Manufacturing double whammy to cost Patheon millions

By Gregory Roumeliotis

- Last updated on GMT

Related tags: Patheon, Puerto rico

More problems at Patheon's Puerto Rican production facilities in
the third quarter of 2006 are expected to reduce the contract
manufacturer's earnings before interest, tax, depreciation and
amortisation (EBITDA) by more than $9m (€7m) compared to last year,
forcing it to negotiate its credit agreement with its lenders.

Stability issues and a disruption in the supply of a raw material prompted Patheon to cease the manufacturing of two products, causing a net loss in the third quarter between $7.4m and $9.3m, and although Q3 results are not due for another month, the company decided to amend its credit agreement which offers revolving credit facilities of $75m, of which approximately $17m was drawn as of the end of July.

Patheon insists it does not face a solvency problem and is confident it has answers for both manufacturing issues it faces.

The most serious problem has occurred at Patheon's Caguas facility in Puerto Rico, where it was discovered that some batches of an undisclosed product might not achieve their expected shelf life.

Patheon decided not to release any more product and to temporarily stop production to consider potential causes and solutions.

Together with its client, who owns the product, it has developed a modified production process which is now being assessed and, by the end of August, Patheon will be able to determine whether it has successfully addressed the concern.

If it has not, and no product is shipped, the Canadian manufacturer stands to lose another $5m in EBITDA in the fourth quarter.

The other problem occurred at a different facility in Puerto Rico, though Patheon would not specify whether this is in Carolina or Manati.

An ingredient for a different product made at that facility was temporarily unavailable, and although this will hurt Patheon's bottom line, it did not disrupt the client's inventory and the situation has now been remedied.

"In light of these results, we will accelerate our performance enhancement programme launched last quarter and this will include a comprehensive review of all the company's operations and its financing structure,"​ Patheon's chairman Peter Green said.

"We have engaged external advisors to help with this shareholder-value enhancement programme."

The "performance enhancement programme"​ was launched by Patheon in response to its second quarter financial results, which saw pre-tax profits remain idle.

Patheon acquired Puerto Rican drug manufacturer MOVA for $350m in late 2004, attracted by Puerto Rico's low corporate tax rate and low labour costs, but has struggled to streamline operations since then.

In Q2 EBITDA plunged 55 per cent to $4.4m partly because Patheon had to take corrective action to address the concerns of the US food and Drug Administration (FDA) relating to the production of Abbott's antibiotic drug Omnicef.

When manufacturing operations for Omnicef resumed 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 February 2006.

The hopes of those who believed Puerto Rico would no longer plague Patheon have now been tarnished with this latest profit warning.

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