MISSISSAUGA, ON, Aug. 9 /PRNewswire-FirstCall/ - DRAXIS Health Inc. reported financial results for the second quarter and the first six months ended June 30, 2007. Consolidated revenues and earnings for the second quarter and the first half of 2007 were down from the corresponding periods in 2006, but cash flows from operating activities were up substantially in both periods compared to the second quarter and first half of 2006. All amounts are expressed in U.S. dollars.
Highlights - Consolidated revenues for the second quarter of 2007 were $19.4 million versus $24.3 million in the second quarter of 2006; six month consolidated revenues were $40.4 million in 2007 and $43.3 million in 2006. Revenues in the quarter were negatively impacted by lower sterile product sales due to production delays and raw material supply problems that have since been resolved. - Operating income for the second quarter of 2007 was $2.5 million versus $5.3 million in the second quarter of 2006; operating income for the first six months of 2007 was $5.0 million and in the first half of 2006 was $7.2 million. - Net income for the second quarter of 2007 was $1.6 million (diluted EPS of 4 cents) compared to $3.6 million (diluted EPS of 9 cents or 7 cents adjusted diluted EPS - See Schedule of Supplemental Information) in the second quarter of 2006; net income for the first six months of 2007 was $3.6 million (diluted EPS of 9 cents or 7 cents adjusted diluted EPS) versus $5.3 million (diluted EPS of 13 cents or 9 cents adjusted diluted EPS) in the first half of 2006. As indicated previously, substantially all revenues related to the amortization of previously received Anipryl(R) milestones terminated on December 31, 2006. The amortization of these deferred revenues has previously resulted in non-cash revenues of $0.8 million per quarter or $3.3 million per year. The termination of the amortization of deferred revenues had no effect on cash flows but had the impact of contributing 7 cents a share to 2006’s reported earnings per share. - Cash flows from operating activities increased 42% to $2.6 million for the second quarter and increased 77% to $8.1 million for the first half 2007, compared to operating cash flows of $1.8 million and $4.6 million respectively for the same periods in 2006. - Cash and cash equivalents at June 30, 2007 increased to $27.4 million compared to $14.9 million at June 30, 2006, notwithstanding investments during the second quarter and first half of 2007 for capital projects, including a new warehouse management system, information technology infrastructure improvements and new installations to exploit new business opportunities, particularly in the non-sterile product business unit.
“Our weaker than expected earnings in the second quarter of 2007 were the result of lower sterile product sales together with other factors that impacted revenues and earnings, although we were able to record increases in operating cash flows compared to the second quarter of last year and we increased our cash balance to over $27 million,” said Dr. Martin Barkin, President and CEO of DRAXIS Health. “The rapid strengthening of the Canadian dollar versus the US dollar during the quarter adversely affected earnings by slightly more than 1.5 cents per share. In addition, production delays prevented the shipment of planned quantities at DRAXIS Pharma and raw material supply problems meant that product volumes at DRAXIMAGE were lower than expected.”
Dr. Barkin continued, “We have made senior level organizational changes designed to further streamline the leadership of the organization, with Jean-Pierre Robert assuming the role of President of DRAXIS Specialty Pharmaceuticals Inc., our operating subsidiary that encompasses both our contract manufacturing and radiopharmaceuticals divisions. Products scheduled and produced by DRAXIS Pharma but not shipped in the second quarter will be shipped to customers in the third quarter so we expect some recovery of earnings in that division. The disruption in the availability of raw material that affected DRAXIMAGE has been resolved and we have qualified an additional supplier to avoid any similar raw material shortages in the future. Prospects for long term growth continue to be favourable, particularly since we have now filed applications for approval to market DRAXIMAGE(R) Sestamibi with both US and European regulatory authorities.”
FINANCIAL HIGHLIGHTS (in thousands of U.S. dollars except share related data and in accordance with U.S. GAAP) ------------------------------------------------------------------------- For the Three-Month For the Six-Month Periods Ended June 30, Periods Ended June 30, ----------------------- ------------------------- 2007 2006 2007 2006 (unaudited) (unaudited) (unaudited) (unaudited) REVENUES $19,048 $23,003 Product sales $38,678 $40,651 Royalty and 359 437 licensing 1,677 1,040 Anipryl(R) deferred 30 825 revenues 60 1,650 ------------------------------------------------------------------------- $19,437 $24,265 $40,415 $43,341 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Product Gross $7,396 $11,073 Margin $14,848 $17,889 Product Gross 38.8% 48.1% Margin % 38.4% 44.0% $2,534 $5,341 Operating income $4,980 $7,240 13.0% 22.0% Operating Margin % 12.3% 16.7% Cash and cash $27,365 $14,881 equivalents $27,365 $14,881 $0 $0 Total debt $0 $0 Cash flows from operating $2,570 $1,814 activities $8,103 $4,580 Cash flows used in investing (2,315) (1,523) activities (5,269) (2,317) ------------------------------------------------------------------------- $255 $291 $2,834 $2,263 ------------------------------------------------------------------------- ------------------------------------------------------------------------- $1,575 $3,564 Net income $3,585 $5,256 Basic earnings $0.04 $0.09 per share $0.09 $0.13 Diluted earnings $0.04 $0.09 per share $0.09 $0.13 -------------------------------------------------------------------------
Two significant non-recurring items in the first half of 2007 positively affected financial performance relative to the first half of 2006. During the first quarter of 2007, the Company received a non-recurring milestone payment of $0.8 million from Shire BioChem Inc. and an insurance payment of $0.5 million from a business interruption insurance claim related to the extended shutdown period in 2005. The impact of these items on operating income and earnings per share are included in the Schedule of Supplemental Information below.
Segment Highlights from Management’s Discussion and Analysis Contract Manufacturing - Revenues of $14 million for the second quarter of 2007 represented a decrease of $4.7 million or 26% over the second quarter of 2006. The decrease was due to lower sterile volumes, principally volumes of Hectorol(R). During the second quarter of 2007, DRAXIS Pharma experienced production delays that prevented the shipment of planned quantities before the end of the quarter. Products scheduled but not shipped in the second quarter of 2007 will be shipped to customers in the third quarter. - Product gross margin percentage decreased to 29% in the second quarter of 2007 and 28% for the first six months of 2007 compared to 42% and 37% respectively for the same periods of 2006. The decrease was driven by lower sterile volumes impacting margins through lower plant utilization and a lower percentage of sterile volumes as part of the overall product mix. - Operating income of $2.2 million for the second quarter of 2007 and $3.8 million for the first six months of 2007 were $2.7 million lower compared to the same periods of 2006, due to lower sterile product volumes, partially offset by a revaluation of incentive awards based on financial performance. - Effective July 21, 2007, Mr. Jean-Pierre Robert assumed the role of President of DRAXIS Specialty Pharmaceuticals Inc. (DSPI), the Company’s wholly owned operating subsidiary that provides products in three categories: sterile products, non-sterile products and radiopharmaceutical products. Previously responsible for the radiopharmaceutical division of DSPI, Mr. Robert now also has responsibility for the contract manufacturing division of DSPI. - In May 2007, the Company announced it had received notification from the U.S. Food and Drug Administration (FDA) that the Company’s manufacturing operations in Montreal continue to maintain their classification as acceptable facilities following an extensive inspection by the FDA in January 2007 of all six production and quality systems for DRAXIS Pharma, the contract manufacturing division of DSPI. - In May 2007, the Company announced the appointment of Bruce DeChambre as Vice President Commercial and Business Development for DRAXIS Pharma. Mr. DeChambre is charged with identifying prospective customers and developing new business opportunities. - The Company is in the final stages of securing significant new non-sterile business. Final contractual arrangements have yet to be signed but material activities are underway in preparation for this new business, including capital installation and product transfer activities with the approval of the potential customer. The Company has recognized approximately $1 million of revenue related to agreed upon product transfer activities completed in the second quarter of 2007 and has received $1.2 million of customer financing in the quarter related to capital expenditure activities for the project. Radiopharmaceuticals - Product sales in the second quarter were $5.9 million representing a 10% increase over the second quarter of 2006; for the first six months of 2007 product sales increased 13% to $11.6 million, driven mainly by increased sales of Sodium Iodide I-131 products to U.S. customers and increased cold kit sales. - Product gross margins in the second quarter of 2007 were 59% of sales compared to 61% for the second quarter of 2006 and for the first six months of 2007 product gross margins were 60% versus 62% for the same period in 2006, due in part to foreign exchange pressures caused by a stronger Canadian dollar. - Operating income was $1.2 million in the second quarter of 2007 compared to $1.2 million in the second quarter of 2006. For the first six months of 2007, operating income of $2.5 million represented an increase of $0.2 million or 11% over the first six months of 2006, primarily due to volume growth of sodium iodide products and increased cold kit sales. - In July 2007, the FDA acknowledged the receipt and acceptance for review of the Abbreviated New Drug Application (ANDA) for DRAXIMAGE(R) Sestamibi, a generic kit for the preparation of Tc-99m Sestamibi for Injection, which was submitted in February 2007. - On July 25, 2007, the Company announced the filing of DRAXIMAGE(R) Sestamibi with European regulatory authorities. The filing marked another milestone in the comprehensive plan to pursue major myocardial perfusion imaging (MPI) markets globally. Outlook and 2007 Guidance
As of August 8, 2007, the forecast information received by the Company from several major customers includes variable factors and assumptions, such as size of requirements and timing of regulatory approvals, that significantly impact overall forecast reliability to a degree that the Company is unable to provide reasonable revenue guidance.
The following factors have led to the revaluation of our guidance targets for 2007 subsequent to the second quarter of 2007:
- During the first six months of 2007, the strengthening of the Canadian dollar from $CDN1.165 per U.S. dollar as at December 31, 2006 to $CDN1.065 per U.S. dollar as at the end of June 30, 2007 has resulted in foreign exchange losses for the first six months of 2007 of approximately 1.5 cents per share. - During the second quarter of 2007, a significant disruption in the availability of I-131 raw material from the supplier impacted the earnings of the Company by approximately 1 cent per share. - Based on the latest information received from Genzyme Corporation (Genzyme), the Company expects Hectorol(R) volumes in 2007 to be approximately $9 million lower compared with what they were in 2006 and lower than what was originally forecasted for in 2007. It is our understanding that these volumes could still vary materially either positively or negatively as a result of customer demand. The lower than expected volumes from Genzyme have offset the positive impact of increased volumes related to new business activities taking place during 2007 within our contract manufacturing division.
Due to the lower than expected financial performance for 2007 resulting from factors described above, the Company has revised its 2007 guidance downwards from a range of 23 to 27 cents per share to 18 to 21 cents per share as compared with 21 cents in 2006 adjusted for the exclusion of the amortization of Anipryl(R) deferred revenues. Given the reduced underlying earnings, we now expect cash flows from operating activities to be at least $18 million as compared with our original target of at least $20 million for 2007. Our financial performance in the second quarter of 2007 is not expected to negatively impact the long term financial performance of the Company. Significant key milestones have already been achieved in 2007 consistent with the sources of future growth detailed below.
The Company’s formal contractual arrangements with Genzyme for the production of Hectorol(R) were to terminate in March 2008, provided that notification of termination was received by the Company prior to March 2007. Such notification of termination was not received and, consequently, the contractual arrangement will remain in place until March 2009 and the Company expects continuing production of Hectorol(R) for Genzyme beyond this date. The actual volumes expected to be produced and shipped are dependent on the usual factors affecting end user demand, including reimbursement policies and customer supply chain management practices. Accordingly, Hectorol(R) volumes are subject to a high degree of variability between now and 2009. While the Company may continue producing Hectorol(R) over a long term period, the Company is planning for the eventual phase out of Hectorol(R) volumes over time in its long term plans, with such capacity eventually filled by other products and customers.
Sources of Future Growth
The Company’s guidance for 2007 assumes core growth in operations. We expect that future additional growth for 2008 and beyond will come from the success of one or more of the many initiatives that have been developed over the past few years and which we continue to develop. The following potential opportunities do not include any potential merger and/or acquisition activities and are not listed in any particular order, as the potential financial impact of each can vary materially over time:
- Conclusion of a strategic alliance with a commercial partner in Europe for the sales and marketing of the four products currently under review by the European regulatory authorities. These products are currently sold in the U.S. or Canada. - The review and approval of a generic form of Sestamibi in the U.S. and in Europe followed by its introduction into those marketplaces. - Completion of the development of proprietary technology for a second generation Technetium Generator and licensing it to others for distribution. - Clinical trials for a new formulation of INFECTON(R) targeted to orthopaedic indications, subject to final analysis and recommendations of an expert panel. - Submission to the FDA for approval of an improved radiopharmaceutical (cold kit) product for bone scan imaging and introduction into the U.S. marketplace. - Completion of clinical trials for I-131 MIBG for the diagnosis and treatment of neuroblastoma and related malignancies and its subsequent sale and distribution in North America. - Completion of negotiations followed by product transfers for the manufacture of a new portfolio of non-sterile products. - Development and approval of additional generic imaging products that now or will shortly cease to be protected by patent. - Expansion of manufacturing capacity at the Montreal facility to accommodate new business opportunities. Schedule of Supplemental Information ------------------------------------------------------------------------- Reconciliation from reported operating income and diluted EPS to adjusted operating income and diluted EPS (in thousands of U.S. dollars except share related data and in accordance with U.S. GAAP) For the Three-Month Periods Ended June 30, ----------------------------- 2007 2006 % Change Operating Income - Reported $2,534 $5,341 (52.6%) Adjustments: (a) Non-recurring Shire milestone receipt(2) - - (b) Insurance proceeds(3) - - (c) DSU expense (recovery)(4) (221) (45) 391.1% Anipryl(R) deferred revenues (30) (825) (96.4%) ------------------------------------------------------------------------- Operating Income - Adjusted(1) $2,283 $4,471 (48.9%) ------------------------------------------------------------------------- Diluted EPS - Reported Adjustments: (a) Non-recurring Shire milestone receipt(2) $0.04 $0.09 (b) Insurance proceeds(3) - - (c) DSU expense (recovery)(4) - - Anipryl(R) deferred revenues - (0.02) ---------------------------------------------------------- ---------------------------------------------------------- For the six-Month Periods Ended June 30, ----------------------------- 2007 2006 % Change Operating Income - Reported $4,980 $7,240 (31.2%) Adjustments: (a) Non-recurring Shire milestone receipt(2) (791) - (b) Insurance proceeds(3) (517) - (c) DSU expense (recovery)(4) 127 (183) (169.4%) Anipryl(R) deferred revenues (60) (1,650) (96.4%) ------------------------------------------------------------------------- Operating Income - Adjusted(1) $3,739 $5,407 (30.8%) ------------------------------------------------------------------------- Diluted EPS - Reported $0.09 $0.13 Adjustments: (a) Non-recurring Shire milestone receipt(2) (0.01) - (b) Insurance proceeds(3) (0.01) - (c) DSU expense (recovery)(4) - - Anipryl(R) deferred revenues - (0.04) ---------------------------------------------------------- Operating Income - Adjusted(1) $0.07 $0.09 ---------------------------------------------------------- (1) “Adjusted Operating Income” and “Adjusted Diluted EPS” are defined as reported operating income and diluted EPS excluding certain items. Management uses adjusted operating income, among other factors to set performance goals and to measure the performance of the overall Company. The Company believes that investors’ understanding of our performance is enhanced by disclosing this measure. (2) The Company became entitled to and received non-recurring contingent milestone payments from Shire BioChem Inc. (3) Insurance proceeds related to a business interruption claim filed resulting from equipment damage during 2005 shutdown period. (4) Reflects the change in the value of Deferred Share Unit Plan based on the market price of the Company’s common stock. See Note 7 of accompanying interim financial statements. Interim Financial Report
This release includes by reference the second quarter interim financial report incorporating the full Management’s Discussion & Analysis (MD&A) as well as financial statements for the quarter ended June 30, 2007, prepared in accordance with U.S. GAAP. The interim financial report, including the MD&A and financial statements, has been filed with applicable Canadian and U.S. securities regulatory authorities and is accessible on the Company’s website at www.draxis.com in the Investor Relations section under Financial Reports. It is also available, on the SEDAR (at www.sedar.com) and EDGAR (at www.sec.gov) databases or upon request by contacting DRAXIS Investor Relations at 1-877-441-1984.
Conference Call
DRAXIS has scheduled a conference call to discuss second quarter 2007 financial results at 10 a.m. (ET) on August 9, 2007. This call can be accessed by dialing 1 (800) 819-9193 (Access Code 7481512) and will also be webcast live with access through the Company’s website at www.draxis.com. The conference call will also be available in archived format on the website for 30 days following the conference call.
About DRAXIS Health Inc.
DRAXIS Health, through its wholly owned operating subsidiary, DRAXIS Specialty Pharmaceuticals Inc. (DSPI), provides products in three categories: sterile products, non-sterile products and radiopharmaceuticals. Sterile products include liquid and freeze-dried (lyophilized) injectables plus sterile ointments and creams. Non-sterile products are produced as solid oral and semi-solid dosage forms. Radiopharmaceuticals are used for both therapeutic and diagnostic molecular imaging applications. Pharmaceutical contract manufacturing services are provided through the DRAXIS Pharma division and radiopharmaceuticals are developed, produced, and sold through the DRAXIMAGE division. DRAXIS employs approximately 500 staff in its Montreal facility.
For additional information please visit www.draxis.com. Caution Concerning Forward-Looking Statements
This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as contemplated under other applicable securities legislation. These statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “believe” or other similar words. These statements discuss future expectations concerning results of operations or financial condition or provide other forward-looking information. Our actual results, performance or achievements could be significantly different from the results expressed in, or implied by, those forward-looking statements. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made.
These statements are not guarantees of future performance. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from such statements or from any future results or performance implied thereby. Factors that could cause the Company’s results or performance to differ materially from a conclusion, forecast or projection in the forward-looking statements include, but are not limited to:
- the achievement of desired clinical trial results related to the Company’s pipeline products; - timely regulatory approval of the Company’s products; - the ability to comply with regulatory requirements applicable to the manufacture and marketing of the Company’s products; - the Company’s ability to obtain and enforce effective patents; - the non-infringement of third party patents or proprietary rights by the Company and its products; - factors beyond our control that could cause interruptions in our operations in our single manufacturing facility (including, without limitation, material equipment breakdowns); - reimbursement policies related to health care; - the establishment and maintenance of strategic collaborative and commercial relationships; - the Company’s dependence on a small number of key customers; - the disclosure of confidential information by our collaborators, employees or consultants; - the preservation of healthy working relationships with the Company’s union and employees; - the Company’s ability to grow the business; - the fluctuation of our financial results and exchange and interest rate fluctuations; - the adaptation to changing technologies; - the loss of key personnel; - the avoidance of product liability claims; - the loss incurred if current lawsuits against us succeed; - the volatility of the price of our common shares; - market acceptance of the Company’s products; and - the risks described in “Item 3. Key Information - Risk Factors” in the Annual Report Form 20-F filed by the Company with the United States Securities and Exchange Commission and which is also filed as the Company’s Annual Information Form with Canadian securities regulators.
For additional information with respect to certain of these and other factors, and relating to the Company generally, reference is made to the Company’s most recent filings with the United States Securities and Exchange Commission (available on EDGAR at www.sec.gov) and the filings made by the Company with Canadian securities regulators (available on SEDAR at www.sedar.com). The forward-looking statements contained in this new release represent the Company’s expectations as at August 8, 2007. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Financial Tables Attached DRAXIS HEALTH INC. Consolidated Statements of Operations In Accordance with U.S. GAAP ------------------------------------------------------------------------- (in thousands of U.S. dollars except share related data) (unaudited) For the Three-Month For the Six-Month Periods Ended June 30, Periods Ended June 30, ------------------------- ------------------------- 2007 2006 2007 2006 ----------- ------------ ----------- ------------ REVENUES $ 19,048 $ 23,003 Product sales $ 38,678 $ 40,651 Royalty and 389 1,262 licensing 1,737 2,690 ------------------------------------------------------------------------- 19,437 24,265 40,415 43,341 ------------------------------------------------------------------------- EXPENSES Cost of goods sold, excluding depreci- ation and amortiz- 11,652 11,930 ation (Note 3) 23,830 22,762 Selling, general 3,151 5,131 and administratio 7,335 9,492 Research and 694 633 development 1,618 1,422 Depreciation and 1,406 1,230 amortization 2,652 2,425 ------------------------------------------------------------------------- 16,903 18,924 35,435 36,101 ------------------------------------------------------------------------- 2,534 5,341 Operating income 4,980 7,240 172 46 Financing income, net 358 54 (882) (283) Foreign exchange loss (990) (238) ------------------------------------------------------------------------- Income before income
