Patheon announces fourth quarter results



    TORONTO, Dec. 14 /CNW/ - Patheon (TSX:PTI), a global provider of drug
development and manufacturing services to the international pharmaceutical
industry, today announced its results for the fourth quarter ended October 31,
2007. (All amounts are in U.S. dollars unless otherwise indicated.)
    The consolidated results for the fourth quarter of 2007 and comparative
prior periods presented in this news release reflect the results for the
Company's continuing operations. The results for Niagara-Burlington operations
have been segregated and presented separately as discontinued operations in
the consolidated financial statements.

    Financial Results

    Fourth Quarter Ended October 31, 2007
    Compared With Fourth Quarter Ended October 31, 2006

    -  Revenues from continuing operations were $166.8 million, an increase
       of 1%;

    -  EBITDA before repositioning expenses from continuing operations was
       $21.2 million (12.7% of revenues), compared with $18.8 million (11.3%
       of revenues);

    -  EBITDA before repositioning expenses from continuing operations
       included foreign exchange gains of $5.8 million;

    -  Revenues and EBITDA before repositioning expenses from continuing
       operations, excluding Puerto Rico, were $151.9 million and
       $30.4 million, respectively, compared with $131.9 million and
       $18.5 million;

    -  Revenues and EBITDA before repositioning expenses from discontinued
       operations were $6.8 million and $0.5 million, respectively, compared
       with $9.4 million and $0.8 million a year ago;

    -  The loss from continuing operations for the quarter was $9.1 million
       (9.9 cents per share), compared with a loss of $22.2 million
       (23.8 cents per share) a year ago;

    -  The net loss including discontinued operations for the quarter was
       $7.5 million (8.2 cents per share) compared with a net loss of
       $22.4 million (24.1 cents per share) a year ago.

    Twelve Months Ended October 31, 2007
    Compared With Twelve Months Ended October 31, 2006

    -  Revenues from continuing operations were $677.1 million versus
       $674.7 million;

    -  EBITDA before repositioning expenses from continuing operations
       improved by 27% to $90.3 million (13.3% of revenues), up from
       $70.9 million (10.5%);

    -  EBITDA before repositioning expenses from continuing operations
       included foreign exchange gains of $8.9 million;

    -  Revenues and EBITDA before repositioning expenses from continuing
       operations, excluding Puerto Rico, were $577.3 million and
       $108.6 million, respectively, compared with $544.9 million and
       $69.5 million;

    -  Revenues and EBITDA before repositioning expenses from discontinued
       operations were $35.2 million and $2.8 million, respectively, compared
       with $37.5 million and $2.9 million;

    -  The loss from continuing operations was $84.5 million (91.0 cents per
       share) compared with a loss of $288.7 million ($3.11 per share) a year
       ago;

    -  The net loss including discontinued operations for the year was
       $94.6 million ($1.02 per share) compared with a net loss of
       $288.2 million ($3.10 per share) a year ago.

    "Fiscal 2007 was a year of considerable improvement in the financial
performance of most of our operations," said Riccardo Trecroce of Patheon Inc.
"Our European, Canadian and Cincinnati sites continued to grow, generating
revenues of $577.3 million, up 6% over 2006. Growth was particularly strong in
Europe, where Rx manufacturing revenues grew by 23% year-over-year due to high
demand for our specialized manufacturing capabilities. Our global PDS revenues
grew 19% to $116.5 million, and we successfully launched three more new
products on behalf of our clients during the year.
    "This strong performance has been overshadowed by the results of our
Puerto Rico operations, which continued to deteriorate in the fourth quarter,"
Mr. Trecroce said. "Increased losses were driven in part by significantly
lower revenues in the fourth quarter for Omnicef(R), manufactured at the
Carolina site, due to generic competition. There also were increased losses at
the Caguas facility, due to lower volumes of several significant products and
various operating inefficiencies."

    Puerto Rico restructuring

    As previously announced, Patheon has been conducting a 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.
    As a result of this review, Patheon has decided to retain and continue to
streamline its facilities in Caguas and Manati, and divest its facility in
Carolina, Puerto Rico.
    The Carolina site is a 230,000-square-foot facility, with approximately
200 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.
    "We have 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," said Mr. Trecroce.
"This divestiture will allow us to focus on improving operating performance
and growing our business at the Caguas and Manati facilities."
    It is anticipated that the 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.
    Patheon plans to retain its facilities at Caguas and Manati, with the
objective of returning the Puerto Rico operations to breakeven at the EBITDA
level by the end of fiscal 2008. With new management in place in Puerto Rico,
Patheon plans to continue an extensive program to improve operating
performance, improve quality and training systems, reduce overhead costs and
pursue new business opportunities for these sites. During the fourth quarter,
the size of the workforce was reduced by an additional 40 positions at Caguas,
resulting in a total workforce at Caguas and Manati of approximately
775 positions at fiscal year end. In the second half of fiscal 2007, the
Company secured commitments to manufacture four additional products on behalf
of three clients that it expects to begin contributing to results in the
latter half of 2008.

    Canadian site network restructuring

    On December 6, 2007, Patheon announced that it had entered into a
definitive agreement to sell its Niagara-Burlington over-the-counter
pharmaceutical manufacturing business to Pharmetics Inc. Pharmetics will
acquire the assets at Patheon's facilities in Fort Erie and Burlington
(Gateway Drive), Ontario, provide employment to the active workforce and,
subject to the assignment of third-party contracts, continue manufacturing the
existing products at the sites. The transaction is expected to be completed on
or about January 31, 2008, subject to closing conditions.
    "The agreement with Pharmetics marked the successful conclusion to the
Niagara-Burlington OTC divestiture process," said Mr. Trecroce. "By divesting
of this business, Patheon can now focus capital and resources on the areas of
its business with the greatest potential for higher-margin growth."

    Fourth-quarter operating results from continuing operations

    Fourth-quarter revenues increased by $1.0 million, or 1%, to
$166.8 million over the same period a year ago. Pharmaceutical development
services ("PDS") revenues grew by $4.1 million and over-the-counter ("OTC")
revenues by $2.3 million, while prescription ("Rx") revenues declined by
$5.4 million.
    Revenues from Rx manufacturing services declined by $5.4 million or 4%
over the same period a year ago, with strong year-over-year growth in Europe
offset by declines in Puerto Rico and Canada. The revenue growth in Europe
reflects the full commercial production of multiple products transferred into
Patheon's sites in Italy and France by two clients. Rx revenues declined in
Puerto Rico year-over-year, due to significantly lower revenues for Omnicef(R)
in the fourth quarter following the emergence of generic competition in May
2007, lower volumes of other products, and the absence of orders for Zocor(R),
which lost patent protection in 2006. Rx revenues were down in Canada,
primarily due to API delivery delays for products manufactured on behalf of a
major client at Toronto Region Operations.
    Revenues from pharmaceutical development services increased by
$4.1 million, or 14%, due to solid growth at the Swindon and Cincinnati PDS
operations. Patheon is currently developing 199 new products on behalf of its
clients, up from 171 a year ago.
    Consolidated EBITDA before repositioning expenses was $21.2 million in
the fourth quarter, up from $18.8 million a year ago. The EBITDA margin before
repositioning expense was 12.7% in the fourth quarter, compared with 11.3% in
the fourth quarter of 2006.
    Operating expenses were reduced in the fourth quarter by foreign exchange
gains of $5.8 million. These gains principally arose from the re-evaluation of
the U.S. dollar denominated debt in Canada and benefits from the Company's
cash flow hedging program. Operating expenses were further reduced in the
fourth quarter as a result of an actuarial gain of $4.3 million arising from a
decision to phase out certain post-retirement health benefits in Canada.
    In Canada, despite a decline in revenues, particularly at Toronto Region
Operations, EBITDA before repositioning expenses from commercial manufacturing
operations was $6.9 million, or $1.7 million higher than the same period a
year ago. This improvement reflects the inclusion of a significant portion of
the actuarial gains resulting from the amendment to the Company's post-
retirement health benefit plans. EBITDA before repositioning expenses was not
significantly impacted by the strengthening of the Canadian dollar relative to
the U.S. dollar in the fourth quarter, due to gains from the Company's foreign
exchange cash flow hedging program.
    EBITDA before repositioning expenses from U.S. operations was a loss of
$4.5 million, compared with a profit of $5.7 million in the same period a year
ago. The decline was attributable to significantly lower volumes of Omnicef at
Carolina Operations and reduced volumes of high-margin products and operating
inefficiencies at Caguas Operations. In Cincinnati, EBITDA before
repositioning expenses continued to improve due to strong volume growth and
increased operating efficiencies.
    In Europe, EBITDA before repositioning expenses from the commercial
manufacturing operations was $3.8 million, or $0.3 million lower than the same
period a year ago. The benefits of higher revenues were offset by additional
variable compensation costs, incremental costs relating to production delays
at Swindon Operations and foreign exchange losses.
    EBITDA before repositioning expenses from global pharmaceutical
development services was $9.4 million, or $3.2 million higher than the same
period a year ago. The increase reflects improved revenue growth at the
Cincinnati and Swindon PDS operations.

    Outlook

    Due to normal shutdowns during December, revenues in the first quarter of
2008 are expected to be lower than the fourth quarter of 2007.

    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 fourth quarter results on Friday, December 14, 2007 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) 915-5761 (Toronto and International) or toll free at (800) 732-
6179 (U.S., including Puerto Rico). Listeners are encouraged to dial in five
to 15 minutes in advance to avoid delays. A live audio webcast, with a slide
presentation, will also be available via the web at www.patheon.com. An
archived version of the Q4 webcast will be available on www.patheon.com for
three months.

    ABOUT PATHEON

    Patheon (TSX:PTI; www.patheon.com) is a leading global provider of drug
development and manufacturing services to the international pharmaceutical
industry. Patheon operates a network of 14 facilities in the United States,
Canada and Europe, employing 5,100 people and serving a client base of 250
pharmaceutical and biotechnology companies.



    Consolidated Statements of Earnings (Loss)
    (unaudited)

                            Three months ended           Twelve months ended
                                    October 31,                   October 31,
                                             %                             %
                       2007      2006   change      2007      2006    change
    -------------------------------------------------------------------------
    (in thousands
     of U.S. dollars,
     except per share
     amounts)            $         $                   $         $
    -------------------------------------------------------------------------
    Revenues       166,792   165,750      0.6%   677,074   674,659      0.4%
    Operating
     expenses      145,558   146,988     -1.0%   586,756   603,783     -2.8%
                   ----------------------------  ----------------------------
    Earnings
     before the
     following:     21,234    18,762     13.2%    90,318    70,876     27.4%
                   ----------------------------  ----------------------------
    (as a % of
     revenues)       12.7%     11.3%               13.3%     10.5%

    Asset
     impairment
     charge
     (note 4)            -         -              48,580   254,661    -80.9%
    Repositioning
     expenses
     (note 7)        6,714    12,998     -48.3%   15,800    12,998     21.6%
    Depreciation
     and
     amortization   10,436     9,676       7.9%   40,979    38,766      5.7%
    Amortization
     of
     intangible
     assets          1,093     2,182     -49.9%    6,687    11,871    -43.7%
    Foreign
     exchange
     loss (note 8)       -         -                 858         -
    Interest         7,468     6,247      19.5%   29,167    21,333     36.7%
    Refinancing
     expenses
     (note 11)           -         -              13,471     1,643    719.9%
    Amortization
     of
     deferred
     financing
     costs               -       346                   -       944
    Write-off of
     deferred
     financing
     costs
     (note 11)           -         -                   -     6,332
                   ----------------------------  ----------------------------
    Loss before
     income taxes   (4,477)  (12,687)     64.7%  (65,224) (277,672)    76.5%
    Provision for
     income taxes    4,573     9,475      51.7%   19,234    11,047     74.1%
                   ----------------------------  ----------------------------
    Loss from
     continuing
     operations     (9,050)  (22,162)     59.2%  (84,458) (288,719)    70.7%
                   ----------------------------  ----------------------------
    (as a % of
     revenues)       -5.4%    -13.4%              -12.5%    -42.8%
    Earnings (loss)
     from
     discontinued
     operations
     (note 5)        1,528      (254)    701.6%  (10,143)      569  -1882.6%
                   ----------------------------  ----------------------------
    Net loss for
     the period     (7,522)  (22,416)     66.4%  (94,601) (288,150)    67.2%
                   ----------------------------  ----------------------------
                   ----------------------------  ----------------------------
    Basic and
     diluted
     earnings
     (loss)
     per share
      From
       continuing
       operations     (9.9     (23.8               (91.0    (310.8
                     cents)    cents)     58.4%    cents)    cents)    70.7%
      From
       discontinued
       operations      1.7      (0.3               (10.9       0.6
                     cents     cents)    666.7%    cents)    cents  -1916.7%
                   ----------------------------  ----------------------------
                      (8.2     (24.1              (101.9    (310.2
                     cents)    cents)     66.0%    cents)    cents)    67.2%
                   ----------------------------  ----------------------------
    Average number
     of shares
     outstanding
     during period
     (in thousands):            `
      Basic and
       diluted      92,473    92,919      -0.5%   92,834    92,868      0.0%
                   ----------------------------  ----------------------------

    see accompanying notes



    Consolidated Balance Sheets
    (unaudited)
                                                           As at       As at
                                                      October 31, October 31,
                                                            2007        2006
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                             $           $
    -------------------------------------------------------------------------

    Assets
    Current
      Cash and cash equivalents                           30,557      50,723
      Accounts receivable                                130,801     117,705
      Inventories                                         88,729      72,057
      Prepaid expenses and other                          12,347       6,615
      Assets held for sale (note 5)                        9,843       8,341
                                                      -----------------------
    Total current assets                                 272,277     255,441
                                                      -----------------------

    Capital assets (note 4)                              487,423     467,365
    Intangible assets (note 4)                             8,718      41,447
    Deferred costs                                         8,878       9,717
    Future tax assets                                     31,055      21,827
    Goodwill                                               3,658       3,077
    Investments                                              946         586
    Assets held for sale (note 5)                         16,662      26,723
                                                      -----------------------
                                                         829,617     826,183
                                                      -----------------------
                                                      -----------------------

    Liabilities and Shareholders' equity
    Current
      Bank indebtedness                                    8,224       3,829
      Accounts payable and accrued liabilities           163,721     140,254
      Income taxes payable                                 4,684         879
      Current portion of long-term debt (note 10)         11,902     283,717
      Liabilities related to assets held for
       sale (note 5)                                       3,174       2,527
                                                      -----------------------
    Total current liabilities                            191,705     431,206
                                                      -----------------------

    Long-term debt (note 10)                             203,647      62,071
    Deferred revenues                                     25,994      23,366
    Future tax liabilities                                47,578      33,128
    Convertible preferred shares
     - debt component (note 10)                          139,916           -
    Other long-term liabilities                           22,069      24,265
    Long-term liabilities related to assets held
     for sale (note 5)                                     1,523       1,416
                                                      -----------------------
    Total liabilities                                    632,432     575,452
                                                      -----------------------

    Shareholders' equity
      Convertible preferred shares - equity
       component (note 2 and 10)                          15,925           -
      Restricted voting shares (note 2)                  391,967     400,721
      Contributed surplus                                  4,049       3,829
      Deficit                                           (286,250)   (189,900)
      Accumulated other comprehensive income              71,494      36,081
                                                      -----------------------
    Total shareholders' equity                           197,185     250,731
                                                      -----------------------
                                                         829,617     826,183
                                                      -----------------------
                                                      -----------------------
    see accompanying notes



    Consolidated Statements of Changes in Shareholders' Equity
    (unaudited)

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

    Convertible preferred shares - equity component
      Balance at beginning of period                           -           -
      Shares issued during the period, net of issue
       costs                                              15,925           -
                                                      -----------------------
      Balance at end of period                            15,925           -
                                                      -----------------------
    Restricted voting shares
      Balance at beginning of period                     400,721     400,594
      Shares issued during the period, net of
       issue costs                                            24         127
      Shares repurchased during the period, net
       of transaction costs                               (8,778)          -
                                                      -----------------------
      Balance at end of period                           391,967     400,721
                                                      -----------------------
    Contributed surplus
      Balance at beginning of period                       3,829       2,901
      Stock options                                          220         928
                                                      -----------------------
      Balance at end of period                             4,049       3,829
                                                      -----------------------
    Retained earnings (deficit)
      Balance at beginning of period                    (189,900)     98,250
      Adjustment related to change in accounting
       policy (note 1)                                    (1,749)          -
      Net loss for the period                            (94,601)   (288,150)
                                                      -----------------------
      Balance at end of period                          (286,250)   (189,900)
                                                      -----------------------
    Accumulated other comprehensive income
      Balance at beginning of period                      36,081      38,106
      Transition adjustment (note 1)                        (762)          -
      Other comprehensive income (loss) for the period    36,175      (2,025)
                                                      -----------------------
      Balance at end of period                            71,494      36,081
                                                      -----------------------
    Total shareholders' equity at end of period          197,185     250,731
                                                      -----------------------
                                                      -----------------------

    see accompanying notes



    Consolidated Statements of Comprehensive Income (Loss)
    (unaudited)
                                                           Three      Twelve
                                                          months      months
                                                           ended       ended
                                                      October 31, October 31,
                                                            2007        2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                             $           $
    -------------------------------------------------------------------------

    Net loss for the period                               (7,522)    (94,601)
                                                     ------------------------
    Other comprehensive income (loss), net of
     income taxes (note 12)
      Change in foreign currency gains on investments
       in subsidiaries, net of hedging activities         18,145      30,787

      Foreign currency losses on investments in
       subsidiaries, net of hedging activities
       reclassified to consolidated statement
       of earnings (loss)                                      -       2,793

      Change in value of derivatives designated
       as foreign currency and interest rate
       cash flow hedges                                    2,522       3,723

      Gains on foreign currency and interest rate
       cash flow hedges reclassified to consolidated
       statements of earnings (loss)                      (1,450)     (1,128)
                                                     ------------------------

      Other comprehensive income for the period           19,217      36,175
                                                     ------------------------

    Comprehensive income (loss) for the period            11,695     (58,426)

    see accompanying notes



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

    Operating activities
      Net loss from continuing
       operations                       (9,050)  (22,162)  (84,458) (288,719)
      Add (deduct) charges to
       operations not requiring a
       current cash payment
        Asset impairment charge
         (note 4)                            -         -    48,580   254,661
        Depreciation and amortization   11,529    11,858    47,666    50,637
        Foreign exchange loss (note 8)       -         -       858         -
        Foreign exchange gain on debt,
         net of hedging                 (7,541)        -   (12,331)        -
        Accretive interest on
         convertible preferred
         shares (note 1)                 3,573         -     7,054         -
        Write-off of deferred
         financing costs (note 11)           -         -         -     6,332
        Amortization of deferred
         financing costs                   151       346     1,657       944
        Employee future benefits,
         net of contributions           (5,169)      319    (4,846)    1,112
        Future income taxes              1,445    (3,514)    4,617    (6,678)
        Amortization of deferred
         revenues                         (505)     (485)   (2,021)   (1,978)
        Other                            1,117       154     2,087     1,587
                                       --------------------------------------
                                        (4,450)  (13,484)    8,863    17,898
      Net change in non-cash working
       capital balances related to
       continuing operations            21,742    36,111    (2,442)   20,506
      Increase in deferred revenues          8         -     2,065     9,614
                                       --------------------------------------
      Cash provided by operating
       activities of continuing
       operations                       17,300    22,627     8,486    48,018
      Cash provided by (used in)
       operating activities
       of discontinued operations
       (note 5)                         (1,127)      715     3,105     4,212
                                       --------------------------------------
    Cash provided by operating
     activities                         16,173    23,342    11,591    52,230
                                       --------------------------------------

    Investing activities
      Additions to capital assets
        - sustaining                    (9,166)   (7,088)  (18,034)  (16,975)
        - project related               (5,519)  (17,791)  (17,768)  (49,617)
      Net increase in investments          (25)      (49)     (202)      (49)
      Increase in deferred
       pre-operating costs                (832)     (625)   (3,659)   (2,204)
                                       --------------------------------------
      Cash used in investing
       activities of continuing
       operations                      (15,542)  (25,553)  (39,663)  (68,845)
      Cash used in investing
       activities of discontinued
       operations (note 5)                   -      (476)     (275)     (907)
                                       --------------------------------------
    Cash used in investing activities  (15,542)  (26,029)  (39,938)  (69,752)
                                       --------------------------------------

    Financing activities
      Increase (decrease) in bank
       indebtedness                     (4,230)    3,041     3,532   (11,096)
      Increase in long-term debt        15,456    42,443   198,108   416,389
      Repayment of long-term debt      (17,380)  (11,790) (337,452) (364,800)
      Issue of convertible preferred
       shares (note 10)                      -         -   150,000         -
      Convertible preferred share
       issue costs - equity component
       (note 10)                             -         -    (1,213)        -
      Issue of restricted voting shares      -        47        24       127
      Repurchase of restricted voting
       shares (note 2)                  (8,778)        -    (8,778)        -
      Decrease in restricted cash            -         -         -     7,805
      Increase in deferred
       financing costs                       -    (1,175)        -    (3,965)
                                       --------------------------------------
    Cash provided by (used in)
     financing activities              (14,932)   32,566     4,221    44,460
                                       --------------------------------------


    Effect of exchange rate changes
     on cash and cash equivalents        4,362       847     3,960     1,278
                                       --------------------------------------

    Net increase (decrease) in
     cash and cash equivalents
     during the period                  (9,939)   30,726   (20,166)   28,216
    Cash and cash equivalents,
     beginning of period                40,496    19,997    50,723    22,507
                                       --------------------------------------
    Cash and cash equivalents,
     end of period                      30,557    50,723    30,557    50,723
                                       --------------------------------------
                                       --------------------------------------

    see accompanying notes



        Notes to Unaudited Consolidated Financial Statements for the
                         Year Ended October 31, 2007

             (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 ("GAAP") 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, 2006.

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

    Changes in accounting policy

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

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

    An investment in shares of a publicly traded company have been designated
    as held for trading and are accounted for at fair value, with changes in
    the fair value being recorded in the consolidated statement of earnings
    (loss). Prior to the adoption of the new standards, this investment was
    accounted for on a cost basis, as adjusted for an other than temporary
    decline in value. All other financial assets are accounted for on an
    amortized cost basis and financial liabilities are accounted for on an
    accruals basis, consistent with prior accounting policies.

    Costs of obtaining bank and other debt financing that were previously
    reported in deferred costs are now netted against the carrying value of
    the related debt and amortized into interest expense using the effective
    interest rate method. Prior to the adoption of the new standards, the
    amortization of deferred financing costs was reported as a separate line
    in the consolidated statement of earnings (loss) and the amortized
    balance disclosed in deferred costs on the consolidated balance sheet.

    In the second quarter of 2007 the Company also changed its accounting
    policy relating to costs of obtaining bank and other debt financing.
    Under the new policy all transaction costs, including fees paid to
    advisors and other related costs, are expensed as incurred. Financing
    costs, including underwriting and arrangement fees paid to lenders are
    deferred and netted against the carrying value of the related debt and
    amortized into interest expense using the effective interest rate method.
    The Company previously deferred all transaction and financing costs
    associated with obtaining bank and other debt financing. The Company
    believes that the new policy is reliable and more relevant as it results
    in a more transparent treatment of transaction costs that the Company has
    incurred in its recent refinancing activities and in the carrying value
    of debt.

    The change in policy has been made retrospectively effective November 1,
    2006 and had the effect of increasing the retained deficit at November 1,
    2006 by $1,749,000 and reducing the interest expense and net loss for the
    three months ended January 31, 2007 by $612,000. Refinancing expenses for
    the twelve months ended October 31, 2007 include transaction costs
    incurred in connection with the completion of the Company's senior
    secured credit facilities and the debt component of the convertible
    preferred shares of $11,889,000 (see note 11).

    In 2006, the Company cancelled its interest rate swaps that were used as
    a hedge against changes in interest payments on floating rate debt.
    Deferred gains from the cancellation of these interest rate swaps that
    had previously been recorded in accounts payable and accrued liabilities
    were recorded in accumulated other comprehensive income. In the second
    quarter of 2007, all remaining deferred gains on the interest rate swap
    were reclassified to the consolidated statement of earnings (loss).

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

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

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

    The effective portion of changes in the fair value of cash flow hedges
    and hedges of net investments in foreign operations are recognized in
    other comprehensive income. Amounts accumulated in other comprehensive
    income are reclassified to the consolidated statement of earnings (loss)
    in the period in which the hedged item affects the earnings (loss). Any
    gain or loss in the fair value relating to the ineffective portion of a
    hedge is recognized immediately in the consolidated statement of earnings
    (loss).

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

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

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

    Convertible preferred shares

    On April 27, 2007 the Company issued $150 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 was determined by discounting the expected future cash
    flows over the expected life using a market interest rate for a non-
    convertible debt instrument with similar terms. The value is carried as
    debt on an amortized cost basis until extinguished on conversion or
    redemption. The remainder of the proceeds were 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. The interest expense for the three and twelve months ended
    October 31, 2007 includes a charge of $3,573,000 and $7,054,000,
    respectively, for the accretive interest on the convertible preferred
    shares.

    2.  Convertible preferred shares and restricted voting shares

    The following table summarizes information on convertible preferred
    shares, and restricted voting shares and related matters at October 31,
    2007:

                                                   Outstanding   Exercisable
    Convertible preferred shares
      Class I preferred shares series C and D          150,000

    Restricted voting shares (previously common
      shares)                                       90,624,388
    Restricted voting share stock options            3,857,916     3,706,249


    During the fourth quarter of 2007, the Company repurchased, through a
    normal course issuer bid, 2,334,300 restricted voting shares at a cost of
    $8,778,000.

    The Company's articles were amended on April 26, 2007 to re-designate the
    common shares as restricted voting shares. This occurred in connection
    with the issuance of the convertible preferred shares. The holders of the
    convertible preferred shares have the right to appoint three of nine
    members of the Board of Directors. The holders of Patheon's restricted
    voting shares have the right to elect the remaining members of the Board
    of Directors. Under the rules of the Toronto Stock Exchange, voting
    equity securities are not to be designated, or called, common shares
    unless they have a right to vote in all circumstances that is not less,
    on a per share basis, than the voting rights of each other class of
    voting securities. Accordingly, the Company has amended its articles to
    re-designate the common shares as restricted voting shares. This
    re-designation involves only a change in the name of the securities; the
    number of shares outstanding and the terms and conditions of the
    outstanding shares are not affected by the change.

    3.  Segmented information

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

    Canadian and foreign continuing operations consist of:

                                                 Manufacturing location
                                         Three months ended October 31, 2007
                                         ------------------------------------
                                           Canada      USA   Europe    Total
                                                $        $        $        $
    -------------------------------------------------------------------------
    Revenues by client's billing location:
      Canada                                3,529      166      233    3,928
      USA                                  32,472   41,428    6,741   80,641
      Europe                               12,503      900   64,497   77,900
      Other geographic areas                1,406    1,854    1,063    4,323
    -------------------------------------------------------------------------
    Total revenues                         49,910   44,348   72,534  166,792
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets                        120,808  119,483  247,132  487,423
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                                3,658        -        -    3,658
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                 Manufacturing location
                                         Three months ended October 31, 2006
                                         ------------------------------------
                                           Canada      USA   Europe    Total
                                                $        $        $        $
    -------------------------------------------------------------------------
    Revenues by client's billing location:
      Canada                                5,138      364    1,337    6,839
      USA                                  35,731   57,719    3,768   97,218
      Europe                                9,661      339   49,565   59,565
      Other geographic areas                  499        -    1,629    2,128
    -------------------------------------------------------------------------
    Total revenues                         51,029   58,422   56,299  165,750
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets                        103,002  142,491  221,872  467,365
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                                3,077        -        -    3,077
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                 Manufacturing location
                                        Twelve months ended October 31, 2007
                                        -------------------------------------
                                           Canada      USA   Europe    Total
                                                $        $        $        $
    -------------------------------------------------------------------------
    Revenues by client's billing location:
      Canada                               14,270    1,069    1,128   16,467
      USA                                 137,389  196,690   17,757  351,836
      Europe                               39,235    3,127  254,547  296,909
      Other geographic areas                4,197    2,146    5,519   11,862
    -------------------------------------------------------------------------
    Total revenues                        195,091  203,032  278,951  677,074
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                 Manufacturing location
                                        Twelve months ended October 31, 2006
                                        -------------------------------------
                                           Canada      USA   Europe    Total
                                                $        $        $        $
    -------------------------------------------------------------------------
    Revenues by client's billing location:
      Canada                               21,323      856    1,930   24,109
      USA                                 138,587  231,184   13,751  383,522
      Europe                               53,010      846  202,842  256,698
      Other geographic areas                4,696      190    5,444   10,330
    -------------------------------------------------------------------------
    Total revenues                        217,616  233,076  223,967  674,659
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 October 31,
                                          -----------------------------------
                                             2007              2006
                                                $                 $
    -------------------------------------------------------------------------
    Commercial manufacturing -
     prescription                         119,226      71%  124,592      75%
    Commercial manufacturing -
     over-the-counter                      14,855       9%   12,581       8%
    Development services                   32,711      20%   28,577      17%
    -------------------------------------------------------------------------
                                          166,792     100%  165,750     100%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                             Twelve months ended October 31,
    -------------------------------------------------------------------------
                                             2007              2006
                                                $                 $
    -------------------------------------------------------------------------
    Commercial manufacturing -
     prescription                         514,069      76%  506,711      75%
    Commercial manufacturing -
      over-the-counter                     46,549       7%   69,973      10%
    Development services                  116,456      17%   97,975      15%
    -------------------------------------------------------------------------
                                          677,074     100%  674,659     100%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    4.  Asset impairment charge

    During the third quarter of 2007 it was determined that the carrying
    value of the intangible assets and depreciable tangible capital assets
    (collectively the "long-lived depreciable assets") at the Company's
    operations in Carolina, Puerto Rico were impaired as a result of volume
    declines arising from the genericization of Omnicef(R), this being the
    largest single product that is manufactured at the facility. The Company
    tested the recoverability of the long-lived depreciable assets at the
    Carolina operations and determined that the expected future cash flows
    over the economic life of the principal assets were less than the
    carrying value of the long-lived depreciable assets. As a result the
    Company recorded an impairment charge of $48,580,000; $26,043,000 for
    intangible assets and $22,537,000 for tangible capital assets. The fair
    value of the intangible assets was determined using a discounted cash
    flow methodology and the fair value of the tangible capital assets was
    based on a weighted average continued use and liquidation value.

    During the third quarter of 2006 the Company determined that the carrying
    value of the long-lived depreciable assets at the Company's operations in
    Caguas and Manati, Puerto Rico and the goodwill associated with all of
    the Puerto Rico operations were impaired as a result of certain events
    which occurred during the third quarter of 2006. These events included:
    continued deterioration in revenues culminating in a significant increase
    in losses reported in the third quarter; suspension of production of a
    major product due to concerns over product shelf life; the risk of a
    decline in revenue of another major product as a result of the approval
    by the U.S. Food and Drug Administration of a generic version of the
    product; and the completion of a long range plan that showed a
    significant reduction in earnings relative to prior forecasts.

    The Company tested the recoverability of the long-lived depreciable
    assets for all the Puerto Rico operations and determined that in Caguas
    and Manati the expected future cash flows over the economic life of the
    principal assets was less than the carrying value of the long-lived
    depreciable assets. As a result the Company recorded an impairment charge
    of $81,428,000; $51,921,000 for intangible assets and $29,507,000 for
    tangible capital assets. The fair value of the intangible assets was
    determined using a discounted cash flow methodology and the fair value of
    tangible capital assets was based on a value in continued use, taking
    into account utilization levels. During the third quarter of 2006 the
    Company also tested the recoverability of the goodwill associated with
    Puerto Rico operations using a discounted cash flow methodology, and
    recorded an impairment charge of $172,477,000 representing the full value
    of the Puerto Rico goodwill.

    During the third quarter of 2006 the Company, as part of its ongoing
    review of long term investments, concluded that its investment in the
    shares of a drug technology company which was accounted for on the cost
    basis had an other than temporary decline and wrote down its value by
    $756,000 to its market value as of July 31, 2006.

    A summary of the asset impairment charges is as follows:

                                              Twelve months ended October 31,
    -------------------------------------------------------------------------
                                                            2007        2006
                                                               $           $
    -------------------------------------------------------------------------

    Intangible asset impairment                           26,043      51,921
    Tangible capital asset impairment                     22,537      29,507
    Goodwill impairment                                        -     172,477
    Other investment impairment                                -         756
    -------------------------------------------------------------------------
                                                          48,580     254,661
    -------------------------------------------------------------------------

    5.  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 December 6, 2007 the Company
    announced that it had entered into a definitive agreement to sell its
    Niagara-Burlington operations focused on the manufacturing of OTC
    products to Pharmetics Inc. See the subsequent events note 14.

    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
    by the first half of fiscal 2009.

    The results of the Niagara-Burlington operations have been reported as
    discontinued operations and prior period amounts have been reclassified
    to conform to the current period presentation. During the third quarter
    of 2007 the Company recorded an impairment charge of $13,029,000 to write
    down the carrying value of Niagara-Burlington operations long-lived
    assets to their fair value less estimated disposition costs. In the
    fourth quarter of 2007 the Company recorded an adjustment of $564,000 to
    reduce the impairment charge to reflect the Company's revised estimate of
    the fair value of the long-lived assets.

    The results of discontinued operations for the three and twelve months
    ended October 31, 2007 and 2006 are as follows:


                                            Three months       Twelve months
                                        ended October 31,   ended October 31,
    -------------------------------------------------------------------------
                                          2007      2006      2007      2006
                                             $         $         $         $
    -------------------------------------------------------------------------

    Revenues                             6,815     9,365    35,244    37,493
    Operating expenses                   6,281     8,562    32,475    34,580
                                        -------------------------------------
    Earnings before the following:         534       803     2,769     2,913
                                        -------------------------------------
    (as a % of revenues)                  7.8%      8.6%      7.9%      7.8%

    Asset impairment charge               (564)        -    12,465         -
    Repositioning expenses (recovery)     (430)      789      (397)      789
    Depreciation and amortization            -       268       844     1,112
                                        -------------------------------------
    Earnings (loss) before
     income taxes                        1,528      (254)  (10,143)    1,012
    Provision for income taxes               -         -         -       443
    -------------------------------------------------------------------------
    Net earnings (loss) for the period   1,528      (254)  (10,143)      569
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Assets held for sale and the related liabilities include the Niagara-
    Burlington 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, as
    at October 31, are as follows:

                                                            As at October 31,
    -------------------------------------------------------------------------
                                                              2007      2006
                                                                 $         $
    -------------------------------------------------------------------------
    Current Assets
      Accounts receivable                                    4,376     4,251
      Inventories                                            5,307     3,905
      Prepaid expenses and other                               160       185
                                                           ------------------
    Total current assets                                     9,843     8,341
                                                           ------------------
    Capital assets                                          16,662    26,723

    Current Liabilities
      Accounts payable and accrued liabilities               3,174     2,527

    Other long-term liabilities                              1,523     1,416
    -------------------------------------------------------------------------

    6.  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 October 31, 2007, the total number of
    restricted voting shares listed and reserved at the TSX for issuance
    under the plan was 6,850,427 of which there are stock options outstanding
    to purchase 3,857,916 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 10 years after the grant date and are also
    subject to early expiry in the event of death, resignation, dismissal or
    retirement of an optionee. Options 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. No options were granted in the fourth quarter of 2007 and
    2006. The weighted average fair value of 100,000 options granted for the
    twelve months ended October 31, 2007 was $1.92. The weighted average fair
    value for the stock options granted for the twelve months ended
    October 31, 2006 was $1.73. The following assumptions were used in
    arriving at the fair value of options issued during the twelve months
    ended October 31, 2007:

           Risk free interest rate                           4.2%
           Expected volatility                                42%
           Expected weighted average life of options      6 years
           Expected dividend yield                             0%

    Stock-based compensation expense recorded in the three months ended
    October 31, 2007 was $52,000 (2006 - $3,000) for options granted on or
    after November 1, 2003. Stock-based compensation expense recorded in the
    twelve months ended October 31, 2007 was $220,000 (2006 - $928,000) for
    options granted on or after November 1, 2003.

    7.  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. 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 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 and twelve months
    ended October 31:

                                  Three months ended     Twelve months ended
                                          October 31,             October 31,
    -------------------------------------------------------------------------
                                    2007        2006        2007        2006
                                       $           $           $           $
    -------------------------------------------------------------------------
    Performance enhancement
     program:
      - Employee-related expenses  6,111       8,821       8,938       8,821
      - Consulting, professional
       and project management
       costs                         603       1,193       3,507       1,193
    Strategic alternatives review      -       2,984       3,355       2,984
    -------------------------------------------------------------------------
                                   6,714      12,998      15,800      12,998
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at October 31, 2007, $6,048,000 of the repositioning expenses are
    unpaid and are recorded in accounts payable and accrued liabilities.
    Repositioning expenses paid during the three months and twelve months
    ended October 31, 2007 amounted to $2,276,000 and $18,998,000
    respectively.

    8.  Other information

    Foreign exchange

    During the three months ended October 31, 2007, the foreign exchange gain
    on operating exposures, (including benefits from cash flow hedges and the
    revaluation of all foreign currency denominated assets and liabilities,
    other than those liabilities designated as a hedge against foreign
    currency denominated net investments) recorded in operating expenses was
    $5,828,000 (2006 - $941,000). During the twelve months ended October 31,
    2007, the foreign exchange gain on operating exposures was $8,921,000
    (2006 - $817,000).

    During the twelve months ended October 31, 2007, the Company recorded a
    foreign exchange loss of $858,000 in connection with a change in the
    Company's internal capital structure, which resulted in the recognition
    of foreign exchange translation losses previously recorded in accumulated
    other comprehensive income.

    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 October 31, 2007 was a recovery of $2,872,000 (2006 expense
    - $2,806,000). For the twelve months ended October 31, 2007 the employee
    future benefit expense was $1,752,000 (2006 - $6,214,000). The employee
    future benefit expense for the three months and twelve months ended
    October 31, 2007 includes a curtailment gain of $4,292,000 in connection
    with a decision made to phase out benefits under one of the Company's
    post retirement benefit plans.

    9.  Financial instruments

    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 October 31, 2007 the Company's Canadian operations had entered into
    foreign exchange forward contracts to sell an aggregate amount of
    US$34,172,000. These contracts hedge the Canadian operations expected
    exposure to U.S. dollar denominated cash flows and mature at the latest
    on April 21, 2008, at an exchange rate of $1.0535 Canadian. The
    mark-to-market value on these financial instruments as at
    October 31, 2007 was an unrealized gain of $4,052,000 which has been
    recorded in accumulated other comprehensive income in shareholders'
    equity.

    As at October 31, 2007 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 hedges the Canadian operations net US dollar balance sheet
    exposure. The mark-to-market value of this contract was a loss of
    $2,699,000, which has been recorded in operating expenses.

    As at October 31, 2007 the Company has designated $141.6 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 October 31, 2007 was an unrealized loss
    of $2,593,000 which has been recorded in accumulated other comprehensive
    income in shareholders' equity.

    10. Refinancing

    Convertible Preferred Shares
    ----------------------------

    On April 27, 2007 JLL Partners, through its investment vehicle, JLL
    Patheon Holdings, LLC, purchased 150,000 convertible preferred shares of
    Patheon for $150 million. Until October 27, 2009, no cash dividends will
    be paid on the preferred shares, but the liquidation preference and
    conversion rate will increase on a quarterly basis by 2.125%. After
    October 27, 2009, these increases in the liquidation preference and
    conversion rate will continue until the maturity or prior conversion,
    unless the Company elects to pay a cash dividend for any applicable
    quarter, in which case the Company will pay a cash dividend for such
    quarter based on an annual dividend rate of 8.5% on the aggregate
    liquidation preference of the convertible preferred shares.

    Each convertible preferred share is convertible into 218.7154 restricted
    voting shares, as adjusted for any non-cash dividends noted above, at any
    time at the holder's option. The Company is entitled to require the
    holder to convert into restricted voting shares if, at any time after
    October 27, 2009, the market price of the restricted voting shares on the
    Toronto Stock Exchange exceeds a price equivalent to US$7.87 for a period
    of at least 60 days.

    If not previously converted, the Company is required to redeem the
    convertible preferred shares for cash on April 27, 2017 at a price equal
    to the aggregate liquidation preference of the convertible preferred
    shares, plus accrued and unpaid dividends thereon. The Company is also
    required to redeem the convertible preferred shares upon the occurrence
    of a change of control of Patheon at a price equal to the greater of the
    aggregate liquidation preference of the convertible preferred shares,
    plus accrued and unpaid dividends thereon, or the price per share paid to
    holders of restricted voting shares in the change of control transaction,
    multiplied by the number of restricted voting shares into which the
    convertible preferred shares are then convertible.

    On issuance, the fair value of the debt component of the preferred shares
    was $132,862,000. The remainder of the proceeds attributable to
    shareholders' equity was $15,925,000, net of apportioned transaction
    costs of $1,213,000.

    Senior Secured Credit Facilities
    --------------------------------

    On April 27, 2007, the Company completed new credit facilities in the
    aggregate amount of $225 million, comprising a seven-year $150 million
    senior secured term loan and a five-year $75 million asset based
    revolving credit facility. The Company is required to make quarterly
    installment payments of $375,000 on the term loan facility, along with
    additional mandatory repayments based on certain excess cash flow
    measures. Interest on the facilities is at floating rates based on LIBOR,
    US prime, or the federal funds effective rate, plus applicable margins.
    The facilities are secured by substantially all of the assets of the
    Company's operations in Canada, U.S.A., Puerto Rico and the U.K. and the
    Company's investments in the shares of all other operating subsidiaries.

    Net proceeds from the issue of the convertible preferred shares and the
    senior secured term loan facility were used to repay the Company's
    obligations under its existing North American and U.K. credit facilities.

    11. Refinancing expenses and write-off of deferred financing costs

    During the second quarter of 2007 the Company incurred expenses of
    $13,471,000 in connection with its refinancing activities. The expenses
    consist of transaction costs relating to the new credit facilities, costs
    allocated to the debt portion of the convertible preferred shares and
    prepayment charges in connection with cancellation of certain of the
    Company's U.K. debt facilities.

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

    12. Other comprehensive income

    The amounts disclosed in other comprehensive income have been recorded
    net of income taxes and take into account valuation reserves for future
    income taxes in the Company's Canadian operations. For the three and
    twelve months ended October 31, 2007 there is no tax expense in
    connection with the change in foreign currency gains on investments in
    subsidiaries, net of hedging activities. Foreign currency losses on
    investments in subsidiaries, net of hedging activities reclassified to
    the consolidated statement of earnings (loss) are net of an income tax
    benefit of $1,935,000 for the twelve months ended October 31, 2007. The
    change in value of derivatives designated as foreign currency and
    interest rate cash flow hedges have been reported net of a tax benefit of
    $257,000 and $373,000 for the three and twelve months ended October 31,
    2007, respectively. The gains on foreign currency and interest rate cash
    flow hedges reclassified to the consolidated statement of earnings (loss)
    are net of an income tax benefit of $343,000 for the twelve months ended
    October 31, 2007.

    13. Related party transactions

    Revenues from companies controlled by a director and significant
    shareholder of the Company were in the amount of $66,000 and $473,000 for
    the three and twelve months ended October 31, 2007, respectively. These
    transactions were conducted in the normal course of business and are
    recorded at the exchanged amount which management believes to be at fair
    value. Accounts receivable at October 31, 2007 includes a balance of
    $392,000.

    At October 31, 2007 the Company has an investment of $739,000
    representing an 18% interest in two Italian companies (collectively
    referred to as "BSP Pharmaceuticals") whose largest investor is an
    officer of the Company. These newly formed companies will specialize in
    the manufacturing of cytotoxic pharmaceutical products.

    The Company has accrued management fees owing to it under a management
    services agreement with BSP Pharmaceuticals of $484,000 and $1,593,000
    for the three months and twelve months end October 31, 2007,
    respectively. These fees will be invoiced to 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
    which management believes to be at fair value.

    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.

    14. Subsequent events

    On December 6, 2007 the Company announced that it had entered into a
    definitive agreement to sell its Niagara-Burlington commercial
    manufacturing business to Pharmetics Inc. Under the terms of the
    agreement Pharmetics will acquire the assets, including equipment
    facilities and land at the Company's facilities in Fort Erie and
    Burlington (Gateway Drive). Pharmetics will provide employment to all of
    the commercial manufacturing employees at the two sites and, subject to
    assignment of third party contracts, will continue to manufacture and
    supply all of the products currently manufactured at these sites.

    The transaction is expected to be completed on or about January 31, 2008,
    subject to closing conditions including regulatory approvals, the
    assignment of client and other contracts and the completion of financing
    arrangements by the purchaser. The purchase price for the business is
    CAD$5.75 million plus working capital, subject to adjustments.

    On December 14, 2007 the Company announced that as a result of its 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.

    Revenues for the three months and twelve months ended October 31, 2007
    for the Carolina operations were $5.0 million and $42.9 million
    respectively. The Carolina operations reported a loss before
    repositioning expenses, asset impairment charge, depreciation and
    amortization, foreign exchange losses reclassified from other
    comprehensive income, interest, refinancing charges, write-off of
    deferred financing costs and income taxes for the three month period
    ended October 31, 2007 of $2.5 million and a profit of $6.1 million for
    the twelve month period ended October 31, 2007.

    15. Comparative amounts

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



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

    The following management discussion and analysis of financial condition
and results of operations ("MD&A") of Patheon Inc. ("Patheon" or "the
Company") for the three-month and twelve-month periods ended October 31, 2007
and 2006 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
December 14, 2007.
    The purpose of this 2007 fourth 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 2006 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 2006
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, write-off of deferred financing costs,
and income taxes. "EBITDA margin before repositioning expenses" is EBITDA
before repositioning expenses divided by revenues. EBITDA before repositioning
expenses and EBITDA margin before repositioning expenses are measures of
earnings or earnings margin not recognized by generally accepted accounting
principles in Canada ("Canadian GAAP"). Since each of these measures is a non-
GAAP measure that does not have a standardized meaning, it may not be
comparable to similar measures presented by other issuers. Prospective
investors are cautioned that these, and other non-GAAP measures should not be
construed as alternatives to net earnings determined in accordance with
Canadian GAAP as indicators of performance. The Company has included these
measures because it believes that this information is used by certain
investors to assess 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 filled in
ampoules, vials, bottles or pre-filled syringes. Sterile lyophilized products
are also manufactured in both vials and ampoules.
    Patheon provides manufacturing services for a broad range of products in
many dosage forms and packaging formats in accordance with client
specifications. Depending on the particular client, Patheon may be responsible
for most or all aspects of the manufacturing and packaging process, from
sourcing excipient raw materials and packaging components to delivering the
finished product in consumer-ready form to the client. Typically, Patheon's
clients supply the active pharmaceutical ingredients ("API") used in the
production process.
    The pharmaceutical development services provided by Patheon include most
of the pharmaceutical development services typically required by companies
conducting clinical trials and preparing for full-scale commercial production
of a new drug.
    At October 31, 2007, there were a total of 199 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 171 client products a year ago, of which five were at the NDA
stage. During the fourth quarter of 2007, no products developed on behalf of
clients were launched from the Company's facilities.

    Vision and Strategy

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

    Key Performance Drivers

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

    Recent Developments

    Financing Arrangements and Strategic Alternatives

    On September 11, 2006 the Company announced that its Board of Directors
had established a special committee to evaluate a range of strategic and
financial alternatives for the Company. As a result of this review, on
April 27, 2007 JLL Partners, through its investment vehicle, JLL Patheon
Holdings, LLC ("JLL Partners") purchased $150 million of convertible preferred
shares of the Company through a private placement. On April 27, 2007 the
Company also completed new credit facilities in the aggregate amount of
$225 million, comprising a seven-year $150 million term loan and a five-year
$75 million revolving facility.
    The net proceeds from the JLL Partners investment and the seven-year term
loan were used to repay the Company's obligations under its existing North
American and U.K. credit facilities.

    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 plans to restructure its current
network of six pharmaceutical manufacturing facilities in Canada.
    In connection with this initiative, on December 6, 2007 the Company
announced that it had entered into a definitive agreement to sell its Niagara-
Burlington commercial manufacturing business to Pharmetics Inc. Under the
terms of the agreement Pharmetics will acquire the assets, including equipment
facilities and land at the Company's facilities in Fort Erie and Burlington
(Gateway Drive). Pharmetics will provide employment to all of the commercial
manufacturing employees at the two sites and, subject to assignment of third
party contracts, will continue to manufacture and supply all of the products
currently manufactured at these sites.
    The transaction is expected to be completed on or about January 31, 2008,
subject to closing conditions including regulatory approvals, the assignment
of client and other contracts and the completion of financing arrangements by
the purchaser. The purchase price for the business is CAD$5.75 million plus
working capital, subject to 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. The process of
transferring production to other facilities is expected to be completed by the
first half of fiscal 2009.
    The assets and the related liabilities of the Niagara-Burlington
Operations, along with the York Mills real estate have 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
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, Puerto Rico.
    The Carolina site is a 230,000-square-foot facility, with approximately
200 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.
    It is anticipated that the 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.

    Results of Operations

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

    Revenues by Geographic Region and Service Activity

                               Three months ended      Twelve months ended
    U.S.$ '000                     October 31,              October 31,
                                                  %                        %
                              2007     2006  Change    2007     2006  Change
                            ------------------------ ------------------------
    North America
    -------------
      Commercial
       Manufacturing
        Prescription         56,543   77,388   -27%  270,515  309,379   -13%
        Over-the-counter     14,564   11,411    28%   43,076   66,327   -35%
                            ------------------------ ------------------------
                             71,107   88,799   -20%  313,591  375,706   -17%
      Development Services   23,151   20,652    12%   84,532   74,986    13%
                            ------------------------ ------------------------
                             94,258  109,451   -14%  398,123  450,692   -12%
                            ------------------------ ------------------------

    Europe
    ------
      Commercial
       Manufacturing
        Prescription         62,683   47,204    33%  243,554  197,332    23%
        Over-the-counter        291    1,170   -75%    3,473    3,646    -5%
                            ------------------------ ------------------------
                             62,974   48,374    30%  247,027  200,978    23%
      Development Services    9,560    7,925    21%   31,924   22,989    39%
                            ------------------------ ------------------------
                             72,534   56,299    29%  278,951  223,967    25%
                            ------------------------ ------------------------

    TOTAL
    -----
      Commercial
       Manufacturing
        Prescription        119,226  124,592    -4%  514,069  506,711     1%
        Over-the-counter     14,855   12,581    18%   46,549   69,973   -33%
                            ------------------------ ------------------------
                            134,081  137,173    -2%  560,618  576,684    -3%
      Development Services   32,711   28,577    14%  116,456   97,975    19%
                            ------------------------ ------------------------

    CONSOLIDATED REVENUES   166,792  165,750     1%  677,074  674,659     0%
                            ------------------------ ------------------------
                            ------------------------ ------------------------


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

    Revenues

    Consolidated revenues from continuing operations for the three-month
period ended October 31, 2007 increased 1%, or $1.0 million, to $166.8 million
from $165.8 million in the same period in 2006. In the fourth quarter,
revenues increased for OTC manufacturing and PDS, but decreased for Rx
manufacturing. On a consolidated basis, compared with the fourth quarter of
2006, OTC and PDS revenues increased by 18% and 14%, respectively, and Rx
revenues declined by 4%.
    For the three-month period ended October 31, 2007 revenues excluding the
Puerto Rico operations were $151.9 million, compared with $131.9 million in
the same period last year.
    Prescription manufacturing and development services represented 91% of
revenues, compared with 92% for the comparable period in 2006. The decline
reflects a significant decrease in Rx manufacturing volumes in Puerto Rico.
    Geographically, in North America, revenues declined in the fourth quarter
by $15.2 million or 14% over the same period a year ago. The decrease reflects
a significant decline in Rx revenues in the Carolina and Caguas facilities in
Puerto Rico as a result of lower revenues for Omnicef(R), which was impacted
by the launch of generic competitive products in May of 2007, the elimination
of manufacturing of Zocor(R) and lower volumes of Levothyroxine sodium, where
the client has suffered a significant decline in market share. Rx revenues
were also slightly lower in Canada, in part due to delays in the availability
of active pharmaceutical ingredients. These declines were offset in part by
higher PDS and OTC manufacturing volumes in the Canadian and Cincinnati
operations.
    In Europe, revenues for the fourth quarter of 2007 increased by
$16.2 million or 29% over the same period of 2006. The year-over-year increase
reflects higher Rx manufacturing revenues from operations in France and Italy,
reflecting the continuing benefits from two carve out initiatives, where the
Company is manufacturing a range of products for two clients that have closed
down facilities within their own manufacturing network. In Swindon, U.K., PDS
revenues showed continued growth, but commercial manufacturing volumes were
lower as a result of production delays, which are expected to be recovered
during the first half of 2008. The Euro strengthened approximately 9% and U.K.
sterling strengthened approximately 7% against the U.S. dollar relative to the
same period last year, increasing reported revenues by approximately
$5.8 million. Had European currencies remained constant to the rates of the
prior year, European revenues would have been 18% higher than the same period
in 2006.

    Operating Expenses

    Operating expenses comprise processing costs (principally materials,
employee and other site-related costs), marketing, sales, service, corporate
support, administrative expenses and foreign exchange gains and losses. In the
fourth quarter of 2007, operating expenses were $145.6 million, being
$1.4 million lower than the same period a year ago. Operating expenses were
reduced in the fourth quarter by net foreign exchange gains of $5.8 million.
The foreign exchange gains have arisen from the revaluation of US dollar
denominated debt in Canada and benefits from the Company's cash flow hedging
program, offset in part by losses arising from the revaluation of foreign
denominated working capital. Operating expenses were further reduced in the
fourth quarter as a result of an actuarial gain of $4.3 million arising from a
decision to phase out certain post retirement benefits in the Canadian
operations. Ongoing expenses were impacted by the strengthening of European
and Canadian currencies relative to the U.S. dollar. Operating expenses as a
percentage of revenues were 87.3%, compared with 88.7% in the same period a
year ago.

    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses

    On a consolidated basis in the fourth quarter of 2007, EBITDA before
repositioning expenses, representing earnings from continuing operations
before repositioning expenses, asset impairment charge, depreciation and
amortization, foreign exchange losses reclassified from other comprehensive
income, interest, refinancing expenses, write-off of deferred financing costs,
and income taxes was $21.2 million, compared with $18.8 million in the same
period a year ago. EBITDA margin before repositioning expenses was 12.7% in
the three-month period, compared with 11.3% in the same period a year ago.
    For the three-month period ended October 31, 2007 EBITDA before
repositioning expenses excluding the Puerto Rico operations was $30.4 million,
compared with $18.5 million in the same period last year. This represents an
EBITDA margin before repositioning expenses of 20.0% in the three month
period, compared with 14.0% in the same period last year.
    In Canada, EBITDA before repositioning expenses from the commercial
operations was $6.9 million in the fourth quarter of 2007, being $1.7 million
higher than the same period last year. This improvement was achieved despite
lower production volumes and includes a significant portion of the actuarial
gains arising from a change in the Company's post retirement benefit plans.
EBITDA before repositioning expenses was not significantly impacted by foreign
exchange in the fourth quarter of 2007, as the negative earnings impact of the
strengthening Canadian dollar relative to the U.S. dollar, was offset by gains
from the Company's foreign exchange cash flow hedging program.
    In the U.S.A. (including Puerto Rico), EBITDA before repositioning
expenses for the commercial operations was a loss of $4.5 million in the
fourth quarter of 2007, compared with a profit of $5.7 million in the same
period last year. The significant deterioration in earnings principally
reflects a reduction in Rx manufacturing volumes in the Carolina and Caguas
facilities in Puerto Rico.
    In Europe, EBITDA before repositioning expenses from the commercial
operations was $3.8 million in the fourth quarter of 2007, being $0.3 million
lower than the same period a year ago. The benefits of higher volumes were
offset by additional variable compensation costs, incremental costs associated
with production delays in Swindon, UK and foreign exchange losses. The
strengthening European currencies relative to the US dollar compared with the
same period last year had the impact of increasing EBITDA before repositioning
expenses by approximately $0.3 million.
    EBITDA before repositioning expenses from the global PDS operations was
$9.4 million in the fourth quarter of 2007, being $3.2 million higher than the
same period in 2006. The increase reflects revenue growth across the network.
    Corporate costs in the fourth quarter of 2007 reflected a net recovery of
$5.5 million, compared with costs of $2.6 million in the same period last
year. This reported gain resulted from foreign exchange gains of $7.5 million
arising from the revaluation of US dollar denominated debt held in the
Canadian legal entity. In October 2007 the Company hedged its net US dollar
balance sheet exposure, which will reduce future volatility.

    Repositioning Expenses

    During the fourth quarter of 2007 the Company incurred $6.7 million of
expenses in connection with its performance enhancement program. The expenses
were associated with cost saving initiatives being undertaken in the Caguas
and Carolina facilities in Puerto Rico and in the restructuring of the
Canadian site network.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $10.4 million in the fourth
quarter of 2007, compared with $9.7 million in the fourth quarter of 2006. The
increase reflects the impact of the strengthening European and Canadian
currencies relative to the US dollar, offset in part by lower depreciation
charges in Carolina as a result of the asset impairment charge booked in the
third quarter of 2007.

    Amortization of Intangible Assets

    Amortization of intangible assets was $1.1 million in the fourth quarter
of 2007, compared with $2.2 million for the fourth quarter of 2006. The
amortization of intangible assets relates to the Puerto Rico operations. The
charge is lower than for the same period last year due to the impact of the
impairment charge booked in the third quarter of 2007.

    Interest Expense and Amortization of Deferred Financing Costs

    Interest expense for the fourth quarter of 2007 was $7.5 million,
compared with $6.2 million in the fourth quarter of 2006. The increase in
interest costs principally reflects the impact of the new financing
arrangements that were put in place on April 27, 2007 and includes a non-cash
accretive interest charge of $3.6 million in respect of the debt component of
the convertible preferred shares.
    Effective November 1, 2006, the Company adopted CICA Accounting Standard
Section 3855 for the accounting of financial instruments, including its policy
on deferring costs of obtaining bank and other debt financing (see "Critical
Accounting Policies and Estimates"). As a result, amounts that in prior
periods were recorded as amortization of deferred financing costs are now
recorded in interest expense.

    Loss Before Income Taxes from Continuing Operations

    The Company reported a loss before income taxes of $4.5 million in the
fourth quarter of 2007, compared with a loss of $12.7 million in the same
period a year ago.

    Income Taxes

    The Company recorded an income tax charge of $4.6 million in the fourth
quarter of 2007, compared with a charge of $9.5 million in the same period
last year. The income tax charge in 2007 principally reflects operating losses
in Puerto Rico, where the tax benefits recognized were minimal, compounded by
high tax rates in Italy where the Company reported significant profits.
Offsetting these was the benefit of pre tax earnings in Canada, which were
sheltered by the draw down of prior period unrecognized losses. In 2006 the
income tax expense included a valuation reserve charge of $6.4 million against
future tax asset balances in the Canadian operations.

    Loss and Loss Per Share from Continuing Operations

    The Company recorded a loss from continuing operations in the fourth
quarter of 2007 of $9.1 million, compared with a loss of $22.2 million in the
same period last year. The loss per share was 9.9 cents, compared with a loss
of 23.8 cents per share a year earlier. The loss in 2007 included after tax
repositioning expenses of $6.8 million or 7.3 cents per share. The loss in
2006 included after tax asset repositioning expenses of $12.2 million or
13.2 cents per share.
    Because the Company reported a loss in the fourth quarter of 2007 and
2006, there is no impact of dilution.

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

    Discontinued operations include the results of the Niagara-Burlington
Operations. Financial details of the operating activities are disclosed in
note 5 in the interim consolidated financial statements. Earnings from
discontinued operations in the fourth quarter of 2007 were $1.5 million, or
1.7 cents compared with a loss of $0.3 million or 0.3 cents in the same period
last year. The improvement reflects the reversal of repositioning expense
accruals in the fourth quarter, compared with a charge in the same period last
year. In the fourth quarter of 2007 the Company also recorded a $0.6 million
reduction to the asset impairment charge that had been booked in the third
quarter of 2007, to reflect the Company's revised estimate of the fair value
of the long-lived assets.

    Twelve Months Ended October 31, 2007 Compared with Twelve Months Ended
    October 31, 2006

    Revenues

    Consolidated revenues from continuing operations for the twelve-month
period ended October 31, 2007 increased $2.4 million to $677.1 million from
$674.7 million in the same period in 2006. Rx manufacturing and PDS revenues
grew by 1% and 19%, respectively, while OTC manufacturing revenues declined by
33%.
    For the twelve-month period ended October 31, 2007 revenues excluding the
Puerto Rico operations were $577.3 million, compared with $544.9 million in
the same period last year.
    Prescription manufacturing and development services represented 93% of
revenues, compared with 90% for the comparable period in 2006. This
improvement is consistent with one of the Company's key performance drivers of
increasing the percentage of higher margin Rx and PDS business.
    Geographically, in North America, revenues for the twelve months ended
October 31, 2007 declined by $52.5 million or 12% over the same period a year
ago. The decline reflects a significant reduction in OTC volumes in the Whitby
and Cincinnati operations as certain clients have repatriated products back to
their own manufacturing network. Rx volumes declined in Caguas and Carolina,
Puerto Rico as a result of lower production of Zocor(R), Levothyroxine sodium
and Omnicef(R). Rx revenues were also lower in Canada principally as a result
of lower volumes for a product where in 2006 the Company's client was building
trade inventory levels for a newly launched product. The declines in
commercial manufacturing revenues were offset in part by an increase in PDS
revenues in Canada and Cincinnati.
    In Europe, revenues for the twelve months ended October 31, 2007 were
$55.0 million or 25% higher than the same period of 2006. The year-over-year
increase in revenues reflects higher Rx manufacturing revenues from operations
in Italy and France arising from the continuing benefits from two carve out
initiatives, where the Company is manufacturing a range of products for two
clients that have closed down facilities within their own manufacturing
network. In Swindon, U.K. PDS operations also continued to show further
increases in volumes. These gains were offset in part by lower pre-launch
commercial revenues for the cephalosporin lyophilization services and
production delays during the fourth quarter. The Euro and U.K. sterling
strengthened approximately 9% and 10%, respectively, against the U.S. dollar
relative to the same period last year, increasing reported revenues by
approximately $22.9 million. Had European currencies remained constant to the
rates of the prior year, European revenues would have been 14% higher than the
same period in 2006.

    Operating Expenses

    Operating expenses comprise processing costs (principally materials,
employee and other site-related costs), marketing, sales, service, corporate
support, administrative expenses and foreign exchange gains and losses. In the
twelve-month period ended October 31, 2007 operating expenses were
$586.8 million, compared with $603.8 million in the same period a year ago, a
decline of 3%. The decline reflects savings from the performance enhancement
program, offset in part by the strengthening European and Canadian currencies
relative to the U.S. dollar. Operating expenses in 2007 are net of foreign
exchange gains of $8.9 million and an actuarial gain of $4.3 million arising
from a decision to phase out certain post retirement benefits in the Canadian
operations.
    Operating expenses as a percentage of revenues were 86.7%, compared with
89.5% in the prior year.

    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses

    On a consolidated basis for the twelve-month period ended October 31,
2007, 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, write-off of deferred
financing costs, and income taxes was $90.3 million, an increase of
$19.4 million, or 27%, from the comparable period in 2006. EBITDA margin
before repositioning expenses was 13.3% in the twelve-month period ended
October 31, 2007, compared with 10.5% in the same period a year ago.
    For the twelve-month period ended October 31, 2007, EBITDA before
repositioning expenses excluding the Puerto Rico operations was
$108.6 million, compared with $69.5 million in the same period last year. This
represents an EBITDA margin before repositioning expenses of 18.8% in 2007,
compared with 12.7% in the same period last year.
    The Canadian commercial operations reported EBITDA before repositioning
expenses of $32.1 million for the twelve months ended October 31, 2007, or
$6.9 million higher than the same period last year. This improvement was
achieved despite lower Rx and OTC volumes and reflects savings from the
performance enhancement program, in particular at the Whitby operations. The
improvement also includes a significant portion of the actuarial gains booked
in the fourth quarter of 2007 arising from a change in the Company's post
retirement benefit plans. EBITDA before repositioning expenses was not
significantly impacted by foreign exchange, as the negative earnings impact of
the 3% increase in the average Canadian dollar exchange rate relative to the
U.S. dollar was offset by foreign exchange gains from the Company's cash flow
hedging program.
    EBITDA before repositioning expenses from the U.S.A. commercial
operations (including Puerto Rico) for the twelve months ended October 31,
2007 was a loss of $7.2 million, compared with a profit of $14.0 million in
the same period last year. The decline principally reflects a reduction in Rx
manufacturing volumes in the Caguas facility in Puerto Rico. In Cincinnati,
volume declines were offset by savings from the performance enhancement
program and a change in the revenue mix to higher margin Rx business.
    In Europe, EBITDA before repositioning expenses from commercial
operations for the twelve months ended October 31, 2007 was $36.9 million,
being $10.1 million higher than the same period last year. The improvement
reflects increased volumes in the operations in Italy and France, offset in
part in Swindon by lower pre-launch revenues for the cephalosporin
lyophilization services and fourth quarter production delays. The
strengthening European currencies against the US dollar compared with the same
period last year also had the impact of increasing EBITDA before repositioning
expense by approximately $2.9 million.
    EBITDA before repositioning expenses from the global PDS operations for
the twelve months ended October 31, 2007 was $30.7 million, being
$10.7 million higher than the same period in 2006. This reflects improved
profitability arising from growing volumes across all operations.
    Corporate costs for the twelve-month period ended October 31, 2007
reflected a net recovery of $0.4 million, compared with costs of $12.4 million
for the same period last year. This reported gain included foreign exchange
gains of $12.3 million arising from the revaluation of US dollar denominated
debt held in the Canadian legal entity. In October 2007 the Company hedged its
net US dollar balance sheet exposure, which will reduce future volatility.

    Asset Impairment Charge

    During the third quarter of 2007 it was determined that the carrying
value of the intangible assets and depreciable tangible capital assets
(collectively the "long-lived depreciable assets") at the Company's operations
in Carolina, Puerto Rico were impaired as a result of volume declines arising
from the genericization of Omnicef(R), this being the largest single product
that is manufactured at the facility. The Company tested the recoverability of
the long-lived depreciable assets at the Carolina operations and determined
that the expected future cash flows over the economic life of the principal
assets was less than the carrying value of the long-lived depreciable assets.
As a result, in the third quarter of 2007, the Company recorded an impairment
charge of $48.6 million; $26.1 million for intangible assets and $22.5 million
for tangible capital assets. The fair value of the intangible assets was
determined using a discounted cash flow methodology and the fair value of the
tangible capital assets was based on a weighted average continued use and
liquidation value.
    During the third quarter of 2006 the Company determined that the carrying
value of the long-lived depreciable assets at the Company's operations in
Caguas and Manati, Puerto Rico and the goodwill associated with all of the
Puerto Rico operations were impaired as a result of certain events which
occurred during the third quarter of 2006. These events included: continued
deterioration in revenues culminating in a significant increase in losses
reported in the third quarter; suspension of production of a major product due
to concerns over product shelf life; the risk of a decline in revenue of
another major product as a result of the approval by the U.S. Food and Drug
Administration of a generic version of the product; and the completion of a
long range plan that showed a significant reduction in earnings relative to
prior forecasts.
    The Company tested the recoverability of the long-lived depreciable
assets for all of the Puerto Rico operations and determined that at Caguas and
Manati the expected future cash flows over the economic life of the principal
assets were less than the carrying value of the long-lived depreciable assets.
As a result, in the third quarter of 2006, the Company recorded an impairment
charge of $81.4 million; $51.9 million for intangible assets and $29.5 million
for tangible capital assets. The fair value of the intangible assets was
determined using a discounted cash flow methodology and the fair value of
tangible capital assets was based on a value in continued use, taking into
account utilization levels.
    During the third quarter of 2006 the Company also tested the
recoverability of the goodwill associated with Puerto Rico operations using a
discounted cash flow methodology, and recorded an impairment charge of
$172.5 million representing the full value of the Puerto Rico goodwill.
    During the third quarter of 2006 the Company, as part of its ongoing
review of long-term investments, concluded that its investment in the shares
of a drug technology company which was accounted for on the cost basis had an
other than temporary decline and wrote down its value by $0.8 million to its
market value as of July 31, 2006.

    Repositioning Expenses

    During the twelve-month period ended October 31, 2007 the Company
incurred $15.8 million of expenses in connection with its performance
enhancement program, the site rationalization program in Puerto Rico and
Canada and its review of strategic and financial alternatives. The expenses
include consulting fees associated with the manufacturing efficiency review,
costs associated with reductions in the work force and professional and other
costs in connection with the strategic alternatives review.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $41.0 million for the twelve
months ended October 31, 2007, compared with $38.8 million in the same period
of 2006, an increase of $2.2 million, or 6%. The increase principally reflects
the effect of the strengthening European and Canadian currencies relative to
the U.S. dollar, offset in part by lower depreciation charges from the Puerto
Rico operations as a result of the impairment charges booked in the third
quarters of 2007 and 2006.

    Amortization of Intangible Assets

    The amortization of intangible assets was $6.7 million in the twelve
months ended October 31, 2007, compared with $11.9 million in the same period
of 2006. The amortization of intangible assets relates to the Puerto Rico
operations. The charge is lower than for the same period last year due to the
impact of the impairment charges made during the third quarters of 2007 and
2006.

    Interest Expense and Amortization of Deferred Financing Costs

    Interest expense for the twelve months ended October 31, 2007 was
$29.2 million, compared with $21.3 million in the same period a year ago. The
increase in interest costs in the first half of the year reflected higher debt
levels, along with increased borrowing costs as a result of the amendments to
the Company's North American loan facilities. The interest expense in the
second half of 2007 reflects the impact of the Company's refinancing that was
completed on April 27, 2007 and includes a non-cash accretive interest charge
of $7.1 million in respect of the debt component of the convertible preferred
shares.
    In 2007, the Company has adopted CICA Accounting Standard Section 3855
for the accounting of financial instruments, including its policy on deferring
costs of obtaining bank and other debt financing (see "Critical Accounting
Policies and Estimates"). As a result, amounts that in prior periods were
recorded as amortization of deferred financing costs are now recorded in
interest expense.

    Refinancing Expenses and Write-off of Deferred Financing Costs

    All refinancing expenses of $13.5 million for the twelve months ended
October 31, 2007 were incurred in connection with the Company's refinancing on
April 27, 2007. The expenses are made up of transaction costs for the new
credit facilities, transaction costs allocated to the debt portion of the
convertible preferred shares and repayment charges in connection with the
cancellation of certain of the Company's U.K. debt facilities.
    During the first quarter of 2006, the Company incurred charges of
$1.6 million in connection with the cancellation and prepayment of certain of
its North American credit facilities. The Company also wrote off $6.3 million
in related deferred financing costs.

    Loss Before Income Taxes from Continuing Operations

    The Company reported a loss before income taxes of $65.2 million in the
twelve months ended October 31, 2007, compared with a loss of $277.7 million
in the same period a year ago.

    Income Taxes

    The income tax expense for the twelve months ended October 31, 2007 was
$19.2 million, compared with an expense of $11.0 million for the same period
last year. The income tax charge in 2007 principally reflects high tax rates
in Italy where the Company reported significant profits, compounded by tax
losses in certain entities in Puerto Rico and Canada, where the tax benefit
after valuation reserves has not been recognized. The 2007 expense includes a
charge of $2.1 million in connection with an inter-company dividend payment
and a charge of $1.9 million in connection with the transfer of net foreign
exchange losses from accumulated other comprehensive income. The 2006 charge
includes a valuation reserve charge of $6.4 million against future tax asset
balances in the Canadian operations.

    Loss and Loss Per Share from Continuing Operations

    The Company recorded a loss from continuing operations for the twelve
months ended October 31, 2007 of $84.5 million, compared with a loss of
$288.7 million in the same period a year ago. The loss per share was
91.0 cents compared with $3.11 a year earlier. The loss for the twelve months
ended October 31, 2007 included an after-tax asset impairment charge of
$47.8 million, or 51.4 cents per share, after tax repositioning expenses of
$14.9 million, or 16.0 cents per share and after tax refinancing expenses of
$12.6 million, or 13.5 cents per share. The loss for the twelve months ended
October 31, 2006 included an after tax asset impairment charge of
$252.1 million, or $2.72 per share and after tax costs for debt prepayment
charges and the write-off of deferred financing costs of $6.2 million, or
6.6 cents per share.
    Because the Company reported a loss in the twelve months ended
October 31, 2007 and 2006 there is no impact of dilution.

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

    The net loss from discontinued operations in the twelve months ended
October 31, 2007 was $10.1 million, or 10.9 cents compared with net earnings
of $0.6 million or 0.6 cents in the same period last year. The net loss in
2007 includes an asset impairment charge of $12.5 million, or 13.4 cents per
share to write down the capital assets to their fair market value less the
estimated cost to sell.

    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.

    Liquidity and Capital Resources

    Summary of Cash Flows

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

                                  Three months ended     Twelve months ended
                                       October 31,             October 31,
                                    2007        2006        2007        2006
                              -----------------------------------------------
                                       $           $           $           $
                              -----------------------------------------------

    Net loss from continuing
     operations                   (9,050)    (22,162)    (84,458)   (288,719)
    Depreciation and
     amortization                 11,529      11,858      47,666      50,637
    Write-off of deferred
     financing costs                   -           -           -       6,332
    Asset impairment charge            -           -      48,580     254,661
    Foreign exchange loss              -           -         858           -
    Foreign exchange gain on
     debt, net of hedging         (7,541)          -     (12,331)          -
    Amortization of deferred
     financing costs                 151         346       1,657         944
    Employee future benefits,
     net of contributions         (5,169)        319      (4,846)      1,112
    Future income taxes            1,445      (3,514)      4,617      (6,678)
    Accretive interest on
     convertible preferred
     shares                        3,573           -       7,054           -
    Amortization of deferred
     revenues                       (505)       (485)     (2,021)     (1,978)
    Other                          1,117         154       2,087       1,587
    Working capital               21,742      36,111      (2,442)     20,506
    Increase in deferred
     revenues                          8           -       2,065       9,614
                              ----------- ----------- ----------- -----------

    Cash provided by
     operating activities         17,300      22,627       8,486      48,018
    Cash used in investing
     activities                  (15,542)    (25,553)    (39,663)    (68,845)
    Cash provided by (used in)
     financing activities        (14,932)     32,566       4,221      44,460
    Net increase (decrease)
     in cash and cash
     equivalents from
     discontinued operations      (1,127)        239       2,830       3,305
    Other                          4,362         847       3,960       1,278
                              ----------- ----------- ----------- -----------
    Net increase (decrease)
     in cash and cash
     equivalents                  (9,939)     30,726     (20,166)     28,216
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------


    Cash Provided by Operating Activities - Continuing Operations

    Cash provided by operating activities from continuing operations was
$17.3 million in the fourth quarter of 2007 compared with a $22.6 million for
the comparable period in 2006. On a year-to-date basis, cash provided by
operating activities from continuing operations was $8.5 million, compared
with $48.0 million in the same period last year. The year-to-date
deterioration reflects lower earnings before non-cash charges. Cash flows in
2006 also benefitted from a net reduction in the investment in working capital
of $20.5 million, compared with an increase in working capital of $2.0 million
in 2007. In 2007, the Company received $2.1 million from clients to assist in
the funding of capital expenditure projects that are tied to specific
manufacturing and supply agreements. This compares with $9.6 million that was
received during the same period last year. These amounts are recorded as an
increase in deferred revenues and will be recognized as income over the life
of the commercial manufacturing contract.

    Cash Used in Investing Activities - Continuing Operations

    Cash used in investing activities from continuing operations in the
fourth quarter of 2007 was $15.5 million, compared with $25.6 million in the
same period a year ago. On a year-to-date basis, cash used in investing
activities was $39.7 million, compared with $68.8 million in the same period
last year. The decrease for the fourth quarter and year-to-date principally
reflects lower project related capital expenditures on the cephalosporin
lyophilization capacity in the Swindon, U.K. facility. The major expenditures
for this expansion were incurred in 2006.

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

                                  Three months ended     Twelve months ended
                                       October 31,             October 31,
                                    2007        2006        2007        2006
                              -----------------------------------------------
                                       $           $           $           $
                              -----------------------------------------------

    Additions to capital
     assets
      - sustaining                (9,166)     (7,088)    (18,034)    (16,975)
      - project related           (5,519)    (17,791)    (17,768)    (49,617)
    Net increase in investments      (25)        (49)       (202)        (49)
    Increase in deferred
     pre-operating costs            (832)       (625)     (3,659)     (2,204)
                              ----------- ----------- ----------- -----------

    Cash used in investing
     activities of continuing
     operations                  (15,542)    (25,553)    (39,663)    (68,845)
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------


    Cash Provided by (Used in) Financing Activities

    In the fourth quarter of 2007 the Company used $8.8 million of cash to
repurchase 2,334,300 of its restricted voting shares under a normal course
issuer bid.
    The principal financing activity for the twelve months ended October 31,
2007 was the issue, through a private placement, of $150 million of
convertible preferred shares of the Company to JLL Partners and the completion
of new credit facilities in the aggregate amount of $225 million, comprising
of a seven-year $150 million term loan and a five-year $75 million revolving
facility. The net proceeds from the JLL Partners investment and the seven-year
term loan were used to repay the Company's obligations under its existing
North American and U.K. credit facilities.
    The principal financing activity during the twelve months ended
October 31, 2006 was the completion of new credit facilities in North America
in the aggregate amount of $290.0 million to refinance existing debt of the
Company and its U.S. subsidiaries. The Company was able to release
$7.8 million of restricted cash that had previously been held as security for
certain of the cancelled facilities. During the first quarter of 2006 the
Company's Italian subsidiary also entered into a new long-term debt facility
in the amount of  euro 28.5 million ($33.9 million) to replace existing loans.

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

                                  Three months ended     Twelve months ended
                                       October 31,             October 31,
                                    2007        2006        2007        2006
                              -----------------------------------------------
                                       $           $           $           $
                              -----------------------------------------------

    Increase (decrease) in
     bank indebtedness            (4,230)      3,041       3,532     (11,096)
    Increase in long-term debt    15,456      42,443     198,108     416,389
    Repayment of long-term debt  (17,380)    (11,790)   (337,452)   (364,800)
    Issue of convertible
     preferred shares                  -           -     150,000           -
    Convertible preferred share
     issue costs - equity
     component                         -           -      (1,213)          -
    Issue of restricted
     voting shares                     -          47          24         127
    Repurchase of restricted
     voting shares                (8,778)          -      (8,778)          -
    Decrease in restricted cash        -           -           -       7,805
    Increase in deferred
     financing costs                   -      (1,175)          -      (3,965)
                              ----------- ----------- ----------- -----------
    Cash provided by (used in)
     financing activities of
     continuing operations       (14,932)     32,566       4,221      44,460
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------


    Financing Arrangements and Ratios

    Convertible Preferred Shares
    ----------------------------
    The $150 million 8.5% convertible preferred shares purchased by JLL
Partners on April 27, 2007 represent 150,000 units, each consisting of one
Class I Preferred Share, Series C (a convertible preferred share) and one
Class I Preferred Share, Series D (a special voting preferred share) at a
purchase price of $1,000 per unit.
    Until October 27, 2009, no cash dividends will be paid, but the
liquidation preference and conversion rate will increase on a quarterly basis
by 2.125%. After October 27, 2009, these increases in the liquidation
preference and conversion rate will continue until the maturity or prior
conversion of the convertible preferred shares, unless the Company elects to
pay a cash dividend for any applicable quarter, in which case the Company will
pay a cash dividend for such quarter based on an annual dividend rate of 8.5%
on the aggregate liquidation preference of the convertible preferred shares.
    Each convertible preferred share is convertible into 218.7154 Patheon
restricted voting shares, as adjusted for any non-cash dividends noted above,
at any time at the holder's option. The Company will be entitled to require
the holder to convert into restricted voting shares if, at any time after
October 27, 2009, the market price of the restricted voting shares on the
Toronto Stock Exchange exceeds a price equivalent to US$7.87 for a period of
at least 60 days.
    If not previously converted, the Company is required to redeem the
convertible preferred shares for cash on April 27, 2017 at a price equal to
the aggregate liquidation preference of the convertible preferred shares, plus
accrued and unpaid dividends thereon. The Company is also required to redeem
the convertible preferred shares upon the occurrence of a change of control of
Patheon at a price equal to the greater of the aggregate liquidation
preference of the convertible preferred shares, plus accrued and unpaid
dividends thereon, or the price per share paid to holders of restricted voting
shares in the change of control transaction, multiplied by the number of
restricted voting shares into which the convertible preferred shares are then
convertible.
    The convertible preferred shares have the right to vote, together with
the holders of the restricted voting shares, on an as-if converted basis, in
respect of all matters other than the election of directors. As at October 31,
2007 these voting rights represent approximately 27% of the voting rights of
Patheon. The special voting preferred shares have the right to appoint up to
three directors.
    The convertible preferred shares are considered to be a compound
financial instrument with both a debt and equity component. On issuance, the
fair value of the debt component was $132.9 million. The remainder of the
proceeds, attributable to shareholders' equity was $15.9 million, net of
apportioned transaction costs of $1.2 million. See Convertible Preferred
Shares in "Critical Accounting Policies and Estimates" below with regard to
how the Convertible Preferred Shares have been accounted for.

    $225 Million Credit Facilities
    ------------------------------
    On April 27, 2007 the Company completed new credit facilities in the
aggregate amount of $225 million, comprising a seven-year $150 million senior
secured term loan and a five-year $75 million asset based revolving credit
facility. The Company is required to make quarterly installment payments of
$375,000 on the term loan facility, along with additional mandatory repayments
based on certain excess cash flow measures. Interest on the facilities is at
floating rates based on LIBOR, US or CAD prime, or the federal funds effective
rate, plus applicable margins. The Company has entered into interest rate
swaps to convert the interest expense on the $150 million senior secured term
loan from a floating interest rate to a fixed interest rate. The facilities
are secured by substantially all of the assets of the Company's operations in
Canada, U.S.A., Puerto Rico and the U.K and the Company's investments in the
shares of all other operating subsidiaries.

    Financial Ratios
    ----------------
    Total interest bearing debt, including the debt component of the
convertible preferred shares, at October 31, 2007 was $363.7 million, being
$14.1 million higher than at October 31, 2006. At October 31, 2007, the
Company's consolidated ratio of interest-bearing debt to shareholders' equity
was 184.4%, compared with 139.4% at October 31, 2006. The increase principally
reflects the reduction in shareholders' equity arising from the losses that
the Company has incurred in the twelve months ended October 31, 2007.

    Adequacy of Financial Resources

    With the completion of the new financing arrangements on April 27, 2007,
the Company believes that its financial resources are sufficient to fund
projected capital expenditures, debt service requirements and employee future
benefit obligations in the normal course of business. The risks associated
with going concern uncertainty reported in the Company's 2006 Annual Report
have now been eliminated.

    Critical Accounting Policies and Estimates

    Changes in and Significant New Accounting Policies

    Effective November 1, 2006 the Company adopted the Canadian Institute of
Chartered Accountants Handbook Section 3855 "Financial Instruments -
Recognition and Measurement", Section 3865 "Hedges", Section 1530
"Comprehensive Income" and Section 3861 "Financial Instruments - Disclosure
and Presentation". The adoption of the new standards resulted in changes in
accounting for financial instruments and hedges as well as the recognition of
certain transition adjustments that have been recorded in accumulated other
comprehensive income. The comparative interim consolidated financial
statements have not been restated, except for the reclassification of amounts
previously recorded as cumulative translation adjustment, which are now
included in accumulated other comprehensive income. For a description of the
principal changes in accounting policy see Note 1 to the consolidated
financial statements.
    In the second quarter of 2007 the Company changed its accounting policy
relating to costs of obtaining bank and other debt financing. Under the new
policy all transaction costs, including fees paid to advisors and other
related costs, are expensed as incurred. Financing costs, including
underwriting and arrangement fees paid to lenders are deferred and netted
against the carrying value of the related debt and amortized into interest
expense using the effective interest rate method. The Company previously
deferred all transaction and financing costs associated with obtaining bank
and other debt financing. Under the new requirements of CICA Handbook Section
3855, all deferred costs are netted off against the fair value of the debt.
The Company believes that the new policy is reliable and more relevant as it
results in a more transparent treatment of transaction costs that the Company
has incurred in its recent refinancing activities and in the carrying value of
debt. The change in policy has been made retrospectively effective November 1,
2006 and had the effect of increasing the retained deficit at November 1, 2006
by $1.7 million and reducing the interest expense and net loss for the three
months ended January 31, 2007 by $0.6 million.
    As a result of the issuance of the convertible preferred shares on
April 27, 2007, the Company has also added a new accounting policy for
convertible preferred shares as detailed below.

    General

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

    Revenue Recognition

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

    Deferred Revenues

    The costs of certain capital assets are reimbursed to the Company by the
pharmaceutical companies that are to benefit from the improvements in
connection with the manufacturing and packaging agreements in force. These
reimbursements are recorded as deferred revenues and are recognized as income
over the remaining minimum term of the agreements. During the fourth quarter
of 2007, $0.5 million was recognized as earnings. During the twelve months
ended October 31, 2007, $2.0 million was recognized as earnings and
$2.1 million was received as a capital expenditure reimbursement.

    Intangible Assets

    Intangible assets represent the values assigned to acquired client
contracts and relationships. They are amortized on a straight-line basis over
their estimated economic life. During the fourth quarter of 2007, $1.1 million
was charged to earnings. During the twelve months ended October 31, 2007,
$6.7 million was charged to 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. In the third quarter of 2007 the Company recorded an
impairment charge of $48.6 million relating to the long-lived depreciable
assets in Carolina, Puerto Rico.

    Valuation of Goodwill

    The Company evaluates goodwill for impairment at least annually and
reviews if there are any indicators of impairment on an ongoing basis. If the
carrying value of the reporting unit exceeds its fair value, the fair value of
the reporting units goodwill, determined in the same manner as in a business
combination, is compared with its carrying amount to measure the amount of any
impairment loss, if any.
    The goodwill shown on the financial statements for the period ended
October 31, 2007 was $3.7 million and relates to the acquisition in 2000 of
the remaining shares of Global Pharm Inc., which now operates as Toronto York
Mills Operations. The goodwill and the business supporting its value will be
transferred to the Whitby operations on the closure of the York Mills
facility.

    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 $31.1 million have been recorded at October 31,
2007. The future tax assets are primarily composed of accounting provisions
related to pension and post-retirement benefits not currently deductible for
tax purposes, the tax benefit of net operating loss carry forwards related to
the U.K., unclaimed R&D expenditures and deferred financing and share issue
costs. The Company evaluates quarterly the ability to realize its future tax
assets. The factors used to assess the likelihood of realization are the
Company's forecast of future taxable income and available tax planning
strategies that could be implemented to realize the future tax assets.
    Future tax liabilities of $47.6 million have been recorded at October 31,
2007. This liability has arisen primarily on tax depreciation in excess of
book depreciation.
    The Company's tax filings are subject to audit by taxation authorities.
Although management believes that it has adequately provided for income taxes
based on the information available, the outcome of audits cannot be known with
certainty and the potential impact on the financial statements is not
determinable.

    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.

    Employee Future Benefits

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

    Risk Management

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

    Foreign Currency

    The Company's business activities are conducted in several currencies -
Canadian dollars and U.S. dollars for the Canadian operations, U.S. dollars
for the U.S. operations and euros and U.K. sterling for the European
operations.
    Since the European and U.S. operations conduct business principally in
their respective local currencies, the exposure to foreign currency gains and
losses is not significant. However, the Company's Canadian operations
negotiate sales contracts for payment in both U.S. and Canadian dollars, and
materials and equipment are purchased in both U.S. and Canadian dollars. The
majority of its non-material costs (including payroll, facilities' costs and
costs of locally sourced supplies and inventory) are denominated in Canadian
dollars. Approximately 70% of revenues of the Canadian operations and
approximately 20% of its operating expenses are transacted in U.S. dollars. As
a result, the Company may experience trading and translation gains or losses
because of volatility in the exchange rate between the Canadian dollar and the
U.S. dollar. Based on the Company's current U.S. denominated net inflows, for
each one-cent change in the Canadian-U.S. rate, the impact on annual pretax
earnings, excluding any hedging activities, is approximately $0.9 million.
    The Company mitigates its foreign exchange risk by engaging in foreign
currency hedging activities using derivative financial instruments. At
October 31, 2007 the Company had outstanding foreign exchange forward
contracts to sell US$34.2 million at an exchange rate of $1.0535 Canadian. The
contracts mature at the latest on April 21, 2008 and cover approximately 75%
of the Company's expected foreign exchange exposure for the first half of the
2008 fiscal year. The mark-to-market value at October 31, 2007 that is
recorded in accumulated other comprehensive income is an unrealized gain of
$4.1 million. At October 31, 2007 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 US dollar balance sheet exposure. The mark-to-market value
at October 31, 2007 that is recorded in earnings is an unrealized loss of
$2.7 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 October 31, 2007, the Company had
designated $141.6 million of US 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 the
$150 million senior secured term loan from a floating interest rate to a fixed
interest rate. Taking this interest rate swap into account, at October 31,
2007, 19% of the Company's total debt portfolio, including the debt component
of the convertible preferred shares, was subject to movements in floating
interest rates. Assuming no change to the structure of the debt portfolio, a
1% change in floating interest rates has an impact on annual pre-tax earnings
of approximately $0.7 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, 2006 by and under the supervision of the Company's
management, including the CEO and the CFO. Based on this evaluation, the CEO
and the CFO have concluded that the Company's disclosure controls and
procedures (as defined in Multilateral Instrument 52-109 - Certification of
Disclosure in Issuers' Annual and Interim Filings of the Canadian Securities
Administrators) are effective to ensure that the information required to be
disclosed in reports that the Company files or submits under Canadian
securities legislation is recorded, processed, summarized and reported within
the time periods specified in such legislation. There have been no changes,
since this last formal assessment, that have materially affected, or are
reasonably likely to materially affect the Company's disclosure controls and
procedures.
    Under the supervision of the CEO and CFO, the Company has designed
internal controls over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. This
design evaluation included documentation activities, management inquiries and
other reviews as deemed appropriate by management in consideration of the size
and nature of the Company's business. There were no changes in the Company's
internal controls over financial reporting during the most recent interim
period that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.

    Selected Quarterly Financial Information

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

                                                             EARNINGS (LOSS)
                                                      NET    PER SHARE FROM
    QUARTER ENDED                      EBITDA    EARNINGS      CONTINUING
    (In thousands of                   BEFORE (LOSS) FROM      OPERATIONS
     U.S. dollars,              REPOSITIONING  CONTINUING  ------------------
     except per        REVENUES      EXPENSES  OPERATIONS     Basic  Diluted
     share amounts)           $             $           $         $        $
    -------------------------------------------------------------------------
    2007

    October 31          166,792        21,234      (9,050)   ($0.10)  ($0.10)
    July 31             175,508        23,138     (50,668)   ($0.55)  ($0.55)
    April 30            171,966        23,153     (22,552)   ($0.24)  ($0.24)
    January 31          162,808        22,793      (2,188)   ($0.02)  ($0.02)

    2006
    October 31          165,750        18,762     (22,162)   ($0.24)  ($0.24)
    July 31             178,739        14,990    (257,698)   ($2.78)  ($2.78)
    April 30            180,157        23,244       2,549     $0.03    $0.03
    January 31          150,013        13,880     (11,408)   ($0.12)  ($0.12)


    Additional Information

    Share Capital

    As of October 31, 2007, the Company had 90,624,388 restricted voting
shares (previously common shares) outstanding and 150,000 each of Class I
Preferred Shares, Series C (convertible preferred shares) and Series D
(special voting preferred shares).
    On October 9, 2007 the Company announced that it would undertake a normal
course issuer bid to repurchase up to 4.6 million of its restricted voting
shares. By October 31, 2007 the Company had repurchased 2.3 million restricted
voting shares under this program for a net cost of $8.8 million.
    The Company's articles were amended on April 26, 2007 to redesignate the
common shares as restricted voting shares. This occurred in connection with
the issuance of the convertible preferred shares. The holders of the special
voting preferred shares have the right to elect up to three of nine members of
the Board of Directors. The holders of Patheon's restricted voting shares have
the right to elect the remaining members of the Board of Directors. Under the
rules of the Toronto Stock Exchange, voting equity securities are not to be
designated, or called, common shares unless they have a right to vote in all
circumstances that is not less, on a per share basis, than the voting rights
of each other class of voting securities. Accordingly, the Company has amended
its articles to redesignate the common shares as restricted voting shares.
This redesignation involves only a change in the name of the securities; the
number of shares outstanding and the terms and conditions of the outstanding
shares are not affected by the change.

    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

    Due to normal shut downs during December, revenues in the first quarter
of 2008 are expected to be lower than the fourth quarter of 2007.

    Auditor Review

    The accompanying unaudited interim consolidated financial statements of
the Company have been prepared by and are the responsibility of management.
The Company's independent auditor has not performed a review of the financial
statements for the three-month and twelve-month periods ended October 31,
2007, or for the comparative periods ended October 31, 2006.

    FORWARD-LOOKING STATEMENTS

    This news release and MD&A contains forward-looking statements which
reflect management's expectations regarding the Company's future growth,
results of operations, performance (both operational and financial) and
business prospects and opportunities. Wherever possible, words such as
"plans", "expects" or "does not expect", "forecasts", "anticipates" or "does
not anticipate", "believes", "intends" and similar expressions or statements
that certain actions, events or results "may", "could", "would", "might" or
"will" be taken, occur or be achieved have been used to identify these 
forward-looking statements. Although the forward-looking statements contained
in this news release and MD&A reflect management's current assumptions based
upon information currently available to management and based upon what
management believes to be reasonable assumptions, the Company cannot be
certain that actual results will be consistent with these forward-looking
statements. Forward-looking statements necessarily involve significant known
and unknown risks, assumptions and uncertainties that may cause the Company's
actual results, performance, prospects and opportunities in future periods to
differ materially from those expressed or implied by such forward-looking
statements. These risks and uncertainties include, among other things: the
market demand for client products; credit and client concentration; the
ability to identify and secure new contracts; regulatory matters, including
compliance with pharmaceutical regulations; management of expanded operations;
international operations risks; currency; competition; product liability
claims; intellectual property; environmental; and interest rates. Although the
Company has attempted to identify important risks and factors that could cause
actual actions, events or results to differ materially from those described in
forward-looking statements, there may be other factors and risks that cause
actions, events or results not to be as anticipated, estimated or intended.
There can be no assurance that forward-looking statements will prove to be
accurate, as actual results and future events could differ materially from
those anticipated in such statements. Accordingly, readers should not place
undue reliance on forward-looking statements. These forward-looking statements
are made as of the date of this news release and MD&A and, except as required
by law, the Company assumes no obligation to update or revise them to reflect
new events or circumstances.





For further information:

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

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Patheon Inc

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