Patheon falls from grace

By Gregory Roumeliotis

- Last updated on GMT

Related tags: Puerto rico, Income statement, Patheon

Canadian drug outsourcing company Patheon has reported its first
quarterly loss since its inception in 1974, swinging from a net
profit of $6m (€4.9m) in Q1 of 2005 to a net loss of $11.5m in Q1
of 2006, as problems with production at its Puerto Rican facility,
a disappointing product launch at its Whitby site and a weaker than
expected demand for its contract manufacturing services have dented
the firm's performance.

Although the Toronto-based firm's revenues were up 2.6 per cent to $157.9m, an 8.8 per cent increase in operating expenses to $143.9m, explained by restructuring costs, lower capacity utilisation and holiday shutdowns at the MOVA site in Puerto Rico, wiped those gains off the bottom line.

Patheon acquired pharma manufacturer MOVA's facilities for $350m in late 2004, attracted by Puerto Rico's low corporate tax rate, but has run into difficulties there with the production of the antibiotic drug Omnicef, prompting a warning letter from the US Food and Drug Administration (FDA).

As a result the company had to suspend production of the drug, and when operations resumed in December after upgrading the equipment, volumes were squeezed by slower line speeds and lower yields and the validation of a third line was not completed until early February.

In other North American sites, commercial revenues were impacted by lower volumes at Whitby and at the company's Canadian sites making over-the-counter (OTC) drugs, while growth in pharmaceutical development services (PDS) revenues was lower than expected due, in part, to the lack of available capacity at the Toronto Region high-potency facility, which, Patheon claims, is currently manufacturing several newly launched prescription products.

Likewise in Europe, growth was also lower than anticipated due to the deferral of client orders to later quarters in 2006, temporary production issues at the Swindon facility and regulatory-related delays in the transfer of a new sterile product at the Monza site that have since been resolved.

Worsening the situation were increases in the amount of one-off charges occurred because of the MOVA site, including $1.1m in depreciation of assets, $2.1m in the amortisation of its operations and $2.8m in interest expense related to the additional debt associated with the MOVA acquisition, as well as $1.6m for the cancellation and prepayment of certain of its North American credit facilities and $6.3m in the writing-off of related deferred financing costs.

Overall, a jump in prescription manufacturing revenues and PDS revenues of 5 per cent was offset by OTC revenues that declined by 10 per cent, posing the question of whether Patheon can keep sales up enough and costs low enough to be in the black again soon.

If the trend continues it will bring Patheon's growth in line with the wider market - during the first three quarters of 2005, Patheon's revenues from the manufacturing of prescription and OTC drugs were equivalent to a growth rate of 49.9 per cent compared to the overall market growth rate of 9.9 per cent.

"The impact of operating challenges in the first quarter on revenues and profitability will be difficult to overcome in the remainder of 2006,"​ Robert Tedford, Patheon's chief executive said.

"While we continue to expect that the second half of the year will be better than the first half, overall growth will be lower than anticipated due to declines in North American base business that are more significant than usual."

The company, which is providing development services for 152 projects, including six that are in line for regulatory approval, concedes this year will end with results lower than 2005 but says it views 2006 as a transitional year, addressing the challenges in its Puerto Rico operations, completing the transfer of two groups of products to our Bourgoin and Italian operations, finishing its new cephalosporin lyophilization facility in Swindon and continuing to develop additional PDS capacity both in existing facilities as well as in India.

To boost its future profits, Patheon has initiated a series of company-wide cost saving programmes, though it remains to be seen how it responds to the fall in demand for OTC manufacturing services.

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