Patheon announces first quarter results



    Revenues advance 11%. Assessment by new management in progress.

    TORONTO, March 7 /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,
2008. (All amounts are in U.S. dollars unless otherwise indicated.)
    The consolidated results for the first quarter of 2008 and comparative
prior periods presented in this news release reflect the results for the
Company's continuing operations. The results for the Niagara-Burlington
operations and the Carolina, Puerto Rico operations have been segregated and
presented separately as discontinued operations in the consolidated financial
statements.

    Financial Results

    First Quarter Ended January 31, 2008
    Compared With First Quarter Ended January 31, 2007

    -   Revenues from continuing operations increased 11% to $164.2 million;
    -   EBITDA before repositioning expenses from continuing operations was
        $10.0 million (6.1% of revenues), compared with $18.7 million (12.7%
        of revenues);
    -   Movements in foreign exchange rates relative to the same period last
        year reduced EBITDA before repositioning expenses by approximately
        $4 million;
    -   Revenues and EBITDA before repositioning expenses from continuing
        operations, excluding Puerto Rico, were $152.3 million and
        $15.4 million, respectively, compared with $128.0 million and
        $20.6 million;
    -   Revenues and EBITDA before repositioning expenses from discontinued
        operations were $11.4 million and ($1.9 million), respectively,
        compared with $24.3 million and $4.6 million a year ago;
    -   The loss from continuing operations was $12.2 million (13.5 cents per
        share), compared with a loss of $3.6 million (3.9 cents per share) a
        year ago;
    -   The net loss including discontinued operations was $15.2 million
        (16.8 cents per share) compared with a net loss of $2.0 million
        (2.2 cents per share) a year ago.

    "First-quarter revenues increased by 11%, reflecting solid growth at most
of our global operations," said Mr. Wesley P. Wheeler, Chief Executive
Officer, Patheon Inc. "Revenue growth was particularly strong in Europe, due
to increased volumes in both prescription manufacturing and pharmaceutical
development services. Although Puerto Rico delivered less revenue than the
same quarter last year, as we reported in December, we are now beginning to
secure new business which we expect to begin contributing to results in the
latter half of 2008, based on our customers' timelines.
    "We achieved strong top-line growth, but this was not reflected in our
EBITDA performance," Mr. Wheeler continued. "This was due to a number of
factors, including a significant weakening of the U.S. dollar, which reduced
reported EBITDA by approximately $4.0 million, net of hedging program
benefits, and continued losses in Puerto Rico. The losses in Puerto Rico were
significantly lower relative to the third and fourth quarter of 2007 due to
new management on the island and aggressive workforce reduction.
    "While efforts by previous management to reduce corporate-wide expenses
have had some effect, there is still more work to do," said Mr. Wheeler. "The
leadership team is being re-configured and supplemented with new talent, and I
am in the process of evaluating all aspects of the company. Several new
initiatives have been implemented which are designed to attract new business,
streamline operations, and eliminate waste. For example, we have launched a
global Lean Six Sigma program, branded as 'The Patheon Advantage', which will
use new key performance indicators, in-depth analysis and focused training to
foster an environment of continuous improvement."

    Update on Puerto Rico restructuring

    "We made good progress on our Carolina divestiture initiative during the
first quarter," Mr. Wheeler reported. "We have had preliminary discussions
with potential buyers of the site, and have identified a significant number of
additional prospective buyers.
    "The continuing operations at Caguas and Manati are making steady
progress," Mr. Wheeler continued. "We have significantly upgraded the
executive management and technical support at both sites and are re-focusing
our efforts to sell this capacity. We are also continuing to streamline
overhead and common services as we make plans to divest one of our three
sites."

    Update on Canadian site restructuring

    On January 31, 2008, the Company completed the divestiture of its Niagara-
Burlington OTC commercial manufacturing business to Pharmetics Inc. Pharmetics
acquired the assets, including equipment, facilities and land, at Patheon's
facilities in Fort Erie and Burlington (Gateway Drive), provided employment to
the workforce at the two facilities and will continue to manufacture and
supply all of the products that were manufactured at these sites. Proceeds
from the divestiture received on closing, net of transaction costs, were
$8.3 million.
    On December 31, 2007, Patheon entered into a binding agreement of
purchase and sale for the sale of the York Mills property for a price of
CAD$12.5 million, including a non-refundable deposit of CAD$1.0 million. The
sale is scheduled to close during the second quarter of 2008 subject to
obtaining the required closing documentation. Under the terms of the
agreement, Patheon will lease back the facility for up to two years until the
transfer of production to other sites has been completed.

    First quarter operating results from continuing operations

    First-quarter revenues increased by $16.8 million, or 11%, to $164.2
million over the same period a year ago. On a consolidated basis, all service
activities contributed to the growth, with pharmaceutical development services
("PDS") revenues up $3.9 million, and commercial manufacturing revenues up
$12.9 million.
    Revenues from the Company's European operations increased by $19.9
million or 35% over the same period a year ago, primarily reflecting higher
volumes at all four European sites. Growth was particularly strong in Italy,
where demand for Patheon's sterile large-volume parenteral capacity continues
to grow. Results also benefited from a strengthening of the British pound and
Euro against the U.S. dollar relative to the same period a year ago, which
increased reported revenues by approximately $6.9 million. On a constant
exchange rate basis, revenues in Europe were 23% higher than the first quarter
of 2007.
    In North America, revenues declined in the first quarter by $3.1 million
or 3% over the same period a year ago. Revenues increased in Canada and in
Cincinnati, reflecting higher volumes for a number of clients. These increases
were offset by a significant decline in volumes of a major product
manufactured at the Caguas, Puerto Rico facility.
    Consolidated EBITDA before repositioning expenses was $10.0 million in
the first quarter, compared with $18.7 million in the same period a year ago.
The EBITDA margin before repositioning expense was 6.1% in the first quarter,
compared with 12.7% a year ago.
    In Europe, EBITDA before repositioning expenses from the commercial
manufacturing operations rose $1.9 million to $7.3 million, with the
strengthening European currencies combined with foreign exchange gains
accounting for $1.5 million of the increase. The benefits of revenue gains in
Europe were reduced by a change in mix to lower-margin products in Italy, and
additional operating costs in Swindon relating to the launch of Ceftobiprole
(R).
    In Canada, EBITDA before repositioning expenses from commercial
manufacturing operations was $6.8 million, or $1.3 million lower than the same
period a year ago. The decline reflected volumes of lower margin products at
Whitby, and the impact of a 16% appreciation in the value of the Canadian
dollar compared with the U.S. dollar relative to the same period last year.
The increase in the value of the Canadian dollar reduced reported EBITDA
before repositioning expenses by approximately $2.1 million, net of benefits
from the Company's cash flow hedging program.
    In the U.S., EBITDA before repositioning expenses from the commercial
manufacturing operations was a loss of $3.4 million in the first quarter,
compared with a profit of $0.7 million in the same period a year ago. The
significant earnings deterioration was primarily attributable to a reduction
in manufacturing volumes at the Caguas, Puerto Rico facility.
    EBITDA before repositioning costs from the global PDS operations was
$5.9 million in the first quarter, down $1.4 million from the same period a
year ago. The strengthening Canadian dollar reduced profitability in the
Canadian PDS operations by approximately $0.9 million, and the Swindon, U.K.
PDS operations were impacted by one-time costs arising from raw material
losses.

    Outlook

    Revenues in the second quarter of 2008 are expected to be higher than the
first quarter, reflecting a recovery from lower volumes that the Company
traditionally experiences in its first fiscal quarter due to plant shut downs.
    "I have now toured all of our facilities, worked with all of our key
executives and visited with many of our customers," Mr. Wheeler concluded. "I
have been very impressed with the quality of our operations, the services that
we provide and the energy with which our employees conduct themselves. We will
build on our reputation for quality, service and highly compliant facilities.
In the past quarter alone, we have maintained our superior regulatory track
record with several notable events, including: a successful major general FDA
inspection at Monza, the MHRA approval of our Milton Park development
facility, and a recent FDA approval at Swindon. Our commercial business
continues to expand with our broad base of 258 pharmaceutical customers.
    "We have 300 active PDS projects, and are in the process of transferring
19 approved products into our commercial plants. The high number of new
proposals flowing into the company has been quite encouraging as well,"
Mr. Wheeler continued. "With only 7% share of a growing $10 billion market -
coupled with our strong technical base and available liquidity of
$100 million - I am confident that we can build a company which delivers long-
term shareholder value."

    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 7, 2008 at 10:00 a.m. (Eastern
Standard Time). 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)
644-3423 (Toronto and International) or toll free at (800) 595-8550 (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 12 facilities in the United States,
Canada and Europe, employing more than 4,650 people and serving a client base
of more than 250 pharmaceutical and biotechnology companies.


    
    Consolidated Statements of Loss
    (unaudited)
                                               Three months ended January 31,
                                                2008       2007     % change
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars,
     except loss per share)                        $          $
    -------------------------------------------------------------------------

    Revenues                                 164,172     147,370       11.4%
                                         ------------------------------------
    Operating expenses                       152,125     128,696       18.2%
    Foreign exchange loss on debt (note 7)     2,004           -
    Repositioning expenses (note 6)            2,352       3,311      -29.0%
    Depreciation and amortization             11,138       9,628       15.7%
    Amortization of intangible assets            471         453        4.0%
    Interest                                   7,958       7,099       12.1%
                                         ------------------------------------
    Loss from continuing operations
     before income taxes                     (11,876)     (1,817)     553.6%
    Provision for income taxes                   339       1,759      -80.7%
                                         ------------------------------------
    Loss from continuing operations          (12,215)     (3,576)     241.6%
                                         ------------------------------------
    (as a % of revenues)                       -7.4%       -2.4%
    Earnings (loss) from discontinued
     operations (note 2)                      (2,973)      1,552     -291.6%
                                         ------------------------------------
    Net loss for the period                  (15,188)     (2,024)     650.4%
                                         ------------------------------------
                                         ------------------------------------

    Basic and diluted earnings
     (loss) per share
      From continuing operations         (13.5 cents) (3.9 cents)     246.2%
      From discontinued operations        (3.3 cents)  1.7 cents     -294.1%
                                         ------------------------------------
                                         (16.8 cents) (2.2 cents)     663.6%
                                         ------------------------------------

    Average number of shares
     outstanding during period -
     basic and diluted (in thousands)         90,624      92,951       -2.5%
                                         ------------------------------------

    see accompanying notes



    Consolidated Balance Sheets
    (unaudited)
                                                          As at        As at
                                                     January 31,  October 31,
                                                           2008         2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                            $            $
    -------------------------------------------------------------------------

    Assets
    Current
      Cash and cash equivalents                          32,154       30,557
      Accounts receivable                               128,628      127,691
      Inventories                                        85,216       85,991
      Prepaid expenses and other                          8,179       11,887
      Current assets held for sale (note 2)               5,671       16,151
                                                     ------------------------
    Total current assets                                259,848      272,277
                                                     ------------------------

    Capital assets                                      470,279      479,682
    Intangible assets                                     6,299        6,770
    Deferred costs                                        8,103        8,878
    Future tax assets                                    32,353       31,039
    Goodwill                                              3,443        3,658
    Investments                                           1,349          946
    Long-term assets held for sale (note 2)              21,259       26,367
                                                     ------------------------
                                                        802,933      829,617
                                                     ------------------------
                                                     ------------------------

    Liabilities and Shareholders' equity
    Current
      Bank indebtedness                                   9,701        8,224
      Accounts payable and accrued liabilities          155,539      159,335
      Income taxes payable                                8,240        4,684
      Current portion of long-term debt                  11,572       11,719
      Current liabilities related to assets
       held for sale (note 2)                             4,196        7,743
                                                     ------------------------
    Total current liabilities                           189,248      191,705
                                                     ------------------------

    Long-term debt                                      210,457      203,615
    Deferred revenues                                    24,146       25,994
    Future tax liabilities                               45,537       47,397
    Convertible preferred shares - debt component       143,582      139,916
    Other long-term liabilities                          21,510       22,069
    Long-term liabilities related to
     assets held for sale (note 2)                           75        1,736
                                                     ------------------------
    Total liabilities                                   634,555      632,432
                                                     ------------------------

    Shareholders' equity
      Convertible preferred shares - equity component    15,925       15,925
      Restricted voting shares                          391,967      391,967
      Contributed surplus                                 4,909        4,049
      Deficit                                          (301,438)    (286,250)
      Accumulated other comprehensive income             57,015       71,494
                                                     ------------------------
    Total shareholders' equity                          168,378      197,185
                                                     ------------------------
                                                        802,933      829,617
                                                     ------------------------
                                                     ------------------------
    see accompanying notes



    Consolidated Statements of Changes in Shareholders' Equity
    (unaudited)

                                               Three months ended January 31,
                                                           2008         2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                            $            $
    -------------------------------------------------------------------------

    Convertible preferred shares - equity component
                                                     ------------------------
      Balance at beginning and end of period             15,925            -
                                                     ------------------------
    Restricted voting shares
                                                     ------------------------
      Balance at beginning and end of period            391,967      400,721
                                                     ------------------------
    Contributed surplus
      Balance at beginning of period                      4,049        3,829
      Stock options                                         860           45
                                                     ------------------------
      Balance at end of period                            4,909        3,874
                                                     ------------------------
    Deficit
      Balance at beginning of period                   (286,250)    (189,900)
      Adjustment related to change in
       accounting policy                                      -       (1,749)
      Net loss for the period                           (15,188)      (2,024)
                                                     ------------------------
      Balance at end of period                         (301,438)    (193,673)
                                                     ------------------------
    Accumulated other comprehensive income
      Balance at beginning of period                     71,494       36,081
      Transition adjustment                                   -         (762)
      Other comprehensive loss for the period           (14,479)      (6,741)
                                                     ------------------------
      Balance at end of period                           57,015       28,578
                                                     ------------------------
    Total shareholders' equity at end of period         168,378      239,500
                                                     ------------------------
                                                     ------------------------
    see accompanying notes



    Consolidated Statements of Comprehensive Loss
    (unaudited)

                                               Three months ended January 31,
                                                           2008         2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                            $            $
    -------------------------------------------------------------------------

    Net loss for the period                             (15,188)      (2,024)
                                                     ------------------------
    Other comprehensive loss, net of income taxes
      Change in foreign currency gains on investments
       in subsidiaries, net of hedging activities(1)     (7,352)      (4,505)


      Change in value of derivatives designated as
       foreign currency and interest rate
       cash flow hedges(2)                               (5,093)      (2,509)

       (Gains) losses on foreign currency and interest
        rate cash flow hedges reclassified to
        consolidated statements of loss(3)               (2,034)         273

                                                     ------------------------
       Other comprehensive loss for the period          (14,479)      (6,741)
                                                     ------------------------

                                                     ------------------------
    Comprehensive loss for the period                   (29,667)      (8,765)
                                                     ------------------------
                                                     ------------------------

    see accompanying notes

    The amounts disclosed in other comprehensive income have been recorded
    net of income taxes as follows:
    (1) Net of an income tax expense of nil (2007 - nil).
    (2) Net of an income tax recovery of $745,000, (2007 - nil).
    (3) Net of an income tax expense of nil, (2007 - recovery of $20,000).



    Consolidated Statements of Cash Flows
    (unaudited)

                                               Three months ended January 31,
                                                           2008         2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                            $            $
    -------------------------------------------------------------------------

    Operating activities
      Net loss from continuing operations               (12,215)      (3,576)
      Add (deduct) charges to operations not requiring
       a current cash payment
        Depreciation and amortization                    11,609       10,081
        Foreign exchange loss on debt                     2,004            -
        Accreted interest on convertible
         preferred shares                                 3,666            -
        Other non-cash interest                             130           69
        Employee future benefits, net of contributions     (608)         359
        Future income taxes                              (3,493)        (129)
        Amortization of deferred revenues                  (477)        (486)
        Other                                               612          276
                                                     ------------------------
                                                          1,228        6,594
      Net change in non-cash working capital balances
       related to continuing operations                    (256)      (8,010)
                                                     ------------------------
      Cash provided by (used in) operating activities
       of continuing operations                             972       (1,416)
      Cash provided by (used in) operating activities
       of discontinued operations                        (4,431)       5,897
                                                     ------------------------
    Cash provided by (used in) operating activities      (3,459)       4,481
                                                     ------------------------

    Investing activities
      Additions to capital assets                        (8,183)      (8,006)
      Net increase in investments                          (385)         116
      Increase in deferred pre-operating costs                -       (1,065)
                                                     ------------------------
      Cash used in investing activities of
       continuing operations                             (8,568)      (8,955)
      Cash provided by (used in) investing activities
       of discontinued operations                         8,202          (58)
                                                     ------------------------
    Cash used in investing activities                      (366)      (9,013)
                                                     ------------------------

    Financing activities
      Increase in bank indebtedness                       1,358        6,942
      Increase in long-term debt                         11,779        9,370
      Repayment of long-term debt                        (6,991)     (24,134)
                                                     ------------------------
      Cash provided by (used in) financing
       activities of continuing operations                6,146       (7,822)
      Cash used in financing activities of
       discontinued operations                             (103)        (336)
                                                     ------------------------
    Cash provided by (used in) financing activities       6,043       (8,158)
                                                     ------------------------

    Effect of exchange rate changes on cash
     and cash equivalents                                  (621)      (1,207)
                                                     ------------------------

    Net increase (decrease) in cash and cash
     equivalents during the period                        1,597      (13,897)
    Cash and cash equivalents, beginning of period       30,557       50,723
                                                     ------------------------
    Cash and cash equivalents, end of period             32,154       36,826
                                                     ------------------------
                                                     ------------------------
    see accompanying notes



            Notes to Unaudited Consolidated Financial Statements
                 for the Three Months Ended January 31, 2008
              (Dollar information in tabular form is expressed
                        in thousands of U.S. dollars)

    1.  Accounting policies

    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 as noted
    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, 2007.

    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.

    Changes in accounting policy

    Effective November 1, 2007, the Company adopted the Canadian Institute of
    Chartered Accountants ("CICA") accounting standards Section 3862
    "Financial Instruments - Disclosure", Section 3863 "Financial Instruments
    - Presentation", Section 1535 "Capital Disclosures" and Section 1506
    "Accounting Changes". The adoption of the new standards resulted in
    additional disclosures with regard to financial instruments and the
    Company's objectives, policies and process for managing capital (notes 8
    and 9). The new standards have no impact on the classification and
    valuation of the Company's consolidated financial instruments.

    Recently issued accounting pronouncements

    (a) Inventories

    The CICA issued a new accounting standard, Section 3031 "Inventories",
    which requires inventory to be measured at the lower of cost and net
    realizable value. The standard provides guidance on the types of costs
    that can be capitalized and requires reversal of previous inventory write-
    downs if economic circumstances have changed to support the higher
    inventory values. The Company will adopt this standard beginning
    November 1, 2008 and is currently evaluating the effects of adopting the
    new requirements of this standard.

    (b) General Standards of Financial Statement Presentation

    The CICA amended Section 1400 "General Standards of Financial Statement
    Presentation", to include requirements to assess and disclose an entity's
    ability to continue as a going concern. The Company will adopt the
    amendments to this standard beginning November 1, 2008 and is currently
    evaluating the effects of adopting the new requirements of this standard.

    (c) Goodwill, Intangible Assets and Financial Statement Concepts

    The CICA has issued a new accounting standard, Section 3064 "Goodwill and
    Intangible Assets", which clarifies that costs can be deferred only when
    they relate to an item that meets the definition of an asset, and as a
    result, start-up costs must be expensed as incurred. Section 1000
    "Financial Statement Concepts", was also amended to provide consistency
    with this new standard. The new and amended standards are effective for
    the Company beginning November 1, 2008. The Company is currently
    assessing the impact of these standards on its consolidated financial
    statements.

    2.  Discontinued operations and assets held for sale

    On April 17, 2007 the Company announced that as part of its strategy to
    focus on developing and manufacturing prescription pharmaceutical
    products and to improve the Company's profitability, it plans to
    restructure its current network of six pharmaceutical manufacturing
    facilities in Canada.

    In connection with this initiative, on January 31, 2008, the Company
    completed the sale of its Niagara-Burlington commercial manufacturing
    business to Pharmetics Inc. Pharmetics has acquired the assets, including
    equipment, facilities and land, at the Company's facilities in Fort Erie
    and Burlington (Gateway Drive) in Ontario. Pharmetics has offered
    employment to all of the commercial manufacturing employees at the two
    sites and will continue to manufacture and supply all of the products
    currently manufactured at these sites.

    Proceeds from the divestiture received on closing, net of transaction
    costs, were $8,255,000. These net proceeds are subject to further post
    closing adjustments. The Company recorded a loss of $601,000 on the
    disposal.

    The Company also plans to close its York Mills, Toronto facility and
    transfer substantially all commercial production and development services
    to its site in Whitby and sell the land and buildings. The process of
    transferring production to other facilities is expected to be completed
    in the first half of fiscal 2009.

    On December 14, 2007 the Company announced that as a result of its
    comprehensive review of the Puerto Rico operations, with a focus on
    restructuring the operations, eliminating operating losses and developing
    a long-term plan for the business, it has decided to retain and continue
    to streamline its facilities in Caguas and Manati and divest its facility
    in Carolina. The decision follows the genericization of Omnicef(R) in
    May 2007 and the resulting significant drop in revenue at the facility.

    The results of the Niagara-Burlington and Carolina operations have been
    reported as discontinued operations and prior period amounts have been
    reclassified to conform to the current period presentation.

    The results of discontinued operations for the three months ended
    January 31, 2008 and 2007 are as follows:

                                               Three months ended January 31,
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------

    Revenues                                             11,379       24,325
    -------------------------------------------------------------------------
    Operating expenses                                   13,238       19,765
    Repositioning expenses                                  148          390
    Depreciation and amortization                            45          842
    Amortization of intangible assets                       324        1,728
    Loss on disposal of discontinued operations             601            -
    Interest                                                  6           12
    -------------------------------------------------------------------------
    Earnings (loss) before income taxes                  (2,983)       1,588
    Provision for (recovery of) income taxes                (10)          36
    -------------------------------------------------------------------------
    Net earnings (loss) for the period                   (2,973)       1,552
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at January 31, 2008, the assets held for sale and the related
    liabilities include the Carolina operations and the land and buildings at
    York Mills. As at October 31, 2007, the assets held for sale and the
    related liabilities include the Niagara-Burlington and Carolina
    operations and the land and buildings at York Mills. In accordance with
    Section 3475 of the CICA Handbook, long-lived assets held for sale are
    measured at the lower of their carrying amount or fair value less cost to
    sell.

    Assets held for sale and the related liabilities are as follows:

                                                          As at        As at
                                                     January 31,  October 31,
    -------------------------------------------------------------------------
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------
    Current assets
      Accounts receivable                                 3,087        7,486
      Inventories                                         2,249        8,045
      Prepaid expenses and other                            335          620
                                                     ------------------------
      Total current assets                                5,671       16,151
                                                     ------------------------
    Long-term assets
      Capital assets                                     19,618       24,403
      Intangible assets                                   1,625        1,948
      Future tax assets                                      16           16
                                                     ------------------------
      Total long-term assets                             21,259       26,367
                                                     ------------------------
    Current liabilities
      Accounts payable and accrued liabilities            4,111        7,743
      Current portion of long-term debt                      85            -
                                                     ------------------------
    Total current liabilities                             4,196        7,743
                                                     ------------------------
    Long-term liabilities
      Long-term debt                                         27          213
      Future tax liabilities                                 48            -
      Other long-term liabilities                             -        1,523
                                                     ------------------------
    Total long-term liabilities                              75        1,736
                                                     ------------------------


    3.  Convertible preferred shares and restricted voting shares

    The following table summarizes information on convertible preferred
    shares, and restricted voting shares and related matters as at
    January 31, 2008:

                                                    Outstanding  Exercisable

    Class I preferred shares series C and D
     outstanding                                        150,000

    Restricted voting shares outstanding             90,624,388
    Restricted voting share stock options             6,541,986    4,180,916


    4.  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 continuing operations consist of:

                                                Manufacturing location
                                         Three months ended January 31, 2008
                                       --------------------------------------
                                        Canada       USA    Europe     Total
                                             $         $         $         $
    -------------------------------------------------------------------------
    Revenues by client's
     billing location:
      Canada                             4,116       227       101     4,444
      USA                               31,600    37,402    11,370    80,372
      Europe                            11,608       907    61,755    74,270
      Other geographic areas             1,006       849     3,231     5,086
    -------------------------------------------------------------------------
    Total revenues                      48,330    39,385    76,457   164,172
    -------------------------------------------------------------------------
    Capital assets                     114,250   110,443   245,586   470,279
    -------------------------------------------------------------------------
    Goodwill                             3,443         -         -     3,443
    -------------------------------------------------------------------------


                                                Manufacturing location
                                         Three months ended January 31, 2007
                                       --------------------------------------
                                        Canada       USA    Europe     Total
                                             $         $         $         $
    -------------------------------------------------------------------------
    Revenues by client's
     billing location:
      Canada                             4,328       238       372     4,938
      USA                               33,204    43,769     3,823    80,796
      Europe                             8,143       432    50,996    59,571
      Other geographic areas               679        56     1,330     2,065
    -------------------------------------------------------------------------
    Total revenues                      46,354    44,495    56,521   147,370
    -------------------------------------------------------------------------
    Capital assets                      95,059   110,387   228,509   433,955
    -------------------------------------------------------------------------
    Goodwill                             2,936         -         -     2,936
    -------------------------------------------------------------------------

    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,
                                    -----------------------------------------
                                          2008                2007
                                             $                   $
    -------------------------------------------------------------------------

    Commercial manufacturing -
     prescription                      118,735       73%   110,969       75%
    Commercial manufacturing -
     over-the-counter                   15,183        9%    10,034        7%
    Development services                30,254       18%    26,367       18%
    -------------------------------------------------------------------------
                                       164,172      100%   147,370      100%
    -------------------------------------------------------------------------


    5.  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 restricted voting shares of the
    Company at any point in time. As of January 31, 2008, the total number of
    restricted voting shares issuable under the plan was 6,796,829 of which
    there are stock options outstanding to purchase 6,541,986 shares under
    the plan. The exercise price of restricted voting 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 restricted voting shares of
    Patheon on the Toronto Stock Exchange during the two trading days
    immediately preceding the grant date. Options generally expire seven to
    ten 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 one to three years, with one-third vesting on
    each of the first, second and third anniversaries of the grant date for
    those vesting over three years.

    For the purposes of calculating the stock-based compensation expense, the
    fair value of stock options is estimated at the date of the grant using
    the Black-Scholes option pricing model and the cost is amortized over the
    vesting period. During the period, 2,707,736 options (2007 - nil options)
    were granted. The weighted average fair value of 2,707,736 options
    granted for the three months January 31, 2008 was $1.29. The following
    assumptions were used in arriving at the fair value of options issued
    during the three months ended January 31, 2008:

              Risk free interest rate                             3.9%
              Expected volatility                                  43%
              Expected weighted average life of options        5 years
              Expected dividend yield                               0%

    Stock-based compensation expense recorded in the three months ended
    January 31, 2008 was $860,000 (2007 - $45,000).

    6.  Repositioning expenses

    The Company has incurred a number of expenses associated with its
    performance enhancement program, which is intended to identify
    operational improvements and cost reduction initiatives and in connection
    with changes in executive management. The related expenses include costs
    associated with a reduction in the work force, project management costs
    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.

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

                                               Three months ended January 31,
    -------------------------------------------------------------------------
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------
    Performance enhancement program:
      Employee-related expenses                           1,893        1,144
      Consulting, professional and project
       management costs                                     459        1,257
    Strategic alternatives review                             -          910
    -------------------------------------------------------------------------
                                                          2,352        3,311
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at January 31, 2008, $3,787,000 of the repositioning expenses are
    unpaid and are recorded in accounts payable and accrued liabilities.
    Repositioning expenses paid during the three months ended January 31,
    2008 amounted to $4,691,000.

    7.  Other information

    Foreign exchange

    During the three months ended January 31, 2008, the foreign exchange gain
    on operating exposures, (including benefits from cash flow hedges and the
    revaluation of all foreign currency denominated working capital) recorded
    in operating expenses was $2,578,000 (2007 gain - $1,407,000). During the
    three months ended January 31, 2008, the Company recorded a foreign
    exchange loss on the revaluation of certain U.S. dollar denominated debt,
    net of hedging activities, in its Canadian legal entity of $2,004,000
    (2007 - nil).

    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, 2008 was $1,469,000 (2007 - $1,567,000).

    8.  Financial instruments and risk management

    Categories of financial assets and liabilities
    ----------------------------------------------

    Under Canadian generally accepted accounting principles financial
    instruments are classified into one of the following five categories:
    held-for-trading, held to maturity investments, loans and receivables,
    available-for-sale financial assets and other financial liabilities. The
    Company has also designated certain of its derivatives as effective
    hedges. The carrying values of the Company's financial instruments,
    including those held for sale on the consolidated balance sheet are
    classified into the following categories:

                                                          As at        As at
                                                     January 31,  October 31,
    -------------------------------------------------------------------------
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------
    Held for trading(1)                                  32,154       30,557
    Loans and receivables(2)                            128,628      127,691
    Loans and receivables - held for sale(2)              3,087        7,486
    Other financial liabilities(3)                      539,091      527,493
    Other financial liabilities - held for sale(3)        4,223        7,956
    Derivatives designated as effective hedges(4)
     - gain/(loss)                                       (6,413)       1,459
    Derivatives designated as held for trading(5)
     - gain/(loss)                                          836       (2,699)
    -------------------------------------------------------------------------
    (1) Includes cash and cash equivalents.
    (2) Includes accounts receivable.
    (3) Includes bank indebtedness, accounts payable and accrued liabilities,
        income taxes payable, long-term debt, and the debt component of the
        convertible preferred shares.
    (4) Includes the Company's foreign exchange forward contracts and
        interest rate swaps, both of which are effective hedges.
    (5) Includes the Company's foreign exchange forward contracts that are
        not considered to be an effective hedge for accounting purposes.

    The Company has determined the estimated fair values of its financial
    instruments based on appropriate valuation methodologies; however,
    considerable judgment is required to develop these estimates. The fair
    values of the Company's financial instruments are not materially
    different from their carrying value, with the exception of the Company's
    senior secured term loan of $148,875,000 (October 31, 2007 -
    $149,250,000). Based on current interest rates for debt with similar
    terms and maturities, the fair market value is estimated to be
    $142,633,000 (October 31, 2007 - $142,582,000).

    As at January 31, 2008, the carrying amount of the financial assets that
    the Company has pledged as collateral for its long-term debt facilities
    was $78,358,000 (October 31, 2007 - $83,704,000).

    Foreign exchange forward contracts, interest rate swaps and other hedging
    -------------------------------------------------------------------------
    arrangements
    ------------

    The Company utilizes financial instruments to manage the risk associated
    with fluctuations in foreign exchange and interest 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.

    As at January 31, 2008, the Company's Canadian operations had entered
    into foreign exchange forward contracts to sell an aggregate amount of
    US$52,305,000. These contracts hedge the Canadian operations' expected
    exposure to U.S. dollar denominated cash flows and mature at the latest
    on October 29, 2008, at an average exchange rate of $1.0324 Canadian. The
    mark-to-market value on these financial instruments as at January 31,
    2008 was an unrealized gain of $1,353,000, which has been recorded in
    accumulated other comprehensive income in shareholders' equity.

    As at January 31, 2008, the Company's Canadian operations had entered
    into a foreign exchange contract to purchase US$45,000,000. The contract
    matures on January 28, 2010, at an exchange rate of $1.0015 Canadian. The
    contract is classified as held for trading and hedges the Canadian
    operations net U.S. dollar balance sheet exposure. The mark-to-market
    value of this contract was a gain of $836,000, which has been recorded in
    the loss from continuing operations.

    As at January 31, 2008 the Company has designated $146.9 million of U.S.
    dollar denominated debt as a hedge against its net investment in its
    subsidiaries in the U.S.A. and Puerto Rico. The exchange gains and losses
    arising from this debt, from the date so designated, are recorded in
    accumulated other comprehensive income in shareholders' equity.

    The Company has entered into interest rate swap contracts to convert all
    of the interest costs on its senior secured term loan from a floating to
    a fixed rate of interest until March 30, 2010. The mark-to-market value
    of these financial instruments at January 31, 2008 was an unrealized loss
    of $7,766,000 which has been recorded in accumulated other comprehensive
    income in shareholders' equity.

    Risks arising from financial instruments and risk management
    ------------------------------------------------------------

    The Company's activities expose it to a variety of financial risks;
    market risk (including foreign exchange and interest rate), credit risk
    and liquidity risk. The Company's overall risk management program focuses
    on the unpredictability of financial markets and seeks to minimize
    potential adverse effects on the Company's financial performance. The
    Company uses derivative financial instruments to hedge certain risk
    exposures. The Company does not purchase any derivative financial
    instruments for speculative purposes.

    Risk management is the responsibility of the corporate finance function.
    The Company's domestic and foreign operations along with the corporate
    finance function, identify, evaluate and, where appropriate, hedge
    financial risks. Material risks are monitored and are regularly discussed
    with the audit committee of the board of directors.

    Foreign exchange risk

    The Company operates in Canada, U.S.A, Puerto Rico, Italy, France and the
    U.K. The functional currency of the parent company is Canadian dollars
    and the reporting currency is U.S. dollars. Foreign exchange risk arises
    because the amount of the local currency receivable or payable for
    transactions denominated in foreign currencies may vary due to changes in
    exchange rates ("transaction exposures") and because the non U.S. dollar
    denominated financial statements of the Company may vary on consolidation
    into Canadian dollars and the subsequent revaluation into the reporting
    currency of U.S. dollars ("translation exposures").

    The most significant transaction exposures arise in the Canadian
    operations. The balance sheet of the Canadian operations includes U.S.
    dollar denominated debt, including the debt component of the convertible
    preferred shares. The Canadian operations are required to revalue the
    Canadian dollar equivalent of the U.S. dollar denominated debt at each
    period end. Part of this debt is designated as an effective hedge against
    the Company's investments in subsidiaries in the U.S.A. and Puerto Rico
    and the related foreign exchange gains and losses are recorded in other
    comprehensive income. Foreign exchange gains and losses from the
    remaining debt are recorded in earnings. As of January 31, 2008,
    fluctuations of +/-5% would, everything else being equal, have an effect
    on loss from continuing operations before taxes for the three months
    ended January 31, 2008 of approximately +/- $4.3 million, prior to
    hedging activities.

    In addition, approximately 70% of revenues of the Canadian operations and
    approximately 10% of its operating expenses are transacted in U.S.
    dollars. As a result, the Company may experience transaction exposures
    because of volatility in the exchange rate between the Canadian and U.S.
    dollar. Based on the Company's current U.S. denominated net inflows, as
    of January 31, 2008, fluctuations of +/-5% would, everything else being
    equal, have an effect on loss from continuing operations before taxes for
    the three months ended January 31, 2008 of approximately +/- $1.5
    million, prior to hedging activities.

    The objective of the Company's foreign exchange risk management
    activities is to minimize transaction exposures and the resulting
    volatility of the Company's earnings. The Company manages this risk by
    entering into foreign exchange forward contracts. The U.S. dollar debt
    exposure is also partially hedged by U.S. denominated cash and accounts
    receivable in the Canadian operations. As at January 31, 2008,
    approximately 83% of the U.S. dollar debt exposure is hedged and the
    Company has entered into forward foreign exchange contracts to cover
    approximately 65% of its Canadian-U.S. dollar cash flow exposures for its
    2008 fiscal year. With the exception of the hedges against the Company's
    investments in the U.S.A. and Puerto Rico noted above, the Company does
    not currently hedge translation exposures.

    Interest rate risk

    The Company's interest rate risk primarily arises from its floating rate
    debt, in particular its senior secured term loan in North America and its
    Italian mortgages. At January 31, 2008, $227.7 million of the Company's
    total debt portfolio, is subject to movements in floating interest rates.
    A +/-1% change in interest rates would, everything else being equal, have
    an effect on the loss from continuing operations before income taxes for
    the three months ended January 31, 2008 of approximately +/-$0.6 million,
    prior to hedging activities.

    The objective of the Company's interest rate management activities is to
    minimize the volatility of the Company's earnings. In order to manage
    this risk, the Company has entered into interest rate swaps to convert
    the interest expense on its senior secured term loan, until March 2010,
    from a floating interest rate to a fixed interest rate. As at January 31,
    2008, taking the interest rate swap into account, $78.9 million of the
    Company's debt portfolio is subject to floating interest rates.

    Credit risk

    Credit risk arises from cash and cash equivalents held with banks and
    financial institutions, derivative financial instruments (foreign
    exchange forward contracts and interest rate swaps with positive fair
    values), as well as credit exposure to clients, including outstanding
    accounts receivable. The maximum exposure to credit risk is equal to the
    carrying value of the financial assets.

    The objective of managing counter party credit risk is to prevent losses
    in financial assets. The Company assesses the credit quality of the
    counter parties, taking into account their financial position, past
    experience and other factors. Management also monitors the utilization of
    credit limits regularly. In cases where the credit quality of a client
    does not meet the Company's requirements, a cash deposit is received
    before any services are provided. As at January 31, 2008, the Company
    held deposits of $16,693,000.

    The carrying amount of accounts receivable are reduced through the use of
    an allowance account and the amount of the loss is recognized in the
    income statement within operating expenses. When a receivable balance is
    considered uncollectible, it is written off against the allowance for
    accounts receivable. Subsequent recoveries of amounts previously written
    off are credited against operating expenses in the income statement.

    The following table sets forth details of the age of receivables that are
    not overdue as well as an analysis of overdue amounts and related
    allowance for the doubtful accounts:

                                                            As at January 31,
    -------------------------------------------------------------------------
                                                                        2008
                                                                           $
    -------------------------------------------------------------------------
    Total accounts receivable                                        129,449
    Less: Allowance for doubtful accounts                               (821)
                                                            -----------------
    Total accounts receivable, net                                   128,628
                                                            -----------------
    Of which:
      Not overdue                                                     92,652
      Past due for more than one day but for not more than
       three months                                                   31,408
      Past due more for than three months but for not more
       than six months                                                 3,331
      Past due for more than six months but not for more
       than one year                                                     519
      Past due for more than one year                                  1,539
      Less:  Allowance for doubtful accounts                            (821)
                                                            -----------------
    Total accounts receivable, net                                   128,628
                                                            -----------------

    Liquidity risk

    Liquidity risk arises through excess of financial obligations over
    available financial assets due at any point in time. The Company's
    objective in managing liquidity risk is to maintain sufficient readily
    available reserves in order to meet its liquidity requirements at any
    point in time. The Company achieves this by maintaining sufficient cash
    and cash equivalents and through the availability of funding from
    committed credit facilities. As at January 31, 2008 the Company was
    holding cash and cash equivalents of $32,154,000 and had undrawn lines of
    credit available to it of $68,570,000.

    The contractual maturities of the Company's financial liabilities were
    presented in the Company's consolidated financial statements for the year
    ended October 31, 2007.

    9.  Management of Capital

    The Company defines capital that it manages as the aggregate of its
    shareholders' equity and interest bearing debt, including the debt and
    equity components of the convertible preferred shares. The Company's
    objectives when managing capital are to ensure that the company will
    continue as a going concern, so that it can provide products and services
    to its customers and returns to its shareholders.

    As at January 31, 2008, total managed capital was $543,690,000
    (October 31, 2007 - $560,659,000), comprised of shareholders' equity of
    $168,378,000 (October 31, 2007 - $197,185,000) and interest-bearing debt
    of $375,312,000 (October 31, 2007 - $363,474,000). Included in interest
    bearing debt is the debt component of the convertible preferred shares of
    $143,582,000 (October 31, 2007 - $139,916,000), where the associated
    accreted interest expense is a non-cash charge. The company has no
    obligation to pay cash dividends on the convertible preferred shares
    until after October 31, 2009, at which time the Company can elect to pay
    a cash dividend or increase the liquidation preference and conversion
    rate of the convertible preferred shares.

    The Company manages its capital structure in a manner to ensure that the
    total of interest bearing debt that requires a cash interest payment is
    not greater than four times the company's cash earnings from continuing
    operations for the previous twelve months. For purposes of measuring the
    company's success in meeting the above stated criteria, cash earnings
    from continuing operations is defined as the net earnings (loss) from
    continuing operations before any deduction for repositioning expenses,
    depreciation and amortization, amortization of intangible assets, asset
    impairment charges, interest and income taxes.

    As at January 31, 2008 and October 31, 2007 the above capital management
    criteria can be illustrated as follows:

                                                     January 31,  October 31,
                                                           2008         2007
                                                              $            $
    -------------------------------------------------------------------------
    Interest bearing debt requiring a cash interest
     payment                                            231,730      223,558
    Cash earnings from continuing operations for
     the previous twelve months                          75,516       84,147
    Ratio                                                  3.07         2.66
    -------------------------------------------------------------------------
    10. Related party transactions

    Revenues from companies controlled by a director and significant
    shareholder of the Company were in the amount of $61,000 for the three
    months ended January 31, 2008 (2007 - $59,000). These transactions were
    conducted in the normal course of business and are recorded at the
    exchanged amount. Accounts receivable at January 31, 2008 include a
    balance of $75,000 (2007 - $222,000) resulting from these transactions.

    At January 31, 2008 the Company has an investment of $1,151,000 (2007 -
    $369,000) representing an 18% interest in two Italian companies
    (collectively referred to as "BSP Pharmaceuticals") whose largest
    investor is an officer of the Company. These companies will specialize in
    the manufacturing of cytotoxic pharmaceutical products.

    The Company has recorded management fees under a management services
    agreement with BSP Pharmaceuticals of $346,000 as for the three months
    ended January 31, 2008 (2007 - $285,000). Accounts receivable at
    January 31, 2008 include a balance of $2,466,000 (2007 - nil) in
    connection with the management services agreement. The receivable
    includes amounts owing for services rendered in fiscal 2007. These fees
    will be paid by BSP Pharmaceuticals once it has finalized all of its bank
    financing. These services were conducted in the normal course of business
    and are recorded at the exchanged amounts.

    In connection with certain of BSP Pharmaceuticals' bank financing, the
    Company has made commitments that it will not dispose of its interest in
    BSP Pharmaceuticals prior to January 1, 2011.

    11. Comparative amounts

    Certain comparative amounts have been re-stated and reclassified to
    conform with current accounting policies and the current period
    presentation for discontinued operations.


                                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 period ended January 31, 2008 and 2007 should be
read in conjunction with the Company's consolidated financial statements and
related notes contained in this interim report. All amounts are in US dollars
unless otherwise indicated. This MD&A is dated as of March 7, 2008.
    The purpose of this 2008 first quarter report is to provide an update to
the information contained in the Company's Management's Discussion and
Analysis section of the Company's 2007 Annual Report, which contains a more
comprehensive discussion of the 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 section of the Company's 2007
Annual Report. 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 Investor Services Inc., 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 from continuing operations before
repositioning expenses, asset impairment charges, depreciation and
amortization, foreign exchange losses reclassified from other comprehensive
income, interest, refinancing expenses, 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. Readers 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 the financial performance of the Company, in
particular the operating earnings before non-cash charges and large and non-
recurring costs.

    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 presented 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. In providing its pharmaceutical development services, Patheon
is able to: (i) develop an appropriate dosage form; (ii) develop analytical
methods; (iii) manufacture the proposed new drug product to client
specifications during the regulatory drug approval process; (iv) manufacture
pilot batches of proposed new drug products for the regulatory drug approval
process; and (v) provide scale-up and technology transfer services designed to
validate that a drug can be manufactured commercially.
    At January 31, 2008, there were a total of 195 client products in
Patheon's pharmaceutical development services ("PDS") pipeline, including nine
drug candidates at the New Drug Application ("NDA") stage. This compares with
a total of 174 client products a year ago, of which seven were at the NDA
stage. During the first quarter of 2008, one product developed on behalf of a
client was launched into commercial production.

    Vision and Strategy

    Patheon's vision is to be the best pharmaceutical development and
contract manufacturing service provider. 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 and development services to establish and maintain
long-term, strategic relationships with clients on a global basis.
    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

    Several key performance drivers for the Company were identified in
Patheon's 2007 Annual Report:

    (i)   Generating higher-quality revenues

    The Company's strategy is to focus resources and capital by increasing
the percentage of revenues generated by higher margin Rx manufacturing and
pharmaceutical development services.

    (ii)  Improving capacity utilization and operating efficiency

    The Company's operating sites' cost structures are largely fixed in the
short term, with the result that unanticipated fluctuations in manufacturing
activity can have a significant impact on profit margins. The Company
continues to focus on improving capacity utilization at all of its sites by
entering into new commercial manufacturing agreements with new and existing
clients. The Company also continues to evaluate how best to utilize the amount
of available capacity in its network.
    The Company continues to improve operating efficiencies through an
operational excellence program with initiatives focused on a global
procurement program, a workforce reduction program and a manufacturing
efficiency review process.

    (iii) Mitigating the impact of foreign exchange fluctuations

    Because the Company's client service contracts in North America are
primarily denominated in U.S. dollars, the profitability of the Company's
Canadian operations can be impacted by significant changes in the foreign
exchange trading relationship between the Canadian and U.S. dollar.
Approximately 70% of revenues and approximately 10% of operating expenses of
the Canadian operations are transacted in U.S. dollars. To help mitigate this
exposure, the Company enters into forward foreign exchange contracts.
    An update on the Company's interim performance relating to these key
issues is provided in the sections below entitled "Recent Developments" and
"Results of Operations".

    Recent Developments

    Restructuring the Canadian Site Network

    On April 17, 2007 the Company announced that as part of its strategy to
focus on developing and manufacturing Rx pharmaceutical products and to
improve the Company's profitability, it planned to restructure its current
network of six pharmaceutical manufacturing facilities in Canada.
    In connection with this initiative, on January 31, 2008 the Company sold
its Niagara-Burlington commercial OTC manufacturing business to Pharmetics
Inc. Pharmetics acquired the assets, including equipment, facilities and land
at the Company's facilities in Fort Erie and Burlington (Gateway Drive).
Pharmetics has provided employment to all of the commercial manufacturing
employees at the two sites and will continue to manufacture and supply all of
the products that were manufactured at these sites. Proceeds from the
divestiture received on closing, net of transaction costs, were $8.3 million
and are subject to further post closing adjustments.
    The Company also plans to close its York Mills, Toronto facility and
transfer substantially all commercial production and development services to
its site in Whitby and sell the land and buildings. Based on current
projections, the process of transferring production to other facilities is
expected to be completed by the end of the first half of fiscal 2009. On
December 31, 2007 the Company entered into a binding agreement of purchase and
sale for the sale of the York Mills property for a price of CAD$12.5 million,
including a non-refundable deposit of CAD$1.0 million. Subject to obtaining
the required closing documentation, the sale is scheduled to close by April 1,
2008, with Patheon leasing back the facility for up to two years in order to
facilitate the decommissioning process.
    The York Mills real estate has been classified as held for sale on the
balance sheet in the consolidated financial statements.

    Restructuring the Puerto Rico Operations

    On December 14, 2007 the Company announced that as a result of its
comprehensive review of the Puerto Rico operations, with a focus on
eliminating operating losses and developing a long-term plan for the business,
it has decided to retain and continue to streamline its facilities in Caguas
and Manati, and divest its facility in Carolina, Puerto Rico. The decision
follows the genericization of Omnicef(R) in May 2007 and the resulting
significant drop in revenues at the Carolina facility.
    The Carolina site is a 230,000-square-foot facility, with approximately
170 employees, that specializes in the manufacture of oral cephalosporin solid
dosage forms, including tablets, capsules and powders for suspension. It
currently manufactures four products on behalf of six clients.
    The Company has concluded that Carolina, a high-quality site with
specialized capabilities and expertise, would be of greater strategic value to
another company with a focus on manufacturing oral cephalosporins. The
divestiture will allow the Company to focus on improving operating performance
and growing the business at the Caguas and Manati facilities.
    Based on current divestiture plans and subject to future negotiation, the
Company expects to provide that any purchaser will assume responsibility for
the staff at the facility and contracts with third parties, subject to their
approval. Patheon has retained an advisor to manage the sale of the Carolina
site.
    The assets and related liabilities of the Carolina operations have been
classified as held for sale and the results of operations have been classified
as discontinued operations in the consolidated financial statements.

    Results of Operations

    The results of operations of the Niagara-Burlington and Carolina
Operations have been segregated and presented separately as discontinued
operations. All comparative amounts have been reclassified to conform to the
current period presentation.

     Results of Consolidated Operations

                                               Three months ended
                                                   January 31,
                                                  2008       2007          %
    ---------------------------------------------------  ---------  ---------
    (in thousands of U.S. dollars)                   $          $     Change
    ---------------------------------------------------  ---------  ---------

    Revenues                                   164,172    147,370      11.4%
    Operating expenses                         152,125    128,696      18.2%
    Foreign exchange loss on debt                2,004          -
                                              ---------  ---------  ---------
    EBITDA before repositioning expenses:       10,043     18,674     -46.2%
                                              ---------  ---------  ---------
    (as a percentage of revenues)                 6.1%      12.7%
    Repositioning expenses                       2,352      3,311     -29.0%
    Depreciation and amortization               11,138      9,628      15.7%
    Amortization of intangible assets              471        453       4.0%
    Interest                                     7,958      7,099      12.1%
                                              ---------  ---------  ---------
    Loss from continuing operations before
     income taxes                              (11,876)    (1,817)    553.6%
    Provision for income taxes                     339      1,759     -80.7%
                                              ---------  ---------  ---------
    Loss from continuing operations            (12,215)    (3,576)    241.6%
                                              ---------  ---------  ---------
    (as a percentage of revenues)                -7.4%      -2.4%
    Earnings (loss) from discontinued
     operations                                 (2,973)     1,552    -291.6%
                                              ---------  ---------  ---------
    Net loss for the period                    (15,188)    (2,024)    650.4%
                                              ---------  ---------  ---------
                                              ---------  ---------  ---------


    Revenues by Geographic Region and Service Activity

                                               Three months ended
                                                   January 31,
                                                  2008       2007          %
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                   $          $     Change
    -------------------------------------------------------------------------

    North America
    -------------
      Commercial Manufacturing
        Prescription                            51,576     61,919       -17%
        Over-the-counter                        13,884      8,760        58%
                                              -------------------------------
                                                65,459     70,679        -7%
      Development Services                      22,255     20,170        10%
                                              -------------------------------
                                                87,715     90,849        -3%
                                              -------------------------------
    Europe
    ------
      Commercial Manufacturing
        Prescription                            67,159     49,050        37%
        Over-the-counter                         1,299      1,274         2%
                                              -------------------------------
                                                68,459     50,324        36%
      Development Services                       7,999      6,197        29%
                                              -------------------------------
                                                76,457     56,521        35%
                                              -------------------------------
    TOTAL
    -----
      Commercial Manufacturing
        Prescription                           118,735    110,969         7%
        Over-the-counter                        15,183     10,034        51%
                                              -------------------------------
                                               133,918    121,003        11%
      Development Services                      30,254     26,367        15%
                                              -------------------------------

    CONSOLIDATED REVENUES                      164,172    147,370        11%
                                              -------------------------------
                                              -------------------------------

    Revenues

    Consolidated revenues from continuing operations for the three-month
period ended January 31, 2008 increased 11%, or $16.8 million, to
$164.2 million from $147.4 million in the same period in 2007. On a
consolidated basis, compared with the first quarter of 2007, Rx revenues
increased by 7%, OTC revenues increased by 51% and PDS revenues increased by
15%.
    For the three-month period ended January 31, 2008 revenues excluding the
Puerto Rico operations were $152.3 million, compared with $128.0 million in
the same period last year, representing an increase of 19%.
    Prescription manufacturing and development services represented 91% of
revenues, compared with 93% for the comparable period in 2007. The decline
reflects a decrease in Rx manufacturing volumes in Caguas, Puerto Rico,
combined with higher OTC volumes in the Whitby operations.
    Geographically, in North America, revenues declined in the first quarter
by $3.1 million or 3% over the same period a year ago. The decrease reflects a
significant decline in Rx revenues in the Caguas facility in Puerto Rico
principally as a result of lower volumes of Levothyroxine sodium, where the
client suffered a significant decline in market share during the first half of
2007. This decline was offset in part by higher OTC and PDS revenues from the
Canadian operations and Cincinnati.
    In Europe, revenues for the first quarter of 2008 increased by
$19.9 million or 35% over the same period in 2007. The year-over-year increase
reflects higher Rx manufacturing revenues from all operations. The Italian
operations in particular recorded higher volumes in sterile Rx manufacturing
and the Swindon, U.K. operations recovered from the order backlog experienced
at the end of last fiscal quarter. The Euro strengthened approximately 12% and
U.K. sterling strengthened approximately 4% against the U.S. dollar relative
to the same period last year, increasing reported revenues by approximately
$6.9  million. Had European currencies remained constant to the rates of the
prior year, European revenues would have been 23% higher than the same period
in 2007.

    Operating Expenses

    Operating expenses comprise processing costs (principally materials,
employee and other site-related costs), marketing, sales, service, corporate
support, administrative expenses and foreign exchange gains and losses
relating to operating activities. In the first quarter of 2008, operating
expenses were $152.1 million, being $23.4 million higher than the same period
a year ago. Operating expenses were impacted by increased volumes, higher
costs of utilities and the strengthening of European and Canadian currencies
relative to the U.S. dollar. Operating expenses as a percentage of revenues
were 92.7%, compared with 87.3% in the same period a year ago.

    Foreign Exchange Loss on Debt

    The net foreign exchange loss of $2.0 million recorded in the fiscal
quarter ended January 31, 2008 related to the revaluation of U.S. dollar
denominated debt in the Canadian legal entity. The reported loss is net of
foreign exchange gains from a forward foreign exchange contract put in place
to reduce the impact of this exposure. This foreign exchange exposure arose as
a result of the new financing that the Company put in place in April 2007.

    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses

    On a consolidated basis in the first quarter of 2008, EBITDA before
repositioning expenses, representing earnings from continuing operations
before repositioning expenses, asset impairment charges, depreciation and
amortization, foreign exchange losses reclassified from other comprehensive
income, interest, refinancing expenses, and income taxes was $10.0 million,
compared with $18.7 million in the same period a year ago. EBITDA margin
before repositioning expenses was 6.1% in the three-month period ending
January 31, 2008, compared with 12.7% in the same period a year ago.
    For the three-month period ended January 31, 2008 EBITDA before
repositioning expenses excluding the Puerto Rico operations was $15.4 million,
compared with $20.6 million in the same period last year. This represents an
EBITDA margin before repositioning expenses of 10.1% in the three month
period, compared with 16.1% in the same period last year.
    On a year-over-year basis the decline in the value of the U.S. dollar
relative to the Canadian dollar has had a significant negative impact on the
profitability of the Canadian operations, where approximately 70% of the
revenues are denominated in U.S. dollars. The U.S. dollar also declined in
value relative to the European currencies; this has had the impact of
increasing the value of earnings in the European operations once translated
into U.S. dollars. Had foreign exchange rates remained the same as those in
the same period last year, EBITDA before repositioning expenses for the three
months ended January 31, 2008 would have been approximately $4 million higher
than was reported. This takes into account all foreign exchange related
factors, including the benefits of the Company's cash flow hedging program and
the change in foreign exchange gains and losses on the revaluation of monetary
assets and liabilities.
    In Canada, EBITDA before repositioning expenses from the commercial
operations was $6.8 million in the first quarter of 2008, being $1.3 million
lower than the same period last year. This change reflects the impact of a 16%
decline in the value of the U.S. dollar, relative to the Canadian dollar in
the same period last year, which reduced EBITDA before repositioning expenses
by approximately $2.1 million, net of the benefits from the Company's cash
flow hedging program. The increase in volumes in Canada arose largely from
lower margin OTC products.
    In the U.S.A. (including Puerto Rico), EBITDA before repositioning
expenses for the commercial operations was a loss of $3.4 million in the first
quarter of 2008, compared with a profit of $0.7 million in the same period
last year. The significant deterioration in earnings principally reflects a
reduction in Rx manufacturing volumes in Caguas, Puerto Rico.
    In Europe, EBITDA before repositioning expenses from the commercial
operations was $7.3 million in the first quarter of 2008, being $1.9 million
higher than the same period a year ago. In Italy, a change in mix to lower
margin products reduced the benefits of the volume gains and the Swindon, U.K.
operations were affected by additional operating costs in anticipation of the
launch of Ceftobiprole(R). The site received FDA approval to manufacture this
product during the quarter. The strengthening European currencies relative to
the U.S. dollar compared with the same period last year, plus the benefits of
foreign exchange gains on the revaluation of foreign currency denominated
assets and liabilities, had the impact of increasing EBITDA before
repositioning expenses by approximately $1.5 million.
    EBITDA before repositioning expenses from the global PDS operations was
$5.9 million in the first quarter of 2008, being $1.4 million lower than the
same period in 2007. The strengthening Canadian dollar reduced profitability
in the Canadian operations by approximately $0.9 million and the Swindon, U.K.
operations were impacted by one time charges arising from raw material losses.
    Corporate costs in the first quarter of 2008 were $6.5 million, compared
with $2.7 million in the same period last year. Costs in 2008 included net
foreign exchange losses of $2.0 million arising from the revaluation of
U.S. dollar denominated debt held in the Canadian legal entity. Costs were
also higher for non-cash stock compensation expenses. The strengthening
Canadian dollar had the impact of increasing the U.S. dollar translated values
of these Canadian costs by approximately $0.8 million.

    Repositioning Expenses

    During the first quarter of 2008 the Company incurred $2.4 million of
expenses in connection with restructuring the Puerto Rico and Canadian
networks and from changes in executive management.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $11.1 million in the first
quarter of 2008, compared with $9.6 million in the first quarter of 2007. The
increase reflects additional depreciation expenses in Swindon, U.K. in
connection with the recently completed lyophilized cephalosporin capacity and
from the impact of the strengthening European and Canadian currencies relative
to the U.S. dollar.

    Amortization of Intangible Assets

    Amortization of intangible assets was $0.5 million in the first quarter
of 2008, being comparable with the charge in the first quarter of 2007. The
amortization of intangible assets relates to the Caguas operations in Puerto
Rico.

    Interest Expense and Amortization of Deferred Financing Costs

    Interest expense for the first quarter of 2008 was $8.0 million, compared
with $7.1 million in the first quarter of 2007. The increase in interest costs
principally reflects the impact of the financing arrangements that were put in
place on April 27, 2007 and includes a non-cash accretive interest charge of
$3.7 million in respect of the debt component of the convertible preferred
shares.

    Loss Before Income Taxes from Continuing Operations

    The Company reported a loss before income taxes of $11.9 million in the
first quarter of 2008, compared with a loss of $1.8 million in the same period
a year ago.

    Income Taxes

    The Company recorded an income tax charge of $0.3 million in the first
quarter of 2008, compared with a charge of $1.8 million in the same period
last year. The income tax charge in 2008 principally reflects operating losses
in Puerto Rico and Canada, where the tax benefit has not been recognized. The
charge is net of a recovery of $2.0 million in future income taxes recorded in
the Italian operations, arising from a reduction in tax rates that was
substantially enacted during the quarter.

    Loss and Loss Per Share from Continuing Operations

    The Company recorded a loss from continuing operations in the first
quarter of 2008 of $12.2 million, compared with a loss of $3.6 million in the
same period last year. The loss per share was 13.5 cents, compared with a loss
of 3.9 cents per share a year earlier. The loss in 2008 included after tax
repositioning expenses of $2.4 million or 2.6 cents per share. The loss in
2007 included after tax repositioning expenses of $2.5 million or 2.7 cents
per share.

    Earnings (Loss) and Earnings (Loss) Per Share from Discontinued
    Operations

    Discontinued operations include the results of the Niagara-Burlington and
Carolina operations. Financial details of the operating activities are
disclosed in note 2 in the interim consolidated financial statements. The loss
from discontinued operations in the first quarter of 2008 was $3.0 million, or
3.3 cents compared with a profit of $1.6 million or 1.7 cents in the same
period last year. The decline reflects the impact of lower production in
Carolina, Puerto Rico following the genericization of Omnicef(R) in May 2007.
The loss in 2008 also includes a charge of $0.6 million in connection with the
final divestiture of the Niagara-Burlington operations.

    Net Loss and Loss Per Share

    The Company recorded a net loss in the first quarter of 2008 of
$15.2 million, or 16.8 cents per share, compared with a loss of $2.0 million
or 2.2 cents per share in the same period last year.
    Because the Company reported a loss in the first quarter of 2008 and
2007, there is no impact of dilution.

    Liquidity and Capital Resources

    Summary of Cash Flows

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


    Summary of Cash flows

                                               Three months ended January 31,
                                                           2008         2007
    ------------------------------------------------ -----------  -----------
    (in thousands of U.S. dollars)                            $            $
    ------------------------------------------------ -----------  -----------
    Net loss from continuing operations                 (12,215)      (3,576)
    Depreciation and amortization                        11,609       10,081
    Foreign exchange loss on debt                         2,004            -
    Accreted interest on convertible preferred shares     3,666            -
    Other non-cash interest                                 130           69
    Employee future benefits, net of contributions         (608)         359
    Future income taxes                                  (3,493)        (129)
    Amortization of deferred revenues                      (477)        (486)
    Other                                                   612          276
    Working capital                                        (256)      (8,010)
                                                     -----------  -----------
    Cash provided by (used in) operating activities
     of continuing operations                               972       (1,416)
    Cash used in investing activities of continuing
     operations                                          (8,568)      (8,955)
    Cash provided by (used in) financing activities
     of continuing operations                             6,146       (7,822)
    Net increase in cash and cash equivalents from
     discontinued operations                              3,668        5,503
    Other                                                  (621)      (1,207)
                                                     -----------  -----------
    Net increase (decrease) in cash and cash
     equivalents during the period                        1,597      (13,897)
                                                     -----------  -----------
                                                     -----------  -----------


    Cash Provided by (Used in) Operating Activities

    Cash provided by operating activities from continuing operations was
$1.0 million in the first quarter of 2008, compared with a cash usage of
$1.4 million in the comparable period in 2007. The improvement reflects
reduced requirements for working capital in 2008, offset in part by an
increase in the loss before non-cash charges.
    Cash used by operating activities from discontinued operations was
$4.4 million in the first quarter of 2008, compared with a cash inflow of
$5.9 million in the comparable period in 2007. The deterioration reflects
reduced earnings in the Carolina operations. The 2007 cash inflow also
included a significant benefit from a reduction in working capital that was
not experienced in 2008.

    Cash Provided by (Used in) Investing Activities

    Cash used in investing activities from continuing operations in the first
quarter of 2008 was $8.6 million, being $0.4 lower than the same period a year
ago.
    Cash provided by investing activities from discontinued operations in the
first quarter of 2008 was $8.2 million, compared with a cash usage of
$0.1 million in the same period last year. The cash inflow in 2008 includes
net proceeds after transaction costs from the sale of the Niagara-Burlington
operations of $8.3 million.

    A summary of cash used in investing activities is as follows:


    Cash Used in Investing Activities

                                               Three months ended January 31,
                                                           2008         2007
    ------------------------------------------------ -----------  -----------
    (in thousands of U.S. dollars)                            $            $
    ------------------------------------------------ -----------  -----------
    Additions to capital assets
      Sustaining                                         (4,357)      (3,063)
      Project-related                                    (3,826)      (4,943)
                                                     ------------------------
    Total additions to capital assets                    (8,183)      (8,006)
    Net increase in investments                            (385)         116
    Increase in deferred pre-operating  costs                 -       (1,065)
                                                     -----------  -----------
    Cash used in investing activities of continuing
     operations                                          (8,568)      (8,955)
                                                     -----------  -----------
    Cash provided (used in) investing activities of
     discontinued operations                              8,202          (58)
                                                     -----------  -----------
    Cash used in investing activities                      (366)      (9,013)
                                                     -----------  -----------
                                                     -----------  -----------


    Cash Provided by (Used in) Financing Activities

    Cash provided by financing activities was $6.0 million in the first
quarter of 2008, compared with a cash usage of $8.2 million in the same period
last year. The net cash inflow in 2008 reflects drawings on existing credit
facilities.

    A summary of cash provided by financing activities is as follows:


    Cash Provided by (Used in) Financing Activities

                                               Three months ended January 31,
                                                           2008         2007
    ------------------------------------------------ ------------------------
    (in thousands of U.S. dollars)                            $            $
    ------------------------------------------------ ------------------------

    Increase in bank indebtedness                         1,358        6,942
    Increase in long-term debt                           11,779        9,370
    Repayment of long-term debt                          (6,991)     (24,134)
                                                     -----------  -----------
    Cash provided by (used in) financing activities
     of continuing operations                             6,146       (7,822)
                                                     -----------  -----------
    Cash used in financing activities of discontinued
     operations                                            (103)        (336)
                                                     -----------  -----------
    Cash provided by (used in) financing activities       6,043       (8,158)
                                                     -----------  -----------
                                                     -----------  -----------

    Financing Arrangements and Ratios

    There have been no changes to the Company's financing arrangements during
the first quarter of 2008.
    Total interest bearing debt, including the debt component of the
convertible preferred shares, at January 31, 2008 was $375.3 million, being
$11.8 million higher than at October 31, 2007. Total interest bearing debt
includes the debt component of convertible preferred shares of $143.6 million,
as the consolidated financial statements include an accretive interest expense
in relation to this liability. At January 31, 2008, the Company's consolidated
ratio of interest-bearing debt to shareholders' equity was 223%, compared with
184% at October 31, 2007. The increase principally reflects the reduction in
shareholders' equity arising from the losses that the Company has incurred in
the three months ended January 31, 2008, combined with a reduction in
accumulated other comprehensive income.

    Adequacy of Financial Resources

    As at January 31, 2008, the Company had cash balances of $32.2 million
and $68.6 million in undrawn credit facilities available to it and was in
compliance with all covenant requirements under its financing arrangements.
The Company believes that, subject to usual business risks, its financial
resources are sufficient to fund projected capital expenditures, debt service
requirements and employee future benefit obligations in the normal course of
business. There have been no material changes to the capital expenditure
commitments disclosed in the MD&A section of the Company's 2007 Annual Report
that are outside the normal course.

    Critical Accounting Policies and Estimates

    Changes in and Significant New Accounting Policies

    Effective November 1, 2007 the Company adopted the Canadian Institute of
Chartered Accountants Handbook Section 1535 "Capital Disclosures", Section
3862 "Financial Instruments - Disclosures", Section 3863 "Financial
Instruments - Presentation" and Section 1506 "Accounting Changes". The
adoption of the new standards resulted in additional disclosures in the notes
to the interim consolidated financial statements only.

    General

    Patheon's significant accounting policies are described in note 2 to the
2007 audited consolidated financial statements. The most critical of these
policies are those related to revenue recognition, deferred revenues,
impairment of long-lived depreciable assets, convertible preferred shares,
employee future benefits, and income taxes, (notes 2, 4, 13, 15, 16 and 18 of
the 2007 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 collectability 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
2008, $0.5 million was recognized as earnings.

    Impairment of Long-Lived Depreciable Assets

    On an ongoing basis, the Company reviews whether there are any indicators
of impairment of its capital assets and identifiable intangible assets ("long-
lived depreciable assets"). If such indicators are present, the Company
assesses the recoverability of the assets or group of 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 impairment charges were recorded in the first
quarter of 2008.

    Convertible Preferred Shares

    On April 27, 2007 the Company issued $150.0 million of convertible
preferred shares. The shares are considered to be a compound financial
instrument that contains both a debt component and an equity component.
    On issuance of the convertible preferred shares, the fair value of the
debt component is determined by discounting the expected future cash flows
using a market interest rate for a non-convertible debt instrument with
similar terms. The resulting value is carried as debt on an amortized cost
basis until extinguished on conversion or redemption. The remainder of the
proceeds is allocated as a separate component of shareholders' equity, net of
transaction costs. Transaction costs are apportioned between the debt and
equity components based on their respective carrying amounts when the
instrument was issued.
    On conversion, the carrying amount of the debt component and the equity
component are transferred to share capital and no gain or loss is recognized.
    The interest cost recognized in respect of the debt component represents
the accretion of the liability, over its expected life using the effective
interest method, to the amount that would be payable if redeemed. During the
first quarter of 2008, the accretive interest expense was $3.7 million.

    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 $32.4 million have been recorded at January 31,
2008. 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 $45.5 million have been recorded at January 31,
2008. 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 15 to the Company's 2007 audited consolidated financial statements.

    Risk Management

    The following are updates to certain risks and uncertainties described in
the Company's Management's Discussion and Analysis for the year ended October
31, 2007, 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.
    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 70% of
revenues of the Canadian operations and approximately 10% 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 pre-tax earnings, excluding
any hedging activities, is approximately $1.2 million.
    The Company mitigates its foreign exchange risk by engaging in foreign
currency hedging activities using derivative financial instruments. At January
31, 2008 the Company had outstanding foreign exchange forward contracts to
sell US$52.3 million at an average exchange rate of $1.0324 Canadian. The
contracts mature at the latest on October 29, 2008 and cover approximately 65%
of the Company's expected foreign exchange exposure for the 2008 fiscal year.
The mark-to-market value at January 31, 2008 that is recorded in accumulated
other comprehensive income is an unrealized gain of $1.4 million. At January
31, 2008 the Company also had an outstanding foreign exchange forward contract
to buy US$45.0 million at an exchange rate of $1.0015 Canadian. The contract
matures on January 28, 2010 and hedges the Canadian operations U.S. dollar
balance sheet exposure. The mark-to-market value at January 31, 2008 that is
recorded in earnings is an unrealized gain of $0.8 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 currency denominated debt
held by the Company and designated as a hedge against the carrying value of
certain foreign subsidiaries, are included in accumulated other comprehensive
income in shareholders' equity. At January 31, 2008, the Company had
designated $146.9 million of U.S. dollar denominated debt as a hedge against
its investment in its U.S.A. and Puerto Rico subsidiaries.

    Interest Rate Exposure

    The Company has exposure to movements in interest rates. The Company has
entered into interest rate swaps to convert the interest expense on its senior
secured term loan from a floating interest rate to a fixed interest rate until
March 30, 2010. Taking this interest rate swap into account, at January 31,
2008, 79% of the Company's total debt portfolio, including the debt component
of the convertible preferred shares, was not 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 $0.8 million.

    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, 2007 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.

    Seasonal Variability of Results

    Historically, 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. Revenues in the fourth fiscal quarter
are also typically impacted by summer shut downs during August in the European
operations.

    Selected Quarterly Financial Information

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


    Quarterly Consolidated Financial Information

    Quarter ended                                      EBITDA   NET EARNINGS
    (in thousands of                                   BEFORE    (LOSS) FROM
     U.S. dollars,                              REPOSITIONING     CONTINUING
     except per share                 REVENUES       EXPENSES     OPERATIONS
     amounts)                                $              $              $
    -------------------------------------------------------------------------
    2008
    January 31                         164,172         10,043        (12,215)

    2007
    October 31                         161,821         23,684         (5,877)
    July 31                            164,737         20,649         (3,365)
    April 30                           160,218         21,140        (21,950)
    January 31                         147,370         18,674         (3,576)

    2006
    October 31                         150,521         14,667        (23,324)
    July 31                            165,598         13,427       (218,820)
    April 30                           166,205         21,662          2,670


                                     BASIC AND
                                       DILUTED
                                       EARNING
    Quarter ended                   (LOSS) PER                     BASIC AND
    (in thousands of                SHARE FROM                       DILUTED
     U.S. dollars,                  CONTINUING   NET EARNINGS  EARNING (LOSS)
     except per share               OPERATIONS          (LOSS)     PER SHARE
     amounts)                                $              $              $
    -------------------------------------------------------------------------
    2008
    January 31                          ($0.14)       (15,188)        ($0.17)

    2007
    October 31                          ($0.06)        (7,522)        ($0.08)
    July 31                             ($0.04)       (63,069)        ($0.68)
    April 30                            ($0.23)       (21,986)        ($0.24)
    January 31                          ($0.04)        (2,024)        ($0.02)

    2006
    October 31                          ($0.25)       (22,416)        ($0.24)
    July 31                             ($2.36)      (257,213)        ($2.77)
    April 30                             $0.03          2,989          $0.03


    Additional Information

    Share Capital

    As of January 31, 2008, the Company had 90,624,388 restricted voting
shares outstanding and 150,000 each of Class I Preferred Shares, Series C
(convertible preferred shares) and Series D (special voting preferred shares).
Each Class I Preferred Shares, Series C was convertible into 223.3631 Patheon
restricted voting shares. As at January 31, 2008 the Company had 6,541,986
stock options outstanding, of which 4,180,916 were exercisable.

    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 in the second quarter of 2008 are expected to be higher than the
first quarter, reflecting a recovery from lower volumes that the Company
traditionally experiences in its first fiscal quarter due to plant shut downs.
This expectation is based on internal management forecasts, which in turn are
based on client purchase orders and forecasts of anticipated demand and other
factors. These internal management forecasts were prepared for internal
planning purposes and may not be appropriate for forecasting future financial
results or for other purposes.
    The Company indicated in its MD&A for the year ending October 31, 2007
that it anticipated that revenues from continuing operations in the first
quarter of 2008 would be lower than the fourth quarter of 2007. Actual
revenues reported from continuing operations, as restated, for the first
quarter of 2008 exceeded the fourth quarter of 2007 by $2.4 million.

    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
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. Current material
assumptions relate to customer volumes, regulatory compliance and foreign
exchange rates. Forward-looking statements necessarily involve significant
known and unknown risks, assumptions and uncertainties that may cause the
Company's actual results, performance, prospects and opportunities in future
periods to differ materially from those expressed or implied by such forward-
looking statements. These risks and uncertainties include, among other things:
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; international operations risks;
exposure to foreign currency risks; competition; product liability claims;
intellectual property; environmental, health and safety risks; substantial
financial leverage; interest rates; conditions of MOVA's tax exemptions;
proposed divestiture of the Carolina site; significant shareholders; risks
associated with information systems; and supply arrangements. 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 MD&A and, except as required by law, the
Company assumes no obligation to update or revise them to reflect new events
or circumstances.
    

    %SEDAR: 00001700E




For further information:

For further information: Mr. Wesley P. Wheeler, Chief Executive Officer,
Tel: (905) 812-2112, Fax: (905) 812-6613, Email: wes.wheeler@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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