10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2011

OR

¨ 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)

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  ¨    No  x

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  ¨    No  ¨

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 Act).    Yes  ¨    No  x

As of June 6, 2011, the registrant had 129,167,926 restricted voting shares outstanding.

TABLE OF CONTENTS

PART I -	Financial Information
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets as of April 30, 2011 and October 31, 2010	1
	Unaudited Consolidated Statements of (Loss) Income for the Three and Six Months Ended April 30, 2011 and 2010	2
	Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended April 30, 2011 and 2010	3
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended April 30, 2011 and 2010	4
	Unaudited Consolidated Statements of Cash Flows for the Three and Six Months Ended April 30, 2011 and 2010	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
PART II -	Other Information	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 6.	Exhibits	42
	Signatures	43
	Exhibit Index	44

Item 1. Financial Statements

Patheon Inc.

CONSOLIDATED BALANCE SHEETS

(unaudited)

	As of April 30,			As of October 31,
	2011			2010
(in millions of U.S. dollars)	$			$
Assets
Current
Cash and cash equivalents		39.3			53.5
Accounts receivable		131.7			139.9
Inventories		82.4			73.3
Income taxes receivable		7.2			5.7
Prepaid expenses and other		13.7			9.5
Future tax assets - short-term		8.2			9.0
Total current assets		282.5			290.9
Capital assets		492.7			478.3
Intangible assets		0.4			1.4
Future tax assets		7.5			11.2
Goodwill		3.7			3.4
Investments		5.0			5.3
Other long-term assets		21.8			18.4
Total assets		813.6			808.9
Liabilities and shareholders’ equity
Current
Short-term borrowings		—			2.0
Accounts payable and accrued liabilities		142.7			156.7
Income taxes payable		0.3			0.4
Deferred revenues - short-term		7.6			26.7
Current portion of long-term debt		1.3			3.5
Total current liabilities		151.9			189.3
Long-term debt		274.0			274.8
Deferred revenues		25.1			19.2
Future tax liabilities		36.3			29.7
Other long-term liabilities		23.6			22.9
Total liabilities		510.9			535.9
Shareholders’ equity
Restricted voting shares		553.8			553.8
Contributed surplus		11.3			10.0
Deficit		(341.4	)		(330.7	)
Accumulated other comprehensive income		79.0			39.9
Total shareholders’ equity		302.7			273.0
Total liabilities and shareholders’ equity		813.6			808.9

see accompanying notes

1

Patheon Inc.

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(unaudited)

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
(in millions of U.S. dollars, except per share information)	$			$			$			$
Revenues		170.0			175.4			345.7			330.2
Cost of goods sold		138.0			132.2			270.8			262.4
Gross profit		32.0			43.2			74.9			67.8
Selling, general and administrative expenses		24.8			27.2			52.6			56.0
Repositioning expenses		0.7			1.0			1.5			3.4
Operating income		6.5			15.0			20.8			8.4
Interest expense, net		6.3			3.3			12.6			6.9
Impairment charge		—			—			—			1.3
Foreign exchange loss (gain)		6.2			(0.9	)		6.8			(1.3	)
Loss on sale of fixed assets		0.2			0.1			0.2			0.1
Refinancing expenses		—			11.7			—			11.7
Other		0.2			(0.1	)		0.3			(0.5	)
(Loss) income from continuing operations before income taxes		(6.4	)		0.9			0.9			(9.8	)
Provision for (benefit from) income taxes		4.7			(10.4	)		11.3			(10.4	)
(Loss) income before discontinued operations		(11.1	)		11.3			(10.4	)		0.6
Loss from discontinued operations		(0.1	)		(0.4	)		(0.3	)		(0.8	)
Net (loss) income attributable to restricted voting shareholders		(11.2	)		10.9			(10.7	)		(0.2	)
Basic and diluted (loss) income per share
From continuing operations	($	0.086	)	$	0.087		($	0.081	)	$	0.005
From discontinued operations	($	0.001	)	($	0.003	)	($	0.002	)	($	0.006	)
	($	0.087	)	$	0.084		($	0.083	)	($	0.001	)
Average number of shares outstanding during period - basic and diluted (in thousands)		129,168			129,168			129,168			129,168

see accompanying notes

2

Patheon Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

	Six months ended April 30,
	2011			2010
(in millions of U.S. dollars)	$			$
Restricted voting shares
Balance at beginning and end of period		553.8			553.8
Contributed surplus
Balance at beginning of period		10.0			7.7
Stock-based compensation		1.3			0.6
Balance at end of period		11.3			8.3
Deficit
Balance at beginning of period		(330.7	)		(325.7	)
Net loss attributable to restricted voting shareholders		(10.7	)		(0.2	)
Balance at end of period		(341.4	)		(325.9	)
Accumulated other comprehensive income
Balance at beginning of period		39.9			35.5
Other comprehensive income (loss) for the period		39.1			(6.5	)
Balance at end of period		79.0			29.0
Total shareholders’ equity at end of period		302.7			265.2

see accompanying notes

3

Patheon Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Net (loss) income attributable to restricted voting shareholders		(11.2	)		10.9			(10.7	)		(0.2	)
Other comprehensive income (loss), net of income taxes
Change in foreign currency gains on investments in subsidiaries, net of hedging activities1		35.4			(2.5	)		36.5			(10.6	)
Change in value of derivatives designated as foreign currency and interest rate cash flow hedges2		2.9			5.9			4.0			9.3
Losses on foreign currency and interest rate cash flow hedges reclassified to consolidated statement of loss3		(1.2	)		(3.1	)		(1.4	)		(5.2	)
Other comprehensive income (loss) for the period		37.1			0.3			39.1			(6.5	)
Comprehensive income (loss) attributable to restricted voting shareholders		25.9			11.2			28.4			(6.7	)

see accompanying notes

The amounts disclosed in other comprehensive income have been recorded net of income taxes as follows:

¹  Net of an income tax expense of $1.2 million and $1.7 million for the three and six months ended April 30, 2011.

(Net of an income tax benefit of $0.1 million for the three and six months ended April 30, 2010.)

²  Net of an income tax expense of $0.7 million and $1.0 million for the three and six months ended April 30, 2011.

(Net of an income tax expense of $1.8 million and $2.4 million for the three and six months ended April 30, 2010.)

³  Net of an income tax benefit of $0.4 million and $0.5 million for the three and six months ended April 30, 2011.

(Net of an income tax benefit of $0.5 million and $0.8 million for the three and six months ended April 30, 2010.)

4

Patheon Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Operating activities
(Loss) income before discontinued operations		(11.1	)		11.3			(10.4	)		0.6
Add (deduct) charges to operations not requiring a current cash payment
Depreciation and amortization		13.5			13.2			28.3			26.3
Impairment charge		—			—			—			1.3
Non-cash interest		0.3			2.0			0.5			2.1
Change in other long-term assets and liabilities		—			(9.0	)		(2.1	)		(9.3	)
Future income taxes		2.9			(9.6	)		10.9			(13.1	)
Amortization of deferred revenues		(18.6	)		(9.8	)		(41.1	)		(11.5	)
Loss on sale of fixed assets		0.2			0.1			0.2			0.1
Stock-based compensation expense		1.1			0.4			1.3			0.6
Other		0.1			—			0.2			(0.4	)
		(11.6	)		(1.4	)		(12.2	)		(3.3	)
Net change in non-cash working capital balances related to continuing operations		(0.5	)		11.3			(6.7	)		8.9
Increase in deferred revenues		5.4			29.1			19.6			40.3
Cash (used in) provided by operating activities of continuing operations		(6.7	)		39.0			0.7			45.9
Cash used in operating activities of discontinued operations		(0.2	)		(0.3	)		(0.4	)		(1.1	)
Cash (used in) provided by operating activities		(6.9	)		38.7			0.3			44.8
Investing activities
Additions to capital assets		(11.1	)		(9.2	)		(21.0	)		(19.4	)
Proceeds on sale of capital assets		—			—			0.1			—
Net increase in investments		—			(0.3	)		—			(0.9	)
Investment in intangibles		—			(0.1	)		—			(0.2	)
Cash used in investing activities of continuing operations		(11.1	)		(9.6	)		(20.9	)		(20.5	)
Cash used in investing activities		(11.1	)		(9.6	)		(20.9	)		(20.5	)
Financing activities
Decrease in short-term borrowings		(0.7	)		(15.0	)		(2.1	)		(12.6	)
Increase in long-term debt		—			278.8			—			286.9
Repayment of long-term debt		(1.1	)		(238.3	)		(1.2	)		(244.3	)
Cash (used in) provided by financing activities of continuing operations		(1.8	)		25.5			(3.3	)		30.0
Cash (used in) provided by financing activities		(1.8	)		25.5			(3.3	)		30.0
Effect of exchange rate changes on cash and cash equivalents		9.3			0.9			9.7			(0.8	)
Net (decrease) increase in cash and cash equivalents during the period		(10.5	)		55.5			(14.2	)		53.5
Cash and cash equivalents, beginning of period		49.8			20.3			53.5			22.3
Cash and cash equivalents, end of period		39.3			75.8			39.3			75.8
Supplemental cash flow information
Interest paid		12.1			3.8			12.2			7.3
Income taxes paid, net of refunds		0.7			(0.9	)		0.7			(0.9	)

see accompanying notes

5

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

1. Accounting policies

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared by Patheon Inc. (the “Company” or “Patheon”) in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) on a basis consistent with those followed in the most recent audited consolidated financial statements except as noted below. Operating results for the three and six months ended April 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2011 (“fiscal 2011”). These consolidated financial statements do not include all the information and footnotes required by Canadian GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes for the fiscal year ended October 31, 2010 (“fiscal 2010”).

The preparation of the consolidated financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and the reported amounts of revenue and expenses in the reporting period. Management believes that the estimates and assumptions used in preparing its consolidated financial statements are reasonable and prudent, however, actual results could differ from those estimates.

Changes in accounting policy

The Company had no changes in accounting policy from the previously audited consolidated financial statements for fiscal 2010.

Recently issued accounting pronouncements

(a) Business combinations

Canadian Institute of Chartered Accountants (“CICA”) Section 1582, “Business Combinations,” replaces Section 1581, “Business Combinations.” Section 1582 was intended to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. This section outlines a variety of changes, including, but not limited to the following: an expanded definition of a business, a requirement to measure all business combinations and non-controlling interests at fair value, and a requirement to recognize future income tax assets and liabilities and acquisition and related costs as expenses of the period. The section applies to annual and interim financial statements for fiscal years beginning on or after January 1, 2011, with early adoption permitted. The Company is currently evaluating the effects of adopting these standards.

(b) Consolidations

In January 2009, the CICA issued Handbook Section 1601, “Consolidations” (“CICA 1601”), and Section 1602, “Non-controlling Interests” (“CICA 1602”). CICA 1601 establishes standards for the preparation of consolidated financial statements. CICA 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. These sections apply to annual and interim financial statements for fiscal years beginning on or after January 1, 2011, with early adoption permitted. The Company does not believe these standards will have a material impact on the financial statements.

(c) Multiple deliverable revenue arrangements

In December 2009, the Emerging Issues Committee issued EIC-175, “Multiple Deliverable Revenue Arrangements.” This Abstract addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, this Abstract addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. This standard may be applied prospectively and should be applied to revenue arrangements with multiple deliverables entered into or materially modified in the first annual fiscal period beginning on or after January 1, 2011. The Company does not believe this standard will have a material impact on the financial statements.

(d) Future accounting changes (U.S. GAAP and International Financial Reporting Standards)

In February 2008, the Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to adopt International Financial Reporting Standards (“IFRSs”) in place of Canadian GAAP for interim and annual reporting purposes for fiscal years beginning on or after January 1, 2011, unless, as permitted by Canadian securities regulations, registrants adopt U.S. generally accepted accounting principles (“U.S. GAAP”) on or before this date. The Company filed a registration statement with the United States Securities and Exchange Commission (the “SEC”) on February 25, 2011 that became effective on April 26, 2011. As a consequence, the Company will convert to and report under U.S. GAAP beginning with the fiscal year ending October 31, 2012. As a result, the Company will not adopt IFRSs on November 1, 2011.

6

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

2. Discontinued operations, assets held for sale and plant consolidations

Puerto Rico

The Company announced on December 10, 2009 its plan to consolidate its Puerto Rico operations into its manufacturing site located in Manati and ultimately close or sell its plant in Caguas. During fiscal 2010, the Company received a letter of intent for the purchase of its Caguas facility for a purchase price of $7.0 million, which resulted in the Company increasing the impairment charge related to the value of the land to $3.6 million from the initial impairment amount of $1.3 million recorded earlier in fiscal 2010. The Company estimated total project repositioning expenses of $9.0 million, of which $0.7 million was booked in the three months ended April 30, 2011. As a result of additional time required to transition manufacturing operations from Caguas to Manati due to longer than expected customer regulatory time lines, the Company now expects the transition to continue beyond the end of calendar year 2012, and therefore the letter of intent was rescinded. The consolidation will also result in additional accelerated depreciation of Caguas assets of approximately $12.0 million over the life of the project. Because the business in the Caguas facility is being transferred within the existing site network, its results of operations are included in continuing operations.

The Company closed its Carolina facility in Puerto Rico effective January 31, 2009. In the second half of fiscal 2010, the Company 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. The Company continues marketing this property. The results of the Carolina operations for the three and six months ended April 30, 2011 and 2010 are reported in discontinued operations as follows:

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
	$			$			$			$
Revenues		—			—			—			—
Cost of goods sold		—			—			—			—
Gross loss		—			—			—			—
Selling, general and administrative expenses		0.1			0.4			0.3			0.8
Repositioning expenses		—			—			—			—
Operating loss		(0.1	)		(0.4	)		(0.3	)		(0.8	)
Asset impairment charge		—			—			—			—
Loss before income taxes		(0.1	)		(0.4	)		(0.3	)		(0.8	)
Net loss for the period		(0.1	)		(0.4	)		(0.3	)		(0.8	)

3. Preferred shares and restricted voting shares

The following table summarizes information regarding the Company’s outstanding preferred shares, restricted voting shares and restricted voting share stock options as of April 30, 2011:

	Outstanding		Exercisable
Class I preferred shares series D1		150,000		N/A
Restricted voting shares		129,167,926		N/A
Restricted voting share stock options		12,435,824		3,080,011

¹  Special voting preferred shares held by JLL Patheon Holdings, LLC (“JLL”) entitling it to elect up to three of our directors based on the number of restricted voting shares that it holds.

7

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

4. Segmented information

The Company is organized and managed in two business segments: commercial manufacturing and pharmaceutical development services (“PDS”). These segments are organized around the service activities provided to the Company’s customers.

	As of and for the three months ended April 30, 2011
	Commercial		PDS		Corp. & Other			Total
	$		$		$			$
Revenues		138.5		31.5		—			170.0
Adjusted EBITDA		17.0		7.3		(10.0	)		14.3
Depreciation		11.9		1.3		0.3			13.5
Capital expenditures		10.0		0.8		0.3			11.1
	As of and for the three months ended April 30, 2010
	Commercial		PDS		Corp. & Other			Total
	$		$		$			$
Revenues		142.2		33.2		—			175.4
Adjusted EBITDA		18.8		16.9		(5.7	)		30.0
Depreciation		11.6		1.5		0.1			13.2
Capital expenditures		7.6		1.5		0.1			9.2
	As of and for the six months ended April 30, 2011
	Commercial		PDS		Corp. & Other			Total
	$		$		$			$
Revenues		287.2		58.5		—			345.7
Adjusted EBITDA		52.5		10.7		(19.4	)		43.8
Total assets		659.0		78.4		76.2			813.6
Depreciation		25.1		2.7		0.5			28.3
Goodwill		3.7		—		—			3.7
Capital expenditures		17.1		3.6		0.3			21.0
	As of and for the six months ended April 30, 2010
	Commercial		PDS		Corp. & Other			Total
	$		$		$			$
Revenues		270.3		59.9		—			330.2
Adjusted EBITDA		27.9		24.4		(12.9	)		39.4
Total assets		624.3		61.7		107.6			793.6
Depreciation		23.1		2.9		0.3			26.3
Impairment		1.3		—		—			1.3
Goodwill		3.4		—		—			3.4
Capital expenditures		17.0		2.3		0.1			19.4

Cash and cash equivalents as well as future tax assets are considered to be part of “Corp. & Other” in the breakout of total assets shown above. The Company evaluates the performance of its segments based on segment Adjusted EBITDA, which is defined as 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 non-cash expenses. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.

8

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

Below is a reconciliation of Adjusted EBITDA to its closest Canadian GAAP measure.

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
	$			$			$			$
Total Adjusted EBITDA		14.3			30.0			43.8			39.4
Depreciation and amortization		(13.5	)		(13.2	)		(28.3	)		(26.3	)
Repositioning expenses		(0.7	)		(1.0	)		(1.5	)		(3.4	)
Interest expense, net		(6.3	)		(3.3	)		(12.6	)		(6.9	)
Impairment charge		—			—			—			(1.3	)
Loss on sale of fixed assets		(0.2	)		(0.1	)		(0.2	)		(0.1	)
Refinancing expenses		—			(11.7	)		—			(11.7	)
(Provision for) benefit from income taxes		(4.7	)		10.4			(11.3	)		10.4
Other		—			0.2			(0.3	)		0.5
(Loss) income before discontinued operations		(11.1	)		11.3			(10.4	)		0.6

As illustrated in the table below, revenues are attributed to countries based on the location of the customer’s billing address, capital assets are attributed to the country in which they are located and goodwill is attributed to the country in which the entity to which the goodwill pertains is organized:

	Three months ended April 30, 2011
	Canada		US*		Europe		Other		Total
	$		$		$		$		$
Revenues		2.6		80.8		77.9		8.7		170.0
	Three months ended April 30, 2010
	Canada		US*		Europe		Other		Total
	$		$		$		$		$
Revenues		5.6		80.2		84.5		5.1		175.4
*  Includes Puerto Rico
	As of and for the six months ended April 30,  2011
	Canada		U.S.*		Europe		Other		Total
	$		$		$		$		$
Revenues		5.3		157.3		167.6		15.5		345.7
Capital assets		121.1		130.8		239.0		1.8		492.7
Goodwill		3.7		—		—		—		3.7
	As of and for the six months ended April 30,  2010
	Canada		U.S.*		Europe		Other		Total
	$		$		$		$		$
Revenues		8.2		159.2		153.8		9.0		330.2
Capital assets		120.0		131.9		215.3		1.0		468.2
Impairment		—		1.3		—		—		1.3
Goodwill		3.4		—		—		—		3.4

* Includes Puerto Rico

9

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

5. Stock-based compensation

The Company has an incentive stock option plan in which directors, officers and key employees of the Company and its subsidiaries, as well as other persons engaged to provide ongoing management or consulting services to Patheon, are eligible to participate. On March 10, 2011, the Company’s shareholders approved an amendment to the stock option plan, which, among other things, provides that the maximum number of shares that may be issued under the plan is 15,500,151, which currently represents 12% of the issued and outstanding restricted voting shares. The plan previously provided that the maximum number of shares that may be issued under the plan was 7.5% of the sum, at any point in time, of the issued and outstanding restricted voting shares of the Company and the aggregate number of restricted voting shares issuable upon exercise of the conversion rights attached to the issued and outstanding Class I Preferred Shares, Series C of the Company. As of April 30, 2011 and 2010, the total number of restricted voting shares issuable under the plan was 15,500,151 shares and 9,687,594 shares, respectively, of which there were stock options outstanding to purchase 12,435,824 shares and 6,316,912 shares, respectively, under the plan. Before the March 2011 amendments, the plan provided that the exercise prices of options were determined at the time of grant and could not be less than the weighted-average market price of the restricted voting shares of Patheon on the Toronto Stock Exchange ( the “TSX”) during the two trading days immediately preceding the grant date. Following the March 2011 amendments, the exercise prices of the options may not be less than the closing price of the restricted voting shares on the TSX (or on such other stock exchange in Canada or the United States on which restricted voting shares may be then listed and posted) on the date of the grant. Options generally expire in no more than 10 years after the grant date and are subject to early expiry in the event of death, resignation, dismissal or retirement of an optionee. Options have vesting periods of either three years or five years, with either one-third or one-fifth vesting on each anniversary of the grant date, respectively.

For the purposes of calculating the stock-based compensation expense in connection with the Company’s incentive stock option plan, the fair value of stock options is estimated at the date of the grant using the Black-Scholes option pricing model and the cost is amortized over the vesting period.

The fair value of stock options is estimated at the date of the grant. The weighted-average fair value of the 5,000,000 and 5,042,000 stock options granted for each of the three and six months ended April 30, 2011 was CAD$1.36. The fair value of stock options is estimated using the Black-Scholes option pricing model with the following assumptions:

	Three months ended April 30,	Six months ended April 30,
	2011	2011
Risk free interest rate	2.6%	2.6%
Expected volatility	59%	59%
Expected weighted-average life of options	5 years	5 years
Expected dividend yield	0%	0%

Stock-based compensation expense recorded in the three and six months ended April 30, 2011 was $1.1 million and $1.3 million, respectively, impacted by new options granted including those to the Company’s new Chief Executive Officer, or CEO, partially offset by the forfeitures of stock options related to the resignation of the Company’s previous CEO. Stock-based compensation expense recorded in the three and six months ended April 30, 2010 was $0.4 million and $0.6 million, respectively.

6. Repositioning expenses

During the three and six months ended April 30, 2011, the Company incurred $0.7 million and $1.5 million, respectively, in expenses associated with the shutdown of its Caguas facility. During the three and six months ended April 30, 2010, the Company incurred $1.0 million and $3.4 million, respectively, in expenses associated with the shutdown of its Caguas facility.

10

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

The following is a summary of these expenses as of and for the three and six months ended April 30, 2011 and 2010:

	As of and for the three months ended April 30,  2011
	Commercial			PDS		Corporate		Total
	$			$		$		$
Total repositioning liabilities at January 31, 2011									3.0
Employee-related expenses		0.1			—		—		0.1
Consulting, professional and project management costs		0.6			—		—		0.6
Total expenses		0.7			—		—		0.7
Repositioning expenses paid									(0.8	)
Foreign exchange									—
Total repositioning liabilities at April 30, 2011									2.9
	As of and for the three months ended April 30,  2010
	Commercial			PDS		Corporate		Total
	$			$		$		$
Total repositioning liabilities at January 31, 2010									3.2
Employee-related expenses		(0.1	)		—		—		(0.1	)
Consulting, professional and project management costs		1.1			—		—		1.1
Total expenses		1.0			—		—		1.0
Repositioning expenses paid									(1.6	)
Foreign exchange									—
Total repositioning liabilities at April 30, 2010									2.6
	As of and for the six months ended April 30, 2011
	Commercial			PDS		Corporate		Total
	$			$		$		$
Total repositioning liabilities at October 31, 2010									3.2
Employee-related expenses		0.1			—		—		0.1
Consulting, professional and project costs		1.4			—		—		1.4
Total expenses		1.5			—		—		1.5
Repositioning expenses paid									(1.8	)
Foreign exchange									—
Total repositioning liabilities at April 30, 2011									2.9
	As of and for the six months ended April 30, 2010
	Commercial			PDS		Corporate		Total
	$			$		$		$
Total repositioning liabilities at October 31, 2009									2.9
Employee-related expenses		1.9			—		—		1.9
Consulting, professional and project costs		1.5			—		—		1.5
Total expenses		3.4			—		—		3.4
Repositioning expenses paid									(3.6	)
Foreign exchange									(0.1	)
Total repositioning liabilities at April 30, 2010									2.6

7. Other information

Foreign exchange

During the three and six months ended April 30, 2011, the Company recorded foreign exchange losses of $6.2 million and $6.8 million, respectively. Losses on transactions related to operating exposures were partially offset by hedging gains on forward contracts. During the three and six months ended April 30, 2010, the Company recorded foreign exchange gains of $0.9 million and of $1.3 million, respectively, primarily on hedging gains. These gains were partially offset by losses related to operating exposures.

11

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

Employee future benefits

The employee future benefit expense in connection with defined benefit pension plans and other post retirement benefit plans for the three and six months ended April 30, 2011 was $2.0 million and $3.9 million, respectively. The employee future benefit expense in connection with defined benefit pension plans and other post retirement benefit plans for the three and six months ended April 30, 2010 was $1.6 million and $3.7 million, respectively.

8. Financial instruments and risk management

Categories of financial assets and liabilities

Under Canadian GAAP financial instruments are classified into one of the following five categories: held-for-trading, held to maturity investments, loans and receivables, available-for-sale financial assets and other financial liabilities. The Company has also designated certain of its derivatives as effective hedges. The carrying values of the Company’s financial instruments, including those held for sale on the consolidated balance sheets, are classified into the following categories:

	As of April 30,		As of October 31,
	2011		2010
	$		$
Held-for-trading1		39.3		53.5
Loans and receivables2		131.7		139.9
Other financial liabilities3		418.0		437.0
Derivatives designated as effective hedges4 - gain		4.4		1.3
Other derivatives5		0.9		0.7

¹  Includes cash and cash equivalents in bank accounts bearing interest rates up to 1%.

²  Includes accounts receivable.

³  Includes bank indebtedness, accounts payable, accrued liabilities and long-term debt.

⁴  Includes the Company’s forward contracts and collars in 2011 and forward contracts in 2010.

⁵  Includes the embedded call option on the Company’s senior secured notes due April 15, 2017.

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Company’s financial instruments are not materially different from their carrying values.

As of April 30, 2011 and October 31, 2010, the carrying amount of the financial assets that the Company has pledged as collateral for its long-term debt facilities was $90.9 million and $101.5 million, respectively.

Fair value measurements

The fair value under CICA Section 3862, “Financial Instruments—Disclosure,” is principally applied to financial assets and liabilities such as derivative instruments consisting of embedded call options and foreign exchange contracts. The following table provides a summary of the financial assets and liabilities that are measured at fair values as of April 30, 2011 and October 31, 2010:

12

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

Assets measured at fair value

	Fair value measurement at April 30, 2011 using:								Fair value measurement at October 31, 2010 using:
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	$		$		$		$		$		$		$		$
Derivatives designated as hedging instruments:
Foreign exchange forward contracts		—		3.4		—		3.4		—		1.3		—		1.3
Foreign exchange collars		—		1.2		—		1.2		—		—		—		—
Total assets		—		4.6		—		4.6		—		1.3		—		1.3
Derivatives not designated as hedging instruments:
Embedded call option on Notes		—		—		0.9		0.9		—		—		0.7		0.7
Total assets		—		—		0.9		0.9		—		—		0.7		0.7
Liabilities measured at fair value
	Fair value measurement at April 30, 2011 using:								Fair value measurement at October 31, 2010 using:
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	$		$		$		$		$		$		$		$
Derivatives designated as hedging instruments:
Foreign exchange forward contracts		—		0.2		—		0.2		—		—		—		—
Total liabilities		—		0.2		—		0.2		—		—		—		—

Level 1 - Based on quoted market prices in active markets.

Level 2 - Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.

Level 3 - Unobservable inputs that are not corroborated by market data.

13

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

The following table presents the fair value of the Company’s derivative financial instruments and their classifications on the consolidated balance sheets as of April 30, 2011 and October 31, 2010:

Fair values of derivative instruments

	Asset derivatives as of April 30, 2011			Asset derivatives as of October 31, 2010
	Balance sheet location	Fair Value		Balance sheet location	Fair Value
		$			$
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expenses and other		3.4	Prepaid expenses and other		1.3
Foreign exchange collars	Prepaid expenses and other		1.2			—
Total designated derivatives			4.6			1.3
Derivatives not designated as hedging instruments:
Embedded call option on Notes	Other long-term assets		0.9	Other long-term assets		0.7
Total non-designated derivatives			0.9			0.7
	Liability derivatives as of April 30, 2011			Liability derivatives as of October 31, 2010
	Balance sheet location	Fair Value		Balance sheet location	Fair Value
		$			$
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	Other long-term liabilities		0.2			—
Total designated derivatives			0.2			—

The Company has optional pre-payment clauses on its senior secured notes due April 15, 2017 (the “Notes”), and is therefore required to account for the value of these optional pre-payment clauses separately as an embedded derivative under Canadian GAAP. The embedded derivative has been bifurcated from the Notes and recorded separately at fair value. In each subsequent period any change in fair value will be recorded as income or expenses in the Company’s consolidated statements of income (loss).

The Company uses valuations from a third party evaluator to assist in estimating the fair value of the embedded call option on the Notes. These third party valuations are completed on a quarterly basis, and take into consideration current market rates and trends. For the debt instruments with embedded options, evaluators determine the price both with and without the option; the price without the option is the “base price.” In the case of debt instruments with calls, the final evaluation is the lesser of “base price” and “price with call.” The evaluator uses models that use the income approach, which discounts future cash flows to the net present value of the security, as the valuation technique.

14

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

The following table presents a reconciliation of the closing balance with respect to the Company’s only Level 3 financial instrument as of April 30, 2011:

Assets measured at fair value based on Level 3
	Embedded call option on Notes		Total
	$		$
Opening balance (October 31, 2010)		0.7		0.7
Purchases		—		—
Issues		—		—
Total gains (losses)				—
In net loss		0.2		0.2
In other comprehensive income		—		—
Settlements		—		—
Transfers out of Level 3		—		—
Closing balance (April 30, 2011)		0.9		0.9

Foreign exchange forward contracts and other hedging arrangements

The Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange rates. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.

As of April 30, 2011, the Company’s Canadian operations had entered into foreign exchange forward contracts to sell an aggregate amount of US$31.4 million. These contracts hedge the Canadian operations’ expected exposure to U.S. dollar denominated cash flows and mature at the latest on January 10, 2012, at an average exchange rate of $1.0499 Canadian. The mark-to-market value of these financial instruments as of April 30, 2011 was an unrealized gain of $3.4 million, which has been recorded in accumulated other comprehensive income in shareholders’ equity, net of associated income tax.

As of April 30, 2011, the Company’s Canadian operations had entered into foreign exchange collars to sell an aggregate amount of US$41.1 million. These contracts hedge the Canadian operations’ expected exposure to U.S. dollar denominated cash flows and mature at the latest on January 17, 2012, at an average exchange rate of $1.0225 Canadian. The mark-to-market value of these financial instruments as of April 30, 2011 was an unrealized gain of $1.2 million, which has been recorded in accumulated other comprehensive income in shareholders’ equity, net of associated income tax.

As of April 30, 2011, the Company’s Canadian operations had entered into foreign exchange forward contracts to sell an aggregate amount of €2.0 million. These contracts hedge the Canadian operations’ expected exposure to Euro denominated cash flows and mature at the latest on October 7, 2011, at an average exchange rate of $1.3929 Canadian. The mark-to-market value of these financial instruments as of April 30, 2011 was an unrealized loss of approximately $0.2 million, with nominal income tax impact, which has been recorded in accumulated other comprehensive income in shareholders’ equity.

Risks arising from financial instruments and risk management

The Company’s activities expose it to a variety of financial risks: market (including foreign exchange and interest rate) risk, credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. The Company does not purchase any derivative financial instruments for speculative purposes.

Risk management is the responsibility of the Company’s corporate finance team. The corporate finance team works with the Company’s operational personnel to identify, evaluate and, where appropriate, hedge financial risks. The Company’s corporate finance team also monitors material risks and discusses them with the audit committee of the board of directors.

15

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

Foreign exchange risk

The Company operates in Canada, the United States, Puerto Rico, Italy, France, Switzerland, the United Kingdom and Japan. Foreign exchange risk arises because the value of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates (“transaction exposures”) and because the non-U.S. dollar denominated financial statements of the Company may vary on consolidation into the reporting currency of U.S. dollars (“translation exposures”).

The Company’s most significant transaction exposures arise in its Canadian operations. Prior to the refinancing in the second quarter of fiscal 2010, the balance sheet of the Company’s Canadian division included U.S. dollar denominated debt, which was designated as a hedge against the Company’s 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, the Company changed the functional currency of its corporate division in Canada to U.S. dollars, thereby eliminating the need for the Company to designate this U.S. dollar denominated debt as a hedge. In addition, approximately 90% of the revenues of the Canadian operations and approximately 15% of its operating expenses are transacted in U.S. dollars. As a result, the Company may experience transaction exposures because of volatility in the exchange rate between the Canadian and U.S. dollar. Based on the Company’s current U.S. denominated net inflows, as of April 30, 2011, fluctuations of +/-10% would, everything else being equal, have an annual effect on income (loss) from continuing operations before income taxes of approximately +/- $5.8 million, prior to hedging activities.

The objective of the Company’s foreign exchange risk management activities is to minimize transaction exposures and the resulting volatility of the Company’s earnings. The Company manages this risk by entering into foreign exchange contracts. As of April 30, 2011, the Company has entered into foreign exchange contracts to cover approximately 75% of its Canadian-U.S. dollar cash flow exposures for fiscal 2011. The Company does not currently hedge any translation exposures.

Translation gains and losses related to certain foreign currency denominated intercompany loans are included as part of the net investment in certain foreign subsidiaries, and are included in accumulated other comprehensive income (loss) in shareholders’ equity.

Credit risk

Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial instruments (foreign exchange contracts with positive fair values), and credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company regularly assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors. Management also regularly monitors the utilization of credit limits. In cases where the credit quality of a customer does not meet the Company’s requirements, a cash deposit is received before any services are provided. As of April 30, 2011 and October 31, 2010, the Company held deposits of $15.8 million and $14.6 million, respectively.

The carrying amounts of accounts receivable are reduced through the use of an allowance account, and the amount of the loss is recognized in the consolidated statements of income (loss) within operating expenses. When a receivable balance is considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off are credited against operating expenses in the consolidated statements of income (loss).

16

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

The following table sets forth details of the age of receivables that are not overdue, as well as an analysis of overdue amounts and the related allowance for doubtful accounts:

	As of April 30, 2011 $
Total accounts receivable		132.2
Less: Allowance for doubtful accounts		(0.5	)
		131.7
Of which:
Not overdue		110.7
Past due for more than one day but for not more than three months		15.9
Past due more for than three months but for not more than six months		2.0
Past due for more than six months but not for more than one year		1.7
Past due for more than one year		1.9
Less: Allowance for doubtful accounts		(0.5	)
Total accounts receivable, net		131.7

Liquidity risk

Liquidity risk arises when financial obligations due exceed financial assets available at a particular point in time. The Company’s objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at all times. The Company mitigates liquidity risk by maintaining cash and cash equivalents on hand and through the availability of funding from credit facilities. As of April 30, 2011, the Company was holding cash and cash equivalents of $39.3 million and had undrawn lines of credit available to it of $85.7 million.

9. Management of capital

The Company defines the capital that it manages as the aggregate of its shareholders’ equity and interest bearing debt. The Company’s objectives when managing capital are to ensure that the Company has adequate capital to achieve its business plans, so that it can provide products and services to its customers and returns to its shareholders.

In order to maintain or adjust its capital structure, the Company may adjust the type of capital utilized, including purchase versus lease decisions and issuing debt or equity securities, all subject to market conditions and the terms of the underlying third-party agreements.

As of April 30, 2011 and October 31, 2010, total managed capital was $578.0 million and $551.3 million, respectively, comprised of shareholders’ equity of $302.7 million and $273.0 million, respectively, and cash interest-bearing debt of $275.3 million and $278.3 million, respectively.

10. Related party transactions

Joaquín B. Viso, a director and significant shareholder of the Company, is the controlling shareholder of a company (the “Viso Affiliate”) that has two contractual commercial relationships with the Company. Revenues from the Viso Affiliate related to these relationships were approximately $0.1 million for each of the three and six months ended April 30, 2011, and were approximately $0.1 million and $0.2 million for the three and six months ended April 30, 2010, respectively. These transactions were conducted in the normal course of business and are recorded at the exchanged amounts. Accounts receivable at April 30, 2011 and October 31, 2010 include a balance of less than $0.1 million and $0.1 million, respectively, resulting from these transactions. In addition, Patheon manufactures a product for a third party for which the product’s intellectual property is owned by the Viso Affiliate. The manufacturing agreement was originally entered into between Patheon and the Viso Affiliate, but has been administered directly between Patheon and the third party on normal commercial terms since 2003.

17

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

As of April 30, 2011 and October 31, 2010, the Company had an investment of $3.0 million and $3.3 million, respectively, representing an 18% interest in two Italian companies (collectively referred to as “BSP Pharmaceuticals”) whose largest investor was previously an officer of the Company. These companies specialize in the manufacture of cytotoxic pharmaceutical products. As a result of the shareholders’ agreement with the other investors in BSP Pharmaceuticals that provides the Company with significant influence over BSP Pharmaceuticals’ operations, the Company accounts for its investment in BSP Pharmaceuticals using the equity method. Accordingly, for the six months ended April 30, 2011 and 2010, the Company recorded investment losses of $0.5 million and income of $0.5 million, respectively.

In connection with its investment in BSP Pharmaceuticals, the Company has a management services agreement with BSP Pharmaceuticals that provides on-going sales and marketing services, and provided engineering and operational services during the construction of the BSP facility which was completed in 2008. There were no management fees recorded under this agreement for the three and six months ended April 30, 2011 and 2010, respectively. Accounts receivable at April 30, 2011 and October 31, 2010 include a balance of $2.0 million and $2.2 million, respectively, in connection with the management services agreement. These services were conducted in the normal course of business and are recorded at the exchanged amounts.

In connection with certain of BSP Pharmaceuticals’ bank financing, the Company made commitments that it would not dispose of its interest in BSP Pharmaceuticals prior to January 1, 2011, and if needed, irrevocably inject equity (pro-rata) in order to ensure BSP complies with certain specific bank covenants.

The cost sharing arrangement between JLL Partners Inc. (“JLL Partners”) and Patheon was terminated during the first quarter of fiscal 2011, and there are no outstanding payables to JLL Partners related to this arrangement.

11. Income taxes

The following is a reconciliation of the expected income tax expense (recovery) obtained by applying a single statutory tax rate to the income (loss) from continuing operations before income taxes:

	As of April 30,
	2011			2010
	$			$
Expected income tax expense (recovery) using statutory tax rates		0.3			(3.1	)
Change in valuation allowance		1.0			(13.3	)
Permanent differences and other:
Foreign		1.0			1.7
Domestic		6.0			(0.2	)
Foreign rate differentials		3.0			4.5
Other		—			—
Provision for (benefit from) income taxes		11.3			(10.4	)
Effective tax rate		1192.2	%		106.2	%

The effective tax rate for the six months ended April 30, 2011 of 1192.2% was primarily due to the book versus tax treatment of foreign exchange gains in Canada (resulting from the change in functional currency of the Company’s corporate division in Canada to U.S. dollars as disclosed in the third quarter of fiscal 2010), tax rate differentials in foreign jurisdictions, and expenses not deductible for tax purposes in foreign jurisdictions. The change in the effective tax rate to 1192.2% in fiscal 2011 from 106.2% in fiscal 2010 was primarily due to the book versus tax treatment of foreign exchange gains in Canada, the mix of earnings in the Company’s subsidiaries and the release of the valuation reserve in Canada in fiscal 2010.

During the second quarter of fiscal 2010 the Company evaluated its valuation reserves. The Company determined that the valuation allowance on its net Canadian future tax assets was no longer required based on its assessment of the future prospects of its Canadian operations. As a result of this determination, the Company released $13.8 million of valuation allowance through income tax benefit in the income statement.

While evaluating the Company’s future tax assets and liabilities during the first quarter of 2010, the Company concluded it would be able to utilize certain Investment Tax Credits (“ITCs”) relating to scientific research and development costs. Therefore, the Company recorded a decrease of $4.4 million and $7.2 million in the cost of goods sold relating to the partial utilization of previous years ITCs in the three and six months ended April 30, 2010.

18

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

12. Subsequent events

On May 19, 2011, the Company settled an on-going insurance claim covering all current and future costs associated with water damage at its Swindon, U.K. facility for approximately $16.0 million. The Company 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, the company recorded an additional $2.6 million as a settlement receivable against cost of goods sold. The Company received the final payout from the settlement in May 2011. The remaining proceeds will be used to offset capital expenses and further remediation costs, with the balance to be booked as other income.

19

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

13. Additional disclosure required under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”)

The Company’s consolidated financial statements have been prepared in accordance with Canadian GAAP. In the case of the Company, Canadian GAAP conforms in all material respects with U.S. GAAP except for certain matters, the details of which are as follows:

Consolidated Balance Sheets

The application of U.S. GAAP has the following effects on consolidated balance sheet items as reported under Canadian GAAP:

	As of April 30, 2011											As of October 31, 2010
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP			Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$			$								$
Assets
Current
Cash and cash equivalents		39.3			—					39.3			53.5			—					53.5
Accounts receivable		131.7			—					131.7			139.9			—					139.9
Inventories		82.4			—					82.4			73.3			—					73.3
Income taxes receivable		7.2			6.1			i		13.3			5.7			1.9			i		7.6
Prepaid expenses and other		13.7			—					13.7			9.5			—					9.5
Future tax assets - short-term		8.2			0.8			g		9.0			9.0			(1.3	)		g		7.7
Total current assets		282.5			6.9					289.4			290.9			0.6					291.5
Capital assets		492.7			(0.9	)		e		491.8			478.3			(0.9	)		e		477.4
Intangible assets		0.4			—					0.4			1.4			—					1.4
Deferred financing costs		—			6.6			f		6.6			—			7.2			f		7.2
Future tax assets		7.5			21.0			c		28.5			11.2			17.7			c		28.9
Goodwill		3.7			—					3.7			3.4			—					3.4
Investments		5.0			—					5.0			5.3			—					5.3
Other long-term assets		21.8			(21.8	)		c,d		—			18.4			(18.4	)		c,d		—
Total assets		813.6			11.8					825.4			808.9			6.2					815.1
Liabilities and shareholders’ equity
Current
Short term borrowings		—			—					—			2.0			—					2.0
Accounts payable and accrued liabilities		142.7			—					142.7			156.7			—					156.7
Income taxes payable		0.3			(0.3	)		i		—			0.4			(0.4	)		i		—
Deferred revenues - short-term		7.6			—					7.6			26.7			—					26.7
Current portion of long-term debt		1.3			—					1.3			3.5			—					3.5
Total current liabilities		151.9			(0.3	)				151.6			189.3			(0.4	)				188.9
Long-term debt		274.0			5.8			d,f		279.8			274.8			6.3			d,f		281.1
Deferred revenues		25.1			—					25.1			19.2			—					19.2
Future tax liabilities		36.3			(0.3	)		e		36.0			29.7			(0.3	)		e		29.4
Other long-term liabilities		23.6			24.3			b,g		47.9			22.9			22.2			b,g		45.1
Total liabilities		510.9			29.5					540.4			535.9			27.8					563.7
Shareholders’ equity
Restricted voting shares		553.8			18.1			a		571.9			553.8			18.1			a		571.9
Contributed surplus		11.3			—					11.3			10.0			—					10.0
Deficit		(341.4	)		(18.6	)		a,d,e,g,i		(360.0	)		(330.7	)		(22.5	)		a,d,e,g		(353.2	)
Accumulated other comprehensive income		79.0			(17.2	)		a,b,e		61.8			39.9			(17.2	)		a,b,e		22.7
Total shareholders’ equity		302.7			(17.7	)				285.0			273.0			(21.6	)				251.4
Total liabilities and shareholders’ equity		813.6			11.8					825.4			808.9			6.2					815.1

See accompanying notes.

20

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

Consolidated Statements of Loss

The application of U.S. GAAP had the following effects on net (loss) income per share as reported under Canadian GAAP:

	Three months ended April 30, 2011
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$
Revenues		170.0			—					170.0
Cost of goods sold		138.0			1.6			c		139.6
Gross profit		32.0			(1.6	)				30.4
Selling, general and administrative expenses		24.8			—					24.8
Repositioning expenses		0.7			—					0.7
Loss on sale of fixed assets		—			0.2			h		0.2
Operating income		6.5			(1.8	)				4.7
Interest expense, net		6.3			0.1			d		6.4
Foreign exchange loss		6.2			—					6.2
Loss on sale of fixed assets		0.2			(0.2	)		h		—
Other		0.2			0.1			d		0.3
Loss from continuing operations before income taxes		(6.4	)		(1.8	)				(8.2	)
Provision for income taxes		4.7			(2.6	)		c,i		2.1
Loss before discontinued operations		(11.1	)		0.8					(10.3	)
Loss from discontinued operations		(0.1	)		—					(0.1	)
Net loss attributable to restricted voting shareholders		(11.2	)		0.8					(10.4	)
Basic and diluted loss per share
From continuing operations		(0.086	)							(0.080	)
From discontinued operations		(0.001	)							(0.001	)
		(0.087	)							(0.081	)
Weighted-average number of shares outstanding during period - basic and diluted (in thousands)		129,168								129,168

See accompanying notes.

21

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

	Six months ended April 30, 2011
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$
Revenues		345.7			—					345.7
Cost of goods sold		270.8			2.3			c		273.1
Gross profit		74.9			(2.3	)				72.6
Selling, general and administrative expenses		52.6			—					52.6
Repositioning expenses		1.5			—					1.5
Loss on sale of fixed assets		—			0.2			h		0.2
Operating income		20.8			(2.5	)				18.3
Interest expense, net		12.6			0.1			d		12.7
Foreign exchange loss		6.8			—					6.8
Loss on sale of fixed assets		0.2			(0.2	)		h		—
Other		0.3			0.2			d		0.5
Income (loss) from continuing operations before income taxes		0.9			(2.6	)				(1.7	)
Provision for income taxes		11.3			(6.5	)		c,i		4.8
Loss before discontinued operations		(10.4	)		3.9					(6.5	)
Loss from discontinued operations		(0.3	)		—					(0.3	)
Net loss attributable to restricted voting shareholders		(10.7	)		3.9					(6.8	)
Basic and diluted loss per share
From continuing operations		(0.081	)							(0.050	)
From discontinued operations		(0.002	)							(0.002	)
		(0.083	)							(0.052	)
Weighted-average number of shares outstanding during period - basic and diluted (in thousands)		129,168								129,168

See accompanying notes.

22

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

	Three months ended April 30, 2010
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$
Revenues		175.4								175.4
Cost of goods sold		132.2			4.4			c		136.6
Gross profit		43.2			(4.4	)				38.8
Selling, general and administrative expenses		27.2			—					27.2
Repositioning expenses		1.0			—					1.0
Loss on sale of fixed assets		—			0.1			h		0.1
Operating income		15.0			(4.5	)				10.5
Interest expense, net		3.3			—					3.3
Foreign exchange gain		(0.9	)		—					(0.9	)
Refinancing expenses		11.7			—					11.7
Loss on sale of fixed assets		0.1			(0.1	)		h		—
Other		(0.1	)		—					(0.1	)
Income (loss) from continuing operations before income taxes		0.9			(4.4	)				(3.5	)
Benefit from income taxes		(10.4	)		2.3			c,i		(8.1	)
Income (loss) before discontinued operations		11.3			(6.7	)				4.6
Loss from discontinued operations		(0.4	)		—					(0.4	)
Net income (loss) attributable to restricted voting shareholders		10.9			(6.7	)				4.2
Basic and diluted income (loss) per share
From continuing operations		0.087								0.036
From discontinued operations		(0.003	)							(0.003	)
		0.084								0.033
Weighted-average number of shares outstanding during period - basic and diluted (in thousands)		129,168								129,168

See accompanying notes.

23

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

	Six months ended April 30, 2010
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$
Revenues		330.2			—					330.2
Cost of goods sold		262.4			7.1			c		269.5
Gross profit		67.8			(7.1	)				60.7
Selling, general and administrative expenses		56.0			—					56.0
Repositioning expenses		3.4			—					3.4
Impairment charge		—			1.3			h		1.3
Loss on sale of fixed assets		—			0.1			h		0.1
Operating income		8.4			(8.5	)				(0.1	)
Interest expense, net		6.9			—					6.9
Impairment charge		1.3			(1.3	)		h		—
Foreign exchange gain		(1.3	)		—					(1.3	)
Refinancing expenses		11.7			—					11.7
Loss on sale of fixed assets		0.1			(0.1	)		h		—
Other		(0.5	)		—					(0.5	)
Loss from continuing operations before income taxes		(9.8	)		(7.1	)				(16.9	)
Benefit from income taxes		(10.4	)		(9.5	)		c,i		(19.9	)
Income before discontinued operations		0.6			2.4					3.0
Loss from discontinued operations		(0.8	)		—					(0.8	)
Net (loss) income attributable to restricted voting shareholders		(0.2	)		2.4					2.2
Basic and diluted loss per share
From continuing operations		0.005								0.023
From discontinued operations		(0.006	)							(0.006	)
		(0.001	)							0.017
Weighted-average number of shares outstanding during period - basic and diluted (in thousands)		129,168								129,168

See accompanying notes.

Consolidated Statements of Cash Flows

There was no material difference in cash flow presentation between Canadian GAAP and U.S. GAAP for three and six months ended April 30, 2011 and 2010.

Consolidated Statements of Changes in Shareholders’ Equity

There was no material difference in presentation of changes in shareholders’ equity between Canadian GAAP and U.S. GAAP for three and six months ended April 30, 2011 and 2010.

(a) Preferred shares

Under Canadian GAAP, the convertible preferred shares held by JLL were classified at inception as having both an equity component and a debt component. Under U.S. GAAP, however, the preferred shares would have been deemed to be mezzanine equity at inception.

As discussed above, under U.S. GAAP, the value of the preferred stock would be adjusted from its initial value on the April 27, 2007 issuance date to its redemption value over the period from issuance date to the redemption or conversion date using the method discussed in U.S. GAAP ASC 480, “Distinguishing Liabilities from Equity.”

In September 2008, the Company entered into an agreement (the “JLL Agreement”) with JLL whereby JLL agreed to waive the mandatory redemption requirement contained in the terms of its Class I, preferred shares, series C (the “Series C Preferred Shares”). The JLL Agreement resulted in a deemed repayment of the debt and equity components of the Series C Preferred Shares, as well as in a change in the accounting treatment for those shares. Completion of the JLL Agreement resulted in the full carrying value of the preferred shares being classified within shareholders’ equity on the Company’s balance sheets, and no further accretive interest expense was

24

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

recorded in the consolidated statements of loss. Paid-in-kind dividend equivalents on the Series C Preferred Shares were reported below net loss to arrive at a loss attributable to the restricted voting shareholders.

Upon settlement of the debt portion of JLL’s Series C Preferred Shares, the Company recognized a gain on the extinguishment of this debt. The Company reported this gain on its consolidated statement of loss below operating income and before income from continuing operations before income taxes. Additionally, upon settlement of the equity portion of the Series C Preferred Shares, the Company recognized a loss on the deemed redemption, which increased accumulated deficit. Under U.S. GAAP, there would be no gain or loss recognized since the Series C Preferred Shares would have been recorded solely as equity from inception.

(b) Pensions and post retirement plans

Under U.S. GAAP ASC 715, “Compensation—Retirement Benefits,” the Company is required to recognize the over or underfunded status of defined benefit pension and other post-retirement plans on its balance sheet. The over or under funded status is measured as the difference between the fair value of the plan assets and the benefit obligation, being the projected obligation for pension plans and the accumulated benefit obligation for other post-retirement plans. In addition, the Company is required to recognize any previously unrecognized actuarial gains and losses and prior service costs and credits that arise during the applicable period in other comprehensive income, net of tax. No similar requirement currently exists under Canadian GAAP. In addition, overfunded plans are reported as non-current assets and underfunded plans are reported as non-current liabilities, with expected benefit payments over the next 12 months reclassified as short-term liabilities from non-current liabilities.

(c) Investment Tax Credits

Under U.S. GAAP ASC 740, “Income Taxes” (“ASC 740”), the Company’s ITCs are credited against income tax expense, whereas under Canadian GAAP CICA Section 3805, “Investment Tax Credits,” ITCs are offset against the related operating expense.

Because the Company’s ITCs are related to research and development costs, primarily labor, assets are not typically created as a part of the operations subject to the ITC calculation pool. Therefore, the Company has determined that the “flow-through method” of accounting under U.S. GAAP is appropriate. Under the flow-through method, ITCs are recognized as a reduction of federal income taxes in the year in which they arise instead of being reflected in net income over the productive life of acquired property (the deferral method).

Under U.S. GAAP, the Company has reclassified the credit to cost of goods sold related to its ITCs to income tax expense and has reclassified the related ITC receivables to deferred tax assets, short-term or long-term, based upon when they are expected to be used. The ITCs will impact current tax expense when used and deferred tax expense when accumulated during the course of a fiscal year.

(d) Embedded derivative on call option premium

Under CICA Section 3855, “Financial Instruments—Recognition and Measurement,” if the economic characteristics of an embedded derivative (in this case the call option on the Notes) are not closely related to the economic characteristics of the host contract (the Notes), then bifurcation of the embedded derivative is required. CICA Section 3855 provides that the economic characteristics of a call option are not closely related to the economic characteristics of the host contract if the call option’s exercise price is not approximately equal, on each exercise date, to the amortized cost of the host contract. In determining whether the exercise price is approximately equal, the amortized cost of the host contract is assumed to be its par value at any given time. Under U.S. GAAP ASC 815, “Derivatives and Hedging,” the bond call provisions were considered clearly and closely related to the host instrument; as such, the embedded derivative is not valued separately from the debt. Therefore, the Canadian GAAP valuations for the call options are reversed for the U.S. GAAP presentation.

(e) Deferred transaction costs

Both U.S. GAAP ASC 805, “Business Combinations,” and its predecessor, Statement of Financial Accounting Standards No. 141, “Business Combinations,” require deferred transaction costs to be expensed as incurred. Under Canadian GAAP, such costs are capitalized and amortized over 15 years. As such, the effect of the deferred transaction costs has been reversed as of the first period presented and included in opening accumulated deficit. The impact of these costs to the consolidated statements of (loss) income for the periods presented was not material.

(f) Deferred financing costs

In accordance with Canadian GAAP, the Company accounts for deferred financing costs, or transaction costs, as a reduction from the related liability and amortizes such costs using the effective interest method. However, for U.S. GAAP purposes, the Company accounts for these costs as an asset and amortizes them over the expected term of the financial liability using the effective interest method.

25

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

(g) Reserves for uncertain tax positions

The Company adopted the uncertain tax positions standard of ASC 740 on November 1, 2007. As a result of the implementation of this standard, the Company recognized no material adjustment in the liability for unrecognized income tax benefits or effect on accumulated deficit. As of April 30, 2011 and October 31, 2010, unrecognized tax benefits were $1.4 million.

(h) Long-lived assets classified as held and used

Under U.S. GAAP ASC 360, “Long-Lived Assets Classified as Held and Used,” impairments and gains/losses on sale of assets should be reported in operating income.

(i) Income taxes

Under U.S. GAAP ASC 740-270, “Income Taxes—Interim Reporting,” on an interim reporting basis, an entity subject to tax in multiple jurisdictions is required to use one overall estimated annual effective tax rate to compute the income tax expense (benefit) applicable to the interim reporting period. At the end of each interim period, the entity estimates the effective tax rate expected to be applicable for the full fiscal year. This annual estimated rate is adjusted, if necessary, for any significant unusual, infrequently occurring or extraordinary items, which are separately reported as period expenses. At the end of each interim period, the entity applies the estimated annual effective tax rate to year-to-date ordinary income (loss) to compute the year-to-date income tax expense (benefit).

Under CICA Section 3465, “Income Taxes,” income taxes are accounted for using the asset and liability method. This method requires the entity to calculate future income taxes in each jurisdiction at the end of each interim reporting period using the current or substantively enacted tax rates that are expected to apply when temporary differences reverse. These rates are applied to year-to-date pre-tax income (loss), adjusted for known permanent or temporary differences.

Additional U.S. GAAP disclosures

Accounts payable and accrued liabilities:

The following is the breakdown of accounts payable and accrued liabilities:

	As of April 30, 2011		As of October 31, 2010
Trade payables		80.1		89.9
Accrued salaries and related expenses		37.0		44.7
Customer deposits		15.8		14.6
Other accruals		9.8		7.5
		142.7		156.7

Included in other accruals are severance accruals, repositioning accruals, and customer liabilities for active pharmaceutical ingredients (API).

Inventories:

	As of April 30, 2011		As of October 31, 2010
	$		$
Raw materials, packaging components and spare parts		55.4		47.3
Work-in-process		27.0		26.0
Ending balance		82.4		73.3

Net income per share:

The computation of diluted net income per share did not include 12,435,824 and 6,316,912 outstanding options in the six months ended April 30, 2011 and 2010, respectively, because such options were anti-dilutive in nature.

26

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2011

(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

Employee future benefits

The components of net periodic benefit cost for the defined benefit plans and other benefit plans for the six months ended April 30, 2011 and 2010, respectively, were as follows:

	For the six months ended April 30,
	2011		2010
	Defined Benefit Pension Plans	Other Benefit Plans	Defined Benefit Pension Plans	Other Benefit Plans
	$	$	$	$
Service cost	1.8	—	1.8	—
Interest cost	2.6	0.2	2.4	0.2
Expected return on plan assets	(2.4)	—	(2.0)	—
Amortization of actuarial loss	0.4	—	0.4	—
Net periodic benefit costs	2.4	0.2	2.6	0.2

Based on current information available from actuarial estimates, the Company anticipates that contributions required under its defined benefit pension plans for fiscal 2011 will be approximately $10.1 million compared to contributions of $4.6 million that were made in fiscal 2010. Included in the fiscal 2011 contributions is a voluntary catch-up contribution of approximately $4.8 million for the benefit plans in the United Kingdom. Required contributions to defined benefit pension plans in future years will be dependent upon a number of variables, including the long-term rate of return on plan assets. The amount that the Company will be required to contribute to such plans in the future may vary.

Impact of new and pending U.S. GAAP accounting standards

In April 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” This ASU codifies the consensus reached in Emerging Issues Task Force Issue No. 09-J, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” The amendments in this ASU clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Early adoption is permitted. The amendments are to be applied by recording a cumulative-effect adjustment to beginning accumulated deficit. The Company does not expect this ASU would have a material impact on its consolidated financial statements if prepared under U.S. GAAP.

27

Item 2. 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, 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 beginning on page 1 of this quarterly report on Form 10-Q and on page F-2 of our Registration Statement on Form 10, as amended, filed with the Securities and Exchange Commission (the “SEC”) on April 13, 2011 (our “Form 10”). Our consolidated financial statements and MD&A have been prepared in accordance with Canadian GAAP. The impact of significant differences between Canadian GAAP and U.S. GAAP on our financial statements is disclosed under “Note 13—Additional disclosures required under U.S. Generally Accepted Accounting Principles” to our consolidated financial statements beginning on page 1of this quarterly report on Form 10-Q. 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 our Form 10. See “Forward Looking Statements.”

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 improved and continue to improve efficiency by consolidating existing facilities, engaging in cost containment and implementing a system of continuous improvement through a Lean 6 Sigma program called “Patheon Advantage.”

We have two reportable segments, commercial manufacturing (“CMO”) and pharmaceutical development services (“PDS”). Our CMO business manufactures prescription products in sterile dosage forms as well as solid, semi-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 during fiscal 2011:

• Revenues for the three months ended April 30, 2011 decreased $5.4 million, or 3.1%, to $170.0 million, from $175.4 million for the three months ended April 30, 2010. Excluding currency fluctuations, revenues for the three months ended April 30, 2011 would have been approximately 4.8% lower than the same period of prior year.

• Loss before discontinued operations for the three months ended April 30, 2011 was $11.1 million, compared to income before discontinued operations of $11.3 million for the three months ended April 30, 2010.

• Adjusted EBITDA for the three months ended April 30, 2011 decreased $15.7 million, or 52.3%, to $14.3 million, from $30.0 million for the three months ended April 30, 2010.

• Revenues for the six months ended April 30, 2011 increased $15.5 million, or 4.7%, to $345.7 million, from $330.2 million for the six months ended April 30, 2010. Excluding currency fluctuations, revenues for the six months ended April 30, 2011 would have been approximately 5.5% higher than the same period of prior year.

• Loss before discontinued operations for the six months ended April 30, 2011 was $10.4 million, compared to income before discontinued operations of $0.6 million for the six months ended April 30, 2010.

• Adjusted EBITDA for the six months ended April 30, 2011 increased $4.4 million, or 11.2%, to $43.8 million, from $39.4 million for the three months ended April 30, 2010.

• 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. We received the final payout from the settlement in May 2011. The remaining proceeds will be used to offset capital expenses and further remediation costs, with the balance to be booked as other income.

• On May 11, 2011, Michael E. Lytton joined our company as Executive Vice President, Corporate Development and Strategy, and General Counsel.

28

• On February 7, 2011, James C. Mullen was appointed as our Chief Executive Officer, or 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 dosage forms and for PDS. According to PharmSource, a provider of pharmaceutical outsourcing business information, the CMO market is expected to grow from 3% to 5% annually during 2011 to 2015. PharmSource also estimated that the outsourced PDS market was approximately $1.3 billion in 2010, with growth projections in the 2011 to 2015 period ranging from 3% to 6% 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 and overall market weakness. 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 the fiscal year ended October 31, 2010 (“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 continue marketing this property. The results of the Carolina operations have been reported in discontinued operations in fiscal 2010 and the six months ended April 30, 2011.

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 initial estimate on the Caguas facility was to complete a sale during the fiscal year ending October 31, 2011 (“fiscal 2011”) for a purchase price of approximately $7.0 million. In conjunction with a purchase offer in the third quarter of fiscal 2010, we reassessed the carrying value of the facility, increased the previous impairment charge to $3.6 million and reduced the time frame in which to accelerate depreciation. We also modified our restructuring program, which raised its anticipated costs from $7.0 million to approximately $9.0 million, of which $8.3 million has been booked as of April 30, 2011. The consolidation will also result 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.

As a result of additional time required to fully transition manufacturing operations from Caguas to Manati due to longer than expected customer regulatory time lines, we now expect the transition to continue beyond the end of calendar year 2012, which resulted in the purchase offer being rescinded. We continue marketing the Caguas facility for eventual sale.

29

Results of Operations

The results of the Carolina operations have been segregated and reported as discontinued operations for the three and six months ended April 30, 2011 and 2010.

Three Months Ended April 30, 2011 Compared to Three Months Ended April 30, 2010

	Three months ended April 30,
	2011			2010			$			%
(in millions of U.S. dollars)	$			$			Change			Change
Revenues		170.0			175.4			(5.4	)		-3.1	%
Cost of goods sold		138.0			132.2			5.8			4.4	%
Gross profit		32.0			43.2			(11.2	)		-25.9	%
Selling, general and administrative expenses		24.8			27.2			(2.4	)		-8.8	%
Repositioning expenses		0.7			1.0			(0.3	)		-30.0	%
Operating income		6.5			15.0			(8.5	)		-56.7	%
Interest expense, net		6.3			3.3			3.0			90.9	%
Foreign exchange loss (gain)		6.2			(0.9	)		(7.1	)		-788.9	%
Loss on sale of fixed assets		0.2			0.1			0.1			100.0	%
Refinancing Expenses		—			11.7			(11.7	)		-100.0	%
Other		0.2			(0.1	)		(0.3	)		-300.0	%
(Loss) income from continuing operations before income taxes		(6.4	)		0.9			(7.3	)		-811.1	%
Provision for (benefit from) income taxes		4.7			(10.4	)		(15.1	)		-145.2	%
(Loss) income before discontinued operations		(11.1	)		11.3			(22.4	)		-198.2	%
Loss from discontinued operations		(0.1	)		(0.4	)		(0.3	)		-75.0	%
Net (loss) income attributable to restricted voting shareholders		(11.2	)		10.9			(22.1	)		-202.8	%

Operating Income Summary

Revenues for the three months ended April 30, 2011 decreased $5.4 million, or 3.1%, to $170.0 million, from $175.4 million for the three months ended April 30, 2010. Excluding currency fluctuations, revenues for the three months ended April 30, 2011 would have been approximately 4.8% lower than the same period of prior year. CMO revenues for the three months ended April 30, 2011 decreased $3.7 million, or 2.6%, to $138.5 million, from $142.2 million for the three months ended April 30, 2010. PDS revenues for the three months ended April 30, 2011 also decreased $1.7 million, or 5.1%, to $31.5 million, from $33.2 million for the three months ended April 30, 2010.

Gross profit for the three months ended April 30, 2011 decreased $11.2 million, or 25.9%, to $32.0 million, from $43.2 million for the three months ended April 30, 2010. The decrease in gross profit was due to lower revenue and a decrease in gross profit margin to 18.8% for the three months ended April 30, 2011 from 24.6% for the three months ended April 30, 2010. The decrease in gross profit margin was primarily due to the non-recurrence of prior years’ Canadian research and development investment tax credits recognized in the second quarter of fiscal 2010 (-2.6%), accelerated recognition of deferred revenue in Cincinnati in fiscal 2010 (-2.5%), higher inventory provisions and active pharmaceutical ingredient write-offs (-1.6%), and higher depreciation (-0.5%), primarily due to the closure of the Caguas facility and the associated accelerated depreciation, and overall lower revenue. These were partially offset by favorable mix primarily due to the reservation fee and higher deferred revenue amortization at our Swindon facility. The unfavorable foreign exchange impact on gross profit included above was approximately $1.1 million.

Selling, general and administrative expenses for the three months ended April 30, 2011 decreased $2.4 million, or 8.8%, to $24.8 million, from $27.2 million for the three months ended April 30, 2010. The decrease was primarily due to lower incentive compensation, travel and entertainment. The unfavorable foreign exchange impact on selling, general and administrative expense included above is approximately $0.8 million.

Repositioning expenses for the three months ended April 30, 2011 decreased $0.3 million, or 30.0%, to $0.7 million, from $1.0 million for the three months ended April 30, 2010. The decrease was due to lower expenses in connection with the Caguas closure and consolidation in Puerto Rico.

Operating income for the three months ended April 30, 2011 decreased $8.5 million, or 56.7%, to $6.5 million (3.8% of revenues), from $15.0 million (8.6% of revenues) for the three months ended April 30, 2010 as a result of the factors discussed above.

Interest Expense

Interest expense for the three months ended April 30, 2011 increased $3.0 million, or 90.9%, to $6.3 million, from $3.3 million for the three months ended April 30, 2010. The increase in interest expense primarily reflects the higher interest rates on our senior secured notes due April 15, 2017 (the “Notes”) versus the rates of our previous debt, as well as overall higher debt levels.

30

Foreign Exchange Losses (Gains)

Foreign exchange loss for the three months ended April 30, 2011 was $6.2 million, compared to a gain of $0.9 million for the three months ended April 30, 2010. The foreign exchange loss was primarily due to the overall increased strengthening of the Canadian dollar against the U.S. dollar during the three months ended April 30, 2011, partially offset by favorable hedging contracts in the Canadian operations. The favorable hedging contracts resulted in gains of $1.3 million for the three months ended April 30, 2011 compared to gains of $1.2 million for the three months ended April 30, 2010.

Refinancing Expenses

During the three months ended April 30, 2010, we incurred $11.7 million in connection with our refinancing activities, which included 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 $6.4 million for the three months ended April 30, 2011, compared to income from continuing operations before income taxes of $0.9 million for the three months ended April 30, 2010. The operating items discussed above were the primary drivers of the year over year variance.

Income Taxes

Income taxes were an expense of $4.7 million for the three months ended April 30, 2011, compared to a benefit of $10.4 million for the three months ended April 30, 2010. The increase in tax expense was primarily due to the non-recurrence of the release of the valuation allowance pertaining to future tax assets in our Canadian operations in fiscal 2010.

(Loss) Income before Discontinued Operations and (Loss) Income Per Share from Continuing Operations

We recorded a loss before discontinued operations for the three months ended April 30, 2011 of $11.1 million, compared to income before discontinued operations of $11.3 million for the three months ended April 30, 2010. The loss per share from continuing operations for the three months ended April 30, 2011 was 8.6¢ compared to income of 8.7¢ for the three months ended April 30, 2010.

Loss and Loss Per Share from Discontinued Operations

Discontinued operations for the three months ended April 30, 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 2—Discontinued operations, assets held for sale, and plant consolidations.” The loss from discontinued operations for the three months ended April 30, 2011 was $0.1 million, or 0.1¢ per share, compared to a loss of $0.4 million, or 0.3¢ per share, for the three months ended April 30, 2010. On-going costs of discontinued operations relate to maintaining the Carolina building for sale.

Net (Loss) Income Attributable to Restricted Voting Shareholders and (Loss) Income Per Share

Net loss attributable to restricted voting shares for the three months ended April 30, 2011 was $11.2 million, or 8.7¢ per share, compared to income of $10.9 million, or 8.4¢ per share, for the three months ended April 30, 2010.

The computation of net income (loss) per share did not include 12,435,824 and 6,316,912 outstanding options in the six months ended April 30, 2011 and 2010, respectively, because such options were anti-dilutive in nature.

Revenues and Adjusted EBITDA by Business Segment

The following discussion provides information regarding our business segments. References in this MD&A to “Adjusted EBITDA” are to income (loss) before discontinued operations before repositioning expenses, interest expense, foreign exchange losses reclassified from other comprehensive income, refinancing expenses, gains and losses on sale of fixed assets, gain on extinguishment of debt, income taxes, asset impairment charge, depreciation and amortization, and other non-cash expenses. “Adjusted EBITDA margin” is Adjusted EBITDA as a percentage of revenues.

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.

31

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

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
	$			$			$			$
Adjusted EBITDA		14.3			30.0			43.8			39.4
Depreciation and amortization		(13.5	)		(13.2	)		(28.3	)		(26.3	)
Repositioning expenses		(0.7	)		(1.0	)		(1.5	)		(3.4	)
Interest expense, net		(6.3	)		(3.3	)		(12.6	)		(6.9	)
Impairment charge		—			—			—			(1.3	)
Loss on sale of fixed assets		(0.2	)		(0.1	)		(0.2	)		(0.1	)
Refinancing expenses		—			(11.7	)		—			(11.7	)
(Provision for) benefit from income taxes		(4.7	)		10.4			(11.3	)		10.4
Other		—			0.2			(0.3	)		0.5
(Loss) income before discontinued operations		(11.1	)		11.3			(10.4	)		0.6

The following provides certain information regarding our business segments for the three months ended April 30, 2011 and 2010:

	Three months ended April 30,
	2011			2010			$			%
(in millions of U.S. dollars)	$			$			Change			Change
Revenues
Commercial Manufacturing
North America		63.3			68.3			(5.0	)		(7.3	)
Europe		75.2			73.9			1.3			1.8
Total Commercial Manufacturing		138.5			142.2			(3.7	)		(2.6	)
Pharmaceutical Development Services		31.5			33.2			(1.7	)		(5.1	)
Total Revenues		170.0			175.4			(5.4	)		(3.1	)
Adjusted EBITDA
Commercial Manufacturing
North America		0.2			6.6			(6.4	)		(97.0	)
Europe		16.8			12.2			4.6			37.7
Total Commercial Manufacturing		17.0			18.8			(1.8	)		(9.6	)
Pharmaceutical Development Services		7.3			16.9			(9.6	)		(56.8	)
Corporate Costs		(10.0	)		(5.7	)		4.3			75.4
Total Adjusted EBITDA		14.3			30.0			(15.7	)		(52.3	)

Commercial Manufacturing

Total CMO revenues for the three months ended April 30, 2011 decreased $3.7 million, or 2.6%, to $138.5 million, from $142.2 million for the three months ended April 30, 2010. Had local currency exchange rates remained constant to the rates of the three months ended April 30, 2010, CMO revenues for the three months ended April 30, 2011 would have been approximately 4.5% lower than the same period of prior year.

North American CMO revenues for the three months ended April 30, 2011 decreased $5.0 million, or 7.3%, to $63.3 million, from $68.3 million for the three months ended April 30, 2010. Had Canadian dollar exchange rates remained constant to the rates of the three months ended April 30, 2010, North American CMO revenues for the three months ended April 30, 2011 would have been approximately 7.8% lower than the same period of prior year. The decrease was primarily due to the prior year recognition of accelerated deferred revenue in Cincinnati and production delays at several sites.

European CMO revenues for the three months ended April 30, 2011 increased $1.3 million, or 1.8%, to $75.2 million, from $73.9 million for the three months ended April 30, 2010. Had European currency exchange rates remained constant to the rates of the three months ended April 30, 2010, European CMO revenues for the three months ended April 30, 2011 would have been approximately 1.5% lower than the same period of prior year. The impact of the reservation fee and associated accelerated deferred revenue in the United Kingdom, versus the take or pay revenue booked in the prior year, was a net increase of $9.4 million, partially offset by weakness across other sites including production delays.

32

Total CMO Adjusted EBITDA for the three months ended April 30, 2011 decreased $1.8 million, or 9.6%, to $17.0 million, from $18.8 million for the three months ended April 30, 2010. This represents an Adjusted EBITDA margin of 12.3% for the three months ended April 30, 2011 compared to 13.2% for the three months ended April 30, 2010. Had local currency exchange rates remained constant to the rates of the three months ended April 30, 2010 rates and after eliminating the impact of all foreign exchange gains and losses, CMO Adjusted EBITDA for the three months ended April 30, 2011 would have been approximately $4.0 million higher than reported.

North American Adjusted EBITDA for the three months ended April 30, 2011 decreased $6.4 million, or 97.0%, to $0.2 million, from $6.6 million for the three months ended April 30, 2010. The decrease was primarily driven by lower revenue in Cincinnati due to prior year’s recognition of $4.2 million in accelerated deferred revenue, and foreign exchange losses of $3.9 million as a result of weakening of the U.S. dollar against the Canadian dollar, partially offset by a $1.8 million Adjusted EBITDA improvement in Puerto Rico. North American CMO had $0.7 million in repositioning relating to the Puerto Rican operations in the three months ended April 30, 2011 that were not included in Adjusted EBITDA.

European Adjusted EBITDA for the three months ended April 30, 2011 increased $4.6 million, or 37.7%, to $16.8 million, from $12.2 million for the three months ended April 30, 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 top line weakness across other European sites.

Pharmaceutical Development Services

Total PDS revenues for the three months ended April 30, 2011 decreased by $1.7 million, or 5.1%, to $31.5 million, from $33.2 million for the three months ended April 30, 2010. Had the local currency rates remained constant to the three months ended April 30, 2010, PDS revenues for the three months ended April 30, 2011 would have been 6.3% lower than the same period of prior year.

Total PDS Adjusted EBITDA for the three months ended April 30, 2011 decreased by $9.6 million, or 56.8%, to $7.3 million, from $16.9 million for the three months ended April 30, 2010. Had local currencies remained constant to the rates of the three months ended April 30, 2010 and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA for the three months ended April 30, 2011 would have been approximately $0.7 million higher than reported. PDS Adjusted EBITDA for the three months ended April 30, 2010 included $4.4 million of prior year’s Canadian research and development investment tax credits. In addition, lower than expected sales across most 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 the three months ended April 30, 2011 increased $4.3 million, or 75.4%, to $10.0 million, from $5.7 million for the three months ended April 30, 2010 primarily due to foreign exchange losses of $4.1 million.

33

Six Months Ended April 30, 2011 Compared to Six Months Ended April 30, 2010

	Six months ended April 30,
	2011			2010			$			%
(in millions of U.S. dollars)	$			$			Change			Change
Revenues		345.7			330.2			15.5			4.7	%
Cost of goods sold		270.8			262.4			8.4			3.2	%
Gross profit		74.9			67.8			7.1			10.5	%
Selling, general and administrative expenses		52.6			56.0			(3.4	)		-6.1	%
Repositioning expenses		1.5			3.4			(1.9	)		-55.9	%
Operating income		20.8			8.4			12.4			147.6	%
Interest expense, net		12.6			6.9			5.7			82.6	%
Impairment charge		—			1.3			(1.3	)		-100.0	%
Foreign exchange loss (gain)		6.8			(1.3	)		(8.1	)		-623.1	%
Loss on sale of fixed assets		0.2			0.1			0.1			100.0	%
Refinancing Expenses		—			11.7			(11.7	)		-100.0	%
Other		0.3			(0.5	)		(0.8	)		-160.0	%
Income (loss) from continuing operations before income taxes		0.9			(9.8	)		10.7			109.2	%
Provision for (benefit from) income taxes		11.3			(10.4	)		(21.7	)		-208.7	%
(Loss) income before discontinued operations		(10.4	)		0.6			(11.0	)
Loss from discontinued operations		(0.3	)		(0.8	)		(0.5	)		-62.5	%
Net loss attributable to restricted voting shareholders		(10.7	)		(0.2	)		(10.5	)

Operating Income Summary

Revenues for the six months ended April 30, 2011 increased $15.5 million, or 4.7%, to $345.7 million, from $330.2 million for the six months ended April 30, 2010. Excluding currency fluctuations, revenues for the six months ended April 30, 2011 would have been approximately 5.5% higher than the same period of prior year. CMO revenues for the six months ended April 30, 2011 increased $16.9 million, or 6.3%, to $287.2 million, from $270.3 million for the six months ended April 30, 2010. PDS revenues for the six months ended April 30, 2011 decreased $1.4 million, or 2.3%, to $58.5 million, from $59.9 million for the six months ended April 30, 2010.

Gross profit for the six months ended April 30, 2011 increased $7.1 million, or 10.5%, to $74.9 million, from $67.8 million for the six months ended April 30, 2010. The increase in gross profit was due to higher revenue and an increase in the gross profit margin to 21.7% for the six months ended April 30, 2011 from 20.5% for the six months ended April 30, 2010. The increase in gross profit margin was due to higher volume and favorable mix due to the reservation fee and higher deferred revenue amortization at our Swindon facility, partially offset by higher depreciation (0.9%), impact of prior years’ Canadian research and development investment tax credits (2.1%), and inventory and customer API write-offs (1.1%). Included in the numbers above was an unfavorable foreign exchange impact of approximately $4.1 million.

Selling, general and administrative expenses for the six months ended April 30, 2011 decreased $3.4 million, or 6.1%, to $52.6 million, from $56.0 million for the six months ended April 30, 2010. The decrease was primarily due to costs of a special committee of independent directors (the “Special Committee”) of $3.0 million for the six months ended April 30, 2010 and a $1.7 million reduction in performance based compensation, partially offset by $1.1 million in higher costs related to the former CEO’s severance. Included in the numbers above was an unfavorable foreign exchange impact of approximately $0.7 million.

Repositioning expenses for the six months ended April 30, 2011 decreased $1.9 million, or 55.9%, to $1.5 million, from $3.4 million for the six months ended April 30, 2010. The decrease was due to lower expenses in connection with the Caguas closure and consolidation in Puerto Rico in the six months ended April 30, 2011 compared to the six months ended April 30, 2010, as the prior period included the initial project accruals.

Operating income for the six months ended April 30, 2011 increased $12.4 million, or 147.6%, to $20.8 million (6.0% of revenues), from $8.4 million (2.5% of revenues) for the six months ended April 30, 2010 as a result of the factors discussed above.

Interest Expense

Interest expense for the six months ended April 30, 2011 increased $5.7 million, or 82.6%, to $12.6 million, from $6.9 million for the six months ended April 30, 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.

34

Impairment Charge

During the six months ended April 30, 2010, we recorded an impairment charge of $1.3 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.

Foreign Exchange Losses (Gains)

Foreign exchange loss for the six months ended April 30, 2011 was $6.8 million, compared to a gain of $1.3 million for the six months ended April 30, 2010. The foreign exchange loss was primarily due to the overall strengthening of the Canadian dollar against the U.S. dollar, partially offset by favorable hedging contracts, including spot buys, in the Canadian operations during the six months ended April 30, 2011, which resulted in gains of $1.9 million for the six months ended April 30, 2011 and April 30, 2010.

Refinancing Expenses

During the six months ended April 30, 2010, we incurred expenses of $11.7 million in connection with our refinancing activities, which included fees paid to advisors and other related costs.

Income (Loss) from Continuing Operations Before Income Taxes

We reported income from continuing operations before income taxes of $0.9 million for the six months ended April 30, 2011, compared to a loss of $9.8 million for the six months ended April 30, 2010. The $11.7 million of refinancing expenses during the second quarter 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 an expense of $11.3 million for the six months ended April 30, 2011, compared to an income tax benefit of $10.4 million for the six months ended April 30, 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 additional tax expense in fiscal 2011 due to book versus tax treatment of foreign exchange gains in Canada. (resulting from the change in functional currency of a division of the Canadian corporate entity to U.S. dollars as disclosed in the third quarter of fiscal 2010).

(Loss) Income before Discontinued Operations and (Loss) Income Per Share from Continuing Operations

We recorded a loss before discontinued operations for the six months ended April 30, 2011 of $10.4 million, compared to income before discontinued operations of $0.6 million for the six months ended April 30, 2010. The loss per share from continuing operations for the six months ended April 30, 2011 was 8.1¢ compared to income per share of 0.5¢ for the six months ended April 30, 2010.

Loss and Loss Per Share from Discontinued Operations

Discontinued operations for the six months ended April 30, 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 2—Discontinued operations, assets held for sale, and plant consolidations.” The loss from discontinued operations for the six months ended April 30, 2011 was $0.3 million, or 0.2¢ per share, compared to a loss of $0.8 million, or 0.6¢ per share, for the six months ended April 30, 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 the six months ended April 30, 2011 increased $10.5 million, to $10.7 million, or 8.3¢ per share, from $0.2 million, or 0.1¢ per share, for the six months ended April 30, 2010. Because we reported a loss for the six months ended April 30, 2011 and 2010, there is no impact of dilution.

35

Revenues and Adjusted EBITDA by Business Segment

	Six months ended April 30,
	2011			2010			$			%
(in millions of U.S. dollars)	$			$			Change			Change
Revenues
Commercial Manufacturing
North America		124.9			124.8			0.1			0.1
Europe		162.3			145.5			16.8			11.5
Total Commercial Manufacturing		287.2			270.3			16.9			6.3
Pharmaceutical Development Services		58.5			59.9			(1.4	)		(2.3	)
Total Revenues		345.7			330.2			15.5			4.7
Adjusted EBITDA
Commercial Manufacturing
North America		1.7			7.1			(5.4	)		(76.1	)
Europe		50.8			20.8			30.0			144.2
Total Commercial Manufacturing		52.5			27.9			24.6			88.2
Pharmaceutical Development Services		10.7			24.4			(13.7	)		(56.1	)
Corporate Costs		(19.4	)		(12.9	)		6.5			50.4
Total Adjusted EBITDA		43.8			39.4			4.4			11.2

Commercial Manufacturing

Total CMO revenues for the six months ended April 30, 2011 increased $16.9 million, or 6.3%, to $287.2 million, from $270.3 million for the six months ended April 30, 2010. Had local currency exchange rates remained constant to the rates of the six months ended April 30, 2010, CMO revenues for the six months ended April 30, 2011 would have been approximately 7.2% higher than the same period of prior year.

North American CMO revenues for the six months ended April 30, 2011 increased $0.1 million, or 0.1%, to $124.9 million, from $124.8 million for the six months ended April 30, 2010. Had Canadian dollar exchange rates remained constant to the rates of the six months ended April 30, 2010, North American CMO revenues for the six months ended April 30, 2011 would have been approximately 0.3% lower than the same period of prior year. The increase was primarily due to new product launch volumes in Cincinnati, and higher volumes in Toronto and Puerto Rico, offset by the accelerated deferred revenue recognition in Cincinnati ($4.2 million) for the six months ended April 30, 2010.

European CMO revenues for the six months ended April 30, 2011 increased $16.8 million, or 11.5%, to $162.3 million, from $145.5 million for the six months ended April 30, 2010. Had European currencies remained constant to the rates of the six months ended April 30, 2010, European CMO revenues for the six months ended April 30, 2011 would have been approximately 13.7% higher than the same period of prior year. The increase was primarily due to higher revenues in the United Kingdom from the reservation fee and accelerated deferred revenue versus take-or-pay revenue in the prior year, partially offset by the lower revenues across other sites.

Total CMO Adjusted EBITDA for the six months ended April 30, 2011 increased $24.6 million, or 88.2%, to $52.5 million, from $27.9 million for the six months ended April 30, 2010. This represents an Adjusted EBITDA margin of 18.3% for the six months ended April 30, 2011 compared to 10.3% for the six months ended April 30, 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 the six months ended April 30, 2011 would have been approximately $6.6 million higher.

North American Adjusted EBITDA for the six months ended April 30, 2011 decreased $5.4 million, or 76.1%, to $1.7 million, from $7.1 million for the six months ended April 30, 2010. The decrease was primarily driven by lower revenue in Cincinnati due to prior year recognition of accelerated deferred revenue of $4.2 million and foreign exchange losses of $4.7 million as a result of the weakening of the U.S. dollar against the Canadian dollar, partially offset by a $1.6 million Adjusted EBITDA improvement in Puerto Rico and lower incentive compensation. North American CMO had $1.5 million in repositioning relating to the Puerto Rican operations in the six months ended April 30, 2011 that were not included in Adjusted EBITDA.

European Adjusted EBITDA for the six months ended April 30, 2011 increased $30.0 million, or 144.2%, to $50.8 million, from $20.8 million for the six months ended April 30, 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 revenue weakness across other European sites.

36

Pharmaceutical Development Services

Total PDS revenues for the six months ended April 30, 2011 decreased by $1.4 million, or 2.3%, to $58.5 million, from $59.9 million for the six months ended April 30, 2010. Had the local currency rates remained constant to the six months ended April 30, 2010, PDS revenues for the six months ended April 30, 2011 would have decreased approximately 2.5% from the same period of fiscal 2010.

Total PDS Adjusted EBITDA for the six months ended April 30, 2011 decreased by $13.7 million, or 56.1%, to $10.7 million, from $24.4 million for the six months ended April 30, 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 the six months ended April 30, 2011 would have been approximately $1.3 million higher than reported. PDS Adjusted EBITDA for the six months ended April 30, 2010 includes $7.2 million of prior years’ Canadian research and development investment tax credits. In addition, lower than expected sales across most 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 the six months ended April 30, 2011 increased $6.5 million, or 50.4%, to $19.4 million, from $12.9 million for the six months ended April 30, 2010. The increase was primarily due to unfavorable foreign exchange of $4.8 million, $2.3 million of higher advisor fees due to registration with the SEC and other corporate initiatives, and expenses related to the change in our CEO of $1.7 million, partially offset by $3.0 million in Special Committee costs booked in fiscal 2010.

Liquidity and Capital Resources

Overview

Our cash and cash equivalents totaled $39.3 million at April 30, 2011 and $53.5 million at October 31, 2010. Our total debt was $275.3 million at April 30, 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 our asset-based revolving credit facility (the “ABL”) for any additional cash needs. Our principal uses of cash have been for operating expenditures, capital expenditures, repositioning expenditures, debt servicing requirements, and employee benefit obligations. We expect cash flow from operations, cash on hand and borrowing under our current ABLs to be sufficient to fund our existing level of operating expenses, capital expenditures, and interest expense for the foreseeable future.

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 securities 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:

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Cash (used in) provided by operating activities of continuing operations		(6.7	)		39.0			0.7			45.9
Cash used in operating activities of discontinued operations		(0.2	)		(0.3	)		(0.4	)		(1.1	)
Cash (used in) provided by operating activities		(6.9	)		38.7			0.3			44.8
Cash used in investing activities of continuing operations		(11.1	)		(9.6	)		(20.9	)		(20.5	)
Cash (used in) provided by financing activities		(1.8	)		25.5			(3.3	)		30.0
Other		9.3			0.9			9.7			(0.8	)
Net (decrease) increase in cash and cash equivalents during the period		(10.5	)		55.5			(14.2	)		53.5

Cash (Used in) Provided by Operating Activities

Cash provided by operating activities from continuing operations for the three months ended April 30, 2011 decreased $45.7 million to a cash usage $6.7 million, from a cash source of $39.0 million for the three months ended April 30, 2010. Prior year cash from operations was driven primarily by the take or pay receipts in our Swindon operations of $53.1 million versus $29.3 million received from the reservation fee in fiscal 2011. Higher interest payments of $8.3 million and other working capital usage making up the majority of the remaining change of cash.

37

Cash provided by operating activities from continuing operations for the six months ended April 30, 2011 decreased $45.2 million, or 98.5%, to $0.7 million, from $45.9 million for the six months ended April 30, 2010. Prior year cash from operations was driven primarily by the take or pay receipts in our Swindon operations of $53.1 million versus $29.3 million received from the reservation fee in fiscal 2011. Higher interest payments of $4.9 million and other working capital usage made up the majority of the remaining change of cash.

Cash used in operating activities from discontinued operations for the three months ended April 30, 2011 decreased $0.1 million, or 33.3%, to $0.2 million, from $0.3 million for the three months ended April 30, 2010. The decrease in cash outflow for the three months ended April 30, 2011 was due to lower costs related to the utilities, insurance and maintenance of the Carolina facility while it is in the process of being sold.

Cash used in operating activities from discontinued operations for the six months ended April 30, 2011 decreased $0.7 million, or 63.6%, to $0.4 million, from $1.1 million for the six months ended April 30, 2010. The decrease in cash outflow for the six months ended April 30, 2011 was due to lower costs related to utilities, insurance and maintenance of the Carolina facility while it is in the process of being sold.

Cash Used in Investing Activities

The following table summarizes the cash used in investing activities for the periods indicated:

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Total additions to capital assets		(11.1	)		(9.2	)		(21.0	)		(19.4	)
Proceeds on sale of capital assets		—			—			0.1			—
Net increase in investments		—			(0.3	)		—			(0.9	)
Investment in intangibles		—			(0.1	)		—			(0.2	)
Cash used in investing activities of continuing operations		(11.1	)		(9.6	)		(20.9	)		(20.5	)
Cash used in investing activities		(11.1	)		(9.6	)		(20.9	)		(20.5	)

Cash used in investing activities from continuing operations for the three months ended April 30, 2011 increased $1.5 million, or 15.6%, to $11.1 million, from $9.6 million for the three months ended April 30, 2010, primarily due to higher capital expenditures in the current period.

Cash used in investing activities from continuing operations for the six months ended April 30, 2011 increased $0.4 million, or 2.0%, to $20.9 million, from $20.5 million for the six months ended April 30, 2010. Higher capital expenditures in fiscal 2011 were partially offset by the non-recurrence of cash contributions in two Italian companies (BSP Pharmaceuticals) in fiscal 2010.

Our principal ongoing investment activities are project-related and sustaining capital programs at our network of sites. The majority of our capital allocation is normally invested in project-related programs, which are defined as outlays that will generate growth in capacity and revenues, while sustaining expenditures related to the preservation of existing assets and capacity.

Cash (Used in) Provided by Financing Activities

The following table summarizes the cash (used in) provided by financing activities for the periods indicated:

	Three months ended April 30,						Six months ended April 30,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Decrease in short-term borrowings		(0.7	)		(15.0	)		(2.1	)		(12.6	)
Increase in long-term debt		—			278.8			—			286.9
Repayment of long-term debt		(1.1	)		(238.3	)		(1.2	)		(244.3	)
Cash (used in) provided by financing activities of continuing operations		(1.8	)		25.5			(3.3	)		30.0
Cash (used in) provided by financing activities		(1.8	)		25.5			(3.3	)		30.0

Cash used in financing activities for the three months ended April 30, 2011 was $1.8 million compared to cash provided of $25.5 million for the three months ended April 30, 2010. During the three months ended April 30, 2011, the cash outflows were primarily due to repayments on a capital lease in Puerto Rico and for insurance financing. Net borrowings for the three months ended April 30, 2010 were from the Notes we issued for an aggregate principal amount of $280 million in a private placement. We used the net proceeds of the offering 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.

38

Cash used in financing activities for the six months ended April 30, 2011 increased $33.3 million, or 111.0%, to $3.3 million, from a source of cash of $30.0 million for the six months ended April 30, 2010, primarily due to the refinancing in the second quarter of fiscal 2010.

Financing Arrangements

Historical Credit Arrangements

On April 27, 2007, we entered into credit facilities in the aggregate amount of $225.0 million, which were comprised of a seven year, $150.0 million senior secured term loan and the five-year, $75.0 million ABL. We were required to make quarterly installment payments of $0.4 million on the term loan, along with additional mandatory repayments based on certain excess cash flow measures. The interest rate applicable to each alternative base rate borrowing under the term loan was equal to 1.5% plus the greater of the prime rate and the federal funds effective rate plus 0.5%. The interest rate applicable to each Eurocurrency borrowing was equal to an adjusted LIBOR plus 2.5%. The interest rate applicable to the ABL was a floating rate determined by the currency of the loan, plus an applicable margin determined by the leverage ratio. The credit facilities were secured by substantially all of the assets of our operations in Canada, the United States, Puerto Rico and the United Kingdom and our investments in the shares of all other operating subsidiaries. The term loan and any borrowings under our then-existing ABL were paid off as part of the refinancing discussed below.

$280 Million Senior Secured Notes and Amended ABL

In April 2010, we issued the Notes for an aggregate principal amount of $280 million. We used the net proceeds of the offering to repay all of the outstanding indebtedness under our then-existing senior secured term loan and the $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.

We also amended and restated our then-existing $75.0 million ABL in connection with the offering to, among other things, extend the maturity date of this facility to 2014.

The Notes and the ABL are secured by substantially all of our assets and are guaranteed by, and secured by substantially all of the assets of, our subsidiaries in the United States (including Puerto Rico), Canada, the United Kingdom and the Netherlands. The Notes and the ABL are guaranteed on a limited basis by, and secured by certain assets of, our subsidiaries in France, Italy and Switzerland.

The Notes indenture contains language consistent with the ABL, which contains usual and customary covenants and events of default provisions.

The agreements that govern the terms of our debt, including the indenture that governs the Notes and the credit agreement that governs the ABL, contain covenants that restrict our ability and the ability of our subsidiaries to, among other things:

• incur additional indebtedness;

• 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 restricted subsidiaries or restrict our ability to incur liens on certain of our assets;

• sell or otherwise dispose of assets, including capital stock of restricted subsidiaries;

• enter into transactions with affiliates;

• create or incur liens; and

• merge, consolidate or sell substantially all of our assets.

Provided that we are not in default under the ABL or the indenture governing the Notes and are able to satisfy certain tests related to our Fixed Charge Coverage Ratio (as defined in the indenture governing the Notes), and will have a required minimum amount of remaining borrowing availability under the ABL after giving effect thereto, we are permitted to pay certain limited amounts of dividends or other distributions with respect to our restricted voting shares (as more particularly described in the ABL and the indenture governing the Notes, up to $15.0 million plus 50.0% of Excess Cash Flow (as defined in the ABL), plus net proceeds of additional permitted equity offerings under the ABL, or up to 50.0% of Consolidated Net Income (as defined in the indenture governing the Notes) plus net proceeds from additional permitted equity offerings or sales of restricted investments under the Notes.

In addition, under the ABL, if our borrowing availability falls below the greater of $10.0 million or 13.3% of total commitments under the ABL for any two consecutive days (which is defined under the ABL as a “Liquidity Event”), we will be required to satisfy and maintain a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00 until the first day thereafter on which our borrowing availability has been greater than the greater of $10.0 million or 13.3% of our total commitments for 30 consecutive days. We will also be required to satisfy the required Fixed Charge Coverage Ratio in order to borrow on any day when our borrowing availability is below that level but a Liquidity Event has not yet occurred. Our ability to meet the required Fixed Charge Coverage Ratio can be affected by events beyond our control, and we may not be able to meet this ratio. A breach of any of these covenants could result in a default under the ABL.

39

Financing Ratios

Total interest-bearing debt at April 30, 2011 was $275.3 million, $3.0 million lower than at October 31, 2010. At April 30, 2011, our consolidated ratio of interest-bearing debt to shareholders’ equity was 90.9%, compared to 101.9% at October 31, 2010.

Off-Balance Sheet Arrangements

We do not use off-balance sheet entities to structure any of our financial arrangements. We do not have any interests in unconsolidated special-purpose or structured finance entities.

Tabular Disclosure of Contractual Obligations

The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” under Item 2 of our Form 10. There have been no material changes to our contractual obligations since our fiscal year ended October 31, 2010.

Recent Accounting Pronouncements

See “Note 1—Accounting policies—Recently issued accounting pronouncements” and “Note 13—Additional disclosure required under U.S. Generally Accepted Accounting Principles—Impact of new and pending U.S. GAAP accounting standards” to our consolidated financial statements beginning on page 1 of this quarterly report on Form 10-Q for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Critical Accounting Policies and Estimates

For information about our critical accounting estimates, see “Item 2. Financial Information—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” beginning on page 53 of our Form 10.

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, 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 quarterly report on Form 10-Q 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; 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 our Form 10. 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 quarterly report on Form 10-Q, and except as required by law, we assume no obligation to update or revise them to reflect new events or circumstances.

40

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

Our business is conducted in several currencies—Canadian dollars and U.S. dollars for our Canadian operations, U.S. dollars for our U.S. operations and Euros and British Sterling for our European operations. We are subject to foreign currency transaction risk because a significant portion of our revenues and operating expenses from our operations in certain countries are denominated in different currencies. Our material foreign currency transaction risk arises from our Canadian operations. Our Canadian operations negotiate sales contracts for payment in both U.S. and Canadian dollars, and materials and equipment are purchased in both U.S. and Canadian dollars. The majority of the non-material costs (including payroll, facilities’ costs and costs of locally sourced supplies and inventory) of our Canadian operations are denominated in Canadian dollars. In the six months ended April 30, 2011, approximately 90% of the revenues and 15% of the operating expenses of our Canadian operations were transacted in U.S. dollars. As a result, if we do not effectively hedge such foreign currency exposure, our results of operations will be adversely affected by an increase in the value of the Canadian dollar relative to such foreign currency. In addition, we may experience hedging and transactional gains or losses because of volatility in the exchange rate between the Canadian dollar and the U.S. dollar. Based on our current U.S. denominated net inflows, for each 10% change in the Canadian-U.S. dollar exchange rate, the impact on annual pre-tax income, excluding any hedging activities, would be approximately $5.8 million.

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 April 30, 2011, we had entered into 60 foreign exchange forward contracts and collars covering approximately 75% of our Canadian-U.S. dollar cash flow exposures for fiscal 2011 and had one forward exchange forward contracts covering our Euro-U.S. dollar cash flow. See “Note 8—Financial instruments and risk management” to our unaudited consolidated financial statements. We do not hedge any of our other foreign exchange exposures. Our foreign exchange forward contracts and collars mature at various dates through January 2012 and have an aggregate fair value of $75.3 million. As of April 30, 2011, an adverse exchange rate movement of 10% against our foreign exchange forward contracts and collars would result in a pre-tax loss of approximately $7.5 million.

Interest Rate Risk

As of April 30, 2011, our long-term debt consisted of the Notes, which have an aggregate principal amount of $280 million and bear interest at a fixed rate, and the $75 million ABL, which bears interest at a variable rate. As of April 30, 2011, we had not borrowed any amounts under the ABL. Assuming a fully drawn ABL and a 100 basis point increase in applicable interest rates, our interest expense, net, would increase by $0.75 million on an annual basis.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures are effective in that they provide reasonable assurances that the information we are required to disclose in the reports we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods required by the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

41

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any material pending legal proceedings, and no such proceedings are known to be contemplated by governmental authorities.

Item 1A. Risk Factors

Impact of the March 2011 Disaster in Japan

We are currently assessing the potential impact of the March 2011 disaster in Japan and its aftermath on our supply chain and operations in Japan for the remainder of 2011. These events did not have a material impact on our net sales, operating profit and supply chain in the second quarter of fiscal 2011. However, any sustained supply chain disruption involving multiple customers or vendors resulting from the disaster in Japan could have material adverse effects on our result of operations.

In addition to the other information set forth in this report, when evaluating our business, investors should carefully consider the risk factors discussed in Item 1A. “Risk Factors” in our Form 10.

Item 6. Exhibits

The exhibits listed in the accompanying exhibit index are filed as part of this quarterly report on Form 10-Q, and such exhibit index is incorporated by reference herein.

42

S I G N A T U R E S

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: June 10, 2011

		PATHEON INC.
By:	/s/ James C. Mullen	By:	/s/ Eric W. Evans
James C. Mullen		Eric W. Evans
Chief Executive Officer		Chief Financial Officer

43

EXHIBIT INDEX

		Incorporated by Reference
Exhibit Number	Description of Document	Form	Filing Date	Number	Filed Herewith
10.1	Employment Agreement between Patheon Pharmaceuticals Services Inc. and James C. Mullen effective February 7, 2011.	10	02/25/11	10.21
10.2	Amended and Restated Employment Agreement dated April 25, 2011 between Patheon Pharmaceutical Services Inc. and James C. Mullen effective February 7, 2011.				X
10.3	2011 Amended and Restated Incentive Stock Option Plan effective March 10, 2011.				X
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X

44

EX-10.2

Exhibit 10.2

EXECUTION COPY

[PATHEON]

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (“Agreement”), dated as of the date of last signature below and effective as of February 7, 2011 (“Effective Date”), is by and between Patheon Pharmaceutical Services Inc. (the “Company”) and James Mullen (“Executive”).

RECITALS

A. The Company is a subsidiary of Patheon Inc. (“Patheon”). Patheon is in the business of providing its customers with pharmaceutical development services, clinical trial manufacturing and packaging, and commercial manufacturing and packaging. The Company serves as the corporate shared services entity for Patheon and the other members of the Patheon Group. As used in this Agreement, “Patheon Group” means Patheon and any entity controlled by Patheon.

B. The Company wishes to employ Executive pursuant to the terms and conditions of this Agreement. The Executive will serve as Chief Executive Officer of Patheon (“CEO”).

C. Executive wishes to be employed by the Company and to serve in such capacity under the terms and conditions set forth in this Agreement.

D. The Company and Executive agree that the terms, provisions and mutual covenants of this Agreement suffice as adequate consideration for their mutual promises made in this Agreement.

NOW, THEREFORE, the parties agree as follows:

1. Position and Duties; Location.

(a) During the Term (as defined below), Executive shall serve as the CEO, with such authority, duties and responsibilities as are commensurate with such position and Executive will report directly to the Board of Directors of Patheon (the “Board”). In addition, Patheon shall cause Executive to be appointed as a member of the Board as of the Effective Date. During Executive’s tenure as CEO, the Board will recommend to Patheon’s shareholders that Executive be re-elected to the Board. Other than Executive, no other employee or executive will report directly to the Board during the Term.

(b) The location of Executive’s employment will be the Company’s Raleigh/Durham offices, located at 4721 Emperor Boulevard, Suite 200, Durham, North Carolina 27703, USA, or such other location where the principal executive offices may be relocated from time to time by the Board. Executive will be permitted to commute to the Company’s Raleigh/Durham offices from his primary residence in Boston, Massachusetts, provided that Executive will be expected to devote his full working time and attention to his duties as CEO and, except as permitted in Section 2 below, shall render no material business services to any other person or company. Executive will be expected to be at the Company’s Raleigh/Durham offices or any other offices of the Company or otherwise engaged in the performance of his duties at least five days per week, subject to required business travel, vacation and holidays. For the initial six months of the Term, (i) Executive will be entitled to a reasonable housing allowance from the Company for the cost of housing arrangements in the Raleigh/Durham area and (ii) the Company will pay for or reimburse travel expenses related to Executive’s weekly commute between Boston and the Raleigh/Durham area.

2. Standards of Performance. Executive will, at all times, faithfully, industriously and to the best of his ability, experience and talents, perform all of the duties required of and from him pursuant to the terms of this Agreement. Notwithstanding the foregoing, Executive is permitted (i) to spend reasonable amounts of time to manage his personal, financial and legal affairs, (ii) to continue to serve on the boards of PerkinElmer, Inc. and Percivia, LLC and (iii) with the Company’s consent, which will not be unreasonably withheld, to serve on civic, charitable, not-for-profit, industry or other for profit corporate boards, provided that such activities, individually and collectively, do not materially interfere with the performance of Executive’s duties hereunder. Executive shall be subject to the Company’s policies, procedures and approval practices, as generally in effect from time to time.

3. Term. The Company hereby agrees to employ Executive, and Executive hereby agrees to be employed by the Company, on the terms and subject to the conditions of this Agreement (including, without limitation, Section 6), for the period commencing on the Effective Date and ending on the second anniversary of the Effective Date. Unless terminated prior to that date, the Term shall be automatically renewed for successive one-year periods on the terms and subject to the conditions of this Agreement (including, without limitation, Section 6), commencing on the second anniversary of the Effective Date, and on each anniversary date thereafter, unless either the Company or Executive gives the other party written notice (in accordance with Section 11 hereof), at least 90 days prior to the end of such initial or extended Term, of its or his intention not to renew this Agreement. Any reference to the “Term” of this Agreement shall include the original term and any extension thereof.

4. Compensation, Benefits and Policies.

(a) Base Salary. As an annual base salary (“Base Salary”), the Company will pay Executive an annual initial Base Salary at a rate of nine hundred thousand dollars ($900,000.00) US, less necessary withholdings and authorized deductions, and payable pursuant to the Company’s regular payroll practices in effect at the time. For the Fiscal Year 2011, Executive’s Base Salary will be prorated from the Effective Date. During the Term, Executive’s Base Salary shall be reviewed annually by the Board, at such time as the salaries of other senior executives of the Company are reviewed generally, and is subject to increase, but not decrease, at the Board’s discretion. If so increased, the Base Salary shall be increased for all purposes of this Agreement.

(b) Paid Time Off and Benefits. Executive will accrue paid time off for vacation at the rate of four (4) weeks for each year of employment, in addition to four (4) floating holidays annually in accordance with the Company’s policies, as may be in effect from time to time, for its senior executives generally. Executive will accrue paid time off for illness pursuant to the Company’s regular policies. In addition, Executive is entitled to (i) participate in any plans regarding benefits of employment, including pension, profit sharing, group health, disability insurance, employee pension and welfare benefit plans for U.S. resident-based senior executives now existing or hereafter established and (ii) participate in any other perquisite program of the Company on a basis at least as favorable as other senior level executives of the Company. Executive may also waive participation under the Company’s medical benefits plans and receive such benefits on a cost-equivalent basis. The Company may, in its sole discretion and from time to time, establish additional senior management benefit plans as it deems appropriate. Executive understands that any such plans may be modified or eliminated in the Company’s sole discretion in accordance with applicable law, provided that no such modification or elimination shall result in reducing or eliminating any benefits in which Executive’s right has vested.

(c) Reimbursement of Business Expenses. The Company will promptly reimburse to Executive his business expenses in connection with the performance of his duties under this Agreement in accordance with the policies and procedures established by the Company.

(d) Retirement Benefits. Executive will be entitled to participate in the 401(k) retirement plan and any other qualified or nonqualified deferred compensation and retirement plans on a basis at least as favorable as other senior executives of the Company generally, in each case as amended from time to time.

(e) Equity Compensation.

(i) As soon as practicable after the end of the current period during which certain activities with respect to Patheon’s shares are prohibited or restricted (any such period, a “Blackout Period”)¹, Executive will be granted (the date of such grant, the “Grant Date”), of an option to acquire 5,000,000 of Patheon’s restricted voting shares (the “Initial Grant”). The Initial Grant will have a per-share exercise price equal to the closing price of the underlying shares on the Toronto Stock Exchange on the Grant Date and will vest in five (5) equal installments on each of the first five anniversaries of the Effective Date, in accordance with the Patheon’s 2011 Amended and Restated Incentive Stock Option Plan. In the event of a Change in Control, Executive’s unvested portion of the Initial Grant will become immediately vested and exercisable and remain in force for the duration of their original term (as described in clause (ii) below).

(ii) All options granted to Executive will expire ten (10) years from the date of grant.

(iii) Executive will be required to comply with the terms of any share ownership guidelines applicable to senior executives of Patheon generally, as amended from time to time. Patheon will count ownership of any vested Options or other vested equity of Patheon (either from the Initial Grant or otherwise) toward meeting any ownership requirements instituted by Patheon.

(iv) As used in this Agreement, a “Change in Control” shall mean any of the following events:

(i) any “Person” (within the meaning of Section 13(d)(3) or 14(d)(2)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than JLL Partners or its affiliates, becomes a Beneficial Owner (within the meaning of Exchange Act Rule 13d-3) of more than fifty (50%) of the voting power of the then outstanding voting securities of Patheon entitled to vote generally in the election of directors;

(ii) there is consummated a merger or consolidation of Patheon or any direct or indirect subsidiary of Patheon with any other company, other than a merger or consolidation that would result in the voting securities of Patheon outstanding immediately

¹  The current Blackout Period is expected to end on March 10, 2011.

prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least fifty percent (50%) of the combined voting power of the securities of Patheon or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation; or

(iii) the stockholders of Patheon approve a plan of complete liquidation or dissolution of the company or there is consummated an agreement for the sale or disposition by Patheon of all or substantially all of its assets.

However, in no event shall a “Change in Control” be deemed to have occurred for purposes of this Agreement solely because Patheon (or any member of the Patheon Group) engages in an internal reorganization, which may include a transfer of assets to, or a merger or consolidation with, one or more affiliates.

(f) Sarbanes-Oxley Act Loan Prohibition. To the extent that any Company benefit, program, practice, arrangement or this Agreement would or might otherwise result in Executive’s receipt of an illegal loan (the “Loan”), the Company shall use commercially reasonable efforts to provide Executive with a substitute for the Loan that is lawful and of at least equal value to Executive. If this cannot be done, or if doing so would be significantly more expensive to the Company than making the Loan, the Company need not make the Loan to Executive or provide him a substitute for it.

(g) Executive Performance Bonus. Executive will be eligible to receive an annual bonus (a “Performance Bonus”) with a target bonus equal to 100% of Executive’s Base Salary (based on achieving 100% of the financial and other targets recommended by Executive and approved by the Board). Executive may earn amounts greater than the target bonus pursuant to the terms of the annual incentive targets. These annual incentive targets will be pre-determined by the Compensation Committee of the Board, after consultation with, and recommendation from, Executive from time to time. For Fiscal Year 2011, Executive’s Performance Bonus will be no less than 50% of his Base Salary, pro-rated from the Effective Date. Nothing contained in this Section 4(h) will prevent the Board from establishing performance goals and compensation targets applicable only to Executive.

5. Termination of Employment.

(a) By Company Without Cause. The Company may terminate Executive’s employment without Cause (as defined below), effective immediately upon written notice (pursuant to Section 11 below) (such date of termination, the “Termination Date”). If the Company delivers to Executive a notice of non-renewal upon the expiration of the Term as provided in Section 3 above, the expiration of the Term shall constitute a termination by the Company without Cause. In the event of such a termination and subject to the other provisions of this Agreement, Executive will be entitled to the following from the Company:

(i) payment of all earned but unpaid compensation (including accrued unpaid vacation) through the effective date of termination, payable on or before the Termination Date;

(ii) reimbursement of expenses incurred on or before the Termination Date in accordance with Section 4(c), above; and

(iii) continued payment for two years of his then current Base Salary rate (less necessary withholdings and authorized deductions) (the “Severance Payments”), payable in equal monthly installments over the two-year period following the Termination Date (the “Severance Period”).

In addition, with respect to the Initial Grant, a pro-rata portion of the shares subject to the Initial Grant in which Executive would have become vested on the following anniversary of the Effective Date will become immediately vested and exercisable on the Termination Date; provided however, that if Executive’s Termination Date is within six (6) months of the Effective Date, 500,000 of the shares subject to the Initial Grant will immediately become vested and exercisable as of the Termination Date (either such amount, the “Equity Severance”).

If Executive is terminated under circumstances in which he becomes entitled to the Equity Severance, Executive will be permitted to exercise his vested options within three (3) months after his Termination Date (the “QT Exercise Period”); provided however, that if Executive would be prevented from selling his shares during the QT Exercise Period due to law or applicable Patheon policy preventing the sale of shares (a “Blackout Period”) that occurs or is ongoing during the QT Exercise Period, the QT Exercise Period shall be extended to a date that is ten (10) days after the last day of the Blackout Period.

The Severance Payments and the Equity Severance shall be referred to collectively as the “Severance Benefits”. Executive shall not receive the Severance Benefits unless Executive executes the release attached hereto as Schedule A (the “Release”), and the same becomes effective pursuant to its terms and is not revoked. In addition, Executive’s rights to the Severance Benefits are subject to Executive’s continued compliance with the provisions of Section 6 below.

(b) By Company With Cause. The Company may terminate Executive’s employment for Cause at any time and without prior notice, written or otherwise, effective immediately upon notice. As used in this Agreement, “Cause” shall mean the determination, in good faith, by the Board, after notice to Executive, that one or more of the following events has occurred:

(i) Executive has willfully failed to perform his material duties, and such failure has not been cured after a period of thirty (30) days’ notice from the Company;

(ii) any reckless or grossly negligent act by Executive having the effect of injuring the interest, business or reputation of the Company, or any member of the Patheon Group in any material respect;

(iii) Executive’s commission of any felony (including entry of a nolo contendere plea);

(iv) any misappropriation or embezzlement of the property of the Company or any member of the Patheon Group; or

(v) a breach of any material provision of this Agreement by Executive, which breach, if curable, remains uncured for a period of thirty (30) days after receipt by Executive of written notice from the Company of such breach, which notice shall contain the specific reasonable cure requested by the Company.

In the event Executive is terminated for Cause, Executive will be entitled only to the Accrued Benefits through the Termination Date. The Company (and Patheon) will have no further obligation to pay any compensation of any kind (including, without limitation, any bonus or portion of a bonus that otherwise may have become due and payable to Executive with respect to the year in which such termination date occurs), or severance payment of any kind, nor will the Company (or Patheon) have any obligation to make any payment in lieu of notice. The definition of Cause set forth in this Agreement shall govern for purposes of Executive’s equity compensation and any other compensation containing such a concept. For purposes of this agreement, Accrued Benefits shall mean (i) payment of Base Salary through the Termination Date, (ii) payment of any Performance Bonus for performance periods completed prior to the Termination Date (provided that Executive is not terminated for Cause or does resign without Good Reason) and (iii) any payments or benefits under the Company’s benefit plans that are earned or accrued prior to the Termination Date.

(c) Incapacity or Death.

(i) If a healthcare provider selected by the Board or its insurers determines Executive has become unable, due to physical or mental illness or injury, to perform the essential duties of his position for more than twelve (12) weeks, whether or not the days of disability are consecutive, in any twelve (12) month period during this Agreement with or without reasonable accommodation (“Incapacity”), the Company has the right to terminate Executive’s employment on fifteen (15) days’ written notice. In the event of termination for Incapacity, Executive will be entitled to receive the Accrued Benefits and, subject to Executive (or his legal representative on his behalf) executing the Release and the same becoming effective pursuant to its terms and not revoked, the Equity Severance; and

(ii) Executive’s employment pursuant to this Agreement shall be immediately terminated without notice by the Company upon the death of Executive. If Executive dies while actively employed pursuant to this Agreement (or if Executive’s employment is terminated (a) by the Company without Cause, (b) by Executive for Good Reason (as defined below), or (c) due to Executive’s Incapacity, but Executive dies prior to the date that is seven (7) days after the day the Company presents him with the Release), his estate or designated beneficiaries will be entitled to receive from the Company the Accrued Benefits and subject to the trustee of Executive’s estate or Executive’s designated beneficiaries signing and executing a release of all claims against the Company and the same becoming effective pursuant to its terms and not revoked, the Equity Severance.

(d) Resignation for Good Reason. Executive may terminate this Agreement for Good Reason (as defined below) by giving written notice of such termination, which termination will become effective on the thirtieth (30th) day following receipt by the Company. As used in this Agreement, “Good Reason” shall mean the occurrence of any of the following events without the prior consent of Executive:

(i) removal of Executive from Executive’s position;

(ii) material reduction of Executive’s duties or responsibilities or the assignment to Executive of duties materially inconsistent with such position; or

(iii) material breach of this Agreement, which breach remains uncured for a period of thirty (30) days after receipt by the Company of written notice from Executive.

No termination for Good Reason shall be effective until (a) Executive has given the Company written notice (pursuant to Section 11 below) within sixty (60) days of Executive becoming aware of the initial occurrence of any of the foregoing specifying the event or condition constituting the Good Reason (the date of such notice, the “Measurement Date”), and the specific reasonable cure requested by Executive (b) the Company has failed to cure the occurrence within thirty (30) days of the Measurement Date, and (c) Executive resigns within three (3) months following the initial occurrence. Further, Executive shall not have “Good Reason” under clauses (i) – (iii) above if, on the Measurement Date, (x) grounds exist for a termination by the Company for Cause or (y) Executive has already given the Company notice of (1) non-renewal of his Agreement at the end of the Term pursuant to Section 3 above or (2) his intention to resign without Good Reason. In the event of a termination for Good Reason, Executive will be entitled to the Accrued Benefits and, subject to the same conditions as are set forth in the final paragraph of Section 5(a), the Severance Benefits.

(e) Voluntary Resignation without Good Reason. Executive may terminate this Agreement without Good Reason effective on sixty (60) day’s written notice (pursuant to Section 11 below), unless the Company in its sole discretion accepts the resignation earlier. In the event that Executive resigns without Good Reason as defined above in Section 5(d), Executive will be entitled only to the Accrued Benefits through the Termination Date. Executive’s equity awards (including the Initial Grant) shall be treated in accordance with their terms. The Company will have no further obligation to pay any compensation of any kind (including, without limitation, any bonus or portion of a bonus that otherwise may have become due and payable to Executive with respect to the year in which such Termination Date occurs), or severance payments of any kind.

(f) Resignation from All Positions. Notwithstanding any other provision of this Agreement, upon the termination of Executive’s employment for any reason, unless otherwise requested by the Board, Executive shall immediately resign as of the Termination Date from all positions that he holds or has ever held with the Company, including his positions as an officer of Patheon and a member of the Board (and with any other entities with respect to which the Company has requested Executive to perform services). Executive hereby agrees to execute any and all documentation to effectuate such resignations upon request by the Company, but he shall be treated for all purposes as having so resigned upon termination of his employment, regardless of when or whether he executes any such documentation.

(i) Effect of Accrued Benefits and Severance Benefits Payments. Executive shall not be entitled to any other severance pay or benefits under any severance plan, program or policy of the Company or any member of the Patheon Group, unless otherwise specifically provided therein in a specific reference to this Agreement.

6. Proprietary Information Obligations.

(a) Proprietary Information, Confidentiality and Non-Disparagement. Both before and during the term of Executive’s employment, Executive will have access to and become acquainted with confidential and proprietary information of the Patheon Group (together “Proprietary Information”), including but not limited to information or plans concerning the Patheon Group’s customer relationships; personnel; sales, marketing and financial operations and methods; trade secrets, formulae, devices; secret inventions; processes; and other compilations of information, records, and specifications. As a result, Executive confirms that he is bound by the provisions of and agrees to execute, effective as of the Effective Date, the Company’s customary confidentiality agreement (the “Confidentiality Agreement”). Executive also agrees not to criticize, denigrate, or otherwise disparage the Company, any members of the Patheon Group, or any of their respective directors, officers, products, processes, experiments, policies, practices, standards of business conduct, or areas or techniques of research. The Company agrees to use its reasonable commercial efforts not to permit, authorize or condone denigrating or disparaging statements about Executive in any press release or other formally released announcement. Factually accurate statements in legal or public filings shall not violate this provision. In addition, nothing in this Section 6(a) shall prohibit Executive or any member of the Patheon Group, or any of their respective officers, employees or directors from complying with any lawful subpoena or court order or taking any other actions affirmatively authorized by law (including testifying truthfully in any legal proceeding).

(b) Non-Solicitation of Customers and Other Business Partners. Executive recognizes that by virtue of his employment with the Company, he will be introduced to and involved in the solicitation and servicing of existing customers and other business partners of the Patheon Group and new customers and business partners obtained by the Patheon Group during his employment. Executive understands and agrees that all efforts expended in soliciting and servicing such customers and business partners shall be for the benefit of the Company. In addition, Executive agrees that, for a period beginning on the Effective Date and ending two (2) years after his Termination Date, regardless of the reason for such termination, Executive shall not use any Proprietary Information to, directly or indirectly (i) solicit, direct, interfere with, or entice away from the Patheon Group any existing customer, business partner, licensee, licensor, vendor, contractor or distributor of the Patheon Group or (ii) solicit, encourage or otherwise direct any customer or other business partner to expand its business with a Competitor, without the prior written consent of the Board.

(c) Non-Solicitation of Employees. Executive recognizes the substantial expenditure of time and effort which the Company and the other members of the Patheon Group devote to the recruitment, hiring, orientation, training and retention of their respective employees. Accordingly, Executive agrees that, for a period beginning on the Effective Date and ending two (2) years after his Termination Date, regardless of the reason for such termination, Executive shall not intentionally use any Proprietary Information, directly for himself, or on behalf of any other person or entity, to knowingly solicit, offer employment to, hire or otherwise retain the services of any salaried employee of any member of the Patheon Group. For purposes of the foregoing, “employee of any member of the Patheon Group” shall include any person who was an employee of any member of the Patheon Group at any time within six (6) months prior to the prohibited conduct.

(d) Non-Competition. Executive recognizes that his loyal and complete fulfillment of employment subsequent to his employment with the Company may inevitably require him to reveal or utilize the Proprietary Information. Accordingly, for a period beginning on the Effective Date and ending two (2) years after his Termination Date, regardless of the reason for such termination, Executive shall not in any manner, directly or indirectly, compete with the Patheon Group by (a) becoming an officer, agent, employee, partner, director, consultant, independent contractor of a Competitor, or (b) acquiring an ownership interest in a Competitor, provided that Executive may, for investment purposes, own not more than 1% of the outstanding stock of any class of a Competitor that is listed on a recognized stock exchange or traded in the over-the-counter market in Canada or the United States, without the Company’s written consent if the CEO then serving reasonably determines that Executive’s subsequent competition would compromise any Proprietary Information. For purposes of this Agreement, the term “Competitor” means any person or entity that is primarily or principally engaged in the business of contract drug manufacturing or contract drug development in Canada, the United States (including the Commonwealth of Puerto Rico), India, Europe or other geographic location in which any member of the Patheon Group is doing business at the time.

(e) Company Property and Materials.

(i) All files, records, documents, computer-recorded or electronic information, drawings, specifications, equipment, and similar items relating to Company business or the business of any member of the Patheon Group, whether prepared by Executive or otherwise coming into his possession, will remain the Company’s (or applicable Patheon Group member’s) exclusive property and will not be removed from Company’s (or applicable Patheon Group member’s ) premises under any circumstances whatsoever without the Company’s prior written consent, except when, and only for the period, necessary to carry out Executive’s duties hereunder;

(ii) In the event of termination of Executive’s employment for any reason, Executive will promptly deliver to the Company all Company equipment (including, without limitation, any cellular phones, beeper/pagers, computer hardware and software, fax machines and other tools of the trade) and all originals and copies of all documents, including without limitation, all books, customer lists, forms, documents supplied by customers, records, product lists, writings, manuals, reports, financial documents and other documents or property in Executive’s possession or control, which relate to the Company’s or any member of the Patheon Group’s business in any way whatsoever, and in particular to customers of any member of the Patheon Group, or which may be considered to constitute or contain Proprietary Information as defined above, and Executive will neither retain, reproduce, nor distribute copies thereof (other than copies of Executive’s rolodex or similar electronic or hardcopy address and telephone directories).

(f) Remedies for Breach. Executive acknowledges that any breach by Executive of the covenants set forth in either this Section 6 or the Confidentiality Agreement (collectively, the “Restrictive Covenants”) would cause the Company irreparable injury and damage for which monetary damages are inadequate. Accordingly, in the event of a breach or a threatened breach of the Restrictive Covenants by Executive, Executive agrees that (i) the Company will be entitled to seek an injunction restraining such breach and (ii) the Company’s obligation to pay any unpaid portion of the Severance Benefits or other benefits as set forth in Sections 5(a) and (d) of this Agreement will be extinguished. Nothing contained herein will be construed as prohibiting the Company from pursuing any other remedy available to the Company for such breach or such threatened breach. Executive agrees not to circumvent the spirit of these restrictions by attempting to accomplish indirectly what Executive is otherwise restricted from doing directly.

(g) Reasonableness and Revision. Executive has carefully read and considered the restrictions and limitations set forth in the Restrictive Covenants and agrees and acknowledges that the Restrictive Covenants (i) are reasonable and necessary for the protection of the Company’s business interests and goodwill due to the uniqueness of Executive’s services and the confidential nature of the information he will possess and (ii) do not prevent Executive from working or from supporting his family and obligations. Moreover, Executive agrees that the geographic restriction on competitive activities by Executive is reasonable, given the global nature of the Patheon Group’s business and Executive’s role in that business. If, at the time of enforcement of this Section 6 and/or the Confidentiality Agreement, a court or other tribunal holds that the Restrictive Covenants are in whole or in part unreasonable under circumstances then existing, the parties agree that (i) the maximum period or scope reasonable under such circumstances will be substituted for the stated period or scope and that the court or other tribunal shall be authorized and directed by the parties to revise the restrictions contained herein to cover the maximum period or scope permitted by law and (ii) the remaining provisions of the Restrictive Covenants shall be enforced as written.

(h) Section 6 Acknowledgement. Executive agrees and acknowledges that the promises and obligations made by the Company in this Agreement (specifically including, but not limited to, the payments and benefits provided for under Section 5) constitute sufficient consideration for the Restrictive Covenants. Executive further acknowledges that it is not the Company’s intention to interfere in any way with his employment opportunities, except in such situations where the same conflict with the legitimate business interests of the Patheon Group. Executive agrees that he will notify the Company in writing if he has, or reasonably should have, any questions regarding the applicability of this Section 6.

(i) Section 6 Survival. Subject to any limits on applicability contained therein, the Restrictive Covenants shall survive and continue in full force in accordance with its terms notwithstanding any expiration or termination of this Agreement.

7. Interpretation, Governing Law and Exclusive Forum. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of New York (excluding any that mandate the use of another jurisdiction’s laws). Any arbitration (unless otherwise mutually agreed), litigation or similar proceeding with respect to such matters only may be brought within New York, and all parties to this Agreement consent to New York’s jurisdiction.

8. Entire Agreement. The recitals set forth above constitute an integral part of this Agreement and are incorporated herein by reference with the same force and effect as if set forth herein as agreements of the parties. This Agreement, together with Schedule A attached hereto and the Confidentiality Agreement referred to herein, when executed by the parties shall constitute the entire agreement pertaining to Executive’s employment with the Company and supersedes all prior agreements, understandings, term sheets, negotiations and discussions, whether written or oral, pertaining to Executive’s employment, and there are no representations, undertakings or agreements of any kind between the parties respecting the subject matter hereof except those contained herein. This Agreement amends, restates, supersedes, and replaces the Employment Agreement dated February 7, 2011 between the Company and Executive, which shall have no further force or effect.

9. Severability. In the event that one or more of the provisions contained in this Agreement are held to be invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such holding shall not impair the validity, legality or enforceability of the remaining provisions herein.

10. Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of, Executive and his estate, but Executive may not assign or pledge this Agreement or any rights arising under it, except to the extent permitted under the terms of the benefit plans in which he participates. No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company shall require any successor (whether direct or indirect, by purchase, merger, reorganization, sale, transfer of stock, consideration or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no succession had taken place. As used in this Agreement, “Company” means the Company as hereinbefore defined and any successor to its business and/or assets (by merger, purchase or otherwise as provided in this Section 10) which executes and delivers the agreement provided for in this Section 10 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. In the event that any successor refuses to assume the obligations hereunder, the Company as hereinbefore defined shall remain fully responsible for all obligations hereunder.

11. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be given by hand delivery, electronic mail, facsimile, telecopy, overnight courier service, or by United States certified or registered mail, return receipt requested. Each such notice, request, demand or other communication shall be effective (i) if delivered by hand or by overnight courier service, when delivered at the address specified in this Section 11; (ii) if given by electronic mail, facsimile or telecopy, when such electronic mail, facsimile or telecopy is transmitted to the electronic mail address or facsimile or telecopy number specified in this Section 11 and confirmation is received if during normal business hours on a business day, and otherwise, on the next business day; and (iii) if given by certified or registered mail, three (3) days after the mailing thereof. Notices shall be addressed to the parties as follows (or at such other address, email address or fax number as either party may from time to time specify in writing by giving notice as provided herein):

If to the Company:

Human Resources

Patheon Pharmaceutical Services Inc.

4721 Emperor Blvd., Suite 200

Durham, North Carolina 27703

with a copy to:

Legal Department

Patheon Pharmaceutical Services Inc.

4721 Emperor Blvd., Suite 200

Durham, North Carolina 27703

If to Executive:

James Mullen

636 Charles River St.

Needham, MA 02492

12. Indemnification. The Company will indemnify Executive to the fullest extent permitted by the laws of the State of New York.

13. Dispute Resolution. The parties agree that all disputes, claims or controversies between them and between Executive and any of the Company’s affiliated entities and the successor of all such entities, including any dispute, claim or controversy arising from or otherwise in connection with this Agreement and/or Executive’s employment with the Company, will be resolved as follows:

(a) Prior to initiating any other proceeding, the complaining party will provide the other party with a written statement of the claim identifying any supporting witnesses or documents and the requested relief. The responding party shall within forty-five (45) days furnish a statement of the relief, if any, that it is willing to provide, and identify supporting witnesses or documents. The parties then shall meet to attempt informal resolution.

(b) If the parties cannot informally resolve the dispute between them, any controversy or claim between Executive and the Company and any of its current or former directors, officers and employees, including any arising out of or relating to this Agreement or breach thereof, shall be settled by final and binding arbitration in the state of New York, or elsewhere as mutually agreed by the parties, by a single arbitrator pursuant to the Employment Arbitration Rules & Procedures of Judicial Arbitration & Mediation Services (“JAMS”), unless the parties to the dispute agree to another arbitration service or independent arbitrator. The parties may conduct discovery to the extent permitted in a court of law; the arbitrator will render an award together with a written opinion indicating the bases for such opinion; and the arbitrator will have full authority to award all remedies that would be available in court. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party shall bear its own attorney’s fees and costs, unless the claim is based on a statute that provides otherwise. Where required by law, the Company will pay the arbitrator’s fees and any administrative charges of the arbitration service, except that if Executive initiates the claim, he will pay a portion of the administrative charges equal to the amount he would have paid to initiate the claim in a court of general jurisdiction.

(c) EXECUTIVE AND THE COMPANY AGREE THAT THIS ARBITRATION PROCEDURE WILL BE THE EXCLUSIVE MEANS OF REDRESS FOR ANY DISPUTES RELATING TO OR ARISING FROM EXECUTIVE’S EMPLOYMENT WITH THE COMPANY OR TERMINATION THEREFROM, INCLUDING DISPUTES OVER UNPAID WAGES, BREACH OF CONTRACT OR TORT, VIOLATION OF PUBLIC POLICY, RIGHTS PROVIDED BY FEDERAL, STATE OR LOCAL STATUTES, REGULATIONS, ORDINANCES, AND COMMON LAW, LAWS THAT PROHIBIT DISCRIMINATION BASED ON ANY PROTECTED CLASSIFICATION, AND ANY OTHER STATUTES OR LAWS RELATING TO AN EXECUTIVE’S RELATIONSHIP WITH THE COMPANY. THE FOREGOING NOTWITHSTANDING, CLAIMS FOR WORKERS’ COMPENSATION BENEFITS OR UNEMPLOYMENT INSURANCE, OR ANY OTHER CLAIMS WHERE MANDATORY ARBITRATION IS PROHIBITED BY LAW, ARE NOT COVERED BY THIS ARBITRATION PROVISION. THE PARTIES EXPRESSLY WAIVE THE RIGHT TO A JURY TRIAL, AND AGREE THAT THE ARBITRATOR’S AWARD SHALL BE FINAL AND BINDING ON THE PARTIES. THIS ARBITRATION PROVISION IS TO BE CONSTRUED AS BROADLY AS IS PERMISSIBLE UNDER APPLICABLE LAW.

14. Representations. Each person executing this Agreement hereby represents and warrants on behalf of himself and of the entity/individual on whose behalf he is executing the Agreement that he is authorized to represent and bind the entity/individual on whose behalf he is executing the Agreement. Executive specifically represents and warrants to the Company that he reasonably believes (a) he is not under any contractual or other obligations, including but not limited to any employment contract, non-competition or other covenants or restrictions, that would prevent, limit or impair Executive’s ability to commence work on the Effective Date or otherwise limit his ability to perform all responsibility and obligations of the position of CEO, (b) that entering into this Agreement will not result in a breach of any other agreement to which he is a party, and (c) that he will not knowingly use any trade secret, confidential information, or other intellectual property right of any former employer or any other person to whom Executive has an obligation of confidentiality in the performance of his duties hereunder and that the Company has not requested the disclosure by Executive of any such information.

15. Amendments and Waivers. No provisions of this Agreement may be modified, waived, or discharged except by a written document signed by Executive and a duly authorized Company officer. Thus, for example, promotions, commendations, and/or bonuses shall not, by themselves, modify, amend, or extend this Agreement. A waiver of any conditions or provisions of this Agreement in a given instance shall not be deemed a waiver of such conditions or provisions at any other time.

16. Taxes.

(a) Withholdings. The Company may withhold from any compensation and benefits payable under this Agreement all federal, state, city and other taxes or amounts as shall be determined by the Company to be required to be withheld pursuant to applicable laws, or governmental regulations or rulings. Executive shall be solely responsible for the satisfaction of any taxes (including employment taxes) imposed on employees and penalty taxes on nonqualified deferred compensation.

(b) Net Proceeds Maximization. Notwithstanding any provision of this Agreement to the contrary, if all or any portion of the payments or benefits received or realized by Executive pursuant to this Agreement either alone or together with other payments or benefits that Executive receives or realizes or is then entitled to receive or realize from the Company or any member of the Patheon Group would constitute an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code (the “Code”), the payments or benefits provided to Executive under this Agreement will be reduced by reducing the amount of payments or benefits payable to Executive to the extent necessary so that no portion of Executive’s payments or benefits will be subject to the excise tax imposed by Section 4999 of the Code. Notwithstanding the foregoing, a reduction will be made under the previous sentence only if, by reason of that reduction, Executive’s net after tax benefit exceeds the net after tax benefit he would realize if the reduction were not made. For purposes of this paragraph, “net after tax benefit” means the sum of (i) the total amount received or realized by Executive pursuant to this Agreement that would constitute a “parachute payment” within the meaning of Section 280G of the Code, plus (ii) all other payments or benefits that Executive receives or realizes or is then entitled to receive or realize from the Company and any member of the Patheon Group that would constitute a “parachute payment” within the meaning of Section 280G of the Code and any corresponding and applicable state law provision, less (iii) the amount of federal or state income taxes payable with respect to the payments or benefits described in (i) and (ii) above calculated at the maximum marginal individual income tax rate for each year in which payments or benefits are realized by Executive (based upon the rate in effect for that year as set forth in the Code at the time of the first receipt or realization of the foregoing), less (iv) the amount of excise taxes imposed with respect to the payments or benefits described in (i) and (ii) above by Section 4999 of the Code. All determinations and calculations made in this paragraph shall be made by an independent accounting firm (the “Accounting Firm”) selected by the Company prior to the Change in Control. The Accounting Firm shall be a nationally recognized United States public accounting firm which has not, during the two (2) years preceding the date of its selection, acted in any way on behalf of (x) the Company or any member of the Patheon Group or (y) Executive.

(c) Section 409A Compliance.

(i) Section 409A Six-Month Delay Rule. If any amounts that become due under this Agreement on account of Executive’s termination of employment constitute “nonqualified deferred compensation” within the meaning of Code section 409A (“Section 409A”), payment of such amounts shall not commence until Executive experiences a “separation from service” within the meaning of Treasury Regulation Section 1.409A-1(h). If, at the time of Executive’s separation from service, Executive is a “specified employee” (under Section 409A), then to the extent necessary to comply with Section 409A, any such amounts will not be paid until after the first business day of the seventh (7th) month after Executive’s separation from service (the “409A Suspension Period”). Within fourteen (14) calendar days after the end of the 409A Suspension Period, Employee shall be paid a lump sum payment in cash equal to any payments delayed because of the preceding sentence, together with interest on them for the period of delay at a rate equal to the average prime interest rate published in the Wall Street Journal on any day chosen by the Company during that period. Thereafter, Executive shall receive any remaining benefits as if there had not been an earlier delay.

(ii) Interpretation. This Agreement is intended to comply with or be exempt from Section 409A, and shall be interpreted and construed by the Company in a manner that the Company reasonably believes, after consultation with Executive, establishes an exemption from (or otherwise conforms them to) the requirements of Section 409A. To the extent that any regulations or other guidance issued under Section 409A (after application of the previous sentence) would result Executive being subject to the payment of interest or any additional tax under Section 409A, the parties agree, to the extent reasonably possible, to amend this Agreement in order to avoid the imposition of any such interest or additional tax under Section 409A, which such amendment shall have the minimum economic effect necessary and be reasonably determined in good faith by Executive and the Company, provided it does not increase the overall expense to the Company in providing the benefits.

Although the Company shall use its best efforts to avoid the imposition of taxation, interest and penalties under Section 409A of the Code, the tax treatment of the benefits provided under this Agreement is not warranted or guaranteed. Neither the Company nor its directors, officers, employees or advisers shall be held liable for any taxes, interest, penalties or other monetary amounts owed by Executive or other taxpayer pursuant to Section 409A as a result of the Agreement. Any reference in this Agreement to Section 409A of the Code will also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section 409A by the U.S. Department of Treasury or the Internal Revenue Service.

17. U.S. Citizenship and Immigration Services. Executive agrees to timely file all documents required by the Department of Homeland Security to verify his identity and lawful employment in the United States.

18. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute the same instrument.

19. Legal Fees. The Company will pay up to $10,000 of any reasonable legal fees and expenses Executive incurs during the negotiation of this Agreement, provided that such fees and expenses are supported by reasonable supporting documentation.

20. Executive’s Acknowledgement.

EXECUTIVE ACKNOWLEDGES THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND HIM RELATING TO THE SUBJECTS COVERED IN THIS AGREEMENT ARE CONTAINED IN IT (INCLUDING THE AGREEMENTS SET FORTH AS EXHIBITS) AND THAT HE HAS ENTERED INTO THIS AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT.

EXECUTIVE FURTHER ACKNOWLEDGES THAT HE HAS CAREFULLY READ THIS AGREEMENT (INCLUDING THE AGREEMENTS SET FORTH AS EXHIBITS), THAT HE UNDERSTANDS ALL OF SUCH AGREEMENTS, AND THAT HE HAS BEEN GIVEN THE OPPORTUNITY TO DISCUSS SUCH AGREEMENTS WITH HIS PRIVATE LEGAL COUNSEL

AND HAS AVAILED HIMSELF OF THAT OPPORTUNITY TO THE EXTENT HE WISHED TO DO SO. EXECUTIVE UNDERSTANDS THAT THE DISPUTE RESOLUTION PROVISIONS OF THIS AGREEMENT GIVE UP THE RIGHT TO A JURY TRIAL ON MATTERS COVERED BY THEM.

[Signature page follows.]

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

“Executive”

/s/ James C. Mullen            

James Mullen

Date: April 22, 2011

“Company”

Patheon Pharmaceutical Services Inc.

/s/ Eric Evans

By: Eric Evans

Title: Chief Financial Officer

Date: April 25, 2011

With respect only to Sections 1(a) and 4(f), and 5:

“Patheon”

Patheon Inc.

/s/ Eric Evans

By: Eric Evans

Title: CFO

Date: April 25, 2011

[PATHEON]

SCHEDULE A

TO

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT WITH

JAMES MULLEN

GENERAL RELEASE

This General Release (“Release”), dated as of             , 20     confirms the following understandings and agreements between James Mullen, an individual (“Executive”), and Patheon Pharmaceutical Services Inc. (the “Company”).

In consideration of the promises set forth in that certain amended and restated employment agreement between Executive and the Company, entered into as of March 18, 2011 (the “Employment Agreement”), Executive agrees as follows:

1. Release by Executive.

(a) For and in consideration of the severance payments and benefits described in the Employment Agreement (the “Consideration”), which are being provided in exchange for your execution of this Release and would not be provided absent your execution of this Release, Executive, for himself and his heirs, executors, administrators, assigns, successors and agents (collectively, the “Executive’s Affiliates”) hereby fully and without limitation releases and forever discharges the Company and all other members of the Patheon Group and each of their respective agents, representatives, shareholders, owners, officers, directors, employees, consultants, attorneys, auditors, accountants, investigators, affiliates, successors and assigns (collectively, the “Patheon Releasees”), both individually and collectively, from any and all waivable rights, claims, demands, liabilities, actions, causes of action, damages, losses, costs, expenses and compensation, of whatever nature whatsoever, known or unknown, fixed or contingent, which Executive or any of Executive’s Affiliates has or may have or may claim to have against any of the Patheon Releasees by reason of any matter, cause, or thing whatsoever, from the beginning of time to the date Executive signs this Release (“Claims”), arising out of, based upon, or relating to his employment or the termination of his employment with the Company and/or his service as an officer of any of the Patheon Releasees, and/or any agreement or compensation arrangement between Executive and any of the Patheon Releasees, to the maximum extent permitted by law.

(b) The Claims released by Executive include, but are not limited to, any Claims arising out of or based on: Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the National Labor Relations Act, the Equal Pay Act, the Age Discrimination in Employment Act (“ADEA”), the Civil Rights Act of 1991, the Family Medical Leave Act, Sections 1981 through 1988 of Title 42 of the United States Code, the Employee Retirement Income Security Act of 1974 (“ERISA”) (except for any vested benefits under any tax qualified benefit plan), the Immigration Reform and Control Act, the Worker Adjustment and Retraining Notification Act, the Occupational Safety and Health Act, the Fair Credit Reporting Act, and the Sarbanes-Oxley Act of 2002 (in each case as the same may be amended from time to time); fraud, misrepresentation, negligence, defamation, infliction of emotional distress or other tort, common law, breach of contract (whether express or implied, written or oral) or covenant, violation of public policy or wrongful termination; state or federal wage and hour laws; or any other state or federal law, rule, or regulation dealing with the employment relationship, except those claims which may not be released herein as a matter of law. The released Claims also include any Claims by Executive for compensation, wages, back pay, reinstatement or reemployment, bonuses, or benefits of any kind or any nature arising out of, based upon, or relating to his employment or the termination of his employment with the Company and/or his service as an officer of any of the Patheon Releasees, and/or any agreement or compensation arrangement between Executive and any of the Patheon Releasees.

(c) Nothing contained in this Section 1 or any other provision of this Release shall release or waive any right that Executive has to (i) the Consideration, which shall be deemed to include the Initial Grant (as defined in the Employment Agreement) and any other equity awards Executive has received from the Company, (ii) any employee benefit Executive is entitled to receive from the Company pursuant to any Company employee benefit plan or program, including any health claim or (iii) indemnification and/or reimbursement of expenses by the Company with respect to which Executive may be eligible as provided by law, the Company’s or any member of the Patheon Group’s Certificates of Incorporation, Bylaws and any applicable directors and officers, errors & omissions, umbrella or general liability insurance policies, or any indemnification agreements, including the Employment Agreement. Further, nothing contained in this Release shall restrict or inhibit any communications by Executive with the Equal Employment Opportunity Commission (“EEOC”) or any other government or law enforcement agency.

2. Waiver of Applicable Release Laws.

(a) Executive understands and agrees that the release provided herein extends to all Claims released above whether known or unknown, suspected or unsuspected, which may be released as a matter of law. Executive expressly waives and relinquishes any and all rights he may have under state law that prohibits the general release of unknown claims.

(b) It is the intention of each party through this Release to fully, finally and forever settle and release the Claims as set forth above. In furtherance of such intention, the release herein given shall be and remain in effect as a full and complete release of such matters notwithstanding the discovery of any additional Claims or facts relating thereto.

3. Review and Revocation Rights. Executive hereby is advised of the following:

(a) Executive has the right to consult with an attorney before signing this Release and is encouraged by the Company to do so;

(b) Executive has twenty-one (21) days from his receipt of this Release to consider it, although Executive may sign and return the Release at any earlier time, in which case Executive waives all rights to the balance of this twenty-one (21) day review period; and

(c) Executive has seven (7) days after signing this Release to revoke this Release, and this Release will not be effective until that revocation period has expired without revocation. Executive agrees that in order to exercise his right to revoke this Release within such seven (7) day period, he must do so in a signed writing delivered to the Board of Directors of the Company (“Board”) before the close of business on the seventh calendar day after he signs this Release.

(d) Nothing in this Release prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties or costs for doing so, unless specifically authorized by federal law.

4. No Filings. Executive represents that he has not filed any waivable lawsuits, claims, charges or complaints, which are pending as of the date hereof, against any of the Patheon Releasees with any local, state or federal agency or court from the beginning of time to the date of execution of this Release, and he agrees that he shall not accept any award, damages, recovery or settlement from any proceeding brought by him or on his behalf relating to his employment or the termination of his employment with the Company and/or his service as an officer of any of the Patheon Releasees or otherwise.

5. Cooperation Clause.

(a) To facilitate the orderly conduct of the Patheon Group, Executive agrees to cooperate, at no charge, with the Company’s reasonable requests for information or assistance related to (i) the time of his employment, (ii) any investigations (including internal investigations) and audits of any member of the Patheon Group’s management’s current and past conduct and business and accounting practices and (iii) any member of the Patheon Group’s defense of, or other participation in, any administrative, judicial, or other proceeding arising from any charge, complaint or other action which has been or may be filed relating to the period during which Executive was employed by the Company. The Company will promptly reimburse Executive for his reasonable, customary and documented out-of-pocket business expenses in connection with the performance of his duties under this Section 5.

6. Governing Law. This Release shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws.

7. Dispute Resolution. The parties hereby agree that all disputes, claims or controversies arising from or otherwise in connection with this Release (except for injunctive relief sought by either party) between them and between Executive and any member of the Patheon Group and the successor of all such entities, and any director, officer, shareholder or employee of any member of the Patheon Group will be resolved in accordance with Section 13 of the Employment Agreement, except for its attorneys’ fee provision.

8. Attorneys’ Fees. Except as otherwise provided herein or as prohibited by law, in any action, litigation or proceeding between the parties arising out of or in relation to this Release, including any purported breach of this Release, each party shall bear its own attorney’s fees and costs.

9. Non-Admission of Liability. The parties understand and agree that neither the furnishing of the Consideration nor the execution of this Release by the parties will constitute or be construed as an admission of any wrongdoing or liability whatsoever by any party.

10. Severability. If any one or more of the provisions contained herein (or parts thereof), or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity and enforceability of any such provision in every other respect and of the remaining provisions hereof will not be in any way impaired or affected, it being intended that all of the rights and privileges shall be enforceable to the fullest extent permitted by law.

11. Entire Agreement. This Release represents the sole and entire agreement among the parties and, except as expressly stated herein, supersedes all prior agreements, negotiations and discussions among the parties with respect to the subject matters contained herein.

12. Waiver. No waiver by any party hereto at any time of any breach of, or compliance with, any condition or provision of this Release to be performed by any other party hereto may be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time.

13. Counterparts. This Release may be executed in counterparts, each of which will be deemed to be an original as against any party that has signed it, but both of which together will constitute one and the same instrument.

14. Miscellaneous Provisions.

(a) The parties represent that they have read this Release and fully understand all of its terms; that they have conferred with their attorneys, or have knowingly and voluntarily chosen not to confer with their attorneys about this Release; that they have executed this Release without coercion or duress of any kind; and that they understand any rights that they have or may have, and they are signing this Release with full knowledge of any such rights.

(b) Both parties have participated in the drafting of this Release with the assistance of counsel to the extent they desired. The language in all parts of this Release must be in all cases construed simply according to its fair meaning and not strictly for or against any party. Whenever the context requires, all words used in the singular must be construed to have been used in the plural, and vice versa, and each gender must include any other gender. The captions of the Sections of this Release are for convenience only and must not affect the construction or interpretation of any of the provision herein.

(c) Each provision of this Release to be performed by a party hereto is both a covenant and condition, and is a material consideration for the other party’s performance hereunder, and any breach thereof by the party will be a material default hereunder. All rights, remedies, undertakings, obligations, options, covenants, conditions and agreements contained in this Release are cumulative and no one of them is exclusive of any other. Time is of the essence in the performance of this Release.

(d) Each party acknowledges that no representation, statement or promise made by any other party, or by the agent or attorney of any other party, except for those in this Release, has been relied on by him or it in entering into this Release.

(e) Unless expressly set forth otherwise, all references herein to a “day” are deemed to be a reference to a calendar day. Unless expressly stated otherwise, cross-references herein refer to provisions within this Release and are not references to any other document.

(f) Each party to this Release will cooperate fully in the execution of any and all other documents and in the completion of any additional actions that may be necessary or appropriate to give full force and effect to the terms and intent of this Release.

(g) Executive represents that he has returned all Patheon Group property and materials in accordance with paragraph 6(e) of the Employment Agreement.

EACH OF THE PARTIES ACKNOWLEDGES THAT HE/IT HAS READ THIS AGREEMENT, UNDERSTANDS IT AND IS VOLUNTARILY ENTERING INTO IT, AND THAT IT INCLUDES A WAIVER OF THE RIGHT TO A TRIAL BY JURY, AND, WITH RESPECT TO EXECUTIVE, HE UNDERSTANDS THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS OTHER THAN AS PROVIDED FOR HEREIN.

IN WITNESS WHEREOF, the parties have executed this Release as of the dates indicated below.

“Executive”

James Mullen

Date:

“Company”

Patheon Pharmaceutical Services Inc.

By:

Title:

Date:

With respect only to Articles 7, 8, and 9:

“Patheon”

Patheon Inc.

By:

Title:

Date:

EX-10.3

Exhibit 10.3

PATHEON INC.

2011 AMENDED AND RESTATED

INCENTIVE STOCK OPTION PLAN

MARCH 10, 2011

1. Purposes of the Plan

The purposes of the Amended and Restated Incentive Stock Option Plan (the “Plan”) are (i) to grant to directors, officers and key employees of Patheon Inc. (the “Corporation”) and its subsidiaries or any other person or company engaged to provide ongoing management or consulting services to the Corporation or any entity controlled by the Corporation (each, an “Eligible Person”) options (the “Options”) to purchase restricted voting shares (the “Shares”) of the Corporation in order to encourage the productivity of such Eligible Persons in furthering the growth and development of the Corporation and (ii) to assist the Corporation in retaining and attracting executives with experience and ability to reward significant performance achievements.

2. Administration

The Plan shall be administered by a committee (the “Compensation Committee”) of three or more members of the board of directors of the Corporation (the “Board”). The Compensation Committee shall have full and complete authority to interpret the Plan and to prescribe such rules and regulations and make such other determinations as it deems necessary or desirable for the administration of the Plan. Individual members of the Compensation Committee shall be eligible to be granted Options under the Plan. Where it is proposed that Options be issued to a member of the Compensation Committee, such member shall refrain from voting on the resolution of the Compensation Committee approving such issuance, and such Options shall only be granted if approved by a majority of the other members of the Compensation Committee. The Options granted under the Plan may constitute “Incentive Stock Options” or “ISOs” within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended from time to time (the “Code”), if the Compensation Committee so chooses.

3. Shares Subject to the Plan

The maximum number of Shares that may be issued upon the exercise of Options granted under the Plan shall be 15,500,151 Shares, subject to adjustment pursuant to Section 11 of the Plan. The maximum number of Shares reserved for issuance under Options granted to any one person within any one year period shall not exceed 6,458,396 Shares, subject to adjustment pursuant to Section 11 of the Plan. The aggregate number of Shares reserved for issuance under Options granted to directors of the Corporation who are not employees of the Corporation (“Outside Directors”) shall not exceed 1% of the then issued and outstanding Shares (on a non-diluted basis), which for greater certainty, in no event shall exceed 15,500,151 Shares, subject to adjustment pursuant to Section 11 of the Plan. The number of Shares issuable to insiders, at any time, under all security based compensation arrangements, cannot exceed 10% of issued and outstanding Shares. The number of Shares issued to insiders, within any one year period, under all security based compensation arrangements, cannot exceed 10% of issued and outstanding Shares. All Shares subject to Options that have, expired or have been forfeited or surrendered or otherwise terminated without the issuance of such Shares shall continue to be available for any subsequent issuance of Options under the Plan. Any Shares withheld to satisfy tax withholding obligations on Options issued under the Plan and Shares used to pay the exercise price of Options under the Plan shall not be available for any subsequent issuance of Options under the Plan.

4. Grant of Options

The Compensation Committee shall from time to time designate and recommend to the Board for approval the Eligible Persons to whom Options should be granted (the “Optionees”) and the number of Shares to be covered by each such Option, provided that ISOs may be granted only to eligible employees of the Corporation and its subsidiaries.

Any Optionee, at the time of the granting of the Option, may hold more than one Option. The granting of each Option shall be evidenced by a letter from the Corporation addressed to the Optionee setting forth the number of Shares covered by such Option, the subscription price, the option period(s) and, as applicable, that the Option is intended to be an ISO.

5. Subscription Price

The subscription price for each Share (the “Option Price”) covered by an Option shall be determined by the Compensation Committee and approved by the Board; but under no circumstances shall any price be less than the “market price” per Share on the date of grant. For the purposes hereof, “market price” per Share shall be the closing price of the Shares as reported on the Toronto Stock Exchange (or, if the Shares are not then listed and posted for trading on the Toronto Stock Exchange, on such stock exchange in Canada or the United States on which such Shares are listed and posted for trading as may be selected for such purpose by the Board) on the date of grant.

6. Option Period

Each Option shall be exercisable during a period (an “Option Period”) recommended by the Compensation Committee and approved by the Board, which shall commence not earlier than the date of the grant of the Option, and shall expire not later than ten years after such date. Subject to the proviso that under no circumstances shall any Option Period extend beyond ten years from the date of grant, the following shall also apply:

(a) in the event of the death of the Optionee either before or after retirement, the Option Period for Options outstanding at the time of death shall expire on the first anniversary of the date of death (but not after the expiry date of the Option first established) and may be exercised by the legal personal representative(s) of the Optionee on or before expiry on such first anniversary;

(b) if an Optionee’s employment or other service with the Corporation terminates because of retirement at or subsequent to normal retirement age, the Option Period for Options then outstanding shall expire on the first anniversary of the date of retirement or such later date as may be fixed (but not after the expiry date of the Option first established), it being understood that an ISO must be exercised within 3 months following retirement (or such other period as may from time to time be prescribed by law) to qualify for ISO tax treatment;

(c) if an Optionee’s employment or other service with the Corporation terminates for any cause other than death, retirement at or subsequent to normal retirement age or Just Cause (as hereinafter defined), the Option Period for Options then outstanding shall expire 3 months after the date of termination of employment or such later date as the Compensation Committee may fix (but not after the termination date of the Option first established), it being understood that an ISO must be exercised within 3 months following termination for any cause other than death or disability (or such other period as may from time to time be prescribed by law) to qualify for ISO tax treatment;

(d) if an Optionee’s employment or other service with the Corporation terminates by reason of his dismissal or removal for just cause, including but not limited to fraud or willful fault or neglect (“Just Cause”), the Option Period for Options then outstanding shall be deemed to have expired on the date immediately preceding the date of such dismissal; and

(e) notwithstanding the foregoing but subject to the Compensation Committee otherwise determining, an Option and all rights to purchase Shares pursuant thereto granted to an Outside Director shall expire and terminate immediately upon the Optionee ceasing to be a director of the Corporation;

All rights under (i) an Option unexercised at the expiry of the Option Period or (ii) an Option for which the Option Period has not commenced prior to the date of death or termination of employment or other service with the Corporation shall be forfeited.

Notwithstanding the foregoing, if the term of an Option held by any Optionee expires during or within 10 business days of the expiration of a period when the Optionee is prohibited from trading in the Corporation’s securities pursuant to (i) the Corporation’s written policies then applicable, or (ii) a notice in writing to the Optionee by a senior officer or director of the Corporation (the “Black-out Period”), then the term of such Option shall be extended to the close of business at the tenth business day following the expiration of the Black-out Period. With regard to Optionees who are U.S. taxpayers, the term “Black-out Period” shall only include a period that the Optionee cannot exercise the Option because such exercise would violate an applicable United States federal, state, local, or foreign law.

Where used in this Section 6, the word “month” means a period of 30 consecutive days and the term “business day” means any day other than Saturday and Sunday on which the Toronto Stock Exchange is open for business.

7. Exercise of Option

(a) An Option may be exercised in whole at any time or in part from time to time during the Option Period. Exercise shall be made by written notice to the Corporation setting forth the number of Shares with respect to which the Option is being exercised and specifying the address to which the certificate evidencing such Shares is to be delivered. Such notice shall be accompanied by a certified cheque made payable to the Corporation or other evidence of payment satisfactory to the Corporation in the amount of the Option Price, together with the amount the Corporation determines, in its discretion, is required to satisfy the Corporation’s withholding tax and source deduction remittance obligations in respect of the exercise of the Options and issuance of Shares. The Corporation shall cause a certificate for the number of Shares specified in the notice to be issued in the name of the Optionee and delivered to the address specified in the notice not later than five business days following receipt of such notice and cheque or other evidence of payment.

(b) If the Shares are listed and posted for trading on a stock exchange or market, an Optionee may elect a cashless exercise in a written notice of exercise if the Shares issuable on the exercise are to be immediately sold. In such case, the Optionee will not be required to deliver to the Corporation a cheque for the applicable Option Price referred to in paragraph (a) above. Instead the following procedure will be followed:

(i) The Optionee will, directly or through an intermediary, instruct a broker selected by the Optionee (or selected by the Corporation at the Corporation’s sole option) to sell through the stock exchange or market on which the Shares are listed or quoted, the Shares issuable on the exercise of Options, as soon as possible at the then applicable bid price of the Shares.

(ii) On the trade date, the Optionee will deliver the written notice of exercise including details of the trades to the Corporation electing the cashless exercise and the Corporation will direct its registrar and transfer agent to issue a certificate in the name of the broker (or as the broker may otherwise direct) for the number of Shares issued on the exercise of the Options, against payment by the broker to the Corporation of (i) the Option Price for such Shares; and (ii) the amount the Corporation determines, in its discretion, is required to satisfy the Corporation’s withholding tax and source deduction remittance obligations in respect of the exercise of the Options and issuance of Shares.

(iii) The broker will deliver to the Optionee the remaining proceeds of sale, net of the brokerage commission.

(c) Notwithstanding any of the provisions contained in the Plan or in any Option, the Corporation’s obligation to issue Shares to an Optionee pursuant to the exercise of an Option shall be subject to:

(i) completion of such registration or other qualification of such Shares or obtaining approval of such governmental authority as the Corporation shall determine to be necessary or advisable in connection with the authorization, issuance or sale thereof;

(ii) the admission of such Shares to listing on any stock exchange on which the Shares may then be listed; and

(iii) the receipt from the Optionee of such representations, agreements and undertakings, including as to future dealings in such Shares, as the Corporation or its counsel determines to be necessary or advisable in order to safeguard against the violation of the securities laws of any jurisdiction.

In this connection the Corporation shall, to the extent necessary, take all reasonable steps to obtain such approvals, registrations and qualifications as may be necessary for the issuance of such Shares in compliance with applicable securities laws and for the listing of such Shares on any stock exchange on which the Shares are then listed.

8. Non-assignable

No Option or any interest therein shall be assignable or transferable by the Optionee otherwise than by will or the law of succession.

9. Not a Shareholder

An Optionee shall have no rights as a shareholder of the Corporation with respect to any Shares covered by his or her Option until he or she shall have become the holder of record of such Shares.

10. Taxes and Source Deductions

The Corporation or an affiliate may take such reasonable steps for the deduction and withholding of any taxes and other required source deductions which the Corporation or the affiliate, as the case may be, is required by any law or regulation of any governmental authority whatsoever to remit in connection with this Plan, any Options or any issuance of Shares. Without limiting the generality of the foregoing, the Corporation may, at its discretion: (i) deduct and withhold those amounts it is required to remit from any cash remuneration or other amount payable to the Optionee, whether or not related to the Plan, the exercise of any Options or the issue of any Shares; (ii) allow the Optionee to make a cash payment to the Corporation equal to the amount required to be remitted, which amount shall be remitted by the Corporation to the appropriate governmental authority for the account of the Optionee; or (iii) sell, on behalf of the Optionee, that number of Shares to be issued upon the exercise of Options such that the amount withheld by the Corporation from the proceeds of such sale will be sufficient to satisfy any taxes required to be remitted by the Corporation for the account of the Optionee. Where the Corporation considers that the steps undertaken in connection with the foregoing result in inadequate withholding or a late remittance of taxes, the delivery of any Shares to be issued to an Optionee on the exercise of Options may be made conditional upon the Optionee (or other person) reimbursing or compensating the Corporation or making arrangements satisfactory to the Corporation for the payment in a timely manner of all taxes required to be remitted for the account of the Optionee.

11. Effects of Alteration of Share Capital

In the event of any change in the outstanding Shares of the Corporation by reason of any stock dividend, split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, an equitable adjustment shall be made in the maximum number of kind of Shares issuable under the Plan or subject to outstanding Options and in the Option Price. Such adjustment shall be determined by the Compensation Committee and, if appropriate, approved by the Board, and shall be conclusive and binding for all purposes of the Plan.

12. Amendments Not Requiring Shareholder Approval

Subject to Section 13, applicable law and the rules and regulations of any stock exchange on which the Shares may be listed, the Board may from time to time in its absolute discretion make amendments, modifications and changes to the Plan or to any Option granted hereunder without notice to or approval by the shareholders of the Corporation including:

(a) minor changes of a “housekeeping nature”, including any amendments to any definitions in the Plan or any Option;

(b) changes in the administration of the Plan including to the delegation by the Board of responsibility for the Plan to any committee of the Board;

(c) changes implemented pursuant to a Change in Control, as defined in Section 14;

(d) changing the exercise method and frequency, the Option Price (including the method of determining the market price), the Option Period (including any alteration, extension or acceleration of the vesting of Options) or the provisions relating to the effect of termination of an Optionee’s employment in Section 6 (for greater certainty, any reduction in the Option Price benefiting an insider or an extension of the Option Period benefiting an insider will require shareholder approval in accordance with Section 13);

(e) changing the terms and conditions of any financial assistance which may be provided by the Corporation to Optionees to facilitate the purchase of Shares under the Plan;

(f) adding, removing or changing a cashless exercise feature or automatic exercise feature payable in cash or securities;

(g) changes required for compliance with applicable laws or regulations, tax or accounting provisions or the rules or requirements of any tax or regulatory authority or stock exchange;

(h) correcting errors or omissions or clarifying the provisions of the Plan or any Option;

(i) changes to enable the Options to qualify for favourable treatment under applicable tax laws;

(j) changing the application of Section 11 (Effects of Alteration of Share Capital) and Section 14 (Change in Control); and

(k) suspending or terminating the Plan.

13. Amendments Requiring Shareholder Approval

The following specific types of amendments require approval by the shareholders of the Corporation:

(a) any increase in the maximum number of Shares issuable under the Plan (other than pursuant to Section 11);

(b) any change in the class of Eligible Persons;

(c) a reduction in the Option Price benefiting an insider of the Corporation;

(d) an extension of the Option Period benefiting an insider of the Corporation;

(e) any increase in the maximum Option Period permitted under the Plan;

(f) any increase in the maximum number of Shares that may be reserved for issuance under Options granted to Outside Directors;

(g) any increase in the maximum number of Shares that may be reserved for issuance to insiders under all security based compensation arrangements;

(h) any increase in the maximum number of Shares that may be issued to insiders in any one year period under all security based compensation arrangements;

(i) the cancellation and reissue of any Option;

(j) any amendment to the provisions of the Plan that would permit Options to be transferred or assigned other than by will or the law of succession; and

(k) any amendments to the amendment provisions of the Plan.

Notwithstanding Section 12 or any other provision of the Plan, any amendment for which shareholder approval would be required to bring the Plan within the performance-based compensation exception under Section 162(m) of the Code, will require shareholder approval.

For the purposes of this Section 13, an amendment does not include an accelerated expiry of an Option by reason of the fact that an Optionee ceases to be an officer, director, or employee of the Corporation or any of its subsidiaries.

The shareholders’ approval of an amendment, if required pursuant to the terms hereof, shall be given by approval of the holders of a majority of the Shares present and voting in person or by proxy at a duly called meeting of the shareholders. Options may be granted under the Plan prior to the approval of the amendment, provided that no Shares may be issued pursuant to the amended terms of the Plan until the shareholders’ approval of the amendment has been obtained.

No amendment, modification or change may, without the consent of the Optionee to whom Options shall theretofore have been granted, adversely affect the rights of such Optionee.

14. Change in Control

In the event of a Change in Control, each Option granted and outstanding under the Plan shall become immediately exercisable, even if such Option is not otherwise vested or exercisable in accordance with its terms.

In the event of a Change in Control or a potential Change in Control, the Board of Directors shall have the power, subject to Section 13, to make such changes to the terms of the Options as it considers fair and appropriate in the circumstances, including but not limited to: (i) accelerating the date at which Options become exercisable; and (ii) otherwise modifying the terms of the Options to assist the Optionees to tender into a take-over bid or other arrangement leading to a Change in Control.

For purposes of this Section 14, “Change in Control” means the occurrence of any of the following:

(a) any person or group, other than JLL Patheon Holdings LLC or its affiliates (as determined pursuant to applicable securities legislation, including all regulations, rules, policy statements, rulings, notices, orders or other instruments promulgated thereunder), acquires beneficial ownership of securities of the Corporation carrying 30% or more of the voting rights attached to all securities of the Corporation then outstanding entitled to vote in the election of directors of the Corporation (collectively, “Voting Shares”) including securities convertible into, or exchangeable for, or providing for the issuance of, Voting Shares; provided, however, that, for the purposes of this paragraph (a), the following acquisitions shall not constitute a Change in Control:

(i) any acquisition of beneficial ownership of Voting Shares by the Corporation or any of its subsidiaries;

(ii) any acquisition of beneficial ownership of Voting Shares by any employee benefit plan (or related trust) of the Corporation or its subsidiaries;

(iii) any acquisition of beneficial ownership of Voting Shares by any person pursuant to a transaction which complies with clauses (i), (ii) and (iii) of paragraph (b); or

(iv) any acquisition of beneficial ownership of Voting Shares by any person whose ordinary business includes the management of investment funds for others and such Voting Shares are beneficially owned by such person in the ordinary course of such business;

(b) consummation of a merger, amalgamation, arrangement, business combination, reorganization or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination:

(i) persons who were the beneficial owners, respectively, of the outstanding common shares immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding Voting Shares of the person resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries);

(ii) no person (excluding any person resulting from the Business Combination or any employee benefit plan (or related trust) of the Corporation or such person resulting from the Business Combination) or group beneficially owns, directly or indirectly, 30% or more of, respectively, the then-outstanding Voting Shares of the person resulting from such Business Combination except to the extent that such ownership existed prior to the Business Combination; and

(iii) at least a majority of the members of the board of directors of the person resulting from such Business Combination were members of the incumbent board of directors at the time of the execution of the initial agreement providing for, or the action of the board of directors approving, such Business Combination.

15. Compliance with Applicable Foreign Laws

Notwithstanding any other provision of this Plan to the contrary, in order to comply with the laws in other countries or other jurisdictions in which the Corporation and its subsidiaries operate or have employees, the Compensation Committee, in its sole discretion, shall have the power and authority to:

(a) Determine which subsidiaries shall be covered by this Plan.

(b) Determine which Eligible Persons outside Canada and the United States are eligible to participate in this Plan.

(c) Modify the terms and conditions of any Option granted to Optionees outside Canada and the United States to comply with applicable foreign laws.

(d) Establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable. Any subplans and modifications to Plan terms and procedures established under this Section 15 by the Compensation Committee shall be attached to this Plan document as appendices.

(e) Take any action, before or after an Option is granted, that it deems advisable to obtain approval or comply with any necessary local government regulatory exemptions or approvals.

Notwithstanding the above, the Compensation Committee may not take any actions hereunder, and no Options shall be granted, that would violate applicable law.

16. Compliance with State Securities Laws

Notwithstanding any provision of this Plan to the contrary, the Compensation Committee, in its sole discretion, shall have the power and authority to modify the terms and conditions of any Option granted to Optionees who reside in one or more individual states to the extent necessary or desirable under applicable state securities laws. Any modifications to Plan terms and procedures established under this Section 16 by the Compensation Committee shall be attached to this Plan document as appendices.

17. Deferred Compensation

No deferral of compensation (as defined under Section 409A of the Code or guidance thereto) is intended under this Plan. If, notwithstanding this intent, the grant of an Option, reduction of an Option Price, extension of an Option Period or other change to the terms of an Option would give rise to deferred compensation as defined under Section 409A of the Code at a time when the Option(s) fail to meet the requirements of Section 409A of the Code, then such grant, reduction, extension or other change shall be null and void.

APPENDIX A

Patheon Inc.

2011 Amended and Restated

Incentive Stock Option Plan

March 10, 2011

Provisions Applicable to California Residents

Notwithstanding anything to the contrary otherwise appearing in the Plan, to the extent applicable, the following provisions promulgated under the California Code of Regulations, together with any and all amendments, supplements or revisions thereto, shall apply to any stock option granted under the Plan to a resident of the State of California and, in the event of any conflict or inconsistency between the following provisions and the provisions otherwise appearing in the Plan, the following provisions shall control, solely with respect to options or other awards granted under the Plan to residents of the State of California:

Rule 260.140.41., Compensatory option plans

Options granted to employees [including insurance agents who are employees for purposes of Rule 701(c) under the Securities Act of 1933, as amended (17 C.F.R. 230.701(c))], officers, directors, general partners, trustees (where the issuer is a business trust) managers, advisors or consultants of the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parents as part of a compensatory benefit plan shall be pursuant to a plan or agreement that provides for all of the following:

(a) The total number of securities (which may be expressed as a specific number of securities or as a percentage of the total number of securities outstanding from time to time) which may be issued and the persons eligible to receive options to purchase these securities.

(b) An exercise period of not more than 120 months from the date the option is granted.

(c) The non-transferability of the options, provided that the plan or agreement may permit transfer by will, by the laws of descent and distribution, to a revocable trust, or as permitted by Rule 701 of the Securities Act of 1933, as amended (17 C.F.R. 230.701).

(d) The proportionate adjustment of the number of securities purchasable and the exercise price thereof under the option in the event of a stock split, reverse stock split, stock dividend, recapitalization, combination, reclassification or other distribution of the issuer’s equity securities without the receipt of consideration by the issuer, of or on the issuer’s class or series of securities underlying the option.

(e) Unless employment is terminated for cause as defined by applicable law, the terms of the plan or option grant or a contract of employment, the right to exercise in the event of termination of employment, to the extent that the optionee is entitled to exercise on the date employment terminates, continues until the earlier of the option expiration date or:

(1) At least 6 months from the date of termination if termination was caused by death or disability.

(2) At least 30 days from the date of termination if termination was caused by other than death or disability.

(f) Options must be granted within 10 years from the date the plan or agreement is adopted or the date the plan or agreement is approved by the issuer’s security holders, whichever is earlier.

(g) The plan or agreement must be approved by a majority of the outstanding securities entitled to vote by the later of (1) within 12 months before or after the date the plan is adopted or the date the agreement is entered into or (2) prior to or within 12 months of the granting of any option or issuance of any security under the plan or agreement in this state. Any option granted to any person in this state that is exercised before security holder approval is obtained must be rescinded if security holder approval is not obtained in the manner described in the preceding sentence. Such securities shall not be counted in determining whether such approval is obtained. A foreign private issuer, as defined by Rule 3b-4 of the Securities Exchange Act of 1934, as amended (17 C.F.R. 240.3b-4), shall not be required to comply with this subsection provided that the aggregate number of persons in this state granted options under all option plans and agreements and issued securities under all purchase and bonus plans and agreements does not exceed 35.

(h) Compliance with Section 260.140.46 of these rules regarding the information required to be received by security holders.

Rule 260.140.45, Limitation on number of securities

(a) The total number of securities issuable upon exercise of all outstanding options [exclusive of rights described in Section 260.140.40 and warrants described in Sections 260.140.43 and 260.140.44 of these rules, and any purchase plan or agreement as described in Section 260.1 40.42 of these rules (provided that the purchase plan or agreement provides that all securities will have a purchase price of 100% of the fair value (Section 260.140.50) of the security either at the time the person is granted the right to purchase securities under the plan or agreement or at the time the purchase is consummated)], and the total number of securities called for under any bonus or similar plan or agreement shall not exceed a number of securities which is equal to 30% of the then outstanding securities of the issuer (convertible preferred or convertible senior common shares of stock will be counted on an as if converted basis), exclusive of securities subject to promotional waivers under Section 260.141, unless a percentage higher than 30% is approved by at least two-thirds of the outstanding securities entitled to vote.

(b) The 30% limitation set forth in this Rule, or such other percentage limitation as may be approved pursuant to this Rule, shall be deemed satisfied if the plan or agreement provides that at no time shall the total number of securities issuable upon exercise of all outstanding options and the total number of securities provided for under any bonus or similar plan or agreement of the issuer exceed the applicable percentage as calculated in accordance with the conditions and the exclusions of this Rule, based on the securities of the issuer which are outstanding at the time the calculation is made.

(c) This section shall not apply to any plan or agreement that complies with all conditions of Rule 701 of the Securities Act of 1933, as amended (17 C.F.R. 230.701); provided that for purposes of determining such compliance, any registered domestic partner shall be considered a “family member” as that term is defined in Rule 701.

Rule 260.140.46, Information to security holders

Plans or agreements pursuant to which securities are to be issued to employees, officers, directors, managers, advisors or consultants (including option, purchase and bonus plans) shall provide that the security holder(s) will receive financial statements at least annually. This section does not require the use of financial statements in accordance with Section 260.613 of these rules. This section shall not apply when issuance is limited to key persons whose duties in connection with the issuer assure them access to equivalent information. This section shall not apply to any plan or agreement that complies with all conditions of Rule 701 of the Securities Act of 1933, as amended (17 C.F.R. 230.701); provided that for purposes of determining such compliance, any registered domestic partner shall be considered a “family member” as that term is defined in Rule 701.

2

EX-31.1

Exhibit 31.1

Certification by the Chief Executive Officer

pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, James C. Mullen, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Patheon Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [Paragraph omitted in accordance with Exchange Act Rule 13a-14(a)];

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 10, 2011

/s/ James C. Mullen

James C. Mullen

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification by the Chief Financial Officer

pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Eric W. Evans, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Patheon Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) or the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [Paragraph omitted in accordance with Exchange Act Rule 13a-14(a);

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 10, 2011

/s/ Eric W. Evans

Eric W. Evans

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification by the Chief Executive Officer

pursuant to 18 U.S.C. Section 1350, as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Patheon Inc. (the “Company”) for the period ended April 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, James C. Mullen, Chief Executive Officer of the Company, hereby certifies, to the knowledge of the undersigned, pursuant to 18 U.S.C. Section 1350, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: June 10, 2011	/s/ James C. Mullen
	James C. Mullen
	Chief Executive Officer (Principal Executive Officer)

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification by the Chief Financial Officer

pursuant to 18 U.S.C. Section 1350, as adopted

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Patheon Inc. (the “Company”) for the period ended April 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Eric W. Evans, Chief Financial Officer of the Company, hereby certifies, to the knowledge of the undersigned, pursuant to 18 U.S.C. Section 1350, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: June 10, 2011	/s/ Eric W. Evans
	Eric W. Evans
	Chief Financial Officer (Principal Financial Officer)

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.