribed in
the credit agreement, and is typically less than $60 million. The Company
estimates that, based on these borrowing base calculations, as at February 28,
2007, an additional $16.7 million was available to be drawn under these
facilities. In addition the Company has cash reserves on hand, which at
January 31, 2007 amounted to $36.8 million. The Company is satisfied that it
has sufficient liquidity to carry on its business in the ordinary course for
the period covered by the amendment to the North American loan facilities.

    Going Concern Uncertainty Note

    As at January 31, 2007, the Company has reclassified the long-term debt
outstanding under its North American loan facilities ($228.7 million) and its
U.K. subsidiary's loan facility ($22.1 million) as current indebtedness, in
accordance with Emerging Issues Committee Abstract 59, which requires such
reclassification unless a violation of the covenants under these credit
facilities at a future compliance date within one year of the balance sheet
date is not likely. See "Liquidity and Capital Resources - Adequacy of
Financial Resources" and "Critical Accounting Policies and Estimates - Going
Concern Uncertainty", below. As a result of this reclassification, the Company
had a working capital deficiency as at January 31, 2007 of $180.4 million.
Consequently, the Company's consolidated financial statements for the first
quarter include a going concern uncertainty note, stating that the Company's
ability to continue as a going concern is uncertain and is dependent upon the
successful outcome of the review of strategic and financial alternatives. The
Company's consolidated financial statements as at and for the first quarter
ended January 31, 2007 do not give effect to any adjustments which would be
necessary should the Company be unable to continue as a going concern.

    Results of Operations

    Three Months Ended January 31, 2007 Compared with Three Months Ended
    January 31, 2006

    Revenues by Geographic Region and Service Activity

    U.S.$ '000                                Three months ended January 31,
                                             2007         2006      % Change
                                          -----------------------------------
    North America
    -------------
      Commercial Manufacturing
        Prescription                        77,177       69,303          11%
        Over-the-counter                    17,203       23,519         -27%
                                          -----------------------------------
                                            94,380       92,822           2%
      Development Services                  20,794       17,718          17%
                                          -----------------------------------
                                           115,174      110,540           4%
                                          -----------------------------------

    Europe
    ------
      Commercial Manufacturing
        Prescription                        49,050       42,736          15%
        Over-the-counter                     1,274          376         239%
                                          -----------------------------------
                                            50,324       43,112          17%
      Development Services                   6,197        4,292          44%
                                          -----------------------------------
                                            56,521       47,404          19%
                                          -----------------------------------

    TOTAL
    -----
      Commercial Manufacturing
        Prescription                       126,227      112,039          13%
        Over-the-counter                    18,477       23,895         -23%
                                          -----------------------------------
                                           144,704      135,934           6%
      Development Services                  26,991       22,010          23%
                                          -----------------------------------

    CONSOLIDATED REVENUES                  171,695      157,944           9%
                                          -----------------------------------
                                          -----------------------------------


    Revenues

    Consolidated revenues for the three-month period ended January 31, 2007
increased 9%, or $13.8 million, to $171.7 million from $157.9 million in the
same period in 2006. In the first quarter, revenue increased in both Rx
manufacturing and PDS, but declined in OTC manufacturing. On a consolidated
basis, compared with the first quarter of 2006, Rx revenues increased by 13%,
PDS revenues increased by 23% and OTC revenues declined by 23%.
    Prescription manufacturing and development services represented 89% of
revenues, compared with 85% for the comparable period in 2006.
    Geographically, in North America, revenues increased in the first quarter
by $4.6 million or 4% over the same period a year ago. The increase reflects
higher Rx revenues from the Canadian and Puerto Rico operations, higher PDS
revenues in Canada and Cincinnati, offset by lower OTC manufacturing revenues
in Canada and Cincinnati. In the same period last year Rx manufacturing
revenues were constrained by the temporary shut down in production at
Carolina, Puerto Rico to resolve issues with regard to a warning letter issued
by the U.S. Food and Drug Administration ("FDA") and by manufacturing
inefficiencies in Whitby. Both of these issues were resolved during 2006. The
improvements in Puerto Rico were offset in part by revenue declines arising
from the loss of patent protection of Zocor(R) during the third quarter of
2006. The growth in PDS revenues reflects an increase in the number of
development projects the Company is working on for its clients. OTC
manufacturing revenues were impacted by certain clients repatriating products
back to their own manufacturing network.
    In Europe, revenues for the first quarter of 2007 were $56.5 million or
19% higher than the same period of 2006. The year-over-year increase in
revenues reflects higher volumes of sterile products in Italy, combined with
the benefits of a carve-out initiative in Bourgoin Jallieu, France where,
during the course of 2006, a client transferred production of a range of
products from its own manufacturing network. The PDS operations in Swindon,
U.K. also continued to benefit from revenue gains. European currencies
strengthened against the U.S. dollar in the first quarter of fiscal 2007
compared with the prior year. The Euro strengthened approximately 9% and U.K.
sterling strengthened approximately 11% against the U.S. dollar, increasing
reported revenues by approximately $5.0 million. Had European currencies
remained constant to the rates of the prior year, European revenues would have
been 9% higher than the same period in 2006.

    Operating Expenses

    Operating expenses comprise processing costs (principally materials,
employee and other site-related costs), marketing, sales, service, corporate
support and administrative expenses. In the first quarter of 2007, operating
expenses were $148.5 million, being $4.5 million higher than the same period a
year ago. Operating expenses were principally impacted by higher volumes, and
the impact of the strengthening European currencies relative to the U.S.
dollar, offset in part by savings from the performance enhancement program.
Operating expenses as a percentage of revenues were 86.5%, compared with 91.1%
in the same period a year ago.

    EBITDA before repositioning expenses and EBITDA margin before
    repositioning expenses

    On a consolidated basis in the first quarter of 2006, EBITDA before
repositioning expenses, representing earnings before repositioning expenses,
depreciation and amortization, interest, debt prepayment charges, write-off of
deferred financing costs, and income taxes was $23.2 million, compared with
$14.0 million in the same period a year ago. EBITDA margin before
repositioning expenses was 13.5% in the three-month period, compared with 8.9%
in the same period a year ago.
    In Canada, EBITDA before repositioning expenses from the commercial
operations was $8.5 million, being $6.0 million higher than the same period
last year. The improvement principally reflects operating efficiency gains at
the Whitby operations, combined with higher capacity utilization levels in the
other operations. EBITDA before repositioning expenses was not significantly
impacted by foreign exchange in the first quarter of 2007, as the Canadian
dollar was only approximately 1% stronger than the U.S. dollar, compared with
the same period in 2006.
    In the U.S.A. (including Puerto Rico) EBITDA before repositioning
expenses for the commercial operations was $4.8 million, being $2.1 million
higher than the same period last year. The increase principally reflects
higher capacity utilization in Carolina, which in 2006 was impacted by a shut
down in production of Omnicef(R) powder due to the FDA warning letter. This
increase was offset in part by lower volumes in Caguas as a result of the loss
in patent protection of Zocor(R).
    In Europe, EBITDA before repositioning expenses from the commercial
manufacturing operations was $5.4 million, being $1.5 million lower than same
period a year ago. The decline reflects a mix of lower margin products, fewer
technical transfer service revenues and lower pre-launch revenues for the
cephalosporin lyophilization services in Swindon than for the same period a
year ago.
    EBITDA before repositioning expenses from the global PDS operations was
$7.4 million, being $2.8 million higher than the same period in 2006. The
increase reflects revenue growth across all of the operations.
    Corporate costs in the first quarter of 2007 were $0.2 million higher
than the same period last year.

    Repositioning Expenses

    During the first quarter of 2007 the Company incurred $3.7 million of
expenses in connection with its performance enhancement program and its review
of strategic and financial alternatives. The expenses include consulting fees
associated with the manufacturing efficiency review, further reductions in the
work force and professional and other costs in connection with the strategic
alternatives review. The Company expects to incur further repositioning
expenses during the course of 2007 as it completes the performance enhancement
program and review of strategic and financial alternatives.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $10.5 million in the first
quarter of 2007, compared with $9.8 million in the first quarter of 2006, an
increase of $0.7 million, or 7%. The increase principally reflects the effect
of the strengthening European currencies relative to the U.S. dollar.

    Amortization of Intangible Assets

    Amortization of intangible assets was $2.2 million in the first quarter
of 2007, compared with $3.4 million for the first quarter of 2006. The charge
is lower than for the same period last year due to the impact of the
impairment charge of $51.9 million that was made during the third quarter of
2006.

    Interest Expense and Amortization of Deferred Financing Costs

    Interest expense for the first quarter of 2007 was $7.7 million, up from
the $5.1 million charge in the first quarter of 2006. During the first quarter
of 2007 the Company has adopted CICA Accounting Standard Section 3855 for the
accounting of financial instruments (see "Critical Accounting Policies and
Estimates"). As a result, amounts that in prior periods were recorded as
amortization of deferred financing costs are now recorded in interest expense.
The increase in interest costs also reflects higher debt levels, along with
increased borrowing costs as a result of the amendments to the Company's North
American loan facilities.

    Debt Prepayment Charges and Write-off of Deferred Financing Costs

    During the first quarter of 2006, the Company incurred charges of $1.6
million in connection with the cancellation and prepayment of certain of its
North American credit facilities. The Company also wrote off $6.3 million in
related deferred financing costs.

    Loss Before Income Taxes

    The Company reported a loss before income taxes of $0.8 million, compared
with $12.6 million in the same period a year ago.

    Income Taxes

    The Company recorded an income tax charge of $1.8 million in the first
quarter of 2007 compared with a recovery of $1.1 million in the same period
last year. The income tax charge in the first quarter of 2007 reflects the
effect of the low tax rate in Puerto Rico, where the Company is currently
incurring significant losses.

    Net Loss and Loss Per Share

    The Company recorded a net loss in the first quarter of 2007 of $2.6
million, compared with $11.5 million in the same period last year. The loss
per share was 2.8 cents, compared with 12.4 cents a year earlier.
    Because the Company reported a loss in the first quarter of 2007 and 2006
there is no impact of dilution.

    Seasonal Variability of Results

    Typically, the Company's manufacturing and PDS revenues are lower in the
first fiscal quarter. The Company attributes this to several factors,
including: (i) many clients reassess their need for additional product in the
last quarter of the calendar year in order to use existing inventories of
products; (ii) the lower production of seasonal cough and cold remedies; (iii)
many small pharmaceutical and small biotechnology clients involved in PDS
projects limit their project activity toward the end of the calendar year in
order to reassess progress on their projects and manage cash resources; and
(iv) the Patheon-wide plant shut-down during a portion of the traditional
holiday period in December and January.

    Liquidity and Capital Resources

    Summary of Cash Flows

    The following table summarizes the Company's cash flows for the periods
indicated:

                                                                Three months
                                                            ended January 31,
                                                           2007         2006
                                                     ------------------------
                                                              $            $
                                                     ------------------------

    Net loss                                             (2,636)     (11,510)
    Depreciation and amortization                        12,651       13,234
    Write-off of deferred financing costs                     -        6,332
    Amortization of deferred financing costs                681          325
    Employee future benefits                                471         (786)
    Future income taxes                                    (224)       2,315
    Amortization of deferred revenues                      (486)        (497)
    Other                                                   276          498
    Working capital                                      (6,252)      (2,147)
    Increase in deferred revenues                             -        9,614
                                                     -----------  -----------

    Cash provided by operating activities                 4,481       17,378
    Cash used in investing activities                    (9,013)     (14,438)
    Cash used in financing activities                    (8,158)     (12,328)
    Other                                                (1,207)         122
                                                     -----------  -----------

    Net decrease in cash and cash equivalents           (13,897)      (9,266)
                                                     -----------  -----------
                                                     -----------  -----------


    Cash Provided by Operating Activities

    Cash provided by operating activities was $4.5 million in the first
quarter of 2007 compared with $17.4 million for the comparable period in 2006.
The reduction principally reflects the inclusion in 2006 of $9.6 million of
cash received from a client for the reimbursement of costs the Company
incurred in connection with the sterile cephalosporin lyophilization capacity
that is being installed in Swindon, U.K. This amount is recorded as an
increase in deferred revenues and will be recognized as income over the life
of the commercial manufacturing contract.

    Cash Used in Investing Activities

    Cash used in investing activities in the first quarter of 2007 was
$9.0 million, compared with $14.4 million in the same period a year ago. The
decrease principally reflects lower project-related capital expenditures on
the cephalosporin lyophilization capacity that is being installed in the
Swindon, U.K. facility.
    A summary of cash used in investing activities is as follows:

                                                                Three months
                                                            ended January 31,
                                                           2007         2006
                                                     ------------------------
                                                              $            $
                                                     ------------------------

    Additions to capital assets - sustaining             (3,117)      (2,740)
                                - project-related        (4,947)     (11,180)
    Decrease in investments                                 116            -
    Increase in deferred pre-operating costs             (1,065)        (518)
                                                     -----------  -----------
    Cash used in investing activities                    (9,013)     (14,438)
                                                     -----------  -----------
                                                     -----------  -----------


    Cash Used in Financing Activities

    There have been no significant financing activities during the first
quarter of 2007.
    The principal financing activity during the first quarter of 2006 was the
completion of new credit facilities in North America in the aggregate amount
of $290.0 million to refinance existing debt of the Company and its U.S.
subsidiaries. The Company was able to release $7.8 million of restricted cash
that had previously been held as security for certain of the cancelled
facilities. The Company also incurred costs in connection with the refinancing
of $2.6 million. During the first quarter of 2006 the Company's Italian
subsidiary also entered into a new long-term debt facility in the amount of
28.5 million euros ($33.9 million) to replace existing loans.
    A summary of cash used in financing activities is as follows:

                                                                Three months
                                                            ended January 31,
                                                           2007         2006
                                                     ------------------------
                                                              $            $
                                                     ------------------------


    Increase (decrease) in bank indebtedness              6,942      (13,596)
    Increase in long-term debt                            9,370      283,580
    Repayment of long-term debt                         (24,470)    (287,352)
    Decrease in restricted cash                               -        7,805
    Increase in deferred financing costs                      -       (2,765)
                                                     -----------  -----------
    Cash used in financing activities                    (8,158)     (12,328)
                                                     -----------  -----------
                                                     -----------  -----------


    Financing Arrangements and Ratios

    Total interest bearing debt at January 31, 2007 was $340.4 million, being
$9.2 million lower than at October 31, 2006. At January 31, 2007, the
Company's consolidated ratio of interest-bearing debt to shareholders' equity
was $141.5%, compared with 139.4% at October 31, 2006. The increase is due to
a reduction in total shareholders' equity.
    During 2006, the Company entered into agreements with lenders under its
North American loan facilities because of concern that the Company would not
be in compliance with its debt-to-EBITDA ratio and fixed charge coverage
financial covenants. The financial covenants were amended to cover a six-month
period ending on March 31, 2007. The Company was in compliance with the terms
and conditions of its North American loan facilities as at January 31, 2007.
    If the Company is not able to implement a long term improvement in its
capital structure as a result of its review of strategic and financial
alternatives, it anticipates that it will be in default of the covenants under
the North American loan facilities as at April 30, 2007 and the lenders could
demand repayment of all amounts outstanding under these credit facilities. As
at February 28, 2007, $237.7 million was outstanding under these facilities
($233.0 million as at January 31, 2007). In addition, any such default would
constitute a default under a lending facility of the company's U.K.
subsidiary, allowing the lender under this facility to demand repayment of all
amounts outstanding under that facility. As at February 28, 2007, $29.2
million was outstanding under that facility ($29.8 million as at January 31,
2007).
    In accordance with Emerging Issues Committee Abstract 59, the Company has
re-classified $250.8 million of debt from long-term debt to current
indebtedness. This amount represents the long-term portion of the Company's
indebtedness under its North American loan facilities ($228.7 million) and the
indebtedness of the Company's U.K. subsidiary under its credit facility ($22.1
million), which was previously classified as long-term debt. Emerging Issues
Committee Abstract-59 requires this reclassification, in light of the North
American loan facilities amendments to prevent a default, unless a violation
of the covenants under these credit facilities at a determination date within
one year of the balance sheet date is not likely.

    Adequacy of Financial Resources

    As at January 31, 2007 the Company has a working capital deficiency of
$180.4 million due to the reclassification of long-term debt to short term
debt as noted above. The Company is able to borrow under its $60 million North
American revolving loan facility, and as at January 31, 2007, $27.3 million
was borrowed under this facility. In addition the company has cash reserves
which at January 31, 2007 amounted to $36.8 million. The Company's ability to
fund its normal operating activities and debt service requirements is
dependent on it being able to improve its long-term capital structure as a
result of its review of strategic and financial alternatives.

    Critical Accounting Policies and Estimates

    Going Concern Uncertainty

    These financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the discharge of liabilities
in the normal course of business for the foreseeable future. As at January 31,
2007, the Company had a working capital deficiency of $180.4 million as a
result of the reclassification of $250.8 million of debt from long term to
short term, as discussed under "Liquidity and Capital Resources - Financing
Arrangements and Ratios" above. The Company's ability to continue as a going
concern is uncertain and is dependent upon the successful completion of the
review of strategic and financial alternatives. If the Company is not able to
implement a long term improvement in its capital structure as a result of this
review, it anticipates that it will be in default of the covenants under the
North American loan facilities as at April 30, 2007.
    These financial statements do not give effect to any adjustments which
would be necessary should the Company be unable to continue as a going concern
and, therefore, be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying financial statements.

    Changes in Significant Accounting Policies

    Effective November 1, 2006 the Company adopted the Canadian Institute of
Chartered Accountants Handbook Section 3855 "Financial Instruments -
Recognition and Measurement", Section 3865 "Hedges", Section 1530
"Comprehensive Income" and Section 3861 "Financial Instruments - Disclosure
and Presentation". The adoption of the new standards resulted in changes in
accounting for financial instruments and hedges as well as the recognition of
certain transition adjustments that have been recorded in accumulated other
comprehensive income. The comparative interim consolidated financial
statements have not been restated, except for the reclassification of amounts
previously recorded as cumulative translation adjustment, which are now
included in accumulated other comprehensive income. For a description of the
principal changes in accounting policy see Note 1 to the consolidated
financial statements.

    General

    Patheon's significant accounting policies are described in Note 1 to the
2006 audited consolidated financial statements. The most critical of these
policies are those related to revenue recognition, deferred revenues,
intangible assets, goodwill, employee future benefits, and income taxes,
(Notes 1, 7, 9, 13 and 17 of the 2006 audited consolidated financial
statements).
    The preparation of the consolidated financial statements in conformity
with Canadian generally accepted accounting principles requires management to
make estimates and assumptions that affect: the reported amounts of assets and
liabilities; the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements; and the reported amounts of revenue
and expenses in the reporting period. Management believes that the estimates
and assumptions used in preparing its consolidated financial statements are
reasonable and prudent; however, actual results could differ from those
estimates.
    The Company's Accounting Policies have been reviewed and discussed with
the Company's Audit Committee.

    Revenue Recognition

    The Company recognizes revenue for its commercial manufacturing and
pharmaceutical development services when services are completed in accordance
with specific agreements with its clients and when all costs connected with
providing these services have been incurred, the price is fixed or
determinable and collectibility is reasonably assured. Client deposits on
pharmaceutical development services in progress are included in accounts
payable and accrued liabilities.
    The Company does not receive any fees on signing of contracts. In the
case of pharmaceutical development services, revenue is recognized on the
achievement of specific milestones in accordance with the respective
development service contracts. In the case of commercial manufacturing
services, revenue is recognized when services are complete and the product has
met rigorous quality assurance testing.

    Deferred Revenues

    The costs of certain capital assets are reimbursed to the Company by the
pharmaceutical companies that are to benefit from the improvements in
connection with the manufacturing and packaging agreements in force. These
reimbursements are recorded as deferred revenues and are recognized as income
over the remaining minimum term of the agreements. During the first quarter of
2007, $0.5 million was recognized as earnings.

    Intangible Assets

    Intangible assets represent the values assigned to acquired client
contracts and relationships. They are amortized on a straight-line basis over
their estimated economic life. During the first quarter of 2007, $2.2 million
was charged to earnings.
    On an ongoing basis, the Company reviews whether there are any indicators
of impairment. If such indicators are present, the Company assesses the
recoverability of intangible assets by determining whether the carrying value
of such assets can be recovered through undiscounted future cash flows. If the
sum of undiscounted future cash flows is less than the carrying amount, the
excess of the carrying amount over the estimated fair value, based on
discounted future cash flows, is recorded as a charge to net earnings. No
amounts in connection with impairment were charged to the net loss in the
first quarter of 2007.

    Valuation of Goodwill

    The Company evaluates goodwill for impairment at least annually and
reviews if there are any indicators of impairment on an ongoing basis. If the
carrying value of the reporting unit exceeds its fair value, the fair value of
the reporting units goodwill, determined in the same manner as in a business
combination, is compared with its carrying amount to measure the amount of any
impairment loss, if any.
    The goodwill shown on the financial statements for the period ended
January 31, 2007 was $2.9 million and relates to the acquisition in 2000 of
the remaining shares of Global Pharm Inc., which now operates as Toronto York
Mills Operations.

    Income Taxes

    In accordance with Canadian GAAP, the Company uses the liability method
of accounting for future income taxes and provides for future income taxes for
significant temporary timing differences.
    Preparation of the consolidated financial statements requires an estimate
of income taxes in each of the jurisdictions in which the Company operates.
The process involves an estimate of the Company's current tax exposure and an
assessment of temporary differences resulting from differing treatment of
items such as depreciation and amortization for tax and accounting purposes.
These differences result in future tax assets and liabilities and are
reflected in the consolidated balance sheet.
    Future tax assets of $24.3 million have been recorded at January 31,
2007. The future tax assets are primarily composed of accounting provisions
related to pension and post-retirement benefits not currently deductible for
tax purposes, the tax benefit of net operating loss carry forwards related to
the U.K., unclaimed R&D expenditures and deferred financing and share issue
costs. The Company evaluates quarterly the ability to realize its future tax
assets. The factors used to assess the likelihood of realization are the
Company's forecast of future taxable income and available tax planning
strategies that could be implemented to realize the future tax assets.
    Future tax liabilities of $34.9 million have been recorded at January 31,
2007. This liability has arisen primarily on tax depreciation in excess of
book depreciation.
    The Company's tax filings are subject to audit by taxation authorities.
Although management believes that it has adequately provided for income taxes
based on the information available, the outcome of audits cannot be known with
certainty and the potential impact on the financial statements is not
determinable.

    Employee Future Benefits

    The Company provides to certain retired employees pensions and post-
employment benefits, including medical benefits and dental care. The
determination of the obligation and expense for defined benefit pensions and
post-employment benefits is dependent on the selection of certain assumptions
used by actuaries in calculating such amounts. Those assumptions are disclosed
in Note 13 to the Company's 2006 audited consolidated financial statements.

    Risk Management

    The following are updates to certain of the risks and uncertainties
described in the Company's Management's Discussion and Analysis for the Year
Ended October 31, 2006, available on SEDAR (www.sedar.com) or on Patheon's
website (www.patheon.com).

    Foreign Currency

    The Company's business activities are conducted in several currencies -
Canadian dollars and U.S. dollars for the Canadian operations, U.S. dollars
for the U.S. operations and euros and U.K. sterling for the European
operations.
    Since the European and U.S. operations conduct business principally in
their respective local currencies, the exposure to foreign currency gains and
losses is not significant. However, the Company's Canadian operations
negotiate sales contracts for payment in both U.S. and Canadian dollars, and
materials and equipment are purchased in both U.S. and Canadian dollars. The
majority of its non-material costs (including payroll, facilities' costs and
costs of locally sourced supplies and inventory) are denominated in Canadian
dollars. Approximately 60% to 70% of revenues of the Canadian operations and
approximately 10% to 20% of its operating expenses are transacted in U.S.
dollars. As a result, the Company may experience trading and translation gains
or losses because of volatility in the exchange rate between the Canadian
dollar and the U.S. dollar. Based on the Company's current U.S. denominated
net inflows, for each one-cent change in the Canadian-U.S. rate, the impact on
annual pretax earnings, excluding any hedging activities, is approximately
$1.1 million.
    The Company mitigates its foreign exchange risk by engaging in foreign
currency hedging activities using derivative financial instruments. At        
January 31, 2007 the Company had outstanding foreign exchange contracts to
sell US$81.0 million. The contracts mature at the latest on October 29, 2007
and cover approximately 90% of the Company's expected foreign exchange
exposure for the balance of the 2007 fiscal year. The mark-to-market value at
January 31, 2007 that is recorded in accumulated comprehensive income is a
loss of $3.6 million. The Company does not purchase any derivative instruments
for speculative purposes.
    Translation gains and losses related to the carrying value of the
Company's foreign operations and certain foreign denominated debt held by the
Company designated as a hedge against the carrying value of certain foreign
operations, are included in accumulated comprehensive income in shareholders'
equity. At January 31, 2007, the Company had designated $204 million US dollar
denominated debt as a hedge against its investment in the U.S.A. and Puerto
Rico.

    Interest Rate Exposure

    The Company has exposure to movements in interest rates. At January 31,
2007, 93% of the Company's total debt portfolio was subject to movements in
floating interest rates. Assuming no change to the structure of the debt
portfolio, a 1% change in floating interest rates has an impact on annual pre-
tax earnings of approximately $3.2 million.
    The Company continues to monitor floating and long-term interest rates
and may enter into new arrangements in the future that reduce the Company's
exposure to changes in floating interest rates.

    Effectiveness of Disclosure Controls and Internal Controls

    Disclosure controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to senior
management, including the Chief Executive Officer ("CEO") and the Chief
Financial Officer ("CFO"), on a timely basis so that appropriate decisions can
be made regarding public disclosure. An evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures was
conducted as of October 31, 2006 by and under the supervision of the Company's
management, including the CEO and the CFO. Based on this evaluation, the CEO
and the CFO have concluded that the Company's disclosure controls and
procedures (as defined in Multilateral Instrument 52-109 - Certification of
Disclosure in Issuers' Annual and Interim Filings of the Canadian Securities
Administrators) are effective to ensure that the information required to be
disclosed in reports that the Company files or submits under Canadian
securities legislation is recorded, processed, summarized and reported within
the time periods specified in such legislation. There have been no changes,
since this last formal assessment, that have materially affected, or are
reasonably likely to materially affect the Company's disclosure controls and
procedures.
    Under the supervision of the CEO and CFO, the Company has designed
internal controls over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. This
design evaluation included documentation activities, management inquiries and
other reviews as deemed appropriate by management in consideration of the size
and nature of the Company's business. There were no changes in the Company's
internal controls over financial reporting during the most recent interim
period that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.

    Selected Quarterly Financial Information

    The following is selected financial information for the eight most recent
quarters:


                                     EBITDA
    QUARTER ENDED                    BEFORE                 EARNINGS (LOSS)
    (In thousands of                 REPOSI-       NET         PER SHARE
     U.S. dollars,                  TIONING   EARNINGS   --------------------
     except per         REVENUES   EXPENSES      (LOSS)     Basic    Diluted
     share amounts)            $          $          $          $          $
    -------------------------------------------------------------------------
    2007
    January 31           171,695     23,234     (2,636)    ($0.03)    ($0.03)

    2006
    October 31           175,115     19,565    (22,416)    ($0.24)    ($0.24)
    July 31              189,191     15,999   (257,213)    ($2.77)    ($2.77)
    April 30             189,902     24,213      2,989      $0.03      $0.03
    January 31           157,944     14,012    (11,510)    ($0.12)    ($0.12)

    2005
    October 31           181,893     26,203      8,379      $0.09      $0.09
    July 31              178,390     25,826      3,455      $0.04      $0.04
    April 30             184,088     24,286      3,783      $0.03      $0.03


    Additional Information

    Share Capital

    As of January 31, 2007, the Company had 92,950,688 common shares
outstanding.

    Public Securities Filings

    Other information about the Company, including the annual information
form and other disclosure documents, reports, statements or other information
that is filed with Canadian securities regulatory authorities can be accessed
through SEDAR at www.sedar.com.

    Outlook

    Revenues for the second quarter of 2007 are expected to be approximately
the same as in the first quarter of 2007. Revenues are expected to be slightly
higher across the network with the exception of the U.S. operations, where we
are experiencing lower client demand for products currently being manufactured
at those operations.

    FORWARD-LOOKING STATEMENTS

    This news release and MD&A 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. 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 news release and MD&A 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. 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: the
market demand for client products; credit and client concentration; the
ability to identify and secure new contracts; regulatory matters, including
compliance with pharmaceutical regulations; management of expanded operations;
international operations risks; currency; competition; product liability
claims; intellectual property; environmental; financial restructuring
including the inability to close the offering of the convertible preferred
shares as a result of the failure to achieve the closing conditions, including
the receipt of regulatory or shareholder approvals on terms acceptable to the
Company and subscriber; restrictive covenants; going-concern uncertainty;
substantial financial leverage; interest rates; and conditions of MOVA's tax
exemptions. 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
news release and MD&A and, except as required by law, the Company assumes no
obligation to update or revise them to reflect new events or circumstances.
    





For further information:

For further information: Mr. Riccardo Trecroce, Chief Executive Officer,
Tel: (905) 812-6877, Fax: (905) 812-6613, Email: rtrecroce@patheon.com; Mr.
John Bell, Chief Financial Officer, Tel: (905) 812-6812, Fax: (905) 812-6613,
Email: john.h.bell@patheon.com; Ms. Shelley Jourard, Director, Corporate
Communications, Tel: (905) 812-6614, Fax: (905) 812-6613; Email:
sjourard@patheon.com

Organization Profile

Patheon Inc

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