Patheon Q4 loss widens to US$5.4M, revenue up at US$181.6 million

TORONTO - Contract drug developer Patheon Inc. (TSX:PTI) said Monday it expects the costs of an ongoing global restructuring will continue to hold its earnings back for several more quarters, as it reported heavier fourth-quarter and full-year losses.

"As discussed last quarter, we expect consulting fees (related to the transformation) to be cash neutral in 2012, but we do expect the savings to lag the consulting fees by several quarters," CEO James Mullen said on a conference call with analysts.

The provider of contract development and manufacturing services to the pharmaceutical industry said its loss in the three months ended Oct. 31 was US$5.4 million or just over four cents per share. That compared with a net loss of $1.78 million or 1.4 cents per share in the same year-earlier period.

Patheon, which is headquartered in Triangle Park, N.C., and reports results in U.S. dollars, said revenue was $181.6 million, up from $177.7 million.

Despite the worsening bottom line, Mullen noted that the company's business and revenues are up, adding that "key internal performance metrics are improving."

"Selling, general and administrative costs, which have increased due to consulting expenses associated with our transformation efforts, should become less of a factor in the fourth quarter of fiscal 2012."

For the full year, Patheon reported a net loss of $16.8 million or 13 cents per share on revenues of $700 million. In fiscal 2010, the company had reported a net loss of $5 million or 3.9 cents per share on revenues of $671.2 million.

Patheon operates 10 drug manufacturing plants, nine development centres and one clinical trial packaging operation in Canada, the United States and Europe.

Selling, general and administrative expenses in fiscal 2011 increased to $120.2 million from $110.6 million, due to higher consulting and professional fees of $12.8 million, higher costs related to the former CEO's severance of $1.1 million, higher stock based compensation of $1.4 million.

That was partially offset by elimination of costs associated with the special committee of independent directors of $3 million for fiscal 2010 and lower depreciation of $3 million.

Mullen said revenue in the first half of fiscal 2011 included $50.4 million in deferred revenue and reservation fees that were not included in the top line going forward.

"In the second half of the year we're looking at more normalized profit margins and the impact of higher volumes on a relatively fixed overhead structure and some strategic initiative savings in Q4," he said.

Under its transformational strategy, already underway in North American and starting in calendar 2012 in Europe, Patheon is focusing on rebuilding its sagging profits.

"Done correctly, operational excellence improves our margin, increases capacity in manufacturing throughput and improves customer service measured by right first, on-time delivery and quality metrics," Mullen said.

"This should show up in the top line and bottom line as revenue growth with expanded margins and increased cash flows."

Meanwhile, Mullen said he did not want to offer guidance on earnings before interest, taxes depreciation and amortization because "this, in my view, is going to be a real transformational year."

Mullen said the transformation would not be complete until the company accomplishes two objectives.

"One is we've got to get the revenue alignment moving at a pace that outpaces the growth of the marketplace."

"Second is that we've got to continue to increase margins," he added, saying margins are now "certainly below what some of the best performing competitors are and kind of in the middle of the pack of the rest."

Patheon shares were up two cents at C$1.15 in midday trading on the Toronto Stock Exchange.