Patheon reports second quarter results



    Q2 2008 revenues increased 16% over last year (9% in local currencies)

    EBITDA margins improved

    TORONTO, June 6 /CNW/ - Patheon (TSX:PTI), a global provider of drug
development and manufacturing services to the international pharmaceutical
industry, today announced its results for the second quarter ended April 30,
2008. (All amounts are in U.S. dollars unless otherwise indicated).
    The consolidated results for the second quarter and first half of 2008
and comparative prior periods presented in this news release reflect the
results for the Company's continuing operations. The results for
Niagara-Burlington operations and the Carolina, Puerto Rico operations have
been segregated and presented separately as discontinued operations in the
consolidated financial statements.
    "This quarter we delivered solid results that demonstrate the early
progress we are making in reshaping Patheon," said Wes Wheeler, President and
Chief Executive Officer, Patheon Inc. "Revenues increased in all our
businesses and for both North America and Europe as a result of our renewed
commitment to customer service. We also made meaningful progress with the
underlying profitability of the operations, however there is still room for
improvement and it continues to be one of our key areas of focus."

    
    Second Quarter 2008 Operating Results from Continuing Operations

    -   Revenues increase 16% year-over-year to $186 million (9% in local
        currencies)
    -   Production Volumes increased 8% over Q1 2008
    -   EBITDA before repositioning expenses were $23.1 million, compared to
        $21.1 million for the same period last year
    -   Net loss was $8.5 million compared to $22.0 million for the same
        period last year
    

    Commercial manufacturing Q2 2008 revenues increased 15% year-over-year to
$151.2 million driven by strong growth in Europe particularly in
Bourgoin-Jallieu, France and steady growth in North America led by Whitby.
Production volumes in Q2 2008, based on a standard pack size, were 8% higher
compared to Q1 2008.
    Pharmaceutical Development Services Q2 2008 revenues increased 23%
year-over-year to $34.8 million with both North America and Europe
experiencing strong growth. In the quarter, over 50 new PDS projects primarily
from existing customers were signed making it the most successful quarter to
date from a new contracts signed perspective.
    Total North American Q2 2008 revenue increased 9% year-over-year to
$98.0 million reflecting improvements in all locations with the exception of
Caguas, Puerto Rico and the Toronto Region Operations.
    Total European Q2 2008 revenue increased 26% year-over-year to
$88.0 million reflecting higher manufacturing revenues from the existing
business base in all locations with particular strength in Bourgoin and
Ferentino and a benefit from foreign exchange of $8.9 million.
    Consolidated EBITDA before repositioning expenses was $23.1 million in
the second quarter, compared with $21.1 million in the same period last year.
Q2 2008 EBITDA margin before repositioning expenses were 12.4% compared with
13.2% in the same period last year. Overall, the net impact of foreign
exchange was not material for the quarter.
    In North America, EBITDA before repositioning expenses for the commercial
operations was $6.2 million in the second quarter of 2008, compared with
$2.5 million in the same period last year. The improvement arose from
cost-savings from workforce reductions in the Puerto Rico operations and the
benefits of higher revenues in the Whitby operations. In Canada the negative
impact of a 15% decline in the value of the U.S. dollar, relative to the
Canadian dollar in the same period last year was offset by benefits from the
Company's cash flow hedging program and gains on the revaluation of working
capital.
    In Europe, EBITDA before repositioning expenses from the commercial
operations was $14.8 million in the second quarter of 2008, $1.8 million
higher than the same period a year ago. The benefits of revenue gains in all
operations were offset by lower margins in Italy, due to a change in mix to
lower margin products. The strengthening European currencies relative to the
U.S. dollar compared with the same period last year, plus the benefits of
foreign exchange gains on the revaluation of foreign currency denominated
assets and liabilities, had the impact of increasing EBITDA before
repositioning expenses by approximately $3.3 million.
    EBITDA before repositioning expenses from the global PDS operations was
$9.6 million in the second quarter of 2008, $2.3 million higher than the same
period in 2007. The global PDS operations benefited from strong growth in
Canada, Ferentino, Italy and Cincinnati. In Canada, the benefits of increased
revenues were offset in part by the strengthening Canadian dollar, which
reduced profitability in the Canadian PDS operations by approximately
$0.9 million.
    Q2 2008 corporate costs were $7.5 million compared with $1.7 million in
the same period last year. Additional costs incurred during the quarter were
in connection with recruiting for senior and executive management positions,
stock based compensation expenses and consulting fees related to new
operational and strategic initiatives. Included in corporate costs were net
foreign exchange losses of $0.8 million compared with a gain of $1.2 million
for the same period last year. The impact of the strengthening Canadian dollar
also had the impact of increasing U.S. translated values of Canadian corporate
costs by approximately $0.6 million.
    Repositioning expenses for the quarter were $8.3 million attributable to
severance costs for changes in senior and executive management, a workforce
reduction in Swindon, U.K. and on-going restructuring of the Canadian and
Puerto Rico site networks. Based on current planning and timelines, further
repositioning expenses are expected in the third quarter of 2008 in connection
with the previously announced consolidation of the York Mills and Whitby
operations.

    
    First Half 2008 Operating Results from Continuing Operations

    -   Revenues increased 14% to $350 million
    -   EBITDA before repositioning expenses were $33.2 million, compared to
        $39.8 million for the same period last year
    -   Net loss was $23.7 million compared to $24.0 million for the same
        period last year
    

    Total North American revenues in the first half of 2008 increased by
$4.6 million or 3% over the same period a year ago reflecting an increase in
commercial manufacturing and PDS revenues in the Canadian and Cincinnati
operations, offset in part by lower revenues in Caguas, Puerto Rico. The
year-over-year decline in Caguas was most significant in the first quarter of
2008.
    Total European revenue for the first half of 2008 increased by
$37.9 million or 30% over the same period a year ago. The year-over-year
increase reflects higher manufacturing revenues from all operations, in
particular Ferentino, Italy and Bourgoin-Jallieu, France and a benefit from
foreign exchange of $15.8 million.
    Consolidated EBITDA before repositioning expenses for the first half of
2008 was $33.2 million, compared with $39.8 million in the same period a year
ago. EBITDA margin before repositioning expenses was 9.5% in the six-month
period ending April 30, 2008, compared with 12.9% in the same period a year
ago. Had foreign exchange rates remained the same as those in the same period
last year, EBITDA before repositioning expenses would have been approximately
$4.0 million higher than was reported.

    Update on Restructuring the Canadian Site Network

    The Company plans to close its York Mills, Toronto facility and is
currently in the process of transferring all commercial production and
development services undertaken at its York Mills facility to, primarily, its
Whitby facility. In accordance with this plan, on April 15, 2008 the Company
completed the sale of the York Mills property for net proceeds of
$11.9 million and has entered into a lease for up to two years in order to
facilitate the decommissioning process.

    Update on Restructuring the Puerto Rico Operations

    "We have made good progress on our plans to focus our Puerto Rico
operations in Manati and Caguas and have already begun to see the benefits
from the operational and service improvements. These include an increase in
revenue since last quarter," said Wes Wheeler.

    Outlook

    Revenues in the third quarter of 2008 are expected to be slightly higher
than the second quarter of 2008. Revenues in the second half of 2008 are also
expected to be slightly higher than the first half of 2008.
    These expectations are based on internal management forecasts, which in
the case of the revenue forecasts, are based on client purchase orders and
forecasts of anticipated demand and other factors. These internal management
forecasts were prepared for internal planning purposes and may not be
appropriate for forecasting future financial results or for other purposes.

    About Patheon Inc.

    Patheon Inc. is a leading global provider of contract development and
manufacturing services to the global pharmaceutical industry. Patheon prides
itself in providing the highest quality products and services to more than 270
of the world's leading pharmaceutical and biotechnology companies. Patheon
services range from preclinical development through commercial manufacturing
of a full array of dosage forms including parenteral, solid, semi-solid and
liquid forms. Patheon uses many innovative technologies including single-use
disposables, Liquid-Filled Hard Capsules and a variety of modified release
technologies.
    Patheon's comprehensive range of fully integrated Pharmaceutical
Development Services includes pre-formulation, formulation, analytical
development, clinical manufacturing, scale-up and commercialization. Patheon
can take customers direct to clinic with global clinical packaging and
distribution services and Patheon's Quick to Clinic(TM) programs can
accelerate early phase development project to clinical trials while minimizing
the consumption of valuable API.
    Patheon's integrated development and manufacturing network of 12 sites,
with locations across North America and Europe, strives to ensure that
customer products can be launched with confidence anywhere in the world.

    Caution Concerning Forward-Looking Statements

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

    Webcast Conference Call with Analysts

    Patheon Inc. will host a webcast conference call with financial analysts
on its second quarter and first half 2008 results on Friday, June 6, 2008 at
10:00 a.m. (Eastern Time). The call will begin with a brief presentation,
followed by a question-and-answer period with investment analysts. Interested
parties are invited to access the live call, via telephone, in listen-only
mode, at (416) 644-3414 (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 will also
be available via the web at www.patheon.com. An archived version of the Q2
webcast will be available on www.patheon.com for three months.


    
    Consolidated Statements of Loss
    (unaudited)
                              Three months ended            Six months ended
                                        April 30,                   April 30,
    -------------------------------------------------------------------------
    (in thousands
     of U.S. dollars,
     except loss per     2008     2007         %     2008     2007         %
     share)                 $        $    change        $        $    change
    -------------------------------------------------------------------------

    Revenues          185,997  160,218     16.1%  350,169  307,588     13.8%
                      --------------------------- ---------------------------
    Operating
     expenses         162,063  140,234     15.6%  314,188  268,930     16.8%
    Foreign exchange
     loss (gain) on
     debt (note 7)        820   (1,156)  -170.9%    2,824   (1,156)  -344.3%
    Repositioning
     expenses (note 6)  8,295    3,631    128.4%   10,647    6,942     53.4%
    Depreciation and
     amortization      10,718    9,917      8.1%   21,856   19,545     11.8%
    Amortization of
     intangible assets    471      490     -3.9%      942      943     -0.1%
    Foreign exchange
     loss on foreign
     operations             -      858                  -      858
    Interest            7,817    7,204      8.5%   15,775   14,303     10.3%
    Refinancing
     expenses               -   13,471                  -   13,471
                      --------------------------- ---------------------------
    Loss from
     continuing
     operations before
     income taxes      (4,187) (14,431)    71.0%  (16,063) (16,248)     1.1%
    Provision for
     income taxes       2,284    7,519    -69.6%    2,623    9,278    -71.7%
                      --------------------------- ---------------------------
    Loss from
     continuing
     operations        (6,471) (21,950)    70.5%  (18,686) (25,526)    26.8%
                      --------------------------- ---------------------------
    (as a % of
     revenues)          -3.5%   -13.7%              -5.3%    -8.3%
    Earnings (loss)
     from discontinued
     operations
     (note 2)          (2,004)     (36) -5466.7%   (4,977)   1,516   -428.3%
                      --------------------------- ---------------------------
    Net loss for the
     period 	        (8,475) (21,986)    61.5%  (23,663) (24,010)     1.4%
                      --------------------------- ---------------------------
                      --------------------------- ---------------------------

    Basic and diluted
     earnings (loss)
     per share
      From continuing
       operations        (7.1)   (23.5)    69.8%    (20.6)   (27.4)    24.8%
                        cents    cents              cents    cents
      From discontinued
       operations        (2.2)    (0.1) -2100.0%     (5.5)     1.6   -443.8%
                        cents    cents              cents    cents
                      --------------------------- ---------------------------
                         (9.3)   (23.6)    60.6%    (26.1)   (25.8)    -1.2%
                        cents    cents              cents    cents
                      --------------------------- ---------------------------

    Average number of
     shares outstanding
     during period -
     basic and diluted
     (in thousands)    90,633   92,959     -2.5%   90,629   92,959     -2.5%
                      --------------------------- ---------------------------

    see accompanying notes



    Consolidated Balance Sheets
    (unaudited)
                                                         As at         As at
                                                      April 30,   October 31,
                                                          2008          2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                           $             $
    -------------------------------------------------------------------------

    Assets
    Current
      Cash and cash equivalents                         30,764        30,557
      Accounts receivable                              132,213       127,691
      Inventories                                       87,913        85,991
      Prepaid expenses and other                         6,934        11,887
      Current assets held for sale (note 2)              5,279        16,151
                                                     ------------------------
    Total current assets                               263,103       272,277
                                                     ------------------------

    Capital assets                                     477,335       479,682
    Intangible assets                                    5,828         6,770
    Deferred costs                                       7,654         8,878
    Future tax assets                                   34,773        31,039
    Goodwill                                             3,431         3,658
    Investments                                          1,406           946
    Long-term assets held for sale (note 2)              9,395        26,367
                                                     ------------------------
                                                       802,925       829,617
                                                     ------------------------
                                                     ------------------------

    Liabilities and Shareholders' equity
    Current
      Bank indebtedness                                 17,174         8,224
      Accounts payable and accrued liabilities         151,659       159,335
      Income taxes payable                               3,863         4,684
      Current portion of long-term debt                 12,017        11,719
      Current liabilities related to assets
       held for sale (note 2)                            3,770         7,743
                                                     ------------------------
    Total current liabilities 	                        188,483       191,705
                                                     ------------------------

    Long-term debt                                     208,770       203,615
    Deferred revenues                                   25,192        25,994
    Future tax liabilities                              46,924        47,397
    Convertible preferred shares - debt component      147,344       139,916
    Other long-term liabilities                         21,366        22,069
    Long-term liabilities related to assets
     held for sale (note 2)                                194         1,736
                                                     ------------------------
    Total liabilities                                  638,273       632,432
                                                     ------------------------

    Shareholders' equity
      Convertible preferred shares - equity
       component                                        15,925        15,925
      Restricted voting shares                         391,992       391,967
      Contributed surplus                                5,538         4,049
      Deficit 	                                       (309,913)     (286,250)
      Accumulated other comprehensive income            61,110        71,494
                                                     ------------------------
    Total shareholders' equity	                        164,652       197,185
                                                     ------------------------
                                                       802,925       829,617
                                                     ------------------------
                                                     ------------------------

    see accompanying notes



    Consolidated Statements of Changes in Shareholders' Equity
    (unaudited)

                                                   Six months ended April 30,
                                                          2008          2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)                           $             $
    -------------------------------------------------------------------------

    Convertible preferred shares - equity component
      Balance at beginning of period                    15,925             -
      Shares issued during the period, net of
       issue costs                                           -        15,925
                                                     ------------------------
      Balance at end of period                          15,925        15,925
                                                     ------------------------
    Restricted voting shares
      Balance at beginning of period                   391,967       400,721
      Shares issued during the period, net of
       issue costs                                          25            24
                                                     ------------------------
      Balance at end of period                         391,992       400,745
                                                     ------------------------
    Contributed surplus
      Balance at beginning of period                     4,049         3,829
      Stock options                                      1,489            94
                                                     ------------------------
      Balance at end of period                           5,538         3,923
                                                     ------------------------
    Deficit
      Balance at beginning of period                  (286,250)     (189,900)
      Adjustment related to change in
       accounting policy                                     -        (1,749)
      Net loss for the period                          (23,663)      (24,010)
                                                     ------------------------
      Balance at end of period                        (309,913)     (215,659)
                                                     ------------------------
    Accumulated other comprehensive income
      Balance at beginning of period                    71,494        36,081
      Transition adjustment                                  -          (762)
      Other comprehensive income (loss) for
       the period                                      (10,384)       11,442
                                                     ------------------------
      Balance at end of period                          61,110        46,761
                                                     ------------------------
    Total shareholders' equity at end of period        164,652       251,695
                                                     ------------------------
                                                     ------------------------
    see accompanying notes



    Consolidated Statements of Comprehensive Loss
    (unaudited)

                                  Three months ended        Six months ended
                                            April 30,               April 30,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)     $           $           $           $
    -------------------------------------------------------------------------

    Net loss for the period       (8,475)    (21,986)    (23,663)    (24,010)
                               ----------------------  ----------------------
    Other comprehensive income
     (loss), net of income taxes
      Change in foreign currency
       gains on investments in
       subsidiaries, net of
       hedging activities(1)       3,566      11,602      (3,786)      7,097

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

      Change in value of
       derivatives designated as
       foreign currency and
       interest rate cash flow
       hedges(3)                   1,730       3,340      (3,363)        831

      (Gains) losses on foreign
       currency and interest
       rate cash flow hedges
       reclassified to
       consolidated statement
       of loss(4)                 (1,201)        448      (3,235)        721
                               ----------------------  ----------------------
      Other comprehensive
       income (loss) for the
       period                      4,095      18,183     (10,384)     11,442
                               ----------------------  ----------------------

                               ----------------------  ----------------------
    Comprehensive loss for the
     period                       (4,380)     (3,803)    (34,047)    (12,568)
                               ----------------------  ----------------------
                               ----------------------  ----------------------

    see accompanying notes

    The amounts disclosed in other comprehensive income have been recorded
    net of income taxes as follows:
    (1) Net of an income tax expense of nil (2007 - nil).
    (2) Net of an income tax expense of nil (Three and six months ended
        April 30, 2007, recovery of $1,935,000).
    (3) Net of an income tax expense of $205,000 and income tax recovery of
        $531,000 for the three and six months ended April 30, 2008,
        respectively (2007 - nil).
    (4) Net of an income tax recovery of $69,000 for the three and six months
        ended April 30, 2008 (Three and six months ended April 30, 2007,
        recovery of $323,000 and $343,000, respectively).



    Consolidated Statements of Cash Flows
    (unaudited)

                                  Three months ended        Six months ended
                                            April 30,               April 30,
    	                             2008        2007        2008        2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)     $           $           $           $
    -------------------------------------------------------------------------

    Operating activities
      Net loss from continuing
       operations                 (6,471)    (21,950)    (18,686)    (25,526)
      Add (deduct) charges to
       operations not requiring
       a current cash payment
        Depreciation and
         amortization             11,189      10,407      22,798      20,488
        Foreign exchange loss
         (gain) on debt              820      (1,156)      2,824      (1,156)
        Foreign exchange loss
         on foreign operations         -         858           -         858
        Accreted interest on
         convertible preferred
         shares                    3,762           -       7,428           -
        Other non-cash interest      130       1,311         260       1,380
        Employee future
         benefits, net of
         contributions              (957)         29      (1,565)        388
        Future income taxes       (2,061)        295      (5,554)        166
        Amortization of
         deferred revenues          (532)       (483)     (1,009)       (969)
        Other                        733         231       1,345         507
                               ----------------------  ----------------------
                                   6,613     (10,458)      7,841      (3,864)
      Net change in non-cash
       working capital balances
       related to continuing
       operations                (13,849)        567     (14,105)     (7,443)
      Increase in deferred
       revenues                    1,478           -       1,478           -
                               ----------------------  ----------------------
      Cash used in operating
        activities of
        continuing operations     (5,758)     (9,891)     (4,786)    (11,307)
      Cash provided by (used in)
       operating activities of
       discontinued operations    (1,765)      4,152      (6,196)     10,049
                               ----------------------  ----------------------
    Cash used in operating
     activities                   (7,523)     (5,739)    (10,982)     (1,258)
                               ----------------------  ----------------------

    Investing activities
      Additions to capital
       assets                    (10,667)     (4,408)    (18,850)    (12,414)
      Proceeds on sale of
       capital assets             12,089           -      12,089           -
      Net increase (decrease)
       in investments                  -           -        (385)        116
      Increase in deferred
       pre-operating costs             -        (646)          -      (1,711)
                               ----------------------  ----------------------
      Cash provided by (used in)
       investing activities
       of continuing operations    1,422      (5,054)     (7,146)    (14,009)
      Cash provided by (used in)
       investing activities of
       discontinued operations     2,237        (395)     10,439        (453)
                               ----------------------  ----------------------
    Cash provided by (used in)
     investing activities          3,659      (5,449)      3,293     (14,462)
                               ----------------------  ----------------------

    Financing activities
      Increase (decrease) in
       bank indebtedness 	    6,715      (8,258)      8,073      (1,316)
      Increase in long-term
       debt                        4,161     166,470      15,940     175,840
      Repayment of long-term
       debt                       (8,585)   (288,453)    (15,576)   (312,587)
      Issue of convertible
       preferred shares                -     150,000           -     150,000
      Convertible preferred
       share issue cost -
       equity component                -      (1,213)          -      (1,213)
      Issue of restricted
       voting shares                  25          24          25          24
                               ----------------------  ----------------------
      Cash provided by financing
       activities of continuing
       operations                  2,316      18,570       8,462      10,748
      Cash used in financing
       activities of
       discontinued operations       (70)        (30)       (173)       (366)
                               ----------------------  ----------------------
    Cash provided by financing
     activities                    2,246      18,540       8,289      10,382
                               ----------------------  ----------------------

    Effect of exchange rate
     changes on cash and cash
     equivalents                     228       2,360        (393)      1,153
                               ----------------------  ----------------------

    Net increase (decrease) in
     cash and cash equivalents
     during the period            (1,390)      9,712         207      (4,185)
    Cash and cash equivalents,
     beginning of period          32,154      36,826      30,557      50,723
                               ----------------------  ----------------------
    Cash and cash equivalents,
     end of period                30,764      46,538      30,764      46,538
                               ----------------------  ----------------------
                               ----------------------  ----------------------

    see accompanying notes



            Notes to Unaudited Consolidated Financial Statements
              for the Three and Six Months Ended April 30, 2008
              (Dollar information in tabular form is expressed
                        in thousands of U.S. dollars)

    1.  Accounting policies

    Basis of presentation

    The accompanying unaudited consolidated financial statements have been
    prepared by the Company in accordance with Canadian generally accepted
    accounting principles on a basis consistent with those followed in the
    most recent audited consolidated financial statements except as noted
    below. These consolidated financial statements do not include all the
    information and footnotes required by generally accepted accounting
    principles for annual financial statements and therefore should be read
    in conjunction with the audited consolidated financial statements and
    notes for the year ended October 31, 2007.

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

    Changes in accounting policy

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

    Recently issued accounting pronouncements

    (a) Inventories

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

    (b) General Standards of Financial Statement Presentation

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

    (c) Goodwill, Intangible Assets and Financial Statement Concepts

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

    2.  Discontinued operations and assets held for sale

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

    In connection with this initiative, on January 31, 2008, the Company
    completed the sale of its Niagara-Burlington commercial manufacturing
    business to Pharmetics Inc. Pharmetics acquired the assets, including
    equipment, facilities and land, at the Company's facilities in Fort Erie
    and Burlington (Gateway Drive) in Ontario. Pharmetics offered employment
    to all of the commercial manufacturing employees at the two sites and
    continues to manufacture and supply all of the products manufactured at
    these sites. Proceeds from the divestiture, net of transaction costs and
    including post closing adjustments, were $10,492,000. The Company
    recorded a loss of $601,000 on the disposal.

    The Company also plans to close its York Mills, Toronto facility and is
    currently in the process of transferring all commercial production and
    development services undertaken at its York Mills facility to its site in
    Whitby. In accordance with this plan, on April 15, 2008 the Company
    completed the sale of the York Mills property for net proceeds of
    $11,864,000 and has entered into a lease for up to two years in order to
    facilitate the decommissioning process.

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

    The results of the Niagara-Burlington and Carolina operations have been
    reported as discontinued operations. Because the business in the York
    Mills, Toronto facility is being transferred within the existing site
    network, its results of operations are included in continuing operations.
    All prior period amounts have been reclassified to conform to the current
    period presentation.

    The results of discontinued operations for the three and six months ended
    April 30, 2008 and 2007 are as follows:

                                  Three months ended        Six months ended
                                            April 30,               April 30,
                                    2008        2007        2008        2007
                                       $           $           $           $
    -------------------------------------------------------------------------

    Revenues                       3,781      20,791      15,160      45,116
    -------------------------------------------------  ----------------------
    Operating expenses             5,616      17,924      18,854      37,689
    Repositioning expenses            18         321         166         711
    Depreciation and
     amortization                      -         862          45       1,704
    Amortization of intangible
     assets                            -       1,692         324       3,420
    Loss on disposal of
     discontinued operations           -           -         601           -
    Interest                           6          20          12          32
    -------------------------------------------------  ----------------------
    Earnings (loss) before
     income taxes                 (1,859)        (28)     (4,842)      1,560
    Provision for income taxes       145           8         135          44
    -------------------------------------------------  ----------------------
    Net earnings (loss) for the
     period                       (2,004)        (36)     (4,977)      1,516
    -------------------------------------------------  ----------------------
    -------------------------------------------------  ----------------------

    As at April 30, 2008, the assets and liabilities held for sale relate to
    the Carolina operations. As at October 31, 2007, the assets held for sale
    and the related liabilities included the Niagara-Burlington and Carolina
    operations and the land and buildings at York Mills. In accordance with
    Section 3475 of the CICA Handbook, long-lived assets held for sale are
    measured at the lower of their carrying amount or fair value less cost to
    sell.

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

                                                         As at         As at
                                                      April 30,   October 31,
    -------------------------------------------------------------------------
                                                          2008          2007
                                                             $             $
    -------------------------------------------------------------------------
    Current assets
      Accounts receivable                                3,683         7,486
      Inventories                                        1,436         8,045
      Prepaid expenses and other                           160           620
    -------------------------------------------------------------------------
    Total current assets                                 5,279        16,151
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Long-term assets
      Capital assets                                     7,754        24,403
      Intangible assets                                  1,625         1,948
      Future tax assets                                     16            16
    -------------------------------------------------------------------------
    Total long-term assets                               9,395        26,367
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Current liabilities
      Accounts payable and accrued liabilities           3,750         7,743
      Current portion of long-term debt                     20             -
    -------------------------------------------------------------------------
    Total current liabilities                            3,770         7,743
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Long-term liabilities
      Long-term debt                                        23           213
      Future tax liabilities                               171             -
      Other long-term liabilities                            -         1,523
    -------------------------------------------------------------------------
    Total long-term liabilities                            194         1,736
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    3.  Convertible preferred shares and restricted voting shares

    The following table summarizes information on convertible preferred
    shares, and restricted voting shares and related matters at April 30,
    2008:

                                                   Outstanding   Exercisable

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

    Restricted voting shares outstanding            90,634,388
    Restricted voting share stock options            7,007,986     4,358,416

    4.  Segmented information

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

    Canadian and foreign continuing operations consist of:

                                            Manufacturing location
                                      Three months ended April 30, 2008
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues by client's billing
     location:
      Canada                       5,219         260           5       5,484
      USA                         34,858      39,360      10,199      84,417
      Europe                      15,459       1,075      76,890      93,424
      Other geographic areas       1,011         724         937       2,672
    -------------------------------------------------------------------------
    Total revenues                56,547      41,419      88,031     185,997
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets               115,961     111,238     250,136     477,335
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                       3,431           -           -       3,431
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                            Manufacturing location
                                      Three months ended April 30, 2007
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues by client's billing
     location:
      Canada                       2,826         111         487       3,424
      USA                         35,563      39,281       2,936      77,780
      Europe                      10,920         523      64,384      75,827
      Other geographic areas         891          83       2,213       3,187
    -------------------------------------------------------------------------
    Total revenues                50,200      39,998      70,020     160,218
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets                99,910     109,007     234,615     443,532
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                       3,113           -           -       3,113
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                            Manufacturing location
                                       Six months ended April 30, 2008
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues by client's billing
     location:
      Canada                       9,335         487         106       9,928
      USA                         66,457      76,762      21,570     164,789
      Europe                      27,067       1,982     138,645     167,694
      Other geographic areas       2,017       1,573       4,168       7,758
    -------------------------------------------------------------------------
    Total revenues               104,876      80,804     164,489     350,169
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                            Manufacturing location
                                       Six months ended April 30, 2007
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues by client's billing
     location:
      Canada                       7,154         349         859       8,362
      USA                         68,767      83,050       6,759     158,576
      Europe                      19,063         955     115,380     135,398
      Other geographic areas       1,570         139       3,543       5,252
    -------------------------------------------------------------------------
    Total revenues                96,554      84,493     126,541     307,588
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 April 30,
                                ---------------------------------------------
                                    2008                    2007
                                       $                       $
    -------------------------------------------------------------------------

    Commercial manufacturing -
     prescription                132,973         71%     121,578         76%
    Commercial manufacturing -
     over-the-counter             18,235         10%      10,432          6%
    Development services          34,789         19%      28,208         18%
    -------------------------------------------------------------------------
                                 185,997        100%     160,218        100%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                          Six months ended April 30,
                                ---------------------------------------------
                                    2008                    2007
                                       $                       $
    -------------------------------------------------------------------------

    Commercial manufacturing -
     prescription                251,708         72%     232,546         76%
    Commercial manufacturing -
     over-the-counter             33,418          9%      20,467          6%
    Development services          65,043         19%      54,575         18%
    -------------------------------------------------------------------------
                                 350,169        100%     307,588        100%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    5.  Stock-based compensation

    The Company has an incentive stock option plan. Persons eligible to
    participate in the plan are directors, officers, and key employees of the
    Company and its subsidiaries or any other person engaged to provide
    ongoing management or consulting services to Patheon and its
    subsidiaries. The plan provides that the maximum number of shares that
    may be issued under the plan is 7.5% of the sum, at any point in time, of
    the issued and outstanding restricted voting shares of the Company and
    the aggregate number of restricted voting shares issuable upon exercise
    of the conversion rights attaching to the issued and outstanding Class I
    Preferred Shares, Series C of the Company. As of April 30, 2008, the
    total number of restricted voting shares issuable under the plan was
    9,363,812 of which there are stock options outstanding to purchase
    7,007,986 shares. The exercise price of restricted voting shares subject
    to an option is determined at the time of grant and the price cannot be
    less than the weighted average market price of the restricted voting
    shares of Patheon on the Toronto Stock Exchange during the two trading
    days immediately preceding the grant date. Options generally expire seven
    to ten years after the grant date and are also subject to early expiry in
    the event of death, resignation, dismissal or retirement of an optionee.
    Options generally vest over one to three years, with one-third vesting on
    each of the first, second and third anniversaries of the grant date for
    those vesting over three years.

    For the purposes of calculating the stock-based compensation expense, the
    fair value of stock options is estimated at the date of the grant using
    the Black-Scholes option pricing model and the cost is amortized over the
    vesting period. During the three and six months ended April 30, 2008, the
    Company granted 496,000 and 3,203,736 options, respectively. For the
    three and six months ended April 30, 2007, the Company granted 100,000
    options. The weighted average fair value of the options granted for the
    three and six months ended April 30, 2008 was $1.36 and $1.35,
    respectively. The weighted average fair value of 100,000 options granted
    for the three and six months ended April 30, 2007 was $1.92. The
    following assumptions were used in arriving at the fair value of options
    issued during the three and six months ended April 30, 2008:

                                  Three months ended        Six months ended
                                      April 30, 2008          April 30, 2008

    Risk free interest rate                     3.0%                    3.8%
    Expected volatility                          44%                     43%
    Expected weighted average life of
     options                                 5 years                 5 years
    Expected dividends yield                      0%                      0%

    Stock-based compensation expense recorded in the three months ended
    April 30, 2008 was $629,000 (2007 - $49,000). Stock-based compensation
    expense recorded in the six months ended April 30, 2008 was $1,489,000
    (2007 - $94,000).

    6.  Repositioning expenses

    The Company has incurred a number of expenses associated with operational
    improvements, cost reduction initiatives and in connection with changes
    in executive management. During the first half of fiscal 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 six months
    ended April 30:

                                  Three months ended        Six months ended
                                            April 30,               April 30,
    -------------------------------------------------------------------------
                                    2008        2007        2008        2007
                                       $           $           $           $
    -------------------------------------------------------------------------
    Employee-related expenses      8,075         404       9,968       1,548
    Consulting, professional and
     project management costs        220         883         679       2,140
    Strategic alternatives review      -       2,344           -       3,254
    -------------------------------------------------------------------------
                                   8,295       3,631      10,647       6,942
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at April 30, 2008, $5,919,000 of the repositioning expenses are unpaid
    and are recorded in accounts payable and accrued liabilities.
    Repositioning expenses paid during the three and six months ended
    April 30, 2008 amounted to $6,155,000 and $10,846,000 respectively.

    7.  Other information

    Foreign exchange

    During the three months ended April 30, 2008, the foreign exchange gain
    on operating exposures, (including benefits from cash flow hedges and the
    revaluation of all foreign currency denominated working capital) recorded
    in operating expenses was $1,210,000 (2007 loss - $2,793,000). During the
    three months ended April 30, 2008, the Company recorded a foreign
    exchange loss on the revaluation of certain U.S. dollar denominated debt,
    net of hedging activities, in its Canadian legal entity of $820,000 (2007
    gain - $1,156,000). During the six months ended April 30, 2008, the
    foreign exchange gain on operating exposures recorded in operating
    expenses was $3,788,000 (2007 loss - $1,386,000) and, the foreign
    exchange loss on the revaluation of certain U.S. dollar denominated debt
    was $2,824,000 (2007 gain -$1,156,000).

    Employee future benefits

    The employee future benefit expense in connection with defined benefit
    pension plans and other post retirement benefit plans for the three
    months ended April 30, 2008 was $1,343,000 (2007 - $1,414,000). For the
    six months ended April 30, 2008, the employee future benefit expense was
    $2,812,000 (2007 - $2,981,000)

    8.  Financial instruments and risk management

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

    Under Canadian generally accepted accounting principles financial
    instruments are classified into one of the following five categories:
    held-for-trading, held to maturity investments, loans and receivables,
    available-for-sale financial assets and other financial liabilities. The
    Company has also designated certain of its derivatives as effective
    hedges. The carrying values of the Company's financial instruments,
    including those held for sale on the consolidated balance sheet are
    classified into the following categories:
                                                         As at         As at
                                                      April 30,   October 31,
    -------------------------------------------------------------------------
                                                          2008          2007
                                                             $             $
    -------------------------------------------------------------------------
    Held for trading(1)                                 30,764        30,557
    Loans and receivables(2)                           132,213       127,691
    Loans and receivables - held for sale(2)             3,683         7,486
    Other financial liabilities(3)                     540,827       527,493
    Other financial liabilities - held for sale(3)       3,793         7,956
    Derivatives designated as effective hedges(4)
     - gain/(loss)                                      (5,738)        1,459
    Derivatives designated as held for trading(5)
     - gain/(loss)                                         368        (2,699)
    -------------------------------------------------------------------------
    (1) Includes cash and cash equivalents.
    (2) Includes accounts receivable.
    (3) Includes bank indebtedness, accounts payable and accrued liabilities,
        income taxes payable, long-term debt, and the debt component of the
        convertible preferred shares.
    (4) Includes the Company's foreign exchange forward contracts and
        interest rate swaps, both of which are effective hedges.
    (5) Includes the Company's foreign exchange forward contracts that are
        not considered to be an effective hedge for accounting purposes.


    The Company has determined the estimated fair values of its financial
    instruments based on appropriate valuation methodologies; however,
    considerable judgment is required to develop these estimates. The fair
    values of the Company's financial instruments are not materially
    different from their carrying value, with the exception of the Company's
    senior secured term loan of $148,500,000 (October 31, 2007 -
    $149,250,000). Based on current interest rates for debt with similar
    terms and maturities, the fair market value is estimated to be
    $103,978,000 (October 31, 2007 - $142,582,000).

    As at April 30, 2008, the carrying amount of the financial assets that
    the Company has pledged as collateral for its long-term debt facilities
    was $90,941,000 (October 31, 2007 - $103,376,000).

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

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

    As at April 30, 2008, the Company's Canadian operations had entered into
    foreign exchange forward contracts to sell an aggregate amount of
    US$56,649,000. These contracts hedge the Canadian operations' expected
    exposure to U.S. dollar denominated cash flows and mature at the latest
    on April 14, 2009, at an average exchange rate of $1.0238 Canadian. The
    mark-to-market value on these financial instruments as at April 30, 2008
    was an unrealized gain of $954,000, which has been recorded in
    accumulated other comprehensive income in shareholders' equity. Also as
    at April 30, 2008, the Company's Canadian operations had entered into a
    foreign exchange contract to purchase US$45,000,000. The contract matures
    on January 28, 2010, at an exchange rate of $1.0015 Canadian. The
    contract is classified as held-for-trading and hedges the Canadian
    operations net U.S. dollar balance sheet exposure. The mark-to-market
    value of this contract was a gain of $368,000, which has been recorded in
    the loss from continuing operations.

    As at April 30, 2008, the Company's U.K. operations had entered into
    foreign exchange forward contracts to sell an aggregate amount of
    US$4,200,000 and (euro) 6,000,000. These contracts hedge the Swindon,
    U.K. operation's expected exposure to U.S. dollar and euro denominated
    cash flows and mature at the latest on November 10, 2008, at an average
    exchange rate of pounds sterling 0.5036 and pounds sterling 0.7859
    respectively. The mark-to-market value on these financial instruments as
    at April 30, 2008 was an unrealized loss of $65,000, which has been
    recorded in accumulated other comprehensive income in shareholders'
    equity.

    As at April 30, 2008, the Company has designated $149.7 million of U.S.
    dollar denominated debt as a hedge against its net investment in its
    subsidiaries in the U.S.A. and Puerto Rico. The exchange gains and losses
    arising from this debt, from the date so designated, are recorded in
    accumulated other comprehensive income in shareholders' equity.

    The Company has entered into interest rate swap contracts to convert all
    of the interest costs on its senior secured term loan from a floating to
    a fixed rate of interest until June 30, 2010. The mark-to-market value of
    these financial instruments at April 30, 2008 was an unrealized loss of
    $6,627,000 which has been recorded in accumulated other comprehensive
    income in shareholders' equity.

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

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

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

    Foreign exchange risk

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

    The most significant transaction exposures arise in the Canadian
    operations. The balance sheet of the Canadian operations includes U.S.
    dollar denominated debt, including the debt component of the convertible
    preferred shares. The Canadian operations are required to revalue the
    Canadian dollar equivalent of the U.S. dollar denominated debt at each
    period end. Part of this debt is designated as an effective hedge against
    the Company's investments in subsidiaries in the U.S.A. and Puerto Rico
    and the related foreign exchange gains and losses are recorded in other
    comprehensive income. Foreign exchange gains and losses from the
    remaining debt are recorded in earnings. As of April 30, 2008,
    fluctuations of +/-5% would, everything else being equal, have an effect
    on loss from continuing operations before taxes of approximately +/-
    $4.3 million, prior to hedging activities.

    In addition, approximately 70% of revenues of the Canadian operations and
    approximately 10% of its operating expenses are transacted in U.S.
    dollars. As a result, the Company may experience transaction exposures
    because of volatility in the exchange rate between the Canadian and U.S.
    dollar. Based on the Company's current U.S. denominated net inflows, as
    of April 30, 2008, fluctuations of +/-5% would, everything else being
    equal, have an effect on loss from continuing operations before taxes for
    the three and six months ended April 30, 2008 of approximately +/-
    $1.5 million and +/- $3.0 million, respectively, prior to hedging
    activities.

    The objective of the Company's foreign exchange risk management
    activities is to minimize transaction exposures and the resulting
    volatility of the Company's earnings. The Company manages this risk by
    entering into foreign exchange forward contracts. The U.S. dollar debt
    exposure is also partially hedged by U.S. denominated cash and accounts
    receivable in the Canadian operations. As at April 30, 2008,
    approximately 78% of the U.S. dollar debt exposure is hedged and the
    Company has entered into forward foreign exchange contracts to cover
    approximately 77% of its Canadian-U.S. dollar cash flow exposures for its
    2008 fiscal year and 10% for its fiscal year 2009. With the exception of
    the hedges against the Company's investments in the U.S.A. and Puerto
    Rico noted above, the Company does not currently hedge translation
    exposures.

    Interest rate risk

    The Company's interest rate risk primarily arises from its floating rate
    debt, in particular its senior secured term loan in North America and its
    Italian mortgages. At April 30, 2008, $235.0 million of the Company's
    total debt portfolio, is subject to movements in floating interest rates.
    A +/-100 basis points change in interest rates would, everything else
    being equal, have an effect on the loss from continuing operations before
    income taxes for the three and six month ended April 30, 2008 of
    approximately +/-$0.6 million and +/-$1.2 million, respectively, prior to
    hedging activities.

    The objective of the Company's interest rate management activities is to
    minimize the volatility of the Company's earnings. In order to manage
    this risk, the Company has entered into interest rate swaps to convert
    the interest expense on its senior secured term loan, until March 2010,
    from a floating interest rate to a fixed interest rate. As at April 30,
    2008, taking the interest rate swap into account, $86.5 million of the
    Company's debt portfolio is subject to floating interest rates.

    Credit risk

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

    The objective of managing counter party credit risk is to prevent losses
    in financial assets. The Company assesses the credit quality of the
    counter parties, taking into account their financial position, past
    experience and other factors. Management also monitors the utilization of
    credit limits regularly. In cases where the credit quality of a client
    does not meet the Company's requirements, a cash deposit is received
    before any services are provided. As at April 30, 2008 the Company held
    deposits of $16,963,000.

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

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

                                                                       As at
                                                                    April 30,
    -------------------------------------------------------------------------
                                                                        2008
                                                                           $
    -------------------------------------------------------------------------
    Total accounts receivable                                        133,247
    Less: Allowance for doubtful accounts                             (1,034)
    -------------------------------------------------------------------------
    Total accounts receivable, net                                   132,213
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Of which:
      Not overdue                                                    116,053
      Past due for more than one day but for not more than
       three months                                                   15,567
      Past due more for than three months but for not more
       than six months                                                   407
      Past due for more than six months but not for more than
       one year                                                          712
      Past due for more than one year                                    508
      Less: Allowance for doubtful accounts	                       (1,034)
    -------------------------------------------------------------------------
    Total accounts receivable, net                                   132,213
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liquidity risk

    Liquidity risk arises through excess of financial obligations over
    available financial assets due at any point in time. The Company's
    objective in managing liquidity risk is to maintain sufficient readily
    available reserves in order to meet its liquidity requirements at any
    point in time. The Company achieves this by maintaining sufficient cash
    and cash equivalents and through the availability of funding from credit
    facilities. As at April 30, 2008 the Company was holding cash and cash
    equivalents of $30,764,000 and had undrawn lines of credit available to
    it of $69,682,000.

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

    9.  Management of Capital

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

    As at April 30, 2008, total managed capital was $549,957,000 (October 31,
    2007 - $560,659,000), comprised of shareholders' equity of $164,652,000
    (October 31, 2007 - $197,185,000), the debt component of the convertible
    preferred shares of $147,344,000 (October 31, 2007 - $139,916,000), where
    the associated accreted interest expense is a non-cash charge and cash
    interest-bearing debt of $237,961,000 (October 31, 2007 - $223,558,000).
    The Company has no obligation to pay cash dividends on the convertible
    preferred shares until after October 31, 2009, at which time the Company
    can elect to pay a cash dividend or increase the liquidation preference
    and conversion rate of the convertible preferred shares.

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

    As at April 30, 2008 and October 31, 2007 the above capital management
    criteria can be illustrated as follows:

                                                      April 30,   October 31,
                                                          2008          2007
                                                             $             $
    -------------------------------------------------------------------------
    Interest bearing debt requiring a cash
     interest payment                                  237,961       223,558
    Cash earnings from continuing operations for
     the previous twelve months                         77,490        84,147
    Ratio                                                 3.07          2.66
    -------------------------------------------------------------------------

    10. Related party transactions

    Revenues from companies controlled by a director and significant
    shareholder of the Company were in the amount of $48,000 and $109,000 for
    the three and six months ended April 30, 2008, respectively. The revenues
    were $624,000 and $683,000 for the three and six months ended April 30,
    2007, respectively. These transactions were conducted in the normal
    course of business and are recorded at the exchanged amount. Accounts
    receivable at April 30, 2008 include a balance of $79,000 (October 31,
    2007 - $392,000) resulting from these transactions.

    At April 30, 2008 the Company has an investment of $1,208,000
    (October 31, 2007 - $739,000) representing an 18% interest in two Italian
    companies (collectively referred to as "BSP Pharmaceuticals") whose
    largest investor is an officer of the Company. These companies will
    specialize in the manufacturing of cytotoxic pharmaceutical products.

    The Company has recorded management fees under a management services
    agreement with BSP Pharmaceuticals of $441,000 and $787,000 for the three
    and six months ended April 30, 2008, respectively. The management fees
    were $400,000 and $686,000 for the three and six months ended April 30,
    2007, respectively. Accounts receivable at April 30, 2008 include a
    balance of $3,193,000 (October 31, 2007 - $1,593,000) in connection with
    the management services agreement. The receivable includes amounts owing
    for services rendered in fiscal 2007. These services were conducted in
    the normal course of business and are recorded at the exchanged amounts.

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

    11. Comparative amounts

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


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

    The following management discussion and analysis of financial condition
and results of operations ("MD&A") of Patheon Inc. ("Patheon" or "the
Company") for the three-month and six-month periods ended April 30, 2008 and
2007 should be read in conjunction with the Company's consolidated financial
statements and related notes contained in this interim report. All amounts are
in US dollars unless otherwise indicated. This MD&A is dated as of June 6,
2008.
    The purpose of this 2008 second quarter report is to provide an update to
the information contained in the Company's Management's Discussion and
Analysis section of the Company's 2007 Annual Report, which contains a more
comprehensive discussion of the Company's strategy, capabilities to deliver
results, risks and key performance indicators. Management assumes that the
reader of this document has access to the MD&A section of the Company's 2007
Annual Report. This document and other information can be downloaded in
portable document format (PDF) from the Company's web site at www.patheon.com
or from the SEDAR web site for Canadian regulatory filings at www.sedar.com.
To request a printed copy, the reader may also contact Patheon's transfer
agent, Computershare Investor Services Inc., at 1-800-564-6253 or via email at
service@computershare.com, or Patheon at www.patheon.com.

    Use of Non-GAAP Financial Measures

    Except as otherwise indicated, references in this MD&A to "EBITDA before
repositioning expenses" are to earnings from continuing operations before
repositioning expenses, asset impairment charges, depreciation and
amortization, foreign exchange losses reclassified from other comprehensive
income, interest, refinancing expenses, and income taxes. "EBITDA margin
before repositioning expenses" is EBITDA before repositioning expenses divided
by revenues. EBITDA before repositioning expenses and EBITDA margin before
repositioning expenses are measures of earnings or earnings margin not
recognized by generally accepted accounting principles in Canada ("Canadian
GAAP"). Since each of these measures is a non-GAAP measure that does not have
a standardized meaning, it may not be comparable to similar measures presented
by other issuers. Readers are cautioned that these, and other non-GAAP
measures should not be construed as alternatives to net earnings determined in
accordance with Canadian GAAP as indicators of performance. The Company has
included these measures because it believes that this information is used by
certain investors to assess the financial performance of the Company, in
particular the operating earnings before non-cash charges and large and
non-recurring costs.

    Overview of Patheon

    Patheon is focused exclusively on providing commercial manufacturing and
pharmaceutical development services to pharmaceutical, biotechnology and
specialty pharmaceutical companies located primarily in North America, Europe
and Japan. Patheon serves its international clientele from its operating
facilities in North America (including Puerto Rico) and Europe.
    Patheon commercially manufactures prescription ("Rx") and
over-the-counter ("OTC") products in solid, semi-solid and liquid dosage
forms. Conventional dosage forms include compressed tablets, hard-shell
capsules, powders, ointments, creams, gels, syrups, suspensions, solutions and
suppositories. Sterile dosage forms include liquids and powders presented in
ampoules, vials, bottles or pre-filled syringes. Sterile lyophilized products
are also manufactured in both vials and ampoules.
    Patheon provides manufacturing services for a broad range of products in
many dosage forms and packaging formats in accordance with client
specifications. Depending on the particular client, Patheon may be responsible
for most or all aspects of the manufacturing and packaging process, from
sourcing excipient raw materials and packaging components to delivering the
finished product in consumer-ready form to the client. Typically, Patheon's
clients supply the active pharmaceutical ingredients ("API") used in the
production process.
    The pharmaceutical development services provided by Patheon include most
of the pharmaceutical development services typically required by companies
conducting clinical trials and preparing for full-scale commercial production
of a new drug. In providing its pharmaceutical development services, Patheon
is able to: (i) develop an appropriate dosage form; (ii) develop analytical
methods; (iii) manufacture the proposed new drug product to client
specifications during the regulatory drug approval process; (iv) manufacture
pilot batches of proposed new drug products for the regulatory drug approval
process; and (v) provide scale-up and technology transfer services designed to
validate that a drug can be manufactured commercially.
    At April 30, 2008, there were a total of 333 ongoing projects being
carried out by Patheon's pharmaceutical development services ("PDS"). This
total includes stability and process optimization work on some products that
have already been launched. The Company is working on seven drug candidates at
the New Drug Application ("NDA") stage. During the second quarter of 2008, one
product developed on behalf of a client was launched into commercial
production.

    Vision and Strategy

    Patheon's vision is to be the best provider of manufacturing and
development services to the pharmaceutical industry. In implementing its
strategy, the Company will grow with the market, increase its market share and
increase efficiency. Growth within the market will be achieved by retaining
existing customers with high quality products and service. The Company will
increase market share by diversifying its customer base and by expanding
capacity and broadening its capabilities in higher value added service
offerings. Efficiency has been and continues to be improved by consolidating
existing facilities, cost containment and by implementing a system of
continuous improvement with a Lean Six Sigma program called "Patheon
Advantage". Patheon Advantage has already been introduced at the Toronto site
during the second quarter of 2008. This program will be launched at the other
Canadian and foreign sites over the second half of fiscal 2008.
    Within the overall market, pharmaceutical companies are increasingly
adopting outsourcing as a strategic approach as they focus on restructuring
their own networks and reassess their structures. Pharmaceutical companies are
also increasingly forming strategic outsourcing arrangements with service
providers. There is also an emergence of specialty pharmaceutical and biotech
companies which require both development and manufacturing services, but are
not investing in their own facilities. The Company is using its position as a
comprehensive provider of commercial manufacturing and development services to
take advantage of these market trends and to establish and maintain long-term,
strategic relationships with customers on a global basis.

    Key Performance Drivers

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

    
    (i)   Generating higher-quality revenues

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

    (ii)  Improving capacity utilization and operating efficiency

    The Company's operating sites' cost structures are largely fixed in the
short term, with the result that fluctuations in manufacturing activity can
have a significant impact on profit margins. The Company continues to focus on
improving capacity utilization at all of its sites by entering into new
commercial manufacturing agreements with new and existing clients. The Company
also continues to evaluate how best to utilize the amount of available
capacity in its network.
    The Company continues to improve operating efficiencies through an
operational excellence program with initiatives focused on a global
procurement program, a workforce reduction program and a manufacturing
efficiency review process. As part of this initiative, in 2008 the Company has
also launched Patheon Advantage, a Lean Six Sigma program. The program works
by empowering site professionals and employees to analyze their own processes,
and identify the root causes of waste, variation and errors. The result is
expected to be a reduction in cycle times and waste from variable processes.

    (iii) Mitigating the impact of foreign exchange fluctuations
    

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

    Recent Developments

    Restructuring the Canadian Site Network

    On April 17, 2007 the Company announced that as part of its strategy to
focus on developing and manufacturing Rx pharmaceutical products and to
improve the Company's profitability, it planned to restructure its network of
pharmaceutical manufacturing facilities in Canada.
    In connection with this initiative, on January 31, 2008 the Company sold
its Niagara-Burlington commercial OTC manufacturing business to Pharmetics
Inc. Pharmetics acquired the assets, including equipment, facilities and land
at the Company's facilities in Fort Erie and Burlington (Gateway Drive).
Pharmetics provided employment to all of the commercial manufacturing
employees at the two sites and will continue to manufacture and supply all of
the products that were manufactured at these sites. Proceeds from the
divestiture received on closing, net of transaction costs and including post
closing adjustments, were $10.5 million.
    The Company also plans to close its York Mills, Toronto facility and is
currently in the process of transferring all commercial production and
development services undertaken at its York Mills facility to, primarily, its
Whitby facility. In accordance with this plan, on April 15, 2008, the Company
completed the sale of the York Mills property for net proceeds of
$11.9 million and has entered into a lease for up to two years in order to
facilitate the decommissioning process.

    Restructuring the Puerto Rico Operations

    On December 14, 2007 the Company announced that as a result of its
comprehensive review of the Puerto Rico operations, with a focus on
eliminating operating losses and developing a long-term plan for the business,
it has decided to retain and continue to streamline its facilities in Caguas
and Manati, and divest its facility in Carolina, Puerto Rico. The decision
follows the genericization of Omnicef(R) in May 2007 and the resulting
significant drop in revenues at the Carolina facility.
    The Carolina site is a 230,000-square-foot facility, with approximately
160 employees, that specializes in the manufacture of oral cephalosporin solid
dosage forms, including tablets, capsules and powders for suspension.
    Subject to acceptable terms and future negotiation, a disposition of the
Company's interest in Carolina would address responsibility for the staff at
the facility and contracts with third parties, subject to their approval.
Patheon has retained an advisor to manage the sale of the Carolina site.
    The assets and related liabilities of the Carolina operations have been
classified as held for sale and the results of operations have been classified
as discontinued operations in the consolidated financial statements.

    New Leadership

    Under the leadership of Wes Wheeler, the new Chief Executive Officer, the
Company has made changes to its executive management team and is undertaking a
series of operational initiatives to reduce operating expenses and increase
manufacturing efficiency, including launching the Patheon Advantage program.
These programs are expected to make the Company more competitive, reduce
operating costs and improve long-term profitability. As part of these
initiatives and based on current planning and timelines, the Company
anticipates that it will incur costs in the range of $4 to $5 million in the
third quarter of 2008 in connection with an early retirement program in
Cincinnati. Costs associated with this program will be charged to operating
expenses.

    Results of Operations

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

    
    Results of Consolidated Operations

                              Three months ended            Six months ended
                                        April 30,                   April 30,
                         2008     2007         %     2008     2007         %
    -------------------------------------------------------------------------
    (in thousands of
     U.S. dollars)          $        $    Change        $        $    Change
    -------------------------------------------------------------------------
    Revenues          185,997  160,218     16.1%  350,169  307,588     13.8%
    Operating
     expenses         162,063  140,234     15.6%  314,188  268,930     16.8%
    Foreign exchange
     loss (gain) on
     debt                 820   (1,156)  -170.9%    2,824   (1,156)  -344.3%
                      --------------------------- ---------------------------
    EBITDA before
     repositioning
     expenses:         23,114   21,140      9.3%   33,157   39,814    -16.7%
                      --------------------------- ---------------------------
    (as a percentage
     of revenues)       12.4%    13.2%               9.5%    12.9%
    Repositioning
     expenses           8,295    3,631    128.4%   10,647    6,942     53.4%
    Depreciation and
     amortization      10,718    9,917      8.1%   21,856   19,545     11.8%
    Amortization of
     intangible assets    471      490     -3.9%      942      943     -0.1%
    Foreign exchange
     loss on foreign
     operations             -      858                  -      858
    Interest            7,817    7,204      8.5%   15,775   14,303     10.3%
    Refinancing
     expenses               -   13,471                  -   13,471
                      --------------------------- ---------------------------
    Loss from
     continuing
     operations
     before income
     taxes             (4,187) (14,431)    71.0%  (16,063) (16,248)     1.1%
    Provision for
     income taxes       2,284    7,519    -69.6%    2,623    9,278    -71.7%
                      --------------------------- ---------------------------
    Loss from
     continuing
     operations        (6,471) (21,950)    70.5%  (18,686) (25,526)    26.8%
                      --------------------------- ---------------------------
    (as a percentage
     of revenues)       -3.5%   -13.7%              -5.3%    -8.3%
    Earnings (loss)
     from discontinued
     operations        (2,004)     (36) -5466.7%   (4,977)   1,516   -428.3%
                      --------------------------- ---------------------------
    Net loss for the
     period            (8,475) (21,986)    61.5%  (23,663) (24,010)     1.4%
                      --------------------------- ---------------------------
                      --------------------------- ---------------------------


    Revenues by Geographic Region and Service Activity


                              Three months ended            Six months ended
                                        April 30,                   April 30,
                         2008     2007         %     2008     2007         %
    -------------------------------------------------------------------------
    (in thousands of
     U.S. dollars)          $        $    Change        $        $    Change
    -------------------------------------------------------------------------
    North America
    -------------
      Commercial
       Manufacturing
        Prescription   56,750   60,004       -5%  108,325  121,922      -11%
        Over-the-
         counter       15,492    9,695       60%   29,376   18,456       59%
                      --------------------------- ---------------------------
                       72,242   69,699        4%  137,701  140,378       -2%
       Development
        Services       25,724   20,499       25%   47,979   40,669       18%
                      --------------------------- ---------------------------
                       97,966   90,198        9%  185,680  181,047        3%
                      --------------------------- ---------------------------
    Europe
    ------
      Commercial
       Manufacturing
        Prescription   76,223   61,574       24%  143,383  110,624       30%
        Over-the-
         counter        2,743      737      272%    4,042    2,011      101%
                      --------------------------- ---------------------------
                       78,966   62,311       27%  147,425  112,635       31%
      Development
       Services         9,065    7,709       18%   17,064   13,906       23%
                      --------------------------- ---------------------------
                       88,031   70,020       26%  164,489  126,541       30%
                      --------------------------- ---------------------------
    TOTAL
    -----
      Commercial
       Manufacturing
        Prescription  132,973  121,578        9%  251,708  232,546        8%
        Over-the-
         counter       18,235   10,432       75%   33,418   20,467       63%
                      --------------------------- ---------------------------
                      151,208  132,010       15%  285,126  253,013       13%
      Development
       Services        34,789   28,208       23%   65,043   54,575       19%
                      --------------------------- ---------------------------
    CONSOLIDATED
     REVENUES         185,997  160,218       16%  350,169  307,588       14%
                      --------------------------- ---------------------------
                      --------------------------- ---------------------------

    Three Months Ended April 30, 2008 Compared with Three Months Ended
    April 30, 2007
    

    Revenues

    Consolidated revenues from continuing operations for the three-month
period ended April 30, 2008 increased 16%, or $25.8 million, to $186.0 million
from $160.2 million in the same period in 2007. On a consolidated basis,
compared with the second quarter of 2007, Rx revenues increased by 9%, OTC
revenues increased by 75% and PDS revenues increased by 23%.
    For the three-month period ended April 30, 2008, revenues excluding the
Puerto Rico operations were $173.3 million, compared with $143.8 million in
the same period last year, representing an increase of 21%.
    Prescription manufacturing and development services represented 90% of
revenues, compared with 93% for the comparable period in 2007. The change
reflects an increase in OTC revenues at the Whitby and Cincinnati operations.
    Production volumes for the three-months ended April 30, 2008 were 7.6%
higher than for the three months ended January 31, 2008 based on standard pack
size.
    Geographically, in North America, revenues increased in the second
quarter by $7.8 million or 9% over the same period a year ago. This reflects
improvements in the level of PDS and manufacturing revenues in all locations
with the exception of the Caguas, Puerto Rico and Toronto Region Operations,
where revenues were lower as a result of reduced volume requirements from a
broad range of clients.
    In Europe, revenues for the second quarter of 2008 increased by $18.0
million or 26% over the same period in 2007. The increase reflects higher
manufacturing revenues from the existing business base in all locations, in
particular Bourgoin-Jallieu, France. PDS volumes were also higher for
lyophilized development services in the Ferentino, Italy facility. Reported
revenues increased as a result of the strengthening of the European
currencies, in particular the euro, which strengthened approximately 16%
against the U.S. dollar relative to the same period last year, increasing
reported revenues by approximately $8.9 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 2007.

    Operating Expenses

    Operating expenses comprise processing costs (principally materials,
employee and other site-related costs), marketing, sales, service, corporate
support, administrative expenses and foreign exchange gains and losses
relating to operating activities. In the second quarter of 2008, operating
expenses were $162.1 million, being $21.8 million higher than the same period
a year ago. Operating expenses were impacted by increased volumes, additional
costs of utilities and the continued strengthening of European and Canadian
currencies relative to the U.S. dollar. Operating expenses as a percentage of
revenues were 87.1%, compared with 87.5% in the same period a year ago.

    Foreign Exchange Loss on Debt

    The net foreign exchange loss of $0.8 million recorded in the quarter
ended April 30, 2008 related to the revaluation of U.S. dollar denominated
debt in the Canadian legal entity. This compares with a gain of $1.2 million
reported in the comparable period in 2007. The reported loss in 2008 is net of
foreign exchange gains from a forward foreign exchange contract put in place
to reduce the impact of this exposure. This foreign exchange exposure arose as
a result of the new financing that the Company put in place in April 2007.

    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses

    On a consolidated basis in the second quarter of 2008, EBITDA before
repositioning expenses, representing earnings from continuing operations
before repositioning expenses, asset impairment charges, depreciation and
amortization, foreign exchange losses reclassified from other comprehensive
income, interest, refinancing expenses, and income taxes was $23.1 million,
compared with $21.1 million in the same period a year ago. EBITDA margin
before repositioning expenses was 12.4% in the three-month period ending
April 30, 2008, compared with 13.2% in the same period a year ago.
    For the three-month period ended April 30, 2008 EBITDA before
repositioning expenses excluding the Puerto Rico operations was $27.7 million,
compared with $25.4 million in the same period last year. This represents an
EBITDA margin before repositioning expenses of 16.0% in the three month
period, compared with 17.7% in the same period last year.
    On a year-over-year basis the decline in the value of the U.S. dollar
relative to the Canadian dollar has had a significant negative impact on the
profitability of the Canadian operations, where approximately 70% of the
revenues are denominated in U.S. dollars. The U.S. dollar also declined in
value relative to the European currencies; this has had the impact of
increasing the value of earnings in the European operations once translated
into U.S. dollars. However, after taking into account all foreign exchange
related factors, including the benefits of the Company's cash flow hedging
program and the change in foreign exchange gains and losses on the revaluation
of monetary assets and liabilities, the impact on EBITDA before repositioning
expenses in the second quarter of 2008 was not material.
    In Canada, EBITDA before repositioning expenses from the commercial
operations was $9.5 million in the second quarter of 2008, being $2.0 million
higher than the same period last year. The improvement reflects increased
volumes in particular at the Whitby operations. The negative impact on EBITDA
before repositioning expenses of a 15% decline in the value of the U.S.
dollar, relative to the Canadian dollar in the same period last year, was
entirely offset by benefits from the Company's cash flow hedging program and
foreign exchange gains on the revaluation of U.S. dollar denominated monetary
assets and liabilities.
    In the U.S.A. (including Puerto Rico), EBITDA before repositioning
expenses for the commercial operations was a loss of $3.2 million in the
second quarter of 2008, compared with a loss of $4.9 million in the same
period last year. The improvement arose from cost-savings from workforce
reductions in the Puerto Rico operations.
    In Europe, EBITDA before repositioning expenses from the commercial
operations was $14.8 million in the second quarter of 2008, being $1.8 million
higher than the same period a year ago. The benefits of volume gains in all
operations were offset by lower profitability in Italy, due to a change in mix
to lower margin products. The strengthening European currencies relative to
the U.S. dollar compared with the same period last year, plus the benefits of
foreign exchange gains on the revaluation of foreign currency denominated
assets and liabilities, had the impact of increasing EBITDA before
repositioning expenses by approximately $3.3 million.
    EBITDA before repositioning expenses from the global PDS operations was
$9.6 million in the second quarter of 2008, being $2.3 million higher than the
same period in 2007. The global PDS operations benefited from strong growth in
Canada, Ferentino, Italy and Cincinnati. In Canada, the benefits of increased
volume were offset in part by the strengthening Canadian dollar, which reduced
profitability in the Canadian operations by approximately $0.9 million.
    Corporate costs in the second quarter of 2008 were $7.5 million, compared
with $1.7 million in the same period last year. Additional costs relative to
the prior year were incurred in connection with recruiting for senior and
executive management positions, stock-based compensation expenses and
consulting fees related to new operational and strategic initiatives. Costs
also include a net foreign exchange loss of $0.8 million arising from the
revaluation of U.S. dollar denominated debt held in the Canadian legal entity.
This compares with a gain of $1.2 million recorded in the same period last
year. The strengthening Canadian dollar had the impact of increasing the U.S.
dollar translated values of Canadian costs by approximately $0.6 million.

    Repositioning Expenses

    During the second quarter of 2008 the Company incurred $8.3 million of
expenses in connection with changes in senior and executive management, a
workforce reduction initiative in Swindon, U.K. and the continuing
restructuring of the Puerto Rico and Canadian networks. Based on progress to
date, the Company expects that it will incur further repositioning expenses in
the third quarter of 2008 in connection with the consolidation of the York
Mills and Whitby operations.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $10.7 million in the second
quarter of 2008, compared with $9.9 million in the second quarter of 2007. The
increase reflects additional depreciation expenses in Swindon, U.K. in
connection with the recently completed lyophilized cephalosporin capacity and
from the impact of the strengthening European and Canadian currencies relative
to the U.S. dollar.

    Amortization of Intangible Assets

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

    Foreign Exchange Loss on Foreign Operations

    In the second quarter of 2007, the Company recorded a net foreign
exchange loss on foreign operations of $0.9 million. This reflected the
recognition of net foreign exchange translation losses previously recorded in
accumulated other comprehensive income, arising from a change in the Company's
internal capital structure.

    Interest Expense

    Interest expense for the second quarter of 2008 was $7.8 million,
compared with $7.2 million in the second quarter of 2007. The increase in
interest costs principally reflects the impact of the financing arrangements
that were put in place on April 27, 2007 and includes a non-cash accretive
interest charge of $3.8 million in respect of the debt component of the
convertible preferred shares.

    Refinancing Expenses

    In the second quarter of 2007, refinancing expenses of $13.5 million were
incurred. The expenses were made up of transaction costs for 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. No refinancing expenses were
incurred in the second quarter of 2008.

    Loss Before Income Taxes from Continuing Operations

    The Company reported a loss before income taxes from continuing
operations of $4.2 million in the second quarter of 2008, compared with a loss
of $14.4 million in the same period a year ago.

    Income Taxes

    The Company recorded an income tax charge of $2.3 million in the second
quarter of 2008, compared with a charge of $7.5 million in the same period
last year. The income tax expense in 2008 principally reflects high tax rates
in Italy where the Company reported significant profits compounded by tax
losses in Puerto Rico, where the tax benefit after valuation reserve has not
been recognized. In addition, the accreted interest expense on the convertible
preferred shares of $3.8 million is not deductible for tax purposes.
    The 2007 expense included 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 in the second
quarter of 2008 of $6.5 million, compared with a loss of $22.0 million in the
same period last year. The loss per share was 7.1 cents, compared with a loss
of 23.5 cents per share a year earlier. The loss in 2008 included after tax
repositioning expenses of $7.4 million or 8.1 cents per share. The loss in
2007 included after tax repositioning expenses of $3.4 million or 3.7 cents
per share and after tax refinancing expenses of $12.6 million, or 13.5 cents
per share.

    Loss and Loss Per Share from Discontinued Operations

    Discontinued operations in the second quarter of 2008 consist of the
results of the Carolina operations. The comparable results for 2007 include
both the Carolina and Niagara-Burlington operations. Financial details of the
operating activities are disclosed in note 2 in the interim consolidated
financial statements. The loss from discontinued operations in the second
quarter of 2008 was $2.0 million, or 2.2 cents compared with a virtual break
even position in the same period last year. The decline principally reflects
the impact of lower production in Carolina, Puerto Rico following the
genericization of Omnicef(R) in May 2007.

    Net Loss and Loss Per Share

    The Company recorded a net loss in the second quarter of 2008 of
$8.5 million, or 9.3 cents per share, compared with a loss of $22.0 million or
23.6 cents per share in the same period last year.
    Because the Company reported a loss in the three and six month periods
ended April 30, 2008 and 2007, there is no impact of dilution.

    Six Months Ended April 30, 2008 Compared with Six Months Ended April 30,
    2007

    Revenues

    Consolidated revenues from continuing operations for the six-month period
ended April 30, 2008 increased 14%, or $42.6 million, to $350.2 million from
$307.6 million in the same period in 2007. Rx revenues increased by 8%, OTC
revenues increased by 63% and PDS revenues increased by 19%.
    For the six-month period ended April 30, 2008 revenues excluding the
Puerto Rico operations were $325.5 million, compared with $271.8 million in
the same period last year, representing an increase of 20%.
    Prescription manufacturing and development services represented 90% of
revenues, compared with 93% for the comparable period in 2007. The decline
reflects the impact of increased OTC revenues in the Whitby and Cincinnati
operations.
    Geographically, in North America, revenues in the first half of 2008
increased by $4.6 million or 3% over the same period a year ago. This reflects
an increase in commercial manufacturing and PDS revenues in the Canadian and
Cincinnati operations, offset in part by lower manufacturing revenues in
Caguas, Puerto Rico.
    In Europe, revenues for the first half of 2008 increased by $37.9 million
or 30% over the same period in 2007. The year-over-year increase reflects
higher manufacturing revenues from all operations, with the most significant
gains being achieved in Ferentino, Italy and Bourgoin-Jallieu, France, as a
result of additional volume requirements from the existing client base.
Reported revenues increased as a result of the strengthening of the European
currencies, in particular the euro, which strengthened approximately 14%
against the U.S. dollar relative to the same period last year, increasing
reported revenues by approximately $15.8 million. Had European currencies
remained constant to the rates of the prior year, European revenues would have
been 18% higher than the same period in 2007.

    Operating Expenses

    Operating expenses comprise processing costs (principally materials,
employee and other site-related costs), marketing, sales, service, corporate
support, administrative expenses and foreign exchange gains and losses
relating to operating activities. In the first half of 2008, operating
expenses were $314.2 million, being $45.3 million higher than the same period
a year ago. Operating expenses were impacted by increased volumes, additional
costs of utilities and the strengthening of European and Canadian currencies
relative to the U.S. dollar. Operating expenses as a percentage of revenues
were 89.7%, compared with 87.4% in the same period a year ago.

    Foreign Exchange Loss on Debt

    The net foreign exchange loss of $2.8 million recorded in the six-months
ended April 30, 2008 related to the revaluation of U.S. dollar denominated
debt in the Canadian legal entity. This compares with a gain of $1.2 million
reported in the comparable period in 2007. The reported loss in 2008 is net of
foreign exchange gains from a forward foreign exchange contract put in place
to reduce the impact of this exposure. This foreign exchange exposure arose as
a result of the new financing that the Company put in place in April 2007.

    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses

    On a consolidated basis in the first half of 2008, EBITDA before
repositioning expenses, representing earnings from continuing operations
before repositioning expenses, asset impairment charges, depreciation and
amortization, foreign exchange losses reclassified from other comprehensive
income, interest, refinancing expenses, and income taxes was $33.2 million,
compared with $39.8 million in the same period a year ago. EBITDA margin
before repositioning expenses was 9.5% in the six-month period ending
April 30, 2008, compared with 12.9% in the same period a year ago.
    For the six-month period ended April 30, 2008 EBITDA before repositioning
expenses excluding the Puerto Rico operations was $43.1 million, compared with
$46.0 million in the same period last year. This represents an EBITDA margin
before repositioning expenses of 13.2%, compared with 16.9% in the same period
last year.
    On a year-over-year basis the decline in the value of the U.S. dollar
relative to the Canadian dollar has had a significant negative impact on the
profitability of the Canadian operations, where approximately 70% of the
revenues are denominated in U.S. dollars. The U.S. dollar also declined in
value relative to the European currencies; this has had the impact of
increasing the value of earnings in the European operations once translated
into U.S. dollars. Had foreign exchange rates remained the same as those in
the same period last year, EBITDA before repositioning expenses for the
six-months ended April 30, 2008 would have been approximately $4 million
higher than was reported. This takes into account all foreign exchange related
factors, including the benefits of the Company's cash flow hedging program and
the change in foreign exchange gains and losses on the revaluation of monetary
assets and liabilities.
    In Canada, EBITDA before repositioning expenses from the commercial
operations was $16.3 million in the first half of 2008, being $0.7 million
higher than the same period last year. Steady growth in commercial revenues
was offset by a 16% decline in the value of the U.S. dollar, relative to the
Canadian dollar in the same period last year, which reduced EBITDA before
repositioning expenses by approximately $1.7 million, net of the benefits from
the Company's cash flow hedging program and foreign exchange gains on the
revaluation of U.S. dollar denominated monetary assets and liabilities.
    In the U.S.A. (including Puerto Rico), EBITDA before repositioning
expenses for the commercial operations was a loss of $6.7 million in the first
half of 2008, compared with a loss of $4.3 million in the same period last
year. The deterioration in earnings principally reflects a reduction in Rx
manufacturing volumes in Caguas, Puerto Rico, especially in the first quarter
of 2008, partially offset by cost savings from headcount reductions.
    In Europe, EBITDA before repositioning expenses from the commercial
operations was $22.1 million in the first half of 2008, being $3.7 million
higher than the same period a year ago. The improvement reflects increased
manufacturing revenues in all operations. In Italy this has been offset by a
change in mix to lower margin products. In the first quarter the Swindon, U.K.
operations were also affected by additional operating costs in anticipation of
the launch of Ceftobiprole(R). The strengthening European currencies relative
to the U.S. dollar compared with the same period last year, plus the benefits
of foreign exchange gains on the revaluation of foreign currency denominated
assets and liabilities, had the impact of increasing EBITDA before
repositioning expenses by approximately $4.7 million.
    EBITDA before repositioning expenses from the global PDS operations was
$15.5 million in the first half of 2008, being $0.8 million higher than the
same period in 2007. This reflected volume gains offset by the negative impact
of the strengthening Canadian dollar, which reduced profitability in the
Canadian operations by approximately $1.8 million. The Swindon, U.K.
operations were also impacted by one time charges arising from raw material
losses which occurred during the first quarter of 2008.
    Corporate costs in the first half of 2008 were $14.1 million, compared
with $4.4 million in the same period last year. Additional costs relative to
prior year were incurred in connection with recruiting for senior and
executive management positions, stock-based compensation expenses and
consulting fees related to new operational and strategic initiatives. The
costs also include net foreign exchange losses of $2.8 million, compared to a
gain of $1.2 million in the prior period, arising from the revaluation of U.S.
dollar denominated debt held in the Canadian legal entity. The strengthening
Canadian dollar had the impact of increasing the U.S. dollar translated values
of Canadian costs by approximately $1.4 million.

    Repositioning Expenses

    During the first half of 2008, the Company incurred $10.6 million of
expenses in connection with changes in senior and executive management, a
workforce reduction initiative in Swindon, U.K. and the continuing
restructuring of the Puerto Rico and Canadian networks. In the first half of
2007 the Company incurred $6.9 million in repositioning expenses, which
included consulting fees associated with a manufacturing efficiency review,
work force reductions in particular in Puerto Rico, and costs incurred in
connection with the Company's strategic alternatives review.
    Based on progress to date, the Company expects that it will incur further
repositioning expenses in the third quarter of 2008 in connection with the
consolidation of the York Mills and Whitby operations.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $21.9 million in the first half
of 2008, compared with $19.5 million in the first half of 2007. The increase
reflects additional depreciation expenses in Swindon, U.K. in connection with
the recently completed lyophilized cephalosporin capacity and from the impact
of the strengthening European and Canadian currencies relative to the U.S.
dollar.

    Amortization of Intangible Assets

    Amortization of intangible assets was $0.9 million in the first half of
2008, being comparable with the charge in 2007. The amortization of intangible
assets relates to the Caguas operations in Puerto Rico.

    Interest Expense

    Interest expense for the first half of 2008 was $15.8 million, compared
with $14.3 million in the first half of 2007. The increase in interest costs
principally reflects the impact of the financing arrangements that were put in
place on April 27, 2007 and includes a non-cash accretive interest charge of
$7.4 million in respect of the debt component of the convertible preferred
shares.

    Loss Before Income Taxes from Continuing Operations

    The Company reported a loss before income taxes from continuing
operations of $16.1 million in the first half of 2008, compared with a loss of
$16.2 million in the same period a year ago.

    Income Taxes

    The Company recorded an income tax charge of $2.6 million in the first
half of 2008, compared with a charge of $9.3 million in the same period last
year. The income tax expense in 2008 principally reflects high tax rates in
Italy where the Company reported significant profits, compounded by tax losses
in Puerto Rico, where the tax benefit after valuation reserve has not been
recognized. In addition, the accreted interest expense on the convertible
preferred shares of $7.4 million is not deductible for tax purposes. During
the first quarter of 2008, the Company booked a future income tax recovery of
$2.0 million relating to a reduction in tax rates in Italy that the Company
will benefit from commencing in fiscal 2009.
    The 2007 expense included 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 in the first half
of 2008 of $18.7 million, compared with a loss of $25.5 million in the same
period last year. The loss per share was 20.6 cents, compared with a loss of
27.4 cents per share a year earlier. The loss in 2008 included after tax
repositioning expenses of $9.7 million or 10.7 cents per share. The loss in
2007 included after tax repositioning expenses of $5.9 million or 6.4 cents
per share and after tax refinancing expenses of $12.6 million, or 13.5 cents
per share.

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

    Discontinued operations in the first half of 2008 and the comparable
results for 2007 include the Carolina and operations and the
Niagara-Burlington operations for the first quarter. Financial details of the
operating activities are disclosed in note 2 in the interim consolidated
financial statements. The loss from discontinued operations in the first half
of 2008 was $5.0 million, or a loss per share of 5.5 cents, compared with
earnings of $1.5 million and earnings per share of 1.6 cents in the same
period last year. The decline principally reflects the impact of lower
production in Carolina, Puerto Rico following the genericization of Omnicef(R)
in May 2007. The loss in 2008 also includes a charge of $0.6 million in
connection with the final divestiture of the Niagara-Burlington operations.

    Net Loss and Loss Per Share

    The Company recorded a net loss in the first half of 2008 of
$23.7 million, or 26.1 cents per share, compared with a loss of $24.0 million
or 25.8 cents per share in the same period last year.
    Because the Company reported a loss in the six months ended April 30,
2008 and 2007, there is no impact of dilution.

    Liquidity and Capital Resources

    Summary of Cash Flows

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

    
    Summary of Cash flows

                                          Three months            Six months
                                        ended April 30,       ended April 30,
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)        $          $          $          $
    -------------------------------------------------------------------------
    Net loss from continuing
     operations                      (6,471)   (21,950)   (18,686)   (25,526)
    Depreciation and amortization    11,189     10,407     22,798     20,488
    Foreign exchange loss
     (gain) on debt                     820     (1,156)     2,824     (1,156)
    Foreign exchange loss on
     foreign operations                   -        858          -        858
    Accreted interest on
     convertible preferred shares     3,762          -      7,428          -
    Other non-cash interest             130      1,311        260      1,380
    Employee future benefits,
     net of contributions              (957)        29     (1,565)       388
    Future income taxes              (2,061)       295     (5,554)       166
    Amortization of deferred
     revenues                          (532)      (483)    (1,009)      (969)
    Other                               733        231      1,345        507
    Working capital                 (13,849)       567    (14,105)    (7,443)
    Increase in deferred revenues     1,478          -      1,478          -
                                    -------------------  --------------------
    Cash used in operating
     activities of continuing
     operations                      (5,758)    (9,891)    (4,786)   (11,307)
    Cash provided by (used in)
     investing activities of
     continuing operations            1,422     (5,054)    (7,146)   (14,009)
    Cash provided by financing
     activities of continuing
     operations                       2,316     18,570      8,462     10,748
    Net increase in cash and cash
     equivalents from discontinued
     operations                         402      3,727      4,070      9,230
    Other                               228      2,360       (393)     1,153
                                    -------------------  --------------------
    Net increase (decrease) in cash
     and cash equivalents during
     the period                      (1,390)     9,712        207     (4,185)
                                    -------------------  --------------------
                                    -------------------  --------------------
    

    Cash Used in Operating Activities

    Cash used in operating activities from continuing operations was
$5.8 million in the second quarter of 2008 compared with $9.9 million in the
comparable period in 2007. On a year-to-date basis cash used in operating
activities from continuing operations was $4.8 million, compared with
$11.3 million in the same period last year. The cash flows reflect a reduction
in losses before non-cash charges, offset in part by an increase in
investments in working capital in the second quarter. Working capital
increases were caused by the payment of bonuses and repositioning expenses
that had been accrued for in prior periods, combined with the impact of an
overall increase in revenues. Cash flows in 2008 also benefited from
$1.5 million received from clients to assist in the funding of capital
expenditure projects that are tied to specific manufacturing and supply
agreements. These amounts have been recorded in deferred revenues and will be
recognized as income over the life of the commercial manufacturing contract.
    Cash used in operating activities from discontinued operations was
$1.8 million and $6.2 million in the second quarter and first half of 2008,
respectively. During the comparable periods in 2007, the Company reported cash
inflows of $4.2 million and $10.0 million, respectively. The deterioration
reflects reduced earnings in the Carolina operations. In addition, the amount
reported for the second quarter of 2007 included $3.1 million of cash inflows
from the operations of the Niagara-Burlington OTC manufacturing business,
which was sold on January 31, 2008.

    Cash Provided by (Used in) Investing Activities

    Cash provided by investing activities from continuing operations in the
second quarter of 2008 was $1.4 million, compared with cash usage of
$5.1 million in the same period a year ago. On a year-to-date basis cash used
in investing activities from continuing operations was $7.2 million compared
with $14.0 million in the same period last year. Cash inflows in the second
quarter of 2008 include net proceeds received on sale of the Company's York
Mills property of $11.9 million. Capital expenditures were $10.7 million and
$18.9 million for the three months and six months ended April 30, 2008,
respectively. The increase in expenditures relative to the prior year
principally relates to facility expansions at the Toronto Region and Whitby
operations.
    Cash provided by investing activities from discontinued operations in the
second quarter of 2008 was $2.2 million, compared with a cash usage of
$0.4 million in the same period last year. Cash provided by investing
activities from discontinued operations in the first half of 2008 was
$10.4 million, compared with a cash usage of $0.5 million in the same period
last year. The cash inflow in 2008 principally reflects net proceeds after
transaction costs from the sale of the Niagara-Burlington operations of
$10.5 million. This includes $2.2 million in post closing adjustments received
in the second quarter.

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

    
    Cash Provided by (Used in) Investing Activities

                                          Three months            Six months
                                        ended April 30,       ended April 30,
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)        $          $          $          $
    -------------------------------------------------------------------------
    Additions to capital assets
      Sustaining                     (2,774)    (2,142)    (7,131)    (5,205)
      Project-related                (7,893)    (2,266)   (11,719)    (7,209)
                                    -------------------  --------------------
    Total additions to capital
     assets                         (10,667)    (4,408)   (18,850)   (12,414)
    Proceeds on sale of capital
     assets                          12,089          -     12,089          -
    Net increase in investments           -          -       (385)       116
    Increase in deferred
     pre-operating costs                  -       (646)         -     (1,711)
                                    -------------------  --------------------
    Cash provided by (used in)
     investing activities of
     continuing operations            1,422     (5,054)    (7,146)   (14,009)
                                    -------------------  --------------------
    Cash provided (used in)
     investing activities of
     discontinued operations          2,237       (395)    10,439       (453)
                                    -------------------  --------------------
    Cash provided by (used in)
     investing activities             3,659     (5,449)      3,293   (14,462)
                                    -------------------  --------------------
                                    -------------------  --------------------

    Cash Provided by Financing Activities

    Cash provided by financing activities was $2.2 million and $8.3 million,
for the three and six months ended April 30, 2008, respectively. The amounts
for the comparable periods a year ago were $18.5 million and $10.4 million,
respectively. The cash flows in 2008 reflect drawings and repayments on
existing credit facilities.
    In the second quarter of 2007, the Company completed, through private
placement, the issuance of $150 million of convertible preferred shares of the
Company to JLL Partners and entered into 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 term loan were used to repay the Company's
obligations under its North American and U.K. credit facilities.
    A summary of cash provided by financing activities is as follows:

    Cash Provided by Financing Activities

                                          Three months            Six months
                                        ended April 30,       ended April 30,
                                       2008       2007       2008       2007
    ---------------------------------------------------  --------------------
    (in thousands of U.S. dollars)        $          $          $          $
    ---------------------------------------------------  --------------------

    Increase (decrease) in bank
     indebtedness                     6,715     (8,258)     8,073     (1,316)
    Increase in long-term debt        4,161    166,470     15,940    175,840
    Repayment of long-term debt      (8,585)  (288,453)   (15,576)  (312,587)
    Issue of convertible preferred
     shares                               -    150,000          -    150,000
    Convertible preferred share
     issue cost-equity component          -     (1,213)         -     (1,213)
    Issue of restricted voting
     shares                              25         24         25         24
                                    -------------------  --------------------
    Cash provided by financing
     activities of continuing
     operations                       2,316     18,570      8,462     10,748
                                    -------------------  --------------------
    Cash used in financing
     activities of discontinued
     operations                         (70)       (30)      (173)      (366)
                                    -------------------  --------------------
    Cash provided by financing
     activities                       2,246     18,540      8,289     10,382
                                    -------------------  --------------------
                                    -------------------  --------------------
    

    Financing Arrangements and Ratios

    There have been no changes to the Company's financing arrangements during
the first half of fiscal of 2008.
    Total cash interest bearing debt, at April 30, 2008 was $238.0 million,
being $14.4 million higher than at October 31, 2007. Total interest bearing
debt at April 30, 2008, including the debt component of convertible preferred
shares of $147.3 million, was $385.3 million. At April 30, 2008, the Company's
consolidated ratio of interest-bearing debt to shareholders' equity was 234%,
compared with 184% at October 31, 2007. The increase reflects a combination of
increased debt and a reduction in shareholders' equity, arising from the
losses and a reduction in accumulated other comprehensive income.

    Adequacy of Financial Resources

    As at April 30, 2008, the Company had cash balances of $30.8 million and
$69.7 million in undrawn credit facilities available to it and was in
compliance with all covenant requirements under its financing arrangements.
The Company believes that, subject to usual business risks, its financial
resources are sufficient to fund projected capital expenditures, debt service
requirements and employee future benefit obligations in the normal course of
business. There have been no material changes to the contractual obligations
disclosed in the MD&A section of the Company's 2007 Annual Report that are
outside the normal course.

    Critical Accounting Policies and Estimates

    Changes in and Significant New Accounting Policies

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

    General

    Patheon's significant accounting policies are described in note 2 to the
2007 audited consolidated financial statements. The most critical of these
policies are those related to revenue recognition, deferred revenues,
impairment of long-lived depreciable assets, convertible preferred shares,
employee future benefits, and income taxes, (notes 2, 4, 13, 15, 16 and 18 of
the 2007 audited consolidated financial statements).
    The preparation of the consolidated financial statements in conformity
with Canadian generally accepted accounting principles requires management to
make estimates and assumptions that affect: the reported amounts of assets and
liabilities; the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements; and the reported amounts of revenue
and expenses in the reporting period. Management believes that the estimates
and assumptions used in preparing its consolidated financial statements are
reasonable and prudent; however, actual results could differ from those
estimates.
    The Company's accounting policies have been reviewed and discussed with
the Company's Audit Committee.

    Revenue Recognition

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

    Deferred Revenues

    The costs of certain capital assets are reimbursed to the Company by the
pharmaceutical companies that are to benefit from the improvements in
connection with the manufacturing and packaging agreements in force. These
reimbursements are recorded as deferred revenues and are recognized as income
over the remaining minimum term of the agreements. $0.5 million and
$1.0 million were recognized as earnings in the three months and six months
ended April 30, 2008, respectively. The Company received $1.5 million in
capital reimbursements in the three months and six months ended April 30,
2008.

    Impairment of Long-Lived Depreciable Assets

    On an ongoing basis, the Company reviews whether there are any indicators
of impairment of its capital assets and identifiable intangible assets
("long-lived depreciable assets"). If such indicators are present, the Company
assesses the recoverability of the assets or group of assets by determining
whether the carrying value of such assets can be recovered through
undiscounted future cash flows. If the sum of undiscounted future cash flows
is less than the carrying amount, the excess of the carrying amount over the
estimated fair value, based on discounted future cash flows, is recorded as a
charge to net earnings. No impairment charges were recorded in the first half
of 2008.

    Convertible Preferred Shares

    On April 27, 2007 the Company issued $150.0 million of convertible
preferred shares. The shares are considered to be a compound financial
instrument that contains both a debt component and an equity component.
    On issuance of the convertible preferred shares, the fair value of the
debt component is determined by discounting the expected future cash flows
using a market interest rate for a non-convertible debt instrument with
similar terms. The resulting value is carried as debt on an amortized cost
basis until extinguished on conversion or redemption. The remainder of the
proceeds is allocated as a separate component of shareholders' equity, net of
transaction costs. Transaction costs are apportioned between the debt and
equity components based on their respective carrying amounts when the
instrument was issued.
    On conversion, the carrying amount of the debt component and the equity
component are transferred to share capital and no gain or loss is recognized.
    The interest cost recognized in respect of the debt component represents
the accretion of the liability, over its expected life using the effective
interest method, to the amount that would be payable if redeemed. The
accretive interest expense for the three months and six months ended April 30,
2008 was $3.8 million and $7.4 million, respectively.

    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 $34.8 million have been recorded at April 30, 2008.
The future tax assets are primarily composed of accounting provisions related
to pension and post-retirement benefits not currently deductible for tax
purposes, the tax benefit of net operating loss carry forwards related to the
U.K., unclaimed R&D expenditures and deferred financing and share issue costs.
The Company evaluates quarterly the ability to realize its future tax assets.
The factors used to assess the likelihood of realization are the Company's
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the future tax assets.
    Future tax liabilities of $46.9 million have been recorded at April 30,
2008. This liability has arisen primarily on tax depreciation in excess of
book depreciation.
    The Company's tax filings are subject to audit by taxation authorities.
Although management believes that it has adequately provided for income taxes
based on the information available, the outcome of audits cannot be known with
certainty and the potential impact on the financial statements is not
determinable.

    Employee Future Benefits

    The Company provides to certain retired employees pensions and
post-employment benefits, including medical benefits and dental care. The
determination of the obligation and expense for defined benefit pensions and
post-employment benefits is dependent on the selection of certain assumptions
used by actuaries in calculating such amounts. Those assumptions are disclosed
in note 15 to the Company's 2007 audited consolidated financial statements.

    Risk Management

    The following are updates to certain risks and uncertainties described in
the Company's Management's Discussion and Analysis for the year ended
October 31, 2007, available on SEDAR (www.sedar.com) or on Patheon's website
(www.patheon.com).

    Foreign Currency

    The Company's business activities are conducted in several currencies -
Canadian dollars and U.S. dollars for the Canadian operations, U.S. dollars
for the U.S. operations and euros, U.K. sterling and US dollars for the
European operations.
    The Company's Canadian operations negotiate sales contracts for payment
in both U.S. and Canadian dollars, and materials and equipment are purchased
in both U.S. and Canadian dollars. The majority of its non-material costs
(including payroll, facilities' costs and costs of locally sourced supplies
and inventory) are denominated in Canadian dollars. Approximately 70% of
revenues of the Canadian operations and approximately 10% of its operating
expenses are transacted in U.S. dollars. As a result, the Company may
experience trading and translation gains or losses because of volatility in
the exchange rate between the Canadian dollar and the U.S. dollar. Based on
the Company's current U.S. denominated net inflows, for each one-cent change
in the Canadian-U.S. rate, the impact on annual pre-tax earnings, excluding
any hedging activities, is approximately $1.2 million.
    In addition certain sales contracts in Swindon, U.K. are denominated in
euros and U.S. dollars. This exposes the UK operations to certain limited
trading and translation gains or losses because of volatility in the exchange
rate between U.K sterling, the euro and the U.S. dollar.
    The Company mitigates its foreign exchange risk by engaging in foreign
currency hedging activities using derivative financial instruments. The
Company does not purchase any derivative instruments for speculative purposes.
    At April 30, 2008 the Company's Canadian operations had outstanding
foreign exchange forward contracts to sell US$56.6 million at an average
exchange rate of $1.0238 Canadian. The contracts mature at the latest on
April 14, 2009 and cover approximately 77% of the Company's expected foreign
exchange exposure for the 2008 fiscal year and 10% for fiscal 2009. The
mark-to-market value at April 30, 2008 that is recorded in accumulated other
comprehensive income is an unrealized gain of $1.0 million. At April 30, 2008
the Company also had an outstanding foreign exchange forward contract to buy
US$45.0 million at an exchange rate of $1.0015 Canadian. The contract matures
on January 28, 2010 and hedges the Canadian operations U.S. dollar balance
sheet exposure. The mark-to-market value at April, 30, 2008 that was recorded
in earnings is an unrealized gain of $0.4 million.
    As at April 30, 2008, the Company's U.K operations had entered into
foreign exchange forward contracts to sell an aggregate amount of
US$4.2 million and (euro) 6.0 million. These contracts hedge the Swindon, U.K
operation's expected exposure to U.S. dollar and euro denominated cash flows
and mature at the latest on November 10, 2008, at an average exchange rate of
pnds stlg 0.5036 and pnds stlg 0.7859, respectively. The mark-to-market value
on these financial instruments as at April 30, 2008 was an unrealized loss of
$0.1 million, which has been recorded in accumulated other comprehensive
income in shareholders' equity.
    Translation gains and losses related to the carrying value of the
Company's foreign operations and certain foreign currency denominated debt
held by the Company and designated as a hedge against the carrying value of
certain foreign subsidiaries, are included in accumulated other comprehensive
income in shareholders' equity. At April 30, 2008, the Company had designated
$149.7 million of U.S. dollar denominated debt as a hedge against its
investment in its U.S.A. and Puerto Rico subsidiaries.

    Interest Rate Exposure

    The Company has exposure to movements in interest rates. The Company has
entered into interest rate swaps to convert the interest expense on its senior
secured term loan from a floating interest rate to a fixed interest rate until
June 30, 2010. Taking this interest rate swap into account, at April, 30,
2008, 78% of the Company's total debt portfolio, including the debt component
of the convertible preferred shares, was not subject to movements in floating
interest rates. Assuming no change to the structure of the debt portfolio, a
1% change in floating interest rates has an impact on annual pre-tax earnings
of approximately $0.9 million.

    Effectiveness of Disclosure Controls and Internal Controls

    Disclosure controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to senior
management, including the Chief Executive Officer ("CEO") and the Chief
Financial Officer ("CFO"), on a timely basis so that appropriate decisions can
be made regarding public disclosure. An evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures was
conducted as of October 31, 2007 by and under the supervision of the Company's
management, including the CEO and the CFO. Based on this evaluation, the CEO
and the CFO have concluded that the Company's disclosure controls and
procedures (as defined in Multilateral Instrument 52-109 - Certification of
Disclosure in Issuers' Annual and Interim Filings of the Canadian Securities
Administrators) are effective to ensure that the information required to be
disclosed in reports that the Company files or submits under Canadian
securities legislation is recorded, processed, summarized and reported within
the time periods specified in such legislation. There have been no changes,
since this last formal assessment, that have materially affected, or are
reasonably likely to materially affect the Company's disclosure controls and
procedures.
    Under the supervision of the CEO and CFO, the Company has designed
internal controls over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. This
design evaluation included documentation activities, management inquiries and
other reviews as deemed appropriate by management in consideration of the size
and nature of the Company's business. There were no changes in the Company's
internal controls over financial reporting during the most recent interim
period that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.

    Seasonal Variability of Results

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

    Selected Quarterly Financial Information

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

    
    Quarterly Consolidated Financial Information


                                               BASIC AND
                                                 DILUTED
                                                LOSS PER
                                      NET LOSS     SHARE
    Quarter ended             EBITDA      FROM      FROM
    (in thousands             BEFORE   CONTIN-   CONTIN-           BASIC AND
     of U.S.                 REPOSI-      UING      UING             DILUTED
     dollars,                TIONING    OPERA-    OPERA-       NET  LOSS PER
     except per   REVENUES  EXPENSES     TIONS    ATIONS      LOSS     SHARE
     share
     amounts)            $         $         $         $         $         $
    -------------------------------------------------------------------------
    2008
    April 30       185,997    23,114    (6,471)   ($0.07)   (8,475)   ($0.09)
    January 31     164,172    10,043   (12,215)   ($0.14)  (15,188)   ($0.17)

    2007
    October 31     161,821    23,684    (5,877)   ($0.06)   (7,522)   ($0.08)
    July 31        164,737    20,649    (3,365)   ($0.04)  (63,069)   ($0.68)
    April 30       160,218    21,140   (21,950)   ($0.23)  (21,986)   ($0.24)
    January 31     147,370    18,674    (3,576)   ($0.04)   (2,024)   ($0.02)

    2006
    October 31     150,521    14,667   (23,324)   ($0.25)  (22,416)   ($0.24)
    July 31        165,598    13,427  (218,820)   ($2.36) (257,213)   ($2.77)
    

    Additional Information

    Share Capital

    As of April 30, 2008, the Company had 90,634,388 restricted voting shares
outstanding and 150,000 each of Class I Preferred Shares, Series C
(convertible preferred shares) and Series D (special voting preferred shares).
Each Class I Preferred Shares, Series C was convertible into 228.1096 Patheon
restricted voting shares. As at April 30, 2008 the Company had 7,007,986 stock
options outstanding, of which 4,358,416 were exercisable.

    Related Party Transactions

    Revenues from companies controlled by a director and significant
shareholder of the Company were in the amount of $48,000 and $0.1 million for
the three and six months ended April 30, 2008, respectively. The revenues were
$0.6 million and $0.7 million for the three and six months ended April 30,
2007, respectively. These transactions were conducted in the normal course of
business and are recorded at the exchanged amount. Accounts receivable at
April 30, 2008 include a balance of $0.1 million (October 31, 2007 -
$0.4 million) resulting from these transactions.
    At April 30, 2008 the Company has an investment of $1.2 million
(October 31, 2007 - $0.8 million) representing an 18% interest in two Italian
companies (collectively referred to as "BSP Pharmaceuticals") whose largest
investor is an officer of the Company. These companies will specialize in the
manufacturing of cytotoxic pharmaceutical products.
    The Company has recorded management fees under a management services
agreement with BSP Pharmaceuticals of $0.4 million and $0.8 million for the
three and six months ended April 30, 2008, respectively. The management fees
were $0.4 million and $0.7 million for the three and six months ended
April 30, 2007, respectively. Accounts receivable at April 30, 2008 include a
balance of $3.2 million (October 31, 2007 - $1.6 million) in connection with
the management services agreement. The receivable includes amounts owing for
services rendered in fiscal 2007. These services were conducted in the normal
course of business and are recorded at the exchanged amounts.
    In connection with certain of BSP Pharmaceuticals' bank financing, the
Company has made commitments that it will not dispose of its interest in BSP
Pharmaceuticals prior to January 1, 2011.

    Public Securities Filings

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

    Outlook

    Revenues in the third quarter of 2008 are expected to be slightly higher
than the second quarter of 2008. Revenues in the second half of 2008 are also
expected to be slightly higher than the first half of 2008. The Company
anticipates that it will incur costs in the $4 to $5 million range in the
third quarter of 2008 in connection with an early retirement program in
Cincinnati. These costs will impact the reported amount of EBITDA before
repositioning expenses. Based on projected participation in the program, cost
savings are expected to benefit the Company in future quarters.
    These expectations are based on internal management forecasts, which in
the case of the revenue forecasts, are based on client purchase orders and
forecasts of anticipated demand and other factors. These internal management
forecasts were prepared for internal planning purposes and may not be
appropriate for forecasting future financial results or for other purposes.
    The Company indicated in its MD&A for the three months ended January 31,
2008 that it anticipated that revenues for the second quarter of 2008 would be
higher than the first quarter, due to a recovery from lower volumes that the
Company traditionally experiences in its first quarter due to plant shut
downs. Revenues reported in the second quarter of 2008 exceeded first quarter
revenues by $21.8 million, representing an increase of 13%.

    FORWARD-LOOKING STATEMENTS

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

    %SEDAR: 00001700E




For further information:

For further information: Mr. Wes Wheeler, President & Chief Executive
Officer, Tel: (905) 812-2112, Email: wes.wheeler@patheon.com; Mr. Eric Evans,
Chief Financial Officer, Tel: (905) 812-6660, Email: eric.evans@patheon.com;
Ms. Jean Treadwell, Investor Relations, Tel: (905) 816-8344, Email:
jean.treadwell@patheon.com; General Inquiries Email: info@patheon.com

Organization Profile

Patheon Inc

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