Patheon Reports Third Quarter 2008 Results



    Revenue advances 18% (12% in local currencies) over prior year

    TORONTO, Sept. 5 /CNW/ - Patheon (TSX:PTI) today announced its results
for the third quarter ended July 31, 2008 with revenue of $195.0 million, 18%
higher than last year (12% in local currencies), and EBITDA before
repositioning expenses of $24.7 million versus $20.6 million in the prior
year. The current year EBITDA growth was achieved after absorbing incremental
costs of $3.3 million related to a previously announced early retirement
program in Cincinnati, a $1.3 million non-cash foreign exchange loss (versus a
$3.6 million gain in the prior year) and operating expenses associated with a
wide range of initiatives related to the restructuring of the Company.
    "This quarter we experienced strong revenue growth from a broad base of
existing customers. In addition we continued to improve the underlying
profitability of the operations, the benefits of which are somewhat masked by
our near term restructuring actions" said Wes Wheeler, President and Chief
Executive Officer, Patheon Inc. "Our focus this quarter was to implement
people, process and operational changes to build a great company. Many of
these initiatives required additional spending in the quarter. To date we've
invested in global training of staff in our Patheon Advantage(TM)
(LeanSixSigma) program, reduced headcount with severance programs to
streamline operations, continued to build our executive team and entered into
an agreement to change the terms of our Preferred Shares that will simplify
our financial reporting and will eliminate a major source of foreign exchange
volatility. All of these initiatives are important elements of our turnaround
strategy."

    Third Quarter 2008 Operating Results from Continuing Operations

    Consolidated revenue increased 18% (12% in local currencies) to
$195.0 million over the prior year consolidated revenue of $164.8 million.
    Commercial Manufacturing revenues increased 15% year-over-year to
$157.3 million driven by strong growth in Europe's existing business base.
Revenue increased at all North America locations with the exception of
Cincinnati, which was impacted by customer related raw material supply
constraints.
    Pharmaceutical Development Services (PDS) Q3 2008 revenues increased 32%
year-over-year to $37.7 million, with both North America and Europe
experiencing strong growth as a result of higher order backlog from contracts
signed in the second quarter. "The PDS business growth is a clear
demonstration that we offer a unique blend of services that our customers
require. We offer talented staff that includes 100 PhD's in six development
facilities, most of which are co-located with sophisticated commercial
manufacturing equipment" said Wes Wheeler.
    Consolidated EBITDA before repositioning expenses was $24.7 million for
an EBITDA margin of 12.7% in the third quarter, compared with $20.6 million
for an EBITDA margin of 12.5% in the same period last year. The current period
includes non-cash net foreign exchange losses on U.S. dollar denominated debt
in Canada of $1.3 million compared with a gain of $3.6 million for the same
period last year. Additional costs were incurred during the quarter in
connection with recruiting executive and senior management positions,
consulting fees related to new operational and strategic initiatives, and
severance costs.
    EBITDA before repositioning expenses for the global commercial operations
was $21.7 million in the third quarter of 2008, $6.8 million higher than the
same period in 2007. EBITDA growth was achieved across all regions with the
exception of Cincinnati, reflecting the benefits of revenue growth and cost
saving initiatives. Cincinnati was impacted by customer-related raw material
supply constraints and a $3.3 million charge for an early retirement program,
the benefits of which will begin in the fourth quarter of 2008.
    EBITDA before repositioning expenses for the global PDS operations was
$13.9 million in the third quarter of 2008, $7.5 million higher than the same
period in 2007. The PDS operations benefited from strong growth in all
regions.
    Repositioning expenses for the quarter were $6.7 million attributable to
severance accruals for the planned 2009 consolidation of the York Mills and
Whitby operations in Canada, and downsizing expense related to establishing
the Caguas, Puerto Rico site as a satellite plant to the Manati operation.

    
    Third Quarter Year to Date 2008 Operating Results from Continuing
    Operations
    

    Consolidated revenue grew 15% year-over-year (9% in local currencies) to
$545.1 million vs. $472.3 million for the prior year. Consolidated EBITDA
before repositioning expenses was $57.9 million reflecting an EBITDA margin of
10.6% year to date, compared with $60.5 million for an EBITDA margin of 12.8%
in the same period last year. This included non-cash net foreign exchange
losses on U.S. dollar denominated debt in Canada of $4.1 million compared with
a gain of $4.8 million for the same period last year. As noted above, these
results also reflect additional costs incurred in connection with recruiting
executive and senior management positions, consulting fees related to new
operational and strategic initiatives, and severance costs.
    Commercial manufacturing revenues increased 14% year-over-year to
$442.4 million reflecting growth from the existing customer base in the
European and Canadian operations. The growth performance more than offset the
loss of two products due to a product market withdrawal and the decision by a
customer to repatriate a product. EBITDA before repositioning expenses from
the Commercial operations was $53.4 million year to date, $8.9 million higher
than the same period in 2007. This EBITDA growth included a benefit of
$4.7 million related to weakness of the U.S. dollar, steady improvement in
performance in Europe, Canada and Puerto Rico, partially offset by higher
energy costs, other restructuring activities and the third quarter results of
Cincinnati.
    PDS revenues grew 24% year-over-year to $102.7 million reflecting
continued broad based growth in all regions. Further growth capacity is
currently coming online due to the completion of a new PDS lab facility in
Research Triangle Park, N.C., the recently launched clinical packaging
operations and a new intermediate scale solid dose pilot facility in
Cincinnati. EBITDA before repositioning expenses from the global PDS
operations was $29.4 million year to date, $8.4 million higher than the same
period in 2007. This reflected the benefit of volume gains in all regions.

    Restructuring Activities

    Repositioning expenses were $17.3 million during the nine-month period
compared to $8.1 million for the same period last year attributable to changes
in executive and senior management, the previously announced workforce
reduction in Swindon and the on-going York Mills/Whitby consolidation and
restructuring of the Puerto Rico operations. The early retirement costs at
Cincinnati were included in operating costs, as noted above.
    The Company is making significant headcount reductions to increase
productivity and drive future profitability. Severance expenses booked
year-to-date, planned divestitures and completed divestitures will account for
a total headcount reduction relative to October 2007 of approximately 850 or
16% of the Patheon workforce.

    Update on Restructuring the Canadian Operations

    The Company's plan to close its York Mills facility is on track to
transfer the facility's commercial production and development services to the
Whitby facility by mid-2009. In the third quarter 2008 the company booked a
severance accrual of $4.4 million for employee related repositioning expenses
at York Mills and Whitby. The consolidation of the York Mills and Whitby
operations will provide the company with an efficient plant structure in
Canada, the benefits of which will begin to be realized in the second half of
2009.

    Update on Carolina Facilities

    The Carolina operations are classified as a discontinued operation, with
related assets and liabilities being classified as held for sale. Based on
discussions with interested third parties, it has been determined that the
carrying value of the assets is impaired. The loss from discontinued
operations for the three months ended July 31, 2008 includes an impairment
charge of $7.7 million to write down the Carolina assets to their fair market
value less estimated disposition costs.

    Outlook

    Due to normal summer shutdowns, particularly in Europe, revenues for the
fourth quarter of 2008 are expected to be lower than revenues for the third
quarter of 2008 and could be subject to fluctuations in the strength of the
U.S. dollar.
    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.

    Convertible Preferred Shares

    The Company is also announcing today that it has entered into an
agreement with JLL Patheon Holdings, LLC under which JLL has agreed to waive
its right to the mandatory redemption provision of the Company's convertible
preferred shares. In consideration JLL will receive 400,000 restricted voting
shares of the Company. The Patheon Board of Directors has also agreed to a
limited waiver of the standstill provision under the investor agreement with
JLL that will allow JLL to acquire restricted voting shares in the open market
over 12 months equal to no more than 1% of the equity of the Company including
the restricted voting shares issuable under the convertible preferred shares.
    "The change in the terms of the agreement allows Patheon to reclassify to
equity from a combination of debt and equity the full value of the preferred
shares. This eliminates both a non-cash accretive interest charge and a
significant foreign exchange exposure, and results in a revised financial
statement presentation that clarifies the true financial nature of the
convertible preferred shares. It also eliminates a potential cash redemption
of the preferred shares in 2017 that would have been at least $185 million"
said Eric Evans, Chief Financial Officer of Patheon.
    The change in terms will result in a deemed repayment of the debt and
equity components of the preferred shares. Based on current market conditions
the Company anticipates that it will recognize in the fourth quarter a
non-cash gain of approximately $28 million on the deemed repayment of the debt
component. The agreement will result in a net increase in shareholders' equity
of approximately $152 million.
    The agreement is subject to TSX approval and is expected to be completed
during the fourth quarter. Additional details on the Agreement can be found in
the Company's third quarter MD&A.

    Notes

    The consolidated results for the third quarter 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, which were divested at the end of the first quarter 2008 and the
Carolina, Puerto Rico operations have been segregated and presented separately
as discontinued operations in the consolidated financial statements. All
amounts are in U.S. dollars unless otherwise indicated.

    ABOUT PATHEON

    Patheon Inc. (TSX:PTI; www.patheon.com) 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 300 of the world's leading pharmaceutical and
biotechnology companies. Patheon's 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
11 facilities, and 6 development centers 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 press release reflect management's current assumptions based upon
information currently available to management and based upon what management
believes to be reasonable assumptions, the Company cannot be certain that
actual results will be consistent with these forward-looking statements.
Current material assumptions relate to customer volumes, regulatory compliance
and foreign exchange rates. Forward-looking statements necessarily involve
significant known and unknown risks, assumptions and uncertainties that may
cause the Company's actual results, performance, prospects and opportunities
in future periods to differ materially from those expressed or implied by such
forward-looking statements. These risks and uncertainties include, among other
things: the inability to complete transactions as a result of failure to
satisfy closing conditions, including receipt of regulatory approvals,
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; 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 third quarter 2008 results on Friday, September 5, 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 Q3 webcast will be
available on www.patheon.com for three months.



    
                 Unaudited Consolidated Financial Statements
                        for the three and nine months
                             ended July 31, 2008



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

    Revenues            194,976  164,737    18.4%  545,145  472,325    15.4%
                       -------------------------- ---------------------------
    Operating expenses  168,977  147,722    14.4%  483,165  416,652    16.0%
    Foreign exchange
     loss (gain) on
     debt (note 7)        1,281   (3,634) -135.3%    4,105   (4,790) -185.7%
    Repositioning
     expenses (note 6)    6,685    1,189   462.2%   17,332    8,131   113.2%
    Depreciation and
     amortization        12,034    9,390    28.2%   33,890   28,935    17.1%
    Amortization of
     intangible assets      471      471     0.0%    1,413    1,414    -0.1%
    Foreign exchange
     loss on foreign
     operations               -        -                 -      858
    Interest              8,342    7,356    13.4%   24,117   21,659    11.3%
    Refinancing
     expenses                 -        -                 -   13,471
                       --------------------------- --------------------------
    Earnings (loss)
     from continuing
     operations before
     income taxes        (2,814)   2,243  -225.5%  (18,877) (14,005)  -34.8%
    Provision for
     income taxes         1,721    5,608   -69.3%    4,344   14,886   -70.8%
                       --------------------------- --------------------------
    Loss from continuing
     operations          (4,535)  (3,365)  -34.8%  (23,221) (28,891)   19.6%
                       --------------------------- --------------------------
    (as a % of revenues)  -2.3%    -2.0%             -4.3%    -6.1%
    Loss from
     discontinued
     operations
     (note 2)           (10,147) (59,704)   83.0%  (15,124) (58,188)   74.0%
                       --------------------------- --------------------------
    Net loss for the
     period             (14,682) (63,069)   76.7%  (38,345) (87,079)   56.0%
                       --------------------------- --------------------------
                       --------------------------- --------------------------
    Basic and diluted
     loss per share
      From continuing      (5.0     (3.7             (25.6    (31.1
       operations         cents)   cents)  -35.1%    cents)   cents)   17.7%
    From discontinued     (11.2    (64.2             (16.7    (62.6
     operations           cents)   cents)   82.6%    cents)   cents)   73.3%
                       --------------------------- --------------------------
                          (16.2    (67.9             (42.3    (93.7
                          cents)   cents)   76.1%    cents)   cents)   54.9%
                       --------------------------- --------------------------
    Average number of
     shares outstanding
     during period
     - basic and diluted
     (in thousands)      90,742   92,959    -2.4%   90,667   92,956    -2.5%
                       --------------------------- --------------------------

    see accompanying notes



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

    Assets
    Current
      Cash and cash equivalents                         34,054        30,557
      Accounts receivable                              146,302       127,691
      Inventories                                       83,884        85,991
      Prepaid expenses and other                        11,411        11,887
      Current assets held for sale (note 2)              1,546        16,151
                                                     ------------------------
    Total current assets                               277,197       272,277
                                                     ------------------------

    Capital assets                                     478,859       479,682
    Intangible assets                                    5,357         6,770
    Deferred costs                                       7,092         8,878
    Future tax assets                                   34,318        31,039
    Goodwill                                             3,375         3,658
    Investments                                          2,178           946
    Long-term assets held for sale (note 2)              1,942        26,367
                                                      -----------------------
                                                       810,318       829,617
                                                      -----------------------
                                                      -----------------------

    Liabilities and Shareholders' equity
    Current
      Bank indebtedness                                 20,834         8,224
      Accounts payable and accrued liabilities         170,001       159,335
      Income taxes payable                               7,759         4,684
      Current portion of long-term debt                 11,984        11,719
      Current liabilities related to assets
       held for sale (note 2)                               17         7,743
                                                     ------------------------
    Total current liabilities                          210,595       191,705
                                                     ------------------------

    Long-term debt                                     208,390       203,615
    Deferred revenues                                   25,185        25,994
    Future tax liabilities                              43,634        47,397
    Convertible preferred shares - debt
     component                                         151,205       139,916
    Other long-term liabilities                         20,968        22,069
    Long-term liabilities related to assets
     held for sale (note 2)                                 20         1,736
                                                     ------------------------
    Total liabilities                                  659,997       632,432
                                                     ------------------------

    Shareholders' equity
      Convertible preferred shares
       - equity component                               15,925        15,925
      Restricted voting shares                         392,395       391,967
      Contributed surplus                                6,164         4,049
      Deficit                                         (324,595)     (286,250)
      Accumulated other comprehensive
       income                                           60,432        71,494
                                                     ------------------------
    Total shareholders' equity                         150,321       197,185
                                                     ------------------------
                                                       810,318       829,617
                                                     ------------------------
                                                     ------------------------

    see accompanying notes



    Consolidated Statements of Changes in Shareholders' Equity
    (unaudited)
                                                   Nine months ended July 31,
                                                          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                                         428            24
                                                      -----------------------
      Balance at end of period                         392,395       400,745
                                                      -----------------------
    Contributed surplus
      Balance at beginning of period                     4,049         3,829
      Stock options                                      2,115           168
                                                      -----------------------
      Balance at end of period                           6,164         3,997
                                                      -----------------------
    Deficit
      Balance at beginning of period                  (286,250)     (189,900)
      Adjustment related to change in accounting
       policy                                                -        (1,749)
      Net loss for the period                          (38,345)      (87,079)
                                                      -----------------------
      Balance at end of period                        (324,595)     (278,728)
                                                      -----------------------
    Accumulated other comprehensive income
      Balance at beginning of period                    71,494        36,081
      Transition adjustment                                  -          (762)
      Other comprehensive income (loss) for the
       period                                          (11,062)       16,958
                                                      -----------------------
      Balance at end of period                          60,432        52,277
                                                      -----------------------
    Total shareholders' equity at end of period        150,321       194,216
                                                      -----------------------
                                                      -----------------------

    see accompanying notes



    Consolidated Statements of Comprehensive Loss
    (unaudited)
                                      Three months ended   Nine months ended
                                                July 31,            July 31,
                                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)           $         $         $         $
    -------------------------------------------------------------------------

    Net loss for the period            (14,682)  (63,069)  (38,345)  (87,079)
                                       ------------------  ------------------
    Other comprehensive income (loss),
     net of income taxes
      Change in foreign currency gains
       on investments in subsidiaries,
       net of hedging activities(1)       (810)    5,545    (4,596)   12,642

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

      Change in value of derivatives
       designated as foreign currency
       and interest rate cash flow
       hedges(3)                         1,248       370    (2,115)    1,201

      (Gains) losses on foreign
       currency and interest rate
       cash flow hedges reclassified
       to consolidated statement of
       loss(4)                          (1,116)     (399)   (4,351)      322
                                       ------------------  ------------------
      Other comprehensive income
       (loss) for the period              (678)    5,516   (11,062)   16,958
                                       ------------------  ------------------

                                       ------------------  ------------------
    Comprehensive loss for the period  (15,360)  (57,553)  (49,407)  (70,121)
                                       ------------------  ------------------
                                       ------------------  ------------------

    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 (Nine months ended July 31, 2007,
        recovery of $1,935,000).
    (3) Net of an income tax expense of $363,000 and income tax recovery of
        $168,000 for the three and nine months ended July 31, 2008,
        respectively.
        (Three and nine months ended July 31, 2007, recovery of $116,000).
    (4) Net of an income tax recovery of $135,000 and $204,000 for the three
        and nine months ended July 31, 2008, respectively. (Three and nine
        months ended July 31, 2007, recovery of $323,000 and $343,000,
        respectively).



    Patheon Inc.
    Consolidated Statements of Cash Flows
    (unaudited)

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

    Operating activities
      Net loss from continuing
       operations                       (4,535)   (3,365)  (23,221)  (28,891)
      Add (deduct) charges to
       operations not requiring a
       current cash payment
        Depreciation and amortization   12,505     9,861    35,303    30,349
        Foreign exchange loss (gain)
         on debt                         1,893    (3,634)    4,717    (4,790)
        Foreign exchange loss on
         foreign operations                  -         -         -       858
        Accreted interest on
         convertible preferred shares    3,861     3,481    11,289     3,481
        Other non-cash interest            161       126       421     1,506
        Employee future benefits, net
         of contributions                 (313)      (65)   (1,878)      323
        Future income taxes             (3,240)    2,980    (8,794)    3,146
        Amortization of deferred
         revenues                         (504)     (547)   (1,513)   (1,516)
        Other                              838       463     2,183       970
                                       ------------------  ------------------
                                        10,666     9,300    18,507     5,436
      Net change in non-cash working
       capital balances related to
       continuing operations             5,156   (20,272)   (8,949)  (27,715)
      Increase in deferred revenues        623     2,057     2,101     2,057
                                       ------------------  ------------------
      Cash provided by (used in)
       operating activities of
       continuing operations            16,445    (8,915)   11,659   (20,222)
      Cash provided by (used in)
       operating activities of
       discontinued operations            (349)    5,591    (6,545)   15,640
                                       ------------------  ------------------
    Cash provided by (used in)
     operating activities               16,096    (3,324)    5,114    (4,582)
                                       ------------------  ------------------

    Investing activities
      Additions to capital assets      (15,200)   (8,186)  (34,050)  (20,600)
      Proceeds on sale of capital
       assets                                -         -    12,089         -
      Net increase in investments         (926)     (293)   (1,311)     (177)
      Increase in deferred
       pre-operating costs                   -    (1,116)        -    (2,827)
                                       ------------------  ------------------
      Cash used in investing
       activities of continuing
       operations                      (16,126)   (9,595)  (23,272)  (23,604)
      Cash provided by (used in)
       investing activities of
       discontinued operations               -      (339)   10,439      (792)
                                       ------------------  ------------------
    Cash used in investing activities  (16,126)   (9,934)  (12,833)  (24,396)
                                       ------------------  ------------------

    Financing activities
      Increase in bank indebtedness      3,728     9,078    11,801     7,762
      Increase in long-term debt         7,882     6,812    23,822   182,652
      Repayment of long-term debt       (8,408)   (7,018)  (23,984) (319,605)
      Issue of convertible preferred
       shares                                -         -         -   150,000
      Convertible preferred share
       issue cost - equity component         -         -         -    (1,213)
      Issue of restricted voting
       shares                              403         -       428        24
                                       ------------------  ------------------
      Cash provided by financing
       activities of continuing
       operations                        3,605     8,872    12,067    19,620
      Cash used in financing
       activities of discontinued
       operations                           (6)     (101)     (179)     (467)
                                       ------------------  ------------------
    Cash provided by financing
     activities                          3,599     8,771    11,888    19,153
                                       ------------------  ------------------

    Effect of exchange rate changes
     on cash and cash equivalents         (279)   (1,555)     (672)     (402)
                                       ------------------  ------------------
    Net increase (decrease) in cash
     and cash equivalents during the
     period                              3,290    (6,042)    3,497   (10,227)
    Cash and cash equivalents,
     beginning of period                30,764    46,538    30,557    50,723
                                       ------------------  ------------------
    Cash and cash equivalents, end of
     period                             34,054    40,496    34,054    40,496
                                       ------------------  ------------------
                                       ------------------  ------------------

    see accompanying notes



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


    1.  Accounting policies

    Basis of presentation

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

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

    Changes in accounting policy

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

    Recently issued accounting pronouncements

    (a) Inventories

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

    (b) General Standards of Financial Statement Presentation

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

    (c) Goodwill, Intangible Assets and Financial Statement Concepts

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

    (d) International Financial Reporting Standards

    In February 2008, the Canadian Accounting Standards Board announced the
    adoption of International Financial Reporting Standards ("IFRS") for
    publicly accountable enterprises. Patheon will be required to adopt
    IFRS no later than November 1, 2011. The Company is currently evaluating
    the effects of adopting these standards.

    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.

    In the third quarter of 2008, based on discussions with third parties
    interested in purchasing the facilities, the Company recorded an
    impairment charge of $7,700,000 to write down the carrying value of the
    Carolina operations long-lived assets to their fair value less estimated
    disposition costs. In the third quarter of 2007, the Company recorded an
    impairment charge of $61,609,000. This included a charge of $48,580,000
    to write down the carrying value of the Carolina long-lived depreciable
    assets to their estimated fair value and a charge of $13,029,000 to write
    down the carrying value of the Niagara-Burlington operations' long-lived
    assets to their fair value less estimated disposition costs.

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


                                  Three months ended       Nine months ended
                                             July 31,                July 31,
                                    2008        2007        2008        2007
                                       $           $           $           $
    -------------------------------------------------------------------------

    Revenues                       1,689      21,270      16,849      66,386
    -------------------------------------------------------------------------
    Operating expenses             4,092      17,841      22,946      55,530
    Repositioning expenses            24         277         190         988
    Asset impairment charge        7,700      61,609       7,700      61,609
    Depreciation and
     amortization                      -         748          45       2,452
    Amortization of intangible
     assets                            -         760         324       4,180
    Loss on disposal of
     discontinued operations           -           -         601           -
    Interest                          20           8          32          40
    -------------------------------------------------------------------------
    Loss before income taxes     (10,147)    (59,973)    (14,989)    (58,413)
    Provision for (recovery
     of) income taxes                  -        (269)        135        (225)
    -------------------------------------------------------------------------
    Net loss for the period      (10,147)    (59,704)    (15,124)    (58,188)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at July 31, 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 are as follows:


                                                         As at         As at
                                                       July 31,   October 31,
    -------------------------------------------------------------------------
                                                          2008          2007
                                                             $             $
    -------------------------------------------------------------------------
    Current assets
      Accounts receivable                                  317         7,486
      Inventories                                          707         8,045
      Prepaid expenses and other                           522           620
    -------------------------------------------------------------------------
    Total current assets                                 1,546        16,151
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Long-term assets
      Capital assets                                     1,942        24,403
      Intangible assets                                      -         1,948
      Future tax assets                                      -            16
    -------------------------------------------------------------------------
    Total long-term assets                               1,942        26,367
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Current liabilities
      Accounts payable and accrued liabilities               -         7,743
      Current portion of long-term debt                     17             -
    -------------------------------------------------------------------------
    Total current liabilities                               17         7,743
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Long-term liabilities
      Long-term debt                                        20           213
      Future tax liabilities                                 -             -
      Other long-term liabilities                            -         1,523
    -------------------------------------------------------------------------
    Total long-term liabilities                             20         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
    July 31, 2008:

                                                  Outstanding    Exercisable

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

    Restricted voting shares outstanding           90,749,388
    Restricted voting share stock options           6,169,770      3,192,093

    Please refer to note 11 "Subsequent Events" with regard to an agreed
    waiver in the mandatory redemption provision in the Class I preferred
    shares series C and D.

    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 July 31, 2008
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues by client's
     billing location:
    Canada                         5,503         129       2,923       8,555
    USA                           39,763      36,025       9,614      85,402
    Europe                        12,468       1,374      79,846      93,688
    Other geographic areas         1,456         164       5,711       7,331
    -------------------------------------------------------------------------
    Total revenues                59,190      37,692      98,094     194,976
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets               117,378     114,009     247,472     478,859
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                       3,375           -           -       3,375
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



                                            Manufacturing location
                                       Three months ended July 31, 2007
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues by client's
     billing locations:
    Canada                         4,515         554          36       5,105
    USA                           35,223      34,255       4,257      73,735
    Europe                         7,669       1,272      74,670      83,611
    Other geographic areas         1,221         153         912       2,286
    -------------------------------------------------------------------------
    Total revenues                48,628      36,234      79,875     164,737
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Capital assets               105,699     110,965     233,662     450,326
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill                       3,239           -           -       3,239
    -------------------------------------------------------------------------


                                            Manufacturing location
                                       Nine months ended July 31, 2008
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues by client's
     billing location:
    Canada                        14,838         616       3,029      18,483
    USA                          106,220     112,787      31,184     250,191
    Europe                        39,535       3,356     218,491     261,382
    Other geographic areas         3,473       1,737       9,879      15,089
    -------------------------------------------------------------------------
    Total revenues               164,066     118,496     262,583     545,145
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                           Manufacturing location
                                       Nine months ended July 31, 2007
                                ---------------------------------------------
                                  Canada         USA      Europe       Total
                                       $           $           $           $
    -------------------------------------------------------------------------
    Revenues by client's
     billing locations:
    Canada                        10,741         903         895      12,539
    USA                          104,917     117,305      11,016     233,238
    Europe                        26,732       2,227     190,050     219,009
    Other geographic areas         2,791         292       4,456       7,539
    -------------------------------------------------------------------------
    Total revenues               145,181     120,727     206,417     472,325
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    Revenue information by service activity is as follows:


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

    Commercial manufacturing
     - prescription              146,046         75%     124,950         76%
    Commercial manufacturing
     - over-the-counter           11,227          6%      11,229          7%
    Development services          37,703         19%      28,558         17%
    -------------------------------------------------------------------------
                                 194,976        100%     164,737        100%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



                                          Nine months ended July 31,
                                ---------------------------------------------
                                    2008                    2007
                                       $                       $
    -------------------------------------------------------------------------

    Commercial manufacturing
     - prescription              397,754         73%     357,498         76%
    Commercial manufacturing
     - over-the-counter           44,645          8%      31,694          6%
    Development services         102,746         19%      83,133         18%
    -------------------------------------------------------------------------
                                 545,145        100%     472,325        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 July 31, 2008,
    the total number of restricted voting shares issuable under the plan was
    9,426,970 of which there are stock options outstanding to purchase
    6,169,770 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 nine months ended July 31, 2008, the
    Company granted 357,140 and 3,560,876 options, respectively. The weighted
    average fair value of the options granted for the three and nine months
    ended July 31, 2008 was $1.75 and $1.39, respectively. No options were
    granted in the third quarter of 2007. The weighted average fair value of
    100,000 options granted for the nine months ended July 31, 2007 was
    $1.92. The following assumptions were used in arriving at the fair value
    of options issued during the three and nine months ended July 31, 2008:


                                   Three months ended    Nine months ended
                                        July 31, 2008        July 31, 2008

    Risk free interest rate                      3.6%                 3.7%
    Expected volatility                           43%                  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
    July 31, 2008 was $626,000 (2007 - $74,000). Stock-based compensation
    expense recorded in the nine months ended July 31, 2008 was $2,115,000
    (2007 - $168,000).

    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 nine months
    ended July 31:


                                  Three months ended       Nine months ended
                                             July 31,                July 31,
    -------------------------------------------------------------------------
                                    2008        2007        2008        2007
                                       $           $           $           $
    -------------------------------------------------------------------------
    Employee-related expenses      6,832         771      16,800       2,319
    Consulting, professional
     and project management
     costs                          (147)        418         532       2,558
    Strategic alternatives
     review                            -           -           -       3,254
    -------------------------------------------------------------------------
                                   6,685       1,189      17,332       8,131
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at July 31, 2008, $9,014,000 of the repositioning expenses are unpaid
    and are recorded in accounts payable and accrued liabilities.
    Repositioning expenses paid during the three and nine months ended
    July 31, 2008 amounted to $3,581,000 and $14,427,000 respectively.

    7.  Other information

    Foreign exchange

    During the three months ended July 31, 2008, the foreign exchange gain on
    operating exposures, (including benefits from cash flow hedges and the
    revaluation of all foreign currency denominated working capital),
    recorded in operating expenses was $135,000 (2007 loss - $309,000).
    During the three months ended July 31, 2008, the Company recorded a
    foreign exchange loss on the revaluation of certain U.S. dollar
    denominated debt, net of hedging activities, in its Canadian legal entity
    of $1,281,000 (2007 gain - $3,634,000). During the nine months ended
    July 31, 2008, the foreign exchange gain on operating exposures recorded
    in operating expenses was $3,923,000 (2007 loss - $1,695,000) and, the
    foreign exchange loss on the revaluation of certain U.S. dollar
    denominated debt was $4,105,000 (2007 gain -$4,790,000).

    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 July 31, 2008 was $1,213,000 (2007 - $1,630,000). For the
    nine months ended July 31, 2008, the employee future benefit expense was
    $4,025,000 (2007 - $4,624,000).

    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
                                                       July 31,   October 31,
    -------------------------------------------------------------------------
                                                          2008          2007
                                                             $             $
    -------------------------------------------------------------------------
    Held for trading (1)                                34,054        30,557
    Loans and receivables (2)                          146,302       127,691
    Loans and receivables - held for sale (2)              317         7,486
    Other financial liabilities (3)                    570,173       527,493
    Other financial liabilities - held for sale (3)         37         7,956
    Derivatives designated as effective hedges(4)
     - gain/(loss)                                      (5,379)        1,459
    Derivatives designated as held for trading(5)
     - loss                                                  -        (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 $148,125,000 and the debt component of the
    convertible preferred shares of $151,205,000. Based on current interest
    rates for debt with similar terms and maturities, the fair market value
    of the senior secured term loan and the debt component of the convertible
    preferred shares is estimated to be $114,135,000 and $123,559,000,
    respectively.

    As at July 31, 2008, the carrying amount of the financial assets that the
    Company has pledged as collateral for its long-term debt facilities was
    $94,148,000 (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 July 31, 2008, the Company's Canadian operations had entered into
    foreign exchange forward contracts to sell an aggregate amount of
    US$58,739,000. These contracts hedge the Canadian operations' expected
    exposure to U.S. dollar denominated cash flows and mature at the latest
    on October 28, 2009, at an average exchange rate of $1.0215 Canadian. The
    mark-to-market value on these financial instruments as at July 31, 2008
    was an unrealized loss of $189,000, which has been recorded in
    accumulated other comprehensive income in shareholders' equity. In the
    third quarter of 2008, the Company's Canadian operations terminated a
    foreign exchange contract to purchase US$45,000,000. The foreign exchange
    contract was classified as held for trading and was used by the
    Canadian operations to hedge a net U.S. dollar balance sheet exposure.
    This US dollar balance sheet exposure will be eliminated once the waiver
    in the mandatory redemption provisions on the convertible preferred
    shares has been completed. Please refer to note 11 "Subsequent Events".

    As at July 31, 2008, the Company's U.K. operations had entered into
    foreign exchange forward contracts to sell an aggregate amount of
    US$2,100,000 and (euro)4,400,000. 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 average
    exchange rates of (pnds stlg)0.5058 and (pnds stlg)0.7865 respectively.
    The mark-to-market value on these financial instruments as at
    July 31, 2008 was an unrealized gain of $20,000, which has been recorded
    in accumulated other comprehensive income in shareholders' equity.

    As at July 31, 2008, the Company has designated $133.8 million of U.S.
    dollar denominated debt as a hedge against its net investment in its
    subsidiaries in the U.S.A. and Puerto Rico. The exchange gains and losses
    arising from this debt, from the date so designated, are recorded in
    accumulated other comprehensive income in shareholders' equity.

    The Company has entered into interest rate swap contracts to convert all
    of the interest costs on its 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 July 31, 2008 was an unrealized loss of
    $5,210,000 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 July 31, 2008,
    fluctuations of +/-5% would, everything else being equal, have an effect
    on loss from continuing operations before taxes of approximately
    +/- $5.3 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 July 31, 2008, fluctuations of +/-5% would, everything
    else being equal, have an effect on loss from continuing operations
    before taxes for the three and nine months ended July 31, 2008 of
    approximately +/- $1.6 million and +/- $4.6 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 of July 31, 2008, approximately
    29% of the U.S. dollar debt exposure is hedged and the Company has
    entered into forward foreign exchange contracts to cover approximately
    80% of its Canadian-U.S. dollar cash flow exposures for its 2008 fiscal
    year and 30% 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 July 31, 2008, $234.6 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 nine month ended July 31, 2008 of
    approximately +/-$0.6 million and +/-$1.8 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 June 2010,
    from a floating interest rate to a fixed interest rate. As at July 31,
    2008, taking the interest rate swap into account, $86.4 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 July 31, 2008 the Company held
    deposits of $18,712,000.

    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 July 31,
    -------------------------------------------------------------------------
                                                                        2008
                                                                           $
    -------------------------------------------------------------------------
    Total accounts receivable                                        147,387
    Less: Allowance for doubtful accounts                             (1,085)
    -------------------------------------------------------------------------
    Total accounts receivable, net                                   146,302
    -------------------------------------------------------------------------

    Of which:
      Not overdue                                                    123,381
      Past due for more than one day but for not more than three
       months                                                         22,622
      Past due more for than three months but for not more than
       six months                                                      1,084
      Past due for more than six months but not for more than one
       year                                                              168
    Past due for more than one year                                      132
    Less: Allowance for doubtful accounts                             (1,085)
    -------------------------------------------------------------------------
    Total accounts receivable, net                                   146,302
    -------------------------------------------------------------------------

    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 July 31, 2008 the Company was holding cash and cash
    equivalents of $34,054,000 and had undrawn lines of credit available to
    it of $65,556,000.

    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 July 31, 2008, total managed capital was $542,734,000 (October 31,
    2007 - $560,659,000), comprised of shareholders' equity of $150,321,000
    (October 31, 2007 - $197,185,000), the debt component of the convertible
    preferred shares of $151,205,000 (October 31, 2007 - $139,916,000), where
    the associated accreted interest expense is a non-cash charge and cash
    interest-bearing debt of $241,208,000 (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 July 31, 2008 and October 31, 2007 the above capital management
    criteria can be illustrated as follows:

                                                       July 31,   October 31,
                                                          2008          2007
                                                             $             $
    -------------------------------------------------------------------------

    Interest bearing debt requiring a cash interest
     payment                                           241,208       223,558
    Cash earnings from continuing operations for the
     previous twelve months                             81,559        84,147
    Ratio                                                 2.96          2.66
    -------------------------------------------------------------------------

    10. Related party transactions

    Revenues from companies controlled by a director and significant
    shareholder of the Company were in the amount of $180,000 and $289,000
    for the three and nine months ended July 31, 2008, respectively. The
    revenues were $52,000 and $735,000 for the three and nine months ended
    July 31, 2007, respectively. These transactions were conducted in the
    normal course of business and are recorded at the exchanged amount.
    Accounts receivable at July 31, 2008 include a balance of $105,000
    (October 31, 2007 - $392,000) resulting from these transactions.

    As at July 31, 2008, the Company has an investment of $2,141,000
    (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.
    On July 2, 2008 the Company signed a shareholders' agreement with the
    other investors in BSP Pharmaceuticals, the terms of which provide the
    Company with significant influence over the strategic operating,
    investing and financing policies of BSP Pharmaceuticals. As a result, the
    Company is now accounting for its investment in BSP Pharmaceuticals using
    the equity method. Accordingly, for the three and nine months ended
    July 31, 2008, the Company has recorded an investment loss of $78,000.

    Management services and other fees charged to BSP Pharmaceuticals under a
    management services agreement were $500,000 and $1,287,000 for the three
    and nine months ended July 31, 2008, respectively. The management fees
    were $423,000 and $1,109,000 for the three and nine months ended
    July 31, 2007, respectively. Accounts receivable at July 31, 2008 include
    a balance of $173,000 (October 31, 2007 - $1,593,000) in connection with
    the management services agreement. 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.  Subsequent event

    Convertible Preferred Shares
    ----------------------------
    On September 5, 2008 the Company announced that it has entered into an
    agreement (the "JLL Agreement") with JLL Patheon Holdings, LLC, ("JLL")
    under which JLL has agreed to waive the requirement, under the terms of
    the convertible preferred shares. In consideration of this waiver, the
    Company has agreed to issue to JLL 400,000 restricted voting shares,
    representing approximately 0.4% of the currently outstanding restricted
    voting shares. The Company also has agreed to provide a limited waiver of
    the standstill provisions of the investor agreement with JLL to permit
    JLL to acquire, through the facilities of the Toronto Stock Exchange,
    over a one-year period, up to 1% of the outstanding restricted voting
    shares (determined on a partially diluted basis, taking into account the
    restricted voting shares issuable on conversion of the convertible
    preferred shares) namely 1,256,929 restricted voting shares.

    The Company entered into the JLL Agreement (i) to characterize the
    convertible preferred shares as equity, following the elimination of such
    obligation, rather than as both debt and equity, thereby achieving a
    simpler financial statement presentation that better reflects the
    financial nature of the convertible preferred shares; (ii) to reduce
    foreign exchange volatility in the Company's financial reporting; and
    (iii) to eliminate the obligation to redeem the convertible preferred
    shares for cash of at least $185 million in April 2017, if they had not
    been converted into restricted voting shares prior to that date.

    The JLL Agreement will result in a change in accounting treatment for the
    convertible preferred shares. The preferred shares are currently treated
    as a compound financial instrument that contains both debt and equity
    components, with the related non-cash accretive interest expense.
    Completion of the JLL Agreement will result in the full carrying value of
    the convertible preferred shares being classified within shareholders'
    equity on the Company's balance sheet and no further accretive interest
    expense will be recorded in the consolidated statement of loss.
    Paid-in-kind dividend equivalents (or cash dividends, if the Company so
    elects after October 27, 2009) on the preferred shares will be reported
    below net loss to arrive at a loss attributable to the restricted voting
    shareholders.

    The debt and equity components of the convertible preferred shares
    reported on the Company's consolidated balance sheet at July 31, 2008
    amounted to $151.2 million and $15.9 million, respectively and the
    related non-cash accretive interest expense recorded in the consolidated
    statement of loss for the three and nine months ended July 31, 2008
    amounted to $3.9 million and $11.3 million, respectively. Had the JLL
    Agreement been signed at the beginning of the 2008 fiscal year, the
    Company would have recorded, as a charge to equity, paid-in-kind
    dividends on the preferred shares for the three and nine months ended
    July 31, 2008 of $3.5 million and $10.2 million respectively.

    The change in terms will result in a deemed repayment of the debt and
    equity components of the convertible preferred shares with the deemed
    consideration being the fair value of the convertible preferred shares
    without mandatory redemption requirements plus the market value of the
    400,000 restricted voting shares, for accounting purposes. The deemed
    consideration received will be allocated to the respective components
    based on their relative fair values at the date of the transaction. Based
    on current market conditions, the Company anticipates that it will
    recognize in the fourth quarter a non-cash gain of approximately
    $28 million on the deemed repayment of the debt component. The JLL
    agreement will result in a net increase in shareholders' equity of
    approximately $152 million.

    The reclassification of the convertible preferred shares to
    shareholders' equity will also eliminate entirely the unhedged U.S.
    dollar denominated debt exposure recorded in the Company's Canadian legal
    entity. The related foreign exchange losses recorded in the Company's
    consolidated statement of loss for the three and nine months ended
    July 31, 2008 amounted to $1.3 million and $4.1 million respectively.

    It is expected that the closing will occur during the Company's fiscal
    fourth quarter, subject to satisfaction of the conditions set out in the
    JLL Agreement. The closing is subject to a number of customary closing
    conditions, including TSX approval of the issuance of restricted voting
    shares to JLL Holdings. Either party may terminate the JLL Agreement if
    the closing does not occur on or prior to October 31, 2008.

    12. 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 nine-month periods ended July 31, 2008 and
2007 should be read in conjunction with the Company's consolidated financial
statements and related notes contained in this interim report. All amounts are
in US dollars unless otherwise indicated. This MD&A is dated as of September
5, 2008.

    The purpose of this 2008 third quarter report is to provide an update to
the information contained in the Company's Management's Discussion and
Analysis section of the Company's 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 ("R(*)") 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 July 31, 2008, there were a total of 364 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. The Company did not launch any
products developed on behalf of a client into commercial production during the
third quarter of 2008.

    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
also 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".
    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 R(*) 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.
This program has been successfully introduced in the North American operations
and will be implemented in the European operations in the fourth quarter of
2008.

    
    (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 R(*) 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 that specializes
in the manufacture of oral cephalosporin solid dosage forms. The decision
follows the genericization of Omnicef(R) in May 2007 and the resulting
significant drop in revenues at the Carolina facility.
    The Carolina operations are classified as a discontinued operation, with
the related assets and liabilities being classified as held for sale. Based on
discussions with interested third parties, it has been determined that the
carrying value of the assets is impaired. The loss from discontinued
operations for the three months ended July 31, 2008 includes an impairment
charge of $7.7 million to write down the Carolina assets to their fair market
value less estimated disposition costs.

    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, during the third quarter of 2008, the Company incurred charges of
$3.3 million relating to an early retirement program in Cincinnati. Costs
associated with this program have been charged to operating expenses. Savings
from the program will start in the fourth quarter of 2008.
    During the third quarter of 2008 the Company has unveiled a new brand
image, featuring a new logo, new company colors and a new slogan that reflect
Patheon's vision to become the best provider of manufacturing and development
services to the pharmaceutical industry. The Company has also made a decision
to re-locate its global headquarters to Research Triangle Park, North
Carolina.

    Convertible Preferred Shares

    On September 5, 2008 the Company announced that it has entered into an
agreement (the "JLL Agreement") with JLL Patheon Holdings, LLC, ("JLL") under
which JLL has agreed to waive the requirement, under the terms of the
convertible preferred shares. In consideration of this waiver, the Company has
agreed to issue to JLL 400,000 restricted voting shares, representing
approximately 0.4% of the currently outstanding restricted voting shares. The
Company also has agreed to provide a limited waiver of the standstill
provisions of the investor agreement with JLL to permit JLL to acquire,
through the facilities of the Toronto Stock Exchange, over a one-year period,
up to 1% of the outstanding restricted voting shares (determined on a
partially diluted basis, taking into account the restricted voting shares
issuable on conversion of the convertible preferred shares) namely
1,256,929 restricted voting shares.
    The Company entered into the JLL Agreement (i) to characterize the
convertible preferred shares as equity, following the elimination of such
obligation, rather than as both debt and equity, thereby achieving a simpler
financial statement presentation that better reflects the financial nature of
the convertible preferred shares; (ii) to reduce foreign exchange volatility
in the Company's financial reporting; and (iii) to eliminate the obligation to
redeem the convertible preferred shares for cash of at least $185 million in
April 2017, if they had not been converted into restricted voting shares prior
to that date.
    The JLL Agreement will result in a change in accounting treatment for the
convertible preferred shares. The preferred shares are currently treated as a
compound financial instrument that contains both debt and equity components,
with the related non-cash accretive interest expense. Completion of the JLL
Agreement will result in the full carrying value of the convertible preferred
shares being classified within shareholders' equity on the Company's balance
sheet and no further accretive interest expense will be recorded in the
consolidated statement of loss. Paid-in-kind dividend equivalents (or cash
dividends, if the Company so elects after October 27, 2009) on the preferred
shares will be reported below net loss to arrive at a loss attributable to the
restricted voting shareholders.
    The debt and equity components of the convertible preferred shares
reported on the Company's consolidated balance sheet at July 31, 2008 amounted
to $151.2 million and $15.9 million, respectively and the related non-cash
accretive interest expense recorded in the consolidated statement of loss for
the three and nine months ended July 31, 2008 amounted to $3.9 million and
$11.3 million, respectively. Had the JLL Agreement been signed at the
beginning of the 2008 fiscal year, the Company would have recorded, as a
charge to equity, paid-in-kind dividends on the preferred shares for the three
and nine months ended July 31, 2008 of $3.5 million and $10.2 million
respectively.
    The change in terms will result in a deemed repayment of the debt and
equity components of the convertible preferred shares with the deemed
consideration being the fair value of the convertible preferred shares without
mandatory redemption requirements plus the market value of the
400,000 restricted voting shares, for accounting purposes. The deemed
consideration received will be allocated to the respective components based on
their relative fair values at the date of the transaction. Based on current
market conditions, the Company anticipates that it will recognize in the
fourth quarter a non-cash gain of approximately $28 million on the deemed
repayment of the debt component. The JLL agreement will result in a net
increase in shareholders' equity of approximately $152 million.
    The reclassification of the convertible preferred shares to shareholders'
equity will also eliminate entirely the unhedged U.S. dollar denominated debt
exposure recorded in the Company's Canadian legal entity. The related foreign
exchange losses recorded in the Company's consolidated statement of loss for
the three and nine months ended July 31, 2008 amounted to $1.3 million and
$4.1 million respectively.
    It is expected that the closing will occur during the Company's fiscal
fourth quarter, subject to satisfaction of the conditions set out in the JLL
Agreement. The closing is subject to a number of customary closing conditions,
including TSX approval of the issuance of restricted voting shares to JLL
Holdings. Either party may terminate the JLL Agreement if the closing does not
occur on or prior to October 31, 2008.
    The JLL Agreement is a "related party transaction" within the meaning of
Multilateral Instrument 61-101 - Protection of Minority Securityholders in
Special Transactions. The negotiation of the JLL Agreement by the Company was
supervised by a Special Committee of independent directors. Based upon, among
other things, the recommendations of, and discussions with management of the
Company and the advice of its legal and financial advisors, the Special
Committee unanimously determined that entering into the JLL Agreement is in
the best interests of the Company and recommended that the Board approve the
agreement.

    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          Nine months ended
                                         July 31,                   July 31,
                           2008     2007        %     2008     2007        %
    -------------------------------------------------------------------------
    (in thousands of
     U.S. dollars)            $        $   Change        $        $   Change
    -------------------------------------------------------------------------
    Revenues            194,976  164,737    18.4%  545,145  472,325    15.4%
    Operating expenses  168,977  147,722    14.4%  483,165  416,652    16.0%
    Foreign exchange
     loss (gain) on
     debt                 1,281   (3,634) -135.3%    4,105   (4,790) -185.7%
                        -------------------------- --------------------------
    EBITDA before
     repositioning
     expenses:           24,718   20,649    19.7%   57,875   60,463    -4.3%
                        -------------------------- --------------------------
    (as a percentage
     of revenues)         12.7%    12.5%             10.6%    12.8%
    Repositioning
     expenses             6,685    1,189   462.2%   17,332    8,131   113.2%
    Depreciation and
     amortization        12,034    9,390    28.2%   33,890   28,935    17.1%
    Amortization of
     intangible assets      471      471     0.0%    1,413    1,414    -0.1%
    Foreign exchange
     loss on foreign
     operations               -        -                 -      858
    Interest              8,342    7,356    13.4%   24,117   21,659    11.3%
    Refinancing expenses      -        -                 -   13,471
                        -------------------------- --------------------------
    Earnings (loss)
     from continuing
     operations before
     income taxes        (2,814)   2,243  -225.5%  (18,877) (14,005)  -34.8%
    Provision for
     income taxes         1,721    5,608   -69.3%    4,344   14,886   -70.8%
                        -------------------------- --------------------------
    Loss from
     continuing
     operations          (4,535)  (3,365)  -34.8%  (23,221) (28,891)   19.6%
                        -------------------------- --------------------------
    (as a percentage of
     revenues)            -2.3%    -2.0%             -4.3%    -6.1%
    Loss from
     discontinued
     operations         (10,147) (59,704)   83.0%  (15,124) (58,188)   74.0%
                        -------------------------- --------------------------
    Net loss for the
     period             (14,682) (63,069)   76.7%  (38,345) (87,079)   56.0%
                        -------------------------- --------------------------
                        -------------------------- --------------------------




    Revenues by Geographic Region and Service Activity

    U.S.$ '000                 Three months ended          Nine months ended
                                         July 31, 	                July 31,
                           2008     2007        %     2008     2007        %
    -------------------------------------------------------------------------
    (in thousands of
     U.S. dollars)            $        $   Change        $        $   Change
    -------------------------------------------------------------------------
    North America
    -------------
      Commercial
       Manufacturing
        Prescription     61,230   54,704      12%  169,555  176,627      -4%
        Over-the-
         counter          8,956   10,058     -11%   38,332   28,512      34%
                        -------------------------- --------------------------
                         70,186   64,762       8%  207,887  205,139       1%
      Development
       Services          26,696   20,100      33%   74,675   60,769      23%
                        -------------------------- --------------------------
                         96,882   84,862      14%  282,562  265,908       6%
                        -------------------------- --------------------------

    Europe
    ------
      Commercial
       Manufacturing
        Prescription     84,816   70,246      21%  228,199  180,871      26%
        Over-the-
         counter          2,271    1,171      94%    6,313    3,182      98%
                        -------------------------- --------------------------
                         87,087   71,417      22%  234,512  184,053      27%
      Development
       Services          11,007    8,458      30%   28,071   22,364      26%
                        -------------------------- --------------------------
                         98,094   79,875      23%  262,583  206,417      27%
                        -------------------------- --------------------------

    TOTAL
    -----
      Commercial
       Manufacturing
        Prescription    146,046  124,950      17%  397,754  357,498      11%
        Over-the-
         counter         11,227   11,229       0%   44,645   31,694      41%
                        -------------------------- --------------------------
                        157,273  136,179      15%  442,399  389,192      14%

      Development
       Services          37,703   28,558      32%  102,746   83,133      24%
                        -------------------------- --------------------------
    CONSOLIDATED
     REVENUES           194,976  164,737      18%  545,145  472,325      15%
                        -------------------------- --------------------------



    Three Months Ended July 31, 2008 Compared with Three Months Ended
    July 31, 2007
    

    Revenues

    Consolidated revenues from continuing operations for the three-month
period ended July 31, 2008 increased 18%, or $30.2 million, to $195.0 million
from $164.7 million in the same period in 2007. On a consolidated basis,
compared with the third quarter of 2007, R(*) revenues increased by 17%, PDS
revenues increased by 32% and OTC revenues were unchanged.
    For the three-month period ended July 31, 2008, revenues excluding the
Puerto Rico operations were $181.4 million, compared with $153.5 million in
the same period last year, representing an increase of 18%.
    Prescription manufacturing and development services represented 94% of
revenues, compared with 93% for the comparable period in 2007.
    Production volumes for the three-months ended July 31, 2008 were 3% lower
than for the three-months ended April 31, 2008 based on standard pack size.
The reduction principally reflects lower production volumes in Cincinnati,
which was constrained by the availability of client supplied API during the
third quarter.
    Geographically, in North America, revenues increased in the third quarter
by $12.0 million or 14% over the same period a year ago. This reflected strong
PDS revenues in Canada and Cincinnati and increases in the level of commercial
manufacturing revenues from a broad range of existing clients in all locations
with the exception of Cincinnati.
    In Europe, revenues for the third quarter of 2008 increased by
$18.2 million or 23% over the same period in 2007. The increase reflects
higher commercial manufacturing revenues from the existing business base in
all locations, in particular in the Ferentino, Italy and Bourgoin-Jallieu,
France facilities. PDS revenues in Swindon, U.K. and Ferentino, Italy also
showed strong growth. Reported revenues increased as a result of the
strengthening of the European currencies, in particular the euro, which
strengthened approximately 15% against the U.S. dollar relative to the same
period last year, increasing reported revenues by approximately $10.1 million.
Had European currencies remained constant to the rates of the prior year,
European revenues would have been 10% 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 third quarter of 2008, operating
expenses were $169.0 million, being $21.3 million higher than the same period
a year ago. Operating expenses were impacted by increased volumes, higher
utility costs and the continued strengthening of European and Canadian
currencies relative to the U.S. dollar. Operating expenses in the third
quarter of 2008 include a charge of $3.3 million incurred in connection with
the early retirement program in Cincinnati and incremental costs in connection
with the initiatives being put in place by the new leadership team. Operating
expenses as a percentage of revenues were 87%, compared with 90% in the same
period a year ago.

    Foreign Exchange Loss on Debt

    The net foreign exchange loss of $1.3 million recorded in the quarter
ended July 31, 2008 related to the revaluation of U.S. dollar denominated debt
in the Canadian legal entity. This compares with a gain of $3.6 million
reported in the comparable period in 2007. The reported loss in 2008 is net of
foreign exchange gains from a US$45 million forward foreign exchange contract
put in place to reduce the impact of this exposure. This foreign exchange
exposure will be eliminated once the mandatory redemption provision of the
Company's convertible preferred shares has been completed (see "Recent
Developments"). In anticipation of this change, the Company unwound the
US$45 million forward exchange contract in July 2008.

    
    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses
    

    On a consolidated basis in the third 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 $24.7 million,
compared with $20.6 million in the same period a year ago. EBITDA margin
before repositioning expenses was 12.7% in the three-month period ending July
31, 2008, compared with 12.5% in the same period a year ago. EBITDA before
repositioning expenses for the three months ended July 31, 2008 includes a
charge of $3.3 million in connection with the Cincinnati early retirement
program.
    For the three-month period ended July 31, 2008 EBITDA before
repositioning expenses excluding the Puerto Rico operations was $29.6 million,
compared with $30.1 million in the same period last year. This represents an
EBITDA margin before repositioning expenses of 16.3% in the three month
period, compared with 19.6% 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. 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 negative impact on EBITDA before repositioning
expenses in the third quarter of 2008 relative to the same period last year
was approximately $4 million.
    In Canada, EBITDA before repositioning expenses from the commercial
operations was $9.9 million in the third quarter of 2008, being $2.9 million
higher than the same period last year. The improvement reflects increased
revenues from the existing client base across all the Canadian operations. The
negative impact on EBITDA before repositioning expenses of a 6% 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 $8.4 million in the third
quarter of 2008, compared with a loss of $6.8 million in the same period last
year. The result reflects a loss reported by Cincinnati, which was impacted by
API supply constraints, a mix of lower margin business and a charge of
$3.3 million in connection with an early retirement program. The decline in
Cincinnati was offset in part by a reduction in the losses in Puerto Rico,
which benefitted from increased volumes and cost savings from the headcount
reductions.
    In Europe, EBITDA before repositioning expenses from the commercial
operations was $20.1 million in the third quarter of 2008, being $5.4 million
higher than the same period a year ago. This reflects revenue gains in all
operations and cost saving benefits from the headcount reduction program in
Swindon, U.K. The strengthening European currencies relative to the U.S.
dollar compared with the same period last year, plus the benefits of foreign
exchange gains on the revaluation of foreign currency denominated assets and
liabilities, had the impact of increasing EBITDA before repositioning expenses
by approximately $1.8 million.
    EBITDA before repositioning expenses from the global PDS operations was
$13.9 million in the third quarter of 2008, being $7.5 million higher than the
same period in 2007. The global PDS operations benefited from strong revenue
growth in all locations. In Canada, the negative impact on EBITDA before
repositioning expenses of a 6% 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.
    Corporate costs in the third quarter of 2008 were $10.9 million, compared
with $0.7 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, consulting fees related to new operational and
strategic initiatives, costs in connection with the relocation of the global
headquarters and higher stock-based compensation expenses. Costs also include
a net foreign exchange loss of $1.3 million arising from the revaluation of
U.S. dollar denominated debt held in the Canadian legal entity. This compares
with a gain of $3.6 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 $0.8 million.

    Repositioning Expenses

    During the third quarter of 2008 the Company incurred $6.7 million of
expenses in connection with the continuing restructuring of the Puerto Rico
operations and the consolidation of the York Mills and Whitby operations in
Canada that was identified in the initial strategic plan.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $12.0 million in the third
quarter of 2008, compared with $9.4 million in the third quarter of 2007. The
increase reflects an accelerated depreciation charge related to certain assets
impacted by the consolidation of the Canadian site network, 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 third quarter
of 2008, being comparable with the charge in the third quarter of 2007. The
amortization of intangible assets relates to the Caguas operations in Puerto
Rico.

    Interest Expense

    Interest expense for the third quarter of 2008 was $8.3 million, compared
with $7.4 million in the third quarter of 2007. The increase in interest costs
principally reflects the translation impact of the strengthening euro against
the U.S. dollar on euro denominated interest costs in the Italian operations
and from an increase in the non-cash accretive interest charge in respect of
the debt component of the convertible preferred shares, which amounted to
$3.9 million in the third quarter of 2008.

    Loss Before Income Taxes from Continuing Operations

    The Company reported a loss before income taxes from continuing
operations of $2.8 million in the third quarter of 2008, compared with
earnings of $2.2 million in the same period a year ago.

    Income Taxes

    The Company recorded an income tax charge of $1.7 million in the third
quarter of 2008, compared with a charge of $5.6 million in the same period
last year. The income tax expenses in 2008 and 2007 principally reflects high
tax rates in Italy where the Company reported significant profits compounded
by tax losses in Puerto Rico and Canada, where the tax benefit after valuation
reserve has not been recognized. The accreted interest expense on the
convertible preferred shares of $3.9 million (third quarter of 2007 -
$3.5 million) is not deductible for tax purposes. During the third quarter of
2008, the Company recorded a future income tax recovery of $3.0 million
relating to prior period research and development tax credits in the Swindon,
U.K. operations that have only recently been approved for assessment.

    Loss and Loss Per Share from Continuing Operations

    The Company recorded a loss from continuing operations in the third
quarter of 2008 of $4.5 million, compared with a loss of $3.4 million in the
same period last year. The loss per share was 5.0 cents, compared with a loss
of 3.7 cents per share a year earlier. The loss in 2008 included after tax
repositioning expenses of $6.7 million or 7.4 cents per share. The loss in
2007 included after tax repositioning expenses of $1.2 million or 1.3 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 third quarter of 2008 consist of the
results of the Carolina, Puerto Rico 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 third quarter of 2008 was $10.1 million, or 11.2 cents compared with a
loss of $59.7 million, or 64.2 cents in the same period last year. The results
for the third quarter of 2008 include a $7.7 million asset impairment charge
to reduce the carrying value of the Carolina site assets to their fair market
value less estimated disposition costs (see "Recent Developments"). The prior
year results include a much larger asset impairment charge of $61.6 million,
of which $48.6 million related to the Carolina operations and $13.0 million to
the Niagara-Burlington operations.

    Net Loss and Loss Per Share

    The Company recorded a net loss in the third quarter of 2008 of $14.7
million, or 16.2 cents per share, compared with a loss of $63.1 million or
67.9 cents per share in the same period last year.
    Because the Company reported a loss in the three and nine month periods
ended July 31, 2008 and 2007, there is no impact of dilution.

    
    Nine Months Ended July 31, 2008 Compared with Nine Months Ended July 31,
    2007

    Revenues
    

    Consolidated revenues from continuing operations for the nine-month
period ended July 31, 2008 increased 15%, or $72.8 million, to $545.1 million
from $472.3 million in the same period in 2007. Rx revenues increased by 11%,
OTC revenues increased by 41% and PDS revenues increased by 24%.
    For the nine-month period ended July 31, 2008, revenues excluding the
Puerto Rico operations were $506.9 million, compared with $425.3 million in
the same period last year, representing an increase of 19%.
    Prescription manufacturing and development services represented 92% of
revenues during the nine-month period ended 2008, compared with 93% for the
comparable period in 2007. The decline reflects the impact of increased OTC
revenues in the Canadian and Cincinnati operations.
    Geographically, in North America, revenues increased by $16.6 million or
6% over the same period a year ago, an increase driven primarily by the
Canadian commercial manufacturing operations and from PDS operations in both
Canada and Cincinnati. Revenues in Puerto Rico were lower than prior year,
reflecting a year-over-year reduction in volumes during the first half of
2008.
    In Europe, revenues increased by $56.2 million or 27% over the same
period in 2007. The year-over-year increase reflects higher manufacturing
revenues from all operations 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 $25.9 million.
Had European currencies remained constant to the rates of the prior year,
European revenues would have been 15% 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. Operating expenses were $483.2 million
during the nine-month period ended 2008, being $66.5 million higher than the
same period a year ago. Operating expenses were impacted by increased volumes,
higher utility costs, incremental costs in connection with hiring the new
leadership team and the strengthening of European and Canadian currencies
relative to the U.S. dollar. Operating expenses in the third quarter of 2008
include a charge of $3.3 million incurred in connection with the early
retirement program in Cincinnati and incremental costs in connection with the
initiatives being put in place by the new leadership team. Operating expenses
as a percentage of revenues were 88.6% during the nine-month period ended
2008, comparable with virtually the same percentage, 88.2% in the same period
a year ago.

    Foreign Exchange Loss on Debt

    The net foreign exchange loss of $4.1 million recorded in the nine-months
ended July 31, 2008 related to the revaluation of U.S. dollar denominated debt
in the Canadian legal entity. This compares with a gain of $4.8 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.

    
    EBITDA Before Repositioning Expenses and EBITDA Margin Before
    Repositioning Expenses
    

    On a consolidated basis, 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 $57.9 million, compared with
$60.5 million in the same period a year ago. EBITDA margin before
repositioning expenses was 10.6% in the nine-month period ending July 31,
2008, compared with 12.8% in the same period a year ago. EBITDA before
repositioning expenses for the nine months ended July 31, 2008 includes a
charge of $3.3 million in connection with the Cincinnati early retirement
program.
    For the nine-month period ended July 31, 2008 EBITDA before repositioning
expenses excluding the Puerto Rico operations was $72.7 million, compared with
$78.1 million in the same period last year. This represents an EBITDA margin
before repositioning expenses of 14.3% during the nine-month period ended
2008, compared with 18.4% 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 nine-
months ended July 31, 2008 would have been approximately $8 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 $26.2 million during the nine-month period ended 2008, being
$3.7 million higher than the same period last year. Steady growth in
commercial revenues, especially in Whitby, was offset by a 12% 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
$1.3 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 $15.1 million during the
nine-month period ended 2008, compared with a loss of $11.1 million in the
same period last year. The result reflects a decline in profitability in the
Cincinnati operations, which in the third quarter of 2008 were impacted by API
supply constraints, a mix of lower margin business and a charge of $3.3
million in connection with an early retirement program. The decline in
Cincinnati was offset in part by a reduction in the losses in Puerto Rico,
which benefitted from increased volumes and cost savings from the headcount
reductions.
    In Europe, EBITDA before repositioning expenses from the commercial
operations was $42.3 million during the nine-month period ended 2008, being
$9.2 million higher than the same period a year ago. The improvement reflects
increased commercial manufacturing revenues in all operations and cost savings
in the third quarter in Swindon, U.K. as a result of headcount reductions. In
Italy this has been offset in part 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 $6.0 million.
    EBITDA before repositioning expenses from the global PDS operations was
$29.4 million during the nine-month period ended 2008, being $8.4 million
higher than the same period in 2007. This reflected the benefit of volume
gains in the Canadian, Cincinnati and Italian operations, offset in part by
the negative impact of the strengthening Canadian dollar, which reduced
profitability in the Canadian operations by approximately $2.4 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 during the nine-month period ended 2008 were $25.0
million, compared with $5.1 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, consulting fees related to new
operational and strategic initiatives, costs in connection with the relocation
of the global headquarters and higher stock-based compensation expenses. The
costs also include net foreign exchange losses of $4.1 million, compared to a
gain of $4.8 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 $2.2 million.

    Repositioning Expenses

    The Company incurred $17.3 million of expenses during the nine-month
period ended July 31, 2008 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
comparable period in 2007, the Company incurred $8.1 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.

    Depreciation and Amortization Expense

    Depreciation and amortization expense was $33.9 million during the nine-
month period ended July 31, 2008, compared with $28.9 million in the same
period in 2007. The increase reflects an accelerated depreciation charge
related to certain assets impacted by the consolidation of the Canadian site
network, 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 $1.4 million during the nine-month
period ended July 31, 2008, being comparable with the charge in 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 was $24.1 million during the nine-month period ended
July 31, 2008, compared with $21.7 million in the first nine-months of 2007.
The increase in interest costs reflects the impact of the financing
arrangements that were put in place on April 27, 2007 and includes a non-cash
accretive interest charge for the nine months ended July 31, 2008 of
$11.3 million in respect of the debt component of the convertible preferred
shares. The increase also reflects the translation impact of the strengthening
euro against the U.S. dollar on euro denominated interest costs in the Italian
operations.

    Loss Before Income Taxes from Continuing Operations

    The Company reported a loss before income taxes from continuing
operations of $18.9 million in the first nine-months of 2008, compared with a
loss of $14.0 million in the same period a year ago.

    Income Taxes

    The Company recorded an income tax charge of $4.3 million during the
nine-month period ended July 31, 2008, compared with a charge of $14.9 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 and Canada, where the tax
benefit after valuation reserve has not been recognized. In addition, the
accreted interest expense on the convertible preferred shares of $11.3 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 and in the third quarter of 2008, the Company recorded a future
income tax recovery of $3.0 million relating to prior period research and
development tax credits in the U.K. that have only recently been approved for
assessment.
    The 2007 income tax 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 of $23.2 million
during the nine-month period ended July 31, 2008, compared with a loss of
$28.9 million in the same period last year. The loss per share was 25.6 cents
during the nine-month period ended July 31, 2008, compared with a loss of 31.1
cents per share a year earlier. The loss in 2008 included after tax
repositioning expenses of $16.4 million or 18.1 cents per share. The loss in
2007 included after tax repositioning expenses of $7.1 million or 7.7 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 nine-month period ended July 31, 2008 and
the comparable results for 2007 include the Carolina operations and the
Niagara-Burlington operations up to the end of the first quarter 2008.
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 nine months of 2008 was $15.1 million, or a loss per
share of 16.7 cents, compared with a loss of $58.2 million, or 62.6 cents in
the same period last year. The loss in 2008 includes a charge of $0.6 million
in connection with the final divestiture of the Niagara-Burlington operations
and an impairment charge of $7.7 million relating to assets of the Carolina
operations. The loss in 2007 includes an asset impairment charge of $48.6
million relating to the Carolina operations and $13.0 million, relating to the
Niagara-Burlington operations.

    Net Loss and Loss Per Share

    The Company recorded a net loss of $38.3 million during the nine-month
period ended July 31, 2008, or 42.3 cents per share, compared with a loss of
$87.1 million or 93.7 cents per share in the same period last year.
    Because the Company reported a loss in the nine months ended July 31,
2008 and 2007, there is no impact of dilution.

    
    Liquidity and Capital Resources

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

    Summary of Cash flows

                                   Three months ended    Nine months ended
                                         July 31,             July 31,
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)        $          $          $          $
    -------------------------------------------------------------------------
    Net loss from continuing
     operations                      (4,535)    (3,365)   (23,221)   (28,891)
    Depreciation and amortization    12,505      9,861     35,303     30,349
    Foreign exchange loss (gain)
     on debt                          1,893     (3,634)     4,717     (4,790)
    Foreign exchange loss on
     foreign operations                   -          -          -        858
    Accreted interest on
     convertible preferred shares     3,861      3,481     11,289      3,481
    Other non-cash interest             161        126        421      1,506
    Employee future benefits, net
     of contributions                  (313)       (65)    (1,878)       323
    Future income taxes              (3,240)     2,980     (8,794)     3,146
    Amortization of deferred
     revenues                          (504)      (547)    (1,513)    (1,516)
    Other                               838        463      2,183        970
    Working capital                   5,156    (20,272)    (8,949)   (27,715)
    Increase in deferred revenues       623      2,057      2,101      2,057
                                   --------------------  --------------------
    Cash provided by (used in)
     operating activities of
     continuing operations           16,445     (8,915)    11,659    (20,222)
    Cash used in investing
     activities of continuing
     operations                     (16,126)    (9,595)   (23,272)   (23,604)
    Cash provided by financing
     activities of continuing
     operations                       3,605      8,872     12,067     19,620
    Net increase(decrease) in cash
     and cash equivalents from
     discontinued operations           (355)     5,151      3,715     14,381
    Other                              (279)    (1,555)      (672)      (402)
                                   --------------------  --------------------
    Net increase (decrease) in cash
     and cash equivalents during
     the period                       3,290     (6,042)     3,497    (10,227)
                                   --------------------  --------------------
                                   --------------------  --------------------
    



    Cash Provided by (Used in) Operating Activities

    Cash provided by operating activities from continuing operations was
$16.4 million in the third quarter of 2008 compared with a usage of $8.9
million in the comparable period in 2007. On a year-to-date basis cash
provided by operating activities from continuing operations was $11.7 million,
compared with a usage of $20.2 million in the same period last year. The
improvement in cash flows reflects a reduction in losses before non-cash
charges, along with a decrease in investments in working capital in the third
quarter of 2008.
    Cash used in operating activities from discontinued operations was
$0.3 million and $6.5 million in the third quarter and the first nine months
of 2008, respectively. During the comparable periods in 2007, the Company
reported cash inflows of $5.6 million and $15.6 million, respectively. The
deterioration reflects reduced earnings in the Carolina operations. In
addition, the amount reported for the second and third quarter of 2007
included a net $4.1 million of cash inflows from the operations of the
Niagara- Burlington OTC manufacturing business, which was sold on January 31,
2008.

    Cash Used in Investing Activities

    Cash used in investing activities from continuing operations in the third
quarter of 2008 was $16.1 million, compared with cash usage of $9.6 million in
the same period a year ago. On a year-to-date basis cash used in investing
activities from continuing operations was $23.3 million compared with $23.6
million in the same period last year. Cash inflows in 2008 include net
proceeds received on sale of the Company's York Mills property of $11.9
million, which was transacted in the second quarter. Capital expenditures were
$15.2 million and $34.1 million for the three months and nine months ended
July 31, 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 during
the nine-month period ended July 31, 2008 was $10.4 million, compared with a
cash usage of $0.8 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.

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

    Cash used in Investing Activities

                                   Three months ended    Nine months ended
                                         July 31,             July 31,
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)        $          $          $          $
    -------------------------------------------------------------------------
    Additions to capital assets
      Sustaining                     (4,990)    (3,146)   (12,121)    (8,351)
      Project-related               (10,210)    (5,040)   (21,929)   (12,249)
                                   --------------------  --------------------
    Total additions to capital
     assets                         (15,200)    (8,186)   (34,050)   (20,600)
    Proceeds on sale of capital
     assets                               -          -     12,089          -
    Net increase in investments        (926)      (293)    (1,311)      (177)
    Increase in deferred pre-
     operating costs                      -     (1,116)         -     (2,827)
                                   --------------------  --------------------
    Cash used in investing
     activities of continuing
     operations                     (16,126)    (9,595)   (23,272)   (23,604)
                                   --------------------  --------------------
    Cash provided (used in)
     investing activities of
     discontinued operations              -       (339)    10,439       (792)
                                   --------------------  --------------------
    Cash used in investing
     activities                     (16,126)    (9,934)   (12,833)   (24,396)
                                   --------------------  --------------------
                                   --------------------  --------------------
    

    Cash Provided by Financing Activities

    Cash provided by financing activities was $3.6 million and $11.9 million,
for the three and nine months ended July 31, 2008, respectively. The amounts
for the comparable periods a year ago were $8.8 million and $19.2 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 ended    Nine months ended
                                         July 31,             July 31,
                                       2008       2007       2008       2007
    -------------------------------------------------------------------------
    (in thousands of U.S. dollars)        $          $          $          $
    -------------------------------------------------------------------------
    Increase in bank indebtedness     3,728      9,078     11,801      7,762
    Increase in long-term debt        7,882      6,812     23,822    182,652
    Repayment of long-term debt      (8,408)    (7,018)   (23,984)  (319,605)
    Issue of convertible
     preferred shares                     -          -          -    150,000
    Convertible preferred share
     issue cost-equity component          -          -          -     (1,213)
    Issue of restricted voting
     shares                             403          -        428         24
                                   --------------------  --------------------
    Cash provided by financing
     activities of continuing
     operations                       3,605      8,872     12,067     19,620
                                   --------------------  --------------------
    Cash used in financing
     activities of discontinued
     operations                          (6)      (101)      (179)      (467)
                                   --------------------  --------------------
    Cash provided by financing
     activities                       3,599      8,771     11,888     19,153
                                   --------------------  --------------------
                                   --------------------  --------------------
    

    Financing Arrangements and Ratios

    There have been no changes to the Company's financing arrangements during
the nine-month period ended July 31, 2008.
    Total cash interest bearing debt, at July 31, 2008 was $241.2 million,
being $17.7 million higher than at October 31, 2007. Total interest bearing
debt at July 31, 2008, including the debt component of the convertible
preferred shares of $151.2 million, was $392.4 million. At July 31, 2008, the
Company's consolidated ratio of interest-bearing debt to shareholders' equity
was 261%, 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.
    The Company has entered into an agreement with JLL under which JLL has
agreed to waive its right to the mandatory redemption provision of the
Company's convertible preferred shares (See "Recent Developments"). Once the
waiver has been completed the debt component of the preferred shares will be
classified within shareholders' equity. Had the waiver been in effect at
July 31, 2008 the Company's consolidated ratio of interest-bearing debt to
shareholders' equity would have been 80%.

    Adequacy of Financial Resources

    As at July 31, 2008, the Company had cash balances of $34.1 million and
$65.6 million in undrawn credit facilities available to it and was in
compliance with all covenant requirements under its financing arrangements.
The Company believes that, subject to usual business risks, its financial
resources are sufficient to fund projected capital expenditures, debt service
requirements and employee future benefit obligations in the normal course of
business. There have been no material changes to the contractual obligations
under the financing arrangements 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 $1.5
million were recognized as earnings in the three months and nine months ended
July 31, 2008, respectively. The Company received $0.6 million and $2.1
million in capital reimbursements in the three months and nine months ended
July 31, 2008, respectively.

    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.

    Convertible Preferred Shares

    On April 27, 2007 the Company issued $150.0 million of convertible
preferred shares. The convertible 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.
    Currently, 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 nine months ended July
31, 2008 was $3.9 million and $11.3 million, respectively.
    The Company has announced that it has entered into an agreement with JLL
under which JLL has agreed to waive its right to the mandatory redemption
provision of the Company's convertible preferred shares (See "Recent
Developments"). Once the waiver has been completed the debt component of the
convertible preferred shares will be classified within shareholders' equity.

    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 $34.3 million have been recorded at July 31, 2008.
The future tax assets are primarily composed of accounting provisions related
to pension and post-retirement benefits not currently deductible for tax
purposes, the tax benefit of net operating loss carry forwards related to the
U.K., unclaimed R&D expenditures and deferred financing and share issue costs.
The Company evaluates quarterly the ability to realize its future tax assets.
The factors used to assess the likelihood of realization are the Company's
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the future tax assets.
    Future tax liabilities of $43.6 million have been recorded at July 31,
2008. This liability has arisen primarily on tax depreciation in excess of
book depreciation.
    The Company's tax filings are subject to audit by taxation authorities.
Although management believes that it has adequately provided for income taxes
based on the information available, the outcome of audits cannot be known with
certainty and the potential impact on the financial statements is not
determinable.

    Employee Future Benefits

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

    Risk Management

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

    Foreign Currency

    The Company's business activities are conducted in several currencies -
Canadian dollars and U.S. dollars for the Canadian operations, U.S. dollars
for the U.S. operations and euros, U.K. sterling and U.S. 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 July 31, 2008 the Company's Canadian operations had outstanding
foreign exchange forward contracts to sell US$58.7 million at an average
exchange rate of $1.0215 Canadian. The contracts mature at the latest on
October 28, 2009 and cover approximately 80% of the Company's expected foreign
exchange exposure for the 2008 fiscal year and 30% for fiscal 2009. The mark-
to-market value at July 31, 2008 that is recorded in accumulated other
comprehensive income is an unrealized loss of $0.2 million. In July 2008 the
Company's Canadian operations terminated a foreign exchange contract to
purchase US$45.0 million. The foreign exchange contract was classified as
held-for-trading and was used by the Canadian operations to hedge a U.S.
dollar balance sheet exposure. This U.S. dollar balance sheet exposure will be
eliminated once the waiver in the mandatory redemption provisions on the
preferred shares has been completed (See "Recent Developments").
    As at July 31, 2008, the Company's U.K. operations had entered into
foreign exchange forward contracts to sell an aggregate amount of US$2.1
million and euro 4.4 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 0.5058 and pnds stlg 0.7865, respectively. The mark-to-market value
on these financial instruments as at July 31, 2008 was an unrealized gain of
$20,000, 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 July 31, 2008, the Company had designated
$133.8 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. The mark-to-market value of these financial instruments at
July 31, 2008 was an unrealized loss of $5.2 million which has been recorded
in accumulated other comprehensive income in shareholders' equity. Taking this
interest rate swap into account, at July 31, 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 in the first quarter; (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
    Quarter ended                     NET LOSS PER SHARE
     (in thousands            EBITDA      FROM      FROM
     of U.S.                  BEFORE      CON-      CON-           BASIC AND
     dollars,                  REPO-   TINUING   TINUING             DILUTED
     except per            SITIONING     OPER-     OPER-            LOSS PER
     share        REVENUES  EXPENSES    ATIONS    ATIONS  NET LOSS     SHARE
     amounts)            $         $         $         $         $         $
    -------------------------------------------------------------------------
    2008
    July 31        194,976    24,718    (4,535)   ($0.05)  (14,682)   ($0.16)
    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)
    -------------------------------------------------------------------------

    Additional Information

    Share Capital
    

    As of July 31, 2008, the Company had 90,749,388 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 232.9569 Patheon
restricted voting shares. As at July 31, 2008 the Company had 6,169,770 stock
options outstanding, of which 3,192,093 were exercisable.
    The Company has entered into an agreement with JLL under which JLL has
agreed to waive its right to the mandatory redemption provision of the
Company's preferred shares. For further information please refer to the
"Recent Developments" section of this MD&A.

    Related Party Transactions

    Revenues from companies controlled by a director and significant
shareholder of the Company were in the amount of $0.2 million and $0.3 million
for the three and nine months ended July 31, 2008, respectively. The revenues
were $0.1 million and $0.7 million for the three and nine months ended July
31, 2007, respectively. These transactions were conducted in the normal course
of business and are recorded at the exchanged amount. Accounts receivable at
July 31, 2008 include a balance of $1.0 million (October 31, 2007 - $0.4
million) resulting from these transactions.
    As at July 31, 2008, the Company has an investment of $2.1 million
(October 31, 2007 - $0.7 million) representing an 18% interest in two Italian
companies (collectively referred to as "BSP Pharmaceuticals") whose largest
investor is an officer of the Company. BSP Pharmaceuticals specializes in the
manufacturing of cytotoxic pharmaceutical products. On July 2, 2008 the
Company signed a shareholders' agreement with the other investors in BSP
Pharmaceuticals, the terms of which provide the Company with significant
influence over the strategic operating, investing and financing policies of
BSP Pharmaceuticals. As a result the Company is now accounting for its
investment in BSP Pharmaceuticals using the equity method. Accordingly, for
the three and nine months ended July 31, 2008, the Company has recorded an
investment loss of $0.1 million.
    Management services and other fees charged to BSP Pharmaceuticals under a
management services agreement were $0.5 million and $1.3 million for the three
and nine months ended July 31, 2008, respectively. The management fees were
$0.4 million and $1.1 million for the three and nine months ended July 31,
2007, respectively. Accounts receivable at July 31, 2008 include a balance of
$0.2 million (October 31, 2007 - $1.6 million) in connection with the
management services agreement. 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 are filed with Canadian securities regulatory authorities can be accessed
through SEDAR at www.sedar.com.

    Outlook

    Due to normal summer shut downs, particularly in Europe, revenues for the
fourth quarter of 2008 are expected to be lower than revenues for the third
quarter of 2008 and are subject to fluctuations in the strength of the U.S.
dollar.
    These expectations are based on internal management forecasts which 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 and six months ended
April 30, 2008 that it anticipated that revenues for the third quarter of 2008
would be slightly higher than the second quarter of 2008. Revenues reported in
the third quarter of 2008 exceeded second quarter revenues by $9.0 million,
representing an increase of 4.8%.

    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: the inability to
complete transactions as a result of the failure to satisfy the closing
conditions, including the receipt of regulatory approvals, 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; 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

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Patheon Inc

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