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TORONTO - Patheon Inc.'s (TSX:PTI) strategy for growth is slowly working and has "moved the needle" on its profit margins, CEO Wes Wheeler said Friday, after the contract drug manufacturer said its second-quarter net loss fell by 60 per cent to US$8.5 million.

Overall revenue grew 16 per cent to $186 million, from $160.2 million in the second quarter of fiscal 2007, with growth coming from all of Patheon's businesses but with Europe taking the lead.

"In this quarter, we delivered solid results that demonstrate the early progress we are making in reshaping Patheon," said Wheeler, who has been Patheon's chief executive less than six months.

"Revenues increased in all our businesses and for both North America and Europe as a result of our renewed commitment to customer service," he said.

"We also made meaningful progress with the underlying profitability of the operations; however there is still room for improvement and it continues to be one of our key areas of focus."

The company also improved its profit margin due to a combination of growth and cost cutting, he said.

"We've moved the needle from an EBITDA margin of 6.1 per cent in Q1 to 12.4 per cent in Q2," he told a conference call to discuss the quarterly results on Friday.

Pharmaceutical development services "growth continues on a rapid pace with over 300 projects active," said Wheeler, who took over as CEO at the start of the year.

While the company's revenue at its troubled Puerto Rico operations declined on a year-over-year basis, he said, "it did increase $1 million" from the year-ago quarter.

"We have made good progress on our plans to focus our Puerto Rico operations in Manati and Caguas and have already begun to see the benefits from the operational and service improvements," said Wheeler. "These include an increase in revenue since last quarter."

"It's been a busy quarter," he said. "I've now visited over 50 of our 300 customers, hired several senior executives, initiated a dozen internal tactical initiatives, launched our operational excellence program and authorized several cost reduction programs."

In early May, Eric Evans, formerly of Novartis, replaced John Bell as chief financial officer, Paul Garofolo was appointed chief information officer, Warren Horton as president of global quality and Doaa Fathallah as head of global pharmaceutical development.

Patheon, reporting in U.S. dollars, said the second-quarter results include $2 million in losses from its factory in Carolina, Puerto Rico, and recently divested Niagara-Burlington assets, classified as discontinued operations.

The net loss was nine cents per share, compared with 24 cents per share or $22 million in the year-ago quarter, when revenue was $160.2 million.

Commercial manufacturing revenue increased 15 per cent from a year earlier thanks to strong growth in Europe and "steady" growth in North America led Patheon's plant in Whitby, east of Toronto.

Pharmaceutical development services revenue grew 23 per cent to $34.8 million, and over 50 new contracts were signed during the quarter, primarily with existing customers.

Total North American revenue increased nine per cent to $98 million, while European revenue expanded 26 per cent to $88 million.

"Repositioning" expenses for the quarter were $8.3 million, including severance costs for changes in senior management, a workforce reduction in Swindon, U.K., and ongoing restructuring of Canadian and Puerto Rico sites.

Wheeler said further unspecified repositioning expenses are expected in the current quarter related to the previously announced closure of the company's York Mills operation in Toronto and the consolidation of work in Whitby, Ont.

Bell, the former CFO who was to leave the company after the conference call, said that "revenues in the third quarter of 2008 are expected to be slightly higher than the second quarter" based on internal management forecasts.

He also said "revenues in the second half of 2008 are also expected to be slightly higher than during the first half."

Maher Yaghi, a financial analyst with Desjardins Securities, said Friday in a note to clients that the company's revenues were in line with Desjardins' expectations of $181 million and consensus expectations of $172 million.

"Earnings per share from continuing operations was a loss of seven cents," he said. "We had expected an adjusted earnings per share loss of two cents, in line with the comparable consensus estimate."

Desjardins, he said, expects the Puerto Rican division "to continue operating at a loss until the Carolina site divestiture is completed and/or the company acquires new revenue sources and ramps up production to employ existing idle capacity."

Desjardins, he said, "rates Patheon a Hold-Above average risk with a C$4.25 target price."

On the TSX, Patheon shares were up 16 cents, or four per cent, at $4.14.