Patheon announces third quarter results



    Website: www.patheon.com

    TORONTO, Sept. 7 /CNW/ - Patheon (TSX:PTI), a global provider of drug
development and manufacturing services to the international pharmaceutical
industry, today announced its results for the third quarter ended July 31,
2007. (All amounts are in U.S. dollars unless otherwise indicated.)
    The consolidated results for the third 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

    Third Quarter Ended July 31, 2007
    Compared With Third Quarter Ended July 31, 2006

    -   Revenues from continuing operations were $175.5 million, a decrease
        of 2%;
    -   EBITDA before repositioning expenses from continuing operations
        improved by 54% to $23.1 million (13.2% of revenues) from
        $15.0 million (8.4% of revenues);
    -   Revenues and EBITDA before repositioning expenses from continuing
        operations, excluding Puerto Rico, were $153.5 million and
        $30.1 million, respectively, compared with $150.8 million and
        $18.0 million;
    -   Revenues and EBITDA before repositioning expenses from discontinued
        operations were $10.5 million and $0.9 million, respectively,
        virtually unchanged from a year ago;
    -   Before write downs and repositioning expenses, the loss from
        continuing operations was $1.4 million (1.5 cents per share) versus a
        loss of $5.6 million (6.0 cents per share);
    -   The loss from continuing operations for the quarter was $50.7 million
        (54.5 cents per share), compared with a loss of $257.7 million
        ($2.78 per share) a year ago;
    -   The net loss including discontinued operations for the quarter was
        $63.1 million (67.8 cents per share) compared with a net loss of
        $257.2 million ($2.77 per share) a year ago.

    Nine Months Ended July 31, 2007
    Compared With Nine Months Ended July 31, 2006

    -   Revenues from continuing operations were $510.3 million versus
        $508.9 million;
    -   EBITDA before repositioning expenses from continuing operations was
        $69.1 million (13.5% of revenues), up from $52.1 million (10.2%);
    -   Revenues and EBITDA before repositioning expenses from continuing
        operations, excluding Puerto Rico, were $425.3 million and
        $78.1 million, respectively, compared with $413.0 million and
        $50.9 million;
    -   Revenues and EBITDA before repositioning expenses from discontinued
        operations were $28.4 million and $2.2 million, respectively,
        compared with $28.1 million and $2.1 million;
    -   Before write downs, repositioning expenses and one-time refinancing
        expenses, the loss from continuing operations was $7.0 million
        (7.5 cents per share) compared with a loss of $8.3 million (9.0 cents
        per share);
    -   The loss from continuing operations was $75.4 million (81.1 cents per
        share) compared with a loss of $266.6 million ($2.87 per share) a
        year ago;
    -   The net loss including discontinued operations for the year-to-date
        was $87.1 million (93.7 cents per share) compared with a net loss of
        $265.7 million ($2.86 per share) a year ago.

    Puerto Rico business review and asset impairment charge

    In the third quarter ended July 31, 2007, Patheon recognized a
$48.6 million non-cash asset impairment charge in respect of depreciable
intangible assets and tangible capital assets related to its operations in
Carolina, Puerto Rico. Although the Carolina Operations have been performing
consistently well during this fiscal year, the Company determined that the
carrying value of these assets was impaired as a result of the genericization
of Omnicef(R), which will significantly reduce the profitability of the
Carolina Operations going forward. This asset impairment charge is a non-cash
item recognized to write these assets down to their estimated fair value.
    The Company commenced a comprehensive review of the Puerto Rico
Operations in the third quarter, with a focus on restructuring the operations,
eliminating operating losses and developing a long-term plan for the business.
The Company is being assisted in this review by Alix Partners, and the review
and new operating plan is expected to be completed by the end of the calendar
year 2007.

    Asset impairment charge - discontinued operations

    Patheon also recognized an asset impairment charge of $13.0 million, or
14.0 cents per share, to write down to fair market value the capital assets of
the facilities in Niagara and Burlington that the Company is in the process of
divesting.

    Third quarter commentary

    "The business, with the exception of Puerto Rico, performed well in the
third quarter, with consolidated revenues of $175 million and EBITDA before
repositioning costs of $23 million," said Riccardo Trecroce, Chief Executive
Officer, Patheon Inc. "Results were particularly strong in Europe, where we
are benefiting from volume gains in Italy and France and strong growth in
pharmaceutical development services at Swindon, U.K. In Canada, EBITDA before
repositioning costs improved on a lower revenue base, reflecting the success
of our efforts to improve operating efficiencies and profitability,
particularly in Whitby."
    In Puerto Rico, the Company recorded losses at its Caguas and Manati
sites, which were partially offset by improved performance at the Carolina
facility.
    At Caguas, in addition to market-driven volume declines for two key
products, the site incurred significant additional costs in connection with
the launch of a new, large-volume product.
    "We have taken several steps to adjust for declining revenues and to
address operational challenges at the Caguas facility," Mr. Trecroce said.
"These have included reducing the size of the workforce at Caguas by an
additional 130 positions since May, bringing the total number of reductions to
225 positions, or almost one-third of the site's workforce, since the
beginning of the fiscal year. We have appointed a new Site Director and are
working diligently to improve the efficiency and operating performance of the
site."
    At Manati, there were lower-than-expected volumes of a new product that
was introduced to the site last year, which impacted the site's revenues and
profitability. At Carolina, declines in volumes of branded Omnicef(R) were
almost entirely offset by the production of launch quantities of the
authorized generic version of the product that Patheon manufactured for its
client during the third quarter. In addition, the site achieved cost savings
and efficiency improvements relative to the same period a year ago,
contributing towards an improved year-over-year EBITDA performance.
    "We have been and continue to be focused on restructuring the Puerto Rico
operations to eliminate losses as soon as possible," Mr. Trecroce said. "Our
Puerto Rico management team, with the support of the external consulting firm
Alix Partners, has developed cost reduction programs to realign operating
costs with significantly reduced revenues, particularly at Carolina and
Caguas. These initiatives are being implemented during the fourth quarter.
    "We have also increased our efforts to secure new business for the Puerto
Rico Operations," Mr. Trecroce added. "We have already identified significant
new business opportunities for Manati which, if successful, could begin to
contribute to results in the latter half of 2008.
    "We continue to evaluate the best way to improve the long-term
profitability of the Puerto Rico operations," Mr. Trecroce concluded. "We know
that with the right mix of attractive capacity, first-rate management
expertise and superior operational performance, we will be able to bring
significant new products into the Puerto Rico sites."

    Update on Canadian site restructuring

    "Our Canadian site restructuring initiative is proceeding on schedule,"
reported Mr. Trecroce. "We have completed preliminary due diligence reviews
with potential purchasers of our Niagara-Burlington OTC manufacturing
business. We are moving forward as quickly as possible, and the next step in
the process will be to negotiate a definitive offer with a preferred party.
    "On the York Mills-Whitby consolidation, we have completed the planning
discussions with our clients and will begin the transfer of products to Whitby
this fall," Mr. Trecroce continued.
    Patheon also has entered into an agreement for the sale of the land and
buildings at the York Mills location. Patheon will continue to occupy the
site, leasing it from the purchaser, while it completes the process of
transferring commercial manufacturing and development services to its Whitby
facility over the next eighteen months.

    Third-quarter operating results from continuing operations

    Third-quarter revenues decreased by $3.2 million, or 2%, to
$175.5 million over the same period a year ago. Growth in Rx and PDS revenues
of $8.7 million was offset by a decline of $11.9 million in over-the-counter
(OTC) manufacturing volumes at Whitby and Cincinnati, where clients decided in
2006 to repatriate certain products back to their own manufacturing networks.
    Revenues from Rx manufacturing services increased by $5.6 million or 4%
over the same period a year ago, driven by strong year-over-year growth in
Europe, partially offset by declines in Canada and Puerto Rico. 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 the absence of orders
for Zocor(R), which lost patent protection in 2006, and lower revenues for
Omnicef(R) following the emergence of generic competition in May 2007. Patheon
is manufacturing the authorized generic of Omnicef, partially offsetting the
reduction in volumes for the branded product. Rx revenues were down modestly
in Canada, due to lower volumes of a product for which the Company's client
was building inventory levels last year following its commercial launch.
    Revenues from pharmaceutical development services (PDS) increased by
$3.2 million, or 12%, due to solid growth, particularly at the Swindon and
Cincinnati PDS operations. Patheon is currently developing 187 new products on
behalf of its clients, up from 165 a year ago. During the third quarter, one
newly approved product that Patheon had developed on behalf of a client was
launched and is being manufactured at the Company's Toronto Region facility.
This brings the total number of new product launches since 2001 to 20.
    Consolidated EBITDA before repositioning expenses was $23.1 million in
the third quarter, up 54% from $15.0 million a year ago. The EBITDA margin
before repositioning expense was 13.2% in the third quarter, compared with
8.4% in the third quarter of 2006.
    In Canada, despite a decline in revenues, which was particularly
significant at Whitby, EBITDA before repositioning expenses from commercial
manufacturing operations was $7.0 million, or $0.9 million higher than the
same period a year ago. This improvement reflects the success of the
Performance Enhancement Program launched last year to improve operating
results. This program, comprising a reduction in the size of the workforce, a
review of manufacturing efficiency, and more effective procurement, resulted
in improved profitability at all of the Canadian sites.
    EBITDA before repositioning expenses from U.S. operations was a loss of
$4.3 million, compared with a loss of $1.2 million in the same period a year
ago. The decline reflects a significant year-over-year decrease at the Caguas,
Puerto Rico facility, mainly attributable to the absence of volumes for
Zocor(R), which lost its patent protection in June 2006 and additional
operating costs incurred in connection with the launch of a new high-volume
product. At Carolina, EBITDA before repositioning costs remained steady year-
over-year, as a result of cost savings and efficiency gains from the
manufacturing review process completed at the site earlier this year. In
Cincinnati, OTC revenue declines were replaced with Rx volumes, reflecting the
site's continuing shift towards higher-margin revenues.
    In Europe, EBITDA before repositioning expenses from the commercial
manufacturing operations was $14.7 million, or $6.4 million higher than the
same period a year ago, reflecting volume gains at all four European sites.
The strengthening European currencies relative to the U.S. dollar also had the
impact of increasing EBITDA before repositioning expenses by approximately
$0.9 million.
    EBITDA before repositioning expenses from global pharmaceutical
development services was $6.4 million, or $0.5 million higher than the same
period a year ago. The increase reflects improved revenue growth and
operational efficiency savings in Canada, Cincinnati and Europe.

    Outlook

    Due to normal summer shut downs, particularly in Europe, and declining
volumes in Puerto Rico, particularly at the Carolina site, revenues for the
fourth quarter of 2007 are expected to be lower than the third 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 third quarter results on Friday, September 7, 2007 at 10:00 a.m.
(Eastern Daylight Time). Representing Patheon on the call will be: Riccardo
Trecroce, Chief Executive Officer; Nick DiPietro, President and Chief
Operating Officer; John Bell, Chief Financial Officer; and Shelley Jourard,
Director, Corporate Communications. The call will begin with a brief
presentation, followed by a question-and-answer period with investment
analysts. Interested parties are invited to access the live call, via
telephone, in listen-only mode, at (416) 644-3414 (Toronto and International)
or toll free at (800) 733-7571 (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 Q3 webcast will be available on
www.patheon.com for three months.

    ABOUT PATHEON

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

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


    
    Consolidated Statements of Earnings (Loss)
    (unaudited)

                            Three months ended             Nine months ended
                                       July 31,                      July 31,
                                             %                             %
                      2007      2006    change      2007      2006    change
    -------------------------------------------------------------------------
    (in thousands
     of U.S. dollars,
     except per share
     amounts)            $         $                   $         $
    -------------------------------------------------------------------------

    Revenues       175,508   178,739     -1.8%   510,282   508,909      0.3%
    Operating
     expenses      152,370   163,749     -6.9%   441,198   456,795     -3.4%
                  ----------------------------- -----------------------------
    Earnings
     before
     the
     following:     23,138    14,990     54.4%    69,084    52,114     32.6%
                  ----------------------------- -----------------------------
    (as a % of
     revenues)       13.2%      8.4%               13.5%     10.2%

    Asset
     impairment
     charge
     (note 4)       48,580   254,661    -80.9%    48,580   254,661    -80.9%
    Repositioning
     expenses
     (note 7)        1,466         -               9,086         -
    Depreciation and
     amortization    9,826     9,941     -1.2%    30,543    29,090      5.0%
    Amortization of
     intangible
     assets          1,231     2,794    -55.9%     5,594     9,689    -42.3%
    Foreign exchange
     loss (note 8)       -         -                 858         -
    Interest         7,364     5,188     41.9%    21,699    15,086     43.8%
    Refinancing
     expenses
     (note 11)           -         -              13,471     1,643    719.9%
    Amortization of
     deferred
     financing costs     -       136                   -       598
    Write-off of
     deferred
     financing
     costs (note 11)     -         -                   -     6,332
                  ----------------------------- -----------------------------
    Earnings
     (loss) before
     income
     taxes         (45,329) (257,730)    82.4%   (60,747) (264,985)    77.1%
    Provision for
     (recovery of)
     income taxes    5,339       (32) 16784.4%    14,661     1,572    832.6%
                  ----------------------------- -----------------------------
    Loss from
     continuing
     operations    (50,668) (257,698)    80.3%   (75,408) (266,557)    71.7%
                  ----------------------------- -----------------------------
    (as a % of
     revenues)      -28.9%   -144.2%              -14.8%    -52.4%
    Earnings
     (loss) from
     discontinued
     operations
     (note 5)      (12,401)      485  -2656.9%   (11,671)      823  -1518.1%
                  ----------------------------- -----------------------------
    Net loss for
     the period    (63,069) (257,213)    75.5%   (87,079) (265,734)    67.2%
                  ----------------------------- -----------------------------
                  ----------------------------- -----------------------------
    Basic and
     diluted
     earnings
     (loss) per
     share
      From
       continuing    (54.5    (277.5               (81.1    (287.1
       operations    cents)    cents)    80.4%     cents)    cents)    71.8%
      From
       discontinued  (13.3       0.5               (12.6       0.9
       operations    cents)    cents  -2760.0%     cents)    cents  -1500.0%
                  ----------------------------- -----------------------------
                     (67.8    (277.0               (93.7    (286.2
                     cents)    cents)    75.5%     cents)    cents)    67.3%
                  ----------------------------- -----------------------------
    Average number
     of shares
     outstanding
     during period
     (in thousands):                        `
      Basic and
       diluted      92,959    92,860      0.1%    92,956    92,851      0.1%
                  ----------------------------- -----------------------------

    see accompanying notes


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

    Assets
    Current
      Cash and cash equivalents                         40,496        50,723
      Accounts receivable                              130,887       117,705
      Inventories                                       82,567        72,057
      Prepaid expenses and other                        13,414         6,615
      Assets held for sale (note 5)                      8,357         8,341
                                                     ------------------------
    Total current assets                               275,721       255,441
                                                     ------------------------

    Capital assets (note 4)                            457,844       467,365
    Intangible assets (note 4)                           9,811        41,447
    Deferred costs                                       8,369         9,717
    Future tax assets                                   26,999        21,827
    Goodwill                                             3,239         3,077
    Investments                                            979           586
    Assets held for sale (note 5)                       14,052        26,723
                                                     ------------------------
                                                       797,014       826,183
                                                     ------------------------
                                                     ------------------------

    Liabilities and Shareholders' equity
    Current
      Bank indebtedness                                 12,143         3,829
      Accounts payable and accrued liabilities         136,236       140,254
      Income taxes payable                               7,443           879
      Current portion of long-term debt (note 10)       10,284       283,717
      Liabilities related to assets held for sale
       (note 5)                                          3,974         2,527
                                                     ------------------------
    Total current liabilities                          170,080       431,206
                                                     ------------------------

    Long-term debt (note 10)                           203,935        62,071
    Deferred revenues                                   25,256        23,366
    Future tax liabilities                              39,690        33,128
    Convertible preferred shares - debt component
     (note 10)                                         136,343             -
    Other long-term liabilities                         27,494        25,681
                                                     ------------------------
    Total liabilities                                  602,798       575,452
                                                     ------------------------

    Shareholders' equity
      Convertible preferred shares - equity
       component (note 10)                              15,925             -
      Restricted voting shares                         400,745       400,721
      Contributed surplus                                3,997         3,829
      Deficit                                         (278,728)     (189,900)
      Accumulated other comprehensive income            52,277        36,081
                                                     ------------------------
    Total shareholders' equity                         194,216       250,731
                                                     ------------------------
                                                       797,014       826,183
                                                     ------------------------
                                                     ------------------------

    see accompanying notes


    Consolidated Statements of Changes in Shareholders' Equity
    (unaudited)

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

    Convertible preferred shares - equity component
      Balance at beginning of period                         -             -
      Shares issued, 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
      Issued during the period, net of issue costs          24            80
                                                     ------------------------
      Balance at end of period                         400,745       400,674
                                                     ------------------------
    Contributed surplus
      Balance at beginning of period                     3,829         2,901
      Stock options                                        168           925
                                                     ------------------------
      Balance at end of period                           3,997         3,826
                                                     ------------------------
    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                          (87,079)     (265,734)
                                                     ------------------------
      Balance at end of period                        (278,728)     (167,484)
                                                     ------------------------
    Accumulated other comprehensive income
      Balance at beginning of period                    36,081        38,106
      Transition adjustment (note 1)                      (762)            -
      Other comprehensive income for the period         16,958         2,314
                                                     ------------------------
      Balance at end of period                          52,277        40,420
                                                     ------------------------
    Total shareholders' equity at end of period        194,216       277,436
                                                     ------------------------
                                                     ------------------------

    see accompanying notes



    Consolidated Statements of Comprehensive Loss
    (unaudited)

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

    Net loss for the period                            (63,069)      (87,079)
                                                     ------------------------
    Other comprehensive income, net of income
     taxes (note 12)
      Change in foreign currency gains on investments
       in subsidiaries, net of hedging activities        5,545        12,642
      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                                              370         1,201
      (Gains)/losses on foreign currency cash flow
       hedges reclassified to consolidated statement
       of earnings (loss)                                 (399)          978
      Gains on interest rate hedges reclassified to
       consolidated statement of earnings (loss)             -          (656)
                                                     ------------------------
      Other comprehensive income for the period          5,516        16,958
                                                     ------------------------

                                                     ------------------------
    Comprehensive loss for the period                  (57,553)      (70,121)
                                                     ------------------------
                                                     ------------------------

    see accompanying notes


    Consolidated Statements of Cash Flows
    (unaudited)

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

    Operating activities
      Net loss from continuing
       operations                (50,668)   (257,698)    (75,408)   (266,557)
      Add (deduct) charges to
       operations not requiring
       a current cash payment
        Asset impairment charge
         (note 4)                 48,580     254,661      48,580     254,661
        Depreciation and
         amortization             11,057      12,735      36,137      38,779
        Foreign exchange loss
         (note 8)                      -           -         858           -
        Accretive interest on
         convertible preferred
         shares (note 1)           3,481           -       3,481           -
        Write-off of deferred
         financing costs
         (note 11)                     -           -           -       6,332
        Amortization of
         deferred financing
         costs                       126         136       1,506         598
        Employee future benefits     (65)        941         323         793
        Future income taxes        3,104      (5,757)      3,172      (3,164)
        Amortization of
         deferred revenues          (547)       (498)     (1,516)     (1,493)
        Other                     (3,171)        562      (3,820)      1,433
                                ---------------------------------------------
                                  11,897       5,082      13,313      31,382
      Net change in non-cash
       working capital balances
       related to continuing
       operations                (17,189)      2,896     (24,184)    (15,605)
      Increase in deferred
       revenues                    2,057           -       2,057       9,614
                                ---------------------------------------------
      Cash provided by (used in)
       operating activities of
       continuing operations      (3,235)      7,978      (8,814)     25,391
      Cash provided by (used in)
       operating activities of
       discontinued operations
       (note 5)                      (89)      1,207       4,232       3,497
                                ---------------------------------------------
    Cash provided by (used in)
     operating activities         (3,324)      9,185      (4,582)     28,888
                                ---------------------------------------------

    Investing activities
      Additions to capital
       assets - sustaining        (3,364)     (3,766)     (8,868)     (9,887)
              - project related   (5,040)    (10,680)    (12,249)    (31,826)
      Net increase in
       investments                  (293)          -        (177)          -
      Increase in deferred
       pre-operating costs        (1,116)     (1,122)     (2,827)     (1,579)
                                ---------------------------------------------
      Cash used in investing
       activities of continuing
       operations                 (9,813)    (15,568)    (24,121)    (43,292)
      Cash used in investing
       activities of
       discontinued operations
       (note 5)                     (121)       (153)       (275)       (431)
                                ---------------------------------------------
    Cash used in investing
     activities                   (9,934)    (15,721)    (24,396)    (43,723)
                                ---------------------------------------------

    Financing activities
      Increase (decrease) in
       bank indebtedness           9,078      (1,446)      7,762     (14,137)
      Increase in long-term
       debt                        6,812      62,803     182,652     373,946
      Repayment of long-term
       debt                       (7,119)    (41,665)   (320,072)   (353,010)
      Issue of convertible
       preferred shares                -           -     150,000           -
      Convertible preferred
       share issue costs -
       equity component                -           -      (1,213)          -
      Issue of restricted
       voting shares                   -          80          24          80
      Decrease in restricted
       cash                            -           -           -       7,805
      Increase in deferred
       financing costs                 -           -           -      (2,790)
                                ---------------------------------------------
      Cash provided by
       financing activities of
       continuing operations       8,771      19,772      19,153      11,894
                                ---------------------------------------------
    Cash provided by financing
     activities                    8,771      19,772      19,153      11,894
                                ---------------------------------------------

    Effect of exchange rate
     changes on cash and cash
     equivalents                  (1,555)        534        (402)        431
                                ---------------------------------------------

    Net increase (decrease) in
     cash and cash equivalents
     during the period            (6,042)     13,770     (10,227)     (2,510)
    Cash and cash equivalents,
     beginning of period          46,538       6,227      50,723      22,507
                                ---------------------------------------------
    Cash and cash equivalents,
     end of period                40,496      19,997      40,496      19,997
                                ---------------------------------------------
                                ---------------------------------------------

    see accompanying notes


        Notes to Unaudited Consolidated Financial Statements for the
                       Nine Months Ended July 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 three months ended April 30, 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, changes in the fair
    value of derivative instruments designated as cash flow hedges and the
    reclassification to net loss of deferred gains on interest rate swaps,
    all net of income taxes.

    On transition to the new accounting standards, deferred after tax gains
    from interest rate swaps of $656,000 and after tax losses on the fair
    value of cash flow hedges of $1,418,000 were recorded in accumulated
    other comprehensive income. Accumulated other comprehensive income also
    includes gains on net investments in self sustaining foreign operations,
    net of hedging activities previously recorded in cumulative translation
    adjustment. As a result, the previously recorded cumulative translation
    adjustment account has been eliminated and the balances have been
    included in accumulated other comprehensive income. On transition to the
    new standards, the comparative amounts of other comprehensive 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 nine months ended
    July 31, 2007 includes a charge of $3,481,000 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 July 31,
    2007:

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

    Restricted voting shares
     (previously common shares)                       92,958,688
    Restricted voting share stock options              3,899,516   3,740,349
    

    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 common 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 July 31, 2007
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues
    Canada                         4,515         554          36       5,105
    USA                           35,223      45,026       4,257      84,506
    Europe                         7,669       1,272      74,670      83,611
    Other geographic areas         1,221         153         912       2,286
    -------------------------------------------------------------------------
    Total revenues                48,628      47,005      79,875     175,508
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets               105,699     118,483     233,662     457,844
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                       3,239           -           -       3,239
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                            Manufacturing location
                                      Three months ended July 31, 2006
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues
    Canada                         3,648         204         185       4,037
    USA                           38,418      53,182       6,055      97,655
    Europe                        18,055         172      55,637      73,864
    Other geographic areas         1,693          19       1,471       3,183
    -------------------------------------------------------------------------
    Total revenues                61,814      53,577      63,348     178,739
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets               101,318     155,103     208,351     464,772
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                       3,054           -           -       3,054
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                            Manufacturing location
                                       Nine months ended July 31, 2007
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues
    Canada                        10,741         903         895      12,539
    USA                          104,917     155,262      11,016     271,195
    Europe                        26,732       2,227     190,050     219,009
    Other geographic areas         2,791         292       4,456       7,539
    -------------------------------------------------------------------------
    Total revenues               145,181     158,684     206,417     510,282
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                            Manufacturing location
                                       Nine months ended July 31, 2006
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues
    Canada                        16,186         492         593      17,271
    USA                          102,855     173,465       9,983     286,303
    Europe                        43,350         507     153,277     197,134
    Other geographic areas         4,196         190       3,815       8,201
    -------------------------------------------------------------------------
    Total revenues               166,587     174,654     167,668     508,909
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 July 31,
                               ----------------------------------------------
                                    2007                    2006
                                       $                       $
    -------------------------------------------------------------------------
    Commercial manufacturing -
     prescription                135,467         77%     129,917         73%
    Commercial manufacturing -
     over-the-counter             11,229          6%      23,171         13%
    Development services          28,812         17%      25,651         14%
    -------------------------------------------------------------------------
                                 175,508        100%     178,739        100%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                      Nine months ended July 31,
                               ----------------------------------------------
                                    2007                    2006
                                       $                       $
    -------------------------------------------------------------------------
    Commercial manufacturing -
     prescription                394,843         77%     382,116         75%
    Commercial manufacturing -
     over-the-counter             31,694          6%      57,412         11%
    Development services          83,745         17%      69,381         14%
    -------------------------------------------------------------------------
                                 510,282        100%     508,909        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:

    
                                         Three and nine months ended July 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.

    The Company plans to divest its Niagara-Burlington Operations business
    that is focused on the commercial manufacturing of OTC products. The
    Niagara-Burlington Operations to be divested consist of facilities in
    Fort Erie and Burlington Gateway and the commercial operations at
    Burlington Century. The Company plans to retain the Burlington Century
    facility where its central quality control laboratory is also based.

    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 take
    18 months.

    The results of operations 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. In 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. The
    results of discontinued operations for the three and nine months ended
    July 31, 2007 and July 31, 2006 are as follows:

    
                                    Three months ended     Nine months ended
                                               July 31,              July 31,
    -------------------------------------------------------------------------
                                       2007       2006       2007       2006
                                          $          $          $          $
    -------------------------------------------------------------------------

    Revenues                         10,499     10,452     28,429     28,128
    Operating expenses                9,559      9,443     26,194     26,018
                                    -----------------------------------------
    Earnings before the
     following:                         940      1,009      2,235      2,110
                                    -----------------------------------------
    (as a % of revenues)               9.0%       9.7%       7.9%       7.5%

    Asset impairment charge          13,029          -     13,029          -
    Repositioning expenses                -          -         33          -
    Depreciation and
     amortization                       312        262        844        844
                                    -----------------------------------------
    Earnings (loss) before
     income taxes                   (12,401)       747    (11,671)     1,266
    Provision for income taxes            -        262          -        443
    -------------------------------------------------------------------------
    Net earnings (loss) for
     the period                     (12,401)       485    (11,671)       823
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    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 at
    July 31, 2007, with comparatives as at October 31, 2006 are as follows:

                                                          As at        As at
                                                        July 31,  October 31,
    -------------------------------------------------------------------------
                                                           2007         2006
                                                              $            $
    -------------------------------------------------------------------------

    Current Assets
      Accounts receivable                                 4,939        4,251
      Inventories                                         3,317        3,905
      Prepaid expenses and other                            101          185
                                                      -----------------------
    Total current assets                                  8,357        8,341
                                                      -----------------------

    Capital assets                                       14,052       26,723

    Current Liabilities
      Accounts payable and accrued liabilities            3,974        2,527
    -------------------------------------------------------------------------
    

    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 July 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 3,899,516 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 on each of the first, second and third anniversary
    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. No options were granted in the
    third quarter of 2007. The weighted average fair value of 100,000 options
    granted for the nine months ended July 31, 2007 was $1.92. The weighted
    average fair value for the stock options granted for the three months and
    nine months ended July 31, 2006 was $1.22 and $2.11, respectively. The
    following assumptions were used in arriving at the fair value of options
    issued during the nine months ended July 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
    July 31, 2007 was $74,000 (2006 - $433,000) for options granted on or
    after November 1, 2003. Stock-based compensation expense recorded in the
    nine months ended July 31, 2007 was $168,000 (2006 - $925,000) 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 and
    consulting fees from external specialists who are assisting in
    identifying operational improvements.

    During the first half of 2007 the Company also incurred professional fees
    and other costs in connection with its review of strategic and financial
    alternatives.

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

    
                                                            Three       Nine
                                                           months     months
                                                            ended      ended
                                                          July 31,   July 31,
    -------------------------------------------------------------------------
                                                             2007       2007
                                                                $          $
    -------------------------------------------------------------------------
    Performance enhancement program:
      -Employee-related expenses                            1,048      2,827
      -Consulting and professional fees                       418      2,904
    Strategic alternatives review                               -      3,355

    -------------------------------------------------------------------------
                                                            1,466      9,086
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    As at July 31, 2007, $1,492,000 of the repositioning expenses are unpaid
    and are recorded in accounts payable and accrued liabilities. This
    includes amounts accrued during the 2006 fiscal year. Repositioning
    expenses paid during the three months and nine months ended July 31, 2007
    amounted to $5,117,000 and $16,722,000, respectively.

    8.  Other information

    Foreign exchange

    During the three months ended July 31, 2007, the foreign exchange gain on
    operating exposures, net of cash flow hedges, (including 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
    $3,325,000 (2006 loss - $271,000). During the nine months ended July 31,
    2007, the foreign exchange gain on operating exposures, net of cash flow
    hedges, was $3,094,000 (2006 loss - $124,000).

    During the nine months ended July 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 July 31, 2007 was $1,630,000 (2006 - $1,410,000). For the
    nine months ended July 31, 2007 the employee future benefit expense was
    $4,624,000 (2006 - $3,408,000).

    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 July 31, 2007 the Company's Canadian operations had entered into
    foreign exchange forward contracts to sell an aggregate amount of
    US$27,000,000. These contracts hedge the Company's expected exposure to
    U.S. dollar denominated cash flows and mature at the latest on
    October 29, 2007 at exchange rates varying between $1.0847 and $1.16698
    Canadian. The mark-to-market value on these financial instruments as at
    July 31, 2007 was an unrealized gain of $1,450,000 which has been
    recorded in accumulated other comprehensive income in shareholders'
    equity.

    As at July 31, 2007 the Company has designated $143.8 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 $150 million 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 July 31, 2007 was an
    unrealized loss of $805,000 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
    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 214.1644 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
    are made up of transaction costs for 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 are net of income
    taxes and take into account valuation reserves for future income taxes in
    the Company's Canadian operations. For the three and nine months
    ended July 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
    nine months ended July 31, 2007. The change in value of derivatives
    designated as foreign currency and interest rate cash flow hedges are net
    of a tax benefit of $116,000 for the three and nine months ended July 31,
    2007. For the three and nine months ended July 31, 2007 there is no
    income tax associated with the gains and losses on foreign currency cash
    flow hedges reclassified to the consolidated statement of earnings
    (loss). The gains on interest rate hedges reclassified to the
    consolidated statement of earnings (loss) are net of an income tax
    benefit of $343,000 for the nine months ended July 31, 2007.

    13. Related party transactions

    Revenues from companies controlled by a director and significant
    shareholder of the Company were in the amount of $52,000 and $735,000 for
    the three and nine months ended July 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 July 31, 2007 includes a balance of $88,000
    resulting from these transactions.

    At July 31, 2007 the Company has an investment of $698,000 representing
    an 18% interest in two Italian companies whose largest investor is an
    officer of the Company. These newly formed companies will specialize in
    the manufacturing of cytotoxic pharmaceutical products.

    14. 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 nine-month periods ended July 31, 2007 and
2006 should be read in conjunction with the Company's consolidated financial
statements and related notes contained in this interim report. This MD&A is
dated as of September 7, 2007.
    The purpose of this 2007 third 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 July 31, 2007, there were a total of 187 client products in the
Patheon's pharmaceutical development services ("PDS") pipeline, including
eight drug candidates at the New Drug Application ("NDA") stage. This compares
with a total of 165 client products a year ago. During the third quarter of
2007, one product developed on behalf of a client was 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.
    The Company plans to divest its Niagara-Burlington Operations business
that is focused on the commercial manufacturing of OTC products. The Niagara-
Burlington Operations to be divested consist of facilities in Fort Erie and
Burlington Gateway and the commercial operations at Burlington Century. The
Company plans to retain the Burlington Century facility where its central
quality control laboratory is also based. The results of operations of the
Niagara-Burlington Operations have been segregated and presented separately as
discontinued operations in the consolidated financial statements.
    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 take 18 months.
    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.

    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

    U.S.$ '000                 Three months ended          Nine months ended
                                          July 31,                   July 31,
                           2007     2006        %     2007     2006        %
                                           Change                     Change
                        -------------------------- --------------------------
    North America
    -------------
      Commercial
       Manufacturing
        Prescription     65,221   74,437     -12%  213,972  231,971      -8%
        Over-the-
         counter         10,058   21,566     -53%   28,512   54,936     -48%
                        -------------------------- --------------------------
                         75,279   96,003     -22%  242,484  286,907     -15%
      Development
       Services          20,354   19,388       5%   61,381   54,334      13%
                        -------------------------- --------------------------
                         95,633  115,391     -17%  303,865  341,241     -11%
                        -------------------------- --------------------------

    Europe
    ------
      Commercial
       Manufacturing
        Prescription     70,246   55,480      27%  180,871  150,145      20%
        Over-the-
         counter          1,171    1,605     -27%    3,182    2,476      29%
                        -------------------------- --------------------------
                         71,417   57,085      25%  184,053  152,621      21%
      Development
       Services           8,458    6,263      35%   22,364   15,047      49%
                        -------------------------- --------------------------
                         79,875   63,348      26%  206,417  167,668      23%
                        -------------------------- --------------------------

    TOTAL
    -----
      Commercial
       Manufacturing
        Prescription    135,467  129,917       4%  394,843  382,116       3%
        Over-the-
         counter         11,229   23,171     -52%   31,694   57,412     -45%
                        -------------------------- --------------------------
                        146,696  153,088      -4%  426,537  439,528      -3%
      Development
       Services          28,812   25,651      12%   83,745   69,381      21%
                        -------------------------- --------------------------
    CONSOLIDATED
     REVENUES           175,508  178,739      -2%  510,282  508,909       0%
                        -------------------------- --------------------------
                        -------------------------- --------------------------
    

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

    Revenues

    Consolidated revenues for the three-month period ended July 31, 2007
decreased 2%, or $3.2 million, to $175.5 million from $178.7 million in the
same period in 2006. In the third quarter, revenues increased for Rx
manufacturing and PDS, but decreased in OTC. On a consolidated basis, compared
with the third quarter of 2006, Rx and PDS revenues increased by 4% and 12%,
respectively, and OTC revenues declined by 52%.
    For the three-month period ended July 31, 2007 revenues excluding the
Puerto Rico operations were $153.5 million, compared with $150.8 million in
the same period last year.
    Prescription manufacturing and development services represented 94% of
revenues, compared with 87% 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 declined in the third quarter
by $19.8 million or 17% over the same period a year ago. The decrease reflects
a significant decline in OTC revenues in Whitby and Cincinnati, where certain
clients have repatriated products back to their own manufacturing networks. Rx
revenues declined in Puerto Rico as a result of the elimination of
manufacturing of Zocor(R), which lost its patent protection in June 2006 and
lower revenues for Omnicef(R), which was impacted by the launch of generic
competitive products in May of 2007. The Company is manufacturing the
authorized generic of Omnicef(R) and revenues for the pipeline fill of this
product in the third quarter partially offset the reduction in revenues for
the branded product.
    In Europe, revenues for the third quarter of 2007 increased by $16.5
million or 26% over the same period of 2006. The year-over-year increase
reflects higher Rx manufacturing revenues from all operations. Gains in France
and Italy reflect 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. PDS
operations in Swindon also continued to show further increases in volumes. The
Euro strengthened approximately 7% and U.K. sterling strengthened
approximately 8% against the U.S. dollar relative to the same period last
year, increasing reported revenues by approximately $5.3 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
third quarter of 2007, operating expenses were $152.4 million, being
$11.4 million lower than the same period a year ago. Operating expenses were
principally impacted by lower commercial manufacturing volumes, savings from
the performance enhancement program and foreign exchange gains, offset in part
by the strengthening of European and Canadian currencies relative to the U.S.
dollar. Operating expenses as a percentage of revenues were 86.8%, compared
with 91.6% in the same period a year ago.

    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses

    On a consolidated basis in the third quarter of 2007, EBITDA before
repositioning expenses, representing earnings 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
$23.1 million, compared with $15.0 million in the same period a year ago.
EBITDA margin before repositioning expenses was 13.2% in the three-month
period, compared with 8.4% in the same period a year ago.
    For the three-month period ended July 31, 2007 EBITDA before
repositioning expenses excluding the Puerto Rico operations was $30.1 million,
compared with $18.0 million in the same period last year. This represents an
EBITDA margin before repositioning expenses of 19.6% in the three month
period, compared with 11.9% in the same period last year.
    In Canada, EBITDA before repositioning expenses from the commercial
operations was $7.0 million, being $0.9 million higher than the same period
last year. This improvement is despite a significant reduction in volumes at
Whitby and reflects operating efficiency gains and cost savings arising from
the profit enhancement program. EBITDA before repositioning expenses was not
significantly impacted by foreign exchange in the third 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 $4.3 million, compared
with a loss of $1.2 million in the same period last year. The significant
decline principally reflects a reduction in Rx manufacturing volumes in the
Caguas, Puerto Rico facility, which previously manufactured Zocor(R). The
Carolina operations were able to offset volume declines in Omnicef(R) with
cost savings and efficiency improvements relative to the same period last
year. OTC revenue declines in Cincinnati were replaced with higher margin Rx
business.
    In Europe, EBITDA before repositioning expenses from the commercial
operations was $14.7 million, being $6.4 million higher than the same period a
year ago. The improvement reflects the volume gains in all operations. The
strengthening European currencies relative to the US dollar compared with the
same period last year also had the impact of increasing EBITDA before
repositioning expense by approximately $0.9 million.
    EBITDA before repositioning expenses from the global PDS operations was
$6.4 million, being $0.5 million higher than the same period in 2006. The
increase reflects revenue growth across all of the operations, with the
exception of Puerto Rico.
    Corporate costs in the third quarter of 2007 were $3.4 million lower than
the same period last year. This reduction principally reflects the benefit of
foreign exchange gains arising from the revaluation of US dollar denominated
debt held in the Canadian legal entity and lower administrative costs.

    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 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 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 third quarter of 2007 the Company incurred $1.5 million of
expenses in connection with its performance enhancement program. The expenses
were principally associated with cost saving initiatives being undertaken in
the Caguas and Carolina facilities in Puerto Rico.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $9.8 million in the third
quarter of 2007, being comparable with the expense of $9.9 million in the
third quarter of 2006.

    Amortization of Intangible Assets

    Amortization of intangible assets was $1.2 million in the third quarter
of 2007, compared with $2.8 million for the third 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 quarters of 2007 and 2006.

    Interest Expense and Amortization of Deferred Financing Costs

    Interest expense for the third quarter of 2007 was $7.4 million, compared
with $5.2 million in the third 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 $3.5 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 $45.3 million,
compared with a loss of $257.7 million in the same period a year ago.

    Income Taxes

    The Company recorded an income tax charge of $5.3 million in the third
quarter of 2007, compared with a minor recovery in the same period last year.
The income tax charge in 2007 principally reflects the asset impairment charge
and 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.

    Loss and Loss Per Share from Continuing Operations

    The Company recorded a loss from continuing operations in the third
quarter of 2007 of $50.7 million, compared with a loss of $257.7 million in
the same period last year. The loss per share was 54.5 cents, compared with a
loss of $2.78 per share a year earlier. The loss in 2007 included an after tax
asset impairment charge of $47.8 million or 51.4 cents per share and after tax
repositioning expenses of $1.5 million or 1.6 cents per share. The loss in
2006 included after tax asset impairment charge of $252.1 million, or $2.72
per share.
    Because the Company reported a loss in the third 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. The net loss from
discontinued operations in the third quarter of 2007 was $12.4 million, or
13.3 cents compared with net earnings of $0.5 million or 0.5 cents in the same
period last year. The net loss in 2007 includes an asset impairment charge of
$13.0 million, or 14.0 cents per share, to write down the capital assets to
their fair market value less cost to sell.

    Nine Months Ended July 31, 2007 Compared with Nine Months Ended July 31,
    2006

    Revenues

    Consolidated revenues for the nine-month period ended July 31, 2007
increased $1.4 million to $510.3 million from $508.9 million in the same
period in 2006. Rx manufacturing and PDS revenues grew by 3% and 21%,
respectively, while OTC manufacturing revenues declined by 45%.
    For the nine-month period ended July 31, 2007 revenues excluding the
Puerto Rico operations were $425.3 million, compared with $413.0 million in
the same period last year.
    Prescription manufacturing and development services represented 94% of
revenues, compared with 89% 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 nine-months ended
July 31, 2007 declined by $37.4 million or 11% 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, Puerto Rico as
a result of lower production of Zocor(R) and Levothyroxine sodium. This was
offset in part by increased volumes in Carolina during the first quarter of
2007, where in the prior year the facility had been impacted by a temporary
shut down in production to resolve issues with regard to a warning letter
issued by the U.S. Food and Drug Administration ("FDA"). 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 a significant increase in PDS revenues in Canada and
Cincinnati.
    In Europe, revenues for the nine-months ended July 31, 2007 were
$38.7 million or 23% 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. PDS operations in Swindon, U.K. also continued to show further
increases in volumes. These gains were offset in part in the first half of the
year by lower pre-launch commercial revenues for the cephalosporin
lyophilization services in Swindon. The Euro strengthened approximately 9% and
U.K. sterling strengthened approximately 10% against the U.S. dollar relative
to the same period last year, increasing reported revenues by approximately
$17.0 million. Had European currencies remained constant to the rates of the
prior year, European revenues would have been 13% 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
nine-month period ended July 31, 2007 operating expenses were $441.2 million,
compared with $456.8 million in the same period a year ago, a decline of 3%.
The decline reflects savings from the performance enhancement program and
foreign exchange gains, offset in part by the strengthening European and
Canadian currencies relative to the U.S. dollar.
    Operating expenses as a percentage of revenues were 86.5%, compared with
89.8% in the prior year.

    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses

    On a consolidated basis for the nine-month period ended July 31, 2007,
EBITDA before repositioning expenses, representing earnings 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 $69.1 million, an increase of $17.0 million, or 33%, from
the comparable period in 2006. EBITDA margin before repositioning expenses was
13.5% in the nine-month period ended July 31, 2007, compared with 10.2% in the
same period a year ago.
    For the nine-month period ended July 31, 2007 EBITDA before repositioning
expenses excluding the Puerto Rico operations was $78.1 million, compared with
$50.9 million in the same period last year. This represents an EBITDA margin
before repositioning expenses of 18.4% in the nine month period, compared with
12.3% in the same period last year.
    The Canadian commercial operations reported EBITDA before repositioning
expenses of $22.5 million, or $5.2 million higher than the same period last
year. The improvement reflects savings from the performance enhancement
program, in particular at the Whitby operations, offset in part by lower Rx
and OTC volumes. EBITDA before repositioning expenses was not significantly
impacted by foreign exchange, as the negative earnings impact of the 1%
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) was a loss of $2.7 million, compared with a
profit of $8.3 million in the same period last year. The decline principally
reflects a reduction in Rx manufacturing volumes in the Caguas facility,
offset in part by higher profitability in Carolina, which in the first quarter
of 2006 was impacted by a temporary shut down in production. The Caguas
operations also incurred significant costs in the third quarter of 2007 in
connection with the launch of a new large-volume product.
    In Europe, EBITDA before repositioning expenses from commercial
operations was $33.1 million being $10.5 million higher than the same period
last year. The improvement reflects increased volumes in the operations in
Italy and France, offset in part in the first half of the year by lower pre-
launch revenues for the cephalosporin lyophilization services in Swindon. 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 $2.5 million.
    EBITDA before repositioning expenses from the global PDS operations was
$21.2 million, being $7.6 million higher than the same period in 2006. This
reflects improved profitability in Europe, Canada and Cincinnati.
    Corporate costs for the nine-month period ended July 31, 2007 were
$4.7 million lower than the same period last year, reflecting cost savings and
the benefit of foreign exchange gains in the third quarter of 2007.

    Repositioning Expenses

    During the nine-month period ended July 31, 2007 the Company incurred
$9.1 million of expenses in connection with its performance enhancement
program and its review of strategic and financial alternatives. The expenses
include consulting fees associated with the manufacturing efficiency review,
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 $30.5 million for the nine
months ended July 31, 2007, compared with $29.1 million in the same period of
2006, an increase of $1.4 million, or 5%. The increase principally reflects
the effect of the strengthening European currencies relative to the U.S.
dollar.

    Amortization of Intangible Assets

    The amortization of intangible assets was $5.6 million in the nine months
ended July 31, 2007, compared with $9.7 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 nine months ended July 31, 2007 was $21.7
million, compared with $15.1 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. Interest expense in the third
quarter of 2007 reflects the impact of the Company's refinancing that was
completed on April 27, 2007 and includes a non-cash expense of $3.5 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 nine months ended
July 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 $60.7 million in the
nine months ended July 31, 2007, compared with a loss of $265.0 million in the
same period a year ago.

    Income Taxes

    The income tax expense for the nine months ended July 31, 2007 was
$14.7 million, compared with an expense of $1.6 million for the same period
last year. The income tax charge in 2007 principally reflects tax losses in
certain entities in Puerto Rico and Canada, where the tax benefit after
valuation reserves has not been recognized, compounded by high tax rates in
Italy where the Company reported significant profits. 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.

    Loss and Loss Per Share from Continuing Operations

    The Company recorded a loss from continuing operations for the nine
months ended July 31, 2007 of $75.4 million, compared with a loss of
$266.6 million in the same period a year ago. The loss per share was
81.1 cents compared with $2.87 a year earlier. The loss for the nine months
ended July 31, 2007 included an after tax asset impairment charge of
$47.8 million, or 51.4 cents per share, after-tax repositioning expenses of
$8.1 million, or 8.7 cents per share and after-tax refinancing expenses of
$12.6 million, or 13.5 cents per share. The loss for the nine months ended
July 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 nine months ended July 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 nine months ended
July 31, 2007 was $11.7 million, or 12.6 cents compared with net earnings of
$0.8 million or 0.9 cents in the same period last year. The net loss in 2007
includes an asset impairment charge of $13.0 million, or 14.0 cents per share
to write down the capital assets to their fair market value less 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     Nine months ended
                                               July 31,              July 31,
                                       2007       2006       2007       2006
                                    -------------------- --------------------
                                          $          $          $          $
                                    -------------------- --------------------

    Net loss from continuing
     operations                     (50,668)  (257,698)   (75,408)  (266,557)
    Depreciation and amortization    11,057     12,735     36,137     38,779
    Write-off of deferred
     financing costs                      -          -          -      6,332
    Asset impairment charge          48,580    254,661     48,580    254,661
    Foreign exchange loss                 -          -        858          -
    Amortization of deferred
     financing costs                    126        136      1,506        598
    Employee future benefits            (65)       941        323        793
    Future income taxes               3,104     (5,757)     3,172     (3,164)
    Accretive interest on
     convertible preferred shares     3,481          -      3,481          -
    Amortization of deferred
     revenues                          (547)      (498)    (1,516)    (1,493)
    Other                            (3,171)       562     (3,820)     1,433
    Working capital                 (17,189)     2,896    (24,184)   (15,605)
    Increase in deferred revenues     2,057          -      2,057      9,614
                                    --------   --------   --------   --------
    Cash provided by (used in)
     operating activities            (3,235)     7,978     (8,814)    25,391
    Cash used in investing
     activities                      (9,813)   (15,568)   (24,121)   (43,292)
    Cash provided by financing
     activities                       8,771     19,772     19,153     11,894
    Net increase (decrease) in
     cash and cash equivalents
     from discontinued operations      (210)     1,054      3,957      3,066
    Other                            (1,555)       534       (402)       431
                                    --------   --------   --------   --------
    Net increase (decrease) in
     cash and cash equivalents       (6,042)    13,770    (10,227)    (2,510)
                                    --------   --------   --------   --------
                                    --------   --------   --------   --------
    


    Cash Provided by (Used in) Operating Activities - Continuing Operations

    Cash used in operating activities was $3.2 million in the third quarter
of 2007 compared with a cash inflow of $8.0 million for the comparable period
in 2006. On a year-to-date basis, cash used in operating activities was
$8.8 million, compared with a cash inflow of $25.4 million in the same period
last year. The year-to-date deterioration principally reflects lower earnings
before non-cash charges and the impact of higher receivable and inventory
levels. In addition in 2007, the Company has 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 in the third quarter of 2007 was
$9.8 million, compared with $15.6 million in the same period a year ago. On a
year-to-date basis, cash used in investing activities was $24.1 million,
compared with $43.3 million in the same period last year. The decrease for the
third 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     Nine months ended
                                               July 31,              July 31,
                                       2007       2006       2007       2006
                                    -------------------- --------------------
                                          $          $          $          $
                                    -------------------- --------------------

    Additions to capital assets
      -sustaining                    (3,364)    (3,766)    (8,868)    (9,887)
      -project related               (5,040)   (10,680)   (12,249)   (31,826)
    Net increase in investments        (293)         -       (177)         -
    Increase in deferred
     pre-operating costs             (1,116)    (1,122)    (2,827)    (1,579)
                                    --------   --------   --------   --------
    Cash used in investing
     activities of continuing
     operations                      (9,813)   (15,568)   (24,121)   (43,292)
                                    --------   --------   --------   --------
                                    --------   --------   --------   --------
    

    Cash Provided by Financing Activities

    The principal financing activity for the nine months ended July 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 nine months ended July 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     Nine months ended
                                               July 31,              July 31,
                                       2007       2006       2007       2006
                                    -------------------- --------------------
                                          $          $          $          $
                                    -------------------- --------------------

    Increase (decrease) in bank
     indebtedness                     9,078     (1,446)     7,762    (14,137)
    Increase in long-term debt        6,812     62,803    182,652    373,946
    Repayment of long-term debt      (7,119)   (41,665)  (320,072)  (353,010)
    Issue of convertible preferred
     shares                               -          -    150,000          -
    Convertible preferred share
     issue costs - equity component       -          -     (1,213)         -
    Issue of restricted voting
     shares                               -         80         24         80
    Decrease in restricted cash           -          -          -      7,805
    Increase in deferred
     financing costs                      -          -          -     (2,790)

                                    --------   --------   --------   --------
    Cash provided by financing
     activities of continuing
     operations                       8,771     19,772     19,153     11,894
                                    --------   --------   --------   --------
                                    --------   --------   --------   --------
    

    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 and one Class I Preferred Share, Series D 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 214.1644 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. These voting
rights represent approximately 25% 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 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.

    Financial Ratios
    ----------------

    Total interest bearing debt, including the debt component of the
convertible preferred shares, at July 31, 2007 was $362.7 million, being
$13.1 million higher than at October 31, 2006. At July 31, 2007, the Company's
consolidated ratio of interest-bearing debt to shareholders' equity was
186.8%, 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 nine months ended July 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 third quarter of
2007, $0.5 million was recognized as earnings and $2.1 million was received as
a capital expenditure reimbursement. During the nine months ended July 31,
2007, $1.5 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 third quarter of 2007, $1.2 million
was charged to earnings. During the nine months ended July 31, 2007, $5.6
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
July 31, 2007 was $3.2 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 $27.0 million have been recorded at July 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 $39.7 million have been recorded at July 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 60% to 70% of revenues of the Canadian operations and
approximately 10% to 20% of its operating expenses are transacted in U.S.
dollars. As a result, the Company may experience trading and translation gains
or losses because of volatility in the exchange rate between the Canadian
dollar and the U.S. dollar. Based on the Company's current U.S. denominated
net inflows, for each one-cent change in the Canadian-U.S. rate, the impact on
annual pretax earnings, excluding any hedging activities, is approximately
$1.1 million.
    The Company mitigates its foreign exchange risk by engaging in foreign
currency hedging activities using derivative financial instruments. At
July 31, 2007 the Company had outstanding foreign exchange forward contracts
to sell US$27.0 million. The contracts mature at the latest on October 29,
2007 and cover approximately 90% of the Company's expected foreign exchange
exposure for the balance of the 2007 fiscal year. The mark-to-market value at
July 31, 2007 that is recorded in accumulated other comprehensive income is an
unrealized gain of $1.5 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 designated as a hedge against the carrying value of
certain foreign operations, are included in accumulated other comprehensive
income in shareholders' equity. At July 31, 2007, the Company had designated
$143.8 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. On May 25, 2007
the Company 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
July 31, 2007, 17% 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 $0.6 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:

    
    Quarterly Consolidated Financial Information

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

    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      (22,943)    ($0.25)     ($0.25)
    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)

    2005

    October 31       171,086      25,251        7,910      $0.09       $0.08
    

    Additional Information

    Share Capital

    As of July 31, 2007, the Company had 92,958,688 restricted voting shares
(previously common shares) outstanding and 150,000 each of Class I Preferred
Shares, Series C and Series D.
    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
convertible preferred shares have the right to elect up to three of nine
members of the Board of Directors. The holders of Patheon's common 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 summer shut downs, particularly in Europe, and declining
volumes in Puerto Rico, particularly at the Carolina site, revenues for the
fourth quarter of 2007 are expected to be lower than the third 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 auditors have been engaged to perform a review of
these financial statements. The independent auditors have advised the Company
that they have satisfactorily completed their review, except for procedures
that have not yet been completed in respect of the asset impairment charge
that the Company recognized for the third quarter ended July 31, 2007. The
independent auditors were unable to complete the review procedures in respect
of the asset impairment charge before the filing of the accompanying unaudited
interim consolidated financial statements because the valuation of the
relevant assets related to the Company's Carolina, Puerto Rico operations was
not substantially completed until shortly before the deadline for filing the
financial statements.

    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; interest rates; and conditions of MOVA's
tax exemptions. Although the Company has attempted to identify important risks
and factors that could cause actual actions, events or results to differ
materially from those described in forward-looking statements, there may be
other factors and risks that cause actions, events or results not to be as
anticipated, estimated or intended. There can be no assurance that forward-
looking statements will prove to be accurate, as actual results and future
events could differ materially from those anticipated in such statements.
Accordingly, readers should not place undue reliance on forward-looking
statements. These forward-looking statements are made as of the date of this
news release and MD&A and, except as required by law, the Company assumes no
obligation to update or revise them to reflect new events or circumstances.

    %SEDAR: 00001700 E




For further information:

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

Organization Profile

Patheon Inc

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