DRAXIS Health Reports Record 20 Cents Basic EPS from Continuing Operat

    News Editors

    MISSISSAUGA, Ontario--(BUSINESS WIRE)--Feb. 10, 2005--

    Target for 2005 basic EPS is 27 to 30 cents

    DRAXIS Health Inc. (TSX:DAX)(NASDAQ:DRAX) reported a solid fourth-quarter and record operating results for the year ended December 31, 2004 to post its fifth consecutive year of strong operating revenue and earnings growth from its two core operating businesses. All amounts are expressed in U.S. dollars.

    Highlights

    - Revenues from continuing operations up 41% both in the fourth-quarter to $20.3 million and in the full-year 2004 to $69.3 million.

    - Net income from continuing operations up 61% for the fourth-quarter to $2.3 million and up 71% for the full-year 2004 to $8.0 million.

    - Basic EPS from continuing operations of 6 cents for the fourth-quarter and 20 cents for the full-year 2004, up 59% from 2003.

    - All outstanding third party debt repaid in the fourth-quarter 2004.

    - Outlook for 2005 - Consolidated revenues expected to range from $88 million to $92 million; basic EPS is expected to reach $0.27 to $0.30.

    "DRAXIS has delivered record operating results in 2004 and improved cash flows from our two core operating businesses following last year's successful strategic divestiture of the Canadian sales and marketing group" said Dr. Martin Barkin, President and CEO of DRAXIS. "We are debt free at year-end and we generated a significant $4.4 million of cash flows from operating activities during the full-year 2004 compared to a cash outflow from operating activities of $3.2 million in 2003. Our contract manufacturing business achieved fourth-quarter revenues 72% above last year's fourth-quarter and their EBITDA margin reached 20.7% of revenues, primarily as a result of our strategic focus in the specialized production of sterile products. We expect this growth pattern to continue into 2005 and beyond as we bring on new customers as well as new products from existing customers and as we increase operating efficiencies and capacity to accommodate this growth. Our radiopharmaceuticals business did not meet expectations for fourth-quarter 2004 and, as a result, a significant proportion of corporate management's attention is now focused on this operation."

    Fourth-quarter 2004 consolidated revenues from continuing operations were $20.3 million, up 41.0% from fourth-quarter 2003. Net income from continuing operations for the fourth-quarter 2004 increased to $2.3 million ($0.06 per share) from $1.4 million ($0.04 per share) in the fourth-quarter 2003.

    For the full-year 2004, revenues from continuing operations were $69.3 million, 40.9% greater than full-year 2003. Net income from continuing operations for full-year 2004 was $8.0 million ($0.20 per share), up 70.8% from $4.7 million ($0.13 per share) for the full-year 2003.

    Results from continuing operations for full-year 2003 include, except where indicated, the one-time recognition of $1.4 million as revenue related to BrachySeed(R) and $0.7 million in insurance proceeds as a reduction in cost of goods sold and exclude $8.5 million of income from discontinued operations, related to the one-time gain from the 2003 divestiture of Canadian pharmaceutical sales and marketing operations.

--------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (in thousands of U.S. dollars except share related data and in accordance with U.S. GAAP)

Q4, 2004 Q4, 2003 (unaudi- (unaudi- 2004 2003 ted) ted) (unaudited)(audited) REVENUES $18,352 $12,440 Product sales $61,693 $ 40,535 1,934 1,945 Royalty and licensing 7,627 8,658 (2) --------------------------------------------------------------------- $20,286 $14,385 $69,320 $ 49,193 --------------------------------------------------------------------- ---------------------------------------------------------------------

Research and development $ 502 $475 expense $ 1,948 $ 1,594

$ 4,092 $ 2,589 EBITDA(1) $14,313 $ 9,973(2)(3) 20.2% 18.0% EBITDA Margin(1) 20.6% 20.3%

$ 2,858 $ 1,664 Operating income $ 9,856 $ 6,686(2)(3) 14.1% 11.6% Operating Margin 14.2% 13.6%

$ 5,926 $10,563 Cash and cash equivalents $ 5,926 $ 10,563

$ 0 $10,466 Total debt $ 0 $ 10,466

Cash flows from (used in) $ 3,942 $ 1,574 operating activities $ 4,393($ 3,221) Cash flows used in investing (2,008) (1,137) activities (4,493) (3,493) --------------------------------------------------------------------- $ 1,934 $ 437 ($ 100)($ 6,714) --------------------------------------------------------------------- ---------------------------------------------------------------------

Net income(loss) $ 2,267 $ 1,409 from continuing operations $ 7,977 $ 4,671 (34) 112 from discontinued operations (61) 8,531 --------------------------------------------------------------------- $ 2,233 $ 1,521 $ 7,916 $ 13,202 --------------------------------------------------------------------- ---------------------------------------------------------------------

Basic income(loss) per share $ 0.055 $ 0.038 from continuing operations $ 0.200 $ 0.126 (0.001) 0.003 from discontinued operations (0.002) 0.230 --------------------------------------------------------------------- $ 0.054 $ 0.041 $ 0.198 $ 0.356 --------------------------------------------------------------------- ---------------------------------------------------------------------

    (1) Non-GAAP Financial Measures. The terms EBITDA (earnings before financing expense and other income, income taxes, minority interest, depreciation and amortization) and EBITDA margin (EBITDA divided by total revenues) do not have a standardized meaning prescribed by U.S. GAAP and therefore may not be comparable to similar measures used by other companies. DRAXIS defines EBITDA as operating income before depreciation and amortization expense and EBITDA is presented on a basis that is consistent from period to period. DRAXIS uses EBITDA measures to assess the operating performance of its on-going businesses without the effects of amortization expense. Amortization expense is excluded because it substantially depends on the accounting methods and assumptions used as well as the historical cost of capital assets. DRAXIS believes that certain shareholders and investors prefer such measures in evaluating the ability of a reporting company to service debt or as the basis for a valuation measurement. EBITDA should not be construed as the equivalent of net cash flows from operating activities. The most comparable U.S. GAAP earnings measure is operating income.

    (2) Includes $1,436 of revenue related to the termination of agreements for BrachySeed(R).

    (3) Includes $730 of insurance proceeds.

    All remaining third party debt was repaid during fourth-quarter 2004. Cash and cash equivalents stood at $5.9 million at December 31, 2004. Cash flows from operating activities increased substantially to $3.9 million for fourth-quarter 2004 versus $1.6 million for the fourth-quarter 2003 and to $4.4 million for full-year 2004 compared to a cash outflow from operating activities of $3.2 million for full-year 2003.

    Subsequent to the end of the quarter, effective January 1, 2005, the Company undertook the legal amalgamation of its two core subsidiaries so that they will now operate simply as two divisions of one entity, called DRAXIS Specialty Pharmaceuticals Inc. This corporate reorganization will not impact the functions or staffing of these divisions but will allow the Company to utilize in a timely fashion its CDN$25 million in tax loss carryforwards available to the Canadian operations. The amalgamation also creates opportunities for achieving operating synergies over the long-term.

    Segment Highlights from Management's Discussion and Analysis

    Contract Manufacturing

    - Revenues in fourth-quarter 2004 were up 72.0% to $14.9 million versus $8.7 million in fourth-quarter 2003. Full-year 2004 revenues were up 72.2% to $46.5 million versus $27.0 million in 2003. The increase is due to continuing growth in sterile products, particularly sterile injectables, topical products and ointments.

    - Earnings before financing expense and other income, income taxes, minority interest, depreciation and amortization ("EBITDA") for fourth-quarter 2004 was $3.1 million compared to $0.6 million for fourth-quarter 2003. For the full-year, EBITDA was $8.0 million for 2004 compared to $1.1 million for 2003.

    - EBITDA margin for fourth-quarter 2004 was 20.7% of revenues, bringing full-year 2004 EBITDA margin to 17.3% of revenues, primarily due to a product mix heavily concentrated on sterile and lyophilized products.

    - During fourth-quarter 2004 significant progress was made toward completing the validation process for the Company's second lyophilizer unit, which should triple existing lyophilization capacity over time.

    Radiopharmaceuticals

    - Product sales for fourth-quarter 2004 were $4.0 million, compared to $4.2 million for fourth-quarter of 2003. Full-year 2004 product sales were $17.2 million, or 17.9% ahead of full-year 2003 product sales of $14.6 million.

    - Demand for diagnostic imaging kits was down during October and November 2004, but returned to levels consistent with historic patterns in December.

    - EBITDA for fourth-quarter 2004 was $0.5 million versus $1.1 million for fourth-quarter 2003 and for the full-year 2004 EBITDA was $4.2 million compared to $5.6 million in 2003, reflecting increased sales and marketing activities plus increased research and development spending coupled with the impact of lower sales of diagnostic kits during fourth-quarter 2004.

    - MDP-25, launched in the fall of 2004 as an improved alternative for skeletal imaging, has yet to succeed in displacing our MDP-10.

    - The market for BrachySeed(R) remains challenging and sales in the fourth quarter continue to be flat.

    Outlook for 2005

    The Company expects to achieve consolidated revenues in 2005 of $88 million to $92 million, up more than 27% from the current year's revenue of $69 million. More than 95% of consolidated revenues are expected to come from the Company's two main operating divisions, with the balance, or less than 5% of revenues, expected to come from the corporate segment. It is anticipated that at least 70% of revenues from the operating divisions will come from contract manufacturing.

    Basic earnings per share from continuing operations in 2005 are expected to reach $0.27 - $0.30, an increase of at least 35% from the current year's $0.20. The change in accounting commencing in third-quarter 2005 for stock-based compensation is not expected to affect earnings by more than $0.01 per share in 2005 and this has been taken into account for 2005 earnings expectations.

    The Company currently has no debt. Current total capital expenditure budgets to increase productivity and maintain regulatory compliance are anticipated to be less than $5 million in 2005. Cash flows from operating activities are expected to be at least $10 million for 2005, subject to working capital requirements driven by business growth.

    Currency fluctuations, particularly between the Canadian and the U.S dollar, are not expected to have a significant effect within a relatively broad range of 75 to 90 cents Canadian per U.S. Dollar because of the mix of business and currencies currently built into the prices that make up the major revenues in both contract manufacturing and radiopharmaceuticals in 2005.

    At the current rate of utilization and new business growth, contract manufacturing capacity for sterile products is expected to reach its optimal levels by the end of 2007. Accordingly, the Company will begin to explore various options during 2005 to increase capacity, including expansion, reconfiguring the existing facility and/or potential acquisitions.

    The final analysis of the data from the FIBRIMAGE(R) Phase III trial in Canada will be completed during the first quarter of 2005 and, pending the outcome of the analysis, the Company expects to file a New Drug Submission in Canada in the first half of 2005. The commencement of a US Phase III clinical trial awaits the outcome of continuing discussions with the FDA regarding the design of such a study. The Company is also in the process of conducting detailed marketing studies to further define the potential target patient populations.

    Phase II clinical studies of INFECTON(R) are underway in both Canada and the U.S. and the Company expects to be able to complete these studies and move to Phase III studies of INFECTON(R) in 2005, pending the results of the Phase II studies.

    Interim Financial Report

    This release includes by reference the fourth quarter interim financial report incorporating the full Management Discussion & Analysis (MD&A) as well as financial statements prepared in accordance with both U.S. and Canadian GAAP. The interim report, including the MD&A and financial statements, has been filed with applicable Canadian and U.S. securities regulatory authorities, is accessible on the Company's website at www.draxis.com in the Investor Relations section under Financial Reports, through the SEDAR and EDGAR databases and is available upon request by contacting DRAXIS Investor Relations at 1-877-441-1984.

    Conference Call

    DRAXIS has scheduled a conference call to discuss fourth quarter and full year 2004 financial results at 10 a.m. (ET) on February 10, 2005. This call can be accessed by dialing 1 (888) 202-2422 (Access Code 6864286) 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 90 days following the conference call.

    About DRAXIS Health Inc.

    DRAXIS Health Inc. www.draxis.com is a rapidly growing company providing specialty pharmaceutical products globally in three categories. Sterile products include liquid and freeze-dried (lyophilized) injectables, sterile ointments and sterile creams. Specialty non-sterile products are produced as tablets, capsules, ointments, liquids and creams. Proprietary 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 Health employs nearly 500 staff in its Montreal facility.

    This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 which could cause the Company's results or performance to differ from current expectations 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; the establishment and maintenance of strategic collaborative and commercial relationships; the Company's dependence on a small number of key customers; the Company's ability to protect its confidential information; the preservation of healthy working relationships with the Company's unions and employees; the avoidance of product liability claims; and market acceptance of the Company's products. For additional information with respect to certain of these and other factors, reference should be made to the Company's most recent Form 20-F filed with the United States Securities and Exchange Commission and with Canadian securities regulators (available on SEDAR (at www.sedar.com). 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.

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 Periods For the Years Ended December 31, Ended December 31, ----------------------- ------------------- 2004 2003 2004 2003 ----------------------- ------------------- (audited) REVENUES $18,352 $12,440 Product sales $ 61,693 $ 40,535 Royalty and 1,934 1,945 licensing (Note 3) 7,627 8,658 --------------------------------------------------------------------- 20,286 14,385 69,320 49,193 --------------------------------------------------------------------- EXPENSES Cost of goods sold, excludes depreciation and amortization 11,968 8,511 (Note 4) 39,793 27,722 Selling, general and 3,724 2,810 administration 13,266 9,904 Research 502 475 and development 1,948 1,594 Depreciation 1,234 925 and amortization 4,457 3,287 --------------------------------------------------------------------- 17,428 12,721 59,464 42,507 --------------------------------------------------------------------- 2,858 1,664 Operating income 9,856 6,686 (271) (303) Financing expense, net (670) (1,532) -- -- Other income 96 -- --------------------------------------------------------------------- Income 2,587 1,361 before undernoted 9,282 5,154 (320) (11) Income taxes (1,301) (874) -- 59 Minority interest (4) 391 --------------------------------------------------------------------- Income from 2,267 1,409 continuing operations 7,977 4,671 (Loss) income from discontinued (34) 112 operations (Note 2) (61) 8,531 --------------------------------------------------------------------- $ 2,233 $ 1,521 Net income $ 7,916 $ 13,202 --------------------------------------------------------------------- ---------------------------------------------------------------------

Basic income (loss) per share ------------------- from continuing $ 0.055 $ 0.038 operations $ 0.200 $ 0.126 from discontinued (0.001) 0.003 operations (0.002) 0.230 --------------------------------------------------------------------- $ 0.054 $ 0.041 $ 0.198 $ 0.356 --------------------------------------------------------------------- ---------------------------------------------------------------------

Diluted income (loss) per share --------------------- from continuing $ 0.054 $ 0.038 operations $ 0.194 $ 0.126 from discontinued (0.001) 0.003 operations (0.001) 0.229 --------------------------------------------------------------------- $ 0.053 $ 0.041 $ 0.193 $ 0.355 --------------------------------------------------------------------- --------------------------------------------------------------------- Weighted-average number of shares outstanding 40,984,891 37,186,652 - basic 39,886,219 37,114,648 42,148,741 37,508,037 - diluted 41,054,883 37,194,994 --------------------------------------------------------------------- ---------------------------------------------------------------------

See the accompanying notes to the Consolidated Financial Statements. These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements.

DRAXIS HEALTH INC. Consolidated Balance Sheets In Accordance with U.S. GAAP --------------------------------------------------------------------- (in thousands of U.S. dollars except share related data) (unaudited)

December 31, December 31, 2004 2003 ------------ ------------ ASSETS (audited)

CURRENT Cash and cash equivalents $ 5,926 $ 10,563 Restricted cash 428 976 Accounts receivable 13,724 9,898 Inventories 10,158 6,096 Prepaid expenses 830 688 Deferred income taxes, net 4,121 2,806 -------------------------------------------------------------------- 35,187 31,027

Property, plant and equipment, net 43,857 32,917 Goodwill, net 728 677 Intangible assets, net 737 1,974 Other assets 604 565 Deferred income taxes, net 7,672 9,393 -------------------------------------------------------------------- $ 88,785 $ 76,553 -------------------------------------------------------------------- --------------------------------------------------------------------

LIABILITIES

CURRENT Accounts payable and accrued liabilities $ 10,436 $ 6,708 Current portion of deferred revenues 4,039 5,309 Current portion of long-term debt -- 981 Customer deposits 628 591 -------------------------------------------------------------------- 15,103 13,589

Deferred revenues 3,762 7,593 Long-term debt -- 9,485 Minority interest (Note 6) -- 4,239 -------------------------------------------------------------------- $ 18,865 $ 34,906 --------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Common stock, without par value of unlimited number of shares authorized $ 75,840 $ 61,175 Additional paid in capital 15,546 15,667 Warrants (Note 5 (c)) 916 -- Employee participation shares; 2,000,000 shares authorized -- 86 Less: loans receivable -- (86) Deficit (27,565) (35,481) Accumulated other comprehensive income 5,183 286 -------------------------------------------------------------------- 69,920 41,647 -------------------------------------------------------------------- -------------------------------------------------------------------- $ 88,785 $ 76,553 -------------------------------------------------------------------- --------------------------------------------------------------------

See the accompanying notes to the Consolidated Financial Statements. These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements.

DRAXIS HEALTH INC. Consolidated Statements of Shareholders Equity In Accordance with U.S. GAAP --------------------------------------------------------------------- (in thousands of U.S. dollars except share related data) (unaudited)

For the Three Month Periods For the Years Ended December 31, Ended December 31, ---------------------- ------------------- 2004 2003 2004 2003 ---------------------- ------------------- Common Stock (Number of Shares) (audited) Balance, beginning of 40,960,326 37,098,390 period 37,297,817 37,098,690 Issuance of -- -- common shares 3,053,436 -- 55,000 190,334 Exercise of options 609,177 240,334 Exercise of employee -- 9,093 participation shares 54,896 9,093 Repurchased -- -- for cancellation -- (50,300) --------------------------------------------------------------------- 41,015,326 37,297,817 Balance, end of period 41,015,326 37,297,817 --------------------------------------------------------------------- Common Stock Balance, $ 75,731 $ 60,665 beginning of period $ 61,175 $ 60,652 -- -- Issuance of common shares 12,867 -- 109 480 Exercise of options 1,594 563 Exercise of employee -- 30 participation shares 204 30 Repurchased -- -- for cancellation -- (70) --------------------------------------------------------------------- $ 75,840 $ 61,175 Balance, end of period $ 75,840 $ 61,175 --------------------------------------------------------------------- Additional Paid In Capital Balance, $ 15,546 $ 15,555 beginning of period $ 15,667 $ 15,550 -- 112 Stock compensation (121) 112 Common shares purchased -- -- for cancellation -- 5 --------------------------------------------------------------------- $ 15,546 $ 15,667 Balance, end of period $ 15,546 $ 15,667 --------------------------------------------------------------------- Warrants Balance, $ 916 $ -- beginning of period $ -- $ -- -- -- Issuance of warrants 916 -- --------------------------------------------------------------------- $ 916 $ -- Balance, end of period $ 916 $ -- --------------------------------------------------------------------- Employee Participation Shares Balance, $ -- $ 113 beginning of period $ 86 $ 140 Cancellation of employee -- -- participation shares -- (27) Exercise of employee -- (27) participation shares (86) (27) --------------------------------------------------------------------- $ -- $ 86 Balance, end of period $ -- $ 86 --------------------------------------------------------------------- Employee Participation Shares-Loans Receivable Balance, $ -- $ (113) beginning of period $ (86) $ (140) Cancellation of employee -- -- participation shares -- 27 Exercise of employee -- 27 participation shares 86 27 $ -- $ (86) Balance, end of period $ -- $ (86) --------------------------------------------------------------------- Deficit Balance, $ (29,798) $ (37,002) beginning of period $(35,481) $(48,683) 2,233 1,521 Net income 7,916 13,202 --------------------------------------------------------------------- $ (27,565) $ (35,481) Balance, end of period $(27,565) $(35,481) --------------------------------------------------------------------- Accumulated Other Comprehensive Income Balance, $ 1,794 $ (1,936) beginning of period $ 286 $ (7,292) Other 3,389 2,222 comprehensive income 4,897 7,578 --------------------------------------------------------------------- 5,183 286 Balance, end of period 5,183 286 --------------------------------------------------------------------- Total $ 69,920 $ 41,647 shareholders' equity $ 69,920 $ 41,647 --------------------------------------------------------------------- --------------------------------------------------------------------- Comprehensive Income Foreign currency $ 3,389 $ 2,222 translation adjustments $ 4,897 $ 7,578 --------------------------------------------------------------------- Other 3,389 2,222 comprehensive income 4,897 7,578 2,233 1,521 Net income 7,916 13,202 --------------------------------------------------------------------- Total $ 5,622 $ 3,743 comprehensive income $ 12,813 $ 20,780 --------------------------------------------------------------------- ---------------------------------------------------------------------

See the accompanying notes to the Consolidated Financial Statements. These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements.

DRAXIS HEALTH INC. Consolidated Statements of Cash Flows In Accordance with U.S. GAAP --------------------------------------------------------------------- (in thousands of U.S. dollars) (unaudited)

For the Three Month Periods For the Years Ended December 31, Ended December 31, ------------------- -------------------- 2004 2003 2004 2003 ------------------- ------------------- CASH FLOWS (USED IN) FROM (audited) OPERATING ACTIVITIES Net income from $ 2,267 $ 1,409 continuing operations $ 7,977 $ 4,671 Adjustments to reconcile net income from continuing operations to net cash (used in) from operating activities Amortization of (1,462) (1,484) deferred revenues (5,495) (6,811) Depreciation and 1,234 925 other amortization 4,457 3,287 -- 112 Stock compensation 83 112 16 (66) Deferred income taxes 322 39 -- (59) Minority interest 4 (391) 615 332 Other 785 799 Changes in operating assets and operating liabilities (1,488) 978 Accounts receivable (2,912) (285) 237 656 Inventories (3,230) (93) 127 (74) Income taxes 63 (803) 269 170 Prepaid expenses (409) (149) Accounts payable 2,127 (1,325) and accrued liabilities 2,748 (3,597) --------------------------------------------------------------------- 3,942 1,574 4,393 (3,221) --------------------------------------------------------------------- --------------------------------------------------------------------- CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES Expenditures for property, (2,065) (1,137) plant and equipment (4,801) (3,536) Increase in -- -- intangible assets (150) (122) Increase in -- 57 deferred revenues 362 165 Proceeds from disposition -- -- of product right 96 -- --------------------------------------------------------------------- (2,008) (1,137) (4,493) (3,493) --------------------------------------------------------------------- --------------------------------------------------------------------- CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES -- -- Restricted cash 582 (976) -- -- Proceeds from bank loan -- 4,942 -- -- Repayment of bank loan -- (5,927) Proceeds -- -- from long-term debt 4,965 947 Repayment (5,472) (241) of long-term debt (15,508) (3,013) Decrease from (31) (54) customer deposits, net (8) (2,044) Exercise of options and employee participation 109 510 shares 1,594 593 Issuance of common shares and warrants, net -- -- of related expenses 13,385 -- Common shares purchased -- -- for cancellation -- (65) Issue of common shares by subsidiary to minority -- -- interest -- 365 Repurchase of common shares by subsidiary from minority -- -- interest (Note 6) (9,557) (140) --------------------------------------------------------------------- (5,394) 215 (4,547) (5,318) --------------------------------------------------------------------- Effect of foreign exchange rate changes on cash (68) 473 and cash equivalents 102 597 --------------------------------------------------------------------- Net cash (used in) from (3,528) 1,125 continuing operations (4,545) (11,435) Net cash (used in) from (53) 181 discontinued operations (92) 17,099 --------------------------------------------------------------------- Net (decrease) increase in cash and cash (3,581) 1,306 equivalents (4,637) 5,664 Cash and cash equivalents, 9,507 9,257 beginning of period 10,563 4,899 --------------------------------------------------------------------- Cash and cash equivalents, $ 5,926 $ 10,563 end of period $ 5,926 $ 10,563 --------------------------------------------------------------------- ---------------------------------------------------------------------

Additional Information $ 97 $ 122 Interest paid $ 310 $ 700 $ 200 $ 276 Income taxes paid $ 1,040 $ 1,882

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See the accompanying notes to the Consolidated Financial Statements. These interim financial statements should be read in conjunction with the annual Consolidated Financial Statements.

DRAXIS HEALTH INC. Notes to the Consolidated Financial Statements In Accordance with U.S. GAAP -------------------------------------------------------- (in thousands of U.S. dollars except share related data) (unaudited)

    1. Significant Accounting Policies

    These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP").

    The functional currency of the Company is the Canadian dollar however its reporting currency is the U.S. dollar. For the current and prior periods, the financial statements of the Company's operations whose reporting currency is other than the U.S. dollar are translated from such reporting currency to U.S. dollars using the current rate method. Under the current rate method, assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Revenues and expenses, including gains and losses on foreign exchange transactions, are translated at average rates for the period. The resulting unrealized translation gains and losses on the Company's net investment in these operations, including long-term intercompany advances, are accumulated in a separate component of shareholders' equity, described in the consolidated balance sheets as accumulated other comprehensive income.

    The disclosures contained in these unaudited interim consolidated financial statements do not include all requirements of GAAP for annual financial statements. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2003.

    The unaudited interim consolidated financial statements are based upon accounting principles consistent with those used and described in the audited consolidated financial statements for the year ended December 31, 2003, other than as noted herein.

    The unaudited interim consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the financial position of the Company as at December 31, 2004 and the results of operations and cash flows for the three month periods and the years ended December 31, 2004 and 2003.

    2. Discontinued Operations

    In 2001, the Company adopted a formal plan to dispose of its Canadian sales and marketing division ("DRAXIS Pharmaceutica").

    Pursuant to APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the results of operations of DRAXIS Pharmaceutica have been reported as discontinued operations and the consolidated financial statements and notes thereto for the year ended December 31, 2001 and all subsequent periods presented have been reclassified.

    On March 31, 2003, the Company amended its License, Distribution and Supply Agreement with Elan Corporation, plc ("Elan") to return the Canadian rights to several of Elan's neurology products in exchange for a cash payment of $6,500, resulting in an after tax gain of $4,286 on this transaction.

    On July 22, 2003, the Company completed the divestiture of DRAXIS Pharmaceutica with the sale to Shire BioChem Inc. ("Shire"), of substantially all remaining products of the division. The Company received $9,600 in cash from Shire and could receive up to $2,900 in market driven milestones over the next several years. The Company realized an after tax gain of $4,054, net of transaction and related charges. In addition, the Company will receive royalty payments based on the continuing Canadian sales of the products. The Company also received the value of acquired inventories and Shire is now responsible for all financial provisions of the license agreement related to Permax(R).

    Commencing in the second quarter of 2002, the Company resolved to retain ownership of the Canadian rights to Alertec(R) and continue to market and sell Alertec(R) in Canada itself. Accordingly, discontinued operations did not include revenues and expenses directly attributable to Alertec(R) up until such time that third party approval was obtained. As a result of the ability to obtain third party approval upon closing with Shire, management decided to dispose of Alertec(R) through the sale of the Canadian rights to Shire and at that time included Alertec(R) as part of discontinued operations on a prospective basis.

    Interest expense directly attributable to license obligations included in the transaction has been allocated to the discontinued operations.

    The results of discontinued operations, presented in the accompanying Consolidated Statements of Operations, were as follows:

For the Three Month Periods For the Years Ended December 31, Ended December 31, ------------------ ------------------ 2004 2003 2004 2003 ------ ----- -------- ----- (audited) $ 32 $ 188 Revenues $ 268 $ 4,301 --------------------------------------------------------------------- Operating (loss) income from (53) 161 discontinued operations (92) 263 19 (49) Income tax recovery (expense) 31 (72) --------------------------------------------------------------------- Operating (loss) income from discontinued operations-net (34) 112 of tax (61) 191 Net gain on disposal of product - - rights-net of tax expense $3,606 - 8,340 --------------------------------------------------------------------- Net (loss) income from discontinued operations $ (34) $ 112 - net of tax $ (61) $ 8,531 --------------------------------------------------------------------- ---------------------------------------------------------------------

    3. Deferred Revenue

    In January 2003, DRAXIMAGE's agreements with its BrachySeed(R) licensee in the U.S was effectively terminated with no further transactions taking place under the agreement. A formal agreement was subsequently reached with its licensee for terminating both the License and Distribution Agreement and Product Manufacturing and Supply Agreement for BrachySeed(R) implants in the U.S.

    Under the terms of the original agreement, non-refundable milestone payments received from the licensee were deferred and amortized into income over the contractual period of the agreement to December 31, 2010. As a result of the termination of the agreements in January, 2003, the unamortized portion of the non-refundable milestone payments of $1,436 was included in income for the year ended December 31, 2003 as royalty and licensing revenue.

    4. Cost of Goods Sold

    On July 28, 2003, Draxis received insurance proceeds of $730 in settlement of physical damage and business interruption losses related to installation problems of its first lyophilizer unit in 2000. The damage resulted in, amongst other things, delays in the commissioning of the lyophilization unit and in obtaining FDA approvals for the transfer of production of the DRAXIMAGE line of lyophilized diagnostic imaging products to DRAXIS Pharma Inc. FDA approval was obtained in 2001 and costs incurred related to the incident were charged to the income statement as incurred. No accrual for insurance proceeds had been previously recorded. The proceeds were recognized as a reduction to cost of goods sold in the third quarter of 2003.

    5. Shareholders' Equity

    (a) Stock Option Plan

    The following is a summary of common shares issuable pursuant to outstanding stock options:

For the Three Month Periods For the Years Ended December 31, Ended December 31, ------------------- ------------------- 2004 2003 2004 2003 ----- ----- ---- ---- (audited) 2,801,566 3,342,776 Balance, beginning of 3,097,942 3,314,109 period Increase (decrease) resulting from: 15,000 40,000 Granted 360,000 775,000 (55,000) (190,334) Exercised (609,177) (240,334) (8,334) (75,000) Cancelled (80,333) (255,000) -- (19,500) Expired (15,200) (495,833) --------------------------------------------------------------------- 2,753,232 3,097,942 Balance, end of period 2,753,232 3,097,942 --------------------------------------------------------------------- ---------------------------------------------------------------------

    (b) Stock-based Compensation Costs

    The following outlines the impact and assumptions used if the compensation cost for the Company's stock options was determined under the fair value based method of accounting.

For the Three Month Periods For the Years Ended December 31, Ended December 31, --------------------- --------------------- 2004 2003 2004 2003 --------------------- --------------------- (audited) $ 2,233 $ 1,521 Net income as reported $ 7,916 $ 13,202 (208) (175) Pro forma impact (733) (681) --------------------------------------------------------------------- $ 2,025 $ 1,346 Pro forma net income $ 7,183 $ 12,521 --------------------------------------------------------------------- ---------------------------------------------------------------------

Basic net income $ 0.056 $ 0.041 per share, as reported $ 0.200 $ 0.356 Pro forma (0.005) (0.005) impact per share (0.018) (0.019) --------------------------------------------------------------------- Pro forma net $ 0.051 $ 0.036 income per share (Basic) $ 0.182 $ 0.337 Pro forma net income $ 0.048 $ 0.036 per share (Diluted) $ 0.175 $ 0.337 --------------------------------------------------------------------- --------------------------------------------------------------------- 0.0% 0.0% Dividend yield 0.0% 0.0% 60% 61% Expected volatility 60%-61% 60%-62% 4.0% 4.1% Risk-free interest rate 3.9%-4.0% 3.8%-4.1% 5 yrs 5 yrs Expected option life 5 yrs 5-10 yrs --------------------------------------------------------------------- ---------------------------------------------------------------------

    (c) Common Share Offering

    On April 22, 2004, the Company closed its offering of 3,053,436 units at a price of $4.82 (CDN$6.55) per unit for proceeds net of related expenses of $13,385 (CDN$18,213). Each unit consists of one common share of the Company and one-half of one share purchase warrant. Each whole warrant will entitle the holder to acquire one common share of the Company at a price of CDN$8.50 at any time prior to two years from April 22, 2004. Included as a component of shareholders' equity is $916, which represents the fair value of the warrants issued. The fair value of the warrant was determined based on the price of the offering.

    The underwriters had an over-allotment option to purchase up to an additional 458,016 units, exercisable at the issue price any time up to 30 days following closing of the offering, representing additional gross proceeds of up to $2,206 (CDN$3,000) to the Company. The over-allotment option expired unexercised.

    6. Acquisition of Minority Interest

    On April 22, 2004, the Company completed the acquisition of the 32.7% interest in the Company's manufacturing subsidiary, DRAXIS Pharma Inc. ("DPI"), that was previously owned by SGF Sante Inc. ("SGF"). The $9.6 million (CDN$13.0 million) cash acquisition has been accounted for by the purchase method of accounting and allocated to identifiable assets and liabilities based on their estimated fair values as follows:

Minority interest $3,992 Property, plant and equipment 6,786 Deferred income tax liability (1,220) ----------------------------------------------- Total purchase price $9,557 ----------------------------------------------- -----------------------------------------------

    The estimates of fair value were determined by the Company's management based on an independent valuation of Property, plant and equipment.

    The purchase price paid to SGF is subject to adjustment in limited circumstances involving a change of control of the Company or DPI or a sale of substantially all of the assets of DPI prior to April 22, 2005.

    7. Segmented Information

    Industry Segmentation

    For purposes of decision-making and assessing performance, management considers that it operates in three segments: Radiopharmaceuticals, Manufacturing, and Corporate and Other. Executive management assesses the performance of each segment based on segment income before financing expense, income taxes and minority interest. The accounting policies used to determine segmented results and measure segmented assets are the same as those described in the summary of significant accounting policies

For the Three Month Periods For the Years Ended December 31, Ended December 31, --------------------------- -------------------- 2004 2003 2004 2003 --------------------------- -------------------- PRODUCT SALES REVENUES (audited) $ 3,995 $ 4,202 Radiopharmaceuticals $ 17,172 $ 14,564 14,913 8,668 Manufacturing 46,461 26,985 (556) (430) Corporate and Other (1,940) (1,014) --------------------------------------------------------------------- $ 18,352 $ 12,440 $ 61,693 $ 40,535 --------------------------------------------------------------------- ROYALTY AND LICENSING REVENUES $ -- $ -- Radiopharmaceuticals $ -- $ 1,521 -- -- Manufacturing -- -- 1,934 1,945 Corporate and Other 7,627 7,137 --------------------------------------------------------------------- $ 1,934 $ 1,945 $ 7,627 $ 8,658 --------------------------------------------------------------------- TOTAL REVENUES $ 3,995 $ 4,202 Radiopharmaceuticals $ 17,172 $ 16,085 14,913 8,668 Manufacturing 46,461 26,985 1,378 1,515 Corporate and Other 5,687 6,123 --------------------------------------------------------------------- $ 20,286 $ 14,385 $ 69,320 $ 49,193 --------------------------------------------------------------------- SEGMENT INCOME(1) $ 506 $ 1,146 Radiopharmaceuticals $ 4,174 $ 5,614 3,085 592 Manufacturing 8,038 1,084 501 851 Corporate and Other 2,101 3,275 --------------------------------------------------------------------- $ 4,092 $ 2,589 $ 14,313 $ 9,973 --------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION $ 243 $ 233 Radiopharmaceuticals $ 949 $ 843 701 434 Manufacturing 2,417 1,448 290 258 Corporate and Other 1,091 996 --------------------------------------------------------------------- $ 1,234 $ 925 $ 4,457 $ 3,287 --------------------------------------------------------------------- OPERATING INCOME (LOSS)2 $ 263 $ 913 Radiopharmaceuticals $ 3,225 $ 4,771 2,384 158 Manufacturing 5,621 (364) 211 593 Corporate and Other 1,010 2,279 --------------------------------------------------------------------- $ 2,858 $ 1,664 $ 9,856 $ 6,686 --------------------------------------------------------------------- ---------------------------------------------------------------------

December 31, December 31, 2004 2003 ------------- ------------- IDENTIFIABLE ASSETS (audited) Radiopharmaceuticals $ 12,354 11,424 Manufacturing 50,103 40,953 Corporate and Other 26,328 24,176 ---------------------------------------------------- $ 88,785 $ 76,553 --------------------------------------------------------------------- ---------------------------------------------------------------------

    (1) Segment income from continuing operations before depreciation and amortization, financing expense, other income, income taxes and minority interest.

    (2) Segment income (loss) from continuing operations before financing expense, other income, income taxes and minority interest.

Geographic Segmentation

For the Three Month Periods For the Years Ended December 31, Ended December 31, ------------------- ------------------ 2004 2003 2004 2003 ---- ---- ---- ---- REVENUES(3) (audited) $ 10,159 $ 6,829 Canada $ 33,609 $ 22,755 10,017 7,489 United States 35,310 26,031 110 67 Other 401 407 --------------------------------------------------------------------- $ 20,286 $ 14,385 $ 69,320 $ 49,193 --------------------------------------------------------------------- ---------------------------------------------------------------------

December 31, December 31, 2004 2003 ------------ ------------ LONG-LIVED ASSETS(4) (audited) Canada $ 45,322 35,568 United States -- -- -------------------------------------------------- $ 45,322 $ 35,568 --------------------------------------------------------------------- ---------------------------------------------------------------------

    (3) Revenues are attributable to countries based upon the location of the customer.

    (4) Represents property, plant and equipment, goodwill and intangible assets that are identified with each geographic region.

Expenditures for Property, Plant and Equipment

For the Three Month Periods For the Years Ended December 31, Ended December 31, --------------------------- ---------------------- 2004 2003 2004 2003 --------------------------- ---------------------- (audited) $ 90 $ 143 Radiopharmaceuticals $ 835 $ 383 1,957 981 Manufacturing 3,928 3,138 18 13 Corporate and Other 38 15 --------------------------------------------------------------------- $ 2,065 $ 1,137 $ 4,801 $ 3,536 --------------------------------------------------------------------- ---------------------------------------------------------------------

    8. Comparative Information

    The Company has reclassified certain prior period's information to conform with the current presentation format.



    DRAXIS Health Inc. (TSX:DAX) (NASDAQ:DRAX)

--30--CCN/na*

CONTACT: DRAXIS Health Inc. Investor Relations: Jerry Ormiston 1-877-441-1984 Fax: 905-677-5494

KEYWORD: NEW YORK INTERNATIONAL CANADA INDUSTRY KEYWORD: PHARMACEUTICAL EARNINGS SOURCE: DRAXIS Health Inc.

Copyright Business Wire 2005