Patheon drops OTC biz in major restructure

By Emilie Reymond

- Last updated on GMT

Related tags: Over-the-counter drug

Canadian contract manufacturer Patheon has announced its plans to
restructure its Ontario network of drug manufacturing facilities in
order to improve its profitability.

The Toronto-based company said it will get rid of its Niagara-Burlington Operations unit - which focuses on the commercial manufacturing of over-the-counter (OTC) drugs - in order to focus on its prescription drugs business. "The OTC market is a highly competitive and consumer-driven business, and we believe that another company with a strategic focus on this specialised market will be better positioned to grow these high-quality, well-established operations more profitably,"​ said Riccardo Trecroce, Patheon CEO. "Our objective is to focus our resources and capital on the development and manufacture of prescription pharmaceutical products which represent higher-margin revenues, while also improving capacity utilisation and operational effectiveness at our sites."​ The divested Niagara-Burlington unit includes two facilities - one in Fort Erie and another in Burlington Gateway - and the commercial operations at Burlington Century. The sale of the unit - which employs 350 people and generated $37m (€27m) in 2006 - will transfer all current 14 contracts to the potential buyer, who is expected to assume responsibility for all of the staff at all three locations. Patheon said it will retain its leased Burlington Century facility where its central quality control lab is also based and which employs 110 staff. The firm's OTC business lack of performance was illustrated in Patheon's first quarter results released last month - revenue in the OTC manufacturing segment fell 23 per cent, while revenues grew in the prescription drug manufacturing business. The company recorded lower OTC manufacturing revenues in particular in Canada and Cincinnati, which it blamed on "certain clients repatriating products back to their own manufacturing network."​Meanwhile, the contract manufacturing organisation (CMO) is reshuffling its operations in the remaining sites by transferring all commercial production and development services at its York Mills site in Toronto to its site in Whitby, Ontario, and some production to its Mississauga and Cincinnati sites. The Whitby operations currently generate 63 per cent of revenues from prescription products, and 37 per cent from legacy OTC manufacturing contracts, primarily cold and flu medication - acquired as part of Patheon's purchase of the site from Novartis Pharmaceuticals in 2001. After completing this reorganisation - which is expected to take two years - Patheon plans to close the York Mills plant and sell it. The site is a 160,000-sq ft facility located in Toronto, Ontario, employing 215 people. "The transfer of production from our York Mills to our Whitby facility is expected to improve profitability by reducing excess manufacturing capacity, reducing anticipated capital expenditure requirements at York Mills, and accelerating the shift towards a higher-margin mix of business at Whitby,"​ Trecroce explained. This reshuffle comes just a month after Patheon announced a $150m investment by a private equity firm - a move seen by the company as the best viable option to end its financial misery. Patheon said at the beginning of March that it has entered into a definitive agreement with JLL Partners under which the equity firm will purchase convertible preferred shares through a private placement. The transaction is subject to shareholder approval, but Patheon is confident that this proposed deal is the first vital step in rebuilding the value of the company in order to make it "more competitive and more profitable."​ The company intends to use the net proceeds of the investment - expected to be around $138m - to pay down a portion of its outstanding debt of $238m under its existing North American credit facilities.

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