Patheon steps up 'damage control' over Puerto Rico

By Kirsty Barnes

- Last updated on GMT

Related tags Puerto rico Over-the-counter drug Patheon

After dismal second quarter results Patheon is stepping up its
resolve for 'damage control' and indicated that further cutbacks at
its problematic Puerto Rico plant are imminent.

The Canadian contract manufacturer is involved in an ongoing attempt to improve its profitability, recently announcing its plans to restructure its Ontario network of drug manufacturing facilities, and also securing a $150m (€112m) investment by a private equity firm to help pay its debts.

For the second quarter, the company suffered a $14.5m pre-tax loss as opposed to a $5.9m profit for the comparable 2006 quarter after being impacted heavily by a $13.5m refinancing expense.

Interest expense also jumped from $4.8m to $7.2m.

In addition, operating profit was only $7.0m, compared to a previous profit of $10.7m. "Repositioning expenses" of $4.0m were to blame, comprising $0.6m in workforce reduction severance payments, primarily in Puerto Rico; $0.9m manufacturing efficiency review fees; and $2.4m in costs relating to the firm's "strategic review process".

Meanwhile, revenues were also down by 5 per cent to $181m. Patheon's Puerto Rico site, which it acquired in 2004 from Mova Pharmaceutical, has been largely responsible for the draining the company of life since it ran into trouble with the US Food and Drug Administration (FDA) in 2005 regarding its production of Abbott's oral antibiotic, Omnicef (cefdinir).

Although the plant was temporarily closed and reopened with the "issue fully resolved" in 2006, production has failed to regain profitability and remains inefficient, and the site has continuously dragged on the company's financial performance.

In addition, it is now facing new pressure as Abbott's two patents on Omnicef expire this year and in 2011, opening the door to generic competition.

Patheon's financial strategy had assumed that Omnicef would be a solid revenue source until at least 2009, however, "this assumption is no longer valid… and we are looking at a range of options," CEO Riccardo Trecroce told analysts in a conference call last week.

"Returning our Puerto Rico operations to profitability is a top priority for the company," he said.

Although the company already managed to cut its entire operating expenditure by 5.2 per cent over the one year period it is now urgently pursuing further cutbacks, particularly in Puerto Rico.

"We need to reduce operating costs as soon as possible… The situation in Puerto Rico is out of sync with the rest of our operations… and is unacceptable," Trecroce told analysts.

Although management is "fully engaged" in improving efficiencies, at this point in time, "we don't have a clear path we can outline," he said.

However, other production problems at several of the company's other sites, lower demand for over-the-counter (OTC) manufacturing services, and deferred client orders has also contributed to the series of disappointing financial results for the firm.

As a result, Patheon announced in April that it is making changes throughout its entire business, getting rid of its Niagara-Burlington Operations unit - which focuses on the commercial 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 Trecroce at the time of the announcement in April.

"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 in 2006 - will transfer all current 14 contracts to the potential buyer, which 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 company 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 came 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 then said at the end of April that equity firm JLL Partners had completed the purchase $150m worth of convertible preferred shares through a private placement.

The transaction gained shareholder approval in April and Patheon's chief financial officer John Bell said the investment would provide the company with a "stable, long-term capital structure", as well as "financial flexibility to pursue new growth opportunities.

The company also said it has refinanced its existing North American and UK credit facilities with new credit facilities with an aggregate amount of $225m.

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