**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

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**FORM 20-F/A**

(Mark One)

**o**                                 REGISTRATIONSTATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF1934

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**OR**

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**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

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**OR**

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**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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**OR**

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**o**                                 SHELLCOMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

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**Commission File Number:** 0-17434

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**DRAXIS HEALTH INC.**

(Exact name of Registrant as specified in its charter)

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**CANADA**

(Jurisdiction of incorporation or organization)

 

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

(Address of principal executive offices)

 

Securities registered orto be registered pursuant to Section 12(b) of the Act.

| **Title of each class** | ** ** | **Name of  each exchange on which registered**        |
|-------------------------|------------|-------------------------------------------------------|
| COMMON SHARES           |       | NASDAQ Global  Select Market   Toronto Stock Exchange |

 

Securities registered or to be registered pursuant toSection 12(g) of the Act.

 

**NONE**

(Title of Class)

 

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act.

 

**NONE**

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the period covered by theannual report.

Shares—41,522,138common shares (as of 12/31/06)

Indicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.

Yes o   Nox

If this report is an annual or transition report, indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934.

Yes o   Nox

Note—Checking the box above will not relieve any registrant required tofile reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 from their obligations under those Sections.

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes x   Noo

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o   Acceleratedfiler x   Non-accelerated filer o

Indicate by check mark which financial statement item the Registranthas elected to follow.

Item 17 o   Item18 x

If this is an annual report, indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   Nox

 

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**ExplanatoryNote**

**PART I**

**Item 5.**                    Operating and FinancialReview and Prospects

**PART III**

**ITEM 19**                 Exhibits
|        | 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 |

 

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# **Explanatory Note**

DRAXISHealth Inc. (the “Company”) is filing this Amendment No. 1 on Form 20-F/A toits Form 20-F for the year ended December 31, 2006, originally filed on March30, 2007 (“Original Form 20-F”) for the purpose of amending Item 5 within theOriginal Form 20-F to remove the EBITDA references. We hereby replace Item 5beginning on page 52 of the Original Form 20-F with the amended Item 5 includedin this Amendment No. 1.

Exceptfor the certifications, this Amendment No. 1 speaks as of the filing date ofthe Original Form 20-F. Other than for the purpose of amending Item 5, thisAmendment No. 1 does not, and does not purport to, amend, update or restate theinformation in any other item of the Original Form 20-F.

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

Thefollowing discussion and analysis of the financial condition and results ofoperations of DRAXIS Health Inc. (the “Company”) should be read in conjunctionwith the Company’s audited consolidated financial statements for the referencedperiods and notes thereto.

Allamounts referred to herein are expressed in U.S. dollars and are in accordancewith U.S. generally accepted accounting principles (“GAAP”), unless otherwiseindicated. Other noteworthy accounting issues are discussed under “AccountingMatters”.

Readersare cautioned not to place undue reliance on forward-looking statementscontained in the following Operating and Financial Review and Prospects sinceactual results could differ materially from what we expect if known or unknownrisks affect our business or if an estimate or assumption turns out to beinaccurate. Unless otherwise required by applicable securities laws, theCompany disclaims any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. See “**Forward-LookingStatements**” on page 75 of the Original Form 20-F, filed with theU.S. Securities and Exchange Commission on March 30, 2007.

Thediscussion and analysis contained in the following Operating and FinancialReview of Prospects are as of February 23, 2007.

**Overview**

DRAXIS is a specialtypharmaceutical company providing pharmaceutical products in three majorcategories: sterile, including sterile lyophilized (freeze-dried) pharmaceuticals;non-sterile specialty pharmaceuticals, and radiopharmaceuticals. In theradiopharmaceutical category, DRAXIS has its own products and a targetedresearch and development (“R&D”) program for new and/or improved products.

The Company isincreasingly focusing on the use of GAAP measures both in reporting externallyand monitoring management performance. Specifically, the key metrics theCompany uses to evaluate divisional and consolidated performance are grossprofit margin, operating income, net income and operating cash flow.

**Terminationof Amortization of *Anipryl®*Deferred Revenues**

As indicated in priordisclosures, substantially all deferred revenues related to the amortization ofpreviously received *Anipryl®*milestones terminated on December 31, 2006. The amortization of these deferredrevenues has previously resulted in non-cash revenues of $0.8 million perquarter, which has contributed approximately 7 cents of earnings per share (“EPS”)per full year. The termination of this source of non-cash revenue and operatingincome has no effect on cash flows but will affect year-over-year comparisonsof operating results going forward (see *Corporateand Other*and*Outlook*).

**2006Financial Results**

The Company successfullyachieved and surpassed its 2006 financial targets for both EPS and netoperating cash flows. Specifically with respect to EPS, the Company achieved 28cents per share for 2006 (or 21 cents 

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excluding theamortization to income of *Anipryl®*deferred revenues), which is 9 cents per share stronger compared to the sameperiod of 2005 despite the following factors:

·                                          During2005, the Company benefited from a contingent milestone payment from ShireBioChem Inc. (“Shire”), which contributed approximately 1.4 cents to EPS for2005.

·                                          EffectiveJanuary 1, 2006, the Company has included stock-based compensation costs inselling, general and administration (“SG&A”) expenses as a non-cash item.This had the effect of lowering EPS by 2.3 cents for 2006 relative to 2005.

Operating income for 2006was $15.0 million, up 53% from $9.8 million in 2005. Net cash flows fromoperating activities were $16.5 million for 2006 compared to $9.7 million for2005.

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**ConsolidatedResults of Operations**Years ended December31,(in thousands of U.S. dollars except share related data) (U.S. GAAP)
| ** **                             | ** **   | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|--------------|-------------|------------|----------|------------|----------|------------|
|                                   | ** **   | ** **  |       |     |       |     |       |
| Revenues                               |         |        |       |     |       |     |       |
| Product sales                          | ** **   | **$**       | **83,545** |     | $          | 72,989   |       | $ | 61,693 |   |
| Royalty and  licensing                 | ** **   | **2,121**   |       | 3,143    |       | 4,326    |       |
| *Anipryl*® deferred revenues | ** **   | **3,301**   |       | 3,301    |       | 3,301    |       |
|                                   | ** **   | **$**       | **88,967** |     | $          | 79,433   |       | $ | 69,320 |   |
|                                   | ** **   | ** **  |       |     |       |     |       |
| Product gross margin                   | ** **   | **$**       | **36,462** |     | $          | 26,153   |       | $ | 21,900 |   |
| *% of  Product sales revenues*         | *** *** | ***43.6***  | ***%***    | *35.8*   | *%*        | *35.5*   | *%*        |
| Royalty and licensing  revenue         | ** **   | **5,422**   |       | 6,444    |       | 7,627    |       |
| SG&A                               | ** **   | **(19,425** | **)**      | (16,185  | )          | (13,266  | )          |
| *% of  Product sales revenues*         | *** *** | ***-23.3*** | ***%***    | *-22.2*  | *%*        | *-21.5*  | *%*        |
| R & D                              | ** **   | **(2,372**  | **)**      | (2,103   | )          | (1,948   | )          |
| Depreciation and  amortization         | ** **   | **(5,135**  | **)**      | (4,545   | )          | (4,457   | )          |
| Operating income                       | ** **   | **14,952**  |       | 9,764    |       | 9,856    |       |
| *% of  Total revenues*                 | *** *** | ***16.8***  | ***%***    | *12.3*   | *%*        | *14.2*   | *%*        |
|                                   | ** **   | ** **  |       |     |       |     |       |
| Financial                              | ** **   | ** **  |       |     |       |     |       |
| —Foreign exchange  translation    | ** **   | **282**     |       | (398     | )          | (374     | )          |
| —Other                            | ** **   | **347**     |       | (29      | )          | (296     | )          |
| Other income                           | ** **   | **—**  |       | —   |       | 96       |       |
| Income tax provision                   | ** **   | **(4,034**  | **)**      | (1,553   | )          | (1,301   | )          |
| Minority interest                      | ** **   | **—**  |       | —   |       | (4       | )          |
| Loss from discontinued  operations     | ** **   | **—**  |       | —   |       | (61      | )          |
| Net income                             | ** **   | **$**       | **11,547** |     | $          | 7,784    |       | $ | 7,916 |   |
|                                   |         |        |       |     |       |     |       |
| Net income (loss)                      | ** **   | ** **  |       |     |       |     |       |
| —From continuing  operations      | ** **   | **$**       | **11,547** |     | $          | 7,784    |       | $ | 7,977 |   |
| —From discontinued  operations    | ** **   | **—**  |       | —   |       | (61      | )          |
|                                   | ** **   | **$**       | **11,547** |     | $          | 7,784    |       | $ | 7,916 |   |
|                                   |         |        |       |     |       |     |       |
| Basic income (loss) per  share         | ** **   | ** **  |       |     |       |     |       |
| —From continuing  operations      | ** **   | **$**       | **0.28**   |     | $          | 0.19     |       | $ | 0.20 |   |
| —From discontinued  operations    | ** **   | **—**  |       | —   |       | (0.00    | )          |
|                                   | ** **   | **$**       | **0.28**   |     | $          | 0.19     |       | $ | 0.20 |   |

 

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*Thefollowing provides a high level overview of the consolidated results of theCompany. Please refer to the segmented results for more detailed explanations.*

**Comparisonof Years Ended December 31, 2006 and 2005**

The financial results forthe year ended December 31, 2005 were negatively affected by the extendedshutdown period that occurred in the sterile products area of the Company’scontract manufacturing. Accordingly, all comparative variances on aconsolidated basis and in the contract manufacturing section reflect the impactof the extended shutdown in 2005.

Consolidated revenues forthe year ended December 31, 2006 are 12% higher compared to 2005.

Consolidated productsales have grown by $11 million, or 15%, for the year ended December 31, 2006compared to 2005, driven by lyophilization revenue (sterile products) incontract manufacturing and Sodium Iodide I-131 sales in the radiopharmaceuticalbusiness. (see the *Contract Manufacturing*segment discussion below).

Radiopharmaceuticalproduct sales grew 12% driven by radioiodine sales in the U.S. includingdiagnostic capsules which were introduced in the U.S. market place in thesecond quarter of 2006.

Consolidated productgross margin percentages for the year ended December 31, 2006 increased to 44%as compared with 36% for 2005. The increase reflects a better mix of highermargin business in both operating segments, especially sterile product volumein contract manufacturing.

Royalty and licensingrevenue decreased for the year ended December 31, 2006 compared with 2005. Thedecrease in royalty and licensing revenue for the year ended December 31, 2006compared to 2005 reflects the receipt of a $0.9 million contingent milestonepayment from Shire in 2005.

As a percentage ofproduct sales, SG&A expenses were 23% for the year ended December 31, 2006compared to 22% for 2005. The 20% increase in SG&A expenses in absolutedollar terms (excluding the impact of foreign currency translation) for theyear ended December 31, 2006 as compared with 2005 was driven by the inclusionof non-cash stock-based compensation costs beginning January 1, 2006 coupledwith increased incentive plan accruals based on the Company’s financialperformance for 2006 relative to 2005. The impact of the strengthening of theCanadian dollar for much of 2006 relative to 2005 increased the nominal valueof SG&A expenses for 2006 relative to 2005.

R&D expendituresincreased slightly for the year ended December 31, 2006 compared to 2005 due tothe work related to specific phases of the Company’s development activitiesrelated to Sestamibi and the “next-generation” Technetium Generators as theCompany completed stages of activities with respect to both initiatives late in2006. These products are described in the *Radiopharmaceutical*ssection.

Depreciation andamortization expense for the year ended December 31, 2006 increased by 13% over2005 following the commencement of depreciation charges on the Company’scontract manufacturing capital upgrades.

The majority of the costsof the Canadian 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, the Company’s overall gross profitmargins and SG&A expenses are affected. The impact is not material on theoverall financial performance for the year.

The net foreign exchangegain for the year ended December 31, 2006 was $282,000 compared to a loss of$398,000 for 2005. As a result of the impact of the weakening of the Canadiandollar late in 2006, a foreign exchange gain was earned on U.S. dollardenominated monetary items in 2006, whereas the strengthening of the Canadiandollar late in 2005 created a foreign exchange loss.

Net financial income for2006 was $347,000 compared to an expense of $29,000 in 2005 due to significantinterest income generated from surplus cash.

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For the year endedDecember 31, 2006, the Company recorded an income tax expense, expressed as apercentage of pre-tax earnings of 26%. The Company’s effective tax rate willvary from the statutory tax rate depending on the mix of income combined withthe statutory rates in the respective jurisdictions in which the Companyoperates. The level of tax credits generated from R&D activities in theradiopharmaceutical business also has the impact of lowering effective taxrates. Benefits related to loss carryforwards not previously recognized werenot material in 2006 compared to 2005.

The effective tax ratefor 2006 was higher than in 2005 due to a one-time adjustment to revalue theCompany’s income tax assets to a lower rate following the enactment of astatutory rate change to Canadian federal taxes in the second quarter of 2006.

The basic weightedaverage number of common shares outstanding during 2006 was 41,592,507 andincreased from 41,471,798 for 2005, primarily as a result of the exercise ofstock options offset by the shares purchased for cancellation under the Company’sNormal Course Issuer Bid.

**Comparisonof Years Ended December 31, 2005 and 2004**

Consolidated revenues of$79.4 million for the year ended December 31, 2005 represented an increase of15% compared with 2004.

Product sales increased18% or $11.3 million for the year ended December 31, 2005 compared to 2004. Theincrease related to continued growth in contract manufacturing revenues,specifically sterile operations, coupled with growth in the radiopharmaceuticalsegment and specifically Sodium Iodide I-131 sales to the U.S. The growth incontract manufacturing was restrained during the second half of 2005 as aresult of the extended shutdown period in contract manufacturing.

Product gross marginpercentages for the year ended December 31, 2005 were similar compared to 2004.While overall volumes increased, the business mix shifted from the highermargin radiopharmaceutical business to the relatively lower margin contractmanufacturing businesses. Furthermore, as a result of the extended shutdownperiod in contract manufacturing, unabsorbed fixed manufacturing costs and thecost of unused capacity related to reduced production had a negative impact onmargins for the second half of 2005.

Since increased revenuesrelated to growth in the sterile contract manufacturing operations and sterileproduct margins generally are lower than radiopharmaceutical margins, theoverall result is that the increased volumes do not result in an overallincrease to consolidated gross profit margins. Accordingly, the Companybelieves that product gross margins are best reviewed at the segmental level.

Absolute product grossmargins increased for the year ended December 31, 2005 relative to 2004 as aresult of a stronger Canadian dollar and its positive impact on margins forproducts priced in Canadian dollars. However, the impact is largely offset bythe increase in SG&A costs strictly related to foreign currencytranslation. Since almost all SG&A expenses are incurred in Canadiandollars, the strengthening of the Canadian dollar beginning in early 2004 hasresulted in an increase in SG&A expenses in 2005 relative to 2004. Changes toforeign exchange rates did not, however, have a material impact on productgross margin percentages or net income.

For the year endedDecember 31, 2005 compared with 2004, royalty and license revenues decreased16%; however, the impact of the completion of the amortization of the deferredrevenue related to the SpectroPharm product line as of January 31, 2005 waspartially offset by the receipt of $0.9 million in contingent milestones fromShire, which the Company earned in the first quarter of 2005.

In absolute dollar terms,the increase in SG&A expenses was 22% for the year ended December 31, 2005(or 14% excluding foreign currency fluctuations) over 2004. Excluding theimpact of foreign currency reporting as described below, the increase in SG&Aexpenses was due to the one-time costs related to the Company’s exiting the *BrachySeed®* product line, severance costsrelated to the Company’s initial steps taken to reduce its overhead coststructure and process improvement initiatives focused in contract manufacturing.

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Approximately $1.1million of the increase in SG&A spending for the year ended December 31,2005 relative to 2004 was a consequence of increased costs in Canadian dollarsrelative to U.S. dollars as a result of the strengthening of the Canadian dollarbeginning in early 2004. This resulted from virtually all SG&A costs beingdenominated in Canadian dollars.

For the year endedDecember 31, 2005, R&D costs increased 8% relative to 2004 due toactivities related to *FIBRIMAGE®*and *INFECTON®*. The increasedexpenditures were primarily attributable to clinical trial activities for *INFECTON®,*coupled with costs associatedwith the detailed review of *FIBRIMAGE®*CanadianPhase III results and the assessment of optimal Phase III protocols for theU.S. by the expert medical advisory panel assembled by the Company.

Depreciation andamortization expenses for the year ended December 31, 2005 increased 1% over2004 following the completion of the installation and the validation of theCompany’s second lyophilization unit. This expense was offset by the completionof amortization of intangibles related to the SpectroPharm product line.

For the years ended 2004and 2005, the impact of foreign exchange on the Company’s results was similardue to the strengthening of the Canadian dollar over those two years.

Interest expense and bankcharges decreased for the year 2005 compared to 2004 due to repayment of thirdparty debt at the end of 2004.

The effective tax ratefor the year ended December 31, 2005 was 17%, or 24% excluding the benefits ofR&D tax credits. The Company benefited during 2005 from statutory tax ratechanges that increased the value of the Company’s loss carryforwards and fromtax credits related to R&D spending. During 2005 the Company furtherbenefited by approximately $400,000 through recognition of the lower effectivestatutory tax rate attributable to milestone payments received and throughwithholding tax refunds received in the quarter but not previously estimated tobe recoverable.

The Company’s effectivetax rate will vary from the statutory tax rate depending on the mix of netincome and the statutory rates in the respective jurisdictions in which theCompany operates. The level of tax credits generated from R&D activities inthe radiopharmaceutical business also had the impact of lowering effective taxrates by $642,000 for 2005.

The basicweighted-average number of common shares outstanding during 2005 was 41,471,798and increased from 39,886,219 in 2004 due mainly to the exercise of stockoptions.

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**RADIOPHARMACEUTICALS***Years ended December 31,(in thousands of U.S. dollars) (U.S. GAAP)*
| ** **                     | ** **   | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------|--------------|------------|------------|------------|------------|------------|------------|
| * *                       | ** **   | ** ** |       |       |       |       |       |
| Revenues                       |         |       |       |       |       |       |       |
| Product sales                  | ** **   | **$**      | **21,508** |       | $          | 19,290     |       | $ | 17,172 |   |
| Royalty and  licensing         | ** **   | **(3**     | **)**      | 9          |       | —     |       |
|                           | ** **   | **$**      | **21,505** |       | $          | 19,299     |       | $ | 17,172 |   |
|                           | ** **   | ** ** |       |       |       |       |       |
| Product gross margin           | ** **   | **13,433** |       | 11,593     |       | 10,028     |       |
| *% of  Product sales revenues* | *** *** | ***62.5*** | ***%***    | ***60.1*** | ***%***    | ***58.4*** | ***%***    |
| SG&A                       | ** **   | **(4,380** | **)**      | (4,660     | )          | (3,906     | )          |
| R & D                      | ** **   | **(2,372** | **)**      | (2,103     | )          | (1,948     | )          |
| Depreciation and  amortization | ** **   | **(1,110** | **)**      | (1,047     | )          | (949       | )          |
| Operating income               | ** **   | **$**      | **5,568**  |       | $          | 3,792      |       | $ | 3,225 |   |
| *% of Revenues*                | *** *** | ***25.9*** | ***%***    | *19.6*     | *%*        | *18.8*     | *%*        |

 

Nuclear medicine imagingand therapeutic agents are the focus of the Company’s radiopharmaceuticaldivision, DRAXIMAGE, which develops, manufactures and markets diagnosticimaging and therapeutic radiopharmaceutical products for the globalmarketplace. Products currently marketed by DRAXIMAGE include a line oflyophilized Technetium-99m (“TC-99m”) kits used in nuclear medicine imagingprocedures and a line of imaging and therapeutic products labelled with avariety of isotopes including Sodium Iodide I-131. DRAXIMAGE has a number ofproducts in late-stage development including a generic Sestamibi injection (forwhich the Company filed an Abbreviated New Drug Approval (“ANDA”) with the U.S.Food and Drug Administration (“FDA”) in February 2007), a lyophilized productthat is widely used for Technetium-based cardiac imaging studies, a “next-generation”version of a Technetium Generator, and *INFECTON*®*,*for imaging infection.

**Comparisonof Years Ended December 31, 2006 and 2005**

Revenues for the yearended December 31, 2006 increased by 11% (or close to 20% excludingbrachytherapy products, which the Company stopped selling late in 2005)compared to 2005 primarily as a result of the increase in product sales fromradioiodine products and, specifically, Sodium Iodide I-131 sales to the U.S.,including diagnostic capsules. The increase is related to higher volumesresulting from greater U.S. market penetration.

On January 13, 2006, theCompany received approval from the FDA regarding its supplemental new drugapplication for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral. Thesediagnostic Sodium Iodide I-131 capsules are intended to be used by physiciansto perform radioactive iodide uptake tests to evaluate thyroid function priorto treatment with stronger therapeutic doses of Sodium Iodide I-131. TheCompany introduced the new diagnostic capsules into the U.S. marketplace duringthe second quarter of 2006 to qualified/approved nuclear physicians and/orradiopharmacists.

For the year endedDecember 31, 2006 product gross margin increased to 63% for the year endedDecember 31, 2006 compared to 2005, reflecting the positive impact of SodiumIodide I-131 sales and the strategic focus on higher margin products that ledto the divestment of the brachytherapy product line in late 2005.

R&D expenditures forthe year ended December 31, 2006 as compared to 2005 increased 13% due to theramping up of product development activities, in particular activities relatedto Sestamibi and Technetium Generators (see below).

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SG&A expensesdecreased by $0.3 million for the year ended December 31, 2006 compared to 2005due mainly to one-time costs relating to the Company’s exit from thebrachytherapy business during the fourth quarter of 2005.

Operating incomeincreased 47% to $5.6 million for 2006 as compared to 2005 driven by increasedvolumes and margins as described above.

Depreciation andamortization expense for this segment was relatively unchanged in nominaldollars in 2006 compared to the year ended December 31, 2005.

***Radiopharmaceutical Product Development Strategy***

On March 27, 2006 theCompany announced that it had realigned its priorities for the R&D of newradiopharmaceutical products that it believes will drive future growth.Priorities for product development were established based on several factors,including time to market, customer needs, size of target markets, cost ofdevelopment and expected regulatory challenges for the various opportunities.The Company believes that this realignment will be the significant driver formaterial growth in the radiopharmaceutical segment. DRAXIMAGE is now focused ondeveloping products that it believes will replace or improve upon severalproducts that are currently in the nuclear medicine marketplace, but that haveor will have ceased to be protected by patents in key markets in the near term.

The following summarizesthe status of current significant initiatives:

*DRAXIMAGE*®* Sestamibi*

As announced on February2, 2007, DRAXIMAGE submitted an ANDA to the FDA for its generic kit for thepreparation of Tc-99m Sestamibi for injection (“DRAXIMAGE® Sestamibi”), a nuclear medicine imaging agentused in myocardial perfusion imaging (“MPI”) to evaluate blood flow to theheart in patients undergoing cardiac tests.

According toAMR/Arlington Medical Resources, in 2005 there were more than 7 million cardiacstudies conducted in the U.S. out of a total of over 15 million nuclearmedicine procedures, making MPI the most widely performed nuclear medicinescan. Recent market research indicates that existing MPI products generaterevenues in excess of $500 million annually in the U.S. and that the imagingagent most often used in conducting MPI procedures is Sestamibi labelled withthe radioactive isotope Tc-99m.

The filing of the ANDAwith the FDA represented the achievement of a key milestone in the DRAXIMAGE® Sestamibi project schedule.

*TechnetiumGenerators*

A second opportunity thatis currently being pursued by DRAXIMAGE is the production and distribution of a“next-generation” version of a Technetium Generator, which is the source ofTechnetium in virtually every radiopharmacy worldwide. Nearly 90% of generatorsare located in radiopharmacies and the rest are in other institutions, such ashospitals and clinics. DRAXIMAGE is in discussion with potential development,marketing and distribution partners for this project. Prototype versions of our“next-generation” Technetium Generator have been built and are undergoingevaluation. The feedback from our evaluation will help drive the productdevelopment process.

*EuropeanEntry*

DRAXIMAGE is continuingits efforts to obtain registrations in European markets for four of itsexisting products that are currently approved and sold in Canada or the U.S. InFebruary 2005, DRAXIMAGE received approval from the Dutch regulatory authorityfor its Kit for the Preparation of Technetium Tc-99m Albumin AggregatedInjection (“MAA Kit”). Initial approval in the Netherlands allowed DRAXIMAGE to

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initiate the MutualRecognition Procedure (“MRP”) in pursuit of further regulatory approvals forthis product in several additional European Union countries.

Additional initialEuropean approvals for the majority of other diagnostic imaging products areanticipated to be received during 2007. DRAXIMAGE is in advanced discussionswith a potential European based commercial partner to initially target thelarger markets in Germany, France, Italy, Spain and the U.K. via a strategicalliance. The strategic alliance could also potentially serve as a means forDRAXIMAGE to expand its product catalogue in North America as well as inEurope. The Company expects to conclude such discussions during 2007.

*INFECTON*®

For the medium term, thekey opportunity being pursued by DRAXIMAGE is the continued development of *INFECTON*®, a novel diagnostic radiopharmaceutical product for imaginginfection. Three Phase II clinical trials were completed and a fourth wasdiscontinued due to a change of market focus. Studies to define the targetmarket population and appropriate clinical trial applications are now beingused to guide preparations for further development studies. An expert panel,comprised of respected nuclear medicine specialists and microbiologists, wasassembled and this expert panel reviewed the preliminary scientific andclinical data together with the outcome of the market research studies. Therole of the expert panel was to assess the results to date, review potentialtarget markets, and advise DRAXIMAGE on the design of future clinical studies andappropriate indications. The preliminary report of the expert panel recommendedthat the product be reformulated for orthopaedic-related indications and theassessment of such potential formulations is under way.

*Others*

DRAXIMAGE has alsoidentified additional new product opportunities in the area of non-radioactivecontrast media that are used in the medical imaging field and is pursuingpotential product development strategies to leverage both its position in themarketplace and its preferred access to appropriate production processexpertise. Contrast media products are injectable liquids produced inhighly-specialized cGMP sterile production facilities, such as those in placeat DRAXIS’ facilities that are currently used to produce certain diagnostic imagingproducts marketed by DRAXIMAGE. The North American market for contrast mediahas been estimated to be valued at approximately $1.6 billion and it isbelieved to be growing, driven largely by the continued growth of computertomography (“CT”) and enhanced magnetic resonance imaging (“MRI”) procedures.

DRAXIMAGE has receivedapproval from the FDA to run two clinical trials using radioactive IobenguaneI-131 Injection (also known as “131I-metaiodobenzylguanidine”, or “I-131 MIBG”)to treat high risk neuroblastoma, a rare form of cancer that affects mostlyinfants and young children.

DRAXIMAGE will provideI-131 MIBG for two clinical trials approved by the FDA under a recentlysubmitted Investigational New Drug (“IND”) application. One trial is a Phase IIstudy in which I-131 MIBG will be administered with intensive chemotherapy andautologous stem cell rescue for high risk neuroblastoma patients. The secondtrial is a Phase I study in which irinotecan and vincristine, two commonchemotherapy agents, will be administered in combination with I-131 MIBG todetermine safety and tolerability in patients with resistant/relapsed high riskneuroblastoma.

**Comparisonof Years Ended December 31, 2005 and 2004**

Revenues for the yearended December 31, 2005 increased 12% compared with 2004, primarily as a resultof higher product sales from radioiodine products and, specifically, SodiumIodide I-131 sales to the U.S. The increase was related to higher volumesresulting from greater U.S. market penetration.

As described above,during the first quarter of 2005, the Company received approval from the Dutchregulatory authority for its Kit for the Preparation of Technetium Tc-99mAlbumin Aggregated Injection (MAA Kit). Approval in the Netherlands allowedDRAXIMAGE to initiate the MRP in pursuit of further 

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regulatory approvals forthis diagnostic imaging product in additional European Union countries. Thisapproval was a key milestone in the strategic plan to introduce severaladditional DRAXIMAGE branded products into a number of European markets.

For the year endedDecember 31, 2005, product gross margin was stronger compared to 2004 due tothe increased market penetration of higher margined products like Sodium IodideI-131coupled with the positive impact of the Company’s decision to exit thebrachytherapy market.

R&D expendituresincreased slightly for the year ended December 31, 2005 as compared to 2004 dueto the activities related to *FIBRIMAGE*® and *INFECTON*®.Specifically, the increased expenditures were mainly for clinical trialactivities for *INFECTON*®**coupledwith costs associated with the ongoing detailed review of *FIBRIMAGE*®**Canadian PhaseIII**results and activities of theexpert medical panel related to the strategy for the further productdevelopment and design and assessment of Phase III clinical trial protocols forthe U.S.

The report andrecommendations of this expert panel were used to assess the strategy forfurther development of *FIBRIMAGE*®and design and assessment of Phase III clinical trial protocols for the U.S. Nosignificant work related to *FIBRIMAGE*®took place following the recommendations of the expert panel in 2006.

SG&A expensesincreased for the year ended December 31, 2005 compared to 2004 mainly due toone-time costs relating to the Company’s exit from the brachytherapy market andcosts of market research studies and activities.

The Company incurredapproximately $457,000 of one-time costs associated with the exit of thebrachytherapy business during 2005. Over 60% of the costs incurred related toaccrual of license termination costs related to the business and is included inSG&A expense. The remainder of the exit costs related to unused inventorycomponents is included in cost of goods sold. The majority of capital equipmentused in the *BrachySeed*® product line, specifically therobotic equipment, is being redeployed in both the radiopharmaceutical andcontract manufacturing segments.

Depreciation andamortization expense for this segment increased 10% for the year ended December31, 2005 compared to 2004 due to the amortization of costs related to theupgrade of warehousing and shipping facilities completed late in 2004.

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**CONTRACTMANUFACTURING***Years ended December 31,(in thousands of U.S. dollars) (U.S. GAAP)*
| ** **                     | ** **   | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|--------------|------------|------------|----------|------------|----------|------------|
|                           | ** **   | ** ** |       |     |       |     |       |
| Revenues                       |         |       |       |     |       |     |       |
| Product sales                  | ** **   | **$**      | **64,731** |     | $          | 54,743   |       | $ | 46,461 |   |
|                           | ** **   | ** ** |       |     |       |     |       |
| Product gross margin           | ** **   | **23,215** |       | 14,628   |       | 11,530   |       |
| *% of  Product sales revenues* | *** *** | ***35.9*** | ***%***    | *26.7*   | *%*        | *24.8*   | *%*        |
| SG&A                       | ** **   | **(6,487** | **)**      | (5,086   | )          | (3,492   | )          |
| Depreciation and  amortization | ** **   | **(3,688** | **)**      | (3,105   | )          | (2,417   | )          |
| Operating income               | ** **   | **$**      | **13,040** |     | $          | 6,437    |       | $ | 5,621 |   |
| *% of  Revenues*               | *** *** | ***20.1*** | ***%***    | *11.8*   | *%*        | *12.1*   | *%*        |

 

Manufacturing comprisesthe Company’s manufacturing division, DRAXIS Pharma, which is a pharmaceuticalcontract manufacturer with capabilities in a broad range of dosage forms,specializing in liquid and lyophilized (freeze-dried) injectables and othersterile products. Operating out of a cGMP-compliant 247,000 square footfacility located in Montreal, Canada, DRAXIS Pharma manufactures certainpharmaceutical products (specifically, cold kits) for DRAXIMAGE, as well as forover 25 other pharmaceutical clients in many international jurisdictions.

**Comparisonof Years Ended December 31, 2006 and 2005**

As stated in priordisclosures, beginning in March 2006, production run rates in the sterile areawere back at levels expected for the contract manufacturing operations prior tothe shutdown issues of late 2005 and actually exceeded previous normalizedlevels in part due to the contribution of the second lyophilization unit, whichcame on line in 2005. The impact of the extended shutdown in 2005 alsonegatively affected results for the fourth quarter of 2005. Since the shutdownfor 2006 was completed in the third quarter of 2006 as planned, fourth quarterresults for 2006 as compared to 2005 are significantly stronger.

For the year endedDecember 31, 2006, revenues increased by $10 million or 18% over 2005. Theincrease was due to increased commercial production of *Hectorol®*Injection for GenzymeCorporation (“Genzyme”), growth in GlaxoSmithKline (“GSK”) volumes andincreases in lyophilized product production.

For the year endedDecember 31, 2006, sterile volumes accounted for 80% of product revenuescompared to 76% for 2005.

Product gross marginpercentage for the year ended December 31, 2006 increased to 36% compared to27% for 2005, driven by a higher ratio of sterile to non-sterile productrevenues and the dilutive impact of the extended shutdown on 2005 product grossmargins. The extended shutdown period in 2005 negatively affected product grossmargin percentage by at least 5% during the second half of 2005.

For the year endedDecember 31, 2006, SG&A expenses rose by $1.4 million compared to 2005 as aresult of incentive plan accruals, the provision for past due receivables andprocess improvement initiatives, including information system and technologyinitiatives. Historically, the Company has not incurred significant provisionsfor past due receivables. SG&A expenses are also inflated for the yearended December 31, 2006 by the strengthening of the Canadian dollar relative tothe U.S. dollar for most of 2006 (relative to 2005), since the vast majority ofSG&A expenses are denominated in Canadian dollars.

Depreciation andamortization for the year ended December 31, 2006 increased 19% over 2005, dueprincipally to completed capital projects in 2005, which provided for increasedlyophilization and autoclave capacity.

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Operating income for allof 2006 increased to $13 million (20% of revenues) compared to $6 million (12%of revenues) for 2005. The increase was driven by higher product sales andproduct gross margins, partially offset by higher SG&A expenses.

While the Company’ssuccess has been driven by its strategy to focus on higher margin sterileproducts, the Company also believes there is opportunity to benefit from theunused capacity in its non-sterile area. The Company is currently in theadvanced stages of negotiations to secure significant new non-sterile businessbut has not yet concluded contractual arrangements for such business. It isdifficult to predict when contractual arrangements will be finalized if thenegotiations are successful as such arrangements can take months to negotiateand close. Disclosure of the nature of any contractual arrangements will bemade upon signing of a definitive agreement.

**Comparisonof Years Ended December 31, 2005 and 2004**

The Company hadoriginally planned to shut down its sterile operations in contractmanufacturing for a period of two to three weeks for regular maintenance in thethird quarter of 2005, as is its normal practice. Near the end of this plannedshutdown, it became necessary to upgrade additional pieces of equipment in thesterile area, including in its lyophilized products area. This required furthercleaning and validation of the facility’s sterile core, thus extending theplanned shutdown period to approximately seven weeks. The Company took these significantmeasures as a result of its internal quality standards. However, as a result ofhaving to recalibrate sterile production schedules based on discussions withclients, which continued into mid to late November 2005, the quality controlprocess required for sterile products prior to shipment, and a delay inreceiving component parts from a third party manufacturer in the fourth quarterof 2005, product sales in the second half of 2005 were negatively impactedrelative to 2004. However, production levels in the sterile area returned topre-shutdown levels by November 2005.

Revenues for the yearended December 31, 2005 increased $8.3 million or 18% over 2004, even factoringin the negative impact of the extended shutdown. The increase was due to increaseddemand for the production of *Hectorol®Injection* for Genzyme and products under the Company’s GSK contract.GSK production rose throughout 2004 as GSK obtained regulatory approvals forproducts manufactured by the Company in additional foreign markets. Throughout2004 and into 2005, the Company increased its output capacity throughadditional production shifts for its sterile business and intends to continueto do so as a result of increasing demand.

Sterile products haveaccounted for all of the product sales growth on a year-to-date basis. Sterileproducts represented 76% of manufacturing revenues on a year-to-date basis in2005 compared to 67% for 2004.

The second lyophilizationunit, which was fully installed and validated by early 2005, did not contributea significant amount of incremental revenues in 2005 since much of the activityon the second lyophilizer was in support of meeting customer demand displacedfrom the third quarter of 2005 as a result of the extended shutdown period. Theextended shutdown did, however, significantly slow the pace at which theCompany was able to carry the normal commercial activities on its secondlyophilization unit. This resulted from the focus being placed on ensuring thatexisting customer demand and requirements were met. Capacity was, accordingly,largely reserved for that purpose in the latter part of 2005.

Product transfer andvalidation activities are necessary as a precursor to significant commercialvolumes and do not create significant revenues, although they consumesignificant available capacity. Revenues from the second lyophilization unitincreased beginning in 2006 and are expected to increase more significantlyinto 2007 since the Company refocused activities back to new productintroductions and new contract negotiations in 2006.

Product gross marginpercentage for the year ended December 31, 2005 increased to 27% from 25%compared to 2004. The increases were related to volume growth, principally ofhigher margin sterile products, that had taken place prior to the extendedshutdown period. The volume growth was made possible by increasing the capacityfor manufacturing sterile products through the introduction of additionalproduction 

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labour. Improved capacityutilization directly resulted in higher margins through substantially improvedabsorption of overhead costs. The extended shutdown in 2005 had the impact oflowering product gross margin percentage for the full year by between 2% to 4%and at least 5% over the final six months of 2005.

Excluding the impact offoreign currency translation, the increase in SG&A expenses for the yearended 2005 compared to 2004 related to the investment in process improvementinitiatives and severance costs of $250,000 related to steps taken to reducethe overhead cost structure in contract manufacturing. The Company has embarkedon process improvement initiatives aimed at enhancing information systems andinformation technology to improve efficiency and productivity in the keyprocesses of production planning, manufacturing and quality control productrelease. We believe the process improvement initiatives will, over time,increase throughput of volumes within the existing manufacturing footprint andthereby increase capacity. Furthermore, the Company expects to increaseoperating margins over time through the application of more efficientprocesses.

Since virtually allSG&A costs are denominated in Canadian dollars and translated into U.S.dollars, the strengthening of the Canadian dollar beginning in early 2004 resultedin inflated SG&A costs upon translation into U.S. dollars of about $346,000for the year ended December 31, 2005. These costs were offset by overall growthof absolute margins upon translating Canadian denominated sales into U.S.dollars.

Depreciation andamortization increased 29% for the year ended December 31, 2005 over 2004, dueprincipally to completed capital projects including additional autoclavecapacity, and following the completion of the installation and validation ofthe Company’s second lyophilization unit in the second quarter of 2005.

The Company announced onSeptember 1, 2005 that it renewed its production outsourcing arrangement withPfizer Canada Inc., Pfizer Consumer Healthcare division. The new three-yearmanufacturing agreement became effective as of January 1, 2005 and will allowthe Company to continue to produce several non-prescription products as one ofa select number of approved suppliers to Pfizer Consumer Healthcare Canada. OnDecember 20, 2006 the Company was advised that Johnson & Johnson, Inc. hadpurchased Pfizer’s Consumer Healthcare business and that the agreement wasassigned to Johnson & Johnson, Inc.

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**CORPORATEAND OTHER***(in thousands of U.S.dollars) (U.S. GAAP)*
| ** **                             | ** **   | **2006**     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|--------------|--------------|------------|----------|------------|----------|------------|
|                                   | ** **   | ** **   |       |     |       |     |       |
| Revenues                               |         |         |       |     |       |     |       |
| Product sales                          | ** **   | **$**        | **295**    |     | $          | 499      |       | $ | 274 |   |
| Intercompany  eliminations             | ** **   | **$**        | **(2,989** | **)**    | $          | (1,543   | )          | $ | (2,214 | ) |
| Royalty and  licensing                 | ** **   | **2,124**    |       | 3,134    |       | 4,326    |       |
| *Anipryl*® deferred revenues | ** **   | **3,301**    |       | 3,301    |       | 3,301    |       |
|                                   | ** **   | **$**        | **2,731**  |     | $          | 5,391    |       | $ | 5,687 |   |
|                                   | ** **   | ** **   |       |     |       |     |       |
| Product gross margin                   | ** **   | **(186**     | **)**      | (68      | )          | 342      |       |
| *% of  Product sales revenues*         | *** *** | ***NM***     | * *   | *NM*     | * *   | *NM*     | * *   |
| SG&A                               | ** **   | **(8,558**   | **)**      | (6,439   | )          | (5,868   | )          |
| Depreciation and  amortization         | ** **   | **(337**     | **)**      | (393     | )          | (1,091   | )          |
| Operating (loss) income                | ** **   | **$**        | **(3,656** | **)**    | $          | (465     | )          | $ | 1,010 |   |
| *% of Revenues*                        | *** *** | ***-133.9*** | ***%***    | *-8.6*   | *%*        | *17.8*   | *%*        |

 

The Corporate and Othersegment comprises: amortization of deferred revenues, royalties**and expenses associated with the Company’sbusiness agreements with Pfizer Inc. with respect to *Anipryl®*; revenues related to royalties and milestones fromShire in connection with the divestiture of DRAXIS Pharmaceutica; non-allocatedcorporate expenses and intercompany eliminations. The Company follows a policyof not allocating its central corporate expenses to its operating businesssegments.

**Comparisonof Years Ended December 31, 2006 and 2005**

Corporate revenues forthe year ended December 31, 2006 were $2.7 million lower compared to 2005 dueto the receipt of a contingent milestone payment of $0.9 million from Shireincluded in 2005 results and higher intercompany eliminations. Intercompanyeliminations increased for the year ended December 31, 2006 compared to 2005due to higher volumes of cold kits manufactured by the contract manufacturingsegment for the radiopharmaceutical segment.

As indicated in priordisclosures, substantially all deferred revenues related to the amortization ofpreviously received *Anipryl®*milestones terminated on December 31, 2006. The amortization of these deferredrevenues has previously resulted in non-cash revenues of $0.8 million perquarter or $3.3 million per year (see *Outlook*).

Depreciation andamortization expense in this segment in 2006 was relatively flat as compared to2005 since the Company had fully amortized product rights related to theSpectroPharm line in January 2005.

Operating loss for theyear ended December 31, 2006 was $3.2 million higher than for 2005 due to thereceipt of a contingent milestone payment of $0.9 million from Shire includedin 2005 results, the inclusion of stock-based compensation costs in SG&Aexpenses effective January 1, 2006 and increased incentive accruals for 2006.

**Comparisonof Years Ended December 31, 2005 and 2004**

Revenues related to thecorporate segment were lower in 2005 compared to the fourth quarter 2004 due toa reduction of deferred revenue amortization offset by lower inter-segmenteliminations. In addition, as of January 31, 2005, all deferred revenue relatedto the SpectroPharm line of products was fully amortized. The amortization ofdeferred revenue related to the SpectroPharm line had accounted forapproximately $500,000 of non-cash revenues per full quarter.

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Also during 2005,revenues for this segment included the receipt of contingent milestones of $0.9million from Shire, which the Company earned in early 2005, partially offset bya reduction of deferred revenue amortization. The contingent milestones wereearned based on market driven conditions related directly to product sales.

Depreciation andamortization expense in this segment in 2005 decreased as compared to 2004since the Company had fully amortized product rights related to theSpectroPharm line in January 2005.

SG&A expensesincreased $571,000 for the year ended 2005 compared with 2004 due toincremental spending on corporate business development activities, regulatorycompliance costs related to the *Sarbanes-OxleyAct of 2002*and the impact of foreign exchange in the translation ofCanadian denominated costs to U.S. reporting dollars. Aside from the impact offoreign currency, none of the factors noted increased SG&A expenses by morethan $200,000 individually. As a result of the strengthening of the Canadiandollar versus the U.S. dollar since early 2004, approximately $438,000 of theSG&A expenses for 2005 were related solely to foreign currency translation.

Operating income fromthis segment decreased compared to 2004 due to the factors described above.

**LIQUIDITYAND CAPITAL RESOURCES***(in thousands of U.S.dollars) (U.S. GAAP)*
| ** **                              | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| * *                                | * *   | * *   | * *   | * * | * *   | * * | * *   |
| Cash and cash  equivalents              | ** ** | **$**      | **21,446** |     | $          | 12,390   |       | $ | 5,926 |   |
| Restricted cash                         | ** ** | **—** |       | —   |       | $        | 428        |   |
| Non-financial working  capital (net)(1) | ** ** | **$**      | **21,247** |     | $          | 18,890   |       | $ | 18,397 |   |
| Total debt (current and  long-term)     | ** ** | **—** |       | —   |       | —   |       |
|                                    |       |       |       |     |       |     |       |
| Cash flows from  operating activities   | ** ** | **$**      | **16,450** |     | $          | 9,717    |       | $ | 5,129 |   |
| Cash flows used in investing activities | ** ** | **$**      | **(5,993** | **)**    | $          | (4,380   | )          | $ | (4,290 | ) |

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(1)             Excludingcash and cash equivalents, restricted cash, current portion of deferredrevenues and customer deposits.
| ** **                                       | ** ** | **Feb 23, 2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                             | ** ** | ** **                 |       |       |       |       |       |       |       |
| Common shares issued  and outstanding            | ** ** | **41,837,140**             |       | 41,522,138 |       | 41,588,005 |       | 41,015,326 |       |
| Warrants issued and  outstanding(2)              | ** ** | **—**                 |       | —     |       | 1,526,718  |       | 1,526,718  |       |
| Stock options  outstanding                       | ** ** | **2,362,993**              |       | 2,257,995  |       | 2,652,620  |       | 2,753,232  |       |
| Outstanding options as a % of outstanding shares | ** ** | **5.6**                    | **%**      | 5.4        | %          | 6.4        | %          | 6.7        | %          |

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

Cash and cash equivalentsas of December 31, 2006 totalled $21.4 million as compared with $12.4 millionas of December 31, 2005 and $5.9 million as at December 31, 2004. The increaseis attributable to the increasing cash earnings of the Company and proceedsfrom the exercise of stock options offset by capital expenditures and fundsused to buy back the Company’s shares under the 2006 Issuer Bid. In management’sopinion, the Company has sufficient funds to meet its present working capitalrequirements.

The Company follows apolicy of investing its surplus cash resources in high quality, liquid,short-term commercial paper and government treasury bills and money marketmutual funds that invest in high quality short-term securities. All investmentsas of December 31, 2006, 2005 and 2004 had less than three months maturity. Asat December 31, 2006 there were no restrictions on the flow of these funds norhave any of these funds been committed in any way.

For the year endedDecember 31, 2006, net operating cash flows were $16.4 million compared to $9.7million for 2005 and $5.1 million for 2004. The year-over-year increases in netoperating cash flows have been driven by increased volumes in the Company’s twocore businesses partially offset by a higher investment in working capital.

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Non-financial workingcapital, comprising accounts receivable, inventories, prepaid expenses, currentdeferred income tax assets, accounts payable and accrued liabilities, as atDecember 31, 2006 increased compared to December 31, 2005 and December 31, 2004due mainly to increased receivable levels related to volume growth and timingof collection of receivables.

Capital expenditures forthe year ended December 31, 2006 are mainly attributable to expenditures toimprove operating efficiencies in production areas, increase manufacturingcapacity and infrastructure upgrades, namely to the Company’s informationtechnology and SAP platforms. Infrastructure upgrade expenditures from existingprograms are expected to continue into the first half of 2007. Capital expendituresfor 2004 and 2005 were mainly to due to the installation and validation of theCompany’s second lyophilization unit.

All third party debt wasrepaid at the end of 2004 (see*BankFinancing).*

Proceeds from theissuance of treasury common shares by the Company attributable to the exerciseof options generated $1.9 million for the year ended December 31, 2006 comparedwith $1.6 million for 2005 and 2004.

The following tablesummarizes the Company’s major contractual cash obligations as of December 31,2006:
| ** **                       | ** ** | **Payment due by end of:** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                      | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
| Operating leases                 |       | 45                                             |       | 16         |       | 16 |   | 11 |   | 2 |   | — |   | — |   |
| Service  contracts               |       | 370                                            |       | 271        |       | 82 |   | 17 |   | — |   | — |   | — |   |
| Milestone  obligations           |       | 1,100                                          |       | 150        |       | 150 |   | 150 |   | 150 |   | 250 |   | 250 |   |
| Total contractual obligations    |       | 1,515                                          |       | 437        |       | 248 |   | 178 |   | 152 |   | 250 |   | 250 |   |

 

All contractualobligations related to 2006 and 2005 were fully paid as of December 31, 2006and December 31, 2005 respectively.

In addition to the above,the Company may be obligated to make certain royalty payments based on relatedproduct sales and milestone payments based on the achievement of certainspecified events.

The amount, timing andlikelihood of these royalty payments are not determinable as they mainly relateto products being developed and not yet approved by the applicable regulatoryauthorities.

**BankFinancing**

The Company has thefollowing credit facilities available, expiring June 2007:

—                                   CDN$15 million orU.S.$ equivalent operating facility payable within 364 days upon drawing uponthe facility. The operating facility can be extended by one year upon agreementwith the lender. As at December 31, 2006, no amount was drawn under thisfacility.

—                                   CDN$10 million orU.S.$ equivalent term facility, repayable in full at the end of the term. As atDecember 31, 2006, 2005 and 2004 no amount was drawn under this facility.

As of December 31, 2006,a letter of credit was issued to the Company’s payroll provider in the amountof $621,000 which expires on March 25, 2007.

Interest under the creditfacilities (both term and operating) is based on the bank’s prime lending rateprovided that the Company meets certain ratios, which as at December 31, 2006were met.

Amounts drawn under bothcredit facilities would be secured by specific assets of DRAXIS SpecialtyPharmaceuticals Inc., and shares and guarantees of certain other subsidiaries.

The Company was incompliance with all lending covenants as at December 31, 2006, 2005 and 2004.

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**Off-BalanceSheet Arrangements**

The Company does not haveany off-balance sheet arrangements that have, or are reasonably likely to have,a current or future effect on the Company’s financial condition, changes inrevenues or expenses, results of operations, liquidity, capital expenditures orcapital resources that are material to investors.

**Research and Developments,Patents and Licenses**

In accordance with SFASNo.2 *Accounting for Research and DevelopmentCosts*, research and development costs are expensed in the period inwhich they are incurred. Acquired research and development having noalternative future use is written off at the time of acquisition. The cost ofintangibles that are purchased from others for a particular research anddevelopment project that have no alternative future use is written off at thetime of acquisition.

In the last three fiscalyears ended December 31, 2004, December 31, 2005 and December 31, 2006, theCompany has spent $1,948,000, 2,103,000 and 2,372,000 respectively on Researchand Development expenses.

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**SELECTEDANNUAL INFORMATION***(in thousands of U.S.dollars, except share related data) (U.S. GAAP)*
| ** **                             | ** ** | **2006**   | ** **  | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|------------|-------------|----------|------------|----------|------------|
|                                   | ** ** | ** ** |        |     |       |     |       |
| Revenues                               |       |       |        |     |       |     |       |
| Product sales                          | ** ** | **$**      | **83,545**  |     | $          | 72,989   |       | $ | 61,693 |   |
| Royalty and  licensing                 | ** ** | **2,121**  |        | 3,143    |       | 4,326    |       |
| *Anipryl*® deferred revenues | ** ** | **3,301**  |        | 3,301    |       | 3,301    |       |
|                                   | ** ** | **$**      | **88,967**  |     | $          | 79,433   |       | $ | 69,320 |   |
|                                   | ** ** | ** ** |        |     |       |     |       |
| Net income (loss)                      | ** ** | ** ** |        |     |       |     |       |
| —From continuing  operations      | ** ** | **$**      | **11,547**  |     | $          | 7,784    |       | $ | 7,977 |   |
| —From  discontinued operations    | ** ** | **—** |        | —   |       | (61      | )          |
|                                   | ** ** | **$**      | **11,547**  |     | $          | 7,784    |       | $ | 7,916 |   |
|                                   |       |       |        |     |       |     |       |
| Basic income (loss) per  share         | ** ** | ** ** |        |     |       |     |       |
| —From continuing  operations      | ** ** | **$**      | **0.28**    |     | $          | 0.19     |       | $ | 0.20 |   |
| —From  discontinued operations    | ** ** | **—** |        | —   |       | —   |       |
|                                   | ** ** | **$**      | **0.28**    |     | $          | 0.19     |       | $ | 0.20 |   |
|                                   |       |       |        |     |       |     |       |
| Diluted income (loss)  per share       | ** ** | ** ** |        |     |       |     |       |
| —From continuing  operations      | ** ** | **$**      | **0.28**    |     | $          | 0.18     |       | $ | 0.19 |   |
| —From discontinued  operations    | ** ** | **—** |        | —   |       | —   |       |
|                                   | ** ** | **$**      | **0.28**    |     | $          | 0.18     |       | $ | 0.19 |   |
|                                   |       |       |        |     |       |     |       |
| Total assets                           | ** ** | **$**      | **105,962** |     | $          | 95,820   |       | $ | 88,785 |   |
| Total long-term financial liabilities  | ** ** | **990**    |        | 308      |       | —   |       |

 

**SUMMARYOF QUARTERLY RESULTS***(in thousands of U.S.dollars, except share related data) (U.S. GAAP)*
| ** **                        | ** ** | **Q4, 2006** | ** ** | **Q3, 2006** | ** ** | **Q2, 2006** | ** ** | **Q1, 2006** | ** ** | **Q4, 2005** | ** ** | **Q3, 2005** | ** ** | **Q2, 2005** | ** ** | **Q1, 2005** | ** ** |
|-----------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
|                              | ** ** | ** **        |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Revenues                          |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Product sales                     | ** ** | **$**             | **23,106** |              | $          | 19,788            |       | $                 | 23,003     |              | $          | 17,648            |       | $                 | 17,273     |              | $          | 16,034 |   | $ | 19,176 |   | $ | 20,506 |   |
| Royalty and  licensing            | ** ** | **465**           |       | 617               |       | 437               |       | 603               |       | 562               |       | 598               |       | 470               |       | 1,514             |       |
| *Anipryl*® deferred revenues | ** ** | **825**           |       | 825               |       | 825               |       | 825               |       | 825               |       | 825               |       | 825               |       | 825               |       |
|                              | ** ** | **$**             | **24,396** |              | $          | 21,230            |       | $                 | 24,265     |              | $          | 19,076            |       | $                 | 18,660     |              | $          | 17,457 |   | $ | 20,471 |   | $ | 22,845 |   |
|                              | ** ** | ** **        |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Net income                        | ** ** | **$**             | **3,687**  |              | $          | 2,604             |       | $                 | 3,564      |              | $          | 1,692             |       | $                 | 1,067      |              | $          | 1,069 |   | $ | 2,353 |   | $ | 3,295 |   |
|                              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Basic income per share            | ** ** | **$**             | **0.09**   |              | $          | 0.06              |       | $                 | 0.09       |              | $          | 0.04              |       | $                 | 0.03       |              | $          | 0.03 |   | $ | 0.06 |   | $ | 0.08 |   |
|                              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Diluted income per share          | ** ** | **$**             | **0.09**   |              | $          | 0.06              |       | $                 | 0.09       |              | $          | 0.04              |       | $                 | 0.03       |              | $          | 0.03 |   | $ | 0.06 |   | $ | 0.08 |   |

 

**MAJORTRENDS IN QUARTERLY NUMBERS**

*Thequarterly numbers reflected in the above table reflect the significant trendsdescribed below. For more detailed explanations, please refer to management’sdiscussion and analysis of financial condition and results of operations (“MD&A”),filed on a quarterly basis on SEDAR and with the Securities and ExchangeCommission on Form 6-K. The MD&A for the quarter ended December 31, 2006 isincorporated herein by reference.*

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Commencing in the secondquarter of 2003, the contract manufacturing segment began a significant ramp-upof shipments of *Hectorol*®*Injection* for Genzyme and products under its GSKmanufacturing agreements. This 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 Genzyme business. This trend continuedthrough 2004 and into the third quarter of 2005. The result was increasingvolume and associated product gross margins in contract manufacturing.

During the third quarterof 2004, there were production breaks caused by normal shutdown activities toperform maintenance and complete capital expenditure projects. The effect incontract manufacturing was to reduce volumes and margins due to productiondowntime resulting in higher unabsorbed overhead costs.

However, during the thirdquarter of 2005, the Company’s contract manufacturing operation extended itsscheduled shutdown period at the beginning of the third quarter in the sterilearea in order to correct an electrical panel failure and make associatedrepairs. The decision to revalidate the entire sterile area following theserepairs and to recalibrate production schedules had material financialimplications that hindered third and fourth quarter results in 2005. Finalizingand executing on production schedules in the fourth quarter of 2005 werefurther hindered by delays in receiving some component materials fromsuppliers. Production in contract manufacturing was ramping up towards normalizedproduction levels by the end of the third quarter of 2005. The overall effectof the extended shutdown was to negatively affect the Company’s key financialmetrics over the second half of 2005 and offset the significant growth achievedover 2004 in the first half of 2005. The impact on product gross margins in thesecond half of 2005 was approximately 5%. The peripheral impacts of theextended shutdown specifically as it related to production scheduling impactedoverall results into February 2006.

Beginning March 2006, theCompany returned to normalized production volumes. The contract manufacturingsegment began achieving significant volume growth beginning with the secondquarter of 2006 and extending to the end of 2006. The growth was driven by thesterile products area, in particular, by volume from two major customers,Genzyme and GSK. In addition, the Company benefited from the effects of thecontribution of additional lyophilization capacity for 2006, which increasedsterile lyophilization volumes in 2006 relative to 2005. Third quarter resultsfor 2006 reflected the impact of a normal shutdown period in contractmanufacturing. As the 2006 shutdown was completed on plan, the Company was ableto return to volumes achieved in the second quarter of 2006 by the fourthquarter.

In theradiopharmaceutical segment, volumes have increased since the first quarter of2003, related to the introduction of Sodium Iodide I-131 to the U.S. In thefourth quarter of 2004, a change in customer purchasing patterns occurred,which lowered cold kit sales to the U.S. below traditional levels in Octoberand November. Cold kit sales returned to more traditional levels in 2005 andthe primary driver for growth in 2005 remained the increasing penetration ofSodium Iodide I-131 in the U.S. Radioiodine sales (Sodium Iodide I-131)continued to drive sales growth in 2006 via increased U.S. market penetrationincluding the introduction of diagnostic capsules into the U.S. marketplace.Overall, margins increased over 2005 due to the decision in late 2005 todiscontinue sales of brachytherapy products.

Apart from the impact offoreign currency on the Company’s Canadian denominated SG&A spending,SG&A spending increased in 2005 due to costs of process improvementinitiatives commencing in the second quarter of 2005, one-time costs associatedwith the exit of the brachytherapy product line, which occurred in the fourthquarter of 2005 and severance costs in the fourth quarter of 2005. EffectiveJanuary 1, 2006, the Company has included stock-based compensation costs inSG&A expenses as a non-cash item. This had the effect of lowering EPS by2.3 cents for 2006 relative to 2005 or 0.6 cents per quarter during 2006.Fourth quarter 2006 results were impacted by accruals for long term incentiveplan awards based on the Company’s financial performance in 2005.

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Depreciation andamortization costs continue to rise over time. This reflects the capitalexpenditure programs implemented since 2002. This trend continued,specifically, as the second lyophilization unit was fully installed andvalidated in the first half of 2005.

Foreign exchange hasimpacted EPS to the extent of the strengthening of the Canadian dollar and itsaffect on the Company’s net monetary position held in U.S. dollars for 2005resulting in a foreign exchange loss during 2005. The Canadian dollar weakenedlate in 2006 resulting in a foreign exchange gain on U.S. dollar denominatednet monetary items.

Interest income hasincreased and become more significant as the Company eliminated debt levels atthe end of 2004 and built up its interest bearing cash position since then.

The Company’s effectivetax rate has been significantly below the statutory rate due to the recognitionof previously unrecognized loss carryforwards. The Company’s ability to executeon tax planning opportunities has expanded as a result of the increasedoperating profits of its contract manufacturing segment, the amalgamation ofits two core businesses effective January 1, 2005, and the purchase of allminority interest shareholdings of its contract manufacturing business on April22, 2004. This trend is not expected to continue in the long term and theeffective tax rate is expected to return closer to statutory levels, subject tothe amount of R&D spending. Over the short term and specifically in 2005,the Company benefited from the recognition of the lower effective statutory taxrate attributable to milestone payments received, and through withholding taxrefunds received in the year but not previously estimated to be recoverable andchanges to statutory tax rates resulting in one-time adjustments to thedeferred income tax values. As expected, during 2006 income taxes moved closerto statutory levels less the positive impact of tax credits received on R&Dexpenditures.

Net cash flow fromoperating activities continues to grow with the increased volumes, subject tothe required investment in working capital to support the ramp-up in business.Net operating flows tend to be higher in the latter half of a year as incentiveawards, insurance payments and tax installments tend to be made early in ayear.

Capital expenditures tendto rise during and after shutdown periods (usually in the third quarter) whenmost installation activities take place. Information technology and SAPspending to upgrade both platforms accelerated in the second half of 2006.

**OUTLOOK**

*Thefollowing section contains numerous forward-looking statements specificallypertaining to guidance. Management has included a narrative of the underlyingfactors and assumptions on which the forward-looking statements are based.While management believes that the basis for these forward-looking statementsis reasonable, they are based on information currently available to managementand, accordingly, actual results could differ materially from theforward-looking statements (see **Forward-LookingStatements** below for factors that could cause our results orperformance to differ materially from a conclusion, forecast or projection inthe forward-looking statements).*

The Company’s ability toforecast revenue over shorter-term periods, especially quarterly targets, isvery difficult and less accurate during periods in which significant changesare made to production schedules, whether due to production issues or changesto the size or timing of customer demand. While delays in receiving componentparts are not unusual, when combined with production issues or customer timingchanges, they can significantly impact revenues compared to forecasts for agiven period. Furthermore, due to the complexity of sterile manufacturing andthe rigors and demands of the quality testing and release process, anticipatedshipment dates and the accompanying revenues can change from period to periodbased on the independent quality control process. Accordingly, the Company doesnot and does not plan to provide specific quarterly guidance.

The Company’s annualguidance is based on the information available when it receives annualizedcustomer forecasts or estimates of demand. During the course of the year,changes to these forecasts and customer 

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demand, which are out ofthe control of the Company, can result in revisions to production schedules. Inaddition, unforeseen production problems can potentially cause variations fromrevenue forecasts and ultimately EPS estimates. Customer forecasts can changepositively or negatively based on several factors such as the ability of ourcustomers to obtain regulatory approval, the success of the product producedfor them in the marketplace and regulatory changes affecting product demand(see *Forward-Looking Statements*).

**ConsolidatedGuidance**

***2006 Guidance Achievements***

The Company originallyprovided EPS guidance of between 23 and 27 cents for 2006. In conjunction withthe release of the results for the third quarter of 2006, the Company thenexpected to achieve EPS closer to the higher end of its original guidancerange. The final results for 2006 not only achieved the higher end of theguidance range but exceeded it by 1 cent. The Company was able to exceed theguidance range mainly due to strong fourth quarter production performance andthe timing of customer demand in the contract manufacturing business as well asforeign exchange gains on U.S. dollar denominated monetary items. The strongerthan anticipated volumes in 2006 due to the timing of requirements from ourmajor customers, including Genzyme and GSK, have resulted in lower preliminaryvolume forecasts from these customers for 2007 relative to 2006. Thesepreliminary volume forecasts are considered in our guidance range for 2007. Theactual volume requirements will be determined by the timing of end-user demandand supply chain management decisions and can vary materially from preliminaryforecasts. Both factors are outside of the Company’s control.

The Company alsosuccessfully achieved its net operating cash flows target of at least $15million by attaining $16.5 million in net operating cash flows for 2006.

***2007 Guidance***

As indicated in priordisclosures, substantially all revenues related to the amortization ofpreviously received *Anipryl*® milestones (see *Corporate and Other*) terminated onDecember 31, 2006. The amortization of these deferred revenues has previouslyresulted in non-cash revenues of $0.8 million per quarter or $3.3 million peryear. The termination of the amortization of deferred revenues had no effect oncash flows but had the impact of contributing 7 cents a share to 2006’sreported EPS.

As of February 23, 2007,the forecast information received by the Company from several major customersincludes variable factors and assumptions, such as size of requirements andtiming of regulatory approvals, that significantly impact overall forecastreliability to a degree that the Company is unable to provide reasonablerevenue guidance. However, based on the current information available, EPS isexpected to range between 23 and 27 cents for 2007 as compared with 21 cents in2006 adjusted for the exclusion of the amortization of *Anipryl*® deferred revenues. This is the same guidance range we gave for2006 but now excludes approximately 7 cents of EPS from *Anipryl*® deferred revenues.

While the Company doesnot plan to provide quantitative quarterly guidance, the Company expects thefirst quarter results for 2007 to be weaker compared to the fourth quarter of2006. The main reason is a delay in receiving component parts related to *Hectorol*®*Injection*creating a production delay for this product. Due to sufficient customerinventory levels, the delay does not create any issues in the end-user market.However, it will have an impact on short-term results of the Company and thecontract manufacturing segment. This has been factored into our overallconsolidated guidance range.

The Company’s formalcontractual arrangements with Genzyme for the production of *Hectorol*®*Injection* willterminate in March 2008. The Company expects continuing production of *Hectorol*®*Injection* forGenzyme beyond this date. The actual volumes expected to be produced andshipped are dependent on the usual factors affecting end-user demand includingreimbursement policies and customer supply chain management practices.Accordingly, *Hectorol*®*Injection* volumes are subject to a high degree of variabilitybetween now and 2009. While the Company may continue producing *Hectorol*®*Injection* over along-term 

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period, the Company isplanning for the eventual phase out of *Hectorol*®*Injection* volumes over time with such capacity to beeventually filled by other products and customers.

Since the *Anipryl*® deferred revenues represent a non-cash source of earnings in2006, the Company believes that net operating cash flow is a reasonable metricto measure growth on a year-over-year basis. Net operating cash flow isexpected to be at least $20 million for 2007 subject, as always, to working capitalrequirements to support business growth.

***Sources of Future Growth***

The Company’s guidancefor 2007 represents core growth in operations. The Company believes that futureadditional growth for 2008 and beyond will come from the success of one or moreof the many initiatives that have been developed over the past few years andthat we continue to develop. The following potential opportunities do notinclude any potential merger and/or acquisition activities and are not listedin any particular order as the potential financial impact of each can varymaterially over time:

·                                          Conclusionof a strategic alliance with a commercial partner in Europe for the sales andmarketing of the four product files currently under review by the Europeanregulatory authorities. These are files for products currently sold in the U.S.or Canada.

·                                          Thefiling for approval of a generic form of Sestamibi in the U.S., Europe andCanada followed by its introduction into those marketplaces.

·                                          Completionof the development of proprietary technology for a second-generation TechnetiumGenerator and licensing it to others for distribution.

·                                          Clinicaltrials for a new formulation of *INFECTON*® targeted to orthopaedic indicationssubject to final analysis and recommendations of an expert panel.

·                                          Submissionto the FDA for approval of an improved radiopharmaceutical (cold kit) productfor bone scan imaging and introduction into the U.S. marketplace.

·                                          Completionof clinical trials for I-131 MIBG for the diagnosis and treatment ofneuroblastoma and related malignancies and its subsequent sale and distributionin North America.

·                                          Completionof negotiations followed by product transfers for the manufacture of a newportfolio of non-sterile products.

·                                          Developmentand approval of additional generic imaging products that have now ceased orwill shortly cease to be protected by patent.

·                                          Expansionof manufacturing capacity at the Montreal facility to accommodate new businessopportunities.

**Other**

The Board of Directorsbelieves that the Company’s shares trade well below their real value and thatthe trading price of the shares does not reflect the potential inherent valuein the Company’s core competencies. Accordingly, the Board of Directors hasauthorized a Normal Course Issuer Bid and is considering other strategies toenhance the trading value of its shares, including a sustainable dividendpolicy, although no commitment has been made to do so.

**ACCOUNTINGMATTERS**

**CriticalAccounting Policies and Estimates**

The foregoing discussionand analysis of the financial condition and results of operations is based uponthe Company’s Consolidated Financial Statements, which have been prepared inaccordance with U.S. GAAP. The preparation of Consolidated Financial Statementsrequires the Company to make estimates and 

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judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. On an ongoing basis, theCompany evaluates its estimates and makes adjustments as appropriate. Actualresults may differ from these estimates.

A summary of thesignificant accounting policies and methods used by the Company in thepreparation of its Consolidated Financial Statements is included in Notes 2 and3 to the 2006 audited Consolidated Financial Statements. The Company believesthe following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its Consolidated FinancialStatements.

***Recognition of Licensing Revenue***

License and other formsof non-refundable fees received pursuant to collaboration agreements areaccounted for according to the related contractual agreements. In general, suchfees are deferred and recognized on a straight-line basis over the contractperiod. Where the contract period is not defined, such fees are recognized on astraight-line basis over the estimated term, during which contractual benefitsare expected to be derived. If payment of such fees is contingent upon futureperformance 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 netdeferred tax assets is dependent on the Company’s ability to generatesufficient taxable income in certain tax jurisdictions. Management believesthat it is more likely than not that the assets will be realized, based onforecasted income. On a quarterly basis, the estimates and assumptionsunderlying the forecasted income are reviewed by management to determinewhether additional valuation allowances are warranted or valuation allowancesare still required. The Company has taken valuation allowances related to taxloss carryforwards in jurisdictions where taxable income is no longergenerated, it is not likely to generate sufficient taxable income in Canada toutilize Canadian tax loss carryforwards prior to expiry, and filing positionstaken with taxation authorities are subject to review. Changes to estimates offuture taxable income, the completion of reviews by taxation authorities andthe ability to execute on tax planning opportunities can significantly affectthe amount of valuation allowances.

***Allowance for Doubtful Accounts***

The Company determines anappropriate allowance for doubtful accounts based on an account-by-accountreview as opposed to a general provision assessed as a percentage of revenues.

***Provision for Inventory Obsolescence***

Provisions for inventoryare charged against income when it is determined that specific inventory itemsdo not meet the defined quality and regulatory requirements for sale. TheCompany does not make general provisions for inventory obsolescence.

**ForeignExchange Risk**

The Company’s reportingcurrency is the U.S. dollar. The functional currency for its Canadian operations—whichinclude the radiopharmaceutical segment, the contract manufacturing segment androyalties and milestones related to product rights sold to Shire—is theCanadian dollar. Accordingly, the Company’s foreign exchange exposure foraccounting purposes mainly relates to U.S.-denominated monetary assets of theseoperations. The Company currently does not actively hedge this exposure, butreduces the exposure by maintaining the minimum level of U.S.-denominated cashavailable to meet its short-term cash requirements.

**RecentAccounting Pronouncement**

In July 2006, theFinancial Accounting Standard Board (“FASB”) issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The Interpretation also provides guidance on de-recognition, 

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classification, interestand penalties, accounting in interim periods, disclosure and transition. FIN 48is effective in fiscal years beginning after December 15, 2006. The provisionsof FIN 48 are to be applied to all tax positions upon initial adoption, withthe cumulative effect adjustment reported as an adjustment to the openingbalance of retained earnings. We are currently evaluating the potential impact,if any, that the adoption of FIN 48 will have on our Consolidated FinancialStatements.

**FORWARD-LOOKING STATEMENTS**

This MD&A containsforward-looking statements within the meaning of Section 27A of the *Securities Act of 1933*, as amended (the “SecuritiesAct”), and as contemplated under the *PrivateSecurities Litigation Reform Act of 1995* and other applicablesecurities legislation. These statements are not guarantees of futureperformance. By their nature, forward-looking statements involve numerousassumptions, known and unknown risks, uncertainties and other factors that maycause the actual results or performance of the Company to be materially differentfrom such statements or from any future results or performance implied thereby.Factors that could cause the Company’s results or performance to differmaterially from a conclusion, forecast or projection in the forward-lookingstatements include, but are not limited to:

·                                          theachievement of desired clinical trial results related to the Company’s pipelineproducts;

·                                          timelyregulatory approval of the Company’s products;

·                                          theability to comply with regulatory requirements applicable to the manufacture andmarketing of the Company’s products;

·                                          theCompany’s ability to obtain and enforce effective patents;

·                                          thenon-infringement of third party patents or proprietary rights by the Companyand its products;

·                                          factorsbeyond our control that could cause interruptions in our operations in oursingle manufacturing facility (including, without limitation, materialequipment breakdowns);

·                                          reimbursementpolicies related to health care;

·                                          theestablishment and maintenance of strategic collaborative and commercial relationships;

·                                          theCompany’s dependence on a small number of key customers;

·                                          thedisclosure of confidential information by our collaborators, employees orconsultants;

·                                          thepreservation of healthy working relationships with the Company’s union and employees;

·                                          theCompany’s ability to grow the business;

·                                          thefluctuation of our financial results and exchange and interest ratefluctuations;

·                                          theadaptation to changing technologies;

·                                          theloss of key personnel;

·                                          theavoidance of product liability claims;

·                                          theloss incurred if current lawsuits against us succeed;

·                                          thevolatility of the price of our common shares;

·                                          marketacceptance of the Company’s products; and

·                                          therisks described in “Item 3. Key Information—Risk Factors” in this AnnualReport.

For additionalinformation with respect to certain of these and other factors, and relating tothe Company generally, reference should be made to the Company’s most recentfilings with the United States Securities and Exchange Commission (available onEDGAR at www.sec.gov) and the filings made by the Company 

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with Canadian securitiesregulators (available on SEDAR at www.sedar.com). The forward-lookingstatements contained in this document represent the Company’s expectations asat February 23, 2007. Unless otherwise required by applicable securities laws,the Company disclaims any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

**PARTIII.**

**Item 19.**                   Exhibits
| Exhibit No. | ** ** | **Description** | ** ** |
|------------------|------------|-----------------|------------|
|             |       |            |       |   |   |
|             | 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 |   |

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*                    Filedherewith

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**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to signthis annual report on its behalf.
|                       | DRAXIS HEALTH INC. |
|-----------------------|--------------------|
|                  |               |
| Date: August 15, 2007 | By:                | /s/ MARK OLEKSIW |
|                  |               | Chief Financial Officer |
|                  |               |   |
|                  | By:                | /s/ MARTIN BARKIN, M.D. |
|                  |               | President and Chief Executive Officer |

 

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