DRAXIS Health Reports Results for the First Quarter of 2008 - Jun 1 2008 8:16PM

Friday, May 09, 2008 7:31 AM

MONTREAL, May 9 /PRNewswire-FirstCall/ - DRAXIS Health Inc. (TSX: DAX)(NASDAQ: DRAX) reported first quarter financial results for the three monthsended March 31, 2008. Revenues and earnings for the first quarter of 2008 werebelow those in the first quarter of 2007 as a result of lower sales of sterileproducts, the negative impact of a significantly stronger Canadian dollarrelative to the first quarter of 2007, the inclusion in the first quarter of2007 of non-recurring items and the inclusion in the first quarter of 2008 ofthe direct and indirect costs related to the potential sale of the Company.All amounts are expressed in U.S. dollars.

    Highlights
        -  Consolidated revenues for the first quarter of 2008 were           $19.2 million versus $21.0 million in the first quarter of 2007.           Product sales in the first quarter of 2008 were $18.7 million,           down 5% from $19.6 million in the first quarter of 2007. Contract           manufacturing sales were down 11%, primarily as a result of lower           revenues from sterile products during the first two months of the           quarter, and radiopharmaceutical sales were up 6%. Product gross           margins for the first quarter of 2008 were impacted by the           stronger Canadian dollar relative to the first quarter of 2007 and           by the change in product mix related to lower sterile product           volumes.
        -  Operating loss for the first quarter of 2008 was $2.4 million           compared to operating income of $2.5 million in the same period in           2007. Operating income in the first quarter of 2007 benefited from           the receipt of two non-recurring items, namely contingent           milestone payments from Shire BioChem Inc. of approximately           $0.8 million and $0.5 million in insurance proceeds.
        -  For the first quarter of 2008, diluted EPS was negative 3 cents           (or negative 2 cents adjusted diluted EPS excluding transaction           costs - See Schedule of Supplemental Information, including           footnotes) compared to diluted EPS of 5 cents (or 4 cents adjusted           diluted EPS) in the first quarter of 2007.
        -  Cash outflows from operating activities in the first quarter of           2008 were $2.3 million, compared to cash inflows of $5.5 million           in the same period in 2007. The decrease was related to lower           cash earnings and the timing of specific payments, including           severance payments.
        -  Subsequent to the end of the first quarter of 2008, on April 4,           2008 DRAXIS and Jubilant Organosys Ltd. ('Jubilant') announced           that they had entered into an arrangement agreement whereby an           indirect wholly-owned subsidiary of Jubilant will acquire all the           outstanding common shares of DRAXIS at a price of US$6.00 per           share in cash by way of a plan of arrangement.

'The first quarter of 2008 continued to be impacted by lower revenues incontract manufacturing, particularly for sterile products,' said Dan Brazier,President and CEO of DRAXIS. 'Product sales in contract manufacturing weredown 11% but were close to plan for the radiopharmaceuticals business. Marginswere negatively impacted this quarter relative to previous quarters due to thelow volume of sterile production, which is generally a higher margincontributor in the overall product mix. In addition, margins and expenses inboth our business units were adversely impacted by a much stronger Canadiandollar in the first quarter of 2008 compared to the same quarter of 2007.

Mr. Brazier continued, 'Our key development projects remain on track.DRAXIMAGE(R) Sestamibi is under active review by the US Food and DrugAdministration following our filing of an ANDA in February 2007. Weestablished a marketing and distribution agreement for this product inDecember 2007 with GE Healthcare and are now in discussions with potentialpartners for markets outside North America. We are also making progress indeveloping strategic alliances for the commercialization of our MOLY-FILL(TM)Tc-99m Generator following a successful external evaluation in late 2007, aswe prepare for the next step in that product's regulatory review process.Discussions are ongoing with potential partners for the marketing anddistribution of radiopharmaceutical products in Europe and we continue toreceive country-specific approvals for our products. Product transferactivities under our expanded relationship with Johnson & Johnson Consumer areongoing and are expected to increase throughout 2008. Construction of the newsecondary packaging facility associated with this expanded relationship is onschedule toward completion during the second half of this year.'

    -------------------------------------------------------------------------                             FINANCIAL HIGHLIGHTS       (in thousands of U.S. dollars except share related data and in                          accordance with U.S. GAAP)
                                                               For the                                                         Three Month Periods                                                           Ended March 31,                                                      2008            2007                                                  (unaudited)     (unaudited)    REVENUES      Product sales                            $      18,656   $      19,630      Royalty and licensing                              465           1,318      Anipryl(R) deferred revenues                        30              30    -------------------------------------------------------------------------                                                      19,151   $      20,978    -------------------------------------------------------------------------    -------------------------------------------------------------------------
    Product Gross Margin                       $       4,799   $       7,452      Product Gross Margin %                           25.7%           38.0%
    Operating (loss) income                          ($2,412)         $2,446      Operating Margin %                              -12.6%           11.7%
    Cash and cash equivalents                  $      22,529   $      25,495
    Total debt                                 $           0   $           0
    Cash flows from operating activities             ($2,305)  $       5,533    Cash flows used in investing activities           (1,010)         (2,954)    -------------------------------------------------------------------------                                                     ($3,315)  $       2,579    -------------------------------------------------------------------------    -------------------------------------------------------------------------
    Net (loss) income                                ($1,392)  $       2,010
    Basic and diluted (loss) earnings per share       ($0.03)  $        0.05    -------------------------------------------------------------------------

Two significant non-recurring items included in the financial results ofthe first quarter of 2007 positively affected financial performance relativeto the first quarter of 2008. During the first quarter of 2007, the Companyreceived non-recurring milestone payments of approximately $0.8 million fromShire BioChem Inc. (Shire) and an insurance payment of $0.5 million from abusiness interruption insurance claim related to an extended shutdown periodin 2005. The impact of these items on operating income and earnings per shareare included in the Schedule of Supplemental Information below.

Impact of Foreign Exchange on Comparison of Quarterly Results

The majority of the costs of the Canadian operations are denominated inCanadian dollars. As the level of revenues denominated in U.S. dollars andother foreign currencies increases relative to the underlying cost structure,the Company's overall gross profit margins and selling, general andadministration expenses are affected. Since the Company reports in $U.S., allincome statement line items are translated at the appropriate exchange rateinto $U.S for the quarterly reports. As at March 31, 2007, the Canadian dollartraded at $1.1546 Canadian per $1 U.S. By contrast, as at March 31, 2008, theCanadian dollar traded at $1.0265 Canadian per $1 U.S. The impact of thestrong Canadian dollar in the first quarter of 2008 relative to its levels inthe first quarter of 2007 materially impacts all line by line comparisonsbetween the first quarter results of 2008 and 2007 resulting in an increase inall revenues and expense line items for 2008 relative to 2007. Accordingly,all explanations of variances between first quarter of 2008 results with thefirst quarter of 2007 exclude the impact of foreign exchange on financialreporting.

Segment Highlights from Management's Discussion and Analysis
Contract Manufacturing
- Revenues of $12.6 million for the first quarter of 2008 represented a decrease of $1.6 million or 11% compared to the first quarter of 2007. The decrease was due to lower revenues of Hectorol(R) for Genzyme in the first quarter of 2008 relative to 2007, which more than offset growth from new product introductions. The Company expects stronger Hectorol(R) demand/volumes over the remainder of 2008 compared to 2007. The Company also expects product transfer activities related to the Johnson & Johnson Consumer contract to increase from the first quarter of 2008 levels as well.
- For the first quarter of 2008, sterile products represented approximately 65% of manufacturing revenues compared to 78% for the first quarter of 2007. The mix was adversely affected by the lower Hectorol(R) volumes.
- Product gross margin percentage decreased in the first quarter of 2008 compared to the same quarter of 2007 from 27% to 14%. The decrease was driven by lower Hectorol(R) volumes shipped in the quarter coupled with investment in product introduction and the impact of a stronger Canadian dollar relative to 2007, which negatively impacted margins. Product gross margin for the first quarter of 2007 benefited from a non-recurring payment of $0.5 million in insurance proceeds during that quarter.
- Operating loss for the first quarter of 2008 was $0.9 million compared with operating income of $1.7 million for the same period of 2007. The lower operating earnings reflects the lower Hectorol(R) revenue for the first quarter of 2008, the inclusion of $0.5 million of insurance proceeds in 2007 results and the collection of previously uncollectible receivables also included in the 2007 results.
Radiopharmaceuticals
- Product sales of $6.1 million for the first quarter of 2008 represent a 6% increase over the first quarter of 2007, primarily as a result of the inclusion in revenues of a chargeback for freight services beginning on April 1, 2007. Revenue growth was hindered by the suspension of production (beginning in the second half of 2007) of a private label radioactive product for one customer that historically contributed $350,000 in quarterly product sales. Shortly after the end of the first quarter of 2008, DRAXIMAGE initiated direct sales to U.S. customers of its own formulation of the radioactive product.
- Product gross margins for the first quarter of 2008 decreased to 49% from 62% compared with the same period in 2007 due to the dramatic strengthening of the Canadian dollar from the first quarter of 2007, the inclusion of freight charges in both revenues and cost of goods sold beginning on April 1, 2007, a change in product mix and increased raw material costs.
- Operating income of $0.5 million for the first quarter of 2008 decreased $0.8 million compared to the same period of 2007 driven by decreased margins related to the strengthening Canadian dollar, the decrease of the private label product volumes, and higher selling, general and administrative expenses.
- DRAXIMAGE is continuing to obtain registrations in European markets for existing products that are currently approved and sold in Canada or the U.S. In February 2005, DRAXIMAGE received approval from the Dutch regulatory authority for its Kit for the Preparation of Technetium Tc-99m Albumin Aggregated Injection ('MAA Kit'). This MAA Kit has since also been approved in Germany, the United Kingdom, Belgium, Austria, Luxembourg and Spain. DRAXIMAGE MDP, a product used for bone imaging, has been approved in the Netherlands, the United Kingdom, Ireland, the Czech Republic, Denmark and Germany. Sodium Iodide I-131 therapeutic capsules for the treatment of thyroid cancer have been approved in Denmark.
Guidance for Future Years

The Company continues to expect progressively improving financial resultsduring 2008 compared to 2007 as a result of increased demand through newbusiness opportunities, product introductions and additional contracts. Thisis expected to result in continuing year-over-year growth in revenues,operating income, and cash flows going forward, starting from a base in 2008.Net earnings per share for 2008 are expected to increase significantly over2007. However, the extent to which the Company can reasonably predict thefinancial performance for 2008 is limited due to variables outside of thecontrol of the Company. Accordingly, the Company does not plan to providespecific quantitative guidance given the anticipated period of expansion andsignificant growth that is expected to be accompanied by periods of increasedforecast variability due to several factors, including the following:

    -   The timing and ramping-up of commercial production of non-sterile        products under the new contract with Johnson & Johnson Consumer will        be influenced by both the product transfer process and the receipt of        manufacturing site transfer approvals from appropriate regulatory        agencies.
    -   We do expect revenue growth associated with product transfer        activities for 2008 but, while such activities will generate positive        margins, the margin percentage is expected to be dilutive to overall        margins as we hire and train new personnel in anticipation of the        commercial phase of the contract.
    -   Several potential new business opportunities have been identified as        a result of increased marketing and outreach activities initiated        during 2007. However, the rate of conversion of such opportunities to        new business contracts over the next several quarters has introduced        increased forecasting variability.
    -   The timing and extent of radiopharmaceutical product introductions to        European markets is highly dependent on receiving timely regulatory        approvals, although additional approvals are expected during 2008 in        several different countries. The Company is actively working to        establish one or more appropriate marketing and distribution        partnerships, which will influence the rate at which product sales        will grow in the European Union markets.
    -   Revenue and earnings from the potential introduction of DRAXIMAGE(R)        Sestamibi will depend on several factors including regulatory        approvals, competitive activity, manufacturing execution, marketing        and distribution partnerships and market acceptance following product        launch. This is expected to be a significant product for the Company        and the variability around its introduction alone is expected to        impact the accuracy of future forecasts for 2008 and 2009.
    -   The potential introduction of the MOLY-FILL(TM) Technetium        Generator is expected to be a significant event given the limited        product offerings currently available, and the forecast variability        associated with this product is highly dependent on somewhat        unpredictable factors including regulatory approvals, marketing        and/or distribution agreements, pricing strategies and market        penetration rates.
    Schedule of Supplemental Information
    -------------------------------------------------------------------------    Reconciliation from reported operating (loss) income and diluted EPS to    adjusted operating (loss) income and diluted EPS    (in thousands of U.S. dollars except share related data and in accordance    with U.S. GAAP)
                                    For the Three Month Periods                                           Ended March 31,                                    ---------------------------                                        2008            2007        % Change
    Operating (Loss) Income -     Reported                        ($2,412)         $2,446         (198.6%)    Adjustments:      (a) Non-recurring Shire           milestone receipt(2)            -            (791)      (b) Insurance proceeds(3)            -            (517)      (c) DSU (recovery) expense(4)      197             348          (43.4%)      (d) Transaction costs              544               -      Anipryl(R) deferred revenues       (30)            (30)              -    -------------------------------------------------------------------------    Operating (Loss) Income -     Adjusted(1)                     ($1,701)         $1,456         (216.9%)    -------------------------------------------------------------------------
    Diluted EPS - Reported            ($0.03)          $0.05    Adjustments:      (a) Non-recurring Shire           milestone receipt(2)            -          ($0.01)      (b) Insurance proceeds(3)            -          ($0.01)      (c) DSU (recovery) expense(4)        -            0.01      (d) Transaction costs             0.01      Anipryl(R) deferred revenues         -               -    ---------------------------------------------------------    Diluted EPS - Adjusted(1)         ($0.02)          $0.04    ---------------------------------------------------------
    -------------------------------------------------------------------------
    (1) 'Adjusted Operating (Loss) Income' and 'Adjusted Diluted EPS' are    defined, respectively, as reported operating (loss) income and diluted    EPS, excluding certain items. These terms do not have a standardized    meaning prescribed by U.S. GAAP and therefore may not be comparable to    similar measures used by other companies. Management uses adjusted    operating (loss) income, among other factors, to set performance goals    and to measure the performance of the overall company. The Company    believes that investors' understanding of our performance is enhanced by    disclosing these measures.
    (2) The Company became entitled to and received non-recurring contingent     milestone payments from Shire.
    (3) Insurance proceeds related to a business interruption claim filed    resulting from equipment damage during 2005 shutdown period.
    (4) Reflects the change in the value of Deferred Share Unit Plan based on    the market price of the Company's common stock. See Note 7 of    accompanying interim financial statements.
    Interim Financial Report

This release incorporates by reference the first quarter Interim Report toShareholders ('Q1 Report'), which includes the full Management's Discussion &Analysis (MD&A) for the quarter ended March 31, 2008 as well as financialstatements for such quarter, prepared in accordance with U.S. GAAP. The Q1Report has been filed with applicable Canadian and U.S. securities regulatoryauthorities and is accessible on the Company's website at www.draxis.com inthe Investor Relations section under Financial Reports. It is also availableon the SEDAR (at www.sedar.com) and EDGAR (at www.sec.gov) databases or uponrequest by contacting DRAXIS Investor Relations at 1-877-441-1984.

Annual and Special Meeting of Shareholders

The annual and special meeting (the 'Meeting') of shareholders of theCompany is scheduled to be held at the offices of McCarthy Tetrault LLP, Suite5300, TD Bank Tower, Toronto, Ontario, Canada on Friday, May 23, 2008 at 10:00a.m. (Toronto time).

At the Meeting, shareholders will be asked to approve a plan ofarrangement under the Canada Business Corporations Act, involving DRAXIS, itsshareholders and Jubilant Acquisition Inc. (the 'Purchaser'), an indirectwholly-owned subsidiary of Jubilant Organosys Ltd. The plan of arrangementwill result in the acquisition by the Purchaser of all the outstanding commonshares of DRAXIS for a consideration of U.S.$6.00 per common share.

About DRAXIS Health Inc.

DRAXIS Health, through its wholly owned operating subsidiary, DRAXISSpecialty Pharmaceuticals Inc., provides products in three categories: sterileproducts, non-sterile products and radiopharmaceuticals. Sterile productsinclude liquid and freeze-dried (lyophilized) injectables plus sterileointments and creams. Non-sterile products are produced as solid oral andsemi-solid dosage forms. Radiopharmaceuticals are used for both therapeuticand diagnostic molecular imaging applications. Pharmaceutical contractmanufacturing services are provided through the DRAXIS Pharma division andradiopharmaceuticals are developed, produced, and sold through the DRAXIMAGEdivision. DRAXIS employs approximately 500 staff in its Montreal facility.

    For additional information please visit www.draxis.com.
    Caution Concerning Forward-Looking Statements

This news release contains forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended (the 'SecuritiesAct') and Section 21E of the Securities Exchange Act of 1934, as amended (the'Exchange Act') and as contemplated under other applicable securitieslegislation. These statements can be identified by the use of forward-lookingterminology such as 'may,' 'will,' 'expect,' 'anticipate,' 'estimate,''continue,' 'plan,' 'intend,' 'believe' or other similar words. Thesestatements discuss future expectations concerning results of operations orfinancial condition or provide other forward-looking information. Our actualresults, performance or achievements could be significantly different from theresults expressed in, or implied by, those forward-looking statements. Youshould not place undue reliance on any forward-looking statement, which speaksonly as of the date made.

These statements are not guarantees of future performance. By theirnature, forward-looking statements involve numerous assumptions, known andunknown risks, uncertainties and other factors that may cause the actualresults or performance of the Company to be materially different from suchstatements or from any future results or performance implied thereby.

Related Stories