Patheon Inc., a provider of contract drug manufacturing
services, reported it lost US$11.2 million in the second quarter, reversing a
$10.9 million profit a year earlier.

The Toronto
company said Friday it lost 8.7 cents a share for the quarter ended April 30,
compared with a profit of 8.4 cents a year earlier.

The news disappointed investors, who sold off the company’s
stock by more than 12 per cent in trading on the Toronto Stock Exchange.

The company, which reports in U.S. currency, said weakness in the
U.S. dollar resulted in an $8.8 million currency translation hit on its books.

Revenues for the quarter fell 3.1 per cent to $170 million.

Patheon said the second quarter results reflect an unusual
level of contract cancellations and delays in the pharmaceutical development
services, or PDS business, during the first half of 2011.

Patheon’s commercial business was also negatively impacted
by operating performance issues and production delays at several of the
company’s drug making plants.

“The commercial production forecast for the remainder
of fiscal 2011 has strengthened and we have a strong book of business in Pharmaceutical
Development Services,” James Mullen, Patheon’s chief executive, said in a
release before stock markets opened Friday.

“We expect underlying operating performance in the
second half to improve significantly from second quarter levels.”

Looking ahead, Mullen said Patheon is working to improve its
operational efficiency.

“We are actively addressing the commercial production
challenges of the second quarter, which included higher than normal inventory
writeoffs at several sites, as well as increased overtime at two sites related
to a major new product launch, and significant increases in market demand for
an existing product,” Mullen said. “This has led to some orders
shifting into the second half of the year.

“Our PDS business experienced an unusual level of
contract cancellations and delays during the first half related to customer
regulatory approval and clinical trial outcome issues, as well as industry
M&A activity. This created short term weakness in demand at some of our PDS
sites, which had staffed for a higher level of activity. Contract cancellations
are not typically a major PDS issue, and we have not seen further material
issues over the last few months.”

Patheon is a global provider of contract development and
manufacturing services to the world’s major drug companies. It has 10 drug
making plants, eight development centres and one clinical trial packaging
operation across North America and Europe.

In Friday trading on the TSX, Patheon shares fell 27 cents
to close at $1.93, a drop of nearly 12.3 per cent.