**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 20-F**

 

**(Mark One)**

 

**o****                                ****REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR(g) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**OR**

 

**ý****                                ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number:  0-17434**

 

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**DRAXIS HEALTH INC.**

(Exact name ofRegistrant as specified in its charter)

 

**CANADA**

(Jurisdiction ofincorporation or organization)

 

**6870GOREWAY DRIVE, 2nd FLOOR, MISSISSAUGA, ONTARIO, CANADA L4V 1P1**

(Address ofprincipal executive offices)

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act.

 

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|-------------------------|------------|-----------------------------------------------|
| NONE                    |       | NONE                                          |

 

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Securitiesregistered or to be registered pursuant to Section 12(g) of the Act.

 

**COMMONSHARES**

(Title of Class)

 

Securities forwhich there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 

**NONE**

(Title of Class)

 

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital or common stock as of the close of the periodcovered by the annual report.

 

Shares –41,015,326 common shares (as of 12/31/04)

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes  ý   Noo

 

Indicate by check mark which financial statement itemthe Registrant has elected to follow.

 

Item 17  o   Item 18  ý

 

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| ITEM 1.    |   | IDENTITY OF DIRECTORS,  SENIOR MANAGEMENT AND ADVISERS                        |   |
|------------|--------|-------------------------------------------------------------------------------|--------|
| ITEM 2.    |   | OFFER STATISTICS AND  EXPECTED TIMETABLE                                      |   |
| ITEM 3.    |   | KEY INFORMATION                                                               |   |
| ITEM 4.    |   | INFORMATION ON THE  COMPANY                                                   |   |
| ITEM  5.   |   | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 |   |
| ITEM  6.   |   | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   |   |
| ITEM  7.   |   | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |   |
| ITEM 8.    |   | FINANCIAL INFORMATION                                                         |   |
| ITEM 9.    |   | THE OFFER AND LISTING                                                         |   |
| ITEM 10.   |   | ADDITIONAL INFORMATION                                                        |   |
| ITEM  11.  |   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |   |
| ITEM  12.  |   | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       |   |
| ITEM  13.  |   | DEFAULTS,  DIVIDENDS ARREARAGES AND DELINQUENCIES                             |   |
| ITEM  14.  |   | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |   |
| ITEM 15.   |   | CONTROLS AND  PROCEDURES                                                      |   |
| ITEM 16A.  |   | AUDIT  COMMITTEE FINANCIAL EXPERT                                             |   |
| ITEM 16B.  |   | CODE OF ETHICS                                                                |   |
| ITEM  16C. |   | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       |   |
| ITEM  16D. |   | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |   |
| ITEM  16E. |   | PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |   |
| ITEM 17.   |   | FINANCIAL STATEMENTS                                                          |   |
| ITEM 18.   |   | FINANCIAL STATEMENTS                                                          |   |
| ITEM 19.   |   | EXHIBITS                                                                      |   |

 

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**Item 1.****           Identity of Directors,Senior Management and Advisers**

 

Not Applicable

 

**Item 2.****           Offer Statistics andExpected Timetable**

 

Not Applicable

 

**Item 3.****           Key Information**

 

DRAXIS Health Inc. (“DRAXIS”or the “Company”) is a specialty pharmaceutical company providing products inthree major categories: sterile, including sterile lyophilized (freeze-dried)pharmaceuticals; non-sterile specialty pharmaceuticals; andradiopharmaceuticals.  In theradiopharmaceutical category, DRAXIS has its own products and a targetedresearch and development program for new products.  As of January 1, 2005, activities of theCompany are carried out through its wholly owned subsidiary DRAXIS SpecialtyPharmaceuticals Inc., which operates two major divisions, DRAXIS Pharma(contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).

 

Our subsidiary DeprenylAnimal Health, Inc. (“DAHI”) receives licensing and royalty revenuerelated to *Anipryl**®*, a companion animalhealth product.

 

Our registered andprincipal office is located at 6870 Goreway Drive, 2nd Floor,Mississauga, Ontario, L4V 1P1.

 

The selected data setforth in the following table are expressed in U.S. dollars and in accordancewith U.S. generally accepted accounting principles (“U.S. GAAP”).  All data presented below should be read inconjunction with, and are qualified in their entirety by, reference to theaudited Consolidated Financial Statements and Notes thereto for the year ended December 31,2004.

 

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| ** **                                                                              | ** ** | **U.S. GAAP  (in thousands of U.S. dollars except share related data)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                                                                | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Operations                                                                              |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                |       | 69,320                                                                  |       | $ | 49,193 |   | $ | 38,640 |   | $ | 33,903 |   | $ | 29,721 |   |
| Operating income                                                                        |       | 9,856                                                                   |       | 6,686 |   | 2,894 |   | 1,773 |   | 36 |   |
| Income (loss) from continuing operations before  cumulative effect of accounting change |       | 7,977                                                                   |       | 4,671 |   | 3,020 |   | (1,015 | ) | 363 |   |
| Income (loss) from discontinued operations, net of  tax                                 |       | (61                                                                     | )          | 8,531 |   | (834 | ) | (569 | ) | (801 | ) |
| Cumulative effect of accounting change, net of tax                                      |       | —                                                                  |       | — |   | — |   | — |   | (19,900 | ) |
| Net income (loss)                                                                       |       | 7,916                                                                   |       | $ | 13,202 |   | $ | 2,186 |   | $ | (1,584 | ) | $ | (20,338 | ) |
|                                                                                    |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Basic income (loss) per share                                                           |       |                                                                    |       |   |   |   |   |   |   |   |   |
| From continuing operations before cumulative effect  of accounting change               |       | 0.20                                                                    |       | 0.13 |   | $ | 0.08 |   | $ | (0.03 | ) | $ | 0.01 |   |
| From discontinued operations                                                            |       | —                                                                  |       | 0.23 |   | (0.02 | ) | (0.02 | ) | (0.02 | ) |
| From cumulative effect of accounting change                                             |       | —                                                                  |       | — |   | — |   | — |   | (0.55 | ) |
| Basic income (loss) per share                                                           |       | 0.20                                                                    |       | $ | 0.36 |   | 0.06 |   | (0.05 | ) | (0.56 | ) |
|                                                                                    |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Financial Position at December 31                                                  |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                               |       | 5,926                                                                   |       | 10,563 |   | 4,899 |   | 5,602 |   | 4,420 |   |
| Total assets                                                                            |       | 88,785                                                                  |       | 76,553 |   | 67,951 |   | 64,360 |   | 67,307 |   |
| Long-term debt                                                                          |       | —                                                                  |       | 10,466 |   | 12,726 |   | 8,060 |   | 9,890 |   |
| Common shareholders’ equity                                                        |       | 69,920                                                                  |       | 41,647 |   | 20,227 |   | 16,878 |   | 20,808 |   |
| Book value per common share                                                             |       | 1.70                                                                    |       | 1.12 |   | 0.55 |   | 0.46 |   | 0.57 |   |
|                                                                                    |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Share Information                                                                       |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Number of shares outstanding at year end                                                |       | 41,015,326                                                              |       | 37,297,817 |   | 37,098,690 |   | 36,613,434 |   | 36,565,102 |   |
| Weighted average number of shares outstanding -  basic                                  |       | 39,886,219                                                              |       | 37,114,648 |   | 36,981,985 |   | 36,587,794 |   | 36,324,199 |   |

 

### **Overview**

 

This Annual Report (Form 20-F)contains forward-looking statements (within the meaning of the SecuritiesExchange Act of 1934, as amended) and information that are based on management’sbeliefs, as well as assumptions made by and information currently available tomanagement.  When used in this AnnualReport (Form 20-F), the words “anticipate,” “estimate,” “believe,” “expect,”“potential,” “intend,” “designed” and “should” and similar expressions areintended to identify forward-looking statements.  These forward-looking statements necessarilymake numerous assumptions with respect to industry performance; generalbusiness, economic and regulatory conditions; access to markets and materials;and other matters, all of which are inherently subject to significantuncertainties and contingencies and many of which are beyond the Company’scontrol.  Should one or more of theserisks or uncertainties materialize, or should underlying assumptions proveincorrect, actual results may vary materially from those anticipated, estimatedor projected.  The Company believes thatany of the following risk factors could cause the Company’s actual results todiffer from those that may have been or may be projected in forward-lookingstatements made by or on behalf of the Company from time to time. 

 

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The forward-looking statements in this AnnualReport (Form 20-F) are contained principally under Items 4 and 5.

 

**RISKFACTORS**

 

Our futurefinancial condition, results of operations and disclosure could be materially affectedby the risks and uncertainties discussed below, or otherwise, and historictrends should not be used to anticipate results or trends in future periods:

 

***Risks Related toour Industry***

 

WE MAY NOT BEABLE TO GET TIMELY REGULATORY APPROVAL FOR OUR PRODUCTS AND WE MUST COMPLY WITHREGULATORY REQUIREMENTS TO MANUFACTURE AND MARKET OUR PRODUCTS.

 

The manufacturingand marketing of our existing and potential products, as well as preclinicalstudies and clinical trials, are subject to extensive regulation and approvalby the Therapeutic Products Directorate (“TPD”) of the Health Products and FoodBranch of Health Canada (“HPFB”) and other authorities in Canada and bynumerous federal, state and local government authorities in the United States,including the Food and Drug Administration (“FDA”). Similar regulatoryrequirements exist in Europe and other countries.  To the extent we choose to explore foreignmarkets, we may rely on licensees to obtain regulatory approvals in suchcountries.  Any failure or delay by us,our collaborators or licensees to comply with applicable requirements or obtainregulatory approvals for our products could adversely affect the marketing ofproducts developed or licensed by us and our ability to receive product orroyalty revenue.

 

As of December 31,2004, the Company had one regulatory submission (a Supplement to a New DrugSubmission) pending with TPD for MDP-25, a radiopharmaceutical product alreadyapproved for marketing in the U.S.   Thissubmission was filed in December, 2003. The Company also had five regulatory submissions filed with Europeanregulatory authorities: four with the Medicines Evaluation Board in theNetherlands and one with the Danish Medicines Agency.  The submission dates for theseradiopharmaceutical products range from June 2003 to December 2004.  All of the approvals sought in Europe are formarketing authorizations through the mutual recognition procedure, whichinvolves obtaining approval in one state (the “reference member state”) andrecognition of that approval in other member states.  All of the approvals being sought in Europeare for radiopharmaceutical products already approved in Canada or theU.S.  One of these five Europeansubmissions was for the Company’s kit for the Preparation of Technetium Tc-99mAlbumin Aggregated Injection (MAA kit) for which the Company received approvalfor in one reference member state, the Netherlands, in February 2005.

 

The regulatoryprocess generally involves preclinical studies and clinical trials of eachcompound to establish its safety and efficacy, takes many years and requiresthe expenditure of substantial resources. Moreover, if regulatory approval of a drug or diagnostic product isgranted, such approval may entail limitations on the indicated uses for whichit may be marketed.  Failure to complywith applicable regulatory requirements can, among other things, result insuspension of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.  Further, government policy may change andadditional government regulations may be established that could prevent ordelay regulatory approvals for our products. In addition, a marketed drug and its manufacturer are subject to continualreview.  Later discovery of previouslyunknown problems with the product or manufacturer may result in restrictions onsuch product or manufacturer, including withdrawal of the product from themarket.

 

DRAXIMAGEmanufactures approximately 70% of the active pharmaceutical

 

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ingredients that are used in theradiopharmaceutical products it manufactures. The final products in which the active pharmaceutical ingredients areused are subject to regulation for safety and efficacy by the FDA, TPD andregulatory authorities in other jurisdictions, as the case may be.  Final products must be approved by the FDA,TPD and the regulatory authorities in other jurisdictions, as the case may be,before they can be commercially marketed. The process of obtaining regulatory clearance for marketing isuncertain, costly and time-consuming.  Wecannot predict how long the necessary regulatory approvals will take or whetherwe or our customers will ever obtain such approval for products.  To the extent that we and/or our customers donot obtain the necessary regulatory approvals for marketing new products, ourproduct sales could be adversely affected.

 

Productsmanufactured by us will have to comply with the current Good ManufacturingPractices (“cGMP”) imposed under the laws of the U.S., Canada and otherjurisdictions, as well as the guidelines and policies of TPD, FDA and theregulatory authorities in other jurisdictions, as the case may be. Productscontaining radioactive isotopes will have to comply with the guidelines andregulations of the Canadian Nuclear Safety Commission in Canada and the UnitedStates Nuclear Regulatory Commission and other similar regulations in othercountries.** **Compliance with cGMP regulations requires manufacturers toexpend time, money and effort in production facilities and to maintain preciseand extensive records and quality control to ensure that the product meetsapplicable specifications and other requirements. The FDA, TPD and otherregulators periodically inspect drug-manufacturing facilities to ensurecompliance with applicable cGMP requirements. In addition, our customers also periodically inspect our manufacturingfacility to ascertain compliance with cGMP requirements.  If we fail to comply with the cGMPrequirements, we may become subject to possible regulatory action, andmanufacturing at the facility could consequently be suspended, causing possibleloss of profit, regulatory fines and third-party liability.  To date we have not been subject to anynotice of material non-compliance.

 

The FDA, TPD orother regulatory authorities may also require the submission of any lot of aparticular product for inspection. If the product lot fails to meet applicablerequirements, then the following actions might be taken: (i) restrict therelease of the product; (ii) suspend manufacturing of the specific productlot; (iii) order a recall of the product lot; or (iv) order a seizureof the product lot.

 

WE MAY NOT BEABLE TO OBTAIN AND ENFORCE EFFECTIVE PATENTS TO PROTECT OUR PROPRIETARY RIGHTSFROM USE BY COMPETITORS, AND THE PATENTS OF OTHER PARTIES COULD REQUIRE US TOSTOP USING OR TO ACQUIRE A LICENSE FOR CONDUCTING CERTAIN BUSINESS ACTIVITIES,AND OUR COMPETITIVE POSITION AND PROFITABILITY COULD SUFFER AS A RESULT.

 

Our success willdepend, in part, on our ability to obtain, enforce and maintain patentprotection for our radiopharmaceutical and *Anipryl*®technologies in Canada, the United States and other countries.  Patents for our radiopharmaceuticaltechnologies have expiry dates ranging from October 17, 2006 to December 18,2021.  Patents issued to DAHI, includingfor our *Anipryl*® technology, haveexpiry dates ranging from August 31, 2010 to June 23, 2018.  We cannot assure you that patents will issuefrom any pending applications or that claims now or in the future, if any,allowed under issued patents will be sufficiently broad to protect ourtechnology. In addition, no assurance can be given that any patents issued toor licensed by us will not be challenged, invalidated, infringed orcircumvented, or that the rights granted thereunder will provide continuingcompetitive advantages to us.  The patentpositions of pharmaceutical and biotechnology firms, including ours, aregenerally uncertain and involve complex legal and factual questions.  In addition, we do not know whether any ofour current research endeavors will result in the issuance of patents inCanada, the United States, or elsewhere, or if any patents already issued willprovide significant proprietary protection or will be circumvented orinvalidated.  Since patent applicationsin the United States and Canada are maintained in secrecy for at least 18months from the date of filing, and since publication of discoveries in thescientific or patent literature tends to lag behind

 

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actual discoveriesby several months, we cannot be certain that we were the first to createinventions claimed by pending patent applications or that we were the first tofile patent applications for such inventions. Loss of patent protection could lead to new competition for theseproducts, and others in the future.

 

Our commercialsuccess will also depend in part on our not infringing patents or proprietaryrights of others and not breaching the licenses granted to us.  In the event that we are found to haveinfringed other parties’ patents, licenses may not be available to us on termsthat are favorable or at all.  Inaddition, the degree of patent protection afforded to pharmaceutical or biotechnologicalinventions around the world is uncertain and varies significantly amongdifferent countries.  There can be noassurance that we will be able to obtain a license to any third-partytechnology or patents that we may require to conduct our business or that suchtechnology or patents can be licensed at a reasonable cost. Failure by us orour collaborators or customers to obtain a license to any technology or patentsthat we may need to commercialize our technologies or manufacture products mayresult in delays in marketing proposed products or the inability to proceedwith the development, manufacture or sale of products requiring such licenses.

 

We may be requiredto engage in litigation and other patent proceedings to enforce patents issuedto us, to defend our right, title and interest in patents related to ourproducts and to determine the scope and ‘validity of other parties’ proprietaryrights.  These proceedings can be costly,and if the outcome of any such proceedings is adverse to us, we could lose theright to sell some of our products or could be required to pay damages.

 

We also rely onunpatented trade secrets, improvements and know-how with respect to ourcontract manufacturing operations, the robotic manufacturing aspects of our *BrachySeed*® business and all of ouroperations associated with our radiopharmaceutical kit business to develop andmaintain our competitive position, which we seek to protect, in part, byconfidentiality agreements with our customers, collaborators, employees and consultants.  These agreements could be breached, and wemay not have adequate remedies for any breach. Further, our trade secrets couldotherwise become known or be independently discovered by competitors.

 

FACTORSBEYOND OUR CONTROL COULD CAUSE INTERRUPTION IN OUR OPERATIONS, WHICH WOULDADVERSELY AFFECT OUR REPUTATION IN THE MARKETPLACE AND OUR RESULTS OFOPERATIONS.

 

To succeed, wemust be able to operate our manufacturing facilities without interruption anddeliver radiopharmaceutical and contract manufacturing products in a timelymanner. We could suffer an interruption caused by damage from a variety ofsources, many of which are not within our control, including fire, flood,earthquake and other natural disasters; power loss and telecommunication failure;disruption to transportation systems; equipment or machinery failure; softwareand hardware errors, failures or crashes and similar disruptions; or unduedelays or restrictions with air transport systems and cross-border shipments.Any significant interruptions in our operations or our ability to delivertime-sensitive products would damage our reputation in the marketplace and havea negative impact on our results of operations. For example, if there was a cessation of flights leaving Canada for theUS, then the radiopharmaceutical products manufactured by DRAXIMAGE, which aredelivered via airplanes, could not be delivered to customers on a timely basisand our products would be harmed due to their short shelf-life.  Also, if there was a prolonged loss ofhydroelectric power at our manufacturing facility, then the manufacturing ofproducts by DRAXIS Pharma may be impaired because we may not have sufficientback-up power from independent generators for the duration of the hydroelectricinterruption.

 

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ALTHOUGH WE CARRY INSURANCE, A SUCCESSFUL LIABILITYCLAIM COULD NEGATIVELY IMPACT OUR BUSINESS.

 

We may besubject to liability claims by those who purchase our contract manufacturingservices, for the use of any of our unapproved products under development andthe sale and use of any approved products. Such claims might be made directly by customers, consumers, healthcareproviders or pharmaceutical companies or others selling such products.  Although the Company believes that itsinsurance coverage is reasonably adequate to insulate it from potential productliability claims and the Company has not historically experienced any problemsassociated with claims by those who purchase its contract manufacturing servicesor users of the products it manufactures, we cannot provide any assurance thatwe will be able to maintain insurance coverage at a reasonable cost or insufficient amounts to protect us against losses due to this potentialliability.  We might not be able tomaintain or obtain additional commercially reasonable product liabilityinsurance for any products approved for marketing and sale.  Even unsuccessful product liability claimscould result in the expenditure of funds in litigation and the diversion ofmanagement time and resources and could damage our reputation and impair themarketability of our products, which could have a material adverse effect onthe financial condition and results of operation of the Company.

 

IF THE MARKET DOESNOT ACCEPT OUR PRODUCTS, OUR BUSINESS COULD BE HARMED.

 

There can be noassurance that any of our products in development or products recently launchedwill achieve market acceptance.  Thedegree of market acceptance will depend upon a number of factors, including thereceipt of regulatory approvals, the establishment and demonstration in themedical community of the clinical efficacy and safety of the products, theestablishment and demonstration of the potential advantages over existing andnew diagnostic and treatment methods and the reimbursement policies ofgovernment and third-party payers. There can be no assurance that physicians,patients, payers or the medical community in general will accept and utilizeany existing or new products that may be developed or manufactured by us.

 

Weanticipate that we will face increased competition in the future as newproducts enter the market and advanced technologies become available.  There can be no assurance that existingproducts or new products developed by our competitors will not be moreeffective, or be more effectively marketed and sold, than any that may bedeveloped or sold by us.  Competitiveproducts may render our products obsolete and uncompetitive prior to recoveringresearch, development or commercialization expenses incurred with respect toany such products.

 

Many of ourexisting or potential competitors, particularly large pharmaceutical companies,have substantially greater financial, technical and human resources than we do.In addition, many of these competitors have significantly greater experience inundertaking research, preclinical studies and human clinical trials of newpharmaceutical products, obtaining regulatory approvals, manufacturing andmarketing such products.  Accordingly,our competitors may succeed in commercializing products more rapidly oreffectively.

 

DRAXIS Pharma, ourcontracting manufacturing unit, competes with pharmaceutical companies thathave in-house manufacturing capabilities as well as with third-party contractmanufacturers, including Hospira Inc., Boehringer Ingelheim, Cardinal Health, Inc.,DPT Laboratories, Haupt Pharma AG, Patheon Inc. and DSM Pharmaceuticals, Inc.

 

DRAXIMAGE, ourradiopharmaceuticals unit, competes with the following companies that havesignificant radiopharmaceutical operations: Bristol-Myers Squibb Company,Amersham Health, part of GE Healthcare (“GE Amersham Healthcare”), TycoInternational Ltd., Schering AG, and Bracco

 

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SpA.  In addition, there are a number of companiesthat are developing and/or marketing other radiopharmaceutical products,including MDS Nordion Inc., Immunomedics, Inc., Biogen Idec Inc. and NeoRxCorporation.

 

*BrachySeed*®implants, which are sold by DRAXIMAGE, are sold into a competitive marketplacethat includes the established market leader, Oncura.  Other competitors in the U.S. market includeTheragenics Corporation, North American Scientific, Inc., MentorCorporation, C.R. Bard Inc. and Best Medical International.

 

DRAXIMAGEbelieves that the only competitive radiopharmaceutical imaging products on themarket at this time to compete with its *INFECTON**®* product under developmentare NeutroSpecÔ and LeukoScan®.  In July 2004, Mallinckrodt (a businessunit of Tyco Healthcare) and Palatin Technologies, Inc. announced thatthey had received FDA approval to market and manufacture NeutroSpecÔ (formerly known asLeuTech®), a Technetium-labeled monoclonal antibody that binds to white bloodcells for diagnosing difficult-to-diagnose appendicitis, which will competewith our *INFECTON**®*product currently in development.  In addition, Immunomedics, Inc.announced in January 2005 that it received Health Canada approval for themarketing and use of LeukoScan® for the detection of osteomyelitis.  LeukoScan® is a murine monoclonal IgGantibody fab’ fragment labeled with Tc-99m.  We believe that *INFECTON**®* may be the firstradiopharmaceutical capable of distinguishing inflammation from infection andas such would offer an advantage over agents that bind to white blood cells andwhich cannot distinguish between infection and inflammation.

 

There are two approvedsomatostatin-based imaging products in the marketplace which compete with our *SOMATOSCAN**®* product currently indevelopment: OctreoScan® from Tyco International Ltd. and NeoTect® from BerlexLaboratories Inc.  Both of thesemolecules offer similar information but OctreoScan® is based on indium-111and is more expensive than Tc-99m-based NeoTect® and must be delivered inradioactive form.  The Company is awarethat development work is also being done on other somatostatin-based cancertherapy products that would compete with Somatostatin Therapy.  DRAXIMAGE believes that by enabling the samemolecule to be used for both diagnosis and therapy, physicians will have agreater ability to deliver therapeutic quantities of radiation specifically towell-defined targets in the body with our product.

 

DRAXIMAGE believes that the only competitiveradiopharmaceutical imaging product on the market at this time to compete withits *FIBRIMAGE*® product underdevelopment is AcuTect®, marketed by Berlex Laboratories, Inc.  DRAXIMAGE believes that *FIBRIMAGE*® will compete well againstAcuTect® because *FIBRIMAGE*® bindsto fibrin, which comprises 75-80% of an actively forming blood clot,whereas AcuTect® binds to platelets.  TheCompany is also aware that Agenix Limited has announced in October 2004that it had received FDA approval for a Phase II clinical trials for itsThromboViewÒ product.  ThromboViewÒuses radiolabelled antibodies to locate blood clots in the body.

 

No significant competition for *Anipryl*®from products approved for veterinary or human use has been experienced to datein Canada or the United States.  However,there are two other treatments available that have not been approved in Canadaor the United States to treat canine Cushing’s disease, but which may be usedoff-label for canine Cushing’s disease: LYSODREN® (mitotane) by Bristol-MyersSquibb Co., which was approved for use in the treatment of human inoperablecancer of the adrenal gland, and NIZORAL® (ketoconazole) by Johnson &Johnson Inc.  The Company believes thathuman use selegiline used for the treatment of Parkinson’s disease, althoughnot approved for veterinary use, may compete with the use of *Anipryl*® in dogs.

 

FAILURE OF ONE OFOUR CURRENT OR FUTURE CLINICAL TRIALS COULD HAVE A MATERIALLY NEGATIVE IMPACTON OUR FUTURE PROSPECTS.

 

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The development ofnew products is subject to a number of significant risks.  Potential products that appear to bepromising in various stages of development may not reach the market for anumber of reasons.  Such reasons include,but are not limited to, the possibility that the potential product will befound ineffective or unduly toxic during preclinical or clinical trials, failto receive necessary regulatory approvals, be difficult to manufacture on alarge scale, be uneconomical to market or not achieve market acceptance, or beprecluded from commercialization by proprietary rights of third parties.  Certain products we are attempting to develophave never been manufactured on a commercial scale, and there can be noassurance that such products can be manufactured at a cost or in a quantity torender such products commercially viable. Production of such products may require the development of newmanufacturing technologies and expertise. The impact on our business in the event that new manufacturingtechnologies and expertise would have to be developed is uncertain.  Many of our potential products will requiresignificant additional research and development efforts and significantadditional preclinical and clinical testing prior to any commercial use.  There can be no assurance that we willsuccessfully meet any of these technological challenges or others that mayarise in the course of development.

 

Before obtainingregulatory approval for the commercial sale of any product under development,we must demonstrate through preclinical studies and clinical trials that theproduct is safe and efficacious.  Theresults of preclinical studies and early-stage clinical trials may not betotally predictive of results obtained in larger late-stage clinical trials,and there can be no assurance that our or clinical trials will demonstratesafety and efficacy, achieve regulatory approvals or result in marketableproducts.  A number of companies in thebiotechnology and pharmaceutical industry have suffered significant setbacks inadvanced clinical trials, even after achieving promising results in earliertrials.

 

OUR PROFIT DEPENDSIN PART ON REIMBURSEMENT POLICIES AND REGULATIONS OF GOVERNMENT HEALTHADMINISTRATION AUTHORITIES, PRIVATE HEALTH INSURERS AND OTHER ORGANIZATIONS.

 

Thebusiness and financial condition of pharmaceutical companies will continue tobe affected by the efforts of governments and third-party payers to contain orreduce the costs of healthcare through various means.  For example, in certain markets, pricing orprofitability of pharmaceutical products, medical devices and diagnosticproducts is subject to government control. In Canada, the Patented Medicine Prices Review Board (“PMPRB”) monitorsand controls prices of patented drug products marketed in Canada.  The PMPRB may assert jurisdiction over ourproducts under development which may limit the prices that can be charged forsuch products.  We may not be able toobtain prices for our products under development that will make themcommercially viable.  In the UnitedStates there have been, and we expect that there will continue to be, a numberof federal and state proposals to implement similar government controls.  In addition, the emphasis on managedhealthcare in the United States has increased and will continue to increase thepressure on pharmaceutical pricing. While we cannot predict whether such legislative or regulatory proposalswill be adopted or the effects such proposals or managed healthcare efforts mayhave on our business, the announcement and/or adoption of such proposals orefforts could have a material adverse effect on our business and financialcondition and that of our current and prospective customers.  Accordingly, our ability to establishstrategic alliances may be adversely affected. In addition, in Canada, the United States and elsewhere, sales ofprescription pharmaceutical products and radiopharmaceutical products aredependent, in part, on the availability of reimbursement to the consumer fromthird-party payers, such as government and private insurance plans.  Third-party payers are increasinglychallenging the prices charged for medical products and services.  To the extent we succeed in bringing newproducts to market, there can be no assurance that these products will beconsidered cost-effective and that reimbursement to consumers will be availableor will be sufficient to allow the sale of these products on a competitivebasis.

 

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***Risks Related toour Company***

 

IF OURCOLLABORATIVE AND COMMERCIAL RELATIONSHIPS WITH THIRD PARTIES ON WHOM WE RELYARE UNSUCCESSFUL, OUR BUSINESS MAY SUFFER.

 

To besuccessful, we must continually establish and maintain strategic relationshipswith leaders in a number of biotechnology and pharmaceutical industrysegments.  This is critical to success becausesuch relationships enable us to extend the reach of our products and sales invarious jurisdictions, generate additional revenue and develop and deploy newproducts in various marketplaces. Entering into strategic relationships is complicated, as some of ourcurrent and future strategic partners may decide to compete with us in some orall of the markets or refuse to fulfill or honor their contractual obligationsto us.  In addition, our relationshipswith customers always require us to manufacture products in accordance withtheir specifications that are issued to us from time to time.  If we are unable to meet our customers’specifications, our strategic relationships would be harmed.  We currently have strategic relationshipswith (i) Pfizer Consumer Healthcare, a division of Pfizer Canada Inc.(“Pfizer Canada”), that covers several non-prescription products for theCanadian market, including Polysporin®, Sudafed®, Actifed® and Zincofax®, (ii) BoneCare International, Inc. (“Bone Care”) to manufacture Hectorol® Injection,(iii) GlaxoSmithKline (“GSK”) to supply it with established sterileproducts marketed by GlaxoSmithKline in multiple international markets and asterile injectable product and (iv) Cardinal Health 414, Inc. inrespect of our Iodine I-131 kits, MAA, DTPA and MDP products sold in theUS.

 

We have enteredinto a number of product and technology in-licensing and out-licensingarrangements in which our business and financial success is dependent.  In some of our product and technology in-licensingarrangements, the licensor is responsible for developing a body of data uponwhich we can base a submission to the HPFB, FDA or other regulatoryauthority.  The interests of the otherparty to each of these arrangements may not be or remain consistent with ourinterests, and our collaborators may not succeed in developing a body of datathat can form the basis of regulatory approval. Should our collaborators fail to develop such body of data to enable us toobtain the requisite regulatory approvals or otherwise fail to honor theircommitments to us or meet our expectations, our business, financial conditionand results of operations may be materially and adversely affected.  In addition, we cannot control the amount andtiming of resources our collaborators devote to the products and technology towhich they have rights or to the subject matter of our agreements with themgenerally.  The agreements may beterminated by our collaborators in certain circumstances.

 

To the extent weenter into product out-licensing agreements for the marketing or distributionof our own products with collaborative partners, any revenues we receive willdepend upon the efforts of said third parties. There can be no assurance thatany third party will market our products successfully or that any third-partycollaboration will be on terms favorable to us.

 

A SIGNIFICANTPORTION OF OUR BUSINESS IS DEPENDENT ON A SMALL NUMBER OF KEY CUSTOMERS.

 

As at December 31,2004, the Company’s three largest customers, Bone Care, GSK and Pfizer Canada represented55% of our total revenues (20%, 18% and 17% respectively). The termination byany of these customers of its relationship with us would have a materialadverse effect on our business, financial condition and results of operationsunless we could replace those customers in a timely fashion.

 

IF OURCOLLABORATORS, EMPLOYEES, OR CONSULTANTS DISCLOSE OUR CONFIDENTIAL INFORMATIONTO OTHERS DESPITE CONFIDENTIALITY AGREEMENTS IN PLACE, OUR BUSINESS MAY SUFFER.

 

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Our practice is torequire our employees, collaborators, consultants and outside scientificadvisors to execute confidentiality agreements upon the commencement ofemployment or consulting relationships. These agreements provide that all confidential information developed ormade known to the individual during the course of the individual’s relationshipwith us is to be kept confidential and not disclosed to third parties, subjectto certain specific limited exceptions. In the case of employees, the agreements provide that all inventionsconceived by the individual shall be our exclusive property.  These agreements, however, may not providemeaningful protection for our trade secrets or adequate remedies in the eventof unauthorized use or disclosure of such information.  For example, if our trade secrets regardingthe robotic manufacturing aspects of our *BrachySeed*®product were disclosed, then a portion of our competitive advantage would belost.  Similarly, trade secrets regardingthe recipe to manufacture one of our kit products could be disclosed, allowingour competitors to copy the recipe and manufacture a competing product.

 

WE ARE SUBJECT TOREGULATION BY GOVERNMENTS IN MANY JURISDICTIONS AND, IF WE DO NOT COMPLY WITHMANUFACTURING, NUCLEAR SAFETY AND ENVIRONMENTAL REGULATIONS, OUR EXISTING ANDFUTURE OPERATIONS MAY BE CURTAILED, AND WE COULD BE SUBJECT TO LIABILITY.

 

Pharmaceuticaldrug manufacturing is a highly regulated industry, requiring significantdocumentation and validation of manufacturing processes and quality controlassurance prior to approval of the facility to manufacture a specificdrug.  There can be considerabletransition time between the initiation of a contract to manufacture a productand the actual initiation of manufacture of that product.  Any lag time in the initiation of a contractto manufacture a product and the actual initiation of the manufacturing at ourfacilities could cause us to lose profits.

 

We have in placefacilities and procedures designed to reduce and, to the extent possible,eliminate the risk of environmental contamination resulting from the processingof raw materials and, more specifically, from the radiopharmaceutical businessof DRAXIMAGE and the manufacturing business of DRAXIS Pharma.  We also have in place a regular maintenanceprogram to ensure continued compliance with all applicable environmentalregulations.  The Company has notreceived any notice stating that it is not in compliance with environmentallegislation applicable to it.

 

Canadianand U.S. federal, state, local and provincial regulations govern extensivelythe use, manufacture, storage, handling, transport and disposal of hazardousmaterial and associated waste products. Although we believe that the operations at our facilities comply in allmaterial respects with the applicable environmental laws in Canada and theUnited States, we cannot completely eliminate the risk of substantialenvironmental liabilities especially in respect of environmental contamination resultingfrom the processing of raw materials from the radiopharmaceutical business ofDRAXIMAGE and the manufacturing business of DRAXIS Pharma.  Any failure by us or any of our subsidiariesto comply with the present or future environmental laws in Canada, the UnitedStates or elsewhere could result in any of the following: (i) cessation ofportions or all of our or our subsidiaries’ operations; (ii) imposition offines; (iii) restrictions on our or our subsidiaries’ ability to carry onor expand our operations; (iv) significant expenditures by us in order tocomply with environmental laws and regulations; or (v) liabilities inexcess of our resources.

 

OUR BUSINESS COULDBE HARMED IF THERE WERE A DISPUTE OR DISRUPTION WITH OUR UNIONIZED EMPLOYEES.

 

Althougha collective agreement with a five-year term to April 30, 2008 wasratified, by DRAXIS Pharma, in February 2004 with the United Food &Commercial Workers International Union, Local 291 (AFL-CIO), there can be noassurance that future labor difficulties will not arise, and if they

 

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did arise then the production and delivery ofthose products manufactured by DRAXIS Pharma would be impaired for the durationof those labor difficulties.

 

OUR FUTURE SUCCESSDEPENDS ON OUR ABILITY TO GROW, AND IF WE ARE UNABLE TO MANAGE OUR GROWTHEFFECTIVELY, WE MAY INCUR UNEXPECTED EXPENSES AND BE UNABLE TO MEET OURCUSTOMERS’ REQUIREMENTS.

 

We will need tomaintain, expand and upgrade our manufacturing facilities and operations toexecute current commercial obligations to customers, widen our customer baseand increase manufacturing efficiencies over the next few years.  We cannot be certain that DRAXIS Pharma willbe able to enter into enough lucrative third-party manufacturing contracts toincrease its profitability.  If we dosecure advantageous agreements, we cannot be certain that our employees,systems, procedures, controls, productive capacity and existing space will beadequate to support expansion of the operations.  Our future operating results will depend onthe ability of our officers and key employees to manage changing businessconditions and to implement and improve our technical, administrative,financial control and reporting systems and operational excellence in order toachieve established business objectives. An unexpectedly large increase in the volume of manufacturing businessor the number of orders placed by customers may require us to expand capacityand further upgrade our facilities and the technology related to ourmanufacturing.  We may not be able toproject the rate of timing of such increases or customer demands accurately orto expand and upgrade our facilities and supporting systems and infrastructureto accommodate such increases. Difficulties in managing future growth and meeting customers’ expandedrequirements could have a significant negative impact on our business and itsprofitability.

 

OUR FINANCIALRESULTS MAY FLUCTUATE, AND OUR FUTURE REVENUE AND PROFITABILITY AREUNCERTAIN.

 

Our ability toachieve and maintain profitability in the foreseeable future depends on thecommercial success of our products and services.  Because we will be launching or are in theprocess of launching new products in new markets, revenues are difficult to predictand may fluctuate substantially from period to period.  In addition, product development programswill require substantial additional investment, including the cost of clinicaltrials, obtaining additional regulatory approvals, if necessary, and marketingand sales expenses associated with potential new product introductions.  Our manufacturing facilities will continue torequire capital investment in order to maintain, upgrade and expand theiroperations.  The success of DRAXIMAGE andDRAXIS Pharma will rely significantly on the ability of both divisions tomaintain and to increase substantially their manufacturing capabilities tosatisfy customer demand.  There can be noassurance that, or when, we will successfully develop, receive regulatoryapprovals for, or manufacture or market any new products for our own marketingpurposes or for third parties.  DRAXISPharma may fail to secure sufficiently lucrative third-party manufacturingcontracts to increase its profitability. The research, development, production and marketing of new products willrequire the application of considerable technical and financial resources by usand our customers, while revenues that are generated by such products, ifsuccessfully developed and marketed, may not be realized for severalyears.  We may not be able to sustainprofitability.  We may require externalfinancing to complete certain aspects of our strategic plan, and externalsources of capital may not be available to us at an acceptable cost.

 

IF WE CANNOT ADAPTTO CHANGING TECHNOLOGIES, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETEAND OUR BUSINESS COULD SUFFER.

 

Because thebiotechnology and pharmaceutical industry is characterized by rapid technologychange and obsolescence, we may be unable to anticipate changes in our currentand potential

 

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customerrequirements that could make our existing technology obsolete.  Our success will depend, in part, on ourability to continue to enhance our existing products and services, develop newtechnology that addresses the increasing sophistication and varied needs of ourrespective customers, license leading technologies and respond to technologicaladvances and emerging industry standards and practices on a timely and cost-effectivebasis.  The development of ourproprietary technology and investing in certain niche markets entailssignificant technical and business risks. We may not be successful in using our new technologies or exploiting ourniche markets effectively or adapting our businesses to evolving customerrequirements or emerging industry standards.

 

WE ARE EXPOSED TOEXCHANGE RATE FLUCTUATIONS WHICH COULD NEGATIVELY AFFECT OUR BUSINESS.

 

A substantialportion of our revenues are now, and are expected to continue to be, realizedin US dollars.  Our operating expensesare primarily paid in Canadian dollars. We may be adversely affected by a significant and rapid strengthening ofthe Canadian dollar against the U.S. dollar, should the Canadian dollar rise invalue compared to the U.S. dollar by more than 10 basis points.  We do not currently use derivativeinstruments to hedge our foreign exchange risk and currently have no plans todo so in the near future.  For fiscalyear 2004, U.S. dollar revenue accounted for approximately 50.9% of the Company’srevenue.  Material fluctuations in theexchange rate between the U.S. dollar and the Canadian dollar may have amaterial effect on our results of operations and in 2004 we charged to incomeapproximately $374,000 due to foreign exchange translation losses related tothe strengthening of the Canadian dollar.

 

IF WE LOSE THESERVICES OF KEY PERSONNEL, WE MAY BE UNABLE TO REPLACE THEM, AND OURBUSINESS COULD BE NEGATIVELY AFFECTED.

 

Our successdepends on the retention of principal members of our management and scientificstaff, including Dr. Martin Barkin, Dr. Richard Flanagan, Mr. JohnDurham and Dr. Edward Bump, and on our ability to continue to attract,motivate and retain additional key personnel. The Company has employment agreements with all its key management andscientific staff, with no fixed terms of duration.  The Company has key man insurance on thelives of Dr. Martin Barkin, Dr. Richard Flanagan and Mr. JohnDurham.  The market for retaining andobtaining such key personnel is intensely competitive, and the loss of theservices of key personnel or the failure to recruit necessary replacement andadditional personnel in a timely manner could materially and adversely affectoperations and our research and development efforts.

 

ALTHOUGHWE CONSIDER THE COMPANY TO HAVE GOOD DEFENSES TO SUCH ACTION, SHOULD THECURRENT LAWSUIT AGAINST US SUCCEED, WE COULD INCUR A SUBSTANTIAL LOSS.

 

In 1998, aCanadian legal proceeding was launched against the Company and DAHI by a formerconsultant, Jozsef Knoll, claiming royalty entitlements based on the net profitfrom sales of *Anipryl*®.  Total damages claimed are $100 million,including a claim to certain shares of DAHI, however, the plaintiff has takenno steps in the last five years to move the claim forward.  While we believe the Company has gooddefenses to the Knoll proceeding, this dispute may not be resolved in ourfavor, if it is pursued.  It is possiblethat a court or arbitration tribunal may find us to be in breach of certainagreements, or of infringing validly issued patents of third parties orpracticing the intellectual property of others. In that event, in addition to the cost of defending the underlyingproceeding, we may have to pay license fees, additional royalties and/ordamages and may be ordered to assign certain *Anipryl®-*relatedpatents and be prohibited from conducting certain activities.  Under such circumstances, we could incursubstantial loss and our business could be negatively affected.

 

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IFINTEREST RATES INCREASE MATERIALLY, OUR INTEREST EXPENSE COULD INCREASEMATERIALLY, AND OUR RESULTS OF OPERATIONS COULD BE NEGATIVELY AFFECTED.

 

All of the Company’sthird-party debt is based on a variable interest rate.  Should the Company borrow in the future onits existing facilities, any material changes to interest rates could result inmaterially increased interest expense and decreased results of operations.  As of the year ended December 31, 2004,the Company had no third-party debt outstanding.

 

***Risks Related toour Common Shares***

 

OUR COMMON SHAREPRICE HAS BEEN, AND IS LIKELY TO CONTINUE TO BE, VOLATILE.

 

The market pricesfor the securities of pharmaceutical and biotechnology companies, includingours, have historically been highly volatile, and the market has, from time totime, experienced significant price and volume fluctuations that are unrelatedto the operating performance of particular companies.  For the last two years, the price of ourstock has ranged from a low of US$1.09, to a high of US$5.94 on the NASDAQExchange (CDN$1.61 to CDN$7.90 on the Toronto Stock Exchange).  We believe that in late 2003, both the priceand the volume of shares traded increased substantially following the releaseto the market of better than expected financial results.  We believe that in 2004 the appreciation inthe price and volumes of shares traded increased due to continued improvementsin financial performance and increased visibility resulting from an equityoffering of shares during the first half of 2004.

 

Factors such asfluctuations in our operating results, announcements of competing technologicalinnovations or new therapeutic products by our competitors, clinical trialresults, governmental regulation, developments in patent or other proprietaryrights, public concern as to the safety of drugs developed by us or others andgeneral market conditions can have an adverse effect on the market price of ourshares.  In particular, the realizationof any of the risks described herein could have a material adverse impact onsuch market price.  Sales of substantialamounts of our shares in the public market, or the perception that such saleswill occur, could also adversely affect the market price of our shares and makeit more difficult in the future for us to raise funds through equity offerings.

 

**Item 4.****           Information on theCompany**

 

DRAXIS is a specialtypharmaceutical company providing products in three major categories: sterile,including sterile lyophilized (freeze-dried) pharmaceuticals; non-sterilespecialty pharmaceuticals; and radiopharmaceuticals.  In the radiopharmaceutical category, DRAXIShas its own products and a targeted research and development program for newproducts.  As of January 1, 2005,activities of the Company are carried out through DRAXIS SpecialtyPharmaceuticals Inc. which operates two major divisions, DRAXIS Pharma(contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).

 

In addition, DRAXIS hascontinuing financial interests associated with its collaboration agreementswith Pfizer Inc. with respect to *Anipryl**®*,GlaxoSmithKline (“GSK”) with respect to theSpectroPharm® line of dermatologyproducts, and Shire BioChem Inc. (“Shire”) with respect to Canadian sales ofproducts divested in 2003.

 

The Company’s consolidatedoperations are integrated across research, product development, manufacturing,sales and marketing, as well as the in-licensing and commercial development ofradiopharmaceutical products and technologies.

 

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DRAXIS has emerged from atransitional phase of its development. Previously, the Company was reliant on income earned from *Anipryl**®*.  For the year ended December 31, 2004,the Company’s collaboration agreement with respect to *Anipryl**®* represented 7.7% of theCompany’s consolidated revenues.  In thenear term, the Company expects to continue to lessen this reliance as itdevelops a diversified profit base from its other business units.  In particular, the Company expects radiopharmaceuticalsand contract manufacturing to remain major sources of longer-term revenue andearnings.

 

The common shares ofDRAXIS are listed on the Toronto Stock Exchange (ticker symbol DAX) and onNASDAQ (ticker symbol DRAX).

 

The Company’s registered andhead office is located at 6870 Goreway Drive, 2nd Floor,Mississauga, Ontario, Canada L4V 1P1. Telephone: (905) 677-5500. Fax: (905) 677-5494.

 

The Company’smanufacturing, research and development facilities are located at 16751Trans-Canada Road, Kirkland, Québec, Canada H9H 4J4.

 

The Company’s websiteis:  www.draxis.com.

 

**History and Development of the Company**

 

The Company wasincorporated under the name Deprenyl Research Limited on October 13, 1987under the *Canada Business Corporations Act*.  The Company was founded principally to engagein the marketing in Canada of prescription pharmaceuticals discovered,developed or acquired by Chinoin Pharmaceutical and Chemical Works Co. Ltd.,the first of which was *Eldepryl**®* (selegiline; 1-deprenyl),for the treatment of Parkinson’s disease. The Company changed its name to DRAXIS Health Inc. in May 1994.

 

The Company completed aninitial public offering of its common shares in February 1988.

 

Beginning in 1990, theCompany expanded on its knowledge and experience with selegiline by initiatingdirectly on its own behalf, as well as through contract research arrangements,studies designed to investigate the potential of selegiline for companionanimal use.  This initiative ultimatelyresulted in the formation of its subsidiary DAHI, through which the Companydeveloped and commercialized a companion animal health product, *Anipryl**®*.

 

In 1991 the Company beganto invest in the applications of aminolevulinic acid photodynamic therapy,which resulted in the formation of a subsidiary, DUSA Pharmaceuticals, Inc.(“DUSA”).  Through a series oftransactions from 1991 to 1996, the Company divested all of its interest inDUSA.

 

By late 1992, the Companyfaced considerable uncertainty due to the impending threat of generic competitionfor *Eldepryl**®* which, at that time,still accounted for almost 100% of the Company’s revenues.  Faced with this as well as other businesschallenges, in 1992 the Company began the process of recruiting new seniormanagement to develop and implement a new strategic business plan for theCompany to (i) address the generic threat to its lead drug by expandingand diversifying its established Canadian pharmaceuticals franchise; (ii) strengthenthe Company’s financial position; and (iii) diversify from its historicalCanadian base through the acquisition of niche pharmaceutical products and/ormanufacturing-oriented businesses with international growth potential.

 

Since 1993, the Companyimplemented the following corporate development initiatives:

 

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#### ***CanadianPharmaceuticals***

#### *** ***

•                  1993 to 1999 – acquisition and licensing of severalprescription and non-prescription products for the Canadian market,predominantly products for neurological disorders.

 

•                  March 2003 – return of Canadian rights toaffiliates of Elan Corporation, plc (“Elan”) for several neurological productsthat had not achieved regulatory approval in Canada.

 

•                  July 2003 – sale to Shire of Canadian marketingrights for substantially all remaining products of the Canadian sales andmarketing division (“DRAXIS Pharmaceutica”).

 

#### ***Financial Position***

 

•                  March 1996 – disposition of the Company’sremaining interest in DUSA for net proceeds of $6.8 million.

 

•                  April 1996 – public offering of 3,000,000 commonshares generating net proceeds of $8.5 million.

 

•                  March 2003 – receipt of $6.5 million from ElanCorporation for Canadian rights to unapproved neurology products.

 

•                  July 2003 – receipt of $9.6 million from Shirefor Canadian marketing rights for substantially all of the remainder of thedivested Canadian sales and marketing division.

 

•                  April 2004 – closingof the acquisition from SGF Santé Inc. (“SGF”) its remaining 32.7% interest inthe Company contract manufacturing operations, DRAXIS Pharma Inc. (now known asDRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.).

 

•                  April 2004 – closingof an equity financing offering of 3,053,436 units, consisting of one commonshare of the Company and one half share purchase warrant per unit, for grossproceeds of $13.4 million.

 

•                  December 2004 –repayment of all third-party debt.

 

Diversification

#### *** ***

•                  November 1996 – acquisition of the shares of DAHIthat the Company did not previously own through a mandatory share exchangetransaction valued at $17.4 million.

 

•                  July 1997 – $8.6 million acquisition by theCompany of Merck’s radiopharmaceutical business which began operations throughDRAXIMAGE Inc. (now known as DRAXIMAGE, a division of DRAXIS SpecialtyPharmaceuticals Inc.).

 

•                  December 1997 – licensing of *Anipryl**®* to Pfizer in return formilestone payments, royalties, a manufacturing supply agreement and a researchcollaboration.  Cumulatively, to December 31,2004, $43.3 million has been received in milestone payments, royalties androyalty-related payments from Pfizer.

 

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•                  May 1998 – $11.1 million acquisition of theCompany’s contract manufacturing facility in Kirkland, Québec, which operatesas DRAXIS Pharma.

 

Beginning in 1998, theCompany embarked on a capital expansion plan for construction of the Company’snew lyophilization line, the construction of radiopharmaceutical manufacturingfacilities and the subsequent expansion of the radiopharmaceutical operations.

 

In late 1999 and early2000, the Company undertook a strategic review of its operations from theperspective of enhancing shareholder value. As a result of this review, the Company resolved to focus its financialand management resources on its radiopharmaceutical and contract manufacturingbusinesses.

 

During 2000, the Companydivested its dermatology product lines for aggregate proceeds of $9.0million.  The largest transaction in thisregard was the sale of the SpectroPharm*®* line of products to Block Drug Company (Canada)Limited (now part of GlaxoSmithKline Consumer Healthcare).

 

In February 2000, theCompany established a strategic alliance with SGF with the sale of a 34.1% equity interest in DRAXISPharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS SpecialtyPharmaceuticals Inc.) to SGF and certain members of DRAXIS Pharma’s managementteam.

 

During 2001, the Companyreceived U.S. and Canadian regulatory approvals for the expandedradiopharmaceutical manufacturing facility and FDA acceptance to manufacturesterile lyophilized and sterile injectable products.

 

In March 2001, theCompany in-licensed *INFECTON**®*, a Technetium 99m-basedradiopharmaceutical for imaging infection.

 

Also during 2001,DRAXIMAGE launched *BrachySeed*® I-125 in the U.S. and Canada and receivedregulatory approvals in the U.S. and Canada for *BrachySeed*® Pd-103.

 

In 2001, the Companyfurther implemented its strategic plan by (i) initiating the production ofBracco Diagnostic Inc.’s sodium iodide I-131 radiotherapy capsules; (ii) signinga long-term supply agreement to manufacture several GSK predominantly sterileproducts for multiple international markets; and (iii) amending the *Anipryl**®*licensing agreement with Pfizer resulting in a $3.1 million cash payment to theCompany plus return of product rights outside of North America.

 

During 2002, the Company achievedimproved financial results from continuing operations.  The Company also received several regulatoryapprovals, including (i) U.S. and Canadian approval to transfer productionof DRAXIMAGE’s line of lyophilized medical imaging products to the Company’s own production facility, (ii) U.S.approval to commence production at DRAXIS Pharma of an established injectableproduct for GlaxoSmithKline for the U.S. market and (iii) U.S. approval tomanufacture solid dosage form products at DRAXIS Pharma.  In 2002, the Company also realigned its U.S.sales and marketing strategy for *BrachySeed*®,the Company’s proprietary radioactive brachytherapy implant.

 

During 2003, the Company achieveda number of significant accomplishments, including:

 

•                  U.K.regulatory approval to manufacture multiple sterile and non-sterile products atDRAXIS Pharma.

 

•                  InJanuary 2003, commencement of a Phase I trial in Canada for *INFECTON®*, a Technetium-99m-based radiopharmaceuticalfor imaging infection.

 

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•                  Followingthe termination of the distribution agreement with Cytogen early in 2003,commencement of direct sales of *BrachySeed*® inthe U.S.

 

•                  InMarch 2003, launch in the U.S. of a new radiotherapeutic Iodine I-131kit product for the treatment of thyroid cancer and hyperthyroidism.

 

•                  InMarch 2003, receipt of $6.5 million from affiliates of Elan, for thereturn of Canadian rights for several of Elan’s neurology products.

 

•                  InJune 2003, appointment of John Durham as President of DRAXIS Pharma,promotion of Mark Oleksiw to Chief Financial Officer and additional realignmentof the Company’s executive management team.

 

•                  InJuly 2003, completion of the divestiture of DRAXIS Pharmaceutica, theCompany’s Canadian pharmaceutical sales and marketing division, for $9.6million in cash plus up to $2.9 million in market-driven contingent milestones.

 

•                  InJuly 2003, commencement of a Phase II trial in Canada for *INFECTON®*.

 

•                  InNovember 2003, the Company, the University of Toronto and the University’sInnovations Foundation agreed to dismiss lawsuits between them related to *Anipryl*® without payment by the Company or DAHI.

 

•                  InDecember 2003, DRAXIMAGE became certified under ISO 9001:1994, includingISO 13485:1996, an international standard for medical device manufacturers.

 

During 2004, the Companyachieved a number of significant accomplishments, including:

 

On April 22, 2004,DRAXIS issued 3,053,436 units of the Company at a purchase price of $4.82(CDN$6.55) per unit, for aggregate proceeds net of related expenses of $13.4million (CDN$18.2 million).  Each unitconsists of one common share of DRAXIS and one-half of one share purchasewarrant.  Each whole warrant entitles theholder to acquire one common share of the Company at a price of CDN$8.50 at anytime prior to April 24, 2006.

 

*On April 22, 2004, DRAXISacquired SGF’s 32.7% interest in DRAXIS Pharma for cash consideration of $9.6million (CDN$13 million).  DRAXIS usedpart of the proceeds from the offering completed in April 2004 to pay forthe acquisition and to repay $3.1 million (CDN$4.2 million) in debt owed byDRAXIS Pharma to SGF and $1.7 million (CDN$2.3 million) in debt owed by DRAXISPharma to Investissement Québec.*

* *

In June 2004, theCompany negotiated new credit facilities with its bankers, the National Bank ofCanada, providing an operating facility of CDN$15 million (or U.S. equivalent),payable within 364 days of drawing upon the facility and a term facility ofCDN$10 million (or U.S. equivalent), repayable in full in three years.  As at December 31, 2004, no amount wasdrawn on either facility.

 

In November 2004, theCompany received FDA approval for a DRAXIMAGE brand of Iodine-131therapeutic capsules.

 

In December 2004, theCompany repaid all of its third-party debt.

 

Subsequent to 2004, effective January 1, 2005,the Company amalgamated its two wholly-owned subsidiaries, DRAXIS Pharma Inc.and DRAXIMAGE Inc., to achieve certain business and tax efficiencies.  The amalgamated subsidiary, called DRAXISSpecialty Pharmaceuticals Inc., will continue to conduct business as twodivisions, DRAXIS Pharma and DRAXIMAGE, and serve as the operating arm of theparent company, DRAXIS Health Inc.

 

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For information concerningthe Company’s capital expenditures and methods of financing, please see Item 5:Operating and Financial Review and Prospects.

 

**Business Strategy**

 

The Company believes that both DRAXIMAGE and DRAXISPharma have significant long-term growth potential and has investedconsiderable financial and management resources in developing these businesses,including:

 

•                  $6.5million of investments establishing the first of two sterile lyophilization(freeze-drying) units at DRAXIS Pharma to provide in-house manufacturing of theCompany’s radiopharmaceutical imaging kits as well as third-party contractmanufacturing services;

 

•                  $12.0****million of investments in a three-year capital plan atDRAXIS Pharma announced in April 2002, including a state-of-the-art rawmaterial dispensing facility, additional autoclave capacity, and expansion ofthe Company’s existing lyophilization capacity which was completed in 2004;

 

•                  $4.7****million of investments in the construction and laterexpansion of DRAXIMAGE’s radiopharmaceutical production facilities andcapabilities, including its robotic manufacturing lines;

 

•                  $0.8****million of investments to enhance DRAXIS Pharma’s andDRAXIMAGE’s capabilities and regulatory compliance; and

 

•                  thecontinued development of the DRAXIMAGE product pipeline, specifically *FIBRIMAGE®* and *INFECTON®*.

 

These initiatives are consistent with the Company’sgeneral business strategy to:

 

•                  Focuson specialty pharmaceutical markets in which the Company can develop andsustain a competitive advantage.

 

•                  DRAXIShas focused its operations on two core businesses:  radiopharmaceuticals and specialtypharmaceutical contract manufacturing. Both businesses target highly differentiated, specialized markets whichfeature significant regulatory requirements and specialized manufacturingrequirements and standards.

 

•                  Developnew pharmaceutical products and services consistent with the Company’sstrengths and capabilities.

 

•                  DRAXIShas established a growing franchise in the highly differentiatedradiopharmaceutical segment with a portfolio of over 34 currently marketedproducts plus four innovative proprietary products in development.  In addition to its radiopharmaceuticalplatform, the Company’s expanding lyophilization capability positions it tooffer new services to take advantage of growth opportunities in contractmanufacturing.

 

•                  Pursuegrowth opportunities with international market potential.

 

•                  TheCompany is leveraging its capabilities, experience and regulatory compliance inradiopharmaceuticals and manufacturing to expand its product and serviceofferings in the United States, Europe and other international markets.

 

•                  Leveragealliances with customers.

 

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•                  TheCompany is pursuing multiple opportunities with new and existingcustomers.  Meeting the strict qualityand service standards of such customers positions the Company to expand onthese relationships in both its radiopharmaceuticals and pharmaceuticalcontract manufacturing businesses.

 

The Company’s primary operationalfocus for 2005 continues to be: (i) improving near-term financial andoperational performance of its radiopharmaceutical and manufacturing businessesthrough increasing sales of existing products and services, improvingmanufacturing efficiency and effectiveness, and obtaining additional regulatoryapprovals; and (ii) securing and advancing its base for long-term growththrough the development of its existing product pipeline as well as identifyingnew business opportunities that are consistent with the Company’s capabilitiesand that contribute to the long-term value of the Company.

 

Consistent with this strategicfocus, the Company divested its dermatology product lines in 2001 and in 2003completed the sale of its Canadian prescription pharmaceutical sales andmarketing business, DRAXIS Pharmaceutica. The Company also realigned its senior management responsibilities in2003 to focus on its core businesses. The positive progress made by both the radiopharmaceutical and contractmanufacturing business is highlighted by the improved operating results ofthese core businesses and improved cash flows of the Company in 2004.

 

A description of theprincipal markets in which the Company operates and a breakdown of totalrevenues by segment and geographic market for the three most recent financialyears is included in Note 20 of the Company’s 2004 Consolidated FinancialStatements and Notes beginning on page F-1.

 

The Company’s two mainoperating businesses, radiopharmaceuticals and pharmaceutical contractmanufacturing, are not characterized by significant seasonality.  Plant operations for DRAXIS Pharma, however,are generally reduced or shut down once a year for approximately two to fourweeks in order to conduct regular required maintenance of facilities.

 

DRAXIMAGE’s principal rawmaterials are radioactive isotopes that are used to label other compounds thatact as carriers or molecular targeting agents. The isotopes are obtained from companies and agencies that are licensedby governmental regulators to produce purified radioactive chemicals.  Radioactive materials, by their nature, decayover time — some rapidly and some more slowly, depending on specificisotopes.  Therefore, DRAXIMAGE receivesshipments of chemical-grade radioisotopes several times each week and convertsthese to finished products within days or weeks.  While prices of selected isotopes can besomewhat volatile over the medium term, DRAXIMAGE endeavors to negotiatelong-term supply arrangements with appropriate suppliers, especially for themore important isotopes such as radioactive Iodine.

 

DRAXIS Pharma, as amanufacturer of pharmaceutical products, obtains its chemical raw materialsfrom approved chemical suppliers of both active pharmaceutical ingredients (“API”)and inactive or excipient ingredients such as fillers, stabilizers,preservative agents and coloring agents. In most instances the API is supplied by the customer.  DRAXIS Pharma conducts full quality controltesting of all ingredients and packaging materials before they are incorporatedinto the finished product.  Prices ofprincipal API are not generally volatile, although prices can vary betweenalternative suppliers.

 

**Radiopharmaceuticals**

 

DRAXIMAGE discovers,develops, manufactures, and markets diagnostic imaging and therapeuticradiopharmaceutical products for the global nuclear medicine marketplace.  Nuclear medicine entails the use ofradioactive drugs (radiopharmaceuticals) for imaging and therapeuticpurposes.  The 

 

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energy released as these products decay can beharnessed to:  (i) elicit a visualrepresentation of various organs and tissues (nuclear imaging), or (ii) destroycancerous cells (radiotherapy).  Productscurrently marketed by DRAXIMAGE include a line of lyophilized Technetium-99mkits used in nuclear imaging procedures, a line of imaging and therapeuticproducts labeled with a variety of isotopes, including radioiodine, and *BrachySeed*®,Iodine-125 brachytherapy implants. DRAXIMAGE also has a number of products in development, including twoTechnetium-99m-based diagnostic imaging products:  *FIBRIMAGE**®*, for imaging deep-vein thrombosis, has completedenrolment of its Phase III trial in Canada and the Company is in negotiationwith the FDA on the commencement of a Phase III trial in the U.S.; *INFECTON**®*, has embarked on its PhaseII trials in both Canada and the U.S. Given the inherent uncertainties associated with new drug development,it is difficult to predict if, or when, these products will achievecommercialization.

 

Founded in 1950 as adivision of Charles E. Frosst & Co., the predecessor business toDRAXIMAGE pioneered and became a leader in the medical application of nucleartechnology after assuming the development function from Atomic Energy of CanadaLtd.  Following the 1965 acquisition ofCharles E. Frosst & Co. by Merck Inc. (“Merck”), the businesscontinued operations as a division of Merck’s Canadian subsidiary, Merck FrosstCanada and Co. (“Merck Frosst”), until its acquisition by DRAXIS in 1997.  As part of the acquisition, the Companyretained all of the business’s managers, scientists and employees as well asits existing products and intellectual property.

 

The acquisition of thisbusiness was consistent with the Company’s strategy of acquiring specialtypharmaceutical platforms with potential for expansion into global markets.  DRAXIMAGEis the only company that manufactures I-131 radiopharmaceutical productsin Canada.

 

DRAXIMAGE and itspredecessor have a long history of technological and scientific progress in thefield of radiopharmaceuticals.  Notableachievements include the development of lyophilized kits for the in-situpreparation of Technetium-99m (“Tc-99m”) radiopharmaceuticalproducts for nuclear medical imaging (“Tc-99m Kits”); the development ofchelates for the indium/yttrium and Technetium/rhenium groups of metals; andthe development of stabilizers for use in iodinated radiopharmaceuticals, whichresulted in DRAXIMAGE being one of the few companies to market iodinatedproducts that do not require refrigeration.

 

Key business developmenttransactions involving DRAXIMAGE have included:

 

•                  July 1997 – $8.6million acquisition of the Canadian radiopharmaceutical division of MerckFrosst, which began operations through DRAXIMAGE Inc. (now known as DRAXIMAGE,a division of DRAXIS Specialty Pharmaceuticals Inc.).

 

•                  June 1988 –establishment of a strategic alliance with Molecular Targeting Technology, Inc.(“MTTI”), to develop, manufacture and market potential novel imagingagents.  The first opportunity pursuedunder this alliance was *AMISCAN**Ô*, an agent for the imagingof acute myocardial infact.

 

•                  October 1999 –licensing from Isogenic Science Ltd. (“Isogenic”) of the rights to Isogenic’sproprietary technology related to radioactive brachytherapy implants (“*BrachySeed*®”) forthe treatment of various localized cancers.

 

•                  July 2000 – signingof a non-exclusive distribution agreement with Syncor International Corporation(now known as Cardinal Health 414, Inc.) for the production of a kit forthe 

 

20

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preparation of SodiumIodide I-131 Capsules and Oral Solution indicated for the treatment of thyroidcancer and hyperthyroidism for sale in the U.S.

 

•                  December 2000 –entering into license, distribution and supply agreements for *BrachySeed*® forthe U.S. market with Cytogen Corporation.

 

•                  March 2001 –licensing from BTG International Limited (formerly known as the BritishTechnology Group) of the rights to *INFECTON**®*, an agent for imaginginfection.

 

•                  October 2001 –long-term third-party manufacturing agreement to supply Bracco Diagnostics Inc.with sodium iodide I-131 radiotherapy capsules for the U.S. market.

 

•                  April 2003 –termination of license, distribution and supply agreements with CytogenCorporation for *BrachySeed*® for the U.S. market.

 

•                  May 2003 – expansionof agreements with Isogenic for global rights to proprietary technology relatedto brachytherapy implants.

 

•                  July 2003 – extensionand expansion of strategic partnership with Bristol-Myers Squibb MedicalImaging (“Bristol-Myers”) for the marketing and distribution ofradiopharmaceutical products in Canada.

 

•                  August 2003 –amendment to the July 2000 agreement with Cardinal Health, 414 Inc. toenable DRAXIMAGE to distribute the new radioactive Iodine I-131 kitproduct to independent radiopharmacies in the U.S.

 

•                  August 2004 –termination of Phase II clinical trial in Canada and U.S. with respect to *AMISCAN**Ô*.

 

DRAXIMAGE’s growthstrategy is to leverage its history and experience in the research,development, manufacture and distribution of radiopharmaceutical products andservices and to capitalize on its manufacturing capabilities.  In particular, DRAXIMAGE’s business strategyincludes:

 

•                  Increasing sales ofradioactive products, particularly in the U.S.;

 

•                  Increasing internationalsales of its existing Tc-99m Kits;

 

•                  Timely, cost-effectivedevelopment of its portfolio of proprietary, innovative imaging and therapeuticradiopharmaceutical products; and

 

•                  Identifying andcapitalizing on additional new business opportunities which are consistent withDRAXIMAGE’s capabilities.

 

### **Overview ofRadiopharmaceuticals**

 

The medical specialty ofnuclear medicine involves the use of short-lived radioisotopes for bothdiagnostic imaging and therapeutic applications.  Pharmaceutical products used in suchapplications are commonly called radiopharmaceuticals.  Radiopharmaceuticals represent awell-defined, growing niche market that involves challenges such as regulatoryapprovals, specialized manufacturing standards, access to supply and criticaldelivery logistics.

 

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#### ***Diagnostic Imaging Applications***

#### *** ***

The diagnostic imagingapplications of nuclear medicine normally involve the intravenousadministration of a radiopharmaceutical consisting of a targeting molecule thathas a particular binding affinity for a specific organ or tissue linked to alow intensity, short-lived, gamma-emitting radioisotope such as Tc-99m.  Following administration, theradiopharmaceutical with its radioactive isotope concentrates at the biologicaltarget, which is then imaged using a scanning device such as a gamma camera.  A gamma camera consists of a scintillationcrystal which, when placed over a region of the body, is capable of detectinggamma rays emitted by radionuclides in underlying tissues.  This imaging modality is also referred to asgamma scintigraphy.  The gamma camera andits associated computerized peripheral devices accurately measure the radiationbeing emitted by the radioisotope and so provide both a visual picture of thetarget and quantitative data concerning the distribution of radioactivity.

 

A nuclear medicine imageprovides both static and functional, or dynamic, information about a biologicaltarget, thereby revealing functional and morphological information normallyunobtainable by other imaging techniques such as X-ray, magnetic resonanceimaging, computer tomography, and ultrasound, all of which provide primarilyanatomical information.

 

Nuclear medical imagingprocedures are established and trusted medical procedures with many years ofsafe and effective use.  Most proceduresare non-invasive, are performed with a minimum of discomfort and inconvenienceto the patient and are normally less costly and involve less risk than newerhigh-tech alternative techniques.

 

#### ***Therapeutic Applications***

#### *** ***

Increasingly, therapeuticradiopharmaceuticals are being used and new products are being developed forthe treatment of disease, particularly for the treatment of variouscancers.  Examples of currently marketedtherapeutic radiopharmaceuticals include:

 

•                  various sodium iodide I-131products for the treatment of thyroid cancer and hyperthyroidism;

 

•                  brachytherapy implants forthe treatment of prostate and other forms of localized cancer;

 

•                  phosphorous-32 for thepalliation of bone pain for patients with advanced bone metastases; and

 

•                  I-131meta-iodobenzylguanidine (MIBG) for the treatment of neuroblastoma.

 

New generations ofanti-cancer agents based on targeting molecules such as peptides, proteins,metabolites and monoclonal antibodies that have binding affinities to thesurface of cancerous cells are being developed to be linked to more potent,higher-intensity, beta-emitting radioisotopes such as yttrium-90, rhenium-186,holmium-166 and lutetium-199.  There is agrowing body of scientific evidence that molecules, thus bound, will permit thedelivery of therapeutic quantities of radiation directly to malignant cells.

 

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### **Competition**

### ** **

The radiopharmaceuticalfield is highly specialized, particularly in the therapeutic area.  Challenges include meeting pharmaceuticalproduct and nuclear regulatory requirements, having the ability to handleradioactive materials and establishing facilities and procedures to manufactureproducts in a sterile lyophilized or freeze-dried form, which involvesmanufacturing standards higher than those typically employed for mostpharmaceutical products.  In addition,manufacturing and distribution logistics systems must be well-integrated andsupportive to ensure that radiopharmaceutical products can be produced rapidlyand delivered to the end user in a timely manner with the prescribed level ofstrength.

 

Companies with significantradiopharmaceutical operations include Bristol-Myers Squibb Company, GEAmersham Health, Tyco International Ltd., Schering AG, and Bracco SpA.  In addition, there are a number of companies thatare developing and/or marketing other radiopharmaceutical products, includingMDS Nordion Inc., Immunomedics, Inc., Biogen Idec Inc. and NeoRxCorporation.

 

*BrachySeed*® implants are sold into a competitive marketplacethat includes the established market leader, Oncura.  Other competitors in the U.S. market includeTheragenics Corporation, North American Scientific, Inc., MentorCorporation, C.R. Bard Inc. and Best Medical International.

 

### **Marketed Products**

### ** **

DRAXIMAGE’s products aredivided into two groups: (i) radioactive products, which are in aradioactive and ready-to-use form when shipped to customers, and (ii) non-radioactiveproducts (predominantly Tc-99m Kits). The kit products are sold in lyophilized (freeze-dried), non-radioactiveform consisting of sterile, pyrogen-free complexes of chemical and/orbiological substances.  Tc-99m Kitsare reconstituted with radioactive Tc-99m in the nuclear medicinelaboratory of a hospital or a unit-dose service supplier, or radiopharmacy,prior to use.

 

#### ***Radioactive Products***

#### *** ***

Radioactive products,which are shipped by DRAXIMAGE with the radioactive isotope alreadyincorporated, are distributed to the nuclear medicine departments of hospitalsor diagnostic clinics in a ready-to-use form.

 

The following tablesummarizes the DRAXIMAGE radioactive products. All products listed have received approval for sale by the applicableregulatory body in the territory in which the product is sold.

 

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| **Product**                                                                                   |   | **Indication**                           | ** ** | **Principal   Markets**   | ** ** |
|-----------------------------------------------------------------------------------------------|--------|------------------------------------------|------------|---------------------------|------------|
| Imaging Products                                                                              |   |                                     |       |                      |       |
| 51Cr-Chromic  Chloride Injection                                                              |   | Diagnosis of  gastroenteropathy          |       | Canada                    |       |
| 51Cr-Sodium  Chromate Injection, USP                                                          |   | Measurement of blood  volume             |       | Canada                    |       |
| 57Co-Cyanocobalamin  Capsule USP                                                              |   | Diagnosis of Vitamin-B12  malabsorption  |       | Canada/Holland            |       |
| 57Co-Standard  Cobalt Reference Solution                                                      |   | Reference for 57Co-Cyanocobalamin        |       | Canada                    |       |
| 111In-Diethylene  Triamine Pentacetic Acid Injection (DTPA)                                   |   | Cisternography                           |       | Canada                    |       |
| 111In-Indium  Chloride Sterile Solution                                                       |   | Labeling of peptides  and antibodies     |       | Canada                    |       |
| 131I-Sodium  Iodide Diagnostic Capsules and Solutions, Oral and Intravenous                   |   | Imaging of thyroid  disorders            |       | Canada                    |       |
| 131I-meta-iodobenzylguanidine                                                                 |   | Adrenal imaging                          |       | Canada/Holland            |       |
| 131I-Iodinated  Serum Albumin Injection, USP                                                  |   | Measurement of blood  and plasma volume  |       | Canada                    |       |
| 131I-Iodohippuric  Sodium Injection, USP                                                      |   | Measurement of renal  plasma flow        |       | Canada                    |       |
| 125I-Iodinated  Albumin Injection, USP                                                        |   | Measurement of blood  and plasma volume  |       | Canada                    |       |
| 133Xe-Xenon  Gas                                                                              |   | Lung ventilation  studies                |       | Canada                    |       |
|                                                                                          |   |                                     |       |                      |       |
| Therapeutic Products                                                                          |   |                                     |       |                      |       |
| 125I   *BrachySeed*®                                                                     |   | Treatment of various   localized cancers |       | U.S./Canada/South America |       |
| 103Pd  *BrachySeed*®*                                                                    |   | Treatment of various  localized cancers  |       | U.S./Canada               |       |
| 131I-Sodium  Iodide Therapeutic Capsules and Solutions, Oral and Intravenous                  |   | Treatment of thyroid  disorders          |       | Canada                    |       |
| Kit  for the Preparation of Sodium Iodide I-131 Capsules and Solution USP  Therapeutic - Oral |   | Treatment of thyroid  disorders          |       | U.S.                      |       |
| 32P-Sodium  Phosphate Solution, USP                                                           |   | Treatment of bone pain                   |       | Canada                    |       |

 

----

| * currently not  being distributed |   |   |   |   |   |
|------------------------------------|--------|--------|--------|--------|--------|

 
| Other                                        |   |                    |   | Canada      |   |
|----------------------------------------------|--------|-------------------------|--------|-------------|--------|
| 131I-Sodium  Iodine Solution – Chemical |   | Radiochemical synthesis |   | Canada      |   |
| 125I-Sodium  Iodide Solution – Chemical |   | Radiochemical synthesis |   | Canada      |   |
| 131I-Iodinated  Human Serum Albumin          |   | Radiochemical use       |   | U.S./Europe |   |
| 125I-Iodinated  Human Serum Albumin          |   | Radiochemical use       |   | U.S./Europe |   |

 

 

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*Sodium Iodide I-131 Radiotherapy*

 

In October 2001, DRAXIMAGE entered into a third-partymanufacturing contract to supply sodium iodide I-131 radiotherapy capsules forBracco Diagnostics Inc. for the U.S. market for the treatment of thyroid cancerand hyperparathyroidism.

 

In January 2003, DRAXIMAGE received FDA approval to produceand market a new radiopharmaceutical kit product for the preparation of SodiumIodide I-131 Capsules and Oral Solution for the treatment of thyroid cancer andhyperthyroidism.  This was the first suchproduct on the market that allows physicians and radiopharmacists to prepare anFDA-approved I-131 gelatin capsule or oral solution.  In March 2003, DRAXIMAGE launched the new kitproduct and initiated shipments to the Nuclear Pharmacy Services group ofCardinal Health, Inc., under a five-year, non-exclusive distribution agreementfor the product for the United States and its possessions.  As of 2003, this product was made availableto other customers and distributors in the U.S.

 

In November 2004, DRAXIMAGE received FDA approval fora DRAXIMAGE brand of I-131 therapeutic capsules.

 

##### ***BrachySeed***®

##### ** **

*BrachySeed*® is a uniquely designed, second-generationradioactive brachytherapy implant developed by DRAXIMAGE and designed to bringa high level of accuracy, precision and safety to sealed source implantsurgery.  Each *BrachySeed*® is robotically manufactured at the DRAXIMAGEfacility.

 

Brachytherapy is the implantation of radioactive “seeds”for the treatment of localized cancers of the prostate and other organs.  These seeds can contain either Iodine-125 orPalladium-103, depending on the status of the cancer and the required durationof treatment.  The seeds deliver aconcentrated, defined radiation dose that destroys cancer cells whileminimizing damage to surrounding tissues. This targeted strategy is particularly important for organs such as theprostate, which is nestled between the bladder and the rectum.  The procedure involves placement ofapproximately 100-150 of these seeds into a locally anesthetized patient.

 

DRAXIMAGE’s Iodine-125 implant was approved by the FDAin the second half of 2000 and launched into the Canadian and U.S. marketsduring the second quarter of 2001.  ThePalladium-103 product was approved by the FDA in the fourth quarter of 2001 andlaunched during the second quarter of 2002, but shipments were subsequentlysuspended pending development of a revised marketing strategy.  The Palladium-103 product was not marketedduring 2003 or 2004.

 

In early 2003,DRAXIMAGE implemented a strategy to market brachytherapy products directly toU.S. customers following the ending of license, distribution and supplyagreements with Cytogen Corporation.  Themove to the end user marketing of brachytherapy implants is part of a trendthat has become evident throughout the brachytherapy industry.  This trend is in part the result of theenactment of the U.S. Medicare Prescription Drug Improvement and ModernizationAct of 2003.  This law provides forseparate payment for brachytherapy seeds and removes restrictive monetary capson brachytherapy seed reimbursement under Medicare’s Hospital OutpatientProspective Payment System, also known as “HOPPS.”  In January 2003 the U.S. Center for Medicareand Medicaid Services (CMS) changed its reimbursement policy in accordance withthe change in the law, to provide that the fee for a prostate cancer treatmentprocedure includes the cost of implants. In 2004, DRAXIMAGE sold *BrachySeed*®through a direct brachytherapy marketing and sales group, including productmanagement, in-house

 

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sales/telemarketing, customer service support, secure website orderingand sales representatives in the U.S.

 

In addition, DRAXIMAGE is developing *BrachySeed*®product enhancements to support expanded sales of *BrachySeed*®.  Examplesof such value-added enhancements include pre-sterilization of *BrachySeed*®implants and delivery of *BrachySeed*® in pre-loaded needles and cartridges.

 

DRAXIMAGE believes that *BrachySeed*® offers important advantages over its competitors,including:

 

•                  a patented designresulting in a nearly spherical dispersion of the radiation field, deliveringuniform doses of radiation to the affected area;

 

•                  double encapsulation ofthe radioisotope for additional patient safety; and

 

•                  excellent visualization byfluoroscopy because of an internal platinum/iridium marker.

 

The nearly spherical dispersion of the radiation fieldprovides a more uniform dosimetry to reduce “cold spots,” areas within thetarget organ not reached by the radiation. Such “cold spots” may occur when brachytherapy seeds do not providesymmetrical and spherical fields of radiation. This also permits the implantation of 8 - 10% fewer seeds to achieve thesame dosimetry.

 

#### ***Non-Radioactive Products***

#### *** ***

DRAXIMAGE currently markets the followingnon-radioactive products.  All productslisted have received approval for sale by the applicable regulatory body in theterritory in which the product is sold.

 
| **Product**                                                                                          | ** ** | **Indication**                                                                  | ** ** | **Principal  Markets** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------------------|------------|
| Tc-99m Kits                                                                                          |       |                                                                            |       |                   |       |
| 99mTc-MarcoAggregated  Albumin Kit (“MAA”)                                                 |       | Diagnosis of  lung perfusion                                                    |       | U.S./Canada            |       |
| 99mTc-Diethylene  TriaminePentacetic Acid Kit (“DTPA”) Stabilized with p-Aminobenzoic Acid |       | Diagnosis of  kidney function, blood pool imaging and lung ventilation function |       | U.S./Canada            |       |
| 99mTc-Calcium  Glucoheptonate Kit                                                                    |       | Diagnosis of  kidney function                                                   |       | U.S./Canada            |       |
| 99mTc-MethyleneDiphosphonic  Acid Kit (“MDP”) Stabilized with p-Aminobenzoic Acid          |       | Diagnosis of  inflammatory and neoplastic bone disease                          |       | U.S./Canada            |       |
| 99mTc-Calcium  Gluceptate Kit                                                                        |       | Diagnosis of  kidney function and red blood cell imaging agent                  |       | Canada                 |       |

 

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| Other                                  |   |                         |   |   |   |
|----------------------------------------|--------|------------------------------|--------|--------|--------|
| Stannous  Gluconate                    |   | Antibody  labeling           |   | U.S.   |   |
| Sodium  Carbonate/Bicarbonate Solution |   | Antibody  labeling           |   | U.S.   |   |
| Acetic Acid/HCI  Solution              |   | Antibody  labeling           |   | U.S.   |   |
| Sterile Empty  Vial                    |   | Antibody  labeling           |   | U.S.   |   |
| Intrinsic Factor  Capsule              |   | Use with 57Co-Cyanocobalamin |   | Canada |   |

 

DRAXIMAGE’s major non-radioactive products are itsMDP, DTPA and MAA Tc-99m diagnostic imaging kits.  While these products would technically beclassified as generic pharmaceutical products, DRAXIMAGE’s versions areproprietary and are sold under the DRAXIMAGE trademark or that of its localdistributors.  All three of theseproducts feature a proprietary formulation that provides additional shelf lifefollowing reconstitution compared to competitive products.

 

On October 25, 1995,Frosst Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (now knownas DRAXIMAGE) entered into a non-exclusive distribution agreement with SyncorInternational Corporation (now known as Cardinal Health 414, Inc.) fordistribution in the U.S. of DTPA, a kit used to prepare Tc-99m Pentetate tostudy kidney clearance, and MDP, a kit used to prepare Tc-99m MethyleneDiphosphonic Acid to study bone metabolism. The initial term was for five years, with automatic renewal of theagreement for successive two-year periods.

 

Prior to 2002, DRAXIMAGE produced Tc-99m kits at itsMerck Frosst location.  Following FDAapproval of the Company’s new lyophilization production facilities in early2002, the resulting increased manufacturing capacity provided the opportunityto increase sales volumes of these products in existing markets in the U.S. andCanada and to build new markets in Europe and Asia, territories in whichproduct approvals are either already in place or expected to be granted in thenear future.

 

In March 2004, DRAXIMAGE received approval from theFDA to produce and market a new formulation of MDP, called MDP-25, a kit forthe preparation of Technetium Tc-99m Medronate Injection.

 

### **Products under Development**

### ** **

As of December 31, 2004, DRAXIMAGE had the followingproducts under development:

 
| **Product**        | ** ** | **Status**                  | ** ** | **Indication**                                                                    | ** ** |
|--------------------|------------|-----------------------------|------------|-----------------------------------------------------------------------------------|------------|
| Imaging Products   |       |                        |       |                                                                              |       |
| *FIBRIMAGE®*  |       | Phase III  (Canada)         |       | Deep-vein thrombosis  imaging                                                     |       |
| *INFECTON®*   |       | Phase II (Canada  and U.S.) |       | Infection  imaging                                                                |       |
| *SOMATOSCAN®* |       | Preclinical                 |       | Imaging of  neuroendocrine tumors, lymphoma, carcinoid and small-cell lung cancer |       |

 

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| **Product**           | ** ** | **Status**  | ** ** | **Indication**                                                                      | ** ** |
|-----------------------|------------|-------------|------------|-------------------------------------------------------------------------------------|------------|
| Imaging Products      |       |        |       |                                                                                |       |
| Therapeutic  Products |       |        |       |                                                                                |       |
|                  |       |        |       |                                                                                |       |
| Somatostatin  Therapy |       | Preclinical |       | Treatment of  neuroendocrine tumors, lymphoma, carcinoid and small-cell lung cancer |       |

 

The clinical development of radiopharmaceutical imaging agents differsfrom that of therapeutics in several areas. While therapeutics are developed tooffer improved efficacy and safety in the treatment of a specific disorder,radiopharmaceutical imaging agents are elaborated for demonstrating theexistence and extent of a specific condition. Therefore the trial design forestablishing efficacy is not the same. In the case of radiopharmaceuticalimaging agents the endpoint is the actual image. The analysis is thereforecentered around various quantitative and qualitative aspects of the image. Forexample, the image quality is assessed at various time points to determine thetime to best quality. Also a blinded read of images is conducted to determinethe accuracy as well as the sensitivity and specificity of the test incomparison to the modality that is currently accepted as the gold standard. Inorder for the test to be useful across clinical sites the inter-raterreliability should also be high. This is an important endpoint that is measuredby a weighted Kappa test. These are the main efficacy considerations forradiopharmaceutical imaging agents. The analysis of safety is similar to thatof therapeutic agents and includes the usual vital sign monitoring as well asthe capturing of side effects through adverse event reporting.

 

#### ***FIBRIMAGE***®

#### *** ***

Description - *FIBRIMAGE**®* is a Tc-99m Kit for theimaging of active thrombus in deep-vein thrombosis (“DVT”).  In DVT, a blood clot (or thrombus) forms in avein, normally in the lower leg, thigh or pelvic area.  Patients with DVT are at risk of pulmonaryembolism, which occurs when a clot associated with DVT breaks free and travelsto the lungs, obstructing blood flow. The Council on Thrombosis estimated in 1996 that approximately two millionAmericans are affected by DVT each year of which approximately 600,000 resultin pulmonary embolism.

 

Mechanism of Action - *FIBRIMAGE**®* is based on linkingTc-99m to the fibrin binding domain (“FBD”) of human fibronectin.  FBD is a recombinant polypeptide with highbinding affinity for active fibrin, the primary component of actively formingvenous thrombus.  The Company believesthat *FIBRIMAGE**®* will be able to positively image DVT and todistinguish acute (i.e. active) thrombus from chronic (i.e. inactive) thrombus.

 

Technology Partner - Recombinant FBD was developed byBio-Technology General Corp. (a subsidiary of Savient Pharmaceuticals Inc.(SVNT: NASDAQ)) and is licensed to DRAXIMAGE on an exclusive, worldwide basis.

 

Regulatory Status - *FIBRIMAGE**®* entered Phase II clinicaltrials in Canada in 1998.  Patients ofany age with a known diagnosis of Deep Vein Thrombosis (“DVT”) were studied.Imaging was done at 3 time points in order to determine the optimal time pointfor diagnosis.  Thirty-six patients wereincluded for each time point.  *FIBRIMAGE**®*entered Phase III clinical trials in Canada in early 2000 to assess diagnosticaccuracy in symptomatic patients with either an initial or a recurrent episodeof DVT.  The Phase III studies weredesigned to address the accuracy, sensitivity, specificity and positive andnegative predictive values of *FIBRIMAGE**®* compared to standarddiagnostic tests.  Patients of any agewith signs and symptoms consistent with the diagnosis of DVT were studied.Comparison with ultrasound was made to determine sensitivity and specificity of*FIBRIMAGE**®* in accurately diagnosingDVT.  There were 130

 

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patients in this study.  Based on a minimum expected rate of agreementbetween the test method and the standard of 75%, 130 patients will give a 95%confidence interval of no more than ± 7.5% (i.e., 67.5%-82.5%).  The progress of Phase III trials for *FIBRIMAGE**®*prior to 2003 had been affected by the lack of availability of clinical trialmaterials and by the need to revise the chemistry and manufacturing sections ofexisting filings.  *FIBRIMAGE**®* has completed enrolmentof its Phase III trial in Canada and the Company is under negotiation with theFDA on the commencement of a Phase III trial in the U.S.

 

Competing Modalities - Traditional approaches to thediagnosis of DVT have included Doppler ultrasound and contrast venography.

 

Potential Advantages of *FIBRIMAGE**®* - DRAXIMAGE believes thatnuclear medicine imaging with *FIBRIMAGE**®* will offer a number ofadvantages over existing imaging modalities, including:

 

•                  the ability to imagewithin two hours post injection;

 

•                  the ability to distinguishold, chronic, stabilized (passive) thrombus from new, active (life-threatening)thrombus;

 

•                  high degree of sensitivityand specificity; and

 

•                  lack of pain, degree ofinvasiveness and risk of side effects associated with venography.

 

DRAXIMAGE believes *FIBRIMAGE**®* should be an attractivealternative to Doppler ultrasound in diagnosing DVT in certain areas, such asbelow the knee and in the pelvis, where ultrasound is less efficacious.  DRAXIMAGE believes that the only competitiveradiopharmaceutical imaging product on the market at this time to compete withits *FIBRIMAGE**®* product under development is AcuTectÒ, marketed by BerlexLaboratories, Inc.  DRAXIMAGE believesthat *FIBRIMAGE**®* will compete well against AcuTectÒ because *FIBRIMAGE**®*binds to fibrin, which comprises 75-80% of an actively forming blood clot,whereas AcuTectÒ binds to platelets.  The Company is also aware that Agenix Limitedannounced in October 2004 that it has received FDA approval for a Phase IIclinical trial for its ThromboViewÒ product. ThromboViewÒ uses radiolabelledantibodies to locate blood clots in the body.

 

#### ***INFECTON***®

#### *** ***

Description - *INFECTON**®*, a complex of Tc-99m andthe anti-bacterial agent ciprofloxacin, is a novel agent for the specificimaging of infection.  *INFECTON**®*acts by binding directly to infecting organisms and so is expected to be highlyspecific for imaging infection.  It isanticipated that *INFECTON**®* may be used to image anumber of serious medical conditions, including fever of unknown origin,osteomyelitis (bone infection), wound infection, abdominal abscess, pneumonia,appendicitis, and tuberculosis.  Many ofthese conditions are difficult to diagnose even by invasive means or bysurgery.

 

Technology Partner - *INFECTON®* wasdiscovered by Drs. Britton and Solanki at St. Bartholomew’s Hospital in London,England.  In March 2001, DRAXIMAGEentered into an agreement with BTG International Limited (formerly known as theBritish Technology Group).  The agreementgives DRAXIMAGE exclusive rights to manufacture and sell *INFECTON®*in the U.S., Canada, South America and Europe. DRAXIMAGE has a sub-license from Bayer AG for the diagnostic imaging useof their ciprofloxacin.

 

Regulatory Status - *INFECTON*’s*®* proof of principle wasestablished in a series of clinical trials sponsored by the InternationalAtomic Energy Agency involving 879 patients in several countries outside

 

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North America in which *INFECTON®*displayed excellent results, with a sensitivity of 88.3%, a specificity of86.5%, and an accuracy of 87.6%.  Theclinical studies showed that the agent achieves up to 96% specificity indetecting bacteria in the lungs, bones and tissues – areas where otherdiagnostics have failed in the past.

 

In January 2003,DRAXIMAGE initiated a Phase I clinical trial of *INFECTON®*in Canada, conducted by Dr. Raymond Taillefer at Hôpital Hotel-Dieu at theCentre Hospitalier du l’Université de Montréal. The study involved 10 healthy subjects in an open-label, single-center,single-dose safety, pharmacokinetic and radiation dosimetry study.  Whole body images were taken at variousintervals after injection of *INFECTON®* tovisualize distribution of the imaging agent throughout the body over time.  The Phase I study was completed during thefirst half of 2003.  *INFECTON®*was found to be safe and well tolerated by the subjects at the administereddosages.  The results of a Phase I trialdo not provide enough evidence regarding safety to support an application formarketing with the FDA or the HPFB, as applicable, and additional tests areconducted and submitted in support of any application for approval.  Subsequent results often do not corroborateearlier results.

 

In July 2003,DRAXIMAGE initiated two Phase II clinical studies of *INFECTON®*in Canada.  The first of the Phase IIstudies is a single-dose, open-label, multi-center trial involving 30 diabeticpatients suffering from clinically confirmed bacterial infections of thefoot.  The second study examines andcompares the uptake of *INFECTON®* inpatients with either a known soft tissue infection or a chronic inflammatorycondition that is sterile.  A total of 50patients with definitive bacterial infections or confirmed chronic asepticinflammatory conditions are being enrolled in the single-dose, open-label,multi-center trial.  Twenty-five patientsfrom each group will be included in the trials. By the end of 2004, enrollmentin the first study was 80% complete.  InSeptember 2004, the Company received approval from the FDA to initiate a PhaseII clinical trial in the U.S.  This trialis a single-dose, open-label, multi center trial involving 22 patients and willexamine patients suffering from bacterial osteomyelitis.  Enrolment in the U.S. Phase II trial startedin October 2004 and by the end of 2004 was 20% complete.

 

Competing Diagnostic Modalities - The most specificcurrent procedure for medical imaging of inflammation due to infection involvesremoving blood from the patient, isolating white blood cells in the patient’sblood, radiolabelling the white blood cells with an isotope such as indium-111or Technetium coupled with a carrier molecule and then injecting the whiteblood cells back into the patient.  Thesewhite blood cells localize around the site of the infection and the associatedradiation can be detected using a gamma camera. White blood cells are not highly specific and cannot readily distinguishinfection from inflammation.  In July2004, Mallinckrodt, a business unit of Tyco Healthcare, and PalatinTechnologies, Inc. announced that they had received approval from the FDA tomarket and distribute NeutroSpecÔ (formerly known as LeuTech®), aTechnetium-labeled monoclonal antibody that binds to white blood cells, fordifficult-to-diagnose appendicitis. NeutroSpecÔ is in clinical trials forother indications, such as detection of other infections, includingosteomyelitis, fever of unknown origin, inflammatory bowel disease andpost-surgical abscesses.  In addition,Immunomedics, Inc. announced in January 2005 that it had received Health Canadaapproval for the marketing and use of its product LeukoScan® for the detectionof osteomyelitis.  LeukoScan® is a murinemonoclonal IgG antibody fab’ fragment labeled with Tc-99m.  We believe that *INFECTON**®* may be the firstradiopharmaceutical capable of distinguishing inflammation from infection andas such would offer an advantage over agents that bind to white blood cells andwhich cannot distinguish between infection and inflammation.

 

Potential Advantages of *INFECTON**®* - Preliminaryinvestigations suggest the possibility that *INFECTON**®* may be the firstradiopharmaceutical capable of distinguishing inflammation from infection.

 

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#### ***Development costs of FIBRIMAGE***® and INFECTON®

#### *** ***

The Company has expended $2.2 million in developing *FIBRIMAGE**®* and *INFECTON**®* during the period between1998 and 2004 inclusively.

 

#### ***SOMATOSCAN***®/Somatostatin Therapy

#### *** ***

Description - *SOMATOSCAN**®* and Somatostatin Therapyare radiolabelled somatostatin peptides derived from a synthetic peptide basedon MK-678, originally developed by Merck, which shows a high binding affinityfor the somatostatin receptors expressed in neuroendocrine tumors, lymphoma andcarcinoid and small-cell lung cancer. This peptide is being developed as both a diagnostic imaging agent (*SOMATOSCAN**®*) and therapeutic product(Somatostatin Therapy) and the Company believes that it will permit the identificationand treatment of primary tumors and the correct diagnosis of metastaticlesions.

 

Technology Partner - *SOMATOSCAN**®* and Somatostatin Therapyare based on innovative research by DRAXIMAGE and the University ofPennsylvania, for which DRAXIMAGE has an exclusive world-wide license fordevelopment and commercialization.

 

Regulatory Status - Preclinical evaluation of *SOMATOSCAN**®* is in progress toward thefiling of an application to initiate clinical testing.  A pilot study conducted at the Montreal GeneralHospital in 1997, involving over 30 patients using an Iodine-131-MK-678,demonstrated good uptake in all of the target tumor types. DRAXIMAGE’s clinicalstudies will be designed to confirm *SOMATOSCAN’s**®* earlier successfulresults observed with the Iodine-131 formulation.  Additional preclinical studies to scale upsynthesis of the drug substance and establish a viable formulation ofSomatostatin Therapy are currently being conducted at DRAXIMAGE.

 

Competing Products - There are two approved somatostatin-basedimaging products in the marketplace: OctreoScan® from Tyco International Ltd. and NeoTectÒ from Berlex LaboratoriesInc.  Both of these molecules offersimilar information but OctreoScan® is based on indium-111 and is moreexpensive than Tc-99m-based NeoTect® and must be delivered in radioactiveform.  The Company is aware thatdevelopment work is also being done on other somatostatin-based cancer therapyproducts that would compete with Somatostatin Therapy.  DRAXIMAGE believes that by enabling the samemolecule to be used for both diagnosis and therapy, physicians will have agreater ability to deliver therapeutic quantities of radiation specifically towell-defined targets in the body with our product.

 

Potential Advantages of *SOMATOSCAN**®* - DRAXIMAGE believes thatby enabling the same molecule to be used for both diagnosis and therapy,physicians will have a greater ability to deliver therapeutic quantities ofradiation specifically to well-defined targets in the body.

 

#### ***Other Products***

#### *** ***

The Company announced in its MD&A for the secondquarter of 2004 that although an interim analysis of the Phase II imagesobtained in the *AMISCAN**Ô* trial were very clear indefinitive myocardial infarction they were insufficiently precise in very earlyequivocal infarction with the current formulation for this indication and thatin light of these observances, the Company decided to cease further developmentof this product for infarct imaging in order to concentrate on its otherpipeline products, notably *FIBRIMAGE**Ò* and *INFECTON**Ò*.

 

DRAXIMAGE has conducted preclinical development ofatrial natriuretic peptide (“ANP”).  ANPis a natural peptide produced in the atrium of the heart and is intended fordevelopment as an imaging agent for kidney structure and function.  Radiolabelled ANP has demonstrated highbinding

 

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affinityto receptors in both the lung and kidney. Experimental results in animals have shown that ANP is effective in thedetection of kidney dysfunction associated with such diseases as diabetes,essential hypertension and reno-vascular hypertension induced by the stenosisof renal arteries.  ANP is based oninnovative research by DRAXIMAGE, the Clinical Research Institute of Montréaland the Research Institute of Hôtel Dieu de Montréal, from which DRAXIMAGE hasan exclusive worldwide license. DRAXIMAGE did not conduct any work related to ANP in 2004.

 

#### ***Paclitaxel***

#### *** ***

Description - Paclitaxel is a novel, anti-tumor agentreferred to in some scientific and medical literature as “taxol.”  Paclitaxel is currently marketed in the U.S.under the brand name Taxol by Bristol-Myers Squibb Co.  In January 1997, DRAXIS acquired from Mylanthe exclusive Canadian marketing rights to the Mylan formulation ofpaclitaxel.  In June 1998, DRAXIS filedwith the HPFB a New Drug Submission in Canada for paclitaxel, and the HPFB hascompleted its review process.  Prior toapproval, DRAXIS must comply with Canadian Patented Drugs Regulations withrespect to generic competition.  Mylan iscurrently assessing the status of patent infringement litigation in Canadaregarding paclitaxel, and the Company has agreed to defer launch in Canadauntil such issues have been clarified.

 

DRAXIS and Mylan will share the profits from marketingand selling paclitaxel in Canada according to a formula agreed to between theparties.  Mylan has obtained fromPhytogen Life Sciences Inc. of Vancouver, British Columbia, the exclusive rightto manufacture, market and distribute a formulated dosage form of paclitaxel inCanada, the United States and Mexico, using Phytogen-produced bulk finechemical paclitaxel.

 

### **Manufacturing**

### ** **

#### ***Radioactive Products***

#### *** ***

DRAXIMAGE manufactures its radioactive products in acGMP compliant manufacturing facility supported by a full quality controldepartment licensed by regulatory agencies in Canada and the U.S.

 

In 2001, DRAXIMAGE completed the expansion of itsradiopharmaceutical production area in anticipation of increasing sales volumesof its radiopharmaceutical line in the U.S. and other markets.  This expansion has approximately doubled thesize of the original facility to 19,000 square feet.

 

Most of the radioisotopes used to produceradiopharmaceuticals are supplied to DRAXIMAGE primarily, but not exclusively,by MDS Nordion, a subsidiary of MDS Inc. and the world’s largest supplier ofchemical-grade isotopes for use as medical radioisotopes.

 

A key distinguishing characteristic of theradiopharmaceuticals business is the need for a sophisticated logisticssystem.  Radiopharmaceuticals, by theirnature, decay continually over time, thereby losing their potency.  Therefore, manufacturing and product deliverysystems must be well coordinated to ensure that the level of radioactivitypresent in the product supplied to the physician is correct at the time ofadministration.

 

#### ***Lyophilized Products***

#### *** ***

DRAXIMAGE’s Tc-99m Kits are currently manufactured inthe DRAXIS Pharma lyophilization facility, which was first accepted as amanufacturing site by the FDA in October 2001. Subsequent

 

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manufacturingsite transfer approvals for the Tc-99m Kits were received during the periodDecember 2001 to March 2002.

 

DRAXIS Pharma’s initial lyophilizer has the productioncapacity to approximately double the supply of Tc-99m Kits to DRAXIMAGE ascompared to the previous outsourced manufacturer.  A second lyophilizer was delivered to DRAXISPharma in mid-2003, and its installation and validation during 2004 will allowfor commercial production starting in the first half of 2005.

 

*Regulatory*

 

In May 2000, DRAXIMAGE received Canadian regulatoryapproval to market its Iodine-125 *BrachySeed*® for treating prostate cancer, and in August 2000,it received FDA approval to market the implant in the U.S.

 

In September and October 2000, DRAXIMAGE was approvedby, respectively, the U.S. Nuclear Regulatory Commission and the CanadianNuclear Safety Commission with respect to its *BrachySeed*® implant.

 

During the period June to July 2001, DRAXIMAGEreceived FDA and Health Canada regulatory approval for its Palladium-103 *BrachySeed*®.

 

In the period December 2001 through March 2002,DRAXIMAGE was approved by the FDA to transfer production of its line oflyophilized medical imaging products in-house to the DRAXIS Pharma lyophilizationproduction facility.

 

In January 2003, DRAXIMAGE received FDA approval toproduce and market a new radiotherapeutic kit product for the preparation ofSodium Iodide I-131 Capsules and Oral Solution.

 

In December 2003, DRAXIMAGE obtained certificationunder ISO 9001: 1994, including ISO 13485: 1996, an international standard formedical device manufacturers.

 

In March 2004, DRAXIMAGE received FDA approval toproduce and market a new formulation of MDP called MDP-25, a diagnostic productfor preparing a skeletal imaging agent.

 

In November 2004, DRAXIMAGE received FDA approval fora DRAXIMAGE brand of I-131 therapeutic capsules.

 

### **Sales and Marketing**

### ** **

At the present time, DRAXIMAGE’s products are marketedprimarily in the U.S. and Canada.  Asmany of the products marketed by DRAXIMAGE have the potential for globalapprovals, it is expected that non-North American based revenues will increasein the future.  The most active growthareas are expected to be Europe and South America.  In January 2003, DRAXIMAGE entered into amarketing and distribution agreement with Netherlands-based IDB Benelux Inc.for the Benelux countries.

 

#### ***United States***

#### *** ***

DRAXIMAGE sells Tc-99m Kits in the U.S. to severalcustomers and distributors including Cardinal Health, Inc., which operates thelargest chain of radiopharmacies, Tyco Healthcare division of

 

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TycoInternational Ltd., GE Amersham Health, CIS bio international (a subsidiary ofSchering AG) and United Pharmacy Partners Inc.

 

Tc-99m Kits sold in the U.S. are marketed under theDRAXIMAGE trademark with the exception of selected Tc-99m Kits sold through CISbio international, which carry the distributor’s trade name.

 

From December 2000 until January 2003, *BrachySeed*® wasdistributed in the U.S. on an exclusive basis by Cytogen.  In January 2003, DRAXIMAGE notified Cytogenthat it was exercising its rights, under its license and supply agreements withCytogen, to terminate Cytogen’s exclusivity with regard to the marketing and distributionof *BrachySeed*® implants in the United States as a result of Cytogen’scontinued failure to meet the minimum annual sales requirements set out in theagreements.  Cytogen subsequentlyunilaterally terminated each of the license and distribution and supplyagreements with DRAXIMAGE.

 

In April 2003, DRAXIMAGE and Cytogen reached agreementto end the license and distribution and supply agreements and to co-ordinateefforts for an orderly transition of the U.S. brachytherapy business.

 

#### ***Canada***

#### *** ***

In Canada, DRAXIMAGE currently markets most of itsproducts directly to end-users through a co-operative agreement withBristol-Myers, pursuant to which Bristol-Myers’ sales force promotes the twocompanies’ non-competitive product lines. This arrangement allows for enhanced coverage of the Canadian marketwhile reducing administrative and shipping costs.  In July 2003, DRAXIMAGE renewed and expandedits distribution agreement with Bristol-Myers in Canada for another five years.  As of December 31, 2004, the Company had oneregulatory submission (a Supplement to a New Drug Submission) pending with TPDfor MDP-25, a radiopharmaceutical product already approved for marketing in theU.S.

 

DRAXIMAGE markets *BrachySeed*® in Canada directly to hospitals and healthcare buyinggroups through its own sales and marketing resources.

 

For many years, DRAXIMAGE has been the primaryCanadian supplier of Iodine-131 and Iodine-125 labeled radiopharmaceuticals,including solutions and capsules used primarily for the diagnosis and treatmentof thyroid gland disorders.

 

#### ***Europe***

#### *** ***

The radiopharmaceutical market in Europe ischaracterized by strong regional fragmentation, which gives the leading marketshare to the individual manufacturer located in each of the major countries(i.e. GE Amersham Health in the UK, Tyco Healthcare in Holland and CIS bio inFrance).  DRAXIMAGE’s marketingactivities in Europe are at their earliest stages pending regulatory approvalsin this jurisdiction.  As of December 31,2004, there were five regulatory submissions filed with European regulatoryauthorities: four with the Medicines Evaluation Board in the Netherlands andone with the Danish Medicines Agency.  The submission dates for these radiopharmaceutical products range fromJune 2003 to December 2004.  All of theapprovals sought in Europe are for marketing authorizations through the mutualrecognition procedure which involves obtaining approval in one state (the “referencemember state”) and recognition of that approval in other member states.  All of the approvals being sought in Europeare for radiopharmaceutical products already approved in Canada or theU.S.  One of these five Europeansubmissions was for the Company’s kit for the Preparation of Technetium Tc-99m

 

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AlbuminAggregated Injection (MAA kit) for which the Company received approval for inone reference member state, the Netherlands, in February 2005.

 

One distribution agreement for the Benelux countries,with the Netherlands-based IDB Benelux Inc., has been concluded, and others arebeing sought.

 

### **Research and Development**

### ** **

DRAXIMAGE conducts both basic research on its ownproducts and development work on in-licensed products and technology developedby other firms, predominantly in the biotechnology field.  DRAXIMAGE applies its chelating expertise andtechnologies to link these compounds with radioisotopes to create innovativediagnostic and therapeutic radiopharmaceuticals.

 

In October 2003, DRAXIMAGE received a U.S. patent fora new family of chelating compounds that have significant potential for thedevelopment of imaging and radiotherapeutic agents to diagnose and treatdiseases, including cancerous tumors or metastases.  The new family of chelating compounds will permit thediscovery of diagnostic imaging agents to visualize important biologicalreceptors or receptor-positive tumors when combined with gamma-emittingradioisotopes. The compounds are also potentially useful as therapeuticradiopharmaceuticals for the in-vivo treatment of tumors and metastases.

 

DRAXIMAGE also provides labeling technology for othercompanies for use with monoclonal antibodies and peptides.  The Company is also working on thedevelopment of novel therapeutic uses of radioactivity.

 

DRAXIMAGE personnel have extensive experiencedeveloping and optimizing formulations applicable to the lyophilizationmanufacturing processes used in the production of cold Tc-99m Kit products.

 

### **Employees**

### ** **

As at December 31, 2004, DRAXIMAGE had 91****employees, broken down as follows:  general management and administration 7;marketing, selling and customer service 20; quality operations 15;manufacturing 37; and research and development 12.

 

### **Patents**

### ** **

Most of DRAXIMAGE’s products are covered by patentsheld by DRAXIMAGE or licensed from third parties.  DRAXIMAGE has numerous patents issued andallowed and patent applications pending in the United States, Canada, Europeand Japan.  For example, DRAXIMAGE has variousU.S. issued patents related to chelates for radiopharmaceutical applicationsand process patents for the preparation of certain radiopharmaceuticals.  In addition, DRAXIMAGE has licensed fromlicensors certain U.S. patents covering its pipeline products and productsalready in the U.S. market, such as *BrachySeed*®.

 

DRAXIMAGE also relies on trade secrets, know-how andother proprietary information to protect its current products andtechnologies.  To protect DRAXIMAGE’srights in these areas, it requires all licensors, licensees and significantemployees to enter into confidentiality agreements.  There can be no assurance, however, thatthese agreements will provide meaningful protection to DRAXIMAGE’s patents,trade secrets, know-how or other proprietary information in the event of anyunauthorized use or disclosure of such patents, trade secrets, know-how orother proprietary information.

 

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**Contract Manufacturing (DRAXIS Pharma)**

 

DRAXIS Pharma is a contract pharmaceuticalmanufacturer with capabilities in a broad range of dosage forms, specializingin liquid and lyophilized (freeze-dried) injectables and other sterileproducts.  Operating out of acGMP-compliant 247,000-square-foot facility located in Kirkland, Québec, DRAXISPharma manufactures pharmaceutical products for DRAXIMAGE, as well as for over20 other pharmaceutical clients in many international jurisdictions.

 

Key business development transactions involving DRAXISPharma have included:

 

•                  May 1998 – $11.1 millionacquisition of DRAXIS Pharma’s pharmaceutical manufacturing facility.

 

•                  July 1999 – signing of afive-year manufacturing supply agreement with Warner-Lambert Canada Inc. (nowknown as Pfizer Consumer Healthcare, a division of Pfizer Canada Inc.).  The term of this agreement has been extendedby mutual agreement while the parties are negotiating a new arrangement for athree-year term which shall have an effective date of January 1, 2005.

 

•                  February 2000 – sale of34.1% equity interest to SGF and DRAXIS Pharma senior management for netproceeds of $5.4 million.

 

•                  December 2001 – signing ofa long-term manufacturing and supply agreement for the renewal and expansion ofDRAXIS Pharma’s existing contract manufacturing relationship with GSK.

 

•                  March 2003 – initiation ofproduction under a manufacturing and supply agreement with Bone Care for Hectorol® Injection.

 

•                  April 2004 – acquisitionby the Company of SGF’s 32.7% interest in DRAXIS Pharma and repayment of $3.1million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF and $1.7 million(CDN$2.3 million) in debt owed by DRAXIS Pharma to Investissement Québec.

 

In 2004, the Company completed a three-year, $12million capital plan at DRAXIS Pharma, including a tripling of the Company’sexisting lyophilization capacity.  Thecapital plan also included new sterile manufacturing capabilities to supportrecently announced contracts, improvements to production line efficiency,improvements to infrastructure, new raw material handling facilities andsupporting systems to maintain the DRAXIS Pharma facility at the forefront ofregulatory compliance.** **DRAXIS Pharma’s three-year, $12million capital plan was initially financed through****loansand equity investment from DRAXIS Pharma’s shareholders, loans from Investissement Québec and internally generatedfunds.  The equity was repurchased andthe loans were repaid in April 2004 from the proceeds of the Company’s publicoffering.

 

Since DRAXIS acquired DRAXIS Pharma, DRAXIS Pharma’srevenues have risen from $6.1 million for the eight-month period ended December31, 1998 to $46.5 million for the year ended December 31, 2004.

 

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DRAXIS Pharma’s business goal is to become a leadingsupplier of high-value-added, high-margin contract pharmaceutical manufacturingservices.  Key components of DRAXISPharma’s strategy to achieve this goal include:

 

•                  obtaining and maintainingall required regulatory approvals for DRAXIS Pharma’s manufacturing facility;

 

•                  securing additionalmanufacturing contracts with existing and new customers;

 

•                  focusing on DRAXIS Pharma’sdistinctive capabilities in sterile and lyophilized product manufacturing;

 

•                  providing manufacturingand related services to DRAXIS’ other businesses; and

 

•                  focusing on operationalexcellence, including regulatory compliance, cost-effectiveness and customerservice.

 

### **Overview of Pharmaceutical Contract Manufacturing**

### ** **

In a report prepared byCIBC World Markets (Equity Research) and dated December 3, 2002 entitled “PharmaceuticalContract Manufacturing”, it was estimated that the manufacturing portion of the$400 billion global pharmaceutical market was $50 billion, with approximately$13 billion outsourced.

 

The secondary, or dosage-form, manufacturingsegment that is currently outsourced was further estimated to be approximately$5.5 billion with an anticipated near-term growth in the 10% – 15% range.

 

The reasonspharmaceutical companies outsource manufacturing include:

 

•                  productivitybenefits – plant utilization rates in the pharmaceutical industry are decliningand have created increased need to lower operating costs;

•                  moving assetsoff the balance sheet – contract manufacturers are a solution to high levels ofindustry assets tied up in under-utilized facilities;

•                  leveragingexternal expertise – third-party contractors provide a logical route tospecialist services and access to updated technologies; and

•                  pharmaceuticalindustry consolidation – continuing mergers will likely force rationalizationof manufacturing capacity.

 

The Company believes that there is currently a significantglobal shortage of sterile lyophilization capacity and that this sector offerssignificantly higher margin growth potential for DRAXIS Pharma due to itstechnical complexity and its increasing demand as a favored dosage form forbiotechnology products in particular.

 

DRAXIS Pharma believes that the key competitivefactors in the contract manufacturing industry include the reliability ofsupply, quality of product, strict compliance with governmental regulations,capacity availability, competitive pricing and the technical and manufacturingability to produce a full range of quantities – from small pilot batches oftenrequired for clinical trials to larger commercial quantities.

 

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### **Competition**

### ** **

DRAXIS Pharma competes with pharmaceutical companiesthat have in-house manufacturing capabilities as well as with third-partycontract manufacturers, including Hospira Inc., Boehringer Ingelheim, CardinalHealth, Inc., DPT Laboratories, Haupt Pharma AG, Patheon Inc. and DSMPharmaceuticals, Inc.

 

### **Manufacturing Capabilities**

### ** **

DRAXIS Pharma is a customer-driven pharmaceuticalcontract manufacturing company that is positioned to manufacture a variety ofdosage forms.  DRAXIS Pharma is one of afew existing full-scale pharmaceutical contract manufacturing facilities inCanada that has FDA-approved sterile manufacturing and sterile lyophilizationcapabilities.

 

Plant operations are organized into four manufacturingareas, supported by packaging and warehousing and distribution functions.

 

#### ***Sterile Lyophilization***

#### *** ***

Lyophilization is the preferred dosage form for abroad range of sterile products that are unstable in liquid form.  Lyophilization is a complex process offreeze-drying in which a liquid solution is frozen under vacuum and all wateris removed, leaving behind a stable, dry, sterile powder that has a relativelylong shelf life and is easily reconstituted into a liquid form prior touse.  Products delivered in a lyophilizeddosage form include injectable pharmaceuticals, vaccines, biotechnologyproteins or peptides and diagnostic products.

 

DRAXIS Pharma’s existing sterile manufacturingcapabilities were enhanced by the addition of sterile lyophilization, whichbecame fully operational and approved by the FDA in the latter half of2001.  This fully automated line includesa vial washer, a depyrogenation tunnel, an in-line filling machine, robotloaders and unloaders, the freeze-drier unit and a capper.  This first freeze-drier has a capacity basedon 11 square meters (120 square feet) of shelf space, while the second unitinstalled in 2004, at 24 square meters (254 square feet) of shelf spacecapacity, will, at optimal configuration, essentially triple overall capacityover time.

 

In 2004, the Company completed a three-year, $12 million capital planfor DRAXIS Pharma, including the tripling of DRAXIS Pharma’s existinglyophilization capacity, new sterile manufacturing capabilities to supportrecently announced contracts, improvements to production line efficiency, improvementsto infrastructure, new raw material handling facilities and supporting systemsto maintain DRAXIS Pharma at the forefront of regulatory compliance.

 

The second lyophilizer, with 24 square meters (254 square feet) offreeze-drying shelf space, was incorporated into DRAXIS Pharma’s existinglyophilization facility.  The specializedfacility was originally designed to readily accommodate this second lyophilizerat a cost significantly less than that of the initial installation with minimaldisruption to ongoing production.

 

The second lyophilization unit will be fully validated and incommercial use during 2005.  At optimumconfiguration, the second lyophilizer should triple existing lyophilizationcapacity over time.  The Company does notexpect to achieve full capacity utilization on this new lyophilizer in2005.  The transferring and introductionof new products to this lyophilizer will occur in stages during 2005 and 2006.

 

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#### ***Other Sterile Products***

#### *** ***

The Sterile Products Department (“SPD”) includespreparation and pharmaceutical areas with manufacturing, filling and inspectionrooms for the manufacture of injectable liquids, ophthalmic and oticproducts.  DRAXIS believes that DRAXISPharma possesses one of the most modern facilities of its kind in Canadaapproved for the manufacture of sterile prescription pharmaceuticals forCanada, the United States and other global markets.

 

Including the new lyophilization line, SPD coversapproximately 17,100 square feet and is designed for segregated operationscomplemented by secure access controls.

 

Computerized systems are utilized for both topical andautomated ointment lines in order to optimize process control.  Both of these lines are closed-loop systems toensure sterile integrity.  The sterileointment system utilizes a patented automated system to place tubes on thefillers, thereby minimizing human intervention.

 

The processes that are incorporated in the operationinclude aseptic manufacturing and filling, terminal sterilization, clean inplace (“CIP”), and sterilize in place (“SIP”). The dosage forms/product types manufactured include solutions inampoules and vials, suspensions and solutions in drop dose form and ointmentsin tubes.  The department currently hasthe capacity to fill vials ranging in size from 5 ml to 30 ml, ampoules rangingin size from 1 ml to 10 ml, and 3.5 g tubes.

 

#### ***Ointments, Creams and Liquids***

#### *** ***

The 16,000-square-foot Ointments, Creams and Liquids (“OCL”)Department offers substantial flexibility in production scale.  Production of ointments and creams utilizes agravity-fed system and incorporates segregated wash areas and clean storageareas for equipment.

 

Batch capability in the OCL Department varies from 200to 18,000 liters and incorporates four dedicated packaging lines.  Interconnecting tanks can be utilized whererequired, thereby providing production flexibility.  Fully automatic validated CIP systems ensurethe purity of each customer’s product. Product is pumped to two of the packaging lines and gravity fed to theother two lines.  Dosage forms/producttypes manufactured include creams, ointments, lotions, syrups, shampoos, gelsand suspensions.

 

#### ***Solid Dosage***

#### *** ***

The Solid Dosage Department covers approximately10,300 square feet of space and is comprised of two suites for granulatingpowders prior to compression plus four isolated compression suites in which thepowders are pressed into tablets and caplets of various forms and sizes.  The first granulation suite is designed forlarge-batch blending, granulating and drying, while the second granulationsuite is equipped with smaller scale equipment that can be used for smallproduction or pilot batches.

 

Each granulation and compression suite has its owntesting equipment and cleaning area.  Therooms are isolated and have purpose-built airflow systems to contain powder.

 

Dosage forms and product types manufactured in thisdepartment include tablets in bottles and blisters, caplets in bottles andblisters, and powders.

 

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#### ***Packaging***

#### *** ***

The Packaging Department covers approximately 51,000square feet and incorporates an open space with movable separations thatprovide flexibility in the packaging area featuring several packaging lines.  Segregated zones are defined for de-boxing,filling and secondary packaging.  Barcoding ensures complete control of all packaging components.

 

Within the department there are packaging lines forointments and creams, lines for tablets (bottles and blisters) and a sterileproduct automatic inspection and packaging line.  One packaging area is dedicated tosmall-quantity tablet filling.  Theinspection of finished sterile products in glass ampoules includes automatedinspection by a leak pinhole detector. An automatic inspection machine has been validated to detect particlesin sterile products packaged in vials and ampoules.  These products may also be inspectedmanually.

 

Several packaging types can be accommodated, includingjars, bottles (glass and plastic), blisters, vials and ampoules.  The department handles a wide variety ofproduct types, including caplets, tablets, creams, ointments and liquids.

 

### **Regulatory**

### ** **

Manufacturing operations at DRAXIS Pharma, fromreceipt of raw material and packaging ingredients, through compounding, dosageform processing, filling, labeling and packaging, to final product release byquality control, are all conducted in accordance with cGMP requirements andother appropriate international regulatory standards.  Regular inspections of facilities, productionprocesses, and control and validation systems, as well as employee trainingprograms, are conducted by the Company, by U.S., Canadian and internationalgovernmental regulatory agencies and by customer inspection teams throughoutthe year.  The Company maintains adistinct internal team to provide effective liaison with various externalinspection groups.

 

DRAXIS Pharma has a strong regulatory trackrecord.  This includes 5 successfulaudits of its facilities in 2004 (1 regulatory inspection and 4 clients audits)and 26 successful audits of its facilities in 2003 (3 regulatory inspectionsand 23 client audits).

 

### **Warehousing and Distribution**

### ** **

The warehousing and distribution facilities of theDRAXIS Pharma plant allow additional manufacturing flexibility andefficiency.  A five-tier pallet-rackingwarehouse has a full height of 29 feet, covers approximately 48,900 square feetof space and has six shipping and receiving docks.  The warehouse has separately locked areas,including refrigeration units to control sensitive raw materials and finishedgoods.  In 2004, a third autoclave wasinstalled to support terminal sterilization of products.

 

DRAXIS Pharma also has a new raw material storage and dispensing area,which improved cGMP compliance and provided an improved environment for thehandling and accurate dispensing of raw materials. This installation improvesthe flow of material and personnel and is equipped with a new ventilationsystem and state-of-the-art dust containment technology.

 

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### **Customers**

### ** **

#### ***Third-Party ContractManufacturing***

#### *** ***

DRAXIS Pharmamanufactures prescription and non-prescription pharmaceutical products for morethan 20 pharmaceutical companies (excluding Inter-Company) pursuant tomanufacturing supply contracts.

 

On July 1, 1999, DRAXISPharma entered into a five-year manufacturing and supply agreement withWarner-Lambert Canada Inc. (now known as Pfizer Consumer Healthcare, a Divisionof Pfizer Canada Inc.) covering several non-prescription products for theCanadian market, including Polysporin®, Sudafed®, Actifed® and Zincofax®.  Manufacturing of these products commenced inearly 2000.  The term of this agreementhas been extended by mutual agreement while the parties are negotiating a newagreement for a three-year term which shall have an effective date of January1, 2005.

 

On December 18, 2001, DRAXIS Pharma finalized supply and related agreementswith GSK for the renewal and expansion of an existing contract manufacturingrelationship between the companies.  Theproducts transferred to DRAXIS Pharma were all established, sterile productsmarketed by GSK in multiple international markets.  In 2002, an additional, established sterileinjectable product was added under this contract and commercial production ofthis product commenced in the second quarter of 2002.  During 2002, site transfer and relatedactivities associated with the other GSK products continued and productionstarted in the second quarter of 2003 and ramped up through 2003 and 2004 withfull production achieved by the end of 2004. DRAXIS Pharma shall manufacture the products covered by the agreementuntil it receives a termination notice from GSK which may be given by atwo-year advance written notice given on or after December 31, 2007.

 

In April 2002, DRAXISPharma entered into an agreement with Bone Care to produce Hectorol® Injection for sale in theU.S., and we began commercial shipments of the sterile injectable product inMarch 2003.  A Manufacturing and SupplyAgreement was signed on March 3, 2003. Production of Hectorol®Injection increased substantially throughout 2004.  The agreement is for a five-year term.

 

#### ***Inter-Company***

#### *** ***

Commencing inearly 2002, DRAXIS Pharma became the FDA-approved manufacturing site forDRAXIMAGE’s lyophilized Tc-99m Kits.  Inaddition, DRAXIS Pharma has been qualified as the manufacturing site for *Anipryl®* tablets.

 

### **Employees**

### ** **

As at December 31, 2004, DRAXIS Pharma had 381employees, consisting of: 45 managerial employees, 41 clerical employees, 60quality operations employees and 235 unionized hourly employees.  The unionized hourly employees arerepresented by the United Food and Commercial Workers International Union,Local 291P.  A new five-year collectiveagreement between DRAXIS Pharma and the union concluded in February 2004,running from May 1, 2003 to April 30, 2008. DRAXIS Pharma has no significant unresolved issues with the union.

 

### **Former Equity Partners**

### ** **

From February 2000 to April 2004, SGF and seniormanagement of DRAXIS Pharma held a non-controlling equity interest in DRAXISPharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS SpecialtyPharmaceuticals Inc.).  In 2002 and 2003,DRAXIS Pharma Inc. (now known as

 

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DRAXISPharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) repurchased andcancelled shares held by a former DRAXIS Pharma employee and members of DRAXISPharma’s management team in exchange for cash and settlement of existingloans.  In April 2004, the Companyacquired from SGF its 32.7% interest in DRAXIS Pharma and also repaid $3.1million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF.

 

**OtherCollaboration Agreements**

** **

The Company has continuing financial interestsassociated with its collaboration agreements with Pfizer with respect to *Anipryl**®*, with GlaxoSmithKlineConsumer Healthcare with respect to the SpectroPharm® line of products and withShire with regard to Canadian sales of products divested in 2003.

 

*Anipryl**®*

 

Beginning in 1990, the Company expanded on itsknowledge and experience with selegiline by initiating directly on its ownbehalf, as well as through contract research arrangements, studies designed toinvestigate the potential of selegiline for companion animal use.  This initiative ultimately resulted in theformation of its subsidiary DAHI, through which the Company developed andcommercialized a companion animal health product, *Anipryl**®*.

 

*Anipryl**®* is a selegiline productdeveloped for use in veterinary prescriptive applications, particularly indogs.  The two indications for which *Anipryl**®*is currently approved are canine Cushing’s disease and canine cognitivedysfunction syndrome (“CDS”).

 

Cushing’s syndrome refers to increased blood cortisoland the presence of one or more typical clinical signs, such as change inappetite, obesity, frequent urination, abdominal distension, loss of hair,lethargy and other behavioral changes. Canine Cushing’s disease is the form of the disorder that is due to primaryhyperfunction of the pituitary gland.

 

CDS, sometimes known as “Old Dog Syndrome,” refers tothe onset in elderly dogs of behavioral problems unrelated to a generalizedmedical condition such as neoplasia, infection, or organ failure.  Typical signs of this disorder can includeconfusion, disorientation, decreased activity, changes in sleep/wake cycles,loss of house training and loss of interest in or ability to interact with itsowner and environment.

 

From March 1991 to November 1996, DAHI’s common shareswere publicly traded on NASDAQ.  InNovember 1996, the Company took DAHI private in a mandatory share exchangetransaction.

 

In December 1997, the Company entered into an alliancewith Pfizer whereby Pfizer was granted a perpetual exclusive license to market,sell and distribute *Anipryl*® in exchange for non-refundable fees, royaltiesbased on the worldwide sales of *Anipryl*®, a manufacturing and supply agreement and aresearch collaboration.

 

In December 1999, the Company and Pfizer amended theterms of the alliance (the “First Amendment”) whereby $9.0 million of potentialadditional non-refundable fees were eliminated in exchange for the Companyreceiving additional regulatory support for a potential new indication andadditional manufacturing data.  Thesepotential additional non-refundable fees would have become payable if Pfizerhad exercised its rights to acquire product registrations following regulatoryapproval of *Anipryl*® in designated European countries.

 

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In April 2001, the Company received a payment of $1.5million with respect to minimum royalty entitlements for the first three-yearperiod ended December 31, 2000.

 

In December 2001, the Company and Pfizer furtheramended the term of the alliance (the “Second Amendment”) whereby the Companyreceived a payment of $3.1 million with respect to minimum royalty entitlementsfor the second and third three-year periods ended December 31, 2001 and 2002and modifications to future royalty entitlements.  The Second Amendment also resulted in allrights to *Anipryl*® outside of North America reverting back to theCompany, forfeiture of any additional minimum royalty entitlements and thetermination of any future collaborative research on new indications orformulations for *Anipryl*®.

 

Cumulatively to December 31, 2004, the Companyreceived a total of $28.1****million innon-refundable fees and $15.2****million inroyalties and royalty-related payments.

 

Under the amended arrangement, the Company will not beentitled to receive any additional non-refundable fees but will continue toearn royalties on Pfizer’s sales of *Anipryl*® in the United States and Canada.  The $28.1 million of non-refundable feesalready received from Pfizer have been deferred and are being recognized asrevenue on a straight-line basis over the period to December 31, 2006 inconformity with Staff Accounting Bulletin No. 101 published by the U.S.Securities and Exchange Commission.

 

The Company currently does not intend to pursue anyadditional or expanded indications for *Anipryl*®.

 

*Anipryl*® is currently approved for sale in the followingjurisdictions:

 

Canada - the Canadian Bureau of Veterinary Affairs (“BVA”)approved *Anipryl*® for the control of clinical signs associated withcanine Cushing’s disease and CDS in October 1995 and February 1997,respectively;

 

United States - the FDA granted regulatory approval tomarket and sell *Anipryl*® in the United States for the treatment of canineCushing’s disease and CDS in June 1997 and September 1997, respectively;

 

Australia - in December 1998, the NationalRegistration Authority granted regulatory approval to market and sell *Anipryl*® inAustralia for the control of clinical signs associated with canine Cushing’sdisease and CDS;

 

New Zealand - In May 2000, the New Zealand AnimalRemedies Board granted regulatory approval to market and sell *Anipryl*® in NewZealand for the control of clinical signs associated with canine Cushing’sdisease and CDS; and

 

Brazil - in October 2000, the Brazilian Ministerio da Agriculturae de Abastecimento granted regulatory approval to market and sell *Anipryl*® inBrazil for the control of clinical signs associated with canine Cushing’sdisease and CDS.

 

In 1997, DAHI filed in Europe for regulatory approvalof *Anipryl*® by the decentralized procedure.  This procedure allows DAHI to file the *Anipryl*® submission in a countryof its choice, and to designate five additional member states of the EuropeanUnion as the countries that will review and approve the regulatorysubmissions.  DAHI chose the UnitedKingdom as the country in which to file the

 

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initial *Anipryl*®applications.  In July 2003, DAHIreceived authorization from the Veterinary Medicines Directorale (“VMD”) tomarket *Anipryl*® Tablets for Dogs in the United Kingdom.  The UK submission is currently beingreformatted in order to be suitable for submission to other European Unionmember states.  The VMD will act as DAHI’sadvocate in this procedure.

 

DRAXIS may continue to seek veterinary regulatoryapprovals for *Anipryl*® in other jurisdictions, as appropriate.

 

### **Sales and Marketing**

### ** **

Under the terms of the amended arrangement, Pfizerwill continue to market and sell *Anipryl*® in the United States and Canada.

 

In July 2003 DRAXIS granted Ceva Santé Animale S.A. anexclusive license for Europe for the marketing and distribution of *Anipryl*®.

 

DRAXIS continues to seek *Anipryl*® marketing partnerships for additional countriesoutside North America and Europe.

 

### **Manufacturing**

### ** **

DAHI’s primary supplier of selegiline for theproduction of *Anipryl*® is Chinoin Pharmaceutical and Chemical Works Co.Ltd (“Chinoin”).  In 1995, DAHI developedthe data required to qualify an alternative source of supply for selegiline,and the BVA and the FDA have accepted the data.

 

Under its supply agreement with Pfizer, DAHI isentitled to designate a third-party supplier or to manufacture *Anipryl*® itselfin a qualified facility.

 

Until recently, *Anipryl*® was produced by a third-party contractmanufacturer.  During 2000, Pfizerqualified one of its own facilities to manufacture *Anipryl*® for the North American marketplace.

 

The Company intends to manufacture *Anipryl*® atDRAXIS Pharma since the application for manufacturing site transfer to DRAXISPharma was approved by the FDA and the transfer was completed during 2004.

 

### **Competition**

### ** **

The animal health marketplace is generally served byveterinary, agricultural or animal health divisions of large internationalpharmaceutical and chemical companies that are involved in research anddevelopment activities.  Productsresulting from their activities may, in the future, compete directly with *Anipryl*®.

 

The Company is not aware of any other HPFB, BVA or FDAapproved product available at this time that competes directly with *Anipryl*®.  In the United States, the 1988 generic animaldrug law offers marketing protection from veterinary generic applicants in theUnited States for a period of five years. This period ended in 2002, in the case of *Anipryl*®.  However,that law does not prevent other companies from repeating the full clinical NewDrug Application process to seek FDA approval for a bio-equivalent product, nordoes it prohibit human generic versions of *Anipryl*® from being sold to veterinarians.  Any such competitor, including sellers of ahuman or veterinary generic selegiline, would be subject to DAHI’s U.S. andinternational patent rights.

 

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No significant competition for *Anipryl*® from products approved for veterinary or humanuse has been experienced to date in Canada or the United States.  However, there are two other treatmentsavailable that have not been approved in Canada or the United States to treatcanine Cushing’s disease, but which may be used off-label for canine Cushing’sdisease:  *LYSODREN**®* (mitotane) by Bristol-Myers Squibb Co., which wasapproved for use in the treatment of human inoperable cancer of the adrenalgland, and *NIZORAL**®* (ketoconazole) by Johnson& Johnson Inc.  These competitivetreatments work by selectively killing the outer layer of the adrenal gland,thereby limiting production of corticosteroid. Notwithstanding such off-label uses, the human generic version of *Eldepryl*® is notapproved for the treatment of canine Cushing’s disease or CDS in Canada, theUnited States or elsewhere.  However,such use of human selegiline may compete with the use of *Anipryl*® in dogs. The dosage required for dogs suffering from canine Cushing’s disease andCDS, in most cases, is much higher than the human 5mg dose for selegiline.  Lastly, patents for the use of *Anipryl*® for the treatment of dogswith conditions including canine Cushing’s disease and CDS have now issued inCanada, the United States and other jurisdictions.  DAHI is positioned to enforce its proprietarypatent rights and defend itself against infringement by other parties.

 

### **Patents**

### ** **

In September 1992,the United States Patent and Trademark Office issued a patent to DAHI entitled “Useof l-deprenyl for Retention of Specific Physiological Function.”  The patent claims specific uses of l-deprenylfor use in treating dogs and covers currently sold products.  Similar patents have also issued to DAHIin many foreign jurisdictions, including Australia, Canada, Hong Kong, NewZealand, Venezuela and Europe.  Sixadditional U.S. patents have also issued to DAHI.  These patents covervarious veterinary pharmaceutical uses of l-deprenyl such as treatment ofCushing’s Disease, weight loss, treatment of immune system dysfunction,extension of life expectancy of dogs, and treatment of hearing loss.  Four of these six patents were also filed inforeign countries that have major companion animal markets.  The markets for the cognitive disease patentsare Australia, Canada, Europe, Hong Kong, Japan, Indonesia, Mexico, Taiwan,Venezuela, New Zealand and Malaysia.  Themarket for the Cushing’s Disease patent is Europe.  The markets for the survival cure shiftingpatent are Australia, Canada, Norway, Finland, Hong King and Europe.  The markets for the treatment of hearing losspatent are Australia, Japan, Canada and the European Union.  The patents held by DAHI have expiry datesranging from August 31, 2010 to June 23, 2018.

 

The European CDS patent was subject to an oppositionprocedure initiated by Ceva.  Ceva holdspatents in the United States, Canada and Europe relating to the use ofselegiline for treating behavioral disorders with change of mood in dogs andcats.  Ceva’s European patent was subjectto an opposition procedure by DAHI.  InJuly 2003, DRAXIS and Ceva agreed to discontinue the opposition proceedingsbetween them before the EPO.  DRAXIS alsogranted Ceva an exclusive license for Europe for the marketing and distributionof *Anipryl*® or the use of *Anipryl*® claims.  Inreturn, Ceva agreed to pay DAHI a percentage royalty on European sales of *Anipryl*® and/or the use of *Anipryl*®claims, inaddition to nominal milestone payments upon the regulatory approval of *Anipryl*® in the UK and insubsequent additional jurisdictions within the European Community.  The agreement also gave DAHI the rights touse Chinoin selegiline in any jurisdiction.

 

*SpectroPharm® Product Line*

 

In May 2000, the Company entered into an arrangementwith Block Drug Company (Canada) Limited, now part of GlaxoSmithKline ConsumerHealthcare, with respect to the SpectroPharm® line of non-prescription dermatology products, whichincluded the sale of product rights by the Company in exchange for anon-refundable fee, the acquisition of inventory on hand, a supply agreementand a technical services arrangement. The $9****million received by the Companywith respect to the

 

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SpectroPharm® product rights has been deferred and is beingrecognized as revenue on a straight-line basis over the period to January 31,2005.

 

**Discontinued Operations (DRAXIS Pharmaceutica)**

 

In July 2003, DRAXIS completed the divestiture of itsCanadian pharmaceutical sales and marketing division, DRAXIS Pharmaceutica,with the sale to Shire of substantially all remaining products of the division,including the Canadian product rights for Alertec®, Diastat®, Hectorol®,Permax® and Zanaflex®.  Shire agreed to pay DRAXIS through acombination of cash and contingent milestone payments plus royalties on futureproduct sales.  DRAXIS has received $9.6million in cash from Shire and could receive up to an additional $2.9 millionin market-driven contingent milestones over the next several years.  In addition, Shire assumed responsibility forthe financial provisions of the license agreement related to Permax®.  This transaction is in addition to the $6.5million received by DRAXIS in March 2003 from affiliates of Elan for the returnof Canadian rights for several of Elan’s neurology products that had notachieved regulatory approval in Canada.

 

**Government Regulation**

 

The Company’s business is governed by a variety ofindustry-specific statutes and regulations in Canada, the United States andother countries.

 

**DRUGS**

 

### **Drug Approval Process**

### ** **

#### ***Human Pharmaceuticals***

#### *** ***

In Canada, pharmaceutical research, development andmarketing activities are regulated by the Food and Drugs Act (Canada) and therules, regulations, policies and guidelines made thereunder.  The Food and Drugs Act (Canada) isadministered by the Therapeutic Products Directorate of the HPFB (“TPD”), whichregulates the use and sale of diagnostic and therapeutic products inCanada.  In the United States, theseactivities are regulated under laws administered by the Food and DrugAdministration (“FDA”), which also have a significant impact on the Company’sactivities.

 

The drug research and development process consists ofboth pre-clinical and clinical phases. The pre-clinical phase consists of screening compounds to identify themost promising leads for continued drug development prior to human clinicaltrials and evaluating the drug’s toxic and pharmacologic effects to show thatthe drug is reasonably safe for use in the initial clinical studies.  The clinical phase involves clinical trialswith healthy participants, as well as patients with specific diseases orconditions.

 

Before commencing clinical trials in Canada or theUnited States, an Investigational New Drug (“IND”) application must besubmitted with the TPD (in the United States, with the FDA).  The IND application includes manufacturingdata, pre-clinical data, information about use of the drug in humans for otherpurposes and a detailed protocol for the conduct of clinical trials.

 

In Canada and the United States, clinical trials ofnew pharmaceutical products involve three phases.  In Phase I, the product’s safety is assessedduring clinical trials involving a limited number of healthy volunteers orpatients.  In Phase II, the product’sefficacy, dosage and safety are tested on a small number of patients with aknown disease.  In Phase III, controlledclinical trials are conducted in which the product is administered to a largernumber of patients with a known disease, and further information relating tosafety and efficacy is gathered.  Further,in Phase III, the effectiveness of the product is, in

 

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certaincases, compared to that of accepted methods of treatment.  If clinical studies establish that theproduct has value, an applicant files a New Drug Submission with the TPD (or aNew Drug Application, or Product License Application or Biologic LicenseApplication (for biological products) with the FDA) to obtain marketingapproval for the product.  The New DrugSubmission/New Drug Application/Product License Application/Biologic LicenseApplication includes a comprehensive summary and analysis of the results of theclinical trials, information relating to proposed labeling and packagingmaterials, and data relating to the proposed manufacturing and quality controlprocedures.  If the New Drug Submission/New DrugApplication/Product License Application/Biologic License Application is foundto be satisfactory, a marketing authorization is issued (in Canada, the TPDissues a Notice of Compliance).

 

The process of completing clinical trials andobtaining regulatory approvals for a new drug will, in general, take a numberof years and require the expenditure of substantial resources.  Once a New Drug Application/New DrugSubmission or Product License Application/Biologic License Application issubmitted, there can be no assurance that the TPD or FDA will review andapprove the application in a timely manner. In certain limited circumstances, the TPD will permit a New DrugSubmission to be subject to a priority review. The TPD’s Priority Review Process allows for a faster review to makeavailable promising drug products for a serious, life-threatening or severelydebilitating illness or condition for which there is substantial evidence ofclinical effectiveness that the drug provides: (i) effective treatment,prevention or diagnosis of a disease or condition for which no drug ispresently marketed in Canada; or (ii) a significant increase in efficacy and/orsignificant decrease in risk such that the overall benefit/risk profile isimproved over existing therapies, preventatives or diagnostic agents for adisease or condition that is not adequately managed by a drug marketed inCanada.

 

Even after initial approval has been obtained, furtherstudies, including post-marketing studies, may be required to provideadditional data on safety necessary to gain approval for the use of the productas a treatment for clinical indications other than those for which the productwas initially tested.  The TPD and FDA mayalso require post-marketing surveillance programs in order to monitor long-termrisks and benefits of the drug, to study different dosages or evaluatedifferent safety and efficacy parameters. Results of post-marketing studies may limit or expand the furthermarketing of products.  A serious safetyor effectiveness problem involving an approved new drug may result in TPD orFDA action requiring withdrawal of the product from the market and possiblecivil action.

 

The Special Access Program of the TPD providespractitioners with access to pharmaceutical, biologic and radiopharmaceuticalproducts that are not yet approved for sale in Canada to treat patients withserious or life-threatening illness or conditions when conventional therapieshave failed, are unsuitable or unavailable. The FDA administers a similar program in the United States to treatpatients with immediately life-threatening diseases.

 

Outside of Canada and the United States, theregulatory approval process for the manufacture and sale of pharmaceuticalsvaries from country to country, and the time required may be longer or shorterthan that required for TPD or FDA approval. To the extent it chooses to explore foreign markets, the Company mayrely on foreign licensees to obtain regulatory approval for marketing itsproducts in foreign countries.

 

#### ***Veterinary Pharmaceuticals***

#### *** ***

In Canada, the drug approval process for veterinarypharmaceuticals is similar to the process for obtaining approvals for humanpharmaceuticals.  To receive regulatoryapproval, a new animal drug must successfully complete a number ofdevelopmental phases which include the establishment of safety and efficacy intarget species, establishment of manufacturing procedures and the conduct ofcontrolled

 

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clinicaltrials in which the drug is administered to a large number of animals in orderto gather further information relating to safety and efficacy.

 

Following the completion of clinical trials, anapplicant files a New Drug Submission to the Veterinary Drugs Directorate.

 

### **Drug Marketing**

### ** **

#### ***Human Pharmaceuticals***

#### *** ***

Prescription drug products generally are made known tohealthcare professionals through advertisements and visits to suchprofessionals, known as “detailing.”  InCanada, unlike the United States, product-specific advertising to the generalpublic is generally not permitted, subjected to very limited exceptions.

 

An increasing percentage of sales of prescriptionpharmaceuticals relates to sales of products which are paid for, in whole or inpart, by government or private insurance drug plans.  In many jurisdictions, governments haveestablished regimes to control drug pricing at the retail pharmacy level.  Most Canadian provinces have implemented drugbenefit formularies.  A formulary liststhe drugs for which a provincial government will reimburse qualifying personsand the prices at which those drugs will be reimbursed.  Although there is not complete uniformityamong provinces, generally speaking, provincial governments will reimburse anamount equal to the lowest available price of the generic versions of any druglisted on the provincial formulary.  Thelegislative regimes of most provinces also permit generic drug substitution,even for patients who do not qualify for government reimbursement.  The effect of these initiatives is toencourage the sale of lower-priced generic versions of pharmaceuticalproducts.  In the United States,beginning in 2006, Medicare beneficiaries will be offered a prescription drugbenefit.  Medicare will contract with atleast two risk-bearing drug plans in each of 34 regions to provide the newbenefit.  The prescription drug planswill cover at least two drugs in each therapeutic class or category of covereddrugs, but may establish formularies and tiered-cost amounts.  The prescription drug plans may limit theircoverage to two drugs in each therapeutic class or category of covereddrugs.  The effect of this new programwill allow prescription drug plans to negotiate price discounts and rebateswith drug companies.

 

Furthermore, there have been, and the Company expectsthat there will continue to be, an increasing number of proposals to implementgovernment and other third-party payer restrictions on the pricing ofprescription pharmaceuticals as a result of continuing efforts to contain orreduce the costs of healthcare throughout North America.  See Item 3: Key Information - Risk Factors. Notably, in Canada, the Patented Medicines Prices Review Board (“PMPRB”)sets the maximum price that can be charged for a patented drug (see below).

 

#### ***Veterinary Pharmaceuticals***

#### *** ***

In Canada, veterinary “prescription” pharmaceuticalsare available only through veterinarians. Veterinary prescription drugs are generally promoted by manufacturersthrough advertisements to veterinarians and sales visits to animal healthclinics.  In Canada, unlike the UnitedStates, product-specific advertising to the general public is generally notpermitted, subjected to very limited exceptions.

 

The PMPRB has the jurisdiction to regulate maximumpricing of veterinary drugs (see below). There are no government reimbursement plans in the veterinarypharmaceutical marketplace.  There are afew private pet insurance plans; however, these plans do not cover asignificant portion of the purchase

 

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forveterinary drugs.  Accordingly, theveterinary marketplace is not subject to the same cost containment measuresthat are prevalent in the human pharmaceutical market.

 

### **Patent Protection and Price Controls**

### ** **

Companies that have invented human or veterinary drugscan apply for patent protection virtually worldwide, subject to strict rulesrelating to timing, subject matter and the scope of protection sought.  Patents can cover many aspects of apharmaceutical product, including the drug itself, processes for preparing thedrug, delivery systems and new uses for the drug.  Patents do not, however, guarantee that theowner of the patent or its licensee can utilize the patented invention becausethere may be pre-existing patent rights owned by a third party.  While a patent permits the owner or itslicensee to prevent others from doing what is covered by the patent,competitors are always free to market products that do not infringe the particularpatent, provided such competitors otherwise comply with health regulatoryrequirements.

 

Historically, pharmaceutical companies have reliedheavily upon patents to protect proprietary positions in respect of drugproducts.  The Company’s policy is toprotect its technology, inventions and improvements by, among other things,filing patent applications for technology it considers important to thedevelopment of its business.  The Companyalso relies upon trade secrets, know-how and licensing opportunities to developand maintain its competitive position.

 

Under United States patent law, a patent is issued tothe person who made the invention first, rather than to the first person tofile an application therefor, as is common in other countries, such asCanada.  Consequently, in determining whois entitled to a United States patent for a particular technology, itis important to consider that it is possible for an inventor to establish anentitlement based on a prior invention, notwithstanding an earlier filed patentapplication.  Priorinvention may not be established before December 8, 1993, in a NAFTA countryother than the United States, or before January 1, 1996, in a WTO membercountry other than a NAFTA country.

 

Remedies for patent infringement are created under thelaws of Canada and the United States.  Inaddition to the standard legal action for patent infringement, in 1993, theCanadian Government enacted Regulations under the Patent Act (Canada) whereby acompany proposing a generic version for a drug which has been marketed inCanada under a Notice of Compliance and in respect of which patents have beenlisted on the Patent Register, must address those patents before a Notice ofCompliance may be granted.  Theoriginator of the drug may apply to the Federal Court of Canada for an orderprohibiting the Minister of National Health and Welfare from issuing a Noticeof Compliance until the issue of possible patent infringement has beenresolved.  Similar proceedings areavailable in the United States if a generic drug manufacturer seeks approvalfor a drug in respect of which patents have been listed in the Orange Book (theUnited States equivalent of the Patent Register).

 

As mentioned above, in Canada, the PMPRB monitors andcontrols prices of drug products marketed in Canada by persons holding, orlicensed under, one or more patents relating to those drug products.  The PMPRB approves the introductory price ofa drug product (based on a comparative analysis) and requires that subsequentprice increases do not exceed the annual increase of the Canadian ConsumerPrice Index.  Thus, in Canada, theexistence of one or more patents relating to a drug product, while providingsome level of proprietary protection for the product, also triggers agovernmental price control regime which significantly impacts on the Canadianpharmaceutical industry’s ability to set pricing.

 

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### **Drug Manufacturing**

### ** **

Pharmaceutical companies are required to submit aspart of their New Drug Submission in Canada, or as part of their New DrugApplication in the United States, detailed descriptions regarding the proposedmanufacturing and packaging process and the identities of the manufacturers inrespect of a particular drug.  A decisionto manufacture or package products in a facility other than that originallyapproved under the New Drug Application or New Drug Submission (as may be thecase with contract manufacturing outsourcing) requires notification of theregulatory authorities and can result in significant delays in production.

 

Pharmaceutical manufacturing facilities are subject tostrict quality control standards including current good manufacturing practices(“cGMPs”).  Production processes within afacility are subject to one-time validation testing, as well as periodicreview.  In the case of sterile productmanufacturing, including lyophilized products, the standards are even higherthan for the manufacturing of non sterile products.  The manufacture of radioactive drugs issubject not only to cGMPs but also the environmental safety, handling andtransportation requirements of the Canadian Nuclear Safety Commission (“CNSC”)and the United States Nuclear Regulatory Commission (“NRC”).  There are no issues with respect toradioactive waste disposal since all of the isotopes used in nuclear medicineare short-lived and can be easily stored on site until decayed and thendisposed of.

 

The FDA, HPFB, CNSC and NRC conduct regular audits ofthe Company’s facilities to ensure compliance with cGMPs and other statutoryrequirements.  See Item 3: KeyInformation - Risk Factors.

 

**MEDICAL DEVICES**

 

In Canada, the development, testing, manufacture,labelling and promotion of medical devices is regulated by the Food and DrugsAct (Canada) and the rules, regulations, policies and guidelines madethereunder.  The Food and Drugs Act isadministered by the TPD.  In the UnitedStates, these activities are regulated under lawsadministered by the FDA which also have asignificant impact on the Company’s activities.

 

Canadian regulation of medical devices relies on arisk-based categorization of devices into four classes, with class III and IVdevices being those that present the higher degrees of risk.  In Canada, Class III medical devices, such asDRAXIMAGE’s *BrachySeed*®may not be imported or sold in Canada unless themanufacturer of the device holds a device-specific license issued by theTPD.  Medical devices must meet safetyand effectiveness requirements relating to the design, manufacture andperformance of the devices, and are also subject to quality control, labelling,advertising, record-keeping and reporting requirements.  Manufacturers must comply with theserequirements, as well as the terms and conditions set out in the licensepermitting sale of a device, such as completion of mandatory post-marketingtesting and/or surveillance activities. Failure to comply with all applicable requirements or the occurrence ofproblems with a device could lead to product recall, suspension of the licensepermitting sale of the device and/or product seizure, which would preventfurther sales until the product is brought into compliance.  If certain changes are made to a medicaldevice (for example, changes that would affect its class) an amended licensemust be obtained prior to marketing it.

 

TheSpecial Access Program of the TPD provides practitioners with access to medicaldevices that are not yet approved for sale in Canada in emergency use cases orwhen conventional therapies have failed, are unavailable or are unsuitable totreat a patient.

 

In the United States, theFDA regulates the design, manufacture, distribution, quality standards andmarketing of medical devices.  If a device is “substantially equivalent” to one that is currently

 

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marketed (as is the case with DRAXIMAGE’s *BrachySeed*®device), the device is not required to undergo a detailed approval processinvolving the conduct of clinical trials. The time to obtain approval can be as short as 90 days.  In the United States this process is called a510(k) clearance.  If adevice does not qualify for 510(k) clearance, a pre-market approval (“PMA”) isrequired.  As part of the approval of aPMA application, the FDA typically requires human clinical testing to determinesafety and efficacy of the device.  Thereview period for a PMA application is fixed at 180 days, but the FDA typicallytakes much longer to complete the review.

 

Medical devices are generally made known tohealthcare professionals through advertisements and visits to suchprofessionals.  In Canada, medicaldevices are not subject to the same restrictions on advertising to the generalpublic as pharmaceutical products. Medical device manufacturing facilities are subject to strict qualitycontrol standards including current good manufacturing practices (“cGMPs”).

 

**ENVIRONMENTALLAWS**

 

Canadian and U.S. federal, state, local andprovincial regulations govern extensively the use, manufacture, storage,handling, transport and disposal of hazardous materials and associated wasteproducts.  The Company is not aware ofany material environmental issues that affect the Company’s utilization of itsassets.  The Company has not received anynotice stating that it is not in compliance with environmental legislationapplicable to it.

 

**Organizational Structure**

 

The following chart illustrates the corporateorganization and jurisdictions of the Company and its significant affiliates asat March 21, 2005:

 

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(1)DRAXISSpecialty Pharmaceuticals Inc. has two divisions, DRAXIMAGE and DRAXIS Pharma.

 

All of the above-depicted companies are whollyowned subsidiaries of DRAXIS Health Inc.

 

**Property, Plants and Equipment**

 

The Company’s operating facility is a247,000-square-foot pharmaceutical manufacturing facility which houses theDRAXIMAGE and DRAXIS Pharma operations. The facility is owned by DRAXIS Specialty Pharmaceuticals Inc., awholly-owned subsidiary of the Company and is located at 16751 Trans-CanadaRoad, Kirkland, Québec, Canada, H9H 4J4.

 

The Company believes all of the above-noted propertiesare suitable and adequate for its business purposes as presentlycontemplated.  Our principal bankers, theNational Bank of Canada, have a first ranking mortgage on all of ourassets.  As of December 2004, the Companyhad repaid all of its third-party debt.

 

**Item 5.    Operating and Financial Review and Prospects**

 

The following discussion and analysis of the Company’sfinancial condition and results of operations should be read in conjunctionwith the Company’s consolidated audited financial statements and notes theretofor the year ended December 31, 2004.

 

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All amounts referred to herein are expressed in U.S.dollars and are in accordance with U.S. generally accepted accountingprinciples (“GAAP”), unless otherwise indicated.  Other noteworthy accounting issues aredescribed under “Accounting Matters.”

 

**Overview**

 

DRAXIS is a specialty pharmaceutical company providing pharmaceuticalproducts in three major categories: sterile, including sterile lyophilized(freeze-dried) pharmaceuticals; non-sterile specialty pharmaceuticals; andradiopharmaceuticals.  In theradiopharmaceutical category, DRAXIS has its own products and a targetedresearch and development program for new products.  As of January 1, 2005, activities of theCompany are carried out through its wholly owned subsidiary, DRAXIS SpecialtyPharmaceuticals Inc., which operates two major divisions, DRAXIS Pharma(contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).

 

Consistent with this strategic focus, the Company divested itsdermatology product lines in 2001 and in 2003 completed the sale of itsCanadian prescription pharmaceutical sales and marketing business (“DRAXISPharmaceutica”). The Company also realigned its senior managementresponsibilities in 2003 to focus on its core businesses. The positive progressmade by both the radiopharmaceutical and contract manufacturing businesses arehighlighted by the strong operating results of these core businesses andimproved cash flows of the Company in 2004.

 

The acquisition of the remaining third-party equity interest in ourcontract manufacturing business from SGF Santé Inc. (“SGF”) in April 2004 isfurther evidence of our commitment and confidence in our core businesses.Furthermore, our contract manufacturing business has returned immediatebenefits through record revenues and profitability in the third and fourthquarters of 2004. This has resulted in the transaction being immediatelyaccretive to the Company’s 2004 earnings, even after taking into account thedilutive aspect of the equity offering which financed the transaction.

 

Effective January 1, 2005, our core subsidiaries, DRAXIMAGE Inc. andDRAXIS Pharma Inc., were legally amalgamated under the name DRAXIS SpecialtyPharmaceuticals Inc., a wholly owned subsidiary of DRAXIS. DRAXIMAGE and DRAXISPharma are now operated as divisions of DRAXIS Specialty PharmaceuticalsInc.  In the short term the amalgamationwill generate significant tax benefits by allowing the Company to utilize itstax loss carryforwards in a timely fashion. The amalgamation also creates opportunities for achieving operatingsynergies over the long term.

 

Comparisons for 2004 with the same periods of 2003 include, exceptwhere indicated, the one time recognition as revenue of $1.4 million of revenuerelated to *BrachySeed®*in the first quarter of 2003and $0.7 million in insurance proceeds as a reduction in cost of goods sold inthe third quarter of 2003.  Actualoperating comparisons, in the opinion of management, are more reflective ofoperating improvements when these “one time non-recurring items” areexcluded.  Accordingly, we have indicatedwhere the comparative number excludes these one time non-recurring items.

 

Highlights for 2004 were as follows:

 

**Record Financial Results**:

 

•                  Recordrevenues of $69.3 million up 40.9% from 2003.

 

•                  RecordEBITDA of $14.3 million from continuing operations up 43.5% from 2003 and up83.3% excluding one time non-recurring items.

 

•                  Recordbasic EPS from continuing operations of 20 cents per share, up 58.7% from 2003.

 

•                  Netoperating cash flows from continuing operations of $4.4 million up $7.6 millionfrom 2003.

 

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**Other Highlights**:

 

•                  OnApril 22, 2004, the Company purchased from SGF its remaining 32.7% minorityinterest in DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division ofDRAXIS Specialty Pharmaceuticals Inc.).

 

•                  During2004, the Company repaid all third-party debt and negotiated new creditfacilities with its bankers.

 

**Consolidated Results of Operations(1)and reconciliation of Non-GAAP Measures**(in thousands of U.S.dollars except share related data) (U.S. GAAP)

 
| **Years ended December 31,**               | ** **   | **2004**    | ** ** | **2003**   | ** ** | **2002** | ** ** |
|--------------------------------------------|--------------|-------------|------------|------------|------------|----------|------------|
| Revenues                                   |         |        | ** ** |       |       |     |       |
| Product sales                              | ** **   | **$**       | **61,693** | ** ** | $          | 40,535   |       | $ | 30,338 |   |
| Royalty and licensing                      | ** **   | **7,627**   | ** ** | 8,658      | (2)        | 8,302    |       |
| ** **                                 |         | **$**       | **69,320** | ** ** | $          | 49,193   |       | $ | 38,640 |   |
|                                       |         |        | ** ** |       |       |     |       |
| Product gross margin                       | ** **   | **$**       | **21,900** | ** ** | $          | 12,813   | (3)        | $ | 6,934 |   |
| *% of Product sales revenues*              | *** *** | ***35.5***  | ***%***    | *31.6*     | *%*        | *22.9*   | *%*        |
| Royalty and licensing revenue              | ** **   | **7,627**   | ** ** | 8,658      | (2)        | 8,302    |       |
| SG&A                                   | ** **   | **(13,266** | **)**      | (9,904     | )          | (7,542   | )          |
| *% of Product sales revenues*              | *** *** | ***-21.5*** | ***%***    | *-24.4*    | *%*        | *-24.9*  | *%*        |
| R & D                                  | ** **   | **(1,948**  | **)**      | (1,594     | )          | (1,996   | )          |
| **EBITDA(4)**                              | ** **   | **14,313**  | ** ** | 9,973      |       | 5,698    |       |
| *% of Total revenues*                      | *** *** | ***20.6***  | ***%***    | *20.3*     | *%*        | *14.7*   | *%*        |
| Depreciation and amortization              | ** **   | **(4,457**  | **)**      | (3,287     | )          | (2,804   | )          |
| Operating income                           | ** **   | **9,856**   | ** ** | 6,686      |       | 2,894    |       |
| *% of Total revenues*                      | *** *** | ***14.2***  | ***%***    | *13.6*     | *%*        | *7.5*    | *%*        |
| Financial                                  |         |        | ** ** |       |       |     |       |
| • Foreign exchange translation        | ** **   | **(374**    | **)**      | (701       | )          | (12      | )          |
| • Other                               | ** **   | **(296**    | **)**      | (831       | )          | (268     | )          |
| Other income                               | ** **   | **96**      | ** ** | —     |       | —   |       |
| Income tax (provision) recovery            | ** **   | **(1,301**  | **)**      | (874       | )          | 154      |       |
| Minority interest                          | ** **   | **(4**      | **)**      | 391        |       | 252      |       |
| (Loss) income from discontinued operations | ** **   | **(61**     | **)**      | 8,531      |       | (834     | )          |
| Net income                                 | ** **   | **$**       | **7,916**  | ** ** | $          | 13,202   |       | $ | 2,186 |   |
|                                       |         |        | ** ** |       |       |     |       |
| Net income (loss)                          |         |        | ** ** |       |       |     |       |
| • from continuing operations          | ** **   | **$**       | **7,977**  | ** ** | $          | 4,671    |       | $ | 3,020 |   |
| • from discontinued operations        | ** **   | **(61**     | **)**      | 8,531      |       | (834     | )          |
| ** **                                 |         | **$**       | **7,916**  | ** ** | $          | 13,202   |       | $ | 2,186 |   |
|                                       |         |        | ** ** |       |       |     |       |
| Basic income (loss) per share              |         |        | ** ** |       |       |     |       |
| • from continuing operations          | ** **   | **$**       | **0.20**   | ** ** | $          | 0.13     |       | $ | 0.08 |   |
| • from discontinued operations        | ** **   | **(0.00**   | **)**      | 0.23       |       | (0.02    | )          |
| ** **                                 |         | **$**       | **0.20**   | ** ** | $          | 0.36     |       | $ | 0.06 |   |
|                                            |              |             |            |            |            |          |            |  |  |  |  |  |

 

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(1)Commencing with the quarter ended December 31, 2001, the results of operationsof DRAXIS Pharmaceutica have been reported as discontinued operations (see*Accounting Matters – Discontinued Operations*).

(2)Includes $1,436 of deferred revenue related to the termination of agreementsfor *BrachySeed*®.

(3)Includes $730 of insurance proceeds.

 

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(4)Income from continuing operations before depreciation and amortization,financing expense, other income, income taxes and minority interest.  This earnings measure does not have astandardized meaning prescribed by U.S. GAAP and therefore may not becomparable to similar measures used by other companies. Such measures should notbe construed as the equivalent of net cash flows from operating activities.(see *Accounting Matters**- Non-GAAPMeasures*).

 

**Comparison of Years Ended December 31, 2004 and2003**

 

Consolidated revenues from continuing operations of $69.3 million forthe year ended December 31, 2004 increased 40.9% compared with the same periodin 2003.

 

Product sales increased 52.2% for the year ended December 31, 2004compared with the same period in 2003. The increase in product sales throughout 2004 was driven by asignificant increase in contract manufacturing revenues, particularly sterileproduct revenues. Radiopharmaceutical product sales grew 17.9% in 2004 over2003 driven primarily by sales of sodium iodide I-131 products to the U.S.

 

Product gross margins for the year ended December 31, 2004 increased ascompared with the same period in 2003, primarily related to significant growthin the sterile business, increased capacity utilization in contractmanufacturing and changes to the price structure in contract manufacturing.These differences were lessened by the impact of one time non-recurring itemsin 2003 and the impact of shutdown activities in the third quarter of 2004.

 

The contract manufacturing business historically has lower margins thanthe radiopharmaceutical business.  As aresult, the shift in business mix towards contract manufacturing is normallydilutive to consolidated gross profit margins. However, as sterile productsales continued to increase in contract manufacturing relative to non-sterileproduct sales, contract manufacturing results became less dilutive.

 

Royalty and licensing revenue decreased for the year ended December 31,2004 compared with the same period of 2003 due to a one time non-recurring itemin 2003.  Excluding a one timenon-recurring item, royalty and license revenues did not change significantlyfrom 2003 to 2004.

 

As a percentage of product sales, selling, general and administrativeexpenses decreased for 2004 to 21.5% from 24.4% in 2003. The increase inselling, general and administrative expenses in absolute dollar terms for theyear was primarily driven by sales and marketing, business developmentactivities and the cost of long-term incentive plans that are indexed to theCompany’s share price.

 

Research and development expenditures increased compared to 2003 due toramping up of clinical trial activities related to *FIBRIMAGE®*and *INFECTON®*.

 

The majority of the costs of the Canadian operations are denominated inCanadian dollars. As the level of revenues denominated in U.S. dollars andother foreign currencies increases relative to the underlying cost structure,the Company’s overall gross profit margins are affected. The impact isreflected within the cost of goods sold and selling, general and administrationexpenses. For 2004, there was an immaterial negative impact on margins relatedto the strengthening of the Canadian dollar relative to the benefit ofincreased higher margin business from the U.S.

 

Depreciation and amortization expense for the year ended December 31,2004 increased 35.6% over the same period of 2003 following the commencement ofdepreciation charges on completed capital projects related to contractmanufacturing operations.

 

Foreign exchange loss was $374,000 for 2004 compared to $701,000 in2003. The decrease in the loss resulted from the strengthening of the Canadiandollar in 2003 which continued, to a lesser extent, in 2004, coupled with areduction in the Company’s net U.S. monetary position.

 

Interest expense and bank charges decreased for the year compared to2003 due to lower debt levels. At the end of 2004, all third-party debt wasrepaid.

 

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Minority interest represents SGF’s share of net income or losses of theCompany’s contract manufacturing operations. Minority interest was neutral to netincome compared with a small income contribution in 2003. As a result of theacquisition by DRAXIS of all minority interest holdings on April 22, 2004,minority interest no longer impacts earnings.

 

Discontinued operations were neutral to the Company’s consolidatedrevenues for 2004. In the first quarter of 2003, the Company realized anafter-tax gain related to the $6.5 million received on the sale of certainproduct rights to Elan Corporation, plc (“Elan”).  In the third quarter of 2003, substantiallyall of the remaining residual discontinued operations’ assets and liabilitieswere disposed of and the Company recognized a further net after-tax gain of$4.1 million.  There are no significantremaining residual assets and liabilities of the discontinued operations andthose remaining are not expected to have a significant impact on futureearnings of the Company.

 

For the year ended December 31, 2004, the Company recorded an incometax expense, expressed as a percentage of pre-tax earnings, of 14%.  The income tax expense is below the statutoryrates in effect in the jurisdictions in which the Company operates as a resultof the recognition of deferred income tax assets not previously recognizedrelated to its Canadian operations. Prior to the acquisition, on April 22, 2004, of all minority interestholdings, the Company was unable to execute tax planning strategies to utilizeall of the loss carryforwards available to the Canadian operations.  As a result of the acquisition of allminority interest holdings and the significant increase in the profitability ofthe contract manufacturing operations, the Company was able to recognize intoincome approximately $0.9 million in previously unrecognized tax losscarryforwards.

 

The effective tax rate will fluctuate depending on the profitability ofindividual operations and tax rates in the respective jurisdictions in whichthe Company operates. The level of tax credits generated from research anddevelopment activities in the radiopharmaceutical business also has the impactof lowering effective tax rates.

 

The basic weighted average number of common shares outstanding during2004 was 39,886,219 and has increased from 37,114,648 for 2003, primarily asthe result of the completion of the equity financing offering of 3,053,436units (which included 3,053,436 common shares) in April 2004 and the exerciseof stock options and employee participation shares.

 

**Comparison of Years Ended December 31, 2003 and2002**

 

Consolidated revenues from continuing operations for the year endedDecember 31, 2003 increased 27.3% compared to 2002 due to higher product salescoupled with the recognition of $1,436,000 of deferred revenue related to thetermination of the agreement with the Company’s former *BrachySeed*®licensee in the U.S. (see *Accounting Matters– Termination of BrachySeed® Agreements*) in the first quarter of2003, partially offset by lower *Anipryl*®-relateddeferred revenue.

 

Increased product gross margins associated with continuing operationsfor 2003 are attributable to changes in product mix driven by higher margin newbusiness in both the radiopharmaceutical and contract manufacturing businessescoupled with the recognition of $730,000 in insurance proceeds as a reductionof cost of goods sold (see*Accounting Matters- Insurance Proceeds*).

 

Selling, general and administration expenses associated with continuingoperations, expressed as a percentage of product sales, for the year endedDecember 31, 2003 decreased modestly compared to 2002 as the impact ofincreased product sales was more than offset by the costs associated withcommencement of direct sales of *BrachySeed*® inthe U.S and costs associated with developing new business.

 

Research and development expenditures associated with continuingoperations for 2003 decreased compared with 2002 due to higher than normalspending in the third quarter of 2002 for third-party toxicity testing of *FIBRIMAGE*® and *AMISCAN*TM.

 

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EBITDA from continuing operations for the year ended December 31, 2003increased 75.0% compared to 2002 due to increased product sales, changes inproduct mix driven by new business, the recognition of $1,436,000 of previouslydeferred *BrachySeed*® revenue, and the receipt of$730,000 of insurance proceeds, partially offset by lower *Anipryl®*-relateddeferred revenue.

 

EBITDA margin grew from 14.7% in 2002 to 20.3% (16.0%, excluding theimpact of the positive non-recurring items) in 2003.

 

Depreciation and amortization expense associated with continuingoperations for the year ended December 31, 2003 increased 17.2% over 2002following the commencement of depreciation charges on completed capitalprojects in the latter part of 2002 and third quarter of 2003.

 

Net financial items associated with continuing operations resulted incharges to income of $1,532,000 compared to $280,000 for the year endedDecember 31, 2002 due to foreign exchange translation losses related to thestrengthening of the Canadian dollar in 2003 as compared with the positiveimpact of a weakening Canadian dollar in 2002, the write-off of $160,000 ofbank financing costs resulting from the early repayment of a secured bank termloan and increased borrowing costs in the early portion of 2003.

 

Minority interest for 2003 had a contribution to net income of $391,000compared to $252,000 in 2002 due to increased losses in the contractmanufacturing operations in the first quarter of 2003.

 

In addition, the majority of the costs of theCanadian operations are denominated in Canadian dollars. As the level ofrevenues denominated in U.S. dollars and other foreign currencies increasesrelative to the underlying cost structure, which is mostly Canadian dollars,the Company’s overall gross profit margins are affected. For 2003, thestrengthening of the Canadian dollar, combined with the growing volume ofbusiness denominated in U.S dollars, negatively affected gross profit marginscompared to 2002. The impact is reflected within the cost of goods sold andselling, general and administration lines on the income statement.

 

Discontinued operations contributed $8,531,000 of income for the yearended December 31, 2003 compared to a loss of $834,000 in 2002 due to the saleof discontinued operations in 2003 and the after-tax gain related to the$6,500,000 received on the sale of product rights in the first quarter of 2003and $9,600,000 received on the sale of product rights in the third quarter of2003.  The tax provision associated withthese transactions reduced the Company’s deferred tax assets.  No cash taxes were paid as a result of thesetransactions.

 

For the year ended December 31, 2003, the Company recorded an incometax expense at an effective tax rate of 17.0% as compared to a recovery of 5.9% in 2002 due to recognition in 2002 of taxrefunds related to the Company filing amended U.S. returns for its 1998, 1999and 2000 taxation years. The Company’s effective tax rate varies from period toperiod depending on the level of income generated in each jurisdiction.

 

The weighted average number of common shares outstanding in 2003 of37,114,648 increased over 2002 due to the exercise of options and employeeparticipation shares during 2003 less shares repurchased for cancellation bythe Company.

 

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**Radiopharmaceuticals**(in thousands of U.S.dollars) (U.S. GAAP)

 
| **Years ended December 31,**  | ** **   | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-------------------------------|--------------|------------|------------|------------|------------|----------|------------|
|                          |         |       | ** ** |       |       |     |       |
| Revenues                      |         |       | ** ** |       |       |     |       |
| Product sales                 | ** **   | **$**      | **17,172** | ** ** | $          | 14,564   |       | $ | 9,704 |   |
| Royalty and licensing         | ** **   | **—** | ** ** | 1,521      | (1)        | 451      |       |
| ** **                    |         | **$**      | **17,172** | ** ** | $          | 16,085   |       | $ | 10,155 |   |
|                          |         |       | ** ** |       |       |     |       |
| R & D                     | ** **   | **(1,948** | **)**      | (1,594     | )          | (1,996   | )          |
| EBITDA(3)                     | ** **   | **4,174**  | ** ** | 5,614      | (1),(2)    | 706      |       |
| *% of Revenues*               | *** *** | ***24.3*** | ***%***    | *34.9*     | *%*        | *7.0*    | *%*        |
| Depreciation and amortization | ** **   | **(949**   | **)**      | (843       | )          | (716     | )          |
| Operating income (loss)       | ** **   | **$**      | **3,225**  | ** ** | $          | 4,771    | (1),(2)    | $ | (10 | ) |
| *% of Revenues*               | *** *** | ***18.8*** | ***%***    | *29.7*     | *%*        | *-0.1*   | *%*        |
|                               |              |            |            |            |            |          |            |  |  |  |  |  |

 

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(1) Includes $1,436 of revenue related to thetermination of agreements for *BrachySeeds**Ò*.

(2) Includes $500 of insurance proceeds

(3) See *AccountingMatters – Non-GAAP Measures*.

 

Radiopharmaceuticals and radiotherapy devices are the focus of theCompany’s radiopharmaceutical division DRAXIMAGE, which discovers, develops,manufactures and markets diagnostic imaging and therapeutic radiopharmaceuticalproducts for the global marketplace. Products currently marketed by DRAXIMAGEinclude a line of lyophilized technetium-99m kits used in nuclear medicineimaging procedures, a line of imaging and therapeutic products labelled with avariety of isotopes including sodium iodide I-131, and *BrachySeed®*brachytherapyimplants. DRAXIMAGE has a number of products in late-stage developmentincluding: *FIBRIMAGE®*, having completed enrolmentof its Phase III trial in Canada and negotiating permission to commence a PhaseIII trial in the U.S., for imaging deep vein thrombosis; and *INFECTON®,* currently in Phase II trials in Canada and theU.S., for imaging infection. DRAXIMAGE is also in the pre-clinical trial phaseof developing a somatostatin-based peptide which has potential for cancerimaging and therapy.

 

Highlights in this segment for the year ended December 31, 2004included:

 

•      Financial results:

 

•                  Product sales of$17.2 million for the year representing a 17.9% increase compared to 2003.

 

•                  EBITDA of $4.2million representing a decrease of $1.4 million compared to 2003, but anincrease of $0.5 million compared to 2003, when one time non-recurring itemsare excluded.

 

•                  EBITDA margin of24.3% for 2004 compared to 34.9% (25.1% excluding one time non-recurring items)for 2003.

 

***Comparison of Years EndedDecember 31, 2004 and 2003***

* *

Revenues for the year ended December 31, 2004 increased 6.8% comparedwith 2003 as the increase in product sales from radioiodine products(substantially sodium iodide I-131 sales to the U.S.) was offset by a decreasein royalty and licensing revenue related to one time non-recurring items in2003 and lower cold kit sales in the fourth quarter of 2004. While cold kitsales decreased in October and November due to changes in customer purchasingpatterns, December sales returned to traditional levels.

 

On March 1, 2004, DRAXIMAGE announced that it had received U.S. Foodand Drug Administration (“FDA”) approval to produce and market a newformulation of a diagnostic product for

 

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preparing askeletal imaging agent that is used to demonstrate areas of alteredosteogenesis or bone growth.  The newlyformulated diagnostic product, called MDP-25, provides an increased ability tomore effectively image the extremities of the skeleton, particularly the handsand feet.

 

MDP-25 was launched in the fall of 2004 with the intent of it being animproved alternative to MDP-10, but has not yet succeeded in displacing MDP-10based on its current formulation. Accordingly, the Company anticipates slower growth in MDP-25 sales andcontinues to provide MDP-10.

 

There were no significant changes to shipments of *BrachySeed®*I-125to the U.S. and Canada in 2004 compared with 2003.

 

For the year ended December 31, 2004, EBITDA margin decreased to 24.3%compared with 25.1% (excluding the impact of one time non-recurring items in2003) for the same period of 2003. The decreased margin reflects increasedsales and marketing activities, increased research and development spending andlower sales of lyophilized kits in the fourth quarter of 2004, which offset theincrease in sales of radioactive sodium iodide I-131 products.

 

The growth in product revenues over 2003 was slower than the Companyexpected and resulted in the Company issuing reduced revenue expectations inthe third quarter of 2004.  These reducedexpectations were met at year end (see *Outlook*).EBITDA margin for 2004 was within our original guidance targets.

 

Research and development expenditures increased $0.4 million for theyear ended December 31, 2004 as compared to 2003 due to the ramping up ofactivities related to *FIBRIMAGE®* and *INFECTON®*, specifically clinical trials.

 

Preliminary observations from both the *FIBRIMAGE®*Phase III trial in Canada and *INFECTON®* PhaseII trials in Canada were presented by the lead investigators at a meeting inPhiladelphia of the Society of Nuclear Medicine during a company-sponsoredcolloquium in the summer of 2004.

 

The final analysis of the data from the *FIBRIMAGE®* Phase III trial in Canada will be completedduring the first quarter of 2005 and, pending the outcome of the analysis, theCompany expects to file a New Drug Submission in Canada in the first half of2005.

 

The initiation of a U.S. Phase III clinicaltrial awaits the outcome of continuing discussions with the FDA regarding thedesign of such a study, and in particular the inclusion of venography as one ofthe reference standards to be incorporated in the clinical trial protocol. TheCompany currently believes that venography is no longer widely used in clinicalpractice and the Company has experienced significant difficulty enlistingclinical sites that will allow venography to be included in a clinical trialfor *FIBRIMAGE**®*.  The Company, in preparation for furtherdiscussions with the FDA, is currently exploring the option of conductingFDA-approved clinical studies outside North America and is also working toestablish an alternative reference test, sufficiently standardized to meetregulatory requirements for such a trial. The Company is also in the process ofconducting detailed marketing studies to further define the potential targetpatient populations.

 

In September 2004, the Company received approval from the FDA toinitiate a Phase II clinical trial of *INFECTON®*. This study will examine patients sufferingfrom bacterial osteomyelitis, a chronic or acute infection of the bone.

 

Phase II clinical trials of *INFECTON®* areunderway in both Canada and the U.S.  TheCompany expects to be able to complete these studies, and if they are positive,move to Phase III trials of *INFECTON®* in2005.

 

An interim analysis of the Phase II images obtained in the *AMISCANTM* trial were very clear in definitive myocardialinfarction but insufficiently precise in very early equivocal infarction withthe

 

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currentformulation for this indication.  Inlight of these observances the Company decided in the second quarter of 2004 tocease further development of this product for infarct imaging in order toconcentrate on its other pipeline products, notably *FIBRIMAGE®*and*INFECTON®.*

 

Depreciation and amortization expense for this segment increasedslightly compared to 2003.

 

On March 22, 2004, DRAXIMAGE concluded a distribution agreement withIsotope Products Laboratories (“IPL”), a California-based producer ofradioactive sources for nuclear medicine and radiography. DRAXIMAGE will marketthe full line of IPL medical products in Canada, including calibrationreferences for imaging applications plus calibration sources for positronemission tomography and single photon emission tomography.

 

***Comparison of Years EndedDecember 31, 2003 and 2002***

* *

Revenues for the radiopharmaceutical segment for the year endedDecember 31, 2003 increased $5,930,000 or 58.4% over 2002 largely driven bysodium iodide I-131 sales to the U.S and by the recognition of $1,436,000 ofdeferred revenue related to the termination of the agreements with the *BrachySeed*® licensee in the U.S in the first quarter of2003.

 

The ramp-up of sales related to sodium iodide I-131 for the treatmentof thyroid cancer and hyperthyroidism followed regulatory approval in January2003.

 

Shipments of *BrachySeed*®I-125 to the U.S. and Canada for the year ended December 31, 2003 decreasedcompared with 2002. Shipments of *BrachySeed*®I-125 to the U.S. remain below levels attained in 2002 following thetermination of agreements with the Company’s former U.S. licensee and theestablishment of a direct sales strategy in the first quarter of 2003.

 

Research and development expenditures for this segment decreased in2003 as compared to 2002 as a result of higher than normal spending in thefourth quarter of 2002 for third-party toxicity testing of *FIBRIMAGE*®and *AMISCAN*TM.

 

EBITDA and EBITDA margin increased for the year ended December 31, 2003largely due to increased product sales driven by sodium iodide I-131 sales tothe U.S., the receipt of insurance proceeds of $500,000, and the recognition inthe first quarter of 2003 of $1,436,000 of deferred revenue related to thetermination of the agreements with the *BrachySeed*®licensee partially offset by costs associated with commencement of direct salesof *BrachySeed*® in the U.S.

 

For the year ended December 31, 2002, *BrachySeed*®net contribution to EBITDA was approximately break-even on $1.8 million ofrevenues.  Included in 2002 results were$1.0 million of inventory losses associated with the palladium version of *BrachySeed*®.

 

Depreciation and amortization expense for this segment increasedslightly for the year ended December 31, 2003 compared to 2002 due to capitalprojects completed in 2002.

 

Also during 2003,the Company achieved the following:

 

•                  Successfulcompletion of Phase I safety and dosimetry trial in Canada for *INFECTON®*.

 

•                  Theestablishment of a marketing and distribution agreement with Netherlands-basedIDB Benelux Inc. for the Benelux countries.

 

•                  Expansion of theCompany’s agreements with Isogenic Sciences Limited, for global rights toproprietary technology related to brachytherapy implants.

 

•                  Five-yearagreement with Bristol-Myers Squibb Medical Imaging for the marketing anddistribution of radiopharmaceutical products in Canada. The agreement providesthat DRAXIMAGE technetium-99m kits, Indium-111 and Xenon-133 will bedistributed

 

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exclusively through Bristol-Myers Squibb MedicalImaging in Canada with the balance marketed on a non-exclusive basis.

 

•                  Receipt ofHealth Canada approval to initiate two Phase II clinical studies of *INFECTON®*, a novel radiopharmaceuticaldiagnostic imaging agent for detecting and determining the location ofinfection in patients with difficult to diagnose signs and symptoms.

 

•                  Granting of aU.S. patent for a new family of chelating compounds that have significantpotential for the development of imaging and radiotherapeutic agents todiagnose and treat diseases, including cancerous tumours or metastases. The newfamily of chelating compounds will permit the discovery of diagnostic imagingagents to visualize important biological receptors or receptor-positive tumourswhen combined with gamma-emitting radioisotopes. The compounds are alsopotentially useful as therapeutic radiopharmaceuticals for the in-vivotreatment of tumours and metastases.

 

•                  On December 9,2003, the Company announced that DRAXIMAGE has been certified under ISO 9001:1994, including ISO 13485: 1996, an international standard for medical devicemanufacturers. The certification is a significant step in the strategy to enterthe European radiopharmaceutical and medical device market.

 

**Contract Manufacturing**(in thousands of U.S.dollars) (U.S. GAAP)

 
| **Years ended December 31,**  | ** **   | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-------------------------------|--------------|------------|------------|------------|------------|----------|------------|
| Revenues                      |         |       |       |       |       |     |       |
| Product sales                 | ** **   | **$**      | **46,461** |       | $          | 26,985   |       | $ | 20,946 |   |
|                          |         |       |       |       |       |     |       |
| EBITDA                        | ** **   | **$**      | **8,038**  | ** ** | $          | 1,084    | (1)        | $ | 627 |   |
| *% of Revenues*               | *** *** | ***17.3*** | ***%***    | *4.0*      | *%*        | *3.0*    | *%*        |
| Depreciation and amortization | ** **   | **(2,417** | **)**      | (1,448     | )          | (1,166   | )          |
| Operating income (loss)       | ** **   | **$**      | **5,621**  | ** ** | $          | (364     | )(1)       | $ | (539 | ) |
| *% of Revenues*               | *** *** | ***12.1*** | ***%***    | *-1.3*     | *%*        | *-2.6*   | *%*        |

 

----

(1) Includes $230 of insurance proceeds.

(2) See *AccountingMatters – Non-GAAP Measures*.

 

Manufacturing comprises the Company’s manufacturing division, DRAXISPharma, which is a pharmaceutical contract manufacturer with capabilities in abroad range of dosage forms, specializing in liquid and lyophilized(freeze-dried) injectables and other sterile products. Operating out of acGMP-compliant 247,000 square-foot facility located in Montreal, Canada, DRAXISPharma manufactures pharmaceutical products for DRAXIMAGE, as well as for over25 other pharmaceutical clients in many international jurisdictions.

 

Highlights in this segment for the year ended December 31, 2004included:

 

•              Record financial results:

 

•      Revenues of $46.5 million for 2004representing an increase of $19.5 million or 72.2% over 2003.

 

•      A $7.0 million EBITDA improvement to $8.0million compared to 2003.

 

•      EBITDA margin of 17.3% for 2004 comparedto 4.0% for 2003.

 

•              Other highlights:

 

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•      On April 22, 2004, the Company purchasedfrom SGF its remaining 32.7% minority interest in DRAXIS Pharma and repaid alldebt facilities owed by it.

 

•      During 2004, the Company completed thereorganization of its senior management team for its contract manufacturingoperations, creating and staffing new positions for: Vice President,Operations; Vice President, Regulatory Compliance; Commercial Director;Director, Quality Operations and additional supporting staff.

 

***Comparison of the Years EndedDecember 31, 2004 and 2003***

* *

For the year ended December 31, 2004, revenues have increased by $19.5million or 72.2% over the same period of 2003. The increase was due to theramp-up in new sterile products business related primarily to the production ofHectorol® Injection**for Bone Care International, Inc.(“Bone Care”) and products under the Company’s GlaxoSmithKline (“GSK”)contract. Production of Hectorol®Injection has continued to rise throughout 2004. In addition, GSKproduction rose in 2004 as products obtained regulatory approvals in additionalforeign markets. Beginning in late 2003, the Company increased its outputcapacity through additional production shifts for its sterile business and iscontinuing to do so as a result of increasing demand. The 2004 revenue growthalso reflects the significant impact of the Company’s investment in increasingcapacity and work performed in prior years to introduce new products to ourfacilities.

 

More than 78% of the revenue growth in 2004 over 2003 is related tosterile products.  For 2004, sterileproducts represented approximately 67% of manufacturing revenues compared to59% for 2003.

 

EBITDA for this segment increased $7.0 million for 2004 compared withthe same period of 2003. The increase is related to the positive impact of theramping up of sterile products business throughout 2004, the positive financialimpact of increased capacity utilization, and changes to the price structurethat became effective during 2004. For the year ended December 31, 2004, thesepositive factors were partially offset by the impact of shutdown activities inthe third quarter of 2004. In addition to completing regular maintenanceactivities, the 2004 shutdown resulted in the completion of the installation ofa second lyophilizer which materially increases the Company’s lyophilizationcapacity. In addition, the Company increased autoclave capacity which iscritical to reducing bottlenecks and further increasing sterile capacity.

 

Improved capacity utilization has directly resulted in better marginsthrough substantially improved absorption of overhead costs.

 

For the year ended December 31, 2004, EBITDA margin was 17.3% comparedto 4.0% over the same period of 2003, reflecting the overall volume growth insterile products business and the result of price structure changes that becameeffective during 2004. Since sterile product manufacturing carriessignificantly higher margins than non-sterile manufacturing, the shift inbusiness mix to sterile production throughout 2004 has driven marginssignificantly higher. The normal year-end holiday period scale down ofproduction did not have a significant impact on the results of the fourthquarter of 2004 due to the high volume of production in the period immediatelypreceding it.  The Company’s improvingmargins in contract manufacturing also reflect concentrated efforts in early2004 to ensure changes to the underlying costs of manufacturing are fullyreflected in the pricing structure. The impact of these efforts has positivelyimpacted margins as compared to 2003 and, we believe, will in 2005 as well.

 

The increases in revenues over 2003 and EBITDA margin for the yearended December 31, 2004, have significantly exceeded our expectations and theCompany revised its guidance parameters as a result in the second quarter of2004 and again at the end of the third quarter of 2004. Our final 2004 resultsreflect achievement of the upper end of our targeted range.  In addition, we have exceeded both ourinitial and revised revenue targets. This highlights the strength of customerdemand and our ability to execute on the demand.

 

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Depreciation and amortization for 2004 increased 66.9% over 2003related to completion of a significant capital improvement program whichcommenced in 2002 and was completed in 2004.

 

On February 23, 2004, DRAXIS Pharma announced that a new collectiveagreement covering its unionized hourly employees, represented by the UnitedFood and Commercial Workers International Union, at its contract manufacturingoperations was reached.  The newcollective agreement, which is retroactive to May 1, 2003, has a 5-yearterm.  The agreement includes provisionsfor additional weekend shifts that will effectively allow DRAXIS Pharma toincrease productive capacity and move toward its objective of operating 24hours a day, 7 days a week in its sterile area.

 

**Comparison of Years Ended December 31, 2003 and2002**

 

Total revenues for the manufacturing segment for 2003 of $27.0 millionwere 28.8% higher compared with 2002 primarily due to commercial production of Hectorol® Injection and productionunder the Company’s GSK manufacturing agreement.

 

EBITDA for this segment for the year ended December 31, 2003 increased$457,000 and EBITDA margin increased from 3.0% to 4.0% over 2002. This was theresult of the positive impact of increased product sales and changes in productmix driven by new business including the production of Hectorol® Injection and production related to the GSKmanufacturing agreement, partially offset by costs associated with developingnew business, training related to the ramping up of sterile productionresources, and the unfavourable impact of reduced production in month ofDecember 2003 related to normal maintenance and capital installation requirements.Included in EBITDA is a portion of the insurance proceeds in the amount of$230,000 which were recorded as a reduction in cost of goods sold in the thirdquarter of 2003.

 

EBITDA and EBITDA margin for the year ended December 31, 2003 werenegatively affected by production disruptions early in the first quarter of2003 in sterile operations due to equipment and related problems which wereresolved during the first quarter and the costs associated with new productintroductions. EBITDA margin over the last three quarters of 2003 wasapproximately 7.8%.

 

During 2003, the operating results of thecontract manufacturing segment were negatively affected by the increased levelof activity of introducing new products. The introduction of new products tothe sterile operations of contract manufacturing results in increased costsbecause of the amount of capacity which is utilized in the process, the higherrisk of batch failures and the ramping up of production staff in preparationfor commercial volumes.  In particular,the ramping up of production staff to meet the ultimate capacity demands oncenew products are approved and commercial production can begin, usually resultsin a three-month training for production staff in which no revenue is generatedfrom their activities.  This reduces theoverall EBITDA margin. In addition, the timing of regulatory approvals for newproducts is difficult to estimate due to the nature of the regulatory approvalprocess. As the commercialization of new products increases in the futurerelative to the activity level of introducing new products, a positive impacton EBITDA margins is expected.

 

Depreciation and amortization expense of $1,448,000 for this segmentfor the year ended December 31, 2003 increased 24.2% over the same period in2002, following the commencement of depreciation on completed capital projectsin late 2002 and the third quarter of 2003.

 

In 2003, Mr. John Durham was appointed President of DRAXIS Pharma Inc.(now known as DRAXIS Pharma, a division of DRAXIS Specialty PharmaceuticalsInc.). Mr. Durham has over 20 years of pharmaceutical experience, most recentlyas a General Manager for an international contract manufacturer. Mr. Durhamreplaced Mr. Jim Garner who held the position of Acting President since September2002 following the departure of Mr. Dwight Gorham.

 

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**Corporate and Other**(in thousands of U.S.dollars) (U.S. GAAP)

 
| **Years ended December 31,**  | ** **   | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-------------------------------|--------------|------------|------------|------------|------------|----------|------------|
| Revenues                      |         |       | ** ** |       |       |     |       |
| Product sales                 | ** **   | **$**      | **22**     | ** ** | $          | 986      |       | $ | 1,381 |   |
| Intercompany eliminations     | ** **   | **(1,962** | **)**      | (2,000     | )          | (1,693   | )          |
| Royalty and licensing         | ** **   | **7,627**  | ** ** | 7,137      |       | 7,851    |       |
| ** **                    |         | **$**      | **5,687**  | ** ** | $          | 6,123    |       | $ | 7,539 |   |
|                          |         |       | ** ** |       |       |     |       |
| EBITDA(1)                     | ** **   | **$**      | **2,101**  | ** ** | $          | 3,275    |       | $ | 4,365 |   |
| *% of Revenues*               | *** *** | ***36.9*** | ***%***    | *53.5*     | *%*        | *57.9*   | *%*        |
| Depreciation and amortization | ** **   | **(1,091** | **)**      | (996       | )          | (922     | )          |
| Operating income              | ** **   | **$**      | **1,010**  | ** ** | $          | 2,279    |       | $ | 3,443 |   |
| *% of Revenues*               | *** *** | ***17.8*** | ***%***    | *37.2*     | *%*        | *45.7*   | *%*        |

 

----

(1) See *Accounting Matters –Non-GAAP Measures*.

 

The Corporate and Other segment comprises: amortization of deferredrevenues, royalties**and expensesassociated with the Company’s business agreements with Pfizer Inc. with respectto *Anipryl®*; deferred revenues and expensesfrom GSK Consumer Healthcare with respect to the SpectroPharmÒline of products; revenues related to royalties and milestones from ShireBioChem Inc. (“Shire”) in connection with the divestiture of DRAXISPharmaceutica; revenues and directly attributable expenses associated with Alertec®; non-allocated corporateexpenses; and inter-segment eliminations. Effective July 22, 2003 revenues and expenses directly related to Alertec® were no longer included inthis segment since Alertec® wasincluded in the divestiture of DRAXIS Pharmaceutica.  The Company follows a policy of notallocating its central corporate expenses to its operating business segments.

 

***Comparison of Years EndedDecember 31, 2004 and 2003***

* *

Revenues related to the corporate segment were slightly lower comparedto 2003 as increased royalties primarily in connection with the sale of productrights to Shire were more than offset by increased inter-segment eliminations(transactions between DRAXIMAGE and DRAXIS Pharma) and lower royalties relatedto *Anipryl*®.

 

EBITDA was lower by $1,174,000 for the year ended December 31, 2004compared to 2003 due to increased costs of long-term incentive plans, which arevalued based on the appreciation in the Company’s stock price and lowerroyalties related to *Anipryl*®.This was partially offset by Shire royalties and milestone revenues.

 

Depreciation and amortization expense in this segment in 2004 waslargely unchanged as compared to 2003.

 

**Comparison of Years EndedDecember 31, 2003 and 2002**

 

Royalty and licensing revenue in this segment for the year endedDecember 31, 2003 of $7,137,000 decreased compared to 2002 due to thepreviously announced elimination of minimum royalty income related to *Anipryl*® effective January 1, 2003 which more than offsetthe royalties related to the sale of products to Shire coupled with paymentsreceived from CEVA Santé Animale Inc. (“CEVA”).

 

EBITDA and EBITDA margin decreased for the year ended December 31, 2003due mainly to the previously announced elimination of minimum royalty incomerelated to *Anipryl*® effective January 1, 2003partially offset by royalties related to sale of product rights to Shirecoupled with payment received from CEVA.

 

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Depreciation and amortization expense in this segment in 2003 waslargely unchanged as compared to 2002.

 

The other significant highlights of 2003 were as follows:

 

•                                          Completionof divestiture of DRAXIS Pharmaceutica in July resulting in total estimatedproceeds of $19.0 million made up of $6.5 million received from Elan in thefirst quarter of 2003, $9.6 million upon closing from Shire, with a potentialof $2.9 million of market driven milestones in future years.  Future royalties are in addition to thesefigures.

 

•                                          Grantingof an exclusive license for Europe to CEVA for the marketing and distributionof *Anipryl*® for the use of approved *Anipryl*® claims. Under terms of the agreement, CEVA has theright to promote approved *Anipryl*®indications in Europe in exchange for a percentage royalty on European sales of*Anipryl*® and/or the use of *Anipryl*® claims.  Inaddition the Company will receive nominal milestones upon regulatory approvalof *Anipryl*® in the U.K. and subsequentadditional jurisdictions within the European Community.

 

•                                          Receiptof authorization from the U.K. Veterinary Medicines Directorate (“VMD”) tomarket *Anipryl*® tablets for dogs in the UnitedKingdom. As a result of the VMD authorization, the Company will file forregulatory approval of the product in four additional European Union memberstates and has received nominal payment from CEVA which is included in revenuesfor 2003.

 

**Corporate Matters**

** **

*Acquisition of Remaining Third-PartyEquity Interest in DRAXIS Pharma*

 

On April 22, 2004, the Company purchased from SGF its remaining 32.7%minority interest in DRAXIS Pharma.  Thepurchase price paid for the shares acquired was $9.6 million cash and has beenallocated to the fair value of the net assets acquired in accordance with thepurchase method of accounting.  Witheffect from the date of the transaction, the Company’s net income results willinclude the full contribution to income or full allocation of any losses, ifany, related to DRAXIS Pharma.

 

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

 

The transaction was fully funded through an equity financingarrangement which closed concurrently with the acquisition (see *Liquidity and Capital Resources - Equity Financing*).

 

*Share Buyback Program*

 

On April 16, 2003 DRAXIS received approval from the Toronto StockExchange for a share buyback program (Normal Course Issuer Bid) to repurchasefor cancellation up to 1,854,934 common shares, the maximum allowable number,representing 5% of the issued and outstanding common shares at that time.  DRAXIS qualified to begin making purchases ofits shares through the facilities of the Toronto Stock Exchange beginning onApril 21, 2003. The bid ended on April 20, 2004. In 2003, 50,300 shares were acquired under this program ata weighted average cost of $1.30 per share. No such shares were acquired in 2004.

 

*Executive Management TeamRealignment*

 

In 2003, the Company announced the realignment of its executivemanagement team to reflect the growing importance of its core operatingbusinesses in Montreal. The significant elements of the realignment, which wereeffective July 1, 2003, are as follows:

 

•              The departure of Jim Garner as Senior Vice PresidentFinance and Chief Financial Officer.

 

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•                                          Theoffice of the Chief Financial Officer was assumed by Mark Oleksiw, previouslyDirector of Finance in Montreal. Mr. Oleksiw has over eight years of experiencewith an international public accounting firm focusing on U.S. and Canadian publiclylisted companies, mostly in the life science and high technology industries. Inaddition, Mr. Oleksiw has three years of experience in external reporting inthe telecommunications industry combined with two years of internal auditexperience. Mr. Oleksiw has also lectured for seven years at McGill Universityin the Chartered Accountancy Program and worked closely with the CanadianInstitute of Chartered Accountants.

 

•                                          Thepromotion to Senior Vice President, Corporate Development and Strategic Planningof Dan Brazier. Mr. Brazier’s new responsibilities were in addition to his rolesince 1998 as President of DRAXIS Pharmaceutica. Mr. Brazier played an integralrole in maintaining the value of the DRAXIS Pharmaceutica division during thelengthy divestiture process. Mr. Brazier has over 23 years of progressiveexperience in various marketing and sales management positions coveringprescriptions, medical devices, over the counter and retail product categories.

 

•                                          Thepromotion to Vice President Finance of Chien Huang. Mr. Huang providesfinancial support for a wide range of corporate activities including strategicplanning, corporate development and investor relations. Mr. Huang joined DRAXISin 1998 as Assistant Controller and has served various corporate financecapacities since then.  In addition, Mr.Huang has over eight years of prior experience including positions as a managerof business process re-engineering, senior financial planning and analysis andaudit experience with an international accounting firm.

 

Furthermore, in order to provide for further concentration of itssupport operations with its operating divisions in Montreal, the Companyappointed Alida Gualtieri, partner in the Corporate Finance Mergers andAcquisitions group of McCarthy Tétrault LLP’s Montreal offices, to the positionof General Counsel and Corporate Secretary. Ms. Gualtieri replaced Mr. Doug Parker, who left the Company on December1, 2003 to join an outside law firm.  Ms.Gualtieri is primarily located at the Company’s Montreal offices and has been amember of the Quebec Bar since 1988.

 

*Sale of Discontinued Operations*

 

On March 31, 2003, the Company amended its License, Distribution andSupply Agreement with Elan to return the Canadian rights for several of Elan’sunapproved neurology products from its DRAXIS Pharmaceutica division inexchange for a cash payment of $6.5 million.

 

On July 22, 2003, the Company completed the divestiture of its DRAXISPharmaceutica division with the sale to Shire of substantially all of the remainingproducts of the division. The Company has received $9.6 million in cash fromShire and may receive up to $2.9 million in market driven milestones over thenext several years. In addition, the Company will receive royalty paymentsbased on the continuing Canadian sales of the sold products. The Company alsoreceived the value of acquired inventories and Shire is now responsible for allfinancial provisions of the license agreement related to Permax®  *(see Accounting Matters- Discontinued Operations)*.

 

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**Liquidityand Capital Resources**(in thousands of U.S. dollars) (U.S. GAAP)

 
| **Years  ended December 31,**                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash and cash  equivalents                      |       | $        | 5,926      |     | $          | 10,563   |       | $ | 4,899 |   |
| Restricted cash                                 |       | $        | 428        |     | $          | 976      |       | — |   |
|                                            |       |     |       |     |       |     |       |
| Non-financial  working capital (net)(1)         |       | $        | 18,397     |     | $          | 12,780   |       | $ | 6,284 |   |
| Total debt  (current and long-term)             |       | —   |       | $        | 10,466     |     | $          | 13,610 |   |
|                                            |       |     |       |     |       |     |       |
| Cash flows from  (used in) operating activities |       | $        | 4,393      |     | $          | (3,221   | )          | $ | (2,184 | ) |
| Cash flows used  in investing activities        |       | $        | (4,476     | )        | $          | (3,493   | )          | $ | (4,551 | ) |

 

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(1) Excluding cash and cash equivalents,restricted cash, current portion of deferred revenues, long-term debt andcustomer deposits.

 
| ** **                                        | ** ** | **March 10, 2005** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|
| Common shares  issued and outstanding             | ** ** | **41,304,388**     |       | 41,015,326 |       | 37,297,817 |       | 37,098,690 |       |
| Warrants issued  and outstanding(2)               | ** ** | **1,526,718**      |       | 1,526,718  |       | —     |       | —     |       |
| Stock options  outstanding                        | ** ** | **2,789,170**      |       | 2,753,232  |       | 3,097,942  |       | 3,314,109  |       |
| Outstanding  options as a % of outstanding shares | ** ** | **6.8**            | **%**      | 6.7        | %          | 8.3        | %          | 8.9        | %          |

 

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(2)          Eachwhole warrant entitles the holder to acquire one common share at a price ofCDN$8.50, subject to certain adjustments, at any time prior to April 24, 2006.

 

Cash and cash equivalents at December 31, 2004 totalled $5,926,000 ascompared with $10,563,000 as at December 31, 2003. The decrease from 2003 to2004 is related to the repayment of overall debt during 2004 which offset theoverall net increase in cash flows from operating activities. The increase from2002 to 2003 was the result of proceeds from the divestiture of DRAXISPharmaceutica, partially offset by the net cash outflow from operatingactivities related to the investment in working capital.

 

In conjunction with the divestiture of DRAXIS Pharmaceutica to Shire,$976,000 of the cash proceeds were held in trust under an escrowagreement.  The release of this amountunder escrow in instalments is dependent upon whether or not claims by Shirehave been made to the Company by certain dates with respect to any breach ofthe representations and warranties made by the Company to Shire or any failureof the Company to perform its obligations under the divestiture agreement. InJuly 2004, the first instalment of $548,000 was released from escrow.

 

The Company follows a policy of investing its surplus cash resources inhigh quality, liquid, short-term commercial paper and government treasury billsand money market mutual funds which invest in high quality short-termsecurities.  All investments as of December31, 2004 had less than three months maturity. As at December 31, 2004 there were no restrictions on the flow of thesefunds nor have any of these funds been committed in any way.  Prior to April 22, 2004, certain standardfinancial liquidity ratio requirements pursuant to DRAXIS Pharma’s term loan aswell as terms of the DRAXIS Pharma shareholders’ agreement could restrict thefree flow of funds from one subsidiary of the Company to another. Theserequirements are no longer applicable following the purchase of all minorityinterest shareholdings in DRAXIS Pharma.

 

For the year ended December 31, 2004, net cash flows from operatingactivities were $4.4 million compared to net cash outflows of $3.2 million forthe same period of 2003.  Cash flows fromoperating activities decreased by $1.1 million from 2002 to 2003 due to higherworking capital requirements to support the growth in business volumes.

 

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Non-financial working capital comprised of accounts receivable,inventories, prepaid expenses, current deferred income tax assets, accountspayable and accrued liabilities, increased to $18,397,000 as at December 31,2004 from $12,780,000 as at December 31, 2003, driven mainly by a significantincrease in raw material and packaging components in contract manufacturing tosupport the ramp-up in business and increased accounts receivable related togrowth in the business. Non-financial working capital increased from $6,284,000as at December 31, 2002 to $12,780,000 as at December 31, 2003 due to increasedaccounts receivable related to the ramp-up in product volumes during the yearand reduction in trade payables.

 

The impact of discontinued operations in 2004 was insignificant.  The inflow of $17.1 million for 2003 was dueto the proceeds received from the sale of product rights and the overalldivestiture of the DRAXIS Pharmaceutica business.

 

Capital expenditures for 2004 are mainly attributable to expendituresunder DRAXIS Pharma’s previously announced capital plan, and specifically,payments on installation activities that took place during the shutdown period.Capital expenditures for the year decreased from $5,390,000 in 2002 to$3,536,000 for 2003 due to timing of the installation.  Payments related to the second lyophilizerproject are attributable to expenditures under the previously announced capitalplan for the contract manufacturing segment.

 

The Company did not make any acquisitions in 2004 or during 2003 otherthan the acquisition of all minority interest holdings in DRAXIS Pharma inApril 2004.

 

All third-party debt was repaid over the course of 2004 (see*Debt Repayment and Bank Financing).*During 2003, theCompany reduced its outstanding third-party debt through the repayment of itssecured revolving credit facility at DRAXIS Pharma and the repayment of itsunsecured subordinated obligation.The increase in debt is related to the strengthening of the Canadian dollar for2003 as all third-party debt is denominated in Canadian dollars.

 

Proceeds from the issuance of treasury common shares by the Companyattributable to the exercise of options and employee participation sharesgenerated $1,594,000 for the year ended December 31, 2004 compared $593,000 forthe year ended December 31, 2003 and $844,000 for the same period of 2002.

 

For the year ended December 31, 2003 the Company received $225,000 fromthe issuance of treasury shares by DRAXIS Pharma, net of the repurchase ofshares held by minority interests.

 

The Company was in compliance with all lending covenants as at December31, 2004 and 2003.

 

*Equity Financing*

 

On April 22, 2004,the Company closed an offering of 3,053,436 units at a price of $4.82(CDN$6.55) per unit for gross proceeds net of related expenses of $13.4 million(CDN$18.2 million). Each unit consists of one common share of the Company andone-half of one share purchase warrant. Each whole warrant will entitle the holder to acquire one common shareof the Company at a price of CDN$8.50 at any time prior to April 24, 2006.

 

The proceeds ofthe offering were used to finance the $9.6 million (CDN$13.0 million) cashpurchase of the 32.7% interest in the Company’s manufacturing subsidiary,DRAXIS Pharma, that was previously owned by SGF and to repay $4.8 million(CDN$6.4 million) of outstanding loans owed by DRAXIS Pharma.

 

*Debt Repayment and Bank Financing*

 

On April 22, 2004, as a result of the equity financing and acquisitionof the remaining interest in the contract manufacturing operations, the Companyrepaid all outstanding debt owed to SGF ($3.1 million) and InvestissementQuébec ($1.7 million).

 

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During 2004, the Company completed the arrangement of new creditfacilities with its bankers, the National Bank of Canada, to replace all existingfacilities at the subsidiary level as follows:

 

•                                          $15million Canadian or U.S. equivalent operating facility payable within 364 daysof drawing upon the facility.  Theoperating facility can be extended by one year upon agreement with the lender.  As at December 31, 2004, no amount was drawnunder this facility.

 

•                                          $10million Canadian or U.S. equivalent term facility, repayable in full in threeyears. As at December 31, 2004, no amount was drawn under this facility.

 

Interest under the credit facilities (both term and operating) is basedon the bank’s prime lending rate provided the Company meets certain ratios,which as at December 31, 2004 were met.

 

Both credit facilities are secured by specific assets of DRAXISSpecialty Pharmaceuticals Inc., and shares and guarantees of certainsubsidiaries.

 

As a result of the debt repayment and bank refinancing, the Company hasreduced its overall debt levels to nil, increased its borrowing capacity andreduced its overall cost of borrowing on outstanding and future debt.

 

*Off-Balance Sheet Arrangements*

 

The Company does not have any off-balance sheet arrangements that have,or are reasonably likely to have, a current or future effect on the Company’sfinancial condition, changes in revenues or expenses, results of operations,liquidity, capital expenditures or capital resources that are material toinvestors.

 

**Related PartyTransaction**

** **

The Company paid rent of $125,000 to a company controlled by a memberof the Board of Directors related to its head office location.

 

This transaction is in the normal course of operations and is measuredat the exchange amount as agreed to by the parties.

 

**Commitments**

** **

The following table summarizes the Company’s major contractual cashobligations as of December 31, 2004:

 
| ** **                     | ** ** | **Payment due by end of:** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**    | ** ** | **Total**                  | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** |
| Long-term debt                 |       | —                     |       | — |   | — |   | — |   | — |   | — |   |
| Capital lease  obligations     |       | —                     |       | — |   | — |   | — |   | — |   | — |   |
| Operating leases               |       | 216                        |       | 152 |   | 64 |   | — |   | — |   | — |   |
| Service  contracts             |       | 588                        |       | 180 |   | 196 |   | 196 |   | 16 |   | — |   |
| Milestone  obligations         |       | 1,929                      |       | 333 |   | 399 |   | 399 |   | 399 |   | 399 |   |
| Total  contractual obligations |       | 2,733                      |       | 665 |   | 659 |   | 595 |   | 415 |   | 399 |   |

 

All contractual obligations related to 2004 and 2003were fully paid as of December 31, 2004 and December 31, 2003, respectively.

 

In addition to the above, the Company may be obligated to make certainroyalty payments based on related product sales and milestone payments based onthe achievement of certain specified events. The amount, timing and likelihood of these royalty payments are notdeterminable as they mainly relate to products being developed and not yetapproved by the applicable regulatory authorities.

 

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**Selected Annual Information**(in thousands of U.S.dollars except share related data) (U.S. GAAP)

 
| **Years  ended December 31,**          | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Revenues                               |       |       | ** ** |       |       |     |       |
| Product sales                          | ** ** | **$**      | **61,693** | ** ** | $          | 40,535   |       | $ | 30,338 |   |
| Royalty and  licensing                 | ** ** | **7,627**  | ** ** | 8,658      |       | 8,302    |       |
| ** **                             |       | **$**      | **69,320** | ** ** | $          | 49,193   |       | $ | 38,640 |   |
|                                   |       |       | ** ** |       |       |     |       |
| Net income  (loss)                     |       |       | ** ** |       |       |     |       |
| • from continuing operations      | ** ** | **$**      | **7,977**  | ** ** | $          | 4,671    |       | $ | 3,020 |   |
| • from discontinued operations    | ** ** | **(61**    | **)**      | 8,531      |       | (834     | )          |
| ** **                             |       | **$**      | **7,916**  | ** ** | $          | 13,202   |       | $ | 2,186 |   |
|                                   |       |       | ** ** |       |       |     |       |
| Basic income  (loss) per share         |       |       | ** ** |       |       |     |       |
| • from continuing operations      | ** ** | **$**      | **0.20**   | ** ** | $          | 0.13     |       | $ | 0.08 |   |
| • from discontinued operations    | ** ** | **—** | ** ** | 0.23       |       | (0.02    | )          |
| ** **                             |       | **$**      | **0.20**   | ** ** | $          | 0.36     |       | $ | 0.06 |   |
|                                   |       |       | ** ** |       |       |     |       |
| Diluted income  (loss) per share       |       |       | ** ** |       |       |     |       |
| • from continuing operations      | ** ** | **$**      | **0.19**   | ** ** | $          | 0.13     |       | $ | 0.08 |   |
| • from discontinued operations    | ** ** | **—** | ** ** | 0.23       |       | (0.02    | )          |
| ** **                             |       | **$**      | **0.19**   | ** ** | $          | 0.36     |       | $ | 0.06 |   |
|                                   |       |       | ** ** |       |       |     |       |
| Total assets                           | ** ** | **$**      | **88,785** | ** ** | $          | 76,553   |       | $ | 67,951 |   |
| Total long-term  financial liabilities | ** ** | **—** | ** ** | $          | 10,466     |     | $          | 12,726 |   |

 

 

**Summary of Quarterly Results**(in thousands of U.S.dollars except share related data) (U.S. GAAP)

 
| **Years  ended December 31,**       | ** ** | **Q4, 2004** | ** ** | **Q3, 2004** | ** ** | **Q2, 2004** | ** ** | **Q1, 2004** | ** ** | **Q4, 2003** | ** ** | **Q3, 2003** | ** ** | **Q2, 2003** | ** ** | **Q1, 2003** | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Revenues                            |       |         | ** ** |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Product sales                       | ** ** | **$**        | **18,352** | ** **   | $          | 16,205       |       | $            | 14,927     |         | $          | 12,209       |       | $            | 12,440     |         | $          | 10,987 |   | $ | 10,153 |   | $ | 6,955 |   |
| Royalty and  licensing              | ** ** | **1,934**    | ** ** | 1,980        |       | 1,786        |       | 1,927        |       | 1,945        |       | 1,978        |       | 1,612        |       | 3,123        |       |
| ** **                          |       | **$**        | **20,286** | ** **   | $          | 18,185       |       | $            | 16,713     |         | $          | 14,136       |       | $            | 14,385     |         | $          | 12,965 |   | $ | 11,765 |   | $ | 10,078 |   |
|                                |       |         | ** ** |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Net income  (loss)                  |       |         | ** ** |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| • from continuing operations   | ** ** | **$**        | **2,267**  | ** **   | $          | 2,058        |       | $            | 2,264      |         | $          | 1,388        |       | $            | 1,409      |         | $          | 1,733 |   | $ | 723 |   | $ | 806 |   |
| • from discontinued operations | ** ** | **(34**      | **)**      | 3            |       | (21          | )          | (9           | )          | 112          |       | 4,112        |       | 103          |       | 4,204        |       |
| ** **                          |       | **$**        | **2,233**  | ** **   | $          | 2,061        |       | $            | 2,243      |         | $          | 1,379        |       | $            | 1,521      |         | $          | 5,845 |   | $ | 826 |   | $ | 5,010 |   |
|                                |       |         | ** ** |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Basic income  (loss) per share      |       |         | ** ** |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| • from continuing operations   | ** ** | **$**        | **0.06**   | ** **   | $          | 0.05         |       | $            | 0.06       |         | $          | 0.04         |       | $            | 0.04       |         | $          | 0.05 |   | $ | 0.02 |   | $ | 0.02 |   |
| • from discontinued operations | ** ** | **—**   | ** ** | —       |       | —       |       | —       |       | —       |       | 0.11         |       | —       |       | 0.11         |       |
| ** **                          |       | **$**        | **0.06**   | ** **   | $          | 0.05         |       | $            | 0.06       |         | $          | 0.04         |       | $            | 0.04       |         | $          | 0.16 |   | $ | 0.02 |   | $ | 0.13 |   |
|                                |       |         | ** ** |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Diluted income  (loss) per share    |       |         | ** ** |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| • from continuing operations   | ** ** | **$**        | **0.05**   | ** **   | $          | 0.05         |       | $            | 0.06       |         | $          | 0.04         |       | $            | 0.04       |         | $          | 0.05 |   | $ | 0.02 |   | $ | 0.02 |   |
| • from discontinued operations | ** ** | **—**   | ** ** | —       |       | —       |       | —       |       | —       |       | 0.11         |       | —       |       | 0.11         |       |
| ** **                          |       | **$**        | **0.05**   | ** **   | $          | 0.05         |       | $            | 0.06       |         | $          | 0.04         |       | $            | 0.04       |         | $          | 0.16 |   | $ | 0.02 |   | $ | 0.13 |   |
|                                     |            |              |            |              |            |              |            |              |            |              |            |              |            |              |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Major Trends in QuarterlyNumbers**

** **

The quarterly numbers reflected in the above table reflect thesignificant trends described below. For more detailed explanations, pleaserefer to the MD&As filed on a quarterly basis.

 

Commencing in the second quarter of 2003, the contract manufacturingsegment began a significant ramp-up of shipments of HectorolÒInjection for Bone Care and products under its GSK manufacturingagreements.  The level of shipments hasincreased since the second quarter of 2003, subject to the Company’s ability toincrease productive capacity by introducing additional shifts and the timing ofdemand. Beginning late in 2003, the Company expanded its production work forceand continues to do so. This has resulted in a positive upward trend in revenuemainly in contract manufacturing and increasing margins due to the highermargin sterile business and the financial benefits of improved capacityutilization. The major trend in revenues has been the shift in business incontract manufacturing where sterile product revenue occupies a higher share ofoverall revenue driven by the GSK and Bone Care business.

 

In the radiopharmaceutical segment, volumes have increased since thefirst quarter of 2003, related to the introduction of sodium iodide I-131 tothe U.S.  In the fourth quarter of 2004,a change in customer purchasing patterns occurred which lowered cold kit salesto the U.S. below traditional levels in October and November.

 

During the third quarter of 2003 and 2004, there were production breakscaused by normal shutdown activities to perform maintenance and completecapital expenditure projects. The effect in contract manufacturing was toreduce volumes and margins due to production downtime resulting in higherunabsorbed overhead costs. The shutdown in 2004 was of a significantly largerscale than 2003 because it involved the introduction of enhanced autoclavecapacity and the installation of a second lyophilization unit as well asnumerous other initiatives.

 

There was normal reduction in production during the 2003 year-endholiday period. This created a pressure on the first quarter 2004 results ofcontract manufacturing.  The effect forthe first quarter of 2005 is not expected to be as significant due to thebuildup of inventory levels preceding the holiday period in 2004.

 

The first and third quarter of 2003 were positively affected by onetime non-recurring items. Specifically, this relates to the recognition in thefirst quarter of 2003 of $1.4 million of revenue driven by termination of *BrachySeed*Òagreements and the $0.7 million of insurance proceeds received in the thirdquarter of 2003 recorded as a reduction in cost of goods sold.

 

Depreciation and amortization costs continue to rise over time. Thisreflects the capital expenditure programs implemented since 2002. This trend isexpected to continue, specifically as the second lyophilization unit commencescommercial production.

 

Foreign exchange has not had a material impact on operating results andnet income other than for the first six months of 2003, when there weresignificant foreign exchange losses created by a strengthening Canadian dollar.

 

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Interest expense has declined as the Company has reduced debt levelsbeginning with the second quarter of 2003, culminating in the repayment of alldebt at the end of 2004.

 

The Company’s effective tax rate has been significantly below thestatutory rate due to the recognition of previously unrecognized losscarryforwards. The Company’s ability to execute on tax planning opportunitieshas expanded as a result of the increased operating profits of its contractmanufacturing segment, the amalgamation of its two core businesses effectiveJanuary 1, 2005, and the purchase of all minority interest shareholdings of itscontract manufacturing business on April 22, 2004. This trend is not expectedto continue and the effective tax rate is expected to return closer tostatutory levels, subject to the amount of research and development spending.

 

Net cash flow from operating activities continues to grow with theincreased volumes, subject to the required investment in working capital tosupport the ramp-up in business.

 

Capital expenditures tend to rise during and after shutdown periods(usually in the third quarter) when most installation activities take place.

 

**Outlook**

** **

The Company’s primary operational focus for 2005 continues to be: (i)improving near-term financial and operational performance of itsradiopharmaceutical and manufacturing businesses through increasing sales ofexisting products and services, improving manufacturing efficiency andeffectiveness, and obtaining additional regulatory approvals; and (ii) securingand advancing its base for long-term growth through the development of itsexisting product pipeline as well as identifying new business opportunitiesthat are consistent with the Company’s capabilities and that contribute to thelong-term value of the Company.

 

*General Guidance*

 

The Companyexpects 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 areexpected to come from the Company’s two main operating divisions, with thebalance, or less than 5% of revenues, expected to come from the corporatesegment.  It is anticipated that at least70% of revenues from the operating divisions will come from contractmanufacturing.

 

Basic earnings pershare from continuing operations in 2005 are expected to reach $0.27 to $0.30,an increase of at least 35% from the current year’s $0.20.  The change in accounting commencing in thethird quarter of 2005 for stock-based compensation is not expected to affectearnings by more than $0.01 in 2005 and we have taken this into account in theguidance given for 2005 earnings expectations.

 

These revenue andearnings estimates are based on the most current information we have and arederived from forecasts received from customers and historical buying patternsconsidering the territories in which customers currently operate, as well asadditional territorial regulatory approvals we anticipate receiving during2005.  The estimates could be impactedpositively if we attain new customers or additional product approvals, ornegatively if territorial product approvals are delayed or unforeseen problemsarise in the introduction of new products into the manufacturing process orhistorical buying patterns do not continue. Reference is made to the specific risk factors listed in our publicdisclosure documents, including our Form 20-F. These factors could have a material adverse effect on our ability toachieve these target revenues and earnings.

 

Currencyfluctuations, particularly between the Canadian and the U.S. dollar, are notexpected to have a significant effect within a relatively broad range of 75 to90 cents Canadian per U.S. dollar because of the mix of business and currenciescurrently built into the prices that make up the major

 

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revenues in both contractmanufacturing and radiopharmaceuticals in 2005.

 

The Companycurrently has no debt. It will have capital expenditures in both operatingdivisions designed to increase productivity and maintain regulatorycompliance.  Current total capitalexpenditure budgets are anticipated to be less than $5 million in 2005.  Capital expenditures will include acquiringequipment to increase efficiency and infrastructure expenses.  Cash flows from operating activities areexpected to be at least $10 million for 2005, subject to working capitalrequirements driven by business growth.

 

At the currentrate of utilization and new business growth, contract manufacturing capacity isexpected to reach its optimal levels by the end of 2007.  Accordingly, the Company will begin toexplore various options during 2005 to increase capacity, including expansion,reconfiguring the existing facility and/or potential acquisitions.

 

*Radiopharmaceutical*

 

**The Company’s longer term objectivefor its radiopharmaceutical business is to leverage its existing business baseand record of regulatory approvals to become a significant North American andinternational competitor in this highly specialized market.  It will work toward this objective through acombination of increasing sales of existing products, the identification andcommercialization of additional product opportunities, development of its newproduct pipeline and possible acquisitions, consistent with its well definedbusiness focus.**

** **

The Company lowered its 2004 product sales targets in the third quarterof 2004 as a result of a lower than anticipated ramp-up in *BrachySeed*® revenues due to very difficultmarket conditions in the brachytherapy area, slower than anticipated regulatoryapprovals of European product entries, and a later-than-anticipated launch ofMDP-25. The Company did achieve its revised product sales target for 2004despite lower sales of lyophilized radiopharmaceutical products in the fourthquarter and the continued market dominance of the Company’s MDP-10 product overthe newly launched MDP-25. None of these factors are expected to have asignificant impact on the Company’s long-term expectations.

 

DRAXIMAGE is expected to continue to grow through increasing sales ofexisting products in the U.S., introduction of new products into the U.S., aswell as expansion into Europe.  Theregulatory process in Europe continues to be slow. In Europe the attainment ofregulatory approvals in one jurisdiction remain necessary prior to filing forapprovals in other jurisdictions. We believe that the delays in approvalsrelate to the significant backlog of work at the European regulator. Allproducts currently being introduced outside of Canada are products currentlyapproved for sale in Canada or the U.S.

 

Management expects that continued emphasis on quality, customer serviceand pricing will be the key factors for the future success of *BrachySeed®*. There are no indications of improvement in themarket, but sales of *BrachySeed®*arenot expected to be a significant source of revenue to the Company relative togrowth in other areas of the Company.

 

Excluding the potential impact of the four innovativeradiopharmaceutical products currently under development, the Company’s targetis to achieve radiopharmaceutical product sales of $30 million to $35 millionby 2007.

 

The Company believes that long-term growth potential for DRAXIMAGEshould be divided between the potential for its innovative proprietaryradiopharmaceutical products currently under development and opportunitiesexcluding these products. Each of DRAXIMAGE’s innovative products underdevelopment addresses substantial unmet market needs and thus has considerablepotential.  Two such products are atadvanced stages of development:  *FIBRIMAGE®* has completed enrolment of its Phase III trial inCanada and is under negotiation with the FDA on the commencement of a Phase IIItrial

 

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in the U.S.; *INFECTON*® has embarked on its Phase II trials in both Canadaand the U.S. Given the inherent uncertainties associated with new drugdevelopment, it is difficult to predict if, or when, these products willachieve commercialization.

 

*Contract Manufacturing*

 

The Company’s longer term objective for its contract manufacturingbusiness is to leverage its existing capabilities and its excellence inregulatory compliance to increase third-party contract manufacturing revenues,while managing costs in order to achieve improving levels of profitabilityassociated with increased capacity utilization. Capacity utilization at DRAXISPharma varies by production flow, specifically between sterile and non-sterileproducts. The demand for DRAXIS Pharma’s sterile capacity, includinglyophilized and non-lyophilized product, continues to grow and create capacitychallenges. Additional production shifts have been added to meet customerdemand within the framework of DRAXIS Pharma’s existing production processesand systems. The Company expects to increase capacity through certain capitaland equipment upgrades and the deployment of additional production shifts.  It plans to reach operating levels in itssterile business at 24 hours a day and 7 days per week by the end of 2005.

 

The Company believes that volumes under the GSK and Bone Careagreements will continue to be significant sources of sterile business in2005.  Volume is, however, expected tofluctuate somewhat during 2005 due to the demand in the end user marketplaceand inventory levels of our customers, which we do not control.

 

In 2004, the Company completed the successful installation of a secondlyophilizer, which will be fully validated and in commercial use during2005.  At optimum configuration, thesecond lyophilizer should triple existing lyophilization capacity over time.The Company does not expect to achieve full capacity utilization on this newlyophilizer in 2005.  The transferringand introduction of new products to this lyophilizer will occur in stagesduring 2005.  Accordingly, the Companyexpects the mix of business to continue to shift in favour of higher marginsterile business, driven both by the additional lyophilization capacity and thecontinued strong demand for other sterile products and by our increasedcapacity to meet such demand.

 

Unlike DRAXIS Pharma’s sterile operations that continue to grow, thenon-sterile operations continue to run below their current one-shift capacity.In 2005, DRAXIS Pharma will seek to increase capacity utilization of thenon-sterile area by maximizing utilization of its current one-shiftconfiguration, including targeting and securing significant contracts in thisarea.

 

The Company’s long-term target is now to achieve manufacturing revenuesfrom its Montreal facility of between $70 million to $80 million by 2007.  This is a reflection of the demand for oursterile capacity, the successful ramp-up of production shifts, and thefinancial and efficiency benefits of increased capacity utilization.

 

The timing of regulatory approvals plays a significant role in thetiming of when commercial production begins for products being introduced inour facilities. Customers operating in multiple markets must get regulatoryapprovals in those markets for us to manufacture products to be sold into thosemarkets.  While our customers generallyhave not had significant issues in getting approvals for us as manufacturer,the timing of when those approvals occur is difficult to predict.

 

*Corporate and Other segment*

 

In 2005, the Company’s Corporate and Other segment is expected toexperience an increase in revenue over 2004 levels, mainly driven by royaltiesand milestones related to the sale of product rights to Shire which may becomepayable to the Company during the year.

 

The Company expects an additional earnings per share from this segmentof approximately 1.5 cents based on royalties and milestones expected to beearned in the first quarter of 2005 related to Shire.

 

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In two years, at the end of 2006, all deferred revenue related to *Anipryl*® will be fully amortized to revenueof the Company.  While this represents amaterial loss of non-cash revenue, within the same period, the Company expectsto fully offset the loss through increased revenues and earnings in itscontract manufacturing and radiopharmaceutical businesses. Since the deferredrevenue represented a non-cash source of income, the replacement of this incomestream by operating income from the core operations will significantly increaselong-term operating cash flows.

 

The Company also expects to see significant increases in expensesrelated to the cost of compliance with the *Sarbanes-OxleyAct of 2002* in the U.S. The majority of these costs relate to thedocumentation and testing of internal controls. The Company anticipates thecosts will exceed $400,000 in addition to the significant amount of managementtime involved. The Company has already invested a considerable amount of timein prior years to ensure that its governance practices comply with therequirements of the *Sarbanes-Oxley Act of2002* and will continue to do so.

 

*Capital and Liquidity*

 

The Company’s balance sheet at the end of December 2004 reflects adramatic improvement in the financial position of the Company, particularlyfrom December 2003. The Company has strengthened its balance sheet significantlythrough the repayment of all third-party debt owing over the course of2004.  The Company’s bank refinancingarrangements completed during the year, coupled with its improving cash flows,significantly increase the Company’s leverage to pursue its strategicobjectives and secured debt capacity at lower borrowing costs.

 

The equity financing completed in April 2004 and the accompanyingrepurchase of the minority interest in DRAXIS Pharma further increases theCompany’s flexibility in managing its core businesses over the long term andachieving synergies.

 

Effective January 1, 2005, the Company amalgamated its two operatingsubsidiaries (“DRAXIMAGE Inc.” and “DRAXIS Pharma Inc.”) into one entity,DRAXIS Specialty Pharmaceuticals Inc. The two operating subsidiaries will continue to report as separatebusiness segments, radiopharmaceutical and contract manufacturing. Theamalgamation provides short-term opportunities to achieve significant cash flowsavings through a deferral of tax payments by allowing the Company to accessits CDN$25 million in tax loss carryforwards available to the Canadianoperations in an expedited manner.  Inthe long term, the Company hopes to achieve greater synergies through thecombined strengths of the two divisions. The Company does not expect torestructure any of its operations but rather, expects to obtain the synergiesand increased efficiencies through standardized processes and systems.

 

Management expects significant growth in operating cash flow andexpects to achieve an operating cash flow exceeding $10 million, subject toworking capital requirements, in 2005. Working capital requirements are linkeddirectly to the volume of business in contract manufacturing and timing ofcustomer orders and, accordingly, the investment in working capital will likelygrow with the growth in business.

 

Management will focus capital spending in the next three years onimproving efficiencies in production through further automation. The Companyexpects in the long term to invest further in upgraded management informationand process control systems to achieve efficiencies and support businessexpansion.

 

With the Company’s current cash balances, anticipated net operatingcash inflows and established financing arrangements, management expects to havesufficient liquidity available to fund the Company’s cash requirements in2005.  Any investments or acquisitions ofbusinesses, products or technologies may require additional funding.

 

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**Accounting Matters**

 

*CriticalAccounting Policies and Estimates*

* *

The foregoing discussion and analysis of the financial condition andresults of operations is based upon the Company’s consolidated financialstatements, which have been prepared in accordance with U.S. GAAP. Thepreparation of consolidated financial statements requires the Company to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an ongoing basis, the Company evaluates its estimates andmakes adjustments as appropriate. Actual results may differ from theseestimates under different assumptions or conditions.

 

A summary of the significant accounting policies and methods used bythe Company in the preparation of its consolidated financial statements isincluded in Note 2 to the 2004 audited consolidated financial statements. TheCompany believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements.

 

Recognition of Licensing Revenue

 

License and other forms of non-refundable fees received pursuant tocollaboration agreements are accounted for according to the related contractualagreements.  In general, such fees aredeferred and recognized on a straight-line basis over the contract period.  Where the contract period is not defined,such fees are recognized on a straight-line basis over the estimated term,during which contractual benefits are expected to be derived.  If payment of such fees is contingent uponfuture performance obligations of the Company or other future events, revenuerecognition of such amounts is deferred and recognized upon completion of thespecific event.

 

Deferred Tax Assets

 

Realization of the net deferred tax assets is dependent on the Company’sability to generate sufficient taxable income in certain taxjurisdictions.  Management believes thatit is more likely than not that the assets will be realized, based onforecasted income.  On a quarterly basis,the estimates and assumptions underlying the forecasted income are reviewed bymanagement to determine whether additional valuation allowances are warrantedor valuation allowances are still required. The Company has taken valuationallowances related to tax loss carryforwards in jurisdictions where taxableincome is no longer generated; it is not likely to generate sufficient taxableincome in Canada to utilize Canadian tax loss carryforwards prior to expiry;and filing positions taken with taxation authorities are subject toreview.  Changes to estimates of futuretaxable income, the completion of reviews by taxation authorities, and theability to execute on tax planning opportunities can significantly affect theamount of valuation allowances.

 

Allowance for Doubtful Accounts

 

The Company determines an appropriate allowance for doubtful accountsbased on an account by account review as opposed to a general provisionassessed as a percentage of revenues.

 

Provision for Inventory Obsolescence

 

Provisions for inventory are charged against income when it isdetermined that the inventory item does not meet the defined quality andregulatory requirements for sale.  TheCompany does not make general provisions for inventory obsolescence as itemsare manufactured based on customer orders.

 

*Termination of BrachySeed® Agreements*

 

InJanuary 2003, DRAXIMAGE’s agreements with its *BrachySeed®*licenseein the U.S. were effectively terminated with no further transactions takingplace under the agreements. A formal agreement

 

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was subsequentlyreached with the licensee for terminating both the License and DistributionAgreement and Product Manufacturing and Supply Agreement for *BrachySeed®*implants in the U.S.

 

Underthe terms of the original agreements, non-refundable milestone paymentsreceived from the licensee were deferred and amortized into income over thecontractual period of the agreement to December 31, 2010.  As a result of the termination of theagreements in January 2003, the unamortized portion of the non-refundablemilestone payments of $1,436,000 was included in income for the year endedDecember 31, 2003 as royalty and licensing revenue.

 

*DiscontinuedOperations*

* *

Commencing with the quarter ended December 31, 2001, the results ofoperations of DRAXIS Pharmaceutica have been reported as discontinuedoperations.  Commencing in the fourthquarter of 2002, the revenues and expenses related to Alertec® were included in the results related to continuingoperations and not discontinued operations due to management’s decision in 2002to retain the Canadian product rights due to the uncertainty of being able toobtain the third-party approval required to be able to include these rights aspart of the divestiture of DRAXIS Pharmaceutica.  As a result of attaining the requiredthird-party approval, the Canadian product rights to Alertec® were included in the sale of the remaining assets andliabilities of DRAXIS Pharmaceutica to Shire, which was completed in the thirdquarter of 2003.

 

*Foreign Exchange Risk*

 

The Company’s reporting currency is the U.S. dollar. The functionalcurrency for its Canadian operations, which includes the radiopharmaceuticalsegment, the contract manufacturing segment and royalties and milestonesrelated to product rights sold to Shire, is the Canadian dollar.  Accordingly, the Company’s foreign exchangeexposure for accounting purposes mainly relates to U.S.-denominated monetaryassets of these operations.  The Companycurrently does not actively hedge this exposure, but reduces the exposure bymaintaining the minimum level of U.S.-denominated cash available to meet itsshort-term cash requirements.

 

*RecentAccounting Pronouncement*

* *

*Share-Based Compensation*

 

In December 2004, the Financial Accounting Standards Board (“FASB”)published *SFAS No. 123R**, Share-Based Payment*. *SFAS No. 123R* replaces *SFAS No. 123,**Stock-BasedCompensation* issued in 1995.  *SFAS No. 123R* requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award (withlimited exceptions). That cost will be recognized over the period during whichan employee is required to provide service in exchange for the award during arequisite service period (usually the vesting period). This statement iseffective for the Company beginning on July 1, 2005 and the Company intends tofully implement this statement beginning in the third quarter of 2005. As ofthe required effective date, the Company will apply *SFAS No. 123R* using a modified version of prospectiveapplication. Under that transition method, compensation cost is recognized onor after the required effective date for the portion of outstanding awards forwhich the requisite service has not yet been rendered, based on the grant-datefair value of those awards calculated under *SFASNo. 123* for either recognition or *proforma* disclosures.  If theCompany had adopted *SFAS No. 123R*in prior periods, the net impact on the Company’s consolidated statements ofoperations would have approximated the impact as described in Note 2(q) on a *pro forma* basis.  The Company expects that the adoption of *SFAS No. 123R* will reduce the basic EPS inthe second half of 2005 by approximately $0.01 per share.

 

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*Non-GAAPFinancial Measures (see reconciliation of Non-GAAP Measures on page 53)*

* *

The Company plans to focus on traditional GAAP measures both inreporting externally and monitoring management performance. Specifically, theCompany will focus on operating income, net income and operating cash flow.Non-GAAP measures and, specifically, EBITDA will continue to be disclosed anddiscussed to provide a comparative link between our historical disclosures asthe Company transitions to more traditional GAAP measures. The Company willcontinue to reconcile any non-GAAP measures used with GAAP line items.

 

The Company additionally plans to incorporate, as a performancemeasure, cash flows from operating activities less cash flows used in investingactivities.

 

The terms EBITDA (earnings before financing expense and other income,taxes, depreciation and amortization) and EBITDA margin (EBITDA divided by totalrevenues) do not have a standardized meaning prescribed by U.S. GAAP andtherefore may not be comparable to similar measures used by othercompanies.  DRAXIS defines EBITDA asoperating income before depreciation and amortization expense and EBITDA is presentedon a basis that is consistent from period to period.  DRAXIS uses EBITDA measures to assess theoperating performance of its ongoing businesses without the effects ofamortization expense. Amortization expense is excluded because it substantiallydepends on the accounting methods and assumptions used as well as thehistorical cost of capital assets. DRAXIS believes that certain shareholders and investors prefer suchmeasures in evaluating the ability of a reporting company to service debt or asthe basis for a valuation measurement. EBITDA should not be construed as the equivalent of net cash flows fromoperating activities.  The mostcomparable U.S. GAAP earnings measure is operating income.

 

**Forward-LookingStatements**

** **

This MD&A containsforward-looking statements within the meaning of the *PrivateSecurities Litigation Reform Act of 1995*. These statements are notguarantees of future performance. By their nature, forward-looking statementsinvolve numerous assumptions, known and unknown risks, uncertainties and otherfactors that may cause the actual results or performance of the Company to bematerially different from such statements or from any future results orperformance implied thereby. Factors which could cause the Company’s results orperformance to differ from current expectations include, but are not limitedto: the achievement of desired clinical trial results related to the Company’spipeline products; timely regulatory approval of the Company’s products; theability to comply with regulatory requirements applicable to the manufactureand marketing of the Company’s products; the Company’s ability to obtain andenforce effective patents; the non-infringement of third-party patents orproprietary rights by the Company and its products; the establishment andmaintenance of strategic collaborative and commercial relationships; theCompany’s dependence on a small number of key customers; the Company’s abilityto protect its confidential information; the preservation of healthy workingrelationships with the Company’s unions and employees; the avoidance of productliability claims; and market acceptance of the Company’s products. Foradditional 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 theUnited States Securities and Exchange Commission (available on EDGAR atwww.sec.gov) and with Canadian securities regulators (available on SEDAR atwww.sedar.com).  The forward-lookingstatements contained in this document represent the Company’s expectations asat March 10, 2005.  Unless otherwiserequired by applicable securities laws, the Company disclaims any intention orobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

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**Item 6.    Direc****tors, Senior Management and Employees**

 

The following is a list of thecurrent directors and senior officers of the Company, their municipalities ofresidence, their current position with the Company and their principaloccupations:

 

 
| Martin Barkin                                                               | Toronto, ON | President and Chief Executive Officer |
|-----------------------------------------------------------------------------|-------------|---------------------------------------|
| Director since May 19, 1992 and employee of the  Company since March, 1992. |

 

Dr. Barkin, MD, B.Sc. (MED.), MA, FRCSC, is Presidentand Chief Executive Officer of the Company. He also serves on the Board of Viventia Biotech Inc. and the medicaladvisory board of VenGrowth Investment Funds. Until April 30, 2004, he was a director of Bone Care International, Inc.  Dr. Barkin was Chairman of the Board ofSunnybrook & Women’s College Health Sciences Centre from June 15, 1998until June 30, 2003.  Dr. Barkin came tothe Company in 1992 from KPMG where he was Partner and National Practice Leaderfor Health Care (1991-1992).  Beforethat, he was Deputy Minister of Health for the Province of Ontario (1987-1991)and before that President and Chief Executive Officer of Sunnybrook HealthSciences Center at the University of Toronto. Dr Barkin is a surgical specialist in Urology holding the rank ofProfessor at the University of Toronto, a former Research Scientist atUniversity of Toronto and was Division Chief at Sunnybrook Health SciencesCentre.

 
| Leslie L. Dan                     | Toronto, ON | Director |
|-----------------------------------|-------------|----------|
| Director since December 10, 1993. |

 

Mr. Dan is Chairman of Novopharm Limited, one ofCanada’s leading pharmaceutical companies and Chairman of Viventia BiotechInc.  Prior to April 5, 2000, Mr.Dan was Chairman and Chief Executive Officer of Novopharm Limited.

 
| George M. Darnell                 | Coral Gables, FL | Director |
|-----------------------------------|------------------|----------|
| Director since November 26, 1996. |

 

Mr. Darnell is the retired President of the DadeDivision and the Executive Vice President of the Baxter Diagnostics Group ofBaxter International.  He has 35 years ofU.S. and international experience in the diagnostic industry.

 
| Rolf H. Henel                   | Wayne, NJ | Director |
|---------------------------------|-----------|----------|
| Director since August 14, 2002. |

 

Mr. Henel is the retired President of CyanamidInternational, Lederle Division.  Hecurrently serves as an advisor to the healthcare industry and is a partner inNaimark & Associates, a healthcare consulting firm.  He is also a director and member of the Auditand Nominating and Corporate Governance Committees of SciClone Pharmaceuticals,Inc. and a director, Chair of the Compensation Committee and member of the AuditCommittee of Penwest Pharmaceuticals Co.

 
| Brian M. King                | Kenora, ON | Chairman and Director |
|------------------------------|------------|-----------------------|
| Director since May 26, 1994. |

 

Mr. King is Chairman of the Board of the Company.  He is the former Chairman and Chief ExecutiveOfficer of Connaught Biosciences, Inc. He is also a director and Chairman of the Compensation Committee of OnexCorporation and a director and member of the Investment, Valuation and AuditCommittees of VenGrowth Investment Funds.

 
| Samuel Sarick                  | Toronto, ON | Director |
|--------------------------------|-------------|----------|
| Director since March 31, 1989. |

 

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Mr. Sarick is President of Samuel Sarick Limited, acompany with long-standing involvement in commercial property development.

 
| Bruce W. Simpson                | Fort Worth, TX | Director |
|---------------------------------|----------------|----------|
| Director since August 14, 2002. |

 

Mr. Simpson servedas the President of the Genpharm division of E Merck, the President and CEO ofMedeva Pharmaceuticals in the United States and in senior management positionsat Fisons Corporation.  He currently headsa private consulting firm specializing in marketing and business developmentwithin the healthcare industry and is a director of Hi-Tech Pharmacal Co., Inc.

 
| John A. Vivash                    | Toronto, ON | Director |
|-----------------------------------|-------------|----------|
| Director since November 17, 1998. |

 

Mr. Vivash was formerly President and Chief ExecutiveOfficer of CIBC Securities Inc., Fidelity Investments Canada Limited andManulife Securities International Ltd. He currently serves as President and Chief Executive Officer ofTesseract Financial Inc., a financial services consultancy; director and memberof the Audit Committee and Chair of the Nominating and Corporate GovernanceCommittee of Sierra Systems Group Inc., and Chairman of the Board and member ofthe Compensation Committee of Financial Models Company Inc.  He is also a member of the Board, the AuditCommittee and the Conduct Review Committee of State Street Trust Company Canadaand is a member of the Board of Eastmain Resources Inc.

 
| Mark Oleksiw             | Montreal, QC | Officer |
|--------------------------|--------------|---------|
| Officer since July 2003. |

 

Mr. Oleksiw joined DRAXIS as Director of Finance inJuly 2002 after eight years with an international accounting firm, mostrecently as a senior manager with a focus on U.S. and Canadian publicly listedlife science and technology companies. He also spent three years with Bell Canada and BCE Inc. with responsibilityfor external reporting, plus two years as a senior internal auditor at McGillUniversity.  Mr. Oleksiw is a CharteredAccountant and earned his Graduate Diploma in Public Accountancy and B. Comm.from McGill University.  He became ChiefFinancial Officer on July 1, 2003.

 
| Dan Brazier                | Stouffville, ON | Officer |
|----------------------------|-----------------|---------|
| Officer since August 1998. |

 

Mr. Brazier, Hon. B. Comm., joined DRAXIS in August1998 as President of SpectroPharm Dermatology and now holds the position ofSenior Vice President, Corporate Development and Strategic Planning.  Prior to July 1, 2003, Mr. Brazier served asPresident of DRAXIS Pharmaceutica.  Priorto joining the Company, Mr. Brazier was the Director of Skin Care at AllerganInc.  Mr. Brazier also held positions inMarketing Management and Sales Management in his 10 years with Allergan.  From 1980-1989, Mr. Brazier held Marketingand Sales positions with Bausch & Lomb, Stafford Foods and Canada Packers.Mr. Brazier holds an Honors B. Comm., majoring in Marketing and Finance.

 
| Jack A. Carter                | Toronto, ON | Officer |
|-------------------------------|-------------|---------|
| Officer since September 1998. |

 

Mr. Carter, B.A., C.H.R.P., joined DRAXIS inSeptember 1998 as Vice President Human Resources following a lengthyrelationship with the Company in a Consultant capacity.  He is now Vice President, Administration andShared Services.  Immediately prior tojoining DRAXIS, Mr. Carter was the President of a Human Resource Consultingfirm, specializing in strategic human resource issues within the CanadianPharmaceutical Industry.  Prior to thisMr. Carter gained significant experience as

 

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VicePresident Human Resources for Sterling Drug/Kodak, Director of Human Resourcesfor the Baxter Corporation, and Director of Human Resources for Johnson & Johnson.  Mr. Carter also served on the founding Boardof Directors of the Human Resources Professionals Association of Ontario, andwas nominated to the “Council of Human Resource Executives” for The ConferenceBoard of Canada.

 
| John Durham              | Montreal, QC | Officer |
|--------------------------|--------------|---------|
| Officer since July 2003. |

 

Mr. Durham is President of the DRAXIS Pharma, divisionof DRAXIS Specialty Pharmaceuticals Inc. Prior to joining the Company in July 2003, Mr. Durham was GeneralManager of an international contract manufacturer, with responsibilities foroperations, finance, sales and marketing, business development and strategicplanning.

 
| Richard Flanagan              | Montreal, QC | Officer |
|-------------------------------|--------------|---------|
| Officer since September 1997. |

 

Dr. Flanagan, B.Sc., Ph.D., MCIC, is President of theDRAXIMAGE, division of DRAXIS Specialty Pharmaceuticals Inc.  He has been with the Company since July 1997and with the same division since 1980 when it was part of Merck.  Dr. Flanagan served as Executive VicePresident of DRAXIMAGE until September 1, 2001, when he was named President.  Prior to joining Merck, Dr. Flanagan was anAdjunct Professor in the Faculty of Pharmacy at the University of Alberta.  Dr. Flanagan is the author of thirtyscientific papers and is listed as inventor on twelve patents.  Dr. Flanagan obtained his Ph.D. in OrganicChemistry from the University of Alberta and a B.Sc. from the UniversityCollege Dublin, Ireland.  He is a KillamFellow and received the Hugh Ryan Memorial Gold Medal as an undergraduate.  Dr. Flanagan has served as an advisor to theInternational Atomic Energy Agency and has sat on grant review committees inCanada and the United States.

 
| Jerry Ormiston          | Toronto, ON | Officer |
|-------------------------|-------------|---------|
| Officer since May 2001. |

 

Mr. Ormiston, B.Sc., MBA, joined DRAXIS in May 2001 asExecutive Director, Investor Relations following two-years as a seniorconsultant in a Toronto investor relations firm working with small andmid-sized entrepreneurial companies on capital markets communicationsstrategies.  Prior to that he was at AllelixBiopharmaceuticals for 12 years – four as Manager of Investor Relations andeight in the business development area. He has 25 years’ experience in the healthcare industry inpharmaceuticals and biotechnology.  Hisassignments over those years have included positions in business development,marketing, corporate communications, production management, quality assuranceand regulatory affairs.

 
| Alida Gualtieri              | Montreal, QC | Officer |
|------------------------------|--------------|---------|
| Officer since November 2003. |         |    |

 

Ms. Gualtieri joined the Company in November 2003 asGeneral Counsel and Secretary.  Prior tojoining the Company, she was a partner in the Corporate Finance Mergers &Acquisitions group of McCarthy Tétrault LLP in Montreal, Quebec, Canada’slargest law firm.  Between March 1996 andAugust 1999, Ms. Gualtieri was legal counsel at Fonds de Solidarité desTravailleurs du Québec (F.T.Q.), Canada’s largest labor-sponsored venturecapital fund.  Ms. Gualtieri earned herBCL and LLB law degrees at McGill University in 1987 and was admitted to theBar of the Province of Quebec in 1988.

 

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| Chien Huang              | Toronto, ON | Officer |
|--------------------------|-------------|---------|
| Officer since July 2003. |        |    |

 

Mr. Huang joined DRAXIS in 1998 as AssistantController.  On July 1, 2003, he waspromoted to Vice President Finance.  Hehas eight years of prior experience, including positions as manager of businessprocess re-engineering, senior financial planning and analysis and in the auditgroup of a major international accounting firm. Mr. Huang is a Chartered Accountant and earned his Graduate Diploma in PublicAccountancy from McGill University as well as a B.Sc. from the University ofToronto.

 

Terms of office as director are for one year or untilthe next Annual Meeting of the Shareholders and subsequent Meeting of the Boardof Directors, respectively.

 

There is no family relationship between any of theexecutive officers.  Officers of theCompany serve at the pleasure of the Board of Directors.

 

**Summary Compensation Table**

 

The following table sets forth all annual andlong-term compensation for services in all capacities to the Company and itssubsidiaries for the fiscal years ended December 31, 2004, 2003 and 2002 inrespect of each of the individuals who were, at December 31, 2004, the ChiefExecutive Officer or other Named Executive Officers (as defined in theRegulations to the Securities Act (Ontario)) of the Company and who receivedsalary and bonus in excess of CDN$150,000 in the 2004 fiscal year.

 

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| ** **                                               | ** ** | ** ** | ** ** | **Annual  Compensation** | ** ** | **Long  Term  Compensation** | ** ** | ** **                         | ** ** |
|----------------------------------------------------------|------------|------------|------------|--------------------------|------------|------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | ** ** | ** ** | **Salary**               | ** ** | **Bonus**                    | ** ** | **Other  Annual  Compensation(1)** | ** ** | **Long Term  Compensation  Awards** | ** ** | **LTIP  Payouts** | ** ** | **All  Other  Compensation** | ** ** |
| **Name & Principal**                                 | ** ** | ** ** | ** ** | **Cash**                 | ** ** | **DSU  Election  (2)**       | ** ** | **Cash**                           | ** ** | **DSU  Election  (2)(3)** | ** ** | ** ** | ** ** | **Securities  Under  Options  Granted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Position**                                             |       | **Year**   |       | **(CDN$)**               | ** ** | **(CDN$)**                   | ** ** | **(CDN$)**                         | ** ** | **(CDN$**) |   | **(CDN$)** |   | **(#)** |   | **(CDN$)** | ** ** | **(CDN$)** |   |
| Martin Barkin, MD                                        |       | 2004       |       | 400,000                  |       | nil                          |       | 154,600                            |       | nil |   | 40,880 |   | nil |   | nil |   | 711,525 | (4) |
| President &  Chief                                   |       | 2003       |       | 320,000                  |       | 80,000                       |       | 125,000                            |       | 125,000 |   | 36,077 |   | nil |   | nil |   | 600,000 | (5) |
| Executive Officer                                        |       | 2002       |       | 301,600                  |       | 75,400                       |       | nil                                |       | nil |   | 20,818 |   | 225,000 |   | nil |   | 289,125 | (6) |
|                                                     |       |       |       |                     |       |                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Mark Oleksiw                                             |       | 2004       |       | 200,000                  |       | nil                          |       | 65,320                             |       | nil |   | 8,217 |   | nil |   | nil |   | 16,434 | (8) |
| Chief Financial                                          |       | 2003       |       | 142,900                  |       | nil                          |       | 53,759                             |       | nil |   | nil |   | 100,000 |   | nil |   | nil |   |
| Officer                                                  |       | 2002       | (7)        | 47,103                   |       | nil                          |       | 4,710                              |       | nil |   | nil |   | 20,000 |   | nil |   | nil |   |
|                                                     |       |       |       |                     |       |                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Dan Brazier                                              |       | 2004       |       | 254,500                  |       | nil                          |       | 85,218                             |       | nil |   | 19,533 |   | 100,000 |   | nil |   | nil |   |
| Senior Vice-                                             |       | 2003       |       | 210,000                  |       | nil                          |       | 79,800                             |       | nil |   | 17,383 |   | 130,000 |   | 75,000 | (9) | 109,000 | (10) |
| President, Corporate  Development and Strategic Planning |       | 2002       |       | 165,000                  |       | nil                          |       | 49,500                             |       | nil |   | nil |   | 20,000 |   | nil |   | nil |   |
|                                                     |       |       |       |                     |       |                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| John Durham                                              |       | 2004       |       | 262,000                  |       | nil                          |       | 95,380                             |       | nil |   | 20,636 |   | nil |   | nil |   | nil |   |
| President, DRAXIS Pharma division                        |       | 2003       | (11)       | 151,667                  |       | nil                          |       | 53,144                             |       | nil |   | 72,381 | (12) | 100,000 |   | nil |   | nil |   |
|                                                     |       |       |       |                     |       |                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Richard Flanagan                                         |       | 2004       |       | 254,500                  |       | nil                          |       | 25,979                             |       | nil |   | 18,975 |   | nil |   | nil |   | nil |   |
| President,                                               |       | 2003       |       | 216,250                  |       | nil                          |       | 77,850                             |       | nil |   | 17,239 |   | 20,000 |   | 389,474 | (13) | nil |   |
| DRAXIMAGE division                                       |       | 2002       |       | 180,000                  |       | nil                          |       | 25,000                             |       | nil |   | nil |   | 40,000 |   | nil |   | nil |   |

 

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(1)                                     “Other Annual Compensation” does not exceed the lesser of CDN$50,000 or10% of the annual salary and bonus for the fiscal year, except as noted.  It includes a payment equal to 5% of theNamed Executive Officers’ salary for RRSP purposes in accordance with the termsof their employment with the Company.

(2)                                     Amounts in these columns relate to the portions of salary and bonuselected to be received in the form of Deferred Share Units and are in additionto the cash amounts specified.  See “IncentivePlans – Deferred Share Unit Plan.”

(3)                                     Includes a special bonus of CDN$60,000 which was paid to Dr. Barkin in2003 related to the successful sale of the Company’s Pharmaceutica Division toShire in July 2003.  The decision on theamount and payment of this bonus had been deferred by the Board of Directors in2002.  Dr. Barkin elected to receiveCDN$30,000 of this bonus in Deferred Share Units and CDN$30,000 in cash.

(4)                                     Dr. Barkin received CDN$480,000 in 2004 as payment of his RetirementCompensation Allowance.  See “ExecutiveCompensation - Termination of Employment and Employment Contracts.”  In addition, he realized an aggregate valueof an amount of CDN$231,525 from the exercise of his options in 2004.

(5)                                     Dr. Barkin received $600,000 in August 2003 as payment of his RetirementCompensation Allowance. See “Executive Compensation - Termination of Employmentand Employment Contracts.”

(6)                                     This amount is the aggregate value realized from the exercise of optionsin the amount of CDN$289,125 for 2002.

(7)                                     Mark Oleksiw joined the Company as Director of Finance on July 29,2002.  He became CFO on July 1, 2003.

(8)                                     This amount is the aggregate value realized from the exercise of optionsin the amount of CDN$16,434 for 2004.

(9)                                     Dan Brazier received CDN$75,000 in August 2003 as payment upon the saleof the Company’s Pharmaceutica Division to Shire in July 2003.  This payment was in lieu of initiating aplanned Long Term Incentive Plan for the Pharmaceutica Division.

(10)                                Represents a success fee related to the sale of the Pharmaceuticadivision of the Company to Shire in July 2003.

(11)                                John Durham joined the Company as President of DRAXIS Pharma Inc. (nowknown as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) onJune 2, 2003.

(12)                                Included in this amount is a signing bonus of CDN$60,000.

(13)                                Dr. Richard Flanagan received CDN$389,474 in December 2003 as a partialpayment of the long term incentive plan payment in accordance with theprovisions of the DRAXIMAGE Long Term Incentive Plan.  See “Executive Compensation – Subsidiary LongTerm Incentive Plans – DRAXIMAGE”

 

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**Incentive Plans**

 

### ***Philosophy***

### ** **

The Company’s philosophy is to link employeecompensation to the success of the Company and to emphasize “at risk” employeecompensation.  Save and except for theRetirement Compensation Allowance for Dr. Barkin set forth under “Terminationof Employment and Employment Contracts,” the Company does not provide any formof pension program to its senior management.

 

The Company has implemented the following plans in aneffort to achieve “at risk” employee compensation: Stock Option Plan andDeferred Share Unit Plan.

 

### ***Stock Option Plan***

### ** **

Intention and Participants***–***Thisplan was approved by shareholders on February 3, 1988 and amended on June 27,2001 to permit the Board of Directors to grant options to purchase commonshares to directors, officers, employees and arm’s length consultants of theCompany and its subsidiaries so as to link corporate compensation to enhancedshareholder value.

 

Maximum Common Shares Issuable – In 2001 the shareholdersauthorized, at the Company’s annual and special meeting, the issuance of up to7,500,000 common shares under this plan. As at March 21, 2005, 2,789,170 options have been granted and areoutstanding, representing 6.8% of the Company’s issued and outstanding capitalas at March 21, 2005.  In addition,852,894 options are available for issuance under the plan as at March 21, 2005,representing 2.1% of the Company’s issued and outstanding capital as at March21, 2005.  The number of shares reservedfor issuance to any one person pursuant to options granted in accordance withthe plan or otherwise cannot exceed 5% of the outstanding common shares of theCompany.

 

Determination of Number, Price and Term of Options – The Board ofDirectors determines the price per common share, the number of options forcommon shares which may be allotted to each designated director, officer,employee or arm’s length consultant, the period in which any option may beexercised and all the terms and conditions of the option in accordance with theapplicable requirements of any regulatory authority or stock exchange.

 

Dilution Guideline –The Company has an established guideline limiting the aggregate number ofcommon shares that can be issued at any point in time through the exercise ofoptions to 13% of the Company’s outstanding common shares.  As at March 21, 2005, the number of common sharesso issuable was 6.8% of the Company’s outstanding common shares.

 

Assignability – Options are non-assignable andnon-transferable.

 

Termination of Employment or Death of an OptionHolder – In the event of the death of an option holder, the options that wereexercisable at the date of the death may be exercised by the option holder’sexecutors or personal representatives within six months of the option holder’sdeath.  If an option holder ceases tohold office as a director, officer or employee of the Company during an optionperiod, the exercisable options may be exercised for a period of thirty daysafter such option holder ceases to hold such office or position or for a longerperiod as the Board of Directors may approve.

 

Amendment of plan – The Board of Directors may terminate the plan atany time or amend the

 

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planat any time with the consent of the Toronto Stock Exchange.

 

Options Available for Future Grants**–852,894 as at March 21, 2005.

 

Unexercised options of Named Executive Officers as a percentage ofcommon shares issued and outstanding as of March 21, 2005 – 3.1%.

 

Aggregate Option Grants to Named Executive Officers as of December 31,2004 – 100,000.

 

The following table sets forth the options grantedduring the financial year ended December 31, 2004:

 

 
| **Name**                                                                 | ** ** | **Securities  Under Options  Granted  (#)** | ** ** | **% of Total  Options Granted  to  Employees in  Financial Year** | ** ** | **Exercise or Base  Price  (CDN$/Security)(1)** | ** ** | **Market Value of  Securities  Underlying  Options on the  Date of Grant  (CDN$/Security)** | ** ** | **Expiration Date** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------|------------|
| Martin Barkin, MD                                                        |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| President & Chief  Executive Officer                                 |       | Nil                                         |       | Nil                                                               |       | Nil                                             |       | Nil                                                                                         |       | Nil                 |       |
|                                                                     |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| Mark Oleksiw                                                             |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| Chief Financial  Officer                                                 |       | Nil                                         |       | Nil                                                               |       | Nil                                             |       | Nil                                                                                         |       | Nil                 |       |
|                                                                     |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| Dan Brazier(2)                                                           |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| Senior Vice-  President,  Corporate  Development and  Strategic Planning |       | 100,000                                     |       | 27.8                                                              | %          | CDN $4.70                                       |       | CDN $4.70                                                                                   |       | August 10, 2009     |       |
|                                                                     |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| John Durham                                                              |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| President,  DRAXIS Pharma  division                                      |       | Nil                                         |       | Nil                                                               |       | Nil                                             |       | Nil                                                                                         |       | Nil                 |       |
|                                                                     |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| Richard Flanagan                                                         |       |                                        |       |                                                              |       |                                            |       |                                                                                        |       |                |       |
| President,  DRAXIMAGE  division                                          |       | Nil                                         |       | Nil                                                               |       | Nil                                             |       | Nil                                                                                         |       | Nil                 |       |

 

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(1) The Exercise Price of the options wasdetermined by the Board in accordance with the provisions of the Stock OptionPlan.

(2) The options are exercisable as follows:one-third on August 10, 2005, one-third on August 10, 2006 and one-third onAugust 10, 2007.

 

The following table sets forth individual exercises ofoptions by the following named executive officers during the financial yearended December 31, 2004 and the financial year-end value of unexercisedoptions:

 

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| **Name**         | ** ** | **Securities  Acquired on  Exercise** | ** ** | **Aggregate Value  (CDN$) Realized** | ** ** | **Unexercised Options at  December 31, 2004  (#)  Exercisable/  Unexercisable** | ** ** | **Value of Unexercised in  the-Money Options at  December 31, 2004****(CDN$)  Exercisable/  Unexercisable** | ** ** |
|------------------|------------|---------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| Martin Barkin(1) |       | 122,396                               |       | 496,123                              |       | 680,125 / 75,000                                                                |       | 1,756,705 / 147,000                                                                                         |       |
| Mark Oleksiw     |       | 6,667                                 |       | 16,434                               |       | 6,666  / 106,667                                                                |       | 15,333 / 375,333                                                                                            |       |
| Dan Brazier      |       | Nil                                   |       | Nil                                  |       | 23,333  / 226,667                                                               |       | 82,533 / 581,867                                                                                            |       |
| John Durham      |       | Nil                                   |       | Nil                                  |       | Nil / 100,000                                                                   |       | Nil / 360,000                                                                                               |       |
| Richard Flanagan |       | Nil                                   |       | Nil                                  |       | 103,333 / 26,667                                                                |       | 250,800 / 79,200                                                                                            |       |

 

----

(1)           On January 14, 2004, Dr. Barkin converted 245,000 Series CParticipation Shares and received 54,896 common shares of the Company with acorresponding value on that date of $264,598.  See “Discontinued Plans – EmployeeParticipation Share Plan” and see “Indebtedness of Directors and SeniorOfficers.”

 

### ***Deferred Share Unit Plan***

### ** **

Intention – To further align the interests of seniormanagement with those of shareholders by increasing management shareholdings atminimal cost to the Company.

 

Mechanism – Eligible participants in this plan areentitled to elect yearly to receive up to 20% of base salary and up to 100% ofany bonus payable in respect of that year in Deferred Share Units in lieu ofcash compensation.  An election must bemade by December 1 of each year in respect of base salary and bonus for thenext year.  The elected amount isconverted to a number of Deferred Share Units equal to the elected amountdivided by the closing price of the common shares on the Toronto Stock Exchangeor The NASDAQ National Market System on December 31 of each year in which theelection is made, based on a purchase commitment as of December 1 of the prioryear.  This plan is administered by theBoard of Directors of the Company.

 

Participants – Members of senior management of theCompany designated by the Human Resources and Compensation Committee.

 

Redemption of Deferred Share Units – Participants arenot entitled to receive any Deferred Share Units until cessation of employmentwith the Company for any reason.  Thevalue of each Deferred Share Unit, redeemable by the participant, will beequivalent to the market value of a common share of the Company at the time ofredemption.  The Deferred Share Unitsmust be redeemed no later than the end of the first calendar year commencingafter the date of cessation of employment.

 

Named Executive Officer Elections for 2003, 2004 and2005 – The following table summarizes the elections under this plan by NamedExecutive Officers:

 
| ** **    | ** ** | **DSU Elections** | ** ** |
|---------------|------------|-------------------|------------|
| ** **    | ** ** | **2003**          | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **    | ** ** | **Salary**        | ** ** | **Bonus** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Salary** | ** ** | **Bonus** | ** ** |
| ** **    | ** ** | **%**             | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** |
| Martin Barkin |       | 20                |       | 80,000 |   | 50 |   | 95,000 | (1) | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   |

 

----

(1)           In2003, Dr. Barkin also elected to have CDN$30,000 of his CDN$60,000 specialbonus related to the sale of the Company’s Pharmaceutica division paid to himin Deferred Share Units.  See note (3) in“Executive Compensation — Summary Compensation Table.”

 

As at March 21,2005, Dr. Barkin had a total of 186,560 Deferred Share Units, and the value ofhis interest in this plan at said date was CDN$1,175,328.

 

86

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### ***Employee Group Registered Retirement Savings Plan***

### ** **

Intention – Toprovide a cost-sharing program for employees of the Company and itssubsidiaries by way of a corporate sponsored registered retirement savings plan(“RRSP”) matching mechanism for employee retirement.

 

Mechanism –Commencing 12 months after continuous employment, employees of the Company andits subsidiaries are entitled to receive a discretionary payment from theCompany which matches employee contributions on a dollar-for-dollar basistoward an employee’s RRSP, up to a maximum of 5% of the employee’s eligibleincome (“normal” straight time annual earnings or salary, not to includeovertime payments, bonus or any other form of exceptional payment).  The corporate contribution to this planremains under the ownership and control of the employee and is not subject toany lock-in provisions.  The plan isadministered by a committee composed of employees and management.  Subject to the investment choices approved bythe committee, employees control the investment of the contributions of boththe employees and the Company.  For thoseemployees belonging to the United Food and Commercial Workers InternationalUnion (“UFCW”) the contribution is 3.5% of base earnings which may be directlycontributed by the Company to the UFCW pension fund if the employees so electas a group.  No such election was madefor 2004.

 

Participants –Participation is open to all full and part-time permanent Canadian employees ofthe Company and its subsidiaries, other than designated senior managementemployees and the Named Executive Officers.

 

Commencement Date– The plan commenced on January 1, 2002, but employee matching contributionsare not required for 2002, 2003, 2004 and 2005.

 

**Subsidiary Long-Term Incentive Plans**

 

### ***DRAXIMAGE, adivision of DRAXIS Specialty Pharmaceuticals Inc.***

### ** **

Intention – To align further the interests of seniormanagement in DRAXIMAGE (formerly DRAXIMAGE Inc.), a division of DRAXISSpecialty Pharmaceuticals Inc., for increasing the value of the division andtherefore enhancing shareholder value of the Company as a whole.

 

Mechanism – The terms of this plan provide that,subject to the achievement of certain conditions, the Company will makepayments to plan participants in the form of cash based on increases in thefair market value of DRAXIMAGE’s equity in excess of the Company’s acquisitioncost.  Prior to March 2005, the Companycould elect to pay the value in shares of the Company. However, no suchelection has been made by the Company. In March 2005, the Board of Directors amended the plan by adoption of aresolution providing that the Company could no longer elect to make payment toplan participants by way of an issuance of shares of the Corporation.

 

Participants – Selected members of senior managementof the DRAXIMAGE division as designated by the Company.  Dr. Richard Flanagan participates in this planbut received no award under the plan in 2004.

 

### ***DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.***

### ** **

Intention – In September 2003, the then-existing EquityParticipation Plan of DRAXIS Pharma Inc. (now known as DRAXIS Pharma, adivision of DRAXIS Specialty Pharmaceuticals Inc.) was terminated and replacedwith a Long Term Equity Incentive Plan to provide certain senior management

 

87

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employees of DRAXISPharma with a meaningful incentive to increase the value of the Company and toallow management to share in the benefits of that value creation.

 

Mechanism**– The terms of this plan providethat eligible participants have a right to receive phantom equity shares ofDRAXIS Pharma and, subject to approval by the Company’s Board of Directors andapplicable regulatory authorities, options of the Company.  The options are governed by the terms of theStock Option Plan of the Company (see “Incentive Plans - Stock Option Plan”).  In accordance with a resolution passed by theBoard of directors in March 2005, the Plan was amended so that a participantmay only receive the cash value of said phantom equity shares on the planexpiry date or other designated termination event.  Prior to said amendment, the Company couldelect to pay such value in shares of the Company.  However, at the date of the amendment, nosuch election had been made by the Company. In order for an eligible participant to receive a terminationdistribution amount with respect to a phantom equity share, certain financialratios must be met by DRAXIS Pharma.

 

Participants – Selected members of senior managementof the DRAXIS Pharma division as designated by the Company.  Mr. John Durham participates in this plan butreceived no award under the plan in 2004.

 

**Discontinued Plans**

 

In late 2002, the Board ofDirectors undertook a comprehensive review of the Company’s various incentiveplans in the context of current best practices and the requirements of the Sarbanes-Oxley Act of 2002.

 

As a result of this review, theBoard of Directors decided to discontinue certain incentive plans of theCompany effective December 4, 2002, subject to appropriate grandfatheringprovisions related to outstanding plan participation.  There was no participation in these plans in2004.

 

The details of these plans arelisted below.

 

### ***Employee Stock Ownership Plan***

### ** **

This plan was originallyimplemented in 1991, and subsequently amended in 1998 and in 2001, to providean incentive to all employees of the Company by giving them a direct interestin the Company’s growth and development. In 2002, the Board of Directors replaced this plan with a registeredretirement savings program (see “Employee Group Registered Retirement SavingsPlan”).  The plan was wound-up in December2004.

 

### ***Equity Purchase Plan***

### ** **

Eligible participants inthis plan were entitled to purchase on a yearly basis common shares of theCompany equal to not more than 40% of their base salary, funded by aninterest-bearing loan from the Company, with the common shares to be acquiredby an open market purchase by a trustee on behalf of the participants.  The purchase price was equal to the closingprice of the common shares on the TSX or NASDAQ on December 31 of each year, basedon a purchase commitment as of December 1 of the prior year.  This plan was cancelled by the Board in 2002.

 

### ***Employee Participation Share Purchase Plan***

### ** **

Pursuant to this plan,each Participation Share is equal to a fraction of a common share

 

88

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depending on the performance of the common share fromthe date the Participation Share is issued to the date of conversion of theParticipation Share.  To minimizedilution to shareholders compared to a stock option plan, common shares areissued only to the extent that the stock price has appreciated since the datethe Participation Shares are issued rather than on a per option exercisebasis.  The value and subscription priceof such common shares is determined with the assistance of an independent valuatorand the subscription amount is loaned to the participant on a non-recourse,interest-free basis by the Company. Certain restrictions on transferability apply and redemption rights areretained by the Company.  ParticipationShares generally vest over a four-year period. The loaned funds are repayable to the Company on conversion of vestedParticipation Shares.  ParticipationShares were viewed as advantageous over other forms of compensation for variousreasons including mild dilution impact, lack of need for participants to sellshares to convert and favorable participant tax treatment.  In January 2004, all outstandingParticipation Shares were converted for common shares of the Company.  No further Participation Shares will beissued.

 

See also “Item 10: Material Contracts.”

 

**Compensation of Directors**

 

In 2004, the compensation paid to each independentdirector of the Company was an annual honorarium of CDN$12,500 plus a meetingfee of CDN$1,500 for each Board of Directors and Committee meeting attended,some via teleconference.** **In addition, the Chairs of each of the Committees received an annualretainer of CDN$1,500.  Directorswho are employees of the Company do not receive any compensation in theircapacity as directors.  For the yearended December 31, 2004, Mr. Brian King received CDN$60,000 as non-executiveChairman of the Board of Directors.  Hedid not otherwise receive meeting fees as a director.  The following table sets forth the totalcompensation paid to each Director in the year ended December 31, 2004.  Martin Barkin, as an employee of the Company,did not receive any compensation in his capacity as a director.

 
| ** **              | ** **   | **Leslie  Dan** | ** **   | **George Darnell** | ** ** | **Rolf  Henel** | ** **   | **Brian  King** | ** **   | **Sam  Sarick** | ** ** | **Stewart  Saxe(1)** | ** **   | **Bruce  Simpson** | ** **   | **John  Vivash** | ** **   |
|-------------------------|--------------|-----------------|--------------|--------------------|------------|-----------------|--------------|-----------------|--------------|-----------------|------------|----------------------|--------------|--------------------|--------------|------------------|--------------|
| **Annual  Retainer**    |         | $               | 12,500       |               | $          | 12,500          |         | $               | 12,500       |            | $          | 60,000               |         | $                  | 12,500       |             | $            | 12,500 |   | $ | 12,500 |   | $ | 12,500 |   |
| **Chair  Retainer**     |         | —          |         | —             |       | —          |         | —          |         | $               | 1,500      |                 |         |               | —       |             | $            | 1,500 |   |
| **Committee  meetings** |         | $               | 10,500       |               | $          | 19,500          |         | $               | 19,500       |            | —     |                 | $            | 10,500             |         | 3,000            |         | $ | 10,500 |   | $ | 10,500 |   |
| **Board  meetings**     |         | $               | 16,500       |               | $          | 19,500          |         | $               | 19,500       |            | —     |                 | $            | 15,000             |         | 16,500           |         | $ | 19,500 |   | $ | 19,500 |   |
| **TOTAL**               | *** *** | ***$***         | ***39,500*** | *** ***       | ***$***    | ***51,500***    | *** *** | ***$***         | ***51,500*** | *** ***    | ***$***    | ***60,000***         | *** *** | ***$***            | ***39,500*** | *** ***     | ***32,000*** | *** *** | ***$*** | ***42,500*** | *** *** | ***$*** | ***44,000*** | *** *** |
| **Options**             |         | 15,000          |         | 15,000             |       | 15,000          |         | 20,000          |         | 15,000          |       | 15,000               |         | 15,000             |         | 15,000           |         |
|                         |              |                 |              |                    |            |                 |              |                 |              |                 |            |                      |              |                    |              |                  |              |  |  |  |  |  |  |  |  |

 

----

(1) Mr.Stewart Saxe resigned as a member of the Board of Directors and a member of theHuman Resources and Compensation Committee on December 2, 2004.

 

In December 2001, under the Corporation’s StockOption Plan, each of the directors (excluding the President and Chief ExecutiveOfficer) was awarded 15,000 options as partial compensation for servicesrendered as directors.  The Chairman wasawarded an additional 5,000 options.  Anaward of the same number of options occurs annually on each January 1 withan exercise price based on the average closing price of the common shares onthe TSX for the five trading days immediately preceding January 1 in each year.

 

From time to time, special committees of the Board ofDirectors are appointed to consider special issues, in particular issues whichcould potentially involve related party transactions and the adequacy and

 

89

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form ofthe compensation of Directors. Compensation for work on such committees is set based on the amount ofwork involved.

 

**Minimum Shareholding Requirements**

 

In June 2001, the Board of Directors established acorporate policy requiring each current Director to acquire by June 2004 (or inthe case of future Board of Directors members, within three years of theirappointment) common shares in the Company equal to five times his or her annualhonorarium.  All directors who were tocomply with this requirement by June 2004 were in compliance as of saiddate.  In February 2005, the Board ofDirectors adopted a resolution amending this policy to fix the number of commonshares to be so held at 15,000. Compliance with this policy will be monitored annually by the Nominatingand Corporate Governance Committee.

 

Director shareholdings as of March 21, 2005

 

| **Director**     | ** ** | **Shares Owned** | ** ** | **% Owned of total issued and  outstanding common shares** | ** ** |
|------------------|------------|------------------|------------|------------------------------------------------------------|------------|
| Martin Barkin(1) |       | 762,544          |       | 1.8                                                        |       |
| Leslie Dan       |       | 28,356           |       | < 1                                                     |       |
| George Darnell   |       | 36,000           |       | < 1                                                     |       |
| Rolf H. Henel    |       | 30,000           |       | < 1                                                     |       |
| Brian King       |       | 110,750          |       | < 1                                                     |       |
| Sam Sarick       |       | 906,589          |       | 2.2                                                        |       |
| Bruce W. Simpson |       | 10,000           |       | < 1                                                     |       |
| John Vivash      |       | 15,000           |       | < 1                                                     |       |
| Total            |       | 1,899,239        |       | 4.6                                                        |       |

 

----

(1)                                 Inaddition, as of December 31, 2004, Dr. Barkin owns 186,560 Deferred Share Unitsof the Company; see “Incentive Plans – Deferred Share Unit Plan.”

 

Senior Managementshareholdings as of March 21, 2005

 

| **Senior Management** | ** ** | **Shares Owned** | ** ** | **% Owned of total issued and  outstanding common shares** | ** ** |
|-----------------------|------------|------------------|------------|------------------------------------------------------------|------------|
| Martin Barkin         |       | 762,544          |       | 1.8                                                        |       |
| Dan Brazier           |       | 4,355            |       | < 1                                                     |       |
| Jack A. Carter        |       | nil              |       | nil                                                        |       |
| John Durham           |       | nil              |       | nil                                                        |       |
| Richard Flanagan      |       | 1,500            |       | < 1                                                     |       |
| Alida Gualtieri       |       | 500              |       | < 1                                                     |       |
| Chien Huang           |       | 10,600           |       | < 1                                                     |       |
| Mark Oleksiw          |       | nil              |       | nil                                                        |       |
| Jerry Ormiston        |       | 4,100            |       | < 1                                                     |       |
| Total                 |       | 21,055           | (1)        | < 1                                                     |       |

 

----

(1)                                 Excludesshares held by Dr. Barkin, which are included in the total of shares held bydirectors.

 

90

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Director outstandingoptions as of March 21, 2005

 
| **Director**       | ** ** | **# of Options** | ** ** | **Exercise Price**  | ** ** | **Expiration Date** | ** ** |
|--------------------|------------|------------------|------------|---------------------|------------|---------------------|------------|
| Martin Barkin      |       | 200,000          |       | CDN$3.07            |       | April 18, 2005      |       |
|               |       | 10,125           |       |   US$3.02 |       | June 13, 2006       |       |
|               |       | 120,000          |       | CDN$3.60            |       | July 5, 2006        |       |
|               |       | 225,000          |       | CDN$4.00            |       | February 5, 2007    |       |
|               |       | 50,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|               |       |             |       |                |       |                |       |
| Leslie L. Dan      |       | 10,000           |       | CDN$2.91            |       | December 31, 2005   |       |
|               |       | 15,000           |       | CDN$4.19            |       | December 31, 2006   |       |
|               |       | 15,000           |       | CDN$2.33            |       | December 31, 2007   |       |
|               |       | 15,000           |       | CDN$4.30            |       | December 31, 2008   |       |
|               |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|               |       |             |       |                |       |                |       |
| George M.  Darnell |       | 33,750           |       |   US$1.76 |       | June 13, 2005       |       |
|               |       | 10,000           |       | CDN$2.91            |       | December 31, 2005   |       |
|               |       | 10,125           |       |   US$3.02 |       | June 13, 2006       |       |
|               |       | 15,000           |       | CDN$4.19            |       | December 31, 2006   |       |
|               |       | 15,000           |       | CDN$2.33            |       | December 31, 2007   |       |
|               |       | 15,000           |       | CDN$4.30            |       | December 31, 2008   |       |
|               |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|               |       |             |       |                |       |                |       |
| Rolf H. Henel      |       | 10,000           |       | CDN$5.12            |       | April 30, 2007      |       |
|               |       | 5,000            |       | CDN$3.66            |       | August 13, 2007     |       |
|               |       | 15,000           |       | CDN$2.33            |       | December 31, 2007   |       |
|               |       | 15,000           |       | CDN$4.30            |       | December 31, 2008   |       |
|               |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|               |       |             |       |                |       |                |       |
| Brian M. King      |       | 15,000           |       | CDN$2.91            |       | December 31, 2005   |       |
|               |       | 20,000           |       | CDN$4.19            |       | December 31, 2006   |       |
|               |       | 20,000           |       | CDN$2.33            |       | December 31, 2007   |       |
|               |       | 20,000           |       | CDN$4.30            |       | December 31, 2008   |       |
|               |       | 20,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|               |       |             |       |                |       |                |       |
| Samuel Sarick      |       | 10,000           |       | CDN$2.91            |       | December 31, 2005   |       |
|               |       | 10,125           |       |   US$3.02 |       | June 13, 2006       |       |
|               |       | 15,000           |       | CDN$4.19            |       | December 31, 2006   |       |
|               |       | 15,000           |       | CDN$2.33            |       | December 31, 2007   |       |
|               |       | 15,000           |       | CDN$4.30            |       | December 31, 2008   |       |
|               |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|               |       |             |       |                |       |                |       |
| Bruce W. Simpson   |       | 10,000           |       | CDN$5.12            |       | April 30, 2007      |       |
|               |       | 5,000            |       | CDN$3.66            |       | August 13, 2007     |       |
|               |       | 15,000           |       | CDN$2.33            |       | December 31, 2007   |       |
|               |       | 15,000           |       | CDN$4.30            |       | December 31, 2008   |       |
|               |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|               |       |             |       |                |       |                |       |
| John A. Vivash     |       | 10,000           |       | CDN$2.91            |       | December 31, 2005   |       |
|               |       | 15,000           |       | CDN$4.19            |       | December 31, 2006   |       |
|               |       | 15,000           |       | CDN$2.33            |       | December 31, 2007   |       |
|               |       | 15,000           |       | CDN$4.30            |       | December 31, 2008   |       |
|               |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|               |       |             |       |                |       |                |       |
| Total              |       | 1,154,125        |       |                |       |                |       |

 

91

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Senior Management outstanding options as of March 21, 2005

 
| **Senior Management** | ** ** | **# of Options** | ** ** | **Exercise Price**  | ** ** | **Expiration Date** | ** ** |
|-----------------------|------------|------------------|------------|---------------------|------------|---------------------|------------|
| Martin Barkin         |       | 200,000          |       | CDN$3.07            |       | April 18, 2005      |       |
|                  |       | 10,125           |       |   US$3.02 |       | June 13, 2006       |       |
|                  |       | 120,000          |       | CDN$3.60            |       | July 5, 2006        |       |
|                  |       | 225,000          |       | CDN$4.00            |       | February 5, 2007    |       |
|                  |       | 50,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| Dan Brazier           |       | 20,000           |       | CDN$2.50            |       | October 31, 2007    |       |
|                  |       | 25,000           |       | CDN$2.32            |       | December 31, 2007   |       |
|                  |       | 100,000          |       | CDN$2.36            |       | July 14, 2013       |       |
|                  |       | 100,000          |       | CDN$4.70            |       | August 10, 2009     |       |
|                  |       | 25,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| Jack A. Carter        |       | 3,334            |       | CDN$3.66            |       | August 13, 2007     |       |
|                  |       | 6,668            |       | CDN$2.32            |       | December 31, 2007   |       |
|                  |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| John Durham           |       | 100,000          |       | CDN$2.36            |       | July 14, 2013       |       |
|                  |       | 25,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| Richard Flanagan      |       | 25,000           |       | CDN$3.60            |       | July 5, 2006        |       |
|                  |       | 40,000           |       | CDN$3.66            |       | August 13, 2007     |       |
|                  |       | 20,000           |       | CDN$2.32            |       | December 31, 2007   |       |
|                  |       | 25,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| Alida Gualtieri       |       | 25,000           |       | CDN$3.25            |       | November 3, 2008    |       |
|                  |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| Chien Huang           |       | 3,333            |       | CDN$3.15            |       | June 19, 2006       |       |
|                  |       | 10,000           |       | CDN$5.41            |       | May 14, 2007        |       |
|                  |       | 50,000           |       | CDN$2.36            |       | July 14, 2013       |       |
|                  |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| Mark Oleksiw          |       | 13,333           |       | CDN$3.66            |       | August 13, 2007     |       |
|                  |       | 100,000          |       | CDN$2.36            |       | July 14, 2013       |       |
|                  |       | 25,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| Jerry Ormiston        |       | 8,333            |       | CDN$3.00            |       | May 29, 2006        |       |
|                  |       | 46,667           |       | CDN$3.15            |       | June 19, 2006       |       |
|                  |       | 25,000           |       | CDN$3.60            |       | July 5, 2006        |       |
|                  |       | 10,000           |       | CDN$3.66            |       | August 13, 2007     |       |
|                  |       | 15,000           |       | CDN$2.32            |       | December 31, 2007   |       |
|                  |       | 15,000           |       | CDN$5.73            |       | December 31, 2009   |       |
|                  |       |             |       |                |       |                |       |
| Total                 |       | 906,668          | (1)        |                |       |                |       |

 

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(1)           Excludesshares held by Dr. Barkin, which are included in the total of shares held bydirectors.

 

**Board Practices**

 

Statement of Corporate Governance Practices

 

The Board of Directors of the Company believes thatsound corporate governance practices are essential to the well-being of theCompany and its shareholders, and that these practices should be reviewedregularly to ensure that they are appropriate. The Board of Directors has carefully considered and reviewed the seriesof guidelines for effective corporate governance issued by The Toronto StockExchange (“TSX Guidelines”), the corporate governance requirements of the U.S. *Sarbanes-Oxley Act of 2002*(the “SOXRequirements”), and the corporate governance reforms of the NASDAQ.  The Board of Directors believes that theCompany’s corporate governance practices satisfy the recommendations and rulescontained in these various guidelines and regulations.  The Board of Directors is also reviewing the

 

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proposedcorporate governance reforms contained in Multilateral Policy 58-201 entitled “EffectiveCorporate Governance” recently proposed by Canadian securities regulators.

 

Mandate of the Board of Directors

 

The mandate of the Board of Directors is to supervisethe management of the business and affairs of the Company.  In light of that responsibility, the Board ofDirectors reviews, discusses and approves various matters related to theCompany’s operations, strategic direction and organizational structure, whererequired, and involves itself jointly with management in ensuring the creationof shareholder value and the serving the best interests of the Company.  In April 2004, the Board of Directors adopteda detailed charter.  The charter isavailable on the Company’s Web site at www.draxis.com.  Thecharter specifies that the Board of Directors is responsible for:

 
| (i)    |   | Adopting a strategic planning process for the  Company;                                                                                                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                   |
| (ii)   |   | Adopting a communications policy for the Company;                                                                                                                                      |
|   |   |                                                                                                                                                                                   |
| (iii)  |   | Overseeing the financial integrity of the Company;                                                                                                                                     |
|   |   |                                                                                                                                                                                   |
| (iv)   |   | Monitoring compliance with the corporate objectives  of the Company;                                                                                                                   |
|   |   |                                                                                                                                                                                   |
| (v)    |   | Approving and ascertaining that the Company monitors  adherence to the Code of Ethics and Business Conduct;                                                                            |
|   |   |                                                                                                                                                                                   |
| (vi)   |   | Appointing the Chief Executive Officer, monitoring  his performance and ascertaining that succession plans are in place with  respect to the CEO and senior management;                |
|   |   |                                                                                                                                                                                   |
| (vii)  |   | Ensuring that appropriate structures and procedures  are in place so that the Board can function independently from management;                                                        |
|   |   |                                                                                                                                                                                   |
| (viii) |   | Establishing performance measures for the Company  and its management;                                                                                                                 |
|   |   |                                                                                                                                                                                   |
| (ix)   |   | Monitoring compliance with legal requirements and  ascertaining that the Company has procedures concerning the proper  preparation, approval and maintenance of documents and records; |
|   |   |                                                                                                                                                                                   |
| (x)    |   | Approving changes in the By-laws and Articles of  Incorporation and agendas for shareholder meetings;                                                                                  |
|   |   |                                                                                                                                                                                   |
| (xi)   |   | Approving the Company’s legal structure, name and  logo; and                                                                                                                      |
|   |   |                                                                                                                                                                                   |
| (xii)  |   | Performing such functions as it reserves to itself  or which cannot, by law, be delegated to Committees of the Board of Directors  or to management.                                   |

 

In addition, inApril 2004, the Board of Directors adopted position descriptions for the CEO,Directors, Chair of the Board of Directors and the Chair of each Committee ofthe Board of Directors.

 

There are five regularly scheduled Board of Directorsmeetings per year.  However, the Board ofDirectors also meets as frequently as the need arises to consider major issuesand opportunities.

 

There were thirteen meetings of the Board of Directorsin 2004.

 

Composition of the Board of Directors

 

The Board of Directors has reviewed the composition ofthe Board to determine which of the directors may be considered “unrelated”within the meaning of that term as set out in the TSX Guidelines.  A director who is free from any interest andany business or other relationship which could, or could

 

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reasonablybe perceived to, materially interfere with the director’s ability to act with aview to the best interests of the Company, other than interests arising fromshareholdings, is considered to be an unrelated director.

 

The Board of Directors, currently composed of eightmembers, has considered the relationship of each of the directors to theCompany and has determined that seven of the eight directors are unrelated tothe Company.  Dr. Martin Barkin, thePresident and Chief Executive Officer of the Company, is considered to be arelated director since he is an employee of the Company.

 

The Board of Directors believes that Dr. Barkin issensitive to conflicts of interest and excuses himself from deliberations andvoting in appropriate circumstances.  Hebrings a skill set and knowledge base that is beneficial to the Company and hisparticipation as a director contributes to the effectiveness of the Board ofDirectors.

 

The Board of Directors has adopted a practice that theChair of the Board and the CEO of the Company are separate individuals.

 

The Board of Directors sets aside during its regularlyscheduled meetings a time for meeting without any management present (includingthe CEO).

 

Committees of the Board of Directors

 

The Board of Directors has three standingcommittees:  the Audit Committee, theHuman Resources and Compensation Committee and the Nominating and CorporateGovernance Committee.  To maintainappropriate independence, no members of management sit on any of the threestanding committees.

 

From time to time, special committees of the Board ofDirectors are appointed to consider special issues, in particular, any issueswhich could potentially involve related party transactions.

 

Committees of the Board of Directors and individualBoard members may engage independent consultants and outside advisors at theexpense of the Company, where reasonable and appropriate, to assist them indischarging their responsibilities.

 

*Audit Committee*

 

The Audit Committee is responsible for reviewing theCompany’s financial reporting procedures and internal controls.  The Committee is also responsible forreviewing quarterly financial statements and the annual financial statementsand earnings announcements prior to their approval by the full Board ofDirectors and communicating regularly with the Company’s external auditors.

 

The Company believes the oversight responsibility ofthe Committee provides a key stewardship role for the Committee in the Company’sfinancial disclosure issues, internal controls, risk management, corporatefinance and related matters.

 

In reviewing the audited financial statements of theCompany, the Committee discusses the quality, not just the acceptability, ofthe accounting principles, the reasonableness of significant judgments, and theclarity of disclosure in the financial statements.  In addition, the Committee discusses with theCompany’s IndependentRegistered Chartered Accountants the overall scope and plans for their audit.  The Committee meets with the externalauditors, with and without management present, to discuss the results of theirexamination and the overall quality of the Company’s financial reporting.  The

 

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Committeealso carefully reviews evolving Canadian and U.S. audit committee regulationsand best practices to ensure corporate alignment with the spirit and intent ofsuch regulations and practices.

 

In February 2005 and April 2004, the Board ofDirectors approved amendments to the Charter for the Audit Committee, which wasinitially approved in February 2003.  Thecharter is available on the Company’s Web site at www.draxis.com.  The charter specifies that the purpose of theCommittee is to assist the Board of Directors with its oversightresponsibilities by:

 

•                  Reviewing theintegrity of the consolidated financial statements of the Company;

•                  Recommending tothe Board of Directors the appointment of the Independent Registered CharteredAccountants and reviewing the Independent Registered Chartered Accountants’qualifications and independence;

•                  Reviewing theperformance of the Company’s Independent Registered Chartered Accountants;

•                  Reviewing thetimely compliance by the Company with all legal and regulatory requirements foraudit and related financial functions of the Company;

•                  Reviewingfinancial information contained in public filings of the Company prior tofiling;

•                  Reviewingearnings announcements of the Company prior to release to the public;

•                  Overseeing theCompany’s systems of and compliance with internal financial controls andmanagement’s reporting on internal controls;

•                  Reviewing theCompany’s auditing, accounting and financial reporting processes; and

•                  Dealing with allcomplaints regarding accounting controls and auditing matters.

 

The Committee is composed of four directors, all ofwhom are unrelated and independent directors and all of whom are financiallyliterate.  The current members of theAudit Committee are Messrs. Samuel Sarick (Chair), Leslie Dan, George Darnelland Rolf Henel.  Mr. Henel is the Company’sdesignated financial expert in accordance with applicable regulatory andlegislative requirements.

 

*Human Resources and CompensationCommittee*

 

The Human Resources and Compensation Committeeoversees overall corporate policy with respect to compensation and benefits andmakes recommendations to the Board of Directors on, among other things, thecompensation of senior management.  Inassessing compensation issues, the Committee reviews and examines in detail theperformance of senior management.

 

Each of the four members of the Committee is anunrelated director.  The current membersof the Human Resources and Compensation Committee are Messrs. Brian King(Chair), Leslie Dan, Bruce Simpson and John Vivash.  Mr. Leslie Dan replaced Mr. Stewart Saxe as amember of the Committee when Mr. Saxe resigned as a member of the Board ofDirectors and a member of the Committee on December 2, 2004.

 

In April 2004, the Board of Directors approved a detailed charter for theHuman Resources and Compensation Committee. The charter is available on the Company’s Web site atwww.draxis.com.  The charter specifiesthat the purpose of the committee is to assist the Board of Directors with itsoversight responsibilities by reviewing and reporting on:

 

•                  Management’ssuccession plans for Executive Officers, with special emphasis on CEOsuccession, and including specific development plans and career planning forpotential successors;

•                  Compensationphilosophy of the organization, including a compensation strategy andcompensation policies for Executive Officers, as proposed by the CEO;

 

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•                  Recommendationsto the Board of Directors for the appointment of the CEO and other ExecutiveOfficers, corporate objectives that the CEO and such other Executive Officers,as the case may be, are responsible for meeting, assessment of the CEO againstthese objectives, monitoring of the CEO’s performance, and providing advice andcounsel in the execution of his duties;

•                  Totalcompensation plans including adequacy and form of compensation realisticallyreflecting the responsibilities and risks of the position for the CEO of theCompany and, in connection therewith, consider appropriate information,including information from the Board with respect to the overall performance ofthe CEO;

•                  Compensation forExecutive Officers, annual adjustment to Executive Officer salaries, and thedesign and administration of short and long-term incentive plans, stockoptions, benefits and perquisites as proposed by the CEO;

•                  Employment andtermination arrangements for Executive Officers;

•                  Adoption of newor significant modifications to pay and benefit plans;

•                  Significantchanges to the Company’s organizational structure relating to human resourcesfunction;

•                  The Committee’sproposed executive compensation report to be contained in the Company’s annualManagement Proxy Circular;

•                  Managementdevelopment programs for the Company;

•                  Any specialemployment contracts or arrangements with Executive Officers of the Companyincluding any contracts relating to a change of control;

•                  Remuneration formembers of the Board of Directors and Committees thereof, including adequacyand form of compensation realistically reflecting the responsibilities andrisks of the positions and recommending changes where applicable;

•                  Compliance bythe Company and its subsidiaries with all applicable employment and laborlegislation; and

•                  The performanceof the Committee and the effectiveness of the Committee’s members.

 

*Nominating and CorporateGovernance Committee*

 

The Nominating and Corporate Governance Committee isresponsible for recommending annually the members of the Board of Directorsproposed for election to the Board of Directors, recommending new candidatesfor Board membership, monitoring the composition and the Board of Directors andsuggesting appropriate changes.  It seekson behalf of shareholders well-qualified candidates to nominate as directors(individuals who provide a balance in terms of their backgrounds and experiencein different industries and professions). It is also responsible for making recommendations to the full Board ofDirectors with respect to developments in the area of corporate governance andbest practices.

 

Each of the four members of the Committee is anunrelated director.  The current membersof the Nominating and Corporate Governance Committee are Messrs. John Vivash(Chair), George Darnell, Rolf Henel and Bruce Simpson.

 

In April 2004, the Board of Directors approved a detailed Charter for theNominating and Corporate Governance Committee. The charter is available on the Company’s Web site atwww.draxis.com.  The charter specifiesthat the purpose of the committee is to assist the Board of Directors with itsoversight responsibilities by:

 

•                  Establishing a policy andprocedure for identifying and selecting potential nominees for the Board ofDirectors, including considering the competencies and skills that the Boardshould possess and the competencies and skills of each existing and potentialdirector;

 

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•                  Monitoring theBoard size and composition and suggesting changes in this respect where appropriate;

•                  Recommendingannually members for election to the Board of Directors;

•                  Identifying andrecommending new candidates for Board membership;

•                  Developing theCompany’s approach to governance issues and making recommendations to the Boardof Directors in the area of corporate governance practices of the Board;

•                  Preparing andreviewing with the Board of Directors an annual performance evaluation of theeffectiveness of individual Board members and the Board and itsCommittees.  The assessment of the Boardexamines its effectiveness as a whole and specifically reviews areas that theBoard and/or management believe could be improved to ensure the continuedeffectiveness of the Board in the execution of its responsibilities inaccordance with conflict of interest standards;

•                  Developing andrecommending to the Board of Directors standards to be applied to assessmaterial relationships between the Company and its Directors;

•                  Ensuring thatsuccession planning for senior management of the Company is in place and toreport annually to the Board of Directors on organizational succession planninginitiatives;

•                  Reviewingannually the risks identified by the Audit Committee with respect to the riskmanagement policies and procedures of the Company and to ensure such risks areappropriately identified in the Company’s public disclosure documentation;

•                  Revising, asappropriate, in accordance with best practices and legal requirements, the Codeof Ethics and Business Conduct for directors, offices and employees, as well asthe written Disclosure and Insider Trading Policy for the Company to address,among other things, procedures to monitor insider trading activities, toprevent selective disclosure and to mandate trading blackouts and corporatequiet periods;

•                  Monitoringcompliance with any Board-mandated Director minimum shareholding requirementsand monitoring attendance by Directors at Board and Committee meetings;

•                  Reviewing thisCharter periodically and recommending any changes required to its scope and contentto the Board; and

•                  Carrying out anyother duties or responsibilities expressly delegated to the Committee by theBoard of Directors.

 

Decisions Requiring Approval by the Board ofDirectors

 

In addition to those matters that must by law beapproved by the Board of Directors, certain other significant matters relatingto the business and affairs of the Company require prior approval of the Boardof Directors.  These matters include:

 

(i)            the approval of management’sdiscussion and analysis of financial results;

(ii)                                  theapproval of the quarterly financial statements and earnings announcements;

(iii)                               theapproval of the Company’s strategic business plans and directions;

(iv)                              anyrelated party transaction or any transaction involving any officer or director,regardless of materiality; and

(v)                                 anydisposition or expenditure in excess of CDN$1,000,000.

 

Orientation of New Directors and ContinuingEducation

 

In orienting new members to the Board ofDirectors, members are provided with an opportunity to visit the Company’sfacilities and to meet with management and other members of the Board ofDirectors to discuss and understand the Company’s business.  In addition, detailed documentation isprovided to Directors relating to the current business plan and currentpolicies of the Company as well as ongoing developments in the industry areasin which the Company operates.

 

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Performance of the Board of Directors

 

The Board of Directors regularly considers and assesses its performancerelating to its effectiveness, size, compensation policies and assessment ofmanagement performance.  In this regard,in January 2005, Directors completed a Board Effectiveness Survey prepared by theNominating and Corporate Governance Committee in which they gave assessments onissues surrounding Board responsibility, operations and effectiveness.  The results of this survey were shared withall of the Board members.  In February2005, Directors completed a Board Evaluation Survey prepared by the Nominatingand Corporate Governance Committee whereby each director assessed theperformance of each other director of the Board.  The Chair of the Nominating and CorporateGovernance Committee advised each director of the assessment so received.

 

CEO Performance

 

On an annual basis, the Company’s President and CEOcirculates proposed strategic plans which are discussed and, if appropriate,adopted by the Board of Directors.  TheBoard met in December 2004 to review the Company’s one year and three yearstrategic plans.  These strategic plansform the basis of the corporate objectives which the CEO is responsible formeeting.  The Human Resources andCompensation Committee of the Board of Directors assesses the CEO’s performanceand recommends to the Board of Directors as a whole, his compensation.

 

Shareholder Feedback and Communication

 

The Company maintains an investor relations departmentheaded by an Executive Director, Investor Relations, which reports directly tothe President and CEO of the Company.  Inaddition, investor relations experts are retained from time to time by theCompany to advise on issues and best practices for investor relations.  The Company communicates regularly with itsshareholders through annual and quarterly reports.  At the Company’s annual general meeting ofshareholders, a full opportunity is afforded for shareholders to ask questionsconcerning the Company’s business.  Eachshareholder and investor inquiry receives a prompt response from the investorrelations department or an appropriate officer of the Company.  Information about the Company, includingannual reports, interim financial reports and recent news releases, are alsoavailable on the Company’s Internet website at www.draxis.com.  In addition, the Company provides theopportunity for investors in both Canada and the U.S. to pose questions tosenior management, including the CEO, the Chief Financial Officer and theExecutive Director, Investor Relations through public forums such as conferencecalls and webcasts.

 

Board of Directors Expectations of Management

 

Management is responsible for the day-to-dayoperations of the Company and is expected to implement the approved strategicbusiness plan within the context of authorized budgets and corporate policies andprocedures.  The information thatmanagement provides to the Board of Directors is critical.  Management is expected to report regularly tothe Board of Directors in a comprehensive, accurate and timely fashion on thebusiness and affairs of the Company.  TheBoard of Directors monitors the nature of the information requested by andprovided to it so that it can effectively identify issues and opportunities forthe Company.

 

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**Employees**

 

As at December 31, 2004,the Company and its subsidiaries employed a total of 495 employees.  The DRAXIS Pharma division is the largestemployer with 381 employees, all located in Kirkland, Québec.  The DRAXIMAGE division employs 91 people all inKirkland, Québec.  The Company itselfemploys 23 people, the majority of whom are located in Kirkland, Québec.  At December 31, 2003 and 2002, the Companyand its subsidiaries had 378 and 315 employees, respectively.

 

**Item 7.****          ****Major********Shareholders and Related PartyTransactions**

 

The Company is not awareof any company, foreign government or natural or legal person that owns orcontrols the Company, directly or indirectly.

 

To our knowledge, thefollowing are the only persons who, as at the dates mentioned below,beneficially own, directly or indirectly, or exercise control over our commonshares carrying more than five percent (5%) of the votes attached to all ofthose shares.

 
| **Identity of Person or Group**                                                                                 | ** ** | **Amount Owned**        | ** ** | **Percent of Class** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| Natcan Investment Management Inc.  (information received by the Company as of March 21, 2005)                   |       | 4,649,567 common shares |       | 11.3                 | %          |
| Neil Gagnon (information received by the  Company as of January 27, 2005, for the year ended December 31, 2004) |       | 3,234,533 common shares |       | 7.9                  | %          |

 

Based on public filingsmade by Natcan Investment Management Inc., during 2003 and 2004, the percentageof our common stock beneficially owned by Natcan Investment Management Inc.increased from 9.4% in 2003 to 10.3% in 2004.

 

Based on public filingsmade by Neil Gagnon, during 2002, 2003 and 2004, the percentage of our commonstock beneficially owned by Neil Gagnon increased from 4.1% in 2002 to 7.6% in2003 and 7.9% in 2004.

 

As of March 21, 2005, 18,041,753 commonshares (43.7%****ofthe outstanding common shares) were held of record by 542 shareholders whoseregistered addresses were in the United States. The Company has no knowledge of any other shares held beneficially inthe United States.

 

As of March 21, 2005, there were a total of 1,082 shareholders ofrecord holding 41,304,388****common sharesissued and outstanding.

 

To our knowledge, there are no arrangements, theoperation of which may, at a subsequent date, result in a change in control.

 

The building housing the Company’s head office premises at 6870 GorewayDrive in Mississauga, Ontario is owned 50% by Samuel Sarick Limited, acorporation wholly owned by Mr. Sarick, a director of the Company.  The original lease for the premises wasentered into on April 25, 1994 between Samuel Sarick Limited, KentlakeConstruction Limited and Anec Investments Limited, as landlord, and theCompany, as tenant.  The lease renewalwas negotiated between the Company and

 

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Samuel Sarick Limited on an arm’s-length basis with the assistance ofColliers International retained by the Company and was renewed with theapproval of the Board of Directors effective May 1, 1999 for a period of fiveyears and renewed again on April 26, 2004 for a period of two years, expiring onMay 31, 2006.  The Company believes thatthe lease terms are consistent with arm’s length comparables and that theannual rent payable of CDN$141,005****isat fair market value.

 

The Company has made loans to certain key management personnel inconnection with its incentive plans and as inducements to enter into employmentagreements.  These plans have beendiscontinued, and there will be no further indebtedness under said plans.  Details of loans currently outstanding areset forth in the table below.

 
| **Name & Principal  Position**                                                    | ** ** | **Involvement  of Issuer or  Subsidiary**           | ** ** | **Largest Amount  Outstanding During 2004  Fiscal Year (1)** | ** ** | **Amount Outstanding as at  March 21, 2005 (1)**    | ** ** | **Financially  Assisted  Securities  Purchased  During the  2003 Fiscal  Year(#)(1)** | ** ** | **Security for  Indebtedness  as at  March 21,  2005(#)(1)** | ** ** | **Amount  Forgiven  during the  2004 Fiscal  Year($)** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Fully  Recourse  Interest  Bearing  (EPP)($)**                                      | ** ** | **Other  Employee  Share  Participation  Plans($)** | ** ** | **Fully  Recourse  Interest  Bearing  (EPP)($)**             | ** ** | **Other  Employee  Share  Participation  Plans($)** |
| Martin Barkin, MD President & Chief  Executive Officer                            |       | Lender                                              |       | 100,000                                                      |       | 157,989                                             | (2)        | 100,000                                                                               |       | Nil                                                          |       | Nil                                                    |       | 46,729 common shares of the Company |   | Nil |   |
| Mark Oleksiw Chief Financial Officer                                                  |       | Lender                                              |       | Nil                                                          |       | Nil                                                 |       | Nil                                                                                   |       | Nil                                                          |       | Nil                                                    |       | Nil |   | Nil |   |
| Dan Brazier Senior  Vice-President, Corporate Development and Strategic Planning |       | Lender                                              |       | Nil                                                          |       | 17,125                                              |       | Nil                                                                                   |       | Nil                                                          |       | Nil                                                    |       | Nil |   | Nil |   |
| John Durham  President, DRAXIS Pharma                                                 |       | Lender                                              |       | Nil                                                          |       | Nil                                                 |       | Nil                                                                                   |       | Nil                                                          |       | Nil                                                    |       | Nil |   | Nil |   |
| Richard Flanagan President, DRAXIMAGE                                                 |       | Lender                                              |       | 30,000                                                       |       | 13,766                                              |       | 30,000                                                                                |       | Nil                                                          |       | Nil                                                    |       | 14,019 common shares of the Company |   | Nil |   |

 

----

(1)          These figures take intoaccount indebtedness pursuant to the Employee Stock Ownership Plan, theEmployee Participation Share Purchase Plan and the Equity Purchase Plan:

 

EmployeeStock Ownership Plan:  through aninterest-free loan mechanism, each employee of the Company, including eachnamed executive officer, was granted on an annual basis a number of commonshares of the Company equal to 7% of total cash compensation.  See “Discontinued Plans – Stock OwnershipPlan;”

 

EmployeeParticipation Share Purchase Plan: subscription proceeds were loaned to each named executive officer on anon-recourse, interest free basis. Amounts referenced in this table include any outstanding loans relatingto Participation Shares, Series A, Series B and Series C.  See “Discontinued Plans – EmployeeParticipation Share Purchase Plan;” and

 

Equity Purchase Plan: the Company loaned funds to participating named executive officers on afull recourse, interest-bearing basis. See “Discontinued Plans – Equity Purchase Plan.”

 

(2)          This figure takes into account anamount of CDN$122,500 which was loaned by the Corporation to Dr. Barkin withrespect to 245,000 Series C Participation Shares in accordance with the termsof the Employee Participation Share Purchase Plan.  In January 14, 2004, Dr. Barkin converted the245,000 Series C Participation Shares and repaid the loan of CDN$122,500 andreceived 54,896 common shares of the Company with a corresponding value on thatdate of CDN$264,598.

 

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**Item 8.****          ****Financial Information**

 

The Company’s Consolidated Financial Statements are attached as pagesF-1 through F-31.  There have been nosignificant changes since the date of the financial statements.

 

**Legal/Arbitration Proceedings**

 

From time to time, the Company becomes involved in legal proceedingsand claims which arise in the ordinary course of business.  With the exception of the matter describedbelow related to *Anipryl*®, the Company considersthat the ultimate liability with respect to any known actions will notmaterially affect the business, financial position, results of operations orcash flows of the Company.

 

In the Ontario Court (General Division), on May 1, 1998, a Canadianlegal proceeding was launched against the Company and DAHI by a formerconsultant, Jozsef Knoll, claiming royalty entitlements based on the net profitfrom sales of *Anipryl*®.  Total damages claimed are $100 million.  The plaintiff also claims entitlement tocertain shares of DAHI.  The plaintiffhas taken no steps in the last five years to move the claim forward and may notdo so.  The Company believes that it hasgood defenses to this claim and that it is without merit and has and willcontinue to vigorously defend itself.

 

**Item 9.****         ****The Offer and Listing**

 

The Company’s commonshares are listed on The Toronto Stock Exchange (the “TSX”) under the symbol “DAX.”  The following table sets forth, in Canadiandollars, the per share high and low sales prices on the TSX for the five mostrecent full financial years:

 
| **Years**  | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------|------------|---------|------------|
| ** ** | ** ** | **($)**  | ** ** | **($)** | ** ** |
| 2000       |       | 5.95     |       | 2.05    |       |
| 2001       |       | 4.40     |       | 2.11    |       |
| 2002       |       | 5.60     |       | 2.00    |       |
| 2003       |       | 4.75     |       | 1.61    |       |
| 2004       |       | 7.90     |       | 4.12    |       |

 

The following table setsforth, in Canadian dollars, the per share high and low sales prices on the TSXby fiscal quarter for 2004 and 2003.

 
| **2004**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** |
| First Quarter  |       | 7.90     |       | 4.12    |       |
| Second Quarter |       | 7.03     |       | 4.78    |       |
| Third Quarter  |       | 6.29     |       | 4.32    |       |
| Fourth Quarter |       | 6.45     |       | 5.21    |       |

 
| **2003**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** |
| First Quarter  |       | 2.50     |       | 1.61    |       |
| Second Quarter |       | 2.50     |       | 1.72    |       |
| Third Quarter  |       | 3.07     |       | 2.15    |       |
| Fourth Quarter |       | 4.75     |       | 2.41    |       |

 

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The followingtable sets forth, in Canadian dollars, the per share high and low sales pricesand the trading volumes on the TSX from January 2004 to February 2005:

 
| **Months**     | ** ** | **High** | ** ** | **Low** | ** ** | **Trading Volumes** | ** ** |
|----------------|------------|----------|------------|---------|------------|---------------------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** | **(#)**             | ** ** |
| January 2004   |       | 5.95     |       | 4.12    |       | 3,818,817           |       |
| February 2004  |       | 6.30     |       | 5.15    |       | 3,874,897           |       |
| March 2004     |       | 7.90     |       | 5.35    |       | 4,718,914           |       |
| April 2004     |       | 7.03     |       | 4.78    |       | 4,636,579           |       |
| May 2004       |       | 6.05     |       | 5.08    |       | 1,699,172           |       |
| June 2004      |       | 6.20     |       | 5.00    |       | 2,942,640           |       |
| July 2004      |       | 5.88     |       | 5.03    |       | 1,246,021           |       |
| August 2004    |       | 6.16     |       | 4.32    |       | 2,005,715           |       |
| September 2004 |       | 6.29     |       | 5.63    |       | 1,203,949           |       |
| October 2004   |       | 6.15     |       | 5.36    |       | 696,328             |       |
| November 2004  |       | 6.45     |       | 5.21    |       | 2,156,756           |       |
| December 2004  |       | 6.03     |       | 5.75    |       | 1,421,699           |       |
| January 2005   |       | 5.99     |       | 4.75    |       | 3,289,003           |       |
| February 2005  |       | 6.25     |       | 5.60    |       | 3,574,727           |       |

 

The commonshares are quoted on the NASDAQ National Market System (“NASDAQ”) in the UnitedStates under the symbol “DRAX.”  Thefollowing table sets forth, in U.S. dollars, the per share high bid and lowasked prices on NASDAQ for the five most recent full financial years:

 
| **Years**  | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------|------------|---------|------------|
| ** ** | ** ** | **($)**  | ** ** | **($)** | ** ** |
| 2000       |       | 4.62     |       | 1.03    |       |
| 2001       |       | 2.79     |       | 1.45    |       |
| 2002       |       | 3.67     |       | 1.29    |       |
| 2003       |       | 3.70     |       | 1.09    |       |
| 2004       |       | 5.94     |       | 3.29    |       |

 

The followingtable sets forth, in U.S. dollars, the per share high and low asked prices onNASDAQ in U.S. dollars, by fiscal quarter for 2004 and 2003:

 
| **2004**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** |
| First Quarter  |       | 5.94     |       | 3.81    |       |
| Second Quarter |       | 5.36     |       | 3.46    |       |
| Third Quarter  |       | 5.00     |       | 3.29    |       |
| Fourth Quarter |       | 5.37     |       | 3.95    |       |

 
| **2003**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** |
| First Quarter  |       | 1.66     |       | 1.09    |       |
| Second Quarter |       | 1.85     |       | 1.18    |       |
| Third Quarter  |       | 2.23     |       | 1.55    |       |
| Fourth Quarter |       | 3.70     |       | 1.80    |       |

 

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The following table setsforth, in U.S. dollars, the per share high and low sales prices and thetrading volumes on NASDAQ fromJanuary 2004 to February 2005:

 
| **Months**     | ** ** | **High** | ** ** | **Low** | ** ** | **Trading Volumes** | ** ** |
|----------------|------------|----------|------------|---------|------------|---------------------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** | **(#)**             | ** ** |
| January 2004   |       | 5.49     |       | 3.18    |       | 8,403,051           |       |
| February 2004  |       | 4.86     |       | 3.81    |       | 8,475,570           |       |
| March 2004     |       | 5.94     |       | 4.06    |       | 14,734,722          |       |
| April 2004     |       | 5.36     |       | 3.46    |       | 9,862,652           |       |
| May 2004       |       | 4.41     |       | 3.70    |       | 3,972,891           |       |
| June 2004      |       | 4.63     |       | 3.65    |       | 3,132,943           |       |
| July 2004      |       | 4.73     |       | 3.70    |       | 2,375,347           |       |
| August 2004    |       | 4.89     |       | 3.29    |       | 4,035,492           |       |
| September 2004 |       | 5.00     |       | 4.26    |       | 1,963,041           |       |
| October 2004   |       | 5.00     |       | 4.30    |       | 1,971,741           |       |
| November 2004  |       | 5.37     |       | 4.30    |       | 3,836,724           |       |
| December 2004  |       | 5.01     |       | 3.95    |       | 2,388,448           |       |
| January 2005   |       | 4.97     |       | 3.95    |       | 4,906,636           |       |
| February 2005  |       | 4.99     |       | 4.45    |       | 2,524,447           |       |

 

The transferagent of the Company is Computershare Trust Company of Canada, Stock TransferServices, located at 100 University Avenue, Toronto, Ontario, Canada M5J 2Y1

 

**Item 10.****                            AdditionalInformation**

 

**Bylawsand Articles of Amalgamation**

 

The Company’s Articles ofAmalgamation are on file with the Corporations Directorate of Industry Canadaunder Corporation Number 357288-9.  The Articlesof Amalgamation do not include a stated purpose and do not place anyrestrictions on the business that the Company may carry on.

 

**Inspection Rights of Shareholders**

 

Under the *Canada Business Corporations Act* (the “CBCA”or the “Act”), shareholders are entitled to be provided with a copy of the listof registered shareholders of the company. In order to obtain the shareholder list, the Company must be providedwith an affidavit including, among other things, a statement that the list willonly be used for the purposes permitted by the CBCA.  These permitted purposes include an effort toinfluence of the voting of shareholders of the Company, an offer to acquiresecurities of the Company and any other matter relating to the affairs of theCompany.  The Company is entitled tocharge a reasonable fee for the provision of the shareholder list and mustdeliver that list no more than ten days after receipt of the affidavitdescribed above.

 

Shareholders of theCompany have the right to inspect certain corporate records, including itsarticles and by-laws and minutes of meetings and resolutions of theshareholders.  Shareholders have nostatutory right to inspect minutes of meetings and resolutions of directors ofthe Company.

 

Shareholders of theCompany have the right to certain financial information respecting theCompany.  In addition to the annual andquarterly financial statement required to be filed under applicable securitieslaws, the Company is required to place before every annual meeting of shareholdersits audited comparative annual financial statements.  In addition, shareholders have the right toexamine the financial

 

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statements of each of itssubsidiaries and any other corporate entity whose accounts are consolidated inthe financial statements of the Company.

 

**Directors**

 

The minimum number ofdirectors of the Company is one (1) and the maximum number is twelve (12).  In accordance with the Company’s bylaws andthe Act, a majority of its directors must be residents of Canada.  In order to serve as a director, a personmust be a natural person at least 18 years of age, of sound mind and notbankrupt.  Neither the Articles ofAmalgamation, bylaws, nor the Act, impose any mandatory retirement requirementsfor directors.

 

Under the Company’s bylawsand the Articles of Amalgamation, a director of the Company need not be ashareholder.  However, in June 2001 theBoard of Directors established a corporate policy requiring each currentDirector to acquire by June 2004 (or in the case of future Board of Directorsmembers, within three years of their appointment) common shares in the Companyequal to five times his or her annual honorarium.  All directors who were to comply with thisrequirement by June 2004 were in compliance as of said date.  In February 2005, the Board of Directorsadopted a resolution amending this policy to fix the number of common shares tobe so held at 15,000.  Compliance withthis policy will be monitored annually by the Nominating and CorporateGovernance Committee.

 

A director who is a partyto, or who is a director or officer of, or has a material interest in, anyperson who is a party to a material contract or transaction or proposedmaterial contract or transaction with the Company must disclose to the Companythe nature and extent of his or her interest at the time and in the mannerprovided by the Act.  The Act prohibitssuch a director from voting on any resolution to approve the contract ortransaction unless the contract or transaction:

 

•                                          is an arrangement by way of security for money lent to or obligationsundertaken by the director for the benefit of the Company or an affiliate;

 

•                                          relates primarily to his or her remuneration as a director, officer,employee or agent of the Company or an affiliate;

 

•                                          is for indemnity or insurance for director’s liability as permitted bythe Act; or

 

•                                          is with an affiliate.

 

The Board of Directorsmay, on behalf of the Company and without authorization of its shareholders:

 

•                                          borrow money upon the credit of the Company;

 

•                                          issue, reissue, sell or pledge debt obligations of the Company;

 

•                                          give a guarantee on behalf of the Company to secure performance of anobligation of any person; and

 

•                                          mortgage, hypothecate, pledge or otherwise create a security interest inall or any property of the Company, owned or subsequently acquired, to secureany obligation of the Company.

 

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The Act prohibits thegiving of a guarantee to any shareholder, director, officer or employee of theCompany or of an affiliated corporation or to an associate of any such personfor any purpose or to any person for the purpose of or in connection with apurchase of a share issued or to be issued by the Company or its affiliates,where there are reasonable grounds for believing that the Company is or, aftergiving the guarantee, would be unable to pay its liabilities as they becomedue, or the realizable value of the Company’s assets in the form of assetspledged or encumbered to secure a guarantee, after giving the guarantee, wouldbe less than the aggregate of the Company’s liabilities and stated capital ofall classes.

 

These borrowing powers maybe varied by the Company’s bylaws or its Articles of Amalgamation.  However, the Company’s bylaws and Articles ofAmalgamation do not contain any restrictions on or variations of theseborrowing powers.

 

The general duties of adirector or officer of the Company under the CBCA are to act honestly and ingood faith with a view to the best interests of the Company and to exercise thecare, diligence and skill that a reasonably prudent person would exercise incomparable circumstances.  Any breach ofthese duties may lead to liability to the Company and its shareholders forbreach of fiduciary duty.  In addition, abreach of certain provisions of the CBCA, including the improper payment ofdividends or the improper purchase or redemption of shares, will render thedirectors who authorized such action liable to account to the Company for anyamounts improperly paid or distributed.

 

**ShareCapitalization**

 

The Company’s Articles ofAmalgamation authorize the issuance of an unlimited number of common shares(41,304,388 of which are outstanding as of March 21, 2005), an unlimited numberof preferred shares (none of which are issued and outstanding), and 2,000,000Employee Participation Shares (2,000,000 of which have been issued and none ofwhich remain outstanding as of March 21, 2005). The Articles of Amalgamation do not authorize the issuance of any otherclass of shares.

 

CommonShares

 

The holders of the commonshares of the Company are entitled to receive notice of and to attend allmeetings of the shareholders of the Company and have one vote for each commonshare held at all meetings of shareholders. The directors are elected at each annual meeting of shareholders and donot stand for re-election at staggered intervals.

 

The holders of commonshares are entitled to receive dividends and the Company will pay dividends, asand when declared by the Board of Directors, out of moneys properly applicableto the payment of dividends, in such amount and in such form as the Board ofDirectors may from time to time determine, subject to the rights of the holdersof any other class of shares of the Company entitled to receive dividends inpriority to or ratably with the holders of the common shares, and all dividendswhich the Board of Directors may declare on the common shares shall be declaredand paid in equal amounts per share on all common shares at the timeoutstanding.

 

In the event of thedissolution, liquidation or winding-up of the Company, whether voluntary orinvoluntary, or any other distribution of assets of the Company among itsshareholders for the purpose of winding-up its affairs, the holders of thecommon shares shall, subject to the rights of the holders of any other class orshares of the Company entitled to receive the assets of the Company upon suchdistribution in priority to or ratably with the holders of the common shares, beentitled to participate ratably in any distribution of the assets of theCompany.

 

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PreferredShares

 

The preferred shares ofthe Company may at any time or from time to time be issued in one or more series.  No preferred shares of the Company have beenissued to date.  Preferred shares shallbe entitled to preference over the common shares and any other shares of theCompany ranking junior to the preferred shares and the distribution of assetsin the event of any liquidation and common dissolution or winding-up of theCompany, whether voluntary or involuntary, or other distribution of the assetsof the Company among its shareholders for the purpose of winding-up itsaffairs.  The preferred shares of each seriesshall rank in parity with the preferred shares of every other series withrespect to priority in the payment of dividends and in the distribution ofassets in the event of liquidation, dissolution or winding-up of the Company.

 

Subject to the provisionsrelating to any particular series, the Company may redeem the whole or any partof the preferred shares on any one or more series outstanding from time to timeat such price or prices as may be applicable to such series by giving at leastthirty (30) days’ prior notice in writing of the intention of the Company toredeem such shares to each person who at the date of giving such notice is theregistered holder of preferred shares to be redeemed.

 

The preferred shares maybe issued on the authorization of the directors, without further authorizationby the shareholders, but the issuance of any preferred share is subject to thegeneral duties of the directors under the CBCA to act honestly and in goodfaith with a view to the best interests of the Company and to exercise thecare, diligence and skill that a reasonably prudent person would exercise incomparable circumstances.  The issuanceof any preferred shares in the face of a take-over bid for the Company would beexamined in light of these duties of the directors and other applicable caselaw.

 

Shareholder Actions

 

The CBCA provides thatshareholders of the Company may, with leave of a court, bring an action in thename of and on behalf of the Company for the purpose of prosecuting, defendingor discontinuing an action on behalf of the Company.  In order to grant leave to permit such anaction, the CBCA provides that the court must be satisfied that the directorsof the Company were given adequate notice of the application, the shareholderis acting in good faith and that it appears to be in the Company’s bestinterests that the action be brought.

 

EmployeeParticipation Shares

 

On February 16, 1995, theBoard of Directors of the Company authorized the issuance of 975,000 Series AParticipation Shares; on December 18, 1995, the Board of Directors of theCompany authorized the issuance of 555,000 Series B Participation Shares and onMay 12, 1999, the Board of Directors of the Company authorized the issuance of470,000 Series C Participation Shares. The Employee Participation Share Purchase Plan (the “EP Plan”) wasdiscontinued effective December 4, 2002.

 

Each participation shareentitles the holder to receive cash dividends, if any, as may from time to timebe declared payable thereon, at the same time as dividends, if any, are paid onthe common shares of the Company, in an amount for each participation share ofa particular series which is equal to the proportion of the amount of thedividend declared on each common share that the subscription price of suchparticipation share is of the fair market value at the date of issuance of suchparticipation share.

 

In the event of aproposal, order or resolution for the liquidation, dissolution or winding-up ofthe Company, whether voluntary or involuntary; or on the “Automatic ConversionDate” (as defined in the Articles of Amalgamation and the terms of the EPPlan); or at the option of the holder on a “Conversion

 

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Date” (as defined in theArticles of Amalgamation and the terms of the EP Plan) other than the “AutomaticConversion Date” (as defined in the Articles of Amalgamation and the terms ofthe EP Plan), the participation shares will become common shares, and thenumber of common shares a holder receives on conversion is the number of commonshares which is determined by multiplying the number of participation sharesheld, or in the case of conversion on a Conversion Date other than theAutomatic Conversion Date, the number of participation shares which the holderelects to convert, by a fraction:

 

1.                the numerator of which shall be the “EPShare Value”(as defined in the Articles of Amalgamation and the terms of the EPPlan) of a participation share of a particular series as at the earlier of the “AutomaticConversion Date” and a “Conversion Date,” as the case may be; and

2.                the denominator of which shall be the “FairMarket Value of a Common Share” (as defined in the Articles of Amalgamation andthe terms of the EP Plan) as at the earlier of the two dates described in 1;provided that no fractional common shares will be issued and no payment will bemade in respect of fractional common shares.

 

On January 14, 2004, the 245,000 Series C shares, which were the onlyoutstanding employee participation shares, were converted into 54,896 commonshares of the Company.

 

Warrants

 

In April 2004, the Company closed an equity financing offering of3,053,436 units consisting of one common share and one-half of one sharepurchase warrant per unit.  Each wholewarrant entitles its holder to acquire one common share at a price of CDN$8.50,subject to certain adjustments, at any time prior to April 24, 2006.  The warrants are transferable. Holders ofwarrants do not, as such, have any voting rights or other right attaching tothe common shares until the warrants are properly exercised and common sharesissuable upon the exercise of the warrants are issued.

 

Pursuant to the terms of the indenture relating to the warrants enteredinto between the Company and Computershare Trust Company of Canada, subject toapplicable law, the Company may purchase prior to April 24, 2006, by privatecontract or otherwise, all of or any of the warrants then outstanding and anywarrants so purchased will be cancelled.

 

ShareholderRights Plan

 

On May 16, 2002, theshareholders of the Company approved a Shareholder Rights Plan Agreement (the “RightsPlan”), the principal terms of which are as follows:

 

***Effective Date***

*** ***

The Rights Plan becameeffective on April 23, 2002 (the “Effective Date”) and was approved byshareholders of the Company at its Annual and Special Meeting of shareholdersheld on May 16, 2002.

 

***Term***

*** ***

The term of the RightsPlan is ten years, subject to reconfirmation by shareholders at every thirdannual meeting.

 

***Issue of Rights***

*** ***

One right (a “Right”)attaches to each outstanding common share.

 

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***Rights Exercise Privilege***

*** ***

The Rights will separatefrom the shares to which they are attached and will become exercisable at thetime (the “Separation Time”) that is ten trading days after the earlier of aperson having acquired, or the commencement, announcement or other datedetermined by the Board of Directors in respect of a takeover bid to acquire,20% or more of the common shares, other than by an acquisition pursuant to atakeover bid permitted by the Rights Plan (a “Permitted Bid”).

 

Theacquisition of Beneficial Ownership (as defined in the Rights Plan) by anyperson (an “Acquiring Person”), including others acting in concert, of 20% ormore of the common shares, other than by way of a Permitted Bid, is referred toas a “Flip-in Event.”  Under the RightsPlan, there are certain exceptions to that rule, including (i) the Company or asubsidiary of the Company, (ii) a person who acquires 20% or more of theoutstanding common shares through, among other things, a share redemption or aPermitted Bid, (iii) an underwriter or selling group member during the courseof a public distribution; or (iv) investment and fund managers, trust companiesand other persons who are managing investment funds, pension funds or plans,estates or accounts on behalf of another person, provided they are not making,or are not part of a group making, a takeover bid.  Any Rights held by an Acquiring Person on orafter the earlier of the Separation Time or the first date of publicannouncement by the Company or an Acquiring Person that an Acquiring Person hasbecome such will become void upon the occurrence of a Flip-in Event.

 

Under theRights Plan, a bidder is entitled to “lock up” any shareholder of the Companywithout triggering the Rights Plan so long as the lock-up agreement is a “soft”lock up, meaning the locked-up shareholder is entitled to tender to a higheroffer (so long as the higher offer is not required under the lock-up agreementto be more than 7% higher than the first offer).

 

Ten trading days after theoccurrence of the Flip-in Event, the Rights (other than those held by theAcquiring Person) will permit the holder to purchase, for the exercise price ofthe Rights, common shares having a value based on the then-prevailing marketprice) equal to twice such exercise price (i.e., at a 50% discount).  The exercise price of the Rights will beequal to five times the prevailing market price at the Separation Time.

 

The issue of the Rights is not initiallydilutive.  Upon a Flip-in Event occurringand the Rights separating from the attached shares, reported earnings percommon share on a fully diluted or non-diluted basis may be affected.  Holders of Rights who do not exercise theirRights upon the occurrence of a Flip-in Event may suffer substantial dilution.

 

***Certificates and Transferability***

*** ***

Prior to theSeparation Time, the Rights will be evidenced by a legend imprinted oncertificates for common shares issued from and after the Effective Date.  Rights are also attached to such sharesoutstanding on the Effective Date, although share certificates issued prior tothat date will not bear such a legend. Prior to the Separation Time, Rights will not be transferable separatelyfrom the attached shares.  From and afterthe Separation Time, the Rights will be evidenced by Rights certificates whichwill be transferable and traded separately from the shares.

 

***Permitted Bid Requirements***

*** ***

The requirements of aPermitted Bid include the following:

 

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•                                          thetakeover bid must be made by way of a takeover bid circular to all holders ofcommon shares;

 

•                                          thetakeover bid must not permit common shares tendered pursuant to the takeoverbid to be taken up prior to the expiry of a period of not less than 60 days andonly if at such time more than 50% of the common shares held by shareholdersother than the bidder, its affiliates, associates and persons acting jointly orin concert with the bidder (the “Independent Shareholders”) have been tenderedpursuant to the takeover bid and not withdrawn; and

 

•                                          ifmore than 50% of the common shares held by Independent Shareholders aretendered to the takeover bid within the 60-day period, the bidder must make apublic announcement of that fact and the takeover bid must remain open fordeposits of common shares for an additional 10 business days from the date ofsuch public announcement.

 

The Rights Plan allows acompeting Permitted Bid (a “Competing Permitted Bid”) to be made while aPermitted Bid is in existence.  ACompeting Permitted Bid must satisfy all the requirements of a Permitted Bidexcept that it may expire on the same date as the Permitted Bid, subject to therequirement that it be outstanding for a minimum period of 35 days.

 

***Waiver***

*** ***

The Board of Directorsmay, prior to a Flip-in Event, waive the dilutive effects of the Rights Plan inrespect of a particular Flip-in Event (an “Exempt Acquisition”) that wouldresult from a takeover bid made by way of a takeover bid circular to allholders of common shares, provided that in such circumstances the Board shallbe deemed to have waived the application of the Rights Plan to any otherFlip-in Event occurring as a result of a takeover bid made by way of a takeoverbid circular to all holders of common shares prior to the expiry of anytakeover bid in respect of which the Rights Plan has been waived.  The Board of Directors may also waive theRights Plan in respect of a particular Flip-in Event that has occurred throughinadvertence, provided that the Acquiring Person that inadvertently triggeredsuch Flip-in Event reduces its beneficial holdings to less than 20% of theoutstanding voting shares of the Company within 14 days or such other period asmay be specified by the Board of Directors.

 

***Redemption***

*** ***

At any time prior to theoccurrence of a Flip-in Event, the Board of Directors may with the priorapproval of the holders of the common shares or the Rights redeem all, but notless than all, of the outstanding Rights at a price of CDN$0.000001 each.  Rights will be deemed to have been redeemedby the Board of Directors following completion of a Permitted Bid, CompetingPermitted Bid or Exempt Acquisition.

 

***Supplements and Amendments***

*** ***

The Company is authorizedto make amendments to the Rights Plan to correct any clerical or typographicalerror or, subject to subsequent ratification by shareholders or Rights holders,to maintain the validity of the Rights Plan as a result of changes in law orregulation.  Other amendments orsupplements to the Rights Plan may be made with the prior approval ofshareholders or Rights holders.

 

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**ActionNecessary to Change Rights of Shareholders**

 

In order to change the rightsof our shareholders, the Company would need to amend its Articles ofAmalgamation to effect the change.  Suchan amendment would require the approval of holders of two-thirds of the commonshares cast at a duly called special meeting. For certain amendments such as those creating of a class of preferredshares, a shareholder is entitled under the Act to dissent in respect of such aresolution amending the Articles of Amalgamation and, if the resolution isadopted and the Company implements such changes, demand payment of the fairvalue of its common shares.

 

**Meetingof Shareholders**

 

An annual meeting ofshareholders is held each year for the purpose of considering the financialstatements and reports, electing directors, appointing auditors and for thetransaction of other business as may be brought before the meeting.  The Board of Directors has the power to calla special meeting of shareholders at any time.

 

Notice of the time andplace of each meeting of shareholders must be given not less than 21 days, normore than 50 days, before the date of each meeting to each director, to theauditor and to each shareholder who at the close of business on the record datefor notice is entered in the securities register as the holder of one or moreshares carrying the right to vote at the meeting.  Notice of meeting of shareholders called forany other purpose other than consideration of the minutes of an earliermeeting, financial statements and auditor’s report, election of directors andreappointment of the incumbent auditor, must state the nature of the businessin sufficient detail to permit the shareholder to form a reasoned judgment onand must state the text of any special resolution or bylaw to be submitted tothe meeting.

 

The only persons entitledto be present at a meeting of shareholders are those entitled to vote, thedirectors of the Company and the auditor of the Company.  Any other person may be admitted only on theinvitation of the chairman of the meeting or with the consent of themeeting.  In circumstances where a courtorders a meeting of shareholders, the court may direct how the meeting may beheld, including who may attend the meeting.

 

The holders of not less than fivepercent of the outstanding voting shares of the Company may requisition thedirectors of the Company to call a meeting of shareholders for the purposestated in the requisition.  Except inlimited circumstances, including where a meeting of shareholders has alreadybeen called and a notice of meeting already given or where it is clear that theprimary purpose of the requisition is to redress a personal grievance againstthe Company or its directors, officers or shareholders, the directors of theCompany shall call a meeting of shareholders. If the directors fail to call a meeting of shareholders within 21 daysafter receiving the requisition, any shareholder who signed the requisition maycall the meeting of shareholders and, unless the shareholders resolve otherwiseat the meeting, the Company shall reimburse the shareholders for the expensesreasonably incurred by them in requisitioning, calling and holding the meetingof shareholders.

 

The CBCA also provides that,except in limited circumstances, a resolution in writing signed by all of theshareholders entitled to vote on that resolution at a meeting of shareholdersis as valid as if it had been passed at a meeting of shareholders.

 

**Limitationson Right to Own Securities**

 

Neither Canadian law northe Company’s Articles of Amalgamation or bylaws limit the right of a non-residentto hold or vote common shares of the Company, other than as provided in theInvestment Canada Act (the “Investment Act”). The Investment Act generally prohibits implementation of a directreviewable investment by an individual, government or agency thereof,corporation, partnership, trust or

 

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joint venture that is nota “Canadian,” as defined in the Investment Act (a “non-Canadian”), unless,after review, the minister responsible for the Investment Act is satisfied oris deemed to be satisfied that the investment is likely to be of net benefit toCanada.  An investment in the commonshares of the Company by a non-Canadian (other than a “WTO Investor,” asdefined below) would be reviewable under the Investment Act if it were aninvestment to acquire direct control of the Company, and the book value of theassets of the Company were CDN$5.0 million or more (provided that immediatelyprior to the implementation of the investment the Company was not controlled byWTO Investors).  An investment in commonshares of the Company by a WTO Investor (or by a non-Canadian other than a WTOInvestor if, immediately prior to the implementation of the investment, theCompany was controlled by WTO Investors) would be reviewable under theInvestment Act if it were an investment to acquire direct control of theCompany (in 2003) and the value of the assets of the Company equaled orexceeded CDN$223.0 million.  Anon-Canadian, whether a WTO Investor or otherwise, would be deemed to acquirecontrol of the Company for purposes of the Investment Act if he or she acquireda majority of the common shares of the Company. The acquisition of less than a majority, but at least one-third of theshares, would be presumed to be an acquisition of control of the Company,unless it could be established that the Company was not controlled in fact bythe acquirer through the ownership of the shares.  In general, an individual is a WTO Investorif he or she is a “national” of a country (other than Canada) that is a memberof the World Trade Organization (“WTO Member”) or has a right of permanentresidence in a WTO Member.  A corporationor other entity will be a “WTO Investor” if it is a “WTO Investor-controlledentity,” pursuant to detailed rules set out in the Investment Act.  The United States is a WTO Member.  Certain transactions involving the Company’scommon shares would be exempt from the Investment Act, including:

 

(a)                                  an acquisition of theshares if the acquisition were made in the ordinary course of that person’sbusiness as a trader or dealer in securities;

(b)                                 an acquisition ofcontrol of the Company in connection with the realization of a securityinterest granted for a loan or other financial assistance and not for anypurpose related to the provisions of the Investment Act; and

(c)                                  an acquisition ofcontrol of the Company by reason of an amalgamation, merger, consolidation orcorporate reorganization, following which the ultimate direct or indirectcontrol in fact of the Company, through the ownership of voting interests,remains unchanged.

 

# **Dividend Policy**

# ** **

For the year ended December 31, 2004, the Company has not declared orpaid any dividends on its common shares and there exists no plans to do so.

 

**MaterialContracts**

 

On October 25, 1995,Frosst Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (now knownas DRAXIMAGE) entered into a non-exclusive distribution agreement with SyncorInternational Corporation (now known as Cardinal Health 414, Inc.) fordistribution in the U.S. of DTPA, a kit used to prepare Tc-99m Pentetate tostudy kidney clearance, and MDP, a kit used to prepare Tc-99m MethyleneDiphosphonic Acid to study bone metabolism. The initial term was for five years, with automatic renewal of theagreement for successive two-year periods. This agreement is filed as Exhibit 4.37 to this annual report.

 

On July 12, 2000 DRAXIMAGEsigned a non-exclusive distribution agreement with Syncor International (nowknown as Cardinal Health 414, Inc.) for the production of a kit for thepreparation of sodium iodide I-131 capsules and oral solution indicated for thetreatment of thyroid cancer and hyperthyroidism for sale in the U.S.  The term of the agreement is five years fromthe date DRAXIMAGE

 

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makes the first sale ofthe product.  The date of the first salewas March 2003.  This agreement wasamended on August 6, 2003 to provide that DRAXIMAGE could distribute the productto independent radiopharmacies in the U.S. This agreement and its amendment are filed as Exhibits 4.38 and 4.39,respectively, to this annual report.

 

On July 1, 1999, DRAXISPharma entered into a five-year manufacturing and supply agreement withWarner-Lambert Canada Inc. (now known as Pfizer Consumer Healthcare, a divisionof Pfizer Inc.) covering several non prescription products for the Canadianmarket, including PolysporinÒ, SudafedÒ, ActifedÒ and ZincofaxÒ.  Manufacturing of these productscommenced in early 2000.  The term ofthis agreement has been extended by mutual agreement while the parties arenegotiating a new agreement for a three-year term which shall have an effectivedate of January 1, 2005, when signed. This agreement is filed as Exhibit 4.40 to this annual report.

 

On December 18, 2001,DRAXIS Pharma finalized supply and related agreements with GlaxoSmithKline Inc.for the renewal and expansion of an existing contract manufacturingrelationship between the companies.  Theproducts transferred to DRAXIS Pharma were all established, sterile productsmarketed by GSK in multiple international markets.  In 2002, an additional, established sterileinjectable product was added under this contract and commercial production ofthis product commenced in the second quarter of 2002.  During 2002, site transfer and relatedactivities associated with the other GSK products continued and productionstarted in the second quarter of 2003 and ramped up through 2003 and 2004 withfull production achieved by the end of 2004. DRAXIS Pharma shall manufacture the products covered by the agreementuntil it receives a termination notice from GSK which may be given by atwo-year advance written notice given on or after December 31, 2007.  This agreement is filed as Exhibit 4.41 tothis annual report.

 

On March 3, 2003, DRAXISPharma signed a manufacturing agreement with Bone Care International, Inc. toproduce HectorolÒInjection for sale in the U.S. and began commercial shipments of the sterileinjectable product in March 2003. Production of HectorolÒ Injection increased substantially throughout 2004.  The agreement is for a five-year term.  This agreement is filed as Exhibit 4.42 tothis annual report.

 

On March 31, 2003, theCompany amended its License, Distribution and Supply Agreement with Elan toreturn the Canadian rights for several of Elan’s unapproved neurology productsfrom its DRAXIS Pharmaceutica division in exchange for a cash payment of $6.5million.

 

OnOctober 24, 2002, the Company entered into a First Amendment to theSubscription Agreement among the Company, DRAXIS Pharma and SGF, which providedfor additional share subscriptions by the Company and SGF in three separate andequal tranches.  On October 24, 2002, theCompany and SGF subscribed for 748,319 common shares and 362,792 common shares,respectively, in the capital of DRAXIS Pharma at a subscription price ofCDN$1.50 per share.  The aggregatesubscription price was CDN$1,666,667. On December 31, 2002, the Company and SGFsubscribed for 748,319 common shares and 362,792 common shares, respectively,in the capital of DRAXIS Pharma at a subscription price of CDN$1.50 pershare.  The aggregate subscription pricewas CDN$1,666,667.  On March 28, 2003,the Company and SGF subscribed for 748,319 common shares and 362,792 commonshares, respectively, in the capital of DRAXIS Pharma at a subscription priceof CDN$1.50 per share.  The aggregatesubscription price was CDN$1,666,667.

 

On April22, 2004, the Company entered into a Share Purchase Agreement with SGF,pursuant to which the Company purchased from SGF 7,670,827 common shares ofDRAXIS Pharma, representing a 32.7% minority interest in DRAXIS Pharma, for$9.6 million (CDN$13 million) in cash.

 

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On July 16,2003, DRAXIS Pharma entered into a Share Purchase Agreement with MohammedBarkat, pursuant to which DRAXIS Pharma purchased from Mr. Barkat 101,425common shares of DRAXIS Pharma for CDN$152,138, CDN$83,376 of which was used torepay a loan from DRAXIS Pharma to Mr. Barkat, and the remaining CDN$68,762 waspaid in cash.

 

On July 16,2003, DRAXIS Pharma entered into a Share Purchase Agreement with MichelSauvageau, pursuant to which DRAXIS Pharma purchased from Mr. Sauvageau 70,028common shares of DRAXIS Pharma for CDN$105,042, CDN$59,999 of which was used torepay a loan from DRAXIS Pharma to Mr. Sauvageau, and the remaining CDN$45,043was paid in cash.

 

On April 2,2004, DRAXIS entered into an Underwriting Agreement with Desjardins SecuritiesInc. and CIBC World Markets Inc. pursuant to which the underwriters agreed topurchase, on a bought deal basis, 3,053,436 units of the Company at a purchaseprice of $4.82(CDN$6.55) per unit, for aggregate proceeds net of relatedexpenses to DRAXIS of approximately $13,385,000 (CDN$18,213,000).  DRAXIS granted the underwriters anover-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 theoffering, representing additional gross proceeds of up to $2,206,000(CDN$3,000,000).  The option was notexercised by the underwriters.  Each unitconsists of one common share of the Company and one-half of one share purchasewarrant.  Each whole warrant entitles theholder to acquire one common share of the Company at a price of CDN$8.50 at anytime prior to April 24, 2006.

 

On July 22,2003, the Company entered into an Asset Purchase Agreement with Shire, pursuantto which the Company sold Shire the rights to substantially all remainingproducts of its Canadian pharmaceutical sales and marketing division, DRAXISPharmaceutica, in return for $9.6 million (CDN$13.5 million) in cash and up toan additional $2.9 million (CDN$4.0 million) in market-driven contingentmilestone payments, plus royalties on future product sales.  Under the terms of the agreement, DRAXISreceived the value of acquired inventories, and Shire assumed responsibilityfor the financial provisions of the license agreement related to Permax®.

 

On September24, 2003, the Company, upon the recommendation of the Human Resources andCompensation Committee, entered into a Retirement Compensation Agreement (“RCA”)with Dr. Barkin to phase out the liability of the Company under the terminationwithout cause provisions of his employment agreement.  The RCA calls for the Company to makepayments totalling CDN$1.4 million to Dr. Barkin, CDN$600,000 which waspaid in August 2003; and theremaining CDN$800,000 is to be paid in equal quarterly installments in arrearscommencing with the fourth quarter of 2003 and ending with the fourth quarterof 2005.  An amount of CDN$480,000 waspaid in 2004.  Dr. Barkin’s employmentagreement has been amended to provide that upon the last RCA payment, theCompany shall have no liability toward Dr. Barkin with respect to thetermination without cause provisions of his employment agreement.  However, in the event of a terminationwithout cause following a defined change of control of the Company, anypayments received by Dr. Barkin pursuant to the RCA shall be credited to thelump sum amount to be paid to him upon said event.

 

In April 2003, the Company entered into anemployment agreement with Mr. Durham, pursuant to which Mr. Durham agreed to beemployed as the President of DRAXIS Pharma Inc. (now known as DRAXIS Pharma, adivision of DRAXIS Specialty Pharmaceuticals Inc.).  In the event that Mr. Durham is terminatedwithout cause, he would be entitled to receive a payment equal to one year ofbase salary.  In the event that Mr.Durham is terminated following a defined change of control, he would be entitledto receive a payment equal to two years of base salary.

 

In October 2003, theCompany entered into an employment agreement with Ms. Gualtieri, pursuant towhich Ms. Gualtieri agreed to be employed as General Counsel and CorporateSecretary of

 

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DRAXIS.  In the event that Ms. Gualtieri is terminatedwithout cause, she would be entitled to receive a payment equal to one year ofbase salary.  In the event that Ms.Gualtieri is terminated following a defined change of control, she would beentitled to receive a payment equal to two years of base salary.

 

In March 2004, the Companyentered into an employment agreement with Mr. Huang, pursuant to which Mr.Huang agreed to be employed as Vice President Finance of DRAXIS.  In the event that Mr. Huang is terminatedwithout cause, he would be entitled to receive a payment equal to one year ofbase salary.  In the event that Mr. Huangis terminated following a defined change of control, he would be entitled to receivea payment equal to two years of annual remuneration.

 

In March 2004, the Companyentered into an employment agreement with Mr. Oleksiw, pursuant to which Mr.Oleksiw agreed to be employed as Chief Financial Officer of DRAXIS.  In the event that Mr. Oleksiw is terminatedwithout cause, he would be entitled to receive a payment equal to one year ofbase salary.  In the event that Mr.Oleksiw is terminated following a defined change of control, he would be entitledto receive a payment equal to two years of annual remuneration.

 

In March 2004, in order toconform with the terms of the Stock Option Plan approved by the shareholders ofthe Company in 2001, the Company entered into amended employment agreementswith Mr. Carter, Mr. Durham, Ms. Gualtieri and Mr. Ormiston.  Under the terms of the amended employmentagreements, in the event of termination of employment following a definedchange of control of the Company, Mr. Carter, Mr. Durham, Ms. Gualtieri and Mr.Ormiston, as the case may be, would be entitled to exercise all stock optionsand other securities, including those not then otherwise exercisable.  In addition, under the terms of the amendedemployment agreement, Ms. Gualtieri is entitled, in the event of a terminationfollowing a defined change of control, to receive a payment equal to two yearsannual remuneration.

 

On April 27, 2004, theCompany entered into an employment agreement with Mr. Brazier, pursuant towhich Mr. Brazier is entitled, in the event his employment is terminatedwithout cause during the period commencing July 21, 2003 and ending July 21,2005, to two times his base salary.  Thisagreement was amended on August 25, 2004 to reflect that in the event that Mr.Brazier determines, during the period commencing June 1, 2005 and ending onDecember 31, 2005, in his discretion, that the position of Senior VicePresident Corporate Development and Strategic Planning is not satisfactory tohim, then he may terminate his employment and receive the sum that the Companywould have paid to him following the Shire transaction if his employment hadbeen terminated at that time following the change of control of DRAXISPharmaceutica.  The amendment alsoprovides that in the event that Mr. Brazier is terminated without cause betweenthe period commencing July 21, 2003 and ending December31, 2005, he would be entitled to receive a payment equalto two years of base salary.  Theabove-mentioned amendment to Mr. Brazier’s employment agreement is filed asExhibit 4.43 to this annual report.

 

On June 10, 2004, theCompany entered into an Amended and Restated Loan Agreement with the NationalBank of Canada providing an operating facility of CDN$15 million (or U.S.equivalent), payable within 364 days of drawing upon the facility and a termfacility of CDN$10 million (or U.S. equivalent), repayable in full in threeyears.  The operating facility can beextended by one year upon agreement with the Bank.  Interest under both the term and operatingfacilities is based on the Bank’s prime lending rate, provided the Companymeets certain ratios which as at December 31, 2004 were met.  As at December 31, 2004, no amount was drawnunder the operating facility or the term facility.  This agreement is filed as Exhibit 4.44 tothis annual report.

 

On June 23, 2004, in orderto conform with the terms of the Stock Option Plan approved by the shareholdersof the Company in 2001, the Company entered into an amended employmentagreement

 

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with Dr. MartinBarkin.  Under the terms of the amendedemployment agreement, in the event of termination of employment following adefined change of control of the Company, Dr. Barkin would be entitled toexercise all stock options and other securities, including those not thenotherwise exercisable.  This amendment toDr. Barkin’s agreement is filed as Exhibit 4.45 to this annual report.

 

**ExchangeControls**

 

Canada has no system ofexchange controls.  There are no exchangerestrictions on borrowing from foreign countries or on the remittance ofdividends, interest, royalties and similar payments, management fees, loanrepayments, settlement of trade debts or the repatriation of capital.  There are no limits on the rights ofnon-Canadians to exercise voting rights on their common shares of the Company.

 

**Taxation**

 

The following summarydescribes the principal Canadian federal income tax considerations generallyapplicable under the Income Tax Act (Canada) (the “ITA”) to a holder of theCompany’s common shares who holds common shares as capital property, who dealsat arm’s length with the Company, who does not hold or use and is not deemed tohold or use such common shares in connection with, or in the course of,carrying on a business in Canada and who is not an insurer thatcarries on an insurance business in Canada and elsewhere.  The ITA contains certain provisionsapplicable to certain financial institutions and provisions applicable totaxpayers an interest in which is a tax-shelter investment.  This summary does not take into account theseprovisions and holders of common shares who are or may be subject to theseprovisions should consult their own tax advisors.

 

This summary is based onthe current provisions of the ITA, the regulations thereunder in force on thedate hereof, all proposed amendments to the ITA and regulations publiclyannounced by the Minister of Finance (Canada) prior to the date hereof (the “Amendments”),and the Company’s understanding of the current published administrative andassessing practices of the Canada Revenue Agency.  This summary is not exhaustive of allpossible Canadian federal income tax considerations, and except as mentionedabove, does not take into account any prospective changes to the tax law ofCanada, whether occasioned by legislative, governmental, or judicialaction.  Further, the summary does nottake account of foreign or provincial tax legislation or considerations thatmay vary from the Canadian federal income tax implications described herein.  This summary does not purport to be, norshould it be construed as, legal or tax-related advice to any holder of commonshares.  Each holder of common sharesshould consult his or her own tax advisor.

 

*CommonShareholders Not Resident in Canada*

 

The following summary generally is applicable to holders of the Company’scommon shares who, at all relevant times and for purposes of the ITA and anyapplicable tax treaty or convention, are not, and are not deemed to be,resident in Canada.

 

Dividendson shares - shareholders who are not residents of Canada

 

Dividends, including stockand cash dividends and certain distributions and redemptions deemed to bedividends under the ITA, on the common shares paid to non-residents of Canadawill be subject to Canadian withholding tax at a rate of twenty-five percent (25%).  The applicable rate of withholding may,however, be reduced by virtue of the terms of any applicable tax treaty.  Under the terms of the Canada-U.S. Income TaxConvention, 1980 (the “Treaty”), the rate which is generally applicable toUnited States residents who are beneficial owners of common shares in respectof which there is paid or credited or deemed by the ITA to be paid or creditedCanadian-source dividends is fifteen percent (15%); in certain

 

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cases where the holder isa company owning more than ten percent (10%) of the voting shares of theCompany, the applicable rate is five percent (5%) for dividends paid.  Under the Treaty, certain tax-exempt entitiesthat are resident in the United States may be exempt from Canadian withholdingtaxes, including any withholding tax levied in respect of dividends received onthe common shares.  Tax-exempt entitiesshould consult their own tax advisors.

 

Dispositionsby shareholders who are not residents of Canada

 

Capital gains arising as aconsequence of the disposition of common shares (other than to the Company) bya resident of the United States will not normally be subject to tax under theITA except to the extent that such shares constitute or are deemed toconstitute taxable Canadian property (“TCP”) (as defined in the ITA) to suchholder, the gain on which would not otherwise be exempt under the terms of theTreaty.  In general, the common shareswill not constitute TCP of a non-resident holder unless (i) such holder, usesor holds or deemed to use or hold, the common shares in connection withcarrying on a business in Canada, (ii) the holder holds or uses such shares inthe course of carrying on an insurance business in Canada or elsewhere, or(iii) at any time in the sixty-month period immediately preceding thedisposition, not less than twenty-five percent (25%) of the issued shares ofany class of the capital stock of the Company belonged to such holder, eitheralone or in combination with persons with whom such holder does not deal at arm’slength.

 

To the extent that the common shares do constitute TCPof the non-resident holder, such holder will normally be obliged to file aCanadian income tax return, recognize any gain and pay any tax thereon pursuantto the provisions of the ITA.  However,the Treaty will normally apply to exempt the United States resident holder ofcommon shares from such tax, provided that the value of such shares is notderived principally from real property situated in Canada and/or intereststherein at the time the common shares are disposed of.  Provided that the common shares are listed on aprescribed stock exchange (including the Toronto Stock Exchange) at the time ofthe disposition of such shares, no clearance certificate will be required undersection 116 of the ITA in respect of a disposition of such shares.

 

*CommonShareholders Resident in Canada*

 

The following summary generally is applicable to holders of the Company’scommon shares who, at all relevant times and for purposes of the ITA and anyapplicable tax treaty or convention, are, or are deemed to be, resident inCanada.

 

Dividendson shares - shareholders who are residents of Canada

 

Dividends, including stock and cash dividends andcertain distributions and redemptions deemed to be dividends under the ITA, onthe common shares of the Company paid to residents of Canada will be includedin computing their income for purposes of the ITA.  Such dividends received or deemed to bereceived by an individual (other than a trust) will generally be subject to thegross-up and dividend tax credit rules normally applicable to taxable dividendsreceived from corporations resident in Canada. Dividendsreceived or deemed to be received on such shares by an individual and certaintrusts may give rise to alternative minimum tax.

 

Generally, dividends received or deemed to be received on common sharesof the Company by a holder that is a corporation will be included in computingthe corporation’s income, but will be deductible in computing the corporation’staxable income, subject to certain limitations in the ITA.  A holder of common shares that is a “privatecorporation” or a “subject corporation” (as defined in the ITA) generally willbe subject to a refundable tax of thirty-three and one-third percent (331/3%)on dividends received or deemed to be received on such shares to the extentthat such dividends are deductible in computing the

 

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holder’s taxable income. Subsection 55(2) of the ITA provides that where certain corporateholders of shares receive a dividend or deemed dividend in specifiedcircumstances, all or part of such dividend may be treated as a capital gainfrom the disposition of capital property and not as a dividend.  The tax treatment of capital gains and lossesin discussed under the heading “Common Shareholders Resident in Canada -Dispositions by Shareholders Who Are Resident in Canada” below.

 

Dispositionby shareholders who are residents of Canada

 

On a disposition or deemeddisposition of a common share of the Company a resident of Canada holder willrealize a capital gain (or capital loss) equal to the amount by which theproceeds of disposition for the common share exceed (or are less than) theaggregate of any reasonable costs of disposition and the adjusted cost base tothe holder of the common share of the Company immediately before thedisposition.  Pursuant to the ITA, aholder of common shares of the Company who is a resident of Canada will be requiredto include in income one-half (1⁄2) of the amount of any capital gain and maydeduct one-half (1⁄2) of the amount of any capital loss against taxable capitalgains realized by the holder in the year of the disposition.  Allowable capital losses in excess of taxablecapital gains in a particular year may be carried back and deducted in any ofthe three proceeding years or carried forward and deducted in any followingyear against taxable capital gains realized in such years to the extent andunder the circumstances described in the ITA and the Amendments.

 

A “Canadian-controlledprivate corporation” (as defined in the ITA) will also be subject to arefundable tax of six and two-thirds percent (62/3%) oncertain investment income, including taxable capital gains realized on thedisposition of common shares of the Company, that will be refundable when thecorporation pays taxable dividends (at a rate of CDN$1.00 for every CDN$3.00 oftaxable dividend paid).

 

A capital loss realized bya holder of common shares of the Company that is a corporation, a partnershipof which a corporation is a member or a trust of which a corporation is abeneficiary may be reduced by the amount of dividends received or deemed to bereceived on such shares in certain circumstances.  Capital gains realized by an individual orcertain trusts may give rise to a liability for alternative minimum tax.

 

**Documentson Display**

 

The Company issubject to the information requirements of the U.S. Securities Exchange Act of1934, as amended.  In accordance withthese requirements, the Company files reports and other information with theUnited States Securities and Exchange Commission.  These materials, including this Annual Reportand the exhibits thereto, may be inspected and copied at the Commission’sPublic Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and atthe Commission’s regional offices at 500 West Madison Street, Suite 1400,Chicago, Illinois 60661.  Copies of thematerials may be obtained from the Public Reference Room of the Commission at450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.  The public may obtain information on theoperation of the Commission’s Public Reference Room by calling the Commissionin the United States at 1-800-SEC-0330. The Commission also maintains a web site at www.sec.gov that containsreports, proxy statements and other information regarding registrants that fileelectronically with the Commission.  TheCompany’s annual reports and some of the other information submitted by theCompany to the Commission may be accessed through this web site.  In addition, material filed by the Companycan be inspected at the offices of the NASDAQ at 9801 Washingtonian Blvd.,Gaithersburg, MD 20878, and on the Canadian Securities Administrators’electronic filing system, SEDAR, accessible at the web site www.sedar.com.  This material includes the Company’sManagement Information Circular for its annual meeting to be held on May 18,2005, which provides information including directors’ and officers’,remuneration and

 

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indebtedness, principal holdersof securities and securities authorized for issuance under equity compensationplans.  Addition financial information isprovided in our annual financial statements for the year ended December 31,2004 and our Management’s Discussion and Analysis relating to thesestatements.  These documents are alsoaccessible on SEDAR (www.sedar.com).

 

**Item 11.****                           ****Quantitative and QualitativeDisclosures About Market Risk**

 

**Market Risk**

 

We are exposedto financial market risks, including changes in foreign currency exchangerates, interest rates on investments and debt obligations.  We do not use derivative financialinstruments for speculative or trading purposes.

 

Inflation has not had asignificant impact on our results of operations.

 

**ForeignCurrency Risk**

 

The Company’s reportingcurrency is the U.S. dollar.  Thefunctional currency for its Canadian operations—which includes theradiopharmaceutical segment, contract manufacturing segment and royalties andmilestones related to product rights sold to Shire—is the Canadian dollar.  Accordingly, the Company’s foreign exchangeexposure for accounting purposes mainly relates to U.S.-denominated monetaryassets of these operations.  The Companycurrently does not actively hedge this exposure but reduces the exposure bymaintaining the minimum level of U.S.-denominated cash available to meet itsshort-term cash requirements.  During2004, the Company incurred foreign exchange losses of $374,000 related to thisexposure.

 

**InterestRate Risk**

 

Theprimary objective of our investment policy is the protection of principal, andaccordingly we invest in high-grade commercial paper and government securitieswith varying maturities, but typically less than 90 days.  As it is our intent and policy to hold theseinvestments until maturity, we do not have a material exposure to interest raterisk.

 

All of the Company’s third-party debt is based on a variable interestrate.  Should the Company borrow in thefuture on its existing facilities, any material changes to interest rates couldresult in materially increased interest expense and decreased results ofoperations.  As of the year ended December31, 2004, the Company had no outstanding third-party debt.

 

**Item 12.****                           ****Description of Securities OtherThan Equity Securities**

 

Not Applicable

 

**PART II.**

 

**Item 13.         Defaults, Dividends Arrearages and Delinquencies**

 

Not Applicable

 

**Item 14.         Material Modifications to the Rights of Security Holders andUse of Proceeds**

 

Not Applicable

 

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**Item 15.         Controlsand Procedures**

 

Not applicable

 

**Item 16.**

 

**Item 16A.**                   **Audit Committee Financial Expert**

 

The Company’s Board of Directors has determined that Mr. Rolf Henel, amember of the Company’s Audit Committee, is a financial expert.

 

**Item 16B.****                  ****Code of Ethics**

 

In April 2004, the Company amended the existing Code of Ethics, whichresulted in the establishment of a new Code of Ethics and Business Conduct inlight of its continued commitment to honesty and integrity in the conduct ofits business.  The Code of Ethics andBusiness Conduct applies to all its officers and employees, including its ChiefExecutive Officer, its Chief Financial Officer, all employees of the Company’ssubsidiaries and all directors of the Company. The Code is available on the Company’s website at www.draxis.com.

 

In 2004, DRAXIS amended its Code of Ethics and Business Conduct tobring it into compliance with current regulatory requirements and bestpractices and to eliminate references to matters more appropriately covered inthe Company’s employee handbook.  Specifically, the changes broaden DRAXIS’conflicts of interest policy, add provisions regarding the integrity of booksand records and compliance with sound accounting practices, expand theprovisions covering the reporting of violations of the Code of Ethics andclarify responsibility for monitoring compliance with the Code of Ethics.

 

**Item 16C.****                  ****Principal Accountant Fees andServices**

 

**Audit Fees**

 

The fees for all audit services performed by Delotte & Touche LLP,independent registered chartered accountants (“Company’s auditor” or “Company’sprincipal accountant”) for the Company and its subsidiaries for the years endedDecember 31, 2003 and December 31, 2004, were CDN$158,000 and CDN$154,000,respectively.

 

**Audit-Related Fees**

 

The aggregate fees billed for the years ended December 31, 2003 andDecember 31, 2004 for assurance and related service by the Company’s auditorthat are reasonably related to the performance of the audit or review of theCompany’s financial statements were CDN$42,000 and CDN$45,000,respectively.  Services provided includereview of the notes to the Company’s annual report to shareholders, managementproxy circular, and this annual report on Form 20-F.

 

**Tax Fees**

 

The aggregate fees billed for the years ended December 31, 2003 andDecember 31, 2004 for professional services rendered by the Company’s auditorfor tax compliance, tax advice and tax planning were CDN$20,000 and CDN$82,250,respectively.

 

**All Other Fees**

 

The aggregate fees billed for the years ended December 31, 2003 andDecember 31, 2004 for products and services provided by the Company’s principalaccountant, other than those described above, were CDN$57,400 and CDN$239,975,respectively.  The services providedincluded quarterly review and

 

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review of the registrationstatement filed in Canada in connection with the Company’s equity offering inApril 2004.

 

**Item 16D.****                  ****Exemptions from the ListingStandards for Audit Committees**

 

Not applicable.

 

**Item 16E.****                    ****Purchases of Equity Securities bythe Issuer and Affiliated Purchasers**

 

On April 16, 2003, DRAXIS announced a share buybackprogram (Normal Course Issuer Bid) to repurchase for cancellation up to1,854,934 common shares.  During 2003,50,300 shares were repurchased for cancellation under said program at anaverage price of $1.30 per share for total consideration of $65,390.  The bid ended on April 20, 2004.  In the period between January 1st,2004 to April 20th, 2004, inclusively, DRAXIS did not repurchase anyshares for cancellation.

 

**Item 17.****                           ****Financial Statements**

 

Not Applicable

 

**Item 18.****                           ****Financial Statements**

 
| The following financial statements are filed as part  of this annual report on Form 20-F. |   |
|------------------------------------------------------------------------------------------------|--------|
| Management’s Report                                                                       |   |
| Report  of Independent Registered Chartered Accountants                                        |   |
| Consolidated statements of operations                                                          |   |
| Consolidated balance sheets                                                                    |   |
| Consolidated Statements of Changes in  Equity and Comprehensive Income (Loss)                  |   |
| Consolidated statements of cash flows                                                          |   |
| Notes to the consolidated financial  statements                                                |   |

 

**Item 19.****                           ****Exhibits**

 
| ** ** | **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|------------|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |  1.1       |       | Articles of Amalgamation of DRAXIS Health Inc. (incorporated herein  by reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                  |
|       |  1.2       |       | By-law No. 1 of DRAXIS Health Inc. (formerly Deprenyl Research  Limited) (incorporated herein by reference to the Company’s Annual Report on  Form 20-F for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                   |
|       |  4.1       |       | Master Agreement dated November 12, 1997 among DRAXIS Health Inc.,  Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated herein by reference  to the Company’s Annual Report on Form 20-F for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434)) |
|       |  4.2       |       | License Agreement dated November 12, 1997 between Deprenyl Animal  Health Inc. and Pfizer Inc. (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                  |

 

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|   |  4.3        |   | Letter Agreement dated December 22, 1999 between DRAXIS Health Inc.,  Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated herein by reference  to the Company’s Annual Report on Form 20-F for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                  |
|--------|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  4.4        |   | Second Amendment dated December 18, 2001 to the Master Agreement, as  amended December 22, 1999, License Agreement, Research Agreement, U.S. and  Canada Manufacturing and Supply Agreement and International Manufacturing and  Supply Agreement between Pfizer Inc., Deprenyl Animal Health, Inc. and DRAXIS  Health Inc. dated November 12, 1997 (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2001,  filed on May 20, 2002 (SEC file no. 000-17434)) |
|   |  4.5        |   | Amending Agreement dated March 31, 2003 between DRAXIS Health, Inc.,  Elan Pharma International Limited and Elan Pharmaceuticals, Inc.  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2002, filed on May 14, 2003 (SEC file no.  000-17434))                                                                                                                                                                                                             |
|   |  4.6        |   | First Amendment to Subscription Agreement dated October 24, 2002  among SGF Santé Inc., DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                                                                                                                              |
|   |  4.7        |   | Share Purchase Agreement dated April 22, 2004 between DRAXIS Health  Inc. and SGF Santé Inc. (incorporated herein by reference to the Company’s  Annual Report on Form 20-F for the year ended December 31, 2003, filed on May  14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                   |
|   |  4.8        |   | Share Purchase Agreement dated July 16, 2003 between Mohammed  Barkat and DRAXIS Pharma Inc. (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2003,  filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                   |
|   |  4.9        |   | Share Purchase Agreement dated July 16, 2003 between Michel  Sauvageau and DRAXIS Pharma Inc. (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2003,  filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                  |
|   |  4.10       |   | Term Loan Agreement dated June 9, 1998 between National Bank of  Canada and DRAXIS Pharma Inc. (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                     |
|   |  4.11       |   | Credit Agreement dated February 18, 2000 between National Bank of  Canada and DRAXIS Pharma Inc. (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                   |
|   |  4.12       |   | Underwriting Agreement dated April 2, 2004 between DRAXIS Health  Inc., Desjardins Securities Inc. and CIBC World Markets Inc. (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                      |
|   |  4.13† |   | Asset  Purchase Agreement dated July 22, 2003 between DRAXIS Health Inc. and Shire  Biochem Inc. (incorporated herein by reference to the Company’s Annual Report  on Form 20-F for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file No. 000-17434))                                                                                                                                                                                                                                                    |
|   |  4.14       |   | Stock Option Plan of DRAXIS Health Inc., as amended, dated June 27,  2001 (incorporated herein by reference to the Company’s Annual Report on Form  20-F for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))                                                                                                                                                                                                                                                                           |

 

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|   |  4.15 |   | DRAXIS Health Inc. Employee Stock Ownership Plan, amended and  restated, effective December 1, 1998 (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                     |
|--------|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  4.16 |   | DRAXIS Health Inc. Employee Participation Share Purchase Plan,  effective February 16, 1995 (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                             |
|   |  4.17 |   | DRAXIS Health Inc. Deferred Share Unit Plan for Employees (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                               |
|   |  4.18 |   | DRAXIS Health Inc. Equity Purchase Plan (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                 |
|   |  4.19 |   | DRAXIS Retirement Savings Program (incorporated herein by reference  to the Company’s Annual Report on Form 20-F for the year ended December 31,  2002, filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                        |
|   |  4.20 |   | Shareholder Rights Plan Agreement dated April 23, 2002 between DRAXIS  Health Inc. and Computershare Trust Company of Canada as trustee  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2001, filed on May 20, 2002 (SEC file no.  000-17434)) |
|   |  4.21 |   | Employment Agreement dated April 15, 1999 between DRAXIS Health Inc.  and Dr. Martin Barkin (incorporated herein by reference to the Company’s  Annual Report on Form 20-F for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                             |
|   |  4.22 |   | Amendment dated June 14, 2000 to Employment Agreement dated April 15,  1999 between DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))            |
|   |  4.23 |   | Retirement Compensation Agreement dated September 24, 2003 between  DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by reference to  the Company’s Annual Report on Form 20-F for the year ended December 31,  2003, filed on May 14, 2004 (SEC file No. 000-17434))                             |
|   |  4.24 |   | Employment Agreement dated April 27, 2004 between DRAXIS Health Inc.  and Dan Brazier (incorporated herein by reference to the Company’s Annual  Report on Form 20-F for the year ended December 31, 2003, filed on May 14,  2004 (SEC file No. 000-17434))                                                    |
|   |  4.25 |   | Employment Agreement dated October 18, 2000 between DRAXIS  Health Inc. and Jack A. Carter (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                          |
|   |  4.26 |   | Amendment dated March 26, 2004 to Employment Agreement dated  October 18, 2000 between DRAXIS Health Inc. and Jack A. Carter  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file No.  000-17434))  |
|   |  4.27 |   | Employment Agreement dated April 22, 2003 between DRAXIS PHARMA  Inc. and John E.M. Durham (incorporated herein by reference to the Company’s  Annual Report on Form 20-F for the year ended December 31, 2003, filed on May  14, 2004 (SEC file No. 000-17434))                                          |

 

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|   |  4.28        |   | Amendment dated March 26, 2004 to  Employment Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and  John E.M. Durham (incorporated herein by reference to the Company’s Annual  Report on Form 20-F for the year ended December 31, 2003, filed on May 14,  2004 (SEC file No. 000-17434))  |
|--------|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  4.29        |   | Employment Agreement dated October 17, 2003 between DRAXIS  Health Inc. and Alida Gualtieri (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2003,  filed on May 14, 2004 (SEC file No. 000-17434))                                         |
|   |  4.30        |   | Amendment dated March 26, 2004 to Employment Agreement dated  October 17, 2003 between DRAXIS Health Inc. and Alida Gualtieri  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file No.  000-17434)) |
|   |  4.31        |   | Employment Agreement dated March 9, 2004 between DRAXIS Health  Inc. and Chien Huang (incorporated herein by reference to the Company’s  Annual Report on Form 20-F for the year ended December 31, 2003, filed on May  14, 2004 (SEC file No. 000-17434))                                                |
|   |  4.32        |   | Employment Agreement dated March 9, 2004 between DRAXIS Health  Inc. and Mark Oleksiw (incorporated herein by reference to the Company’s  Annual Report on Form 20-F for the year ended December 31, 2003, filed on May  14, 2004 (SEC file No. 000-17434))                                               |
|   |  4.33        |   | Employment Agreement dated May 14, 2001 between DRAXIS Health Inc.  and Jerry Ormiston (incorporated herein by reference to the Company’s Annual  Report on Form 20-F for the year ended December 31, 2001, filed on May 20,  2002 (SEC file no. 000-17434))                                                   |
|   |  4.34        |   | Amendment dated March 26, 2004 to Employment Agreement dated  May 14, 2001 between DRAXIS Health Inc. and Jerry Ormiston (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))       |
|   |  4.35        |   | Employment Agreement dated October 1, 1997 between DRAXIS Health Inc.  and Dr. Richard J. Flanagan (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2003,  filed on May 14, 2004 (SEC file No. 000-17434))                                       |
|   |  4.36        |   | Amendment dated July 23, 2001 to Employment Agreement dated October  1, 1997 between DRAXIS Health Inc. and Dr. Richard J. Flanagan (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))      |
|   |  4.37*† |   | Non Exclusive Distribution Agreement dated October 25, 1995 between  Frosst Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (now  known as DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc.) and  Syncor International Corporation (now known as Cardinal Health 414, Inc.)              |
|   |  4.38*† |   | Non Exclusive Distribution Agreement dated July 12, 2000 between  DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc. and Syncor  International (now known as Cardinal Health 414, Inc.)                                                                                                                 |
|   |  4.39*† |   | Amendment dated August 6, 2003 to Non Exclusive Distribution  Agreement dated July 12, 2000 between DRAXIMAGE, a division of DRAXIS Specialty  Pharmaceuticals Inc. and Syncor International (now known as Cardinal Health  414, Inc.)                                                                              |
|   |  4.40*† |   | Manufacturing and Supply Agreement dated July 1, 1999 between  Warner-Lambert Canada Inc. (now known as Pfizer Consumer Healthcare, a  Division of Pfizer Canada Inc.) and DRAXIS Pharma Inc. (now known as DRAXIS  Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.)                                    |

 

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|   |  4.41*† |   | Supply Agreement dated December 18, 2001  between GlaxoSmithKline Inc. and DRAXIS Pharma Inc. (now known as DRAXIS  Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.)                                                                                                                                  |
|--------|-------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  4.42*† |   | Manufacture and Supply Agreement entered into between DRAXIS Pharma  Inc. (now known as DRAXIS Pharma, a division of DRAXIS Specialty  Pharmaceuticals Inc.) and Bone Care International, Inc. on March 3, 2003                                                                                                   |
|   |  4.43*       |   | Amendment dated August 25, 2004 to Employment Agreement dated April  27, 2004 between DRAXIS Health Inc. and Dan Brazier                                                                                                                                                                                          |
|   |  4.44*       |   | Amended and Restated Loan Agreement dated June 10, 2004 between  DRAXIS Health Inc. and National Bank of Canada                                                                                                                                                                                                   |
|   |  4.45*       |   | Amendment dated June 23, 2004 to Employment Agreement dated April 15,  1999 between DRAXIS Health Inc. and Martin Barkin                                                                                                                                                                                          |
|   |  4.46        |   | Amendment to Credit Facilities for DRAXIS Pharma Inc. dated March 28,  2002 between National Bank of Canada and DRAXIS Pharma Inc. (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))     |
|   |  4.47        |   | Loan Agreement dated March 28, 2002 among DRAXIS Pharma Inc., SGF  Santé Inc. and DRAXIS Health Inc. (incorporated herein by reference to the  Company’s Annual Report on Form 20-F for the year ended December 31, 2001,  filed on May 20, 2002 (SEC file No. 000-17434))                              |
|   |  4.48        |   | Loan Agreement dated March 28, 2002 among DRAXIS Pharma Inc.,  Investissement Québec and DRAXIS Health Inc. (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))                       |
|   |  4.49        |   | First Amendment to Subscription Agreement dated October 24, 2002  among SGF Santé Inc., DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2002, filed on May 14, 2003 (SEC file No. 000-17434)) |
|   |  8.1*        |   | List of Subsidiaries                                                                                                                                                                                                                                                                                              |
|   | 12.1*             |   | Certification of CEO required by Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                   |
|   | 12.2*             |   | Certification of CFO required by Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                   |
|   | 13.1*             |   | Certification of CEO required by Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                   |
|   | 13.2*             |   | Certification of CFO required by Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                   |

 

----

* Filed herewith

† Portions of the exhibits have been omittedpursuant to a confidential treatment request. This information has been filedseparately with the Securities and Exchange Commission.

 

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SIGNATURES

 

The registrant hereby certifies that it meets allof the requirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf.

 

 
|                                  | DRAXIS HEALTH INC. |
|---------------------------------------|--------------------|
|                                  |               |   |
| Date:   March 31, 2005 | By:                |     /s/ MARK OLEKSIW |   |
|                                  |               | Chief Financial Officer |
|                                  |               |   |
|                                  | By:                |     /s/ MARTIN BARKIN, M.D. |   |
|                                  |               | President and Chief Executive Officer |

 

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EXHIBIT INDEX

DRAXIS HEALTH INC.

Form 20-F Annual Report

 
| ** ** | **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |  1.1        |       | Articles of Amalgamation of DRAXIS Health Inc.  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                                                                                                                                                                                                                                                                                     |
|       |  1.2        |       | By-law No. 1 of DRAXIS Health Inc. (formerly  Deprenyl Research Limited) (incorporated herein by reference to the Company’s  Annual Report on Form 20-F for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                       |
|       |  4.1        |       | Master Agreement dated November 12, 1997 among  DRAXIS Health Inc., Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                     |
|       |  4.2        |       | License Agreement dated November 12, 1997 between  Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated herein by reference  to the Company’s Annual Report on Form 20-F for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                      |
|       |  4.3        |       | Letter Agreement dated December 22, 1999 between  DRAXIS Health Inc., Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                   |
|       |  4.4        |       | Second Amendment dated December 18, 2001 to the  Master Agreement, as amended December 22, 1999, License Agreement, Research  Agreement, U.S. and Canada Manufacturing and Supply Agreement and  International Manufacturing and Supply Agreement between Pfizer Inc.,  Deprenyl Animal Health, Inc. and DRAXIS Health Inc. dated November 12, 1997  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2001, filed on May 20, 2002 (SEC file no.  000-17434)) |
|       |  4.5        |       | Amending Agreement dated March 31, 2003 between  DRAXIS Health, Inc., Elan Pharma International Limited and Elan  Pharmaceuticals, Inc. (incorporated herein by reference to the Company’s  Annual Report on Form 20-F for the year ended December 31, 2002, filed on May  14, 2003 (SEC file no. 000-17434))                                                                                                                                                                                                              |
|       |  4.6        |       | First Amendment to Subscription Agreement dated  October 24, 2002 among SGF Santé Inc., DRAXIS Health Inc. and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report on Form  20-F for the year ended December 31, 2002, filed on May 14, 2003 (SEC file  no. 000-17434))                                                                                                                                                                                                              |
|       |  4.7        |       | Share Purchase Agreement dated April 22, 2004  between DRAXIS Health Inc. and SGF Santé Inc. (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                                                                                                                    |
|       |  4.8        |       | Share Purchase Agreement dated July 16, 2003  between Mohammed Barkat and Draxis Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                                                                                                                    |

 

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|   |  4.9        |   | Share Purchase Agreement dated July 16, 2003  between Michel Sauvageau and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                       |
|--------|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  4.10       |   | Term Loan Agreement dated June 9, 1998 between  National Bank of Canada and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                          |
|   |  4.11       |   | Credit Agreement dated  February 18, 2000 between National Bank of Canada and DRAXIS Pharma Inc.  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                       |
|   |  4.12       |   | Underwriting Agreement dated April 2, 2004 between  DRAXIS Health Inc., Desjardins Securities Inc. and CIBC World Markets Inc.  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file no.  000-17434))          |
|   |  4.13† |   | Asset Purchase Agreement dated July 22, 2003 between  DRAXIS Health Inc. and Shire Biochem Inc. (incorporated herein by reference  to the Company’s Annual Report on Form 20-F for the year ended December 31,  2003, filed on May 14, 2004 (SEC file no. 000-17434))                                          |
|   |  4.14       |   | Stock Option Plan of DRAXIS Health Inc., as amended,  dated June 27, 2001 (incorporated herein by reference to the Company’s Annual  Report on Form 20-F for the year ended December 31, 2003, filed on May 14,  2004 (SEC file no. 000-17434))                                                                |
|   |  4.15       |   | DRAXIS Health Inc. Employee Stock Ownership Plan,  amended and restated, effective December 1, 1998 (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                     |
|   |  4.16       |   | DRAXIS Health Inc. Employee Participation Share  Purchase Plan, effective February 16, 1995 (incorporated herein by reference  to the Company’s Annual Report on Form 20-F for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                             |
|   |  4.17       |   | DRAXIS Health Inc. Deferred Share Unit Plan for  Employees (incorporated herein by reference to the Company’s Annual Report on  Form 20-F for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                                                              |
|   |  4.18       |   | DRAXIS Health Inc. Equity Purchase Plan  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                                                                                |
|   |  4.19       |   | DRAXIS Retirement Savings Program (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                        |
|   |  4.20       |   | Shareholder Rights Plan Agreement dated April 23,  2002 between DRAXIS Health Inc. and Computershare Trust Company of Canada as  trustee (incorporated herein by reference to the Company’s Annual Report on  Form 20-F for the year ended December 31, 2001, filed on May 20, 2002 (SEC  file no. 000-17434)) |
|   |  4.21       |   | Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by reference to  the Company’s Annual Report on Form 20-F for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                             |

 

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|   |  4.22 |   | Amendment dated June 14, 2000 to Employment  Agreement dated April 15, 1999 between DRAXIS Health Inc. and Dr. Martin Barkin  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))           |
|--------|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  4.23 |   | Retirement Compensation Agreement dated September  24, 2003 between DRAXIS Health Inc. and Dr. Martin Barkin (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                             |
|   |  4.24 |   | Employment Agreement dated April 27, 2004 between DRAXIS  Health Inc. and Dan Brazier (incorporated herein by reference to the Company’s  Annual Report on Form 20-F for the year ended December 31, 2003, filed on May  14, 2004 (SEC file no. 000-17434))                                                    |
|   |  4.25 |   | Employment Agreement dated October 18, 2000  between DRAXIS Health Inc. and Jack A. Carter (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                          |
|   |  4.26 |   | Amendment dated March 26, 2004 to Employment  Agreement dated October 18, 2000 between DRAXIS Health Inc. and Jack A.  Carter (incorporated herein by reference to the Company’s Annual Report on  Form 20-F for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434))  |
|   |  4.27 |   | Employment Agreement dated April 22, 2003  between DRAXIS PHARMA Inc. and John E.M. Durham (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                          |
|   |  4.28 |   | Amendment dated March 26, 2004 to Employment  Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M.  Durham (incorporated herein by reference to the Company’s Annual Report on  Form 20-F for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434))  |
|   |  4.29 |   | Employment Agreement dated October 17, 2003  between DRAXIS Health Inc. and Alida Gualtieri (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                         |
|   |  4.30 |   | Amendment dated March 26, 2004 to Employment  Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida  Gualtieri (incorporated herein by reference to the Company’s Annual Report on  Form 20-F for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434)) |
|   |  4.31 |   | Employment Agreement dated March 9, 2004  between DRAXIS Health Inc. and Chien Huang (incorporated herein by reference  to the Company’s Annual Report on Form 20-F for the year ended December 31,  2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                |
|   |  4.32 |   | Employment Agreement dated March 9, 2004  between DRAXIS Health Inc. and Mark Oleksiw (incorporated herein by reference  to the Company’s Annual Report on Form 20-F for the year ended December 31,  2003, filed on May 14, 2004 (SEC file no. 000-17434))                                               |
|   |  4.33 |   | Employment Agreement dated May 14, 2001 between  DRAXIS Health Inc. and Jerry Ormiston (incorporated herein by reference to  the Company’s Annual Report on Form 20-F for the year ended December 31,  2001, filed on May 20, 2002 (SEC file no. 000-17434))                                                   |

 

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|   |  4.34        |   | Amendment dated March 26, 2004 to Employment  Agreement dated May 14, 2001 between DRAXIS Health Inc. and Jerry  Ormiston (incorporated herein by reference to the Company’s Annual Report on  Form 20-F for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434))  |
|--------|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  4.35        |   | Employment Agreement dated October 1, 1997 between  DRAXIS Health Inc. and Dr. Richard J. Flanagan (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                   |
|   |  4.36        |   | Amendment dated July 23, 2001 to Employment Agreement  dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J. Flanagan  (incorporated herein by reference to the Company’s Annual Report on Form 20-F  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file no.  000-17434)) |
|   |  4.37*† |   | Non Exclusive Distribution Agreement dated October  25, 1995 between Frosst Radiopharmaceuticals, a division of Merck Frosst  Canada Inc. (now known as DRAXIMAGE, a division of DRAXIS Specialty  Pharmaceuticals Inc.) and Syncor International Corporation (now known as  Cardinal Health 414, Inc.)         |
|   |  4.38*† |   | Non Exclusive Distribution Agreement dated July 12,  2000 between DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc.  and Syncor International (now known as Cardinal Health 414, Inc.)                                                                                                             |
|   |  4.39*† |   | Amendment dated August 6, 2003 to Non Exclusive  Distribution Agreement dated July 12, 2000 between DRAXIMAGE, a division of  DRAXIS Specialty Pharmaceuticals Inc. and Syncor International (now known as  Cardinal Health 414, Inc.)                                                                          |
|   |  4.40*† |   | Manufacturing and Supply Agreement dated July 1,  1999 between Warner-Lambert Canada Inc. (now known as Pfizer Consumer  Healthcare, a Division of Pfizer Canada Inc.) and DRAXIS Pharma Inc. (now  known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.)                                |
|   |  4.41*† |   | Supply Agreement dated December 18, 2001 between  GlaxoSmithKline Inc. and DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a  division of DRAXIS Specialty Pharmaceuticals Inc.)                                                                                                                                |
|   |  4.42*† |   | Manufacture and Supply Agreement entered into  between DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS  Specialty Pharmaceuticals Inc.) and Bone Care International, Inc. on March 3,  2003                                                                                                |
|   |  4.43*       |   | Amendment dated August 25, 2004 to Employment  Agreement dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier                                                                                                                                                                                        |
|   |  4.44*       |   | Amended and Restated Loan Agreement dated June 10,  2004 between DRAXIS Health Inc. and National Bank of Canada                                                                                                                                                                                                 |
|   |  4.45*       |   | Amendment dated June 23, 2004 to Employment  Agreement dated April 15, 1999 between DRAXIS Health Inc. and Martin Barkin                                                                                                                                                                                        |
|   |  4.46        |   | Amendment to Credit Facilities for DRAXIS Pharma  Inc. dated March 28, 2002 between National Bank of Canada and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report on Form  20-F for the year ended December 31, 2001, filed on May 20, 2002 (SEC file  No. 000-17434))  |
|   |  4.47        |   | Loan Agreement dated March 28, 2002 among DRAXIS  Pharma Inc., SGF Santé Inc. and DRAXIS Health Inc. (incorporated herein by  reference to the Company’s Annual Report on Form 20-F for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))                            |
|   |  4.48        |   | Loan Agreement dated March 28, 2002 among DRAXIS  Pharma Inc., Investissement Québec and DRAXIS Health Inc. (incorporated  herein by reference to the Company’s Annual Report on Form 20-F for the year  ended December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))                     |

 

129

----

 
|   |  4.49 |   | First Amendment to Subscription Agreement dated  October 24, 2002 among SGF Santé Inc., DRAXIS Health Inc. and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report on Form  20-F for the year ended December 31, 2002, filed on May 14, 2003 (SEC file  No. 000-17434)) |
|--------|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  8.1* |   | List of Subsidiaries                                                                                                                                                                                                                                                                                               |
|   | 12.1*      |   | Certification of CEO required by Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                    |
|   | 12.2*      |   | Certification of CFO required by Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                    |
|   | 13.1*      |   | Certification of CEO required by Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                    |
|   | 13.2*      |   | Certification of CFO required by Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                    |

 

----

* Filed herewith

† Portions of the exhibits have been omitted pursuant to a confidentialtreatment request. This information has been filed separately with theSecurities and Exchange Commission.

 

130

----

 

**Management’s Report**

 

The Company’s management isresponsible for preparing the accompanying consolidated financial statements inconformity with United States generally accepted accounting principles (“GAAP”).  In preparing these consolidated financialstatements, management selects accounting policies and uses its judgment andbest estimates, as appropriate in the circumstances.  Management has determined such amounts on areasonable basis in order to ensure that the financial statements are presentedfairly, in all material respects.

 

The Company maintains asystem of internal accounting controls designed to provide reasonableassurance, at a reasonable cost, that assets are safeguarded and thattransactions are executed and recorded in accordance with the Company’spolicies.  This system is supported bypolicies and procedures for key business activities, by the hiring of qualifiedstaff and by a continuous planning and monitoring program.

 

Deloitte & Touche LLPhas been engaged by the Company’s shareholders to audit the consolidatedfinancial statements.  During the courseof their audit, Deloitte & Touche LLP reviewed the Company’s system ofinternal controls to the extent necessary to render their opinion on theconsolidated financial statements.

 

The Board of Directors isresponsible for ensuring that management fulfills its responsibility forfinancial reporting and is ultimately responsible for reviewing and approvingthe financial statements.  The Boardcarries out the responsibility principally through its Audit Committee.  The members of the Audit Committee areoutside Directors.  The Committeeconsiders, for review by the Board of Directors and approval by theshareholders, the engagement or reappointment of the external auditors.  Deloitte & Touche LLP has full and freeaccess to the Audit Committee.

 

Management acknowledges itsresponsibility to provide financial information that is representative of theCompany’s operations, is consistent and reliable, and is relevant for theinformed evaluation of the Company’s activities.

 

 
|     | By:                                      | /s/ Martin Barkin, MD |                      |   | By: | /s/ Mark Oleksiw, CA |   |
|----------|------------------------------------------|-----------------------|---------------------------|--------|-----|----------------------|--------|
| * * | *President and Chief Executive  Officer* | * *              | *Chief Financial Officer* |
| * * | * *                                 | * *              | * *                  |
|     | Mississauga, Ontario                     |                  |                      |
|     | March 4, 2005.                           |                  |                      |

 

F-1

----

 

Reportof Independent Registered Chartered Accountants

 

To the Shareholders andBoard of Directors of DRAXIS Health Inc.

 

We have audited theconsolidated balance sheets of DRAXIS Health Inc. as at December 31, 2004and 2003 and the consolidated statements of operations, shareholders’ equityand cash flows for each of the years in the three-year period endedDecember 31, 2004.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits inaccordance with Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform an audit to obtain reasonable assurance whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theseconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as at December 31, 2004 and 2003 and theresults of its operations and its cash flows for each of the years in thethree-year period ended December 31, 2004 in accordance with generallyaccepted accounting principles in the United States of America.

 

The Company is not requiredto have, nor were we engaged to perform, an audit of its internal controls overfinancial reporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal controls over financial reporting. Accordingly we express no such opinion.

 

 
|   | By:                                           | /s/ DELOITTE & TOUCHE  LLP |   |   |
|--------|-----------------------------------------------|--------------------------------|--------|--------|
|   | Independent Registered  Chartered Accountants |                           |
|   |                                          |                           |
|   |                                          |                           |
|   | Montreal, Quebec                              |                           |
|   | March 4, 2005.                                |                           |

 

F-2

----

 

**DRAXIS HEALTH INC.**

**Consolidated Statements ofOperations**

**Years ended December 31**

*(in thousands of U.S. dollars except share relateddata)*

 
| ** **                                                            | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ***REVENUES***                                                        |       |       |       |       |       |     |       |
| Product sales                                                         | ** ** | **$**      | **61,693** | ** ** | $          | 40,535   |       | $ | 30,338 |   |
| Royalty and licensing  (Note 15)                                      | ** ** | **7,627**  | ** ** | 8,658      |       | 8,302    |       |
| ** **                                                            |       | **69,320** | ** ** | 49,193     |       | 38,640   |       |
| ***EXPENSES***                                                        |       |       | ** ** |       |       |     |       |
| Cost  of goods sold, excluding depreciation and amortization (Note 3) | ** ** | **39,793** | ** ** | 27,722     |       | 23,404   |       |
| Selling, general and  administration                                  | ** ** | **13,266** | ** ** | 9,904      |       | 7,542    |       |
| Research and development                                              | ** ** | **1,948**  | ** ** | 1,594      |       | 1,996    |       |
| Depreciation and  amortization                                        | ** ** | **4,457**  | ** ** | 3,287      |       | 2,804    |       |
| ** **                                                            |       | **59,464** | ** ** | 42,507     |       | 35,746   |       |
| Operating income                                                      | ** ** | **9,856**  | ** ** | 6,686      |       | 2,894    |       |
| Financing expense, net (Note  4)                                      | ** ** | **(670**   | **)**      | (1,532     | )          | (280     | )          |
| Other income (Note 5)                                                 | ** ** | **96**     | ** ** | —     |       | —   |       |
| Income before undernoted                                              | ** ** | **9,282**  | ** ** | 5,154      |       | 2,614    |       |
| Income taxes (Note 6)                                                 | ** ** | **(1,301** | **)**      | (874       | )          | 154      |       |
| Minority interest                                                     | ** ** | **(4**     | **)**      | 391        |       | 252      |       |
| Income from continuing  operations                                    | ** ** | **7,977**  | ** ** | 4,671      |       | 3,020    |       |
| (Loss) income from  discontinued operations, net of taxes (Note 7)    | ** ** | **(61**    | **)**      | 8,531      |       | (834     | )          |
| Net income                                                            | ** ** | **$**      | **7,916**  | ** ** | $          | 13,202   |       | $ | 2,186 |   |
|                                                                  |       |       | ** ** |       |       |     |       |
| Basic income (loss) per  share (Note 8)                               |       |       | ** ** |       |       |     |       |
| from continuing  operations                                           | ** ** | **$**      | **0.20**   | ** ** | $          | 0.13     |       | $ | 0.08 |   |
| from discontinued  operations                                         | ** ** | **—** | ** ** | 0.23       |       | (0.02    | )          |
| ** **                                                            |       | **$**      | **0.20**   | ** ** | $          | 0.36     |       | $ | 0.06 |   |
|                                                                  |       |       | ** ** |       |       |     |       |
| Diluted income (loss) per  share (Note 8)                             |       |       | ** ** |       |       |     |       |
| from continuing  operations                                           | ** ** | **$**      | **0.19**   | ** ** | $          | 0.13     |       | $ | 0.08 |   |
| from discontinued  operations                                         | ** ** | **—** | ** ** | 0.23       |       | (0.02    | )          |
| ** **                                                            |       | **$**      | **0.19**   | ** ** | $          | 0.36     |       | $ | 0.06 |   |

 
| APPROVED BY THE BOARD |   |     |
|-----------------------|--------|----------|
|                  |   |     |
|                  |   |     |
|                  |   | By:      | /s/ Brian King |   | By: | /s/ Martin Barkin, MD |   |
|                  |   | Director |   | Director |   |
|                       |        |          |  |  |  |  |  |  |

 

*See the accompanyingnotes to the Consolidated Financial Statements*

* *

F-3

----

 

**DRAXIS HEALTH INC.**

**Consolidated Balance Sheets**

**December 31**

*(in thousands of U.S. dollars except share relateddata)*

 
| ** **                                                                                                                                                     | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| ***ASSETS***                                                                                                                                                   |       |        |       |       |       |
|                                                                                                                                                           |       |        |       |       |       |
| **Current assets**                                                                                                                                             |       |        |       |       |       |
| Cash and cash equivalents                                                                                                                                      | ** ** | **$**       | **5,926**  | ** ** | $          | 10,563 |   |
| Restricted cash (Note 9)                                                                                                                                       | ** ** | **428**     | ** ** | 976        |       |
| Accounts receivable (Note  10)                                                                                                                                 | ** ** | **13,724**  | ** ** | 9,898      |       |
| Inventories (Note 11)                                                                                                                                          | ** ** | **10,158**  | ** ** | 6,096      |       |
| Prepaid expenses                                                                                                                                               | ** ** | **830**     | ** ** | 688        |       |
| Deferred income taxes,  net (Note 6)                                                                                                                           | ** ** | **4,121**   | ** ** | 2,806      |       |
| **Total current assets**                                                                                                                                       | ** ** | **35,187**  | ** ** | 31,027     |       |
|                                                                                                                                                           |       |        | ** ** |       |       |
| Property, plant and equipment,  net (Note 12)                                                                                                                  | ** ** | **43,857**  | ** ** | 32,917     |       |
| Goodwill, net                                                                                                                                                  | ** ** | **728**     | ** ** | 677        |       |
| Intangible assets, net  (Note 13)                                                                                                                              | ** ** | **737**     | ** ** | 1,974      |       |
| Other assets                                                                                                                                                   | ** ** | **604**     | ** ** | 565        |       |
| Deferred income taxes,  net (Note 6)                                                                                                                           | ** ** | **7,672**   | ** ** | 9,393      |       |
| **Total assets**                                                                                                                                               | ** ** | **$**       | **88,785** | ** ** | $          | 76,553 |   |
|                                                                                                                                                           |       |        | ** ** |       |       |
| ***LIABILITIES***                                                                                                                                              |       |        | ** ** |       |       |
|                                                                                                                                                           |       |        | ** ** |       |       |
| **Current liabilities**                                                                                                                                        |       |        | ** ** |       |       |
| Accounts payable and  accrued liabilities (Note 14)                                                                                                            | ** ** | **$**       | **10,436** | ** ** | $          | 6,708 |   |
| Current portion of  deferred revenues (Note 15)                                                                                                                | ** ** | **3,676**   | ** ** | 5,309      |       |
| Current portion of long-term  debt (Note 16)                                                                                                                   | ** ** | **—**  | ** ** | 981        |       |
| Customer deposits                                                                                                                                              | ** ** | **628**     | ** ** | 591        |       |
| **Total current liabilities**                                                                                                                                  | ** ** | **14,740**  | ** ** | 13,589     |       |
|                                                                                                                                                           |       |        | ** ** |       |       |
| Deferred revenues (Note  15)                                                                                                                                   | ** ** | **4,125**   | ** ** | 7,593      |       |
| Long-term debt (Note 16)                                                                                                                                       | ** ** | **—**  | ** ** | 9,485      |       |
| **Total liabilities**                                                                                                                                          | ** ** | **18,865**  | ** ** | 30,667     |       |
|                                                                                                                                                           |       |        | ** ** |       |       |
| Minority interest (Note  17)                                                                                                                                   | ** ** | **—**  | ** ** | 4,239      |       |
|                                                                                                                                                           |       |        | ** ** |       |       |
| Commitments and  contingencies (Note 21)                                                                                                                       |       |        | ** ** |       |       |
|                                                                                                                                                           |       |        | ** ** |       |       |
| ***SHAREHOLDERS’  EQUITY***                                                                                                                               |       |        | ** ** |       |       |
|                                                                                                                                                           |       |        | ** ** |       |       |
| Common stock, without par  value of unlimited shares authorized, 41,015,326 and 37,297,817 issued and  outstanding at December 31, 2004 and 2003, respectively | ** ** | **75,840**  | ** ** | 61,175     |       |
| Additional paid-in  capital                                                                                                                                    | ** ** | **15,546**  | ** ** | 15,667     |       |
| Warrants (Note 18(a))                                                                                                                                          | ** ** | **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        |       |
| **Total shareholders’  equity**                                                                                                                           | ** ** | **69,920**  | ** ** | 41,647     |       |
| **Total liabilities and  shareholders’ equity**                                                                                                           | ** ** | **$**       | **88,785** | ** ** | $          | 76,553 |   |

 

*See the accompanying notes to theConsolidated Financial Statements*

 

F-4

----

 

**DRAXIS HEALTH INC.**

**Consolidated Statements ofChanges in Equity and Comprehensive Income (Loss)**

**Years ended December 31**

*(in thousands of U.S. dollars except share relateddata)*

* *
| ** **                                             | ** ** | **2004**       | ** **  | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------------|------------|----------------|-------------|------------|------------|------------|------------|
| **Common Stock (Number of  Shares)**                   |       |           | ** **  |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **37,297,817** | ** **  | 37,098,690 |       | 36,613,434 |       |
| Issuance of common shares                              | ** ** | **3,053,436**  | ** **  | —     |       | —     |       |
| Exercise of options                                    | ** ** | **609,177**    | ** **  | 240,334    |       | 468,168    |       |
| Exercise of employee  participation shares             | ** ** | **54,896**     | ** **  | 9,093      |       | 17,088     |       |
| Repurchased for cancellation                           | ** ** | **—**     | ** **  | (50,300    | )          | —     |       |
| Balance, end of year                                   | ** ** | **41,015,326** | ** **  | 37,297,817 |       | 37,098,690 |       |
| **Common Stock**                                       |       |           | ** **  |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **$**          | **61,175**  | ** ** | $          | 60,652     | ** ** | $ | 59,781 |   |
| Issuance of common shares                              | ** ** | **12,867**     | ** **  | —     |       | —     |       |
| Exercise of options                                    | ** ** | **1,594**      | ** **  | 563        |       | 817        |       |
| Exercise of employee  participation shares             | ** ** | **204**        | ** **  | 30         |       | 54         |       |
| Repurchased for  cancellation                          | ** ** | **—**     | ** **  | (70        | )          | —     |       |
| Balance, end of year                                   | ** ** | **$**          | **75,840**  | ** ** | $          | 61,175     | ** ** | $ | 60,652 |   |
| **Additional Paid-In  Capital**                        |       |           | ** **  |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **$**          | **15,667**  | ** ** | $          | 15,550     | ** ** | $ | 15,476 |   |
| Stock compensation                                     | ** ** | **(121**       | **)**       | 112        |       | —     |       |
| Fair value associated  with expired warrants           | ** ** | **—**     | ** **  | —     |       | 74         |       |
| Common shares purchased  for cancellation (Note 18(C)) | ** ** | **—**     | ** **  | 5          |       | —     |       |
| Balance, end of year                                   | ** ** | **$**          | **15,546**  | ** ** | $          | 15,667     | ** ** | $ | 15,550 |   |
| **Warrants**                                           |       |           | ** **  |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **$**          | **—**  | ** ** | $          | —     | ** ** | $ | 74 |   |
| Issuance of warrants                                   | ** ** | **916**        | ** **  | —     |       | —     |       |
| Expiry of warrants                                     | ** ** | **—**     | ** **  | —     |       | (74        | )          |
| Balance, end of year                                   | ** ** | **$**          | **916**     | ** ** | $          | **—** | ** ** | $ | **—** |   |
| **Employee Participation  Shares**                     |       |           | ** **  |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **$**          | **86**      | ** ** | $          | 140        | ** ** | $ | 166 |   |
| Cancellation of employee  participation shares         | ** ** | **—**     | ** **  | (27        | )          | —     |       |
| Exercise of employee  participation shares             | ** ** | **(86**        | **)**       | (27        | )          | (26        | )          |
| Balance, end of year                                   | ** ** | **$**          | **—**  | ** ** | $          | 86         | ** ** | $ | 140 |   |
| **Employee Participation  Shares-Loans Receivable**    |       |           | ** **  |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **$**          | **(86**     | **)**      | $          | (140       | )          | $ | (166 | ) |
| Cancellation of employee  participation shares         | ** ** | **—**     | ** **  | 27         |       | —     |       |
| Exercise of employee  participation shares             | ** ** | **86**         | ** **  | 27         |       | 26         |       |
| Balance, end of year                                   | ** ** | **$**          | **—**  | ** ** | $          | (86        | )          | $ | (140 | ) |
| **Deficit**                                            |       |           | ** **  |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **$**          | **(35,481** | **)**      | $          | (48,683    | )          | $ | (50,869 | ) |
| Net income                                             | ** ** | **7,916**      | ** **  | 13,202     |       | 2,186      |       |
| Balance, end of year                                   | ** ** | **$**          | **(27,565** | **)**      | $          | (35,481    | )          | $ | (48,683 | ) |
| **Accumulated Other  Comprehensive Income (Loss)**     |       |           | ** **  |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **$**          | **286**     | ** ** | $          | (7,292     | )          | $ | (7,584 | ) |
| Other comprehensive income                             | ** ** | **4,897**      | ** **  | 7,578      |       | 292        |       |
| Balance, end of year                                   | ** ** | **5,183**      | ** **  | 286        |       | (7,292     | )          |
| **Total shareholders’  equity**                   | ** ** | **$**          | **69,920**  | ** ** | $          | 41,647     | ** ** | $ | 20,227 | ** ** |
| **Comprehensive Income**                               |       |           | ** **  |       |       |       |       |
| Foreign currency  translation adjustments              | ** ** | **$**          | **4,897**   | ** ** | $          | 7,578      | ** ** | $ | 292 | ** ** |
| Other comprehensive  income                            | ** ** | **4,897**      | ** **  | 7,578      |       | 292        |       |
| Net income                                             | ** ** | **7,916**      | ** **  | 13,202     |       | 2,186      |       |
| **Total comprehensive  income**                        | ** ** | **$**          | **12,813**  | ** ** | $          | 20,780     | ** ** | $ | 2,478 | ** ** |

 

*See the accompanyingnotes to the Consolidated Financial Statements*

* *

F-5

----

 

**DRAXIS HEALTH INC.**

**Consolidated Statements of CashFlows**

**Years ended December 31**

*(in thousands of U.S. dollars)*

* *
| ** **                                                                                                       | ** ** | **2004**    | ** ** | **2003**   | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|----------|------------|
| ***CASH  FLOWS FROM (USED IN) OPERATING ACTIVITIES***                                                            |       |        | ** ** |       |       |     |       |
| Net income from  continuing operations                                                                           | ** ** | **$**       | **7,977**  | ** ** | $          | 4,671    |       | $ | 3,020 |   |
| Adjustments to reconcile  net income from continuing operations to net cash from (used in) operating  activities |       |        | ** ** |       |       |     |       |
| Amortization of deferred  revenues                                                                               | ** ** | **(5,495**  | **)**      | (6,811     | )          | (6,568   | )          |
| Depreciation and other  amortization                                                                             | ** ** | **4,457**   | ** ** | 3,287      |       | 2,804    |       |
| Stock compensation                                                                                               | ** ** | **83**      | ** ** | 112        |       | 28       |       |
| Deferred income taxes                                                                                            | ** ** | **322**     | ** ** | 39         |       | (1,181   | )          |
| Minority interest                                                                                                | ** ** | **4**       | ** ** | (391       | )          | (252     | )          |
| Other                                                                                                            | ** ** | **785**     | ** ** | 799        |       | 376      |       |
| Changes in operating  assets and liabilities                                                                     |       |        | ** ** |       |       |     |       |
| Accounts receivable                                                                                              | ** ** | **(2,912**  | **)**      | (285       | )          | (401     | )          |
| Inventories                                                                                                      | ** ** | **(3,230**  | **)**      | (93        | )          | (835     | )          |
| Income taxes                                                                                                     | ** ** | **63**      | ** ** | (803       | )          | (235     | )          |
| Prepaid expenses                                                                                                 | ** ** | **(409**    | **)**      | (149       | )          | (185     | )          |
| Accounts payable and  accrued liabilities                                                                        | ** ** | **2,748**   | ** ** | (3,597     | )          | 1,245    |       |
| Net cash from (used in)  operating activities of continuing operations                                           | ** ** | **4,393**   | ** ** | (3,221     | )          | (2,184   | )          |
| ***CASH  FLOWS FROM (USED IN) INVESTING ACTIVITIES***                                                            |       |        | ** ** |       |       |     |       |
| Expenditures for  property, plant and equipment                                                                  | ** ** | **(4,801**  | **)**      | (3,536     | )          | (5,390   | )          |
| Increase in intangible  assets                                                                                   | ** ** | **(150**    | **)**      | (122       | )          | (60      | )          |
| Increase in deferred  revenues                                                                                   | ** ** | **362**     | ** ** | 165        |       | 899      |       |
| Proceeds from disposition  of product right (Note 5)                                                             | ** ** | **113**     | ** ** | —     |       | —   |       |
| Net cash from (used in)  investing activities of continuing operations                                           | ** ** | **(4,476**  | **)**      | (3,493     | )          | (4,551   | )          |
| ***CASH  FLOWS FROM (USED IN) FINANCING ACTIVITIES***                                                            |       |        | ** ** |       |       |     |       |
| Restricted cash (Note 9)                                                                                         | ** ** | **548**     | ** ** | (976       | )          | —   |       |
| Proceeds from bank  indebtedness                                                                                 | ** ** | **—**  | ** ** | 4,942      |       | 382      |       |
| Repayment of bank  indebtedness                                                                                  | ** ** | **—**  | ** ** | (5,927     | )          | (1,190   | )          |
| Proceeds from long-term  debt                                                                                    | ** ** | **4,965**   | ** ** | 947        |       | 5,243    |       |
| Repayment of long-term  debt                                                                                     | ** ** | **(15,508** | **)**      | (3,013     | )          | (172     | )          |
| (Decrease) increase of  customer deposits, net                                                                   | ** ** | **(8**      | **)**      | (2,044     | )          | 477      |       |
| Exercise of options and  employee participation shares                                                           | ** ** | **1,594**   | ** ** | 593        |       | 844      |       |
| Issuance of common shares  and warrants, net of related expenses  (Note 18(a))                                   | ** ** | **13,385**  | ** ** | —     |       | —   |       |
| Common shares purchased  for cancellation                                                                        | ** ** | **—**  | ** ** | (65        | )          | —   |       |
| Issue of common shares by  subsidiary to minority interest                                                       | ** ** | **—**  | ** ** | 365        |       | 969      |       |
| Repurchase of common  shares by subsidiary from minority interest  (Note 17)                                     | ** ** | **(9,557**  | **)**      | (140       | )          | (177     | )          |
| Net cash from (used in)  financing activities of continuing operations                                           | ** ** | **(4,581**  | **)**      | (5,318     | )          | 6,376    |       |
| Effect of foreign  exchange rate changes on cash and cash equivalents                                            | ** ** | **119**     | ** ** | 597        |       | 95       |       |
| Net cash used in  continuing operations                                                                          | ** ** | **(4,545**  | **)**      | (11,435    | )          | (264     | )          |
| Net cash (used in) from  discontinued operations                                                                 | ** ** | **(92**     | **)**      | 17,099     |       | (439     | )          |
| Net (decrease) increase  in cash and cash equivalents                                                            | ** ** | **(4,637**  | **)**      | 5,664      |       | (703     | )          |
| Cash and cash  equivalents, beginning of year                                                                    | ** ** | **10,563**  | ** ** | 4,899      |       | 5,602    |       |
| Cash and cash  equivalents, end of year                                                                          | ** ** | **5,926**   | ** ** | $          | 10,563     |     | $          | 4,899 |   |
|                                                                                                             |       |        | ** ** |       |       |     |       |
| **Additional Information**                                                                                       |       |        | ** ** |       |       |     |       |
| Interest paid                                                                                                    | ** ** | **310**     | ** ** | $          | 700        |     | $          | 417 |   |
| Income taxes paid                                                                                                | ** ** | **1,040**   | ** ** | $          | 1,882      |     | $          | 1,791 |   |
|                                                                                                                  |            |             |            |            |            |          |            |  |  |  |

 

*See the accompanying notes to theConsolidated Financial Statements*

 

F-6

----

 

**DRAXIS HEALTH INC.**

**Notes to the ConsolidatedFinancial Statements**

*(in thousands of U.S. dollars except share relateddata)*

 

**1.**                                      Nature of Operations

** **

DRAXIS Health Inc. (“DRAXIS”or the “Company”) is a specialty pharmaceutical company providingpharmaceutical products in three major categories: sterile, including sterilelyophilized (freeze-dried) pharmaceuticals; non-sterile specialtypharmaceuticals; and radiopharmaceuticals. In the radiopharmaceutical category,DRAXIS has its own products and a targeted research and development program fornew products.  As of January 1, 2005,activities of the Company are carried out through its wholly owned subsidiary,DRAXIS Specialty Pharmaceuticals Inc., which operates two major divisions,DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).  TheCompany’s common shares are listed on NASDAQ and the Toronto Stock Exchange.

 

**2.**                                      Significant Accounting Policies

** **

*(a)**                               Basisof Presentation*

 

The Company has prepared theseconsolidated financial statements in U.S. dollars and in accordance withgenerally accepted accounting principles (“GAAP”) in the United States.

 

Reconciliations to Canadian GAAP areavailable to shareholders.

 

*(b)**                               Principlesof Consolidation*

 

The consolidated financial statementsinclude the accounts of the Company and its subsidiary companies with provisionfor minority interests.  The Company’seffective interest in the voting equity share capital of its subsidiaries is100%, except in the case of DRAXIS Pharma, for which it was 67.3% prior toApril 22, 2004 (2003-67.3%; 2002-66.9%) and 100% thereafter.  All intercompany transactions and balancesare eliminated on consolidation.

 

*(c)**                                MinorityInterest*

 

Minority interest represents theminority shareholders’ proportionate share of equity and net income or loss ofDRAXIS Pharma prior to April 22, 2004, the date on which the Company acquiredthe remaining minority interest, see Note 17.

 

*(d)**                               Useof Estimates*

 

The preparation of the Company’sconsolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  Estimatesand assumptions are used when accounting for items and matters such as assetimpairments, allowance for uncollectible accounts receivable, inventoryobsolescence, warranties and provisions, amortization, deferred and currentincome taxes, stock compensation and contingencies.

 

F-7

----

 

*(e)**                                ReportingCurrency and Foreign Currency Translation*

 

The Company’s principal functionalcurrency is the Canadian dollar, however, it reports its consolidated financialstatements in U.S. dollars.  Thefinancial statements of the parent company and its non-U.S. subsidiaries whosefunctional currency is not the U.S. dollar are translated into U.S. dollars inaccordance with Statement of Financial Accounting Standards (“*SFAS*”) *No. 52, “Foreign CurrencyTranslation*.”  Asset andliability accounts are translated at the rate of exchange prevailing at thebalance sheet date.  Shareholders’ equityaccounts are translated at the applicable historical rate.  Revenue and expense accounts are translatedat the average rate of exchange for the period. The cumulative foreign currency translation adjustment is reported as acomponent of accumulated other comprehensive income (loss) in shareholders’equity.  The net change in the cumulativeforeign currency translation adjustment in the periods presented is primarilydue to fluctuations in the exchange rates between the Company’s reportingcurrency and the Canadian dollar.

 

The monetary assets and liabilities ofthe Company are translated at the exchange rates in effect at the balance sheetdates and at historical exchange rates for non-monetary assets andliabilities.  Revenues and expenses aretranslated at average rates for the period. Resulting translation gains or losses are reflected in net income(loss).

 

*(f)**                                   RevenueRecognition*

 

**Product Sales** – The Company recognizes revenue, net of trade discountsand allowances, when evidence of an arrangement exists, delivery has occurredor services rendered, the price is fixed or determinable and collectability isreasonably assured.

 

Amounts received from customers asprepayments for products to be shipped or services provided in the future arereported as customer deposits.

 

Product sales include related servicerevenues which are recognized at the time of performance or proportionatelyover the term of the contract, as appropriate.

 

**Royalty and Licensing** - Royalty revenue is recognized on an accrual basis inaccordance with contractual agreements when all significant contractualobligations have been satisfied, the amounts are determinable and collection isreasonably assured.  Royalty revenue isnet of amounts owing to sublicensees where the Company is acting as an agentfor the sublicensee.

 

License and other forms of non-refundablefees received pursuant to collaboration agreements are accounted for accordingto the related contractual agreements. In general, such fees are deferred and recognized on a straight-linebasis over the contract period. Where the contract period is not defined, suchfees are recognized on a straight-line basis over the estimated term, duringwhich contractual benefits are expected to be derived.  If payment of such fees is contingent uponfuture performance obligations of the Company or other future events, revenuerecognition of such amounts is deferred and recognized upon completion of thespecific event.

 

F-8

----

 

*(g)**                               Researchand Development*

 

In accordance with *SFAS No. 2, “Accountingfor Research and Development Costs*,” research and development costsare expensed in the period in which they are incurred.  Acquired research and development having noalternative future use is written off at the time of acquisition.  The cost of intangibles that are purchasedfrom others for a particular research and development project that have noalternative future use is written off at the time of acquisition.

 

The Canadian Federal and QuebecProvincial governments offer a tax incentive to companies performing researchand development (‘R&D”) activities in Canada.  The federal tax incentive is calculated basedon pre-determined rates considers eligible R&D expenditures and can be usedto reduce federal income taxes in Canada otherwise payable.  Such credits, if not used in the year earned,can be carried forward for a period of ten years.  The Quebec Provincial government offers asimilar incentive, except that it is receivable in cash, instead of a creditused to reduce taxes otherwise payable. The cash credit is awarded regardless of whether or not there are QuebecProvincial taxes payable.  These taxcredits are recorded as a reduction of the income tax expense.

 

*(h)**                               IncomeTaxes*

 

The liability method of accounting forincome taxes is used in accordance with *SFAS No. 109, “Accountingfor Income Taxes*.”  Under thismethod, deferred tax assets and liabilities are recognized for the differencesbetween the financial statement and income tax bases of assets and liabilities,and for operating losses and tax credit carryforwards.  A valuation allowance is provided for theportion of deferred tax assets which are more likely than not to beunrealized.  Deferred tax assets andliabilities are measured using the enacted tax rates and laws.

 

*(i)**                                  Cashand Cash Equivalents*

 

All highly liquid investments withoriginal maturities of three months or less are classified as cash and cashequivalents.  The fair value of cash andcash equivalents approximates the amounts shown in the financial statements.

 

*(j)**                                   Allowancefor doubtful accounts*

 

The Company determines an appropriateallowance for doubtful accounts based on an account by account review asopposed to a general provision assessed as a percentage of revenues.

 

*(k)**                               Inventories*

 

Inventories are comprised of rawmaterials, work-in-process and finished goods. Raw materials are valued at the lower of standard cost and replacementcost.  Standard cost approximates actualcost, computed on a first-in, first-out basis. Work-in-process is valued at the lower of standard cost and net realizablevalue and includes material, direct labour, and related manufacturing andoverhead costs.  Finished goods arevalued at the lower of cost on a first-in, first-out basis and net realizablevalue and include all related manufacturing, packaging and overhead costs.  Provisions for inventory are charged againstincome when it is determined that the inventory item does not meet the definedquality and regulatory requirements for sale. The Company does not make general provisions for inventory obsolescenceas items are manufactured based on customer orders.

 

F-9

----

 

*(l)**                                  Property,Plant and Equipment*

 

Property, plant and equipment arereported at cost, less accumulated depreciation.  The Company provides for depreciation usingthe following methods and applying rates estimated to amortize the cost overthe useful life of the assets:

 
| Building  |   | straight-line over 25 years                                  |
|-----------|--------|--------------------------------------------------------------|
| Equipment |   | 20%-30% declining balance and straight-line over  5-10 years |

 

Expenditures for construction of assetsincurred prior to productive use are reflected as assets underconstruction.  Depreciation commenceswhen an asset is substantially completed and ready for productive commercialuse.

 

*(m)**                             Goodwill*

 

Effective with the adoption of *SFAS No. 142, “Goodwill and Other Intangible Assets*,” as ofJanuary 1, 2002, goodwill is not amortized however, it is subject to an annualimpairment test or more frequently under certain circumstances.  The assessment of impairment is done byapplying a fair-value-based test. Measurement of the fair value of the reporting unit is based on one ormore fair value measures including present value techniques of estimated futurecash flows.

 

*(n)*                               *Intangible Assets*

 

Acquired intangible assets which do nothave regulatory approval and for which there are no alternative uses areexpensed as acquired in-process research and development, and those that haveregulatory approval are capitalized.

 

Intangible assets with finite lives arereported at cost, less accumulated amortization.  The Company does not have any intangibleassets with indefinite lives.  TheCompany provides for amortization on a straight-line basis over the followingestimated useful lives:

 
| Patents and trademarks |   | 10 years     |
|------------------------|--------|--------------|
| Licenses               |   | 9 - 15 years |

 

F-10

----

 

*(o)**                               Impairmentof long-lived assets*

 

Long-lived assets, comprisedprincipally of property, plant and equipment and intangible assets with finitelives are reviewed for impairment whenever events or circumstances indicate thecarrying amount of assets may not be recoverable.  The Company evaluates recoverability ofassets to be held and used by comparing the carrying amount of an asset toestimated future net undiscounted cash flows generated by the asset.  If such assets are considered to be impaired,the impairment recognized is measured as the amount by which the carryingamount of the assets exceeds the fair value of the assets.

 

*(p)**                               RecentPronouncement*

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) published *SFAS No.123R, Share-Based Payment*.  *SFAS No. 123R* replaces *SFAS No. 123*, *Stock-Based Compensation* issued in 1995.  *SFAS No.**123R* requires a public entity to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award (with limited exceptions). That costwill be recognized over the period during which an employee is required toprovide service in exchange for the award during a requisite service period (usuallythe vesting period). This statement is effective for the Company beginning onJuly 1, 2005 and the Company intends to fully implement this statementbeginning in the third quarter of 2005. As of the required effective date, theCompany will apply *SFAS No.**123R* using a modified version of the prospectiveapplication. Under that transition method, compensation cost is recognized onor after the required effective date for the portion of outstanding awards forwhich the requisite service has not yet been rendered, based on the grant-datefair value of those awards calculated under *SFAS No. 123*for either recognition or *pro forma*disclosures. If the Company had adopted *SFAS No.**123R* in prior periods, the net impact on the Company’sconsolidated statements of operations would have approximated the impact asdescribed in Note 2(q) below on a *pro forma*basis.  The Company expects that theadoption of *SFAS No.**123R*willreduce the basic EPS in the second half of 2005 by approximately $0.01 pershare.

 

*(q)**                               Share-basedCompensation Plan*

 

Under the provisions of *SFAS No. 123, “Stock-Based Compensation”*, companies caneither measure the compensation cost of equity instruments issued underemployee compensation plans using a fair-value-based method or can continue torecognize compensation cost using the intrinsic value method under theprovisions of Accounting Principles Board Opinion (“*APB*”)*No. 25, “Accounting for Stock Issued to Employees.”*  However, if the provisions of *APB No. 25* are applied, *pro forma*disclosure of net income and earnings per share must be presented in thefinancial statements as if the fair value method had been applied.  For all periods presented, the Companyrecognized compensation costs under the provisions of *APB No*.*25,* and the Company has provided theexpanded disclosure required by *SFAS**No. 123*.

 

Accordingly, the Company’s net incomeapplicable to common shares and income per common share would have been changedby the *pro forma* amounts as indicated below:

 
| ** **                                 | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Net income, as  reported                   | ** ** | **$**    | **7,916**  | ** ** | $          | 13,202   |       | $ | 2,186 |   |
| *Pro  forma impact*                        | ** ** | **(733** | **)**      | (681       | )          | (736     | )          |
| *Pro  forma*net income                     | ** ** | **$**    | **7,183**  | ** ** | $          | 12,521   |       | $ | 1,450 |   |
|                                       |       |     | ** ** |       |       |     |       |
| Basic net income  per share, as reported   | ** ** | **$**    | **0.20**   | ** ** | $          | 0.36     |       | $ | 0.06 |   |
| *Pro  forma*impact per share               | ** ** | **$**    | **(0.02**  | **)**      | $          | (0.02    | )          | $ | (0.02 | ) |
| *Pro  forma*net income per share (Basic)   | ** ** | **$**    | **0.18**   | ** ** | $          | 0.34     |       | $ | 0.04 |   |
| *Pro  forma*net income per share (Diluted) | ** ** | **$**    | **0.18**   | ** ** | $          | 0.34     |       | $ | 0.04 |   |

 

F-11

----

 

The fair value of stock options used tocompute *pro forma* net income applicable tocommon shares and loss per common share disclosures is the estimated fair valueat grant date using the Black-Scholes option-pricing model with the followingassumptions as at December 31:

 
| ** **               | ** ** | **2004**      | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|--------------------------|------------|---------------|------------|-----------|------------|-----------|------------|
| Dividend yield           | ** ** | **0.0%**      |       | 0.0%      |       | 0.0%      |       |
| Expected  volatility     | ** ** | **60-61%**    |       | 60%-62%   |       | 62%-64%   |       |
| Risk-free  interest rate | ** ** | **3.9%-4.0%** |       | 3.8%-4.1% |       | 4.1%-5.6% |       |
| Expected option  life    | ** ** | **5-10  yrs** |       | 5-10 yrs  |       | 5 yrs     |       |

 

The Black-Scholes option-pricing modelwas developed for use in estimating the fair value of traded options, whichhave no vesting restrictions and are fully transferable and which significantlydiffer from the Company’s stock option awards. In addition, option-pricing models require the input of highly subjectiveassumptions including the expected price volatility.  The Company uses expected volatility rates,which are based on historical volatility rates trended into future years.  Changes in the subjective input assumptionscan materially affect the fair value estimate, and therefore the existing modeldoes not necessarily provide a reliable single measure of the fair value of theCompany’s stock options.

 

F-12

----

 

**3.**                                      Cost of Goods Sold

** **

On July 28, 2003, DRAXIS receivedinsurance proceeds of $730 in settlement of physical damage and businessinterruption losses related to installation problems of its first lyophilizerunit in 2000.  The damage resulted in,amongst other things, delays in the commissioning of the lyophilization unitand in obtaining FDA approvals for the transfer of production of the DRAXIMAGEline of lyophilized diagnostic imaging products to DRAXIS Pharma.  FDA approval was ultimately obtained in 2001and costs incurred related to the incident were charged to the statement ofoperations when incurred.  No accrual forinsurance proceeds had been previously recorded as the claim represented acontingent gain.  The proceeds wererecognized as a reduction to cost of goods sold in the third quarter of 2003.

 

**4.**                                      Financing Expense

 
| ** **             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income        |       | $        | 133        |     | $          | 144      |       | $ | 155 |   |
| Interest expense       |       | (429     | )          | (975     | )          | (422     | )          |
| Foreign exchange  loss |       | (374     | )          | (701     | )          | (13      | )          |
|                   |       | $        | (670       | )        | $          | (1,532   | )          | $ | (280 | ) |
|                        |            |          |            |          |            |          |            |  |  |  |  |

 

**5.**                                      Other Income

** **

During 2004, the Company disposed of aright to a dermatology product for proceeds of $113 and realized a gain of $96.

 

F-13

----

 

**6.**                                      Income Taxes

 
| ** **                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| The components  of income tax expense are as follows: |       |     |       |     |       |     |       |
| Current                                               |       | $        | 980        |     | $          | 932      |       | $ | 1,144 |   |
| Deferred                                              |       | 321      |       | (58      | )          | (1,298   | )          |
|                                                  |       | $        | 1,301      |     | $          | 874      |       | $ | (154 | ) |

 

The reported incometax expense differs from the expected amount calculated by applying the Company’sCanadian combined federal and provincial tax rate to income before income taxexpense.  The reasons for this differenceand the related tax effects are as follows:

 
| ** **                                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income before  income taxes from continuing operations - substantially all from the Canadian  operations |       | $        | 9,282      |     | $          | 5,154    |       | $ | 2,614 |   |
| Canadian  combined federal and provincial tax rate                                                       |       | 32.4     | %          | 34.0     | %          | 36.4     | %          |
| Expected income  tax expense                                                                             |       | $        | 3,007      |     | $          | 1,753    |       | $ | 951 |   |
|                                                                                                     |       |     |       |     |       |     |       |
| Increase  (decrease) resulting from:                                                                     |       |     |       |     |       |     |       |
| Foreign tax rate  differences                                                                            |       | 95       |       | —   |       | (90      | )          |
| Effect of tax  planning on valuation of available loss carryforwards                                     |       | (884     | )          | —   |       | —   |       |
| Effects on  deferred income taxes from reduction in Canadian income tax rates                            |       | —   |       | —   |       | 178      |       |
| Recovery of  prior years’ U.S. taxes                                                                |       | —   |       | —   |       | (418     | )          |
| Unrecognized  income tax benefit of losses                                                               |       | (786     | )          | (732     | )          | (658     | )          |
| Goodwill and  other amortization                                                                         |       | 358      |       | 281      |       | 253      |       |
| Investment tax  credits                                                                                  |       | (398     | )          | (343     | )          | (495     | )          |
| Other                                                                                                    |       | (91      | )          | (85      | )          | 125      |       |
|                                                                                                     |       | $        | 1,301      |     | $          | 874      |       | $ | (154 | ) |

 

Deferred income tax assets have beenprovided as follows:

 
| ** **                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Loss carryforwards  and investment tax credits                          |       | $        | 12,595     |     | $          | 11,436 |   |
| Expenses not  currently deductible for tax purposes                     |       | 809      |       | 344      |       |
| Deferred revenue                                                        |       | 1,444    |       | 2,202    |       |
| Share issuance  costs                                                   |       | 644      |       | —   |       |
| Tax value of  property, plant and equipment in excess of net book value |       | (550     | )          | 1,636    |       |
| Tax value of  intangible assets in excess of net book value             |       | 698      |       | 582      |       |
| Total deferred  tax assets                                              |       | 15,640   |       | 16,200   |       |
| Valuation  allowance                                                    |       | (3,847   | )          | (4,001   | )          |
| Net deferred tax  assets                                                |       | $        | 11,793     |     | $          | 12,199 |   |
| Deferred income  tax assets are classified as follows:                  |       |     |       |     |       |
| Current                                                                 |       | $        | 4,121      |     | $          | 2,806 |   |
| Non-current                                                             |       | 7,672    |       | 9,393    |       |
|                                                                    |       | $        | 11,793     |     | $          | 12,199 |   |

 

At December 31, 2004, the Company hasaccumulated tax losses of $27,378 available for federal and provincial purposesin Canada, which expire from 2005 to 2014. The Company also has $1,482 of unclaimed Canadian investment taxcredits, which expire from 2005 to 2014. These losses and investment tax credits can be used to offset futureyears’ taxable income.

 

The Company has accumulated tax lossesof $6,283 for federal and state purposes in the U.S., which expire from 2010 to2014.  Subject to certain limitations,these losses can be used to offset future years’ taxable income.

 

As a result of tax planning initiativesmade possible by the purchase of the minority interest on April 22, 2004, theCompany was able to increase the value of its deferred income tax assets byrecognizing the benefits of previously unrecognized tax loss carryforwards.

 

F-14

----

 

The Company’s valuation allowance ismade up of loss carryforwards in jurisdictions where taxable income is nolonger generated or where it is more likely they will not be realized prior toexpiry.  The reduction in the valuationallowance over 2003 relates to the recognition of previously unrecognized losscarryfowards from tax planning as described above.  The impact is offset by the increase in thetotal deferred tax assets and related valuation allowances caused by thestrengthening of the Canadian dollar.

 

F-15

----

 

**7.**                                      Discontinued Operations

** **

In 2001, the Company adopted a formalplan to dispose of its Canadian sales and marketing division (“DRAXISPharmaceutica”).

 

Pursuant to APB *No. 30, “Reportingthe Results of Operations - Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions*,” the results of operations of DRAXIS Pharmaceuticahave been reported as discontinued operations and the consolidated financialstatements and notes thereto for the year ended December 31, 2001 and allsubsequent periods presented have been reclassified.

 

On March 31, 2003, the Company amendedits License, Distribution and Supply Agreement with Elan Corporation, plc (“Elan”)to return the Canadian rights for several of Elan’s neurology products inexchange for a cash payment of $6,500 and realized an after-tax gain of $4,286on this transaction.

 

On July 22, 2003, the Company completedthe divestiture of DRAXIS Pharmaceutica with the sale to Shire BioChem Inc. (“Shire”),of substantially all remaining products of the division.  The Company has received $9,600 in cash fromShire and could receive up to $2,900 in market driven milestones over the nextseveral years.  The Company realized anafter-tax gain of $4,054, net of transaction and related charges.  In addition, the Company will receive royaltypayments based on the continuing Canadian sales of the products.  The Company also received the value ofacquired inventories and Shire is now responsible for all financial provisionsof the license agreement related to Permax®.

 

Commencing in the second quarter of2002, the Company resolved to retain ownership of the Canadian rights toAlertec® and continue to market and sell Alertec® in Canada itself.Accordingly, discontinued operations did not include revenues and expensesdirectly attributable to Alertec® up until such time that third-party approvalwas obtained.  As a result of the abilityto obtain third-party approval upon closing with Shire, management decided todispose of Alertec® through the sale of the Canadian rights to Shire and atthat time included Alertec® as part of discontinued operations on a prospectivebasis.

 

Interest expense directlyattributable to license obligations included in the transaction has beenallocated to the discontinued operations.

 

The results ofdiscontinued operations, presented in the accompanying Consolidated Statementsof Operations, were as follows:

 
| ** **                                                                      | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Revenues                                                                        | ** ** | **$**      | **268**    | ** ** | $          | 4,301    |       | $ | 6,844 |   |
| Operating (loss)  income from discontinued operations                           | ** ** | **(92**    | **)**      | 263        |       | (1,236   | )          |
| Income tax  recovery (expense)                                                  | ** ** | **31**     | ** ** | (72        | )          | 402      |       |
| Operating (loss)  income from discontinued operations – net of tax         | ** ** | **(61**    | **)**      | 191        |       | (834     | )          |
| Net gain on  disposal of product rights – net of tax expense $3,606 (2003) | ** ** | **—** | ** ** | 8,340      |       | —   |       |
| Net (loss)  income from discontinued operations – net of tax               | ** ** | **$**      | **(61**    | **)**      | $          | 8,531    |       | $ | (834 | ) |

 

F-16

----

** **

**8.**                                      Earnings (Loss) per Share

** **

Basic income(loss) per common share is calculated by dividing the net income (loss) by theweighted average number of Company’s common shares outstanding during theperiod.  Diluted income (loss) per commonshare is calculated by dividing the net income (loss) by the sum of theweighted average number of common shares that would have been outstanding ifpotentially dilutive common shares had been issued during the period.  The treasury stock method is used to computethe dilutive effect of warrants, stock options and the Employee ParticipationShare Purchase Plan.  The calculation ofdiluted income (loss) per common share excludes any potential conversion ofwarrants, options and Employee Participation Shares that would increaseearnings per share or decrease a loss per share.

 

The followingtable sets forth the computation of basic and diluted income (loss) per sharefor the years ended December 31:

 
| ** **                                                         | ** ** | **2004**       | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Numerator:                                                         |       |           |       |       |       |       |       |
| Net income from  continuing operations                             | ** ** | **$**          | **7,977**  | ** ** | $          | 4,671      |       | $ | 3,020 |   |
| Net (loss)  income from discontinued operations                    | ** ** | **(61**        | **)**      | 8,531      |       | (834       | )          |
| Net income                                                         | ** ** | **$**          | **7,916**  | ** ** | $          | 13,202     |       | $ | 2,186 |   |
| Denominator:                                                       |       |           | ** ** |       |       |       |       |
| Weighted average  number of common shares outstanding – basic | ** ** | **39,886,219** | ** ** | 37,114,648 |       | 36,981,985 |       |
| Weighted average  effect of dilutive securities:                   |       |           | ** ** |       |       |       |       |
| Warrants                                                           | ** ** | **—**     | ** ** | —     |       | 32,305     |       |
| Stock option  plan                                                 | ** ** | **1,168,664**  | ** ** | 80,346     |       | 295,866    |       |
| Employee  Participation Share Purchase Plan                        | ** ** | **—**     | ** ** | —     |       | 27,723     |       |
| Weighted average  number of common shares outstanding - diluted    | ** ** | **41,054,883** | ** ** | 37,194,994 |       | 37,337,879 |       |
|                                                               |       |           | ** ** |       |       |       |       |
| Basic income  (loss) per share:                                    |       |           | ** ** |       |       |       |       |
| from continuing  operations                                        | ** ** | **$**          | **0.20**   | ** ** | $          | 0.13       |       | $ | 0.08 |   |
| from  discontinued operations                                      | ** ** | **—**     | ** ** | 0.23       |       | (0.02      | )          |
| ** **                                                         |       | **$**          | **0.20**   | ** ** | $          | 0.36       |       | $ | 0.06 |   |
| Diluted income  (loss) per share:                                  |       |           | ** ** |       |       |       |       |
| from continuing  operations                                        | ** ** | **$**          | **0.19**   | ** ** | $          | 0.13       |       | $ | 0.08 |   |
| from  discontinued operations                                      | ** ** | **—**     | ** ** | 0.23       |       | (0.02      | )          |
| ** **                                                         |       | **$**          | **0.19**   | ** ** | $          | 0.36       |       | $ | 0.06 |   |

** **

**9**                                         Restricted Cash

** **

In conjunctionwith the divestiture of DRAXIS Pharmaceutica to Shire (see Note 7), $976 of thecash proceeds are held in trust under an escrow agreement.  The release of this amount under escrow isdependent upon whether or not claims by Shire have been made to the Company bycertain dates with respect to any breach of the representations and warrantiesmade by the Company to Shire or any failure of the Company to perform itsobligations under the divestiture agreement. In July 2004, the first instalment of $548 was released from escrow.

 

**10**                                  Accounts Receivable

 
| ** **                       | ** ** | **2004** | ** ** | **2003**   | ** ** |
|----------------------------------|------------|----------|------------|------------|------------|
| Trade                            | ** ** | **$**    | **13,970** | ** ** | $          | 9,957 |   |
| Allowance for  doubtful accounts | ** ** | **(411** | **)**      | (266       | )          |
| Loans to  employees              | ** ** | **109**  | ** ** | 120        |       |
| Income taxes                     | ** ** | **56**   | ** ** | 87         |       |
| ** **                       |       | **$**    | **13,724** | ** ** | $          | 9,898 |   |

 

F-17

----

 

**11.****                               Inventories**

 
| ** **      | ** ** | **2004**  | ** ** | **2003** | ** ** |
|-----------------|------------|-----------|------------|----------|------------|
| Raw materials   | ** ** | **$**     | **5,491**  |     | $          | 3,440 |   |
| Work-in-process | ** ** | **1,501** |       | 1,541    |       |
| Finished goods  | ** ** | **3,166** |       | 1,115    |       |
| ** **      |       | **$**     | **10,158** |     | $          | 6,096 |   |

 

**12.****                               Property,Plant and Equipment**

 
| ** **                 | ** ** | **2004**    | ** ** | **2003** | ** ** |
|----------------------------|------------|-------------|------------|----------|------------|
| Land                       | ** ** | **$**       | **2,342**  |     | $          | 2,128 |   |
| Building                   | ** ** | **15,884**  | ** ** | 13,995   |       |
| Equipment                  | ** ** | **31,694**  | ** ** | 19,435   |       |
| Assets under  construction | ** ** | **8,264**   | ** ** | 7,511    |       |
| ** **                 |       | **58,184**  |       | 43,069   | ** ** |
| Accumulated  depreciation  | ** ** | **(14,327** | **)**      | (10,152  | )          |
| ** **                 |       | **$**       | **43,857** |     | $          | 32,917 | ** ** |

 

Depreciation of property, plant andequipment from continuing operations was $3,380, $2,177, and $1,750, for theyears ended December 31, 2004, 2003 and 2002, respectively.

 

**13.**                               IntangibleAssets

 
| ** **              | ** ** | **2004**  | ** ** |
|-------------------------|------------|-----------|------------|
| ** **              | ** ** | **Cost**  | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Patents and  trademarks | ** ** | **$**     | **441**    | ** ** | **$** | **331** | ** ** | **$** | **110** | ** ** |
| Licenses                | ** ** | **9,453** | ** ** | **8,899** | ** ** | **554** | ** ** |
| Other                   | ** ** | **208**   | ** ** | **135** | ** ** | **73** | ** ** |
| ** **              | ** ** | **$**     | **10,102** | ** ** | **$** | **9,365** | ** ** | **$** | **737** | ** ** |

 
| ** **              | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|
| ** **              | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Patents and  trademarks |       | $        | 411        |   | $ | 267 |   | $ | 144 |   |
| Licenses                |       | 8,797    |       | 7,058 |   | 1,739 |   |
| Other                   |       | 193      |       | 102 |   | 91 |   |
|                    |       | $        | 9,401      |   | $ | 7,427 |   | $ | 1,974 |   |

 

Amortization of intangible assets fromcontinuing operations was $1,077, $1,110, and $1,054, for the years endedDecember 31, 2004, 2003and 2002, respectively.

 

**14.**                               Accounts Payable and Accrued Liabilities

 
| ** **              | ** ** | **2004**  | ** ** | **2003** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|
| Trade                   | ** ** | **$**     | **5,622**  |     | $          | 3,617 |   |
| Accrued  liabilities    | ** ** | **2,051** |       | 1,556    |       |
| Employee related  items | ** ** | **2,763** |       | 1,535    |       |
| ** **              |       | **$**     | **10,436** |     | $          | 6,708 |   |

 

F-18

----

 

**15.          DeferredRevenues**

 
| ** **                      | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|
| (a)*BrachySeed®*           | ** ** | **$**      | **—** |     | $          | — |   |
| (b) SpectroPharm  product line  | ** ** | **10,157** |       | 9,452    |       |
| (c)*Anipryl®*              | ** ** | **29,893** |       | 29,893   |       |
| (d)*Other*                      | ** ** | **195**    |       | —   |       |
| ** **                      |       | **40,245** |       | 39,345   |       |
| Less:  accumulated amortization | ** ** | **32,444** |       | 26,443   |       |
| ** **                      |       | **7,801**  |       | 12,902   |       |
| Less: current  portion          | ** ** | **3,676**  |       | 5,309    |       |
| ** **                      |       | **$**      | **4,125**  |     | $          | 7,593 |   |

 

Amortization of deferred revenuestotalled $5,495, $6,811 and $6,568 for the years ended December 31, 2004, 2003,and 2002, respectively.

 

*(a)**                               BrachySeed®*

 

In September 2000,the Company entered into a 10 year arrangement with Cytogen Corporation (“Cytogen”)whereby Cytogen was granted an exclusive license to market, sell and distributethe Company’s BrachySeed® implant for the treatment of prostate cancer in theUnited States in exchange for non-refundable fees, royalties based on Cytogen’ssales of BrachySeed® and a supply agreement. Under the arrangement, the Company was entitled to receive up to $2,000in non-refundable fees upon achievement of specified milestones of which nilwas received in 2003 (2002 - $1,000). Non-refundable fees received from Cytogen were deferred and recognizedas revenue on a straight-line basis over the period to December 31, 2010.

 

In January 2003, theCompany’s agreements with its BrachySeed® licensee in the U.S were effectivelyterminated with no further transactions taking place under the agreements. Aformal agreement was subsequently reached with its licensee for terminatingboth the License and Distribution Agreement and Product Manufacturing and SupplyAgreement for BrachySeed® implants in the U.S. As a result of the termination of the agreements, the unamortizedportion of the non-refundable milestone payments of $1,436 was included inincome as royalty and licensing revenue.

 

*(b)**                               SpectroPharmProduct Line*

 

In May 2000, theCompany entered an arrangement with GlaxoSmithKline Consumer Healthcare (“GSK”),formerly Block Drug Company (Canada) Limited, with respect to the Company’sSpectroPharm line of dermatology products, which included the sale of productrights to GSK in exchange for a non-refundable fee, the acquisition ofinventory on hand, a supply agreement and a technical servicesarrangement.  As a result of the Company’songoing obligations to GSK pursuant to this arrangement, the $8,169 of net proceedsfrom the sale of the product rights have been deferred and are being recognizedas revenue on a straight-line basis over the period to January 31, 2005.

 

*(c)**                                Anipryl®*

 

In December 1997, the Company enteredinto an alliance with Pfizer Inc. (“Pfizer”), whereby Pfizer was granted aperpetual exclusive license to market, sell and distribute *Anipryl*®in exchange for non-refundable fees, royalties based on the worldwide sales of *Anipryl*®, a manufacturing and supply agreement and aresearch collaboration.

 

In December 1999, the Company andPfizer amended the terms of the alliance (the “First Amendment”) whereby $9,000of potential additional non-refundable fees were eliminated in exchange for theCompany receiving additional regulatory support for a potential new indicationand additional manufacturing data.

 

F-19

----

 

These potential additionalnon-refundable fees would have become payable if Pfizer had exercised its rightto acquire product registrations following regulatory approval of *Anipryl*® in designated European countries.

 

In December 2001, the Company andPfizer further amended the terms of the alliance (the “Second Amendment”)whereby the Company received a payment of $3,150 in respect of minimum royaltyentitlements for the second and third three year periods ending December 31,2001 and 2002 and modifications to future royalty entitlements.  The Second Amendment also resulted in allrights to *Anipryl*® outside of North Americareverting back to the Company, forfeiture of any additional minimum royaltyentitlements and the termination of any future collaborative research on newindications or formulations for *Anipryl*®.

 

Under the amended arrangement, theCompany will not be entitled to receive any additional non-refundablefees.  The $28,090 in non-refundable feesalready received from Pfizer have been deferred and are being recognized asrevenue on a straight-line basis over the period to December 31, 2006.

 

The portion of the $3,150 paymentallocated to the modifications of future royalty entitlements has been deferredand is being recognized as revenue on a straight-line basis over the period toDecember 31, 2013.

 

The portion of the $3,150 paymentreferable to the minimum royalty entitlement for the three year period endingDecember 31, 2001 was recognized as revenue in the fourth quarter of 2001.  The portion referable to the third three yearperiod ending December 31, 2002 was deferred and recognized as revenue on astraight-line basis during 2002.

 

F-20

----

 

**16.          Long-TermDebt and Credit Facilities**

 
| ** **                                  | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|
| **DRAXIS  Pharma**                          |       |       |       |     |       |
| Term bank loan  repaid in 2004              | ** ** | **$**      | **—** |     | $          | 5,559 |   |
| Term government  loan repaid in 2004        | ** ** | **—** |       | 1,742    |       |
| Loan from  minority interest repaid in 2004 | ** ** | **—** |       | 3,165    |       |
| ** **                                  |       | **—** |       | 10,466   |       |
| Less: current  portion                      | ** ** | **—** |       | 981      |       |
| ** **                                  |       | **$**      | **—** |     | $          | 9,485 |   |

 

Interest expense on long-term debt fromcontinuing operations totalled $420, $958, and $367 for the years endedDecember 31, 2004, 2003, and 2002, respectively.

 

The fair value of the long-term debt asat December 31, 2003 approximated its carrying value based upon considerationof borrowings with similar credit ratings and maturities.

 

**Credit Facilities**

 

During 2004, the Company completed thearrangement of new credit facilities with its bankers, the National Bank ofCanada, to replace all existing facilities at the subsidiary level as follows:

 

•                  $15million Canadian or U.S. equivalent operating facility payable within 364 daysupon drawing upon the facility.  Theoperating facility can be extended by one year upon agreement with thelender.  As at December 31, 2004, noamount was drawn under this facility.

 

•                  $10million Canadian or U.S. equivalent term facility, repayable in full in threeyears. As at December 31, 2004, no amount was drawn under this facility.

 

Interest under the credit facilities(both term and operating) is based on the bank’s prime lending rate providedthe Company meets certain ratios, which as at December 31, 2004 were met.

 

Both credit facilities are secured byspecific assets of DRAXIS Specialty Pharmaceuticals Inc., and shares andguarantees of certain subsidiaries.

 

F-21

----

 

**17.          MinorityInterest**

** **

On April 22, 2004, the Companycompleted the acquisition of the 32.7% interest in the Company’s manufacturingsubsidiary, DRAXIS Pharma, that was previously owned by SGF Santé Inc. (“SGF”).  The $9.6 million (CDN$13.0 million) cashacquisition has been accounted for by the purchase method of accounting andallocated to identifiable assets and liabilities based on their estimated fairvalues as follows:

 

| Minority  interest             |   | $      | 3,992  |   |
|--------------------------------|--------|--------|--------|--------|
| Property, plant  and equipment |   | 6,785  |   |
| Deferred income  tax liability |   | (1,220 | )      |
| Total purchase  price          |   | $      | 9,557  |   |

 

The estimates of fair value weredetermined by the Company’s management based on an independent valuation ofProperty, plant and equipment.

 

The purchase price paid to SGF issubject to adjustment in limited circumstances involving a change of control ofthe Company or DRAXIS Pharma or a sale of substantially all of the assets ofDRAXIS Pharma prior to April 22, 2005.

 

During 2003, the Company’s wholly ownedsubsidiary, DRAXIS Pharma, issued 367,589 (2002-1,018,809) common shares to SGFand members of DRAXIS Pharma’s management team in exchange for net proceeds of$365 (2002-$969).  These issuances werebased on the pro-rata shareholdings of DRAXIS Pharma prior to the issuance andaccordingly there was no change in the Company’s effective interest in DRAXIS Pharma.

 

Furthermore in 2003, DRAXIS Pharmarepurchased and cancelled 171,452 outstanding shares of DRAXIS Pharma held bymembers of DRAXIS Pharma’s management team in exchange for cash and settlementof existing loans to those employees.

 

During 2002, DRAXIS Pharma repurchasedand cancelled 277,778 outstanding shares of DRAXIS Pharma held by a formeremployee of DRAXIS Pharma in exchange for cash and settlement of an existingloan to the employee related to the original issuance of those shares.

 

F-22

----

 

**18.          Shareholders’Equity**

** **

*(a)          CommonShare Offering*

 

On April 22, 2004, theCompany 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). Eachunit consists of one common share of the Company and one-half of one sharepurchase warrant.  Each whole warrantwill entitle the holder to acquire one common share of the Company at a priceof CDN$8.50 at any time prior to April 24, 2006.  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 determinedbased on the price of the offering using the Black-Scholes option model.

 

The underwriters had anover-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 theoffering, representing additional gross proceeds of up to $2,206 (CDN$3,000) tothe Company.  The over-allotment optionexpired unexercised.

 

*(b)          Employee Participation Share Purchase Plan*

 

On February 16, 1995, the Companyestablished the Employee Participation Share Purchase Plan for the directors,officers and employees of the Company to tie employee compensation more closelyto shareholder value.  The EmployeeParticipation Share Purchase Plan was approved by the shareholders onJune 16, 1995.  The Board ofDirectors has provided that it would be a condition to receiving any benefitfrom the Employee Participation Share Purchase Plan that the share price hasappreciated at least 25% from the date of issuance of any EmployeeParticipation Shares.  The maximum numberof Employee Participation Shares issuable pursuant to the EmployeeParticipation Share Purchase Plan is 2,000,000. No further EmployeeParticipation Shares will be issued by the Company.

 

Vesting takes place over a four yearperiod at the rate of 20%, 20%, 20% and 40% commencing on the first anniversaryof the issuance of the Employee Participation Shares and for each of the threeyears thereafter, with the exception of 500,000 Employee Participation Sharesheld by an officer of the Company, which vest at the rate of 10%, 20%, 30% and40%.  Vested Employee ParticipationShares are automatically convertible into shares of the Company at the electionof the holder, provided that the shares have increased in value since the dateof issuance of the vested Employee Participation Shares by the aforementioned25%.  The number of common shares aParticipant will receive when converting Employee Participation Shares isdetermined by multiplying the number of Employee Participation Shares held by aParticipant by a fraction whose numerator is the amount by which the fairmarket value of a common share at the date of conversion exceeds the fairmarket value of a common share as at the date on which the EmployeeParticipation Shares were issued, and whose denominator is the fair marketvalue of the common shares at the date of conversion.  For purposes of the Employee ParticipationShare Purchase Plan, the fair market value of common shares at a particulartime means the average of the daily high and low board lot trading prices oneach of the five trading days on the Toronto Stock Exchange immediatelypreceding the valuation date.

 

*(i) Series A*

 

On February 16, 1995, the Board ofDirectors of the Company authorized the issuance of 975,000 Series A EmployeeParticipation Shares at a subscription price of CDN$0.30 each.  The average of the daily high and low board lottrading prices on each of the five trading days on the Toronto Stock Exchangeimmediately preceding the issuance of the Series A Employee ParticipationShares was CDN$2.45.  As at December 31,2000 all Series A Employee Participation Shares had been either converted intocommon shares or cancelled by the Company.

 

*(ii) Series B*

 

On December 18, 1995, the Board ofDirectors of the Company authorized the issuance of 555,000 Series BEmployee Participation Shares at a subscription price of CDN$0.30 each.  The average of the

 

F-23

----

 

daily high and low board lot tradingprices on each of the five trading days on the Toronto Stock Exchangeimmediately preceding the issuance of the Series B Employee ParticipationShares was CDN$2.25.  As at December 31,2000 all Series B Employee Participation Shares had been either converted intocommon shares or cancelled by the Company.

 

*(iii) Series C*

 

On May 12, 1999, the Board of Directorsof the Company authorized the issuance of 470,000 Series C EmployeeParticipation Shares at a subscription price of CDN$0.50 each.  The average of the daily high and low boardlot trading prices on each of the five trading days on the Toronto StockExchange immediately preceding the issuance of the Series C EmployeeParticipation Shares was CDN$3.24. As at December 31, 2004 all remaining SeriesC Employee Participation Shares had been converted into common shares.

 

All outstanding Employee ParticipationShares have been issued and paid for by the employees through the issuance of alimited recourse promissory note and are secured against the shares.

 

Information pertaining to EmployeeParticipation Shares for the years ended December 31, 2004, 2003 and 2002 isset forth in the following table:

 
| ** **                      | ** ** | **2004**     | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|--------------|------------|----------|------------|----------|------------|
|                            |       |         | ** ** |     |       |     |       |
| Outstanding,  beginning of year | ** ** | **245,000**  | ** ** | 395,000  |       | 470,000  |       |
| Exercised                       | ** ** | **(245,000** | **)**      | (75,000  | )          | (75,000  | )          |
| Cancelled                       | ** ** | **—**   | ** ** | (75,000  | )          | —   |       |
| Outstanding, end  of year       | ** ** | **—**   | ** ** | 245,000  |       | 395,000  |       |
|                            |       |         | ** ** |     |       |     |       |
| Exercisable, end  of year       | ** ** | **—**   | ** ** | 245,000  |       | 207,000  |       |

 

*(c)           StockRepurchase Program*

 

Under the Company’s most recent issuerbid which commenced on April 21, 2003 and terminated on April 20, 2004, theCompany did not repurchase any common shares in 2004.  During 2003, 50,300 shares were repurchasedunder the program for cancellation at an average price of $1.30 per share fortotal consideration of $65.  The excessof $5 below the stated capital of the acquired shares was added to additionalpaid-in capital.

 

F-24

----

 

**19.          Stock-basedCompensation Plans**

** **

*(a)          StockOption Plan*

 

On February 3, 1988, theshareholders approved a stock option plan to permit the Board of Directors togrant options to purchase common shares to directors, officers, employees andarm’s length consultants of the Corporation and subsidiaries so as to linkcorporate compensation to enhanced shareholder value.  The Board of Directors determines the priceper common share; the number of common shares which may be allotted to eachdesignated director, officer, employee or arm’s length consultant; the periodduring which any option may be exercised; and all the terms and conditions ofthe option in accordance with the applicable requirements of any relevantregulatory authority or stock exchange. These options will be exercisable for a period not exceeding 10 yearsfrom the date of the grant and generally options vest one third on each of thefirst, second and third anniversaries of grant.

 

On June 20, 2001, the Boardof Directors received shareholder approval to increase the maximum number ofoptions for issuance under the stock option plan from 5,500,000 to 7,500,000.

 

The Board of Directors hasadopted a guideline limiting the aggregate number of common shares that can beissued at any point in time, either through the exercise of options or theconversion of Employee Participation Shares, to 13% of the Company’soutstanding common shares.  As atDecember 31, 2004 the aggregate number of shares issuable pursuant tooutstanding options represented 6.7% (2003-8.4%) of the outstanding commonshares.

 

F-25

----

 

The following is a summaryof the maximum number of common shares issuable pursuant to outstanding stockoptions and available for future issuance:

 
| ** **                                   | ** ** | **Outstanding** | ** ** | **Available  for  issuance** | ** ** |
|----------------------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                                   | ** ** | **2004**        | ** ** | **2003**                     | ** ** | **2002** | ** ** | **2004** | ** ** |
| Balance, beginning of  year                  |       | 3,097,942       |       | 3,314,109                    |       | 3,358,444 |   | 1,442,361 |   |
| Increase (decrease)  resulting from:         |       |            |       |                         |       |   |   |   |   |
| Granted                                      |       | 360,000         |       | 775,000                      |       | 750,000 |   | (360,000 | ) |
| Exercised                                    |       | (609,177        | )          | (240,334                     | )          | (468,168 | ) | — |   |
| Cancelled                                    |       | (80,333         | )          | (255,000                     | )          | (150,167 | ) | 80,333 |   |
| Expired                                      |       | (15,200         | )          | (495,833                     | )          | (176,000 | ) | 15,200 |   |
| Balance, end of year                         |       | 2,753,232       |       | 3,097,942                    |       | 3,314,109 |   | 1,177,894 |   |
|                                         |       |            |       |                         |       |   |   |   |   |
| Exercisable at December  31                  |       | 1,721,565       |       | 1,911,331                    |       | 2,102,609 |   |   |   |
|                                         |       |            |       |                         |       |   |   |   |   |
| Weighted average exercise  price of options: |       |            |       |                         |       |   |   |   |   |
| Outstanding, end of year                     |       | CDN$3.41        |       | CDN$3.25                     |       | CDN$3.60 |   |   |   |
| Exercisable, end of year                     |       | CDN$3.40        |       | CDN$3.39                     |       | CDN$3.60 |   |   |   |
| Granted                                      |       | CDN$4.67        |       | CDN$2.42                     |       | CDN$3.86 |   |   |   |
| Exercised                                    |       | CDN$3.37        |       | CDN$3.23                     |       | CDN$2.78 |   |   |   |
| Cancelled and Expired                        |       | CDN$3.03        |       | CDN$3.28                     |       | CDN$3.49 |   |   |   |

 
| ** **                           | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |   |   |
|--------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|--------|--------|
| Range of exercise price  of options: |       |             |       |             |       |             |       |   |   |
| Granted                              |       | CDN$4.30 - $6.17 |       | CDN$2.29 - $3.25 |       | CDN$2.50 - $5.41 |       |   |   |
| Exercised                            |       | CDN$1.63 - $4.40 |       | CDN$1.63 - $3.66 |       | CDN$2.55 - $4.29 |       |   |   |
| Cancelled and Expired                |       | CDN$2.23 - $5.41 |       | CDN$2.32 - $3.91 |       | CDN$2.55 - $4.42 |       |   |   |

 

The following table summarizes information about stock optionsoutstanding at December 31, 2004:

 
| ** **                     | ** ** | **Options  Outstanding** | ** ** | **Options  Exercisable**                                        | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------------------------------------------|------------|
| **Range  of Exercise  Prices** | ** ** | **Number  Outstanding**  | ** ** | **Weighted  Average  Remaining  Contractual  Life (in  years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| CDN$2.01 - $2.50               |       | 640,411                  |       | 5.89                                                            |       | CDN$2.35 |   | 167,910 |   | CDN$2.34 |   |
| CDN$2.51 - $3.00               |       | 110,833                  |       | 3.61                                                            |       | $2.82 |   | 85,833 |   | $2.88 |   |
| CDN$3.01 - $3.50               |       | 763,500                  |       | 0.99                                                            |       | $3.23 |   | 736,833 |   | $3.23 |   |
| CDN$3.51 - $4.00               |       | 740,155                  |       | 1.89                                                            |       | $3.76 |   | 605,989 |   | $3.74 |   |
| CDN$4.01 - $4.50               |       | 220,000                  |       | 3.14                                                            |       | $4.25 |   | 95,000 |   | $4.19 |   |
| CDN$4.51 - $5.00               |       | 200,000                  |       | 5.36                                                            |       | $4.70 |   | — |   | — |   |
| CDN$5.01 - $6.17               |       | 78,333                   |       | 3.35                                                            |       | $5.52 |   | 30,000 |   | $5.28 |   |
|                           |       | 2,753,232                |       | 3.04                                                            |       | CDN$3.41 |   | 1,721,565 |   | CDN$3.40 |   |

 

F-26

----

 

*(b)          DeferredShare Unit Plan*

 

Under the Company’s Deferred Share UnitPlan, members of senior management can elect to receive up to 20% of basesalary and up to 100% of any bonus paid in respect of that year in deferredshare units (“DSU”) in lieu of cash compensation.  An election must be made by December 1 ofeach year in respect of base salary and bonus for the next year.  The elected amount is converted to a numberof DSUs equal to the elected amount divided by the closing price of the commonshares on the TSX or NASDAQ on December 31 of each year, based on a purchasecommitment as of December 1 of the prior year. Participants are not entitled to receive any DSUs until cessation ofemployment with the Company for any reason. The value of DSUs redeemable by the participants will be equivalent tothe market value of the common share at the time of redemption.  The DSUs must be redeemed no later than theend of the first calendar year commencing after the date of cessation ofemployment.  The values of the DSUs aremarked to market at the end of each reporting period.  The net increase or decrease in the value ofthe DSUs is recorded as compensation cost included in selling, general andadministration expense.  During 2004, asa result of the change in the value of the DSUs, an expense in the amount of$284 was recorded (2003-$378; 2002-$88 recovery).  In aggregate, as of December 31, 2004 therewere 190,313 DSUs (2003 - 190,313; 2002 – 98,198) issued and outstanding.

 

F-27

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**Segmented Information and Major Customers**

** **

Industry Segmentation

 

For purposes of operatingdecision-making and assessing performance, management considers that itoperates in three segments: Radiopharmaceuticals, Manufacturing, and Corporateand Other. Executive management assesses the performance of each segment basedon segment income before financing expense, income taxes and minorityinterest.  The segments, particularlyoperating segments, are identified as reporting segments based on the distinctmanagement teams, customer base, production process and regulatory requirementsof each.  The Corporate segment includesrevenues earned via royalties and milestones, intercompany eliminations andcorporate expenses.  The accountingpolicies used to determine segmented results and measure segmented assets arethe same as those described in the summary of significant accounting policies.

 
| ** **                            | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ***PRODUCT  SALES REVENUES***         |       |       |       |     |       |     |       |
| Radiopharmaceuticals                  | ** ** | **$**      | **17,172** |     | $          | 14,564   |       | $ | 9,704 |   |
| Manufacturing                         | ** ** | **46,461** |       | 26,985   |       | 20,946   |       |
| Corporate and Other                   | ** ** | **(1,940** | )          | (1,014   | )          | (312     | )          |
| ** **                            |       | **$**      | **61,693** |     | $          | 40,535   |       | $ | 30,338 |   |
| ***ROYALTY  AND LICENSING REVENUES*** |       |       |       |     |       |     |       |
| Radiopharmaceuticals                  | ** ** | **$**      | **—** |     | $          | 1,521    |       | $ | 451 |   |
| Manufacturing                         | ** ** | **—** |       | —   |       | —   |       |
| Corporate and Other                   | ** ** | **7,627**  |       | 7,137    |       | 7,851    |       |
| ** **                            |       | **$**      | **7,627**  |     | $          | 8,658    |       | $ | 8,302 |   |
| ***TOTAL REVENUES***                  |       |       |       |     |       |     |       |
| Radiopharmaceuticals                  | ** ** | **$**      | **17,172** |     | $          | 16,085   |       | $ | 10,155 |   |
| Manufacturing                         | ** ** | **46,461** |       | 26,985   |       | 20,946   |       |
| Corporate and Other                   | ** ** | **5,687**  |       | 6,123    |       | 7,539    |       |
| ** **                            |       | **$**      | **69,320** |     | $          | 49,193   |       | $ | 38,640 |   |
| ***SEGMENT  INCOME(1)***              |       |       |       |     |       |     |       |
| Radiopharmaceuticals                  | ** ** | **$**      | **4,174**  |     | $          | 5,614    |       | $ | 706 |   |
| Manufacturing                         | ** ** | **8,038**  |       | 1,084    |       | 627      |       |
| Corporate and Other                   | ** ** | **2,101**  |       | 3,275    |       | 4,365    |       |
| ** **                            |       | **$**      | **14,313** |     | $          | 9,973    |       | $ | 5,698 |   |
| ***DEPRECIATION  AND AMORTIZATION***  |       |       |       |     |       |     |       |
| Radiopharmaceuticals                  | ** ** | **$**      | **949**    |     | $          | 843      |       | $ | 716 |   |
| Manufacturing                         | ** ** | **2,417**  |       | 1,448    |       | 1,166    |       |
| Corporate and Other                   | ** ** | **1,091**  |       | 996      |       | 922      |       |
| ** **                            |       | **$**      | **4,457**  |     | $          | 3,287    |       | $ | 2,804 |   |
| ***OPERATING  INCOME (LOSS)(2)***     |       |       |       |     |       |     |       |
| Radiopharmaceuticals                  | ** ** | **$**      | **3,225**  |     | $          | 4,771    |       | $ | (10 | ) |
| Manufacturing                         | ** ** | **5,621**  |       | (364     | )          | (539     | )          |
| Corporate and Other                   | ** ** | **1,010**  |       | 2,279    |       | 3,443    |       |
| ** **                            |       | **$**      | **9,856**  |     | $          | 6,686    |       | $ | 2,894 |   |
| ***IDENTIFIABLE ASSETS***             |       |       |       |     |       |     |       |
| Radiopharmaceuticals                  | ** ** | **$**      | **12,354** |     | $          | 11,424   |       | $ | 10,823 |   |
| Manufacturing                         | ** ** | **50,103** |       | 40,953   |       | 30,701   |       |
| Corporate and Other                   | ** ** | **26,328** |       | 24,176   |       | 26,427   |       |
| ** **                            |       | **$**      | **88,785** |     | $          | 76,553   |       | $ | 67,951 |   |

 

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(1) Segment income from continuing operationsbefore depreciation and amortization, financing expense, other income, incometaxes and minority interest.

(2) Segment income (loss) from continuingoperations before financing expense, other income, income taxes and minorityinterest.

 

F-28

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***Geographic Segmentation***

** **
| ** **                 | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------|------------|------------|------------|----------|------------|----------|------------|
| ***REVENUES(3)***          |       |       |       |     |       |     |       |
| Canada                     | ** ** | **$**      | **33,609** |     | $          | 22,755   |       | $ | 23,205 |   |
| United States              | ** ** | **35,310** |       | 26,031   |       | 15,246   |       |
| Other                      | ** ** | **401**    |       | 407      |       | 189      |       |
| ** **                 |       | **$**      | **69,320** |     | $          | 49,193   |       | $ | 38,640 |   |
| ***LONG-LIVED ASSETS(4)*** |       |       |       |     |       |     |       |
| Canada                     | ** ** | **$**      | **45,322** |     | $          | 35,568   |       | $ | 34,334 |   |
| United States              | ** ** | **—** |       | —   |       | —   |       |
| ** **                 |       | **$**      | **45,322** |     | $          | 35,568   |       | $ | 34,334 |   |

 

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(3) Revenues are attributable to countriesbased 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 andEquipment***

 
| ** **           | ** **   | **2004**  | ** ** | **2003**     | ** ** | **2002** | ** ** |
|----------------------|--------------|-----------|------------|--------------|------------|----------|------------|
| Radiopharmaceuticals | ** **   | **$**     | **835**    | *** *** | $          | 383      | ** ** | $ | 471 | ** ** |
| Manufacturing        | ** **   | **3,928** |       | 3,138        |       | 5,128    |       |
| Corporate and Other  | ** **   | **38**    |       | 15           |       | (209     | )          |
| ** **           | *** *** | **$**     | **4,801**  | *** *** | $          | 3,536    | ** ** | $ | 5,390 |   |

 

***Product Sales Revenues***By major product groups

 
| ** **                       | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Radiopharmaceuticals             | ** ** | **$**      | **17,172** |     | $          | 14,564   |       | $ | 9,704 |   |
| Manufacturing - Sterile          | ** ** | **31,270** |       | 15,959   |       | 7,473    |       |
| Manufacturing – Non Sterile | ** ** | **15,191** |       | 11,026   |       | 13,473   |       |
| Corporate and Other              | ** ** | **22**     |       | 986      |       | 1,381    |       |
| Intercompany eliminations        | ** ** | **(1,962** | )          | (2,000   | )          | (1,693   | )          |
| ** **                       |       | **$**      | **61,693** |     | $          | 40,535   |       | $ | 30,338 |   |

 

***Major Customers***

The major customers disclosed in this tableare included in the Manufacturing segment results**.**

 
| ** ** | ** ** | **Percentage of Total Revenue** | ** ** |
|------------|------------|---------------------------------|------------|
| ** ** | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| Customer A | ** ** | **20**                          | **%**      | 15 | % | — |   |
| Customer B | ** ** | **18**                          |       | 15 |   | 17 |   |
| Customer C | ** ** | **17**                          |       | 11 |   | 19 |   |
| ** ** |       | **55**                          | **%**      | 41 | % | 36 | % |

 

F-29

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**21.          Commitmentsand Contingencies**

** **

*Operating Leases and ServiceContracts*

 

The operating leases relate to therental of office space, office equipment and some ancillary lab and productionrelated equipment.  Service contractsrelate to a portion of information services outsourced to a third party.

 

*Royalty and MilestonePayments*

 

The Company is obligated to makecertain royalty payments based on related product sales and milestone paymentsbased on the achievement of certain specified events.

 

The Company is committed under variouscontractual commitments requiring minimum annual payments as follows:

 

| ** ** | ** ** | **Operating Leases** | ** ** | **Service Contracts** | ** ** | **Milestone Obligations** | ** ** |
|------------|------------|----------------------|------------|-----------------------|------------|---------------------------|------------|
| 2005       |       | $                    | 152        |                  | $          | 180                       |       | $ | 333 |   |
| 2006       |       | 64                   |       | 196                   |       | 399                       |       |
| 2007       |       | —               |       | 196                   |       | 399                       |       |
| 2008       |       | —               |       | 16                    |       | 399                       |       |
| Thereafter |       | —               |       | —                |       | 399                       |       |
|       |       | $                    | 216        |                  | $          | 588                       |       | $ | 1,929 |   |

 

All contractual obligations related to2004 and 2003 were fully paid as of December 31, 2004 and December 31, 2003,respectively.

 

*Agreement Pertaining toDRAXIS Pharma.*

 

In connection with the acquisition ofthe 32.7% interest in DRAXIS Pharma from SGF (see Note 17), the Company may berequired to pay to SGF in limited circumstances involving a change of controlof the Company or DRAXIS Pharma or a sale of substantially all of the assets ofDRAXIS Pharma prior to April 22, 2005.

 

*Legal Proceedings*

 

From time to time, the Company becomesinvolved in legal proceedings and claims which arise in the ordinary course ofbusiness.

 

The Company considers that the ultimateliability with respect to any known actions will not materially affect thebusiness, financial position, results of operations or cash flows of theCompany.

 

**22.          RelatedParty Transaction**

** **

Significant transaction not otherwisedisclosed in the accompanying financial statements is as follows:

 

 
| ** **                                                                                                                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Rent paid to a  company jointly controlled by a member of the Board of Directors included in  selling, general and administration expenses | ** ** | **$**    | **125**    |     | $          | 130      |       | $ | 125 |   |
|                                                                                                                                            |            |          |            |          |            |          |            |  |  |  |

 

The aforementioned transaction is inthe normal course of operations and is measured at the exchange amount, whichis the amount of consideration established and agreed to by the related parties.

 

F-30

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**23.          FinancialInstruments**

** **

*Fair Value*

 

The fair values of cash, accountsreceivable, accounts payable and accrued charges are equivalent to theircarrying values because of the short-term maturity of those instruments.  The Company is not party to any derivativeinstruments.

 

*Credit Risk*

 

The Company is subject to credit riskthrough trade receivables and short-term cash investments.  Credit risk with respect to trade receivablesis limited given the creditworthiness of the counterparties.  The Company invests its excess liquidity inhigh quality government securities and short-term commercial paper, bankdeposits and money market mutual funds, which are invested in high quality,short-term securities.

 

*CurrencyRisk*

 

The Company’s foreign exchange exposurefor accounting purposes mainly relates to the U.S.-denominated monetary assetsof the Canadian operations of the Company. Changes in the exchange rate mayresult in a decrease or increase in the foreign exchange gain or loss.  The Company does not actively hedge thisexposure but reduces the exposure by maintaining the minimum level ofU.S.-denominated cash available to meet its short-term cash requirements.

 

**24.          ComparativeInformation**

** **

The Company has reclassified certainprior years’ information to conform with the current year’s presentation.

 

F-31

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