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 July 31, 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  x    No  ¨

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 September 7, 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 July 31, 2011 and October 31, 2010	1
	Unaudited Consolidated Statements of Loss for the Three and Nine Months Ended July 31, 2011 and 2010	2
	Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended July 31, 2011 and 2010	3
	Unaudited Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended July 31, 2011 and 2010	4
	Unaudited Consolidated Statements of Cash Flows for the Three and Nine Months Ended July 31, 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	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II -	Other Information	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	Signatures	44
	Exhibit Index	45

Item 1. Financial Statements

Patheon Inc.

CONSOLIDATED BALANCE SHEETS

(unaudited)

	As of July 31,			As of October 31,
	2011			2010
(in millions of U.S. dollars)	$			$
Assets
Current
Cash and cash equivalents		39.5			53.5
Accounts receivable		148.1			139.9
Inventories		88.2			73.3
Income taxes receivable		7.5			5.7
Prepaid expenses and other		16.9			9.5
Future tax assets - short-term		10.8			9.0
Total current assets		311.0			290.9
Capital assets		483.2			478.3
Intangible assets		0.3			1.4
Future tax assets		8.7			11.2
Goodwill		3.6			3.4
Investments		5.3			5.3
Other long-term assets		27.0			18.4
Total assets		839.1			808.9
Liabilities and shareholders’ equity
Current
Short-term borrowings		3.3			2.0
Accounts payable and accrued liabilities		171.4			156.7
Income taxes payable		0.2			0.4
Deferred revenues - short-term		9.8			26.7
Current portion of long-term debt		1.2			3.5
Total current liabilities		185.9			189.3
Long-term debt		274.3			274.8
Deferred revenues		28.1			19.2
Future tax liabilities		38.2			29.7
Other long-term liabilities		22.0			22.9
Total liabilities		548.5			535.9
Shareholders’ equity
Restricted voting shares		553.8			553.8
Contributed surplus		12.6			10.0
Deficit		(342.1	)		(330.7	)
Accumulated other comprehensive income		66.3			39.9
Total shareholders’ equity		290.6			273.0
Total liabilities and shareholders’ equity		839.1			808.9

see accompanying notes

1

Patheon Inc.

CONSOLIDATED STATEMENTS OF LOSS

(unaudited)

	Three months ended July 31,						Nine months ended July 31,
	2011			2010			2011			2010
(in millions of U.S. dollars, except loss per share)	$			$			$			$
Revenues		172.7			163.3			518.4			493.5
Cost of goods sold		145.3			128.9			416.1			391.3
Gross profit		27.4			34.4			102.3			102.2
Selling, general and administrative expenses		31.7			26.1			84.3			82.1
Repositioning expenses		1.9			2.4			3.4			5.8
Operating (loss) income		(6.2	)		5.9			14.6			14.3
Interest expense, net		6.3			6.3			18.9			13.2
Impairment charge		—			2.1			—			3.4
Foreign exchange (gain) loss		(3.6	)		(2.2	)		3.2			(3.5	)
(Gain) loss on sale of fixed assets		(0.1	)		—			0.1			0.1
Refinancing expenses		—			0.3			—			12.0
Other (income) expense, net		(5.6	)		0.4			(5.3	)		(0.1	)
Loss from continuing operations before income taxes		(3.2	)		(1.0	)		(2.3	)		(10.8	)
(Benefit from) provision for income taxes		(2.7	)		2.0			8.6			(8.4	)
Loss before discontinued operations		(0.5	)		(3.0	)		(10.9	)		(2.4	)
Loss from discontinued operations		(0.2	)		—			(0.5	)		(0.8	)
Net loss attributable to restricted voting shareholders		(0.7	)		(3.0	)		(11.4	)		(3.2	)
Basic and diluted loss per share
From continuing operations		($0.004	)		($0.023	)		($0.084	)		($0.019	)
From discontinued operations		($0.002	)		$0.000			($0.004	)		($0.006	)
		($0.006	)		($0.023	)		($0.088	)		($0.025	)
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)

	Nine months ended July 31,
	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		2.6			1.4
Balance at end of period		12.6			9.1
Deficit
Balance at beginning of period		(330.7	)		(325.7	)
Net loss attributable to restricted voting shareholders		(11.4	)		(3.2	)
Balance at end of period		(342.1	)		(328.9	)
Accumulated other comprehensive income
Balance at beginning of period		39.9			35.5
Other comprehensive income (loss) for the period		26.4			(11.9	)
Balance at end of period		66.3			23.6
Total shareholders’ equity at end of period		290.6			257.6

see accompanying notes

3

Patheon Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)

	Three months ended July 31,						Nine months ended July 31,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Net loss attributable to restricted voting shareholders		(0.7	)		(3.0	)		(11.4	)		(3.2	)
Other comprehensive (loss) income, net of income taxes
Change in foreign currency gains on investments in subsidiaries, net of hedging activities1		(11.8	)		(4.2	)		24.7			(14.8	)
Change in value of derivatives designated as foreign currency and interest rate cash flow hedges2		0.2			(0.7	)		4.2			8.6
Losses on foreign currency and interest rate cash flow hedges reclassified to consolidated statement of loss3		(1.1	)		(0.5	)		(2.5	)		(5.7	)
Other comprehensive (loss) income for the period		(12.7	)		(5.4	)		26.4			(11.9	)
Comprehensive (loss) income attributable to restricted voting shareholders		(13.4	)		(8.4	)		15.0			(15.1	)

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 benefit of $0.3 million and an expense of $1.4 million for the three and nine months ended July 31, 2011. (Net of an income tax expense of $1.8 million for the three and nine months ended July 31, 2010.)

²  Net of an income tax benefit of $0.1 million and an expense of $0.9 million for the three and nine months ended July 31, 2011. (Net of an income tax expense of $0.9 million and $2.4 million for the three and nine months ended July 31, 2010.)

³  Net of an income tax benefit of $0.4 million and $0.9 million for the three and nine months ended July 31, 2011.

(Net of an income tax benefit of nil and $0.8 million for the three and nine months ended July 31, 2010.)

4

Patheon Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three months ended July 31,						Nine months ended July 31,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Operating activities
Loss before discontinued operations		(0.5	)		(3.0	)		(10.9	)		(2.4	)
Add (deduct) charges to operations not requiring a current cash payment
Depreciation and amortization		12.6			13.2			40.8			39.5
Impairment charge		—			2.1			—			3.4
Non-cash interest		0.4			0.2			0.8			2.3
Change in other long-term assets and liabilities		(7.6	)		0.4			(9.7	)		(8.9	)
Future income taxes		(0.6	)		1.4			10.3			(11.7	)
Amortization of deferred revenues		(1.6	)		(13.0	)		(42.6	)		(24.5	)
(Gain) loss on sale of fixed assets		(0.1	)		—			0.1			0.1
Stock-based compensation expense		1.3			0.8			2.6			1.4
Other		0.1			0.4			0.4			—
		4.0			2.5			(8.2	)		(0.8	)
Net change in non-cash working capital balances related to continuing operations		(0.1	)		(12.3	)		(6.8	)		(3.4	)
Increase in deferred revenues		7.6			3.8			27.2			44.1
Cash provided by (used in) operating activities of continuing operations		11.5			(6.0	)		12.2			39.9
Cash (used in) provided by operating activities of discontinued operations		(0.1	)		0.3			(0.5	)		(0.8	)
Cash provided by (used in) operating activities		11.4			(5.7	)		11.7			39.1
Investing activities
Additions to capital assets		(10.2	)		(13.5	)		(31.2	)		(32.9	)
Proceeds on sale of capital assets		0.1			—			0.3			—
Net increase in investments		—			—			—			(0.9	)
Investment in intangibles		—			—			—			(0.2	)
Cash used in investing activities of continuing operations		(10.1	)		(13.5	)		(30.9	)		(34.0	)
Cash used in investing activities		(10.1	)		(13.5	)		(30.9	)		(34.0	)
Financing activities
Increase (decrease) in short-term borrowings		3.5			3.5			1.3			(9.1	)
Increase in long-term debt		6.0			2.0			6.0			288.9
Repayment of long-term debt		(6.2	)		(2.1	)		(7.4	)		(246.4	)
Cash provided by (used in) financing activities of continuing operations		3.3			3.4			(0.1	)		33.4
Cash provided by (used in) financing activities		3.3			3.4			(0.1	)		33.4
Effect of exchange rate changes on cash and cash equivalents		(4.4	)		(3.0	)		5.3			(3.8	)
Net increase (decrease) in cash and cash equivalents during the period		0.2			(18.8	)		(14.0	)		34.7
Cash and cash equivalents, beginning of period		39.3			75.8			53.5			22.3
Cash and cash equivalents, end of period		39.5			57.0			39.5			57.0
Supplemental cash flow information
Interest paid		0.3			3.8			12.5			11.1
Income taxes (received) paid, net		(1.3	)		5.7			(0.6	)		4.8

see accompanying notes

5

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 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 nine months ended July 31, 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. Currently the Company does not believe these standards will have a material impact on the financial statements.

(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 Nine Months Ended July 31, 2011

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

2. Discontinued operations 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. As a result of additional time required to transition manufacturing operations from Caguas to Manati due to longer than expected customer regulatory time lines and increased product demand, the Company now expects the transition to continue beyond the end of calendar year 2012. Therefore, the letter of intent was rescinded, and the extended time-frame will result in additional repositioning costs. The Company has increased its estimated total project repositioning expenses from $9.0 million to $11.5 million, of which an additional $0.9 million of severance costs was included in the repositioning expenses of $1.9 million booked in the three months ended July 31, 2011. The consolidation also results 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 nine months ended July 31, 2011 and 2010 are reported in discontinued operations as follows:

	Three months ended July 31,					Nine months ended July 31,
	2011			2010		2011			2010
	$			$		$			$
Revenues		—			—		—			—
Cost of goods sold		—			—		—			—
Gross loss		—			—		—			—
Selling, general and administrative expenses		0.2			—		0.5			0.8
Operating loss		(0.2	)		—		(0.5	)		(0.8	)
Loss before income taxes		(0.2	)		—		(0.5	)		(0.8	)
Net loss for the period		(0.2	)		—		(0.5	)		(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 July 31, 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		12,725,924		3,666,957

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 Nine Months Ended July 31, 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 July 31, 2011
	Commercial		PDS		Corp. & Other			Total
	$		$		$			$
Revenues		138.7		34.0		—			172.7
Adjusted EBITDA		11.5		9.3		(8.9	)		11.9
Depreciation		10.9		1.4		0.3			12.6
Capital expenditures		8.3		1.7		0.2			10.2
	As of and for the three months ended July 31, 2010
	Commercial		PDS		Corp. & Other			Total
	$		$		$			$
Revenues		130.2		33.1		—			163.3
Adjusted EBITDA		17.9		11.3		(5.5	)		23.7
Depreciation		11.6		1.4		0.2			13.2
Capital expenditures		11.3		2.1		0.1			13.5
	As of and for the nine months ended July 31, 2011
	Commercial		PDS		Corp. & Other			Total
	$		$		$			$
Revenues		425.8		92.6		—			518.4
Adjusted EBITDA		64.1		20.0		(28.3	)		55.8
Total assets		682.2		77.8		79.1			839.1
Depreciation		35.8		4.2		0.8			40.8
Goodwill		3.6		—		—			3.6
Capital expenditures		25.4		5.3		0.5			31.2
	As of and for the nine months ended July 31, 2010
	Commercial		PDS		Corp. & Other			Total
	$		$		$			$
Revenues		400.5		93.0		—			493.5
Adjusted EBITDA		45.7		35.8		(18.4	)		63.1
Total assets		626.3		66.8		94.7			787.8
Depreciation		34.7		4.4		0.4			39.5
Impairment		3.4		—		—			3.4
Goodwill		3.4		—		—			3.4
Capital expenditures		28.3		4.4		0.2			32.9

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 income and 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 Nine Months Ended July 31, 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 July 31,						Nine months ended July 31,
	2011			2010			2011			2010
	$			$			$			$
Total Adjusted EBITDA		11.9			23.7			55.8			63.1
Depreciation and amortization		(12.6	)		(13.2	)		(40.8	)		(39.5	)
Repositioning expenses		(1.9	)		(2.4	)		(3.4	)		(5.8	)
Interest expense, net		(6.3	)		(6.3	)		(18.9	)		(13.2	)
Impairment charge		—			(2.1	)		—			(3.4	)
Gain (loss) on sale of fixed assets		0.1			—			(0.1	)		(0.1	)
Refinancing expenses		—			(0.3	)		—			(12.0	)
Benefit from (provision for) income taxes		2.7			(2.0	)		(8.6	)		8.4
Other income (expense), net		5.6			(0.4	)		5.1			0.1
Loss before discontinued operations		(0.5	)		(3.0	)		(10.9	)		(2.4	)

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 July 31, 2011
	Canada		US*		Europe		Other		Total
	$		$		$		$		$
Revenues		3.6		88.9		69.6		10.6		172.7
	Three months ended July 31, 2010
	Canada		US*		Europe		Other		Total
	$		$		$		$		$
Revenues		4.1		80.1		62.0		17.1		163.3
*  Includes Puerto Rico
	As of and for the nine months ended July 31,  2011
	Canada		U.S.*		Europe		Other		Total
	$		$		$		$		$
Revenues		8.9		246.2		237.2		26.1		518.4
Capital assets		118.8		132.9		229.7		1.8		483.2
Goodwill		3.6		—		—		—		3.6
	As of and for the nine months ended July 31,  2010
	Canada		U.S.*		Europe		Other		Total
	$		$		$		$		$
Revenues		12.3		239.3		215.7		26.2		493.5
Capital assets		116.7		130.2		215.9		1.0		463.8
Impairment		—		3.4		—		—		3.4
Goodwill		3.4		—		—		—		3.4

* Includes Puerto Rico

9

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 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 July 31, 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 12,725,924 shares and 8,333,928 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 400,000 and 5,442,000 stock options granted for each of the three and nine months ended July 31, 2011 was CAD$1.09 and CAD$1.34. The fair value of stock options is estimated using the Black-Scholes option pricing model with the following assumptions:

	Three months ended July 31, 2011			Nine months ended July 31, 2011
Risk free interest rate		2.2	%		2.5	%
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 nine months ended July 31, 2011 was $1.3 million and $2.6 million, respectively, impacted by new options granted including those to the Company’s new Chief Executive Officer (“CEO”), partially offset by the forfeitures of stock options related to the departure of the Company’s previous CEO. Stock-based compensation expense recorded in the three and nine months ended July 31, 2010 was $0.8 million and $1.4 million, respectively.

6. Repositioning expenses

During the three and nine months ended July 31, 2011, the Company incurred $1.9 million and $3.4 million, respectively, in expenses associated with the shutdown of its Caguas facility. As a result of additional time required to transition manufacturing operations from Caguas to Manati due to longer than expected customer regulatory time lines, increased product demand and fewer than expected employee transfers, the Company will incur additional repositioning costs. The Company has increased its estimated total project repositioning expenses from $9.0 million to $11.5 million, of which an additional $0.9 million of severance costs was included in the repositioning expenses in the three months ended July 31, 2011. During the three and nine months ended July 31, 2010, the Company incurred $2.4 million and $5.8 million, respectively, in expenses associated with the shutdown of its Caguas facility.

10

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 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 nine months ended July 31, 2011 and 2010:

	As of and for the three months ended July 31,  2011
	Commercial		PDS		Corporate		Total
	$		$		$		$
Total repositioning liabilities at April 30, 2011								2.9
Employee-related expenses		1.1		—		—		1.1
Consulting, professional and project management costs		0.8		—		—		0.8
Total expenses		1.9		—		—		1.9
Repositioning expenses paid								(1.0	)
Total repositioning liabilities at July 31, 2011								3.8
	As of and for the three months ended July 31,  2010
	Commercial		PDS		Corporate		Total
	$		$		$		$
Total repositioning liabilities at April 30, 2010								2.6
Employee-related expenses		1.8		—		—		1.8
Consulting, professional and project management costs		0.6		—		—		0.6
Total expenses		2.4		—		—		2.4
Repositioning expenses paid								(1.4	)
Foreign exchange								(0.1	)
Total repositioning liabilities at July 31, 2010								3.5
	As of and for the nine months ended July 31, 2011
	Commercial		PDS		Corporate		Total
	$		$		$		$
Total repositioning liabilities at October 31, 2010								3.2
Employee-related expenses		1.2		—		—		1.2
Consulting, professional and project costs		2.2		—		—		2.2
Total expenses		3.4		—		—		3.4
Repositioning expenses paid								(2.8	)
Total repositioning liabilities at July 31, 2011								3.8
	As of and for the nine months ended July 31, 2010
	Commercial		PDS		Corporate		Total
	$		$		$		$
Total repositioning liabilities at October 31, 2009								2.9
Employee-related expenses		3.6		—		—		3.6
Consulting, professional and project costs		2.2		—		—		2.2
Total expenses		5.8		—		—		5.8
Repositioning expenses paid								(5.0	)
Foreign exchange								(0.2	)
Total repositioning liabilities at July 31, 2010								3.5

7. Other information

Foreign exchange

During the three months ended July 31, 2011, the Company recorded foreign exchange gains of $3.6 million. These gains were primarily due to gains on hedging and operating exposures. During the nine months ended July 31, 2011, the Company recorded foreign exchange losses of $3.2 million. These losses related to operating exposures, partially offset by hedging gains on forward contracts. During the three and nine months ended July 31, 2010, the Company recorded foreign exchange gains of $2.2 million and $3.5 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 Nine Months Ended July 31, 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 nine months ended July 31, 2011 was $1.9 million and $5.8 million, respectively. The employee future benefit expense in connection with defined benefit pension plans and other post retirement benefit plans for the three and nine months ended July 31, 2010 was $1.6 million and $5.3 million, respectively.

Other (income) expense, net

In May 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 (costs primarily related to repairs and maintenance, cleaning, validation, inspection, and compliance) 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. In the third quarter of fiscal 2011, the Company received the final payout from the settlement of approximately $13.6 million. A portion of the settlement was used to offset capital expenditures and accrue for future remediation liabilities, with the remaining $6.0 million booked as other income.

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 July 31,		As of October 31,
	2011		2010
	$		$
Held-for-trading 1		39.5		53.5
Loans and receivables 2		148.1		139.9
Other financial liabilities 3		450.2		437.0
Derivatives designated as effective hedges 4 - gain		3.0		1.3
Other derivatives 5		0.2		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 July 31, 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 $105.7 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 July 31, 2011 and October 31, 2010:

12

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 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 July 31, 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		—		1.5		—		1.5		—		1.3		—		1.3
Foreign exchange collars		—		1.8		—		1.8		—		—		—		—
Total assets		—		3.3		—		3.3		—		1.3		—		1.3
Derivatives not designated as hedging instruments:
Embedded call option on Notes		—		—		0.2		0.2		—		—		0.7		0.7
Total assets		—		—		0.2		0.2		—		—		0.7		0.7
Liabilities measured at fair value
	Fair value measurement at July 31, 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		—		0.1		—		0.1		—		—		—		—
Foreign exchange collars		—		0.2		—		0.2		—		—		—		—
Total liabilities		—		0.3		—		0.3		—		—		—		—

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 Nine Months Ended July 31, 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 July 31, 2011 and October 31, 2010:

Fair values of derivative instruments

	Asset derivatives as of July 31, 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		1.5	Prepaid expenses and other		1.3
Foreign exchange collars	Prepaid expenses and other		1.8			—
Total designated derivatives			3.3			1.3
Derivatives not designated as hedging instruments:
Embedded call option on Notes	Other long-term assets		0.2	Other long-term assets		0.7
Total non-designated derivatives			0.2			0.7
	Liability derivatives as of July 31, 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	Accounts payable and accrued liabilities		0.1			—
Foreign exchange collars	Other long-term liabilities		0.2			—
Total designated derivatives			0.3			—

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 Nine Months Ended July 31, 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 July 31, 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 (losses) gains					—
In net loss		(0.5	)		(0.5	)
In other comprehensive (loss) income		—			—
Settlements		—			—
Transfers out of Level 3		—			—
Closing balance (July 31, 2011)		0.2			0.2

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 July 31, 2011, the Company’s Canadian operations had entered into foreign exchange forward contracts to sell an aggregate amount of US$14.2 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 $1.0568 Canadian. The mark-to-market value of these financial instruments as of July 31, 2011 was an unrealized gain of $1.5 million, which has been recorded in accumulated other comprehensive income in shareholders’ equity, net of associated income tax.

As of July 31, 2011, the Company’s Canadian operations had entered into foreign exchange collars to sell an aggregate amount of US$104.5 million. These contracts hedge the Canadian operations’ expected exposure to U.S. dollar denominated cash flows and mature at the latest on January 2, 2013, at an average exchange rate of $0.9855 Canadian. The mark-to-market value of these financial instruments as of July 31, 2011 was an unrealized gain of $1.6 million, which has been recorded in accumulated other comprehensive income in shareholders’ equity, net of associated income tax.

As of July 31, 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 July 31, 2011 was an unrealized loss of approximately $0.1 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 Nine Months Ended July 31, 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 10% 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 July 31, 2011, fluctuations of +/-10% would, everything else being equal, have an annual effect on (loss) income from continuing operations before income taxes of approximately +/- $8.9 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 July 31, 2011, the Company has entered into foreign exchange contracts to cover approximately 80% 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 July 31, 2011 and October 31, 2010, the Company held deposits of $16.6 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 Nine Months Ended July 31, 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 July 31, 2011 $
Total accounts receivable		148.5
Less: Allowance for doubtful accounts		(0.4	)
		148.1
Of which:
Not overdue		120.5
Past due for more than one day but for not more than three months		22.4
Past due more for than three months but for not more than six months		1.8
Past due for more than six months but not for more than one year		1.5
Past due for more than one year		2.3
Less: Allowance for doubtful accounts		(0.4	)
Total accounts receivable, net		148.1

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 July 31, 2011, the Company was holding cash and cash equivalents of $39.5 million and had undrawn lines of credit available to it of $98.2 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 July 31, 2011 and October 31, 2010, total managed capital was $566.1 million and $551.3 million, respectively, comprised of shareholders’ equity of $290.6 million and $273.0 million, respectively, and cash interest-bearing debt of $275.5 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 less than $0.1 million for each of the three and nine months ended July 31, 2011, and were approximately $0.0 million and $0.2 million for the three and nine months ended July 31, 2010, respectively. These transactions were conducted in the normal course of business and are recorded at the exchanged amounts. There were no accounts receivable at July 31, 2011 and a balance of $0.1 million at October 31, 2010, 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 Nine Months Ended July 31, 2011

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

As of each of July 31, 2011 and October 31, 2010, the Company had an investment of $3.3 million, 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 nine months ended July 31, 2011 and 2010, the Company recorded investment losses of less than $0.1 million and income of $0.6 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. There were no management fees recorded under this agreement for the three and nine months ended July 31, 2011 and 2010, respectively. Accounts receivable at July 31, 2011 and October 31, 2010 include a balance of $1.7 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 loss from continuing operations before income taxes:

	Nine months ended July 31,
	2011			2010
	$			$
Expected income tax recovery using statutory tax rates		(1.0	)		(3.6	)
Change in valuation allowance		1.6			(12.9	)
Permanent differences and other:
Foreign		(0.6	)		0.8
Domestic		(0.7	)		(0.9	)
Foreign rate differentials		3.7			7.8
Other		5.6			0.4
Provision for (benefit from) income taxes		8.6			(8.4	)
Effective tax rate		(374.0	)%		78.0	%

The effective tax rate for the nine months ended July 31, 2011 of (374.0)% was primarily due to the book versus tax treatment of foreign exchange gains in Canada included in “Other” above (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 (374.0)% in fiscal 2011 from 78.0% in fiscal 2010 was primarily due to the book versus tax treatment of foreign exchange gains in Canada recorded in “Other” above, the mix of earnings in the Company’s subsidiaries, increase to the valuation allowance related to the U.S. local net operating losses, 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 $7.2 million in the cost of goods sold relating to the partial utilization of previous years ITCs in the nine months ended July 31, 2010.

18

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 2011

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

12. 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 July 31, 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		39.5			—					39.5			53.5			—					53.5
Accounts receivable		148.1			—					148.1			139.9			—					139.9
Inventories		88.2			—					88.2			73.3			—					73.3
Income taxes receivable		7.5			3.2			i		10.7			5.7			—					5.7
Prepaid expenses and other		16.9			—					16.9			9.5			—					9.5
Future tax assets - short-term		10.8			—			g		10.8			9.0			(1.3	)		g		7.7
Total current assets		311.0			3.2					314.2			290.9			(1.3	)				289.6
Capital assets		483.2			(0.8	)		e		482.4			478.3			(0.9	)		e		477.4
Intangible assets		0.3			—					0.3			1.4			—					1.4
Deferred financing costs		—			6.4			f		6.4			—			7.2			f		7.2
Future tax assets		8.7			23.0			c		31.7			11.2			17.7			c		28.9
Goodwill		3.6			—					3.6			3.4			—					3.4
Investments		5.3			—					5.3			5.3			—					5.3
Other long-term assets		27.0			(23.0	)		c,d		4.0			18.4			(18.4	)		c,d		—
Total assets		839.1			8.8					847.9			808.9			4.3					813.2
Liabilities and shareholders’ equity
Current
Short term borrowings		3.3			—					3.3			2.0			—					2.0
Accounts payable and accrued liabilities		171.4			—					171.4			156.7			—					156.7
Income taxes payable		0.2			(0.2	)		i		—			0.4			1.0					1.4
Deferred revenues - short-term		9.8			—					9.8			26.7			—					26.7
Current portion of long-term debt		1.2			—					1.2			3.5			—					3.5
Total current liabilities		185.9			(0.2	)				185.7			189.3			1.0					190.3
Long-term debt		274.3			5.5			d,f		279.8			274.8			6.3			d,f		281.1
Deferred revenues		28.1			—					28.1			19.2			—					19.2
Future tax liabilities		38.2			(0.2	)		e		38.0			29.7			(0.3	)		e		29.4
Other long-term liabilities		22.0			23.7			b,g		45.7			22.9			22.2			b,g		45.1
Total liabilities		548.5			28.8					577.3			535.9			29.2					565.1
Shareholders’ equity
Restricted voting shares		553.8			18.1			a		571.9			553.8			18.1			a		571.9
Contributed surplus		12.6			—					12.6			10.0			—					10.0
Deficit		(342.1	)		(21.0	)		a,d,e,g,i		(363.1	)		(330.7	)		(25.8	)		a,d,e,g		(356.5	)
Accumulated other comprehensive income		66.3			(17.1	)		a,b,e		49.2			39.9			(17.2	)		a,b,e		22.7
Total shareholders’ equity		290.6			(20.0	)				270.6			273.0			(24.9	)				248.1
Total liabilities and shareholders’ equity		839.1			8.8					847.9			808.9			4.3					813.2

See accompanying notes.

19

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 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 July 31, 2011
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$
Revenues		172.7			—					172.7
Cost of goods sold		145.3			1.6			c		146.9
Gross profit		27.4			(1.6	)				25.8
Selling, general and administrative expenses		31.7			—					31.7
Repositioning expenses		1.9			—					1.9
Gain on sale of fixed assets		—			(0.1	)		h		(0.1	)
Operating income		(6.2	)		(1.5	)				(7.7	)
Interest expense, net		6.3			—			d		6.3
Foreign exchange gain		(3.6	)		—					(3.6	)
Gain on sale of fixed assets		(0.1	)		0.1			h		—
Other (income) expense, net		(5.6	)		(0.7	)		d		(6.3	)
Loss from continuing operations before income taxes		(3.2	)		(0.9	)				(4.1	)
Benefit from income taxes		(2.7	)		(2.0	)		c,i		(4.7	)
(Loss) income before discontinued operations		(0.5	)		1.1					0.6
Loss from discontinued operations		(0.2	)		—					(0.2	)
Net (loss) income attributable to restricted voting shareholders		(0.7	)		1.1					0.4
Basic and diluted (loss) income per share
From continuing operations		(0.004	)							0.005
From discontinued operations		(0.002	)							(0.002	)
		(0.006	)							0.003
Weighted-average number of shares outstanding during period - basic and diluted (in thousands)		129,168								129,168

See accompanying notes.

20

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 2011

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

	Nine months ended July 31, 2011
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$
Revenues		518.4			—					518.4
Cost of goods sold		416.1			4.0			c		420.1
Gross profit		102.3			(4.0	)				98.3
Selling, general and administrative expenses		84.3			—					84.3
Repositioning expenses		3.4			—					3.4
Loss on sale of fixed assets		—			0.1			h		0.1
Operating income		14.6			(4.1	)				10.5
Interest expense, net		18.9			0.1			d		19.0
Foreign exchange loss		3.2			—					3.2
Loss on sale of fixed assets		0.1			(0.1	)		h		—
Other (income) expense, net		(5.3	)		(0.5	)		d		(5.8	)
Loss from continuing operations before income taxes		(2.3	)		(3.6	)				(5.9	)
Provision for income taxes		8.6			(8.5	)		c,i		0.1
Loss before discontinued operations		(10.9	)		4.9					(6.0	)
Loss from discontinued operations		(0.5	)		—					(0.5	)
Net loss attributable to restricted voting shareholders		(11.4	)		4.9					(6.5	)
Basic and diluted loss per share
From continuing operations		(0.084	)							(0.046	)
From discontinued operations		(0.004	)							(0.004	)
		(0.088	)							(0.050	)
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 Nine Months Ended July 31, 2011

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

	Three months ended July 31, 2010
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$
Revenues		163.3								163.3
Cost of goods sold		128.9			2.7			c		131.6
Gross profit		34.4			(2.7	)				31.7
Selling, general and administrative expenses		26.1			—					26.1
Repositioning expenses		2.4			—					2.4
Impairment charge		—			2.1			h		2.1
Operating income		5.9			(4.8	)				1.1
Interest expense, net		6.3			—					6.3
Impairment charge		2.1			(2.1	)		h		—
Foreign exchange gain		(2.2	)		—					(2.2	)
Refinancing expenses		0.3			—					0.3
Other (income) expense, net		0.4			(0.7	)				(0.3	)
Loss from continuing operations before income taxes		(1.0	)		(2.0	)				(3.0	)
Provision for income taxes		2.0			0.5			c,i		2.5
Loss before discontinued operations		(3.0	)		(2.5	)				(5.5	)
Loss from discontinued operations		—			—					—
Net loss attributable to restricted voting shareholders		(3.0	)		(2.5	)				(5.5	)
Basic and diluted loss per share
From continuing operations		(0.023	)							(0.043	)
From discontinued operations		—								—
		(0.023	)							(0.043	)
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 Nine Months Ended July 31, 2011

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

	Nine months ended July 31, 2010
	Canadian GAAP			Increase (Decrease)			Notes		U.S. GAAP
	$								$
Revenues		493.5			—					493.5
Cost of goods sold		391.3			9.8			c		401.1
Gross profit		102.2			(9.8	)				92.4
Selling, general and administrative expenses		82.1			—					82.1
Repositioning expenses		5.8			—					5.8
Impairment charge		—			3.4			h		3.4
Loss on sale of fixed assets		—			0.1			h		0.1
Operating income		14.3			(13.3	)				1.0
Interest expense, net		13.2			—					13.2
Impairment charge		3.4			(3.4	)		h		—
Foreign exchange gain		(3.5	)		—					(3.5	)
Refinancing expenses		12.0			—					12.0
Loss on sale of fixed assets		0.1			(0.1	)		h		—
Other (income) expense, net		(0.1	)		(0.5	)				(0.6	)
Loss from continuing operations before income taxes		(10.8	)		(9.3	)				(20.1	)
Benefit from income taxes		(8.4	)		(8.9	)		c,i		(17.3	)
Loss before discontinued operations		(2.4	)		(0.4	)				(2.8	)
Loss from discontinued operations		(0.8	)		—					(0.8	)
Net loss attributable to restricted voting shareholders		(3.2	)		(0.4	)				(3.6	)
Basic and diluted loss per share
From continuing operations		(0.019	)							(0.022	)
From discontinued operations		(0.006	)							(0.006	)
		(0.025	)							(0.028	)
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 the three and nine months ended July 31, 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 the three and nine months ended July 31, 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 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.

23

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 2011

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

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 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.

24

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 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 July 31, 2011 and October 31, 2010, unrecognized tax benefits were $0.8 million and $1.4 million, respectively.

(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 July 31, 2011		As of October 31, 2010
Trade payables		93.6		88.9
Interest payable		7.1		1.0
Accrued salaries and related expenses		42.1		44.7
Customer deposits		16.6		14.6
Other accruals		12.0		7.5
		171.4		156.7

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

Inventories:

	As of July 31, 2011		As of October 31, 2010
	$		$
Raw materials, packaging components and spare parts		56.3		47.3
Work-in-process		31.9		26.0
		88.2		73.3

Net income per share:

The computation of diluted net income per share did not include 12,725,924 and 8,333,928 outstanding options in the nine months ended July 31, 2011 and 2010, respectively, because such options were anti-dilutive in nature.

25

Notes to Unaudited Consolidated Financial Statements for the Three and Nine Months Ended July 31, 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 nine months ended July 31, 2011 and 2010, respectively, were as follows:

	For the nine months ended July 31,
	2011					2010
	Defined Benefit Pension Plans			Other Benefit Plans		Defined Benefit Pension Plans			Other Benefit Plans
	$			$		$			$
Service cost		2.7			—		2.7			—
Interest cost		3.9			0.3		3.6			0.3
Expected return on plan assets		(3.6	)		—		(3.0	)		—
Amortization of actuarial loss		0.6			—		0.6			—
Net periodic benefit costs		3.6			0.3		3.9			0.3

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 $4.9 million for the benefit plans in the United Kingdom, which was made during the third quarter of fiscal 2011. 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 June 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this new ASU, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. This guidance is effective for publicly traded companies as of the beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective application is required. As the Company reports net (loss) income and comprehensive (loss) income in two statements, the adoption of this ASU will not impact the presentation of the Company’s consolidated financial statements beginning in the first quarter of 2012.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU modifies the existing standard to include disclosure of all transfers between Level 1 and Level 2 asset and liability fair value categories. In addition, the ASU provides guidance on measuring the fair value of financial instruments managed within a portfolio and the application of premiums and discounts on fair value measurements. The ASU requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, with early adoption prohibited. The Company does not expect this ASU would have a material impact on its consolidated financial statements if prepared under U.S. GAAP.

In April 2010, the FASB issued 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.

26

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 12—Additional disclosures required under U.S. Generally Accepted Accounting Principles” to our consolidated financial statements beginning on page 1 of 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 this Form 10-Q and 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 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 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 the three and nine months ended July 31, 2011:

• Revenues for the three months ended July 31, 2011 increased $9.4 million, or 5.8%, to $172.7 million, from $163.3 million for the three months ended July 31, 2010. Excluding currency fluctuations, revenues for the three months ended July 31, 2011 would have been approximately 0.2% higher than the same period of prior year.

• Loss before discontinued operations for the three months ended July 31, 2011 was $0.5 million, compared to a loss before discontinued operations of $3.0 million for the three months ended July 31, 2010.

• Adjusted EBITDA for the three months ended July 31, 2011 decreased $11.8 million, or 49.8%, to $11.9 million, from $23.7 million for the three months ended July 31, 2010.

• Revenues for the nine months ended July 31, 2011 increased $24.9 million, or 5.0%, to $518.4 million, from $493.5 million for the nine months ended July 31, 2010. Excluding currency fluctuations, revenues for the nine months ended July 31, 2011 would have been approximately 3.7% higher than the same period of prior year.

• Loss before discontinued operations for the nine months ended July 31, 2011 was $10.9 million, compared to a loss before discontinued operations of $2.4 million for the nine months ended July 31, 2010.

• Adjusted EBITDA for the nine months ended July 31, 2011 decreased $7.3 million, or 11.6%, to $55.8 million, from $63.1 million for the nine months ended July 31, 2010.

• On September 8, 2011, our board of directors reviewed and approved our new corporate strategy which includes, among other things, assessing strategic options for the Swindon commercial operation and the Burlington, Ontario facility, accelerating our operational excellence programs for our CMO and PDS segments, and continuing the evolution of our existing commercial sites into centers of excellence focusing on specific technologies or production types. In addition, we are in the process of transferring our Zug, Switzerland European Headquarter operations to our U.K. operations. We expect these initiatives will reduce costs and make our company more efficient over the next several years.

• On May 19, 2011, we settled an on-going insurance claim covering all current and future costs associated with water damage at our Swindon, U.K. facility for approximately $16.0 million. We recorded a settlement receivable of

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approximately $2.4 million against cost of goods sold in the fourth quarter of fiscal 2010, which was subsequently received in the first quarter of fiscal 2011. In the second quarter of fiscal 2011, we recorded an additional $2.6 million as a settlement receivable against cost of goods sold. In the third quarter of fiscal 2011, we received the final payout from the settlement of approximately $13.6 million. A portion of the settlement was used to offset capital expenditures and accrue for future remediation liabilities, with the remaining $6.0 million 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.

• On February 7, 2011, James C. Mullen was appointed as our Chief Executive Officer (“CEO”), and a member of our Board.

• In December 2010, we amended a manufacturing and supply agreement with a major customer, in which both parties agreed to a contract termination date in February 2011, approximately two and a half years earlier than was originally planned. The amendment reflected the customer’s decision not to proceed with a product following receipt of a Complete Response letter from the FDA. As part of the amendment, the customer agreed to pay us a reservation fee of €21.6 million, and as a result of the shortened contract life, we accelerated the related deferred revenue recognition and were relieved of the obligation to repay certain customer-funded capital related to the original manufacturing and supply agreement.

• On November 30, 2010, Wesley P. Wheeler, our then President and Chief Executive Officer, left our company. We accrued approximately $1.4 million in the first quarter of fiscal 2011 for severance payments due to Mr. Wheeler under his employment agreement.

Opportunities and Trends

Our target markets include the highly fragmented global market for the manufacture of finished pharmaceutical dosage forms and for PDS. According to PharmSource, a provider of pharmaceutical outsourcing business information, the CMO market totaled $11.7 billion in 2010, and could experience marginal growth of roughly 1% (in conservative scenarios) to as much as 3% - 5% annually during 2011 to 2015. PharmSource also estimates that the outsourced PDS market totaled approximately $1.3 billion in 2010, with growth projections in the 2011 to 2015 period approaching 3% annually. We are one of only a few industry participants that can provide a broad range of CMO and PDS services.

Pharmaceutical outsourcing service providers have faced challenges in recent years due to the uncertain economic environment. In the research and development area, emerging pharmaceutical companies have faced funding uncertainties due to limited access to capital, and many larger companies have decreased or delayed product development spending due to uncertainties surrounding industry consolidation, overall market weakness and the regulatory approval environment. As a result, decision-making related to the awarding of new outsourcing projects has slowed during recent years for similar reasons.

Puerto Rico Operations

We closed our Carolina facility in Puerto Rico effective January 31, 2009. In the second half of 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 nine months ended July 31, 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 current expectations with respect to the Caguas facility assumes completion of a sale during fiscal 2012 for a purchase price of approximately $7.0 million. In conjunction with this estimate the company booked an impairment charge of $3.6 million in fiscal 2010. The consolidation results in additional accelerated depreciation of Caguas assets of approximately $12.0 million by the end of the project. Because the business in our Caguas facility is being transferred within the existing site network, its results of operations are included in continuing operations in our consolidated financial statements.

As a result of the additional time required to fully transition manufacturing operations from Caguas to Manati due to longer than expected customer regulatory timelines and higher product demand, we now expect the transition to continue beyond the end of calendar year 2012. As a result of the additional time required to complete the transition, we now estimate that the restructuring program will cost $11.5 million, of which $10.2 million has been booked as of July 31, 2011.

Results of Operations

The results of the Carolina operations have been segregated and reported as discontinued operations for the three and nine months ended July 31, 2011 and 2010.

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Three Months Ended July 31, 2011 Compared to Three Months Ended July 31, 2010

	Three months ended July 31,
	2011			2010			$			%
(in millions of U.S. dollars)	$			$			Change			Change
Revenues		172.7			163.3			9.4			5.8
Cost of goods sold		145.3			128.9			16.4			12.7
Gross profit		27.4			34.4			(7.0	)		20.3
Selling, general and administrative expenses		31.7			26.1			5.6			21.5
Repositioning expenses		1.9			2.4			(0.5	)		20.8
Operating (loss) income		(6.2	)		5.9			(12.1	)		205.1
Interest expense, net		6.3			6.3			—			—
Impairment charge		—			2.1			(2.1	)		100.0
Foreign exchange gain		(3.6	)		(2.2	)		1.4			63.6
Gain on sale of fixed assets		(0.1	)		—			(0.1	)		—
Refinancing Expenses		—			0.3			(0.3	)		100.0
Other (income) expense, net		(5.6	)		0.4			6.0			1,500.0
Loss from continuing operations before income taxes		(3.2	)		(1.0	)		(2.2	)		220.0
(Benefit from) provision for income taxes		(2.7	)		2.0			4.7			235.0
Loss before discontinued operations		(0.5	)		(3.0	)		2.5			83.3
Loss from discontinued operations		(0.2	)		—			0.2			—
Net loss attributable to restricted voting shareholders		(0.7	)		(3.0	)		2.3			76.7

Operating Income Summary

Revenues for the three months ended July 31, 2011 increased $9.4 million, or 5.8%, to $172.7 million, from $163.3 million for the three months ended July 31, 2010. Excluding currency fluctuations, revenues for the three months ended July 31, 2011 would have been approximately 0.2% higher than the same period of prior year. CMO revenues for the three months ended July 31, 2011 increased $8.5 million, or 6.5%, to $138.7 million, from $130.2 million for the three months ended July 31, 2010. PDS revenues for the three months ended July 31, 2011 also increased $0.9 million, or 2.7%, to $34.0 million, from $33.1 million for the three months ended July 31, 2010.

Gross profit for the three months ended July 31, 2011 decreased $7.0 million, or 20.3%, to $27.4 million, from $34.4 million for the three months ended July 31, 2010. The decrease in gross profit was primarily due to a decrease in gross profit margin to 15.9% for the three months ended July 31, 2011 from 21.1% for the three months ended July 31, 2010. The decrease in gross profit margin was primarily due to unfavorable foreign exchange related to the weakening of the U.S. dollar (-3.9%), higher supplies and maintenance (-1.7%) and a reduction of take or pay revenue in the United Kingdom (-1.7%), partially offset by prior years’ research and development investment tax credits in the quarter (0.8%), and the impact of higher volumes.

Selling, general and administrative expenses for the three months ended July 31, 2011 increased $5.6 million, or 21.5%, to $31.7 million, from $26.1 million for the three months ended July 31, 2010. The increase was primarily due to higher consulting fees related to our strategic and operational review and higher compensation expense. The unfavorable foreign exchange impact on selling, general and administrative expenses versus prior year is approximately $1.9 million.

Repositioning expenses for the three months ended July 31, 2011 decreased $0.5 million, or 20.8%, to $1.9 million, from $2.4 million for the three months ended July 31, 2010. The decrease was due to lower expenses in connection with the Caguas closure and consolidation in Puerto Rico.

Operating (loss) income for the three months ended July 31, 2011 decreased $12.1 million, or 205.1%, to a loss of $6.2 million (3.6% of revenues), from income of $5.9 million (3.6% of revenues) for the three months ended July 31, 2010 as a result of the factors discussed above.

Foreign Exchange Gains

Foreign exchange gain for the three months ended July 31, 2011 was $3.6 million, compared to $2.2 million for the three months ended July 31, 2010. The foreign exchange gain was primarily due to favorable hedging contracts in the Canadian operations and operating exposures. The favorable hedging contracts resulted in gains of $1.7 million for the three months ended July 31, 2011 compared to gains of $1.0 million for the three months ended July 31, 2010.

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Refinancing Expenses

During the three months ended July 31, 2010, we incurred $0.3 million in connection with our refinancing activities, which included fees paid to advisors and other related costs.

Other (Income) Expense, Net

Other income for the three months ended July 31, 2011 was $5.6 million, compared to expenses of $0.4 million for the three months ended July 31, 2010. The increase of other income was primarily due to the final payout from the settlement of the insurance claim associated with water damage at our Swindon, U.K. facility, of which $6.0 million was recorded in other income.

Loss from Continuing Operations Before Income Taxes

We reported a loss from continuing operations before income taxes of $3.2 million for the three months ended July 31, 2011, compared to $1.0 million for the three months ended July 31, 2010. The operating items discussed above were the primary drivers of the year over year variance.

Income Taxes

Income taxes were a benefit of $2.7 million for the three months ended July 31, 2011, compared to an expense of $2.0 million for the three months ended July 31, 2010. The decrease in tax expense was primarily due to the mix of income and loss from our operating units.

Loss before Discontinued Operations and Loss Per Share from Continuing Operations

We recorded a loss before discontinued operations for the three months ended July 31, 2011 of $0.5 million, compared to a loss before discontinued operations of $3.0 million for the three months ended July 31, 2010. The loss per share from continuing operations for the three months ended July 31, 2011 was 0.4¢ compared to a loss of 2.3¢ for the three months ended July 31, 2010.

Loss and Loss Per Share from Discontinued Operations

Discontinued operations for the three months ended July 31, 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 and plant consolidations.” The loss from discontinued operations for the three months ended July 31, 2011 was $0.2 million, or 0.2¢ per share, compared to a loss of less than $0.1 million, or 0.0¢ per share, for the three months ended July 31, 2010. On-going costs of discontinued operations relate to maintaining the Carolina building for sale.

Net Loss Attributable to Restricted Voting Shareholders and Loss Per Share

Net loss attributable to restricted voting shares for the three months ended July 31, 2011 was $0.7 million, or 0.6¢ per share, compared to a net loss of $3.0 million, or 2.3¢ per share, for the three months ended July 31, 2010.

The computation of net loss per share did not include 12,725,924 and 8,333,928 outstanding options in the nine months ended July 31, 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 loss, refinancing expenses, gains and losses on sale of fixed assets, gain on extinguishment of debt, income taxes, asset impairment charges, depreciation and amortization and other income and expenses. “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.

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

	Three months ended July 31,						Nine months ended July 31,
	2011			2010			2011			2010
	$			$			$			$
Adjusted EBITDA		11.9			23.7			55.8			63.1
Depreciation and amortization		(12.6	)		(13.2	)		(40.8	)		(39.5	)
Repositioning expenses		(1.9	)		(2.4	)		(3.4	)		(5.8	)
Interest expense, net		(6.3	)		(6.3	)		(18.9	)		(13.2	)
Impairment charge		—			(2.1	)		—			(3.4	)
Gain (loss) on sale of fixed assets		0.1			—			(0.1	)		(0.1	)
Refinancing expenses		—			(0.3	)		—			(12.0	)
Benefit from (provision for) income taxes		2.7			(2.0	)		(8.6	)		8.4
Other income (expense), net		5.6			(0.4	)		5.1			0.1
Loss before discontinued operations		(0.5	)		(3.0	)		(10.9	)		(2.4	)

The following provides certain information regarding our business segments for the three months ended July 31, 2011 and 2010:

	Three months ended July 31,
	2011			2010			$			%
(in millions of U.S. dollars)	$			$			Change			Change
Revenues
Commercial Manufacturing
North America		72.9			62.7			10.2			16.3
Europe		65.8			67.5			(1.7	)		2.5
Total Commercial Manufacturing		138.7			130.2			8.5			6.5
Pharmaceutical Development Services		34.0			33.1			0.9			2.7
Total Revenues		172.7			163.3			9.4			5.8
Adjusted EBITDA
Commercial Manufacturing
North America		9.3			6.6			2.7			40.9
Europe		2.2			11.3			(9.1	)		80.5
Total Commercial Manufacturing		11.5			17.9			(6.4	)		35.8
Pharmaceutical Development Services		9.3			11.3			(2.0	)		17.7
Corporate Costs		(8.9	)		(5.5	)		3.4			61.8
Total Adjusted EBITDA		11.9			23.7			(11.8	)		49.8

Commercial Manufacturing

Total CMO revenues for the three months ended July 31, 2011 increased $8.5 million, or 6.5%, to $138.7 million, from $130.2 million for the three months ended July 31, 2010. Had local currency exchange rates remained constant to the rates of the three months ended July 31, 2010, CMO revenues for the three months ended July 31, 2011 would have been approximately 0.2% higher than the same period of prior year.

North American CMO revenues for the three months ended July 31, 2011 increased $10.2 million, or 16.3%, to $72.9 million, from $62.7 million for the three months ended July 31, 2010. Had Canadian dollar exchange rates remained constant to the rates of the three months ended July 31, 2010, North American CMO revenues for the three months ended July 31, 2011 would have been approximately 15.6% higher than the same period of prior year. The increase was primarily due to new product launch volumes in Cincinnati, higher volumes in Toronto and increased worldwide demand for a customer’s product manufactured in our Puerto Rico facility.

European CMO revenues for the three months ended July 31, 2011 decreased $1.7 million, or 2.5%, to $65.8 million, from $67.5 million for the three months ended July 31, 2010. Had European currency exchange rates remained constant to the rates of the three months ended July 31, 2010, European CMO revenues for the three months ended July 31, 2011 would have been approximately 14.1% lower than the same period of prior year. The decrease was primarily due to the non-recurrence of take or pay revenue from the United Kingdom and lower current quarter sales in France and Italy.

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Total CMO Adjusted EBITDA for the three months ended July 31, 2011 decreased $6.4 million, or 35.8%, to $11.5 million, from $17.9 million for the three months ended July 31, 2010. This represents an Adjusted EBITDA margin of 8.3% for the three months ended July 31, 2011 compared to 13.7% for the three months ended July 31, 2010. Had local currency exchange rates remained constant to the rates of the three months ended July 31, 2010 rates and after eliminating the impact of all foreign exchange gains and losses, CMO Adjusted EBITDA for the three months ended July 31, 2011 would have been approximately $0.5 million lower than reported.

North American Adjusted EBITDA for the three months ended July 31, 2011 increased $2.7 million, or 40.9%, to $9.3 million, from $6.6 million for the three months ended July 31, 2010. The increase was primarily driven by a $2.7 million Adjusted EBITDA improvement in Puerto Rico, improvements in Cincinnati of $0.8 million from a prior year R&D credit recorded in the third quarter of fiscal 2011 and foreign exchange gains of $0.5 million, partially offset by lower volumes in Whitby. North American CMO had $1.9 million in repositioning relating to the Puerto Rican operations in the three months ended July 31, 2011 that were not included in Adjusted EBITDA.

European Adjusted EBITDA for the three months ended July 31, 2011 decreased $9.1 million, or 80.5%, to $2.2 million, from $11.3 million for the three months ended July 31, 2010. This decrease was primarily due to top line weakness in the United Kingdom and France. European CMO has $6.0 million in insurance proceeds relating to U.K. operations that was recorded in other income and was not included in Adjusted EBITDA.

Pharmaceutical Development Services

Total PDS revenues for the three months ended July 31, 2011 increased by $0.9 million, or 2.7%, to $34.0 million, from $33.1 million for the three months ended July 31, 2010. Had the local currency rates remained constant to the three months ended July 31, 2010, PDS revenues for the three months ended July 31, 2011 would have been 0.3% lower than the same period of prior year.

Total PDS Adjusted EBITDA for the three months ended July 31, 2011 decreased by $2.0 million, or 17.7%, to $9.3 million, from $11.3 million for the three months ended July 31, 2010. Had local currencies remained constant to the rates of the three months ended July 31, 2010 and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA for the three months ended July 31, 2011 would have been approximately $0.4 million higher than reported. PDS Adjusted EBITDA for the three months ended July 31, 2011 included $0.7 million of prior years’ research and development investment tax credits compared to $2.8 million in the same period of fiscal 2010. In addition, lower than expected sales at certain sites resulting from project cancellations during the second quarter of fiscal 2011 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 July 31, 2011 increased $3.4 million, or 61.8%, to $8.9 million, from $5.5 million for the three months ended July 31, 2010 primarily due to higher consulting fees related to our strategic and operational review and higher compensation expense.

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Nine Months Ended July 31, 2011 Compared to Nine Months Ended July 31, 2010

	Nine months ended July 31,
	2011			2010			$			%
(in millions of U.S. dollars)	$			$			Change			Change
Revenues		518.4			493.5			24.9			5.0
Cost of goods sold		416.1			391.3			24.8			6.3
Gross profit		102.3			102.2			0.1			0.1
Selling, general and administrative expenses		84.3			82.1			2.2			2.7
Repositioning expenses		3.4			5.8			(2.4	)		41.4
Operating income		14.6			14.3			0.3			2.1
Interest expense, net		18.9			13.2			5.7			43.2
Impairment charge		—			3.4			(3.4	)		100.0
Foreign exchange loss (gain)		3.2			(3.5	)		(6.7	)		191.4
Loss on sale of fixed assets		0.1			0.1			—			—
Refinancing Expenses		—			12.0			(12.0	)		100.0
Other (income) expense, net		(5.3	)		(0.1	)		5.2			5,200.0
Loss from continuing operations before income taxes		(2.3	)		(10.8	)		8.5			78.7
Provision for (benefit from) income taxes		8.6			(8.4	)		(17.0	)		202.4
Loss before discontinued operations		(10.9	)		(2.4	)		(8.5	)		354.2
Loss from discontinued operations		(0.5	)		(0.8	)		(0.3	)		37.5
Net loss attributable to restricted voting shareholders		(11.4	)		(3.2	)		(8.2	)		256.3

Operating Income Summary

Revenues for the nine months ended July 31, 2011 increased $24.9 million, or 5.0%, to $518.4 million, from $493.5 million for the nine months ended July 31, 2010. Excluding currency fluctuations, revenues for the nine months ended July 31, 2011 would have been approximately 3.7% higher than the same period of prior year. CMO revenues for the nine months ended July 31, 2011 increased $25.3 million, or 6.3%, to $425.8 million, from $400.5 million for the nine months ended July 31, 2010. PDS revenues for the nine months ended July 31, 2011 decreased $0.4 million, or 0.4%, to $92.6 million, from $93.0 million for the nine months ended July 31, 2010.

Gross profit for the nine months ended July 31, 2011 increased $0.1 million, or 0.1%, to $102.3 million, from $102.2 million for the nine months ended July 31, 2010. The increase in gross profit was due to higher revenue partially offset by a decrease in gross profit margin to 19.7% for the nine months ended July 31, 2011 from 20.7% for the nine months ended July 31, 2010. The decrease in gross profit margin was due to unfavorable foreign exchange impact on cost of goods sold related to the weakening of the U.S. dollar (-1.8%), increase in supplies and maintenance (-1.2%), increase in inventory reserves (-0.5%), increased depreciation expenses from accelerated depreciation in Puerto Rico (-0.6%) and the impact of prior years’ research and development investment tax credits (-1.0%), partially offset by favorable mix resulting from the reservation fee related to the amended manufacturing and supply agreement in the United Kingdom and higher deferred revenue amortization at our Swindon facility.

Selling, general and administrative expenses for the nine months ended July 31, 2011 increased $2.2 million, or 2.7%, to $84.3 million, from $82.1 million for the nine months ended July 31, 2010. The increase was primarily due to higher legal and consulting fees of $2.4 million, higher costs related to the former CEO’s severance of $1.1 million and higher stock based compensation of $1.1 million, partially offset by costs associated with the special committee of independent directors (the “Special Committee”) of $3.0 million for the nine months ended July 31, 2010. Included in the numbers above was an unfavorable foreign exchange impact versus prior year of approximately $2.6 million.

Repositioning expenses for the nine months ended July 31, 2011 decreased $2.4 million, or 41.4%, to $3.4 million, from $5.8 million for the nine months ended July 31, 2010. The decrease was due to lower expenses in connection with the Caguas closure and consolidation in Puerto Rico during the nine months ended July 31, 2011 compared to the nine months ended July 31, 2010, as the prior period included the initial project accruals.

Operating income for the nine months ended July 31, 2011 increased $0.3 million, or 2.1%, to $14.6 million (2.8% of revenues), from $14.3 million (2.9% of revenues) for the nine months ended July 31, 2010 as a result of the factors discussed above.

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Interest Expense

Interest expense for the nine months ended July 31, 2011 increased $5.7 million, or 43.2%, to $18.9 million, from $13.2 million for the nine months ended July 31, 2010. The increase in interest expense primarily reflects the higher interest rates on the Notes versus the rates of our previous debt, as well as overall higher debt levels.

Impairment Charge

During the nine months ended July 31, 2010, we recorded an impairment charge of $3.4 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 nine months ended July 31, 2011 was $3.2 million, compared to a gain of $3.5 million for the nine months ended July 31, 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 in the Canadian operations during the nine months ended July 31, 2011. Prior year gains were primarily from hedging and operational exposure.

Refinancing Expenses

During the nine months ended July 31, 2010, we incurred expenses of $12.0 million in connection with our refinancing activities, which included fees paid to advisors and other related costs.

Other (Income) Expense, Net

Other income for the nine months ended July 31, 2011 was $5.3 million, compared to $0.1 million for the nine months ended July 31, 2010. The increase of other income was primarily due to the final payout from the settlement of the insurance claim associated with water damage at our Swindon, U.K. facility, of which $6.0 million was recorded in other income.

Loss from Continuing Operations Before Income Taxes

We reported a loss from continuing operations before income taxes of $2.3 million for the nine months ended July 31, 2011, compared to a loss of $10.8 million for the nine months ended July 31, 2010. The $12.0 million of refinancing expenses during the nine months ended July 31, 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 $8.6 million for the nine months ended July 31, 2011, compared to a benefit of $8.4 million for the nine months ended July 31, 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 before Discontinued Operations and Loss Per Share from Continuing Operations

We recorded a loss before discontinued operations for the nine months ended July 31, 2011 of $10.9 million, compared to a loss before discontinued operations of $2.4 million for the nine months ended July 31, 2010. The loss per share from continuing operations for the nine months ended July 31, 2011 was 8.4¢ compared to a loss per share of 1.9¢ for the nine months ended July 31, 2010.

Loss and Loss Per Share from Discontinued Operations

Discontinued operations for the nine months ended July 31, 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 nine months ended July 31, 2011 was $0.5 million, or 0.4¢ per share, compared to a loss of $0.8 million, or 0.6¢ per share, for the nine months ended July 31, 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 nine months ended July 31, 2011 increased $8.2 million, to $11.4 million, or 8.8¢ per share, from $3.2 million, or 2.5¢ per share, for the nine months ended July 31, 2010. Because we reported a loss for the nine months ended July 31, 2011 and 2010, there is no impact of dilution.

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Revenues and Adjusted EBITDA by Business Segment

	Nine months ended July 31,
	2011			2010			$			%
(in millions of U.S. dollars)	$			$			Change			Change
Revenues
Commercial Manufacturing
North America		197.8			187.4			10.4			5.5
Europe		228.0			213.1			14.9			7.0
Total Commercial Manufacturing		425.8			400.5			25.3			6.3
Pharmaceutical Development Services		92.6			93.0			(0.4	)		0.4
Total Revenues		518.4			493.5			24.9			5.0
Adjusted EBITDA
Commercial Manufacturing
North America		11.0			13.6			(2.6	)		19.1
Europe		53.1			32.1			21.0			65.4
Total Commercial Manufacturing		64.1			45.7			18.4			40.3
Pharmaceutical Development Services		20.0			35.8			(15.8	)		44.1
Corporate Costs		(28.3	)		(18.4	)		9.9			53.8
Total Adjusted EBITDA		55.8			63.1			(7.3	)		11.6

Commercial Manufacturing

Total CMO revenues for the nine months ended July 31, 2011 increased $25.3 million, or 6.3%, to $425.8 million, from $400.5 million for the nine months ended July 31, 2010. Had local currency exchange rates remained constant to the rates of the nine months ended July 31, 2010, CMO revenues for the nine months ended July 31, 2011 would have been approximately 4.9% higher than the same period of prior year.

North American CMO revenues for the nine months ended July 31, 2011 increased $10.4 million, or 5.5%, to $197.8 million, from $187.4 million for the nine months ended July 31, 2010. Had Canadian dollar exchange rates remained constant to the rates of the nine months ended July 31, 2010, North American CMO revenues for the nine months ended July 31, 2011 would have been approximately 5.1% higher than the same period of prior year. The increase was primarily due to new product launch volumes in Cincinnati, higher volumes in Toronto and increased worldwide demand for a customer’s product manufactured in our Puerto Rico facility.

European CMO revenues for the nine months ended July 31, 2011 increased $14.9 million, or 7.0%, to $228.0 million, from $213.1 million for the nine months ended July 31, 2010. Had European currencies remained constant to the rates of the nine months ended July 31, 2010, European CMO revenues for the nine months ended July 31, 2011 would have been approximately 4.8% higher than the same period of prior year. The increase was primarily due to higher revenues in the United Kingdom from the reservation fee related to the amended manufacturing and supply agreement and accelerated deferred revenue versus take-or-pay revenue in the prior year, partially offset by lower revenues across other sites.

Total CMO Adjusted EBITDA for the nine months ended July 31, 2011 increased $18.4 million, or 40.3%, to $64.1 million, from $45.7 million for the nine months ended July 31, 2010. This represents an Adjusted EBITDA margin of 15.1% for the nine months ended July 31, 2011 compared to 11.4% for the nine months ended July 31, 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 nine months ended July 31, 2011 would have been approximately $6.1 million higher.

North American Adjusted EBITDA for the nine months ended July 31, 2011 decreased $2.6 million, or 19.1%, to $11.0 million, from $13.6 million for the nine months ended July 31, 2010. The decrease was primarily driven by Cincinnati due to prior year recognition of accelerated deferred revenue of $4.2 million, and foreign exchange losses of $4.1 million as a result of the weakening of the U.S. dollar against the Canadian dollar. These were partially offset by a $4.6 million Adjusted EBITDA improvement in Puerto Rico and higher volumes in Toronto. North American CMO had $3.4 million in repositioning relating to the Puerto Rican operations in the nine months ended July 31, 2011 that were not included in Adjusted EBITDA.

European Adjusted EBITDA for the nine months ended July 31, 2011 increased $21.0 million, or 65.4%, to $53.1 million, from $32.1 million for the nine months ended July 31, 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,

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partially offset by lower revenue across other European sites. European CMO has $6.0 million in insurance proceeds relating to the U.K. operations that was recorded in other income and was not included in Adjusted EBITDA.

Pharmaceutical Development Services

Total PDS revenues for the nine months ended July 31, 2011 decreased by $0.4 million, or 0.4%, to $92.6 million, from $93.0 million for the nine months ended July 31, 2010. Had the local currency rates remained constant to the nine months ended July 31, 2010, PDS revenues for the nine months ended July 31, 2011 would have decreased approximately 1.5% from the same period of fiscal 2010.

Total PDS Adjusted EBITDA for the nine months ended July 31, 2011 decreased by $15.8 million, or 44.1%, to $20.0 million, from $35.8 million for the nine months ended July 31, 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 nine months ended July 31, 2011 would have been approximately $1.7 million higher than reported. PDS Adjusted EBITDA for the nine months ended July 31, 2011 includes $1.4 million of research and development investment tax credits compared to $7.2 million in the same period of fiscal 2010. In addition, lower than expected sales at certain sites resulting from project cancellations related to customer regulatory approvals, clinical trial outcome issues, and industry consolidation contributed to the reduction in Adjusted EBITDA.

Corporate Costs

Corporate costs for the nine months ended July 31, 2011 increased $9.9 million, or 53.8%, to $28.3 million, from $18.4 million for the nine months ended July 31, 2010. The increase was primarily due to unfavorable foreign exchange of $5.2 million, $2.4 million of higher advisor fees due to registration with the SEC and corporate strategy initiatives, expenses related to the change in our CEO of $2.0 million and higher compensation expenses. These were partially offset by the non-recurrence of $3.0 million in Special Committee costs booked in fiscal 2010.

Liquidity and Capital Resources

Overview

Cash and cash equivalents totaled $39.5 million at July 31, 2011 and $53.5 million at October 31, 2010. Our total debt was $275.5 million at July 31, 2011 and $278.3 million at October 31, 2010.

Our primary source of liquidity is cash flow from operations. Historically, we have also used availability under 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 ABL 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 July 31,						Nine months ended July 31,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Cash provided by (used in) operating activities of continuing operations		11.5			(6.0	)		12.2			39.9
Cash (used in) provided by operating activities of discontinued operations		(0.1	)		0.3			(0.5	)		(0.8	)
Cash provided by (used in) operating activities		11.4			(5.7	)		11.7			39.1
Cash used in investing activities of continuing operations		(10.1	)		(13.5	)		(30.9	)		(34.0	)
Cash provided by (used in) financing activities		3.3			3.4			(0.1	)		33.4
Other		(4.4	)		(3.0	)		5.3			(3.8	)
Net increase (decrease) in cash and cash equivalents during the period		0.2			(18.8	)		(14.0	)		34.7

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Cash Provided by (Used in) Operating Activities

Cash provided by operating activities from continuing operations for the three months ended July 31, 2011 increased $17.5 million to cash provided of $11.5 million, from a cash usage of $6.0 million for the three months ended July 31, 2010. The increase includes $12.0 million from the insurance claim settlement received in the third quarter of fiscal 2011, an increase in deferred revenue (customer funding for capital) in Cincinnati of $3.8 million and better usage of working capital from higher payables partially offset by receivables. These were partially offset by a voluntary pension contribution in the United Kingdom of $4.9 million and lower cash generated from operations.

Cash provided by operating activities from continuing operations for the nine months ended July 31, 2011 decreased $27.7 million, or 69.4%, to $12.2 million, from $39.9 million for the nine months ended July 31, 2010. Prior year cash contributions included take or pay receipts in our Swindon operations of $53.1 million versus $29.3 million received from the reservation fee related to the amended manufacturing and supply agreement in the United Kingdom in fiscal 2011. The nine months ended July 31, 2011 also included $3.4 million of higher working capital expenditures, the previously disclosed voluntary pension contribution in the U.K., and lower cash from operations, partially offset by $14.0 million from the insurance claim settlement.

Cash (used in) provided by operating activities from discontinued operations for the three months ended July 31, 2011 decreased $0.4 million, or 133.3%, to a cash usage of $0.1 million, from a cash source of $0.3 million for the three months ended July 31, 2010. The increase in cash outflow for the three months ended July 31, 2011 was due to costs related to the utilities, insurance and maintenance of the Carolina facility while it is in the process of being sold and the cash proceeds from a license sale of intellectual property in Puerto Rico in the nine months ended July 31, 2010.

Cash used in operating activities from discontinued operations for the nine months ended July 31, 2011 decreased $0.3 million, or 37.5%, to $0.5 million, from $0.8 million for the nine months ended July 31, 2010. The decrease in cash outflow for the nine months ended July 31, 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 July 31,						Nine months ended July 31,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Total additions to capital assets		(10.2	)		(13.5	)		(31.2	)		(32.9	)
Proceeds on sale of capital assets		0.1			—			0.3			—
Net increase in investments		—			—			—			(0.9	)
Investment in intangibles		—			—			—			(0.2	)
Cash used in investing activities of continuing operations		(10.1	)		(13.5	)		(30.9	)		(34.0	)
Cash used in investing activities		(10.1	)		(13.5	)		(30.9	)		(34.0	)

Cash used in investing activities from continuing operations for the three months ended July 31, 2011 decreased $3.4 million, or 25.2%, to $10.1 million, from $13.5 million for the three months ended July 31, 2010. The decrease is primarily due to lower capital expenditures in Puerto Rico and recovery of capital expenditures from the insurance settlement in the United Kingdom, partially offset by client project related capital expenditures in Cincinnati.

Cash used in investing activities from continuing operations for the nine months ended July 31, 2011 decreased $3.1 million, or 9.1%, to $30.9 million, from $34.0 million for the nine months ended July 31, 2010. The decrease was primarily due to lower capital expenditures in Puerto Rico in fiscal 2011 and the non-recurrence of cash contributions in two Italian companies (BSP Pharmaceuticals) in fiscal 2010, partially offset by higher client project related capital expenditures in Cincinnati.

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.

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Cash Provided by (Used in) Financing Activities

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

	Three months ended July 31,						Nine months ended July 31,
	2011			2010			2011			2010
(in millions of U.S. dollars)	$			$			$			$
Increase (decrease) in short-term borrowings		3.5			3.5			1.3			(9.1	)
Increase in long-term debt		6.0			2.0			6.0			288.9
Repayment of long-term debt		(6.2	)		(2.1	)		(7.4	)		(246.4	)
Cash provided by (used in) financing activities of continuing operations		3.3			3.4			(0.1	)		33.4
Cash provided by (used in) financing activities		3.3			3.4			(0.1	)		33.4

Cash provided by financing activities for the three months ended July 31, 2011 was $3.3 million compared to cash provided of $3.4 million for the three months ended July 31, 2010.

Cash (used in) provided by financing activities for the nine months ended July 31, 2011 decreased $33.5 million, or 100.3%, to a cash usage of $0.1 million, from a source of cash of $33.4 million for the nine months ended July 31, 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.

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$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.

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Financing Ratios

Total interest-bearing debt at July 31, 2011 was $275.5 million, $2.8 million lower than at October 31, 2010. At July 31, 2011, our consolidated ratio of interest-bearing debt to shareholders’ equity was 94.8%, 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 12—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; implementation of our new corporate strategy; the global economic environment; our exposure to complex production issues; our substantial financial leverage; interest rate risks; potential environmental, health and safety liabilities; credit and customer concentration; competition; rapid technological change; product liability claims; intellectual property; significant shareholder; supply arrangements; pension plans; derivative financial instruments; and our dependence upon key management, scientific and technical personnel. These and other risks are described in greater detail in “Item 1A. Risk Factors” of this Form 10-Q and 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.

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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, U. S. dollars 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 nine months ended July 31, 2011, approximately 90% of the revenues and 10% 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 $8.9 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 July 31, 2011, we had entered into 126 foreign exchange forward contracts and collars covering approximately 80% 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 2013 and have an aggregate fair value of $121.5 million. As of July 31, 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 $12.2 million.

Interest Rate Risk

As of July 31, 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 July 31, 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.

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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 or third quarters 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.

Failure to successfully implement our new corporate strategy or realize the expected benefits from this strategy could adversely affect our business and results of operations.

Our Board of Directors recently reviewed and approved a new corporate strategy for our company that is focused on improving the performance of our core operations. This new corporate strategy includes, among other things, assessing our global footprint, accelerating our operational excellence programs for our CMO and PDS segments, and continuing the evolution of our existing commercial sites into centers of excellence that focus on specific technologies or production types.

We have incurred and will likely continue to incur expenses in connection with the design, review and implementation of our new corporate strategy, and these expenses may exceed our estimates, may be significant and could materially adversely impact our financial performance.

We have based the design of our new corporate strategy on certain assumptions regarding our business, markets, cost structures and customers. If our assumptions are incorrect, we may be unable to fully implement our new corporate strategy and, even if fully implemented, our new corporate strategy may not yield the benefits that we expect. For example, our new corporate strategy may involve the acquisition or disposition of assets, which we may not be able to consummate in a timely manner, on terms acceptable to us or at all, or which may not achieve the benefits or cost savings we anticipate. If we do not effectively manage our new corporate strategy, instead of resulting in growth for and enhanced value to our company, our new strategy may cause us to experience operational issues and expose us to operational and regulatory risk, each of which could have material adverse effects on our reputation, business, financial condition and results of operations.

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 5. Other Information

On June 9, 2011, the Compensation and Human Resources Committee of our Board of Directors (our “CHR Committee”) adopted the Patheon Group’s Leadership Incentive Plan (the “Leadership Incentive Plan”) to provide cash incentives for executive officers and certain other members of management for their contributions to our success.

Under the Leadership Incentive Plan, participants become eligible for bonus payouts based on the achievement of corporate and individual performance objectives. The CHR Committee approved the corporate performance objectives for each executive officer, the corporate performance objectives for other plan participants by functional area, and the individual performance objectives for our CEO. Individual performance objectives for executive officers other than our CEO were approved by our CEO, while those of plan participants other than executive officers were approved by the individual participant’s supervisor. Each particular performance objective has three possible levels of achievement (minimum, target and maximum) that correspond to three levels of payouts, ranging from 0% up to 175% (depending on the plan participant) of the target payout for that particular objective. Achievement between levels (e.g., between minimum and target) will be interpolated on a linear basis.

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Each participant’s target award is equal to his or her earned base pay (less certain benefit amounts), multiplied by the incentive target level, which level is determined on an individual basis as a percentage of base pay. Provided that all necessary conditions for payout have been met, each participant’s payout will equal the participant’s target award multiplied by the total achievement of the participant’s designated weighted objectives.

All payouts are contingent upon us achieving 90% of target Corporate 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 income and expenses, with additional adjustments for foreign currency exchange differences versus budgeted exchange rates and other one-time non-operating gains or losses. In addition, each individual’s payout is contingent upon such individual receiving threshold performance ratings.

The foregoing summary is qualified in its entirety by reference to the Leadership Incentive Plan, a copy of which is filed as Exhibit 10.1 to this quarterly report on Form 10-Q and is incorporated herein by reference.

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.

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SIGNATURES

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: September 9, 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

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EXHIBIT INDEX

		Incorporated by Reference
Exhibit Number	Description of Document	Form	Filing Date	Number	Filed Herewith
10.1	The Patheon Group’s Leadership Incentive Plan.					X
10.2	2011 Amended and Restated Incentive Stock Option Plan.					X
10.3	Employment Agreement between Patheon Pharmaceuticals Services Inc. and Michael E. Lytton effective May 9, 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

45

EX-10.1

Exhibit 10.1

The Patheon Group’s “Leadership” Incentive Plan

Overview

This Leadership Incentive Plan (this “Plan”) is designed to provide a financial incentive to Eligible Participants (as defined below) for their collective and individual contributions to the success of the Patheon Group during the Performance Period (as defined below), as measured through the achievement of assigned financial targets, key performance indicators and individual performance ratings. The “Patheon Group” means Patheon Inc. (“Patheon”) and any entity controlled by Patheon.

Key Plan Concepts

• Sustainable, profitable growth is our most important objective. One important measure of profitability is Earnings Before Income Taxes, Depreciation and Amortization (“EBITDA”). For purposes of this Plan, the Patheon Group utilizes an Adjusted EBITDA measure (please refer to Patheon’s 2010 Annual Report for a full description of “Adjusted EBITDA”) which is then further adjusted for foreign currency exchange differences versus budgeted exchange rates and other one-time non-operating gains or losses, at the discretion of management (“Corporate Adjusted EBITDA”). The Plan itself is eligible for payout only if the Corporate Adjusted EBITDA Threshold (as defined below) is achieved.

• This Plan is designed to reward corporate, regional, business unit and individual achievement IF the Corporate Adjusted EBITDA Threshold is achieved. Patheon’s overall success is the collective achievement of the businesses, sites, and Eligible Participants that make up the Patheon Group.

• Each of Patheon’s two businesses, PDS and Commercial, will have financial objectives and key performance indicators (“KPIs”) for its respective business and/or specific site location. Sites where both businesses exist will share in the success of the combined site.

• Eligible Participants in functions that support the PDS or Commercial business will be aligned to the business, site(s), and/or regions they support.

Tying pay to performance applies to each Eligible Participant by applying Component Thresholds (as defined below) to individual performance.

Key Plan Objectives

The objectives of this Plan include:

• Align performance with key measures of business success.

• Reward for controllable and collective efforts.

• Reward for efforts at the individual level.

• Provide a competitive variable pay program.

• Support the “One Patheon” initiative through a consistent, global program with a focus on the success of the Patheon Group as a whole.

Corporate Adjusted EBITDA Threshold and Component Thresholds

• This Plan will be paid from general assets of the company. However, no Incentive Payouts are payable under this Plan unless a minimum of ninety percent (90%) of planned Corporate Adjusted EBITDA (the “Corporate Adjusted EBITDA Threshold”) is achieved, regardless of how well a specific business, region, or site performs. Patheon reserves the right to withhold any and all Incentive Payouts if the Corporate

Adjusted EBITDA Threshold is not achieved or if this Plan’s payout is not authorized by the Compensation Committee.

• In the event that the Corporate Adjusted EBITDA Threshold is achieved (and this Plan’s payout is authorized by the Compensation Committee), the individual incentive payout to an Eligible Participant (each, an “Incentive Payout”) will be determined by calculating the applicable component of the Plan Option (as defined below) to which an Eligible Participant is assigned, as reflected in the table below (each such component, a “Component”).

• Each Component of this Plan has a specified minimum achievement threshold (each, a “Component Threshold”), a Target, and a Maximum, as noted in the tables below. No Incentive Payout will be made on any Component for which the applicable Component Threshold has not been achieved.

• The range of Incentive Payout under this Plan is 0% to 175% of the Target for each applicable Component, depending on the Component. In order for an Eligible Participant to be eligible for the Maximum level Incentive Payout for a Component, (i) achievement of all objectives with respect to a specified Component must equal or exceed the specified Maximum for such Component and (ii) the Eligible Participant must receive a performance rating of at least “Meets Expectations”

Plan Options & Components:

Each Eligible Participant will be assigned by management and HR to one of the following 14 plan options (each, a “Plan Option”):

By Business:

		Adjusted EBITDA													Key Performance Indicators								Other
Plan ID	Affiliation	Corporate		Global- Division		Region- Division			Country- Division			Site- Division			Global- Division		Region- Division		Country- Division		Site- Division		PDS New Business (Revenue)		Commercial Awards (Revenue)		Individual
Leadership (Non-EC)
L1	Global PDS		20%		30%											30%												20%
L2	Region PDS		10%		15%		25%											30%										20%
L3	Country PDS		10%		15%					25%										30%								20%
L4	Site PDS		10%		15%								25%									30%						20%
L5	Global Commercial		20%		30%											30%												20%
L6	Region Commercial		10%				40%											30%										20%
L7	Country Commercial		10%				15%			25%										30%								20%
L8	Site Commercial		10%				15%						25%									30%						20%
L9	Global Support		70%																									30%
L10	Region Support		20%				25%/25	%																				30%
L11	Country Support		20%							25%/25	%																	30%
L12	Site Support		20%										25%/25	%														30%
L13	Sales		30%																					25%		25%		20%
L14	Marketing		30%																					20%		20%		30%

For L13 & L14, PDS New Business and Commercial Awards may be specified by region, sub-region or other geographical affiliation at the discretion of the EVP, Sales & Marketing.

Performance and Payout Levels

Each level of achievement (i.e., Minimum, Target, and Maximum Achievements) has a corresponding level of Payout (i.e., Minimum, Target and Maximum Payouts) as indicated in the chart below. For example, Corporate Adjusted EBITDA achievement of 90% provides a Payout level of 50% and Corporate Adjusted EBITDA achievement of 120% or greater provides a payout of 175%.

		Commercial KPIs			PDS KPIs
	EBITDA	On-Time Delivery	Right First Time	Inventory Turns	Customer Satisfaction	Days Sales Outstanding	Billable Hours	Commercial Awards (Revenue)	PDS New Business (Revenue)	Individual
Achievement
Minimum	90%	85%	85%	3.0	80%	55	70%	90%	90%	50%
Target	100%	95%	95%	4.5	90%	50	80%	100%	100%	100%
Maximum	120%	100%	100%	6.0	95%	45	90%	120%	120%	100%
Payout
Minimum	50%	50%	50%	50%	50%	50%	50%	50%	50%	50%
Target	100%	100%	100%	100%	100%	100%	100%	100%	100%	100%
Maximum	175%	150%	150%	150%	150%	150%	150%	175%	175%	100%

Notes:

1. If the Corporate Adjusted EBITDA Threshold is not met, there will be no payouts under this Plan.

2. If the Component Threshold for any other Component is not met, there will be no payout for that Component.

3. Achievement between Minimum (i.e., a Component Threshold) and Target or between Target and Maximum is interpolated on a linear basis. For illustrative purposes: according to the table above, a 90% Achievement of Corporate Adjusted EBITDA would pay the specified minimum of 50% of the Payout for that Component. If there was a 95% Achievement of Corporate Adjusted EBITDA then the Payout would be 50% for reaching the specified Minimum plus 5.0% for each one percentage point of incremental achievement between Minimum and Target, for a total Payout of 75.0% (50% + 25%). This is calculated using the following formula: ((100% - 50%) / (100% - 90%)) * (95% - 90%) + 50%.

4. The achievement level of Individual Objectives are measured in the aggregate. No single Individual Objective shall have less than a 10% weight or an achievement level greater than 100%. Individual Objectives shall be captured in writing on the approved template and signed by the Eligible Participant and their immediate supervisor.

Note: An Eligible Participant with a performance rating of “NA” (Not Acceptable) will not be eligible to receive an Incentive Payout even if thresholds are met on financial and/or KPI targets. An Eligible Participant with a performance rating of “SME” (Sometimes Meets Expectations) could have any Incentive Payout reduced for not achieving at least a performance rating of “ME” (Meets Expectations). Performance ratings are subject to calibration across functions, businesses and geographies in order to ensure consistency, fairness and equity.

Payout Calculation:

** The Target Award is equal to Eligible Earnings multiplied by the incentive target level, which level is determined on an individual basis as a percentage of Eligible Earnings of the applicable Eligible Participant (the “Individual Incentive Target Level”).

For example:

• Eligible Participant assigned to Plan Option L8

• Eligible Participant works in Commercial business in Cincinnati

• Hypothetical eligible earnings of $150,000 USD

• Hypothetical Target of 30% ($45,000 USD)

• Assumes the Corporate Adjusted EBITDA Threshold of 90% has been achieved

• Assumes the Eligible Participant’s performance rating is at least an “ME – Meets Expectations”

Hypothetical Eligible Earnings		Hypothetical On-Target Bonus %		Hypothetical On-Target Bonus Amount		Weight		Bonus Target		Description	Hypothetical Achievement Level		Payout at Hypothetical Achievement Level		Total Payout
	$150,000		30.0%	$	45,000		10.0%	$	4,500.00	Corporate Adjusted EBITDA		120%		175%	$	7,875.00
							15.0%	$	6,750.00	Region-Division EBITDA (NA – Commercial)		90%		50%	$	3,375.00
							25.0%	$	11,250.00	Site (Cincinnati) – Division (Commercial) EBITDA		100%		100%	$	11,250.00
							10.0%	$	4,500.00	Site (Cincinnati) – Division (Commercial) KPI – On time delivery		90%		50%	$	2,250.00
							10.0%	$	4,500.00	Site (Cincinnati) – Division (Commercial) KPI – Right First Time		88%		0%		—
							10.0%	$	4,500.00	Site (Cincinnati) – Division (Commercial) KPI – Inventory Turns*		5 turns		116.5%	$	5,242.50
							20.0%	$	9,000.00	Individual Objectives		100%		100%	$	9,000.00
							100.0%	$	45,000.00						$	38,992.50
																86.7	%

* Inventory Turns: 5.0 (min 3, target 4.5, max 6.0) = 100% + 5*3.33% = 116.5%

Foreign Exchange Considerations

For the purposes of measuring financial performance to budget as required by any Component, local currencies will be used. Budget currency exchange rates will be used for converting forecasted and actual results to U.S. Dollars. Therefore, a constant exchange rate will be used throughout the Plan Year.

General Terms & Conditions of this Plan

Eligible Participants: This Plan is designed for active, full-time, management employees of members of the Patheon Group at the level of director (or regional equivalent) and above, whose participation has been nominated and approved by the employees’ supervisors and Human Resources, and who are not eligible under another incentive plan (“Eligible Participants”). This Plan does not apply to employees on “fixed term contracts” or who are otherwise ineligible based on the terms of their employment.

Payout Eligibility: Eligible Participants must meet each of the following conditions to be eligible for a payout under this Plan:

1) must have initiated employment with a member of the Patheon Group prior to August 1^st of the Plan Year (as defined below); and

2) be actively employed at the time of payout except in the following limited circumstances:

a. Approved Leaves of Absence: Eligible Participants on an approved leave of absence will remain eligible under this Plan only to the extent required by applicable law. The Incentive Payout, if any, will be based solely on Eligible

Earnings (as defined below) paid to the Eligible Participant during the Performance Period during which such Eligible Participant was not on any such leave of absence, except where applicable law requires otherwise. The Incentive Payout is payable only if the Corporate Adjusted EBITDA Threshold, and all Component Thresholds, including without limitation, individual performance multipliers, are achieved and all other requirements are met. Regarding the Individual Performance Multiplier, each Eligible Participant’s achievement will be assessed on a case-by-case basis and in the sole discretion of Patheon (or the applicable member of the Patheon Group), based solely on personal performance up to the last day on which the Eligible Participant actually worked. Any such Incentive Payouts made hereunder may be adjusted, giving consideration to (i) the effect of any such payout on the applicable Eligible Participant’s eligibility for disability payments or related income (or the amount thereof), and (ii) other applicable local laws or regulations. Any such Incentive Payouts made hereunder will only be made after the applicable Eligible Participant returns from any such approved leave of absence.

b. Retirement: For Plan purposes, “retirement” means the conclusion of employment with a member of the Patheon Group as may be defined in the specific retirement plan of the member of the Patheon Group that is the employer of the applicable Eligible Participant. The Incentive Payout, if any, for an Eligible Participant who retires during the Plan Year will be based solely on Eligible Earnings paid to such Eligible Participant during the Plan Year. The Incentive Payout will be payable only if the Corporate Adjusted EBITDA Threshold and the required Component Thresholds are met and the payout is approved by the Compensation Committee. Regarding the Individual Performance Mulitiplier, each Eligible Participant’s achievement will be assessed on an individual basis and in the sole discretion of Patheon (or the applicable member of the Patheon Group), based solely on personal performance up to the last day on which the Eligible Participant actually worked. Any Incentive Payouts hereunder will made at the same time that Incentive Payouts for actively employed Eligible Participants are made (i.e., such Incentive Payouts will not be accelerated).

c. Death and Disability: If the employment of an Eligible Participant is terminated because of such Eligible Participant’s death or disability, the Incentive Payout, if any, will be calculated based on Eligible Earnings up to the last day on which the Eligible Participant actually worked. The Incentive Payout will be payable only if the Corporate Adjusted EBITDA Threshold and the required Component Thresholds are met and the payout is approved by the Compensation Committee. Regarding the Individual Performance Multiplier, each Eligible Participant’s achievement will be assessed on an individual basis and in the sole discretion of Patheon (or the applicable member of the Patheon Group), based solely on personal performance up to the last day on which the Eligible Participant actually worked. Any such Incentive Payouts made hereunder may be adjusted or withheld, giving consideration (i) to the effect of any such payout on the applicable Eligible Participant’s eligibility for disability payments or related income (or the amount thereof), and (ii) other applicable local laws or regulations. Any Incentive Payouts hereunder will be made at the same time that Incentive Payouts for actively employed Eligible Participants are made (i.e., such Incentive Payouts will not be accelerated).

d. Not-for-Cause Involuntary Termination: An Eligible Participant who is terminated on a not-for-cause basis is eligible to receive an Incentive Payout, based on Eligible Earnings for the Performance Period only if the Corporate Adjusted EBITDA Threshold and the required Component Thresholds are met and the payout is approved by the Compensation Committee. Regarding the Individual Performance Multiplier, each Eligible Participant’s achievement will be assessed on an individual basis and in the sole discretion of Patheon (or the applicable member of the Patheon Group), based solely on personal performance up to the last day on which the Eligible Participant actually worked. With respect to any severance or other termination-related payments made to an Eligible Participant, Eligible Earnings will include only base pay earned through the last day worked. Any Incentive Payouts hereunder will made at the same time that Incentive Payouts for actively employed Eligible Participants are made (i.e., such Incentive Payouts will not be accelerated).

e. Applicable Local Law Applies. The Payout Eligibility requirement of active employment at the time the Incentive Payout is made is subject to applicable local law which may prohibit such eligibility requirements or otherwise limit their application. Patheon, in its sole discretion, may alter the Payout Eligibility requirement to conform to applicable local law.

NOTE: Any Eligible Participant who is terminated for cause, as determined by his/her employer in its sole discretion, or who voluntarily leaves employment (other than via retirement or as a result of disability), or provides notice thereof, prior to the date of the Incentive Payout, is not eligible for an Incentive Payment under any circumstance (even if the Eligible Participant is an active employee at the time of such Incentive Payout).

Performance Period / Plan Year: The performance period runs concurrent with the fiscal year; currently November 1^st thru October 31^st (the “Performance Period” or the “Plan Year”)

Eligible Earnings: For the purpose of the calculation of any Incentive Payouts, eligible earnings are defined as the actual earned base pay (and non-exempt overtime pay, where required by law) reported by payroll paid during the performance period (in accordance with applicable employment standards law), excluding fringe benefits, cash allowances, disability, worker’s compensation, vacation/paid time off and all other types of pay not directly related to base pay, unless applicable law requires that other items of income be included for purpose of calculating an award in a discretionary incentive plan (“Eligible Earnings”).

Changes in Individual Incentive Target Level: If the Individual Incentive Target Level for an Eligible Participant changes during a Plan Year, then generally the Individual Incentive Target Level in effect as of as of October 31^st of the Plan Year will be used in the calculation of the Incentive Payout. However, Patheon reserves the right to pro-rate the Incentive Payout accordingly if an Eligible Participant receives an increase or decrease in Individual Incentive Target Level during the second (2^nd) half of the Plan Year (i.e., from May 1^st thru October 31^st).

Transfers: Annual incentive calculations for Eligible Participants who transfer between sites or businesses during the Plan Year will be based on the Components, levels and other terms and conditions which apply to the site or business to which they are assigned on October 31st of the relevant Plan Year. Patheon reserves the right to pro-rate the Incentive Payout if an Eligible Participant transfers during the second half of the Plan Year (i.e., from May 1^st thru October 31^st).

Communication of Results: Results to be used in the calculation of an incentive payout are provided by Corporate Finance. All such results, the determination of achievement of the Corporate Adjusted EBITDA Threshold, and the respective Incentive Payouts are subject to approval by the Compensation Committee. To minimize confusion, no one shall communicate any results as it relates to the Plan or Incentive Payout amounts until authorized to do so by Corporate HR or Corporate Finance.

Governance: This Plan is developed and administered by Corporate HR. This Plan is governed by the rules specified within this document and is subject to applicable law.

Exceptions: Any exceptions to this Plan must be made in writing and approved by Corporate HR.

Timing of Payment: If a payment is due under this Plan’s guidelines as set forth herein, the payment will be made no later than two (2) and one-half (1/2) months (i.e., seventy-five (75) days) days after the end of the calendar year during which Performance Period ends.

Disclaimer: Patheon reserves the right to amend or discontinue this Leadership Incentive Plan at any time, with or without notice.

Bonus Weightings for Patheon’s Executive Committee

Plan	Incumbent	Corporate Adjusted EBITDA	Global PDS Adjusted EBITDA	NA Commercial Adjusted EBITDA	EUR Commercial Adjusted EBITDA	PDS New Business (Revenue)	Commercial Award Target (Revenue)	Individual	Total	Max
E1	James Mullen	80%						20%	100%	160.0%
	Eric Evans	80%						20%	100%	160.0%
E2	Mark Kontny	20%	60%					20%	100%	160.0%
E3	Peter Bigelow	20%		60%				20%	100%	160.0%
	Antonella Mancuso	20%			60%			20%	100%	160.0%
E4	Geoff Glass	40%				20%	20%	20%	100%	160.0%
E5	Paul Garofolo	70%						30%	100%	152.5%
	Warren Horton	70%						30%	100%	152.5%
	Michael Lytton	70%						30%	100%	152.5%
	Vacant- Head of HR	70%						30%	100%	152.5%

EX-10.2

Exhibit 10.2

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.

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Appendix B

PATHEON INC.

2011 Amended and Restated

Incentive Stock Option Plan

March 10, 2011

Residents of Puerto Rico

Options granted to Eligible Persons who are residents of Puerto Rico are subject to the following additional conditions:

1. Eligible Persons

The definition of “Eligible Persons” shall mean only directors, officers and key employees of the Corporation and its subsidiaries.

2. Shares Subject to the Plan

Notwithstanding clause 3 of the Plan, the maximum number of Shares that may be issued upon the exercise of Options granted under the Plan is 15,500,151, subject to adjustment pursuant to Section 11 of the Plan.

3. Withholding Taxes, etc.

Pursuant to applicable United States federal laws and laws of the Commonwealth of Puerto Rico, the Corporation is or may be required to collect withholding taxes upon the exercise of an Option. The Corporation may require, as a condition to the exercise of an Option or the issuance of a share certificate, that the Optionee concurrently pay to the Corporation in cash the entire amount or a portion of any taxes which the Corporation is required to withhold by reason of such exercise, in such amount as the Compensation Committee in its discretion may determine.

4. Restrictions to be “Qualified Options”

In order to be “qualified options” pursuant to the Internal Revenue Code for a New Puerto Rico, as amended, the aggregate market value or aggregate book value of Shares with respect to which Options may be exercised for the first time by an individual during any calendar year (under all plans of the Corporation or any of its subsidiaries) may not exceed $100,000 or such other amount as may be prescribed from time to time. In addition, such Options must have been granted no later than March 31, 2015.

5. Investment Representation

Each Optionee by accepting an Option represents and agrees, for himself or herself and his or her transferees by will or the laws of descent and distribution, that all Shares purchased upon the exercise of the Option will be acquired for investment and not for

resale or distribution. Upon such exercise of any portion of any Option, the person entitled to exercise the same shall upon request of the Corporation furnish evidence satisfactory to the Corporation (including a written and signed representation) to the effect that the Shares are being acquired in good faith for investment and not for resale or distribution. Furthermore, the Corporation may if it deems appropriate affix a legend to certificates representing Shares purchased upon exercise of Options indicating that such shares have not been registered with the Securities and Exchange Commission and may so notify its transfer agent.

6. Offers and Sales Made in Puerto Rico; No Offers or Sales Where Prohibited

Each Optionee by accepting an Option represents and agrees, for himself or herself and his or her transferees by will or the laws of descent and distribution, that the offer of the Shares which may be purchased upon exercise of an Option and the sale of any Shares upon exercise of an Option has and will occur (unless the Corporation otherwise determines) only in the Commonwealth of Puerto Rico, which is the operating location of the Corporation’s subsidiary, MOVA Pharmaceutical Corporation. NO OFFER IS HEREBY MADE (AND THE GRANT OF AN OPTION SHALL NOT CONSTITUTE AN OFFER) TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, SHARES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.

7. No Approval of Options or Shares by any Regulatory Authority

NEITHER THE OPTIONS NOR THE SHARES HAVE BEEN REGISTERED UNDER THE PUERTO RICO UNIFORM SECURITIES ACT BASED ON AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. NEITHER THE OPTIONS NOR THE SHARES HAVE BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, THE COMMISSIONER OF FINANCIAL INSTITUTIONS OF PUERTO RICO OR ANY OTHER AGENCY NOR HAS THE COMMISSION, THE DIVISION OR ANY SUCH OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION PROVIDED TO OPTIONEES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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APPENDIX C

PATHEON INC.

2011 Amended and Restated

Incentive Stock Option Plan

March 10, 2011

UK UNAPPROVED SUBPLAN

(as originally adopted by resolution dated 10 June 2010 and following amendments made to the Plan further adopted by resolution dated June 10, 2011)

This Subplan constitutes an unapproved part of the Patheon Inc. Amended and Restated Incentive Stock Option Plan dated 31 March 2005 - current version 10 March 2011 (“the Plan”) and incorporates all the rules of the Plan, but modified in accordance with this Subplan.

This Subplan applies to Patheon UK Limited and any other Participating Company. For the purposes of this Subplan “Participating Company” shall mean Patheon UK Limited and any other company which is for the time being nominated by the board of directors of the Company to be a Participating Company being a company of which the Company has control.

Words and expressions not otherwise defined shall have the same meanings as in Schedule 4 to the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).

1. PURPOSE OF THE UK UNAPPROVED SUBPLAN

The purpose of this unapproved Subplan is to establish a plan under which Options may be granted to Eligible Persons which exceed the requirements for approval under Schedule 4 of ITEPA.

2. SUBSCRIPTION PRICE

The market price determined by the Compensation Committee at the time of grant shall be no less than the market value of a Share on the date of grant.

3. EXERCISE OF OPTION

(a) In the event that, on the exercise of an Option by the Optionee under Rule 7 of the Plan, that Optionee’s employing company would be liable for Employer’s National Insurance Contributions in respect of that exercise, the exercise of that Option shall not be effective unless within 30 days after the date on which the notice of exercise of that Option was lodged in accordance with Rule 7 whichever of the following two conditions as is specified by the Compensation Committee is satisfied:

(i) the Optionee shall have entered into an agreement under which his employing company may recover from him all or part of its liability for Employer’s National Insurance Contributions on the exercise of that Option

(ii) the Optionee shall have entered into a form of joint election, in such form as may be determined by the Compensation Committee and approved in advance by the Board of Inland Revenue, for the transfer to the Optionee of the whole or any part of the Employer’s National Insurance Contributions due on the exercise of that Option and the arrangements made in that election for securing that the Optionee will meet the liability transferred to him have been approved in advance by the Board of Inland Revenue

provided that the Compensation Committee, in its absolute discretion, may waive the requirement for one of these two conditions to be satisfied in order for the exercise of an Option to be effective.

(b) An Option shall be deemed to have been exercised on the date when the conditions in Rule 3(a) of this Subplan have been satisfied, unless such condition is waived in which case, the Option shall be deemed to have been exercised on the date the Notice of Exercise and subscription price is received from the Optionee.

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4. NON ASSIGNABLE

Rule 8 of the Plan in its entirety applies to this Subplan.

5. RELATIONSHIP WITH CONTRACT OF EMPLOYMENT

(a) Notwithstanding any other provision of this Subplan:

(i) this Subplan shall not form part of any contract of employment between any Participating Company and any employee of any such company and the rights and obligations of any individual under the terms of his office or employment with any Participating Company or the Company shall not be affected by his participation in this Subplan or any right which he may have to participate in it and this Subplan shall afford such an individual no additional rights to compensation or damages in consequence of the termination of such office or employment for any reason whatsoever;

(ii) no Optionee shall be entitled to any compensation or damages for any loss or potential loss which he may suffer by reason of being unable to exercise an Option in consequence of the loss or termination of his office or employment with the Company or any Participating Company for any reason whatsoever;

(iii) this Plan shall not confer on any person any legal or equitable rights (other than those constituting the Options themselves) against the Company or any Participating Company directly or indirectly, or give rise to any cause of action at law or in equity against the Company or any Participating Company.

Patheon Inc.

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EX-10.3

Exhibit 10.3

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is made as of May 9, 2011 (the “Effective Date”), between Patheon Pharmaceuticals Services Inc. (the “Company”) and Michael Lytton (the “Executive”).

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 other members of the Patheon Group. As used herein, “Patheon Group” means Patheon and any entity controlled by Patheon.

B. The Company and the Executive wish to enter into this Agreement to set forth the rights and obligations of each of them with respect to the employment of the Executive.

C. The Company wishes to employ the Executive pursuant to the terms and subject to the conditions set forth in this Agreement.

D. The Executive wishes to be employed by the Company pursuant to the terms and subject to the conditions set forth in this Agreement.

E. The Company and the 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:

ARTICLE 1

INTERPRETATION

1.1 Governing Law. This Agreement shall be construed and interpreted in accordance with the substantive laws of the State of North Carolina, without giving effect to any choice or conflict of law provision or rule (whether of the State of North Carolina or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of North Carolina. The state and federal courts located in North Carolina shall be the exclusive forum for the adjudication of all disputes between the parties arising out of or relating to this Agreement. Each of the parties hereby irrevocably consents to the personal jurisdiction of the federal and state courts in the State of North Carolina with respect to any matters arising out of this Agreement and waives any and all objections and defenses to such personal jurisdiction regardless of whether such objection or defense is based upon the venue, North Carolina’s long-arm statute, residence and/or contacts with North Carolina, the convenience of the witnesses and/or parties, the inconvenience of the forum, or otherwise.

1.2 Definitions. In this Agreement, including Schedule A and B hereto, unless the context otherwise requires, the following terms shall have the following meanings, respectively:

(a) “Board of Directors” means the Board of Directors of Patheon.

(b) “Cause” means the determination, in good faith, by the Company, after notice to the Executive that one or more of the following events has occurred: (i) the Executive has failed to perform his material duties and, if curable, 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 the Executive having the effect of injuring the interests, business, or reputation of any member of the Patheon Group in any material respect; (iii) the Executive’s commission of any felony (including entry of a nolo contendere plea); (iv) any misappropriation or embezzlement of the property of any member of the Patheon Group; or (v) a breach of any material provision of this Agreement by the Executive, which breach, if curable, remains uncured for a period of thirty (30) days after receipt by Executive of notice from the Company of such breach.

(c) “Change in Control” means 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 percent (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 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 shareholders 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.

(d) “Code” means the Internal Revenue Code of 1986, as amended.

(e) “Good Reason” means the occurrence of any of the following events without the consent of the Executive: (i) a material reduction of the Executive’s duties or responsibilities or the assignment to the Executive of duties or responsibilities materially inconsistent with the Executive’s position; (ii) a material breach by the Company of this Agreement, which breach remains uncured for a period of thirty (30) days after receipt by the Company of written notice from Executive (iii) a requirement by the Company that the Executive work more than fifty (50) miles from Executive’s principle office. A termination of the Executive’s employment by Executive shall not be deemed to be for Good Reason unless (i) the Executive gives notice to the Company of the existence of the event or condition constituting Good Reason within thirty (30) days after such event or condition

initially occurs or exists, (ii) the Company fails to cure such event or condition within thirty (30) days after receiving such notice, and (iii) the Executive’s “separation from service” within the meaning of Section 409A of the Code occurs not later than ninety (90) days after such event or condition initially occurs or exists.

ARTICLE 2

EFFECTIVE DATE; TERMS OF EMPLOYMENT

2.1 Term

The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company pursuant to the terms and subject to the conditions of this Agreement (including, without limitation, Article 6 and Schedules A and B), commencing on the Effective Date. The Executive’s employment with the Company will be “at will,” meaning that either the Executive or the Company will be entitled to terminate the Executive’s employment at any time and for any reason, with or without cause. Any contrary representations which may have been made to the Executive are superseded by this Agreement. This is the full and complete agreement between the Executive and the Company on this term. Although the Executive’s job duties, title, compensation and benefits, as well as the Company’s personnel policies and procedures, may change from time to time, the “at will” nature of the Executive’s employment may only be changed in an express written agreement signed by the Executive and a duly authorized officer of the Company.

2.2 Position and Duties

The Executive shall be employed by the Company and shall serve as Executive Vice President, Corporate Development and Strategy and General Counsel of Patheon, with such authority, duties and responsibilities as are commensurate with such position, reporting to the Chief Executive Officer. In addition, the Executive will be a member of the Patheon Group’s Executive Committee and will become an officer of Patheon and of any members of the Patheon Group, as may be requested.

The Executive shall also be responsible for the functions and responsibilities set out in the Position Description attached hereto as Schedule A.

The location of the 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 Company. The Executive will be permitted to commute to the Company’s Raleigh/Durham offices from his primary residence in Boston, Massachusetts. The 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. In lieu of Patheon’s standard relocation benefits, Executive will be entitled to a lump sum payment of $75,000 (subject to tax withholdings required by federal, state, and local laws). This amount will be treated as taxable income and will be paid within thirty (30) days after the Effective Date (assuming the Executive continues to be employed by Patheon at such time). If the Executive’s employment is terminated other than (i) for Good Reason (as defined below) or (ii) without Cause (as defined below) by the Company, before the first (1^st) anniversary of the Effective Date, he will repay to the Company within thirty (30) days of the Date of Termination, a pro rata portion of the lump sum payment, based on the number of months remaining to the first (1^st) anniversary of the Effective Date from the Date of Termination (by way of example, if the Date of Termination would occur with six (6) months remaining until the first (1^st) anniversary of

the Effective Date, then the Executive would repay fifty percent (50%) of the lump sum payment to the Company). The indicated repayment amount is not subject to offset or any other reduction for any prior withholdings or deductions (i.e., tax withholdings).

In addition, a second lump sum payment of $75,000 (subject to tax withholdings required by federal, state, and local laws) will be paid within thirty (30) days after the first (1^st) anniversary of the Effective Date (assuming the Executive continues to be employed by Patheon at such time). This amount will be treated as taxable income. If the Executive’s employment is terminated other than (i) for Good Reason (as defined below) by the Executive or (ii) without Cause (as defined below) by the Company, before the second (2^nd) anniversary of the Effective Date, he will repay to the Company, within thirty (30) days of the Date of Termination, a pro rata portion of the second lump sum payment, based on the number of months remaining to the second (2^nd) anniversary of the Effective Date from the Date of Termination (by way of example, if the Date of Termination would occur with six (6) months remaining until the second (2^nd) anniversary of the Effective Date, then the Executive would repay fifty percent (50%) of the second lump sum payment to the Company). The indicated repayment amount is not subject to offset or any other reduction for any prior withholdings or deductions (i.e., tax withholdings).

Notwithstanding the above, in the event that the Executive’s employment is terminated without Cause (as defined below) or terminated by the Executive for Good Reason (as defined below) at any time during the six (6) month period following a Change in Control (as defined below), the lump sum payments will cease to be subject to the claw-back provisions, and the Executive will not be required to repay any portion thereof to the Company or its successor.

Upon the Executive’s relocation to the Raleigh-Durham area in accordance with this Agreement, the Executive will be entitled to a relocation package equal to no less than the then standard relocation package in North America for executives at the same level as the Executive in the Company, provided that any amount reimbursable thereunder will be modified in a mutually agreeable manner, giving consideration to the total amount paid to the Executive pursuant to this Section 2.2.

2.3 Standards of Performance and Time Commitments

The 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. During the Executive’s employment, the Executive shall devote substantially all of his working time and attention to his duties with the Patheon Group and shall render no material business services to any other person or company; provided, however, it shall not be a violation of this Agreement for the Executive, subject to the requirements of Article 6, to (a) to spend reasonable amounts of time to manage his personal, financial and legal affairs; (b) to fulfill speaking engagements; and (c) 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, so long as such activities do not materially interfere with the performance of the Executive’s duties or responsibilities under this Agreement.

ARTICLE 3

COMPENSATION AND BENEFITS

3.1 Base Salary

The Company shall pay the Executive an annualized base salary (“Annual Base Salary”) at a rate of US$400,000, payable pursuant to the Company’s regular payroll practices for its executives in effect at the time. For fiscal year 2011, the Executive’s Annual Base Salary will be prorated from the Effective Date. The Annual Base Salary shall be reviewed by the Chief Executive Officer, for increase only, at such time as the salaries of other senior executives of Patheon are reviewed generally.

3.2 Executive Performance Bonus

The Executive shall be eligible to participate in an annual performance incentive plan under terms and conditions no less favorable than other senior executives of the Company; provided that the Executive’s target bonus shall not be less than forty-five percent (45%) of his Annual Base Salary. The Executive’s payment under the annual performance incentive plan shall be based on meeting predetermined personal objectives and Patheon’s financial performance. The personal objectives will be set by the Chief Executive Officer, and the financial performance measures will be set by the Chief Executive Officer. For fiscal year 2011, the annual performance bonus will be prorated from the Effective Date. The annual performance bonus, if earned, will be paid to the Executive by the Company in the same manner and payment period generally applicable under the annual performance incentive plan and state law, but in no event later than two and a half months after the later of (i) the end of the applicable performance period, or (ii) the end of the calendar year in which the performance period ends. Nothing contained in this Section 3.2 will guarantee the Executive any specific amount of incentive compensation, or prevent the Chief Executive Officer from establishing performance goals and compensation targets applicable only to the Executive.

3.3 Stock Options

(a) The Executive shall be eligible to participate in Patheon’s 2011 Amended and Restated Incentive Stock Option Plan (the “Stock Option Plan”) and shall be eligible to be awarded options to acquire Patheon’s restricted voting shares from time to time in accordance with the terms of such Plan and related stock option award agreement (together, with the Stock Option Plan, the “Stock Option Related Documents”).

(b) Subject to approval of the Board of Directors at a meeting following the Effective Date, the Executive will be granted options to acquire four hundred thousand (400,000) of Patheon’s restricted voting shares, which options shall be granted subject to the Stock Option Related Documents. Except as otherwise provided in the Stock Option Related Documents, the options will vest in five (5) equal installments on each of the first five (5) anniversaries of the Effective Date, subject to the Executive’s continued employment with the Patheon Group until the relevant vesting dates . The subscription price for the shares under option will be the market price (as defined in the Stock Option Plan) on the date of grant. All options granted to the Executive will expire ten (10) years from the date of grant.

(c) During the Executive’s employment, at the discretion of the Board or its delegate, the Executive also will be eligible to receive additional options and other long-term incentives under the Stock Option Plan or any similar plan adopted by Patheon from time to time in the course of its periodic review of executive compensation arrangements.

(d) Upon the occurrence of a Change in Control, any options to purchase restricted voting shares of Patheon then held by the Executive shall, to the extent provided in the applicable Stock Option Related Documents, become immediately vested and exercisable and remain exercisable for the remaining term of such option (which remaining term shall be determined without regard to the Executive’s termination of employment).

(e) The Executive will be required to comply with the Stock Option Related Documents and the terms of any share ownership guidelines of Patheon generally, as amended from time to time.

3.4 Employee Benefits

The Executive will be entitled to participate in all employee healthcare and welfare benefits programs of the Company, in accordance with the then applicable terms, conditions and eligibility requirements of such programs that are offered from time to time to U.S. resident-based employees at the Executive’s level, including medical, dental, life insurance, 401-K retirement plans and other health benefit programs.

In addition, the Executive will be entitled to four (4) weeks of vacation time, subject to the Company’s vacation policy, as may be in effect from time to time, which will be pro-rated based on the Effective Date. Further, the Executive will be entitled to three (3) floating holidays annually and twenty-four (24) hours for emergency time off annually, each in accordance with the Company’s policies, as may be in effect from time to time, and pro-rated for 2011 based on the Effective Date.

3.5 Reimbursement of Business Expenses

The Executive shall be reimbursed for all reasonable travel and other out-of-pocket expenses actually and properly incurred by the Executive during the Executive’s employment in connection with carrying out his duties hereunder in accordance with the Company’s policies, as may be in effect from time to time. Notwithstanding the foregoing, the Executive shall not be entitled to any reimbursement under this Section 3.5 for any commute to the Company’s Raleigh/Durham offices from his primary residence occurring prior to the second (2^nd) anniversary of the Effective Date.

3.6 Sarbanes-Oxley Act Loan Prohibition

To the extent that any Company or Patheon Group benefit, program, practice, arrangement or this Agreement would or might otherwise result in the Executive’s receipt of an illegal loan (the “Loan”), the Company shall use commercially reasonable efforts to provide the Executive with a substitute for the Loan that is lawful and of at least equal value to the 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 the Executive or provide him a substitute for it.

ARTICLE 4

TERMINATION OF EMPLOYMENT

4.1 Death or Incapacity

(a) The Executive’s employment shall be immediately terminated without notice by the Company upon the death of the Executive.

(b) If the Company determines in good faith that the Incapacity (as defined below) of the Executive has occurred during the Executive’s employment, it may give to the Executive written notice in accordance with Section 7.4 of this Agreement of its intention to terminate the Executive’s employment; provided that such notice is provided no later than one hundred fifty (150) days following the Executive’s first day of Incapacity. In such event, the Executive’s employment shall terminate effective on the thirtieth (30^th) day after receipt of such notice by the Executive (the “Incapacity Effective Date”), provided that, within such thirty (30) day period after such receipt, the Executive has not returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Incapacity” shall mean the failure of the Executive to perform his duties under this Agreement for at least ninety (90) consecutive business days as a result of any medically determinable physical or mental impairment. The determination of Incapacity shall be made by a physician selected by the Company or its insurers and reasonably acceptable to the Executive or the Executive’s legal representative.

4.2 Cause

The Executive’s employment with the Company may be terminated with or without Cause.

4.3 Good Reason

The Executive’s employment with the Company may be terminated by the Executive with or without Good Reason.

4.4 Notice of Termination

Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party in accordance with Section 7.4. For purposes of this Agreement, a “Notice of Termination” means a written notice which (a) indicates the specific termination provision in this Agreement relied upon, (b) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (c) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by the Company or the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause or Good Reason shall not waive any right of the Company or the Executive, respectively, hereunder or preclude the Company or the Executive, respectively, from asserting such fact or circumstance in enforcing the Company’s or the Executive’s rights hereunder.

4.5 Date of Termination

“Date of Termination” means (a) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (b) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (c) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. The Company and the Executive shall take all steps necessary (including with regard to any post-termination services by the Executive) to ensure that any termination described in this Section 4.5 constitutes a “separation from service” within the meaning of Section 409A of the Code, and the date on which such separation from service takes place shall be the “Date of Termination.”

4.6 Resignation from All Positions

Notwithstanding any other provision of this Agreement, upon the termination of the Executive’s employment for any reason, unless otherwise requested by the Board of Directors, the Executive shall immediately resign as of the Date of Termination from all positions that he holds or has ever held with the Patheon Group (and with any other entities with respect to which the Patheon Group has requested the Executive to perform services). The 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.

ARTICLE 5

OBLIGATIONS OF THE COMPANY UPON TERMINATION

5.1 Good Reason; Other than for Cause

If the Company shall terminate the Executive’s employment other than for Cause, or if the Executive shall terminate the Executive’s employment for Good Reason:

(a) The Company shall pay, or cause to be paid, to the Executive in a lump sum in cash the sum of: (i) that portion of the Executive’s Annual Base Salary earned but not previously paid through the Date of Termination; (ii) reimbursement of expenses incurred on or before the Date of Termination in accordance with Section 3.5, above; and (iii) any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (i), (ii), and (iii) shall be hereinafter referred to as the “Accrued Obligations”). The Accrued Obligations shall be paid on the regular payday following the Date of Termination.

(b) Subject to Executive’s compliance with Section 5.3, Article 6 and Schedule B, the Company shall pay, or cause to be paid, to the Executive an amount equal to the Executive’s Annual Base Salary, plus payment of any performance bonus set forth in Section 3.2 above for performance periods completed prior to the Date of Termination. Such amount shall generally be paid in cash in twelve (12) equal monthly installments beginning within sixty (60) days after the Date of Termination or such later date set forth in Section 7.8. Notwithstanding the foregoing, if the severance benefit described in this Section 5.1(b) exceeds two

(2) times the lesser of (i) the Executive’s annual compensation or (ii) the compensation limit in effect under Section 401(a)(17) of the Code for the calendar year including the Date of Termination, any amounts not yet paid as of the “short-term deferral date” shall be paid in a lump sum on the “short-term deferral date.” The “short-term deferral date” is the date that is two and one-half months after the end of the later of (i) the calendar year containing the Date of Termination or (ii) the Company’s fiscal year containing the Date of Termination.

(c) To the extent not theretofore paid or provided, Company (or Patheon, as the case may be) shall pay or provide, or cause to be paid or provided, to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Patheon Group (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”), in accordance with the terms and normal procedures of each such plan, program, policy or practice or contract or agreement, based on earned, accrued or vested benefits through the Date of Termination.

If the Executive receives payments and benefits pursuant to this Section 5.1, then the Executive shall not be entitled to any other severance pay or benefits under any severance plan, program or policy of any member of the Patheon Group, unless otherwise specifically provided therein in a specific reference to this Agreement; provided, however, in the event any payment is made, or required to be made, under any such severance plan, program or policy, then the amounts payable under this Section 5.1 shall be reduced by such amount.

5.2 Death or Incapacity; Cause; Other than for Good Reason

If the Executive’s employment is terminated due to death or Incapacity or for Cause, or if the Executive voluntarily terminates his employment without Good Reason, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive his Accrued Obligations through the Date of Termination and the Other Benefits earned, accrued, or vested through the Date of Termination, in each case to the extent not theretofore paid or provided. All Accrued Obligations shall be paid to the Executive in accordance with Section 5.1(a) and the Other Benefits shall be paid to the Executive in accordance with Section 5.1(c). The Company (and the Patheon Group) 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 the Executive with respect to the year in which such Date of Termination occurs), or severance payment of any kind, nor will the Company (or the Patheon Group) have any obligation to make any payment in lieu of notice.

5.3 Release

Notwithstanding anything contained herein to the contrary, the Company shall only be obligated to make the payments under Section 5.1(b) if, in addition to the other contingencies under Section 5.1(b): (a) within the 50-day period after the Date of Termination, the Executive executes a general release, in a form provided by the Company, of all current or future claims, known or unknown, against the Patheon Group, its officers, directors, shareholders, employees and agents arising on or before the date of the release, including but not limited to all claims arising out of the Executive’s employment with the Patheon Group or the termination of such employment, and (b) the Executive does not revoke the release during the seven-day revocation period

prescribed by the Age Discrimination in Employment Act of 1967, as amended, or any similar revocation period, if applicable. The Company shall be obligated to provide such release to the Executive promptly following the Date of Termination.

ARTICLE 6

RESTRICTIVE COVENANTS

6.1 In General

(a) The Executive acknowledges and agrees that the Patheon Group is a business engaged in the sale of commercial pharmaceutical manufacturing capabilities and/or pharmaceutical development services, and during the Executive’s employment, the Patheon Group’s business may expand or change (“the Patheon Group’s Business”). Any such expansions and changes shall expand or change the Executive’s obligations under this Agreement accordingly. The Patheon Group’s Business is international in scope and without geographical limitation and the Patheon Group has valuable business relationships within its industry throughout the world.

(b) By virtue of the Executive’s employment by and position with the Company: (i) the Executive has or will have access to confidential and proprietary information of the Patheon Group, including valuable information about its business operations and methods and the persons with whom it does business in various locations throughout the world that is not generally known to, or readily ascertainable by, the Patheon Group’s competitors, and the Executive understands that the continued success of the Patheon Group depends upon the use and protection of a large body of confidential and proprietary information, and (ii) the Executive has specialized knowledge of, and has received or will receive specialized training in, the Patheon Group’s Business.

(c) The Executive authorizes the Company to disclose this Agreement to Executive’s future or prospective employers along with notification of the Company’s intent to exercise all rights it has to seek enforcement of its terms.

6.2 Confidentiality Undertaking

The Executive confirms that he is bound by the provisions of the Confidentiality Undertaking covenant set out in Schedule B hereto.

6.3 Non-Compete, Non-Solicitation

(a) During the Executive’s employment with the Company and for one (1) year thereafter (the “Non-compete Period”), the Executive shall not engage in any of the following activities (except in connection with his/her duties for the Company):

(i) engage in any business activity that competes with the Patheon Group’s Business within the geographical areas set forth in Section 6.3(b);

(ii) within the geographical areas set forth in Section 6.3(b), solicit or do business which is the same, similar to or otherwise in competition with the business engaged in by the Patheon Group, from or with persons or entities: (a) who are customers of the Patheon Group; (b) whom Executive or someone for whom Executive was responsible solicited, negotiated, contracted, serviced or had contact with on the Patheon Group’s behalf; (c) who were customers of the Patheon Group at any time

during the last year of the Executive’s employment with the Patheon Group; or (d) to whom the Patheon Group had made proposals to do business at any time during the last year of the Executive’s employment with the Company; or

(iii) offer employment to or otherwise solicit for employment any employee or other person who had been employed by the Patheon Group during the last year of the Executive’s employment with the Company;

(iv) within the geographical areas set forth in Section 6.3(b), be employed (or otherwise engaged) in (i) a management capacity, (ii) other capacity providing the same or similar services which the Executive provided to the Patheon Group, or (iii) any capacity connected with competitive business activities, by any person or entity that engages in the same, similar or otherwise competitive business as the Patheon Group;

(v) directly or indirectly take any action which is materially detrimental or otherwise intended to be adverse to the Patheon Group’s goodwill, name, business relations, prospects and operations.

(b) The restrictions set forth in this Section 6.3 apply to the following geographical areas: (i) the Research Triangle Park, North Carolina metropolitan area; (ii) the Cincinnati, Ohio metropolitan area; (iii) any city, metropolitan area, county (or similar political subdivisions in foreign countries) in which the Patheon Group is located or does or, during the Executive’s employment with the Company, did business; (iv) any city, metropolitan area, county (or similar political subdivisions in foreign countries) in which the Executive’s services were provided, or for which the Executive had responsibility, or in which the Executive worked on Patheon Group projects, while employed by the Company.

(c) If, at the time of enforcement of this Section 6.3, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the Executive agrees that they be “blue-penciled” or rewritten by the court to the extent necessary to render them enforceable. In addition, the one (1) year time period specified in this Section 6.3 shall be tolled and shall not run during any time the Executive is in violation of Section 6.3 or period(s) of time required for legal action to enforce the provisions of this Section 6.3.

6.4 Remedies

Because the Executive has access to Confidential Information (as defined in Schedule B), the Executive understands and agrees the Patheon Group would suffer irreparable harm from a breach of this Agreement and that money damages would not be an adequate remedy for any such breach of this Agreement. Therefore, in the event of a breach or threatened breach of this Agreement (including Schedules A and B), the Patheon Group and its successors or assigns, in addition to other rights and remedies existing in their favor, shall be entitled to specific performance and/or injunctive or other equitable relief from a court of competent jurisdiction in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security) as well as court costs and reasonable attorney’s fees.

6.5 Acknowledgements

The 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 5.1(b) and (d) hereof) constitute sufficient consideration for the covenants contained in this Article 6 and Schedule B. The Executive further acknowledges that it is not the Patheon Group’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. The Executive agrees that he will notify the Company in writing if he has, or reasonably should have, any questions regarding the applicability of this Article 6 and Schedule B.

6.6 Survival

Subject to any limits on applicability contained therein, this Article 6 and Schedule B shall survive and continue in full force in accordance with their respective terms, notwithstanding any expiration or termination of this Agreement.

ARTICLE 7

GENERAL PROVISIONS

7.1 Entire Agreement

This Agreement, together with Schedules A and B attached hereto and incorporated herein by reference, when executed by both parties shall constitute the entire agreement pertaining to the Executive’s employment and supersedes all prior agreements, understandings, negotiations and discussions, whether written or oral, pertaining to the 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. The recitals set forth above are incorporated herein by this reference with the same force and effect as if set forth herein as agreements of the parties. This Agreement supersedes the offer letter between the parties, dated April 18, 2011.

7.2 Severability

If any provision of this Agreement is declared void or unenforceable, such provision shall be deemed severed from this Agreement to the extent of the particular circumstances giving rise to such declaration and such provision as it applies to other persons and circumstances and the remaining terms and conditions of this Agreement shall remain in full force and effect.

7.3 Representations

The Executive represents and warrants that (a) he is not a party to any contract, understanding, agreement or policy, whether or not written, with his current employer (or any previous employer) or otherwise, that would be breached by the Executive’s entering into, or performing services under, this Agreement and (b) will not knowingly use any trade secret, confidential information, or other intellectual property right of any other party in the performance of his duties hereunder. The Executive will indemnify, defend, and hold each member of the Patheon Group harmless, from any and all suits and claims arising out of any breach of such restrictive contracts, understandings, agreements or policies.

7.4 Notices

All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Mr. Michael Lytton

48 Conant Road

Lincoln, MA 01773

If to the Company:

Patheon Pharmaceutical Services Inc.

4721 Emperor Blvd., Suite 200

Durham, NC 27703

Attention: Senior Human Resources Executive

with a copy to:

Patheon Pharmaceutical Services Inc.

4721 Emperor Blvd., Suite 200

Durham, NC 27703

Attention: Legal Department

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

7.5 Withholding

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. The Executive shall be solely responsible for the satisfaction of any taxes (including employment taxes) imposed on employees and penalty taxes on nonqualified deferred compensation.

7.6 Waiver

The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

7.7 Successors

(a) This Agreement is personal to the Executive is not assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives. This Agreement shall inure to the benefit of

and be binding upon the Company, the other members of the Patheon Group, and their respective successors and assigns.

(b) The Company, at its discretion, may assign this Agreement, and will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Patheon or the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

7.8 Compliance with Section 409A of the Code

(a) Although the payments and benefits provided under this Agreement are intended to be exempt from the application of, or otherwise comply with, the requirements of Section 409A of the Code (“Section 409A”), the tax treatment of the payments and benefits provided under this Agreement is not warranted or guaranteed. Specifically, any taxable benefits or payments provided under this Agreement are intended to be separate payments that qualify for the “short-term deferral” exception to Section 409A to the maximum extent possible, and to the extent they do not so qualify, are intended to qualify for the involuntary separation pay exceptions to Section 409A to the maximum extent possible. This Agreement shall be construed, administered, and governed in a manner that effects such intent, and the Company shall not take any action that would be inconsistent with such intent. Without limiting the foregoing, the payments and benefits provided under this Agreement may not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A upon the Executive.

(b) If neither the “short-term deferral” nor the involuntary separation pay exceptions to Section 409A described above applies to a benefit, payment or reimbursement under this Agreement, then notwithstanding any provision herein to the contrary, the remaining provisions of this Section 7.8(b) shall apply.

(i) If the Executive is a “specified employee,” as determined under the Company’s policy for identifying specified employees on the Date of Termination, then to the extent required in order to comply with Section 409A, all payments and benefits provided under this Agreement that constitute a “deferral of compensation” within the meaning of Section 409A, that are provided as a result of a “separation from service” within the meaning of Section 409A and that would otherwise be paid or provided during the first six months following such Date of Termination shall be accumulated through and paid or provided (together with interest on the delayed amount at the applicable federal rate under Section 7872(f)(2)(A) of the Code in effect on the Date of Termination) within thirty (30) days after the first business day following the sixth (6^th) month anniversary of such Date of Termination (or, if the Executive dies during such six-(6-)month period, then within thirty (30) days after the Executive’s death).

(ii) To the extent required by Section 409A, each reimbursement or in-kind benefit provided under this Agreement that will not be excluded from Executive’s income when received is subject to the following requirements: (i) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during each calendar year can not affect the

expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year; (ii) any reimbursement of an eligible expense shall be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; and (iii) the right to reimbursements or in-kind benefits under this Agreement shall not be subject to liquidation or exchange for another benefit.

(c) Although the Company will endeavor 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 Patheon Group nor its directors, officers, employees or advisers shall be held liable for any taxes, interest, penalties or other monetary amounts owed by the Executive or other taxpayer 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.

NOW THEREFORE, the parties below have entered into this Agreement as of the date first written above.

PATHEON PHARMACEUTICALS SERVICES INC.
By:	/s/ James C. Mullen
Name:	James C. Mullen
Title:	Chief Executive Officer

		EXECUTIVE
SIGNED, SEALED AND DELIVERED	)
in the presence of	)
	)
/s/ Meghan Lytton	)	/s/ Michael Lytton
Name of Witness:		Michael Lytton

SCHEDULE A

TO

EMPLOYMENT AGREEMENT WITH

Michael Lytton

POSITION DESCRIPTION

The functions and responsibilities of the Executive Vice President, Corporate Development and Strategy and General Counsel will include the following:

A. SCOPE AND GENERAL RESPONSIBILITIES:

• Span of control involves executive leadership of Patheon’s international operations and global customers.

• Ensures compliance with securities laws, issues for debt, equities and mixed financial instruments.

• Develops and negotiates complex business arrangements including short-term and long-term business contracts with complex provisions.

• Leads and coordinates corporate development activities, such as mergers and acquisitions, licensing, divestments, joint ventures, strategic alliances (outside of core Sales and Marketing activities) and similar business arrangements.

• Leads strategic planning activities.

• Leads and/or directs global litigation, including but not limited to, business contracts, performance issues and employment charges or litigation.

• Ensures compliance with regulatory legal matters including the activities of international bodies such as the FDA, US DEA, EMEA, EPA, etc.

• Supports manufacturing activities requiring filings and registration with these regulators covering environmental, safety, employment conditions, etc.

• Provides direction in matters involving intellectual property laws with respect to pharmaceutical products, formulations, manufacturing processes and devices that affect many of the products and customers.

B. MANAGEMENT:

• Provides material support for execution of global Legal and Corporate Development responsibilities to protect and support sustained growth of the business and improve profitability.

• Provides executive leadership to the global Legal and Corporate Development functions, including management of a diverse Legal team located in several countries where Patheon conducts its Commercial and Development business.

C. ETHICS, CULTURE, POLICY & PUBLIC REPRESENTATION:

Ensures global employees comply with company established Ethics, Confidentiality and other practices including but not limited to Patheon’s Code of Business Conduct or other country specific policies.

This position description is not intended as a complete list of all responsibilities and responsibilities may change.

SCHEDULE B

TO

EMPLOYMENT AGREEMENT WITH

Michael Lytton

CONFIDENTIALITY, INVENTIONS ASSIGNMENT AND RETURN OF PROPERTY

UNDERTAKING

In consideration of Michael Lytton (the “Executive”) accepting an employment agreement between the Executive and Patheon Pharmaceuticals Services Inc. (the “Company”) dated May 9, 2011, (the “Agreement”) to which this Confidentiality, Inventions Assignment and Return of Property Undertaking (“Confidentiality Undertaking”) is attached as Schedule B, the Executive undertakes and covenants with the Patheon Group (as defined in the Agreement) as follows:

1. CONFIDENTIAL INFORMATION

Executive acknowledges that all Confidential Information (defined below) is the sole and exclusive property of the Patheon Group (or a third party providing such information to the Patheon Group). At all times during Executive’s employment and thereafter, Executive will hold in strictest confidence and will not use, disclose, copy or remove from the Patheon Group premises any Confidential Information, nor aid third parties in obtaining or using any Confidential Information, nor access or attempt to access any Patheon Group computer systems, networks or any resources or data that resides thereon, except as such use, disclosure, copying, removal or access may be required in connection with Executive’s employment and only then in accordance with applicable Patheon Group policies and procedures and solely for the Patheon Group’s benefit. Executive further acknowledges that the applicable Patheon Group policies and procedures referenced in the preceding sentence include but are not limited to the following and apply regardless of whether or not the information is Confidential Information: (i) no forwarding of electronic files, data, emails or other information to home, personal or external email accounts even for the purpose of working remotely; (ii) no use of thumb drives, flash drives or other portable devices or copying methods without the express written consent of the Company; (iii) no copying of hard copy documents for removal from the worksite even for the purpose of working remotely; (iv) emails, voicemails or other communications, whether written, verbal, electronic or otherwise, sent to Executive are for his/her eyes/ears only and are not to be shared with any other employee or person, except with the express consent of the sender; and (v) violation of policies and procedures regarding Patheon Group information is grounds for immediate termination for Cause. Additionally, Executive will notify the Patheon Group of any known or suspected unauthorized use, disclosure, copying or removal of Confidential Information by others.

As used in this Agreement, “Confidential Information” means any and all facts, data or information of the Patheon Group (or of third parties providing such information to the Patheon Group) that is not known by, or generally available to the public at large, that concerns the business of the Patheon Group (or third parties providing such information to the Patheon Group) whether now existing or to be developed in the future, and whether embodied in tangible or intangible form or merely remembered, including but not limited to trade secrets or

other intellectual property; products, product plans, designs, ideas, concepts, costs, methods or policies; prices or price formulas; processes; procedures; raw materials; research, development or know-how; customer lists and information, information relating to customers, prospective partners, partners, parents, subsidiaries, affiliates and other entities; financial information; computer software (including design, programming techniques, flow charts, source code, object code, and related information and documentation); products and services; inventory lists; market and/or product research and development data; business strategies and methodologies, strategic or business plans, training manuals and methodologies; employee phone and address lists, personnel data, incentive packages, compensation data and employee performance data; and all other information of any kind or character relating to the development, improvement, manufacture, sale, or delivery of products or services by the Patheon Group.

If Executive is required to disclose Confidential Information pursuant to a court order or such disclosure is necessary to comply with applicable law or defend against claims, Executive shall: (i) notify the Patheon promptly before any such disclosure is made; (ii) at Patheon’s request and expense take all reasonably necessary steps to defend against such disclosure, including defending against the enforcement of the court order, other government process or claims; and (iii) permit the Patheon Group to participate with counsel of its choice in any related proceeding.

2. INVENTIONS

a. Inventions. Subject to paragraph 2 b., Executive agrees that all right, title, and interest in and to (i) all discoveries, designs, ideas, works of authorship, and inventions created, conceived, reduced to practice, or otherwise developed, in whole or in part, by Executive, whether jointly or individually, during Executive’s employment or within three years following termination of employment for any reason whatsoever; (ii) all improvements, modifications, and derivative works to and of any of the foregoing in (i); and (iii) all patent, copyright, trademark, trade secret and other intellectual property rights in any of the foregoing in (i) and (ii) (all the foregoing in (i)-(iii), collectively, the “Inventions”) will be owned solely and exclusively by the Company. Without limiting the foregoing, all copyrightable subject matter included in the Inventions shall constitute “work made for hire” under applicable copyright law. Executive will:

(i) promptly and fully disclose and describe, in detail satisfactory to the Company, all such Inventions in writing to the Company;

(ii) irrevocably and unconditionally assign, and Executive does hereby irrevocably and unconditionally assign, to the Company, without further compensation or other consideration, any and all of Executive’s rights, title and interest in and to the Inventions, including without limitation (1) all rights to collect royalties for any use, and pursue remedies for any infringement, misappropriation, or other violation, thereof and (2) all applications for letters of patent, copyright registrations, trademark, service mark, and trade dress registrations, and industrial design or other forms of protection granted for the Inventions throughout the world;

(iii) deliver promptly to the Company, upon request and in the form and manner prescribed by the Company (without charge to the Company but at the Company’s expense), including without limitation Executive’s notarized signature in execution of, the written instruments described in paragraph b. and perform all other acts deemed necessary by the

Company to obtain and maintain the instruments and to transfer all rights and title thereto to the Company in accordance with this Agreement; and

(iv) promptly render all assistance that may be required by the Company to enable it to protect or exploit the Inventions in any country of the world.

In addition, Executive does hereby waive and agree never to assert any rights in the Inventions, and any part or parts thereof, that are not susceptible of assignment by Executive under applicable law, including, but not limited to, any moral rights or the right to the integrity or attribution of the Inventions, or any other right to be associated with the Inventions as its author, inventor, or user by name or under a pseudonym or the right to remain anonymous.

b. Excluded Inventions. The provisions of paragraph 2 a. will not apply to Inventions which fulfill all of the following criteria:

(i) Inventions for which no equipment, supplies, facility or Confidential Information belonging to the Company were used; and

(ii) Inventions that do not relate to the business of the Company or to the Company’s actual or demonstrably anticipated processes, research or development; and

(iii) Inventions that do not result from any work performed by Executive for the Company.

3. RETURN OF COMPANY PROPERTY

Upon the Company’s request and, in any event, upon the cessation of Executive’s employment with the Company, Executive will return to the Company all Confidential Information in Executive’s possession or control, along with all Company property, including but not limited to keys, pass cards, identification cards, computer hardware and software, manuals, passwords, customer lists, sales records, business plans, any data concerning customers of the Company, brochures of the Company and of any competitor, all corporate records, policy handbooks, receipts, documents, records, files and other documents in whatever form they exist, whether electronic, hard copy or otherwise, and all copies, notes or summaries thereof. Any and all such documents contained on Executive’s personal computer or devices shall be printed, delivered to the Company and thereafter deleted from the personal computer/device. These documents and items must be returned whether in Executive’s possession, work area, home, vehicle or in the wrongful possession of any third party with Executive’s knowledge or acquiescence, and whether prepared by the Company or any other person or entity.

I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS.

/s/ Michael Lytton	(SEAL)	5/9/11
Executive’s Signature		Date:
Michael Lytton
Print Executive Name

The signature above was witnessed by:

/s/ Meghan Lytton	5-9-11
Witness’ Signature	Date:
Meghan Lytton
Witness’ Name

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: September 9, 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: September 9, 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 July 31, 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: September 9, 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 July 31, 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: September 9, 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.