DRAX Draxis Health (MM)

MONTREAL, May 9 /PRNewswire-FirstCall/ -- DRAXIS Health Inc. (TSX: DAX) (NASDAQ:DRAX) reported first quarter financial results for the three months ended March 31, 2008. Revenues and earnings for the first quarter of 2008 were below those in the first quarter of 2007 as a result of lower sales of sterile products, the negative impact of a significantly stronger Canadian dollar relative to the first quarter of 2007, the inclusion in the first quarter of 2007 of non-recurring items and the inclusion in the first quarter of 2008 of the 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 in contract manufacturing, particularly for sterile products," said Dan Brazier, President and CEO of DRAXIS. "Product sales in contract manufacturing were down 11% but were close to plan for the radiopharmaceuticals business. Margins were negatively impacted this quarter relative to previous quarters due to the low volume of sterile production, which is generally a higher margin contributor in the overall product mix. In addition, margins and expenses in both our business units were adversely impacted by a much stronger Canadian dollar 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 Drug Administration following our filing of an ANDA in February 2007. We established a marketing and distribution agreement for this product in December 2007 with GE Healthcare and are now in discussions with potential partners for markets outside North America. We are also making progress in developing strategic alliances for the commercialization of our MOLY-FILL(TM) Tc-99m Generator following a successful external evaluation in late 2007, as we prepare for the next step in that product's regulatory review process. Discussions are ongoing with potential partners for the marketing and distribution of radiopharmaceutical products in Europe and we continue to receive country-specific approvals for our products. Product transfer activities under our expanded relationship with Johnson & Johnson Consumer are ongoing and are expected to increase throughout 2008. Construction of the new secondary packaging facility associated with this expanded relationship is on schedule 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 of the first quarter of 2007 positively affected financial performance relative to the first quarter of 2008. During the first quarter of 2007, the Company received non-recurring milestone payments of approximately $0.8 million from Shire BioChem Inc. (Shire) and an insurance payment of $0.5 million from a business interruption insurance claim related to an extended shutdown period in 2005. The impact of these items on operating income and earnings per share are 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 in Canadian dollars. As the level of revenues denominated in U.S. dollars and other foreign currencies increases relative to the underlying cost structure, the Company's overall gross profit margins and selling, general and administration expenses are affected. Since the Company reports in $U.S., all income statement line items are translated at the appropriate exchange rate into $U.S for the quarterly reports. As at March 31, 2007, the Canadian dollar traded at $1.1546 Canadian per $1 U.S. By contrast, as at March 31, 2008, the Canadian dollar traded at $1.0265 Canadian per $1 U.S. The impact of the strong Canadian dollar in the first quarter of 2008 relative to its levels in the first quarter of 2007 materially impacts all line by line comparisons between the first quarter results of 2008 and 2007 resulting in an increase in all revenues and expense line items for 2008 relative to 2007. Accordingly, all explanations of variances between first quarter of 2008 results with the first quarter of 2007 exclude the impact of foreign exchange on financial reporting. 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 results during 2008 compared to 2007 as a result of increased demand through new business opportunities, product introductions and additional contracts. This is 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 over 2007. However, the extent to which the Company can reasonably predict the financial performance for 2008 is limited due to variables outside of the control of the Company. Accordingly, the Company does not plan to provide specific quantitative guidance given the anticipated period of expansion and significant growth that is expected to be accompanied by periods of increased forecast 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 to Shareholders ("Q1 Report"), which includes the full Management's Discussion & Analysis (MD&A) for the quarter ended March 31, 2008 as well as financial statements for such quarter, prepared in accordance with U.S. GAAP. The Q1 Report has been filed with applicable Canadian and U.S. securities regulatory authorities and is accessible on the Company's website at http://www.draxis.com/ in the Investor Relations section under Financial Reports. It is also available on the SEDAR (at http://www.sedar.com/) and EDGAR (at http://www.sec.gov/) databases or upon request 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 the Company is scheduled to be held at the offices of McCarthy Tetrault LLP, Suite 5300, TD Bank Tower, Toronto, Ontario, Canada on Friday, May 23, 2008 at 10:00 a.m. (Toronto time). At the Meeting, shareholders will be asked to approve a plan of arrangement under the Canada Business Corporations Act, involving DRAXIS, its shareholders and Jubilant Acquisition Inc. (the "Purchaser"), an indirect wholly-owned subsidiary of Jubilant Organosys Ltd. The plan of arrangement will result in the acquisition by the Purchaser of all the outstanding common shares 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, DRAXIS Specialty Pharmaceuticals Inc., provides products in three categories: sterile products, non-sterile products and radiopharmaceuticals. Sterile products include liquid and freeze-dried (lyophilized) injectables plus sterile ointments and creams. Non-sterile products are produced as solid oral and semi-solid dosage forms. Radiopharmaceuticals are used for both therapeutic and diagnostic molecular imaging applications. Pharmaceutical contract manufacturing services are provided through the DRAXIS Pharma division and radiopharmaceuticals are developed, produced, and sold through the DRAXIMAGE division. DRAXIS employs approximately 500 staff in its Montreal facility. For additional information please visit http://www.draxis.com/. Caution Concerning Forward-Looking Statements This news release 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") and as contemplated under other applicable securities legislation. These statements can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue," "plan," "intend," "believe" or other similar words. These statements discuss future expectations concerning results of operations or financial condition or provide other forward-looking information. Our actual results, performance or achievements could be significantly different from the results expressed in, or implied by, those forward-looking statements. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. These statements are not guarantees of future performance. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from such statements or from any future results or performance implied thereby. Factors that could cause the Company's results or performance to differ materially from a conclusion, forecast or projection in the forward-looking statements include, but are not limited to: - the potential acquisition of DRAXIS by Jubilant, by way of plan of arrangement, in an all cash transaction at US$6.00 per outstanding share (the "Acquisition); - a special meeting of DRAXIS' shareholders to consider the Acquisition, currently scheduled to be held on May 23, 2008; - the approval of the Acquisition by DRAXIS' shareholders; - the ability of each of Jubilant and DRAXIS to satisfy all of the closing conditions to complete the Acquisition; - the possibility that DRAXIS' shareholders do not approve the Acquisition at the special meeting of shareholders; - the achievement of desired clinical trial results related to DRAXIS' pipeline products; - timely regulatory approval of DRAXIS' products; - the ability to comply with regulatory requirements applicable to the manufacture and marketing of DRAXIS' products; - DRAXIS' ability to obtain and enforce effective patents; - the non-infringement of third party patents or proprietary rights by DRAXIS and its products; - factors beyond DRAXIS' control that could cause interruptions in operations in its single manufacturing facility (including, without limitation, material equipment breakdowns); - reimbursement policies related to health care; - the establishment and maintenance of strategic collaborative and commercial relationships; - DRAXIS' dependence on a small number of key customers; - the disclosure of confidential information by DRAXIS' collaborators, employees or consultants; - the preservation of healthy working relationships with DRAXIS' union and employees; - DRAXIS' ability to grow the business; - the fluctuation of DRAXIS' financial results and exchange and interest rate fluctuations; - the adaptation to changing technologies; - the loss of key personnel; - the avoidance of product liability claims; - the loss incurred if current lawsuits against DRAXIS succeed; - the volatility of the price of DRAXIS' common shares; - market acceptance of DRAXIS' products; and - the risks described in "Item 3. Key Information - Risk Factors" in the Annual Report Form 20-F filed by DRAXIS with the United States Securities and Exchange Commission and which is also filed as DRAXIS' Annual Information Form with Canadian securities regulators. For additional information with respect to certain of these and other factors, and relating to DRAXIS generally, reference is made to DRAXIS' most recent filings with the United States Securities and Exchange Commission (available on EDGAR at http://www.sec.gov/) and the filings made by DRAXIS with Canadian securities regulators (available on SEDAR at http://www.sedar.com/). The forward-looking statements contained in this new release represent DRAXIS' expectations as at May 8, 2008. Unless otherwise required by applicable securities laws, DRAXIS disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Financial Tables Attached DRAXIS HEALTH INC. Consolidated Statements of Operations In Accordance with U.S. GAAP ------------------------------------------------------------------------- (in thousands of U.S. dollars except share related data) (unaudited) For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 -------------- -------------- REVENUES Product sales $ 18,656 $ 19,630 Royalty and licensing 495 1,348 ------------------------------------------------------------------------- 19,151 20,978 ------------------------------------------------------------------------- EXPENSES Cost of goods sold, excluding depreciation and amortization (Note 3) 13,857 12,178 Selling, general and administration 5,444 4,184 Research and development 729 924 Depreciation and amortization 1,533 1,246 ------------------------------------------------------------------------- 21,563 18,532 ------------------------------------------------------------------------- Operating (loss) income (2,412) 2,446 Financing income, net 213 186 Foreign exchange gain (loss) 168 (108) ------------------------------------------------------------------------- (Loss) income before income taxes (2,031) 2,524 Income taxes (recovery) expense (639) 514 ------------------------------------------------------------------------- Net (loss) income $ (1,392) $ 2,010 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic (loss) earnings per share (Note 4) $ (0.03) $ 0.05 ---------------------------------------- Diluted (loss) earnings per share (Note 4) $ (0.03) $ 0.05 ------------------------------------------ Weighted-average number of shares outstanding - basic 42,063,197 41,734,615 - diluted 42,063,197 41,889,281 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See the accompanying notes to the Consolidated Financial Statements. These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements. DRAXIS HEALTH INC. Consolidated Balance Sheets In Accordance with U.S. GAAP ------------------------------------------------------------------------- (in thousands of U.S. dollars except share related data) (unaudited) March 31, December 31, 2008 2007 -------------- -------------- ASSETS Current assets Cash and cash equivalents $ 22,529 $ 24,796 Restricted cash 1,266 1,326 Accounts receivable 16,460 18,059 Inventories (Note 5) 10,130 9,620 Prepaid expenses 1,165 1,358 Deferred income taxes, net 4,119 4,119 ------------------------------------------------------------------------- Total current assets 55,669 59,278 Accounts receivable, long term 3,657 2,514 Property, plant and equipment, net 57,425 58,494 Goodwill, net 854 885 Intangible assets, net 230 240 Other assets 362 310 Deferred income taxes, net 6,626 6,213 ------------------------------------------------------------------------- Total assets $ 124,823 $ 127,934 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Current liabilities Accounts payable and accrued liabilities (Note 6) $ 10,514 $ 11,904 Current portion of deferred revenues 621 411 Customer deposits 207 385 ------------------------------------------------------------------------- Total current liabilities 11,342 12,700 Other liabilities 185 164 Deferred revenues 564 594 Customer financing 5,841 3,135 ------------------------------------------------------------------------- Total liabilities $ 17,932 $ 16,593 ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, without par value of unlimited shares authorized $ 79,831 $ 79,814 Additional paid-in capital 16,193 15,984 Deficit (7,968) (6,576) Accumulated other comprehensive income 18,835 22,119 ------------------------------------------------------------------------- Total shareholders' equity 106,891 111,341 ------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 124,823 $ 127,934 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See the accompanying notes to the Consolidated Financial Statements. These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements. DRAXIS HEALTH INC. Consolidated Statements of Changes in Equity and Comprehensive Income (Loss) In Accordance with U.S. GAAP ------------------------------------------------------------------------- (in thousands of U.S. dollars except share related data) (unaudited) For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 ------------------------------ Common Stock (Number of Shares) Balance, beginning of period 42,062,538 41,522,138 Exercise of options 5,000 462,501 ------------------------------------------------------------------------- Balance, end of period 42,067,538 41,984,639 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Common Stock Balance, beginning of period $ 79,814 $ 77,749 Exercise of options 11 1,453 Fair values of options exercised 6 - ------------------------------------------------------------------------- Balance, end of period $ 79,831 $ 79,202 ------------------------------------------------------------------------- Additional Paid In Capital Balance, beginning of period $ 15,984 $ 15,475 Stock-based compensation 215 281 Fair values of options exercised (6) - ------------------------------------------------------------------------- Balance, end of period $ 16,193 $ 15,756 ------------------------------------------------------------------------- Deficit Balance, beginning of period $ (6,576) $ (8,234) Net (loss) income (1,392) 2,010 ------------------------------------------------------------------------- Balance, end of period $ (7,968) $ (6,224) ------------------------------------------------------------------------- Accumulated Other Comprehensive Income (Loss) Balance, beginning of period $ 22,119 $ 7,425 Other comprehensive (loss) income (3,284) 791 ------------------------------------------------------------------------- Balance, end of period 18,835 8,216 ------------------------------------------------------------------------- Total shareholders' equity $ 106,891 $ 96,950 ------------------------------------------------------------------------- Comprehensive (Loss) Income Foreign currency translation adjustments $ (3,284) $ 791 Net (loss) income (1,392) 2,010 ------------------------------------------------------------------------- Total comprehensive (loss) income $ (4,676) $ 2,801 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See the accompanying notes to the Consolidated Financial Statements. These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements. DRAXIS HEALTH INC. Consolidated Statements of Cash Flows In Accordance with U.S. GAAP ------------------------------------------------------------------------- (in thousands of U.S. dollars) (unaudited) For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 ------------------------------ CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net (loss) income $ (1,392) $ 2,010 Adjustments to reconcile net (loss) income to net cash from (used in) operating activities Amortization of deferred revenues (30) (30) Depreciation and amortization 1,533 1,246 Stock-based compensation 215 281 Deferred income taxes (877) 353 Foreign exchange 10 108 Deferred Share Unit expense (Note 7) 197 347 Other 25 177 Changes in operating assets and liabilities Accounts receivable (253) 3,639 Accounts receivable, long term (1,143) - Proceeds from customer financing used in operations 1,006 - Inventories (881) 452 Prepaid expenses 149 (484) Accounts payable and accrued liabilities (1,077) (2,176) Other liabilities 27 (232) Deferred revenues 186 (158) ------------------------------------------------------------------------- Net cash from (used in) operating activities (2,305) 5,533 ------------------------------------------------------------------------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Expenditures for property, plant and equipment (2,236) (2,780) Decrease in receivables related to property, plant and equipment 1,226 - Increase in intangible assets - (174) ------------------------------------------------------------------------- Net cash from (used in) investing activities (1,010) (2,954) ------------------------------------------------------------------------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Proceeds from customer financing 2,706 - Proceeds from customer financing used in operations (1,006) - Customer deposits, net (173) (38) Exercise of options 11 1,453 ------------------------------------------------------------------------- Net cash from (used in) financing activities 1,538 1,415 ------------------------------------------------------------------------- Effect of foreign exchange rate changes on cash and cash equivalents (490) 55 ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,267) 4,049 Cash and cash equivalents, beginning of period 24,796 21,446 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 22,529 $ 25,495 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Additional Information Interest paid $ - $ - Income taxes paid $ 541 $ 203 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See the accompanying notes to the Consolidated Financial Statements. These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements DRAXIS HEALTH INC. Notes to the Consolidated Financial Statements In Accordance with U.S. GAAP ------------------------------------------------------------------------- (in thousands of U.S. dollars except share related data) (unaudited) 1. Significant Accounting Policy These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America. The functional currency of the Company is the Canadian dollar however its reporting currency is the U.S. dollar. For the current and prior periods, the financial statements of the Company's operations whose reporting currency is other than the U.S. dollar are translated from such reporting currency to U.S. dollars using the current rate method. Under the current rate method, assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Revenues and expenses, including gains and losses on foreign exchange transactions, are translated at average rates for the period. The resulting unrealized translation gains and losses on the Company's net investment in these operations, including long-term intercompany advances, are accumulated in a separate component of shareholders' equity, described in the consolidated balance sheets as accumulated other comprehensive income. The disclosures contained in these unaudited interim consolidated financial statements do not include all requirements of GAAP for annual financial statements. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2007. The unaudited interim consolidated financial statements are based upon accounting principles consistent with those used and described in the audited consolidated financial statements for the year ended December 31, 2007, other than as noted herein. The unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the financial position of the Company as at March 31, 2008 and the results of operations and cash flows for the three-month period ended March 31, 2008 and 2007. 2. Recent Accounting Pronouncements Effective January 1, 2008, the Company adopted SFAS # 157, "Fair Value Measurements" ("SFAS 157"). In February 2008, the FASB issued FASB Staff Position # FAS 157-2, "Effective Date of FASB Statement # 157", which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value on a recurring basis (at least annually). Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: - Level 1 - Quoted prices in active markets for identical assets or liabilities. - Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. - Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The adoption of this statement did not have a material impact on the Company's consolidated results of operations and financial condition. Effective January 1, 2008, the Company adopted SFAS # 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under this Statement. Fair Value In accordance with SFAS 157, the following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2008 (in thousands): Assets Level 1 ------ -------- Other assets indexed to value of the Company's share price $ 362 Liabilities ----------- Deferred share unit liabilities indexed to value of the Company's share price (1,105) 3. Cost of Goods Sold In the first quarter of 2007, DRAXIS received insurance proceeds of $517 in settlement of business interruption losses related to the extended shutdown in the third quarter of 2005. No accrual for insurance proceeds had been previously recorded as the claim represented a contingent gain. The proceeds were recognized as a reduction to cost of goods sold in the first quarter of 2007. 4. Earnings (loss) per Share Basic earnings (loss) per common share is calculated by dividing the net income by the weighted-average number of the Company's common shares outstanding during the period. Diluted earnings per common share is calculated by dividing the net (loss) income by the sum of the weighted-average number of common shares that would have been outstanding if potentially dilutive common shares had been issued during the period. The treasury stock method is used to compute the dilutive effect of stock options. The calculation of diluted earnings (loss) per common share excludes any potential conversion of options that would increase earnings per share. The following table sets forth the computation of basic and diluted earnings (loss) per share: For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 ------------------------------ Numerator: Net (loss) income $ (1,392) $ 2,010 Denominator: Weighted-average number of common shares outstanding - basic 42,063,197 41,734,615 Weighted-average effect of dilutive securities-stock options - 154,666 ------------------------------------------------------------------------- Weighted-average number of common shares outstanding-diluted 42,063,197 41,889,281 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings (loss) per share $ (0.03) $ 0.05 Diluted earnings (loss) per share $ (0.03) $ 0.05 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 5. Inventories March 31, December 31, 2008 2007 ------------------------------------------------------------------------- Raw materials $ 4,655 $ 4,707 Work-in-process 1,519 1,330 Finished goods 3,956 3,583 ------------------------------------------------------------------------- $ 10,130 $ 9,620 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 6. Accounts Payable and Accrued Liabilities March 31, December 31, 2008 2007 ------------------------------------------------------------------------- Trade $ 6,876 $ 6,575 Accrued liabilities 1,322 2,313 Employee-related items 2,316 3,016 ------------------------------------------------------------------------- $ 10,514 $ 11,904 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. Shareholders' Equity (a) Stock Option Plan The following is a summary of the number of common shares issuable pursuant to outstanding stock options: For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 Balance, beginning of period 1,875,828 2,257,995 Increase (decrease) resulting from: Granted 260,000 420,000 Exercised (5,000) (462,501) Cancelled (10,000) - Expired - - ------------------------------ Balance, end of period 2,120,828 2,215,494 ------------------------------ ------------------------------ Exercisable at March 31 938,328 869,105 As of March 31: Remaining unrecognized compensation cost related to non-vested stock options $ 1,591 $ 2,222 Weighted-average remaining requisite service period 1.4 years 1.9 years Weighted-average exercise price of options: Outstanding, end of period CDN$4.69 CDN$4.62 Exercisable, end of period CDN$5.25 CDN$4.64 Granted CDN$4.07 CDN$5.69 Exercised CDN$2.30 CDN$3.68 Cancelled CDN$2.63 - Expired - - The following table summarizes information about stock options outstanding at March 31, 2008: Options Outstanding --------------------------------------------------- Weighted- Average Remaining Weighted- Aggregate Contractual Average Intrinsic Range of Exercise Number Life Exercise Value Prices Outstanding (in years) Price ($000's) $2.01 - $2.50 350,001 5.29 $2.36 $1,383 $2.51 - $3.00 27,500 5.37 $2.63 $101 $3.01 - $3.50 15,000 0.59 $3.25 $46 $3.51 - $4.00 - - - - $4.01 - $4.50 385,000 3.46 $4.14 $834 $4.51 - $5.00 130,000 1.36 $4.70 $209 $5.01 - $6.65 1,213,327 3.39 $5.58 $895 --------------------------------------------------- 2,120,828 3.61 $4.69 $3,467 --------------------------------------------------- --------------------------------------------------- Options Exercisable --------------------------------------------------- Weighted- Average Remaining Weighted- Aggregate Contractual Average Intrinsic Range of Exercise Number Life Exercise Value Prices Exercisable (in years) Price ($000's) $2.01 - $2.50 1 0.13 $2.29 $0 $2.51 - $3.00 - - - - $3.01 - $3.50 15,000 0.59 $3.25 $46 $3.51 - $4.00 - - - - $4.01 - $4.50 125,000 0.75 $4.30 $251 $4.51 - $5.00 130,000 1.36 $4.70 $209 $5.01 - $6.65 668,327 2.48 $5.54 $517 --------------------------------------------------- 938,328 2.08 $5.25 $1,024 --------------------------------------------------- --------------------------------------------------- (b) Deferred Share Unit Plan Under the Company's Deferred Share Unit Plan, members of senior management can elect to receive up to 20% of base salary and up to 100% of any bonus payable in respect of that year in deferred share units ("DSUs") in lieu of cash compensation. An election must be made by December 1 of each year in respect of base salary and bonus for the following year. The elected amount is converted to a number of DSUs equal to the elected amount divided by the closing price of the common shares on TSX or NASDAQ on December 31 of each year, based on a purchase commitment as of December 1 of the prior year. Participants are not entitled to redeem any DSUs until cessation of employment with the Company for any reason. The value of DSUs redeemable by the participants will be equivalent to the market value of the common share at the time of redemption. The DSUs must be redeemed no later than the end of the first calendar year commencing after the date of cessation of employment. The DSU liability is re-measured at the end of each reporting period based on the market price of the Company's common stock. The net increase or decrease in the value of the DSUs is recorded as compensation cost included in selling, general and administration expense. The following summarizes the number of DSUs issued and outstanding and its impact on SG&A: For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 ------------------------------ Balance, beginning of period 230,018 230,447 Issued - - Cancelled - (429) ------------------------------------------------------------------------- Balance, end of period 230,018 230,018 ------------------------------------------------------------------------- ------------------------------------------------------------------------- DSU expense $197 $347 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. Segmented Information Industry Segmentation For purposes of operating decision-making and assessing performance, management considers that it operates in three segments: Radiopharmaceuticals, Manufacturing, and Corporate and Other. Executive management assesses the performance of each segment based on segment income. The segments are identified as reporting segments based on the distinct management teams, customer base, production process and regulatory requirements of each. The Corporate and Other segment includes revenues earned via royalties and milestones, inter-segment eliminations and corporate expenses. The accounting policies used to determine segmented results and measure segmented assets are the same as those described in the summary of significant accounting policies in the 2007 annual Consolidated Financial Statements. For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 -------------- -------------- PRODUCT SALES REVENUES Radiopharmaceuticals $ 6,086 $ 5,757 Manufacturing 12,623 14,235 Corporate and Other (53) (362) ------------------------------------------------------------------------- $ 18,656 $ 19,630 ------------------------------------------------------------------------- ROYALTY AND LICENSING REVENUES Radiopharmaceuticals $ 46 $ - Manufacturing - - Corporate and Other 449 1,348 ------------------------------------------------------------------------- $ 495 $ 1,348 ------------------------------------------------------------------------- TOTAL REVENUES Radiopharmaceuticals $ 6,132 $ 5,757 Manufacturing 12,623 14,235 Corporate and Other 396 986 ------------------------------------------------------------------------- $ 19,151 $ 20,978 ------------------------------------------------------------------------- PRODUCT GROSS MARGIN Radiopharmaceuticals $ 2,955 $ 3,583 Manufacturing 1,758 3,844(1) Corporate and Other 86 25 ------------------------------------------------------------------------- $ 4,799 $ 7,452 ------------------------------------------------------------------------- SELLING, GENERAL AND ADMINISTRATION EXPENSE Radiopharmaceuticals $ 1,472 $ 1,088 Manufacturing 1,509 1,297 Corporate and Other(2) 2,463 1,799 ------------------------------------------------------------------------- $ 5,444 $ 4,184 ------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT EXPENSE Radiopharmaceuticals $ 729 $ 924 Manufacturing - - Corporate and Other - - ------------------------------------------------------------------------- $ 729 $ 924 ------------------------------------------------------------------------- SEGMENT(LOSS) INCOME(3) Radiopharmaceuticals $ 800 $ 1,571 Manufacturing 249 2,547 Corporate and Other (1,928) (426) ------------------------------------------------------------------------- $ (879) $ 3,692 ------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION Radiopharmaceuticals $ 266 $ 273 Manufacturing 1,175 891 Corporate and Other 92 82 ------------------------------------------------------------------------- $ 1,533 $ 1,246 ------------------------------------------------------------------------- OPERATING (LOSS) INCOME(4) Radiopharmaceuticals $ 534 $ 1,298 Manufacturing (926) 1,656 Corporate and Other (2,020) (508) ------------------------------------------------------------------------- $ (2,412) $ 2,446 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes $517 of insurance proceeds related to a business interruption claim filed resulting from equipment damage during 2005 shutdown period. (2) Stock-based compensation expense was recorded in SG&A in the amount of $215 in Q1, 2008 (Q1, 2007 - $281). (3) Income (loss) before depreciation and amortization, financing income, foreign exchange (loss) gain and income taxes. (4) Income (loss) before financing income, foreign exchange (loss) gain and income taxes. March 31, December 31, IDENTIFIABLE ASSETS 2008 2007 -------------- -------------- Radiopharmaceuticals $ 20,274 $ 19,560 Manufacturing 68,167 68,117 Corporate and Other 36,382 40,257 ------------------------------------------------------------------------- $ 124,823 $ 127,934 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Geographic Segmentation For the Three Month Periods Ended March 31, ------------------------------ REVENUES(1) 2008 2007 -------------- -------------- Canada $ 9,306 $ 9,746 United States 8,456 10,531 Other 1,389 701 ------------------------------------------------------------------------- $ 19,151 $ 20,978 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Revenues are attributable to countries based upon the location of the customer. Long-Lived Assets Substantially all of the Company's Property, Plant and Equipment, Goodwill and Intangible Assets are located in Canada. Expenditures for Property, Plant and Equipment For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 -------------- -------------- Radiopharmaceuticals $ 172 $ 335 Manufacturing 2,064 2,445 Corporate and Other - - ------------------------------------------------------------------------- $ 2,236 $ 2,780 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Product Sales Revenues by Major Product Groups For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 -------------- -------------- Radiopharmaceuticals $ 6,086 $ 5,757 Manufacturing - Sterile 8,170 11,119 Manufacturing - Non Sterile 4,453 3,116 Corporate and Other 120 227 Intercompany eliminations (173) (589) ------------------------------------------------------------------------- $ 18,656 $ 19,630 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Major Customers The major customers disclosed in this table are included in the Manufacturing segment results. For the Three Month Periods Ended March 31, ------------------------------ 2008 2007 -------------- -------------- Customer A 6.0% 15.0% Customer B 22.0% 19.0% Customer C 15.0% 12.0% Customer D 12.0% 10.0% ------------------------------------------------------------------------- 55.0% 56.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9. Contingency On July 22, 2005 the Company announced that, together with other defendants, it had received a Statement of Claim filed before the Superior Court of Justice of Ontario wherein the plaintiff alleges that Permax(R), a drug that the Company distributed in Canada for a fourth-party manufacturer prior to July 2003, causes "compulsive/obsessive behaviour, including pathological gambling". The plaintiff is seeking to have this action certified as a class action. The Company believes this claim against it is without merit and intends to vigorously defend this proceeding and any motion for certification. Prior to July 2003, Permax(R) was distributed in Canada by DRAXIS Pharmaceutica, the Canadian pharmaceutical sales and marketing division of the Company. In July 2003 the Company completed the divestiture of the DRAXIS Pharmaceutica division to Shire. On February 29, 2008 the plaintiff served an Amended Statement of Claim and a Motion Record in support of the plaintiff's motion for certification of this action as a class proceeding. On March 20, 2008, the Court asked the defendants to file responding materials to the plaintiff's certification motion by July 31st, 2008. 10. Subsequent Events On April 4, 2008, DRAXIS and Jubilant Organosys Ltd. ("Jubilant") announced that they had entered into an arrangement agreement whereby a wholly-owned subsidiary of Jubilant will acquire all of the outstanding common shares of DRAXIS at a price of US$6.00 per share in cash by way of a plan of arrangement. 11. Comparative Information The Company has reclassified certain prior period's information to conform with the current presentation format. DATASOURCE: DRAXIS Health Inc. CONTACT: Investor Relations: Jerry Ormiston, DRAXIS Health Inc., Phone: 1-877-441-1984, Fax: (905) 677-5494

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