Patheon reveals plans to tackle Puerto Rico problems

By Kirsty Barnes

- Last updated on GMT

Related tags Puerto rico Patheon

Patheon has finally revealed its plans to tackle the ongoing
problems it has been facing with its Puerto Rican operations, which
are draining the firm of profitability.

Following a "comprehensive review", the Canadian contract manufacturer has decided to cut its Carolina plant loose, offering it up for sale, while holding on to the other two facilities at Manati and Caguas, with the objective of bringing them to the point where they break even of operating profit by the end of 2008.

The announcement was made when the firm reported its fourth quarter results on Friday, which were again "overshadowed by the results of our Puerto Rico operations, which continued to deteriorate", said company CEO Riccardo Trecroce, who incidentally is in the process of handing over the reigns to his successor Wesley Wheeler.

During the quarter, total revenue for the company remained virtually unchanged, at $166.8m, while a pre-tax loss of $4.5m was recorded, although this was still a major improvement on the $12.7m loss taken in the comparable 2006 quarter.

Patheon's pharmaceutical development services (PDS) revenues grew by $4.1m and its over-the-counter (OTC) sales rose by $2.3m. However, any gains in these two segments were largely offset by a $5.4m drop in its prescription drugs contract manufacturing segment.

Even though the unit displayed strong year-over-year growth in Europe, largely thanks to the full commercial production of multiple products being transferred into its sites in Italy and France by two of its clients, overall revenue was eroded by declines in Puerto Rico and Canada.

In Puerto Rico, the deterioration was blamed on "significantly lower" revenues for the biggest product made at the plant, Abbott's oral antibiotic, Omnicef (cefdinir), on which Abbott has a patent expiry this year and has faced generic competition since May.

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strategy had assumed that Omnicef would be a solid revenue source until at least 2009, however, "this assumption is no longer valid…and we are looking at a range of options", Trecroce told analysts in a conference call in June.

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, the site in Carolina was already suffering due to the absence of manufacturing orders for Merck's Zocor (simvastatin) which lost patent protection in 2006, hence the final decision to now sell.

The Carolina site specialises in the manufacture of oral cephalosporin solid dosage forms, including tablets, capsules and powders for suspension and is at present producing four products on behalf of six customers.

Patheon said it has determined that the plant "would be of greater strategic value to another company with a focus on manufacturing oral cephalosporins", and anticipates that any purchaser will assume responsibility for its current contract and staff of 200.

How much of a challenge it will be to find such a buyer remains to be seen - Patheon's Puerto Rico sites, which it acquired in 2004 from Mova Pharmaceutical, have been largely responsible for draining the company of life.

The company first ran into trouble with the Carolina site when it had a run in with the US Food and Drug Administration (FDA) in 2005 regarding its production of Omnicef.

The plant was temporarily closed and reopened with the "issue fully resolved" in 2006, but in terms of profitability, it has been facing an ongoing struggle due to generic competition and undercapacity.

Meanwhile, the other two sites on the Island have had their own share of problems, although Patheon has decided to hold on to these, and its remaining 775 workers, for now at least.

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.

The site has since been 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.

During the fourth quarter results announcement, Trecroce confirmed that: "There also were increased losses at the Caguas facility, due to lower volumes of several significant products and various operating inefficiencies".

The firm has been taking several steps to adjust for the declining revenues and to address operational challenges at the Caguas facility.

Since May , the size of the workforce has been slashed by 130 positions, with a further 40 having been cut in the fourth quarter, bringing the total number of job losses to 265 - over one-third of the site's workforce - since the beginning of the fiscal year.

Moreover, in late 2006 a problem occurred at the facility in Manati, where an ingredient for a different product made at that facility was temporarily unavailable.

Currently this site is also experiencing a negative impact on its revenues and profitability, stemming largely from lower-than-expected volumes of a new product that was introduced to the site last year.

Amidst the drama, Patheon is hoping that the sale of its Carolina facility will allow it to "focus on continuing to improve the operating performance at the Caguas and Manati sites".

"With new management in place in Puerto Rico, Patheon plans to continue an extensive program to improve operating performance, improve quality and training systems, reduce overhead costs and pursue new business opportunities for these sites", said Trecroce.

Meanwhile, Patheon also announced last week that it will be selling two of its Ontario operations, in Fort Erie plant and Burlington, to Quebec-based firm Pharmetics for a total of $5.75m.

The deal, expected to close by 31 January, is part of Patheon's strategy to improve operating efficiencies and profitability in Canada.

Under the new ownership, the operations are expected to continue as normal, the firm said.

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