Patheon continues to show the strain of Puerto Rico

By Kirsty Barnes

- Last updated on GMT

Related tags: Puerto rico

Patheon's third quarter results continue to show the strain of the
company's underperforming Puerto Rican operation.

Pre-tax loss and loss from continuing operations were $45.3m (€33.2m) and $50.7m respectively although this was still a vast improvement on the $257.7m loss for both figures in the comparable 2006 quarter. Patheon's Puerto Rico sites, which it acquired in 2004 from Mova Pharmaceutical, have been largely responsible for draining the company of life. In late 2006 it was discovered that in Patheon's Caguas facility some batches of an undisclosed product might not achieve their expected shelf life. The firm decided not to release any more product and to temporarily stop production to consider potential causes and solutions. Now, the site is incurring significant additional costs in connection with the launch of a new, large-volume product, as well as market-driven volume declines for two key products. In late 2006 a problem occurred at a different facility, believed to be Manati, where an ingredient for a different product made at that facility was temporarily unavailable. Currently the site is experiencing lower-than-expected volumes of a new product that was introduced to the site last year, which impacted the site's revenues and profitability. At its other Puerto Rican site in Carolina, Patheon ran into trouble with the US Food and Drug Administration (FDA) in 2005 regarding its production of Abbott's oral antibiotic, Omnicef (cefdinir). The plant was temporarily closed and reopened with the "issue fully resolved" in 2006, but although, according to a Patheon spokesperson the site has "performed consistently well this year",​ in terms of profitability, 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strategy had assumed that Omnicef would be a solid revenue source until at least 2009, however, "this assumption is no longer valid…and we are looking at a range of options,"​ CEO Riccardo Trecroce told analysts in a conference call in June. During the third quarter, declines in volumes of Omnicef at Carolina were almost entirely offset by the production of launch quantities of the authorised generic version of the product that Patheon manufactured for its client during the period. Even so, the company wrote down a $48.6m non-cash asset impairment charge "in respect of depreciable intangible assets and tangible capital assets related to its operations in Carolina".​ The firm said it determined that the carrying value of these assets was "impaired as a result of the genericisation of Omnicef, which will significantly reduce the profitability of the Carolina operations going forward".​ Meanwhile, during the third quarter Patheon also recognised an asset impairment charge of $13.0m to write down to fair market value the capital assets of the facilities in Niagara and Burlington that it is in the process of divesting. Amidst all the disruption, the company continues to see a gradual decline in revenue, with sales dipping 2 per cent to $175.5m during the quarter. This is despite robust sales in Europe, where the firm said it was benefiting from volume gains in Italy and France and strong growth in pharmaceutical development services at Swindon, UK. To try and turn things around, Patheon is involved in an ongoing attempt to improve its profitability. At the end of the second quarter it announced it would undertake a comprehensive review of the Puerto Rico operations, with a focus on restructuring the activities, eliminating operating losses and developing a long-term plan for the business, along with plans to restructure its Ontario network of drug manufacturing facilities, and also secured a $150m investment by a private equity firm to help pay back its debts. Trecroce said that the strategy has already started to improve operating efficiencies and profitability in Canada, paticularly in Whitby. "Our Canadian site restructuring initiative is proceeding on schedule…We have completed preliminary due diligence reviews with potential purchasers of our Niagara-Burlington OTC manufacturing business…the next step in the process will be to negotiate a definitive offer with a preferred party". "On the York Mills-Whitby consolidation, we have completed the planning discussions with our clients and will begin the transfer of products to Whitby this fall",​ Trecroce said. He added that Patheon also has entered into an agreement for the sale of the land and buildings at the York Mills location and the firm will continue to occupy the site, leasing it from the purchaser, while it completes the process of transferring commercial manufacturing and development services to its Whitby facility over the next 18 months. Furthermore, "We have been and continue to be focused on restructuring the Puerto Rico operations to eliminate losses as soon as possible…and evaluate the best way to improve the long-term profitability",​ said Trecroce. He detailed the development of cost reduction programmes to realign operating costs with significantly reduced revenues, particularly at Carolina and Caguas. These initiatives are being implemented during the fourth quarter, he said. He said that in particular the firm has taken several steps to adjust for declining revenues and to address operational challenges at the Caguas facility. "These have included reducing the size of the workforce at Caguas by an additional 130 positions since May, bringing the total number of reductions to 225 positions, or almost one-third of the site's workforce, since the beginning of the fiscal year"."We have appointed a new site director and are working diligently to improve the efficiency and operating performance of the site." ​ In addition, "We have also increased our efforts to secure new business for the Puerto Rico Operations…We have already identified significant new business opportunities for Manati which, if successful, could begin to contribute to results in the latter half of 2008",​ said Trecoe.

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