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Rating Action:

Moody's affirms Patheon's B2 CFR; assigns liquidity rating of SGL-2

Global Credit Research - 21 Mar 2011

Approximately $355 million of rated debt affected

New York, March 21, 2011 -- Moody's affirmed the ratings of Patheon, Inc. ("Patheon"), including the B2 Corporate Family Rating and B2 Probability of Default Rating. At the same time Moody's assigned to Patheon a first time Speculative Grade Liquidity Rating of SGL-2, reflecting Moody's expectations of good liquidity over the next twelve months. The rating outlook remains stable.

Ratings affirmed/ LGD point estimate revised:

$75 million ABL facility due 2014, Ba3 (LGD3, 32%)

$280 million Senior Secured notes due 2017, B1 (LGD3, 41%)

Corporate Family Rating, B2

Probability of Default Rating, B2

The rating outlook is stable.

RATINGS RATIONALE

The SGL-2 rating is supported by the company's cash balance, availability under its ABL revolver and the lack of financial maintenance covenants in the capital structure. At January 21, 2011 Patheon had $50 million of cash, which Moody's believes will increase following the contractual payment from Johnson & Johnson (J&J) under a now terminated take-or-pay arrangement. The liquidity rating is constrained by Moody's expectation that Patheon's free cash flow will remain negative or slightly breakeven over the next 12 to 18 months.

The B2 Corporate Family Rating is constrained by the weak profitability and cash flow of the company, partly due to the underperformance of three Puerto Rico facilities acquired in FY2005 (one of which was closed in 2009), as well as broader weakness in the pharmaceutical outsourcing industry. Further, the significant fixed costs of the business lead to high operating leverage and margins that are extremely sensitive to revenue and product mix. These characteristics lend a measure of volatility to both revenues and profitability.

The ratings are also constrained by the risks inherent in the business, including the potential loss of revenues due to generic competition, product approval delays and client repatriation of products, which have all negatively impacted operations over the past several years. For example, the termination of the J&J agreement was prompted by J&J's difficulty in gaining regulatory approvals for Ceftobiprole, an antibiotic. Moody's believes this development could put longer-term pressure on Patheon's margins due to the costs of running an under-utilized facility, if the company is not able to fill this specialized manufacturing space with another product.

The ratings are supported by the company's relatively modest financial leverage and good liquidity. The ratings also reflect Patheon's leading market position in the pharmaceutical contract manufacturing arena which has high barriers to entry. In addition, Moody's believes that demand from pharmaceutical companies for contract manufacturing services will be sound over the long-term.

The principal methodologies used in this rating were Global Business & Consumer Service Industry Rating Methodology published in October 2010, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Patheon Inc. ("Patheon"), headquartered in Mississauga, Canada, is a leading provider of commercial manufacturing and pharmaceutical development services ("PDS") of branded and generic prescription drugs to the international pharmaceutical industry. Patheon's stock is publicly traded on the Toronto Stock Exchange, and the company recently filed a registration statement with the SEC. JLL Partners, a private equity firm, owns approximately 56% of the company's restricted voting shares. For the twelve month period ended January 31, 2011 Patheon reported revenues of $692 million.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Christina Padgett
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Jessica Gladstone
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Patheon's B2 CFR; assigns liquidity rating of SGL-2
No Related Data.
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