Patheon 2011 10K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2011
OR
o 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 000-54283
 
PATHEON INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Canada
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
c/o Patheon Pharmaceuticals Services Inc.
4721 Emperor Boulevard, Suite 200
Durham, NC
 
27703
(Address of principal executive offices)
 
(Zip Code)
(919) 226-3200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Restricted Voting Shares
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o     No x  
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     No x  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o  
 

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
x (Do not check if a smaller reporting company)
  
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x  

The aggregate market value of restricted voting shares held by non-affiliates of the registrant as of April 29, 2011, the last business day of the registrant's most recently completed second fiscal quarter, was $98,933,146 (based on the last reported closing sale price on the Toronto Stock Exchange on that date of $2.14 per share, as converted from C$2.27 using the closing rate of exchange from Reuters).
 
As of December 15, 2011, the registrant had 129,167,926 restricted voting shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive Proxy Statement and Information Circular to be delivered to shareholders in connection with the Annual and Special Meeting of Shareholders to be held March 22, 2012 are incorporated by reference into Part III.

 

 


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TABLE OF CONTENTS
 
 
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Reserved and Removed
 
PART II
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
 
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
 
SIGNATURES
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
EXHIBIT INDEX
 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which reflect our expectations regarding our future growth, results of operations, performance (both operational and financial) and business prospects and opportunities. All statements, other than statements of historical fact, are forward-looking statements. Wherever possible, words such as “plans,” “expects,” or “does not expect,” “forecasts,” “anticipates” or “does not anticipate,” “believes,” “intends” and similar expressions or statements that certain actions, events or results “may,” “could,” “would,” “might” or “will” be taken, occur or be achieved have been used to identify these forward-looking statements. Although the forward-looking statements contained in this annual report on Form 10-K reflect our current assumptions based upon information currently available to us and based upon what we believe to be reasonable assumptions, we cannot be certain that actual results will be consistent with these forward-looking statements. Our current material assumptions include assumptions related to customer volumes, regulatory compliance and foreign exchange rates. Forward-looking statements necessarily involve significant known and unknown risks, assumptions and uncertainties that may cause our actual results, performance, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, risks related to international operations and foreign currency fluctuations; customer demand for our services; regulatory matters affecting manufacturing and pharmaceutical development services; impacts of acquisitions, divestitures and restructurings; implementation of our new corporate strategy; the global economic environment; our exposure to complex production issues; our substantial financial leverage; interest rate risks; potential environmental, health and safety liabilities; credit and customer concentration; competition; rapid technological change; product liability claims; intellectual property; significant shareholder; supply arrangements; pension plans; derivative financial instruments; and our dependence upon key management, scientific and technical personnel. These and other risks are described in greater detail in “Item 1A. Risk Factors” of this annual report on Form 10-K. Although we have attempted to identify important risks and factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors and risks that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. These forward-looking statements are made as of the date of this annual report on Form 10-K, and except as required by law, we assume no obligation to update or revise them to reflect new events or circumstances.
General
All references to “$” or “dollars” in this annual report are to U.S. dollars unless otherwise indicated. References in this Form 10-K to “Patheon,” “we,” “us,” “our” and “our company” refer to Patheon Inc. and its consolidated subsidiaries.

 
PART I

Item 1.          Business.
Overview
We are a leading provider of commercial manufacturing outsourcing services (“CMO”) and outsourced pharmaceutical development services (“PDS”) to the global pharmaceutical industry. We believe we are the world’s second-largest CMO provider and the world’s largest PDS provider based on calendar year 2010 revenues provided by PharmSource, a provider of pharmaceutical outsourcing business information. We offer a wide range of services from developing drug candidates at the pre-formulation stage through the launch, commercialization and production of approved drugs. During the fiscal year ended October 31, 2011 (“fiscal 2011”), we provided services to approximately 300 customers throughout the world, including 18 of the world’s 20 largest pharmaceutical companies, nine of the world’s 10 largest biotechnology companies and seven of the world’s 10 largest specialty pharmaceutical companies. In fiscal 2011, we manufactured 12 of the top 100 selling drug compounds in the world based on revenues for the products reported by Evaluate Pharma, a provider of pharmaceutical industry data, and our products were distributed in approximately 60 countries. We are also currently developing 17 of the top 100 developmental stage drugs in the world on behalf of our customers based on projected potential revenues for the products reported by Evaluate Pharma.
Our CMO business focuses primarily on prescription products in sterile dosage forms and solid, semi-solid and liquid conventional dosage forms. We have also developed a wide range of specialized capabilities in high potency, controlled substances and sustained release products. Our PDS business provides a broad range of development services, including finished dosage formulation across approximately 40 dosage forms, clinical trial packaging and associated analytical services.

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We have established our position as a market leader by leveraging our scale, global reach, specialized capabilities, broad service offerings, scientific expertise and track record of product quality and regulatory compliance to provide cost-effective solutions to our customers.

Company History
The heritage of our company dates back to 1974, when we established Custom Pharmaceuticals Ltd., a contract manufacturing business, in Fort Erie, Canada. Since that time, we have expanded operations through acquisition of contract manufacturing facilities in Canada, Europe, Puerto Rico and the United States, and entered into the PDS business. In addition, we continue to assess our footprint and as market conditions warrant consolidate or dispose of facilities.
In 2007, we announced a plan to restructure our Canadian network of six pharmaceutical manufacturing facilities to align with our strategy of focusing on developing and manufacturing prescription, rather than over-the-counter, products. To improve capacity utilization and profitability at our Whitby facility, we began decommissioning our York Mills facility and transferring all services undertaken at that site to, primarily, our Whitby facility. In the fiscal year ended October 31, 2008 (“fiscal 2008”), we sold our Niagara-Burlington operations to Pharmetics Inc.
In fiscal 2008, we announced a plan to restructure our Puerto Rican operations. In January 2009, we closed our Carolina facility in Puerto Rico and are marketing the remaining assets for sale. Later in 2009, we announced our intention to consolidate our two remaining Puerto Rico operations into our manufacturing site in Manatí and ultimately close or sell our plant in Caguas. The consolidation is expected to continue beyond the end of calendar year 2012.
In 2006 and 2007, we conducted a review of strategic and financial alternatives that resulted in a $150,000,000 investment in us by JLL Partners Inc., a New York private equity firm (“JLL Partners”), and a refinancing of our North American indebtedness. As a result of this investment, JLL Patheon Holdings, LLC ("JLL Patheon Holdings"), an affiliate of JLL Partners, received two series of preferred stock, one of which it converted into 38,018,538 voting shares in 2009 and the other of which entitles it to elect up to three members of our Board of Directors (our “Board”).
JLL Patheon Holdings' also made an unsolicited offer to acquire any or all of the outstanding restricted voting shares of Patheon (“JLL Offer”) that it did not already own in 2009, which resulted in JLL Patheon Holdings and its affiliates (“JLL”) acquiring an additional 33,854,708 restricted voting shares that were validly deposited. The restricted voting shares that JLL purchased pursuant to the JLL Offer represented approximately 38% of the outstanding restricted voting shares of Patheon not already owned by JLL. As of October 31, 2011, JLL owned an aggregate of 72,077,781 restricted voting shares, representing approximately 56% of Patheon’s total restricted voting shares outstanding.

Our Segments
Although we were historically organized and managed as a single business segment providing commercial manufacturing and pharmaceutical development services, due to the continued growth in our operations and a change in our executive management structure, in the fiscal year ended October 31, 2008 (“fiscal 2008”) we organized ourselves into two operating segments: CMO and PDS. In addition, we categorize certain selling, general and administrative costs and certain foreign exchange gains and losses under a separate segment reporting line item referred to as “corporate costs.” In fiscal 2011, our CMO and PDS segments accounted for 81.8% and 18.2% of our total revenues, respectively. Financial information about these segments and information regarding net sales and long-lived assets attributable to operations in Canada, the United States, Europe and other countries is contained in “Note 16—Segmented Information” of our consolidated financial statements included in this Form 10-K. Additional financial information about our segments is contained in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.” For a discussion of risks attendant to our foreign operations, please see “Item 1A. Risk Factors—Risks Related to our Business and Industry.”
The illustration below sets forth the various stages of the drug development and manufacturing process; shaded processes are services that we provide.


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Note: API: Active Pharmaceutical Ingredient
PAI: Pre-Approval Inspection(s)
Commercial Manufacturing
We believe we are the world’s second-largest CMO provider with an approximate 5% global market share in 2010 based on calendar year 2010 revenues provided by PharmSource. We operate nine facilities located throughout North America and Europe. We manufacture various sterile dosage forms, as well as solid, semi-solid and liquid conventional dosage forms. Our sterile dosage forms include aseptically (sterile) filled and terminally sterilized liquids and powders in ampoules, vials, bottles and pre-filled syringes and sterile lyophilized (freeze-dried) products in both vials and ampoules. Conventional dosage forms include both coated and uncoated compressed tablets, hard shell gelatin capsules, powders, ointments, creams, gels, syrups, suspensions, solutions and suppositories. Currently, our capacity utilization is higher for our facilities for sterile dosage forms than for conventional dosage forms. We further differentiate ourselves by offering specialized capabilities relating to high potency, controlled substance and sustained release products. In fiscal 2011, our CMO segment generated 81.8% of our total revenues.
Set forth below is a table illustrating our various dosage forms.
 
Conventional dosage forms
Solids
 
•    Tablets
•    Capsules
•    Powders
Specialized
capabilities
•    High potency
•    Controlled substances
Semi-solids
 
•    Creams
•    Ointments
•    Suppositories
•    Gels
 
•    Sustained release products
•    Soft gels
•    Liquid filled hard shell capsules
Liquids
 
•    Syrups
•    Solutions
•    Suspensions
 
•    Nasal sprays
Sterile dosage forms
 
 
•    Aseptically (sterile) filled and terminally sterilized liquids and powders (in ampoules, vials, bottles and pre-filled syringes)
•    Pre-filled syringes and sterile lyophilized (freeze-dried) products (in vials and ampoules)
•    Sterile (injectable) cephalosporin powder filling
In fiscal 2011, we had a diverse CMO customer base with large pharmaceutical companies, mid-size companies and emerging companies comprising 55%, 24% and 7% of our fiscal 2011 CMO revenues, respectively, with the remainder being derived from our early stage pharmaceutical, generic and other customers.
Pharmaceutical Development Services

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We believe we are the world’s largest PDS provider with an approximate 10% global market share in 2010 based on calendar year 2010 revenues provided by PharmSource, offering a broad range of development services across approximately 40 different dosage forms. We operate eight development centers and one clinical trial packaging facility located throughout North America and Europe. Our PDS offerings support customers across various stages of the drug development process, including (i) pre-formulation, formulation and development of dosage forms; (ii) manufacturing of development stage products during the regulatory drug approval process, including manufacturing of pilot batches; (iii) scale-up and technology transfer services designed to validate commercial-scale drug manufacturing processes; and (iv) development of analytical methods and delivery of analytical services. In fiscal 2011, our PDS offerings were provided to a diverse customer base with mid-size companies, large pharmaceutical companies and emerging companies comprising 33%, 28% and 37% of our fiscal 2011 PDS revenues, respectively, with the remaining 2% being derived from our early stage pharmaceutical, generic and other customers.
During fiscal 2011, we worked on approximately 419 projects for our customers, including seven drug candidates at the new drug application (“NDA”) stage. Among the projects we worked on during fiscal 2011, 117 projects were at Phase I, 104 projects were at Phase II, 100 projects were at Phase III, and 60 projects were at the pre-clinical or post-approval stage. During fiscal 2011 and 2010, we developed 10 products for customers that received new market approval. Since the beginning of fiscal 2001, our PDS business has developed, on behalf of our customers, 36 new molecular entities (“NME”) that have been approved for marketing by regulatory authorities, as well as numerous new formulations of existing NMEs. Any patent and drug approvals that we obtain, or help to obtain, belong to our customers, and we do not receive royalties or earn revenues from products or NMEs that we develop, or help to develop, other than for the development services we provide. Our development group, comprised of approximately 600 scientists and technicians, including approximately 80 holding doctoral degrees, has extensive development experience across a wide variety of pharmaceutical dosage forms. Our PDS business serves as a pipeline for future commercial manufacturing opportunities. Since most of these products are at the beginning of their patent life, these products typically present long-term manufacturing opportunities. From the beginning of fiscal 2008 through the end of fiscal 2011, we were awarded CMO contracts for 14 new products that had been developed by our PDS business. In fiscal 2011, our PDS segment generated 18.2% of our total revenues.

Performance Enhancement Initiatives
We are committed to providing quality products and services to our customers. We are undertaking a series of initiatives to reduce operating expenses and increase manufacturing efficiency, including launching the Patheon AdvantageTM II Lean 6 Sigma program and upgrading our information technology infrastructure.

Our new corporate strategy includes accelerating and revising the Patheon Advantage program, which combines “lean” manufacturing practices with “six sigma” manufacturing to streamline operations, remove production bottlenecks, increase capacity utilization and improve performance throughout the network; assessing strategic options for the Swindon commercial operation and the Burlington, Ontario facility; continuing the evolution of our existing commercial sites into centers of excellence focusing on specific technologies or production types; and focusing improvements in other areas of the business including working capital, pricing, and selling, general and administrative costs. We believe our pilot program in our Canadian sites has been very successful to date. A global roll out is being targeted for 2012.

In addition, we have developed an information technology master plan that sets the overall direction for systems and services for our business. It centers on the development of strategic information technology assets that will drive competitive advantages for our business and includes both the addition of new information technology assets and the enhancement of existing information technology assets.
Customers
In fiscal 2011, we provided services to approximately 300 customers throughout the world, including 18 of the world's 20 largest pharmaceutical companies, nine of the world's 10 largest biotechnology companies and seven of the world's 10 largest specialty pharmaceutical companies. We are also currently developing on behalf of our customers 17 of the 100 top developmental stage drugs in the world, based on the potential revenues for the products reported by EvaluatePharma®. During fiscal 2011, no single customer accounted for more than 10.0% of our consolidated revenues. In fiscal 2011, our top 20 customers in our CMO segment accounted for approximately 79% of our CMO revenues. As described above, in June 2009, we launched a new performance guarantee initiative designed to enhance our service to customers. The Patheon Performance Guarantee was added as a new feature in CMO contracts for customers with critical supply requirements.
We have entered into several master service agreements with customers that contemplate long-term multi-product and multi-site commercial manufacturing and/or PDS, including a seven-year manufacturing agreement that led to construction of a new manufacturing facility within one of our existing sites with significant financing from the customer, a five-year master supply agreement with a global pharmaceutical company to provide development and manufacturing services and “carve-out”

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arrangements at certain of our facilities under which sizeable parts of our current production have been transferred to us from facilities owned by our customers that were slated for closure or downsizing. These arrangements are part of a trend towards developing broader and longer-term relationships with our customers.
Our CMO customers typically provide a yearly forecast of anticipated product demand. Customers also deliver firm purchase orders, typically three months prior to scheduled production, after which time they may adjust contract quantities or delivery dates within certain limits, provided that we are reimbursed for any expenses incurred in connection with such adjustment. Upon delivery to us of a customer purchase order confirming the quantity and delivery date, the order is scheduled for production. Our CMO customer contracts, typically with multi-year terms, formalize the standard business arrangements outlined above, including production based on the delivery of firm purchase orders. In addition, the contracts typically provide for 12 to 18 months’ advance notice for the transfer or discontinuance of any product. The customer assumes liability for all material commitments made in accordance with purchase orders. We maintain the right to pass on price increases to the customer over and above some predetermined minimum percentage. The actual revenues generated by our major customer agreements are based on volumes that are determined by market demands for the customer’s product from time to time.
Our PDS business provides services on a fee-for-service basis. We typically respond to a customer request and prepare a quotation which, if accepted, typically forms the basis of the contract with the customer. Our PDS contracts typically require us to perform development services within a designated scope. Frequently, the continuation of our work on a particular project will depend on various factors such as research results and the customer’s needs.
Sales and Marketing
Our global sales and marketing group is responsible for generating new business for our CMO and PDS businesses. Our sales team is broken into two distinct groups—territory-based sales executives and key account executives. Each of our territory-based sales teams is responsible for seeking potential customers and generating sales to all customers within its territory that are not named as a key account. Our North America territory-based sales team is comprised of 14 team members and covers the United States and Canada. We also have a territory-based sales team covering Europe and Japan, which is comprised of eight members. In addition, we have seven global key account executives who act as our primary interface with our most significant accounts; currently approximately 35 of our customers have key account status. Despite the functional and geographical delineation of our sales teams, each sales team or executive seeks to generate sales in both our CMO and PDS segments across our entire network. Determination of which site, or sites, will perform specific services is dictated by the nature of the customer’s product, our capabilities and customer preferences.
The projects of our existing customers are managed by site-based project managers and business managers, who also play an integral role in the sales process by ensuring that the existing projects are meeting customers’ expectations. Our sales executives work closely with the site-based teams to understand our customers’ projects and evolving needs, enabling the sales executives and site-based teams to obtain additional work on existing projects and to identify new projects.
Our sales team is supported by global marketing, sales operations and business intelligence groups located at our U.S. headquarters in Research Triangle Park, North Carolina, and regional support resources in Europe.

Our global marketing team supported the development and launch of two innovative programs in fiscal 2011:

SoluPath™- a fixed-price, multiplatform scalable solution to identify development technologies to increase bioavailability in formulations. By using parallel drug formulation screening and expert scientific analysis, the formulations are also able to move quickly to phase I trials.

Sterile Backup Supply Program - a sterile backup supply program to eliminate the supply risks associated with increasing regulatory pressure on outsourced manufacturing. This program is specifically targeted to sterile manufacturing because of our exceptionally reliable sterile facilities in Italy with enhanced features of no required commitment volume and streamlined tech transfer processes.
Supply Arrangements
For our contract manufacturing operations, we are required to source various active pharmaceutical ingredients ("APIs"), excipients, raw materials and packaging components from third-party suppliers and/or our actual customers. Our customers specify these components, raw materials and packaging materials in line with their product registration files, and, in some cases, they specify the actual supplier from whom we must purchase these inputs. In most cases, our customers manage the sourcing and physical delivery of the API to us at no cost. We generally source and procure all other input materials from

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established local or regional suppliers specialized in serving the pharmaceutical sector. With the exception of certain patented APIs and excipients, most inputs are available from multiple sources.
Supply arrangements are an inherent part of our ability to produce products for our customers in a timely manner and thus create a degree of dependence that could negatively impact revenues if such supply is interrupted. Such interruptions can be either localized to a specific supplier issue or as a result of wider supply interruptions due to natural disasters or international disruptions caused by geopolitical issues or other events. See “Item 1A. Risk Factors—Risks Related to Our Business and Industry.” We work closely with suppliers at both a local and corporate level to establish clear supply agreements that set forth the supply relationship expectations and the legal terms and conditions of the agreements, including potential liabilities for supply interruption situations. These agreements are critical to our ability to manage and mitigate risk across our supply chain.
Competition
We operate in a market that is highly competitive. We compete to provide CMO and PDS to pharmaceutical companies around the world.
Our competition in the CMO market includes full-service pharmaceutical outsourcing companies; contract manufacturers focusing on a limited number of dosage forms; contract manufacturers providing multiple dosage forms; and large pharmaceutical companies offering third-party manufacturing services to fill their excess capacity. In addition, in Europe, there are a large number of privately owned, dedicated outsourcing companies that serve only their local or national markets. Also, large pharmaceutical companies have been seeking to divest portions of their manufacturing capacity, and any such divested businesses may compete with us in the future. We compete primarily on the basis of the security of supply (quality, regulatory compliance and financial stability), service (on-time delivery and manufacturing flexibility) and cost-effective manufacturing (prices and a commitment to continuous improvement).
Our competition in the PDS market includes a large number of laboratories that offer only a limited range of developmental services, generally at a small scale; providers focused on specific technologies and/or dosage forms; and a few fully integrated companies that can provide the full complement of services necessary to develop, scale-up and manufacture a wide range of dosage forms. We also compete in the PDS market with major pharmaceutical and chemical companies, specialized contract research organizations, research and development firms, universities and other research institutions. We may also compete with the internal operations of pharmaceutical companies that choose to source PDS internally. We compete primarily on the basis of scientific expertise, knowledge and experience in dosage form development, availability of a broad range of equipment, on-time delivery of clinical materials, compliance with current good manufacturing practices (“cGMPs”), regulatory compliance, cost effective services and financial stability.
Some of our competitors may have substantially greater financial, marketing, technical or other resources than we do. Additional competition may emerge and may, among other things, result in a decrease in the fees paid for our services.
One of the many factors affecting competition is the current excess capacity within the pharmaceutical industry of facilities capable of manufacturing drugs in solid and semi-solid dosage forms. Thus, customers currently have a wide range of supply alternatives for these dosage forms. Another factor causing increased competition is that a number of companies in Asia, particularly India, have been entering the CMO and PDS sectors over the past few years, have begun obtaining approval from the U.S. Food and Drug Administration (the “FDA”) for certain of their plants and have acquired additional plants in Europe and North America. One or more of these companies may become a significant competitor to us.
Employees
As of November 30, 2011, we had approximately 3,900 employees. National works councils are active at all of our facilities in the United Kingdom, France and Italy consistent with local labor laws. There is no union representation at any of our North American sites. Our management believes that we generally have a good relationship with our employees around the world and the works councils that represent a portion of our European employee base.
Intellectual Property
We rely on a combination of trademark, patent, trade secret and other intellectual property laws of the United States and other countries. We have applied in the United States and in certain foreign countries for registration of a limited number of trademarks and patents, some of which have been registered or issued. Also, many of the formulations used by us in manufacturing products to customer specifications are subject to patents or other intellectual property rights owned by or licensed to the relevant customer. Further, we rely on non-disclosure agreements and other contractual provisions to protect our intellectual property rights and typically enter into mutual confidentiality agreements with customers that own or are licensed users of patented formulations.

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We have developed and continue to develop knowledge and expertise (“know-how”) and trade secrets in the provision of services in both our PDS and CMO businesses. Our know-how and trade secrets may not be patentable, but they are valuable in that they enhance our ability to provide high-quality services to our customers.
To the extent that we determine that certain aspects of the service provided by our CMO and PDS businesses are innovative and patentable, we have filed and pursued, and plan to continue to file and pursue, patent applications to protect such inventions, as well as applications for registration of other intellectual property rights, as appropriate. However, we do not consider any particular patent, trademark, license, franchise or concession to be material to our overall business.
Regulatory Matters
We are required to comply with the regulatory requirements of various local, state, provincial, national and international regulatory bodies having jurisdiction in the countries or localities where we manufacture products or where our customers' products are distributed. In particular, we are subject to laws and regulations concerning research and development, testing, manufacturing processes, equipment and facilities, including compliance with cGMPs, labeling and distribution, import and export, and product registration and listing. As a result, most of our facilities are subject to regulation by the FDA, as well as regulatory bodies of other jurisdictions, such as the European Medicines Agency of the European Union (“EMA”) and/or the National Health Surveillance Agency in Brazil (“Anvisa”), depending on the countries in which our customers market and sell the products we manufacture and/or package on their behalf. We are also required to comply with environmental, health and safety laws and regulations, as discussed in “Environmental Matters” below. These regulatory requirements impact many aspects of our operations, including manufacturing, developing, labeling, packaging, storage, distribution, import and export and record keeping related to customers' products. Noncompliance with any applicable regulatory requirements can result in government refusal to approve (i) facilities for testing or manufacturing products or (ii) products for commercialization. The FDA and other regulatory agencies can delay, limit or deny approval for many reasons, including:

Changes to the regulatory approval process, including new data requirements, for product candidates in those jurisdictions, including the United States, in which we or our customers may be seeking approval;
A product candidate may not be deemed to be safe or effective;
The ability of the regulatory agency to provide timely responses as a result of its resource constraints; and
The manufacturing processes or facilities may not meet the applicable requirements.
 
In addition, if new legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we may be required to obtain additional approvals or operate according to different manufacturing or operating standards or pay additional product or establishment user fees. This may require a change in our research and development and manufacturing techniques or additional capital investments in our facilities.
Our pharmaceutical development and manufacturing projects generally involve products that must undergo pre-clinical and clinical evaluations relating to product safety and efficacy before they are approved as commercial therapeutic products. The regulatory authorities having jurisdiction in the countries in which our customers intend to market their products may delay or put on hold clinical trials, delay approval of a product or determine that the product is not approvable. The FDA or other regulatory agencies can delay approval of a drug if our manufacturing facility is not able to demonstrate compliance with cGMPs, pass other aspects of pre-approval inspections (i.e compliance with filed submissions) or properly scale up to produce commercial supplies. The FDA and comparable government authorities having jurisdiction in the countries in which our customers intend to market their products have the authority to withdraw product approval or suspend manufacture if there are significant problems with raw materials or supplies, quality control and assurance or the product is deemed adulterated or misbranded.
Some of our manufactured products are listed as controlled substances. Controlled substances are those products that present a risk of substance abuse. In the United States, these types of products are classified by the U.S. Drug Enforcement Agency (the “DEA”) as Schedule II, III, and IV substances under the Controlled Substances Act of 1970. The DEA classifies substances as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Scheduled substances are subject to DEA regulations relating to manufacturing, storage, distribution, import and export and physician prescription procedures. For example, scheduled drugs are subject to distribution limits and a higher level of recordkeeping requirements. Furthermore, the total amount of controlled substances for manufacture or commercial distribution is limited by the DEA and allocated through quotas. Our quotas or our customers' quotas, if any, may not be sufficient to meet commercial demand or to economically produce the product.
Entities must be registered annually with the DEA to manufacture, distribute, dispense, import, export and conduct research using controlled substances. State controlled substance laws also require registration for similar activities. In addition,

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the DEA requires entities handling controlled substances to maintain records, file reports, follow specific labeling and packaging requirements and provide appropriate security measures to control against diversion of controlled substances. If we fail to follow these requirements, we may be subject to significant civil and/or criminal penalties and possibly a revocation of one of our DEA registrations.
Products containing controlled substances may generate significant public health and safety issues, and in such instances, federal or state authorities can withdraw or limit the marketing rights or regulatory approvals for these products. For some scheduled substances, the FDA may require us or our customers to develop product attributes or a risk evaluation and mitigation strategy to reduce the inappropriate use of the products, including the manner in which they are marketed and sold, so as to reduce the risk of diversion or abuse of the product. Developing such a program may be time-consuming and could delay approval of product candidates containing controlled substances. Such a program or delays of any approval from the FDA could adversely affect our business, results of operations and financial condition.
Audits are an important means by which prospective and existing customers gain confidence that our operations are conducted in accordance with applicable regulatory requirements. In fiscal 2011, our facilities and development centers were audited by 186 separate customer audit teams, representing both prospective and existing customers. These audits contribute to our ongoing improvement of our manufacturing and development practices. In addition to customer audits, we, like all commercial drug manufacturers, are subject to audits by various regulatory authorities. In fiscal 2011, 23 such audits by regulatory authorities were conducted at our sites in North America and Europe, involving multiple products. Responses to audit observations were submitted to address observations noted. We have yet to receive feedback from most of the inspections conducted in the third and fourth quarters of fiscal 2011. It is not unusual for regulatory agencies or customers to request further clarification and/or follow-up on the responses we provide.
Environmental Matters
Our operations are subject to a variety of environmental, health and safety laws and regulations in each of the jurisdictions in which we operate. These laws and regulations govern, among other things, air emissions, wastewater discharges, the handling and disposal of hazardous substances and wastes, soil and groundwater contamination and employee health and safety. We are also subject to laws and regulations governing the destruction and disposal of raw materials and non-compliant products, the handling of regulated material that is included in our offerings and the disposal of our offerings at the end of their useful life. These laws and regulations have increasingly become more stringent, and we may incur additional expenses to ensure compliance with existing or new requirements in the future. Any failure by us to comply with environmental, health and safety requirements could result in the limitation or suspension of our operations. We also could incur monetary fines, civil or criminal sanctions, third-party claims or cleanup or other costs as a result of violations of or liabilities under such requirements. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly pollution control equipment, incur other significant expenses or modify our manufacturing processes.
Our manufacturing facilities, in varying degrees, use, store and dispose of hazardous substances in connection with their processes. At some of our facilities, these substances are stored in underground storage tanks or used in refrigeration systems. Some of our facilities, including those in Puerto Rico, have been utilized over a period of years as manufacturing facilities, with operations that may have included on-site landfill or other waste disposal activities and have certain known or potential conditions that may require remediation in the future, and several of these have undergone remediation activities in the past by former owners or operators. Some of our facilities are located near third-party industrial sites and may be impacted by contamination migrating from such sites. A number of our facilities use groundwater from onsite wells for process and potable water, and if these onsite sources became contaminated or otherwise unavailable for future use, we could incur expenses for obtaining water from alternative sources. In addition, our operations have grown through acquisitions, and it is possible that facilities that we have acquired may expose us to environmental liabilities associated with historical site conditions that have not yet been discovered. Some environmental laws impose liability for contamination on current and former owners and operators of affected sites, regardless of fault. If remediation costs or potential claims for personal injury or property or natural resource damages resulting from contamination arise, they may be material and may not be recoverable under any contractual indemnity or otherwise from prior owners or operators or any insurance policy. Additionally, we may not be able to successfully enforce any such indemnity or insurance policy in the future. In the event that new or previously unknown contamination is discovered or new cleanup obligations are otherwise imposed at any of our currently or previously owned or operated facilities, we may be required to take additional, unplanned remedial measures and record charges for which no reserves have been recorded.
Seasonality
Revenues from some of our CMO and PDS operations have traditionally been lower in our first fiscal quarter, being the

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three months ending January 31. We attribute this trend to several factors, including (i) the reassessment by many customers of their need for additional product in the last quarter of the calendar year in order to use existing inventories of products; (ii) the lower production of seasonal cough and cold remedies in the first fiscal quarter; (iii) limited project activity towards the end of the calendar year by many small pharmaceutical and biotechnology customers involved in PDS projects in order to reassess progress on their projects and manage cash resources; and (iv) the Patheon-wide facility shutdown during a portion of the traditional holiday period in December and January. In addition, we expect revenues in the first half of fiscal 2012 to be lower than in the first half of fiscal 2011, due to the impact in fiscal 2011 of $50.4 million in reservation fees and deferred revenue amortization from the amended manufacturing and supply agreement in the United Kingdom.
Research and Development
We have not spent any material amount in the last three fiscal years on company-sponsored research and development activities.

Item 1A.
Risk Factors.
Risks Related to Our Business and Industry
We are dependent on our customers’ spending on and demand for our manufacturing and development services. A reduction in spending or demand could have a material adverse effect on our business.
The amount of customer spending on pharmaceutical development and manufacturing, particularly the amount our customers choose to spend on outsourcing these services, has a large impact on our sales and profitability. Consolidation in the pharmaceutical industry may impact such spending as customers integrate acquired operations, including research and development departments and manufacturing operations.
Many of our customers finance their research and development spending from private and public sources. We have experienced slowdowns in our customers’ spending on pharmaceutical development and related services, which we believe have been primarily due to the lack or decreased availability of capital for specialty and emerging pharmaceutical companies and the consolidation within the pharmaceutical industry, which resulted in the postponement of certain projects. Any reduction in customer and potential customer spending on pharmaceutical development and related services may have a material adverse effect on our business, results of operations and financial condition.
Furthermore, demand for our CMO segment is driven, in part, by products we bring to market for our PDS customers. Due to the long lead times associated with obtaining regulatory approvals for many of these products, particularly dosage forms, and the competitive advantage that can come from gaining early approval, it is important that we maintain a sufficiently large portfolio of pharmaceutical products and such products are brought to market on a timely basis. If we experience a reduction in research and development by our customers, the decrease in activity in our PDS segment could also negatively affect activity levels in our CMO business. Any decline in demand for our services may have a material adverse effect on our business, results of operations and financial condition.
The consumers of the products we manufacture for our customers may significantly influence our business, results of operations and financial condition.
We are dependent on demand for the products we manufacture for our customers and have no control or influence over the market demand for our customers’ products. Demand for our customers’ products can be adversely affected by, among other things, delays in health regulatory approval, the loss of patent and other intellectual property rights protection, the emergence of competing products, including generic drugs, the degree to which private and government drug plans subsidize payment for a particular product and changes in the marketing strategies for such products.
If the products we manufacture for our customers do not gain market acceptance, our revenues and profitability will be adversely affected. The degree of market acceptance of our customers’ products will depend on a number of factors, including:
the ability of our customers to publicly establish and demonstrate the efficacy and safety of such products, including compared to competing products;
the costs to potential consumers of using such products; and
marketing and distribution support for such products.
If production volumes of key products that we manufacture for our customers and related revenues are not maintained, it may have a material adverse effect on our business, results of operations and financial condition. Additionally, any changes in product mix due to market acceptance of our customers’ products may adversely affect our margins.


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Our services and offerings are highly complex, and if we are unable to provide quality and timely offerings to our customers, our business could suffer.
The services we offer are highly exacting and complex, due in part to strict regulatory requirements. A failure of our quality control systems in our business units and facilities could cause problems to arise in connection with facility operations or during preparation or provision of products, in both cases, for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials or environmental factors. Such problems could affect production of a particular batch or series of batches, requiring the destruction of products, or could halt facility production altogether. In addition, our failure to meet required quality standards may result in our failure to timely deliver products to our customers, which in turn could damage our reputation for quality and service. Any such incident could, among other things, lead to increased costs, lost revenue, reimbursement to customers for lost APIs, damage to and possibly termination of existing customer relationships, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products. If problems are not discovered before the product is released to the market, we may be subject to regulatory actions, including product recalls, product seizures, injunctions to halt manufacture and distribution, restrictions on our operations, civil sanctions, including monetary sanctions, and criminal actions. In addition, such issues could subject us to litigation, the cost of which could be significant.
Our PDS projects are typically for a shorter term than our CMO projects, and any failure by us to maintain a high volume of PDS projects, including due to lower than expected success rates of the products for which we provide services, could adversely affect our business, results of operations and financial condition.
Unlike our CMO segment, where our contracts are typically multi-year in duration, our PDS segment contracts are generally shorter in term and typically require us to provide development services within a designated scope. Since our PDS business focuses on products that are still in the developmental stages, the viability of many of our PDS projects is not certain. As a result, many of these projects fail to progress to the subsequent development phase. Even if a customer wishes to proceed with a project, the product we are developing on its behalf may fail to receive necessary regulatory approval, or other factors, such as the development of a competing product, may hinder the development of the product.
If we are unable to continue to obtain new projects from existing and new customers, our PDS segment could be adversely affected. Furthermore, although our PDS business acts as a pipeline for our CMO segment, we cannot predict the turnover rate of our PDS projects or how successful we will be in winning new projects that lead to a viable product. As such, an increase in the turnover rate of our PDS projects may negatively affect our CMO segment at a later time. In addition, the discontinuation of a project as a result of our failure to satisfy a customer’s requirements may also affect our ability to obtain future projects from the customer involved or from new customers.
Continued volatility and disruption to the global capital and credit markets and the global economy have adversely affected, and may continue to adversely affect, our business and results of operations and have adversely affected, and may continue to adversely affect, our customers and suppliers.
In recent years, the global capital and credit markets and the global economy have experienced a period of significant uncertainty, characterized by the bankruptcy, failure, collapse or sale of various financial institutions and a considerable level of intervention from governments around the world. These conditions have adversely affected the demand for our products and services, which has negatively affected our business and results of operations. In addition, interest rate fluctuations, financial market volatility or credit market disruptions may limit our access to capital, and may also negatively affect our customers’ and our suppliers’ ability to obtain credit to finance their businesses on acceptable terms or at all. As a result, customers’ need for and ability to purchase our products or services may decrease. For example, certain of our customers have decreased their research and development spending due to their lack of access to capital. In addition, lack of access to capital may cause our suppliers to increase their prices, reduce their output or change their terms of sale. If our customers’ or suppliers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, our customers may not be able to pay, or may delay payment of, accounts receivable owed to us, and our suppliers may restrict credit or impose different payment terms. Any inability of our customers to pay us for our products and services or any demands by suppliers for different payment terms may adversely affect our earnings and cash flow.
As the contraction of the global capital and credit markets has spread throughout the broader economy, the United States and other major markets around the world have experienced very weak or negative economic growth. These recessionary conditions have impacted, and will continue to impact, consumer demand for the products we manufacture for our customers.

Our operations outside the United States and Canada are subject to a number of economic, political and regulatory risks.

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We are an international company incorporated and listed in Canada with facilities and offices in seven countries. In fiscal 2011, we provided services to customers in approximately 60 countries, and nearly half of our revenues were attributable to customers outside the United States and Canada. Our operations outside the United States and Canada could be substantially affected by foreign economic, political and regulatory risks. These risks include:
fluctuations in currency exchange rates;
the difficulty of enforcing agreements and collecting receivables through some foreign legal systems;
customers in some foreign countries potentially having longer payment cycles;
changes in local tax laws, tax rates in some countries that may exceed those of Canada or the United States and lower earnings due to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;
seasonal reductions in business activity;
the credit risk of local customers and distributors;
general economic and political conditions;
unexpected changes in legal, regulatory or tax requirements;
relationships with labor unions and works councils;
the difficulties associated with managing a large global organization;
the risk that certain governments may adopt regulations or take other actions that would have a direct or indirect adverse impact on our business and market opportunities, including nationalization of private enterprise;
non-compliance with applicable currency exchange control regulations, transfer pricing regulations or other similar regulations; and
violations of the Foreign Corrupt Practices Act by acts of agents and other intermediaries whom we have limited or no ability to control.
If any of these economic or political risks materialize and we have failed to anticipate and effectively manage them, we may experience adverse effects on our business and results of operations. Additionally, if we do not remain in compliance with current regulatory requirements or fail to comply with future regulatory requirements, then such non-compliance may subject us to liability and have a material adverse effect on our business and results of operations.

Fluctuations in exchange rates could have a material adverse effect on our results of operations and financial performance.
Our most significant transaction exposures arise in our Canadian operations. Prior to the refinancing in the second quarter of the year ended October 31, 2010 ("fiscal 2010"), the balance sheet of our Canadian division included U.S. dollar denominated debt which was designated as a hedge against our investments in subsidiaries in the United States and Puerto Rico. The foreign exchange gains and losses related to the effective portion of this hedge were recorded in other comprehensive income. In the third quarter of fiscal 2010, we changed the functional currency of our corporate division in Canada to U.S. dollars, thereby eliminating the need to designate this U.S. dollar denominated debt as a hedge. In addition, approximately 90% of the revenues of the Canadian operations and approximately 10% of its operating expenses are transacted in U.S. dollars. As a result, we may experience transaction exposures because of volatility in the exchange rate between the Canadian and U.S. dollar. Based on our current U.S. denominated net inflows, as of October 31, 2011, fluctuations of +/-10% would, everything else being equal, have an annual effect on loss from continuing operations before taxes of approximately +/- $12.4 million, prior to hedging activities.
The objective of our foreign exchange risk management activities is to minimize transaction exposures and the resulting volatility of our earnings. To mitigate exchange-rate risk, we utilize foreign exchange forward contracts and collars in certain circumstances to lock in exchange rates with the objective that the gain or loss on the forward contracts and collars will approximately offset the loss or gain that results from the transaction or transactions being hedged. As of October 31, 2011, we had entered into foreign exchange forward contracts and collars to cover approximately 80% of our Canadian-U.S. dollar cash flow exposures for fiscal 2011.
Translation gains and losses related to certain foreign currency denominated intercompany loans are included as part of

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the net investment in certain foreign subsidiaries and are included in accumulated other comprehensive income in shareholders’ equity. We do not currently hedge translation exposures.
While we attempt to mitigate our foreign exchange risk by engaging in foreign currency hedging activities using derivative financial instruments, we may not be successful. We may not be able to engage in hedging transactions in the future, and if we do, we may not be able to eliminate foreign currency risk, and foreign currency fluctuations may have a material adverse effect on our results of operations and financial performance.
We are, or may be, party to certain derivative financial instruments, and our results of operations may be negatively affected in the event of non-performance by the counterparties to such instruments.
From time to time, we enter into interest rate swaps and foreign exchange forward contracts and collars to limit our exposure to changes in variable interest rates and foreign exchange rates. When we enter into such swaps and contracts, we are exposed to credit-related losses, which could impact our results of operations and financial condition in the event of non-performance by the counterparties to such instruments. For more information about our foreign currency risks, please see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Because a significant portion of our revenues comes from a limited number of customers, any decrease in sales to these customers could harm our business, results of operations and financial condition.
In fiscal 2011, our top 20 customers in our CMO segment accounted for approximately 79% of our CMO revenues. This customer concentration increases credit risk and other risks associated with particular customers and particular products, including risks related to market demand for customer products and regulatory and other operating risks. Disruptions in the production of major products could damage our customer relationships and adversely impact our results of operations in the future. Revenues from customers that have accounted for significant sales in the past, either individually or as a group, may not reach or exceed historical levels in any future period. The loss or a significant reduction of business from any of our major customers may have a material adverse effect on our business, results of operations and financial condition.
We operate in highly competitive markets and competition may adversely affect our business.
We operate in a market that is highly competitive. We compete to provide CMO and PDS to pharmaceutical companies around the world.
Our competition in the CMO market includes full-service pharmaceutical outsourcing companies; contract manufacturers focusing on a limited number of dosage forms; contract manufacturers providing multiple dosage forms; and large pharmaceutical companies offering third-party manufacturing services to fill their excess capacity. In addition, in Europe, there are a large number of privately owned, dedicated outsourcing companies that serve only their local or national markets. Also, large pharmaceutical companies have been seeking to divest portions of their manufacturing capacity, and any such divested businesses may compete with us in the future. We compete primarily on the basis of the security of supply (quality, regulatory compliance and financial stability), service (on-time delivery and manufacturing flexibility) and cost-effective manufacturing (prices and a commitment to continuous improvement).
Our competition in the PDS market includes a large number of laboratories that offer only a limited range of developmental services, generally at a small scale; providers focused on specific technologies and/or dosage forms; and a few fully integrated companies that can provide the full complement of services necessary to develop, scale-up and manufacture a wide range of dosage forms. We also compete in the PDS market with major pharmaceutical and chemical companies, specialized contract research organizations, research and development firms, universities and other research institutions. We may also compete with the internal operations of pharmaceutical companies that choose to source PDS services internally. We compete primarily on the basis of scientific expertise, knowledge and experience in dosage form development, availability of a broad range of equipment, on-time delivery of clinical materials, compliance with cGMPs, regulatory compliance, cost effective services and financial stability.
Some of our competitors may have substantially greater financial, marketing, technical or other resources than we do. Additional competition may emerge and may, among other things, result in a decrease in the fees paid for our services, which would affect our results of operations and financial condition.
One of the many factors affecting competition is the current excess capacity within the pharmaceutical industry of facilities capable of manufacturing drugs in solid and semi-solid dosage forms. Thus, customers currently have a wide range of supply alternatives for these dosage forms. Another factor causing increased competition is that a number of companies in Asia, particularly India, that have been entering the CMO and PDS sectors over the past few years, have begun obtaining approval from the FDA for certain of their plants and have acquired additional plants in Europe and North America. One or more of

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these companies may become a significant competitor to us. Competition may mean lower prices and reduced demand for CMO and PDS, which could have an adverse effect on our business, results of operations and financial condition.
We may not be able to successfully offer new services.
In order to successfully compete, we will need to offer and develop new services. The related development costs may require a substantial investment, and we may not have the financial resources to fund such initiatives.
In addition, the success of enhanced or new services will depend on several factors, including our ability to:
properly anticipate and satisfy customer needs, including increasing demand for lower cost services;
enhance, innovate, develop and manufacture new offerings in an economical and timely manner;
differentiate our offerings from competitors’ offerings;
meet quality requirements and other regulatory requirements of government agencies;
obtain valid and enforceable intellectual property rights; and
avoid infringing the proprietary rights of third parties.
Even if we were to succeed in creating enhanced or new services, those services may not produce revenues in excess of the costs of development and capital investment and may be quickly rendered obsolete by changing customer preferences or by technologies or features offered by our competitors. In addition, innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice, the need for regulatory clearance and uncertainty over third-party reimbursement.
We rely on our customers to supply many of the necessary ingredients for our products, and for other ingredients, we rely on other third parties. Our inability to obtain the necessary materials or ingredients for the products we manufacture on behalf of our customers may adversely impact our business, results of operations and financial condition.
Our operations require various APIs, components, compounds and raw materials supplied primarily by third parties, including our customers. Our customers specify the components, raw materials and packaging materials required for their products and, in some cases, specify the suppliers from which we must purchase these inputs. In most cases, the customers supply the APIs to us at no cost pursuant to our standard services agreements.
We generally source our components, compounds and raw materials locally, and most of the materials required by us for our CMO business are readily available from multiple sources.
In some cases, we manage the supply chain for our customers, including the sourcing of certain ingredients and packaging material from third-party suppliers. In certain instances, such ingredients or packaging material can only be supplied by a limited number of suppliers or in limited quantities. If our customers or third-party suppliers do not supply API or other raw materials on a timely basis, we may be unable to manufacture products for our customers. Although no one product or customer is material to our operations, a sustained disruption in the supply chain involving multiple customers or vendors at one time could have a material adverse effect on our results of operations.
Furthermore, customers or third-party suppliers may fail to provide us with raw materials and other components that meet the qualifications and standards required by us or our customers. If third-party suppliers are not able to provide us with products that meet our or our customers’ specifications on a timely basis, we may be unable to manufacture products, or products may be available only at a higher cost or after a long delay, which could prevent us from delivering products to our customers within required timeframes. Any such delay in delivering our products may create liability for us to our customers for breach of contract or cause us to experience order cancellations and loss of customers. In the event that we produce products with inferior quality components and raw materials, we may become subject to product liability or warranty claims caused by defective raw materials or components from a third-party supplier or from a customer, or our customer may be required to recall its products from the market.
It is also possible that any of our supplier relationships could be interrupted due to natural disasters, international supply disruptions caused by geopolitical issues or other events or could be terminated in the future. Any sustained interruption in our receipt of adequate supplies could have an adverse effect on our business and financial results. In addition, while we have supply chain processes intended to reduce volatility in component and material pricing, we may not be able to successfully manage price fluctuations. Price fluctuations or shortages may have an adverse effect on our results of operations and financial condition.
Technological change may cause our offerings to become obsolete over time. If customers decrease their purchases of

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our offerings, our business, results of operations and financial condition may be adversely affected.
The healthcare industry is characterized by rapid technological change. Demand for our services may change in ways that we may not anticipate because of evolving industry standards or as a result of evolving customer needs that are increasingly sophisticated and varied or because of the introduction by competitors of new services and technologies. Any such decreased demand may adversely affect our business, results of operations and financial condition.
We are dependent on key management, scientific and technical personnel.
We are dependent upon the continued support and involvement of our key management, scientific and technical personnel, the majority of whom have employment agreements with us that impose noncompetition and nonsolicitation restrictions following cessation of employment. Because our ability to manage our business activities and, hence, our success depend in large part on the collective efforts of such personnel, our inability to continue to attract and retain such personnel could have a material adverse effect on our business.
Certain of our pension plans are underfunded, and additional cash contributions may be required, which may reduce the cash available for our business.
Certain of our employees in Canada, France and the United Kingdom are participants in defined benefit pension plans that we sponsor. As of October 31, 2011, the unfunded pension liability on our pension plans was approximately $30.6 million in the aggregate. The amount of future contributions to our defined benefit plans will depend upon asset returns and a number of other factors and, as a result, the amounts we will be required to contribute to such plans in the future may vary. Such cash contributions to the plans will reduce the cash available for our business.
In relation to our U.K. pension plan, the trustees are authorized to accelerate the required payment of future contribution obligations if they have received actuarial advice that the plan is incapable of paying all the benefits that have or will become due for payment as they become due. If the trustees of our U.K. pension plan were to be so advised and took such a step, our U.K. subsidiary would be required to meet the full balance of the cost of securing the benefits provided by the plan through the purchase of annuities from an insurance company, to the extent that it was able to do so. The cost would be likely to exceed the amount of any deficit under the plan while the plan was ongoing.
Any failure of our information systems, such as from data corruption, cyber-based attacks or network security breaches, could adversely affect our business and results of operations.
We rely on information systems in our business to obtain, rapidly process, analyze and manage data to:

facilitate the manufacture and distribution of thousands of inventory items to and from our facilities;
receive, process and ship orders on a timely basis;
manage the accurate billing of, and collections from, our customers;
manage the accurate accounting for, and payment to, our vendors; and
schedule and operate our global network of manufacturing and development facilities.
 
Security breaches of this infrastructure can create system disruptions, shutdowns or unauthorized disclosure of confidential information. If we are unable to prevent such breaches, our operations could be disrupted, or we may suffer financial damage or loss because of lost or misappropriated information. We cannot be certain that advances in criminal capabilities, new discoveries in the field of cryptography or other developments will not compromise or breach the technology protecting the networks that access our products and services. If these systems are interrupted, damaged by unforeseen events or fail for any extended period of time, including due to the actions of third parties, then we may not be able to effectively manage our business, and our results of operations could be adversely affected.
From time to time, we may seek to restructure our operations, which may require us to incur restructuring charges, and we may not be able to achieve the cost savings that we expect from any such restructuring efforts.

To improve our profitability, we restructured our Canadian manufacturing operations during fiscal 2008. We also are in the process of restructuring our Puerto Rican operations as part of our efforts to eliminate operating losses and develop a long-term plan for our business. As part of our restructuring efforts, we incurred $7.0 million of restructuring charges during fiscal 2011, including approximately $1.9 million related to our Swindon facility and approximately $1.0 million related to the closure of our Zug offices. We expect to adopt additional restructuring plans in order to improve our operational efficiency.
We may not be able to achieve the level of benefits that we expect to realize from these or any future restructuring

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activities, within expected timeframes, or at all. Furthermore, upon the closure of any facilities in connection with our restructuring efforts, we may not be able to divest such facilities at a fair price or in a timely manner. In addition, as part of any plant closures and the transfer of production to another facility, we are required to obtain the consents of our customers and the relevant regulatory agencies, which we may not be able to obtain. Changes in the amount, timing and character of charges related to our current and future restructurings and the failure to complete or a substantial delay in completing our current and any future restructuring plan could have a material adverse effect on our business.
We may in the future engage in acquisitions and joint ventures and may divest non-strategic businesses or assets. We may not be able to complete such transactions, and such transactions, if executed, pose significant risks.
Our future success may depend on our ability to acquire other businesses or technologies or enter into joint ventures that could complement, enhance or expand our current business or offerings and services or that might otherwise offer us growth opportunities. We may face competition from other companies in pursuing acquisitions and joint ventures. Our ability to enter into such transactions may also be limited by applicable antitrust laws and other regulations in the United States, Canada and foreign jurisdictions in which we do business. We may not be able to complete such transactions for reasons including, but not limited to, a failure to secure financing. Any transactions that we are able to identify and complete may involve a number of risks, including:
the diversion of management’s attention to negotiate the transaction and then integrate the acquired businesses or joint ventures;
the possible adverse effects on our operating results during the negotiation and integration process;
significant costs, charges or writedowns;
the potential loss of customers or employees of the acquired business; and
our potential inability to achieve our intended objectives for the transaction.
In addition, we may be unable to maintain uniform standards, controls, procedures and policies with respect to the acquired business, and this may lead to operational inefficiencies. To the extent that we are successful in making acquisitions, we may have to expend substantial amounts of cash, incur debt and assume loss-making divisions.
We may also seek to sell some of our assets in connection with the divestiture of a non-strategic business or as part of internal restructuring efforts. In September 2011, we announced that we would be considering strategic alternatives for the Swindon U.K. commercial business and the Burlington, Ontario clinical packaging operation. To the extent that we are not successful in completing such divestitures or restructuring efforts, we may have to expend substantial amounts of cash, incur debt and continue to absorb loss-making or under-performing divisions. Any divestitures that we are unable to complete may involve a number of risks, including diversion of management’s attention, a negative impact on our customer relationships, costs associated with retaining the targeted divestiture, closing and disposing of the impacted business or transferring business to other facilities. Furthermore, our ability to initiate and complete such transactions may be hindered by our Investor Agreement (the “Investor Agreement”) with JLL Patheon Holdings. For example, under the terms of the Investor Agreement, we need majority independent director approval to engage in certain types of transactions.
JLL has significant influence over our business and affairs, and its interests may differ from ours and those of our other shareholders.
As of October 31, 2011, JLL owned an aggregate of 72,077,781 restricted voting shares, representing approximately 56% of our total restricted voting shares outstanding. JLL Patheon Holdings also owns an aggregate of 150,000 special voting Class I, Preferred Shares, Series D (“Series D Preferred Shares”), pursuant to which it is entitled to elect up to three of our directors based on the number of restricted voting shares that it holds.
In addition, in connection with the investment by JLL Patheon Holdings in our shares, on April 27, 2007, we entered into the Investor Agreement.
Under the Investor Agreement, we currently are required to seek the approval of JLL Patheon Holdings before we undertake certain actions, including share issuances, the payment of dividends, share repurchases, any merger, consolidation or sale of all or substantially all of our assets or a similar business combination transaction and the incurrence of certain indebtedness in excess of $20.0 million.
JLL exercises significant influence over us as a result of its majority shareholder position, voting rights, board appointment rights and its rights under the Investor Agreement. As a result, JLL has significant influence over our decisions to enter into corporate transactions and has the ability to prevent any transaction that requires shareholder approval. This

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concentration of ownership and JLL's rights may prevent a change of control of us that might be considered to be in the interests of shareholders or other stakeholders. In addition, if we are unable to obtain requisite approvals from JLL, we may be prevented from executing critical elements of our business strategy.
Our stock price is volatile and could experience substantial declines.
The market price of our common stock has historically experienced, and may continue to experience, substantial volatility. Such volatility has resulted or may result from fluctuations in our quarterly operating results or anticipated future results, changes in general conditions in the economy or the financial markets, which both experienced uncertainty in fiscal 2010 and fiscal 2011 due to the effects of the global financial crisis, and other developments affecting us or our competitors. Some of these factors are beyond our control, such as changes in revenue and earnings estimates by analysts, market conditions within our industry, disclosures by product development partners and actions by regulatory authorities with respect to potential drug candidates and changes in pharmaceutical and biotechnology industries and the government sponsored clinical research sector. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. The stock market, and in particular the market for pharmaceutical and biotechnology company stocks, has also experienced significant decreases in value in the past. This volatility and valuation decline have affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and might adversely affect the price of our common stock.
Our shareholders might have difficulty enforcing U.S. judgments against us, enforcing U.S. judgments in a Canadian court or bringing an original action in Canada to enforce liabilities based upon U.S. federal securities laws.
We are a corporation organized under the Canada Business Corporations Act, and some of our directors and officers reside principally outside of the United States. As a result, it may not be possible for our shareholders to enforce judgments obtained in U.S. courts against us or them within the United States because a substantial portion of our assets and the assets of these persons are located outside the United States. In addition, a Canadian court may not agree to recognize and enforce a judgment of a U.S. court. Accordingly, even if a shareholder obtains a favorable judgment in a U.S. court, he, she or it may be required to re-litigate the claim in other jurisdictions. In addition, it is possible that a Canadian court would not take jurisdiction over a matter involving a claim based on foreign laws, such as the federal securities laws of the United States.

Failure to implement our new corporate strategy or realize the expected benefits from this strategy could adversely affect our business and results of operations.
In September 2011, our Board reviewed and approved a new corporate strategy for our company that is focused on improving the performance of our core operations. This new corporate strategy includes, among other things, assessing our global footprint, accelerating our operational excellence programs for our CMO and PDS segments, and continuing the evolution of our existing commercial sites into centers of excellence that focus on specific technologies or production types.
We have incurred and will likely continue to incur expenses in connection with the design, review and implementation of our new corporate strategy, and these expenses may exceed our estimates, may be significant and could materially adversely impact our financial performance.
We have based the design of our new corporate strategy on certain assumptions regarding our business, markets, cost structures and customers. If our assumptions are incorrect, we may be unable to fully implement our new corporate strategy and, even if fully implemented, our new corporate strategy may not yield the benefits that we expect. For example, our new corporate strategy may involve the acquisition or disposition of assets, which we may not be able to consummate in a timely manner, on terms acceptable to us or at all, or which may not achieve the benefits or cost savings we anticipate. If we do not effectively manage our new corporate strategy, instead of resulting in growth for and enhanced value to our company, our new strategy may cause us to experience operational issues and expose us to operational and regulatory risk, each of which could have material adverse effects on our reputation, business, financial condition and results of operations.

Risks Relating to Regulatory and Legal Matters
Failure to comply with existing and future regulatory requirements could adversely affect our business, results of operations and financial condition.
Our industry is highly regulated. We are required to comply with the regulatory requirements of various local, state, provincial, national and international regulatory bodies having jurisdiction in the countries or localities in which we manufacture products or in which our customers’ products are distributed. In particular, we are subject to laws and regulations concerning research and development, testing, manufacturing processes, equipment and facilities, including compliance with cGMPs, labeling and distribution, import and export, and product registration and listing. As a result, most of our facilities are subject to regulation by the FDA, as well as regulatory bodies of other jurisdictions such as the EMEA and/or the NHSA,

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depending on the countries in which our customers market and sell the products we manufacture and/or package on their behalf. These regulatory requirements impact many aspects of our operations, including manufacturing, developing, labeling, packaging, storage, distribution, import and export and record keeping related to customers’ products. Noncompliance with any applicable regulatory requirements can result in government refusal to approve (i) facilities for testing or manufacturing products or (ii) products for commercialization. The FDA and other regulatory agencies can delay, limit or deny approval for many reasons, including:
changes to the regulatory approval process, including new data requirements for product candidates in those jurisdictions, including the United States, in which we or our customers may be seeking approval;
that a product candidate may not be deemed to be safe or effective;
the ability of the regulatory agency to provide timely responses as a result of its resource constraints; and
that the manufacturing processes or facilities may not meet the applicable requirements.
Any delay in, or failure to receive, approval for any of our or our customers’ product candidates or the failure to maintain regulatory approval for our or our customers’ products could negatively impact our revenue growth and profitability.
In addition, if new legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we may be required to obtain additional approvals, operate according to different manufacturing or operating standards or pay additional product or establishment user fees. This may require a change in our research and development and manufacturing techniques or additional capital investments in our facilities. Any related costs may be significant. If we fail to comply with applicable regulatory requirements in the future, then we may be subject to warning letters and/or civil or criminal penalties and fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, restrictions on the import and export of our products, debarment, exclusion, disgorgement of profits, operating restrictions and criminal prosecution and the loss of contracts, including government contracts, and resulting revenue losses. Inspections by regulatory authorities that identify any deficiencies could result in remedial actions, production stoppages or facility closure, which would disrupt the manufacturing process and supply of product to our customers. In addition, such failure to comply could expose us to contractual and product liability claims, including claims by customers for reimbursement for lost or damaged APIs or recall or other corrective actions, the cost of which could be significant.
Our pharmaceutical development and manufacturing projects generally involve products that must undergo pre-clinical and clinical evaluations relating to product safety and efficacy before they are approved as commercial therapeutic products. The regulatory authorities having jurisdiction in the countries in which our customers intend to market their products may delay or put on hold clinical trials or delay approval of a product or determine that the product is not approvable. The FDA or other regulatory agencies can delay approval of a drug if our manufacturing facility is not able to demonstrate compliance with cGMPs, pass other aspects of pre-approval inspections or properly scale up to produce commercial supplies. The FDA and comparable government authorities having jurisdiction in the countries in which our customers intend to market their products have the authority to withdraw product approval or suspend manufacture if there are significant problems with raw materials or supplies, quality control and assurance or the product we manufacture is adulterated or misbranded. If our pharmaceutical development projects and their related revenues are not maintained, it could materially adversely affect our results of operations and financial condition.
We are subject to regulatory requirements for controlled substances, which may adversely affect our business or subject us to liabilities if we fail to comply.
Some of our manufactured products are listed as controlled substances. Controlled substances are those products that present a risk of substance abuse. In the United States, these types of products are classified by the by the DEA as Schedule II, III, and IV substances under the Controlled Substances Act of 1970. The DEA classifies substances as Schedule I, II, III, IV or V substances, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest risk. Scheduled substances are subject to DEA regulations relating to manufacturing, storage, distribution, import and export and physician prescription procedures. For example, scheduled drugs are subject to distribution limits and a higher level of recordkeeping requirements. Furthermore, the total amount of controlled substances for manufacture or commercial distribution is limited by the DEA and allocated through quotas, and we or our customers’ quotas, if any, may not be sufficient to meet commercial demand or to economically produce the product.
Entities must be registered annually with the DEA to manufacture, distribute, dispense, import, export and conduct research using controlled substances. State controlled substance laws also require registration for similar activities. In addition, the DEA requires entities handling controlled substances to maintain records, file reports, follow specific labeling and packaging requirements and provide appropriate security measures to control against diversion of controlled substances. In addition, certain of the non-U.S. jurisdictions in which our customers market their products have similar restrictions with

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respect to controlled substances. If we fail to follow these requirements, we may be subject to significant civil and/or criminal penalties and possibly a revocation of a DEA registration.
Products containing controlled substances may generate significant public health and safety issues, and in such instances, federal or state authorities can withdraw or limit the marketing rights or regulatory approvals for these products. For some scheduled substances, the FDA may require us or our customers to develop product attributes or a risk evaluation and mitigation strategy to reduce the inappropriate use of the products, including the manner in which they are marketed and sold, so as to reduce the risk of diversion or abuse of the product. Developing such a program may be time-consuming and could delay approval of any product candidates. Such a program or delays of any approval from the FDA could adversely affect our business, results of operations and financial condition.
Decisions of the governmental agencies that regulate us and our customers may affect the demand for our products and significantly influence our business, results of operations and financial condition.
We are dependent on the ability of our customers to obtain regulatory approval and successfully market and obtain third-party coverage and reimbursement for their products and have no control or influence over the regulatory approval process. Delays in obtaining regulatory approval may have a material impact on our operations since our pharmaceutical development and manufacturing projects often involve products that must undergo safety and clinical evaluations before they are approved as commercial therapeutic products. In recent years, our revenues have been negatively impacted due to delays in the regulatory approval of certain of our customers’ products.
By way of example, on February 7, 2010, a unit of Johnson & Johnson (“J&J”) announced that it received a complete response letter from the FDA regarding an NDA for Ceftobiprole that requested additional information and recommended additional clinical studies before approval. The company originally submitted the application in May 2007, and Ceftobiprole has been approved in Canada and in Switzerland. On June 24, 2010, the Committee for Medicinal Products for Human Use (the “CHMP”), after re-examination, confirmed refusal of Janssen-Cilag International N.V.’s marketing authorization for Ceftobiprole. On September 9, 2010, Basilea Pharmaceutica Ltd. announced that Janssen-Cilag AG, a J&J company, will be discontinuing sale of Ceftobiprole (Zevtera™) for the treatment of complicated skin and soft tissue infections in Switzerland. Janssen-Cilag AG, the holder of the Marketing Authorization in Switzerland, has requested Swissmedic to withdraw the marketing authorization of Zevtera™ and discontinued sale of Zevtera™ as of September 17, 2010. This action was taken based on the unfavorable assessments of the marketing authorization applications for Ceftobiprole in the United States and the European Union. In the first quarter of fiscal 2011, we amended our manufacturing and supply agreement with J&J for Ceftobripole to terminate the agreement two and a half years earlier than was originally planned, which will negatively impact our future revenue streams from J&J for this product.
Since we develop and manufacture products that require regulatory approval, failure to gain all such regulatory approvals in a timely manner may adversely reduce our production levels, which would adversely affect our business, results of operations and financial condition. In the event that regulatory authorities fail to approve the products that we develop and/or manufacture, we may not receive payment from our customers under our contracts.
We are subject to environmental, health and safety laws and regulations, which could subject us to liabilities, increase our costs or restrict our operations in the future.
Our operations are subject to a variety of environmental, health and safety laws and regulations in each of the jurisdictions in which we operate. These laws and regulations govern, among other things, air emissions, wastewater discharges, the handling and disposal of hazardous substances and wastes, soil and groundwater contamination and employee health and safety. We are also subject to laws and regulations governing the destruction and disposal of raw materials and non-compliant products, the handling of regulated material that is included in our offerings and the disposal of our offerings at the end of their useful life. These laws and regulations have increasingly become more stringent, and we may incur additional expenses to ensure compliance with existing or new requirements in the future. Any failure by us to comply with environmental, health and safety requirements could result in the limitation or suspension of our operations. We also could incur monetary fines, civil or criminal sanctions, third-party claims or cleanup or other costs as a result of violations of or liabilities under such requirements. Although we maintain insurance coverage for environmental liabilities in the aggregate amount of $10 million, the costs of environmental remediation and other liabilities may exceed the amount of such coverage or may not be covered by such insurance. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly pollution control equipment, incur other significant expenses or modify our manufacturing processes.
Our manufacturing facilities, in varying degrees, use, store and dispose of hazardous substances in connection with their processes. At some of our facilities, these substances are stored in underground storage tanks or used in refrigeration systems.

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Some of our facilities, including those in Puerto Rico, have been utilized over a period of years as manufacturing facilities, with operations that may have included on-site landfill or other waste disposal activities and have certain known or potential conditions that may require remediation in the future, and several of these have undergone remediation activities in the past by former owners or operators. Some of our facilities are located near third-party industrial sites and may be impacted by contamination migrating from such sites. A number of our facilities use groundwater from onsite wells for process and potable water, and if these onsite sources became contaminated or otherwise unavailable for future use, we could incur expenses for obtaining water from alternative sources. In addition, our operations have grown through acquisitions, and it is possible that facilities that we have acquired may expose us to environmental liabilities associated with historical site conditions that have not yet been discovered. Some environmental laws impose liability for contamination on current and former owners and operators of affected sites, regardless of fault. If remediation costs or potential claims for personal injury or property or natural resource damages resulting from contamination arise, they may be material and may not be recoverable under any contractual indemnity or otherwise from prior owners or operators or any insurance policy. Additionally, we may not be able to successfully enforce any such indemnity or insurance policy in the future. In the event that new or previously unknown contamination is discovered or new cleanup obligations are otherwise imposed at any of our currently or previously owned or operated facilities, we may be required to take additional, unplanned remedial measures and record charges for which no reserves have been recorded.
We are subject to product and other liability risks that could adversely affect our results of operations and financial condition.
We may be named as a defendant in product liability lawsuits, which may allege that products or services we have provided have resulted or could result in an unsafe condition or injury to consumers. We may also be exposed to other liability lawsuits, such as other tort, regulatory or intellectual property claims. Such lawsuits could be costly to defend and could result in reduced sales, significant liabilities and diversion of management’s time, attention and resources. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees.
Historically, we have sought to manage this risk through the combination of product liability insurance and contractual indemnities and liability limitations in our agreements with customers and vendors. We currently maintain insurance coverage for product and other liability claims in the aggregate amount of $75.0 million. If our existing liability insurance is inadequate or we are not able to maintain such insurance, there may be claims asserted against us that are not covered by such insurance. A partially or completely uninsured claim, if successful and of sufficient magnitude, could have a material adverse effect on our results of operations and financial condition.
We and our customers depend on trademarks, patents, trade secrets, copyrights and other forms of intellectual property protections, but these protections may not be adequate.
We rely on a combination of trademark, patent, trade secret and other intellectual property laws in Canada, the United States and other foreign countries. We have applied in Canada, the United States and in certain countries for registration of a limited number of patents and trademarks, some of which have been registered or issued. Our applications may not be approved by the applicable governmental authorities, and third parties may seek to oppose or otherwise challenge our registrations or applications. We also rely on unregistered proprietary rights, including know-how and trade secrets related to our PDS and CMO services. Although we require our employees to enter into confidentiality agreements prohibiting them from disclosing our proprietary information or technology, these agreements may not provide meaningful protection for our trade secrets and proprietary know-how. Further, third parties who are not party to confidentiality agreements may obtain access to our trade secrets or know-how, and others may independently develop similar or equivalent trade secrets or know-how. If our proprietary information is divulged to third parties, including our competitors, or our intellectual property rights are otherwise misappropriated or infringed, our competitive position could be harmed.
If we are unable to protect the confidentiality of our customers’ proprietary information, we may be subject to claims.
Many of the formulations used by us in manufacturing or developing products to customer specifications are subject to trade secret protection, patents or other protections owned or licensed by the relevant customer. We take significant efforts to protect our customer’s proprietary and confidential information, including requiring our employees to enter into agreements protecting such information. If, however, any of our employees breaches the non-disclosure provisions in such agreements, or if our customers make claims that their proprietary information has been disclosed, then our business may be materially adversely impacted.
Our services and our customers’ products may infringe on or misappropriate the intellectual property rights of third parties.
While we believe that our services do not infringe upon in any material respect or misappropriate the proprietary rights of

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other parties and/or that meritorious defenses would exist with respect to any assertions to the contrary, our services may be found to infringe on the proprietary rights of others. Any claims that our services infringe third parties’ rights, including claims arising from our contracts with our customers, regardless of their merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could be required, among other things, to pay substantial damages, license such technology and/or cease the manufacture, use or sale of the infringing processes or offerings, any of which could adversely affect our business.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We are a multinational corporation with global operations. As such, we are subject to the tax laws and regulations of Canadian federal, provincial and local governments, the United States and many international jurisdictions. From time to time, various legislative initiatives may be proposed that could adversely affect our effective tax rate or tax payments. In addition, tax laws and regulations are extremely complex and subject to varying interpretations. If our tax positions are challenged by relevant tax authorities, we may not be successful in defending such a challenge and may experience an adverse impact on our results of operations and financial condition.
Changes in healthcare reimbursement in Canada, the United States or internationally could adversely affect customers’ demand for our services and our results of operations.
The healthcare industry has changed significantly over time, and we expect the industry to continue to evolve. Some of these changes, such as healthcare reform, adverse changes in government funding of healthcare products and services, legislation or regulations governing the privacy of patient information, or the delivery or pricing of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to reduce the amount of our services and products they purchase or the price they are willing to pay for our services and products. For example, the recent passage of healthcare reform legislation in the United States changes laws and regulations governing healthcare service providers and specifically includes certain cost containment measures that may adversely impact some or all of our customers and thus may have an adverse impact on our business. Changes in the healthcare industry’s pricing, selling, inventory, distribution or supply policies or practices could also significantly reduce our revenue and profitability. In particular, volatility in individual product demand may result from changes in public or private payer reimbursement or coverage.

Risks Relating to Our Debt
Our substantial level of indebtedness could adversely affect our financial health.
Our total interest-bearing debt as of October 31, 2011 was $275.7 million. As of October 31, 2011, we had approximately $70.5 million available for additional borrowings under our $75.0 million asset-based revolving credit facility ("ABL") and other lines of credit, taking into account our borrowing base limitations.
Our substantial financial leverage poses risks to us. Debt service requirements in future periods may be higher than in prior years as a result of a number of factors, including increased borrowing and increases in floating interest rates. In addition, we may incur substantial fees from time to time in connection with debt amendments or refinancing. If our cash flow is not sufficient to service our debt and adequately fund our business, we may be required to seek further additional financing or refinancing or dispose of assets. We may not be able to effect any of these alternatives on satisfactory terms or at all. In addition, our financial leverage could adversely affect our ability to raise additional capital to fund our operations, could impair our ability to respond to operational challenges, changing business and economic conditions and new business opportunities and may make us vulnerable in the event of a downturn in our business.
If we fail to satisfy our obligations under our indebtedness or fail to comply with the financial and other restrictive covenants contained in the agreements governing such indebtedness, such failure could result in an event of default in respect of any or all such indebtedness. An event of default under one or more of our material debt instruments could result in all of our indebtedness becoming immediately due and payable and could permit (i) the ABL lenders, (ii) the holders of our $280.0 million, 8.625% senior secured notes, due April 15, 2017 (the "Notes") and (iii) our other secured lenders to foreclose on our assets securing such indebtedness.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us

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to pay the principal and interest on our Notes and our other indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness, including our ABL and Notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. The instruments governing our indebtedness restrict our ability to conduct asset sales and/or use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices and on terms that we believe are fair and any proceeds that we receive may not be adequate to meet all debt service obligations then due. If we cannot meet our debt service obligations, the holders of our debt may accelerate our debt and, to the extent such debt is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our debt.
Our debt agreements contain restrictions that limit our flexibility in operating our business and our ability to raise additional funds.
The agreements that govern the terms of our debt contain, and the agreements that govern our future debt may contain, covenants that restrict our ability and the ability of our subsidiaries to, among other things:
incur additional indebtedness;
issue additional equity;
pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments;
enter into agreements that restrict distributions from subsidiaries or restrict our ability to incur liens on certain of our assets;
make capital expenditures;
sell or otherwise dispose of assets, including capital stock of subsidiaries;
enter into transactions with affiliates;
create or incur liens; and
merge or consolidate.
A breach of the covenants or restrictions under our indebtedness could result in an event of default, which may allow our lenders and note holders to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event our lenders and note holders accelerate the repayment of our indebtedness, we may not have sufficient assets to repay such indebtedness or be able to borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms acceptable to us. As a result of these restrictions, we may be:
limited in how we conduct our business and execute our business strategy;
unable to raise additional debt or equity financing to operate during general economic or business downturns;
unable to compete effectively or to take advantage of new business opportunities; or
insolvent.
These restrictions may affect our ability to grow in accordance with our plans.
The amount of borrowings permitted under the ABL may fluctuate significantly, which may adversely affect our liquidity, results of operations and financial condition.
The amount of borrowings permitted at any time under the ABL is limited to a periodic borrowing base valuation of our and certain of our subsidiaries' eligible inventory and accounts receivable. As a result, our access to credit under the ABL is potentially subject to significant fluctuations depending on the value of the borrowing base eligible assets as of any valuation date and certain discretionary rights of the agent in respect of the calculation of such borrowing base valuation. The inability to borrow under, or the early termination of, the ABL may adversely affect our liquidity, results of operations and financial condition.
Despite our substantial level of indebtedness, we may still be able to incur significant additional amounts of debt, which

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could further exacerbate the risks associated with our substantial debt.
We and our subsidiaries may be able to incur significant additional amounts of debt, including additional secured indebtedness, in the future. The terms of the ABL and Notes restrict, but do not completely prohibit, us from doing so. In addition, our ABL and Notes allow us to issue additional senior secured notes and other indebtedness under certain circumstances and generally do not prevent us from incurring other liabilities that do not constitute indebtedness. If new debt or other liabilities are added to our current debt levels, then the related risks that we and our subsidiaries now face could intensify.


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Item 1B.     Unresolved Staff Comments.

Not applicable.


Item 2.         Properties.
We have a network of nine manufacturing facilities, and eight development centers located in North America and Europe and one clinical packaging facility in North America. The following table provides additional information about our principal manufacturing facilities and development centers:
 
Facility sites
Country
 
Segment
 
Square Feet
 
Owned/Leased
Burlington(1)
Canada
 
PDS
 
45,496

 
Leased
Mississauga
Canada
 
CMO/PDS
 
285,570

 
Owned
Whitby
Canada
 
CMO/PDS
 
233,664

 
Owned
Cincinnati
U.S.
 
CMO/PDS
 
495,700

 
Owned
Caguas
Puerto Rico
 
CMO
 
209,336

 
Owned
Manatí
Puerto Rico
 
CMO
 
546,872

 
Owned
Ferentino
Italy
 
CMO/PDS
 
290,473

 
Owned
Monza
Italy
 
CMO
 
463,229

 
Owned
Milton Park(2)
U.K.
 
PDS
 
13,500

 
Leased
Swindon
U.K.
 
CMO/PDS
 
355,511

 
Owned
Bourgoin-Jallieu
France
 
CMO/PDS
 
355,228

 
Owned
San Francisco
U.S.
 
PDS
 
5,063

 
Leased
 _________________________
(1)
Our Burlington facility is subject to a lease from Klaus Stephan Reeckmann until 2014, with a minimum annual rent of $256,410, based on an average foreign exchange rate of Canadian dollars (“CAD”) to USD for fiscal 2011 of 1.0137.
(2)
Our Milton Park facility is subject to a lease from Lansdown Estates Group Limited until 2020, with a minimum annual rent of $133,000, based on an average foreign exchange rate of British pound sterling to USD for fiscal 2011 of 1.6085.
We also lease facilities in Research Triangle Park, North Carolina (U.S. headquarters), Zug, Switzerland (European headquarters), Mississauga, Canada (regional administration) and Tokyo, Japan (sales office). Our primary facilities are pledged as collateral for the Notes and the ABL. See “Item 7. Management’s Discussion and Analysis—Liquidity and Capital Resources—Financing Arrangements.” We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed.

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Item 3.          Legal Proceedings.
Neither we, nor any of our subsidiaries, are involved in any material pending legal proceeding. Additionally, no such proceedings are known to be contemplated by governmental authorities.


Item 4.         Removed and Reserved
PART II

Item 5.        Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.

Market Information
Our restricted voting shares are traded on the TSX under the trading symbol “PTI.” There is no established public trading market for our shares in the United States. The following table sets forth the reported high and low trading prices (in Canadian dollars) and trading volumes of our restricted voting shares on the TSX for the following periods:
Toronto Stock Exchange
(Canadian $s)
 
 
High
 
Low
Fiscal year ending October 31, 2011:
 
 
 
Quarter ended January 31, 2011
2.45

 
2.03

Quarter ended April 30, 2011
2.74

 
2.27

Quarter ended July 31, 2011
2.33

 
1.80

Quarter ended October 31, 2011
2.03

 
1.33

Fiscal year ended October 31, 2010:
 
 
 
Quarter ended January 31, 2010
2.73

 
2.11

Quarter ended April 30, 2010
2.70

 
2.46

Quarter ended July 31, 2010
2.66

 
2.38

Quarter ended October 31, 2010
2.58

 
2.19

Holders
As of December 15, 2011, there were approximately 539 holders of record of our restricted voting shares. This number does not include beneficial owners for whom shares are held by nominees in street name.
Dividends
We did not pay dividends on our restricted voting shares during fiscal 2011, fiscal 2010 or our fiscal year ended October 31, 2009 (“fiscal 2009”). We currently do not intend to pay cash dividends on our restricted voting shares for the foreseeable future, as we prefer to reinvest our cash to enhance our growth.
Our debt agreements include covenants that limit our ability to pay dividends. See “Note 8—Long-Term Debt” to our consolidated financial statements included in this Form 10-K. The Investor Agreement also prevents us from declaring or paying any dividends without the approval of JLL Patheon Holdings for so long as JLL Patheon Holdings holds 13,306,488 restricted voting shares.

Exchange Controls
There is no law or governmental decree or regulation in Canada that restricts the export or import of capital or affects the remittance of dividends, interest or other payments to non-resident holders of our common stock, other than withholding tax requirements. See “—Certain Canadian Federal Income Tax Considerations.”
There is no limitation imposed by Canadian law or by our articles of amalgamation on the right of a non-resident to hold or vote restricted voting shares, other than as provided by the “Investment Canada Act,” the “North American Free Trade

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Agreement Implementation Act (Canada),” the “World Trade Organization Agreement Implementation Act” and the CBCA, which permits our shareholders, by special resolution, to amend our articles of amalgamation to constrain the issue or transfer of any class or series of our securities to persons who are not residents of Canada in certain limited circumstances.
The Investment Canada Act requires notification and, in certain cases, advance review and approval by the Government of Canada of the acquisition by a “non-Canadian” of “control” of a “Canadian business,” all as defined in the Investment Canada Act. Generally, the threshold for review will be higher in monetary terms for a member of the World Trade Organization or North American Free Trade Agreement.
Taxation
Certain Canadian Federal Income Tax Considerations
The following is a summary of the principal Canadian federal income tax considerations generally applicable to holders of our restricted voting shares who, at all relevant times, for purposes of the Income Tax Act (Canada) (the “Tax Act”) and the Canada-United States Tax Convention (1980) ( the "Canada-U.S. Tax Treaty") (i) are the beneficial owners of such restricted voting shares; (ii) are “qualifying persons” entitled to benefits under the Canada-U.S. Tax Treaty, (iii) are resident in the United States and are neither resident nor deemed to be resident in Canada; (iv) deal at arm's length with, and are not affiliated with, us; (v) hold their restricted voting shares as capital property; (vi) do not use or hold, and are not deemed to use or hold their restricted voting shares in connection with carrying on business in Canada; and (vii) do not hold or use restricted voting shares in connection with a permanent establishment or fixed base in Canada (each, a “U.S. Resident Holder”). Special rules, which are not discussed in this summary, may apply to a U.S. Resident Holder that is an insurer that carries on an insurance business in Canada and elsewhere.
Our restricted voting shares will generally be considered capital property to a U.S. Resident Holder unless either (i) the U.S. Resident Holder holds our restricted voting shares in the course of carrying on a business of buying and selling securities, or (ii) the U.S. Resident Holder has acquired our restricted voting shares in a transaction or transactions considered to be an adventure in the nature of trade.
Limited liability companies (“LLCs”) that are not taxed as corporations pursuant to the provisions of the Code generally do not qualify as resident in the United States and are not “qualified persons” for purposes of the Canada-U.S. Tax Treaty. Under the Canada-U.S. Tax Treaty, a resident of the United States who is a member of such an LLC and is otherwise a “qualified person” eligible for benefits under the Canada-U.S. Tax Treaty may be entitled to claim benefits under the Canada-U.S. Tax Treaty in respect of income, profits or gains derived through the LLC. A U.S. Resident Holder who is a member of an LLC should consult with his, her or its own tax advisors with respect to eligibility for benefits in respect of any income, profits or gains derived through such LLC.  
The Canada-U.S. Tax Treaty includes limitation on benefits rules that restrict the ability of certain persons who are resident in the United States to claim any or all benefits under the Canada-U.S. Tax Treaty. A U.S. Resident Holder should consult his, her or its own tax advisors with respect to his, her or its eligibility for benefits under the Canada-U.S. Tax Treaty, having regard to these rules.
This summary is based on the current provisions of the Canada-U.S. Tax Treaty and the Tax Act, the regulations thereunder (the “Regulations”) and counsel's understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency (the “CRA”) made publicly available prior to the date of this registration statement. This summary also takes into account all specific proposals to amend the Tax Act and the Regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Tax Proposals”), and assumes that all such Tax Proposals will be enacted in the form proposed. There is no assurance that the Tax Proposals will be enacted in their current form, or at all. This summary does not otherwise take into account or anticipate any changes in the law, whether by legislative, governmental or judicial action, or in the CRA's administrative policies or assessing practices.
This summary does not address the tax laws of any province or territory of, or any jurisdiction outside, Canada, which might materially differ from the Canadian federal considerations.
This summary is of a general nature only and not intended to be, nor should it be construed to be, legal or tax advice to any particular U.S. Resident Holder, and no representations concerning the tax consequences to any particular U.S. Resident Holder are made. U.S. Resident Holders should consult their own tax advisers regarding the income tax consequences, arising from and relating to the acquisition, ownership and disposition of our restricted voting shares with respect to their own particular circumstances.


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Currency Conversion
For purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of our restricted voting shares, including interest, dividends, adjusted cost base and proceeds of disposition, must be converted into Canadian dollars based on the relevant exchange rate applicable on the effective date (as determined in accordance with the Tax Act) of the related acquisition, disposition or recognition of income.
Disposition of Restricted Voting Shares
A U.S. Resident Holder will not be subject to tax under the Tax Act in respect of any capital gain (or entitled to deduct any capital loss) realized on a disposition of restricted voting shares unless our restricted voting shares constitute “taxable Canadian property” (as defined in the Tax Act) of the U.S. Resident Holder at the time of disposition and the U.S. Resident Holder is not entitled to relief under the Canada-U.S. Tax Treaty. So long as our restricted voting shares are then listed on a designated stock exchange (which currently includes the TSX), our restricted voting shares will generally not constitute taxable Canadian property of a U.S. Resident Holder.
A U.S. Resident Holder whose restricted voting shares are, or may be considered to be, taxable Canadian property should consult with his, her or its own tax advisors for advice having regard to such holder's particular circumstances.
Dividends
Dividends on restricted voting shares paid or credited, or deemed to be paid or credited, to a U.S. Resident Holder will be subject to a non-resident withholding tax under the Tax Act at a rate of 25%, subject to reduction under the provisions of an applicable tax treaty or convention. Pursuant to the Canada-U.S. Tax Treaty, the rate of withholding tax on dividends paid or credited to a U.S. Resident Holder that is the beneficial owner of such dividends generally is reduced to 15% or, if the U.S. Resident Holder is a corporation that is the beneficial owner of at least 10% of our voting stock, to 5%.  
The Canada-U.S. Tax Treaty generally exempts from Canadian withholding tax dividends paid or credited to (i) a qualifying religious, scientific, literary, educational or charitable organization or (ii) a qualifying trust, company, organization or arrangement constituted and operated exclusively to administer or provide a pension, retirement or employee benefit fund or plan, if such organization or qualifying trust, company or arrangement is a resident of the United States and is exempt from income tax under the laws of the United States.
HOLDERS OF RESTRICTED VOTING SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF RESTRICTED VOTING SHARES.
Recent Sales of Unregistered Securities.
The following securities were sold by us during fiscal 2011 and were not registered under the Securities Act.
Between November 1, 2010 and April 26, 2011, when our registration statement on Form 10 became effective, we issued options to purchase 5,042,000 restricted voting shares with an aggregate exercise price of $2.62 to our directors, officers, employees and consultants. The grants of these securities to persons residing outside the United States were made in reliance on Regulation S promulgated under the Securities Act. The grants of these securities to persons residing in the United States were made in reliance on Rule 701 promulgated under the Securities Act.

Stock Performance Graph

The information in this “Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity—Stock Performance Graph” is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission (the “SEC”) or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.

The following graph compares our cumulative total shareholder return from October 31, 2006 with those of the TSX Index and the S&P/TSX Pharmaceutical Index. The measurement points utilized in the graph consist of the last trading day in each fiscal year. The historical stock performance presented below is not intended to and may not be indicative of future stock performance.


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Comparison of 5-Year Cumulative Total Return*
Among Patheon Inc., the TSX Index and the S&P/TSX Pharmaceutical Index
*    Assumes (1) $100 invested on October 31, 2006 in Patheon's restricted voting shares, the TSX Index and the S&P/TSX Pharmaceutical Index and (2) the immediate reinvestment of all dividends.


Item 6.          Selected Financial Data.
The selected financial data set forth below as of and for the years ended October 31, 2011, 2010, 2009, 2008 and 2007 were derived from our consolidated financial statements and should be read in conjunction with “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto of this Form 10-K .

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Note 21—Additional Disclosures Required Under U.S. Generally Accepted Accounting Principles” to our consolidated financial statements included in this Form 10-K for a detailed description of the differences between Canadian GAAP and accounting principles generally accepted in the United States (“U.S. GAAP”) relating to our company.
Canadian GAAP
The following table shows selected financial information for the periods indicated in accordance with Canadian GAAP:
 

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Years ended October 31,
 
2007(1)
 
2008(2)
 
2009(3)
 
2010(4)
 
2011(5)
 
(Dollar information in millions of U.S. dollars (“USD”), except per share information)
 
$
 
$
 
$
 
$
 
$
Statement of (loss) income data:
 
 
 
 
 
 
 
 
 
Revenues
634.1

 
717.3

 
655.1

 
671.2

 
700.0

(Loss) income before discontinued operations
(36.5
)
 
20.3

 
1.0

 
(3.3
)
 
(16.2
)
Adjusted EBITDA
80.5

 
82.6

 
74.0

 
91.7

 
73.0

Basic and diluted (loss) income per share from continuing operations
(0.39
)
 
0.21

 
(0.10
)
 
(0.03
)
 
(0.13
)
Weighted-average number of shares outstanding—basic and diluted (in thousands)
92,834

 
90,737

 
100,964

 
129,168

 
129,168

Balance sheet data (at period end):
 
 
 
 
 
 
 
 
 
Total assets
803.7

 
701.9

 
790.8

 
808.9

 
818.6

Long-term debt
203.6

 
200.5

 
221.1

 
274.8

 
274.6

Deferred revenues
26.0

 
22.5

 
41.7

 
45.9

 
36.5

Convertible preferred shares—debt component
139.9

 

 

 

 

Other long-term liabilities
22.1

 
16.4

 
21.5

 
22.9

 
21.7

Total shareholders’ equity
174.3

 
237.2

 
271.3

 
273.0

 
263.7

 ____________________________
(1)
Loss before discontinued operations included a non-cash impairment charge of $48.6 million related to the Puerto Rico operations, $15.8 million in repositioning expenses, a $12.4 million non-cash foreign exchange gain on the revaluation of certain U.S. dollar denominated debt in Canada and $7.1 million in non-cash accreted interest on the Series C Preferred Shares. Our liabilities as of October 31, 2007 included the debt component of JLL Patheon Holdings' purchase of the 150,000 units of Series C Preferred Shares for the price of $150.0 million.

(2)
Income before discontinued operations included $19.9 million in repositioning expenses, a $6.4 million non-cash foreign exchange loss on the revaluation of certain U.S. dollar denominated debt in Canada, $13.5 million in non-cash accreted interest on the convertible Series C Preferred Shares and the $34.9 million non-cash gain on the deemed repayment of debt discussed below. The reduction in total liabilities from the fiscal year ended October 31, 2007 was primarily the result of the completion of our agreement with JLL Patheon Holdings pursuant to which JLL Patheon Holdings agreed to waive the mandatory redemption requirement in respect of the Series C Preferred Shares that it held (the “Redemption Waiver Agreement”) in fiscal 2008, which resulted in the full carrying value of the Series C Preferred Shares being classified within shareholders' equity on our balance sheet and the reclassification of $131.8 million of debt to equity. The entry into the Redemption Waiver Agreement resulted in a deemed repayment of the debt and equity components of the Series C Preferred Shares. As such, we recognized a non-cash gain of $34.9 million on the deemed repayment of the debt component.

(3)
Income before discontinued operations included $2.1 million in repositioning expenses and $8.0 million in costs associated with the special committee of independent directors that we formed during fiscal 2009 (the “Special Committee”) and JLL Patheon Holdings' December 8, 2009 unsolicited offer to acquire any or all of our outstanding restricted voting shares that it did not already own at a price of $2.00 per share in cash (the “JLL Offer”).

(4)
Loss before discontinued operations included $6.8 million in repositioning expenses, $12.2 million in refinancing costs, $3.6 million in non-cash impairment charges, $7.2 million in non-cash reduction in costs for the utilization of the prior fiscal years' investment tax credits, a non-cash tax benefit of $13.8 from the release of the valuation reserve in our Canadian operations and $3.0 million in costs associated with the Special Committee and the JLL Offer. The long-term debt increased from fiscal 2009 due to the issuance of the Notes for an aggregate principal amount of $280.0 million, the proceeds from which were used to repay all of the outstanding indebtedness under our then-existing senior secured term loan and our $75.0 million ABL, to repay certain other indebtedness and to pay related fees and expenses. We used the remaining proceeds for general corporate purposes. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Summary of Cash Flows—Cash Provided by Financing Activities”).

(5)
Loss before discontinued operations included $12.8 million in consulting and professional fees primarily related to our

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strategic initiatives and our SEC registration and $7.0 million in repositioning expenses, partially offset by proceeds from an insurance settlement of $4.9 million.
References to “Adjusted EBITDA” are to income (loss) before discontinued operations before repositioning expenses, interest expense, foreign exchange losses reclassified from other comprehensive loss, refinancing expenses, gains and losses on sale of fixed assets, gain on extinguishment of debt, income taxes, asset impairment charges, depreciation and amortization and other income and expenses.
Since Adjusted EBITDA is a non-GAAP measure that does not have a standardized meaning, it may not be comparable to similar measures presented by other issuers. Readers are cautioned that Adjusted EBITDA should not be construed as an alternative to net income (loss) determined in accordance with Canadian GAAP as an indicator of performance. Adjusted EBITDA is used by management as an internal measure of profitability. We have included Adjusted EBITDA because we believe that this measure is used by certain investors to assess our financial performance before non-cash charges and certain costs that we do not believe are reflective of our underlying business.


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A reconciliation of Adjusted EBITDA to (loss) income before discontinued operations is set forth below:

 
 
Years ended October 31,
 
2007(1)
 
2008(2)
 
2009(3)
 
2010(4)
 
2011(5)
 
(in millions of USD)
 
$
 
$
 
$
 
$
 
$
Net (loss) income for the period
(96.3
)
 
0.8

 
(6.8
)
 
(5.0
)
 
(16.8
)
Loss from discontinued operations
(59.8
)
 
(19.5
)
 
(7.8
)
 
(1.7
)
 
(0.6
)
(Loss) income before discontinued operations
(36.5
)
 
20.3

 
1.0

 
(3.3
)
 
(16.2
)
Add (deduct):
 
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes
19.7

 
1.5

 
12.5

 
(3.0
)
 
7.3

Gain on extinguishment of debt

 
(34.9
)
 

 

 

(Gain) loss on sale of fixed assets

 
(0.7
)
 

 
0.2

 
0.2

Foreign exchange loss on foreign operations
0.8

 

 

 

 

Refinancing expenses
13.5

 

 

 
12.2

 

Interest expense, net
29.1

 
30.7

 
15.4

 
19.5

 
25.4

Repositioning expenses
14.5

 
19.9

 
2.1

 
6.8

 
7.0

Depreciation and amortization
39.4

 
45.3

 
42.6

 
55.8

 
53.4

Asset impairment charge

 
0.4

 

 
3.6

 

Other

 
0.1

 
0.4

 
(0.1
)
 
(4.1
)
Adjusted EBITDA
80.5

 
82.6

 
74.0

 
91.7

 
73.0


U.S. GAAP
Our financial statements have been prepared in accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP. The differences between Canadian GAAP and U.S. GAAP that affect our financial statements are described in detail in “Note 21—Additional Disclosures Required Under U.S. Generally Accepted Accounting Principles” to our consolidated financial statements included in this Form 10-K.

Had we followed U.S. GAAP, certain selected financial data reported above in accordance with Canadian GAAP would have been reported as follows:

 

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Years ended October 31,
 
2007
 
2008
 
2009
 
2010
 
2011
 
(Dollar information in millions of USD, except per share
information)
 
$
 
$
 
$
 
$
 
$
Statement of (loss) income data:
 
 
 
 
 
 
 
 
 
Revenues
634.1

 
717.3

 
655.1

 
671.2

 
700.0

(Loss) income before discontinued operations
(41.5
)
 
4.9

 
1.1

 
(2.9
)
 
(15.8
)
Adjusted EBITDA
66.4

 
89.0

 
74.0

 
80.9

 
66.4

Basic (loss) income per share from continuing operations
(0.52
)
 
0.09

 
(0.10
)
 
(0.02
)
 
(0.12
)
Diluted income per share from continuing operations

 
0.01

 

 

 

Weighted-average number of shares outstanding during period—basic (in thousands)
92,834

 
90,737

 
100,964

 
129,168

 
129,168

Weighted-average number of shares outstanding during period—diluted (in thousands)

 
123,634

 

 

 

Balance sheet data (at period end):
 
 
 
 
 
 
 
 
 
Total assets
805.8

 
703.5

 
794.2

 
813.2

 
824.6

Long-term debt
207.5

 
203.2

 
223.5

 
281.1

 
280.1

Deferred revenues
26.0

 
22.5

 
41.7

 
45.9

 
36.5

Other long-term liabilities
28.4

 
30.6

 
49.5

 
45.1

 
53.7

Convertible preferred shares—temporary equity
155.2

 

 

 

 

Total shareholders’ equity
167.4

 
222.2

 
244.6

 
248.1

 
237.7


A reconciliation of Adjusted EBITDA to (loss) income before discontinued operations is set forth below:

 
Years ended October 31,
 
2007
 
2008
 
2009
 
2010
 
2011
 
(in millions of USD)
 
$
 
$
 
$
 
$
 
$
Net (loss) income for the period
(101.3
)
 
(14.6
)
 
(6.7
)
 
(4.6
)
 
(16.4
)
Loss from discontinued operations
(59.8
)
 
(19.5
)
 
(7.8
)
 
(1.7
)
 
(0.6
)
(Loss) income from continuing operations
(41.5
)
 
4.9

 
1.1

 
(2.9
)
 
(15.8
)
Add (deduct):
 
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes
18.0

 
2.2

 
12.6

 
(13.8
)
 
1.1

(Gain) loss on sale of fixed assets

 
(0.7
)
 

 
0.2

 
0.2

Foreign exchange loss on foreign operations
0.8

 

 

 

 

Refinancing expenses
13.5

 

 

 
12.2

 

Interest expense, net
22.0

 
17.2

 
15.4

 
19.6

 
25.6

Repositioning expenses
14.5

 
19.9

 
2.1

 
6.8

 
7.0

Depreciation and amortization
39.1

 
45.0

 
42.4

 
55.6

 
53.2

Asset impairment charge

 
0.4

 

 
3.6

 

Other

 
0.1

 
0.4

 
(0.4
)
 
(4.9
)
Adjusted EBITDA
66.4

 
89.0

 
74.0

 
80.9

 
66.4










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The following is a summary of our unaudited quarterly results of operations under Canadian GAAP:
Year Ended October 31, 2011
 
1st Quarter(1)
 
2nd Quarter(2)
 
3rd Quarter(3)
 
4th Quarter
 
(Dollar information in millions of USD, except per share
information)
 
$
 
$
 
$
 
$
Revenues
175.7
 
170.0
 
172.7
 
181.6
Gross profit
43.0
 
32.0
 
27.4
 
35.7
Income (loss) before discontinued operations
0.7
 
(11.1)
 
(0.5)
 
(5.3)
Loss from discontinued operations
(0.2)
 
(0.1)
 
(0.2)
 
(0.1)
Net income (loss) attributable to restricted voting shareholders
0.5
 
(11.2)
 
(0.7)
 
(5.4)
 
 
 
 
 
 
 
 
Basic and diluted income (loss) per share
 
 
 
 
 
 
 
     From continuing operations
0.006
 
(0.086)
 
(0.004)
 
(0.041)
     From discontinued operations
(0.002)
 
(0.001)
 
(0.002)
 
(0.001)
 
0.004
 
(0.087)
 
(0.006)
 
(0.042)
Year Ended October 31, 2010
 
1st Quarter(4)
 
2nd Quarter(5)
 
3rd Quarter
 
4th Quarter
 
(Dollar information in millions of USD, except per share
information)
 
$
 
$
 
$
 
$
Revenues
154.8
 
175.4
 
163.3

 
177.7
Gross profit
24.6
 
43.2
 
34.4

 
42.8
(Loss) income before discontinued operations
(10.7)
 
11.3
 
(3.0)

 
(0.9)
Loss from discontinued operations
(0.4)
 
(0.4)
 

 
(0.9)
Net (loss) income attributable to restricted voting shareholders
(11.1)
 
10.9
 
(3.0)

 
(1.8)
 
 
 
 
 
 
 
 
Basic and diluted (loss) income per share
 
 
 
 
 
 
 
     From continuing operations
(0.083)
 
0.087
 
(0.023)

 
(0.041)
     From discontinued operations
(0.003)
 
(0.003)
 

 
(0.001)
 
(0.086)
 
0.084
 
(0.023)

 
(0.042)
____________________

(1)
Revenues included the impact of approximately $32.9 million in reservation fees and deferred revenue amortization from the amended manufacturing and supply agreement in the United Kingdom.

(2)
Revenues included the impact of approximately $17.5 million in reservation fees and deferred revenue amortization from the amended manufacturing and supply agreement in the United Kingdom.

(3)
Loss before discontinued operations included an insurance settlement of $6.0 million in other income.

(4)
Loss before discontinued operations included $3.0 million in special committee costs offset by $2.8 million of prior year's Canadian research and development investment tax credits

(5)
Loss before discontinued operations included $13.8 million from releasing our valuation allowance pertaining to future tax assets in the Company's Canadian operations through income tax benefit in the income statement and $4.4 million of prior year's Canadian research and development investment tax credits through cost of goods sold. Loss also included $4.2 million in accelerated deferred revenue in Cincinnati.

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The following is a summary of our unaudited quarterly results of operations under U.S. GAAP:
Year Ended October 31, 2011
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
(Dollar information in millions of USD, except per share
information)
 
$
 
$
 
$
 
$
Revenues
175.7

 
170.0

 
172.7

 
181.6

Gross profit
42.2

 
30.4

 
25.8

 
33.5

Income (loss) before discontinued operations
3.7

 
(10.3
)
 
0.6

 
(9.8
)
Loss from discontinued operations
(0.2
)
 
(0.1
)
 
(0.2
)
 
(0.1
)
Net income (loss) attributable to restricted voting shareholders
3.5

 
(10.4
)
 
0.4

 
(9.9
)
 
 
 
 
 
 
 
 
Basic and diluted income (loss) per share
 
 
 
 
 
 
 
     From continuing operations
0.029

 
(0.080
)
 
0.005

 
(0.075
)
     From discontinued operations
(0.002
)
 
(0.001
)
 
(0.002
)
 
(0.001
)
 
0.027

 
(0.081
)
 
0.003

 
(0.076
)
Year Ended October 31, 2010
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
(Dollar information in millions of USD, except per share
information)
 
$
 
$
 
$
 
$
Revenues
154.8

 
175.4

 
163.3

 
177.7

Gross profit
21.8

 
38.8

 
31.7

 
42.1

(Loss) income before discontinued operations
(1.7
)
 
4.6

 
(5.5
)
 
(0.4
)
Loss from discontinued operations
(0.4
)
 
(0.4
)
 

 
(0.9
)
Net (loss) income attributable to restricted voting shareholders
(2.1
)
 
4.2

 
(5.5
)
 
(1.3
)
 
 
 
 
 
 
 
 
Basic and diluted (loss) income per share
 
 
 
 
 
 
 
     From continuing operations
(0.013
)
 
0.036

 
(0.043
)
 
(0.003
)
     From discontinued operations
(0.003
)
 
(0.003
)
 

 
(0.007
)
 
(0.016
)
 
0.033

 
(0.043
)
 
(0.010
)




Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is designed to provide a better understanding of our consolidated financial statements, including a brief discussion of our business and products, key factors that impact our performance and a summary of our operating results. You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and the related notes included in this Form 10-K. Our consolidated financial statements and MD&A have been prepared in accordance with Canadian GAAP. The impact of significant differences

33

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between Canadian GAAP and U.S. GAAP on the financial statements is disclosed in “Note 21—Additional Disclosures Required Under U.S. Generally Accepted Accounting Principles” to our consolidated financial statements included in this Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors including, but not limited to, those set forth under “Item 1A. Risk Factors” of this Form 10-K.
Executive Overview
We are a leading provider of contract manufacturing and development services to the global pharmaceutical industry, offering a wide range of services from developing drug candidates at the pre-formulation stage through the launch, commercialization and production of approved drugs. We have established our position as a market leader by leveraging our scale, global reach, specialized capabilities, broad service offerings, scientific expertise and track record of product quality and regulatory compliance to provide cost-effective solutions to our customers.
We have two reportable segments, CMO and PDS. Our CMO business manufactures prescription products in sterile dosage forms as well as solid and liquid conventional dosage forms, and we differentiate ourselves by offering specialized manufacturing capabilities relating to high potency, controlled substance and sustained release products. Our PDS business provides a broad range of development services, including finished dosage formulation across approximately 40 dosage forms, clinical trial packaging and associated analytical services. Additionally, our PDS business serves as a pipeline for future commercial manufacturing opportunities.
Recent Business Highlights
The following is a summary of certain key financial results and non-financial events that occurred during and subsequent to fiscal 2011:
Revenues for fiscal 2011 increased $28.8 million, or 4.3%, to $700.0 million, from $671.2 million for fiscal 2010. Excluding currency fluctuations, revenues for fiscal 2011 would have been approximately 3.0% higher than prior year.
Loss before discontinued operations for fiscal 2011 was $16.2 million, compared to a loss before discontinued operations of $3.3 million for fiscal 2010.
Adjusted EBITDA for fiscal 2011 decreased $18.7 million, or 20.4%, to $73.0 million, from $91.7 million for fiscal 2010.
On December 15, 2011, we announced the appointment of Michel Lagarde, Principal, JLL Partners, to our Board.  Mr. Lagarde replaced Thomas S. Taylor, Managing Director, JLL Partners, who left our Board effective December 15, 2011.  Mr. Lagarde replaced Mr. Taylor as the Chairman of our Compensation and Human Resources Committee ("CHR Committee") and is a member of our Audit and Corporate Governance Committees.
On November 1, 2011, Eric W. Evans, our then Chief Financial Officer, resigned. In connection with Mr. Evans's employment agreement, we incurred a severance charge of approximately $0.5 million in the first quarter of fiscal year ended October 31, 2012 ("fiscal 2012").
In the fourth quarter of fiscal 2011, a customer of ours gave notice of its intent to seek indemnification against us pursuant to a Manufacturing Service Agreement (“MSA”) for all costs associated with a recall and associated defective products. We accrued $1.7 million, net of expected insurance proceeds,  to cover  recall costs and replace the returned products.  In November, the customer gave further notice of its intent to seek indemnification pursuant to the MSA for all actual and potential third party claims filed against them in connection with the recall, as well as all costs and expenses of the defense and settlement of such claims. To date, three putative class actions related to the recall have been commenced in the U.S. against our customer.  At this time, it is not possible to estimate the number of potential claimants or the amount of potential damages in the above actions.  To date, we have not been named as a party in any action related to the product recall. 
On October 20, 2011, we announced that Boehringer Ingelheim, a leading globally operating pharmaceutical corporation, awarded us two projects with combined revenue of more than $18.0 million over a three year period. The projects are both fixed-dose combination drugs in development for the treatment of the growing population of type II diabetics.
On October 5, 2011, Peter T. Bigelow, our then President, North American Operations, resigned effective as of November 1, 2011. In connection with his resignation, Mr. Bigelow agreed to provide transitional consulting services for up to one year.
On September 8, 2011, our Board reviewed and approved our new corporate strategy which includes, among other

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things, assessing strategic options for the Swindon commercial operation and the Burlington, Ontario facility, accelerating our operational excellence programs for our CMO and PDS segments, and continuing the evolution of our existing commercial sites into centers of excellence focusing on specific technologies or production types. In addition, we are in the process of transferring our Zug, Switzerland European Headquarter operations to our U.K. operations. We expect these initiatives will reduce costs and make our company more efficient over the next several years.
On May 19, 2011, we settled an on-going insurance claim covering all current and future costs associated with water damage at our Swindon, U.K. facility for approximately $16.0 million. We recorded a settlement receivable of approximately $2.4 million against cost of goods sold in the fourth quarter of fiscal 2010, which was subsequently received in the first quarter of fiscal 2011. In the second quarter of fiscal 2011, we recorded an additional $2.6 million as a settlement receivable against cost of goods sold. In the third quarter of fiscal 2011, we received the final payout from the settlement of approximately $13.6 million. A portion of the settlement was used to offset capital expenditures and cover current and future remediation liabilities, with the remaining $4.9 million recorded as other income in the current fiscal year.
On May 11, 2011, Michael E. Lytton joined our company as Executive Vice President, Corporate Development and Strategy, and General Counsel.
On February 7, 2011, James C. Mullen was appointed as our Chief Executive Officer (“CEO”) and a member of our Board.
In December 2010, we amended a manufacturing and supply agreement with a major customer, in which both parties agreed to a contract termination date in February 2011, approximately two and a half years earlier than was originally planned. The amendment reflected the customer's decision not to proceed with a product following receipt of a complete response letter from the FDA. As part of the amendment, the customer agreed to pay us a reservation fee of €21.6 million, and as a result of the shortened contract life, we accelerated the related deferred revenue recognition and were relieved of the obligation to repay certain customer-funded capital related to the original manufacturing and supply agreement.
On November 30, 2010, Wesley P. Wheeler, our then President and Chief Executive Officer, left our company. We accrued approximately $1.4 million in the first quarter of fiscal 2011 for severance payments due to Mr. Wheeler under his employment agreement.

Opportunities and Trends
Our target markets include the highly fragmented global market for the manufacture of finished pharmaceutical dosage forms and for PDS. According to PharmSource, a provider of pharmaceutical outsourcing business information, the CMO market totaled $11.7 billion in 2010, and could experience marginal growth of roughly 1% (in conservative scenarios) to as much as 3% - 5% annually during 2011 to 2015. PharmSource also estimates that the outsourced PDS market totaled approximately $1.3 billion in 2010, with growth projections in the 2011 to 2015 period approaching 3% annually. We are one of only a few industry participants that can provide a broad range of CMO and PDS services.
Pharmaceutical outsourcing service providers have faced challenges in recent years due to the uncertain economic environment. In the research and development area, emerging pharmaceutical companies have faced funding uncertainties due to limited access to capital, and many larger companies have decreased or delayed product development spending due to uncertainties surrounding industry consolidation, overall market weakness and the regulatory approval environment. As a result, decision-making related to the awarding of new outsourcing projects has slowed during recent years for similar reasons.
Puerto Rico Operations
We closed our Carolina facility in Puerto Rico effective January 31, 2009. In the second half of fiscal 2010, we performed an impairment analysis based on recent offers, which resulted in the complete write down as the fair value less the cost to sell was nil. We expect the sale of this property to be complete in the first half of fiscal 2012. The results of the Carolina operations have been reported in discontinued operations in fiscal 2011, 2010 and 2009.
In December 2009, we announced our plan to consolidate our Puerto Rico operations into our manufacturing site located in Manati and ultimately close or sell our plant in Caguas. Our current expectations with respect to the Caguas facility assume that we will be able to complete a sale during fiscal 2012 for a purchase price of approximately $7.0 million. In conjunction with this estimate we incurred an impairment charge of $3.6 million in fiscal 2010. The consolidation results in additional accelerated depreciation of Caguas assets of approximately $12.0 million by the end of the project. Because the business in our Caguas facility is being transferred within the existing site network, its results of operations are included in continuing operations in our consolidated financial statements.

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As a result of the additional time required to fully transition manufacturing operations from Caguas to Manati due to longer than expected customer regulatory timelines and higher product demand, we now expect the transition to continue beyond the end of calendar year 2012. As a result of the additional time required to complete the transition, we now estimate that the restructuring program will cost $11.5 million, of which $10.8 million has been incurred as of October 31, 2011.
Selected Financial Information
 
 
Years ended October 31,
(in millions of USD, except per share information)
2011
 
2010
 
2009
 
$
 
$
 
$
Revenues
700.0

 
671.2

 
655.1

Adjusted EBITDA
73.0

 
91.7

 
74.0

Net loss attributable to restricted voting shareholders
(16.8
)
 
(5.0
)
 
(17.9
)
Basic and diluted loss per share
(0.13
)
 
(0.04
)
 
(0.18
)
Total assets
818.6

 
808.9

 
790.8

Total long-term liabilities
357.7

 
346.6

 
311.2

Reconciliations of Adjusted EBITDA to income (loss) before discontinued operations are included in "Item 6Selected Financial Data” and “Note 16Segmented Information” to our consolidated financial statements included in this Form 10-K.

Results of Operations
The results of the Carolina operations have been segregated and reported as discontinued operations in fiscal 2011, 2010 and 2009.
Fiscal 2011 Compared to Fiscal 2010
Consolidated Statements of Loss
 

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Years ended October 31,
(in millions of USD, except per share information)
2011
 
2010
 
Change
 
Change
 
$
 
$
 
$
 
%
Revenues
700.0

 
671.2

 
28.8

 
4.3
Cost of goods sold
561.9

 
526.2

 
35.7

 
6.8
Gross profit
138.1

 
145.0

 
(6.9
)
 
4.8
Selling, general and administrative expenses
120.2

 
110.6

 
9.6

 
8.7
Repositioning expenses
7.0

 
6.8

 
0.2

 
2.9
Operating income
10.9

 
27.6

 
(16.7
)
 
60.5
Interest expense, net
25.4

 
19.5

 
5.9

 
30.3
Impairment charge

 
3.6

 
(3.6
)
 
100.0
Foreign exchange gain
(1.6
)
 
(1.5
)
 
0.1

 
6.7
Loss on sale of fixed assets
0.2

 
0.2

 

 
Refinancing Expenses

 
12.2

 
 
 
 
Other (income) expense, net
(4.2
)
 
(0.1
)
 
(4.1
)
 
Loss from continuing operations before income taxes
(8.9
)
 
(6.3
)
 
(2.6
)
 
41.3
Current
1.6

 
6.7

 
(5.1
)
 
76.1
Future
5.7

 
(9.7
)
 
(15.4
)
 
158.8
Provision for (benefit from) income taxes
7.3

 
(3.0
)
 
(10.3
)
 
343.3
Loss before discontinued operations
(16.2
)
 
(3.3
)
 
(12.9
)
 
390.9
Loss from discontinued operations
(0.6
)
 
(1.7
)
 
(1.1
)
 
64.7
Net loss for the period
(16.8
)
 
(5.0
)
 
(11.8
)
 
236.0
Dividends on convertible preferred shares

 

 

 
Net loss attributable to restricted voting shareholders
(16.8
)
 
(5.0
)
 
(11.8
)
 
236.0
Basic and diluted loss per share
 
 
 
 
 
 
 
From continuing operations
$
(0.125
)
 
$
(0.026
)
 
 
 
 
From discontinued operations
$
(0.005
)
 
$
(0.013
)
 
 
 
 
 
$
(0.130
)
 
$
(0.039
)
 
 
 
 
Weighted-average number of shares outstanding during period—basic and diluted (in thousands)
129,168

 
129,168

 
 
 
 
Operating Income Summary
Revenues for fiscal 2011 increased $28.8 million, or 4.3%, to $700.0 million, from $671.2 million for fiscal 2010. Excluding currency fluctuations, revenues for fiscal 2011 would have been approximately 3.0% higher than the same period of the prior fiscal year. CMO revenues for fiscal 2011 increased $27.3 million, or 5.0%, to $572.6 million, from $545.3 million for fiscal 2010. PDS revenues for fiscal 2011 increased $1.5 million, or 1.2%, to $127.4 million, from $125.9 million for fiscal 2010.
Gross profit for fiscal 2011 decreased $6.9 million, or 4.8%, to $138.1 million, from $145.0 million for fiscal 2010. The decrease in gross profit was due to a decrease in gross profit margin to 19.7% for fiscal 2011 from 21.6% for fiscal 2010, partially offset by higher revenues. The decrease in gross profit margin was due to unfavorable foreign exchange impact on cost of goods sold related to the weakening of the U.S. dollar (-1.1%), higher labor costs (-0.7%), increase in supplies and maintenance (-0.7%), increase in inventory write-offs (-0.5%), and the impact of the prior fiscal years' research and development investment tax credits (-0.6%), partially offset by favorable mix resulting from the reservation fee and higher deferred revenue amortization related to the amended manufacturing and supply agreement in the United Kingdom.
Selling, general and administrative ("SG&A") expenses for fiscal 2011 increased $9.6 million, or 8.7%, to $120.2 million, from $110.6 million for fiscal 2010. The increase was primarily due to higher consulting and professional fees of $12.8 million, higher costs related to the former CEO's severance of $1.1 million and higher stock based compensation of $1.4 million, partially offset by elimination of costs associated with the special committee of independent directors (the “Special Committee”) of $3.0 million for fiscal 2010, and lower depreciation of $3.0 million. The impact of unfavorable foreign exchange rates on SG&A expense was approximately $3.4 million versus prior year.
Repositioning expenses for fiscal 2011 increased $0.2 million, or 2.9%, to $7.0 million, from $6.8 million for fiscal 2010.

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The increase was due to increased expenses in connection with the Zug and Swindon facilities, partially offset by lower expenses in connection with the Caguas closure and consolidation in Puerto Rico during fiscal 2011 compared to fiscal 2010, as the prior period included the initial project accruals.
Operating income for fiscal 2011 decreased $16.7 million, or 60.5%, to $10.9 million (1.6% of revenues), from $27.6 million (4.1% of revenues) for fiscal 2010 as a result of the factors discussed above.
 Interest Expense
Interest expense for fiscal 2011 increased $5.9 million, or 30.3%, to $25.4 million, from $19.5 million for fiscal 2010. The increase in interest expense primarily reflects the higher interest rates on the Notes versus the rates of our previous debt, as well as overall higher debt levels.
Impairment Charge
During fiscal 2010, we recorded an impairment charge of $3.6 million in connection with the consolidation of our Puerto Rico operations into our manufacturing site located in Manati. This charge wrote down the carrying value of the Caguas facility's long-lived assets to their anticipated fair value upon closure of the facility.
Refinancing Expenses
During fiscal 2010, we incurred expenses of $12.2 million in connection with our refinancing activities, which included fees paid to advisors and other related costs.
Other (Income) Expense, Net
Other income for fiscal 2011 was $4.2 million, compared to $0.1 million for fiscal 2010. The increase of other income was primarily due to the settlement of the insurance claim associated with water damage at our Swindon, U.K. facility, of which $4.9 million was recorded in other income.
Loss from Continuing Operations Before Income Taxes
We reported a loss from continuing operations before income taxes of $8.9 million for fiscal 2011, compared to a loss of $6.3 million for fiscal 2010. The $12.2 million of refinancing expenses during fiscal 2010, along with the other operating items discussed above, were the primary drivers of the year over year variance.
Income Taxes
Income taxes were an expense of $7.3 million for fiscal 2011, compared to a benefit of $3.0 million for fiscal 2010. The increase in tax expense for the period was primarily due to the benefit in fiscal 2010 of releasing $13.8 million of the valuation allowance pertaining to future tax assets in our Canadian operations and mix of earnings in various tax jurisdictions.
Loss before Discontinued Operations and Loss Per Share from Continuing Operations
We recorded a loss before discontinued operations for fiscal 2011 of $16.2 million, compared to a loss before discontinued operations of $3.3 million for fiscal 2010. The loss per share from continuing operations for fiscal 2011 was 12.5¢ compared to a loss per share of 2.6¢ for fiscal 2010.
Loss and Loss Per Share from Discontinued Operations
Discontinued operations for fiscal 2011 and 2010 include the results of the Carolina, Puerto Rico operations. Financial details of the operating activities of the Carolina operations are disclosed in “Note 3Discontinued Operations and Plant Consolidations.” The loss from discontinued operations for fiscal 2011 was $0.6 million, or 0.5¢ per share, compared to a loss of $1.7 million, or 1.3¢ per share, for fiscal 2010. On-going costs of discontinued operations relate to maintaining the Carolina building for sale.
Net Loss, Loss Attributable to Restricted Voting Shareholders and Loss Per Share
Net loss attributable to restricted voting shares for fiscal 2011 increased $11.8 million, to $16.8 million, or 13.0¢ per share, from $5.0 million, or 3.9¢ per share, for fiscal 2010. Because we reported a loss for fiscal 2011 and 2010, there is no impact of dilution.



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 Revenues and Adjusted EBITDA by Business Segment
 
Years ended October 31,
(in millions of USD)
2011
 
2010
 
Change
 
Change
 
$
 
$
 
$
 
%
Revenues
 
 
 
 
 
 
 
Commercial Manufacturing
 
 
 
 
 
 
 
North America
274.5

 
251.6

 
22.9

 
9.1

Europe
298.1

 
293.7

 
4.4

 
1.5

Total Commercial Manufacturing
572.6

 
545.3

 
27.3

 
5.0

Pharmaceutical Development Services
127.4

 
125.9

 
1.5

 
1.2

Total Revenues
700.0

 
671.2

 
28.8

 
4.3

Adjusted EBITDA
 
 
 
 
 
 
 
Commercial Manufacturing
 
 
 
 
 
 
 
North America
19.1

 
20.6

 
(1.5
)
 
(7.3
)
Europe
60.9

 
51.7

 
9.2

 
17.8

Total Commercial Manufacturing
80.0

 
72.3

 
7.7

 
10.7

Pharmaceutical Development Services
29.9

 
46.8

 
(16.9
)
 
(36.1
)
Corporate Costs
(36.9
)
 
(27.4
)
 
(9.5
)
 
34.7

Total Adjusted EBITDA
73.0

 
91.7

 
(18.7
)
 
(20.4
)
Commercial Manufacturing
Total CMO revenues for fiscal 2011 increased $27.3 million, or 5.0%, to $572.6 million, from $545.3 million for fiscal 2010. Had local currency exchange rates remained constant to the rates of fiscal 2010, CMO revenues for fiscal 2011 would have been approximately 3.6% higher than the same period of the prior fiscal year.
North American CMO revenues for fiscal 2011 increased $22.9 million, or 9.1%, to $274.5 million, from $251.6 million for fiscal 2010. Had Canadian dollar exchange rates remained constant to the rates of fiscal 2010, North American CMO revenues for fiscal 2011 would have been approximately 8.7% higher than the same period of the prior fiscal year. The increase was primarily due to increased worldwide demand for a customer's product manufactured in our Puerto Rico facility, higher volumes in Toronto and new product launch volumes in Cincinnati.
European CMO revenues for fiscal 2011 increased $4.4 million, or 1.5%, to $298.1 million, from $293.7 million for fiscal 2010. The increase was primarily due to higher revenues in the United Kingdom, from the reservation fee related to the amended manufacturing and supply agreement and accelerated deferred revenue versus take-or-pay revenue in the prior year, and higher volumes in Ferentino, partially offset by lower revenues across other sites. Had European currencies remained constant to the rates of fiscal 2010, European CMO revenues for fiscal 2011 would have been approximately 0.6% lower than the same period of the prior fiscal year.
Total CMO Adjusted EBITDA for fiscal 2011 increased $7.7 million, or 10.7%, to $80.0 million, from $72.3 million for fiscal 2010. This represents an Adjusted EBITDA margin of 14.0% for fiscal 2011 compared to 13.3% for fiscal 2010. Had local currencies remained constant to prior year rates, and after eliminating the impact of all foreign exchange gains and losses, CMO Adjusted EBITDA for fiscal 2011 would have been approximately $2.3 million higher.
North American Adjusted EBITDA for fiscal 2011 decreased $1.5 million, or 7.3%, to $19.1 million, from $20.6 million for fiscal 2010. The decrease was primarily driven by $5.0 million in consulting fees related to recent strategic initiatives, prior year recognition of accelerated deferred revenue of $4.2 million in Cincinnati and foreign exchange losses of $2.4 million as a result of the weakening of the U.S. dollar against the Canadian dollar. These were partially offset by a $6.7 million Adjusted EBITDA improvement in Puerto Rico, and better operating results in our Canadian operations. North American CMO had $4.0 million in repositioning costs relating to the Puerto Rican operations in fiscal 2011 that was not included in Adjusted EBITDA.
European Adjusted EBITDA for fiscal 2011 increased $9.2 million, or 17.8%, to $60.9 million, from $51.7 million million for fiscal 2010. This increase was primarily due to the recognition of the reservation fee related to the amended manufacturing and supply agreement in the United Kingdom and associated deferred revenue amortization, partially offset by lower operating results across other European sites. European CMO has $4.9 million in insurance proceeds relating to the U.K. operations that was recorded in other income and $2.9 million in repositioning costs for the Zug and U.K. operations, both of which were not included in Adjusted EBITDA.

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Pharmaceutical Development Services
Total PDS revenues for fiscal 2011 increased by $1.5 million, or 1.2%, to $127.4 million, from $125.9 million for fiscal 2010. Had the local currency rates remained constant to fiscal 2010, PDS revenues for fiscal 2011 would have increased approximately 0.2% from fiscal 2010.
Total PDS Adjusted EBITDA for fiscal 2011 decreased by $16.9 million, or 36.1%, to $29.9 million, from $46.8 million for fiscal 2010. Had local currencies remained constant to the rates of the prior year and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA for fiscal 2011 would have been approximately $2.2 million higher than reported. PDS Adjusted EBITDA for fiscal 2011 includes $5.8 million of research and development investment tax credits compared to $10.8 million in fiscal 2010. In addition, lower than expected sales at certain sites resulting from project cancellations related to customer regulatory approvals, clinical trial outcome issues, and industry consolidation contributed to the reduction in Adjusted EBITDA.
Corporate Costs
Corporate costs for fiscal 2011 increased $9.5 million, or 34.7%, to $36.9 million, from $27.4 million for fiscal 2010. The increase was primarily due to unfavorable foreign exchange of $3.4 million, $4.4 million of higher advisor fees due to registration with the SEC and corporate strategy initiatives, expenses related to the change in our CEO of $3.3 million and higher compensation expenses. These were partially offset by the non-recurrence of $3.0 million in Special Committee costs incurred in fiscal 2010.
Fiscal 2010 Compared to Fiscal 2009
Consolidated Statements of Loss
 

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Years ended October 31
(in millions of USD, except per share information)
2010
 
2009
 
$
 
%
 
$
 
$
 
Change
 
Change
Revenues
671.2

 
655.1

 
16.1

 
2.5

Cost of goods sold
526.2

 
511.2

 
15.0

 
2.9

Gross profit
145.0

 
143.9

 
1.1

 
0.8

Selling, general and administrative expenses
110.6

 
105.5

 
5.1

 
4.8

Repositioning expenses
6.8

 
2.1

 
4.7

 
223.8

Operating income
27.6

 
36.3

 
(8.7
)
 
(24.0
)
Interest expense, net
19.5

 
15.4

 
4.1

 
26.6

Impairment charge
3.6

 

 
3.6

 

Foreign exchange (gain) loss
(1.5
)
 
7.0

 
(8.5
)
 
(121.4
)
Loss on sale of fixed assets
0.2

 

 
0.2

 

Refinancing Expenses
12.2

 

 
12.2

 

Other (income) expense, net
(0.1
)
 
0.4

 
(0.5
)
 
(125.0
)
(Loss) income from continuing operations before income taxes
(6.3
)
 
13.5

 
(19.8
)
 
(146.7
)
Current
6.7

 
7.7

 
(1.0
)
 
(13.0
)
Future
(9.7
)
 
4.8

 
(14.5
)
 
(302.1
)
(Benefit from) provision for income taxes
(3.0
)
 
12.5

 
(15.5
)
 
(124.0
)
(Loss) income before discontinued operations
(3.3
)
 
1.0

 
(4.3
)
 
(430.0
)
Loss from discontinued operations
(1.7
)
 
(7.8
)
 
(6.1
)
 
(78.2
)
Net loss for the period
(5.0
)
 
(6.8
)
 
(1.8
)
 
(26.5
)
Dividends on convertible preferred shares

 
11.1

 
(11.1
)
 
(100.0
)
Net loss attributable to restricted voting shareholders
(5.0
)
 
(17.9
)
 
(12.9
)
 
(72.1
)
Basic and diluted loss per share
 
 
 
 
 
 
 
From continuing operations
$
(0.026
)
 
$
(0.100
)
 
 
 
 
From discontinued operations
$
(0.013
)
 
$
(0.077
)
 
 
 
 
 
$
(0.039
)
 
$
(0.177
)
 
 
 
 
Weighted-average number of shares outstanding during period—basic and diluted (in thousands)
129,168

 
100,964

 
 
 
 

Operating Income Summary
Revenues for fiscal 2010 increased $16.1 million, or 2.5%, to $671.2 million, from $655.1 million for fiscal 2009. Excluding currency fluctuations, revenues for fiscal 2010 would have increased by approximately 2.3%. CMO revenues for fiscal 2010 increased $15.3 million, or 2.9%, to $545.3 million, from $530.0 million for fiscal 2009. PDS revenues for fiscal 2010 also increased $0.8 million, or 0.6%, to $125.9 million, from $125.1 million for fiscal 2009.
Gross profit for fiscal 2010 increased $1.1 million, or 0.8%, to $145.0 million, from $143.9 million for fiscal 2009. The increase in gross profit was due to higher volume, partially offset by a decrease in gross profit margin to 21.6% for fiscal 2010 from 22.0% for fiscal 2009. The decrease in gross profit margin was due to unfavorable foreign exchange impact on cost of goods sold (-1.7%), higher depreciation (-1.3%) and higher lease expense (-0.3%), partially offset by the favorable impact of the prior fiscal years' Canadian research and development investment tax credits (+1.1%) and higher volume.
Selling, general and administrative expenses for fiscal 2010 increased $5.1 million, or 4.8%, to $110.6 million, from $105.5 million for fiscal 2009. The increase was primarily due to higher compensation expenses and stock option amortization ($6.9 million), unfavorable foreign exchange ($1.9 million) and higher depreciation ($2.6 million), partially offset by costs associated with the Special Committee of $3.0 million for fiscal 2010 compared to $8.0 million for fiscal 2009. Fiscal 2009 also included $2.0 million of transitional expenses for the opening of our new U.S. headquarters.
Repositioning expenses for fiscal 2010 increased $4.7 million, or 223.8%, to $6.8 million, from $2.1 million for fiscal 2009. The increase was due to higher expenses in connection with the Caguas closure and consolidation in Puerto Rico in fiscal 2010 compared to expenses in connection with the ongoing shut down and transition of business out of our York Mills facility and manufacturing restructuring in Puerto Rico in fiscal 2009.


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Operating income for fiscal 2010 decreased $8.7 million, or 24.0%, to $27.6 million (4.1% of revenues), from $36.3 million (5.5% of revenues) for fiscal 2009 as a result of the factors discussed above.
Interest Expense
Interest expense for fiscal 2010 increased $4.1 million, or 26.6%, to $19.5 million, from $15.4 million for fiscal 2009. The increase in interest expense primarily reflects the higher interest rates on the Notes versus the rates of our previous debt, as well as overall higher debt levels.
Impairment Charge
During fiscal 2010, we recorded an impairment charge of $3.6 million in connection with the consolidation of our Puerto Rico operations into our manufacturing site located in Manatí. This charge wrote down the carrying value of the Caguas facility’s long-lived assets to their anticipated fair value upon closure of the facility.
Foreign Exchange (Gains) Losses
Foreign exchange gain for fiscal 2010 was $1.5 million, compared to a loss of $7.0 million for fiscal 2009. The foreign exchange gain was primarily due to the overall strengthening of the Canadian dollar against the U.S. dollar during fiscal 2009 and favorable hedging contracts in the Canadian operations during fiscal 2010, which resulted in gains of $4.0 million for fiscal 2010 compared to losses of $9.2 million for fiscal 2009.
Refinancing Expenses
During fiscal 2010, we incurred expenses of $12.2 million in connection with our refinancing activities. These expenses include fees paid to advisors and other related costs.
(Loss) Income from Continuing Operations Before Income Taxes
We reported a loss from continuing operations before income taxes of $6.3 million for fiscal 2010, compared to income of $13.5 million for fiscal 2009. The $12.2 million of refinancing expenses during the second and third quarters of fiscal 2010, along with the other operating items discussed above, were the primary drivers of the year over year variance.
Income Taxes
Income taxes were a benefit of $3.0 million for fiscal 2010, compared to an income tax expense of $12.5 million for fiscal 2009. The benefit was primarily due to releasing the valuation allowance pertaining to future tax assets and recognition of the current net operating loss benefits in our Canadian operations. We have determined that this valuation allowance is no longer required based on our assessment of the future prospects of our Canadian operations.
(Loss) Income before Discontinued Operations and (Loss) Income Per Share from Continuing Operations
We recorded a loss before discontinued operations for fiscal 2010 of $3.3 million, compared to income before discontinued operations of $1.0 million for fiscal 2009. The loss per share before discontinued operations for fiscal 2010 was 2.6¢ compared to a loss per share of 10.0¢ for fiscal 2009, after taking into account the dividends of $11.1 million on the Class I Preferred Shares, Series C (the "Series C Preferred Shares") for fiscal 2009.
Loss and Loss Per Share from Discontinued Operations
Discontinued operations for fiscal 2010 and 2009 include the results of the Carolina, Puerto Rico operations. Financial details of the operating activities are disclosed in “Note 3Discontinued Operations and Plant Consolidations” of our consolidated financial statements included in this Form 10-K. The loss from discontinued operations for fiscal 2010 was $1.7 million, or 1.3¢ per share, compared to a loss of $7.8 million, or 7.7¢ per share, for fiscal 2009. On-going costs of discontinued operations relate to maintaining the Carolina building for sale.
Net Loss, Loss Attributable to Restricted Voting Shareholders and Loss Per Share
Net loss attributable to restricted voting shares for fiscal 2010 decreased $12.9 million, or 72.1%, to $5.0 million, or 3.9¢ per share, from $17.9 million, or 17.7¢ per share, for fiscal 2009. Fiscal 2009 results include dividends on the Series C Preferred Shares of $11.1 million. Dividends were recorded until July 28, 2009, the date when the preferred shares were converted to restricted voting shares by JLL Patheon Holdings. Because we reported a loss for fiscal 2010 and 2009, there is no impact of dilution.

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Revenues and Adjusted EBITDA by Business Segment
 
 
Years ended October 31,
(in millions of USD)
2010
 
2009
 
Change
 
Change
 
$
 
$
 
$
 
%
Revenues
 
 
 
 
 
 
 
Commercial Manufacturing
 
 
 
 
 
 
 
North America
251.6

 
249.0

 
2.6

 
1.0

Europe
293.7

 
281.0

 
12.7

 
4.5

Total Commercial Manufacturing
545.3

 
530.0

 
15.3

 
2.9

Pharmaceutical Development Services
125.9

 
125.1

 
0.8

 
0.6

Total Revenues
671.2

 
655.1

 
16.1

 
2.5

Adjusted EBITDA
 
 
 
 
 
 
 
Commercial Manufacturing
 
 
 
 
 
 
 
North America
20.6

 
19.2

 
1.4

 
7.3

Europe
51.7

 
52.0

 
(0.3
)
 
-0.6

Total Commercial Manufacturing
72.3

 
71.2

 
1.1

 
1.5

Pharmaceutical Development Services
46.8

 
32.7

 
14.1

 
43.1

Corporate Costs
(27.4
)
 
(29.9
)
 
2.5

 
-8.4

Total Adjusted EBITDA
91.7

 
74.0

 
17.7

 
23.9

Commercial Manufacturing
Total CMO revenues for fiscal 2010 increased $15.3 million, or 2.9%, to $545.3 million, from $530.0 million for fiscal 2009. Changes in foreign exchange rates between fiscal 2009 and 2010 did not have a material impact on fiscal 2010 CMO revenues as compared to fiscal 2009 CMO revenues.
North American CMO revenues for fiscal 2010 increased $2.6 million, or 1.0%, to $251.6 million from $249.0 million for fiscal 2009. Had the Canadian dollar remained constant to the rates of fiscal 2009, North American CMO revenues for fiscal 2010 would have been approximately 0.2% higher than for fiscal 2009. The increase was primarily due to a favorable foreign exchange impact from Canada, higher revenues in Cincinnati as a result of accelerated deferred revenue recognition (+$7.2 million) and stronger performance in Puerto Rico (+$2.0 million), partially offset by lower revenues from the Canadian operations (-$9.0 million).
European CMO revenues for fiscal 2010 increased $12.7 million, or 4.5%, to $293.7 million, from $281.0 million for fiscal 2009. Had European currencies remained constant to the rates of fiscal 2009, European CMO revenues for fiscal 2010 would have been approximately 5.3% higher than for fiscal 2009. The increase was primarily due to higher revenues in the United Kingdom from increased take-or-pay and accelerated deferred revenue recognition, partially offset by the weakening of the Euro against the U.S. dollar.
Total CMO Adjusted EBITDA for fiscal 2010 increased $1.1 million, or 1.5%, to $72.3 million, from $71.2 million for fiscal 2009. This represents an Adjusted EBITDA margin (Adjusted EBITDA as a percentage of revenues) of 13.3% for fiscal 2010 compared to 13.4% for fiscal 2009. Had local currencies remained constant to fiscal 2009 rates, and after eliminating the impact of all foreign exchange gains and losses, CMO Adjusted EBITDA would have been approximately $3.5 million higher for fiscal 2010.
North American Adjusted EBITDA for fiscal 2010 increased $1.4 million, or 7.3%, to $20.6 million, from $19.2 million for fiscal 2009. The increase was primarily driven by higher revenue and favorable foreign exchange rates, inclusive of hedging (+$1.5 million), partially offset by unfavorable production mix and higher compensation costs. Included in the North American Adjusted EBITDA is a loss in the Puerto Rico operations of $11.9 million, up slightly from fiscal 2009. The continued weak Puerto Rico performance was due to the cost of operating two facilities, inventory provisions, high energy prices and various performance issues during the first half of fiscal 2010. We expect losses in Puerto Rico to be significantly reduced during fiscal 2011 due to improved operating performance and product mix, and the initial financial benefits of actions to integrate the Caguas site into Manatí during fiscal 2011. North American CMO had $6.8 million in repositioning expenses and $3.4 million in impairment charges relating to the Puerto Rican operations in fiscal 2010 that were not included in Adjusted EBITDA.
European Adjusted EBITDA for fiscal 2010 decreased $0.3 million, or 0.6%, to $51.7 million, from $52.0 million for

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fiscal 2009. Higher revenues for fiscal 2010 were more than offset by unfavorable transactional foreign exchange ($4.9 million), higher employee benefit related costs ($2.0 million), higher lease expense ($0.8 million) and higher supplies and maintenance ($0.8 million).
Pharmaceutical Development Services
Total PDS revenues for fiscal 2010 increased by $0.8 million, or 0.6%, to $125.9 million, from $125.1 million for fiscal 2009. Had the local currency rates remained constant to fiscal 2009, PDS revenues for fiscal 2010 would have decreased approximately 0.2% from fiscal 2009.
Total PDS Adjusted EBITDA for fiscal 2010 increased by $14.1 million, or 43.1%, to $46.8 million, from $32.7 million for fiscal 2009. Had local currencies remained constant to the rates of fiscal 2009 and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA for fiscal 2010 would have been approximately $2.6 million lower. PDS Adjusted EBITDA for fiscal 2010 includes $7.2 million in prior years Canadian research and development investment tax credits that were recognized this year and benefits from a tightly controlled cost structure.
Corporate Costs
Corporate costs for fiscal 2010 decreased $2.5 million, or 8.4%, to $27.4 million, from $29.9 million for fiscal 2009. This decrease was primarily due to lower Special Committee costs and the non recurrence of $2.0 million of transitional expenses for the opening our U.S. headquarters in Research Triangle Park, North Carolina, partially offset by higher compensation expenses and stock option amortization. Fiscal 2010 included $3.0 million associated with the Special Committee costs compared to $8.0 million of Special Committee costs for fiscal 2009.

Liquidity and Capital Resources
Overview
Our cash and cash equivalents totaled $33.4 at October 31, 2011 and $53.5 million at October 31, 2010. Our total debt was $275.7 million at October 31, 2011 and $278.3 million at October 31, 2010.
Our primary source of liquidity is cash flow from operations. Historically, we have also used availability under the ABL and other credit lines for any additional cash needs. Our principal uses of cash have been for capital expenditures, debt servicing requirements, working capital, employee benefit obligations, and in fiscal 2012, expenditures for consultants to assist in implementing our strategic initiatives.
From time to time, we evaluate strategic opportunities, including potential acquisitions, divestitures or investments in complementary businesses, and we anticipate continuing to make such evaluations. We may also access capital markets through the issuance of debt or equity in connection with the acquisition of complementary businesses or other significant assets or for other strategic opportunities.
Summary of Cash Flows
The following table summarizes our cash flows for the periods indicated:
 
 
Years ended October 31,
(in millions of USD)
2011
 
2010
 
2009
 
$
 
$
 
$
Cash provided by operating activities of continuing operations
23.9

 
50.7

 
48.0

Cash used in operating activities of discontinued operations
(1.0
)
 
(0.7
)
 
(8.9
)
Cash provided by operating activities
22.9

 
50.0

 
39.1

Cash used in investing activities of continuing operations
(47.4
)
 
(50.0
)
 
(49.5
)
Cash provided by investing activities of discontinued operations

 

 
0.2

Cash provided by financing activities
2.7

 
31.6

 
13.6

Other
1.7

 
(0.4
)
 
(1.3
)
Net (decrease) increase in cash and cash equivalents during the period
(20.1
)
 
31.2

 
2.1



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Cash Provided by Operating Activities
Cash provided by operating activities from continuing operations for fiscal 2011 decreased $26.8 million, or 52.9%, to $23.9 million, from $50.7 million for fiscal 2010. Prior year cash contributions included take or pay receipts in our Swindon operations of $53.1 million versus $29.3 million received from the reservation fee related to the amended manufacturing and supply agreement in the United Kingdom in fiscal 2011. Fiscal 2011 also included previously disclosed voluntary pension contributions in the U.K. of $4.9 million, and lower cash from operations, partially offset by $14.0 million from the insurance claim settlement.
Cash provided by operating activities from continuing operations for fiscal 2010 increased $2.7 million, or 5.6%, to $50.7 million, from $48.0 million for fiscal 2009. Year over year change in cash provided by operating activities from continuing operations was primarily due to higher deferred revenue (mainly an early payment for a take or pay amount) and better working capital usage, which was partially offset by refinancing costs, higher interest payments and lower cash flows from the commercial operations excluding the deferred revenue amounts.
Cash provided by operating activities from continuing operations for fiscal 2009 was primarily due to higher customer funded capital that increased deferred revenue and the use of deferred tax assets during fiscal 2009 which resulted in lower tax payments, partially offset by working capital usage.
Cash used in operating activities from discontinued operations for fiscal 2011 increased $0.3 million, or 42.9%, to $1.0 million, from $0.7 million for fiscal 2010.
Cash used in operating activities from discontinued operations for fiscal 2010 decreased $8.2 million, or 92.1%, to $0.7 million, from $8.9 million for fiscal 2009. The decrease in cash outflow for fiscal 2010 was due to our Carolina facility closing down operations for fiscal 2009 and fiscal 2010 expenses representing primarily utility costs, insurance and maintenance for the building while it is in the process of being sold.
Cash used in operating activities from discontinued operations for fiscal 2009 was due to severance payments and closing costs during the period.
Cash Used in Investing Activities
The following table summarizes the cash used in investing activities for the periods indicated:
 
 
Years ended October 31,
(in millions of USD)
2011
 
2010
 
2009
 
$
 
$
 
$
Total additions to capital assets
(47.8
)
 
(48.7
)
 
(49.1
)
Proceeds on sale of capital assets
0.4

 

 
0.1

Net increase in investments

 
(1.1
)
 
(0.3
)
Investment in intangibles

 
(0.2
)
 
(0.2
)
Cash used in investing activities of continuing operations
(47.4
)
 
(50.0
)
 
(49.5
)
Cash provided by investing activities of discontinued operations

 

 
0.2

Cash used in investing activities
(47.4
)
 
(50.0
)
 
(49.3
)

Cash used in investing activities from continuing operations for fiscal 2011 decreased $2.6 million, or 5.2%, to $47.4 million, from $50.0 million for fiscal 2010. The decrease was primarily due to lower capital expenditures in fiscal 2011 and the non-recurrence of cash contributions in two Italian companies (BSP Pharmaceuticals) in fiscal 2010.
Cash used in investing activities from continuing operations for fiscal 2010 increased $0.5 million, or 1.0%, to $50.0 million, from $49.5 million for fiscal 2009.
Our principal ongoing investment activities are capital programs at our sites. The majority of our capital allocation is normally invested in projects that will support growth in capacity and revenues.
During fiscal 2011, our major capital projects (in millions of U.S. dollars) were:

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•    Facility infrastructure at Cincinnati to support introduction of new customer product
$
10.5

•    Consolidation of Caguas facility in Puerto Rico
$
2.3

•    Addition of PDS capabilities at the Bourgoin site
$
2.0

•    High potency packaging in Toronto
$
1.4

•    Equipment for customer product in Bourgoin
$
2.0

During fiscal 2010, our major capital projects (in millions of U.S. dollars) were:
•    Facility infrastructure at Cincinnati to support introduction of new customer product
$