Patheon posts surprise Q2 loss on delays and write-offs

By Nick Taylor

- Last updated on GMT

Related tags: Business, Patheon

Shares in Patheon slumped after delays, cancellations and inventory write-offs caused a drop in second quarter operating income.

The commercial manufacturing and pharmaceutical development services (PDS) both recorded a dip in revenues, contributing to a 57 per cent drop in operating profit. Coupled to unfavourable foreign currency exchange this led to Patheon posting a net loss of $11.2m (€7.8m), when analysts had expected a profit.

Speaking in a conference call with investors James Mullen, CEO of Patheon, said: “The second quarter was disappointing for both our commercial and PDS businesses. Production challenges in the commercial business led to some orders shifting...[and] we also experienced higher than normal inventory write-offs at several sites​.”

Inventory write-offs were caused by chemical problems or human error and cost Patheon “low single digit millions​”. Mullen said the level of write-offs is unacceptable and promised Patheon is “hard at work​” to implement an operational excellence programme designed, in part, to reduce write-offs.

Consolidation and strategic relationships

In recent years consolidation and strategic partnerships have changed, and continue to shape, the contract research sector. Now Mullen sees both trends approaching the contract manufacturing organisation (CMO) market.

I do believe that in this industry there will be consolidation​”, said Mullen. Patheon is in a position to be a consolidator of assets but, Mullen acknowledged, “you could look at it the other way​”. In 2009 Lonza and private equity firm JLL fought unsuccessfully to acquire Patheon but since then talk of a takeover has died down.

As in the contract research sector, acquisitions could be a means for CMOs to add the scale to compete for strategic deals. Patheon is in conversations with mid-sized and up biopharm companies about more strategic outsourcing relationships.

Entering into such deals requires Patheon to sell in a slightly different way, moving away from just providing production capacity to supporting clients with “strategic solutions​”, said Mullen. This will allow clients to take fixed costs out of their supply chains ahead of revenues being hit by patent loss on major products in coming years.

Driving growth

Strategic partnerships are one element of Patheon's plans to grow its new business pipeline. Other strategies discussed by Mullen include plans to provide more materials for preclinical and Phase I trials.

Commercial manufacturing at Patheon benefits from the flow through of business from the clinical trial material production unit, currently focused on late stage. Strengthening preclinical and Phase I production operations should therefore drive business at the late stage unit and eventually commercial-scale CMO operations.

Patheon has also seen interest in its plans to provide a back up supply source for biopharm manufacturing steriles and other complex products. Biopharm can, and has, run into difficulties when relying on one or two sources for these products and Patheon plans to provide an emergency back up supply.

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