Production problems hobble Patheon's bottom line

Production problems hobble Patheon's bottom line, giving $11-million US loss in Q1.

A pack of troubles continued to plague drugmaker Patheon Inc. in the first quarter, giving the company a big loss and taking its already battered stock down 3 per cent on Friday.

And Toronto-based Patheon does not expect its woes to end anytime soon. It said production problems at its plants in Puerto Rico and elsewhere would hamper its bottom line through 2006.

"It certainly was a challenging quarter for us. Events happened that we weren't anticipating," chief executive Robert Tedford told a conference call with analysts after the company reported a sizable three-month loss.

"I can tell you that we have some substantial initiatives underway to improve operating performance in the second quarter and beyond."

His comments sent Patheon's stock (TSX:PTI)down 21 cents to $6.67 on the TSX.

Patheon has encountered difficulties with the production of the antibiotic drug Omnicef at its Puerto Rico plant, leading to a warning letter from the U.S. Food and Drug Administration.

It bought the plant for $350 million US in late 2004.

It saw lower demand for over-the-counter manufacturing services; temporary production issues at its Swindon, U.K. and Whitby, Ont., plants and deferred client orders at its operation in Monza, Italy.

In Toronto, capacity constraints limited revenue growth across North America.

Patheon reported a net loss of $11.5 million US or 12.4 cents a share in the quarter. That compared with a net profit of $6 million or 8.7 cents per share for the same period last year.

Revenues rose three per cent to $157.9 million.

Patheon reports in U.S. dollars.

The year ahead will continue to be challenging, Tedford said, adding that Patheon has seen "greater-than-anticipated declines in base business in our operations, that's a fact of life for us."

The company expects the problems to continue through the year, giving year-end profits that will be lower than in 2005.

"It's going to be difficult for us to recover from the operating challenges we had in Q1 but we will see some improved results in Q2 as we make some progress with respect to these operating challenges," Tedford said.

But he said he sees an improvement in 2007, perhaps from the company's new businesses.

In the meantime, at least one analyst is warning investors away.

"As foreshadowed in the company's pre-announcement, the weakness in the quarter was very broad-based, with issues in essentially all of the business units," analyst Jeff Elliott of UBS Securities wrote in a research note.

"As a result of continued near-term challenges facing the company (and we are doubtful that the current issues are the last to be encountered) and the lack of visibility into the business development pipeline, we do not feel Patheon presents an attractive risk/reward profile."

He maintained his negative outlook for the stock, with a price target of $4.25 Cdn.

Patheon shares have traded in a 52-week range between $5.13 and $12.22.

Patheon operates 14 plants in the United States, Canada and Europe, employing more than 5,900 people, and has a customer base of more than 200 pharmaceutical and biotechnology companies.

It provides development and manufacturing support to the global pharmaceutical industry.