FY 2016 Financial Results Call December 2016

4Q/FY 2016 Financial Results Call December 2016 ©2016 PATHEON® FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES Forward-Looking Statements This pr...
Author: Philip Dixon
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4Q/FY 2016 Financial Results Call

December 2016

©2016 PATHEON®

FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES Forward-Looking Statements This presentation contains forward-looking statements which reflect the current beliefs and expectations of Patheon’s management regarding the company’s future growth, results of operations, performance (both operational and financial) and business prospects and opportunities. The statements in this presentation are not historical facts and may be forward-looking statements. Readers can identify these forward-looking statements by the use of words such as ‘‘outlook,’’ ‘‘believes,’’ ‘‘expects,’’ ‘‘potential,’’ ‘‘continues,’’ ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘seeks,’’ ‘‘approximately,’’ ‘‘predicts,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘estimates,’’ ‘‘anticipates’’ or the negative version of these words or other comparable words. Such forward looking statements are subject to various risks and uncertainties, which could cause actual results to differ from those indicated in these forward looking statements. For more information concerning factors that could cause actual results to differ materially from those conveyed in the forward-looking statements, please refer to the "Risk Factors" section of the prospectus included in the company’s registration statement, in the form last filed with the SEC. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law. Accordingly, readers should not place undue reliance on forward-looking statements as a prediction of actual results. Use of Non-GAAP Financial Measures See the Appendix for additional information regarding the use of Non-GAAP financial measures.

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©2016 PATHEON®

STRONG 2016 PERFORMANCE – POSITIVE MOMENTUM INTO 2017

Growth across all segments, helping clients simplify the supply chain

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Strong financial performance in the quarter and for the year

Positive momentum going into 2017, 85% of next year’s revenue locked in

Execute on the M&A strategy acquisition of North

American API site

©2016 PATHEON®

Invest in new capabilities to support key growth areas – sterile and Biologics

Outlook for 2017 in line with consensus of analyst’s estimates

STRONG Q4 FINANCIAL RESULTS REVENUE ($M)

ADJUSTED NET INCOME ($M)

10% Growth

22% Growth $67

Adj. EPS $0.46

$510

$462

$55

4Q15

4Q16

4Q15

4Q16

KEY CONSIDERATIONS

ADJUSTED EBITDA ($M)

17% Growth $124

• •

Shares Outstanding Q4’16: 145M Diluted Weighted Avg. Shares Q4’16: 146M



Interest Expense Q4’16: $31M, including ~$3M amortization of deferred financing costs



Q4’16 adjusted EPS positively impacted by favorable tax expense

$106

4Q15

4Q16

STRONG GROWTH DELIVERS 24% ADJUSTED EBITDA MARGIN 4

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©2016 PATHEON®

Q4’16: BROAD-BASED GROWTH ACROSS ALL SEGMENTS

DRUG SUBSTANCE SERVICES (DSS)

PHARMACEUTICAL DEVELOPMENT SERVICES (PDS)

DRUG PRODUCT SERVICES (DPS)

Revenue up 10% y/y to $152 million

Revenue up 18% y/y to $60 million

Revenue up 10% y/y to $298 million

Adj. EBITDA up 9% y/y to $49 million

Adj. EBITDA up 36% y/y to $23 million

Adj. EBITDA up 14% y/y to $80 million

Adj. EBITDA margin 32%

Adj. EBITDA margin 37%

Adj. EBITDA margin 27%

• Continued strong demand for biologic services

• Strong demand for sterile and lowsolubility services

• Continued volume growth and demand across sterile and oral solid dose

• Biologics represents approximately 50% of the segments revenues

• Improved productivity across the network

• Key client wins • 2017: ~95% of revenue under contract

• 2017: ~85% of revenue under contract

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• 2017: ~ 45% of revenue under contract

©2016 PATHEON®

CASH POSITION OF $165 MILLION

Delevering

Cash Position •

Cash Position: Q3: $100 million****

Deleverage rapidly through debt reduction and Adjusted EBITDA expansion

Q4: $165 million* Q4FY15 LTM

Q4: $347M total liquidity

5.6x*

$2.1B Gross Debt

Q4FY16 LTM

$2.0B Net Debt

4.7x* •

* Incl. $20M borrowing from revolver facility

• •

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NTM Leverage Ratio = 4.1x** Leverage ratio is calculated based on net debt and pro forma adjusted EBITDA

*Leverage ratios derived using total debt on the balance sheet less cash on the balance sheet divided by LTM pro-forma Adjusted EBITDA ** NTM Leverage based on forecasted Adjusted EBITDA Refer to reconciliation tables for LTM pro-forma adjusted EBITDA *** Net of cash used for debt repayment in Q4

©2016 PATHEON®

CONTINUED GROWTH WITH STRONG MOMENTUM

SOLID BUSINESS MOMENTUM • More than 100 Tech Transfers in 2016 • More than 50 Launches o 17 New Drug Approvals in FY 2016 • 470 New Contracts Including: o Boehringer Ingelheim, Amgen, Grünenthal • Positive strategic dialogues with clients

Growth across all 3 segments

Successful IPO; reducing leverage

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Strong demand for services

©2016 PATHEON®

SIGNIFICANT ACHIEVEMENTS • Successful IPO • Key management additions: new President, leaders in API and Biologics segments • Added high-quality API capacity with facility acquisition

ACQUISITION OF STATE OF THE ART API FACILITY EXPECTED TO CLOSE FEBRUARY 2017

Florence, South Carolina

STRONG BENEFITS

State of the art facility

Expanded API capacity in North America

Multi-year manufacturing agreement with Roche

SIGNIFICANT OPPORTUNITY

Margin Enhancement Opportunities

Immediate Capacity Utilization

200 professionals, 1,100 acre site to support continued growth 8

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©2016 PATHEON®

Long-Term Growth

FY 2017 OUTLOOK

CONFIDENTIAL ©2016 PATHEON®

SOLID TRACK RECORD OF PERFORMANCE

Revenue Adjusted EBITDA*

8%

1,867

1,774

CAGR***

Organic Growth

1,484 $ in millions

991 748

648**

29** Adj. EBITDA Margin

$700M

87

4%

12%

2011

2012

143

14% 2013

248

375

17%

21%

2014

2015

Revenue from 5 Acquisitions in 5 Years (excluding divestitures)

395

21%

2016

OUTPACING MARKET GROWTH ON BOTH THE TOP LINE AND BOTTOM LINE *Non-GAAP, see Appendix for reconciliation. **Adjusted for contract termination fee. *** CAGR for 2013-2015 and includes FX adjustments

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©2016 PATHEON®

FY17 GUIDANCE | OVERVIEW Mid-term Financial Objectives at IPO

FY 2017 Outlook

ORGANIC REVENUE GROWTH OF 8-9%

ORGANIC REVENUE GROWTH OF 10% $2,050M, on a currency neutral basis

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SOLID MARGIN PROFILE

ADJ EBITDA MARGIN EXPANSION OF 200bps

~150 bps expansion per annum

Adj. EBITDA of $475M

©2016 PATHEON®

KEY ASSUMPTIONS FOR FY 2017 OUTLOOK REVENUE GROWTH OF 10% ASSUMES: CURRENCY NEUTRAL

EVERY $0.01 RATE CHANGE

ADDITIONAL ITEMS INTEREST EXPENSE: $108M

PATHEON-FUNDED CAPEX: $155M

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The avg rate of 2016 Euro / US of $1.11

Impacts top line by $5M and Adj EBITDA by $1M

Excluding amortization of deferred financing costs

CURRENCY COMPOSITION:

AT EURO/US $1.15 RATE AT IPO

FLORENCE SITE ACQUISITION NOT INCLUDED

65% Dollar/ 30% Euro/ 5% Other

2017 US revenue outlook would be $2,070M

©2016 PATHEON®

2/3 growth CapEx

HIGH VISIBILITY TO FY17 BUSINESS DEMANDS: 85% of FY17 revenue locked in

2017 ADJ. EBITDA, ADJ. NET INCOME AND ADJ. EPS $475

$105

$108

Adjusted Net Income: $202 - $222 $40 - $60

~147M Shares

$202 - $222

Adjusted Depreciation Interest EBITDA Expense

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Tax Impacts

| Based on 2017 FactSet Consensus Estimate of Analysts

Adjusted Net Income

©2016 PATHEON®

Adjusted EPS $1.37 - $1.51

LEADING INDICATOR OF LONG-TERM TOTAL CONTRACT VALUE (TCV)

• Metric built on historical analysis of Patheon sales to revenue conversion rates • Signed business only • Indicator of long-term growth • TCV naturally ramps throughout fiscal year • Combined with base business, supports 8-9% revenue growth

• Long and Short Conversion Cycles o 12 to 24 months for commercial o 6 to 18 months for development • High forward visibility, sticky revenue streams • Avg. Length of Contract o Commercial - 5 to 10 years o Development - 18 to 24 months

TCV = revenue expected to be booked over the life of the contracts closed in the current year 14

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©2016 PATHEON®

TOTAL CONTRACT VALUE OF $2B+ IN 2017 EXAMPLE OF SALES TO REVENUE CONVERSION

$2.0 – 2.2B Total Contract Value Development Commercial

ILLUSTRATIVE

2017

2018

FY17 New Business Wins

2019

Revenue Conversion

TCV = Revenue expected to be booked over the life of the contracts closed in the current year

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©2016 PATHEON®

2020

2021-2025

DRIVING ABOVE-MARKET PERFORMANCE

STRONG CLIENT DEMAND

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ABOVE-MARKET REVENUE GROWTH

©2016 PATHEON®

SOLID MARGIN PROFILE

Questions?

CONFIDENTIAL ©2016 PATHEON®

RECONCILIATION OF GAAP TO NON-GAAP MEASURES Unaudited Three months ended

Three months ended

Twelve months ended

Twelve months ended

10/31/2016

10/31/2015

10/31/2016

10/31/2015

$

$

$

$

(in millions of U.S. dollars, except share data) Net income from continuing operations Depreciation and amortization

$

44.1 31.5

$

40.8 28.5

$

34.8 113.0

$

34.9 107.8

Repositioning expenses

6.3

3.8

9.2

25.1

Acquisition and integration costs

4.0

4.0

16.6

22.3

30.9

42.8

160.4

141.8

Interest expense, net Impairment charge

-

(Benefit from) provision for income taxes

0.9

(24.3)

Refinancing expenses

-

(19.5)

4.1

(24.0)

0.3

21.6

-

21.6

3.7

Operational initiatives related consulting costs

0.3

4.1

4.2

13.0

IPO costs

0.9

2.1

2.0

4.5

Acquisition-related litigation expenses

1.0

4.9

4.0

12.7

Stock-based compensation expense

5.3

2.6

21.6

13.9

Remediation costs

5.3

2.6

32.8

2.6

Gain on sale of third party investment

-

Other Total Adjusted EBITDA

(16.2)

(3.0) $

123.9

-

4.7 $

106.1

(16.2)

(1.6) $

394.6

4.1 $

374.6

Depreciation

(25.2)

(23.7)

(88.4)

(85.1)

Interest expense

(28.2)

(39.6)

(147.8)

(130.6)

24.3

19.5

24.0

(0.3)

(20.2)

(5.1)

(29.0)

(6.0)

(7.2)

(1.9)

(26.5)

(18.2)

Tax expense Discrete tax items Estimated tax effect on adjustments Adjusted net income

$

Weighted average shares - diluted (in millions) Adjusted net income per diluted share

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67.4

$

145.8 $

0.46

55.3

$

115.6 $

0.48

©2016 PATHEON®

126.9

$

124.3 $

1.02

134.4 115.6

$

1.16

CONSOLIDATED SEGMENT OPERATIONS Unaudited (in millions of U.S. Dollars) Three months ended October 31, 2016 Revenues

Adjusted EBITDA

$

$

DPS

297.9

80.4

PDS

60.4

22.6

DSS

152.2

49.1

Other

-

(28.2)

(0.3)

-

Intersegment Eliminations Total

510.2

123.9

Three months ended October 31, 2015 Revenues

Adjusted EBITDA $

DPS

272.4

70.6

PDS

51.2

16.6

DSS

138.5

45.2

Other

-

(26.3)

Intersegment Eliminations Total

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$

(0.1) 462.0

106.1

©2016 PATHEON®

RECONCILIATION FOR CONSOLIDATED EBITDA per CREDIT AGREEMENT Unaudited (in millions of U.S. dollars) Consolidated EBITDA per Credit Agreement Less Pro forma cost savings Other Adjusted EBITDA (Deduct) add Depreciation and amortization Repositioning expenses Acquisition and integration costs Interest expense, net Benefit from income taxes Refinancing expenses Operational initiatives related consulting costs IPO Costs Acquisition-related litigation expenses Stock-based compensation expense Remediation costs Other Income from continuing Operations Add (deduct): Depreciation and amortization Stock-based compensation expense Net change in non-cash working capital Net change in deferred revenues Non-cash interest Other, primarily changes in long-term assets and liabilities of deferred taxes Cash flows from operating activities of continuing operations Cash flows from operating activities of discontinued operations Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities

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Twelve Months Ended October 31, 2016 $ 420.2 (24.8) (0.8) 394.6 (113.0) (9.2) (16.6) (160.4) 24.0 (21.6) (4.2) (2.0) (4.0) (21.6) (32.8) 1.6 34.8

113.0 21.6 (175.9) 92.7 25.3 (50.7) 60.8 (2.9) 57.9 (206.7) (16.0)

©2016 PATHEON®

ADJUSTED EBITDA RECONCILIATION Unaudited

(in millions of U.S. dollars) Net (loss) income from continuing operations Depreciation and amortization Repositioning expenses Acquisition and integration costs Interest expense, net Impairment charge Provision for (benefit from) income taxes Refinancing expenses Operational initiatives related consulting costs IPO costs Acquisition-related litigation expenses Stock-based compensation expense Remediation costs Purchase accounting adjustments Gain on sale of third party investment Other Total Adjusted EBITDA

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FY 2011 $ (16.1) 53.2 7.0 25.6 1.1 9.0 3.5 (4.7) 78.6

FY 2012 $ (106.7) 40.8 6.1 3.2 26.5 57.9 43.4 13.3 3.1 (0.5) 87.1

©2016 PATHEON®

FY 2013 $ (32.6) 46.9 15.8 17.0 47.9 13.1 (3.7) 27.3 2.3 6.4 3.2 2.8 (3.6) 142.8

FY 2014 $ (117.1) 79.5 51.7 60.3 90.5 9.7 4.3 28.2 10.1 10.2 10.0 11.4 (0.5) 248.3

FY 2015 $ 34.9 107.8 25.1 22.3 141.8 4.1 0.3 3.7 13.0 4.5 12.7 13.9 2.6 (16.2) 4.1 374.6

FY 2016 $ 34.8 113.0 9.2 16.6 160.4 (24.0) 21.6 4.2 2.0 4.0 21.6 32.8 (1.6) 394.6

2011 REVENUE AND ADJUSTED EBITDA RECONCILIATION ($ in millions)

Revenue

2011 Reported Contract cancellation fee Pro forma results

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©2016 PATHEON®

Adjusted EBITDA 698.0

78.6

50.0

50.0

648.0

28.6

USE OF NON-GAAP FINANCIAL MEASURES Use of Non-GAAP Financial Measures We define Adjusted EBITDA as income (loss) from continuing operations before repositioning expenses (including certain product returns and inventory write-offs recorded in gross profit), interest expense, foreign exchange losses reclassified from other comprehensive income (loss), refinancing expenses, acquisition and integration costs (including certain product returns and inventory write-offs recorded in gross profit), gains and losses on sale of capital assets, Biologics earnout income and expense, income taxes, impairment charges, remediation costs, depreciation and amortization, stock-based compensation expense, consulting costs related to our operational initiatives, purchase accounting adjustments, acquisition-related litigation expenses and other income and expenses. We define Adjusted net income as Adjusted EBITDA minus depreciation expense (excluding amortization from intangibles acquired in acquisitions), interest expense (excluding amortization of the deferred financing costs), and tax expense. In addition, we exclude discrete tax items and apply an estimated tax effect on adjustments within the calculation. The estimated tax effect is calculated using statutory tax rates on each expense item, except in the case where a jurisdiction is under a full valuation allowance at the time of the expense, in which we apply a tax rate of 0%. We define Adjusted EPS as Adjusted net income divided by the average number of shares outstanding on a diluted basis for the related period. Our management uses Adjusted EBITDA as one of several metrics to measure the Company’s operating performance. Adjusted EBITDA is also a component of the performance objectives used to determine the short and long-term incentive portions of executive compensation. We present Adjusted net income and Adjusted EPS because we believe they are useful supplemental measures in evaluating the performance of our operations and provide greater transparency into our results. We believe that providing these non-GAAP financial measures to investors as a supplement to the comparable U.S. GAAP measures in evaluating the performance of our operations provides greater transparency to the information used by the Company’s management in its financial and operational decision-making. These non-GAAP financial measures do not have standard meanings, so they may not be comparable to similarly-titled measures presented by other companies and should not be considered in isolation or as a substitute for U.S. GAAP financial measures of performance. Reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP financial measure is included with the financial statements in this press release. The Company does not provide a reconciliation of forward-looking non-GAAP financial measures to their comparable GAAP financial measures because it could not do so without unreasonable effort due to the unavailability of the information needed to calculate reconciling items and the variability, complexity and limited visibility of the adjusting items that would be excluded from the non-GAAP financial measures in future periods. When planning, forecasting and analyzing future periods, the Company does so primarily on a non-GAAP basis without preparing a GAAP analysis as that would require estimates for various cash and non-cash reconciling items that would be difficult to predict with reasonable accuracy. For example, equity compensation expense would be difficult to estimate because it depends on the Company’s future hiring and retention needs, as well as the future fair market value of the Company’s common stock, all of which are difficult to predict and subject to constant change. It is equally difficult to anticipate the need for or magnitude of a presently unforeseen one-time restructuring expense or the values of end-of-period foreign currency exchange rates. As a result, the Company does not believe that a GAAP reconciliation to forward-looking on-GAAP financial measures would provide meaningful supplemental information about the Company’s outlook. 23

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©2016 PATHEON®