**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 20-F**

**(Mark One)**

 
| **o****          ****REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                | ** ** | ** ** |
| **OR**                                                                                                                                                                    |
| ** **                                                                                                                                                                | ** ** | ** ** |
| **ý****          ****ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
|                                                                                                                                                                      |
| **FOR THE  FISCAL YEAR ENDED DECEMBER 31, 2005**                                                                                                                          |
| ** **                                                                                                                                                                | ** ** | ** ** |
| **OR**                                                                                                                                                                    |
| ** **                                                                                                                                                                | ** ** | ** ** |
| **o****          ****TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|                                                                                                                                                                      |
| **Commission File Number:  0-17434**                                                                                                                                 |

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**DRAXIS HEALTH INC.**

(Exact name of Registrant asspecified in its charter)

 

**CANADA**

(Jurisdiction of incorporationor organization)

 

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

(Address of principal executiveoffices)

 

Securities registered or to beregistered pursuant to Section 12(b) of the Act.

 

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

 

Securities registered or to beregistered pursuant to Section 12(g) of the Act.

 

**COMMON SHARES**

(Title of Class)

 

Securities for which there is areporting obligation pursuant to Section 15(d) of the Act.

 

**NONE**

(Title of Class)

 

Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report.

 

Shares – 41,588,005 commonshares (as of 12/31/05)

 

Indicate by check mark if the registrantis  a well-known seasoned issuer, asdefined in Rule 405 of the Securities Act.

Yes   o   No   ý

 

If this report is an annual or transitionreport, indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes   o   No   ý

 

Note—Checking the box above will not relieveany registrant required to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   ý   No   o

 

Indicate by check mark whetherthe 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 ý                                        Non-acceleratedfiler o

 

Indicate by check mark whichfinancial statement item the Registrant has elected to follow.

 

Item 17   o   Item 18   ý

 

 

 

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

 

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**Item 1.  Identity of Directors, Senior Management andAdvisers**

 

Not Applicable

 

**Item 2.  Offer Statistics and Expected Timetable**

 

Not Applicable

 

**Item 3.  Key Information**

 

DRAXISHealth Inc. (“DRAXIS” or the “Company”) is a specialty pharmaceutical companyproviding products in three categories: sterile products, non-sterile productsand radiopharmaceuticals.  Sterileproducts include liquid and freeze-dried (lyophilized) injectables and sterileointments.  Non-sterile products areproduced as solid oral, liquid and semi-solid dosage forms.  Radiopharmaceuticals are used for boththerapeutic and diagnostic molecular imaging applications.  In the radiopharmaceutical category, DRAXIShas its own products and a targeted research and development program for newproducts.  As of January 1, 2005, all ofthe operations of the Company are carried out through our wholly ownedsubsidiary DRAXIS Specialty Pharmaceuticals Inc., which operates two majordivisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE(radiopharmaceuticals).  Our operationsare carried out at our sole manufacturing facilities located at 16751, Trans-CanadaHighway, Kirkland, Québec, H9H 4J4, Canada (our “manufacturing facilities” or“facility”).  For the year ended December31, 2005, 68.9% of our consolidated revenues were derived from DRAXIS Pharma(contract manufacturing) and 24.3% of our consolidated revenues were derivedfrom DRAXIMAGE (radiopharmaceuticals).

 

Oursubsidiary Deprenyl Animal Health, Inc. (“DAHI”) receives licensing and royaltyrevenue related solely to *ANIPRYL**®*, a companion animal health product. It does not engage in any operations.

 

Ourregistered and principal office is located at 6870 Goreway Drive, 2ndFloor, Mississauga, Ontario, L4V 1P1, Canada.

 

Unlessotherwise indicated herein, the information presented in this Annual Report(Form 20-F) is for the year ended December 31, 2005.

 

Theselected data set forth in the following table are expressed in U.S. dollarsand in accordance with U.S. generally accepted accounting principles (“U.S.GAAP”).  All data presented below shouldbe read in conjunction with, and is qualified in its entirety by, reference toour audited Consolidated Financial Statements and Notes thereto for the yearended December 31, 2005 which are included in this annual report.

 

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**Selected Five-Year Review**

*(in thousands of U.S. dollars except share relateddata)*

 
| ** **                                              | ** ** | **2005**       | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** |
|---------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Operations**                                          |       |           |       |       |       |       |       |       |       |       |       |
| Revenues                                                |       |           |       |       |       |       |       |       |       |       |       |
| Product sales                                           | ** ** | **72,989**     |       | 61,693     |       | 40,535     |       | 30,338     |       | 27,151     |       |
| Royalty and licensing                                   | ** ** | **6,444**      |       | 7,627      |       | 8,658      |       | 8,302      |       | 6,752      |       |
| ** **                                              |       | **79,433**     |       | 69,320     |       | 49,193     |       | 38,640     |       | 33,903     |       |
|                                                    |       |           |       |       |       |       |       |       |       |       |       |
| Operating income                                        | ** ** | **9,764**      |       | 9,856      |       | 6,686      |       | 2,894      |       | 1,773      |       |
|                                                    |       |           |       |       |       |       |       |       |       |       |       |
| Income (loss) from continuing operations                | ** ** | **7,784**      |       | 7,977      |       | 4,671      |       | 3,020      |       | (1,015     | )          |
| (Loss) income from discontinued operations,  net of tax | ** ** | **—**     |       | (61        | )          | 8,531      |       | (834       | )          | (569       | )          |
| Net income (loss)                                       | ** ** | **7,784**      |       | 7,916      |       | 13,202     |       | 2,186      |       | (1,584     | )          |
|                                                    |       |           |       |       |       |       |       |       |       |       |       |
| Basic income (loss) per share                           |       |           |       |       |       |       |       |       |       |       |       |
| - From continuing operations                            | ** ** | **$**          | **0.19**   |       | $          | 0.20       |       | $          | 0.13       |       | $          | 0.08 |   | $ | (0.03 | ) |
| - From discontinued operations                          | ** ** | **—**     |       | —     |       | 0.23       |       | (0.02      | )          | (0.02      | )          |
| ** **                                              |       | **$**          | **0.19**   |       | $          | 0.20       |       | $          | 0.36       |       | $          | 0.06 |   | $ | (0.05 | ) |
|                                                    |       |           |       |       |       |       |       |       |       |       |       |
| Diluted income (loss) per share                         |       |           |       |       |       |       |       |       |       |       |       |
| - From continuing operations                            | ** ** | **$**          | **0.18**   |       | $          | 0.19       |       | $          | 0.13       |       | $          | 0.08 |   | $ | (0.03 | ) |
| - From discontinued operations                          | ** ** | **—**     |       | —     |       | 0.23       |       | (0.02      | )          | (0.02      | )          |
| ** **                                              |       | **$**          | **0.18**   |       | $          | 0.19       |       | $          | 0.36       |       | $          | 0.06 |   | $ | (0.05 | ) |
|                                                    |       |           |       |       |       |       |       |       |       |       |       |
| **Financial Position at December 31**                   |       |           |       |       |       |       |       |       |       |       |       |
| Cash and cash equivalents                               | ** ** | **12,390**     |       | 5,926      |       | 10,563     |       | 4,899      |       | 5,602      |       |
| Total assets                                            | ** ** | **95,820**     |       | 88,785     |       | 76,553     |       | 67,951     |       | 64,360     |       |
| Long-term debt                                          | ** ** | **—**     |       | —     |       | 10,466     |       | 12,726     |       | 8,060      |       |
| Common shareholders’ equity                        | ** ** | **81,628**     |       | 69,920     |       | 41,647     |       | 20,227     |       | 16,878     |       |
| Book value per common share                             | ** ** | **1.96**       |       | 1.70       |       | 1.12       |       | 0.55       |       | 0.46       |       |
|                                                    |       |           |       |       |       |       |       |       |       |       |       |
| **Share Information**                                   |       |           |       |       |       |       |       |       |       |       |       |
| Number of shares outstanding at end of year             | ** ** | **41,588,005** |       | 41,015,326 |       | 37,297,817 |       | 37,098,690 |       | 36,613,434 |       |
| Weighted average number of shares - basic               | ** ** | **41,471,798** |       | 39,886,219 |       | 37,114,648 |       | 36,981,985 |       | 36,587,794 |       |
| Weighted average number of shares - diluted             | ** ** | **42,365,782** |       | 41,054,883 |       | 37,194,994 |       | 37,337,879 |       | 36,610,927 |       |

 

### **Overview**

 

ThisAnnual Report (Form 20-F) contains forward-looking statements (within themeaning of the Securities Exchange Act of 1934, as amended) and informationthat are based on management’s beliefs, as well as assumptions made by andinformation currently available to management. When used in this Annual Report (Form 20-F), the words “anticipate,”“estimate,” “plan”, “believe,” “expect,” “potential,”

 

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“intend,” “designed” and “should” and similar expressions are intendedto identify forward-looking statements. These forward-looking statements necessarily make numerous assumptionswith respect to: industry performance; general business, economic andregulatory conditions; access to markets and materials; and other matters, allof which are inherently subject to significant uncertainties and contingenciesand many of which are beyond our control. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions made or factors considered in making a forwardlooking statement prove incorrect, actual results may vary materially fromthose anticipated, estimated or projected. We believe that any of the following risk factors could cause our actualresults to differ from those that may have been or may be projected inforward-looking statements made by us or on our behalf from time to time.  The forward-looking statements in this AnnualReport (Form 20-F) are contained principally under Items 4 and 5.

 

**RISK FACTORS**

 

Our futurefinancial condition, results of operations and business could be materiallyaffected by the risks and uncertainties discussed below, or otherwise, andhistoric trends should not be used to anticipate results or trends in futureperiods:

 

***Risks Related to ourIndustry***

 

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

 

Themanufacturing and marketing of our existing and potential products, as well aspreclinical studies and clinical trials, are subject to extensive regulationand approval by the Therapeutic Products Directorate (“TPD”) of the HealthProducts and Food Branch Inspectorate of Health Canada (“HPFBI”) and otherauthorities in Canada and by numerous federal, state and local governmentauthorities in the United States, including the Food and Drug Administration(“FDA”). Similar regulatory requirements exist in Europe and othercountries.  To the extent we choose todistribute our products in foreign markets, we may rely on licensees to obtainregulatory approvals in such countries. Any failure or delay by us, our collaborators or licensees to complywith applicable requirements or obtain regulatory approvals for our productscould adversely affect the marketing of products developed or licensed by usand our ability to receive product or royalty revenue.

 

As of December 31, 2005,DRAXIMAGE had five regulatory submissions filed with European regulatoryauthorities: four with the Medicines Evaluation Board in the Netherlands andone with the Danish Medicines Agency. The submission dates for these radiopharmaceutical products range fromJune 2003 to December 2004.  All of theapprovals sought by DRAXIMAGE in Europe are for marketing authorizationsthrough the mutual recognition procedure, which involves obtaining approval inone state (the “reference member state”) and recognition of that approval inother member states.  All of theapprovals being sought by DRAXIMAGE in Europe are for radiopharmaceuticalproducts already approved in Canada or the U.S. One of these five European submissions was for DRAXIMAGE’s kit for thePreparation of Technetium Tc-99m Albumin Aggregated Injection (MAA Kit) forwhich DRAXIMAGE received approval in one reference member state, theNetherlands, in February 2005.

 

The regulatoryprocess for innovative products generally involves preclinical studies andclinical trials of each compound to establish its safety and efficacy, takesmany years and requires the expenditure of substantial resources.  For generic products, the regulatory processdoes not typically involve clinical studies.  Moreover, if regulatory approval of a drug ordiagnostic product is granted, such approval may entail limitations on theindicated uses for which it may be marketed. Our failure to

 

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comply with applicableregulatory requirements can, among other things, result in the suspension ofour regulatory approvals, product recalls, seizure of products, operatingrestrictions and criminal prosecution. Further, government policy may change and additional governmentregulations may be established that could prevent or delay regulatory approvalsfor our products.  In addition, amarketed drug and its manufacturer are subject to continual review.  Later discovery of previously unknownproblems with the product or manufacturer may result in restrictions on suchproduct or manufacturer, including withdrawal of the product from the market.

 

DRAXIMAGEmanufactures approximately 65% of the active pharmaceutical ingredients thatare used in the radiopharmaceutical products it manufactures.  The final products in which the activepharmaceutical ingredients are used are subject to regulation for safety andefficacy by the FDA, TPD and regulatory authorities in other jurisdictions, asthe case may be.  Final products must beapproved by the FDA, TPD and the regulatory authorities in other jurisdictions,as the case may be, before they can be commercially marketed.  The process of obtaining regulatory clearancefor marketing is uncertain, costly and time-consuming.  We cannot predict how long the necessaryregulatory approvals will take or whether we or our customers for whom wemanufacture products will ever obtain such approval for products.  To the extent that we and/or our customers donot obtain the necessary regulatory approvals for marketing new products, ourproduct sales could be adversely affected.

 

All products manufactured by us (including those manufactured for ourcontract manufacturing customers) will have to comply with the current GoodManufacturing Practices (“cGMP”) imposed under the laws of the U.S., Canada andother jurisdictions, as well as the guidelines and policies of TPD, FDA and theregulatory authorities in other jurisdictions, as the case may be.  In addition, products containing radioactiveisotopes will have to comply with the guidelines and regulations of theCanadian Nuclear Safety Commission in Canada and the United States NuclearRegulatory Commission and other similar regulations in other countries.** **Compliancewith cGMP regulations requires us to expend time, money and effort on ourproduction facilities and to maintain precise and extensive records and qualitycontrol to ensure that our products meet applicable specifications and otherrequirements. The FDA, TPD and other regulators may periodically inspect ourdrug manufacturing facilities to ensure compliance with applicable cGMPrequirements.  In addition, our customersalso periodically inspect our manufacturing facilities to ascertain compliancewith cGMP requirements.  If we fail tocomply with the cGMP requirements, we may become subject to possible regulatoryaction, and manufacturing at the facility could consequently be suspended,causing possible loss of profit, regulatory fines and third-partyliability.  To date we have not beensubject to any notice of material non-compliance.

 

The FDA, TPD or other regulatory authorities may also require us tosubmit lots of a particular product for inspection. If the product lot fails tomeet applicable requirements, then the following actions might be taken: (i)restrict the release of the product; (ii) suspend manufacturing of the specificproduct lot; (iii) order a recall of the product lot; or (iv) order a seizureof the product lot.

 

WE MAY NOT BE ABLE TO OBTAIN AND ENFORCE EFFECTIVE PATENTS TO PROTECTOUR PROPRIETARY RIGHTS FROM USE BY COMPETITORS, AND THE PATENTS OF OTHERPARTIES COULD REQUIRE US TO STOP USING OR TO ACQUIRE A LICENSE FOR CONDUCTINGCERTAIN BUSINESS ACTIVITIES, AND OUR COMPETITIVE POSITION AND PROFITABILITYCOULD SUFFER AS A RESULT.

 

Our success will depend, in part, on our ability to obtain, enforce andmaintain patent protection for our radiopharmaceutical and *ANIPRYL*® technologies in Canada, theUnited States and other countries. Patents for our radiopharmaceutical technologies have expiry datesranging from October 2006 to July 2023. Patents issued to our subsidiary DAHI for our *ANIPRYL*® technology, have expiry dates ranging from August2010 to June 2016.  We cannot assure youthat patents will be issued from any

 

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pending applications or that claims now or in the future, if any,allowed under issued patents will be sufficiently broad to protect ourtechnology. In addition, we cannot assure you that any patents issued to orlicensed by us will not be challenged, invalidated, infringed or circumvented,or that the rights granted under these patents will provide a continuingcompetitive advantages to us.  The patentpositions of pharmaceutical and biotechnology firms, including ours, aregenerally uncertain and involve complex legal and factual questions.  In addition, we do not know whether any ofour current research endeavors will result in the issuance of patents inCanada, the United States or elsewhere, or if any patents already issued willprovide significant proprietary protection or will be circumvented orinvalidated.  Since patent applicationsin the United States and Canada are maintained in secrecy for at least 18months from the date of filing, and since publication of discoveries in thescientific or patent literature tends to lag behind actual discoveries byseveral months, we cannot be certain that we will be the first to createinventions claimed by pending patent applications or that we will be the firstto file patent applications for such inventions.  Our failure to obtain patents for ourproducts could negatively affect our competitive position.

 

Our commercialsuccess will also depend in part on our not infringing patents or proprietaryrights of others and not breaching the licenses granted to us.  In the event that we are found to haveinfringed other parties’ patents, licenses may not be available to us on termsthat are favorable or at all.  Inaddition, the degree of patent protection afforded to pharmaceutical orbiotechnological inventions around the world is uncertain and variessignificantly among different countries. There can be no assurance that we will be able to license third-partytechnology or patents that we may require to conduct our business or that suchtechnology or patents can be licensed at a reasonable cost. Failure by us orour collaborators or customers to license any technology or patents that we mayneed to commercialize our technologies or manufacture our products may resultin delays in marketing our products or may impede our inability to proceed withthe development, manufacture or sale of products requiring such licenses.

 

We may berequired to engage in litigation and other patent proceedings to enforcepatents issued to us, to defend our right, title and interest in patentsrelated to our products and to determine the scope and ‘validity of otherparties’ proprietary rights.  Theseproceedings can be costly, and if the outcome of any such proceedings isadverse to us, we could lose the right to sell some of our products or could berequired to pay damages.

 

We also relyon unpatented trade secrets, improvements and know-how with respect to ourcontract manufacturing operations and all of our operations associated with ourradiopharmaceutical kit business to develop and maintain our competitiveposition, which we seek to protect, in part, by confidentiality agreements withour customers, collaborators, employees and consultants.  These agreements could be breached, and wemay not have adequate remedies for any breach. Further, our trade secrets couldotherwise become known or be independently discovered by competitors.

 

ALTHOUGH WECARRY PRODUCT LIABILITY INSURANCE, A SUCCESSFUL LIABILITY CLAIM COULDNEGATIVELY IMPACT OUR BUSINESS.

 

We may be subject toliability claims by those who purchase our contract manufacturing services, forthe use of any of our products under clinical development and the sale and useof any of our approved products.  Such claimsmight be made directly by customers, consumers, healthcare providers orpharmaceutical companies or others selling such products.  Although we believe that our insurancecoverage is reasonably adequate to insulate us from potential product liabilityclaims and we have not historically experienced any problems associated withclaims by those who purchase our contract manufacturing services or users ofour products under development or that we manufacture, we cannot provide anyassurance that we will be able to maintain insurance coverage at a reasonablecost or in sufficient amounts to protect us against losses due to thispotential liability.  We might not beable to

 

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maintain or obtainadditional commercially reasonable product liability insurance for any productsapproved for marketing and sale.  Evenunsuccessful product liability claims could result in the expenditure of fundsin litigation and the diversion of management time and resources and coulddamage our reputation and impair the marketability of our products, which couldhave a material adverse effect on our financial condition and results ofoperation.

 

On July22, 2005, we announced that, together with other defendants, we had received aStatement of Claim filed before the Superior Court of Justice of Ontarioalleging that PermaxÒ, a drug that we distributed in Canada for a third party manufacturerprior to July 2003, causes “compulsive/obsessive behaviour, includingpathological gambling”.  The plaintiff isseeking to have this action certified as a class action.  We believe this claim against us is withoutmerit and we intend to vigorously defend this proceeding and any motion forcertification.  Prior to July 2003,PermaxÒ wasdistributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceuticalsales and marketing division.  In July2003, we sold the DRAXIS Pharmaceutica division to Shire BioChem Inc.(“Shire”).

 

IF THE MARKET DOES NOT ACCEPT OUR PRODUCTS CURRENTLY IN DEVELOPMENT,OUR BUSINESS COULD BE HARMED.

 

There can be no assurance that any of our products currently indevelopment or our recently approved products will achieve marketacceptance.  The degree of marketacceptance will depend upon a number of factors, including the receipt ofregulatory approvals (generic and innovative products), the establishment anddemonstration in the medical community of the clinical efficacy and safety ofour products (innovative products), the establishment and demonstration oftheir potential advantages to existing and new diagnostic and treatment methodsand the reimbursement policies of government and third-party payers and mostimportantly, the launching of competing products by our competitors that becomeestablished prior to the launch of our products in development. There can be noassurance that physicians, patients, payers or the medical community in generalwill accept and utilize any existing or future products.

 

Weanticipate that we will face increased competition in the future as newproducts enter the market and advanced technologies become available.  There can be no assurance that existingproducts or new products developed by our competitors will not be moreeffective, or be more effectively marketed and sold, than any of the productsthat may be developed, manufactured or sold by us.  Competitive products may render our productsobsolete and uncompetitive prior to recovering our research, development orcommercialization expenses incurred with respect to any such products.

 

For example, in a press release dated March27, 2006, we announced that although our product *FIBRIMAGE**Ò* had met primary end points in its PhaseIII clinical trial in Canada, further market analysis had shown that newtechnologies have successfully captured the current deep venous thrombosisindications and there is no longer an economically interesting marketopportunity at this time in either the at-risk asymptomatic patient, or thosewith symptoms.  We further indicated thatwe had decided that no significant further work will be conducted in the developmentof this product for its current indications but that other potentialopportunities for this product would be explored.

 

We currently have other products indevelopment that could be exposed to this risk.

 

With respect to ourradiopharmaceutical operations, we believe that theonly radiopharmaceutical imaging products on the market at this time which maycompete with DRAXIMAGE’s *INFECTON®*product under clinical development (Phase II in Canada, U.S. and U.K.) areNeutroSpec® and LeukoScan®.  In July2004, Mallinckrodt (a business unit of Tyco Healthcare) and PalatinTechnologies, Inc. (“Palatin”) announced that they had received FDA approval tomarket and

 

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manufacture NeutroSpec® (formerly known as LeuTech®),a Technetium-labeled monoclonal antibody that binds to white blood cells and isindicated for diagnosing difficult-to-diagnose appendicitis, which will competewith our *INFECTON®*product currently in Phase II development.  On December 19, 2005, Palatin announced that,as a result of the safety concerns raised in connection with the use ofNeutroSpec® identified during routine pharmacovigilance, Palatin andMallinckrodt decided to voluntarily suspend the sales, marketing anddistribution of NeutroSpec® and recall existing customer inventories of thisproduct.  In addition, Immunomedics, Inc.announced in January 2005 that it received Health Canada approval for themarketing and use of LeukoScan® for the detection of osteomyelitis.  LeukoScan® is a murine monoclonal IgGantibody fab’ fragment labeled with Tc-99m. We believe that *INFECTON®* willbe capable of distinguishing inflammation from infection and as such wouldoffer an advantage over agents that bind to white blood cells and which cannotdistinguish between infection and inflammation.

 

To our knowledge, there are two approved somatostatin-based imagingproducts in the marketplace which may compete with our *SOMATOSCAN**®* product currently in pre-clinical development:OctreoScan® from Tyco International Ltd. and NeoTect® from Berlex LaboratoriesInc.  Both of these molecules offersimilar information but OctreoScan® is based on Indium-111 and is moreexpensive than Tc-99m-based NeoTect® and must be delivered in radioactiveform.  We are aware that development workis also being done on other somatostatin-based cancer therapy products thatwould compete with Somatostatin Therapy. We believe that by enabling the same molecule to be used for bothdiagnosis and therapy, physicians may have a greater ability to delivertherapeutic quantities of radiation specifically to well-defined targets in thebody with our product.

 

With respect to our licensed technology, nosignificant competition for *ANIPRYL*® hasbeen experienced to date in Canada or the United States from products approvedfor veterinary or human use.  However,there are other treatments available that have not been approved in Canada orthe United States to treat canine Cushing’s disease, but which we believe maybe being used off-label for canine Cushing’s disease: *LYSODREN®* (mitotane) by Bristol-MyersSquibb Co., which was approved for use in the treatment of human inoperablecancer of the adrenal gland, and *NIZORAL**®* (ketoconazote)tablets by Johnson & Johnson Inc., an anti-fungal medication, which wasapproved for the treatment of various internal and external fungal and yeastinfections in humans.  We believethat human use selegiline used for the treatment of Parkinson’s disease,although not approved for veterinary use, may also compete with the use of *ANIPRYL*® in dogs.

 

WE DO NOT HAVE THE SAME AMOUNT OF RESOURCES ASSOME OF OUR COMPETITORS.

 

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

 

WE OPERATE INA VERY COMPETITIVE MARKET.

 

DRAXIS Pharma,our contracting manufacturing division, competes with pharmaceutical companiesthat have in-house manufacturing capabilities as well as with third-partycontract manufacturers, including Hospira Inc., Boehringer Ingelheim, CardinalHealth, Inc., DPT Laboratories, Haupt Pharma AG, Patheon Inc., Hollister-StierLaboratories LLC and DSM Pharmaceuticals, Inc.

 

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DRAXIMAGE, ourradiopharmaceuticals division, competes with the following companies that havesignificant radiopharmaceutical operations: Bristol-Myers Squibb Company,Cardinal Health, Inc., Amersham Health, part of GE Healthcare (“GE AmershamHealthcare”), Tyco International Ltd., Schering AG, and Bracco SpA.  In addition, there are a number of companiesthat are developing and/or marketing other radiopharmaceutical products, includingMDS Nordion Inc., Immunomedics, Inc., Biogen Idec Inc. and NeoRx Corporation.

 

FAILURE OF ONEOF OUR CURRENT OR FUTURE CLINICAL TRIALS COULD HAVE A MATERIALLY NEGATIVEIMPACT ON OUR FUTURE PROSPECTS.

 

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

 

Beforeobtaining regulatory approval for the commercial sale of any innovative productunder development, we must demonstrate through preclinical studies and clinicaltrials that the product is safe and efficacious.  As of March 31, 2006, our *INFECTON**Ò* product is in Phase II trials in Canada, theU.S. and the U.K.  The results ofpreclinical studies and early-stage clinical trials may not be totallypredictive of results obtained in larger late-stage clinical trials, and therecan be no assurance that our clinical trials will demonstrate safety andefficacy, achieve regulatory approvals or result in marketable products.  A number of companies in the biotechnologyand pharmaceutical industry have suffered significant setbacks in advancedclinical trials, even after achieving promising results in earlier clinicaltrials.

 

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

 

The business and financialcondition of pharmaceutical companies will continue to be affected by theefforts of governments and third-party payers to contain or reduce the costs ofhealthcare through various means.  Forexample, in certain markets, pricing or profitability of pharmaceuticalproducts, medical devices and diagnostic products is subject to governmentcontrol.  In Canada, the PatentedMedicine Prices Review Board (“PMPRB”) monitors and controls prices of patenteddrug products marketed in Canada.  ThePMPRB may assert jurisdiction over our products under development which maylimit the prices that can be charged for such products in Canada.  We may not be able to obtain prices for ourproducts under development that will make them commercially viable exclusivelyin Canada.  In the United States therehave been, and we expect that there will continue to be, a number of federaland state proposals to implement similar pricing controls by government.  In addition, the emphasis on managedhealthcare in the United States has increased and will continue to increase the

 

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pressure on pharmaceuticalpricing.  While we cannot predict whethersuch legislative or regulatory proposals will be adopted or the effects suchproposals or managed healthcare efforts may have on our business, theannouncement of such proposals or efforts could have a material adverse effecton the market price of our securities and, if adopted, on our business andfinancial condition and that of our current and prospective customers.  Accordingly, our ability to establishstrategic alliances may be adversely affected. In addition, in Canada, the United States and elsewhere, sales ofprescription pharmaceutical products and radiopharmaceutical products aredependent, in part, on the availability of reimbursement to the consumer fromthird-party payers, such as government and private insurance plans.  Third-party payers are increasinglychallenging the prices charged for medical products and services.  To the extent we succeed in bringing newproducts to market, there can be no assurance that these products will beconsidered cost-effective and that reimbursement to consumers will be availableor will be sufficient to allow the sale of these products on a competitivebasis.

 

***Risks Related to ourCompany***

 

WE ONLYHAVE ONE MANUFACTURING FACILITY AND FACTORS BEYOND OUR CONTROL COULD CAUSE ANINTERRUPTION IN OUR MANUFACTURING OPERATIONS, WHICH WOULD ADVERSELY AFFECT OURREPUTATION IN THE MARKETPLACE AND OUR RESULTS OF OPERATIONS.

 

All of our manufacturing facilities are located in the same location inKirkland, Québec.  To succeed, we must beable to operate our manufacturing facilities without significant interruptionand deliver radiopharmaceutical and contract manufacturing products in a timelymanner. We could suffer an interruption in our manufacturing operations causedby damage from a variety of sources, many of which are not within our control,including fire, flood, earthquake and other natural disasters; power loss andtelecommunication failure; disruption to transportation systems; equipment ormachinery failure; software and hardware errors, failures or crashes andsimilar disruptions; or undue delays or restrictions with air transport systemsand cross-border shipments. Any significant interruptions in our manufacturingoperations or our ability to deliver time-sensitive products would damage ourreputation in the marketplace and have a negative impact on our results ofoperations.  For example, during thethird quarter of 2005, DRAXIS Pharma, our contract manufacturing operatingdivision, extended its regularly scheduled summer shutdown period at thebeginning of the third quarter in the sterile area of our manufacturingfacility, in order to correct an electrical panel failure and make associatedrepairs.  The revalidation of the entiresterile area following these repairs and the related recalibration ofproduction schedules due to this interruption had material financialimplications which negatively affected our third and fourth quarterresults.  As a further example, if therewas a cessation of flights leaving Canada for the U.S., then the radiopharmaceuticalproducts manufactured by DRAXIMAGE, which are delivered in part via airplanes,could not be delivered to customers on a timely basis and our products would beharmed due to their short shelf-life.  Also,if there was a prolonged loss of hydroelectric power at our manufacturingfacility, then the manufacturing of our products may be impaired because we maynot have sufficient back-up electrical power from independent generators forthe duration of the hydroelectric interruption. Although we believe that we carry adequate property and businessinterruption insurance, we cannot provide any assurance that we will be able tomaintain such insurance coverage at a reasonable cost or in sufficient amountsto protect us against all potential eventualities.

 

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

 

To besuccessful, we must continually establish and maintain strategic relationshipswith leaders in a number of biotechnology and pharmaceutical industrysegments.  This is critical to oursuccess because such relationships enable us to extend the reach of ourproducts and sales in various

 

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jurisdictions,generate additional revenue and develop and deploy new products in variousmarketplaces.  Entering into strategicrelationships is complicated, as some of our current and future strategicpartners may decide to compete with us in some or all of the markets in whichwe operate or refuse to fulfill or honor their contractual obligations tous.  In addition, our relationships withcustomers always require us to manufacture products in accordance with theirspecifications that are issued to us from time to time.  If we are unable to meet our customers’specifications, our strategic relationships would be harmed.  We currently have strategic relationshipswith (i) Pfizer Consumer Healthcare, a division of Pfizer Canada, Inc. (“PfizerCanada”), that covers several non-prescription products for the Canadianmarket, including Polysporin®, Sudafed®, Actifed® and Zincofax®, (ii) GenzymeCorporation (“Genzyme”) to manufacture Hectorol® Injection, (iii)GlaxoSmithKline Inc. (“GSK”) to supply it with established sterile productsmarketed by GSK in multiple international markets and a prescription sterileinjectable product for the U.S. market and (iv) Cardinal Health 414, Inc. inrespect of our Iodine I-131 kits, MAA, DTPA and MDP products sold in the U.S.

 

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

 

For the yearended December 31, 2005, our three largest customers, Genzyme, GSK and PfizerCanada, represented 58% of our consolidated revenues (23%, 22% and 13%respectively). The termination by any of these customers of its relationshipwith us would have a material adverse effect on our business, financialcondition and results of operations unless we could replace those customers ina timely fashion.

 

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

 

Our practiceis to require our employees, collaborators, consultants and outside scientificadvisors to execute confidentiality agreements upon the commencement ofemployment or consulting relationships. These agreements provide that all confidential information developed ormade known to the individual during the course of the individual’s relationshipwith us is to be kept confidential and not disclosed to third parties, subjectto certain specific limited exceptions. In the case of employees, the agreements provide that all inventionsconceived by the individual shall be our exclusive property.  These agreements, however, may not providemeaningful protection for our trade secrets or adequate remedies in the eventof unauthorized use or disclosure of such information.  For example, trade secrets regarding therecipe to manufacture one of our radiopharmaceutical kit or capsule productscould be disclosed, allowing our competitors to copy the recipe and manufacturea competing product.

 

WE ARE SUBJECTTO REGULATION BY GOVERNMENTS IN MANY JURISDICTIONS AND, IF WE DO NOT COMPLYWITH MANUFACTURING, NUCLEAR SAFETY AND ENVIRONMENTAL REGULATIONS, OUR EXISTINGAND FUTURE OPERATIONS MAY BE CURTAILED, AND WE COULD BE SUBJECT TO LIABILITY.

 

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

 

We have inplace facilities and procedures designed to reduce and, to the extent possible,

 

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eliminate the risk ofenvironmental contamination resulting from the processing of raw materials and,more specifically, from the radiopharmaceutical business of DRAXIMAGE and thecontract manufacturing business of DRAXIS Pharma.  We also have in place regular maintenanceprograms to ensure continued compliance with all applicable health and safety,environmental and nuclear safety regulations. We believe that the operations at our manufacturing facilities comply inall material respects with applicable health and safety, environmental andnuclear safety laws.  As of December 31,2005, we have not received any notice stating that we are not in compliancewith any such legislation applicable to us.

 

Canadianand U.S. federal, state, local and provincial regulations govern extensivelythe use, manufacture, storage, handling, transport and disposal of hazardousmaterial and associated waste products. Although we believe that the operations at our facilities comply in allmaterial respects with applicable laws, we cannot completely eliminate the riskof substantial environmental liabilities especially in respect of environmentalcontamination resulting from the processing of raw materials from theradiopharmaceutical business of DRAXIMAGE and the manufacturing business ofDRAXIS Pharma.  Any failure by us or anyof our subsidiaries to comply with such present or future laws could result inany of the following: (i) cessation of portions or all of our or oursubsidiaries’ operations; (ii) imposition of fines; (iii) restrictions on ouror our subsidiaries’ ability to carry on or expand our operations; (iv)significant expenditures by us in order to comply with laws and regulations; or(v) liabilities in excess of our resources.

 

OUR BUSINESS COULD BE HARMED IF THERE WERE A DISPUTE OR DISRUPTION WITHOUR UNIONIZED EMPLOYEES.

 

Theproducts manufactured by DRAXIS Pharma represent a significant amount of ourconsolidated revenues.  68.9% of ourconsolidated revenues for the year ended December 31, 2005 were derived fromDRAXIS Pharma.  Although a collectiveagreement with a five-year term to April 30, 2008 was ratified, by DRAXISPharma, in February 2004 with the United Food & Commercial WorkersInternational Union, Local 291 (AFL-CIO), there can be no assurance that futurelabor difficulties will not arise, and if they did arise then the productionand delivery of those products manufactured by DRAXIS Pharma would be impairedfor the duration of those labor difficulties.

 

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO GROW, AND IF WE ARE UNABLETO MANAGE OUR GROWTH EFFECTIVELY, WE MAY INCUR UNEXPECTED EXPENSES AND BEUNABLE TO MEET OUR CUSTOMERS’ REQUIREMENTS.

 

We willneed to maintain, expand and upgrade our manufacturing facilities andoperations to execute current commercial obligations to customers, widen ourcustomer base and increase manufacturing efficiencies over the next fewyears.  We cannot be certain that DRAXISPharma will be able to enter into enough lucrative third-party manufacturingcontracts to increase its profitability. If we do secure advantageous agreements, we cannot be certain that ouremployees, systems, procedures, controls, productive capacity and existingspace will be adequate to support expansion of the operations.  Our future operating results will depend onthe ability of our officers and key employees to manage changing businessconditions and to implement and improve our technical, administrative,financial control and reporting systems and operational excellence in order toachieve established business objectives. An unexpectedly large increase in the volume of manufacturing businessor the number of orders placed by customers may require us to expand capacityand further upgrade our manufacturing facilities and the technology related toour manufacturing.  We may not be able toproject the rate of timing of such increases or customer demands accurately orto expand and upgrade our manufacturing facilities and supporting systems andinfrastructure to accommodate such increases. Difficulties in managing future growth and meeting customers’ expandedrequirements could have a significant negative

 

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impact onour business and its profitability.

 

OUR FINANCIALRESULTS MAY FLUCTUATE, AND OUR FUTURE REVENUE AND PROFITABILITY ARE UNCERTAIN.

 

Our ability toachieve and maintain profitability in the foreseeable future depends on thecommercial success of our products and services.  Because we will be launching or are in theprocess of launching new products in new markets such as our Sodium IodideI-131 Capsules USP, Diagnostic-Oral in the U.S., revenues are difficult topredict and may fluctuate substantially from period to period.  In addition, product development programswill require substantial additional investment, including the cost of clinicaltrials for innovative products, obtaining additional regulatory approvals, ifnecessary, and marketing and sales expenses associated with potential newproduct introductions.  Our manufacturingfacilities will continue to require capital investment in order to maintain,upgrade and expand their operations.  Thesuccess of DRAXIMAGE and DRAXIS Pharma will rely significantly on the abilityof both divisions to maintain and to increase substantially their manufacturingcapabilities to satisfy customer demand. There can be no assurance that, or when, we will successfully develop,receive regulatory approvals for, or manufacture or market any new products forour own marketing purposes or for third parties.  DRAXIS Pharma may fail to secure sufficientlylucrative third-party manufacturing contracts to increase itsprofitability.  In addition, DRAXISPharma may lose anticipated volumes of new products if the customers for whomit manufactures said products do not receive required approvals for thecommercial sale of same.  DRAXIS Pharmamay also lose anticipated volumes of existing products if its customers losemarket share for products due to decreased demand for said products.  DRAXIMAGE may fail to increase its marketpenetration of its radioactive products, particularly in the U.S.  DRAXIMAGE may also fail to increase itsinternational sales of its key Tc-99m kits and Iodine I-131 products,particularly in Europe.  The research,development, production and marketing of new products will require theapplication of considerable technical and financial resources by us and ourcustomers, while revenues that are generated by such products, if successfullydeveloped and marketed, may not be realized for several years.  We may not be able to sustainprofitability.  We may require externalfinancing to complete certain aspects of our three-year strategic plan, andexternal sources of capital may not be available to us at an acceptable cost.

 

IF WE CANNOTADAPT TO CHANGING TECHNOLOGIES, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETEAND OUR BUSINESS COULD SUFFER.

 

Because thebiotechnology, pharmaceutical and radiopharmaceutical industry is characterizedby technology change and obsolescence, we may be unable to anticipate changesin our current and potential customer requirements that could make our existingtechnology obsolete.  Our success willdepend, in part, on our ability to continue to enhance our existing productsand services, develop new technology that addresses the increasingsophistication and varied needs of our respective customers, license leadingtechnologies and respond to technological advances and emerging industrystandards and practices on a timely and cost-effective basis.  The development of our proprietary technologyand investing in certain niche markets entails significant technical andbusiness risks.  We may not be successfulin using our new technologies or exploiting our niche markets effectively oradapting our businesses to evolving customer requirements or emerging industrystandards.

 

WE ARE EXPOSEDTO EXCHANGE RATE FLUCTUATIONS WHICH COULD NEGATIVELY AFFECT OUR BUSINESS.

 

A substantialportion of our consolidated revenues are now, and are expected to continue tobe, realized in U.S. dollars.  Ouroperating expenses are primarily paid in Canadian dollars.  We may be adversely affected by a significantand rapid strengthening of the Canadian dollar against the U.S.

 

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dollar, should the Canadiandollar rise in value compared to the U.S. dollar by more than 10 cents.  We do not currently use derivativeinstruments to hedge our foreign exchange risk and currently have no plans todo so in the near future.  For fiscalyear 2005, U.S. dollar revenue accounted for approximately 50% of the Company’sconsolidated revenue.  During this sameperiod, the value of the U.S. dollar versus the Canadian dollar decreased by3.5% from January 1, 2005 to December 31, 2005. As a result, in 2005 we had to charge to income approximately $398,000due to foreign exchange translation losses related to the strengthening of theCanadian dollar.

 

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

 

Our successdepends on the retention of principal members of our management staff,including Dr. Martin Barkin, Mr. Dan Brazier, Mr. Jean-Pierre Robert and Mr.John Durham and on our ability to continue to attract, motivate and retainadditional key personnel.  We haveemployment agreements with all our key management, with no fixed terms ofduration.  We have key man insurance onthe lives of Dr. Martin Barkin, Mr. Jean-Pierre Robert and Mr. JohnDurham.  The market for retaining andobtaining such key personnel is intensely competitive, and the loss of theservices of key personnel or the failure to recruit necessary replacement andadditional personnel in a timely manner could materially and adversely affectoperations.

 

ALTHOUGH WE CONSIDER THECOMPANY TO HAVE GOOD DEFENSES TO SUCH ACTIONS, SHOULD THE CURRENT LAWSUITSAGAINST US SUCCEED, WE COULD INCUR A SUBSTANTIAL LOSS.

 

In 1998, aCanadian legal proceeding was launched against us and our subsidiary DAHI by aformer consultant, Jozsef Knoll, claiming royalty entitlements based on the netprofit from sales of *ANIPRYL*®.  Total damages claimed are $100 million,including a claim to certain shares of DAHI. However, the plaintiff has takenno steps in the last six years to move the claim forward.  While we believe that we have good defensesto the Knoll proceeding, this dispute may not be resolved in our favor, if itis pursued.  It is possible that a courtor arbitration tribunal may find us to be in breach of certain agreements, orinfringing validly issued patents of third parties or practicing theintellectual property of others.  In thatevent, in addition to the cost of defending the underlying proceeding, we mayhave to pay license fees, additional royalties and/or damages and may beordered to assign certain *ANIPRYL®-*relatedpatents and be prohibited from conducting certain activities.  Under such circumstances, we could incursubstantial loss and our business could be negatively affected.

 

On July 22,2005, we announced that, together with other defendants, we had received aStatement of Claim filed before the Superior Court of Justice of Ontarioalleging that PermaxÒ,a drug that we distributed in Canada for a third party manufacturer prior toJuly 2003, causes “compulsive/obsessive behaviour, including pathologicalgambling”.  The plaintiff is seeking tohave this action certified as a class action. We believe this claim against us is without merit and we intend tovigorously defend this proceeding and any motion for certification.  Prior to July 2003, PermaxÒwas distributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceuticalsales and marketing division.  In July2003, we sold the DRAXIS Pharmaceutica division to Shire.

 

***Risks Related to ourCommon Shares***

 

OUR COMMONSHARE PRICE HAS BEEN, AND IS LIKELY TO CONTINUE TO BE, VOLATILE.

 

The marketprices for the securities of pharmaceutical and biotechnology companies,

 

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including ours, havehistorically been volatile, and the market has, from time to time, experiencedsignificant price and volume fluctuations that are unrelated to the operatingperformance of particular companies.  Forthe last two years, the price of our stock has ranged from a low of $3.18, to ahigh of $5.94 on NASDAQ (CDN$4.12 to CDN$7.90 on the Toronto StockExchange).  We believe that in 2005 thevolatility in the share price and volumes of shares traded was impacted byfinancial results that differed from market expectations, particularly in thesecond half of the year as a result of the extended shutdown of production atDRAXIS Pharma for sterile products.  Webelieve that in 2004 the appreciation in the share price and volumes of sharestraded increased due to improvements in financial performance and increasedvisibility resulting from an equity offering of shares during the first half of2004.

 

Factors suchas fluctuations in our operating results, announcements of competingtechnological innovations or new products by our competitors, clinical trialresults, governmental regulation and enforcement actions, developments inpatent or other proprietary rights, public concern as to the safety of drugsdeveloped by us or others and general market conditions can have an adverseeffect on the market price of our shares. In particular, the realization of any of the risks described hereincould have a material adverse impact on such market price.  Unusual sales of substantial amounts of ourshares in the public market over a relatively short time period, or theperception that such sales will occur, could also adversely affect the marketprice of our shares and make it more difficult in the future for us to raisefunds through equity offerings.

 

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**Item 4.  Information on the Company**

 

DRAXISis a specialty pharmaceutical company providing products in three categories:sterile products, non-sterile products and radiopharmaceuticals.  Sterile products include liquid andfreeze-dried (lyophilized) injectables and sterile ointments.  Non-sterile products are produced as solidoral, liquid and semi-solid dosage forms. Radiopharmaceuticals are used for both therapeutic and diagnosticmolecular imaging applications.  In theradiopharmaceutical category, DRAXIS has its own products and a targetedresearch and development program for new products.  As of January 1, 2005, all of the operationsof the Company are carried out through our wholly owned subsidiary DRAXIS SpecialtyPharmaceuticals Inc., which operates two major divisions, DRAXIS Pharma(contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).  For the year ended December 31, 2005, 68.9%of our consolidated revenues were derived from DRAXIS Pharma (contractmanufacturing) and 24.3% of our consolidated revenues were derived fromDRAXIMAGE (radiopharmaceuticals).

 

Inaddition, DRAXIS has continuing financial interests associated with itscollaboration agreements with Pfizer Inc. with respect to *ANIPRYL**®*,and with Shire with respect to Canadian salesof products divested in 2003.

 

Ourconsolidated operations are integrated across research, product development,manufacturing, sales and marketing, as well as the in-licensing and commercialdevelopment of radiopharmaceutical products and technologies.

 

DRAXIShas emerged from a transitional phase of its development.  In past years, we were reliant on incomeearned from *ANIPRYL**®*.  Forthe year ended December 31, 2005, our collaboration agreement with Pfizer Inc.with respect to *ANIPRYL**®*represented 6.3% of our consolidated revenues which represented the majority ofour income from royalties and licensing. In the near term, we expect to continue to lessen this reliance as wecontinue to develop a diversified profit base from our other businessunits.  In particular, we expectradiopharmaceuticals and contract manufacturing to remain major sources oflonger-term revenue and earnings.

 

Thecommon shares of DRAXIS are listed on the Toronto Stock Exchange (ticker symbolDAX) and on NASDAQ (ticker symbol DRAX). The shares of DRAXIS are included in the NASDAQ Biotechnology IndexÒ (NASDAQ: NBI) since May 23, 2005 and the NASDAQ Healthcare IndexÒ (symbol: IXHC) since July 27, 2005.

 

Ourregistered and head office is located at 6870 Goreway Drive, 2ndFloor, Mississauga, Ontario, Canada L4V 1P1. Telephone: (905) 677-5500. Fax: (905) 677-5494.

 

TheCompany’s only manufacturing, research and development facilities are locatedat 16751 Trans-Canada Road, Kirkland, Québec, Canada H9H 4J4.

 

TheCompany’s website is:  www.draxis.com.

 

**Historyand Development of the Company**

 

TheCompany was incorporated under the name Deprenyl Research Limited on October13, 1987 under the *Canada BusinessCorporations Act*.  The Companywas founded principally to engage in the marketing in Canada of prescriptionpharmaceuticals discovered, developed or acquired by Chinoin Pharmaceutical andChemical Works Co. Ltd., the first of which was *ELDEPRYL**®* (selegiline; 

 

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1-deprenyl), for the treatment of Parkinson’s disease.  We changed our name to DRAXIS Health Inc. inMay 1994.

 

Wecompleted an initial public offering of our common shares in February 1988 onthe Toronto Stock Exchange.  Our commonshares were listed on NASDAQ in August 1989.

 

Beginningin 1990, we expanded on our knowledge and experience with selegiline byinitiating directly on our own behalf, as well as through contract researcharrangements, studies designed to investigate the potential of selegiline forcompanion animal use.  This initiativeultimately resulted in the formation of our subsidiary DAHI, through which wedeveloped and commercialized a companion animal health product, *ANIPRYL**®*.

 

In1991, we began to invest in the applications of aminolevulinic acidphotodynamic therapy, which resulted in the formation of a subsidiary, DUSAPharmaceuticals, Inc. (“DUSA”).  Througha series of transactions from 1991 to 1996, we divested all of our interest inDUSA.

 

Bylate 1992, we faced considerable uncertainty due to the impending threat ofgeneric competition for *ELDEPRYL**®* which, at that time, still accounted for almost 100% of ourconsolidated revenues.  Faced with thisas well as other business challenges, in 1992 we began the process ofrecruiting new senior management to develop and implement a new strategicbusiness plan for the Company to (i) address the generic threat to our leaddrug by expanding and diversifying our established Canadian pharmaceuticalsfranchise; (ii) strengthen our financial position; and (iii) diversify from ourhistorical Canadian base through the acquisition of niche pharmaceuticalproducts and/or manufacturing-oriented businesses with international growthpotential.

 

Since1993, we implemented the following corporate development initiatives:

 

#### ***Canadian Pharmaceuticals***

 

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

 

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

 

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

 

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

 

•              March 1996 – disposition of our remaininginterest in DUSA for net proceeds of $6.8 million.

 

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

 

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

 

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

 

•              April 2004 – purchase from SGF Santé Inc.(“SGF”) of its remaining 32.7% interest in our contract manufacturingoperations, DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division ofDRAXIS Specialty Pharmaceuticals Inc.).

 

•              April 2004 – closing of an equity financingoffering of 3,053,436 units, consisting of one common share of the Company andone half share purchase warrant per unit, for gross proceeds of $13.4 million.

 

•              December 2004 – repayment of all third-partydebt.

 

•              December 2005 – we initiated a Normal CourseIssuer Bid to buy back on the Toronto Stock Exchange for cancellation up to3,522,530 of our common shares, representing up to 10% of the public float onDecember 6, 2005.  As at March 20, 2006,199,200 shares have been repurchased and cancelled at an average market priceplus commission of $4.49 (CDN$5.18).

 

#### ***Diversification***

 

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

 

•              July 1997 – $8.6 million acquisition of Merck’sradiopharmaceutical business which became DRAXIMAGE Inc. (now known asDRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc.).

 

•              December 1997 – licensing of *ANIPRYL**®* to Pfizer in return for milestone payments,royalties, a manufacturing supply agreement and a research collaboration.  Cumulatively, to December 31, 2005, $44.5million has been received in milestone payments, royalties and royalty-relatedpayments from Pfizer.

 

•              May 1998 – $11.1 million acquisition of ourcontract manufacturing facility in Kirkland, Québec.

 

Beginningin 1998, we embarked on a capital expansion plan for construction of our newlyophilization line, the construction of our radiopharmaceutical manufacturingfacilities and the subsequent expansion of our radiopharmaceutical operations.

 

Inlate 1999 and early 2000, we undertook a strategic review of our operationsfrom the perspective of enhancing shareholder value.  As a result of this review, we resolved tofocus our financial and management resources on our radiopharmaceutical andcontract manufacturing businesses.

 

During2000, we divested our dermatology product lines for aggregate proceeds of $9.0million.  The largest transaction in thisregard was the sale of the SpectroPharm*®* line of products to Block Drug Company(Canada) Limited (now part of GlaxoSmithKline Consumer Healthcare).

 

InFebruary 2000, we established a strategic alliance with SGF with thesale of a 34.1% equity interest in DRAXIS Pharma Inc. (now known as DRAXISPharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) to SGF and certainmembers of DRAXIS Pharma’s management team.

 

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During2001, we received U.S. and Canadian regulatory approvals for our expandedradiopharmaceutical manufacturing facility and FDA acceptance to manufacturesterile lyophilized and sterile injectable products.

 

InMarch 2001, we in-licensed *INFECTON**®*, a Technetium 99m-based radiopharmaceutical for the imaging ofinfection.

 

Alsoduring 2001, DRAXIMAGE launched *BrachySeed*® I-125 in theU.S. and Canada and received regulatory approvals in the U.S. and Canada for *BrachySeed*® Pd-103.

 

In 2001, we further implemented our strategic plan by (i) initiating theproduction of Bracco Diagnostic Inc.’s sodium iodide I-131 radiotherapycapsules; (ii) signing a long-term supply agreement to manufacture several GSKproducts (predominantly sterile) for multiple international markets; and (iii)amending the *ANIPRYL**®* licensing agreement with Pfizer resulting in a $3.1 million cashpayment to the Company plus the return of product rights outside of NorthAmerica to us.

 

During 2002,we achieved improved financial results from continuing operations.  We also received several regulatoryapprovals, including (i) U.S. and Canadian approval to transfer production ofDRAXIMAGE’s line of lyophilized medical imaging products to our own manufacturing facility, (ii)U.S. approval to commence production at DRAXIS Pharma of a prescription sterileinjectable product for GSK for the U.S. market and (iii) U.S. approval tomanufacture solid dosage form products at DRAXIS Pharma.

 

During 2003,we achieved a number of significant accomplishments, including:

 

•      U.K.regulatory approval to manufacture multiple sterile and non-sterilepharmaceutical products at DRAXIS Pharma.

 

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

 

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

 

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

 

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

 

•      InJune 2003, appointment of John Durham as President of DRAXIS Pharma, promotionof Mark Oleksiw to Chief Financial Officer and additional realignment of ourexecutive management team.

 

•      InJuly 2003, completion of the divestiture of DRAXIS Pharmaceutica, our Canadianpharmaceutical sales and marketing division to Shire, for $9.6 million in cashplus up to $2.9 million in market-driven contingent milestones.

 

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

 

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

 

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•      InDecember 2003, DRAXIMAGE became certified under ISO 9001:1994, including ISO13485:1996, an international standard for medical device manufacturers.  Said ISO certifications were only requiredfor the marketing and sale of BrachySeedÒ.  DRAXIMAGE’s ISO certifications will expire onJuly 14, 2006 and will not be renewed as DRAXIMAGE announced in November 2005that it would discontinue the manufacture and sale of implantable brachytherapyseeds as of December 15, 2005.

 

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

 

On April 22, 2004, we issued3,053,436 units of the Company at a purchase price of $4.82 (CDN$6.55) perunit, for aggregate proceeds net of related expenses of $13.4 million (CDN$18.2million).  Each unit consists of onecommon share of DRAXIS and one-half of one share purchase warrant.  Each whole warrant entitles the holder toacquire one common share of DRAXIS at a price of CDN$8.50 at any time prior toApril 24, 2006.

 

*OnApril 22, 2004, DRAXIS acquired SGF’s 32.7% interest in DRAXIS Pharma for cashconsideration of $9.6 million (CDN$13 million). DRAXIS used part of the proceeds from the offering completed in April2004 to pay for the acquisition and to repay $3.1 million (CDN$4.2 million) indebt owed by DRAXIS Pharma to SGF and $1.7 million (CDN$2.3 million) in debtowed by DRAXIS Pharma to Investissement Québec.*

 

In June 2004, we negotiated new credit facilities with our bankers, theNational Bank of Canada, providing an operating facility of CDN$15 million (orU.S. equivalent), payable within 364 days of drawing upon the facility and aterm facility of CDN$10 million (or U.S. equivalent), repayable in full inthree years.  As at December 31, 2005, noamount was drawn on either facility.

 

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

 

InDecember 2004, we repaid all of our third-party debt.

 

During2005, we achieved a number of significant accomplishments, including:

 

As of January1, 2005, we amalgamated our two wholly-owned subsidiaries, DRAXIS Pharma Inc.and DRAXIMAGE Inc., to achieve certain business and tax efficiencies.  The amalgamated subsidiary, called DRAXISSpecialty Pharmaceuticals Inc., will continue to conduct business as twodivisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals),and serve as our operating arm.

 

In February2005, we announced that DRAXIMAGE had received approval from the Dutchregulatory authority for its kit for the preparation of Technetium Tc-99mAlbumin Aggregated Injection (“MAA Kit”). This approval allowed DRAXIMAGE to initiate the Mutual RecognitionProcedure (“MRP”) in pursuit of further regulatory approvals for the diagnosticimaging product in additional European Union countries.

 

In April 2005,we announced the appointment of Mr. Jean-Pierre Robert as the new President of theDRAXIMAGE division effective as of May 9, 2005.

 

In October2005, we announced the appointment of Mr. Dan Brazier to the newly createdposition of Chief Operating Officer.

 

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In November2005, DRAXIMAGE announced that it would discontinue the manufacture and sale ofimplantable brachytherapy seeds as of December 15, 2005.

 

**Recent Developments**

 

In January2006, we announced we had received approval from the FDA for our supplementaldrug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral.

 

In a pressrelease dated March 27, 2006, we provided an update on DRAXIMAGE’s research andproduct development strategy.  Weindicated that in the near term of one to three years DRAXIMAGE would focus oncurrently marketed significant radiopharmaceutical and imaging products whosepatents have expired or are close to expiring, and sestamibi injection (forcardiac imaging) in particular.  We alsoannounced that a major opportunity under development by DRAXIMAGE was theproduction and distribution of a “next generation” version of a TechnetiumGenerator, which is the source of Tc-99m in virtually every radiopharmacy.  We indicated that for the medium term, in athree to five year horizon, the highest priority opportunity being pursued byDRAXIMAGE is the continued development of *INFECTON*Ò.  We also announced that although our product *FIBRIMAGE*Òhad met primary end points in its Phase III clinical trial in Canada, furthermarket analysis had shown that new technologies have successfully captured thecurrent deep venous thrombosis indications and there is no longer aneconomically interesting market opportunity at this time in either the at-riskasymptomatic patient, or those with symptoms. We further indicated that we had decided that no significant furtherwork will be conducted in the development of this product for its currentindications but other potential opportunities for this product would beexplored.

 

For information concerning the Company’s capital expenditures andmethods of financing, please see Item 5: Operating and Financial Review andProspects.

 

**BusinessStrategy**

 

We believe that bothDRAXIMAGE and DRAXIS Pharma have significant long-term growth potential andhave invested considerable financial and management resources in developingthese businesses, including:

 

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

 

•      $12.0****million of investments in a three-year capital plan atDRAXIS Pharma announced in April 2002, including a state-of-the-art rawmaterial dispensing facility, additional autoclave capacity, and expansion ofour existing lyophilization capacity which was completed in 2004 and whichbecame operational in 2005;

 

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

 

•      thecontinued development of the DRAXIMAGE product pipeline, specifically *INFECTON®*.  We havespent $1.7 million in developing *INFECTON*Ò during the period between1998 and 2005 inclusively.

 

These initiatives are consistent with our generalbusiness strategy to:

 

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•      Focuson specialty pharmaceutical markets in which we can develop and sustain acompetitive advantage.

 

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

 

•      Developnew pharmaceutical products and services consistent with our strengths andcapabilities.

 

•              DRAXIShas established a growing franchise in the highly differentiatedradiopharmaceutical segment with a portfolio of over 34 currently marketedproducts plus innovative proprietary products in various stages ofdevelopment.  In addition to ourradiopharmaceutical platform, our expanding lyophilization capability positionsus to offer new services to customers and to take advantage of growthopportunities in contract manufacturing.

 

•      Pursuegrowth opportunities with international market potential.

 

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

 

•      Leveragealliances with customers.

 

•              Weare pursuing multiple opportunities with new and existing customers.  Meeting the strict quality and service standardsof such customers positions us to expand on these relationships in both ourradiopharmaceuticals and pharmaceutical contract manufacturing businesses.

 

Our primaryoperational focus for 2006 continues to be: (i) improving near-term financialand operational performance of our radiopharmaceutical and manufacturingbusinesses through increasing sales of existing products and services,improving manufacturing efficiency and effectiveness, and obtaining additionalregulatory approvals; and (ii) securing and advancing our base for long-termgrowth through the development of our existing product pipeline as well asidentifying new business opportunities that are consistent with ourcapabilities and that contribute to the long-term value of the Company.

 

Consistentwith this strategic focus, we divested our dermatology product lines in 2001and in 2003 completed the sale of our prescription pharmaceutical sales andmarketing business, DRAXIS Pharmaceutica. We also realigned our senior management responsibilities in 2003 tofocus on our core businesses and in 2005 created the position of ChiefOperating Officer to provide executive oversight to our core operatingbusinesses.

 

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The following is a description of the principalmarkets in which we operate and a breakdown of total revenues by segment andgeographic market for the three most recent financial years(1):

 
| **Geographic Segmentation** | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|------------|------------|----------|------------|----------|------------|
| ***REVENUES******(2)***     |       |       |       |     |       |     |       |
| Canada                      | ** ** | **$**      | **39,026** |     | $          | 33,609   |       | $ | 22,755 |   |
| United  States              | ** ** | **39,612** |       | 35,310   |       | 26,031   |       |
| Other                       | ** ** | **795**    |       | 401      |       | 407      |       |
| ** **                  |       | **$**      | **79,433** |     | $          | 69,320   |       | $ | 49,193 |   |

 

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*(1)**         **See Note 20 inour 2005 Consolidated Financial Statements and Notes beginning on page F-1*

*(2)**         **Revenues areattributable to countries based upon the location of the customer.*

 
| **Product Sales Revenues**   | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
|------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| **By Major Product Groups**  | ** **   | **2005**     | ** **   | **2004**     | ** **   | **2003**     | ** **   |
| Radiopharmaceuticals         | ** **   | **$**        | **19,290**   |         | $            | 17,172       |         | $ | 14,564 |   |
| Manufacturing  - Sterile     | ** **   | **41,488**   |         | 31,270       |         | 15,959       |         |
| Manufacturing  - Non-Sterile | ** **   | **13,255**   |         | 15,191       |         | 11,026       |         |
| Corporate  and Other         | ** **   | **499**      |         | 22           |         | 986          |         |
| Inter-segment  eliminations  | ** **   | **(1,543**   | **)**        | (1,962       | )            | (2,000       | )            |
| ** **                   |         | **$**        | **72,989**   |         | $            | 61,693       |         | $ | 40,535 |   |

 

Ourtwo main operating businesses, radiopharmaceuticals and contract manufacturing(sterile and non-sterile products), are not characterized by significantseasonality.  However, plant activitiesat DRAXIS Pharma (contract manufacturing) are generally reduced or shut downonce a year for approximately two to four weeks in order to conduct regularrequired maintenance.

 

DRAXIMAGE’sprincipal raw materials are radioactive isotopes that are used to label othercompounds that act as carriers or molecular targeting agents.  The isotopes are obtained from companies andagencies that are licensed by governmental regulators to produce purifiedradioactive chemicals.  Radioactivematerials, by their nature, decay over time – some rapidly and some moreslowly, depending on specific isotopes. Therefore, DRAXIMAGE receives shipments of chemical-grade radioisotopesseveral times each week and converts these to finished products within days orweeks.  While prices of selected isotopescan be somewhat volatile over the medium term, DRAXIMAGE endeavors to negotiatelong-term supply arrangements with appropriate suppliers, especially for themore important isotopes such as radioactive Iodine.

 

DRAXISPharma, as a contract manufacturer of pharmaceutical products, obtains itschemical raw materials from approved chemical suppliers of both activepharmaceutical ingredients (“API”) and inactive or excipient ingredients suchas fillers, stabilizers, preservative agents and coloring agents.  In most instances the API is supplied by thecustomer.  DRAXIS Pharma conducts fullquality control testing of all ingredients and packaging materials before theyare incorporated into the finished product. Prices of principal API are not generally volatile, although prices canvary between alternative suppliers.

 

**ContractManufacturing (DRAXIS Pharma)**

 

Contractmanufacturing accounted for 68.9% of our consolidated revenues for the yearended December 31, 2005.  Our DRAXISPharma division is responsible for our contract pharmaceutical manufacturingand has capabilities in a broad range of dosage forms, specializing in liquidand lyophilized (freeze-dried) injectables and other sterile products.  Operating out of a cGMP-compliant247,000-square-foot facility located in Kirkland, Québec, DRAXIS Pharmamanufactures pharmaceutical

 

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products for DRAXIMAGE, as well as for over 20 other pharmaceuticalclients in many international jurisdictions.

 

Keybusiness development transactions involving DRAXIS Pharma have included:

 

•      May 1998 – $11.1 million acquisition of DRAXIS Pharma’s pharmaceuticalmanufacturing facility.

 

•      July 1999 – signing of a five-year manufacturing supply agreement withWarner-Lambert Canada Inc. (now known as Pfizer Consumer Healthcare, a divisionof Pfizer Canada Inc.).  In September2005, the Company announced that Pfizer Canada had renewed this agreement for athree year term effective January 1, 2005.

 

•      February 2000 – sale of 34.1% equity interest to SGF and DRAXIS Pharmasenior management for net proceeds of $5.4 million.

 

•      December 2001 – signing of a long-term manufacturing and supplyagreement for the renewal and expansion of DRAXIS Pharma’s existing contractmanufacturing relationship with GSK.

 

•      March 2003 – initiation of production under a manufacturing and supplyagreement with Bone Care International, Inc. (now Genzyme) for Hectorol® Injection.

 

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

 

In2004, we completed a three-year, $12 million capital plan at DRAXIS Pharma,including the installation of a second lyophilizer.  The capital plan also included new sterilemanufacturing capabilities to support then recently announced contracts,improvements to production line efficiency, improvements to infrastructure, newraw material handling facilities and supporting systems to maintain the DRAXISPharma facility at the forefront of regulatory compliance.** **DRAXIS Pharma’s three-year, $12million capital plan was initially financed through****loansand equity investment from DRAXIS Pharma’s shareholders, loans from Investissement Québec and internally generated funds. The equity was repurchased and the loans were repaid in April 2004 fromthe proceeds of the Company’s public offering.

 

SinceDRAXIS acquired DRAXIS Pharma, DRAXIS Pharma’s revenues have risen from $6.1million for the eight-month period ended December 31, 1998 to $54.7 million forthe year ended December 31, 2005.

 

DRAXISPharma’s business goal is to become a leading supplier of high-value-added,high-margin contract pharmaceutical manufacturing services.  Key components of DRAXIS Pharma’s strategy toachieve this goal include:

 

•      obtaining and maintaining all required regulatory approvals for DRAXISPharma’s manufacturing facility;

 

•      securing additional manufacturing contracts with existing and newcustomers;

 

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•      focusing on DRAXIS Pharma’s distinctive capabilities in sterile andlyophilized product manufacturing;

 

•      providing manufacturing and related services to DRAXIS’ otherbusinesses; and

 

•      focusing on operational excellence, including regulatory compliance,cost-effectiveness and customer service.

 

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

 

In a report prepared byCIBC World Markets (Equity Research) and dated December 3, 2002 entitled“Pharmaceutical Contract Manufacturing”, it was estimated that themanufacturing portion of the $400 billion global pharmaceutical market was $50billion, with approximately $13 billion outsourced.  Since 2002, we believe that the contractmanufacturing market for pharmaceuticals has continued to grow.

 

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

 

The reasonspharmaceutical companies outsource manufacturing include:

 

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

 

•      movingassets off the balance sheet – contract manufacturers are a solution to highlevels of industry assets tied up in under-utilized facilities;

 

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

 

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

 

TheCompany believes that there is currently a significant global shortage ofsterile lyophilization capacity and that this sector offers significantlyhigher margin growth potential for DRAXIS Pharma due to its technicalcomplexity and its increasing demand as a favored dosage form for biotechnologyproducts in particular.

 

DRAXISPharma believes that the key competitive factors in the contract manufacturingindustry include the reliability of supply, quality of product, strictcompliance with governmental regulations, capacity availability, competitivepricing and the technical and manufacturing ability to produce a full range ofquantities – from small pilot batches often required for clinical trials tolarger commercial quantities.

 

### **Competition**

 

DRAXISPharma competes with pharmaceutical companies that have in-house manufacturingcapabilities as well as with third-party contract manufacturers, includingHospira Inc., Boehringer Ingelheim, Cardinal Health, Inc., Hollister-StierLaboratories LLC, DPT Laboratories, Haupt Pharma AG, Patheon Inc. and DSMPharmaceuticals, Inc.

 

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### **Manufacturing Capabilities**

### ** **

DRAXIS Pharma is acustomer-driven pharmaceutical contract manufacturing division that ispositioned to manufacture a variety of dosage forms. DRAXIS Pharma is one of afew existing full-scale pharmaceutical contract manufacturing facilities inCanada that has FDA-approved sterile manufacturing and sterile lyophilizationcapabilities.

 

Plant operations at ourmanufacturing facilities in Kirkland, Québec are organized into fourmanufacturing areas, supported by packaging and warehousing and distributionfunctions.

 

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

#### *** ***

Lyophilization is the preferreddosage form for a broad range of sterile products that are unstable inliquid form. Lyophilization is a complex process of freeze-drying in which aliquid solution is frozen under vacuum and all water is removed, leaving behinda stable, dry, sterile powder that has a relatively long shelf life and iseasily reconstituted into a liquid form prior to use. Products deliveredin a lyophilized dosage form include injectable pharmaceuticals, vaccines,biotechnology proteins or peptides and diagnostic products.

 

DRAXIS Pharma’s existing sterilemanufacturing capabilities were enhanced by the addition of sterilelyophilization, which became fully operational and approved by the FDA in thelatter half of 2001. This fully automated line includes a vial washer, adepyrogenation tunnel, an in-line filling machine, robot loaders and unloaders,the freeze-drier unit and a capper. This first freeze-drier has a capacitybased on 11 square meters (120 square feet) of shelf space, while the secondunit installed in 2004, at 24 square meters (254 square feet) of shelf space,has double the shelf space.

 

In 2004, the Companycompleted a three-year, $12 million capital plan for DRAXIS Pharma, includingthe addition of the second lyophilizer, new sterile manufacturing capabilitiesto support recently announced contracts, improvements to production lineefficiency, improvements to infrastructure, new raw material handlingfacilities and supporting systems to maintain DRAXIS Pharma at the forefront ofregulatory compliance.

 

The second lyophilizerwas incorporated into DRAXIS Pharma’s existing lyophilization facility. Thespecialized facility was originally designed to readily accommodate this secondlyophilizer at a cost significantly less than that of the initial installationwith minimal disruption to ongoing production.

 

Thesecond lyophilization unit completed validation and began commercial productionduring 2005. At optimum configuration and given the appropriate mix oflyophilization cycles, the second lyophilizer could potentially allow us toapproximately triple existing lyophilization capacity over time. We did notachieve full capacity utilization on this new lyophilizer in 2005. The transferand introduction of some current products and new products to this lyophilizerwill continue to occur in 2006 and beyond.

 

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

#### *** ***

The Sterile Products Department (“SPD”)includes preparation and pharmaceutical areas with manufacturing, filling andinspection rooms for the manufacture of injectable liquids, ophthalmic and oticproducts. We believe that DRAXIS Pharma possesses one of the most modernfacilities of its kind in Canada approved for the manufacture of sterileprescription pharmaceuticals for Canada, the United States and other globalmarkets.

 

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Including the new lyophilizationline, SPD covers approximately 17,100 square feet and is designed forsegregated operations complemented by secure access controls.

 

Computerized systems are utilizedfor both topical and automated ointment lines in order to optimize processcontrol. Both of these lines are closed-loop systems to ensure sterileintegrity. The sterile ointment system utilizes a patented automated system toplace tubes on the fillers, thereby minimizing human intervention.

 

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

 

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

#### *** ***

The 16,000-square-foot Ointments,Creams and Liquids (“OCL”) Department offers substantial flexibility inproduction scale. Production of ointments and creams utilizes a gravity-fedsystem and incorporates segregated wash areas and clean storage areas forequipment.

 

Batch capability in the OCLDepartment varies from 200 to 18,000 liters and incorporates four dedicatedpackaging lines. Interconnecting tanks can be utilized where required, therebyproviding production flexibility. Fully automatic validated CIP systems ensurethe purity of each customer’s product. Product is pumped to two of thepackaging lines and gravity fed to the other two lines. Dosage forms/producttypes manufactured include creams, ointments, lotions, syrups, shampoos, gelsand suspensions.

 

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

#### *** ***

The Solid Dosage Departmentcovers approximately 10,300 square feet of space and is comprised of two suitesfor granulating powders prior to compression plus four isolated compressionsuites in which the powders are pressed into tablets and caplets of variousforms and sizes. The first granulation suite is designed for large-batchblending, granulating and drying, while the second granulation suite isequipped with smaller scale equipment that can be used for small production orpilot batches.

 

Each granulation and compression suite hasits own testing equipment and cleaning area. The rooms are isolated and havepurpose-built airflow systems to contain powder.

 

Dosage forms and product typesmanufactured in this department include tablets in bottles and blisters,caplets in bottles and blisters, and powders.

 

#### ***Packaging***

#### *** ***

The Packaging Department coversapproximately 51,000 square feet and incorporates an open space with movableseparations that provide flexibility in the packaging area featuring severalpackaging lines. Segregated zones are defined for de-boxing, filling andsecondary packaging. Bar coding ensures complete control of all packagingcomponents.

 

Within the department there arepackaging lines for ointments and creams, a line for liquid packaging, linesfor tablets (bottles and blisters), a sterile product packaging line whichincludes automatic inspection and a line dedicated for lyophilized products andtopical packaging. The inspection

 

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offinished sterile products in glass ampoules includes automated inspection by aleak pinhole detector. An automatic inspection machine has been validated todetect particles in sterile products packaged in vials and ampoules. Theseproducts may also be inspected manually.

 

Several packaging types can beaccommodated, including jars, bottles (glass and plastic), blisters, vials andampoules. The department handles a wide variety of product types, includingcaplets, tablets, creams, ointments and liquids.

 

### **Regulatory**

### ** **

Manufacturing operations atDRAXIS Pharma, from receipt of raw material and packaging ingredients, throughcompounding, dosage form processing, filling, labeling and packaging, tofinal product release by quality control, are all conducted in accordance withcGMP requirements and other appropriate international regulatory standards. Regularinspections of facilities, production processes, and control and validationsystems, as well as employee training programs, are conducted by DRAXIS Pharma,by U.S., Canadian and international governmental regulatory agencies and bycustomer inspection teams throughout the year. DRAXIS Pharma maintains adistinct internal team to provide effective liaison with various externalinspection groups.

 

DRAXIS Pharma has a strongregulatory track record. This includes 12 successful audits of its facilitiesin 2005 (2 regulatory inspections and 10 clients audits) and 5 successfulaudits of its facilities in 2004 (1 regulatory inspection and 4 client audits).

 

### **Warehousing and Distribution**

### ** **

The warehousing and distributionfacilities at DRAXIS Pharma at our facilities in Kirkland, Québec, allow additionalmanufacturing flexibility and efficiency. A five-tier pallet-racking warehousehas a full height of 29 feet, covers approximately 48,900 square feet of spaceand has six shipping and receiving docks. The warehouse has separately lockedareas, including refrigeration units to control sensitive raw materials andfinished goods. In 2004, a third autoclave was installed to support terminalsterilization of products.

 

DRAXIS Pharma also has araw material storage and dispensing area, which provides an improvedenvironment for the handling and accurate dispensing of raw materials. Thisinstallation improves the flow of material and personnel and is equipped with aventilation system and state-of-the-art dust containment technology.

 

### **Customers**

### ** **

#### ***Third-Party Contract Manufacturing***

#### *** ***

DRAXISPharma manufactures prescription and non-prescription pharmaceutical productsfor more than 20 pharmaceutical companies (excluding Inter-Company) pursuant tomanufacturing supply contracts. Such contract manufacturing represented 68.9%of our consolidated revenues for the year ended December 31, 2005. Asignificant portion of this contract manufacturing business is focused on ourthree largest customers, Genzyme, GSK and Pfizer. See “Risk Factors – RisksRelated to our Company – A Significant Portion of our Business is Dependent ona Small Number of Key Customers”.

 

In April 2002,DRAXIS Pharma entered into an agreement with Bone Care International, Inc.(now Genzyme) to produce Hectorol®Injection for sale in the U.S., and we began commercial shipments of thesterile injectable product in March 2003. A Manufacturing and SupplyAgreement was signed on

 

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March 3, 2003. Productionof Hectorol® Injectionincreased substantially throughout 2005. The agreement is for a five-year term.

 

On December 18, 2001, DRAXIS Pharma finalizedsupply and related agreements with GSK for the renewal and expansion of anexisting contract manufacturing relationship between the companies. Theproducts transferred to DRAXIS Pharma were all established, sterile productsmarketed by GSK in multiple international markets. In 2002, a prescriptionsterile injectable product for the U.S. market was added under this contractand commercial production of this product commenced in the second quarter of2002. During 2002, site transfer and related activities associated with theother GSK products continued and production started in the second quarter of2003 and ramped up through 2003 and 2004 with full production achieved by theend of 2004. DRAXIS Pharma will manufacture the products covered by theagreement until it receives a termination notice from GSK which may begiven by a two-year advance written notice given on or after December 31,2007.

 

On July 1,1999, DRAXIS Pharma entered into a five-year manufacturing and supply agreementwith Warner-Lambert Canada Inc. (now known as Pfizer Consumer Healthcare, aDivision of Pfizer Canada Inc.) covering several non-prescription products forthe Canadian market, including Polysporin®, Sudafed®, Actifed® and Zincofax®. Manufacturingof these products commenced in early 2000. On September 1, 2005, DRAXISannounced it had renewed its agreement with Pfizer Canada for a three yearterm, effective January 1, 2005.

 

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

#### *** ***

Commencing in early 2002,DRAXIS Pharma became the FDA-approved manufacturing site for DRAXIMAGE’slyophilized Tc-99m Kits. In addition, DRAXIS Pharma has been qualified as themanufacturing site for *ANIPRYL®*tablets.

 

### **Employees**

### ** **

As at December 31, 2005,DRAXIS Pharma had 385 employees (representing 78.2% of the Company’semployees), consisting of: 36 managerial employees, 41 clerical employees, 61quality operations employees and 247 unionized hourly employees. The unionizedhourly employees are represented by the United Food & CommercialWorkers International Union, Local 291 (AFL-CIO). A collective agreement with afive-year term to April 30, 2008 was ratified in February 2004. DRAXISPharma has no significant unresolved issues with the union. See “Risk Factors –Risks Related to our Company – Our Business Could be Harmed if there were aDispute or Disruption with our Unionized Employees”.

 

### **Former Equity Partners**

### ** **

From February 2000 to April 2004,SGF and senior management of DRAXIS Pharma held a non-controlling equityinterest in DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division ofDRAXIS Specialty Pharmaceuticals Inc.). In 2002 and 2003, DRAXIS Pharma Inc.(now known as DRAXIS Pharma, a division of DRAXIS Specialty PharmaceuticalsInc.) repurchased and cancelled shares held by a former DRAXIS Pharma employeeand members of DRAXIS Pharma’s management team in exchange for cash andsettlement of existing loans. In April 2004, the Company acquired from SGFits 32.7% interest in DRAXIS Pharma and also repaid $3.1 million (CDN$4.2million) in debt owed by DRAXIS Pharma to SGF.

 

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**Radiopharmaceuticals**

 

Radiopharmaceuticals accountedfor 24.3% of our consolidated revenues for the year ended December 31,2005. Our DRAXIMAGE division is responsible for discovering, developing,manufacturing, and marketing our diagnostic imaging and therapeuticradiopharmaceutical products for the global nuclear medicine marketplace. Nuclearmedicine entails the use of radioactive drugs (radiopharmaceuticals) forimaging and therapeutic purposes. The energy released as these products decaycan be harnessed to:  (i) elicit avisual representation of various organs and tissues (nuclear imaging); or (ii) destroycancerous cells (radiotherapy). Products currently marketed by DRAXIMAGEinclude a line of lyophilized Technetium-99m kits used in nuclear imagingprocedures and a line of imaging and therapeutic products labeled with avariety of isotopes, including radioiodine. DRAXIMAGE also has a number ofproducts in development, including a Technetium-99m-based diagnostic imagingproduct, *INFECTON**®*, for which two of four Phase II trials conducted inCanada and the U.S. have been completed as of December 31, 2005. Marketresearch studies to define the target market population and appropriateclinical applications are underway and are expected to be completed in time toguide the design of future studies, which are expected to begin in 2006 or 2007.In April 2006, an expert panel is scheduled to review preliminary Phase IIclinical results and to discuss potential target markets and to advise theCompany on the design of further clinical studies and appropriate indications. Giventhe inherent uncertainties associated with new drug development, it isdifficult to predict if, or when, this product will achieve commercialization.

 

Founded in 1950 as a division ofCharles E. Frosst & Co., the predecessor business to DRAXIMAGEpioneered and became a leader in the medical application of nuclear technologyafter assuming the development function from Atomic Energy of Canada Ltd. Followingthe 1965 acquisition of Charles E. Frosst & Co. by Merck Inc. (“Merck”),the business continued operations as a division of Merck’s Canadian subsidiary,Merck Frosst Canada and Co. (“Merck Frosst”), until its acquisition by DRAXISin 1997. As part of the acquisition, the Company retained all of thebusiness’s managers, scientists and employees as well as its existing productsand intellectual property.

 

The acquisition of this businesswas consistent with our strategy of acquiring specialty pharmaceuticalplatforms with potential for expansion into global markets. We believe that DRAXIMAGE is the only company thatmanufactures I-131 radiopharmaceutical products in Canada.

 

DRAXIMAGE and its predecessorhave a long history of technological and scientific progress in the field ofradiopharmaceuticals. Notable achievements include the development oflyophilized kits for the in-situ preparation of Technetium-99m (“Tc-99m”)radiopharmaceutical products for nuclear medical imaging (“Tc-99m Kits”); thedevelopment of chelates for the indium/yttrium and Technetium/rhenium groups ofmetals; and the development of stabilizers for use in iodinatedradiopharmaceuticals, which resulted in DRAXIMAGE being one of the fewproviders to market iodinated products that do not require refrigeration.

 

Key business developmenttransactions involving DRAXIMAGE have included:

 

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

 

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

 

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

 

•                  July 2000 – signingof a non-exclusive distribution agreement with Syncor International Corporation(now known as Cardinal Health 414, Inc.) for the production of a kit forthe preparation of Sodium Iodide I-131 Capsules and Oral Solution indicated forthe treatment of thyroid cancer and hyperthyroidism for sale in the U.S.

 

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

 

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

 

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

 

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

 

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

 

•                  July 2003 – extensionand expansion of strategic partnership with Bristol-Myers Squibb Canada Co. (“Bristol-MyersCanada”) for the marketing and distribution of radiopharmaceutical products inCanada.

 

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

 

•                  February 2005 –announcement thatDRAXIMAGE had received approval from the Dutch regulatory authority for its kitfor the Preparation of Technetium Tc-99m Albumin Aggregated Injection (“MAA Kit”).This approval allowed DRAXIMAGE to initiate the Mutual Recognition Procedure (“MRP”)in pursuit of further regulatory approvals for the diagnostic imaging productin additional European Union countries.

 

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

 

•                  April 2005 – announcementof the appointment of Mr. Jean-Pierre Robert as the new President of theDRAXIMAGE division.

 

•                  November 2005 –DRAXIMAGE announced it would discontinue the manufacture and sale ofimplantable brachytherapy seeds as of December 15, 2005.

 

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•                  January 2006 –DRAXIMAGE announced it had received approval from the FDA for its supplementalnew drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral

 

DRAXIMAGE’s growth strategy is toleverage its history and experience in the research, development, manufactureand distribution of radiopharmaceutical products and services and to capitalizeon its manufacturing capabilities. In particular, DRAXIMAGE’s business strategyincludes:

 

•                  Increasing the marketpenetration of its radioactive products, particularly in the U.S.;

 

•                  Increasing internationalsales of its key Tc-99m Kits and Iodine I-131 products, particularly in Europe;

 

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

 

•                  Identifying andcapitalizing on additional new business opportunities and strategicpartnerships which are consistent with DRAXIMAGE’s capabilities, including themonitoring of products that will come off patent protection in key markets thatcan be manufactured, marketed and sold by DRAXIMAGE and monitoring productsthat are owned by third parties and which could be divested in theconsolidation that is taking place in the radiopharmaceutical industry.

 

### **Overview of Radiopharmaceuticals**

### ** **

The medical specialty of nuclearmedicine involves the use of short-lived radioisotopes for both diagnosticimaging and therapeutic applications. Pharmaceutical products used in suchapplications are commonly called radiopharmaceuticals. Radiopharmaceuticalsrepresent a well-defined, growing niche market that involves challenges such asregulatory approvals, specialized manufacturing standards, access to supply andcritical delivery logistics.

 

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

#### *** ***

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

 

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

 

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Nuclear medical imagingprocedures are established and trusted medical procedures with many years ofsafe and effective use. Most procedures are non-invasive, are performed with aminimum of discomfort and inconvenience to the patient and are normally lesscostly and involve less risk than other currently available high-techalternative techniques.

 

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

#### *** ***

Increasingly, therapeuticradiopharmaceuticals are being used and new products are being developed forthe treatment of disease, particularly for the treatment of various cancers. Examplesof currently marketed therapeutic radiopharmaceuticals include:

 

•                  various sodium iodideI-131 products for the diagnosis and treatment of thyroid cancer andhyperthyroidism;

 

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

 

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

 

New generations of anti-canceragents based on targeting molecules such as peptides, proteins, metabolites andmonoclonal antibodies that have binding affinities to the surface of cancerouscells are being developed to be linked to more potent, higher-intensity,beta-emitting radioisotopes such as yttrium-90, rhenium-186, holmium-166 andlutetium-199. There is a growing body of scientific evidence that molecules,thus bound, will permit the delivery of therapeutic quantities of radiationdirectly to malignant cells.

 

### **Competition**

### ** **

The radiopharmaceutical field ishighly specialized, particularly in the therapeutic area. Challenges includemeeting pharmaceutical product and nuclear regulatory requirements, having theability to handle radioactive materials and establishing facilities andprocedures to manufacture products in a sterile lyophilized or freeze-driedform, which involves manufacturing standards higher than those typicallyemployed for most pharmaceutical products. In addition, manufacturing anddistribution logistics systems must be well-integrated and supportive to ensurethat radiopharmaceutical products can be produced rapidly and delivered to theend user in a timely manner with the prescribed level of strength.

 

Companies with significantradiopharmaceutical operations include Bristol-Myers Squibb Company, CardinalHealth, Inc., GE Amersham Healthcare, Tyco International Ltd., ScheringAG, and Bracco SpA. In addition, there are a number of companies that aredeveloping and/or marketing other radiopharmaceutical products, including MDSNordion Inc., Immunomedics, Inc., Biogen Idec Inc. and NeoRx Corporation.

 

### **Marketed Products**

### ** **

DRAXIMAGE’s products are dividedinto two groups: (i) radioactive products, which are in a radioactive andready-to-use form when shipped to customers, and (ii) non-radioactiveproducts (predominantly Tc-99m Kits). The kit products are sold in lyophilized(freeze-dried), non-radioactive form consisting of sterile, pyrogen-freecomplexes of chemical and/or biological substances. Tc-99m Kits arereconstituted with radioactive Tc-99m in the nuclear medicine laboratory of ahospital or a unit-dose service supplier, or radiopharmacy, prior to use.

 

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

#### *** ***

Radioactive products, which areshipped by DRAXIMAGE with the radioactive isotope already incorporated, aredistributed to the nuclear medicine departments of hospitals or diagnosticclinics in a ready-to-use form.

 

The following table summarizesthe DRAXIMAGE radioactive products. All products listed have received approvalfor sale by the applicable regulatory body in the territory in which theproduct is sold.

 
| **Product**                                                                 |   | **Indication**                          |   | **Principal  Markets** |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|------------------------|
| Imaging Products                                                            |   |                                    |   |                   |
| 51Cr-Chromic  Chloride Injection                                            |   | Diagnosis of  gastroenteropathy         |   | Canada                 |
| 51Cr-Sodium  Chromate Injection, USP                                        |   | Measurement of blood  volume            |   | Canada                 |
| 57Co-Cyanocobalamin  Capsule USP                                            |   | Diagnosis of Vitamin-B12  malabsorption |   | Canada/Holland         |
| 57Co-Standard  Cobalt Reference Solution                                    |   | Reference for 57Co-Cyanocobalamin       |   | Canada                 |
| 111In-Diethylene  Triamine Pentacetic Acid Injection (DTPA)                 |   | Cisternography                          |   | Canada                 |
| 111In-Indium  Chloride Sterile Solution                                     |   | Labeling of peptides  and antibodies    |   | Canada                 |
| 131I-Sodium  Iodide Diagnostic Capsules and Solutions, Oral and Intravenous |   | Imaging of thyroid  disorders           |   | Canada                 |
| 131I-meta-iodobenzylguanidine                                               |   | Adrenal imaging                         |   | Canada/Holland         |
| 131I-Iodinated  Serum Albumin Injection, USP                                |   | Measurement of blood  and plasma volume |   | Canada                 |
| 131I-Iodohippuric  Sodium Injection, USP                                    |   | Measurement of renal  plasma flow       |   | Canada                 |
| 125I-Iodinated  Albumin Injection, USP                                      |   | Measurement of blood  and plasma volume |   | Canada                 |
| 133Xe-Xenon  Gas                                                            |   | Lung ventilation  studies               |   | Canada                 |

 

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| Therapeutic  Products                                                                         |   |                            |   |        |
|-----------------------------------------------------------------------------------------------|--------|---------------------------------|--------|-------------|
| 131I-Sodium  Iodide Therapeutic Capsules and Solutions, Oral and Intravenous                  |   | Treatment of thyroid  disorders |   | Canada      |
| Kit  for the Preparation of Sodium Iodide I-131 Capsules and Solution USP  Therapeutic - Oral |   | Treatment of thyroid  disorders |   | U.S.        |
| 32P-Sodium  Phosphate Solution, USP                                                           |   | Treatment of bone pain          |   | Canada      |
|                                                                                          |   |                            |   |        |
| Other                                                                                         |   |                            |   | Canada      |
| 131I-Sodium  Iodine Solution – Chemical                                                  |   | Radiochemical synthesis         |   | Canada      |
| 125I-Sodium  Iodide Solution – Chemical                                                  |   | Radiochemical synthesis         |   | Canada      |
| 131I-Iodinated  Human Serum Albumin                                                           |   | Radiochemical use               |   | U.S./Europe |
| 125I-Iodinated  Human Serum Albumin                                                           |   | Radiochemical use               |   | U.S./Europe |

 

*Sodium Iodide I-131 Radiotherapy*

 

In October 2001, DRAXIMAGEentered into a third-party manufacturing contract to supply sodium iodide I-131radiotherapy capsules for Bracco Diagnostics Inc. for the U.S. market for thetreatment of thyroid cancer and hyperparathyroidism.

 

In January 2003, DRAXIMAGEreceived FDA approval to produce and market a new radiopharmaceutical kitproduct for the preparation of Sodium Iodide I-131 Capsules and Oral Solutionfor the treatment of thyroid cancer and hyperthyroidism. This was the firstsuch product on the market that allows physicians and radiopharmacists toprepare an FDA-approved I-131 gelatin capsule or oral solution. In March 2003,DRAXIMAGE launched the new kit product and initiated shipments to the NuclearPharmacy Services group of Cardinal Health 414, Inc., under a five-year,non-exclusive distribution agreement for the product for the United States andits possessions. As of 2003, this product was made available to other customersand distributors in the U.S.

 

In November 2004, DRAXIMAGEreceived FDA approval for a DRAXIMAGEÒ brand of I-131 therapeutic capsules.

 

In November 2005, DRAXIMAGEannounced it had received FDA approval for a new larger format of its I-131 kitfor the preparation of Sodium Iodide I-131 Capsules and Oral Solution.

 

In January 2006, DRAXIMAGEannounced it had received approval from the FDA for 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 the radioactive iodide (RAI) uptake test to evaluate thyroidfunction prior to treatment with stronger therapeutic doses of Sodium IodideI-131. Diagnostic doses of Sodium Iodide I-131 may also be employed inlocalizing metastases associated with thyroid malignancies. DRAXIMAGE plans tointroduce the new diagnostic capsules in the U.S. market during the first halfof 2006.

 

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##### ***BrachySeed***®

##### ** **

In November 2005,DRAXIMAGE announced it had initiated a process to discontinue the manufactureand sale of implantable brachytherapy seeds by December 15, 2005 as part ofan orderly exit from the brachytherapy market. To minimize inconveniences tocustomers, we announced that DRAXIMAGE had established a customer supplyalternative with Oncura, Inc.

 

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

#### *** ***

DRAXIMAGE currently markets thefollowing non-radioactive products. All products listed have received approvalfor sale by the applicable regulatory body in the territory in which theproduct is sold.

 
| **Product**                                                                                          | ** ** | **Indication**                                                                  | ** ** | **Principal Markets** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------|
| Tc-99m Kits                                                                                          |       |                                                                            |       |                       |
| 99mTc-MarcoAggregated  Albumin Kit (“MAA”)                                                 |       | Diagnosis of lung  perfusion                                                    |       | U.S./Canada                |
| 99mTc-Diethylene  TriaminePentacetic Acid Kit (“DTPA”) Stabilized with p-Aminobenzoic Acid |       | Diagnosis of kidney  function, blood pool imaging and lung ventilation function |       | U.S./Canada                |
| 99mTc-Calcium  Glucoheptonate Kit                                                                    |       | Diagnosis of kidney  function                                                   |       | U.S./Canada                |
| 99mTc-MethyleneDiphosphonic  Acid Kit (“MDP”) Stabilized with p-Aminobenzoic Acid          |       | Diagnosis of  inflammatory and neoplastic bone disease                          |       | U.S./Canada                |
| 99mTc-Calcium  Gluceptate Kit                                                                        |       | Diagnosis of kidney  function and red blood cell imaging agent                  |       | Canada                     |
|                                                                                                 |       |                                                                            |       |                       |
| Other                                                                                                |       |                                                                            |       |                       |
| Stannous Gluconate                                                                                   |       | Antibody  labeling                                                              |       | U.S.                       |
| Sodium  Carbonate/Bicarbonate Solution                                                               |       | Antibody labeling                                                               |       | U.S.                       |
| Acetic  Acid/HCI Solution                                                                            |       | Antibody labeling                                                               |       | U.S.                       |
| Sterile  Empty Vial                                                                                  |       | Antibody labeling                                                               |       | U.S.                       |
| Intrinsic  Factor Capsule                                                                            |       | Use with 57Co-Cyanocobalamin                                                    |       | Canada                     |

 

DRAXIMAGE’s major non-radioactiveproducts are its MDP, DTPA and MAA Tc-99m diagnostic imaging kits. While theseproducts would technically be classified as generic pharmaceutical products,DRAXIMAGE’s versions are proprietary and are sold under the DRAXIMAGEÒ trademark or that of itslocal distributors. All three of these products feature a proprietaryformulation that provides additional shelf life following reconstitutioncompared to competitive products.

 

On October 25,1995, Frosst Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (nowknown as DRAXIMAGE) entered into a non-exclusive distribution agreement withSyncor International Corporation (now known as Cardinal Health 414, Inc.)for distribution in the U.S. of DTPA, a kit used to prepare Tc-99m Pentetate tostudy kidney clearance, and MDP, a kit used to prepare Tc-99m Methylene

 

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Diphosphonic Acid tostudy bone metabolism. The initial term was for five years, with automaticrenewal of the agreement for successive two-year periods.

 

Prior to 2002, DRAXIMAGE producedTc-99m kits at its Merck Frosst location. Following FDA approval of the Company’snew lyophilization production facilities in early 2002, the resulting increasedmanufacturing capacity provided the opportunity to increase sales volumes ofthese products in existing markets in the U.S. and Canada and to build newmarkets in Europe and Asia, territories in which product approvals are eitheralready in place or expected to be granted in the near future.

 

In March 2004, DRAXIMAGEreceived approval from the FDA to produce and market a new formulation of MDP,called MDP-25, a kit for the preparation of Technetium Tc-99m MedronateInjection. In September 2005, MDP-25 was approved by Health Canada.

 

### **Products under Development**

### ** **

As of March 31, 2006,DRAXIMAGE had the following products under development:

 
| **Product**           | ** ** | **Status**                        | ** ** | **Indication**                                                                      |
|-----------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------------|
| Imaging  Products     |       |                              |       |                                                                                |
| *INFECTON®*      |       | Phase II (Canada, U.S.  and U.K.) |       | Infection imaging                                                                   |
| *SOMATOSCAN**®*  |       | Preclinical                       |       | Imaging of  neuroendocrine tumors, lymphoma, carcinoid and small-cell lung cancer   |
| Therapeutic  Products |       |                              |       |                                                                                |
|                  |       |                              |       |                                                                                |
| Somatostatin  Therapy |       | Preclinical                       |       | Treatment of  neuroendocrine tumors, lymphoma, carcinoid and small-cell lung cancer |

 

The clinical development of radiopharmaceuticalimaging agents differs from that of therapeutics in several areas. Whiletherapeutics are developed to offer improved efficacy and safety in thetreatment of a specific disorder, radiopharmaceutical imaging agents areelaborated for demonstrating the existence and extent of a specific condition.Therefore the trial design for establishing efficacy is not the same. In thecase of radiopharmaceutical imaging agents the endpoint is the actual image.The analysis is therefore centered around various quantitative and qualitativeaspects of the image. For example, the image quality is assessed at varioustime points to determine the time to best quality. Also a blinded read ofimages is conducted to determine the accuracy as well as the sensitivity andspecificity of the test in comparison to the modality that is currentlyaccepted as the gold standard. In order for the test to be useful acrossclinical sites the inter-rater reliability should also be high. This is animportant endpoint that is measured by a weighted Kappa test. These are themain efficacy considerations for radiopharmaceutical imaging agents. Theanalysis of safety is similar to that of therapeutic agents and includes theusual vital sign monitoring as well as the capturing of side effects throughadverse event reporting.

 

#### ***INFECTON***®

#### *** ***

Description - *INFECTON**®*,a complex of Tc-99m and the anti-bacterial agent ciprofloxacin, is a novelagent for the specific imaging of infection. *INFECTON**®* acts by binding directlyto infecting

 

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organisms and so isexpected to be highly specific for imaging infection. It is anticipated that *INFECTON®* may be used to image a number of seriousmedical conditions, including fever of unknown origin, osteomyelitis (boneinfection), wound infection, abdominal abscess, pneumonia, appendicitis, andtuberculosis. Many of these conditions are difficult to diagnose even byinvasive means or by surgery.

 

Technology Partner - *INFECTON®*was discovered by Drs. Britton and Solanki at St. Bartholomew’s Hospitalin London, England. In March 2001, DRAXIMAGE entered into an agreementwith BTG International Limited (formerly known as the British Technology Group).The agreement gives DRAXIMAGE exclusive rights to manufacture and sell *INFECTON®* in the U.S., Canada, South America and Europe. DRAXIMAGEhas a sub-license from Bayer AG for the diagnostic imaging use of theirciprofloxacin.

 

Regulatory Status - *INFECTON*’s*®*proof of principle was established in a series of clinical trialssponsored by the International Atomic Energy Agency involving 879 patients inseveral countries outside North America in which *INFECTON**®* displayed excellentresults, with a sensitivity of 88.3%, a specificity of 86.5%, and an accuracyof 87.6%. The clinical studies showed that the agent achieves up to 96%specificity in detecting bacteria in the lungs, bones and tissues – areas whereother diagnostics have failed in the past.

 

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

 

In July 2003,DRAXIMAGE initiated two Phase II clinical studies of *INFECTON®*in Canada. The first of the Phase II studies was a single-dose, open-label,multi-center trial involving 30 diabetic patients suffering from clinicallyconfirmed bacterial infections of the foot. The second study examined andcompared the uptake of *INFECTON®* inpatients with either a known soft tissue infection or a chronic inflammatorycondition that is sterile. A total of 50 patients with definitive bacterialinfections or confirmed chronic aseptic inflammatory conditions were enrolledin the single-dose, open-label, multi-center trial. Twenty-five patients fromeach group were included in the trials. By the end of 2005, enrollment in thefirst study was 97% complete and enrollment in the second study fully completed.In September 2004, the Company received approval from the FDA to initiatea Phase II clinical trial in the U.S. - single-dose, open-label, multi centertrial involving 22 patients suffering from bacterial osteomyelitis. Enrolmentin this Phase II trial was fully completed by the end of 2005. In March 2005,the Company initiated a fourth Phase II clinical trial in the U.S. This trialis a single-dose, open-label, multi-center trial involving 21 patients and willexamine patients suffering from suspected appendicitis. This study alsorecruited patients in the U.K. Marketresearch studies to define the target market population and appropriateclinical applications are underway and are expected to be completed in time toguide the design of future studies, which are expected to begin in 2006 or 2007.In April 2006, an expert panel is scheduled to review preliminary Phase IIclinical results and to discuss potential target markets and to advise theCompany on the design of further clinical studies and appropriate indications. Giventhe inherent uncertainties associated with new drug development, it isdifficult to predict if, or when, this product will achieve commercialization.

 

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Competing Diagnostic Modalities -The most specific current procedure for medical imaging of inflammation due toinfection involves removing blood from the patient, isolating white blood cellsin the patient’s blood, radiolabelling the white blood cells with an isotopesuch as indium-111 or Technetium coupled with a carrier molecule and theninjecting the white blood cells back into the patient. These white blood cellslocalize around the site of the infection and the associated radiation can bedetected using a gamma camera. White blood cells are not highly specific andcannot readily distinguish infection from inflammation. In July 2004,Mallinckrodt, a business unit of Tyco Healthcare, and Palatin Technologies, Inc.announced that they had received approval from the FDA to market and distributeNeutroSpec® (formerly known as LeuTech®), a Technetium-labeled monoclonalantibody that binds to white blood cells and is indicated, fordifficult-to-diagnose appendicitis. On December 19, 2005, Palatinannounced that, as a result of the safety concerns raised in connection withthe use of NeutroSpec® identified during routine pharmacovigilance, Palatin andMallinckrodt decided to voluntarily suspend the sales, marketing anddistribution of NeutroSpec® and recall all existing customer inventories ofthis product. In addition, Immunomedics, Inc. announced in January 2005that it had received Health Canada approval for the marketing and use of itsproduct LeukoScan® for the detection of osteomyelitis. LeukoScan® is a murine monoclonalIgG antibody fab’ fragment labeled with Tc-99m. We believe that *INFECTON**®*will be capable of distinguishing inflammation from infection and as such would offer an advantage overagents that bind to white blood cells and which cannot distinguish betweeninfection and inflammation.

 

Potential Advantages of *INFECTON**®*- Preliminary investigations suggest the possibility that *INFECTON**®* may be capable ofdistinguishing inflammation from infection.

 

#### ***Developmentcosts of INFECTON***®

#### *** ***

We have spent $1.7 million indeveloping *INFECTON**®* during the period between1998 and 2005 inclusively.

 

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

#### *** ***

Description - *SOMATOSCAN**®* and Somatostatin Therapyare radiolabelled somatostatin peptides derived from a synthetic peptide basedon MK-678, originally developed by Merck, which shows a high binding affinityfor the somatostatin receptors expressed in neuroendocrine tumors, lymphoma andcarcinoid and small-cell lung cancer. This peptide is being developed as both adiagnostic imaging agent (*SOMATOSCAN**®*) and therapeutic product(Somatostatin Therapy) and we believe that it may permit theidentification and treatment of primary tumors and the correct diagnosis ofmetastatic lesions. No substantial work was conducted in 2005 on *SOMATOSCAN**®*/Somatostatin Therapy.

 

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

 

Regulatory Status - A pilot studyconducted at the Montreal General Hospital in 1997, involving over 30 patientsusing an Iodine-131-MK-678, demonstrated good uptake in all of the target tumortypes. DRAXIMAGE’s clinical studies will be designed to confirm *SOMATOSCAN**®*’s earlier successfulresults observed with the Iodine-131 formulation.

 

Competing Products – To ourknowledge, there are two approved somatostatin-based imaging products in themarketplace:  OctreoScan® from TycoInternational Ltd. and NeoTectÒ from Berlex Laboratories Inc. Both of thesemolecules offer similar information but OctreoScan® is based on indium-111 andis more expensive than Tc-99m-based NeoTect® and must be delivered inradioactive form. We

 

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are aware thatdevelopment work is also being done on other somatostatin-based cancer therapyproducts that would compete with Somatostatin Therapy.

 

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

 

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

#### *** ***

DRAXIMAGE has conductedpreclinical development of atrial natriuretic peptide (“ANP”). ANP is a naturalpeptide produced in the atrium of the heart and is intended for development asan imaging agent for kidney structure and function. Radiolabelled ANP hasdemonstrated high binding affinity to receptors in both the lung and kidney. Experimentalresults in animals have shown that ANP is effective in the detection of kidneydysfunction associated with such diseases as diabetes, essential hypertensionand reno-vascular hypertension induced by the stenosis of renal arteries. ANPis based on innovative research by DRAXIMAGE, the Clinical Research Instituteof Montréal and the Research Institute of Hôtel Dieu de Montréal, from whichDRAXIMAGE has an exclusive worldwide license. DRAXIMAGE did not conduct anywork related to ANP in 2004 and 2005.

 

#### ***Paclitaxel***

#### *** ***

Description - Paclitaxel is anovel, anti-tumor agent referred to in some scientific and medical literatureas “taxol.”  Paclitaxel is currentlymarketed in the U.S. under the brand name TaxolÒ by Bristol-Myers Squibb Company. In January 1997,DRAXIS acquired from Mylan Laboratories Inc. (“Mylan”) the exclusive Canadianmarketing rights to the Mylan formulation of paclitaxel. In June 1998,DRAXIS filed with the HPFBI a New Drug Submission in Canada for paclitaxel, andthe HPFBI has completed its review process. Prior to approval, DRAXIS mustcomply with Canadian Patented Drugs Regulations with respect to genericcompetition. Mylan is currently assessing the status of patent infringementlitigation in Canada regarding paclitaxel, and the Company has agreed to deferlaunch in Canada until such issues have been clarified.

 

According to the agreement,DRAXIS and Mylan will share the profits from marketing and selling paclitaxelin Canada according to a formula agreed to between the parties.

 

### **Manufacturing**

### ** **

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

#### *** ***

DRAXIMAGE manufactures itsradioactive products in its cGMP compliant manufacturing facility located inKirkland, Québec supported by a full quality control department licensed byregulatory agencies in Canada and the U.S.

 

In 2001, DRAXIMAGE completed theexpansion of its radiopharmaceutical production area in anticipation ofincreasing sales volumes of its radiopharmaceutical line in the U.S. and othermarkets. This expansion has approximately doubled the size of the originalfacility to 19,000 square feet.

 

Most of the radioisotopes used toproduce radiopharmaceuticals are supplied to DRAXIMAGE primarily, but notexclusively, by MDS Nordion, a subsidiary of MDS Inc. and the world’s largestsupplier of chemical-grade isotopes for use as medical radioisotopes.

 

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A key distinguishingcharacteristic of the radiopharmaceuticals business is the need for asophisticated logistics system. Radiopharmaceuticals, by their nature, decaycontinually over time, thereby losing their potency. Therefore, manufacturingand product delivery systems must be well coordinated to ensure that the levelof radioactivity present in the product supplied to the physician is correct atthe time of administration.

 

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

#### *** ***

DRAXIMAGE’s Tc-99m Kits arecurrently manufactured by DRAXIS Pharma in its Kirkland, Québec facility, whichwas first accepted as a manufacturing site by the FDA in October 2001. Subsequentmanufacturing site transfer approvals for the Tc-99m Kits were received duringthe period December 2001 to March 2002.

 

*Regulatory*

 

In the period December 2001through March 2002, DRAXIMAGE was approved by the FDA to transferproduction of its line of lyophilized medical imaging products in-house to theDRAXIS Pharma lyophilization production facility.

 

In January 2003, DRAXIMAGEreceived FDA approval to produce and market a new radiotherapeutic kit productfor the preparation of Sodium Iodide I-131 Capsules and Oral Solution.

 

In December 2003, DRAXIMAGEobtained certification under ISO 9001: 1994, including ISO 13485: 1996, aninternational standard for medical device manufacturers.

 

In March 2004, DRAXIMAGEreceived FDA approval to produce and market a new formulation of MDP calledMDP-25, a diagnostic product for preparing a skeletal imaging agent.

 

In November 2004, DRAXIMAGEreceived FDA approval for a DRAXIMAGE brand of I-131 therapeutic capsules.

 

In September 2005, MDP-25was approved by Health Canada.

 

In November 2005, DRAXIMAGEannounced it had received FDA approval for a new larger format of its I-131 kitfor the preparation of Sodium Iodide I-131 Capsules and Oral Solution.

 

In January 2006, DRAXIMAGEannounced it had received approval from the FDA for 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 the radioactive iodide (RAI) uptake test to evaluate thyroidfunction prior to treatment with stronger therapeutic doses of Sodium IodideI-131. Diagnostic doses of Sodium Iodide I-131 may also be employed inlocalizing metastases associated with thyroid malignancies. We plan tointroduce the new diagnostic capsules in the U.S. market during the first halfof 2006.

 

DRAXIMAGE has a strong regulatorytrack record. This includes 4 successful audits of its facilities in 2005 (2regulatory inspections and 2 client audits) and 2 successful audits of itsfacilities in 2004 (1 regulatory inspection and 1 client audit).

 

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### **Sales and Marketing**

### ** **

At the present time, DRAXIMAGE’sproducts are marketed primarily in the U.S. and Canada. As many of the productsmarketed by DRAXIMAGE have the potential for global approvals, it is expectedthat non-North American based revenues will increase in the future. The mostactive growth areas are expected to be Europe and South America. In January 2003,DRAXIMAGE entered into a marketing and distribution agreement withNetherlands-based IDB Holland B.V. for the Benelux countries.

 

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

#### *** ***

DRAXIMAGE sells Tc-99m Kits inthe U.S. to several customers and distributors including Cardinal Health, Inc.,which operates the largest chain of radiopharmacies, Tyco Healthcare divisionof Tyco International Ltd., GE Amersham Healthcare, CIS bio international (asubsidiary of Schering AG), United Pharmacy Partners Inc. and large universityhospitals.

 

Tc-99m Kits sold in the U.S. aremarketed under the DRAXIMAGE trademark with the exception of selected Tc-99mKits sold through CIS bio international, which carry the distributor’s tradename.

 

#### ***Canada***

#### *** ***

In Canada, DRAXIMAGE currentlymarkets most of its products directly to end-users through a co-operativeagreement with Bristol-Myers Canada, pursuant to which Bristol-Myers Canada’ssales force promotes the non-competitive product lines of each party. Thisarrangement allows for enhanced coverage of the Canadian market while reducingadministrative and shipping costs. In July 2003, DRAXIMAGE renewed andexpanded its distribution agreement with Bristol-Myers Canada for another fiveyears.

 

For many years, DRAXIMAGE hasbeen the primary Canadian supplier of Iodine-131 and Iodine-125 labeledradiopharmaceuticals, including solutions and capsules used primarily for thediagnosis and treatment of thyroid gland disorders.

 

#### ***Europe***

#### *** ***

The radiopharmaceutical market inEurope is characterized by strong regional fragmentation, which gives theleading market share to the individual manufacturer located in each of themajor countries (i.e. GE Amersham Health in the UK, Tyco Healthcare in Hollandand CIS bio in France). DRAXIMAGE’s marketing activities in Europe are at theirearliest stages pending regulatory approvals in this jurisdiction. As of December 31,2005, DRAXIMAGE had five regulatory submissions filed with European regulatoryauthorities: four with the Medicines Evaluation Board in the Netherlands andone with the Danish Medicines Agency. The submission dates for theseradiopharmaceutical products range from June 2003 to December 2004. Allof the approvals sought by DRAXIMAGE in Europe are for marketing authorizationsthrough the mutual recognition procedure which involves obtaining approval inone state (the “reference member state”) and recognition of that approval inother member states. All of the approvals being sought in Europe are forradiopharmaceutical products already approved in Canada or the U.S. One ofthese five European submissions was for DRAXIMAGE’s kit for the Preparation ofTechnetium Tc-99m Albumin Aggregated Injection (MAA Kit) for which DRAXIMAGEreceived approval for in one reference member state, the Netherlands, in February 2005.

 

One distribution agreement forthe Benelux countries, with the Netherlands-based IDB Holland B.V., has beenconcluded, and others are being sought.

 

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### **Research and Development**

### ** **

DRAXIMAGE conducts both basicresearch on its own products and development work on in-licensed products andtechnology developed by other firms, predominantly in the biotechnology field. DRAXIMAGEapplies its chelating expertise and technologies to link these compounds withradioisotopes to create innovative diagnostic and therapeuticradiopharmaceuticals.

 

In October 2003, DRAXIMAGEreceived a U.S. patent for a new family of chelating compounds that havesignificant potential for the development of imaging and radiotherapeuticagents to diagnose and treat diseases, including cancerous tumors or metastases.We believe that the new family of chelating compounds will permit the discovery of diagnostic imagingagents to visualize important biological receptors or receptor-positive tumorswhen combined with gamma-emitting radioisotopes. We believe that the compoundsare also potentially useful as therapeutic radiopharmaceuticals for the in-vivotreatment of tumors and metastases.

 

DRAXIMAGE is also able to providelabeling technology for other companies for use with monoclonal antibodies andpeptides. We are also working on the development of novel therapeutic uses ofradioactivity.

 

DRAXIMAGE personnel haveextensive experience developing and optimizing formulations applicable to thelyophilization manufacturing processes used in the production of cold Tc-99mKit products.

 

### **Employees**

### ** **

As at December 31, 2005,DRAXIMAGE had 82****employees (representing 16.7% ofthe Company’s employees), consisting of: 9 general management and administration employees, 12 marketing, sellingand customer service employees, 15 quality operations employees, 33manufacturing employees, and 13 research and development employees. None ofthese employees are unionized.

 

### **Patents**

### ** **

Most of DRAXIMAGE’s products arecovered by patents held by DRAXIMAGE or licensed from third parties. DRAXIMAGEhas numerous patents issued and allowed and patent applications pending in theUnited States, Canada, Europe and Japan. For example, DRAXIMAGE has variousU.S. issued patents related to chelates for radiopharmaceutical applicationsand process patents for the preparation of certain radiopharmaceuticals. Inaddition, DRAXIMAGE has licensed from BTG International Limited (formerly knownas the British Technology Group) certain U.S. patents covering its *INFECTON*Ò product.

 

DRAXIMAGE also relies on tradesecrets, know-how and other proprietary information to protect its currentproducts and technologies. To protect DRAXIMAGE’s rights in these areas, itrequires all licensors, licensees, customers and significant employees to enterinto confidentiality agreements. There can be no assurance, however, that theseagreements will provide meaningful protection to DRAXIMAGE’s patents, tradesecrets, know-how or other proprietary information in the event of anyunauthorized use or disclosure of such patents, trade secrets, know-how orother proprietary information.

 

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**OtherCollaboration Agreements**

** **

We have continuing financialinterests associated with our collaboration agreements with Pfizer with respectto *ANIPRYL**®* and with Shire withregard to Canadian sales of products divested in 2003. As of January 1,2005 all deferred revenue related to the SpectroPharmÒ line of products from GSK was fully amortized bythe Company.

 

*ANIPRYL**®*

 

Beginning in 1990, we expanded onour knowledge and experience with selegiline by initiating directly on our ownbehalf, as well as through contract research arrangements, studies designed toinvestigate the potential of selegiline for companion animal use. Thisinitiative ultimately resulted in the formation of our subsidiary DAHI, throughwhich the Company developed and commercialized a companion animal healthproduct, *ANIPRYL**®*.

 

*ANIPRYL**®* is a selegiline productdeveloped for use in veterinary prescriptive applications, particularly in dogs.The two indications for which *ANIPRYL**®* is currently approved arecanine Cushing’s disease and canine cognitive dysfunction syndrome (“CDS”).

 

Cushing’s disease refers toincreased blood cortisol and the presence of one or more typical clinicalsigns, such as change in appetite, obesity, frequent urination, abdominaldistension, loss of hair, lethargy and other behavioral changes. Canine Cushing’sdisease is the form of the disorder that is due to primary hyperfunctionof the pituitary gland.

 

CDS, sometimes known as “Old DogSyndrome,” refers to the onset in elderly dogs of behavioral problems unrelatedto a generalized medical condition such as neoplasia, infection or organfailure. Typical signs of this disorder can include confusion, disorientation,decreased activity, changes in sleep/wake cycles, loss of house training andloss of interest in or ability to interact with its owner and environment.

 

From March 1991 to November 1996,DAHI’s common shares were publicly traded on NASDAQ. In November 1996, theCompany took DAHI private in a mandatory share exchange transaction.

 

In December 1997, we enteredinto an alliance with Pfizer whereby Pfizer was granted a perpetual exclusivelicense to market, sell and distribute *ANIPRYL*® in exchange for non-refundable fees, royaltiesbased on the worldwide sales of *ANIPRYL*®, a manufacturing and supply agreement and aresearch collaboration.

 

In December 1999, theCompany and Pfizer amended the terms of the alliance (the “First Amendment”)whereby $9.0 million of potential additional non-refundable fees wereeliminated in exchange for the Company receiving additional regulatory supportfor a potential new indication and additional manufacturing data. Thesepotential additional non-refundable fees would have become payable if Pfizer hadexercised its rights to acquire product registrations following regulatoryapproval of *ANIPRYL*® in designated European countries.

 

In April 2001, we received apayment of $1.5 million with respect to minimum royalty entitlements for thefirst three-year period ended December 31, 2000.

 

In December 2001, theCompany and Pfizer further amended the term of the alliance (the “SecondAmendment”) whereby the Company received a payment of $3.1 million with respectto

 

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minimumroyalty entitlements for the second and third three-year periods ended December 31,2001 and 2002 and modifications to future royalty entitlements. The SecondAmendment also resulted in all rights to *ANIPRYL*® outside of North America reverting back to theCompany, forfeiture of any additional minimum royalty entitlements and thetermination of any future collaborative research on new indications orformulations for *ANIPRYL*®.

 

Cumulatively to December 31,2005, we received a total of $28.1****million innon-refundable fees and $16.4****million inroyalties and royalty-related payments relating to *ANIPRYL*Ò.

 

Under the amended arrangement, wewill not be entitled to receive any additional non-refundable fees but willcontinue to earn royalties on Pfizer’s sales of *ANIPRYL*® in the United States and Canada. The $28.1million of non-refundable fees already received from Pfizer have been deferredand are being recognized as revenue on a straight-line basis over the period toDecember 31, 2006 in conformity with Staff Accounting Bulletin No. 101published by the U.S. Securities and Exchange Commission.

 

We currently do not intend topursue any additional or expanded indications for *ANIPRYL*®.

 

*ANIPRYL*® is currently approved for sale in Canada, theUnited States, Australia, United Kingdom, New Zealand and Brazil.

 

In 1997, DAHI filed forregulatory approval of *ANIPRYL*® in Europe by using the decentralized procedure. Thisprocedure allows DAHI to file the *ANIPRYL*® submission in a country of its choice, and to designatefive additional member states of the European Union as the countries that willreview and approve the regulatory submissions. DAHI chose the United Kingdom asthe country in which to file the initial *ANIPRYL*® applications. In July 2003, DAHI receivedauthorization from the Veterinary Medicines Directorale (“VMD”) to market *ANIPRYL*® tablets for dogs in theUnited Kingdom. The United Kingdom submission is currently being reformatted inorder to be suitable for submission to other European Union member states. TheVMD will act as DAHI’s advocate in this procedure.

 

DRAXIS may continue to seekveterinary regulatory approvals for *ANIPRYL*® in other jurisdictions, as appropriate.

 

### **Sales and Marketing**

### ** **

Under the terms of the amendedarrangement, Pfizer will continue to market and sell *ANIPRYL*® in the United States and Canada.

 

In July 2003 DRAXIS grantedCeva Santé Animale S.A. (“CEVA”) an exclusive license for Europe for themarketing and distribution of *ANIPRYL*®.

 

DRAXIS may continue to seek *ANIPRYL*® marketingpartnerships for additional countries outside North America and Europe.

 

### **Manufacturing**

### ** **

DAHI’s primary supplier ofselegiline for the production of *ANIPRYL*® is Chinoin Pharmaceutical and Chemical Works Co.Ltd (“Chinoin”). In 1995, DAHI developed the data required to qualify analternative source of supply for selegiline, and the BVA and the FDA haveaccepted the data.

 

Under its supply agreement withPfizer, DAHI is entitled to designate a third-party supplier or to manufacture *ANIPRYL*® itselfin a qualified facility.

 

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During 2000, Pfizer qualified oneof its own facilities to manufacture *ANIPRYL*® for the North American marketplace. During 2000and up to the second quarter of 2005, Pfizer manufactured *ANIPRYL*®.

 

Since the second quarter of 2005,DRAXIS Pharma manufactures *ANIPRYL*® at its manufacturing facilities in Kirkland,Québec.

 

### **Competition**

### ** **

The animal health marketplace isgenerally served by veterinary, agricultural or animal health divisions oflarge international pharmaceutical and chemical companies that are involved inresearch and development activities. Products resulting from their activitiesmay, in the future, compete directly with *ANIPRYL*®.

 

We are not aware of any otherHPFBI, BVA or FDA approved product available at this time that competesdirectly with *ANIPRYL*®. In the United States, the 1988 generic animaldrug law offers marketing protection from veterinary generic applicants in theUnited States for a period of five years. This period ended in 2002, in thecase of *ANIPRYL*®. However, that law does not prevent other companiesfrom repeating the full clinical New Drug Application process to seek FDAapproval for a bio-equivalent product, nor does it prohibit human genericversions of *ANIPRYL*® from being sold to veterinarians. Any suchcompetitor, including sellers of a human or veterinary generic selegiline,would be subject to DAHI’s U.S. and international patent rights.

 

No significant competition for *ANIPRYL*® hasbeen experienced to date in Canada or the United States from products approvedfor veterinary or human use. However, there are two other treatments availablethat have not been approved in Canada or the United States to treat canineCushing’s disease, that we believe may be being used off-label for canineCushing’s disease:  *LYSODREN**®* (mitotane) byBristol-Myers Squibb Co., which was approved for use in the treatment of humaninoperable cancer of the adrenal gland and *NIZORAL**®* (ketoconazote) tablets byJohnson & Johnson Inc., an anti-fungal medication, which was approvedfor the treatment of various internal and external fungal and yeast infectionin humans. These competitive treatments work by selectively killing the outerlayer of the adrenal gland, thereby limiting production of corticosteroid. Thehuman generic version of *ELDEPRYL*® is not approved for the treatment of canineCushing’s disease or CDS in Canada, the United States or elsewhere. However, webelieve that such use of human selegiline may compete with the use of *ANIPRYL*® in dogs. The dosagerequired for dogs suffering from canine Cushing’s disease and CDS, in mostcases, is much higher than the human 5mg dose for selegiline.

 

Patents for the use of *ANIPRYL*® forthe treatment of dogs with conditions including canine Cushing’s disease andCDS are issued in Canada, the United States and other jurisdictions. DAHI ispositioned to enforce its proprietary patent rights and defend itself againstinfringement by other parties.

 

### **Patents**

### ** **

In September 1992,the United States Patent and Trademark Office issued a patent to DAHI entitled “Useof l-deprenyl for Retention of Specific Physiological Function.”  The patent claims specific uses of l-deprenylfor use in treating dogs and covers currently sold products. Similar patents havealso issued to DAHI in many foreign jurisdictions, including Canada, NewZealand, Venezuela and Europe. Six additional U.S. patents have alsoissued to DAHI. These patents cover various veterinary pharmaceutical uses ofl-deprenyl such as treatment of Cushing’s Disease, weight loss, treatment ofimmune system dysfunction, extension of life expectancy of dogs, and treatmentof hearing loss. Four of

 

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these six patents werealso filed in foreign countries that have major companion animal markets. Themarkets for the cognitive disease patents are Canada, U.S., Europe, Japan,Mexico, Venezuela, New Zealand and Malaysia. The markets for the Cushing’sDisease patent are Europe, Canada and the U.S. The markets for the survivalcure shifting patent are Canada, Norway, Finland and Europe. The markets forthe treatment of hearing loss patent are Japan and Canada. The patents held byDAHI have expiry dates ranging from August 31, 2010 to June 3, 2016.

 

The European CDS patent wassubject to an opposition procedure initiated by Ceva. Ceva holds patents in theUnited States, Canada and Europe relating to the use of selegiline for treatingbehavioral disorders with change of mood in dogs and cats. Ceva’s Europeanpatent was subject to an opposition procedure by DAHI. In July 2003,DRAXIS and Ceva agreed to discontinue the opposition proceedings between thembefore the EPO. DRAXIS also granted Ceva an exclusive license for Europe forthe marketing and distribution of *ANIPRYL*® or the use of *ANIPRYL*® claims. In return, Ceva agreed to pay DAHI apercentage royalty on European sales of *ANIPRYL*® and/or the use of *ANIPRYL*® claims, in addition to nominal milestone paymentsupon the regulatory approval of *ANIPRYL*® in the UK and in subsequent additionaljurisdictions within the European Community. The agreement also gave DAHI therights to use Chinoin selegiline in any jurisdiction.

 

*SpectroPharm® Product Line*

 

In May 2000, we entered intoan arrangement with Block Drug Company (Canada) Limited, now part ofGlaxoSmithKline Consumer Healthcare, with respect to the SpectroPharm® line of non-prescription dermatology products,which included the sale of product rights by the Company in exchange for anon-refundable fee, the acquisition of inventory on hand, a supply agreementand a technical services arrangement. The $9****millionwe received with respect to the SpectroPharm® product rights was deferred and was recognized asrevenue on a straight-line basis over the period to January 31, 2005. Asof January 31, 2005, all deferred revenue related to the SpectroPharmÒ line of products wasfully amortized.

 

**Discontinued Operations (DRAXIS Pharmaceutica)**

 

In July 2003, we completedthe divestiture of our Canadian pharmaceutical sales and marketing division,DRAXIS Pharmaceutica, with the sale to Shire of substantially all remainingproducts of the division, including the Canadian product rights for Alertec®, Diastat®, Hectorol®,Permax® and Zanaflex®. Shireagreed to pay DRAXIS through a combination of cash and contingent milestonepayments plus royalties on future product sales. We have received $9.6 millionin cash from Shire and could receive up to an additional $2.9 million inmarket-driven contingent milestones****overthe next several years. In addition, Shire assumed responsibility for thefinancial provisions of the license agreement related to Permax®.Thistransaction is in addition to the $6.5 million received by DRAXIS in March 2003from affiliates of Elan for the return of Canadian rights for several of Elan’sneurology products that had not achieved regulatory approval in Canada.

 

**Government Regulation**

 

Our business is governed by avariety of industry-specific statutes and regulations in Canada, the UnitedStates and other countries.

 

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**DRUGS**

 

### **Drug Approval Process**

### ** **

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

#### *** ***

In Canada, pharmaceuticalresearch, development and marketing activities are regulated by the Food andDrugs Act (Canada) and the rules, regulations, policies and guidelines madethereunder. The Food and Drugs Act (Canada) is administered by the TherapeuticProducts Directorate of the HPFBI (“TPD”), which regulates the use and sale ofdiagnostic and therapeutic products in Canada. In the United States, theseactivities are regulated under laws administered by the Food and DrugAdministration (“FDA”), which also have a significant impact on the Company’sactivities.

 

The drug research and developmentprocess consists of both pre-clinical and clinical phases. The pre-clinicalphase consists of screening compounds to identify the most promising leads forcontinued drug development prior to human clinical trials and evaluating thedrug’s toxic and pharmacologic effects to show that the drug is reasonably safefor use in the initial clinical studies. The clinical phase involves clinicaltrials with healthy participants, as well as patients with specific diseases orconditions.

 

Before commencing clinical trialsin Canada or the United States, an Investigational New Drug (“IND”) applicationmust be submitted with the TPD (in the United States, with the FDA). The INDapplication includes manufacturing data, pre-clinical data, information aboutuse of the drug in humans for other purposes and a detailed protocol for theconduct of clinical trials.

 

In Canada and the United States,clinical trials of new pharmaceutical products involve three phases. In PhaseI, the product’s safety is assessed during clinical trials involving a limitednumber of healthy volunteers or patients. In Phase II, the product’s efficacy,dosage and safety are tested on a small number of patients with a known disease.In Phase III, controlled clinical trials are conducted in which the product isadministered to a larger number of patients with a known disease, and furtherinformation relating to safety and efficacy is gathered. Further, in Phase III,the effectiveness of the product is, in certain cases, compared to that ofaccepted methods of treatment. If clinical studies establish that the producthas value, an applicant files a New Drug Submission with the TPD (or a New DrugApplication, or Product License Application or Biologic License Application(for biological products) with the FDA) to obtain marketing approval for theproduct. The New Drug Submission/New Drug Application/Product LicenseApplication/Biologic License Application includes a comprehensive summary andanalysis of the results of the clinical trials, information relating toproposed labeling and packaging materials, and data relating to the proposedmanufacturing and quality control procedures. If the New Drug Submission/New DrugApplication/Product License Application/Biologic License Application is foundto be satisfactory, a marketing authorization is issued (in Canada, the TPD issuesa Notice of Compliance).

 

The process of completingclinical trials and obtaining regulatory approvals for a new drug will, ingeneral, take a number of years and require the expenditure of substantialresources. Once a New Drug Application/New Drug Submission or Product LicenseApplication/Biologic License Application is submitted, there can be noassurance that the TPD or FDA will review and approve the application in atimely manner. In certain limited circumstances, the TPD will permit a New DrugSubmission to be subject to a priority review. The TPD’s Priority ReviewProcess allows for a faster review to make available promising drug productsfor a serious, life-threatening or severely debilitating illness or conditionfor which there is substantial evidence of clinical effectiveness that the drugprovides: (i) effective treatment, prevention or diagnosis of a disease orcondition for which no drug is presently marketed in Canada; or (ii) asignificant increase in efficacy and/or significant decrease in risk such that

 

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the overall benefit/riskprofile is improved over existing therapies, preventatives or diagnostic agentsfor a disease or condition that is not adequately managed by a drug marketed inCanada.

 

Even after initial approval hasbeen obtained, further studies, including post-marketing studies, may berequired to provide additional data on safety necessary to gain approval forthe use of the product as a treatment for clinical indications other than thosefor which the product was initially tested. The TPD and FDA may alsorequire post-marketing surveillance programs in order to monitor long-termrisks and benefits of the drug, to study different dosages or evaluatedifferent safety and efficacy parameters. Results of post-marketing studies may limitor expand the further marketing of products. A serious safety or effectivenessproblem involving an approved new drug may result in TPD or FDA actionrequiring withdrawal of the product from the market and possible civil action.

 

The Special Access Program of theTPD provides practitioners with access to pharmaceutical, biologic andradiopharmaceutical products that are not yet approved for sale in Canada totreat patients with serious or life-threatening illness or conditions whenconventional therapies have failed, are unsuitable or unavailable. The FDAadministers a similar program in the United States to treat patients withimmediately life-threatening diseases.

 

Outside of Canada and the UnitedStates, the regulatory approval process for the manufacture and sale ofpharmaceuticals varies from country to country, and the time required may belonger or shorter than that required for TPD or FDA approval. To the extent itchooses to explore foreign markets, the Company may rely on foreignlicensees to obtain regulatory approval for marketing its products in foreigncountries.

 

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

#### *** ***

In Canada, the drug approvalprocess for veterinary pharmaceuticals is similar to the process for obtainingapprovals for human pharmaceuticals. To receive regulatory approval, a newanimal drug must successfully complete a number of developmental phases whichinclude the establishment of safety and efficacy in target species,establishment of manufacturing procedures and the conduct of controlledclinical trials in which the drug is administered to a large number of animalsin order to gather further information relating to safety and efficacy.

 

Following the completion ofclinical trials, an applicant files a New Drug Submission to the VeterinaryDrugs Directorate.

 

### **Drug Marketing**

### ** **

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

#### *** ***

Prescription drug productsgenerally are made known to healthcare professionals through advertisements andvisits to such professionals, known as “detailing.”  In Canada, unlike the United States,product-specific advertising to the general public is generally not permitted,subjected to very limited exceptions.

 

An increasing percentage of salesof prescription pharmaceuticals relates to sales of products which are paidfor, in whole or in part, by government or private insurance drug plans. Inmany jurisdictions, governments have established regimes to control drugpricing at the retail pharmacy level. Most Canadian provinces have implementeddrug benefit formularies. A formulary lists the drugs for which a provincialgovernment will reimburse qualifying persons and the prices at which thosedrugs will be reimbursed. Although there is not complete uniformity amongprovinces, generally speaking,

 

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provincial governmentswill reimburse an amount equal to the lowest available price of the genericversions of any drug listed on the provincial formulary. The legislativeregimes of most provinces also permit generic drug substitution, even forpatients who do not qualify for government reimbursement. The effect of theseinitiatives is to encourage the sale of lower-priced generic versions ofpharmaceutical products. In the United States, beginning in 2006, Medicarebeneficiaries will be offered a prescription drug benefit. Medicare willcontract with at least two risk-bearing drug plans in each of 34 regions toprovide the new benefit. The prescription drug plans will cover at least twodrugs in each therapeutic class or category of covered drugs, but may establishformularies and tiered-cost amounts. The prescription drug plans may limittheir coverage to two drugs in each therapeutic class or category ofcovered drugs. The effect of this new program will allow prescription drugplans to negotiate price discounts and rebates with drug companies.

 

Furthermore, there have been, andthe Company expects that there will continue to be, an increasing number ofproposals to implement government and other third-party payer restrictions onthe pricing of prescription pharmaceuticals as a result of continuing effortsto contain or reduce the costs of healthcare throughout North America. See Item3:  Key Information - Risk Factors. Notably,in Canada, the Patented Medicines Prices Review Board (“PMPRB”) sets themaximum price that can be charged for a patented drug (see below).

 

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

#### *** ***

In Canada, veterinary “prescription”pharmaceuticals are available only through veterinarians. Veterinary prescriptiondrugs are generally promoted by manufacturers through advertisements toveterinarians and sales visits to animal health clinics. In Canada, unlike theUnited States, product-specific advertising to the general public is generallynot permitted, subjected to very limited exceptions.

 

The PMPRB has the jurisdiction toregulate maximum pricing of veterinary drugs (see below). There are nogovernment reimbursement plans in the veterinary pharmaceutical marketplace. Thereare a few private pet insurance plans; however, these plans do not cover asignificant portion of the purchase for veterinary drugs. Accordingly, theveterinary marketplace is not subject to the same cost containment measuresthat are prevalent in the human pharmaceutical market.

 

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

### ** **

Companies that have inventedhuman or veterinary drugs can apply for patent protection virtually worldwide,subject to strict rules relating to timing, subject matter and the scopeof protection sought. Patents can cover many aspects of a pharmaceuticalproduct, including the drug itself, processes for preparing the drug, deliverysystems and new uses for the drug. Patents do not, however, guarantee that theowner of the patent or its licensee can utilize the patented invention becausethere may be pre-existing patent rights owned by a third party. While apatent permits the owner or its licensee to prevent others from doing what iscovered by the patent, competitors are always free to market products that donot infringe the particular patent, provided such competitors otherwise complywith health regulatory requirements.

 

Historically, pharmaceuticalcompanies have relied heavily upon patents to protect proprietary positions inrespect of drug products. The Company’s policy is to protect its technology,inventions and improvements by, among other things, filing patent applicationsfor technology it considers important to the development of its business. TheCompany also relies upon trade secrets, know-how and licensing opportunities todevelop and maintain its competitive position.

 

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Under United States patent law, apatent is issued to the person who made the invention first, rather than to thefirst person to file an application therefor, as is common in other countries,such as Canada. Consequently, in determining who is entitled to a United Statespatent for a particular technology, it is important toconsider that it is possible for an inventor to establish an entitlement based ona prior invention, notwithstanding an earlier filed patent application. Priorinvention may not be established before December 8, 1993, in a NAFTAcountry other than the United States, or before January 1, 1996, in a WTOmember country other than a NAFTA country.

 

Remedies for patent infringementare created under the laws of Canada and the United States. In addition to thestandard legal action for patent infringement, in 1993, the Canadian Governmentenacted Regulations under the Patent Act (Canada) whereby a company proposing ageneric version for a drug which has been marketed in Canada under a Notice ofCompliance and in respect of which patents have been listed on the PatentRegister, must address those patents before a Notice of Compliance may begranted. The originator of the drug may apply to the Federal Court ofCanada for an order prohibiting the Minister of National Health and Welfarefrom issuing a Notice of Compliance until the issue of possible patentinfringement has been resolved. Similar proceedings are available in the UnitedStates if a generic drug manufacturer seeks approval for a drug in respect ofwhich patents have been listed in the Orange Book (the United States equivalentof the Patent Register).

 

As mentioned above, in Canada, thePMPRB monitors and controls prices of drug products marketed in Canada bypersons holding, or licensed under, one or more patents relating to those drugproducts. The PMPRB approves the introductory price of a drug product (based ona comparative analysis) and requires that subsequent price increases do notexceed the annual increase of the Canadian Consumer Price Index. Thus, inCanada, the existence of one or more patents relating to a drug product, whileproviding some level of proprietary protection for the product, also triggers agovernmental price control regime which significantly impacts on the Canadianpharmaceutical industry’s ability to set pricing.

 

### **Drug Manufacturing**

### ** **

Pharmaceutical companies arerequired to submit as part of their New Drug Submission in Canada, or as part oftheir New Drug Application in the United States, detailed descriptionsregarding the proposed manufacturing and packaging process and the identitiesof the manufacturers in respect of a particular drug. A decision to manufactureor package products in a facility other than that originally approved under theNew Drug Application or New Drug Submission (as may be the case withcontract manufacturing outsourcing) requires notification of the regulatoryauthorities and can result in significant delays in production.

 

Pharmaceutical manufacturingfacilities are subject to strict quality control standards including currentgood manufacturing practices (“cGMPs”). Production processes within a facilityare subject to one-time validation testing, as well as periodic review. In thecase of sterile product manufacturing, including lyophilized products, thestandards are even higher than for the manufacturing of non sterile products. Themanufacture of radioactive drugs is subject not only to cGMPs but also theenvironmental safety, handling and transportation requirements of the CanadianNuclear Safety Commission (“CNSC”) and the United States Nuclear RegulatoryCommission (“NRC”). There are no issues with respect to radioactive waste disposalsince all of the isotopes used in nuclear medicine are short-lived and can beeasily stored on site until decayed and then disposed of.

 

The FDA, HPFBI, CNSC and NRCconduct regular audits of the Company’s facilities to ensure compliance withcGMPs and other statutory requirements. See Item 3: Key Information - RiskFactors.

 

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**MEDICAL DEVICES**

 

In Canada, the development, testing,manufacture, labelling and promotion of medical devices is regulated by theFood and Drugs Act (Canada) and the rules, regulations, policies and guidelinesmade thereunder.  The Food and Drugs Actis administered by the TPD.  In theUnited States, these activities are regulated under lawsadministered by the FDA which also have asignificant impact on the Company’s activities.

 

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

 

The Special Access Program ofthe TPD provides practitioners with access to medical devices that are not yetapproved for sale in Canada in emergency use cases or when conventionaltherapies have failed, are unavailable or are unsuitable to treat a patient.

 

In the UnitedStates, the FDA regulates the design, manufacture, distribution, qualitystandards and marketing of medical devices. If a device is “substantially equivalent” toone that is currently marketed, the device is not required to undergo adetailed approval process involving the conduct of clinical trials.  The time to obtain approval can be as shortas 90 days.  In the United States thisprocess is called a 510(k) clearance.  If adevice does not qualify for 510(k) clearance, a pre-market approval (“PMA”) isrequired.  As part of the approval of aPMA application, the FDA typically requires human clinical testing to determinesafety and efficacy of the device.  Thereview period for a PMA application is fixed at 180 days, but the FDA typicallytakes much longer to complete the review.

 

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

 

**ENVIRONMENTALLAWS**

 

Canadian and U.S. federal,state, local and provincial regulations govern extensively the use,manufacture, storage, handling, transport and disposal of hazardous materialsand associated waste products.  TheCompany is not aware of any material environmental issues that affect theCompany’s utilization of its assets.  TheCompany has not received any notice stating that it is not in compliance withenvironmental legislation applicable to it.

 

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**ORGANIZATIONALSTRUCTURE**

 

Thefollowing chart illustrates the corporate organization and jurisdictions of theCompany and its significant affiliates as at March 31, 2006.

 

 

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(1) DRAXIS Specialty Pharmaceuticals Inc. has twodivisions, DRAXIMAGE (radiopharmaceuticals) and DRAXIS Pharma (contractmanufacturing).

 

All of the above-depictedcompanies are wholly owned subsidiaries of DRAXIS Health Inc.

 

**PROPERTY,PLANTS AND EQUIPMENT**

 

Oursole operating facility is a 247,000-square-foot pharmaceutical manufacturingfacility which houses the DRAXIMAGE and DRAXIS Pharma operations.  The facility is owned by DRAXIS SpecialtyPharmaceuticals Inc., a wholly-owned subsidiary of the Company and is locatedat 16751 Trans-Canada Road, Kirkland, Québec, Canada, H9H 4J4.  See “Risk Factors – Risks Related to ourCompany – Our Manufacturing Operations are Concentrated in One Location”.  Factors beyond our control could cause aninterruption in our manufacturing operations, which could adversely affect ourreputation in the market place and our results of operations”.

 

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Webelieve that the above-noted property is suitable and adequate for its businesspurposes as presently contemplated.  Wehave an undrawn credit line issued by our principal bankers, the National Bankof Canada who have a first ranking mortgage on all of our assets.  However, as of March 31, 2006, we had nothird-party debt outstanding.

 

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

 

Thefollowing management, discussion and analysis (“MD&A”) of the financialcondition and results of operations of DRAXIS Health Inc. (“DRAXIS” or the“Company”) should be read in conjunction with the Company’s consolidatedaudited financial statements and notes thereto for the year ended December 31,2005.

 

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

 

Readersare cautioned not to place undue reliance on forward-looking statementscontained in this MD&A since actual results could differ materially fromwhat we expect if known or unknown risks affect our business or if an estimateor assumption turns out to be inaccurate. We disclaim any intention and assume no obligation to update anyforward-looking statement even if new information becomes available as a resultof future events or any other reason. See “Forward-Looking Statements” on page 77 hereof.

 

Thediscussion and analysis contained in this MD&A are as of February 28, 2006.

 

**Overview**

 

DRAXISis a specialty pharmaceutical company providing pharmaceutical products inthree major categories: sterile, including sterile lyophilized (freeze-dried)pharmaceuticals; non-sterile specialty pharmaceuticals; andradiopharmaceuticals.  In theradiopharmaceutical category, DRAXIS has its own products and a targetedresearch and development (“R&D”) program for new products.

 

TheCompany is increasingly focusing on the use of GAAP measures both in reportingexternally and monitoring management performance. Specifically, the key metricsthe Company uses to evaluate divisional and consolidated performance are grossprofit margin, operating income, net income and operating cash flow. Non-GAAPmeasures, specifically EBITDA, will continue to be disclosed to provide acomparative link between our historical disclosures as the Company transitionsto more traditional GAAP measures. The Company will continue to reconcile anynon-GAAP measures used with GAAP line items. The Company additionally uses, asa performance measure, cash flows from operating activities less cash flowsused in investing activities.

 

Duringthe third quarter of 2005, the Company’s contract manufacturing operationextended its scheduled shutdown period at the beginning of the third quarter inthe sterile areas, in order to correct an electrical panel failure and makeassociated repairs, and the decision to revalidate the entire sterile areafollowing these repairs and to recalibrate production schedules had materialfinancial implications which hindered third and fourth quarter results. Thisresulted in downward revisions to the Company’s revenue and earnings per share(“EPS”) guidance when production was recommenced and when production schedulesand shipping schedules were finalized. Finalizing and executing on productionschedules in the fourth quarter of 2005 were further hindered by delays inreceiving some component materials from suppliers. Production in contractmanufacturing was ramping up towards normalized production levels by the end ofthe third quarter of 2005.  The overalleffect of the extended shutdown was to negatively affect the Company’s keyfinancial metrics over the second half of 2005 and offset the significantgrowth achieved over 2004 in the first half of 2005.

 

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Highlights for 2005, which include the negative effects of the extendedshutdown, were as follows:

 

•      Recordrevenues of $79.4 million, up 15% from 2004:

 

•      Operatingincome of $9.8 million and not significantly different from 2004.

 

•      BasicEPS from continuing operations of 19 cents per share, down 1 cent per sharefrom 2004.

 

•      Recordnet operating cash flows from continuing operations of $9.3 million, up $4.6million from 2004.

 

**CONSOLIDATED RESULTS OF OPERATIONS(1)AND RECONCILIATION OF NON-GAAP MEASURES**

 

*(inthousands of US dollars, except share related data) (U.S. GAAP)*

 
| **Years ended December 31,**                | ** **   | **2005**    | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------|--------------|-------------|------------|------------|------------|----------|------------|
| Revenues                                    |         |        |       |       |       |     |       |
| Product sales                               | ** **   | **$**       | **72,989** | ** ** | $          | 61,693   |       | $ | 40,535 |   |
| Royalty and licensing                       | ** **   | **6,444**   | ** ** | 7,627      | ** ** | 8,658    | **(2)**    |
| ** **                                  |         | **$**       | **79,433** | ** ** | $          | 69,320   |       | $ | 49,193 |   |
|                                        |         |        | ** ** |       |       |     |       |
| Product  gross margin                       | ** **   | **$**       | **26,153** | ** ** | $          | 21,900   | ** ** | $ | 12,813 | **(3)** |
| *% of Product sales revenues*               | *** *** | ***35.8***  | ***%***    | *35.5*     | *%*        | *31.6*   | *%*        |
| Royalty and  licensing revenue              | ** **   | **6,444**   | ** ** | 7,627      | ** ** | 8,658    | **(2)**    |
| SG&A                                    | ** **   | **(16,185** | **)**      | (13,266    | )          | (9,904   | )          |
| *% of Product sales revenues*               | *** *** | ***-22.2*** | ***%***    | *-21.5*    | *%*        | *-24.4*  | *%*        |
| R & D                                   | ** **   | **(2,103**  | **)**      | (1,948     | )          | (1,594   | )          |
| **EBITDA****(4)**                           | ** **   | **14,309**  | ** ** | 14,313     |       | 9,973    |       |
| *% of Total revenues*                       | *** *** | ***18.0***  | ***%***    | *20.6*     | *%*        | *20.3*   | *%*        |
| Depreciation  and amortization              | ** **   | **(4,545**  | **)**      | (4,457     | )          | (3,287   | )          |
| Operating  income                           | ** **   | **9,764**   | ** ** | 9,856      |       | 6,686    |       |
| *% of Total revenues*                       | *** *** | ***12.3***  | ***%***    | *14.2*     | *%*        | *13.6*   | *%*        |
| Financial                                   |         |        | ** ** |       |       |     |       |
| - Foreign  exchange loss                    | ** **   | **(398**    | **)**      | (374       | )          | (701     | )          |
| - Other                                     | ** **   | **(29**     | **)**      | (296       | )          | (831     | )          |
| Other income                                | ** **   | **—**  | ** ** | 96         |       | —   |       |
| Income tax  provision                       | ** **   | **(1,553**  | **)**      | (1,301     | )          | (874     | )          |
| Minority  interest                          | ** **   | **—**  | ** ** | (4         | )          | 391      |       |
| (Loss)  income from discontinued operations | ** **   | **—**  | ** ** | (61        | )          | 8,531    |       |
| Net income                                  | ** **   | **$**       | **7,784**  | ** ** | $          | 7,916    |       | $ | 13,202 |   |
|                                        |         |        | ** ** |       |       |     |       |
| Net income  (loss)                          |         |        | ** ** |       |       |     |       |
| - From continuing operations                | ** **   | **$**       | **7,784**  | ** ** | $          | 7,977    |       | $ | 4,671 |   |
| - From discontinued operations              | ** **   | **—**  | ** ** | (61        | )          | 8,531    |       |
| ** **                                  |         | **$**       | **7,784**  | ** ** | $          | 7,916    |       | $ | 13,202 |   |
|                                        |         |        | ** ** |       |       |     |       |
| Basic income  (loss) per share              |         |        | ** ** |       |       |     |       |
| - From continuing operations                | ** **   | **$**       | **0.19**   | ** ** | $          | 0.20     |       | $ | 0.13 |   |
| - From discontinued operations              | ** **   | **—**  | ** ** | —     |       | 0.23     |       |
| ** **                                  |         | **$**       | **0.19**   | ** ** | $          | 0.20     |       | $ | 0.36 |   |

 

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*(1)** **Commencing with the quarterended December 31, 2001, the results of operations of DRAXIS Pharmaceutica havebeen reported as discontinued operations (see “Accounting Matters –Discontinued Operations”).*

 

*(2)** **Includes $1,436 of deferredrevenue related to the termination of agreements for BrachySeed®.*

 

*(3)** **Includes $730 of insuranceproceeds.*

 

*(4)**  Incomefrom continuing operations before depreciation and amortization, financialexpense, foreign exchange loss, other income, income taxes and minorityinterest. This earnings measure does not have a standardized meaning prescribedby U.S. GAAP and therefore may not be comparable to similar measures used byother companies. Such measures should not be construed as the equivalent of netcash flows from operating activities (see “Accounting Matters – Non-GAAPMeasures”).*

 

*The following provides a high leveloverview of the consolidated results of the Company. Please refer to thesegmented results for more detailed explanations.*

 

**Comparison of Years Ended December31, 2005 and 2004**

 

Consolidatedrevenues of $79.4 million for the year ended December 31, 2005 represent anincrease of 15% compared with the same period in 2004.

 

Productsales increased 18% or $11.3 million for the year ended December 31, 2005compared to 2004. The increase relates to continued growth in contractmanufacturing revenues, specifically sterile operations, coupled with growth inthe radiopharmaceutical segment and specifically sodium iodide I-131 sales tothe U.S.  The growth in contractmanufacturing was restrained during the second half of 2005 as a result of theextended shutdown period in contract manufacturing.

 

Productgross margin percentages for the year ended December 31, 2005 were similarcompared to the same period of 2004. While overall volumes have increased, thebusiness mix has shifted from the higher margin radiopharmaceutical business tothe relatively lower margin contract manufacturing businesses. Furthermore, asa result of the extended shutdown period in contract manufacturing, unabsorbedfixed manufacturing costs and the cost of unused capacity related to reducedproduction had a negative impact on margins for the second half of 2005.

 

Sinceincreased revenues related to growth in the sterile contract manufacturingoperations and sterile product margins generally are lower thanradiopharmaceutical margins, the overall result is that the increased volumesdo not result in an overall increase to consolidated gross profit margins.Accordingly, the Company believes that product gross margins are best reviewedat the segmental level.

 

Absoluteproduct gross margins have increased for the year ended December 31, 2005 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 selling, general and administrative costs strictly related toforeign currency translation. Since almost all selling, general andadministrative (“SG&A”) expenses are incurred in Canadian dollars, thestrengthening of the Canadian dollar since early 2004 has resulted in anincrease in selling, general and administrative expenses in 2005 relative to2004. Changes to foreign exchange rates have, however, not had a material impacton product gross margin percentages or net income.

 

Forthe year ended December 31, 2005 compared with 2004, royalty and licenserevenues decreased 16%; however, the impact of the completion of theamortization of the deferred revenue related to the SpectroPharm product lineas of January 31, 2005 was partially offset by the receipt of $0.9 million incontingent milestones from Shire BioChem Inc. (“Shire”), which the Companyearned in the first quarter of 2005.

 

Inabsolute dollar terms, the increase in selling, general and administrativeexpenses was 22% for the year ended December 31, 2005 (or 14% excluding foreigncurrency fluctuations) over 2004. Excluding the impact of foreign currencyreporting as described below, the increase in selling, general andadministrative is due to the one-time costs related to the Company’s exitingthe *BrachySeed®* product

 

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line, severance costs related to the Company’s initial steps taken toreduce its overhead cost structure and process improvement initiatives focusedin contract manufacturing.

 

Approximately$1.1 million of the increase in selling, general and administrative spendingfor the year ended December 31, 2005 is a consequence of increased costs inCanadian dollars relative to US dollars as a result of the strengthening of theCanadian dollar since early 2004.  Thisresults from virtually all selling, general and administrative costs beingdenominated in Canadian dollars.

 

Forthe year ended December 31, 2005, research and development costs increased 8%due to activities related to *FIBRIMAGE®* and *INFECTON®*.  Theincreased expenditures were primarily attributable to clinical trial activitiesfor *INFECTON®*, coupled with costs associatedwith the detailed review of *FIBRIMAGE®*Canadian Phase III results and the assessment of optimal Phase III protocolsfor the U.S. by the expert medical advisory panel assembled by the Company.

 

Depreciationand amortization expenses for the year ended December 31, 2005 increased 1%over the same period of 2004 following the completion of the installation andthe validation of the Company’s second lyophilization unit. This expense wasoffset by the completion of amortization of intangibles related to theSpectroPharm product line.

 

Forthe years ended 2004 and 2005, the impact of foreign exchange on the Company’sresults was similar due to the strengthening of the Canadian dollar over thepast two years.

 

Interestexpense and bank charges decreased for the year compared to 2004 due torepayment of third party debt at the end of 2004.

 

Theeffective tax rate for the year ended December 31, 2005 was 17% or 24%excluding the benefits of research and development tax credits.  The Company benefited during 2005 fromstatutory tax rate changes which increased the value of the Company’s losscarryforwards and from tax credits related to research and developmentspending. During 2005 the Company further benefited by approximately $400,000through recognition of the lower effective statutory tax rate attributable tomilestone payments received and through withholding tax refunds received in thequarter but not previously estimated to be recoverable.

 

TheCompany’s effective tax rate will vary from the statutory tax rate depending onthe mix of net income and the statutory rates in the respective jurisdictionsin which the Company operates. The level of tax credits generated from researchand development activities in the radiopharmaceutical business also had theimpact of lowering effective tax rates by $642,000 for 2005.

 

Thebasic weighted-average number of common shares outstanding during 2005 was41,471,798 and has increased from 39,886,219 in 2004 due mainly to the exerciseof stock options.

 

**Comparison of Years Ended December31, 2004 and 2003**

 

Consolidatedrevenues from continuing operations of $69.3 million for the year endedDecember 31, 2004 increased 40.9% compared with the same period in 2003.

 

Productsales increased 52.2% for the year ended December 31, 2004 compared with thesame period in 2003. The increase in product sales throughout 2004 was drivenby a significant increase in contract manufacturing revenues, particularlysterile product revenues. Radiopharmaceutical product sales grew 17.9% in 2004over 2003 driven primarily by sales of sodium iodide I-131 products to the U.S.

 

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Productgross margins for the year ended December 31, 2004 increased as compared withthe same period in 2003, primarily related to significant growth in the sterilebusiness, increased capacity utilization in contract manufacturing and changesto the price structure in contract manufacturing. These differences werelessened by the impact of one-time non-recurring items in 2003 and the impactof shutdown activities in the third quarter of 2004.

 

Thecontract manufacturing business historically has lower margins than theradiopharmaceutical business. As a result, the shift in business mix towardscontract manufacturing is normally dilutive to consolidated gross profitmargins. However, as sterile product sales continued to increase in contractmanufacturing relative to non-sterile product sales, contract manufacturingresults became less dilutive.

 

Royaltyand licensing revenue decreased for the year ended December 31, 2004 comparedwith the same period of 2003 due to a one-time non-recurring item in 2003.Excluding a one-time non-recurring item, royalty and license revenues did notchange significantly from 2003 to 2004.

 

Asa percentage of product sales, selling, general and administrative expensesdecreased for 2004 to 21.5% from 24.4% in 2003. The increase in selling,general and administrative expenses in absolute dollar terms for the year wasprimarily driven by sales and marketing, business development activities andthe cost of long-term incentive plans that are indexed to the Company’s shareprice.

 

Researchand development expenditures increased compared to 2003 due to ramping up ofclinical trial activities related to *FIBRIMAGE®* and *INFECTON®*.

 

Themajority of the costs of the Canadian operations are denominated in Canadiandollars. As the level of revenues denominated in US dollars and other foreigncurrencies increases relative to the underlying cost structure, the Company’soverall gross profit margins are affected. The impact is reflected within thecost of goods sold and selling, general and administration expenses. For 2004,there was an immaterial negative impact on margins related to the strengtheningof the Canadian dollar relative to the benefit of increased higher marginbusiness from the U.S.

 

Depreciationand amortization expense for the year ended December 31, 2004 increased 35.6%over the same period of 2003 following the commencement of depreciation chargeson completed capital projects related to contract manufacturing operations.

 

Foreignexchange loss was $374,000 for 2004 compared to $701,000 in 2003. The decreasein the loss resulted from the strengthening of the Canadian dollar in 2003which continued, to a lesser extent, in 2004, coupled with a reduction in theCompany’s net U.S. monetary position.

 

Interestexpense and bank charges decreased for the year compared to 2003 due to lowerdebt levels. At the end of 2004, all third party debt was repaid.

 

Minorityinterest represents Société générale de financement du Québec (“SGF”) 32.7%share of net income or losses of the Company’s contract manufacturingoperations. Minority interest was neutral to net income compared with a smallincome contribution in 2003. As a result of the acquisition by DRAXIS of allminority interest holdings on April 22, 2004, minority interest no longerimpacts earnings.

 

Discontinuedoperations were neutral to the Company’s consolidated revenues for 2004. In thefirst quarter of 2003, the Company realized an after- tax gain related to the$6.5 million received on the sale of certain product rights to ElanCorporation, plc (“Elan”). In the third quarter of 2003, substantially all ofthe remaining residual discontinued operations’ assets and liabilities weredisposed of and the Company recognized a further net after-tax gain of $4.1million. There are no significant remaining

 

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residual assets and liabilities of the discontinued operations and thoseremaining are not expected to have a significant impact on future earnings ofthe Company.

 

For the year ended December 31, 2004, the Company recorded an incometax expense, expressed as a percentage of pre-tax earnings, of 14%. The incometax expense is below the statutory rates in effect in the jurisdictions inwhich the Company operates as a result of the recognition of deferred incometax assets not previously recognized related to its Canadian operations. Priorto the acquisition, on April 22, 2004, of all minority interest holdings, theCompany was unable to execute tax planning strategies to utilize all of theloss carryforwards available to the Canadian operations. As a result of theacquisition of all minority interest holdings and the significant increase inthe profitability of the contract manufacturing operations, the Company wasable to recognize into income approximately $0.9 million in previouslyunrecognized tax loss carryforwards.

 

The effectivetax rate will fluctuate depending on the profitability of individual operationsand tax rates in the respective jurisdictions in which the Company operates.The level of tax credits generated from research and development activities inthe radiopharmaceutical business also has the impact of lowering effective taxrates.

 

The basicweighted-average number of common shares outstanding during 2004 was 39,886,219and increased from 37,114,648 for 2003, primarily as the result of thecompletion of the equity financing offering of 3,053,436 units (which included3,053,436 common shares) in April 2004 and the exercise of stock options andemployee participation shares.

 

**RADIOPHARMACEUTICALS**

 

*(inthousands of US dollars) (U.S. GAAP)*

 
| ** **                    | ** **   | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** **  |
|-------------------------------|--------------|------------|------------|------------|------------|------------|-------------|
| Revenues                      |         |       |       |       |       |       |        |
| Product sales                 | ** **   | **$**      | **19,290** | ** ** | $          | 17,172     |        | $ | 14,564 |   |
| Royalty and licensing         | ** **   | **9**      | ** ** | —     | ** ** | 1,521      | **(1)**     |
| ** **                    |         | **$**      | **19,299** | ** ** | $          | 17,172     |        | $ | 16,085 |   |
| Product  gross margin         | ** **   | **11,593** | ** ** | 10,028     |       | 8,631      | **(2)**     |
| *% of Product sales revenues* | *** *** | ***60.1*** | ***%***    | ***58.4*** | ***%***    | ***59.3*** | ***%***     |
| SG&A                      | ** **   | **(4,660** | **)**      | (3,906     | )          | (2,944     | )           |
| R & D                     | ** **   | **(2,103** | **)**      | (1,948     | )          | (1,594     | )           |
| **EBITDA****(3)**             | ** **   | **4,839**  | ** ** | 4,174      | ** ** | 5,614      | **(1),(2)** |
| *% of Revenues*               | *** *** | ***25.1*** | ***%***    | *24.3*     | *%*        | *34.9*     | *%*         |
| Depreciation and amortization | ** **   | **(1,047** | **)**      | (949       | )          | (843       | )           |
| Operating  income             | ** **   | **$**      | **3,792**  | ** ** | $          | 3,225      | ** **  | $ | 4,771 | **(1),(2)** |
| *% of Revenues*               | *** *** | ***19.6*** | ***%***    | *18.8*     | *%*        | *29.7*     | *%*         |

 

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(1)   *Includes $1,436 of revenuerelated to the termination of agreements for*BrachySeed®*.*

 

(2)   *Includes $500 of insuranceproceeds.*

 

(3)   *See “Accounting Matters –Non-GAAP Measures.”*

 

Radiopharmaceuticalsand radiotherapy devices 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 kits used in nuclear medicine imaging procedures anda line of imaging and therapeutic products labelled with a variety of isotopesincluding sodium iodide I-131. DRAXIMAGE has a number of products in late-stagedevelopment including: *FIBRIMAGE®*, aproduct that images Deep Vein Thrombosis (“DVT”) and for which a Phase

 

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IIIclinical study in Canada has been completed, although the additional analysisof the data from the study is still ongoing and an expert medical advisorypanel has been assembled; and *INFECTON®,* forimaging infection, which is nearing the completion of Phase II clinical trialsin Canada and the U.S.

 

Highlights inthis segment for the quarter ended December 31, 2005 included:

 

Financialresults:

 

•      Productsales of $19.3 million for the year representing a 12% increase over 2004.

 

•      Productgross margin percentage of 60% compared to 58% for 2004.

 

•      Operatingincome of $3.8 million ($4.2 million, excluding the impact of the costs ofexiting the brachytherapy market) compared to $3.2 million for 2004.

 

Otherhighlights:

 

•      EffectiveMay 2005, the Company appointed Mr. Jean-Pierre Robert as the new President ofthe DRAXIMAGE division.

 

•      OnOctober 6, 2005, the Company announced its strategies for long-term growththrough the addition of new and improved products, further penetration of nichemarkets in North America where the Company has had success, and plans to expandinto new territories and into segments where the Company has not previouslyparticipated.

 

•      OnNovember 22, 2005, the Company announced that it had begun to implement itsstrategy to focus its product offerings. Related to this strategy, the Companyinitiated a process to discontinue the manufacture and sale of implantablebrachytherapy seeds.  The Company establisheda customer supply alternative with Oncura, Inc. All costs related to theCompany’s exit from the brachytherapy market have been fully accrued in 2005.

 

•      OnJanuary 13, 2006, the Company received approval from the U.S. Food and DrugAdministration (“FDA”) regarding its supplemental new drug application forSodium Iodide I-131 Capsules USP, Diagnostic-Oral. These diagnostic sodiumiodide I-131 capsules are intended to be used by physicians to performradioactive iodide uptake tests to evaluate thyroid function prior to treatmentwith stronger therapeutic doses of sodium iodide I-131. The Company plans tointroduce the new diagnostic capsules during the first half of 2006 toqualified/approved nuclear physicians and/or radiopharmacists.

 

**Comparison of Years Ended December31, 2005 and 2004**

 

Revenues forthe year ended December 31, 2005 increased 12% compared with the same period of2004, primarily as a result of higher product sales from radioiodine productsand, specifically, sodium iodide I-131 sales to the U.S.  The increase is related to higher volumesresulting from greater U.S. market penetration.

 

During thefirst quarter of 2005, the Company received approval from the Dutch regulatoryauthority for its Kit for the Preparation of Technetium Tc 99m AlbuminAggregated Injection (MAA Kit). Approval in the Netherlands allowed DRAXIMAGEto initiate the Mutual Recognition Procedure in pursuit of further regulatoryapprovals for this diagnostic imaging product in additional European Unioncountries. This approval was a key milestone in the strategic plan to introduceseveral additional DRAXIMAGE branded products into a number of Europeanmarkets. However, the pace of product approvals remains very slow due to thenature of the approval process and regulator backlog.

 

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For the yearended December 31, 2005, product gross margin was stronger compared to 2004,resulting from the increased market penetration of higher margined productslike sodium iodide coupled with the positive impact of the Company’s decisionto exit the brachytherapy market.

 

Research anddevelopment expenditures increased slightly for the year ended December 31,2005 as compared to 2004 due to the activities related to *FIBRIMAGE®*and *INFECTON®*. Specifically, the increasedexpenditures were mainly for clinical trial activities for *INFECTON®*coupledwith costs associated with the ongoing detailed review of *FIBRIMAGE®*Canadian Phase III**results andactivities of the expert medical panel related to the strategy for the furtherproduct development and design and assessment of Phase III clinical trialprotocols for the U.S.

 

The planned clinical development program for the commercialization of *INFECTON®*is nearing the completion of Phase II withthree of the four planned clinical trial studies completed. All four clinicaltrials took place at sites in the U.S. and Canada. Studies to define the targetmarket population and appropriate clinical applications are under way and areexpected to be completed in time to guide the design of Phase III studies,which are expected to begin in 2006. An expert panel is being assembled toreview the clinical results as they are assessed and analyzed, to reviewpotential target markets, and to advise on the design of Phase III studies andappropriate indications.

 

An expertmedical panel was assembled to assess the results of clinical testing performedto date with *FIBRIMAGE®*in conjunction withmarket related information derived from two market studies that have beenconducted recently.  The report andrecommendations of this expert panel will be used to assess the strategy forfurther development of *FIBRIMAGE*® and design and assessment of Phase IIIclinical trial protocols for the U.S.

 

Selling, general and administrativeexpenses increased for the year ended December 31, 2005, compared to the sameperiods of 2004 mainly due to one-time costs relating to the Company’s exitfrom the brachytherapy market and costs of market research studies andactivities.

 

TheCompany incurred approximately$457,000 of one-time costs associated with the exit of the brachytherapybusiness during 2005. Over 60% of the costs incurred related to accrual oflicense termination costs related to the business and is included in selling,general and administration expense.  Theremainder of the exit costs related to unused inventory components are includedin cost of goods sold. The majority of capital equipment used in the *BrachySeed®* product line, specifically therobotic equipment, is being redeployed in both the radiopharmaceutical andcontract manufacturing segments.

 

Depreciationand amortization expense for this segment increased 10% for the year endedDecember 31, 2005, compared to 2004 due to the amortization of costs related tothe upgrade of warehousing and shipping facilities completed late in 2004.

 

Effective May2005, the Company appointed Mr. Jean-Pierre Robert as the new President of theDRAXIMAGE division.

 

Mr. Robertpreviously served as Vice President and General Manager of Tyco Healthcare(Canada), overseeing domestic and export operations, following its acquisitionof Mallinckrodt (Canada), where he held the same position. Most recently, hewas President and CEO of an emerging Canadian biopharmaceutical company.  He has extensive health care industryexperience, including executive, general management, marketing and sales rolesinvolving diagnostic, pharmaceutical, chemical and laboratory products withMallinckrodt, Fisher Scientific Canada, Hoechst and Bayer (Canada).  He holds a B.Sc. and was a member of theCanadian Society of Nuclear Medicine.

 

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During thethird quarter of 2005, the Company hired Dr. Jean De Serres as Vice President,Clinical Research and Regulatory Affairs. Dr. De Serres has twenty years ofexperience in establishing and managing both small and large teams in medicaland regulatory affairs, clinical research and sales and marketing. He isresponsible for establishing and maintaining clear lines of communication withregulatory agencies in key jurisdictions worldwide, in order to bring newproducts to market in a timely manner. He has initiated a process to prioritize projects in order to acceleratedevelopment of the products currently in the research and development pipelineto maximize their value.

 

During thethird quarter of 2005, the Company hired Mr. Francois Bergeron as the newDirector of Marketing for its radiopharmaceutical business.  Mr. Bergeron previously served as a seniorexecutive in the biotechnology sector and has experience in various marketing,sales, business development and training roles in the pharmaceutical and lifesciences industries. The initial focus of Mr. Bergeron is to maximize thepenetration of the U.S. market through enhanced relationships with existingcustomers. In addition, efforts are under way to establish new internationalpartnerships and distribution networks to facilitate the future sales ofproduct globally.

 

Discussionscontinue between DRAXIMAGE and its major distribution and marketing partners inthe U.S. radiopharmaceutical sector and between potential partners in otherinternational markets to identify new products or product improvementopportunities. The in-licensing of new products or technologies continues to beexplored.

 

**Comparison of Years Ended December31, 2004 and 2003**

 

Revenues forthe year ended December 31, 2004 increased 6.8% compared with 2003 as theincrease in product sales from radioiodine products (substantially sodiumiodide I-131 sales to the U.S.) was offset by a decrease in royalty andlicensing revenue related to one-time non-recurring items in 2003 and lowercold kit sales in the fourth quarter of 2004. While cold kit sales decreased inOctober and November due to changes in customer purchasing patterns, Decembersales returned to traditional levels.

 

On March 1,2004, DRAXIMAGE announced that it had received FDA approval to produce andmarket a new formulation of a diagnostic product for preparing a skeletalimaging agent that is used to demonstrate areas of altered osteogenesis or bonegrowth. The newly formulated diagnostic product, called MDP-25, provides anincreased ability to more effectively image the extremities of the skeleton,particularly the hands and feet.

 

MDP-25 waslaunched in the fall of 2004 with the intent of it being an improvedalternative to MDP-10, but has not yet succeeded in displacing MDP-10 based onits current formulation. Accordingly, the Company anticipates slower growth inMDP-25 sales and continues to provide MDP-10.

 

There were nosignificant changes to shipments of *BrachySeed®*I-125 to the U.S. and Canada in 2004 compared with 2003.

 

For the yearended December 31, 2004, EBITDA margin decreased to 24.3% compared with 25.1%(excluding the impact of one-time non-recurring items in 2003) for the sameperiod of 2003. The decreased margin reflects increased sales and marketingactivities, increased research and development spending and lower sales oflyophilized kits in the fourth quarter of 2004, which offset the increase insales of radioactive sodium iodide I-131 products.

 

The growth inproduct revenues over 2003 was slower than the Company expected and resulted inthe Company issuing reduced revenue expectations in the third quarter of 2004.These reduced expectations were met at year end. EBITDA margin for 2004 waswithin our original guidance targets.

 

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

 

In September2004, the Company received approval from the FDA to initiate a Phase IIclinical trial of *INFECTON®*. Thisstudy will examine patients suffering from bacterial osteomyelitis, a chronicor acute infection of the bone.

 

An interimanalysis of the Phase II images obtained in the *AMISCANTM*  trial werevery clear in definitive myocardial infarction but insufficiently precise invery early equivocal infarction with the current formulation for thisindication. In light of these observances the Company decided in the secondquarter of 2004 to cease further development of this product for infarctimaging in order to concentrate on its other pipeline products, notably *FIBRIMAGE®*and *INFECTON®*.

 

Depreciationand amortization expense for this segment increased slightly compared to 2003.

 

On March 22,2004, DRAXIMAGE concluded a distribution agreement with Isotope ProductsLaboratories (“IPL”), a California-based producer of radioactive sources fornuclear medicine and radiography. DRAXIMAGE will market the full line of IPLmedical products in Canada, including calibration references for imagingapplications plus calibration sources for positron emission tomography andsingle photon emission tomography.

 

**CONTRACT MANUFACTURING**

 

*(inthousands of US dollars) (U.S. GAAP)*

 
| ** **                     | ** **   | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------|--------------|------------|------------|------------|------------|----------|------------|
| Revenues                       |         |       |       |       |       |     |       |
| Product sales                  | ** **   | **$**      | **54,743** | ** ** | $          | 46,461   |       | $ | 26,985 |   |
|                           |         |       | ** ** |       |       |     |       |
| Product  gross margin          | ** **   | **14,628** | ** ** | 11,530     | ** ** | 3,393    | **(1)**    |
| *% of Product sales revenues*  | *** *** | ***26.7*** | ***%***    | *24.8*     | *%*        | *12.6*   | *%*        |
| SG&A                       | ** **   | **(5,086** | **)**      | (3,492     | )          | (2,309   | )          |
| **EBITDA****(2)**              | ** **   | **$**      | **9,542**  | ** ** | $          | 8,038    | ** ** | $ | 1,084 | **(1)** |
| *% of Revenues*                | *** *** | ***17.4*** | ***%***    | *17.3*     | *%*        | *4.0*    | *%*        |
| Depreciation  and amortization | ** **   | **(3,105** | **)**      | (2,417     | )          | (1,448   | )          |
| Operating  income (loss)       | ** **   | **$**      | **6,437**  | ** ** | $          | 5,621    | ** ** | $ | (364 | )**(1)** |
| *% of Revenues*                | *** *** | ***11.8*** | ***%***    | *12.1*     | *%*        | *-1.3*   | *%*        |

 

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(1)   *Includes $230 of insuranceproceeds.*

 

(2)   *See “Accounting Matters –Non-GAAP Measures.”*

 

Manufacturingcomprises the Company’s manufacturing division, DRAXIS Pharma, which is apharmaceutical contract manufacturer with capabilities in a broad range ofdosage forms, specializing in liquid and lyophilized (freeze-dried) injectablesand other sterile products. Operating out of a cGMP-compliant 247,000square-foot facility located in Montreal, Canada, DRAXIS Pharma manufacturespharmaceutical products for DRAXIMAGE, as well as for over 20 otherpharmaceutical clients in many international jurisdictions.

 

•      Highlightsin this segment for the year ended December 31, 2005 are reflective of theimpact of the extended shutdown period which impacted results over the lasthalf of 2005:

 

•      Revenuesof $54.7 million for 2005 represented an increase of 18% for 2004.

 

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•      Productgross margin percentage of 27% compared to 25% for 2004.

 

•      Operatingincome of $6.4 million compared to $5.6 million for 2004.

 

**Comparison of Years Ended December31, 2005 and 2004**

 

The Companyhad originally 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 thesesignificant measures as a result of its internal quality standards. However, asa result of having to recalibrate sterile production schedules based ondiscussions with clients, which continued into mid to late November 2005, thequality control process required for sterile products prior to shipment, and adelay in receiving component parts from a third party manufacturer in thefourth quarter of 2005, product sales in the second half of 2005 werenegatively impacted relative to 2004. However, production levels in the sterilearea returned to pre-shutdown levels by November 2005.

 

Revenues forthe year ended December 31, 2005 increased $8.3 million or 18% over the sameperiod of 2004, even factoring in the negative impact of the extended shutdown.The increase was due to increased demand for the production of *Hectorol® Injection* for Genzyme Corp.(“Genzyme”) and products under the Company’s GlaxoSmithKline (“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.

 

Sterileproducts have accounted for all of the product sales growth on a year-to-datebasis. Sterile products represented 76% of manufacturing revenues on a year todate basis compared to 67% for 2004.

 

The secondlyophilization unit, which was fully installed and validated by early 2005, didnot contribute a significant amount of incremental revenues in 2005 since muchof the activity on the second lyophilizer was in support of meeting customerdemand displaced from the third quarter of 2005 as a result of the extendedshutdown period. The extended shutdown did, however, significantly slow thepace at which the Company was able to carry the normal commercial activities onits second lyophilization unit. This results from the focus being placed onensuring that existing customer demand and requirements were met. Capacity was,accordingly, largely reserved for that purpose in the latter part of 2005.

 

Producttransfer and validation activities are necessary as a precursor to significantcommercial volumes and do not create significant revenues, although theyconsume significant available capacity. Revenues from the second lyophilizationunit are expected to increase beginning in 2006 and more significantly into2007 as the Company refocuses activities back to new product introductions andnew contract negotiations in 2006.

 

Product grossmargin percentage for the year ended December 31, 2005 increased to 27% from25% compared to 2004. The increases are related to volume growth, principallyof higher margin sterile products which 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 labour. Improved capacity utilization has directly resulted inhigher margins through substantially improved absorption of overhead costs. Theextended shutdown had the impact of

 

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loweringproduct gross margin percentage for the full year by between 2-4% and at least5% over the final six months of 2005.

 

Excluding theimpact of foreign currency translation, the increase in selling, general andadministrative expenses for the year end 2005 compared to 2004 relates to theinvestment in process improvement initiatives and severance costs of $250,000related to steps taken to reduce the overhead cost structure in contractmanufacturing. The Company has embarked on process improvement initiativesaimed at enhancing information systems and information technology to improveefficiency and productivity in the key processes of production planning,manufacturing and quality control product release.  We believe the process improvementinitiatives will, over time, increase throughput of volumes within the existingmanufacturing footprint and thereby increase capacity. Furthermore, the Companyexpects to increase operating margins over time through the application of moreefficient processes.

 

Sincevirtually all selling, general and administrative costs are denominated inCanadian dollars and translated into US dollars, the strengthening of theCanadian dollar since early 2004 has resulted in inflated selling, general andadministrative costs upon translation into US dollars of about $346,000 for theyear ended December 31, 2005. These costs are offset by overall growth ofabsolute margins upon translating Canadian denominated sales into US dollars.

 

Depreciationand amortization for the fourth quarter of 2005 increased 29% for the yearended December 31, 2005 over 2004, due principally to completed capitalprojects including additional autoclave capacity, and following the completionof the installation and validation of the Company’s second lyophilization unitin the second quarter of 2005.

 

TheCompany announced on September 1, 2005, that it renewed its productionoutsourcing arrangement with Pfizer Canada Inc., Pfizer Consumer Healthcaredivision. The new three-year manufacturing agreement is effective as of January1, 2005 and will allow the Company to continue to produce severalnon-prescription products as one of a select number of approved suppliers toPfizer Consumer Healthcare Canada.

 

**Comparison of Years Ended December31, 2004 and 2003**

 

For the yearended December 31, 2004, revenues have increased by $19.5 million or 72.2% overthe same period of 2003. The increase was due to the ramp-up in new sterileproducts business related primarily to the production of *Hectorol® Injection* for Bone CareInternational, Inc. (now “Genzyme”) and products under the Company’s GSKcontract. Production of *Hectorol® Injection*has continued to rise throughout 2004. In addition, GSK production rose in 2004as products obtained regulatory approvals in additional foreign markets.Beginning in late 2003, the Company increased its output capacity throughadditional production shifts for its sterile business and is continuing to doso as a result of increasing demand. The 2004 revenue growth also reflects thesignificant impact of the Company’s investment in increasing capacity and workperformed in prior years to introduce new products to our facilities.

 

More than 78%of the revenue growth in 2004 over 2003 is related to sterile products. For2004, sterile products represented approximately 67% of manufacturing revenuescompared to 59% for 2003.

 

EBITDA forthis segment increased $7.0 million for 2004 compared with the same period of2003. The increase is related to the positive impact of the ramping up ofsterile products business throughout 2004, the positive financial impact ofincreased capacity utilization, and changes to the price structure that becameeffective during 2004. For the year ended December 31, 2004, these positivefactors were partially offset by the impact of shutdown activities in the thirdquarter of 2004. In addition to completing regular maintenance activities, the2004 shutdown accommodated the completion of the

 

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installationof a second lyophilizer which materially increases the Company’s lyophilizationcapacity. In addition, the Company increased autoclave capacity which iscritical to reducing bottlenecks and further increasing sterile capacity.

 

Improvedcapacity utilization has directly resulted in better margins throughsubstantially improved absorption of overhead costs.

 

For the yearended December 31, 2004, EBITDA margin was 17.3% compared to 4.0% over the sameperiod of 2003, reflecting the overall volume growth in sterile productsbusiness and the result of price structure changes that became effective during2004. Since sterile product manufacturing carries significantly higher marginsthan non-sterile manufacturing, the shift in business mix to sterile productionthroughout 2004 has driven margins significantly higher. The normal year-endholiday period scale down of production did not have a significant impact onthe results of the fourth quarter of 2004 due to the high volume of productionin the period immediately preceding it. The Company’s improving margins incontract manufacturing also reflect concentrated efforts in early 2004 toensure changes to the underlying costs of manufacturing are fully reflected inthe pricing structure. The impact of these efforts has positively impactedmargins as compared to 2003.

 

Depreciationand amortization for 2004 increased 66.9% over 2003 related to completion of asignificant capital improvement program that commenced in 2002 and wascompleted in 2004.

 

On February23, 2004, DRAXIS Pharma announced that a new collective agreement covering itsunionized hourly employees, represented by the United Food and CommercialWorkers International Union, at its contract manufacturing operations wasreached. The new collective agreement, which is retroactive to May 1, 2003, hasa five-year term. The agreement includes provisions for additional weekendshifts that will effectively allow DRAXIS Pharma to increase productivecapacity and move toward its objective of operating 24 hours a day, 7 days aweek in its sterile area.

 

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**CORPORATE AND OTHER**

 

*(inthousands of US dollars) (U.S. GAAP)*

 
| ** **                     | ** **   | **2005**     | ** **   | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------|--------------|--------------|--------------|------------|------------|----------|------------|
| Revenues                       |         |         |         |       |       |     |       |
| Product  sales                 | ** **   | **$**        | **499**      | ** ** | $          | 274      |       | $ | 863 |   |
| Inter-segment eliminations     | ** **   | **$**        | **(1,543**   | **)**      | $          | (2,214   | )          | $ | (1,877 | ) |
| Royalty and licensing          | ** **   | **6,435**    | ** **   | 7,627      |       | 7,137    |       |
| ** **                     |         | **$**        | **5,391**    | ** ** | $          | 5,687    |       | $ | 6,123 |   |
| Product  gross margin          | ** **   | **(68**      | **)**        | 342        |       | 789      |       |
| *% of Product sales revenues*  | *** *** | ***—*** | *** *** | *—*   | * *   | *—* | * *   |
| SG&A                       | ** **   | **(6,439**   | **)**        | (5,868     | )          | (4,651   | )          |
| **EBITDA****(1)**              | ** **   | **$**        | **(72**      | **)**      | $          | 2,101    |       | $ | 3,275 |   |
| *% of Revenues*                | *** *** | ***-1.3***   | ***%***      | *36.9*     | *%*        | *53.5*   | *%*        |
| Depreciation  and amortization | ** **   | **(393**     | **)**        | (1,091     | )          | (996     | )          |
| Operating  (loss) income       | ** **   | **$**        | **(465**     | **)**      | $          | 1,010    |       | $ | 2,279 |   |
| *% of Revenues*                | *** *** | ***-8.6***   | ***%***      | *17.8*     | *%*        | *37.2*   | *%*        |

 

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

 

The Corporateand Other segment is comprised of: amortization of deferred revenues, royalties**and expenses associated with the Company’s businessagreements with Pfizer Inc. with respect to *ANIPRYL®*;deferred revenues and expenses from GSK Consumer Healthcare with respect to theSpectroPharm line of products; revenues related to royalties and milestonesfrom Shire in connection with the divestiture of DRAXIS Pharmaceutica;non-allocated corporate expenses; and inter-segment eliminations.  The Company follows a policy of notallocating its central corporate expenses to its operating business segments.

 

**Comparison of Years Ended December31, 2005 and 2004**

 

Revenuesrelated to the corporate segment were lower compared to the fourth quarter 2004due to a reduction of deferred revenue amortization offset by lowerinter-segment eliminations. In addition, as of January 31, 2005, all deferredrevenue related to the SpectroPharm line of products was fully amortized.  The amortization of deferred revenue relatedto the SpectroPharm line had accounted for approximately $500,000 of non-cashrevenues per full quarter.

 

Also during2005, revenues for this segment included the receipt of contingent milestonesof $0.9 million from Shire, which the Company earned in early 2005, partiallyoffset by a reduction of deferred revenue amortization.  The contingent milestones are earned based onmarket driven conditions related directly to product sales.

 

Depreciationand amortization 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.

 

Selling,general and administrative expenses increased $571,000 for the year ended 2005compared with the same period in 2004 due to incremental spending on corporatebusiness development activities, regulatory compliance costs related to the *Sarbanes-Oxley Act of 2002*and the impactof foreign exchange in the translation of Canadian denominated costs to USreporting dollars. Aside from the impact of foreign currency, none of thefactors noted has increased selling, general and administrative expenses bymore than $200,000 individually. As a result of the strengthening of theCanadian dollar

 

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versusthe US dollar since early 2004, approximately $438,000 for 2005 is relatedsolely to foreign currency translation.

 

Operatingincome from this segment decreased compared to 2004 due to the factorsdescribed above.

 

**Comparison of Years Ended December31, 2004 and 2003**

 

Revenuesrelated to the corporate segment were slightly lower compared to 2003 asincreased royalties primarily in connection with the sale of product rights toShire were more than offset by increased inter-segment eliminations (transactionsbetween DRAXIMAGE and DRAXIS Pharma) and lower royalties related to *ANIPRYL®*.

 

EBITDA waslower by $1,174,000 for the year ended December 31, 2004 compared to 2003 dueto increased costs of long-term incentive plans, which are valued based on theappreciation in the Company’s stock price and lower royalties related to *ANIPRYL®*. This was partially offset byShire royalties and milestone revenues.

 

Depreciationand amortization expense in this segment in 2004 was largely unchanged ascompared to 2003.

 

**CORPORATE MATTERS**

 

*Appointment of Chief Operating Officer (COO)*

 

On October 4,2005, the Company announced that it named Dan Brazier, formerly Senior VicePresident, Corporate Development and Strategic Planning, as COO of the Company.Mr. Brazier assumes responsibilities for the day-to-day operations across theCompany and reports to Dr. Martin Barkin, President and Chief ExecutiveOfficer.

 

The creationof the COO position is the result of the growth of the Company’s operations inscope requiring a senior executive dedicated to overseeing operating efficiencyand profitability as well as customer service.

 

*NormalCourse Issuer Bid*

 

OnDecember 8, 2005, the Board of Directors of the Company authorized therepurchase for cancellation of up to 3,522,530 of its common shares through aNormal Course Issuer Bid (the “Issuer Bid”), which represented 10% of thepublic float on December 6, 2005.  Inaccordance with the rules of The Toronto Stock Exchange (“TSX”), such purchasesmay be made beginning on December 15, 2005 and ending no later than December14, 2006.

 

As at February28, 2006, 171,400 shares had been repurchased and cancelled at an average priceof CDN$5.15.

 

*Permax*®*Litigation*

 

On July 22,2005, we announced that, together with other defendants, we had received aStatement of Claim filed before the Superior Court of Justice of Ontarioalleging that *Permax*®, a drug that wedistributed in Canada for a third party manufacturer prior to July 2003, causes“compulsive/obsessive behaviour, including pathological gambling”. Theplaintiff is seeking to have this action certified as a class action.  We believe this claim against us is withoutmerit and intend to vigorously defend this proceeding and any motion forcertification.  Prior to July 2003, *Permax*® was

 

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distributedin Canada by DRAXIS Pharmaceutica, our Canadian pharmaceutical sales andmarketing division. In July 2003, we sold the DRAXIS Pharmaceutica division toShire.  No amounts have been accruedpursuant to the claim.

 

*DRAXISAdded to the NASDAQ Biotechnology Index® and the NASDAQ Health Care Index®*

 

On May 23,2005, DRAXIS Health was added to the NASDAQ Biotechnology Index® and on July27, 2005, DRAXIS Health was added to the NASDAQ Health Care Index®.

 

*DisclosureControls and Procedures*

 

As of December31, 2005, an evaluation was carried out, under the supervision of and with theparticipation of management, including the President and Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of our disclosurecontrols and procedures as defined in Multilateral Instrument 52-109.  Based on that evaluation, the President andChief Executive Officer and the Chief Financial Officer concluded that the designand operation of these disclosure controls and procedures were effective, inaccordance with the requirements of Multilateral Instrument 52-109.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*(inthousands of US dollars) (U.S. GAAP)*

 
| ** **                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Cash and  cash equivalents                      | ** ** | **$**      | **12,390** | ** ** | $          | 5,926    |       | $ | 10,563 |   |
| Restricted  cash                                | ** ** | **—** | ** ** | $          | 428        |     | $          | 976 |   |
| Non-financial  working capital (net)**(1)**     | ** ** | **$**      | **18,890** | ** ** | $          | 18,397   |       | $ | 12,780 |   |
| Total debt  (current and long-term)             | ** ** | **—** | ** ** | —     |       | $        | 10,466     |   |
|                                            |       |       | ** ** |       |       |     |       |
| Cash flows  from (used in) operating activities | ** ** | **$**      | **9,319**  | ** ** | $          | 4,755    |       | $ | (3,056 | ) |
| Cash flows  used in investing activities        | ** ** | **$**      | **(4,380** | **)**      | $          | (4,290   | )          | $ | (4,634 | ) |

 

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**(1)****  **Excluding cash and cash equivalents, restricted cash, current portion ofdeferred revenues, current portion of long-term debt and customer deposits.

 
| ** **                                        | ** ** | **Feb 28,  2006** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|
| Common  shares issued and outstanding             | ** ** | **41,495,538**    |       | 41,588,005 |       | 41,015,326 |       | 37,297,817 |       |
| Warrants  issued and outstanding**(2)**           | ** ** | **1,526,718**     |       | 1,526,718  |       | 1,526,718  |       | —     |       |
| Stock  options outstanding                        | ** ** | **2,938,953**     |       | 2,652,620  |       | 2,753,232  |       | 3,097,942  |       |
| Outstanding  options as a % of outstanding shares | ** ** | **7.1**           | **%**      | 6.4        | %          | 6.7        | %          | 8.3        | %          |

 

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**(2)****  **Each whole warrant entitles the holder to acquire one common share atprice of CDN$8.50, subject to certain adjustments, any time prior to April 24,2006.

 

Cash and cashequivalents at December 31, 2005 totalled $12.4 million as compared with $5.9million as at December 31, 2004.  Theincrease is attributable to the increasing cash earnings of the Company andproceeds from the exercise of stock options and is offset by investment inworking capital and capital expenditures. Cash and cash equivalents at December31, 2004 totalled $5.9 million as compared with $10.6 million as at December31, 2003. The decrease from 2003 to 2004 was related to the repayment of overalldebt during 2004, which offset the overall net increase in cash flows fromoperating activities.

 

The Companyfollows a policy of investing its surplus cash resources in high quality,liquid, short-term commercial paper and government treasury bills and moneymarket mutual funds which invest in high quality, short-term securities.  All investments as of December 31, 2005 hadless than three

 

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monthsmaturity.  As at December 31, 2005 therewere no restrictions on the flow of these funds nor have any of these fundsbeen committed in any way.

 

For the yearended December 31, 2005, net cash flows from operations increased to $9.3million or $4.6 million higher compared to the same period of 2004. This was drivenby increased operating earnings and the fact that a smaller portion of thoseearnings relate to non-cash deferred revenue amortization. For the year endedDecember 31, 2004, net cash flows from operating activities were $4.8 millioncompared to net cash outflows of $3.1 million for the same period of 2003.

 

Non-financialworking capital comprising accounts receivable, inventories, prepaid expenses,current deferred income tax assets, accounts payable and accrued liabilitiesincreased slightly to $18.9 million as at December 31, 2005 from $18.4 millionas at December 31, 2004. Non-financial working capital increased to $18.4million as at December 31, 2004 from $12.8 million as at December 31, 2003,driven mainly by a significant increase in raw material and packagingcomponents in contract manufacturing to support the ramp-up in business andincreased accounts receivable related to growth in the business.

 

Capitalexpenditures for 2005 were mainly attributable to expenditures related toincreasing operating efficiency in production areas through automation and toremove bottlenecks in contract manufacturing, coupled with infrastructureupgrades, principally information technology.

 

Capitalexpenditures for 2004 were mainly attributable to expenditures under DRAXISPharma’s previously announced capital plan and, specifically, payments oninstallation activities that took place during the shutdown period.

 

Proceeds fromthe issuance of treasury common shares by the Company attributable to theexercise of options generated $1.6 million for the year ended December 31, 2005compared with $1.6 million for the same period of 2004.

 

The Companywas in compliance with all lending covenants as at December 31, 2005 and 2004.

 

The Companydid not make any acquisitions in 2005 or during 2004 other than the acquisitionof all minority interest holdings in DRAXIS Pharma in April 2004.

 

All thirdparty debt was repaid over the course of 2004 (see “Debt Repayment and BankFinancing”). During 2003, the Company reduced its outstanding third party debtthrough the repayment of its secured revolving credit facility at DRAXIS Pharmaand the repayment of its unsecured subordinated obligation.

 

**Equity Financing**

 

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

 

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

 

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**Debt Repayment and Bank Financing**

 

On April 22,2004, as a result of the equity financing and acquisition of the remaininginterest in the contract manufacturing operations, the Company repaid alloutstanding debt owed to SGF ($3.1 million) and Investissement Québec ($1.7million).

 

During 2004,the Company completed the arrangement of new credit facilities with itsbankers, the National Bank of Canada, to replace all existing facilities at thesubsidiary level as follows:

 

•      CDN$15million or US$ equivalent operating facility payable within 364 days of drawingupon the facility. The operating facility can be extended by one year uponagreement with the lender. As at December 31, 2005, no amount was drawn underthis facility.

 

•      CDN$10million or US$ equivalent term facility, repayable in full in three years. Asat December 31, 2005, no amount was drawn under this facility.

 

Interest underthe credit facilities (both term and operating) is based on the bank’s primelending rate provided the Company meets certain ratios, which as at December31, 2005 were met.

 

Creditfacilities, if drawn upon, are to be secured by specific assets of DRAXISSpecialty Pharmaceuticals Inc., and shares and guarantees of certainsubsidiaries.

 

As a result ofthe debt repayment and bank refinancing, the Company has reduced its overalldebt levels to nil, increased its borrowing capacity and reduced its overallcost of borrowing on outstanding and future debt.

 

**Off-Balance Sheet Arrangements**

 

The Companydoes not have any off-balance sheet arrangements that have, or are reasonablylikely to have, a current or future effect on the Company’s financialcondition, changes in revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that are material to investors.

 

**RELATED PARTY TRANSACTION**

 

The Companypaid rent of $123,000 and $125,000 to a company controlled by a member of theBoard of Directors related to its head office location in 2005 and 2004,respectively. This lease expires on May 31, 2006.

 

Thistransaction is in the normal course of operations and is measured at theexchange amount as agreed to by the parties.

 

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**COMMITMENTS**

 

The followingtable summarizes the Company’s major contractual cash obligations as ofDecember 31, 2005:

 
| ** **                     | ** ** | **Payment due by end of:** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**    | ** ** | **Total**                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
| Operating  leases              |       | 66                         |       | 66 |   | — |   | — |   | — |   | — |   |
| Service  contracts             |       | 447                        |       | 192 |   | 192 |   | 63 |   | — |   | — |   |
| Milestone  obligations         |       | 1,558                      |       | 308 |   | 327 |   | 327 |   | 327 |   | 269 |   |
| Other  long-term obligations   |       | 310                        |       | 58 |   | 77 |   | 77 |   | 77 |   | 21 |   |
| Total  contractual obligations |       | 2,381                      |       | 624 |   | 596 |   | 467 |   | 404 |   | 290 |   |

 

Allcontractual obligations related to 2005 and 2004 were fully paid as of December31, 2005 and December 31, 2004 respectively.

 

In addition tothe above, the Company may be obligated to make certain royalty payments basedon related product sales and milestone payments based on the achievement ofcertain specified events.

 

The amount,timing and likelihood of these royalty payments are not determinable as theymainly relate to products being developed and not yet approved by theapplicable regulatory authorities.

 

**SELECTED ANNUAL INFORMATION**

 

*(inthousands of US dollars, except share related data) (U.S. GAAP)*

 
| ** **                             | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Revenues                               |       |       |       |     |       |     |       |
| Product sales                          | ** ** | **$**      | **72,989** |     | $          | 61,693   |       | $ | 40,535 |   |
| Royalty and licensing                  | ** ** | **6,444**  |       | 7,627    |       | 8,658    |       |
| ** **                             |       | **$**      | **79,433** |     | $          | 69,320   |       | $ | 49,193 |   |
| Net income  (loss)                     |       |       |       |     |       |     |       |
| - From continuing operations           | ** ** | **$**      | **7,784**  |     | $          | 7,977    |       | $ | 4,671 |   |
| - From discontinued operations         | ** ** | **—** |       | (61      | )          | 8,531    |       |
| ** **                             |       | **$**      | **7,784**  |     | $          | 7,916    |       | $ | 13,202 |   |
| Basic income  per share                |       |       |       |     |       |     |       |
| - From continuing operations           | ** ** | **$**      | **0.19**   |     | $          | 0.20     |       | $ | 0.13 |   |
| - From discontinued operations         | ** ** | **—** |       | —   |       | 0.23     |       |
| ** **                             |       | **$**      | **0.19**   |     | $          | 0.20     |       | $ | 0.36 |   |
| Diluted  income per share              |       |       |       |     |       |     |       |
| - From continuing operations           | ** ** | **$**      | **0.18**   |     | $          | 0.19     |       | $ | 0.13 |   |
| - From discontinued operations         | ** ** | **—** |       | —   |       | 0.23     |       |
| ** **                             |       | **$**      | **0.18**   |     | $          | 0.19     |       | $ | 0.36 |   |
| Total assets                           | ** ** | **$**      | **95,820** |     | $          | 88,785   |       | $ | 76,553 |   |
| Total  long-term financial liabilities | ** ** | **252**    |       | —   |       | $        | 10,466     |   |

 

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**SUMMARY OF QUARTERLY RESULTS**

 

*(in thousands of US dollars, exceptshare related data) (U.S. GAAP)*

 
| ** **                      | ** ** | **Q4, 2005** | ** ** | **Q3, 2005** | ** ** | **Q2, 2005** | ** ** | **Q1, 2005** | ** ** | **Q4, 2004** | ** ** | **Q3, 2004** | ** ** | **Q2, 2004** | ** ** | **Q1, 2004** | ** ** |
|---------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                            |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Revenues                        |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Product sales                   | ** ** | **$**        | **17,273** |         | $          | 16,034       |       | $            | 19,176     |         | $          | 20,506       |       | $            | 18,352     |         | $          | 16,205 |   | $ | 14,927 |   | $ | 12,209 |   |
| Royalty and  licensing          | ** ** | **1,387**    |       | 1,423        |       | 1,295        |       | 2,339        |       | 1,934        |       | 1,980        |       | 1,786        |       | 1,927        |       |
| ** **                      |       | **$**        | **18,660** |         | $          | 17,457       |       | $            | 20,471     |         | $          | 22,845       |       | $            | 20,286     |         | $          | 18,185 |   | $ | 16,713 |   | $ | 14,136 |   |
|                            |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Net income (loss)               |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| - From continuing  operations   | ** ** | **$**        | **1,067**  |         | $          | 1,069        |       | $            | 2,353      |         | $          | 3,295        |       | $            | 2,267      |         | $          | 2,058 |   | $ | 2,264 |   | $ | 1,388 |   |
| - From discontinued  operations | ** ** | **—**   |       | —       |       | —       |       | —       |       | (34          | )          | 3            |       | (21          | )          | (9           | )          |
| ** **                      |       | **$**        | **1,067**  |         | $          | 1,069        |       | $            | 2,353      |         | $          | 3,295        |       | $            | 2,233      |         | $          | 2,061 |   | $ | 2,243 |   | $ | 1,379 |   |
|                            |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Basic income per share          |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| - From continuing  operations   | ** ** | **$**        | **0.03**   |         | $          | 0.03         |       | $            | 0.06       |         | $          | 0.08         |       | $            | 0.06       |         | $          | 0.05 |   | $ | 0.06 |   | $ | 0.04 |   |
| - From  discontinued operations | ** ** | **—**   |       | —       |       | —       |       | —       |       | —       |       | —       |       | —       |       | —       |       |
| ** **                      |       | **$**        | **0.03**   |         | $          | 0.03         |       | $            | 0.06       |         | $          | 0.08         |       | $            | 0.06       |         | $          | 0.05 |   | $ | 0.06 |   | $ | 0.04 |   |
|                            |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Diluted income per share        |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| - From continuing  operations   | ** ** | **$**        | **0.03**   |         | $          | 0.03         |       | $            | 0.06       |         | $          | 0.08         |       | $            | 0.05       |         | $          | 0.05 |   | $ | 0.06 |   | $ | 0.04 |   |
| - From  discontinued operations | ** ** | **—**   |       | —       |       | —       |       | —       |       | —       |       | —       |       | —       |       | —       |       |
| ** **                      |       | **$**        | **0.03**   |         | $          | 0.03         |       | $            | 0.06       |         | $          | 0.08         |       | $            | 0.05       |         | $          | 0.05 |   | $ | 0.06 |   | $ | 0.04 |   |

 

**MAJOR TRENDS IN QUARTERLY NUMBERS**

 

The quarterlynumbers reflected in the above table reflect the significant trends describedbelow. For more detailed explanations, please refer to the MD&As filed on aquarterly basis.

 

Commencing inthe second quarter of 2003, the contract manufacturing segment began asignificant ramp-up of shipments of *Hectorol®Injection* for Genzyme and products under its GSK manufacturingagreements. The level of shipments has increased since the second quarter of2003, subject to the Company’s ability to increase productive capacity byintroducing additional shifts and the timing of demand. Beginning late in 2003,the Company expanded its production work force and continues to do so. This hasresulted in a positive upward trend in revenue mainly in contract manufacturingand increasing margins due to the higher margin sterile business and thefinancial benefits of improved capacity utilization. The major trend inrevenues has been the shift in business in contract manufacturing where sterileproduct revenue occupies a higher share of overall revenue driven by the GSKand Genzyme business. This trend continued through 2004 and into the thirdquarter of 2005. The result was increasing volume and associated product grossmargins in contract manufacturing.

 

During thethird quarter of 2003 and 2004, there were production breaks caused by normalshutdown activities to perform maintenance and complete capital expenditureprojects. The effect in contract manufacturing was to reduce volumes andmargins due to production downtime resulting in higher unabsorbed overheadcosts. The shutdown in 2004 was of a significantly larger scale than 2003because it involved the introduction of enhanced autoclave capacity and theinstallation of a second lyophilization unit as well as numerous otherinitiatives.

 

Duringthe third quarter of 2005, the Company’s contract manufacturing operationextended its scheduled shutdown period at the beginning of the third quarter inthe sterile areas, in order to correct an electrical panel failure and makeassociated repairs, and the decision to revalidate the entire sterile areafollowing these repairs and to recalibrate production schedules had materialfinancial implications which hindered third and fourth quarter results.Finalizing and executing on production schedules in the fourth quarter of 2005were further hindered by delays in receiving some component materials fromsuppliers. Production in contract manufacturing was ramping up towardsnormalized production levels by the end of

 

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the third quarter of 2005.  Theoverall effect of the extended shutdown was to negatively affect the Company’skey financial metrics over the second half of 2005 and offset the significantgrowth achieved over 2004 in the first half of 2005. The impact on productgross margins in the second half of 2005 was approximately 5%.

 

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 whichlowered cold kit sales to the U.S. below traditional levels in October andNovember. Cold kit sales return to more traditional levels in 2005 and theprimary driver for growth in 2005 remained the increasing penetration of sodiumiodide I-131 in the U.S.

 

Apart from theimpact of foreign currency on the Company’s Canadian denominated selling,general and administrative spending, selling, general and administrativespending increased due to: costs of process improvement initiatives commencingin the second quarter of 2005; one-time costs associated with the exit ofbrachytherapy product line which occurred in fourth quarter of 2005; andseverance costs in the fourth quarter of 2005. We expect that other fluctuations will occur from time to time relatedto compliance activities related to Sarbanes-Oxley and the costs ofcompensation programs which are linked to the Company’s share value.

 

Depreciationand amortization 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.

 

Foreignexchange has impacted EPS to the extent of the strengthening of the Canadiandollar and its affect on the Company’s net monetary position held in USdollars.

 

Interestexpense has declined as the Company has reduced debt levels beginning with thesecond quarter of 2003, culminating in the repayment of all debt at the end of2004 and no debt in 2005.

 

The Company’seffective tax rate has been significantly below the statutory rate due to therecognition of previously unrecognized loss carryforwards. The Company’sability to execute on tax planning opportunities has expanded as a result ofthe increased operating profits of its contract manufacturing segment, theamalgamation of its two core businesses effective January 1, 2005, and thepurchase of all minority interest shareholdings of its contract manufacturingbusiness on April 22, 2004. This trend is not expected to continue in the longterm and the effective tax rate is expected to return closer to statutorylevels, subject to the amount of research and development 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.

 

Net cash flowfrom operating activities continues to grow with the increased volumes, subjectto the required investment in working capital to support the ramp-up inbusiness.

 

Capitalexpenditures tend to rise during and after shutdown periods (usually in thethird quarter) when most installation activities take place.

 

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**OUTLOOK**

 

*General Guidance*

 

During 2005,the Company revised downward two key financial targets for 2005, namelyrevenues and earnings per share, as a result of the extension of the plannedshutdown of the sterile operations of contract manufacturing (as describedunder “Contract Manufacturing”).  The downward revisions resulted from theproduction delays during the extended shutdown period and the process theCompany undertook to recalibrate production schedules to meet customerdemand.  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 timing of customer demand. While delays in receiving component parts arenot unusual, when combined with production issues or customer timing changes,they can significantly impact revenues compared to forecasts for a givenperiod. Furthermore, due to the complexity of sterile manufacturing and therigours 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 does not and doesnot plan to provide specific quarterly guidance.

 

The Company’sannual guidance is based on the information available when it receivesannualized customer forecasts or estimates of demand. During the course of theyear, changes to these forecasts and customer demand, which are out of thecontrol of the Company, can result in revisions to production schedules.  In addition, unforeseen production problemscan potentially cause variations from revenue forecasts and ultimately earningsper share estimates. Customer forecasts can change positively or negativelybased on several factors such as the ability of our customers to obtainregulatory approval, the success of the product produced for them in themarketplace and regulatory changes affecting product demand. (See“Forward-Looking Statements”).

 

As of February28, 2006, the Company has not yet received forecast information from a numberof customers in sufficient detail regarding timing and quantification of demandto allow the Company to provide meaningful guidance at this time on 2006revenues.  Based on the currentinformation available, earnings per share are expected to range between 23cents and 27 cents for 2006.  Thisincludes a non-cash charge of 2 cents per share for stock-based compensation,according to new accounting rules which became effective January 1, 2006.  Net operating cash flow in 2006 is expectedto be at least $15 million.

 

**ACCOUNTING MATTERS**

 

**Critical Accounting Policies andEstimates**

 

The foregoingdiscussion and analysis of the financial condition and results of operations isbased upon the Company’s Consolidated Financial Statements, which have beenprepared in accordance with U.S. GAAP. The preparation of ConsolidatedFinancial Statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an ongoing basis,the Company evaluates its estimates and makes adjustments as appropriate.Actual results may differ from these estimates.

 

A summary ofthe significant accounting policies and methods used by the Company in thepreparation of its Consolidated Financial Statements is included in Note 2 tothe 2005 audited Consolidated Financial Statements. The Company believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its Consolidated Financial Statements.

 

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***Recognition ofLicensing Revenue***

 

License andother forms of non-refundable fees received pursuant to collaborationagreements are accounted for according to the related contractual agreements.In general, such fees are deferred and recognized on a straight-line basis overthe contract period. Where the contract period is not defined, such fees arerecognized on a straight-line basis over the estimated term, during whichcontractual benefits are expected to be derived. If payment of such fees iscontingent upon future performance obligations of the Company or other futureevents, revenue recognition of such amounts is deferred and recognized uponcompletion of the specific event.

 

***Deferred Tax Assets***

 

Realization ofthe net deferred 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 assumptions underlying the forecasted income are reviewed bymanagement to determine whether additional valuation allowances are warrantedor valuation allowances are still required. The Company has taken valuationallowances related to tax loss carryforwards in jurisdictions where taxableincome is no longer generated; it is not likely to generate sufficient taxableincome in Canada to utilize Canadian tax loss carryforwards prior to expiry;and filing positions taken with taxation authorities are subject to review.Changes to estimates of future taxable income, the completion of reviews bytaxation authorities, and the ability to execute on tax planning opportunitiescan significantly affect the amount of valuation allowances.

 

***Allowance forDoubtful Accounts***

 

The Companydetermines an appropriate allowance for doubtful accounts based on an accountby account review as opposed to a general provision assessed as a percentage ofrevenues.

 

***Provision forInventory Obsolescence***

 

Provisions forinventory are charged against income when it is determined that specificinventory items do not meet the defined quality and regulatory requirements forsale.  The Company does not make generalprovisions for inventory obsolescence.

 

**Termination of *BrachySeed®* Agreements**

 

In January2003, DRAXIMAGE’s agreements with its *BrachySeed®*licensee in the U.S. were effectively terminated with no further transactionstaking place under the agreements. A formal agreement was subsequently reachedwith the licensee for terminating both the License and Distribution Agreementand Product Manufacturing and Supply Agreement for *BrachySeed®* implants in the U.S.

 

Under theterms of the original agreements, non-refundable milestone payments received fromthe licensee were deferred and amortized into income over the contractualperiod of the agreement to December 31, 2010. As a result of the termination ofthe agreements in January 2003, the unamortized portion of the non-refundablemilestone payments of $1,436,000 was included in income for the year endedDecember 31, 2003 as royalty and licensing revenue.

 

**Discontinued Operations**

 

Commencingwith the quarter ended December 31, 2001, the results of operations of DRAXISPharmaceutica have been reported as discontinued operations. Commencing in thefourth quarter of 2002, the revenues and expenses related to *Alertec®* were included in the resultsrelated to continuing operations and not discontinued operations due tomanagement’s decision in 2002 to retain the Canadian

 

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productrights due to the uncertainty of being able to obtain the third party approvalrequired to be able to include these rights as part of the divestiture ofDRAXIS Pharmaceutica. As a result of attaining the required third partyapproval, the Canadian product rights to *Alertec®*were included in the sale of the remaining assets and liabilities of DRAXISPharmaceutica to Shire, which was completed in the third quarter of 2003.

 

**Foreign Exchange Risk**

 

The Company’sreporting currency is the US dollar. The functional currency for its Canadianoperations – which include the radiopharmaceutical segment, the contractmanufacturing segment and royalties and milestones related to product rightssold to Shire – is the Canadian dollar. Accordingly, the Company’s foreignexchange exposure for accounting purposes mainly relates to U.S.-denominatedmonetary assets of these operations. The Company currently does not activelyhedge this exposure, but reduces the exposure by maintaining the minimum levelof U.S.-denominated cash available to meet its short-term cash requirements.

 

**RecentAccounting Pronouncements**

 

In December2004, the Financial Accounting Standards Board (“FASB”) published SFAS No.123R,*Share-Based Payments. *SFAS No. 123R amends SFAS No. 123,*Stock-Based Compensation* issued in 1995 and supercedesAccounting Principles Board Opinion (“APB”) No. 25 issued in 1972.  Compensation expense is generally recognizedover the period during which an employee is required to provide service inexchange for the award (usually the vesting period). This statement iseffective for the Company beginning on January 1, 2006.  As of the required effective date, theCompany will apply SFAS No. 123R using a modified version of the prospectiveapplication. Under that transition method, compensation cost is recognizedbeginning on the required effective date for the portion of outstanding awardsfor which the requisite service has not yet been rendered, based on the grant-datefair value of those awards calculated under SFAS No. 123 for either recognitionor *pro forma* disclosures. Had theCompany adopted SFAS No. 123R prospectively, the net impact on the Company’sconsolidated statements of operations would have approximated the impact asdescribed in Note 2(q) of the Consolidated Financial Statements on a *pro forma* basis.  The Company is currently evaluating theimpact of adopting SFAS No. 123R and expects the impact to be material to theEPS.

 

In November2004, FASB issued SFAS No. 151, *InventoryCosts-An Amendment of APB No. 43* which requires that items such asidle facility expense, excessive spoilage, double freight, and re-handlingcosts be recognized as current period charges. Additionally, SFAS No. 151 requires that the allocation of fixedproduction overheads to the costs of conversions be based on normal capacity ofthe production facilities.  SFAS No. 151is required to be adopted by the Company in the first quarter of fiscal2006.  Adoption by the Company of thispronouncement is not expected to have a material impact on the Company’sresults of operations or financial conditions.

 

*Non-GAAP FinancialMeasures*

 

The Companynow focuses on GAAP measures both in reporting externally and monitoringmanagement performance. Specifically, the Company measures divisionalperformance and consolidated performance based on gross profit margin,operating income, net income and operating cash flow. Non-GAAP measures and,specifically, EBITDA will continue to be disclosed to provide a comparativelink between our historical disclosures as the Company transitions to moretraditional GAAP measures. The Company will continue to reconcile any non-GAAPmeasures used with GAAP line items.

 

The Companyadditionally has incorporated, as a performance measure, cash flows fromoperating activities less cash flows used in investing activities.

 

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The termsEBITDA (earnings before financing expense and other income, taxes, depreciationand amortization) and EBITDA margin (EBITDA divided by total revenues) do nothave a standardized meaning prescribed by U.S. GAAP and therefore may not becomparable to similar measures used by other companies.  DRAXIS defines EBITDA as operating incomebefore depreciation and amortization expense and EBITDA is presented on a basisthat is consistent from period to period. DRAXIS uses EBITDA measures to assess the operating performance of itsongoing businesses without the effects of amortization expense. Amortizationexpense is excluded because it substantially depends on the accounting methodsand assumptions used as well as the historical cost of capital assets.  DRAXIS believes that certain shareholders andinvestors prefer such measures in evaluating the ability of a reporting companyto service debt or as the basis for a valuation measurement.  EBITDA should not be construed as theequivalent of net cash flows from operating activities.  The most comparable U.S. GAAP earningsmeasure is operating income.

 

**Forward-LookingStatements**

 

This MD&Acontains forward-looking statements within the meaning of the *Private Securities Litigation Reform Act of 1995*.These statements are not guarantees of future performance. By their nature,forward-looking statements involve numerous assumptions, known and unknownrisks, uncertainties and other factors that may cause the actual results orperformance of the Company to be materially different from such statements orfrom any future results or performance implied thereby. Factors which couldcause the Company’s results or performance to differ materially from aconclusion, forecast or projection in the forward-looking statements include,but are not limited to: the achievement of desired clinical trial resultsrelated to the Company’s pipeline products; timely regulatory approval of theCompany’s products; the ability to comply with regulatory requirementsapplicable to the manufacture and marketing of the Company’s products; theCompany’s ability to obtain and enforce effective patents; the non-infringementof third party patents or proprietary rights by the Company and its products;factors beyond our control which could cause interruptions in our operations(including, without limitation, material equipment breakdowns); reimbursementpolicies related to health care; the establishment and maintenance of strategiccollaborative and commercial relationships; the Company’s dependence on a smallnumber of key customers; the disclosure of confidential information by ourcollaborators, employees or consultants; the preservation of healthy workingrelationships with the Company’s union and employees; the Company’s ability togrow the business; the fluctuation of our financial results and exchange andinterest rate fluctuations; the adaptation to changing technologies; the lossof key personnel; the avoidance of product liability claims; the loss incurredif current lawsuits against us succeed; the volatility of the price of ourcommon shares; and market acceptance of the Company’s products. For additionalinformation with respect to certain of these and other factors, referenceshould be made to the Company’s most recent Form 20-F filed with the UnitedStates Securities and Exchange Commission (available on EDGAR at www.sec.gov)and with Canadian securities regulators (available on SEDAR atwww.sedar.com).  The forward-lookingstatements contained in this MD&A represent the Company’s expectations asat February 28, 2006.  Unless otherwiserequired by applicable securities laws, the Company disclaims any intention orobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

 

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**Item 6.  Directors, Senior Management and Employees**

 

Thefollowing is a list of the current directors and senior officers of theCompany, their municipalities of residence, their current position with theCompany and their principal occupations:

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

 

Dr.Barkin, MD, B.Sc. (MED.), MA, FRCSC, is President and Chief Executive Officerof the Company.  As of February 8, 2006,he became a member of the Board of Allon Therapeutics Inc.  Dr. Barkin served on the Board of ViventiaBiotech Inc. until December 30th, 2005, at which date ViventiaBiotech Inc. ceased to be a reporting issuer and Dr. Barkin ceased to be adirector.  Dr. Barkin was Chairman of theBoard of Sunnybrook & Women’s College Health Sciences Centre from June 15,1998 until June 30, 2003.  Dr. Barkincame to the Company in 1992 from KPMG where he was Partner and NationalPractice Leader for Health Care.  Before that,he was Deputy Minister of Health for the Province of Ontario and before thatPresident and Chief Executive Officer of Sunnybrook Health Sciences Centre atthe University of Toronto.  Dr Barkin isa surgical specialist in Urology holding the rank of Professor at theUniversity of Toronto, a former Research Scientist at University of Toronto andwas Division Chief at Sunnybrook Health Sciences Centre.

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

 

Mr.Dan is Chairman of Novopharm Limited, one of Canada’s leading pharmaceuticalcompanies and Chairman of Viventia Biotech Inc. Prior to April 5, 2000, Mr. Dan was Chairman and Chief ExecutiveOfficer of Novopharm Limited.

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

 

Mr.Darnell is the retired President of the Dade Division and the retired ExecutiveVice President of the Baxter Diagnostics Group of Baxter International.  He has over 35 years of U.S. andinternational experience in the diagnostic industry.

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

 

Mr.Henel is the retired President of Cyanamid International, LederleDivision.  He currently serves as anadvisor to the healthcare industry and is a partner in Naimark & Associates,a healthcare consulting firm.  He is alsoa director and Chairman of the Compensation and Nominating and CorporateGovernance Committees of SciClone Pharmaceuticals, Inc. and a director,Chairman of the Compensation Committee and member of the Audit and Nominatingand Corporate Governance Committees of Penwest Pharmaceuticals Co.

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

 

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

 

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

 

Mr.Sarick is President of Samuel Sarick Limited, a company with long-standinginvolvement in commercial property development.

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

 

Mr. Simpsonserved as the President of the Genpharm division of E Merck, the President andCEO of Medeva Pharmaceuticals in the United States and in senior managementpositions at Fisons Corporation.  Hecurrently heads a private consulting firm specializing in marketing andbusiness development within the healthcare industry and is a director ofHi-Tech Pharmacal Co., Inc.

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

 

Mr.Vivash was formerly President and Chief Executive Officer of CIBC SecuritiesInc., Fidelity Investments Canada Limited and Manulife Securities InternationalLtd.  He currently serves as Presidentand Chief Executive Officer of Tesseract Financial Inc., a financial servicesconsultancy; director and member of the Compensation Committee and Chairman ofthe Nominating and Corporate Governance Committee of Sierra Systems Group Inc.,and director and member of the Nominating and Corporate Governance Committee ofCangene Corporation.  He is also a memberof the Board of Directors, the Audit Committee and the Conduct Review Committeeof State Street Trust Company Canada.

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

 

Mr.Oleksiw joined DRAXIS as Director of Finance in July 2002 after eight yearswith an international accounting firm, most recently as a senior manager with afocus on U.S. and Canadian publicly listed life science and technologycompanies.  He also spent three yearswith Bell Canada and BCE Inc. with responsibility for external reporting, plustwo years as a senior internal auditor at McGill University.  Mr. Oleksiw is a Chartered Accountant andearned his Graduate Diploma in Public Accountancy and B. Comm. from McGillUniversity.  He became Chief FinancialOfficer on July 1, 2003.

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

 

Mr.Brazier, Hon. B. Comm., joined DRAXIS in August 1998 as President ofSpectroPharm Dermatology and now holds the position of Chief OperatingOfficer.  Prior to July 1, 2003, Mr.Brazier served as President of DRAXIS Pharmaceutica.  Prior to joining the Company, Mr. Brazier wasthe Director of Skin Care at Allergan Inc. Mr. Brazier also held positions in Marketing Management and SalesManagement in his 10 years with Allergan. From 1980-1989, Mr. Brazier held Marketing and Sales positions withBausch & Lomb, Stafford Foods and Canada Packers. Mr. Brazier holds anHonors B. Comm., majoring in Marketing and Finance.

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

 

Mr. Carter, B.A., C.H.R.P., joined DRAXIS in September 1998 as VicePresident Human Resources following a lengthy relationship with the Company ina Consultant capacity.  He is now Vice President,Administration and Shared Services. Immediately prior to joining DRAXIS, Mr. Carter was the President of aHuman Resource Consulting firm, specializing in strategic human resource issues

 

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within the Canadian Pharmaceutical Industry.  Prior to this Mr. Carter gained significantexperience as Vice President Human Resources for Sterling Drug/Kodak, Directorof Human Resources for the Baxter Corporation, and Director of Human Resourcesfor Johnson & Johnson.  Mr. Carteralso served on the founding Board of Directors of the Human ResourcesProfessionals Association of Ontario, and was nominated to the “Council ofHuman Resource Executives” for The Conference Board of Canada.

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

 

Mr.Durham is President of DRAXIS Pharma, a division of DRAXIS SpecialtyPharmaceuticals Inc.  Prior to joiningthe Company in July 2003, Mr. Durham was General Manager of an internationalcontract manufacturer, with responsibilities for operations, finance, sales andmarketing, business development and strategic planning.

 
| **Jean-Pierre  Robert** |   | Montreal, QC | Officer |
|-------------------------|--------|--------------|---------|
| Officer since May 2005. |   |
|                         |        |              |         |  |

 

Mr.Robert, B.Sc., is President of DRAXIMAGE, a division of DRAXIS Specialty PharmaceuticalsInc. Prior to joining DRAXIS, he served as Vice President and General Managerof Tyco Healthcare (Canada), overseeing domestic and export operations,following its acquisition of Mallinckrodt (Canada), where he held the sameposition. Most recently, Mr. Robert was President and CEO of an emergingCanadian biopharmaceutical company. He has extensive healthcare industryexperience including executive, general management, marketing and sales rolesinvolving diagnostic, pharmaceutical, chemical and laboratory products withMallinckrodt, Fisher Scientific, Hoechst and Bayer. He holds a B.Sc. and was amember of the Canadian Society of Nuclear Medicine.

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

 

Mr.Ormiston, B.Sc., MBA, joined DRAXIS in May 2001 as Executive Director, InvestorRelations following two years as a senior consultant in a Toronto investorrelations firm working with small and mid-sized entrepreneurial companies oncapital markets communications strategies. Prior to that he was at Allelix Biopharmaceuticals for 12 years – fouras Manager of Investor Relations and eight in the business developmentarea.  He has 32 years’ experience in thehealthcare industry in pharmaceuticals and biotechnology.  His assignments over those years haveincluded positions in business development, marketing, corporatecommunications, production management, quality assurance and regulatoryaffairs.

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

 

Ms.Gualtieri joined the Company in November 2003 as General Counsel andSecretary.  Prior to joining the Company,she was a partner in the Corporate Finance Mergers & Acquisitions group ofMcCarthy Tétrault LLP in Montreal, Quebec, Canada’s largest law firm.  Between March 1996 and August 1999, Ms.Gualtieri was legal counsel at Fonds de Solidarité des Travailleurs du Québec(F.T.Q.), Canada’s largest labor-sponsored venture capital fund.  Ms. Gualtieri earned her BCL and LLB lawdegrees at McGill University in 1987 and was admitted to the Bar of theProvince of Quebec in 1988.

 

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

 

Mr.Huang joined DRAXIS in 1998 as Assistant Controller.  On July 1, 2003, he was promoted to VicePresident Finance.  He has eight years ofprior experience, including positions as manager of business processre-engineering, senior financial planning and analysis and in the audit groupof a major international accounting firm. Mr. Huang is a Chartered Accountant and earned his Graduate Diploma inPublic Accountancy from McGill University as well as a B.Sc. from theUniversity of Toronto.

 

Termsof office as director are for one year or until the next Annual Meeting of theShareholders and subsequent Meeting of the Board of Directors, respectively.

 

Thereis no family relationship between any of the executive officers.  Officers of the Company serve at the pleasureof the Board of Directors.

 

**Summary Compensation Table**

 

Thefollowing table sets forth all annual and long-term compensation for servicesin all capacities to the Company and its subsidiaries for the fiscal yearsended December 31, 2005, 2004 and 2003 in respect of each of the individuals(i) who were, at December 31, 2005, the Chief Executive Officer, the ChiefFinancial Officer, and each of the Company’s three most highly compensatedexecutive officers other than the CEO and CFO and who received salary and bonusin excess of CDN$150,000 in the 2005 fiscal year; and (ii) who would have beenone of the three most highly compensated executive officers other than the CEOand CFO except that such individuals were no longer serving as officers of theCompany on December 31, 2005 (collectively, the “Named Executive Officers”).

 

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| ** **                                                  | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** | ** **               | ** ** | ** **        | ** ** | ** **             | ** ** | **Long  Term Compensation** | ** ** |              | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|---------------------------|------------|------------------|------------|--------------------------|------------|-------------------|------------|------------------------|------------|-----------------------------|------------|-------------------|------------|
| ** **                                                  | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** | ** **               | ** ** | ** **        | ** ** | ** **             | ** ** | **Long  Term**              | ** ** | ** **        | ** ** |   | ** ** |
| ** **                                                  | ** ** | ** **       | ** ** | ** **                | ** ** | ** **       | ** ** | ** **               | ** ** | ** **        | ** ** | ** **             | ** ** | **Compensation**            | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | ** **       | ** ** | **Annual  Compensation**  | ** ** | **Awards**       | ** ** | ** **               | ** ** | ** **        | ** ** |
| ** **                                                  | ** ** | ** **       | ** ** | **Salary**                | ** ** | **Bonus**        | ** ** | ** **               | ** ** | **Securities**    | ** ** | ** **             | ** ** | ** **                  | ** ** |
| ** **                                                  | ** ** | ** **       | ** ** | ** **                | ** ** | **DSU**          | ** ** | ** **               | ** ** | **DSU**           | ** ** | **Other**              | ** ** | **Under**                   | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Name & Principal**                                    | ** ** | ** **       | ** ** | ** **                | ** ** | **Election**     | ** ** | ** **               | ** ** | **Election**      | ** ** | **Annual**             | ** ** | **Options**                 | ** ** | **LTIP**          | ** ** | **All  Other** | ** ** |
| **Position**                                                | ** ** | **Year**         | ** ** | **Cash**                  | ** ** | **(2)**          | ** ** | **Cash**                 | ** ** | **(2)**           | ** ** | **Compensation(1)**    | ** ** | **Granted**                 | ** ** | **Payouts**       | ** ** | **Compensation** | ** ** |
| ** **                                                  | ** ** | ** **       | ** ** | **(CDN$)**                | ** ** | **(CDN$)**       | ** ** | **(CDN$)**               | ** ** | **(CDN$)**        | ** ** | **(CDN$)**             | ** ** | **(#)**                     | ** ** | **(CDN$)**        | ** ** | **(CDN$)** | ** ** |
| Martin Barkin, MD  President & Chief  Executive Officer |       | 2005  2004  2003 |       | 450,000  400,000  320,000 |       | nil  nil  80,000 | ** ** | 91,432  154,600  125,000 | (3)        | nil  nil  125,000 | (3)        | 23,355  40,880  36,077 |       | 50,000  nil  nil            |       | nil  nil  nil     |       | 1,611,000  711,525  600,000 | (4)  (5)  (6) |
|                                                        |       |             |       |                      |       |             | ** ** |                     |       |              |       |                   |       |                        |       |              |       |   |   |
| Mark  Oleksiw  Chief Financial  Officer                     |       | 2005  2004  2003 |       | 225,000  200,000  142,900 |       | nil  nil  nil    |       | 37,587  65,32053,759     |       | nil  nil  nil     |       | 11,150  8,217  nil     |       | 25,000  nil  100,000        |       | nil  nil  nil     |       | nil  16,434  nil | (7) |
|                                                        |       |             |       |                      |       |             |       |                     |       |              |       |                   |       |                        |       |              |       |   |   |
| Dan  Brazier  Chief Operating  Officer                      |       | 2005  2004  2003 |       | 290,000  254,500  210,000 |       | nil  nil  nil    |       | 48,333  85,218  79,800   |       | nil  nil  nil     |       | 13,666  19,533  17,383 |       | 75,000  100,000  130,000    |       | nil  nil  75,000  | (8)        | 61,475  Nil  109,000 | (9)  (10) |
|                                                        |       |             |       |                      |       |             |       |                     |       |              |       |                   |       |                        |       |              |       |   |   |
| John  Durham  President, DRAXIS  Pharma division            |       | 2005  2004  2003 | (11)       | 300,000  262,000  151,667 |       | nil  nil  nil    |       | 15,650  95,380  53,144   |       | nil  nil  nil     |       | 14,386  20,636  72,381 | (12)       | 25,000  nil  100,000        |       | nil  nil  nil     |       | nil  nil  nil |   |
|                                                        |       |             |       |                      |       |             |       |                     |       |              |       |                   |       |                        |       |              |       |   |   |
| Jean-Pierre  Robert  President,  DRAXIMAGE  division        |       | 2005             | (13)       | 183,606                   |       | nil              |       | 45,206                   |       | nil               |       | 594                    |       | 100,000                     |       | nil               |       | nil |   |
|                                                        |       |             |       |                      |       |             |       |                     |       |              |       |                   |       |                        |       |              |       |   |   |
| Richard  FlanaganScientific Advisor                         |       | 2005  2004  2003 | (14)       | 191,731  254,500  216,250 |       | nil  nil  nil    |       | nil  25,979  77,850      |       | nil  nil  nil     |       | 13,431  18,975  17,239 |       | 25,000  nil  20,000         |       | nil  nil  389,474 | (15)       | 1,109,472  nil  nil | (16) |

 

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(1)                                  “Other Annual Compensation” does not exceed thelesser of CDN$50,000 or 10% of the annual salary and bonus for the fiscal year,except as noted.  It includes a paymentequal to 5% of the Named Executive Officers’ salary for RRSP purposes inaccordance with the terms of their employment with the Company.

 

(2)                                  Amounts in these columns relate to the portionsof salary and bonus elected to be received in the form of Deferred Share Units(“DSU”) and are in addition to the cash amounts specified.  See “Incentive Plans – Deferred Share UnitPlan”.

 

(3)                                  Includes a special bonus of CDN$60,000 whichwas paid to Dr. Barkin in 2003 related to the successful sale of the Company’sPharmaceutica Division to Shire BioChem Inc. in July 2003.  The decision on the amount and payment ofthis bonus was deferred by the directors in 2002.  Dr. Barkin elected to receive CDN$30,000 ofthis bonus in Deferred Share Units and CDN$30,000 in cash.

 

(4)                                  Dr. Barkin realized an aggregate amount ofCDN$1,291,000 from the exercise of 400,000 options in 2005 and CDN$320,000pursuant to his Retirement Compensation Agreement.  See “Executive Compensation – EmploymentContracts and Termination of Employment”.

 

(5)                                  Dr. Barkin received CDN$480,000 in 2004 aspayment of his Retirement Compensation Allowance.  See “Executive Compensation - EmploymentContracts and Termination of Employment.” In addition, he realized an aggregate value of an amount of CDN$231,525from the exercise of his options in 2004.

 

(6)                                  Dr. Barkin received CDN$600,000 in August 2003as payment of his Retirement Compensation Allowance. See “ExecutiveCompensation - Employment Contracts and Termination of Employment”.

 

(7)                                  This amount is the aggregate value realizedfrom the exercise of options in the amount of CDN$16,434 for 2004.

 

(8)                                  Dan Brazier received CDN$75,000 in August 2003as payment upon the sale of the Company’s Pharmaceutica Division to ShireBioChem Inc. in July 2003.  This paymentwas in lieu of initiating a planned Long Term Incentive Plan for thePharmaceutica Division.

 

(9)                                  Mr. Brazier realized an aggregate amount ofCDN$61,475 from the exercise of 15,000 options in 2005.

 

(10)                            Represents a success fee related to the sale ofthe Pharmaceutica Division of the Company to Shire BioChem Inc. in July 2003.

 

(11)                            John Durham joined the Company as President ofDRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS SpecialtyPharmaceuticals Inc.) on June 2, 2003.

 

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

 

(13)                            Jean-Pierre Robert joined the Company asPresident of DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc. onMay 9, 2005.

 

(14)                            Dr. Richard Flanagan was President ofDRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc. until May 8,2005, at which time he became a Scientific Advisor to the Company.

 

(15)                            Dr. Richard Flanagan received CDN$389,474 inDecember 2003 as a partial payment of the long term incentive plan payment inaccordance with the provisions of the DRAXIMAGE Long Term Incentive Plan.  See “Executive Compensation – Subsidiary LongTerm Incentive Plans – DRAXIMAGE”.

 

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(16)                            Dr. Flanagan realized an aggregate amount ofCDN$177,250 from the exercise of 70,000 options in 2005 and CDN$932,222pursuant to his Retirement Compensation Agreement.  See “Executive Compensation – EmploymentContracts and Termination of Employment”.

 

**IncentivePlans**

 

### ***Philosophy***

 

TheCompany’s philosophy is to link employee compensation to the success of theCompany and to emphasize “at risk” employee compensation.  Save and except for the RetirementCompensation Allowance for each of Dr. Barkin and Dr. Flanagan set forth under“Employment Contracts and Termination of Employment”, the Company does notprovide any form of pension program to its senior management.

 

TheCompany has implemented the following plans in an effort to achieve “at risk”employee compensation: Stock Option Plan, Deferred Share Unit Plan, EmployeeGroup Registered Retirement Savings Plan and Non-Executive Long Term IncentivePlan.

 

### ***StockOption Plan***

 

Intention and Participants*–*****This plan was approved by shareholders onFebruary 3, 1988 and amended on June 27, 2001 to permit the Board of Directorsto grant options to purchase common shares to directors, officers, employeesand arm’s length consultants of the Company and its subsidiaries so as to linkcorporate compensation to enhanced shareholder value.

 

Maximum Common Shares Issuable – In 2001 the shareholdersauthorized, at the Company’s annual and special meeting, the issuance of up to7,500,000 common shares under this plan. As at March 20, 2006, 2,925,453 options have been granted and areoutstanding, representing 7.1% of the Company’s issued and outstanding capitalas at March 20, 2006.  As at March 20,2006, 3,279,514 common shares remain reserved for issuance under this plan and,accordingly, 354,061 options are available for issuance under the plan as atsuch date, representing 0.9% of the Company’s issued and outstanding capital asat such date.  The number of sharesreserved for issuance to any one person, including insiders, pursuant tooptions granted in accordance with the plan or otherwise cannot exceed 5% ofthe outstanding common shares of the Company.

 

Determination of Number, Price and Term of Options – The Board ofDirectors determines the price per common share, the number of options forcommon shares which may be allotted to each designated director, officer,employee or arm’s length consultant, the period in which any option may beexercised and all the terms and conditions of the option in accordance with theapplicable requirements of any regulatory authority or stock exchange.  The exercise price for an option must not beless than the closing price of common shares on the TSX on the trading dayimmediately preceding the date of the grant.

 

Dilution Guideline – The Company has anestablished guideline limiting the aggregate number of common shares that canbe issued at any point in time through the exercise of options to 13% of theCompany’s outstanding common shares.  As at March 20, 2006, the number of commonshares so issuable was 7.1% of the Company’soutstanding common shares.

 

Vesting – The period during which any optionmay be exercised is determined by the Board of Directors at the time at whichthe option is granted and shall be no later than ten years from the grant date.

 

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Assignability – Options are non-assignableand non-transferable.

 

Termination of Employment, PermanentDisability or Death of an Option Holder – If an Option Holder ceases to holdoffice as a director, officer or employee of the Company during an optionperiod, the exercisable options may be exercised for a period of thirty daysafter such Option Holder ceases to hold such office or position or for a longerperiod as the Board of Directors may approve. In the event of the total and permanent disability of an Option Holder,the exercisable options may be exercised for a period of six months after thedate on which the Board of Directors has determined that the Option Holder ispermanently disabled or for such longer period as the Board of Directors mayapprove.  In the event of the death of anOption Holder, the options that were exercisable at the date of the death maybe exercised by the Option Holder’s executors or personal representativeswithin six months of the Option Holder’s death.

 

Amendment of plan – The Board of Directors may terminate the plan atany time or amend the plan at any time with the consent of the Toronto StockExchange.  Security holder approval oftermination of or amendments to the plan is not required by the terms of theplan.

 

Options Available for Future Grants*–*354,061 as at March 20, 2006.

 

Unexercised options of Named Executive Officers as a percentage ofcommon shares issued and outstanding as of March 20, 2006 – 3.2%.

 

Aggregate Option Grants to Named Executive Officers as of December 31,2005 – 300,000.

 

Thefollowing table sets forth the options granted during the financial year endedDecember 31, 2005:

 

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| **Name**                                                    | ** ** | **Securities  Under  Options  Granted  (#)(1)** | ** ** | **% of Total  Options Granted  to  Employees in  Financial Year** | ** ** | **Exercise or Base  Price  (CDN$/Security)****(2)** | ** ** | **Market Value of  Securities  Underlying  Options on the  Date of Grant  (CDN$/Security)** | ** **   | **Expiration Date** | ** **                                                     |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------|--------------|---------------------|----------------------------------------------------------------|
| Martin  Barkin, MD  President & Chief Executive Officer |       | 50,000                                          |       | 11.0                                                              |       | CDN $5.73                                           |       | CDN                                                                                         | $5.73        |                | December 31, 2009                                              |   |
|                                                        |       |                                            |       |                                                              |       |                                                |       |                                                                                        |         |                |                                                           |   |
| Mark Oleksiw    Chief Financial Officer                     |       | 25,000                                          |       | 5.5                                                               |       | CDN $5.73                                           |       | CDN                                                                                         | $5.73        |                | December 31, 2009                                              |   |
|                                                        |       |                                            |       |                                                              |       |                                                |       |                                                                                        |         |                |                                                           |   |
| Dan Brazier 

Chief  Operating Officer                      |       | 75,000                                          |       | 16.5                                                              |       | 25,000 @ CDN $5.73  50,000 @ CDN $5.38              |       | CDN   CDN                                                                                   | $5.73  $5.38 |                | December 31, 2009 October 2, 2015                              |   |
|                                                        |       |                                            |       |                                                              |       |                                                |       |                                                                                        |         |                |                                                           |   |
| John Durham   President, DRAXIS Pharma division             |       | 25,000                                          |       | 5.5                                                               |       | CDN $5.73                                           |       | CDN                                                                                         | $5.73        |                | December 31, 2009                                              |   |
|                                                        |       |                                            |       |                                                              |       |                                                |       |                                                                                        |         |                |                                                           |   |
| Jean-Pierre Robert  President, DRAXIMAGE division           |       | 100,000                                         |       | 22.0                                                              |       | CDN $6.05                                           |       | CDN                                                                                         | $6.05        |                | 25,000 expire   May 10, 2010 75,000 expire 

May 10, 2015 |   |
|                                                        |       |                                            |       |                                                              |       |                                                |       |                                                                                        |         |                |                                                           |   |
| Richard  Flanagan  Scientific Advisor                       |       | 25,000                                          |       | 5.5                                                               |       | CDN $5.73                                           |       | CDN                                                                                         | $5.73        |                | December 31, 2009                                              |   |

----

(1) All options,except for the 75,000 options issued to Jean-Pierre Robert which expire on May10, 2015 and the 50,000 options issued to Dan Brazier which expire on October2, 2015, have a three year vesting period. The 75,000 options issued to Mr. Robert which expire May 10, 2015 andthe 50,000 options issued to Mr. Brazier which expire on October 2, 2015 vestas follows: (i) half after five years from the date of grant; and (ii) halfafter seven years from the date of grant.

(2) The ExercisePrice of the options was determined by the Board of Directors in accordancewith the provisions of the Stock Option Plan.

 

Thefollowing table sets forth individual exercises of options by the followingNamed Executive Officers during the financial year ended December 31, 2005 andthe financial year-end value of unexercised options:

 
| **Name**           | ** ** | **Securities****Acquired onExercise** | ** ** | **Aggregate Value****(CDN$) Realized** | ** ** | **Unexercised Options at****December 31, 2005(#)Exercisable/Unexercisable** | ** ** | **Value of Unexercised in-  the-Money Options at  December 31, 2005********(CDN$)********Exercisable/********Unexercisable** | ** ** |
|--------------------|------------|---------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| Martin Barkin      |       | 400,000                               |       | 1,291,000                              |       | 371,792 / 33,333                                                            |       | 425,820 / Nil                                                                                                                |       |
| Mark Oleksiw       |       | Nil                                   |       | Nil                                    |       | 21,666 / 116,667                                                            |       | 18,533 / 269,000                                                                                                             |       |
| Dan Brazier        |       | 15,000                                |       | 61,475                                 |       | 76,666 / 183,334                                                            |       | 103,617 / 292,333                                                                                                            |       |
| John Durham        |       | Nil                                   |       | Nil                                    |       | 8,333 / 116,667                                                             |       | Nil / 269,000                                                                                                                |       |
| Jean-Pierre Robert |       | Nil                                   |       | Nil                                    |       | Nil/100,000                                                                 |       | Nil / Nil                                                                                                                    |       |
| Richard Flanagan   |       | 70,000                                |       | 177,250                                |       | 68,333/ 16,667                                                              |       | 110,200/Nil                                                                                                                  |       |

 

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

 

Intention– To further align the interests of senior management with those ofshareholders by increasing management shareholdings at minimal cost to theCompany.

 

85

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Mechanism– Eligible participants in this plan are entitled to elect yearly to receive upto 20% of base salary and up to 100% of any bonus payable in respect of that yearin Deferred Share Units in lieu of cash compensation.  An election must be made by December 1 ofeach year in respect of base salary and bonus for the next year.  The elected amount is converted to a numberof Deferred Share Units equal to the elected amount divided by the closingprice of the common shares on the Toronto Stock Exchange or The NASDAQ NationalMarket System on December 31 of each year, based on a purchase commitment as ofDecember 1 of the prior year.  This planis administered by the Board of Directors of the Company.

 

Participants– Members of senior management of the Company designated by the Human Resourcesand Compensation Committee.

 

Redemptionof Deferred Share Units – Participants are not entitled to receive any DeferredShare Units until cessation of employment with the Company for any reason.  The value of each Deferred Share Unit,redeemable by the participant, will be equivalent to the market value of acommon share of the Company at the time of redemption.  The Deferred Share Units must be redeemed nolater than the end of the first calendar year commencing after the date ofcessation of employment.

 

NamedExecutive Officer Elections for 2004, 2005 and 2006 – The following tablesummarizes the elections under this plan by Named Executive Officers:

 

**DSU Elections**

 
| ** **        | ** ** | **2004**   | ** ** | **2005**    | ** ** | **2006**   | ** ** |
|-------------------|------------|------------|------------|-------------|------------|------------|------------|
| ** **        | ** ** | **Salary** | ** ** | **Bonus**   | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Salary** | ** ** | **Bonus** | ** ** |
| ** **        | ** ** | **%**      | ** ** | **$ ** | ** ** | **%**      | ** ** | **$ ** | ** ** | **%** | ** ** | **$ ** | ** ** | **%** | ** ** | **$ ** | ** ** | **%** | ** ** | **$ ** | ** ** | **%** | ** ** | **$ ** | ** ** |
| Martin  Barkin(1) |       | nil        |       | nil         |       | nil        |       | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | Nil |   |
| Dan  Brazier(2)   |       | nil        |       | nil         |       | nil        |       | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | 100 |   | 100,000 |   |

 

----

(1)           As at March 20, 2006, Dr. Barkin had a total of 186,560 Deferred Share Units and the value of hisinterest in this plan at said date was CDN$1,029,811.

(2)           As at March 20, 2006, Mr. Brazier had a total of 19,802 Deferred Share Units and the value of hisinterest in this plan at said date was CDN$109,307.

 

### ***Employee Group Registered Retirement SavingsPlan***

 

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

 

Mechanism –Commencing 12 months after continuous employment, employees of the Company andits subsidiaries are entitled to receive a discretionary payment from theCompany which matches employee contributions on a dollar-for-dollar basistowards an employee’s RRSP, up to a maximum of 5% of the employee’s eligibleincome (“normal” straight time annual earnings or salary, not to includeovertime payments, bonus or any other form of exceptional payment).  The corporate contribution to this planremains under the ownership and control of the employee and is not subject toany lock-in provisions.  The plan isadministered by a committee composed of employees and management.  Subject to the investment choices approved bythe committee, employees control the investment of the contributions of boththe employees and the Company.  For thoseemployees belonging to the United Food and Commercial Workers InternationalUnion (“UFCW”) the contribution is 3.5% of base earnings which may be directlycontributed by the Company to the UFCW pension fund if the employees so electas a group.  No such election was madefor 2005.

 

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

 

86

----

 

CommencementDate – The plan commenced on January 1, 2002, but employee matchingcontributions were not required for 2003, 2004 and 2005.  In 2006, matching contributions are required.

 

### ***Non-Executive Long Term Incentive Plan***

 

Intention -This plan was approved by the Board of Directors on December 6, 2005.  Its purposes are: (i) to align the interestsof eligible employees with the interests of the shareholders of the Company;(ii) to attract and retain key employees; and (iii) to ensure that key employees’incentives and rewards are consistent with the strategic business initiativesof the Company and to achieve divisional and corporate financial goals toenhance shareholder value.

 

Mechanism –The maximum plan award for any two-year cycle is established by the Board ofDirectors at the beginning of each cycle and is a percentage of a participant’saverage annual base salary for the cycle. A portion of the maximum plan award is determined based on the Company’scumulative earnings per share (“EPS”) target for the cycle (“FinancialPortion”) and a portion of the maximum plan award is determined based on theperformance of the individual participant during the cycle (“PerformancePortion”).  The maximum percentage of theplan award comprised of the Financial Portion and the maximum percentage of theplan award comprised of the Performance Portion are identical for allparticipants within each cycle and are established by the Board ofDirectors.  The portion of the maximumpotential Financial Portion and the maximum potential Performance Portion thata participant will be awarded depends upon the EPS achieved during the cycleand whether the participant has achieved his or her performance objectives,respectively.  The plan is administeredby the President and Chief Executive Officer of the Company under thesupervision of the Board of Directors. All plan awards are paid in cash within 90 days of the end of a cycle.

 

Participants –Members of senior management of the Company who are full time employees may beselected to participate in the plan. Members of the Executive Operations Committee and those senior managersof the Company who participate in an established incentive or participationplan of the Company are excluded from participating in this plan.  Each of the Named Executive Officers may notparticipate in the plan

 

**SubsidiaryLong-Term Incentive Plans**

 

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

 

Intention– To align further the interests of senior management in DRAXIMAGE (formerlyDRAXIMAGE Inc.), a division of DRAXIS Specialty Pharmaceuticals Inc.(“DRAXIMAGE”), for increasing the value of the division and therefore enhancingshareholder value of the Company as a whole.

 

Mechanism– The terms of this plan provide that, subject to the achievement of certainconditions, the Company will make payments to plan participants in the form ofcash based on increases in the fair market value of DRAXIMAGE’s equity inexcess of the Company’s acquisition cost. Prior to March 2005, the Company could elect to pay the value in sharesof the Company. However, no such election has been made by the Company.

 

InMarch 2005, the Board of Directors amended the plan by adoption of a resolutionproviding that the Company could no longer elect to make payments to planparticipants by way of an issuance of shares of the Company.

 

87

----

 

Participants– Selected members of senior management of the DRAXIMAGE division as designatedby the Company.  Mr. Jean-Pierre Robertparticipates in this plan but received no award under the plan in 2005.  Dr. Richard Flanagan participated andreceived an award under the plan in 2005. See “Employment Contracts and Termination ofEmployment”.

 

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

 

Intention– In September 2003, the then-existing EquityParticipation Plan of DRAXIS Pharma Inc. (as of January 1, 2005 known as DRAXISPharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) was terminated andreplaced with a Long Term Equity Incentive Plan to provide certain seniormanagement employees of DRAXIS Pharma with a meaningful incentive to increasethe value of the Company and to allow management to share in the benefits ofthat value creation.

 

Mechanism*–* The terms of this plan provide that eligible participantshave a right to receive phantom equity shares of DRAXIS Pharma and, subject toapproval by the Company’s Board of Directors and applicable regulatoryauthorities, options of the Company.  Theoptions are governed by the terms of the Stock Option Plan of the Company (see“Incentive Plans - Stock Option Plan”). In accordance with a resolution passed by the Board of Directors inMarch 2005, the Plan was amended so that a participant may only receive thecash value of said phantom equity shares on the plan expiry date or otherdesignated termination event.  Prior tosaid amendment, the Company could elect to pay such value in shares of theCompany.  However, at the date of theamendment, no such election had been made by the Company.  In order for an eligible participant toreceive a termination distribution amount with respect to a phantom equityshare, certain financial ratios must be met by DRAXIS Pharma.

 

Participants– Selected members of senior management of the DRAXIS Pharma division asdesignated by the Company.  Mr. JohnDurham participates in this plan but received no award under the plan in 2005.

 

**DiscontinuedPlan**

 

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

 

Eligible participants in this plan were entitled to purchase on ayearly basis common shares of the Company equal to not more than 40% of theirbase salary, funded by an interest-bearing loan from the Company, with thecommon shares to be acquired by an open market purchase by a trustee on behalfof the participants.  The purchase pricewas equal to the closing price of the common shares on the TSX or NASDAQ onDecember 31 of each year, based on a purchase commitment as of December 1 ofthe prior year.  This plan was cancelledby the Board of Directors in 2002 and all outstanding loans granted thereunderwere repaid in 2005.

 

**Compensationof Directors**

 

In 2005, the compensation paid to each director of the Company wasrevised following a review of the compensation paid to directors.  At the request of the Human Resources andCompensation Committee and the Board of Directors, the CEO reviewed managementproxy circulars of twelve Canadian companies, as well as a third party reviewof corporate governance and director compensation in Canada. As of January 1,2005, each director, other than Dr. Martin Barkin, received an annualhonorarium of $17,500 plus a meeting fee of $1,500 for each Board of Directorsand Committee meeting attended, some via teleconference.  In addition, the Chairs of each of the HumanResources and Compensation Committee and the Nominating and CorporateGovernance Committee received an annual retainer of $5,000.  The Chairman of the Audit

 

88

----

 

Committeereceived an annual retainer of $10,000. Directors who are employees of the Company do not receive anycompensation in their capacity as directors. For the year ended December 31, 2005, in addition to the retainerreceived as Chairman of the Human Resources and Compensation Committee, Mr.Brian King received $95,000 as non-executive Chairman of the Board ofDirectors.  He did not otherwise receivemeeting fees as a director.  Thefollowing table sets forth the total compensation paid to each Director in theyear ended December 31, 2005.  Dr. MartinBarkin, as an employee of the Company, did not receive any compensation in hiscapacity as a director.

 
| ** **              | ** **   | **Leslie  Dan** | ** **   | **George  Darnell** | ** ** | **Rolf  Henel** | ** **   | **Brian  King** | ** **   | **Sam  Sarick** | ** ** | **Bruce  Simpson** | ** **   | **John  Vivash** | ** **   |
|-------------------------|--------------|-----------------|--------------|---------------------|------------|-----------------|--------------|-----------------|--------------|-----------------|------------|--------------------|--------------|------------------|--------------|
| **Annual  Retainer**    |         | $               | 17,500       |                | $          | 17,500          |         | $               | 17,500       |            | $          | 95,000             |         | $                | 17,500       |   | $ | 17,500 |   | $ | 17,500 |   |
| **Chairman  Retainer**  |         | —          |         | —              |       | —          |         | 5,000           |         | 10,000          |       | —             |         | $                | 5,000        |   |
| **Committee  Retainer** |         | $               | 2,500        |                | 5,000      |            | 5,000        |            | —       |            | 5,000      |               | 2,500        |             | —       |   |
| **Committee  meetings** |         | $               | 6,000        |                | $          | 16,500          |         | $               | 16,500       |            | —     |               | $            | 7,500            |         | $ | 12,000 |   | $ | 9,000 |   |
| **Board  meetings**     |         | $               | 12,000       |                | $          | 15,000          |         | $               | 13,500       |            | —     |               | $            | 12,000           |         | $ | 15,000 |   | $ | 15,000 |   |
| **TOTAL**               | *** *** | ***$***         | ***38,000*** | *** ***        | ***$***    | ***54,000***    | *** *** | ***$***         | ***52,500*** | *** ***    | ***$***    | ***100,000***      | *** *** | ***$***          | ***52,000*** | *** *** | ***$*** | ***47,000*** | *** *** | ***$*** | ***46,500*** | *** *** |
| **Options**             |         | 15,000          |         | 15,000              |       | 15,000          |         | 20,000          |         | 15,000          |       | 15,000             |         | 15,000           |         |

 

In December 2001, under the Company’s Stock Option Plan, each of thedirectors (excluding the President and Chief Executive Officer) was awarded15,000 options as partial compensation for services rendered as directors.  The Chairman was awarded an additional 5,000options.  An award of the same number ofoptions occurs annually on each January 1 with an exercise price based onthe average closing price of the common shares on the TSX for the five tradingdays immediately preceding January 1 in each year.

 

Fromtime to time, special committees of the Board of Directors are appointed toconsider special issues, in particular issues which could potentially involverelated party transactions or other special transactions.  Compensation for work on such committees isset based on the amount of work involved. No compensation was paid in 2005 to any special committee members.

 

**Minimum Shareholding Requirements**

 

InJune 2001, the Board of Directors established a corporate policy requiring eachthen current Director to acquire by June 2004 (or in the case of future Boardof Directors members, within three years of their appointment) common shares inthe Company equal to five times his or her annual honorarium.  All directors who were to comply with thisrequirement by June 2004 were in compliance as of said date.  In February 2005, the Board of Directorsadopted a resolution amending this policy to fix the number of common shares tobe so held at 15,000.  Compliance withthis policy is monitored annually by the Nominating and Corporate GovernanceCommittee.  As at December 31, 2005 andMarch 20, 2006, all directors were compliant with this policy.

 

89

----

 

Directorshareholdings as of March20, 2006

 
| **Director**      | ** ** | **Shares Owned** | ** ** | **% Owned of total issued and  outstanding common shares** | ** ** |
|-------------------|------------|------------------|------------|------------------------------------------------------------|------------|
| Martin Barkin(1)  |       | 737,408          |       | 1.8                                                        |       |
| Leslie Dan        |       | 38,356           |       | <  1                                                    |       |
| George  Darnell   |       | 79,750           |       | <  1                                                    |       |
| Rolf H.  Henel    |       | 30,000           |       | <  1                                                    |       |
| Brian King        |       | 125,750          |       | <  1                                                    |       |
| Sam Sarick        |       | 916,589          |       | 2.2                                                        |       |
| Bruce W.  Simpson |       | 20,000           |       | <  1                                                    |       |
| John Vivash       |       | 20,000           |       | <  1                                                    |       |
| Total             |       | 1,967,853        |       | 4.7                                                        |       |

 

----

(1)                                  Inaddition, as of March 20, 2006, Dr. Barkin owns 186,560 Deferred Share Units ofthe Company (see “Incentive Plans – Deferred Share Unit Plan) and the value ofhis interest in this plan at said date was CDN$1,029,811.

 

Senior Managementshareholdings as of March 20, 2006

 
| **Senior Management** | ** ** | **Shares Owned** | ** ** | **% Owned of total issued and  outstanding common shares** | ** ** |
|-----------------------|------------|------------------|------------|------------------------------------------------------------|------------|
| Martin  Barkin        |       | 737,408          |       | 1.8                                                        |       |
| Dan Brazier(2)        |       | 4,355            |       | <  1                                                    |       |
| Jack A.  Carter       |       | 0                |       | nil                                                        |       |
| John Durham           |       | 0                |       | nil                                                        |       |
| Jean-Pierre Robert    |       | 0                |       | nil                                                        |       |
| Alida Gualtieri       |       | 500              |       | <  1                                                    |       |
| Chien Huang           |       | 0                |       | nil                                                        |       |
| Mark Oleksiw          |       | 0                |       | nil                                                        |       |
| Jerry  Ormiston       |       | 4,100            |       | <  1                                                    |       |
| Total                 |       | 8,955            | (3)        | <  1                                                    |       |

 

----

(2)**                                **In addition, as at March 20, 2006, Mr.Brazier owns 19,802 Deferred Share Units and the value of his interest in thisplan at said date was CDN$109,307.

 

(3)                                  Excludesshares held by Dr. Barkin, which are included in the total of shares held bydirectors.

 

90

----

 

Directoroutstanding options as of March 20,2006

 
| **Director**       | ** ** | **# of Options** | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** **         |
|--------------------|------------|------------------|------------|--------------------|------------|---------------------|--------------------|
| Martin  Barkin     |       | 10,125           |       | US$                | 3.02       |                | June 13,  2006     |   |
|               |       | 120,000          |       | CDN$               | 3.60       |                | July 5, 2006       |   |
|               |       | 225,000          |       | CDN$               | 4.00       |                | February 5,  2007  |   |
|               |       | 50,000           |       | CDN$               | 5.73       |                | December 31,  2009 |   |
|               |       | 50,000           |       | CDN$               | 5.05       |                | December 31,  2010 |   |
| Leslie L. Dan      |       | 15,000           |       | CDN$               | 4.19       |                | December 31,  2006 |   |
|               |       | 15,000           |       | CDN$               | 2.33       |                | December 31,  2007 |   |
|               |       | 15,000           |       | CDN$               | 4.30       |                | December 31,  2008 |   |
|               |       | 15,000           |       | CDN$               | 5.73       |                | December 31,  2009 |   |
|               |       | 15,000           |       | CDN$               | 5.05       |                | December 31,  2010 |   |
| George M.  Darnell |       | 10,125           |       | US$                | 3.02       |                | June 13,  2006     |   |
|               |       | 15,000           |       | CDN$               | 4.19       |                | December 31,  2006 |   |
|               |       | 15,000           |       | CDN$               | 2.33       |                | December 31,  2007 |   |
|               |       | 15,000           |       | CDN$               | 4.30       |                | December 31,  2008 |   |
|               |       | 15,000           |       | CDN$               | 5.73       |                | December 31,  2009 |   |
|               |       | 15,000           |       | CDN$               | 5.05       |                | December 31,  2010 |   |
| Rolf H.  Henel     |       | 10,000           |       | CDN$               | 5.12       |                | April 30,  2007    |   |
|               |       | 5,000            |       | CDN$               | 3.66       |                | August 13,  2007   |   |
|               |       | 15,000           |       | CDN$               | 2.33       |                | December 31,  2007 |   |
|               |       | 15,000           |       | CDN$               | 4.30       |                | December 31,  2008 |   |
|               |       | 15,000           |       | CDN$               | 5.73       |                | December 31,  2009 |   |
|               |       | 15,000           |       | CDN$               | 5.05       |                | December 31,  2010 |   |
| Brian M.  King     |       | 20,000           |       | CDN$               | 4.19       |                | December 31,  2006 |   |
|               |       | 20,000           |       | CDN$               | 2.33       |                | December 31,  2007 |   |
|               |       | 20,000           |       | CDN$               | 4.30       |                | December 31,  2008 |   |
|               |       | 20,000           |       | CDN$               | 5.73       |                | December 31,  2009 |   |
|               |       | 20,000           |       | CDN$               | 5.05       |                | December 31,  2010 |   |
| Samuel  Sarick     |       | 10,125           |       | US$                | 3.02       |                | June 13,  2006     |   |
|               |       | 15,000           |       | CDN$               | 4.19       |                | December 31,  2006 |   |
|               |       | 15,000           |       | CDN$               | 2.33       |                | December 31,  2007 |   |
|               |       | 15,000           |       | CDN$               | 4.30       |                | December 31,  2008 |   |
|               |       | 15,000           |       | CDN$               | 5.73       |                | December 31,  2009 |   |
|               |       | 15,000           |       | CDN$               | 5.05       |                | December 31,  2010 |   |
| Bruce W. Simpson   |       | 10,000           |       | CDN$               | 5.12       |                | April 30,  2007    |   |
|               |       | 5,000            |       | CDN$               | 3.66       |                | August 13,  2007   |   |
|               |       | 5,000            |       | CDN$               | 2.33       |                | December 31,  2007 |   |
|               |       | 15,000           |       | CDN$               | 4.30       |                | December 31,  2008 |   |
|               |       | 15,000           |       | CDN$               | 5.73       |                | December 31,  2009 |   |
|               |       | 15,000           |       | CDN$               | 5.05       |                | December 31,  2010 |   |
| John A.  Vivash    |       | 15,000           |       | CDN$               | 4.19       |                | December 31,  2006 |   |
|               |       | 15,000           |       | CDN$               | 2.33       |                | December 31,  2007 |   |
|               |       | 15,000           |       | CDN$               | 4.30       |                | December 31,  2008 |   |
|               |       | 15,000           |       | CDN$               | 5.73       |                | December 31,  2009 |   |
|               |       | 15,000           |       | CDN$               | 5.05       |                | December 31,  2010 |   |
| **Total**          | ** ** | **1,015,375**    |       |               |       |                |               |   |

 

91

----

 

Senior Managementoutstanding options as of March 20,2006

 
| **Senior Management** | ** ** | **# of Options**    | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** **         |
|-----------------------|------------|---------------------|------------|--------------------|------------|---------------------|--------------------|
| Martin  Barkin        |       | 10,125              |       | US$                | 3.02       |                | June  13, 2006     |   |
|                  |       | 120,000             |       | CDN$               | 3.60       |                | July  5, 2006      |   |
|                  |       | 225,000             |       | CDN$               | 4.00       |                | February  5, 2007  |   |
|                  |       | 50,000              |       | CDN$               | 5.73       |                | December  31, 2009 |   |
|                  |       | 50,000              |       | CDN$               | 5.05       |                | December  31, 2010 |   |
| Dan  Brazier          |       | 20,000              |       | CDN$               | 2.50       |                | October  31, 2007  |   |
|                  |       | 15,000              |       | CDN$               | 2.32       |                | December  31, 2007 |   |
|                  |       | 100,000             |       | CDN$               | 2.36       |                | July  14, 2013     |   |
|                  |       | 100,000             |       | CDN$               | 4.70       |                | August  10, 2009   |   |
|                  |       | 25,000              |       | CDN$               | 5.73       |                | December  31, 2009 |   |
|                  |       | 50,000              |       | CND$               | 5.38       |                | October 2, 2015    |   |
|                  |       | 25,000              |       | CDN$               | 5.05       |                | December  31, 2010 |   |
| Jack  A. Carter       |       | 3,334               |       | CDN$               | 3.66       |                | August  13, 2007   |   |
|                  |       | 6,668               |       | CDN$               | 2.32       |                | December  31, 2007 |   |
|                  |       | 15,000              |       | CDN$               | 5.73       |                | December  31, 2009 |   |
|                  |       | 15,000              |       | CDN$               | 5.05       |                | December  31, 2010 |   |
| John  Durham          |       | 100,000             |       | CDN$               | 2.36       |                | July  14, 2013     |   |
|                  |       | 25,000              |       | CDN$               | 5.73       |                | December  31, 2009 |   |
|                  |       | 25,000              |       | CDN$               | 5.05       |                | December  31, 2010 |   |
| Jean-Pierre  Robert   |       | 25,000              |       | CDN$               | 6.05       |                | May  10, 2010      |   |
|                  |       | 75,000              |       | CDN$               | 6.05       |                | May  10, 2015      |   |
|                  |       | 25,000              |       | CDN$               | 5.05       |                | December 31, 2010  |   |
| Alida Gualtieri       |       | 25,000              |       | CDN$               | 3.25       |                | November 3, 2008   |   |
|                  |       | 15,000              |       | CDN$               | 5.73       |                | December  31, 2009 |   |
|                  |       | 15,000              |       | CDN$               | 5.05       |                | December  31, 2010 |   |
| Chien Huang           |       | 3,333               |       | CDN$               | 3.15       |                | June  19, 2006     |   |
|                  |       | 10,000              |       | CDN$               | 5.41       |                | May  14, 2007      |   |
|                  |       | 50,000              |       | CDN$               | 2.36       |                | July  14, 2013     |   |
|                  |       | 15,000              |       | CDN$               | 5.73       |                | December  31, 2009 |   |
|                  |       | 15,000              |       | CDN$               | 5.05       |                | December  31, 2010 |   |
| Mark  Oleksiw         |       | 13,333              |       | CDN$               | 3.66       |                | August  13, 2007   |   |
|                  |       | 100,000             |       | CDN$               | 2.36       |                | July  14, 2013     |   |
|                  |       | 25,000              |       | CDN$               | 5.73       |                | December  31, 2009 |   |
|                  |       | 25,000              |       | CDN$               | 5.05       |                | December  31, 2010 |   |
| Jerry  Ormiston       |       | 8,333               |       | CDN$               | 3.00       |                | May  29, 2006      |   |
|                  |       | 46,667              |       | CDN$               | 3.15       |                | June  19, 2006     |   |
|                  |       | 25,000              |       | CDN$               | 3.60       |                | July  5, 2006      |   |
|                  |       | 10,000              |       | CDN$               | 3.66       |                | August  13, 2007   |   |
|                  |       | 15,000              |       | CDN$               | 2.32       |                | December  31, 2007 |   |
|                  |       | 15,000              |       | CDN$               | 5.73       |                | December  31, 2009 |   |
|                  |       | 15,000              |       | CDN$               | 5.05       |                | December  31, 2010 |   |
| **Total**             | ** ** | **1,096,668 ** | (1)        | ** **         | ** ** | ** **          | ** **         | ** ** |

 

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(1)           Excludes shares held by Dr. Barkin,which are included in the total of shares held by directors.

 

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**Board Practices**

 

Statement of Corporate Governance Practices

 

TheBoard of Directors of the Company believes that sound corporate governancepractices are essential to the well-being of the Company and its shareholders,and that these practices should be reviewed regularly to ensure that they areappropriate.  EffectiveJune 30, 2005, National Instrument 58-101 *Disclosureof Corporate Governance Practices* (“NI 58-101”) and NationalPolicy 58-201 *Corporate GovernanceGuidelines* (“NP 58-201”) were adopted in Canada.  NI 58-101 requires issuers to disclosethe corporate governance practices that they have adopted.  NP 58-201 provides guidance on corporategovernance practices.  In addition, theCompany is subject to Multilateral Instrument 52-110 *Audit Committees* (“MI 52-110”), which has been adoptedin various Canadian provinces and territories and which prescribes certainrequirements in relation to audit committees. The Board ofDirectors has carefully considered and reviewed the series of guidelines foreffective corporate governance in NP 58-201, the corporate governancerequirements of the U.S. *Sarbanes-Oxley Actof 2002*(the “SOX Requirements”), and the corporate governancereforms of the NASDAQ Stockmarket, Inc. (the “NASDAQ Rules”).  The Board of Directors believes that theCompany’s corporate governance practices satisfy the recommendations and rulescontained in these various regulations. The Company’s policies and practices for corporate governance are setout below.

 

Mandate of the Board of Directors

 

Themandate of the Board of Directors is to supervise the management of thebusiness and affairs of the Company.  Inlight of that responsibility, the Board of Directors reviews, discusses andapproves various matters related to the Company’s operations, strategicdirection and organizational structure, where required, and involves itselfjointly with management in ensuring the creation of shareholder value and inserving the best interests of the Company. In April 2004, the Board of Directors adopted a detailed Charter.  The Charter is available on the Company’swebsite at www.draxis.com.  TheCharter is also filed as Exhibit 4.54 to this Annual Report (Form 20-F).  The Charter specifies that the Board ofDirectors is responsible for:

 
| (i)    |   | Adopting a  strategic planning process for the Company;                                                                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
| (ii)   |   | Adopting a  communications policy for the Company;                                                                                                                                         |
|   |   |                                                                                                                                                                                       |
| (iii)  |   | Overseeing  the financial integrity of the Company;                                                                                                                                        |
|   |   |                                                                                                                                                                                       |
| (iv)   |   | Monitoring  compliance with the corporate objectives of the Company;                                                                                                                       |
|   |   |                                                                                                                                                                                       |
| (v)    |   | Approving  and ascertaining that the Company monitor adherence to its Code of Ethics and  Business Conduct;                                                                                |
|   |   |                                                                                                                                                                                       |
| (vi)   |   | Appointing  the Chief Executive Officer (“CEO”), monitoring his performance and  ascertaining that succession plans are in place with respect to the CEO and  senior management; |
|   |   |                                                                                                                                                                                       |
| (vii)  |   | Ensuring  that appropriate structures and procedures are in place so that the Board of  Directors can function independently from management;                                              |
|   |   |                                                                                                                                                                                       |
| (viii) |   | Establishing  performance measures for the Company and its management;                                                                                                                     |
|   |   |                                                                                                                                                                                       |
| (ix)   |   | Monitoring  compliance with legal requirements and ascertaining that the Company has  procedures concerning the proper preparation, approval and maintenance of  documents and records;    |

 

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| (x)    |   | Approving  changes in the By-laws and Articles of Incorporation and agendas for  shareholder meetings;                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                 |
| (xi)   |   | Approving  the Company’s legal structure, name and logo; and                                                                                    |
|   |   |                                                                                                                                                 |
| (xii)  |   | Performing  such functions as it reserves to itself or which cannot, by law, be delegated  to Committees of the Board of Directors or to management. |

 

In addition,in April 2004, the Board of Directors adopted position descriptions for theChief Executive Officer, Directors, Chairman of the Board of Directors and theChairman of each Committee of the Board of Directors.  There are no service contracts with the Boardmembers that provide for any benefits upon their termination as directors ofthe Company.

 

Thereare five regularly scheduled Board of Directors meetings per year.  However, the Board of Directors also meets asfrequently as the need arises to consider major issues and opportunities.

 

Therewere ten meetings of the Board of Directors in 2005.

 

Composition of the Board of Directors

 

TheBoard of Directors has reviewed its composition to determine which of thedirectors may be considered “independent” in conformity with applicableCanadian, TSX, U.S. and NASDAQ requirements. Generally, a director who does not have any direct or indirect “materialrelationship” with the Company is considered independent.  A “material relationship” is a relationshipwhich could, in the view of the Board of Directors, be reasonably expected tointerfere with the exercise of a member’s independent judgment.

 

TheBoard of Directors, currently composed of eight members, has considered therelationship of each of the directors to the Company and has determined thatsix of the eight directors are independent. Dr. Martin Barkin, President and Chief Executive Officer of the Company,is not considered to be an independent director since he is an employee of theCompany.  Mr. Leslie Dan is notconsidered to be an independent director because he is an executive officer ofViventia Biotech Inc. and Dr. Barkin was, until December 30, 2005, a member ofthe Compensation Committee of that corporation.

 

TheBoard of Directors believes that Dr. Barkin is sensitive to conflicts of interestand excuses himself from deliberations and voting in appropriatecircumstances.  He brings a skill set andknowledge base which is beneficial to the Company and his participation as adirector contributes to the effectiveness of the Board of Directors.  In addition, when it determines that it wouldbe appropriate to do so, the Board of Directors sets aside, during itsregularly scheduled meetings, time for meeting without any member of management(including the Chief Executive Officer) or any non-independent directorspresent. Since January 1, 2005, 6 meetings have been so held.

 

TheBoard of Directors has adopted a practice that the Chairman of the Board ofDirectors and the Chief Executive Officer of the Company are separateindividuals.  Mr. Brian King, theChairman of the Board of Directors, is an independent director.  The Chairman provides leadership to the Boardof Directors with respect to its functions as described in the Board ofDirectors’ mandate and oversees the logistics of the operations of the Board ofDirectors.

 

TheBoard of Directors requires that any director recuse himself from any decisionto be made in any transaction in which the director has a material interest.

 

Directorsare elected to a renewable one year term.

 

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Committees of the Board of Directors

 

TheBoard of Directors has three standing committees:  the Audit Committee, the Human Resources andCompensation Committee and the Nominating and Corporate GovernanceCommittee.  To maintain appropriateindependence, no members of management sit on any of the three standingcommittees.

 

Fromtime to time, special committees of the Board of Directors are appointed toconsider special issues, in particular, any issues which could potentiallyinvolve related party transactions.

 

Committeesof the Board of Directors and individual Board members may engage independentconsultants and outside advisors at the expense of the Company, wherereasonable and appropriate, to assist them in discharging theirresponsibilities.

 

*AuditCommittee*

 

TheAudit Committee is responsible for reviewing the Company’s financial reportingprocedures and internal controls.  TheCommittee is also responsible for reviewing quarterly financial statements andthe annual financial statements and earnings announcements prior to theirapproval by the full Board of Directors and communicating regularly with theCompany’s external auditors.

 

TheCompany believes the oversight responsibility of the Committee provides a keystewardship role for the Committee in the Company’s financial disclosureissues, internal controls, risk management, corporate finance and relatedmatters.

 

Inreviewing the audited financial statements of the Company, the Committeediscusses the quality, not just the acceptability, of the accountingprinciples, the reasonableness of significant judgments, and the clarity ofdisclosure in the financial statements. In addition, the Committee discusses with the Company’s Independent Registered Chartered Accountants the overall scope and plans for theiraudit.  The Committee meets with the Independent Registered Chartered Accountants, with and without management present, todiscuss the results of their examination and the overall quality of theCompany’s financial reporting.  TheCommittee also carefully reviews evolving Canadian and U.S. audit committeeregulations and best practices to ensure corporate alignment with the spiritand intent of such regulations and practices.

 

InMay 2005, February 2005 and April 2004, the Board of Directors approvedamendments to the Charter for the Audit Committee, which was initially approvedin February 2003.  The Charter isavailable on the Company’s website at www.draxis.com.  TheCharter is also filed as Exhibit 4.55 to this Annual Report (Form 20-F).  The Charter specifies that the purpose of theCommittee is to assist the Board of Directors with its oversightresponsibilities by:

 

•                  Reviewing theintegrity of the consolidated financial statements of the Company;

•                  Recommending tothe Board of Directors the appointment of the Independent Registered CharteredAccountants and reviewing the Independent Registered Chartered Accountants’qualifications and independence;

•                  Reviewing theperformance of the Company’s Independent Registered Chartered Accountants;

•                  Reviewing thetimely compliance by the Company with all legal and regulatory requirements foraudit and related financial functions of the Company;

 

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•                  Reviewingfinancial information contained in public filings of the Company prior tofiling;

•                  Reviewingearnings announcements of the Company prior to release to the public;

•                  Overseeing theCompany’s systems of and compliance with internal financial controls andmanagement’s reporting on internal controls;

•                  Reviewing theCompany’s auditing, accounting and financial reporting processes; and

•                  Dealing with allcomplaints regarding accounting controls and auditing matters.

 

In accordancewith the Audit Committee Charter, the Audit Committee pre-approves all auditingservices and permitted non-audit services (including fees and terms thereof) tobe performed for the Company or its subsidiaries by its Independent RegisteredChartered Accountants

 

Composition of the Audit Committee

 

The Committeeis currently composed of four directors, all of whom are independent directorsand all of whom are financially literate. The members of the Audit Committee are Messrs. Samuel Sarick (Chairman),Bruce Simpson, George Darnell and Rolf Henel. Mr. Simpson replacedMr. Dan as a member of the Committee on May 18, 2005.  Mr. Henel is the Company’s designatedfinancial expert in accordance with applicable regulatory and legislativerequirements.  The designation of Mr.Henel as an Audit Committee financial expert does not make Mr. Henel an“expert” for any other purpose, impose any duties, obligations or liability onMr. Henel that are greater than those imposed on members of the Audit Committeeand Board of Directors who do not carry his designation, or affect the duties,obligations or liability of any other member of the Audit Committee.

 

RelevantEducation and Experience

 

Allof the members of the Audit Committee are financially literate.  Each of the Audit Committee members (i) hasan understanding of the accounting principles used by the issuer to prepare itsfinancial statement, (ii) the ability to assess the general application of suchaccounting principles in connection with the accounting for estimates, accrualsand reserves; (iii) has practical experience in preparing, auditing, analyzingor evaluating financial statements, and (iv) has an understanding of internalcontrols and procedures for financial reporting.

 

Indetermining whether a director: (i) is “financially literate”, the Board of Directorsconsiders whether the director has the ability to read and understand a balancesheet, an income statement, a cash flow statement and the notes attachedthereto; and (ii) has “accounting or related financial experience”, the Boardof Directors considers whether the director has the ability to analyze andinterpret a full set of financial statements, including the notes attachedthereto.

 

Mr.Samuel Sarick has over 50 years of experience as President and CEO of a majorreal estate corporation.

 

Mr.Bruce Simpson has an MBA degree and has served as President of the Genpharmdivision of E Merck and President and Chief Executive Officer of MedevaPharmaceuticals in the United States.

 

Mr.George Darnell has an MBA degree and is the retired President of the DadeDivision and Executive Vice President of the Baxter Diagnostics Group of BaxterInternational.

 

Mr.Rolf Henel has an MBA degree in Finance and Accounting and was a treasurer andthen President of Cyanamid International, Lederle Division.

 

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*HumanResources and Compensation Committee*

 

TheHuman Resources and Compensation Committee oversees overall corporate policywith respect to compensation and benefits and makes recommendations to theBoard of Directors on, among other things, the compensation of seniormanagement.  In assessing compensationissues, the Committee reviews and examines in detail the performance of seniormanagement.

 

Eachof the three current members of the Committee is an independent director.  The members of the Human Resources andCompensation Committee are Messrs. Brian King (Chairman), Bruce Simpson andJohn Vivash.

 

In May 2005,the Board of Directors approved amendments to the Charter for the HumanResources and Compensation Committee, which was initially approved in April2004.  The Charter is available on theCompany’s website at www.draxis.com.  TheCharter is also filed as Exhibit 4.56 to this Annual Report (Form 20-F).  The Charter specifies that the purpose of theCommittee is to assist the Board of Directors with its oversightresponsibilities by reviewing and reporting on:

 

•                  Management’ssuccession plans for Executive Officers, with special emphasis on CEOsuccession, and including specific development plans and career planning forpotential successors;

•                  Compensationphilosophy of the organization, including a compensation strategy andcompensation policies for Executive Officers, as proposed by the CEO;

•                  Recommendationsto the Board of Directors for the appointment of the CEO and other ExecutiveOfficers, corporate objectives that the CEO and such other Executive Officers,as the case may be, are responsible for meeting, assessment of the CEO againstthese objectives, monitoring of the CEO’s performance, and providing advice andcounsel in the execution of his duties;

•                  Totalcompensation plans including adequacy and form of compensation realisticallyreflecting the responsibilities and risks of the position for the CEO of theCompany and, in connection therewith, consider appropriate information,including information from the Board of Directors with respect to the overallperformance of the CEO;

•                  Compensation forExecutive Officers, annual adjustment to Executive Officer salaries, and thedesign and administration of short and long-term incentive plans, stockoptions, benefits and perquisites as proposed by the CEO;

•                  Employment andtermination arrangements for Executive Officers;

•                  Adoption of newor significant modifications to pay and benefit plans;

•                  Significant changesto the Company’s organizational structure relating to human resources function;

•                  The Committee’sproposed executive compensation report to be contained in the Company’s annualManagement Proxy Circular;

•                  Managementdevelopment programs for the Company;

•                  Any specialemployment contracts or arrangements with Executive Officers of the Companyincluding any contracts relating to a change of control;

•                  Remuneration formembers of the Board of Directors and Committees thereof, including adequacyand form of compensation realistically reflecting the responsibilities andrisks of the positions and recommending changes where applicable;

•                  Compliance bythe Company and its subsidiaries with all applicable employment and laborlegislation; and

•                  The performanceof the Committee and the effectiveness of the Committee’s members.

 

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In accordancewith the Committee’s oversight responsibility over succession plans formanagement and particularly CEO succession, The Hay Group was engaged by theCompany in November 2005 to provide a report to the Chairman of the Board ofDirectors and to the Human Resources and Compensation Committee on the criticalsuccess factors required for a successor CEO. In addition, The Hay Group was asked to identify the background,expertise and competencies required for a successor, on a going forward basis.

 

There iscurrently no set date for the retirement of the existing CEO.

 

Mercer HumanResources Consulting Limited (“Mercer”) was engaged in November 2005 to providethe Company with advice on compensation of the CEO and other senior executivesof the Company for the 2006 financial year and on trends in compensation forsenior executives in comparable companies. Decisions made by the Company with respect to the compensation of theCEO and other senior executives are its own responsibility and may reflectfactors and considerations other than the information provided to the Companyby Mercer.

 

*Nominatingand Corporate Governance Committee*

 

TheNominating and Corporate Governance Committee is responsible for recommendingannually the members of the Board of Directors proposed for election to theBoard of Directors, recommending new candidates for Board of Directorsmembership, monitoring the composition and the Board of Directors andsuggesting appropriate changes.  It seekson behalf of shareholders well-qualified candidates to nominate as directors(individuals who provide a balance in terms of their backgrounds and experiencein different industries and professions). It is also responsible for making recommendations to the full Board ofDirectors with respect to developments in the area of corporate governance andbest practices.

 

Eachof the three current members of the Committee is an independent director.  The members of the Nominating and CorporateGovernance Committee are Messrs. John Vivash (Chairman), George Darnell andRolf Henel.  Mr. Simpson ceased to be amember of the Committee on May 18, 2005.

 

In May2005, the Board of Directors approved amendments to the Charter for theNominating and Corporate Governance Committee, which was initially approved inApril 2004.  The Charter is available onthe Company’s website at www.draxis.com. The Charter is also filed as Exhibit 4.57 to this Annual Report (Form20-F).  The Charter specifies that thepurpose of the Committee is to assist the Board of Directors with its oversightresponsibilities by:

 

•                  Establishing a policy andprocedure for identifying and selecting potential nominees for the Board ofDirectors, including considering the competencies and skills that the Board ofDirectors should possess and the competencies and skills of each existing andpotential director;

•                  Monitoring Boardof Directors size and composition and suggesting changes in this respect whereappropriate;

•                  Recommendingannually members for election to the Board of Directors;

•                  Identifying andrecommending new candidates for Board of Directors membership;

•                  Developing theCompany’s approach to governance issues and making recommendations to the Boardof Directors in the area of corporate governance practices of the Board ofDirectors;

•                  Preparing andreviewing with the Board of Directors an annual performance evaluation of theeffectiveness of individual Board members and the Board of Directors and itsCommittees.  The assessment of the Boardof Directors examines its effectiveness as a whole and specifically reviewsareas that the Board of Directors and/or management believe could be improvedto

 

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ensure the continued effectiveness of theBoard of Directors in the execution of its responsibilities;

•                  Developing andrecommending to the Board of Directors standards to be applied to assessmaterial relationships between the Company and its Directors in accordance withconflict of interest standards;

•                  Reviewingannually the risks identified by the Audit Committee with respect to the riskmanagement policies and procedures of the Company and to ensure such risks areappropriately identified in the Company’s public disclosure documentation;

•                  Revising, asappropriate, in accordance with best practices and legal requirements, the Codeof Ethics and Business Conduct for directors, officers and employees, as wellas the Disclosure and Insider Trading Policy for the Company to address, amongother things, procedures to monitor insider trading activities, to preventselective disclosure and to mandate trading blackouts and corporate quietperiods;

•                  Monitoringcompliance with any Board of Directors mandated Director minimum shareholdingrequirements and monitoring attendance by Directors at Board of Directors andCommittee meetings;

•                  Reviewing thisCharter periodically and recommending any changes required to its scope andcontent to the Board of Directors; and

•                  Carrying out anyother duties or responsibilities expressly delegated to the Committee by theBoard of Directors.

 

Decisions Requiring Approval by the Board of Directors

 

Inaddition to those matters that must, by law, be approved by the Board ofDirectors, certain other significant matters relating to the business andaffairs of the Company require prior approval of the Board of Directors.  These matters include:

 

(i)                                     theapproval of the quarterly and annual financial statements and earningsannouncements;

(ii)                                  theapproval of management’s discussion and analysis of financial results;

(iii)                               theapproval of the Company’s strategic business plans and directions;

(iv)                              anyrelated party transaction or any transaction involving any officer or director,regardless of materiality; and

(v)                                 anydisposition or expenditure in excess of CDN$1,000,000.

 

Orientation of New Directors and Continuing Education

 

In orienting new members to the Board of Directors, members areprovided with an opportunity to visit the Company’s facilities and to meet withmanagement and other members of the Board of Directors to discuss andunderstand the Company’s business.  With respect to continuingeducation of the Directors, detailed documentation and presentations areregularly provided to Directors relating to the current business plan andcurrent policies of the Company as well as ongoing developments in the industryareas in which the Company operates as well as legislative changes affectingthe Company.  All of the Company’sexecutives are available for discussions with Directors concerning anyquestions or comments which may arise between meetings.

 

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Performance of the Board of Directors

 

The Board ofDirectors regularly considers and assesses its performance relating to itseffectiveness, size, compensation policies and assessment of managementperformance.  In this regard, in January2006, Directors completed a Board Effectiveness Survey prepared by theNominating and Corporate Governance Committee in which they gave assessments onissues surrounding Board of Directors responsibility, operations andeffectiveness.  The results of thissurvey were forwarded to the Chairman of the Nominating and CorporateGovernance Committee, who shared the results with all of the Boardmembers.  In January 2006, Directors alsocompleted a Board Evaluation Survey prepared by the Nominating and CorporateGovernance Committee whereby each director assessed the performance of eachother director of the Board of Directors. The Chairman of the Nominating and Corporate Governance Committeeadvised each director of the assessment so received and forwarded a copy ofeach of the assessments to the Chairman of the Board.

 

CEO Performance

 

Onan annual basis, the Company’s President and CEO circulates proposed operatingand strategic plans which are discussed and, if appropriate, adopted by theBoard of Directors.  The Board ofDirectors met in December 2005 to review the Company’s one year operating planand three year strategic plan.  Thesestrategic plans form the basis of the corporate objectives which the CEO isresponsible for meeting.  The Human Resourcesand Compensation Committee of the Board of Directors assesses the CEO’sperformance against the goals established and agreed to and recommends hiscompensation to the Board of Directors as a whole.

 

Shareholder Feedback and Communication

 

TheCompany maintains an investor relations department headed by an ExecutiveDirector, Investor Relations, which reports directly to the President and CEOof the Company.  In addition, investorrelations experts are retained from time to time by the Company to advise onissues and best practices for investor relations.  The Company communicates regularly with itsshareholders through annual and quarterly reports.  At the Company’s annual general meeting ofshareholders, a full opportunity is afforded for shareholders to ask questionsconcerning the Company’s business.  Eachshareholder and investor inquiry receives a prompt response from the investorrelations department or an appropriate officer of the Company.  Information about the Company, includingannual reports, interim financial reports and recent news releases, are alsoavailable on the Company’s website at www.draxis.com.  Inaddition, the Company provides the opportunity for investors in both Canada andthe U.S. to pose questions to senior management, including the CEO, the ChiefOperating Officer, the Chief Financial Officer and the Executive Director,Investor Relations through public forums such as conference calls and webcasts.

 

Board of Directors’ Expectations of Management

 

Managementis responsible for the day-to-day operations of the Company and is expected toimplement the approved operating and strategic business plans within thecontext of authorized budgets and corporate policies and procedures.  The information which management provides tothe Board of Directors is critical. Management is expected to report regularly to the Board of Directors ina comprehensive, accurate and timely fashion on the business and affairs of theCompany and any legislative changes which affect the Company.  The Board of Directors monitors the nature ofthe

 

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information requested by and provided to it so that it can effectivelyidentify issues and opportunities for the Company.

 

**Employees**

 

Asat December 31, 2005, the Company and its subsidiaries employed a total of 492employees.  The DRAXIS Pharma division isthe largest employer with 385 employees, all located in Kirkland, Québec.  The DRAXIMAGE division employs 82 people allin Kirkland, Québec.  The Company itselfemploys 25 people, the majority of whom are located in Kirkland, Québec.  At December 31, 2004 and 2003, the Companyand its subsidiaries had 495 and 378 employees, respectively.

 

**Item 7.  Major Shareholders and Related PartyTransactions**

 

TheCompany is not aware of any company, foreign government or natural or legalperson that owns or controls the Company, directly or indirectly.

 

Tothe knowledge of the directors and officers of the Company as of December 31,2005, the following are the only persons who, as at the dates mentioned below,beneficially own, directly or indirectly, or exercise control over our commonshares carrying more than five percent (5%) of the votes attached to all ofthose shares.

 
| **Identity  of Person or Group**   | ** ** | **Amount Owned**        | ** ** | **Percent of Class** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------------------|------------|
| Natcan  Investment Management Inc. |       | 3,972,967 common shares |       | 9.6                  | %          |
|                               |       | 197,200 warrants        |       | 0.5                  | %          |
| Neil Gagnon                        |       | 3,241,740 common shares |       | 7.8                  | %          |
| Mackenzie  Financial Corporation   |       | 2,721,000 common shares |       | 6.5                  | %          |

 

Basedon the Schedule 13G public filings and Early Warning Reports under NationalInstrument 62-103 in Canada made by Natcan Investment Management Inc. during2004 and 2005, the percentage of our common stock beneficially owned by NatcanInvestment Management Inc. decreasedfrom 10.3% in 2004 to 9.6% as at December 31, 2005.

 

Basedon the Schedule 13G public filings made by Neil Gagnon during 2003, 2004 and2005, the percentage of our common stock beneficially owned by Neil Gagnonincreased from 7.6% in 2003 to 7.9% in 2004 and decreased to 7.8% as atDecember 31, 2005.

 

Basedon the Schedule 13G public filings made by Mackenzie Financial Corporation, thepercentage of our common stock owned by Mackenzie Financial Corporation is 6.5%as at December 31, 2005.

 

Toour knowledge, as of March 20, 2006, 18,097,611 common shares (43.6%****of the outstanding common shares at that date) were held ofrecord by 522 shareholders whose registered addresses were in the UnitedStates.  The Company has no knowledge ofany other shares held beneficially in the United States.

 

As of March 20, 2006, to our knowledge therewere a total of 1,041 shareholders of record holding 41,467,738****common shares issued and outstanding.

 

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Toour knowledge, there are no arrangements, the operation of which may, at asubsequent date, result in a change in control.

 

The building housing ourhead office premises at 6870 Goreway Drive in Mississauga, Ontario is owned 50%by Samuel Sarick Limited, a corporation wholly owned by Mr. Sarick, a directorof the Company.  The original lease forthe premises was entered into on April 25, 1994 between Samuel Sarick Limited,Kentlake Construction Limited and Anec Investments Limited, as landlord, andthe Company, as tenant.  The leaserenewal was negotiated between the Company and Samuel Sarick Limited on anarm’s-length basis with the assistance of Colliers International retained bythe Company and was renewed with the approval of the Board of Directorseffective May 1, 1999 for a period of five years and renewed again on April 26,2004 for a period of two years, expiring on May 31, 2006.  The Company believes that the lease terms areconsistent with arm’s length comparables and that the annual rent payable ofCDN$149,185****is at fair marketvalue.

 

The Company has, in thepast, made loans to certain key management personnel in connection with itsincentive plans and as inducements to enter into employment agreements.  These plans have been discontinued, and therewill be no further indebtedness under said plans.  All outstanding loans were repaid in May2005.

 
| ** **                                                           | ** ** | ** **                                | ** ** | **Largest  Amount**                           | ** ** | ** **                                       | ** ** | ** **                                    | ** ** | ** **                                       | ** ** | ** **                                                     | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                           | ** ** | ** **                                | ** ** | **Outstanding  During 2005**                  | ** ** | **Amount  Outstanding as at**                    | ** ** | **Financially**                               | ** ** | ** **                                       | ** ** | ** **                                                     | ** ** |
| ** **                                                           | ** ** | ** **                                | ** ** | **Fiscal  Year****(1)**                       | ** ** | **March  20, 2006****(1)**                       | ** ** | **Assisted**                                  | ** ** | ** **                                       | ** ** | ** **                                                     | ** ** |
| **Name & Principal  Position**                                   | ** ** | **Involvement  of Issuer or  Subsidiary** | ** ** | **Fully  Recourse  Interest  Bearing  (EPP)** | ** ** | **Other  Employee  Share  Participation  Plans** | ** ** | **Fully  Recourse  Interest  Bearing  (EPP)** | ** ** | **Other  Employee  Share  Participation  Plans** | ** ** | **Securities  Purchased  During the  2005 Fiscal Year****(1)** | ** ** | **Security  for  Indebtedness  as at  March 20,  2006****(1)** | ** ** | **Amount  Forgiven  during the  2005 Fiscal  Year** | ** ** |
| ** **                                                           | ** ** | ** **                                | ** ** | **($)**                                       | ** ** | **($)**                                          | ** ** | **($)**                                       |       | **($)**                                          | ** ** | **(#)**                                                        | ** ** | **(#)** | ** ** | **(#)** | ** ** |
| Martin Barkin, MDPresident & Chief Executive  Officer(2)         |       | Lender                                    |       | 100,000                                       |       | Nil                                              |       | Nil                                           |       | Nil                                              |       | 46,729                                                         |       | Nil |   | Nil |   |
| Mark Oleksiw  Chief Financial Officer                                |       | Lender                                    |       | Nil                                           |       | Nil                                              |       | Nil                                           |       | Nil                                              |       | Nil                                                            |       | Nil |   | Nil |   |
| Dan  BrazierChief Operating Officer                                  |       | Lender                                    |       | Nil                                           |       | Nil                                              |       | Nil                                           |       | Nil                                              |       | Nil                                                            |       | Nil |   | Nil |   |
| John  Durham  President, DRAXIS Pharma                               |       | Lender                                    |       | Nil                                           |       | Nil                                              |       | Nil                                           |       | Nil                                              |       | Nil                                                            |       | Nil |   | Nil |   |
| Richard Flanagan  President, DRAXIMAGE  (until May 8, 2005) (3) |       | Lender                                    |       | 30,000                                        |       | Nil                                              |       | Nil                                           |       | Nil                                              |       | 14,019                                                         |       | Nil |   | Nil |   |
| Jean-Pierre Robert  President DRAXIMAGE (as of May 9, 2005)          |       | Lender                                    |       | Nil                                           |       | Nil                                              |       | Nil                                           |       | Nil                                              |       | Nil                                                            |       | Nil |   | Nil |   |

 

----

(1)          These figures take into account indebtednesspursuant to the Equity Purchase Plan whereby the Company loaned funds toparticipating Named Executive Officers on a full recourse, interest bearingbasis.  See “Discontinued Plan – EquityPurchase Plan”.  All outstanding amountswere repaid in May 2005.

 

102

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(2)          Dr. Barkin is also a Director of the Companyand is a proposed nominee for re-election as a Director of the Company.

 

(3)          Dr. Flanagan ceased to be an executive officerof the Company on May 8, 2005.

 

**Item 8.  Financial Information**

 

The Company’s ConsolidatedFinancial Statements are attached as pages F-1 through F-24.  There have been no significant changes sincethe date of the financial statements.

 

**Legal/ArbitrationProceedings**

 

From time to time, theCompany becomes involved in legal proceedings and claims which arise in theordinary course of business.  With theexception of the matters described below, the Company considers that theultimate liability with respect to any known actions will not materially affectthe business, financial position, results of operations or cash flows of theCompany.

 

In 1998, a Canadian legalproceeding was launched against us and our subsidiary DAHI by a formerconsultant, Jozsef Knoll, claiming royalty entitlements based on the net profitfrom sales of *ANIPRYL*®.  Total damages claimed are $100 million,including a claim to certain shares of DAHI. However, the plaintiff has taken no steps in the last six years to movethe claim forward.  While we believe thatwe have good defenses to the Knoll proceeding, this dispute may not be resolvedin our favor, if it is pursued.  It ispossible that a court or arbitration tribunal may find us to be in breach ofcertain agreements, or infringing validly issued patents of third parties orpracticing the intellectual property of others. In that event, in addition to the cost of defending the underlyingproceeding, we may have to pay license fees, additional royalties and/ordamages and may be ordered to assign certain *ANIPRYL®-*relatedpatents and be prohibited from conducting certain activities.  Under such circumstances, we could incursubstantial loss and our business could be negatively affected.

 

On July 22, 2005, we announced that, together withother defendants, we had received a Statement of Claim filed before the SuperiorCourt of Justice of Ontario alleging that PermaxÒ, a drug that we distributed in Canada for a third party manufacturerprior to July 2003, causes “compulsive/obsessive behaviour, includingpathological gambling”.  The plaintiff isseeking to have this action certified as a class action.  We believe this claim against us is withoutmerit and we intend to vigorously defend this proceeding and any motion forcertification.  Prior to July 2003,PermaxÒ was distributedin Canada by DRAXIS Pharmaceutica, our Canadian pharmaceutical sales andmarketing division.  In July 2003, wesold the DRAXIS Pharmaceutica division to Shire.

 

**Item 9.  The Offer and Listing**

 

TheCompany’s common shares are listed on The Toronto Stock Exchange (the “TSX”)under the symbol “DAX” and the NASDAQ National Market System (“NASDAQ”) in theUnited States under the symbol “DRAX”.

 

Thefollowing table sets forth, in Canadian dollars, the per share high and lowsales prices on the TSX for the five most recent full financial years:

 

| **Years**  | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------|------------|---------|------------|
| ** ** | ** ** | **($)**  | ** ** | **($)** | ** ** |
| 2001       |       | 4.40     |       | 2.11    |       |
| 2002       |       | 5.60     |       | 2.00    |       |
| 2003       |       | 4.75     |       | 1.61    |       |
| 2004       |       | 7.90     |       | 4.12    |       |
| 2005       |       | 7.05     |       | 4.61    |       |

 

103

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Thefollowing table sets forth, in Canadian dollars, the per share high and lowsales prices on the TSX by fiscal quarter for 2005 and 2004.

 

| **2005**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** |
| First Quarter  |       | 6.57     |       | 4.75    |       |
| Second Quarter |       | 7.05     |       | 5.65    |       |
| Third Quarter  |       | 6.92     |       | 5.27    |       |
| Fourth Quarter |       | 6.03     |       | 4.61    |       |

 

| **2004**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** |
| First Quarter  |       | 7.90     |       | 4.12    |       |
| Second Quarter |       | 7.03     |       | 4.78    |       |
| Third Quarter  |       | 6.29     |       | 4.32    |       |
| Fourth Quarter |       | 6.45     |       | 5.21    |       |

 

The following table sets forth, in Canadiandollars, the per share high and low sales prices and the trading volumes on theTSX from January 2005 to February 2006:

 
| **Months**      | ** ** | **High** | ** ** | **Low** | ** ** | **Trading Volumes** | ** ** |
|-----------------|------------|----------|------------|---------|------------|---------------------|------------|
| ** **      | ** ** | **($)**  | ** ** | **($)** | ** ** | **(#)**             | ** ** |
| January 2005    |       | 5.99     |       | 4.75    |       | 3,289,003           |       |
| February  2005  |       | 6.25     |       | 5.60    |       | 3,574,727           |       |
| March 2005      |       | 6.57     |       | 5.88    |       | 1,584,060           |       |
| April 2005      |       | 7.05     |       | 5.85    |       | 1,507,946           |       |
| May 2005        |       | 6.90     |       | 5.85    |       | 1,493,969           |       |
| June 2005       |       | 6.40     |       | 5.65    |       | 1,184,222           |       |
| July 2005       |       | 6.67     |       | 5.71    |       | 820,388             |       |
| August 2005     |       | 6.92     |       | 5.37    |       | 1,461,500           |       |
| September  2005 |       | 5.87     |       | 5.27    |       | 1,614,218           |       |
| October 2005    |       | 5.67     |       | 5.16    |       | 1,075,809           |       |
| November  2005  |       | 6.03     |       | 4.63    |       | 2,611,806           |       |
| December  2005  |       | 5.12     |       | 4.61    |       | 1,487,392           |       |
| January 2006    |       | 5.50     |       | 5.00    |       | 789,146             |       |
| February  2006  |       | 5.56     |       | 5.10    |       | 1,176,687           |       |

 

The following table sets forth, in U.S.dollars, the per share high bid and low asked prices on NASDAQ for the fivemost recent full financial years:

 

| **Years**  | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------|------------|---------|------------|
| ** ** | ** ** | **($)**  | ** ** | **($)** | ** ** |
| 2001       |       | 2.79     |       | 1.45    |       |
| 2002       |       | 3.67     |       | 1.29    |       |
| 2003       |       | 3.70     |       | 1.09    |       |
| 2004       |       | 5.94     |       | 3.29    |       |
| 2005       |       | 5.84     |       | 3.93    |       |

 

104

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The following table sets forth,in U.S. dollars, the per share high and low asked prices on NASDAQ in U.S.dollars, by fiscal quarter for 2005 and 2004:

 

| **2005**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** |
| First Quarter  |       | 5.45     |       | 3.95    |       |
| Second Quarter |       | 5.84     |       | 4.51    |       |
| Third Quarter  |       | 5.74     |       | 4.50    |       |
| Fourth Quarter |       | 5.07     |       | 3.93    |       |

 

| **2004**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| ** **     | ** ** | **($)**  | ** ** | **($)** | ** ** |
| First Quarter  |       | 5.94     |       | 3.81    |       |
| Second Quarter |       | 5.36     |       | 3.46    |       |
| Third Quarter  |       | 5.00     |       | 3.29    |       |
| Fourth Quarter |       | 5.37     |       | 3.95    |       |

 

Thefollowing table sets forth, in U.S. dollars, the per share high and low salesprices and the trading volumes on NASDAQ from January2004 to February 2005:

 
| **Months**      | ** ** | **High** | ** ** | **Low** | ** ** | **Trading Volumes** | ** ** |
|-----------------|------------|----------|------------|---------|------------|---------------------|------------|
| ** **      | ** ** | **($)**  | ** ** | **($)** | ** ** | **(#)**             | ** ** |
| January 2005    |       | 4.97     |       | 3.95    |       | 4,906,636           |       |
| February  2005  |       | 4.99     |       | 4.45    |       | 2,524,447           |       |
| March 2005      |       | 5.45     |       | 4.75    |       | 2,435,812           |       |
| April 2005      |       | 5.84     |       | 4.70    |       | 2,685,919           |       |
| May 2005        |       | 5.44     |       | 4.67    |       | 2,512,973           |       |
| June 2005       |       | 5.19     |       | 4.51    |       | 2,086,242           |       |
| July 2005       |       | 5.43     |       | 4.68    |       | 1,447,142           |       |
| August 2005     |       | 5.74     |       | 4.52    |       | 3,767,838           |       |
| September  2005 |       | 4.84     |       | 4.50    |       | 2,121,864           |       |
| October 2005    |       | 4.84     |       | 4.33    |       | 1,065,100           |       |
| November  2005  |       | 5.07     |       | 3.93    |       | 2,388,241           |       |
| December  2005  |       | 4.36     |       | 3.99    |       | 1,324,406           |       |
| January 2006    |       | 4.63     |       | 4.27    |       | 942,602             |       |
| February  2006  |       | 4.85     |       | 4.35    |       | 860,161             |       |

 

The transferagent of the Company is Computershare Trust Company of Canada, Stock TransferServices, located at 100 University Avenue, Toronto, Ontario, Canada M5J 2Y1

 
| **Item 10.** | ** ** | **Additional Information** |
|--------------|------------|----------------------------|

 

**Bylaws and Articles of Amalgamation**

 

TheCompany’s Articles of Amalgamation are on file with the CorporationsDirectorate of Industry Canada under Corporation Number 357288-9.  The Articles of Amalgamation do not include astated purpose and do not place any restrictions on the business that theCompany may carry on.

 

105

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**Inspection Rights of Shareholders**

 

Underthe *Canada Business Corporations Act*(the “CBCA” or the “Act”), shareholders are entitled to be provided with a copyof the list of registered shareholders of the company.  In order to obtain the shareholder list, theCompany must be provided with an affidavit including, among other things, astatement that the list will only be used for the purposes permitted by theCBCA.  These permitted purposes includean effort to influence of the voting of shareholders of the Company, an offerto acquire securities of the Company and any other matter relating to theaffairs of the Company.  The Company isentitled to charge a reasonable fee for the provision of the shareholder listand must deliver that list no more than ten days after receipt of the affidavitdescribed above.

 

Shareholdersof the Company have the right to inspect certain corporate records, includingits articles and by-laws and minutes of meetings and resolutions of theshareholders.  Shareholders have nostatutory right to inspect minutes of meetings and resolutions of directors ofthe Company.

 

Shareholdersof the Company have the right to certain financial information respecting theCompany.  In addition to the annual andquarterly financial statement required to be filed under applicable securitieslaws, the Company is required to place before every annual meeting ofshareholders its audited comparative annual financial statements.  In addition, shareholders have the right toexamine the financial statements of each of its subsidiaries and any othercorporate entity whose accounts are consolidated in the financial statements ofthe Company.

 

**Directors**

 

Theminimum number of directors of the Company is one (1) and the maximum number istwelve (12).  In accordance with theCompany’s bylaws and the Act, a majority of its directors must be residents ofCanada.  In order to serve as a director,a person must be a natural person at least 18 years of age, of sound mind andnot bankrupt.  Neither the Articles ofAmalgamation, bylaws, nor the Act, impose any mandatory retirement requirementsfor directors.

 

Underthe Company’s bylaws and the Articles of Amalgamation, a director of theCompany need not be a shareholder. However, in June 2001 the Board of Directors established a corporatepolicy requiring each current Director to acquire by June 2004 (or in the caseof future Board of Directors members, within three years of their appointment)common shares in the Company equal to five times his or her annualhonorarium.  All directors who were tocomply with this requirement by June 2004 were in compliance as of saiddate.  In February 2005, the Board ofDirectors adopted a resolution amending this policy to fix the number of commonshares to be so held at 15,000. Compliance with this policy is monitored annually by the Nominating andCorporate Governance Committee.

 

Adirector who is a party to, or who is a director or officer of, or has amaterial interest in, any person who is a party to a material contract ortransaction or proposed material contract or transaction with the Company mustdisclose to the Company the nature and extent of his or her interest at thetime and in the manner provided by the Act. The Act prohibits such a director from voting on any resolution toapprove the contract or transaction unless the contract or transaction:

 

•                                          relates primarily to his or her remuneration asa director, officer, employee or agent of the Company or an affiliate;

 

•                                          is for indemnity or insurance for director’sliability as permitted by the Act; or

 

•                                          is with an affiliate of the Company.

 

106

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TheBoard of Directors may, on behalf of the Company and without authorization ofits shareholders:

 

•                                          borrow money upon the credit of the Company;

 

•                                          issue, reissue, sell or pledge debt obligationsof the Company;

 

•                                          give a guarantee on behalf of the Company tosecure performance of an obligation of any person; and

 

•                                          mortgage, hypothecate, pledge or otherwisecreate a security interest in all or any property of the Company, owned orsubsequently acquired, to secure any obligation of the Company.

 

TheAct prohibits the giving of a guarantee to any shareholder, director, officeror employee of the Company or of an affiliated corporation or to an associateof any such person for any purpose or to any person for the purpose of or inconnection with a purchase of a share issued or to be issued by the Company orits affiliates, where there are reasonable grounds for believing that theCompany is or, after giving the guarantee, would be unable to pay itsliabilities as they become due, or the realizable value of the Company’s assetsin the form of assets pledged or encumbered to secure a guarantee, after givingthe guarantee, would be less than the aggregate of the Company’s liabilitiesand stated capital of all classes.

 

Theseborrowing powers may be varied by the Company’s bylaws or its Articles ofAmalgamation.  However, the Company’sbylaws and Articles of Amalgamation do not contain any restrictions on orvariations of these borrowing powers.

 

Thegeneral duties of a director or officer of the Company under the CBCA are toact honestly and in good faith with a view to the best interests of the Companyand to exercise the care, diligence and skill that a reasonably prudent personwould exercise in comparable circumstances. Any breach of these duties may lead to liability to the Company and itsshareholders for breach of fiduciary duty. In addition, a breach of certain provisions of the CBCA, including theimproper payment of dividends or the improper purchase or redemption of shares,will render the directors who authorized such action liable to account to theCompany for any amounts improperly paid or distributed.

 

**Share Capitalization**

 

TheCompany’s Articles of Amalgamation authorize the issuance of an unlimitednumber of common shares (41,467,738 of which are outstanding as of March 20,2006), an unlimited number of preferred shares (none of which are issued and outstanding),and 2,000,000 Employee Participation Shares (2,000,000 of which have beenissued and none of which remain outstanding as of March 20, 2006).  The Articles of Amalgamation do not authorizethe issuance of any other class of shares.

 

Common Shares

 

Theholders of the common shares of the Company are entitled to receive notice ofand to attend all meetings of the shareholders of the Company and have one votefor each common share held at all meetings of shareholders.  The directors are elected at each annualmeeting of shareholders and do not stand for re-election at staggeredintervals.

 

107

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Theholders of common shares are entitled to receive dividends and the Company willpay dividends, as and when declared by the Board of Directors, out of moneysproperly applicable to the payment of dividends, in such amount and in suchform as the Board of Directors may from time to time determine, subject to therights of the holders of any other class of shares of the Company entitled toreceive dividends in priority to or ratably with the holders of the commonshares, and all dividends which the Board of Directors may declare on thecommon shares shall be declared and paid in equal amounts per share on all commonshares at the time outstanding.

 

Inthe event of the dissolution, liquidation or winding-up of the Company, whethervoluntary or involuntary, or any other distribution of assets of the Companyamong its shareholders for the purpose of winding-up its affairs, the holdersof the common shares shall, subject to the rights of the holders of any otherclass or shares of the Company entitled to receive the assets of the Companyupon such distribution in priority to or ratably with the holders of the commonshares, be entitled to participate ratably in any distribution of the assets ofthe Company.

 

Preferred Shares

 

Thepreferred shares of the Company may at any time or from time to time be issuedin one or more series.  No preferredshares of the Company have been issued to date. Preferred shares shall be entitled to preference over the common sharesand any other shares of the Company ranking junior to the preferred shares andthe distribution of assets in the event of any liquidation and commondissolution or winding-up of the Company, whether voluntary or involuntary, orother distribution of the assets of the Company among its shareholders for thepurpose of winding-up its affairs.  Thepreferred shares of each series shall rank in parity with the preferred sharesof every other series with respect to priority in the payment of dividends andin the distribution of assets in the event of liquidation, dissolution orwinding-up of the Company.

 

Subjectto the provisions relating to any particular series, the Company may redeem thewhole or any part of the preferred shares on any one or more series outstandingfrom time to time at such price or prices as may be applicable to such seriesby giving at least thirty (30) days’ prior notice in writing of the intentionof the Company to redeem such shares to each person who at the date of givingsuch notice is the registered holder of preferred shares to be redeemed.

 

Thepreferred shares may be issued on the authorization of the directors, withoutfurther authorization by the shareholders, but the issuance of any preferredshare is subject to the general duties of the directors under the CBCA to acthonestly and in good faith with a view to the best interests of the Company andto exercise the care, diligence and skill that a reasonably prudent personwould exercise in comparable circumstances. The issuance of any preferred shares in the face of a take-over bid forthe Company would be examined in light of these duties of the directors andother applicable case law.

 

ShareholderActions

 

The CBCAprovides that shareholders of the Company may, with leave of a court, bring anaction in the name of and on behalf of the Company for the purpose ofprosecuting, defending or discontinuing an action on behalf of the Company.  In order to grant leave to permit such anaction, the CBCA provides that the court must be satisfied that the directorsof the Company were given adequate notice of the application, the shareholderis acting in good faith and that it appears to be in the Company’s bestinterests that the action be brought.

 

108

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Employee Participation Shares

 

OnFebruary 16, 1995, the Board of Directors of the Company authorized theissuance of 975,000 Series A Participation Shares; on December 18, 1995, theBoard of Directors of the Company authorized the issuance of 555,000 Series BParticipation Shares and on May 12, 1999, the Board of Directors of the Companyauthorized the issuance of 470,000 Series C Participation Shares.  The Employee Participation Share PurchasePlan (the “EP Plan”) was discontinued effective December 4, 2002.

 

Eachparticipation share entitles the holder to receive cash dividends, if any, asmay from time to time be declared payable thereon, at the same time asdividends, if any, are paid on the common shares of the Company, in an amountfor each participation share of a particular series which is equal to theproportion of the amount of the dividend declared on each common share that thesubscription price of such participation share is of the fair market value atthe date of issuance of such participation share.

 

Inthe event of a proposal, order or resolution for the liquidation, dissolutionor winding-up of the Company, whether voluntary or involuntary; or on the“Automatic Conversion Date” (as defined in the Articles of Amalgamation and theterms of the EP Plan); or at the option of the holder on a “Conversion Date”(as defined in the Articles of Amalgamation and the terms of the EP Plan) otherthan the “Automatic Conversion Date” (as defined in the Articles ofAmalgamation and the terms of the EP Plan), the participation shares willbecome common shares, and the number of common shares a holder receives onconversion is the number of common shares which is determined by multiplyingthe number of participation shares held, or in the case of conversion on aConversion Date other than the Automatic Conversion Date, the number ofparticipation shares which the holder elects to convert, by a fraction:

 

1.               thenumerator of which shall be the “EP Share Value”(as defined in the Articles ofAmalgamation and the terms of the EP Plan) of a participation share of aparticular series as at the earlier of the “Automatic Conversion Date” and a“Conversion Date,” as the case may be; and

 

2.               thedenominator of which shall be the “Fair Market Value of a Common Share” (asdefined in the Articles of Amalgamation and the terms of the EP Plan) as at theearlier of the two dates described in 1; provided that no fractional commonshares will be issued and no payment will be made in respect of fractionalcommon shares.

 

On January 14,2004, the 245,000 Series C participation shares, which were the onlyoutstanding employee participation shares, were converted into 54,896 commonshares of the Company.

 

Warrants

 

In April 2004, the Company closed an equity financing offering of3,053,436 units consisting of one common share and one-half of one sharepurchase warrant per unit.  Each wholewarrant entitles its holder to acquire one common share at a price of CDN$8.50,subject to certain adjustments, at any time prior to April 24, 2006.  The warrants are transferable. Holders ofwarrants do not, as such, have any voting rights or other right attaching tothe common shares until the warrants are properly exercised and common sharesissuable upon the exercise of the warrants are issued.

 

Pursuant to the terms of the indenture relating to the warrants enteredinto between the Company and Computershare Trust Company of Canada, subject toapplicable law, the Company may purchase prior to April 24, 2006, by privatecontract or otherwise, all of or any of the warrants then outstanding and anywarrants so purchased will be cancelled.

 

109

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Shareholder Rights Plan

 

OnMay 16, 2002, the shareholders of the Company approved a Shareholder RightsPlan Agreement (the “Rights Plan”), which was reconfirmed at the Annual GeneralMeeting dated May 18, 2005, the principal terms of which are as follows:

 

***Effective Date***

 

TheRights Plan became effective on April 23, 2002 (the “Effective Date”) and wasapproved by shareholders of the Company at its Annual and Special Meeting ofshareholders held on May 16, 2002.

 

***Term***

 

Theterm of the Rights Plan is ten years, subject to reconfirmation by shareholdersat every third annual meeting.

 

***Issue of Rights***

 

Oneright (a “Right”) attaches to each outstanding common share.

 

***Rights Exercise Privilege***

 

TheRights will separate from the shares to which they are attached and will becomeexercisable at the time (the “Separation Time”) that is ten trading days afterthe earlier of a person having acquired, or the commencement, announcement orother date determined by the Board of Directors in respect of a takeover bid toacquire, 20% or more of the common shares, other than by an acquisitionpursuant to a takeover bid permitted by the Rights Plan (a “Permitted Bid”).

 

Theacquisition of Beneficial Ownership (as defined in the Rights Plan) by anyperson (an “Acquiring Person”), including others acting in concert, of 20% ormore of the common shares, other than by way of a Permitted Bid, is referred toas a “Flip-in Event.”  Under the RightsPlan, there are certain exceptions to that rule, including (i) the Company or asubsidiary of the Company, (ii) a person who acquires 20% or more of theoutstanding common shares through, among other things, a share redemption or aPermitted Bid, (iii) an underwriter or selling group member during the courseof a public distribution; or (iv) investment and fund managers, trust companiesand other persons who are managing investment funds, pension funds or plans,estates or accounts on behalf of another person, provided they are not making,or are not part of a group making, a takeover bid.  Any Rights held by an Acquiring Person on orafter the earlier of the Separation Time or the first date of publicannouncement by the Company or an Acquiring Person that an Acquiring Person hasbecome such will become void upon the occurrence of a Flip-in Event.

 

Under theRights Plan, a bidder is entitled to “lock up” any shareholder of the Companywithout triggering the Rights Plan so long as the lock-up agreement is a “soft”lock up, meaning the locked-up shareholder is entitled to tender to a higheroffer (so long as the higher offer is not required under the lock-up agreementto be more than 7% higher than the first offer).

 

Tentrading days after the occurrence of the Flip-in Event, the Rights (other thanthose held by the Acquiring Person) will permit the holder to purchase, for theexercise price of the Rights, common shares having a value based on thethen-prevailing market price) equal to twice such exercise price (i.e., at a50% discount).  The exercise price of theRights will be equal to five times the prevailing market price at theSeparation Time.

 

110

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The issue of the Rights is not initially dilutive.  Upon a Flip-in Event occurring and the Rightsseparating from the attached shares, reported earnings per common share on afully diluted or non-diluted basis may be affected.  Holders of Rights who do not exercise theirRights upon the occurrence of a Flip-in Event may suffer substantial dilution.

 

***Certificatesand Transferability***

 

Prior to the Separation Time, the Rights willbe evidenced by a legend imprinted on certificates for common shares issuedfrom and after the Effective Date. Rights are also attached to such shares outstanding on the EffectiveDate, although share certificates issued prior to that date will not bear sucha legend.  Prior to the Separation Time,Rights will not be transferable separately from the attached shares.  From and after the Separation Time, theRights will be evidenced by Rights certificates which will be transferable andtraded separately from the shares.

 

***Permitted Bid Requirements***

 

Therequirements of a Permitted Bid include the following:

 

•                                          the takeover bid must be made by way of atakeover bid circular to all holders of common shares;

 

•                                          the takeover bid must not permit common sharestendered pursuant to the takeover bid to be taken up prior to the expiry of aperiod of not less than sixty (60) days and only if at such time more than 50%of the common shares held by shareholders other than the bidder, itsaffiliates, associates and persons acting jointly or in concert with the bidder(the “Independent Shareholders”) have been tendered pursuant to the takeoverbid and not withdrawn; and

 

•                                          if more than 50% of the common shares held byIndependent Shareholders are tendered to the takeover bid within the sixty(60)-day period, the bidder must make a public announcement of that fact andthe takeover bid must remain open for deposits of common shares for anadditional ten (10) business days from the date of such public announcement.

 

TheRights Plan allows a competing Permitted Bid (a “Competing Permitted Bid”) tobe made while a Permitted Bid is in existence. A Competing Permitted Bid must satisfy all the requirements of aPermitted Bid except that it may expire on the same date as the Permitted Bid,subject to the requirement that it be outstanding for a minimum period ofthirty-five (35) days.

 

***Waiver***

 

TheBoard of Directors may, prior to a Flip-in Event, waive the dilutive effects ofthe Rights Plan in respect of a particular Flip-in Event (an “ExemptAcquisition”) that would result from a takeover bid made by way of a takeoverbid circular to all holders of common shares, provided that in suchcircumstances the Board shall be deemed to have waived the application of theRights Plan to any other Flip-in Event occurring as a result of a takeover bidmade by way of a takeover bid circular to all holders of common shares prior tothe expiry of any takeover bid in respect of which the Rights Plan has beenwaived.  The Board of Directors may alsowaive the Rights Plan in respect of a particular Flip-in Event that hasoccurred through inadvertence, provided that the Acquiring Person thatinadvertently triggered

 

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such Flip-in Event reduces its beneficial holdings to less than 20% ofthe outstanding voting shares of the Company within fourteen (14) days or suchother period as may be specified by the Board of Directors.

 

***Redemption***

 

Atany time prior to the occurrence of a Flip-in Event, the Board of Directors maywith the prior approval of the holders of the common shares or the Rightsredeem all, but not less than all, of the outstanding Rights at a price ofCDN$0.000001 each.  Rights will be deemedto have been redeemed by the Board of Directors following completion of aPermitted Bid, Competing Permitted Bid or Exempt Acquisition.

 

***Supplements and Amendments***

 

TheCompany is authorized to make amendments to the Rights Plan to correct anyclerical or typographical error or, subject to subsequent ratification byshareholders or Rights holders, to maintain the validity of the Rights Plan asa result of changes in law or regulation. Other amendments or supplements to the Rights Plan may be made with theprior approval of shareholders or Rights holders.

 

**Action Necessary to Change Rights of Shareholders**

 

Inorder to change the rights of our shareholders, the Company would need to amendits Articles of Amalgamation to effect the change.  Such an amendment would require the approvalof holders of two-thirds of the common shares cast at a duly called specialmeeting.  For certain amendments such asthose creating of a class of preferred shares, a shareholder is entitled underthe Act to dissent in respect of such a resolution amending the Articles ofAmalgamation and, if the resolution is adopted and the Company implements suchchanges, demand payment of the fair value of its common shares.

 

**Meeting of Shareholders**

 

Anannual meeting of shareholders is held each year for the purpose of consideringthe financial statements and reports, electing directors, appointing auditorsand for the transaction of other business as may be brought before themeeting.  The Board of Directors has thepower to call a special meeting of shareholders at any time.

 

Noticeof the time and place of each meeting of shareholders must be given not lessthan twenty-one (21) days, nor more than fifty (50) days, before the date ofeach meeting to each director, to the auditor and to each shareholder who atthe close of business on the record date for notice is entered in thesecurities register as the holder of one or more shares carrying the right tovote at the meeting.  Notice of meetingof shareholders called for any other purpose other than consideration of theminutes of an earlier meeting, financial statements and auditor’s report,election of directors and reappointment of the incumbent auditor, must statethe nature of the business in sufficient detail to permit the shareholder toform a reasoned judgment on and must state the text of any special resolutionor bylaw to be submitted to the meeting.

 

Theonly persons entitled to be present at a meeting of shareholders are thoseentitled to vote, the directors of the Company and the auditor of theCompany.  Any other person may beadmitted only on the invitation of the chairman of the meeting or with theconsent of the meeting.  In circumstanceswhere a court orders a meeting of shareholders, the court may direct how themeeting may be held, including who may attend the meeting.

 

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The holders ofnot less than five percent of the outstanding voting shares of the Company mayrequisition the directors of the Company to call a meeting of shareholders forthe purpose stated in the requisition. Except in limited circumstances, including where a meeting ofshareholders has already been called and a notice of meeting already given orwhere it is clear that the primary purpose of the requisition is to redress apersonal grievance against the Company or its directors, officers orshareholders, the directors of the Company shall call a meeting ofshareholders.  If the directors fail tocall a meeting of shareholders within twenty-one (21) days after receiving therequisition, any shareholder who signed the requisition may call the meeting ofshareholders and, unless the shareholders resolve otherwise at the meeting, theCompany shall reimburse the shareholders for the expenses reasonably incurredby them in requisitioning, calling and holding the meeting of shareholders.

 

The CBCA alsoprovides that, except in limited circumstances, a resolution in writing signedby all of the shareholders entitled to vote on that resolution at a meeting ofshareholders is as valid as if it had been passed at a meeting of shareholders.

 

**Limitations on Right to Own Securities**

 

NeitherCanadian law nor the Company’s Articles of Amalgamation or bylaws limit theright of a non-resident to hold or vote common shares of the Company, otherthan as provided in the Investment Canada Act (the “Investment Act”).  The Investment Act generally prohibitsimplementation of a direct reviewable investment by an individual, governmentor agency thereof, corporation, partnership, trust or joint venture that is nota “Canadian,” as defined in the Investment Act (a “non-Canadian”), unless,after review, the minister responsible for the Investment Act is satisfied oris deemed to be satisfied that the investment is likely to be of net benefit toCanada.  An investment in the commonshares of the Company by a non-Canadian (other than a “WTO Investor,” asdefined below) would be reviewable under the Investment Act if it were aninvestment to acquire direct control of the Company, and the book value of theassets of the Company were CDN$5.0 million or more (provided that immediatelyprior to the implementation of the investment the Company was not controlled byWTO Investors).  An investment in commonshares of the Company by a WTO Investor (or by a non-Canadian other than a WTOInvestor if, immediately prior to the implementation of the investment, theCompany was controlled by WTO Investors) would be reviewable under theInvestment Act if it were an investment to acquire direct control of theCompany (in 2003) and the value of the assets of the Company equaled orexceeded CDN$223.0 million.  Anon-Canadian, whether a WTO Investor or otherwise, would be deemed to acquirecontrol of the Company for purposes of the Investment Act if he or she acquireda majority of the common shares of the Company. The acquisition of less than a majority, but at least one-third of theshares, would be presumed to be an acquisition of control of the Company,unless it could be established that the Company was not controlled in fact bythe acquirer through the ownership of the shares.  In general, an individual is a WTO Investorif he or she is a “national” of a country (other than Canada) that is a memberof the World Trade Organization (“WTO Member”) or has a right of permanentresidence in a WTO Member.  A corporationor other entity will be a “WTO Investor” if it is a “WTO Investor-controlledentity,” pursuant to detailed rules set out in the Investment Act.  The United States is a WTO Member.  Certain transactions involving the Company’scommon shares would be exempt from the Investment Act, including:

 

(a)                                  an acquisition of theshares if the acquisition were made in the ordinary course of that person’sbusiness as a trader or dealer in securities;

 

(b)                                 an acquisition ofcontrol of the Company in connection with the realization of a securityinterest granted for a loan or other financial assistance and not for anypurpose related to the provisions of the Investment Act; and

 

(c)                                  an acquisition ofcontrol of the Company by reason of an amalgamation, merger, consolidation orcorporate reorganization, following which the ultimate direct or indirect

 

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control in fact of the Company, through the ownership of votinginterests, remains unchanged.

 

# **Dividend Policy**

 

For the yearsended December 31, 2003, 2004 and 2005, we have not declared or paid anydividends on our common shares and there exists no plans to do so.

 

**Material Contracts**

 

OnOctober 25, 1995, Frosst Radiopharmaceuticals, a division of Merck Frosst CanadaInc. (now known as DRAXIMAGE) entered into a non-exclusive distributionagreement with Syncor International Corporation (now known as Cardinal Health414, Inc.) for distribution in the U.S. of DTPA, a kit used to prepare Tc-99mPentetate to study kidney clearance, and MDP, a kit used to prepare Tc-99mMethylene Diphosphonic Acid to study bone metabolism.  The initial term was for five years, withautomatic renewal of the agreement for successive two-year periods.

 

OnJuly 12, 2000 DRAXIMAGE signed a non-exclusive distribution agreement withSyncor International Corporation (now known as Cardinal Health 414, Inc.) forthe production of a kit for the preparation of sodium iodide I-131 capsules andoral solution indicated for the treatment of thyroid cancer and hyperthyroidismfor sale in the U.S.  The term of theagreement is five years from the date DRAXIMAGE makes the first sale of theproduct.  The date of the first sale wasMarch 2003.  This agreement was amendedon August 6, 2003 to provide that DRAXIMAGE could distribute the product toindependent radiopharmacies in the U.S.

 

OnJuly 1, 1999, DRAXIS Pharma entered into a five-year manufacturing and supplyagreement with Warner-Lambert Canada Inc. (now known as Pfizer ConsumerHealthcare, a division of Pfizer Canada Inc.) covering several non prescriptionproducts for the Canadian market, including PolysporinÒ, SudafedÒ, ActifedÒ and ZincofaxÒ. Manufacturing of these products commenced in early 2000.  On September 1, 2005, DRAXIS Pharma announcedit had renewed its agreement with Pfizer Canada for a three year term effectiveJanuary 1, 2005.  This agreement for therenewal is filed as Exhibit 4.50 to this Annual Report (Form 20-F).

 

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

 

OnMarch 3, 2003, DRAXIS Pharma signed a manufacturing agreement with Bone CareInternational, Inc. (now Genzyme Corporation) to produce HectorolÒ Injection for sale in the U.S. and began commercial shipments of thesterile injectable product in March 2003. Production of HectorolÒ Injection increased substantially throughout2005.  The agreement is for a five-yearterm.

 

On April 2,2004, DRAXIS entered into an Underwriting Agreement with Desjardins Securities

 

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Inc. and CIBC World MarketsInc. pursuant to which the underwriters agreed to purchase, on a bought dealbasis, 3,053,436 units of the Company at a purchase price of $4.82(CDN$6.55)per unit, for aggregate proceeds net of related expenses to DRAXIS ofapproximately $13,385,000 (CDN$18,213,000). DRAXIS granted the underwriters an over-allotment option to purchase upto an additional 458,016 units, exercisable at the issue price any time up to30 days following closing of the offering, representing additional grossproceeds of up to $2,206,000 (CDN$3,000,000). The option was not exercised by the underwriters.  Each unit consists of one common share of theCompany and one-half of one share purchase warrant.  Each whole warrant entitles the holder toacquire one common share of the Company at a price of CDN$8.50 at any timeprior to April 24, 2006.

 

On July 22,2003, the Company entered into an Asset Purchase Agreement with Shire, pursuantto which the Company sold Shire the rights to substantially all remainingproducts of its Canadian pharmaceutical sales and marketing division, DRAXISPharmaceutica, in return for $9.6 million (CDN$13.5 million) in cash and up toan additional $2.9 million (CDN$4.0 million) in market-driven contingentmilestone payments, plus royalties on future product sales.  Under the terms of the agreement, DRAXISreceived the value of acquired inventories, and Shire assumed responsibilityfor the financial provisions of the license agreement related to Permax®.

 

On September 24, 2003, the Company, upon therecommendation of the Human Resources and Compensation Committee, entered intoa Retirement Compensation Agreement (“RCA”) with Dr. Barkin to phase out theliability of the Company under the termination without cause provisions of hisemployment agreement.  The RCA called forthe Company to make payments totalling CDN$1.4 million to Dr. Barkin,CDN$600,000 which was paid in August 2003; and the remaining CDN$800,000 to bepaid in equal quarterly installments in arrears commencing with the fourthquarter of 2003 and ending with the fourth quarter of 2005.  An amount of CDN$320,000 was paid in 2005 andno sum remains outstanding under the RCA. Dr. Barkin’s employment agreement was amended in 2003 to provide thatupon the last RCA payment, the Company shall have no liability toward Dr.Barkin with respect to the termination without cause provisions of hisemployment agreement.  However, in theevent of a termination without cause following a defined change of control ofthe Company, any payments received by Dr. Barkin pursuant to the RCA shall becredited to the lump sum amount to be paid to him upon said event.

 

OnJune 23, 2004, in order to conform with the terms of the Stock Option Planapproved by the shareholders of the Company in 2001, the Company entered intoan amended employment agreement with Dr. Martin Barkin.  Under the terms of the amended employmentagreement, in the event of termination of employment following a defined changeof control of the Company, Dr. Barkin would be entitled to exercise all stockoptions and other securities, including those not then otherwise exercisable.

 

InApril 2003, the Company entered into an employment agreement with Mr. Durham,pursuant to which Mr. Durham agreed to be employed as the President of DRAXISPharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS SpecialtyPharmaceuticals Inc.).  In the event thatMr. Durham is terminated without cause, he would be entitled to receive apayment equal to one year of base salary. In the event that Mr. Durham is terminated following a defined change ofcontrol, he would be entitled to receive a payment equal to two years of basesalary.

 

InOctober 2003, the Company entered into an employment agreement with Ms.Gualtieri, pursuant to which Ms. Gualtieri agreed to be employed as GeneralCounsel and Corporate Secretary of DRAXIS. In the event that Ms. Gualtieri is terminated without cause, she wouldbe entitled to receive a payment equal to one year of base salary.  In the event that Ms. Gualtieri is terminatedfollowing a defined change of control, she would be entitled to receive a paymentequal to two years of base salary.

 

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InMarch 2004, the Company entered into an employment agreement with Mr. Huang,pursuant to which Mr. Huang agreed to be employed as Vice President Finance ofDRAXIS.  In the event that Mr. Huang isterminated without cause, he would be entitled to receive a payment equal toone year of base salary.  In the eventthat Mr. Huang is terminated following a defined change of control, he would beentitled to receive a payment equal to two years of annual remuneration.

 

InMarch 2004, the Company entered into an employment agreement with Mr. Oleksiw,pursuant to which Mr. Oleksiw agreed to be employed as Chief Financial Officerof DRAXIS.  In the event that Mr. Oleksiwis terminated without cause, he would be entitled to receive a payment equal toone year of base salary.  In the eventthat Mr. Oleksiw is terminated following a defined change of control, he wouldbe entitled to receive a payment equal to two years of annual remuneration.

 

InMarch 2004, in order to conform with the terms of the Stock Option Planapproved by the shareholders of the Company in 2001, the Company entered intoamended employment agreements with Mr. Carter, Mr. Durham, Ms. Gualtieri andMr. Ormiston.  Under the terms of theamended employment agreements, in the event of termination of employmentfollowing a defined change of control of the Company, Mr. Carter, Mr. Durham,Ms. Gualtieri and Mr. Ormiston, as the case may be, would be entitled toexercise all stock options and other securities, including those not thenotherwise exercisable.  In addition,under the terms of the amended employment agreement, Ms. Gualtieri is entitled,in the event of a termination following a defined change of control, to receivea payment equal to two years annual remuneration.

 

OnApril 27, 2004, the Company entered into an employment agreement with Mr.Brazier, pursuant to which Mr. Brazier is entitled, in the event his employmentis terminated without cause during the period commencing July 21, 2003 and endingJuly 21, 2005, to two times his base salary. This agreement was amended on August 25, 2004 to reflect that in theevent that Mr. Brazier determines, during the period commencing June 1, 2005and ending on December 31, 2005, in his discretion, that the position of SeniorVice President Corporate Development and Strategic Planning is not satisfactoryto him, then he may terminate his employment and receive the sum that theCompany would have paid to him following the Shire transaction if hisemployment had been terminated at that time following the change of control ofDRAXIS Pharmaceutica.  The amendment alsoprovides that in the event that Mr. Brazier is terminated without cause betweenthe period commencing July 21, 2003 and ending December31, 2005, he would beentitled to receive a payment equal to two years of base salary.  Further to the nomination of Mr. Brazier asChief Operating Officer in October 2005, this employment agreement was furtheramended on December 20, 2005 to provide that in the event of a terminationwithout cause, Mr. Brazier would be entitled to receive a payment equal to oneyear of base salary.  In the event of atermination following a defined change of control, Mr. Brazier would be entitledto receive a payment equal to two years of annual remuneration.  The amended agreement also provides that theabovementioned sum relating to the Shire transaction is no longer available toMr. Brazier.  This amendment to Mr.Brazier’s employment agreement is filed as Exhibit 4.51 to this Annual Report(Form 20-F).

 

OnJune 10, 2004, the Company entered into an Amended and Restated Loan Agreementwith the National Bank of Canada providing an operating facility of CDN$15million (or U.S. equivalent), payable within 364 days of drawing upon the facilityand a term facility of CDN$10 million (or U.S. equivalent), repayable in fullin three years.  The operating facilitycan be extended by one year upon agreement with the Bank.  Interest under both the term and operatingfacilities is based on the Bank’s prime lending rate, depending on whether theCompany meets certain ratios which as at December 31, 2005 were met.  As at March 31, 2006, no amount was drawnunder the operating facility or the term facility.

 

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InApril 2005, the Company entered into an employment agreement with Mr. Robert,pursuant to which Mr. Robert agreed to be employed as President of theDRAXIMAGE division.  In the event thatMr. Robert is terminated without cause, he would be entitled to receive apayment equal to one year of base salary. In the event that Mr. Robert is terminated following a defined change ofcontrol, he would be entitled to receive a payment equal to two years of base salary.  The above-mentioned agreement with Mr. Robertis filed as Exhibit 4.52 to this Annual Report (Form 20-F).

 

OnJuly 8, 2005, the Company, upon the recommendation ofthe Human Resources and Compensation Committee, entered into an agreement withDr. Flanagan with respect to the payment of his long term incentive award underthe DRAXIMAGE Long Term Incentive Plan by entering into a RetirementCompensation Agreement (“RCA”) in his favour for a total amount of $2.2million.  The RCA called for the Companyto make payments totalling CDN$2.2 million to Dr. Flanagan, CDN$751,111 whichwas paid in August 2005; and the remaining CDN$1,448,889 to be paid in equalquarterly installments in arrears commencing with the third quarter of 2005 andending with the second quarter of 2007. An amount of CDN$932,222 was paid in 2005.  The above-mentioned agreement with Dr. Flanagan is filed as Exhibit 4.53to this Annual Report (Form 20-F).

 

**Exchange Controls**

 

Canadahas no system of exchange controls. There are no exchange restrictions on borrowing from foreign countriesor on the remittance of dividends, interest, royalties and similar payments,management fees, loan repayments, settlement of trade debts or the repatriationof capital.  There are no limits on therights of non-Canadians to exercise voting rights on their common shares of theCompany.

 

**Taxation**

 

Thefollowing summary describes the principal Canadian federal income taxconsiderations generally applicable under the Income Tax Act (Canada) (the“ITA”) to a holder of the Company’s common shares who holds common shares ascapital property, who deals at arm’s length with the Company, who does not holdor use and is not deemed to hold or use such common shares in connection with,or in the course of, carrying on a business in Canada andwho is not an insurer that carries on an insurance business in Canada andelsewhere.  The ITA contains certainprovisions applicable to certain financial institutions and provisionsapplicable to taxpayers an interest in which is a tax-shelter investment.  This summary does not take into account theseprovisions and holders of common shares who are or may be subject to theseprovisions should consult their own tax advisors.

 

Thissummary is based on the current provisions of the ITA, the regulationsthereunder in force on the date hereof, all proposed amendments to the ITA andregulations publicly announced by the Minister of Finance (Canada) prior to thedate hereof (the “Amendments”), and the Company’s understanding of the currentpublished administrative and assessing practices of the Canada RevenueAgency.  This summary is not exhaustiveof all possible Canadian federal income tax considerations, and except asmentioned above, does not take into account any prospective changes to the taxlaw of Canada, whether occasioned by legislative, governmental, or judicialaction.  Further, the summary does nottake account of foreign or provincial tax legislation or considerations thatmay vary from the Canadian federal income tax implications describedherein.  This summary does not purport tobe, nor should it be construed as, legal or tax-related advice to any holder ofcommon shares.  Each holder of commonshares should consult his or her own tax advisor.

 

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*CommonShareholders Not Resident in Canada*

 

The following summary generally is applicable to holders of theCompany’s common shares who, at all relevant times and for purposes of the ITAand any applicable tax treaty or convention, are not, and are not deemed to be,resident in Canada.

 

Dividends on shares - shareholders who are not residents of Canada

 

Dividends,including stock and cash dividends and certain distributions and redemptionsdeemed to be dividends under the ITA, on the common shares paid tonon-residents of Canada will be subject to Canadian withholding tax at a rateof twenty-five percent (25%).  Theapplicable rate of withholding may, however, be reduced by virtue of the termsof any applicable tax treaty.  Under theterms of the Canada-U.S. Income Tax Convention, 1980 (the “Treaty”), the ratewhich is generally applicable to United States residents who are beneficialowners of common shares in respect of which there is paid or credited or deemedby the ITA to be paid or credited Canadian-source dividends is fifteen percent(15%); in certain cases where the holder is a company owning more than tenpercent (10%) of the voting shares of the Company, the applicable rate is fivepercent (5%) for dividends paid.  Underthe Treaty, certain tax-exempt entities that are resident in the United Statesmay be exempt from Canadian withholding taxes, including any withholding taxlevied in respect of dividends received on the common shares.  Tax-exempt entities should consult their owntax advisors.

 

Dispositions by shareholders who are not residents of Canada

 

Capitalgains arising as a consequence of the disposition of common shares (other thanto the Company) by a resident of the United States will not normally be subjectto tax under the ITA except to the extent that such shares constitute or aredeemed to constitute taxable Canadian property (“TCP”) (as defined in the ITA)to such holder, the gain on which would not otherwise be exempt under the termsof the Treaty.  In general, the commonshares will not constitute TCP of a non-resident holder unless (i) such holder,uses or holds or deemed to use or hold, the common shares in connection withcarrying on a business in Canada, (ii) the holder holds or uses such shares inthe course of carrying on an insurance business in Canada or elsewhere, or(iii) at any time in the sixty-month period immediately preceding thedisposition, not less than twenty-five percent (25%) of the issued shares ofany class of the capital stock of the Company belonged to such holder, eitheralone or in combination with persons with whom such holder does not deal atarm’s length.

 

To the extent that the common shares do constitute TCPof the non-resident holder, such holder will normally be obliged to file aCanadian income tax return, recognize any gain and pay any tax thereon pursuantto the provisions of the ITA.  However,the Treaty will normally apply to exempt the United States resident holder ofcommon shares from such tax, provided that the value of such shares is notderived principally from real property situated in Canada and/or intereststherein at the time the common shares are disposed of.  Provided that thecommon shares are listed on a prescribed stock exchange (including the TorontoStock Exchange) at the time of the disposition of such shares, no clearancecertificate will be required under section 116 of the ITA in respect of adisposition of such shares.

 

*CommonShareholders Resident in Canada*

 

The following summary generally is applicable to holders of theCompany’s common shares who, at all relevant times and for purposes of the ITAand any applicable tax treaty or convention, are, or are deemed to be, residentin Canada.

 

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Dividends on shares - shareholders who are residents of Canada

 

Dividends, including stock and cash dividends andcertain distributions and redemptions deemed to be dividends under the ITA, onthe common shares of the Company paid to residents of Canada will be includedin computing their income for purposes of the ITA.  Such dividends received or deemed to bereceived by an individual (other than a trust) will generally be subject to thegross-up and dividend tax credit rules normally applicable to taxable dividendsreceived from corporations resident in Canada. Dividends received or deemed to be received onsuch shares by an individual and certain trusts may give rise to alternativeminimum tax.

 

Generally, dividends received or deemed to be received on common sharesof the Company by a holder that is a corporation will be included in computingthe corporation’s income, but will be deductible in computing the corporation’staxable income, subject to certain limitations in the ITA.  A holder of common shares that is a “private corporation”or a “subject corporation” (as defined in the ITA) generally will be subject toa refundable tax of thirty-three and one-third percent (331/3%)on dividends received or deemed to be received on such shares to the extentthat such dividends are deductible in computing the holder’s taxableincome.  Subsection 55(2) of the ITAprovides that where certain corporate holders of shares receive a dividend ordeemed dividend in specified circumstances, all or part of such dividend may betreated as a capital gain from the disposition of capital property and not as adividend.  The tax treatment of capitalgains and losses in discussed under the heading “Common Shareholders Residentin Canada - Dispositions by Shareholders Who Are Resident in Canada” below.

 

Disposition by shareholders who are residents of Canada

 

Ona disposition or deemed disposition of a common share of the Company a residentof Canada holder will realize a capital gain (or capital loss) equal to theamount by which the proceeds of disposition for the common share exceed (or areless than) the aggregate of any reasonable costs of disposition and theadjusted cost base to the holder of the common share of the Company immediatelybefore the disposition.  Pursuant to theITA, a holder of common shares of the Company who is a resident of Canada willbe required to include in income one-half (1⁄2) of the amount of any capital gainand may deduct one-half (1⁄2) of the amount of any capital loss against taxablecapital gains realized by the holder in the year of the disposition.  Allowable capital losses in excess of taxablecapital gains in a particular year may be carried back and deducted in any ofthe three proceeding years or carried forward and deducted in any followingyear against taxable capital gains realized in such years to the extent andunder the circumstances described in the ITA and the Amendments.

 

A“Canadian-controlled private corporation” (as defined in the ITA) will also besubject to a refundable tax of six and two-thirds percent (6 2/3%) on certaininvestment income, including taxable capital gains realized on the dispositionof common shares of the Company, that will be refundable when the corporationpays taxable dividends (at a rate of CDN$1.00 for every CDN$3.00 of taxabledividend paid).

 

Acapital loss realized by a holder of common shares of the Company that is acorporation, a partnership of which a corporation is a member or a trust ofwhich a corporation is a beneficiary may be reduced by the amount of dividendsreceived or deemed to be received on such shares in certain circumstances.  Capital gains realized by an individual orcertain trusts may give rise to a liability for alternative minimum tax.

 

**Documents on Display**

 

We are subjectto the information requirements of the U.S. Securities Exchange Act of 1934, asamended.  In accordance with theserequirements, we file reports and other information with the United

 

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States Securities and ExchangeCommission.  These materials, includingthis Annual Report (Form 20-F) and the exhibits thereto, may be inspected andcopied at the Commission’s Public Reference Room at 450 Fifth Street, N.W.,Washington, D.C. 20549 and at the Commission’s regional offices at 500 WestMadison Street, Suite 1400, Chicago, Illinois 60661.  Copies of the materials may be obtained fromthe Public Reference Room of the Commission at 450 Fifth Street, N.W.,Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Commission’sPublic Reference Room by calling the Commission in the United States at1-800-SEC-0330.  The Commission alsomaintains a website at www.sec.gov that contains reports, proxy statements andother information regarding registrants that file electronically with theCommission.  The Company’s annual reportsand some of the other information submitted by the Company to the Commissionmay be accessed through this website.  Inaddition, material filed by the Company can be inspected at the offices of theNASDAQ at 9801 Washingtonian Blvd., Gaithersburg, MD 20878, and on the CanadianSecurities Administrators’ electronic filing system, SEDAR, accessible at thewebsite www.sedar.com.  This materialincludes the Company’s Management Information Circular for its annual meetingto be held on May 18, 2006, which provides information including directors’ andofficers’, remuneration and indebtedness, principal holders of securities andsecurities authorized for issuance under equity compensation plans.  Additional financial information is providedin our annual financial statements for the year ended December 31, 2005 and ourManagement’s Discussion and Analysis relating to these statements.  These documents are also accessible on SEDAR(www.sedar.com).

 

**Item 11.         Quantitative and Qualitative Disclosures About Market Risk**

 

**MarketRisk**

 

We are exposedto financial market risks, including changes in foreign currency exchange ratesand interest rates on investments.  We donot use derivative financial instruments for speculative or trading purposes.

 

Inflationhas not had a significant impact on our results of operations.

 

**ForeignCurrency Risk**

 

Our reporting currency isthe U.S. dollar.  The functional currencyfor our Canadian operations, which includes the radiopharmaceutical segment,contract manufacturing segment and royalties and milestones related to productrights sold to Shire, is the Canadian dollar. Accordingly, our foreign exchange exposure for accounting purposesmainly relates to U.S.-denominated monetary assets of these operations.  We do not currently use derivativeinstruments to hedge our foreign exchange risk and currently have no plans todo so in the near future.  For fiscalyear 2005, U.S. dollar revenue accounted for approximately 50% of the Company’srevenue.  During this same period, thevalue of the U.S. dollar versus the Canadian dollar decreased by 3.5% fromJanuary 1, 2005 to December 31, 2005.  Asa result, in 2005 we had to charge to income approximately $398,000 due toforeign exchange translation losses related to the strengthening of theCanadian dollar.  See “Risk Factors –Risks Related to Our Company – We are Exposed to Exchange Rate Fluctuationswhich could Negatively Affect our Business”.

 

**InterestRate Risk**

 

The primary objective of our investment policy isthe protection of principal, and accordingly we invest in high-grade commercialpaper and government securities with varying maturities, but typically lessthan 90 days.  As it is our intent andpolicy to hold these investments until maturity, we believe we do not have amaterial exposure to interest rate risk.

 

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We currentlyhave no outstanding third party debt, but we do have access to undrawn creditfacilities with variable interest rates. Should we borrow in the future on our existing facilities, any materialchanges to interest rates could result in materially increased interest expenseand decreased results of operations.

 

**Item 12.         Description of Securities Other Than Equity Securities**

 

Not Applicable

 

**PART II.**

 

**Item 13.         Defaults, Dividends Arrearages and Delinquencies**

 

Not Applicable

 

**Item 14.         Material Modifications to the Rights of Security Holders andUse of Proceeds**

 

Not Applicable

 

**Item 15.         Controls and Procedures**

 

As at the end of theperiod covered by this report, our Chief Executive Officer and our ChiefFinancial Officer, together with members of our senior management, have carriedout an evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures. These are defined (in Rule 13a-15(e) or 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) as those controls and procedures designed toensure that information required to be disclosed in reports filed under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin specified time periods.  As of thedate of the evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of these disclosure controls andprocedures were effective.

 

There have occurred nochanges in our internal controls over financial reporting (as defined in Rule13a-15 or 15d-15 under the Exchange Act) during the period covered by thisAnnual Report (Form 20-F) that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

**Item 16.**

 

**Item 16A.**      **Audit Committee FinancialExpert**

 

The Company’s Board ofDirectors has determined that Mr. Rolf Henel, a member of the Company’s AuditCommittee, is a financial expert.  Mr.Henel is an independent director under each of definitions of such terms underthe applicable Canadian, TSX, U.S. and NASDAQ rules.

 

**Item 16B.      Code of Ethics and Business Conduct**

 

In April 2004,we amended our existing Code of Ethics, which resulted in the establishment ofa new Code of Ethics and Business Conduct (the “Code”) in light of ourcontinued commitment to honesty and integrity in the conduct of itsbusiness.  The Code applies to all ourdirectors, officers and employees, including our Chief Executive Officer, ourChief Financial Officer and all employees of our subsidiaries.  The Code is available on our website atwww.draxis.com and was filed on SEDAR (www.sedar.com) on August 31, 2005.

 

In accordancewith the terms of the Code, the Audit Committee receives quarterly reports from

 

121

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the Vice President,Administration and Shared Services on any concerns received regardingaccounting, internal accounting controls and auditing matters.  The Board of Directors monitors compliancewith the Code by receiving quarterly reports from the Audit Committee regardingany concerns raised.  Complaints receivedby any officer concerning any violation of the Code would be brought to theattention of the Board of Directors.  TheCode is distributed and signed by each of the Company’s employees when they arehired and it is available on the Company’s intranet and in each employeehandbook.  Information sessions are givento employees on the contents and application of the Code.

 

**Item 16C.      Principal Accountant Fees and Services**

 

In accordancewith the Audit Committee Charter, the Audit Committee pre-approves all auditingservices and permitted non-audit services (including fees and terms thereof) tobe performed for the Company or its subsidiaries by its Independent RegisteredChartered Accountants.  All the servicesof Deloitte & Touche LLP rendered in 2005 were pre-approved by the AuditCommittee.

 

Deloitte & Touche LLP has served as our Independent RegisteredChartered Accountants for each of the fiscal years in the three-year periodended December 31, 2005, for which audited financial statements appear in thisAnnual Report (Form 20-F).

 

**2005 Audit Fees**

 

The fees for all audit services performed by Deloitte & Touche LLP,Independent Registered Chartered Accountants (“Company’s auditor” or “Company’sprincipal accountant”) for the Company and its subsidiaries for the year endedDecember 31, 2005 were CDN$300,000. Services provided include the audit of theCompany’s consolidated financial statements, review of the notes to the annualreport to shareholders, management proxy circular, quarterly reviews and thisAnnual Report (Form 20-F).  No hours wereexpended in the audit of our financial statements by persons other than theCompany’s principal accountant.

 

**2005 Audit-Related Fees**

 

The aggregate fees billed for the year ended December 31, 2005 forassurance and related services by the Company’s auditor that are reasonablyrelated to the performance of the audit or review of the Company’s financialstatements were CDN$Nil.

 

**2005 Tax Fees**

 

The aggregate fees billed for the year ended December 31, 2005 forprofessional services rendered by the Company’s auditor for tax compliance, taxadvice and tax planning was CDN$41,950.

 

**2005 All Other Fees**

 

The aggregate fees billed for the year ended December 31, 2005 forproducts and services provided by the Company’s principal accountant, otherthan those described above, were CDN$Nil.

 

**2004 Audit Fees**

 

The fees for all audit services performed by the Company’s auditor forthe Company and its subsidiaries for the year ended December 31, 2004 wereCDN$154,000.

 

122

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**2004 Audit-Related Fees**

 

The aggregate fees billed for the year ended December 31, 2004 forassurance and related services by the Company’s auditor that are reasonablyrelated to the performance of the audit or review of the Company’s financialstatements were CDN$45,000.  Servicesprovided include review of the notes to the Company’s annual report toshareholders, management proxy circular, and the Annual Report (Form 20-F).

 

**2004 Tax Fees**

 

The aggregate fees billed for the year ended December 31, 2004 forprofessional services rendered by the Company’s auditor for tax compliance, taxadvice and tax planning were CDN$82,250.

 

**2004 All Other Fees**

 

The aggregate fees billed for the year ended December 31, 2004 forproducts and services provided by the Company’s principal accountant, otherthan those described above, were $239,975. The services provided included quarterly reviews and review of theregistration statement filed in Canada in connection with the Company’s equityoffering in April 2004.

 

**Interestof Auditors**

 

Deloitte &Touche LLP are the Independent Registered Chartered Accountants of the Companyand are independent within the meaning of the Code of Ethics of the Ordre descomptables agréés du Québec, and of the Securities Act of 1933 and theapplicable rules and regulations thereunder adopted by the Securities andExchange Commission (“SEC”) and the Public Company Accounting Oversight Board(United States).

 

**Item 16D.      Exemptions from the Listing Standards for Audit Committees**

 

Notapplicable.

 

**Item 16E.       Purchases of Equity Securities by the Issuer and AffiliatedPurchasers**

 

On December 7, 2005, the Board of Directors authorized the purchase ofup to 10% of the public float of the Company’s common shares through a NormalCourse Issuer Bid (the “Issuer Bid”). The Issuer Bid enables the Company to purchase on the open marketthrough the facilities of the Toronto Stock Exchange up to 3,522,530 commonshares for cancellation.  As at December6, 2005, there were 41,652,271 common shares outstanding of which approximately90% were widely held.  Pursuant to theacceptance by the TSX of the Notice of Intention to make a Normal Course IssuerBid, which was received by the Company on December 13, 2005, the Company wasauthorized to purchase common shares under the Issuer Bid commencing onDecember 15, 2005, and may continue until December 14, 2006, or until suchearlier date when the Company completes its purchases or elects to terminatethe bid.  As of March 20, 2006, theCompany had purchased 199,200 common shares under the Issuer Bid for anaverage market price plus commission of CDN$5.18, representing an aggregateconsideration of CDN$1,031,491.

 

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**ISSUER PURCHASES OF EQUITY SECURITIES**

 
| **Period**     | ** ** | **(a) Total Number  of Shares (Or  Units) Purchased** | ** ** | **(b) Average Price  Paid per Share (or  Units)** | ** **     | **(c) Total Number  of Shares (or  Units) Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **(d) Maximum  Number (or  Approximate  Dollar Value) of  Shares (or Units)  that May Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|----------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
|           |       |                                                  |       |                                              |           |                                                                                                     |       |                                                                                                                                    |       |
| December  2005 |       | 75,600                                                |       | $                                                 | 4.37 (CDN$5.07 | )                                                                                                        | 75,600     |                                                                                                                                    | 3,446,930  |   |
| January 2006   |       | 37,400                                                |       | $                                                 | 4.43 (CDN$5.10 | )                                                                                                        | 113,000    |                                                                                                                                    | 3,409,530  |   |
| February  2006 |       | 58,400                                                |       | $                                                 | 4.58 (CDN$5.28 | )                                                                                                        | 171,400    |                                                                                                                                    | 3,351,130  |   |
| March 2006     |       | 27,800                                                |       | $                                                 | 4.71 (CDN$5.35 | )                                                                                                        | 199,200    |                                                                                                                                    | 3,323,330  |   |
| Total          |       | 199,200                                               |       | $                                                 | 4.49 (CDN$5.18 | )                                                                                                        | 199,200    |                                                                                                                                    | 3,323,330  |   |

 

**Item 17.         Financial Statements**

 

Not Applicable

 

**Item 18.         Financial Statements**

 

The following financialstatements are filed as part of this Annual Report (Form 20-F).

 
| Management’s Report                                                      |   |
|-------------------------------------------------------------------------------|--------|
| Report of  Independent Registered Chartered Accountants                       |   |
| Consolidated statements of operations                                         |   |
| Consolidated balance sheets                                                   |   |
| Consolidated Statements of Changes in  Equity and Comprehensive Income (Loss) |   |
| Consolidated statements of cash flows                                         |   |
| Notes to the consolidated financial  statements                               |   |

 

**Item 19.         Exhibits**

 
| **Exhibit No.** | ** ** | **Description** |
|-----------------|------------|-----------------|
| 1.              | 1          |            | Articles of Amalgamation of DRAXIS Health Inc. (incorporated herein  by reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434)) |
| 1.              | 2          |            | By-law  No. 1 of DRAXIS Health Inc. (formerly Deprenyl Research Limited)  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434)) |

 

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| 4. | 1  |   | Master  Agreement dated November 12, 1997 among DRAXIS Health Inc., Deprenyl Animal  Health Inc. and Pfizer Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                    |
|----|----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4. | 2  |   | License  Agreement dated November 12, 1997 between Deprenyl Animal Health Inc. and  Pfizer Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                                                                                                                                                                                                                                     |
| 4. | 3  |   | Letter  Agreement dated December 22, 1999 between DRAXIS Health Inc., Deprenyl Animal  Health Inc. and Pfizer Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                  |
| 4. | 4  |   | Second  Amendment dated December 18, 2001 to the Master Agreement, as amended  December 22, 1999, License Agreement, Research Agreement, U.S. and Canada  Manufacturing and Supply Agreement and International Manufacturing and Supply  Agreement between Pfizer Inc., Deprenyl Animal Health, Inc. and DRAXIS Health  Inc. dated November 12, 1997 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2001,  filed on May 20, 2002 (SEC file no. 000-17434)) |
| 4. | 5  |   | Amending  Agreement dated March 31, 2003 between DRAXIS Health, Inc., Elan Pharma  International Limited and Elan Pharmaceuticals, Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                                                                                                                              |
| 4. | 6  |   | First Amendment to Subscription  Agreement dated October 24, 2002 among SGF Santé Inc., DRAXIS Health Inc. and  DRAXIS Pharma Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2002, filed on May 14,  2003 (SEC file no. 000-17434))                                                                                                                                                                                                              |
| 4. | 7  |   | Share  Purchase Agreement dated April 22, 2004 between DRAXIS Health Inc. and SGF  Santé Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file No. 000-17434))                                                                                                                                                                                                                                                   |
| 4. | 8  |   | Share  Purchase Agreement dated July 16, 2003 between Mohammed Barkat and  DRAXIS Pharma Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2003, filed on May 14,  2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                   |
| 4. | 9  |   | Share  Purchase Agreement dated July 16, 2003 between Michel Sauvageau and  DRAXIS Pharma Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004  (SEC file No. 000-17434))                                                                                                                                                                                                                                                  |
| 4. | 10 |   | Term Loan  Agreement dated June 9, 1998 between National Bank of Canada and DRAXIS  Pharma Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                                                                                                                                                                                                                                     |
| 4. | 11 |   | Credit  Agreement dated February 18, 2000 between National Bank of Canada and DRAXIS  Pharma Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                                                                                                                                                                                                                                   |
| 4. | 12 |   | Underwriting  Agreement dated April 2, 2004 between DRAXIS Health Inc., Desjardins  Securities Inc. and CIBC World Markets Inc. (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                      |

 

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| 4. | 13† |   | Asset Purchase Agreement dated  July 22, 2003 between DRAXIS Health Inc. and Shire Biochem Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                          |
|----|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4. | 14       |   | Stock Option  Plan of DRAXIS Health Inc., as amended, dated June 27, 2001 (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                |
| 4. | 15       |   | DRAXIS  Health Inc. Employee Stock Ownership Plan, amended and restated, effective  December 1, 1998 (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2000, filed on June 29,  2001 (SEC file no. 000-17434))                                    |
| 4. | 16       |   | DRAXIS  Health Inc. Employee Participation Share Purchase Plan, effective February  16, 1995 (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                            |
| 4. | 17       |   | DRAXIS  Health Inc. Deferred Share Unit Plan for Employees (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                              |
| 4. | 18       |   | DRAXIS  Health Inc. Equity Purchase Plan (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                |
| 4. | 19       |   | DRAXIS  Retirement Savings Program (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2002, filed on May  14, 2003 (SEC file no. 000-17434))                                                                                                       |
| 4. | 20       |   | Shareholder  Rights Plan Agreement dated April 23, 2002 between DRAXIS Health Inc. and  Computershare Trust Company of Canada as trustee (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file no. 000-17434)) |
| 4. | 21       |   | Employment  Agreement dated April 15, 1999 between DRAXIS Health Inc. and Dr. Martin  Barkin (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC file  no. 000-17434))                                            |
| 4. | 22       |   | Amendment  dated June 14, 2000 to Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))           |
| 4. | 23       |   | Retirement  Compensation Agreement dated September 24, 2003 between DRAXIS Health Inc.  and Dr. Martin Barkin (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2003, filed on May  14, 2004 (SEC file No. 000-17434))                            |
| 4. | 24       |   | Employment  Agreement dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file No.  000-17434))                                                   |
| 4. | 25       |   | Employment  Agreement dated October 18, 2000 between DRAXIS Health Inc. and Jack A. Carter  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                              |

 

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| 4. | 26       |   | Amendment  dated March 26, 2004 to Employment Agreement dated October 18, 2000  between DRAXIS Health Inc. and Jack A. Carter (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                              |
|----|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4. | 27       |   | Employment  Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M.  Durham (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))                                                                                                                                                     |
| 4. | 28       |   | Amendment  dated March 26, 2004 to Employment Agreement dated April 22, 2003  between DRAXIS PHARMA Inc. and John E.M. Durham (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                              |
| 4. | 29       |   | Employment  Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida  Gualtieri (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file No. 000-17434))                                                                                                                                                    |
| 4. | 30       |   | Amendment  dated March 26, 2004 to Employment Agreement dated October 17, 2003  between DRAXIS Health Inc. and Alida Gualtieri (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                             |
| 4. | 31       |   | Employment  Agreement dated March 9, 2004 between DRAXIS Health Inc. and Chien Huang  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file No.  000-17434))                                                                                                                                                           |
| 4. | 32       |   | Employment  Agreement dated March 9, 2004 between DRAXIS Health Inc. and Mark  Oleksiw (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))                                                                                                                                                          |
| 4. | 33       |   | Employment  Agreement dated May 14, 2001 between DRAXIS Health Inc. and Jerry Ormiston  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2001, filed on May 20, 2002 (SEC file no.  000-17434))                                                                                                                                                              |
| 4. | 34       |   | Amendment  dated March 26, 2004 to Employment Agreement dated May 14, 2001  between DRAXIS Health Inc. and Jerry Ormiston (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                  |
| 4. | 35       |   | Employment  Agreement dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J.  Flanagan (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file No. 000-17434))                                                                                                                                                  |
| 4. | 36       |   | Amendment  dated July 23, 2001 to Employment Agreement dated October 1, 1997 between  DRAXIS Health Inc. and Dr. Richard J. Flanagan (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                 |
| 4. | 37† |   | Non  Exclusive Distribution Agreement dated October 25, 1995 between Frosst  Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (now known as  DRAXIMAGE) and Syncor International Corporation (now known as Cardinal Health  414, Inc.) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on March 31, 2005  (SEC file No. 000-17434)) |

 

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| 4. | 38† |   | Non  Exclusive Distribution Agreement dated July 12, 2000 between DRAXIMAGE and  Syncor International (now known as Cardinal Health 414, Inc.) (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2004, filed on March 31, 2005 (SEC file No. 000-17434))                                                                                                                                    |
|----|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4. | 39† |   | Amendment  dated August 6, 2003 to Non Exclusive Distribution Agreement dated July 12,  2000 between DRAXIMAGE and Syncor International (now known as Cardinal Health  414, Inc.) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on March 31, 2005  (SEC file No. 000-17434))                                                                                                 |
| 4. | 40† |   | Manufacturing  and Supply Agreement dated July 1, 1999 between Warner-Lambert Canada Inc.  (now known as Pfizer Consumer Healthcare, a Division of Pfizer Canada Inc.)  and DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS  Specialty Pharmaceuticals Inc.) (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file No. 000-17434)) |
| 4. | 41† |   | Supply  Agreement dated December 18, 2001 between GlaxoSmithKline Inc. and DRAXIS  Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS Specialty  Pharmaceuticals Inc.) (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004, filed on  March 31, 2005 (SEC file No. 000-17434))                                                                                                 |
| 4. | 42† |   | Manufacture  and Supply Agreement entered into between DRAXIS Pharma Inc. (now known as  DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) and Bone  Care International, Inc. on March 3, 2003 (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2004, filed on March 31, 2005 (SEC file No. 000-17434))                                                                  |
| 4. | 43       |   | Amendment  dated August 25, 2004 to Employment Agreement dated April 27, 2004 between  DRAXIS Health Inc. and Dan Brazier (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file No. 000-17434))                                                                                                                                                         |
| 4. | 44       |   | Amended and  Restated Loan Agreement dated June 10, 2004 between DRAXIS Health Inc. and  National Bank of Canada (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004, filed on  March 31, 2005 (SEC file No. 000-17434))                                                                                                                                                                  |
| 4. | 45       |   | Amendment  dated June 23, 2004 to Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Martin Barkin (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file No. 000-17434))                                                                                                                                                         |
| 4. | 46       |   | Amendment to  Credit Facilities for DRAXIS Pharma Inc. dated March 28, 2002 between  National Bank of Canada and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))                                                                                                                                                 |
| 4. | 47       |   | Loan  Agreement dated March 28, 2002 among DRAXIS Pharma Inc., SGF Santé Inc. and  DRAXIS Health Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2001, filed on May 20,  2002 (SEC file No. 000-17434))                                                                                                                                                                          |
| 4. | 48       |   | Loan  Agreement dated March 28, 2002 among DRAXIS Pharma Inc., Investissement  Québec and DRAXIS Health Inc. (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2001, filed on May  20, 2002 (SEC file No. 000-17434))                                                                                                                                                                   |

 

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| 4.  | 49        |   | First  Amendment to Subscription Agreement dated October 24, 2002 among SGF Santé  Inc., DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file No. 000-17434)) |
|-----|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.  | 50*† |   | Manufacturing and Supply Master Agreement, dated January 1, 2005,  between Pfizer Canada Inc. and DRAXIS Pharma, a division of DRAXIS Specialty  Pharmaceuticals Inc.                                                                                                                                             |
| 4.  | 51*† |   | Amendment, dated December 20, 2005, to Employment Agreement dated  April 27, 2004, as amended between DRAXIS Health Inc. and Dan Brazier, Chief  Operating Officer of the Company                                                                                                                                 |
| 4.  | 52*† |   | Employment Agreement, dated April 22, 2005, between DRAXIS Health  Inc. and Mr. Jean-Pierre Robert, President of DRAXIMAGE, a division of DRAXIS  Specialty Pharmaceuticals Inc.                                                                                                                                  |
| 4.  | 53*† |   | Retirement  Compensation Arrangement Trust Agreement, dated July 8, 2005, between DRAXIS  Health Inc. and Dr. Richard Flanagan                                                                                                                                                                                    |
| 4.  | 54*       |   | Charter of  the Board of Directors adopted in April 2004                                                                                                                                                                                                                                                          |
| 4.  | 55*       |   | Charter of  the Audit Committee amended in May 2005                                                                                                                                                                                                                                                               |
| 4.  | 56*       |   | Charter of  the Human Resources and Compensation Committee amended in May 2005                                                                                                                                                                                                                                    |
| 4.  | 57*       |   | Charter of  the Nominating and Corporate Governance Committee amended in May 2005                                                                                                                                                                                                                                 |
| 8.  | 1*        |   | List of  Subsidiaries                                                                                                                                                                                                                                                                                             |
| 12. | 1*        |   | Certification  of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                   |
| 12. | 2*        |   | Certification  of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                   |
| 13. | 1*        |   | Certification  of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                   |
| 13. | 2*        |   | Certification  of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                   |

 

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* Filed herewith

† Portions of the exhibits have been omitted pursuant to a confidentialtreatment request. This information has been filed separately with theSecurities and Exchange Commission.

 

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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: March 31, 2006 | By:                 | /S/ MARK OLEKSIW |   |
|                      |                | Chief Financial Officer |   |
|                      |                |   |   |
|                      | By:                 | /S/ MARTIN BARKIN, M.D. |   |
|                      |                | President and Chief Executive Officer |

 

130

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EXHIBIT INDEX

DRAXIS HEALTH INC.

Form 20-F Annual Report

 
| **Exhibit No.** | ** ** | **Description** |
|-----------------|------------|-----------------|
| 1.              | 1          |            | Articles of  Amalgamation of DRAXIS Health Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434)) |
| 1.              | 2          |            | By-law  No. 1 of DRAXIS Health Inc. (formerly Deprenyl Research Limited)  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434)) |
| 4.              | 1          |            | Master  Agreement dated November 12, 1997 among DRAXIS Health Inc., Deprenyl Animal  Health Inc. and Pfizer Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434)) |
| 4.              | 2          |            | License  Agreement dated November 12, 1997 between Deprenyl Animal Health Inc. and  Pfizer Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434)) |
| 4.              | 3          |            | Letter  Agreement dated December 22, 1999 between DRAXIS Health Inc., Deprenyl Animal  Health Inc. and Pfizer Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434)) |
| 4.              | 4          |            | Second  Amendment dated December 18, 2001 to the Master Agreement, as amended  December 22, 1999, License Agreement, Research Agreement, U.S. and Canada  Manufacturing and Supply Agreement and International Manufacturing and Supply  Agreement between Pfizer Inc., Deprenyl Animal Health, Inc. and DRAXIS Health  Inc. dated November 12, 1997 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2001,  filed on May 20, 2002 (SEC file no. 000-17434)) |
| 4.              | 5          |            | Amending  Agreement dated March 31, 2003 between DRAXIS Health, Inc., Elan Pharma  International Limited and Elan Pharmaceuticals, Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434)) |
| 4.              | 6          |            | First  Amendment to Subscription Agreement dated October 24, 2002 among SGF Santé  Inc., DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434)) |
| 4.              | 7          |            | Share  Purchase Agreement dated April 22, 2004 between DRAXIS Health Inc. and SGF  Santé Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434)) |
| 4.              | 8          |            | Share  Purchase Agreement dated July 16, 2003 between Mohammed Barkat and  Draxis Pharma Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2003, filed on May 14,  2004 (SEC file no. 000-17434)) |

 

131

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| 4. | 9        |   | Share  Purchase Agreement dated July 16, 2003 between Michel Sauvageau and  DRAXIS Pharma Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2003, filed on May 14,  2004 (SEC file no. 000-17434))                                      |
|----|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4. | 10       |   | Term Loan  Agreement dated June 9, 1998 between National Bank of Canada and DRAXIS  Pharma Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                         |
| 4. | 11       |   | Credit Agreement dated  February 18, 2000 between National Bank of Canada and DRAXIS Pharma Inc.  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                       |
| 4. | 12       |   | Underwriting  Agreement dated April 2, 2004 between DRAXIS Health Inc., Desjardins  Securities Inc. and CIBC World Markets Inc. (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file no. 000-17434))          |
| 4. | 13† |   | Asset  Purchase Agreement dated July 22, 2003 between DRAXIS Health Inc. and Shire  Biochem Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434))                                         |
| 4. | 14       |   | Stock Option  Plan of DRAXIS Health Inc., as amended, dated June 27, 2001 (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                |
| 4. | 15       |   | DRAXIS  Health Inc. Employee Stock Ownership Plan, amended and restated, effective  December 1, 1998 (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2000, filed on June 29,  2001 (SEC file no. 000-17434))                                    |
| 4. | 16       |   | DRAXIS  Health Inc. Employee Participation Share Purchase Plan, effective February  16, 1995 (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                            |
| 4. | 17       |   | DRAXIS  Health Inc. Deferred Share Unit Plan for Employees (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                              |
| 4. | 18       |   | DRAXIS  Health Inc. Equity Purchase Plan (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                |
| 4. | 19       |   | DRAXIS Retirement  Savings Program (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2002, filed on May 14,  2003 (SEC file no. 000-17434))                                                                                                       |
| 4. | 20       |   | Shareholder  Rights Plan Agreement dated April 23, 2002 between DRAXIS Health Inc. and  Computershare Trust Company of Canada as trustee (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file no. 000-17434)) |
| 4. | 21       |   | Employment Agreement  dated April 15, 1999 between DRAXIS Health Inc. and Dr. Martin Barkin  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                            |

 

132

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| 4. | 22 |   | Amendment  dated June 14, 2000 to Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))           |
|----|----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4. | 23 |   | Retirement  Compensation Agreement dated September 24, 2003 between DRAXIS Health Inc.  and Dr. Martin Barkin (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2003, filed on May  14, 2004 (SEC file no. 000-17434))                            |
| 4. | 24 |   | Employment  Agreement dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file no.  000-17434))                                                   |
| 4. | 25 |   | Employment  Agreement dated October 18, 2000 between DRAXIS Health Inc. and Jack A.  Carter (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2000, filed on June 29, 2001  (SEC file no. 000-17434))                              |
| 4. | 26 |   | Amendment  dated March 26, 2004 to Employment Agreement dated October 18, 2000  between DRAXIS Health Inc. and Jack A. Carter (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))  |
| 4. | 27 |   | Employment  Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M.  Durham (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  no. 000-17434))                                         |
| 4. | 28 |   | Amendment  dated March 26, 2004 to Employment Agreement dated April 22, 2003  between DRAXIS PHARMA Inc. and John E.M. Durham (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))  |
| 4. | 29 |   | Employment  Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida  Gualtieri (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434))                                        |
| 4. | 30 |   | Amendment  dated March 26, 2004 to Employment Agreement dated October 17, 2003  between DRAXIS Health Inc. and Alida Gualtieri (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434)) |
| 4. | 31 |   | Employment  Agreement dated March 9, 2004 between DRAXIS Health Inc. and Chien Huang  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file no.  000-17434))                                               |
| 4. | 32 |   | Employment  Agreement dated March 9, 2004 between DRAXIS Health Inc. and Mark  Oleksiw (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434))                                              |
| 4. | 33 |   | Employment  Agreement dated May 14, 2001 between DRAXIS Health Inc. and Jerry Ormiston  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2001, filed on May 20, 2002 (SEC file no.  000-17434))                                                  |

 

133

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| 4. | 34       |   | Amendment  dated March 26, 2004 to Employment Agreement dated May 14, 2001  between DRAXIS Health Inc. and Jerry Ormiston (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                 |
|----|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4. | 35       |   | Employment  Agreement dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J.  Flanagan (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434))                                                                                                                                                                                 |
| 4. | 36       |   | Amendment  dated July 23, 2001 to Employment Agreement dated October 1, 1997 between  DRAXIS Health Inc. and Dr. Richard J. Flanagan (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                |
| 4. | 37† |   | Non  Exclusive Distribution Agreement dated October 25, 1995 between Frosst  Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (now known as  DRAXIMAGE) and Syncor International Corporation (now known as Cardinal Health  414, Inc.) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on March 31, 2005  (SEC file no. 000-17434))                                |
| 4. | 38† |   | Non  Exclusive Distribution Agreement dated July 12, 2000 between DRAXIMAGE and  Syncor International (now known as Cardinal Health 414, Inc.) (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2004, filed on March 31, 2005 (SEC file no. 000-17434))                                                                                                                                    |
| 4. | 39† |   | Amendment  dated August 6, 2003 to Non Exclusive Distribution Agreement dated July 12,  2000 between DRAXIMAGE and Syncor International (now known as Cardinal Health  414, Inc.) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on March 31, 2005  (SEC file no. 000-17434))                                                                                                 |
| 4. | 40† |   | Manufacturing  and Supply Agreement dated July 1, 1999 between Warner-Lambert Canada Inc.  (now known as Pfizer Consumer Healthcare, a Division of Pfizer Canada Inc.)  and DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS  Specialty Pharmaceuticals Inc.) (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file no. 000-17434)) |
| 4. | 41† |   | Supply  Agreement dated December 18, 2001 between GlaxoSmithKline Inc. and DRAXIS  Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS Specialty  Pharmaceuticals Inc.) (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004, filed on  March 31, 2005 (SEC file no. 000-17434))                                                                                                 |
| 4. | 42† |   | Manufacture  and Supply Agreement entered into between DRAXIS Pharma Inc. (now known as  DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) and Bone  Care International, Inc. on March 3, 2003 (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2004, filed on March 31, 2005 (SEC file no. 000-17434))                                                                  |
| 4. | 43       |   | Amendment  dated August 25, 2004 to Employment Agreement dated April 27, 2004 between  DRAXIS Health Inc. and Dan Brazier (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file no. 000-17434))                                                                                                                                                         |

 

134

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| 4.  | 44        |   | Amended and  Restated Loan Agreement dated June 10, 2004 between DRAXIS Health Inc. and  National Bank of Canada (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004, filed on  March 31, 2005 (SEC file no. 000-17434))                      |
|-----|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.  | 45        |   | Amendment  dated June 23, 2004 to Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Martin Barkin (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file no. 000-17434))             |
| 4.  | 46        |   | Amendment to  Credit Facilities for DRAXIS Pharma Inc. dated March 28, 2002 between  National Bank of Canada and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))     |
| 4.  | 47        |   | Loan  Agreement dated March 28, 2002 among DRAXIS Pharma Inc., SGF Santé Inc. and  DRAXIS Health Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2001, filed on May 20,  2002 (SEC file No. 000-17434))                              |
| 4.  | 48        |   | Loan  Agreement dated March 28, 2002 among DRAXIS Pharma Inc., Investissement  Québec and DRAXIS Health Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2001,  filed on May 20, 2002 (SEC file No. 000-17434))                       |
| 4.  | 49        |   | First  Amendment to Subscription Agreement dated October 24, 2002 among SGF Santé  Inc., DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file No. 000-17434)) |
| 4.  | 50*† |   | Manufacturing and Supply Master Agreement, dated January 1, 2005,  between Pfizer Canada Inc. and DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals  Inc.                                                                                                                                             |
| 4.  | 51*† |   | Amendment, dated December 20, 2005, to Employment Agreement dated  April 27, 2004, as amended between DRAXIS Health Inc. and Dan Brazier, Chief  Operating Officer of the Company                                                                                                                                 |
| 4.  | 52*† |   | Employment Agreement, dated April 22, 2005, between DRAXIS Health  Inc. and Mr. Jean-Pierre Robert, President of DRAXIMAGE, a division of DRAXIS  Specialty Pharmaceuticals Inc.                                                                                                                                  |
| 4.  | 53*† |   | Retirement  Compensation Arrangement Trust Agreement, dated July 8, 2005, between DRAXIS  Health Inc. and Dr. Richard Flanagan                                                                                                                                                                                    |
| 4.  | 54*       |   | Charter of  the Board of Directors adopted in April 2004                                                                                                                                                                                                                                                          |
| 4.  | 55*       |   | Charter of  the Audit Committee amended in May 2005                                                                                                                                                                                                                                                               |
| 4.  | 56*       |   | Charter of  the Human Resources and Compensation Committee amended in May 2005                                                                                                                                                                                                                                    |
| 4.  | 57*       |   | Charter of  the Nominating and Corporate Governance Committee amended in May 2005                                                                                                                                                                                                                                 |
| 8.  | 1*        |   | List of  Subsidiaries                                                                                                                                                                                                                                                                                             |
| 12. | 1*        |   | Certification  of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                   |
| 12. | 2*        |   | Certification  of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                   |
| 13. | 1*        |   | Certification  of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                   |
| 13. | 2*        |   | Certification  of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                   |

 

----

* Filed herewith                    

† Portions of the exhibits have been omitted pursuant to a confidentialtreatment request. This information has been filed separately with theSecurities and Exchange Commission.                             

 

135

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**MANAGEMENT’S REPORT**

 

The Company’s management isresponsible for preparing the accompanying Consolidated Financial Statements inconformity with United States generally accepted accounting principles (“GAAP”).In preparing these Consolidated Financial Statements, management selectsaccounting policies and uses its judgment and best estimates, as appropriate inthe circumstances. Management has determined such amounts on a reasonable basisin order to ensure that the financial statements are presented fairly, in allmaterial respects.

 

The Company maintains asystem of internal accounting controls designed to provide reasonableassurance, at a reasonable cost, that assets are safeguarded and thattransactions are executed and recorded in accordance with the Company’spolicies. This system is supported by policies and procedures for key businessactivities, by the hiring of qualified staff and by a continuous planning andmonitoring program.

 

Deloitte & Touche LLPhas been engaged by the Company’s shareholders to audit the ConsolidatedFinancial Statements. During the course of their audit, Deloitte & ToucheLLP reviewed the Company’s system of internal controls to the extent necessaryto render their opinion on the Consolidated Financial Statements.

 

The Board of Directors isresponsible for ensuring that management fulfills its responsibility forfinancial reporting and is ultimately responsible for reviewing and approvingthe financial statements. The Board carries out the responsibility principallythrough its Audit Committee. The members of the Audit Committee are outsideDirectors. The Committee considers, for review by the Board of Directors andapproval by the shareholders, the engagement or reappointment of the externalauditors. Deloitte & Touche LLP has full and free access to the AuditCommittee.

 

Management acknowledges itsresponsibility to provide financial information that is representative of theCompany’s operations, is consistent and reliable, and is relevant for theinformed evaluation of the Company’s activities.

 

 
| (signed)                               | (signed)                 |
|----------------------------------------|--------------------------|
|                                   |                     |
|                                   |                     |
| MARTIN BARKIN, MD                      | MARK OLEKSIW, CA         |
| President  and Chief Executive Officer | Chief  Financial Officer |
| Mississauga, Ontario                   |                     |
| February 28, 2006                      |                     |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS**

 

To the Shareholders andBoard of Directors of DRAXIS Health Inc.

 

We have audited theconsolidated balance sheets of DRAXIS Health Inc. as at December 31, 2005 and2004 and the consolidated statements of operations, changes in equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod ended December 31, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform an audit to obtain reasonableassurance whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, theseConsolidated Financial Statements present fairly, in all material respects, thefinancial position of the Company as at December 31, 2005 and 2004 and theresults of its operations and its cash flows for each of the years in thethree-year period ended December 31, 2005 in accordance with generally acceptedaccounting principles in the United States of America.

 

The Company is not requiredto have, nor were we engaged to perform, an audit of its internal controls overfinancial reporting. Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal controls over financialreporting. Accordingly we express no such opinion.

 

We also reported separatelyon February 28, 2006, to the shareholders and Directors of the Company on ouraudit, where we expressed an opinion without reservation on the Consolidated FinancialStatements prepared in accordance with United States generally acceptedaccounting principles, except that those financial statements contain anadditional note presenting the reconciliation of the Company’s net income andshareholders’ equity with Canadian generally accepted accounting principles.

 

 
| (signed)                                      |
|-----------------------------------------------|
|                                          |
|                                          |
| DELOITTE & TOUCHE LLP                     |
| Independent  Registered Chartered Accountants |
| Montreal, Quebec                              |
| February 28, 2006                             |

 

F-2

----

 

**Consolidated Statements of Operations**

 

*(in thousands of U.S. dollars, except share relateddata)*

 
| **Years  ended December 31**                                          | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ***REVENUES***                                                        |       |       | ** ** |       |       |     |       |
| Product sales                                                         | ** ** | **$**      | **72,989** | ** ** | $          | 61,693   |       | $ | 40,535 |   |
| Royalty and licensing (Note 14)                                       | ** ** | **6,444**  | ** ** | 7,627      |       | 8,658    |       |
| ** **                                                            |       | **79,433** |       | 69,320     | ** ** | 49,193   |       |
| ***EXPENSES***                                                        |       |       | ** ** |       |       |     |       |
| Cost of goods sold, excluding depreciation  and amortization (Note 3) | ** ** | **46,836** | ** ** | 39,793     |       | 27,722   |       |
| Selling, general and administration                                   | ** ** | **16,185** | ** ** | 13,266     |       | 9,904    |       |
| Research and development                                              | ** ** | **2,103**  | ** ** | 1,948      |       | 1,594    |       |
| Depreciation and amortization                                         | ** ** | **4,545**  | ** ** | 4,457      |       | 3,287    |       |
| ** **                                                            |       | **69,669** |       | 59,464     | ** ** | 42,507   |       |
| Operating income                                                      | ** ** | **9,764**  | ** ** | 9,856      |       | 6,686    |       |
| Financial expense, net (Note 4)                                       | ** ** | **(29**    | **)**      | (296       | )          | (831     | )          |
| Foreign exchange loss                                                 | ** ** | **(398**   | **)**      | (374       | )          | (701     | )          |
| Other income                                                          | ** ** | **—** | ** ** | 96         |       | —   |       |
| Income before undernoted                                              | ** ** | **9,337**  | ** ** | 9,282      |       | 5,154    |       |
| Income taxes (Note 5)                                                 | ** ** | **(1,553** | **)**      | (1,301     | )          | (874     | )          |
| Minority interest (Note 17)                                           | ** ** | **—** | ** ** | (4         | )          | 391      |       |
| Income from continuing operations                                     | ** ** | **7,784**  | ** ** | 7,977      |       | 4,671    |       |
| (Loss) income from discontinued operations,  net of taxes (Note 6)    | ** ** | **—** | ** ** | (61        | )          | 8,531    |       |
| Net income                                                            | ** ** | **$**      | **7,784**  | ** ** | $          | 7,916    |       | $ | 13,202 |   |
|                                                                  |       |       | ** ** |       |       |     |       |
| Basic income per share (Note 7)                                       |       |       | ** ** |       |       |     |       |
| from continuing operations                                            | ** ** | **$**      | **0.19**   | ** ** | $          | 0.20     |       | $ | 0.13 |   |
| from discontinued operations                                          | ** ** | **—** | ** ** | —     |       | 0.23     |       |
| ** **                                                            |       | **$**      | **0.19**   |       | $          | 0.20     | ** ** | $ | 0.36 |   |
|                                                                  |       |       | ** ** |       |       |     |       |
| Diluted income per share (Note 7)                                     |       |       | ** ** |       |       |     |       |
| from continuing operations                                            | ** ** | **$**      | **0.18**   | ** ** | $          | 0.19     |       | $ | 0.13 |   |
| from discontinued operations                                          | ** ** | **—** | ** ** | —     |       | 0.23     |       |
| ** **                                                            |       | **$**      | **0.18**   |       | $          | 0.19     | ** ** | $ | 0.36 |   |

 

See the accompanying notes to the ConsolidatedFinancial Statements

 
| Approved by the Board |              |
|-----------------------|-------------------|
|                  |              |
|                  |              |
| (signed)              | (signed)          |
|                  |              |
| BRIAN KING            | MARTIN BARKIN, MD |
| Director              | Director          |

 

F-3

----

 

**Consolidated Balance Sheets**

* *

*(in thousands of U.S. dollars, except share relateddata)*

 
| **As at December 31**                                                                                                                                                  | ** ** | **2005**    | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| **ASSETS**                                                                                                                                                             |       |        |       |       |       |
| **Current  assets**                                                                                                                                                    |       | ** **  | ** ** |       |       |
| Cash and cash equivalents                                                                                                                                              |       | **$**       | **12,390** | ** ** | $          | 5,926 |   |
| Restricted cash (Note 8)                                                                                                                                               |       | **—**  | ** ** | 428        |       |
| Accounts receivable (Note 9)                                                                                                                                           |       | **16,301**  | ** ** | 13,724     |       |
| Inventories (Note 10)                                                                                                                                                  |       | **7,629**   | ** ** | 10,158     |       |
| Prepaid expenses                                                                                                                                                       |       | **1,003**   | ** ** | 830        |       |
| Deferred income taxes, net (Note 5)                                                                                                                                    |       | **2,750**   | ** ** | 4,121      |       |
| Total  current assets                                                                                                                                                  |       | **40,073**  | ** ** | 35,187     |       |
|                                                                                                                                                                   |       | ** **  | ** ** |       |       |
| Property,  plant and equipment, net (Note 11)                                                                                                                          |       | **45,652**  | ** ** | 43,857     |       |
| Goodwill,  net                                                                                                                                                         |       | **754**     | ** ** | 728        |       |
| Intangible  assets, net (Note 12)                                                                                                                                      |       | **399**     | ** ** | 737        |       |
| Other assets                                                                                                                                                           |       | **475**     | ** ** | 604        |       |
| Deferred  income taxes, net (Note 5)                                                                                                                                   |       | **8,467**   | ** ** | 7,672      |       |
| Total assets                                                                                                                                                           |       | **$**       | **95,820** | ** ** | $          | 88,785 |   |
|                                                                                                                                                                   |       | ** **  | ** ** |       |       |
| **LIABILITIES**                                                                                                                                                        |       | ** **  | ** ** |       |       |
| **Current  liabilities**                                                                                                                                               |       | ** **  | ** ** |       |       |
| Accounts payable and accrued liabilities  (Note 13)                                                                                                                    |       | **$**       | **8,793**  | ** ** | $          | 10,436 |   |
| Current portion of deferred revenues (Note  14)                                                                                                                        |       | **3,671**   | ** ** | 3,676      |       |
| Customer deposits                                                                                                                                                      |       | **649**     | ** ** | 628        |       |
| Total  current liabilities                                                                                                                                             |       | **13,113**  | ** ** | 14,740     |       |
|                                                                                                                                                                   |       | ** **  | ** ** |       |       |
| Other  liabilities (Note 16)                                                                                                                                           |       | **252**     | ** ** | —     |       |
| Deferred  revenues (Note 14)                                                                                                                                           |       | **827**     | ** ** | 4,125      |       |
| Total  liabilities                                                                                                                                                     |       | **14,192**  | ** ** | 18,865     |       |
|                                                                                                                                                                   |       | ** **  | ** ** |       |       |
| Commitments  and contingencies (Note 21)                                                                                                                               |       | ** **  | ** ** |       |       |
|                                                                                                                                                                   |       | ** **  | ** ** |       |       |
| **SHAREHOLDERS’  EQUITY**                                                                                                                                         |       | ** **  | ** ** |       |       |
| Common stock, without par value, unlimited  number of shares authorized, 41,588,005 and 41,015,326 issued and outstanding  at December 31, 2005 and 2004, respectively |       | **77,313**  | ** ** | 75,840     |       |
| Additional  paid-in capital                                                                                                                                            |       | **15,370**  | ** ** | 15,546     |       |
| Warrants  (Note 18(a))                                                                                                                                                 |       | **916**     | ** ** | 916        |       |
| Deficit                                                                                                                                                                |       | **(19,781** | **)**      | (27,565    | )          |
| Accumulated  other comprehensive income                                                                                                                                |       | **7,810**   | ** ** | 5,183      |       |
| Total  shareholders’ equity                                                                                                                                       |       | **81,628**  | ** ** | 69,920     |       |
| Total  liabilities and shareholders’ equity                                                                                                                       |       | **$**       | **95,820** | ** ** | $          | 88,785 |   |

 

See the accompanying notes to the ConsolidatedFinancial Statements

 

F-4

----

 

**Consolidated Statements of Changes in Equity andComprehensive Income**

* *

*(in thousands of U.S. dollars, except share relateddata)*

 
| **Years  ended December 31**                            | ** ** | **2005**       | ** **  | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------|------------|----------------|-------------|------------|------------|------------|------------|
| **Common Stock (Number of Shares)**                     |       |           | ** **  |       |       |       |       |
| Balance, beginning of year                              | ** ** | **41,015,326** | ** **  | 37,297,817 |       | 37,098,690 |       |
| Issuance of common shares                               | ** ** | **—**     | ** **  | 3,053,436  |       | —     |       |
| Exercise of options                                     | ** ** | **648,279**    | ** **  | 609,177    |       | 240,334    |       |
| Exercise of employee participation shares               | ** ** | **—**     | ** **  | 54,896     |       | 9,093      |       |
| Repurchased for cancellation                            | ** ** | **(75,600**    | **)**       | —     |       | (50,300    | )          |
| Balance, end of year                                    | ** ** | **41,588,005** | ** **  | 41,015,326 |       | 37,297,817 |       |
| **Common Stock**                                        |       |           | ** **  |       |       |       |       |
| Balance, beginning of year                              | ** ** | **$**          | **75,840**  | ** ** | $          | 61,175     |       | $ | 60,652 |   |
| Issuance of common shares                               | ** ** | **—**     | ** **  | 12,867     |       | —     |       |
| Exercise of options                                     | ** ** | **1,628**      | ** **  | 1,594      |       | 563        |       |
| Exercise of employee participation shares               | ** ** | **—**     | ** **  | 204        |       | 30         |       |
| Repurchased for cancellation                            | ** ** | **(155**       | **)**       | —     |       | (70        | )          |
| Balance, end of year                                    | ** ** | **$**          | **77,313**  | ** ** | $          | 75,840     |       | $ | 61,175 |   |
| **Additional Paid-In Capital**                          |       |           | ** **  |       |       |       |       |
| Balance, beginning of year                              | ** ** | **$**          | **15,546**  | ** ** | $          | 15,667     |       | $ | 15,550 |   |
| Stock compensation                                      | ** ** | **—**     | ** **  | (121       | )          | 112        |       |
| Common shares purchased for cancellation  (Note (18(b)) | ** ** | **(176**       | **)**       | —     |       | 5          |       |
| Balance, end of year                                    | ** ** | **$**          | **15,370**  | ** ** | $          | 15,546     |       | $ | 15,667 |   |
| **Warrants**                                            |       |           | ** **  |       |       |       |       |
| Balance, beginning of year                              | ** ** | **$**          | **916**     | ** ** | $          | —     |       | $ | — |   |
| Issuance of warrants                                    | ** ** | **—**     | ** **  | 916        |       | —     |       |
| Balance, end of year                                    | ** ** | **$**          | **916**     | ** ** | $          | 916        |       | $ | — |   |
| **Employee Participation Shares**                       |       |           | ** **  |       |       |       |       |
| Balance, beginning of year                              | ** ** | **$**          | **—**  | ** ** | $          | 86         |       | $ | 140 |   |
| Cancellation of employee participation  shares          | ** ** | **—**     | ** **  | —     |       | (27        | )          |
| Exercise of employee participation shares               | ** ** | **—**     | ** **  | (86        | )          | (27        | )          |
| Balance, end of year                                    | ** ** | **$**          | **—**  | ** ** | $          | —     |       | $ | 86 |   |
| **Employee Participation Shares-Loans Receivable**      |       |           | ** **  |       |       |       |       |
| Balance, beginning of year                              | ** ** | **$**          | **—**  | ** ** | $          | (86        | )          | $ | (140 | ) |
| Cancellation of employee participation  shares          | ** ** | **—**     | ** **  | —     |       | 27         |       |
| Exercise of employee participation shares               | ** ** | **—**     | ** **  | 86         |       | 27         |       |
| Balance, end of year                                    | ** ** | **$**          | **—**  | ** ** | $          | —     |       | $ | (86 | ) |
| **Deficit**                                             |       |           | ** **  |       |       |       |       |
| Balance, beginning of year                              | ** ** | **$**          | **(27,565** | **)**      | $          | (35,481    | )          | $ | (48,683 | ) |
| Net income                                              | ** ** | **7,784**      | ** **  | 7,916      |       | 13,202     |       |
| Balance, end of year                                    | ** ** | **$**          | **(19,781** | **)**      | $          | (27,565    | )          | $ | (35,481 | ) |
| **Accumulated Other Comprehensive Income (Loss)**       |       |           | ** **  |       |       |       |       |
| Balance, beginning of year                              | ** ** | **$**          | **5,183**   | ** ** | $          | 286        |       | $ | (7,292 | ) |
| Other comprehensive income                              | ** ** | **2,627**      | ** **  | 4,897      |       | 7,578      |       |
| Balance, end of year                                    | ** ** | **7,810**      | ** **  | 5,183      |       | 286        |       |
| **Total  shareholders’ equity**                    | ** ** | **$**          | **81,628**  | ** ** | $          | 69,920     |       | $ | 41,647 |   |
| **Comprehensive Income**                                |       |           | ** **  |       |       |       |       |
| Foreign currency translation adjustments                | ** ** | **$**          | **2,627**   | ** ** | $          | 4,897      |       | $ | 7,578 |   |
| Other comprehensive income                              | ** ** | **2,627**      | ** **  | 4,897      |       | 7,578      |       |
| Net income                                              | ** ** | **7,784**      | ** **  | 7,916      |       | 13,202     |       |
| **Total comprehensive income**                          | ** ** | **$**          | **10,411**  | ** ** | $          | 12,813     |       | $ | 20,780 |   |

 

See the accompanying notes to the ConsolidatedFinancial Statements

 

F-5

----

 

**Consolidated Statements of Cash Flows**

 

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

 
| **Years  ended December 31**                                                                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ***CASH FLOWS FROM (USED IN) OPERATING  ACTIVITIES***                                                           |       |       | ** ** |       |       |     |       |
| Net income from continuing operations                                                                           | ** ** | **$**      | **7,784**  | ** ** | $          | 7,977    | ** ** | $ | 4,671 | ** ** |
| Adjustments to reconcile net income from  continuing operations to net cash from (used in) operating activities |       |       | ** ** |       |       |     |       |
| Amortization of deferred revenues                                                                               | ** ** | **(3,701** | **)**      | (5,495     | )          | (6,811   | )          |
| Depreciation and amortization                                                                                   | ** ** | **4,545**  | ** ** | 4,457      |       | 3,287    |       |
| Deferred income taxes                                                                                           | ** ** | **765**    | ** ** | 322        |       | (58      | )          |
| Minority interest                                                                                               | ** ** | **—** | ** ** | 4          |       | (391     | )          |
| Stock compensation                                                                                              | ** ** | **—** | ** ** | 83         |       | 112      |       |
| Other                                                                                                           | ** ** | **427**    | ** ** | 785        |       | 896      |       |
| Changes in operating assets and liabilities                                                                     |       |       | ** ** |       |       |     |       |
| Accounts receivable                                                                                             | ** ** | **(1,903** | **)**      | (2,849     | )          | (1,088   | )          |
| Inventories                                                                                                     | ** ** | **2,786**  | ** ** | (3,230     | )          | (93      | )          |
| Prepaid expenses                                                                                                | ** ** | **(263**   | **)**      | (409       | )          | (149     | )          |
| Accounts payable and accrued liabilities                                                                        | ** ** | **(1,758** | **)**      | 2,748      |       | (3,597   | )          |
| Other liabilities                                                                                               | ** ** | **252**    | ** ** | —     |       | —   |       |
| Deferred revenues                                                                                               | ** ** | **385**    | ** ** | 362        |       | 165      |       |
| Net cash from (used in) operating activities of continuing operations                                           | ** ** | **9,319**  | ** ** | 4,755      |       | (3,056   | )          |
| ***CASH FLOWS (USED IN) FROM INVESTING  ACTIVITIES***                                                           |       |       | ** ** |       |       |     |       |
| Expenditures for property, plant and  equipment                                                                 | ** ** | **(4,619** | **)**      | (4,801     | )          | (3,536   | )          |
| Increase in intangible assets                                                                                   | ** ** | **(185**   | **)**      | (150       | )          | (122     | )          |
| Proceeds from disposition of product right                                                                      | ** ** | **—** | ** ** | 113        |       | —   |       |
| Restricted cash (Note 8)                                                                                        | ** ** | **424**    | ** ** | 548        |       | (976     | )          |
| Net cash from (used in) investing activities of continuing operations                                           | ** ** | **(4,380** | **)**      | (4,290     | )          | (4,634   | )          |
| ***CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES***                                                            |       |       | ** ** |       |       |     |       |
| Proceeds from bank indebtedness                                                                                 | ** ** | **—** | ** ** | —     |       | 4,942    |       |
| Repayment of bank indebtedness                                                                                  | ** ** | **—** | ** ** | —     |       | (5,927   | )          |
| Proceeds from long-term debt                                                                                    | ** ** | **—** | ** ** | 4,965      |       | 947      |       |
| Repayment of long-term debt                                                                                     | ** ** | **—** | ** ** | (15,508    | )          | (3,013   | )          |
| Decrease of customer deposits, net                                                                              | ** ** | **(2**     | **)**      | (8         | )          | (2,044   | )          |
| Exercise of options and employee  participation shares                                                          | ** ** | **1,628**  | ** ** | 1,594      |       | 593      |       |
| Issuance of common shares and warrants, net  of related expenses  (Note 18(a))                                  | ** ** | **—** | ** ** | 13,385     |       | —   |       |
| Common shares purchased for cancellation                                                                        | ** ** | **(331**   | **)**      | —     |       | (65      | )          |
| Issue of common shares by subsidiary to  minority interest                                                      | ** ** | **—** | ** ** | —     |       | 365      |       |
| Repurchase of common shares by subsidiary  from minority interest  (Note 17)                                    | ** ** | **—** | ** ** | (9,557     | )          | (140     | )          |
| Net cash from (used in) financing activities of continuing operations                                           | ** ** | **1,295**  | ** ** | (5,129     | )          | (4,342   | )          |
| Effect of foreign exchange rate changes on  cash and cash equivalents                                           | ** ** | **230**    | ** ** | 119        |       | 597      |       |
| Net cash from (used in) continuing  operations                                                                  | ** ** | **6,464**  | ** ** | (4,545     | )          | (11,435  | )          |
| ***CASH FLOWS OF DISCONTINUED OPERATIONS  (Revised - Note 6)***                                                 |       |       | ** ** |       |       |     |       |
| Operating cash flows                                                                                            | ** ** | **—** | ** ** | (92        | )          | 2,343    |       |
| Investing cash flows                                                                                            | ** ** | **—** | ** ** | —     |       | 17,333   |       |
| Financing cash flows                                                                                            | ** ** | **—** | ** ** | —     |       | (2,577   | )          |
| Net cash from (used in) discontinued operations                                                                 | ** ** | **—** | ** ** | (92        | )          | 17,099   |       |
| Net increase (decrease) in cash and cash  equivalents                                                           | ** ** | **6,464**  | ** ** | (4,637     | )          | 5,664    |       |
| Cash and cash equivalents, beginning of  period                                                                 | ** ** | **5,926**  | ** ** | 10,563     |       | 4,899    |       |
| Cash and cash equivalents, end of period                                                                        | ** ** | **$**      | **12,390** | ** ** | $          | 5,926    |       | $ | 10,563 |   |
|                                                                                                            |       |       | ** ** |       |       |     |       |
| **Additional Information**                                                                                      |       |       | ** ** |       |       |     |       |
| Interest paid                                                                                                   | ** ** | **$**      | **—** | ** ** | $          | 310      |       | $ | 700 |   |
| Income taxes paid                                                                                               | ** ** | **$**      | **804**    | ** ** | $          | 1,040    |       | $ | 1,882 |   |

 

See the accompanying notes to the ConsolidatedFinancial Statements

 

F-6

----

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

Forthe years ended December 31, 2005, 2004 and 2003

* *

*(in thousands of U.S. dollars,except share related data)*

# ** **

# **1.             NATUREOF OPERATIONS**

 

DRAXIS Health Inc. (“DRAXIS”or the “Company”) is a specialty pharmaceutical company providingpharmaceutical products in three major categories: sterile, including sterilelyophilized (freeze-dried) pharmaceuticals; non-sterile specialtypharmaceuticals; and radiopharmaceuticals. In the radiopharmaceutical category,DRAXIS has its own products and a targeted research and development program fornew products. As of January 1, 2005, activities of the Company are carried outthrough its wholly owned subsidiary, DRAXIS Specialty Pharmaceuticals Inc.,which operates two major divisions, DRAXIS Pharma (contract manufacturing) andDRAXIMAGE (radiopharmaceuticals). The Company’s common shares are listed onNASDAQ and Toronto Stock Exchange (“TSX”).

# ** **

# **2.             SIGNIFICANTACCOUNTING POLICIES**

## *** ***

## ***(a)          ***Basis of Presentation

The Company has preparedthese Consolidated Financial Statements in U.S. dollars and in accordance withgenerally accepted accounting principles (“GAAP”) in the United States.

 

Reconciliations of netincome and shareholders’ equity in accordance with Canadian GAAP are availableto shareholders.

## *** ***

## ***(b)          ***Principles of Consolidation

The Consolidated FinancialStatements include the accounts of the Company and its subsidiary companieswith provision for minority interests. The Company’s effective interest in thevoting equity share capital of its subsidiaries is 100%, except in the case ofDRAXIS Pharma, for which it was 67.3% prior to April 22, 2004 (2003 – 67.3%)and 100% thereafter. All intercompany transactions and balances are eliminatedon consolidation.

## *** ***

## ***(c)          ***Minority Interest

Minority interest representsthe minority shareholders’ proportionate share of equity and net income or lossof DRAXIS Pharma prior to April 22, 2004, the date on which the Companyacquired the remaining minority interest; see Note 17.

## *** ***

## ***(d)          ***Use of Estimates

The preparation of theCompany’s Consolidated Financial Statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.Estimates and assumptions are used when accounting for items and matters suchas asset impairments, allowance for uncollectible accounts receivable,inventory obsolescence, warranties and provisions, amortization, deferred andcurrent income taxes, stock compensation and contingencies.

 

F-7

----

 

## ***(e)          ***Reporting Currency and Foreign CurrencyTranslation

The Company’s principalfunctional currency is the Canadian dollar; however, it reports itsConsolidated Financial Statements in U.S. dollars. The financial statements ofthe parent company and its non-U.S. subsidiaries whose functional currency isnot the U.S. dollar are translated into U.S. dollars in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency Translation. Assetand liability accounts are translated at the rate of exchange prevailing at thebalance sheet date. Shareholders’ equity accounts are translated at theapplicable historical rate. Revenue and expense accounts are translated at theaverage rate of exchange for the period. The cumulative foreign currencytranslation adjustment is reported as a component of accumulated othercomprehensive income in shareholders’ equity. The net change in the cumulativeforeign currency translation adjustment in the periods presented is primarilydue to fluctuations in the exchange rates between the Company’s reportingcurrency and the Canadian dollar.

 

Foreign denominated monetaryassets and liabilities of the Company are translated at the exchange rates ineffect at the balance sheet dates. Revenues and expenses are translated ataverage rates for the period. Resulting translation gains or losses arereflected in net income.

## *** ***

## ***(f)           ***Revenue Recognition

 

**ProductSales**

 

The Company recognizesrevenue, net of trade discounts and allowances, when evidence of an arrangementexists, delivery has occurred or services rendered, the price is fixed ordeterminable and collectability is reasonably assured.

 

Amounts received fromcustomers as prepayments for products to be shipped or services to be providedin the future are reported as customer deposits.

 

Product sales includerelated service revenues which are recognized at the time of performance orproportionately over the term of the contract, as appropriate.

** **

**Royaltyand Licensing**

 

Royalty revenue isrecognized on an accrual basis in accordance with contractual agreements whenall significant contractual obligations have been satisfied, the amounts aredeterminable and collection is reasonably assured. Royalty revenue is net ofamounts owing to sublicensees where the Company is acting as an agent for thesublicensee.

 

License and other forms ofnon-refundable fees received pursuant to collaboration agreements are accountedfor according to the related contractual agreements. In general, such fees aredeferred and recognized on a straight-line basis over the contract period.Where the contract period is not defined, such fees are recognized on 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.

## *** ***

## ***(g)          ***Research and Development

In accordance with SFAS No.2, Accounting for Research andDevelopment Costs, research and development costs are expensed in theperiod in which 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.

 

F-8

----

 

The Canadian Federal andQuébec Provincial governments offer a tax incentive to companies performingresearch and development activities in Canada. The federal tax incentive iscalculated based on pre-determined rates, considers eligible R&Dexpenditures and can be used to reduce federal income taxes in Canada otherwisepayable. Such credits, if not used in the year earned, can be carried forwardfor a period of 10 years. The Québec Provincial government offers a similarincentive, except that it is receivable in cash, instead of a credit used toreduce taxes otherwise payable. The cash credit is awarded regardless ofwhether or not there are Québec Provincial taxes payable. These tax credits arerecorded as a reduction of the income tax expense.

## *** ***

## ***(h)          ***Income Taxes

The liability method ofaccounting for income taxes is used in accordance with SFAS No. 109, Accounting for Income Taxes. Underthis method, deferred tax assets and liabilities are recognized for thedifferences between the financial statement and income tax bases of assets andliabilities, and for operating losses and tax credit carryforwards. A valuationallowance is provided for the portion of deferred tax assets which is morelikely than not to be unrealized. Deferred tax assets and liabilities aremeasured using the enacted tax rates and laws.

## *** ***

## ***(i)           ***Cash and Cash Equivalents

All highly liquidinvestments with original maturities of three months or less are classified ascash and cash equivalents. The fair value of cash and cash equivalentsapproximates the amounts shown in the financial statements.

## *** ***

## ***(j)           ***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.

## *** ***

## ***(k)          ***Inventories

Inventories are comprised ofraw materials, work-in-process and finished goods. Raw materials are valued atthe lower of standard cost and replacement cost. Standard cost approximatesactual cost, computed on a first-in, first-out basis. Work-in-process is valuedat the lower of standard cost and net realizable value and includes material,direct labour and related manufacturing overhead costs. Finished goods arevalued at the lower of cost computed on a first-in, first-out basis, and netrealizable value, and include all related manufacturing, packaging and overheadcosts. Provisions for inventory obsolescence are charged against income when itis determined that the inventory item does not meet the defined quality orregulatory requirements for sale.

## *** ***

## ***(l)           ***Property, Plant and Equipment

Property, plant andequipment are reported at cost, less accumulated depreciation. The Companyprovides for depreciation using the following methods and applying rates toamortize the cost over the estimated useful life of the assets:

 
| Building  |   | straight-line over 25 years                                 |
|-----------|--------|-------------------------------------------------------------|
| Equipment |   | 20%-30% declining balance and straight-line over 5-10 years |

 

Expenditures for constructionof assets incurred prior to productive use are reflected as assets

 

F-9

----

 

under construction.Depreciation commences when an asset is substantially completed and ready forproductive commercial use.

## *** ***

## ***(m)         ***Goodwill

Goodwill is not amortized;however, it is subject to an annual impairment test, or more frequently undercertain circumstances. The assessment of impairment is done annually atDecember 31, by applying a fair-value-based test. Measurement of the fair valueof the reporting unit is based on one or more fair value measures, includingpresent value techniques of estimated future cash flows.

## *** ***

## ***(n)          ***Intangible Assets

Acquired intangible assetsthat do not have regulatory approval and for which there are no alternativeuses are expensed as acquired in-process research and development, and thosethat have regulatory approval are capitalized.

 

Intangible assets withfinite lives are reported at cost, less accumulated amortization. The Companydoes not have any intangible assets with indefinite lives. The Company providesfor amortization on a straight-line basis over the following estimated usefullives:

 
| Patents and trademarks |   | 10 years |
|------------------------|--------|----------|
| Licenses               |   | 10 years |

## *** ***

## ***(o)          ***Impairment of Long-lived Assets

Long-lived assets, comprisedprincipally of property, plant and equipment and intangible assets with finitelives are reviewed for impairment whenever events or circumstances indicate thecarrying amount of assets may not be recoverable. The Company evaluates recoverabilityof assets to be held and used by comparing their carrying amount to theestimated future net undiscounted cash flows generated by the assets. If suchassets are considered to be impaired, the impairment recognized is measured asthe amount by which the carrying amount of the assets exceeds the fair value ofthe assets.

## *** ***

## ***(p)          ***Recent Accounting Pronouncements

In December 2004, theFinancial Accounting Standards Board (“FASB”) published SFAS No. 123R,*Share-Based Payments*. SFAS No. 123Ramends SFAS No. 123*, Stock-BasedCompensation* issuedin 1995 and supercedes Accounting Principles Board Opinion (“APB”) No. 25issued in 1972. Compensation expense is generally recognized over the periodduring which an employee is required to provide service in exchange for theaward (usually the vesting period). This statement is effective for the Companybeginning on January 1, 2006. As of the required effective date, the Companywill apply SFAS No. 123R using a modified version of the prospectiveapplication. Under that transition method, compensation cost is recognizedbeginning on the required effective date for the portion of outstanding awardsfor which the requisite service has not yet been rendered, based on thegrant-date fair value of those awards calculated under SFAS No. 123 for eitherrecognition or *pro forma* disclosures. Had the Company adopted SFAS No. 123Rprospectively, the net impact on the Company’s consolidated statements ofoperations would have approximated the impact as described in Note 2(q) belowon a *pro forma* basis. The Company is currently evaluating the impact ofadopting SFAS No. 123R and expects the impact to be material to the EPS.

 

In November 2004, FASBissued SFAS No. 151, *Inventory Costs-AnAmendment of APB No. 43* which requires that items such as idlefacility expense, excessive spoilage, double freight, and

 

F-10

----

 

re-handling costs berecognized as current period charges. Additionally, SFAS No. 151 requires thatthe allocation of fixed production overheads to the costs of conversions bebased on normal capacity of the production facilities. SFAS No. 151 is requiredto be adopted by the Company in the first quarter of fiscal 2006. Adoption bythe Company of this pronouncement is not expected to have a material impact onthe Company’s results of operations or financial conditions.

## *** ***

## ***(q)          ***Share-Based Compensation Plan

Under the provisions of SFASNo. 123,*Stock-Based Compensation*,companies can either measure the compensation cost of equity instruments issuedunder employee compensation plans using a fair-value-based method or cancontinue to recognize compensation cost using the intrinsic value method underthe provisions of APB No. 25, *Accounting for StockIssued to Employees*. However,if the provisions of APB No. 25 are applied, *pro forma* disclosure of net income and EPSmust be presented in the financial statements as if the fair value method hadbeen applied. For all periods presented, the Company recognized compensationcosts under the provisions of APB No. 25, and the Company has provided theexpanded disclosure required by SFAS No. 123.

 

Accordingly, the Company’snet income applicable to common shares and income per common share would havebeen as follows:

 
| ** **                                | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
|                                      |       |     | ** ** |       |       |     |       |
| Net income,  as reported                  | ** ** | **$**    | **7,784**  | ** ** | $          | 7,916    |       | $ | 13,202 |   |
| *Pro forma  impact*                       | ** ** | **(839** | **)**      | (733       | )          | (681     | )          |
| *Pro forma*net income                     | ** ** | **$**    | **6,945**  | ** ** | $          | 7,183    |       | $ | 12,521 |   |
|                                      |       |     | ** ** |       |       |     |       |
| Basic net  income per share, as reported  | ** ** | **$**    | **0.19**   | ** ** | $          | 0.20     |       | $ | 0.36 |   |
| *Pro forma*impact per share               | ** ** | **$**    | **(0.02**  | **)**      | $          | (0.02    | )          | $ | (0.02 | ) |
| *Pro forma*net income per share (Basic)   | ** ** | **$**    | **0.17**   | ** ** | $          | 0.18     |       | $ | 0.34 |   |
| *Pro forma*net income per share (Diluted) | ** ** | **$**    | **0.16**   | ** ** | $          | 0.18     |       | $ | 0.34 |   |

 

The fair value of stockoptions used to compute pro forma netincome applicable to common shares and loss per common share disclosures is theestimated fair value at grant date using the Black-Scholes option-pricing modelwith the following weighted-average assumptions as at December 31:

 
| ** **                     | ** ** | **2005**  | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------|------------|-----------|------------|------------|------------|----------|------------|
|                           |       |      | ** ** |       |       |     |       |
| Dividend  yield                | ** ** | **0.0**   | **%**      | 0.0        | %          | 0.0      | %          |
| Expected  volatility           | ** ** | **58**    | **%**      | 63         | %          | 61       | %          |
| Risk-free  interest rate       | ** ** | **3.6**   | **%**      | 4.1        | %          | 4.0      | %          |
| Expected  option life          | ** ** | **6 yrs** | ** ** | 5 yrs      |       | 8 yrs    |       |
| Fair value  per option granted | ** ** | **$**     | **2.74**   | ** ** | $          | 2.00     |       | $ | 1.09 |   |
|                                |            |           |            |            |            |          |            |  |  |  |

 

TheBlack-Scholes option-pricing model was developed for use in estimating the fairvalue of traded options, which have no vesting restrictions and are fullytransferable and which significantly differ from the Company’s stock optionawards. In addition, option-pricing models require the input of highly subjectiveassumptions including the expected price volatility. The Company uses expectedvolatility rates that are based on historical volatility rates trended intofuture years. Changes in the subjective input assumptions can materially affectthe fair value estimate, and therefore the existing model does not necessarilyprovide a reliable single measure of the fair value of the Company’s stockoptions.

 

F-11

----

 

# **3.             COSTOF GOODS SOLD**

 

On July 28, 2003, DRAXIS receivedinsurance proceeds of $730 in settlement of physical damage and businessinterruption losses related to installation problems of its first lyophilizerunit in 2000. The damage resulted in, amongst other things, delays in thecommissioning of the lyophilization unit and in obtaining U.S. Food and DrugAdministration (“FDA”) approvals for the transfer of production of theDRAXIMAGE line of lyophilized diagnostic imaging products to DRAXIS Pharma. FDAapproval was ultimately obtained in 2001 and costs incurred related to theincident were charged to the statement of operations when incurred. No accrualfor insurance proceeds had been previously recorded as the claim represented acontingent gain. The proceeds were recognized as a reduction to cost of goodssold in the third quarter of 2003.

# ** **

# **4.             FINANCIALEXPENSE**

 
| ** **                              | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Interest  income                        | ** ** | **$**    | **107**    | ** ** | $          | 133      |       | $ | 144 |   |
| Interest  expense and financial charges | ** ** | **(136** | **)**      | (429       | )          | (975     | )          |
| ** **                              |       | **$**    | **(29**    | **)**      | $          | (296     | )          | $ | (831 | ) |

# ** **

# **5.             INCOMETAXES**

 
| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| The  components of income tax expense are as follows: |       |     |       |     |       |     |       |
| Current                                               | ** ** | **$**    | **788**    |     | $          | 979      |       | $ | 932 |   |
| Deferred                                              | ** ** | **765**  |       | 322      |       | (58      | )          |
| ** **                                            |       | **$**    | **1,553**  |     | $          | 1,301    |       | $ | 874 |   |

 

The reported income taxexpense differs from the expected amount calculated by applying the Company’sCanadian combined federal and provincial tax rate to income before income taxexpense. The reasons for this difference and the related tax effects are asfollows:

 
| ** **                                                                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Income before income taxes from continuing  operations - substantially all from the Canadian operations | ** ** | **$**      | **9,337**  | ** ** | $          | 9,282    |       | $ | 5,154 |   |
| Canadian  combined federal and provincial tax rate                                                      | ** ** | **32.4**   | **%**      | 32.4       | %          | 34.0     | %          |
| Expected  income tax expense                                                                            | ** ** | **$**      | **3,026**  | ** ** | $          | 3,007    |       | $ | 1,753 |   |
| Increase  (decrease) resulting from:                                                                    |       |       | ** ** |       |       |     |       |
| Foreign tax rate differences                                                                            | ** ** | **111**    | ** ** | 95         |       | —   |       |
| Effect of tax planning on valuation of  available loss carryforwards                                    | ** ** | **—** | ** ** | (884       | )          | —   |       |
| Unrecognized income tax benefit of losses                                                               | ** ** | **(876**   | **)**      | (786       | )          | (732     | )          |
| Goodwill and other amortization                                                                         | ** ** | **111**    | ** ** | 358        |       | 281      |       |
| Investment tax credits                                                                                  | ** ** | **(642**   | **)**      | (398       | )          | (343     | )          |
| Non-taxable capital gains related to  milestones                                                        | ** ** | **(264**   | **)**      | —     |       | —   |       |
| Other                                                                                                   | ** ** | **87**     | ** ** | (91        | )          | (85      | )          |
| ** **                                                                                              |       | **$**      | **1,553**  |       | $          | 1,301    | ** ** | $ | 874 |   |

 

F-12

----

 

Deferred income tax assetshave been provided as follows:

 
| ** **                                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Loss  carryforwards and undeducted research and development expenses    | ** ** | **$**      | **10,953** | ** ** | $          | 11,596   |       | $ | 10,516 |   |
| Investment  tax credits                                                 | ** ** | **1,028**  | ** ** | 999        |       | 918      |       |
| Expenses not  currently deductible for tax purposes                     | ** ** | **468**    | ** ** | 809        |       | 344      |       |
| Deferred revenue                                                        | ** ** | **923**    | ** ** | 1,444      |       | 2,204    |       |
| Share  issuance costs                                                   | ** ** | **487**    | ** ** | 644        |       | —   |       |
| Tax value of  property, plant and equipment in excess of net book value | ** ** | **(497**   | **)**      | (550       | )          | 1,636    |       |
| Tax value of  intangible assets in excess of net book value             | ** ** | **643**    | ** ** | 698        |       | 582      |       |
| Total deferred  tax assets                                              | ** ** | **14,005** | ** ** | 15,640     |       | 16,200   |       |
| Valuation  allowance                                                    | ** ** | **(2,788** | **)**      | (3,847     | )          | (4,001   | )          |
| Net deferred  tax assets                                                | ** ** | **$**      | **11,217** | ** ** | $          | 11,793   |       | $ | 12,199 |   |
| Deferred  income tax assets are classified as follows:                  |       |       | ** ** |       |       |     |       |
| Current                                                                 | ** ** | **$**      | **2,750**  | ** ** | $          | 4,121    |       | $ | 2,806 |   |
| Non-current                                                             | ** ** | **8,467**  | ** ** | 7,672      |       | 9,393    |       |
| ** **                                                              |       | **$**      | **11,217** | ** ** | $          | 11,793   |       | $ | 12,199 |   |

 

At December 31, 2005, theCompany has accumulated tax losses of $23,174 available for federal purposesand $25,050 for provincial purposes in Canada, which expire from 2006 to 2014.In addition the Company has $1,670 of undeducted scientific research andexperimental development expenditures in Canada, which have no expiry. TheCompany also has $1,530 of unclaimed Canadian investment tax credits, whichexpire from 2006 to 2015. These losses, undeducted scientific research andexperimental development expenditures and investment tax credits can be used tooffset future years’ taxes payable.

 

The Company has accumulatedtax losses of $6,283 for federal and state purposes in the U.S., which expirefrom 2010 to 2014. Subject to certain limitations, these losses can be used tooffset future years’ taxable income.

 

In 2005, the Companyre-evaluated the tax rate applied to the temporary difference associated withcapital assets acquired in 2004.

 

As a result of tax planninginitiatives made possible by the purchase of the minority interest on April 22,2004, the Company was able to increase the value of its deferred income taxassets at December 31, 2004 and 2005 by recognizing the benefits of previouslyunrecognized tax loss carryforwards by decreasing the valuation allowance.

 

The Company’s valuationallowance is made up of loss carryforwards in jurisdictions where taxableincome is no longer generated or where it is more likely they will not berealized prior to expiry.

 

F-13

----

 

# **6.             DISCONTINUEDOPERATIONS**

 

In 2001, the Company adopteda formal plan to dispose of its Canadian sales and marketing division (“DRAXISPharmaceutica”).

 

Pursuant to APB No. 30, Reporting the Results of Operations —Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions,the results of operations of DRAXIS Pharmaceutica have been reported asdiscontinued operations and the Consolidated Financial Statements and notesthereto for the year ended December 31, 2001 and all subsequent periodspresented.

 

On March 31, 2003, theCompany amended its License, Distribution and Supply Agreement with ElanCorporation, plc (“Elan”) to return the Canadian rights for several of Elan’sneurology products in exchange for a cash payment of $6,500 and realized anafter-tax gain of $4,286 on this transaction.

 

On July 22, 2003, theCompany completed the divestiture of DRAXIS Pharmaceutica with the sale toShire BioChem Inc. (“Shire”), of substantially all remaining products of thedivision. The Company has received $9,600 in cash from Shire and could receiveup to $2,900 in market driven milestones over the next several years. TheCompany realized an after-tax gain of $4,054, net of transaction and relatedcharges. In addition, the Company will receive royalty payments based on thecontinuing Canadian sales of the products.

 

The Company also receivedthe value of acquired inventories and Shire is now responsible for allfinancial provisions of the license agreement related to *Permax®*.

 

Commencing in the secondquarter of 2002, the Company resolved to retain ownership of the Canadianrights to *Alertec®* and continue tomarket and sell *Alertec®* inCanada itself. Accordingly, discontinued operations did not include revenuesand expenses directly attributable to *Alertec®*up until such time that third party approval was obtained. As a result of theability to obtain third party approval upon closing with Shire, managementdecided to dispose of *Alertec®*through the sale of the Canadian rights to Shire and at that time included *Alertec®* as part of discontinuedoperations on a prospective basis.

 

Interest expense directlyattributable to license obligations included in the transaction has beenallocated to the discontinued operations.

 

The results of discontinuedoperations, presented in the accompanying Consolidated Statements ofOperations, were as follows:

 
| ** **                                                                      | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Revenues                                                                        | ** ** | **$**      | **—** |     | $          | 268      |       | $ | 4,301 |   |
| Operating  (loss) income from discontinued operations                           | ** ** | **—** |       | (92      | )          | 263      |       |
| Income tax  recovery (expense)                                                  | ** ** | **—** |       | 31       |       | (72      | )          |
| Operating  (loss) income from discontinued operations – net of tax         | ** ** | **—** |       | (61      | )          | 191      |       |
| Net gain on  disposal of product rights – net of tax expense $3,606 (2003) | ** ** | **—** |       | —   |       | 8,340    |       |
| Net (loss)  income from discontinued operations – net of tax               | ** ** | **$**      | **—** |     | $          | (61      | )          | $ | 8,531 |   |

 

In 2005, the Companyretroactively modified the disclosures of the cash flows pertaining to thediscontinued operations.  The modification separately discloses theoperating, investing and financing portions of the cash flows attributable toits discontinued operations, which in prior periods were reported on a combinedbasis as a single amount.

 

F-14

----

 

# **7.             INCOMEPER SHARE**

 

Basic income per commonshare is calculated by dividing the net income by the weighted-average numberof Company’s common shares outstanding during the period. Diluted income per commonshare is calculated by dividing the net income by the sum of theweighted-average number of common shares that would have been outstanding ifpotentially dilutive common shares had been issued during the period. Thetreasury stock method is used to compute the dilutive effect of warrants, stockoptions and the Employee Participation Share Purchase Plan. The calculation ofdiluted income per common share excludes any potential conversion of warrants,options and employee participation shares that would increase income per share.

 

The following table setsforth the computation of basic and diluted income per share for the years endedDecember 31:

 
| ** **                                                         | ** ** | **2005**       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Numerator:                                                         |       |           |       |       |       |       |       |
| Net income from continuing operations                              | ** ** | **$**          | **7,784**  |       | $          | 7,977      |       | $ | 4,671 |   |
| Net (loss) income from discontinued  operations                    | ** ** | **—**     |       | (61        | )          | 8,531      |       |
| Net income                                                         | ** ** | **$**          | **7,784**  |       | $          | 7,916      |       | $ | 13,202 |   |
| Denominator:                                                       |       |           |       |       |       |       |       |
| Weighted-average  number of common shares outstanding – basic | ** ** | **41,471,798** |       | 39,886,219 |       | 37,114,648 |       |
| Weighted-average  effect of dilutive securities:                   |       |           |       |       |       |       |       |
| Stock options                                                      | ** ** | **893,984**    |       | 1,168,664  |       | 80,346     |       |
| Weighted-average  number of common shares outstanding - diluted    | ** ** | **42,365,782** |       | 41,054,883 |       | 37,194,994 |       |
|                                                               |       |           |       |       |       |       |       |
| Basic income  per share:                                           |       |           |       |       |       |       |       |
| from continuing operations                                         | ** ** | **$**          | **0.19**   |       | $          | 0.20       |       | $ | 0.13 |   |
| from discontinued operations                                       | ** ** | **—**     |       | —     |       | 0.23       |       |
| ** **                                                         |       | **$**          | **0.19**   |       | $          | 0.20       |       | $ | 0.36 |   |
| Diluted  income per share:                                         |       |           |       |       |       |       |       |
| from continuing operations                                         | ** ** | **$**          | **0.18**   |       | $          | 0.19       |       | $ | 0.13 |   |
| from discontinued operations                                       | ** ** | **—**     | ** ** | **—** |       | 0.23       |       |
| ** **                                                         |       | **$**          | **0.18**   |       | $          | 0.19       |       | $ | 0.36 |   |

# ** **

# **8.             RESTRICTEDCASH**

 

In conjunction with thedivestiture of DRAXIS Pharmaceutica to Shire (see Note 6), $976 of the cashproceeds were held in trust under an escrow agreement. The release of thisamount was dependent upon whether or not claims by Shire were made to theCompany, by certain dates, with respect to any breach of the representationsand warranties made by the Company to Shire or any failure of the Company toperform its obligations under the divestiture agreement. In July 2005, thefinal installment was released from escrow.

# ** **

# **9.             ACCOUNTSRECEIVABLE**

 
| ** **                            | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|
| Trade                                 | ** ** | **$**      | **16,410** |     | $          | 13,970 |   |
| Allowance  for doubtful accounts      | ** ** | **(316**   | )          | (411     | )          |
| Loans to  employees                   | ** ** | **—** |       | 109      |       |
| Income taxes  and R&D tax credits | ** ** | **207**    |       | 56       |       |
| ** **                            |       | **$**      | **16,301** |     | $          | 13,724 |   |

 

F-15

----

 

# **10.          INVENTORIES**

 
| ** **      | ** ** | **2005**  | ** ** | **2004** | ** ** |
|-----------------|------------|-----------|------------|----------|------------|
| Raw  materials  | ** ** | **$**     | **4,576**  |     | $          | 5,491 |   |
| Work-in-process | ** ** | **1,285** |       | 1,501    |       |
| Finished  goods | ** ** | **1,768** |       | 3,166    |       |
| ** **      |       | **$**     | **7,629**  |     | $          | 10,158 |   |

# ** **

# **11.          PROPERTY,PLANT AND EQUIPMENT**

 
| ** **                 | ** ** | **2005**    | ** ** | **2004**   | ** ** |
|----------------------------|------------|-------------|------------|------------|------------|
| Land                       | ** ** | **$**       | **2,424**  | ** ** | $          | 2,342 |   |
| Building                   | ** ** | **17,157**  | ** ** | 15,884     |       |
| Equipment                  | ** ** | **41,770**  | ** ** | 31,694     |       |
| Assets under  construction | ** ** | **3,498**   | ** ** | 8,264      |       |
| ** **                 |       | **64,849**  | ** ** | 58,184     |       |
| Accumulated  depreciation  | ** ** | **(19,197** | **)**      | (14,327    | )          |
| ** **                 |       | **$**       | **45,652** | ** ** | $          | 43,857 |   |

 

Depreciation of property,plant and equipment from continuing operations was $4,200, $3,380 and $2,177,for the years ended December 31, 2005, 2004 and 2003, respectively.

# ** **

# **12.          INTANGIBLEASSETS**

 
| ** **              | ** ** | **2005**   | ** ** |
|-------------------------|------------|------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **              | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Patents and  trademarks | ** ** | **$**      | **457**    | ** ** | **$** | **389** | ** ** | **$** | **68** | ** ** |
| Licenses                | ** ** | **9,793**  | ** ** | **9,512** | ** ** | **281** | ** ** |
| Other                   | ** ** | **215**    | ** ** | **165** | ** ** | **50** | ** ** |
| ** **              | ** ** | **$**      | **10,465** | ** ** | **$** | **10,066** | ** ** | **$** | **399** | ** ** |

 
| ** **              | ** ** | **2004**   | ** ** |
|-------------------------|------------|------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **              | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Patents and  trademarks |       | $          | 441        |   | $ | 331 |   | $ | 110 |   |
| Licenses                |       | 9,453      |       | 8,899 |   | 554 |   |
| Other                   |       | 208        |       | 135 |   | 73 |   |
|                    |       | $          | 10,102     |   | $ | 9,365 |   | $ | 737 |   |

 

Amortization of intangibleassets from continuing operations was $345, $1,077 and $1,110, for the yearsended December 31, 2005, 2004 and 2003, respectively.

# ** **

# **13.          ACCOUNTSPAYABLE AND ACCRUED LIABILITIES**

 
| ** **              | ** ** | **2005**  | ** ** | **2004** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|
| Trade                   | ** ** | **$**     | **4,533**  |     | $          | 5,944 |   |
| Accrued  liabilities    | ** ** | **1,045** |       | 787      |       |
| Employee  related items | ** ** | **3,215** |       | 3,705    |       |
| ** **              |       | **$**     | **8,793**  |     | $          | 10,436 |   |

 

F-16

----

 

# **14.          DEFERREDREVENUES**

 
| ** **                      | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------------------|------------|------------|------------|----------|------------|
| (a)  SpectroPharm product line  | ** ** | **$**      | **10,522** |     | $          | 10,157 |   |
| *(b)  Anipryl®*            | ** ** | **29,893** |       | 29,893   |       |
| (c) Other                       | ** ** | **373**    |       | 195      |       |
| ** **                      |       | **40,788** |       | 40,245   |       |
| Less:  accumulated amortization | ** ** | **36,290** |       | 32,444   |       |
| ** **                      |       | **4,498**  |       | 7,801    |       |
| Less:  current portion          | ** ** | **3,671**  |       | 3,676    |       |
| ** **                      |       | **$**      | **827**    |     | $          | 4,125 |   |

 

Amortization of deferredrevenues totalled $3,701, $5,495 and $6,811 for the years ended December 31,2005, 2004, and 2003, respectively.

## *** ***

## ***(a)          ***SpectroPharm Product Line

In May 2000, the Companyentered an arrangement with GlaxoSmithKline Consumer Healthcare (“GSK”),formerly Block Drug Company (Canada) Limited, with respect to the Company’sSpectroPharm line of dermatology products, which included the sale of productrights to GSK in exchange for a non-refundable fee, the acquisition ofinventory on hand, a supply agreement and a technical services arrangement. Asa result of the Company’s ongoing obligations to GSK pursuant to thisarrangement, the $8,169 of net proceeds from the sale of the product rightshave been deferred and have been recognized as revenue on a straight-line basisover the period to January 31, 2005.

## *** ***

## ***(b)          ***Anipryl®

In December 1997, theCompany entered into an alliance with Pfizer Inc. (“Pfizer”), whereby Pfizerwas granted a perpetual exclusive license to market, sell and distribute *Anipryl®* in exchange for non-refundablefees, royalties based on the worldwide sales of *Anipryl®*, a manufacturing and supply agreement and aresearch collaboration.

 

In December 1999, theCompany and Pfizer amended the terms of the alliance (the “First Amendment”)whereby $9,000 of potential additional non-refundable fees were eliminated inexchange for the Company receiving additional regulatory support for apotential new indication and additional manufacturing data. These potentialadditional non-refundable fees would have become payable if Pfizer hadexercised its right to acquire product registrations following regulatoryapproval of *Anipryl®* indesignated European countries.

 

In December 2001, theCompany and Pfizer further amended the terms of the alliance (the “SecondAmendment”) whereby the Company received a payment of $3,150 in respect ofminimum royalty entitlements for the second and third three-year periods endingDecember 31, 2001 and 2002 and modifications to future royalty entitlements.The Second Amendment also resulted in all rights to *Anipryl®* outside of North America reverting back to theCompany, forfeiture of any additional minimum royalty entitlements and thetermination of any future collaborative research on new indications orformulations for *Anipryl®*.

 

Under the amendedarrangement, the Company is not entitled to receive any additionalnon-refundable fees. The $28,090 in non-refundable fees already received fromPfizer have been deferred and are being recognized as revenue on astraight-line basis over the period to December 31, 2006.

 

F-17

----

 

The portion of the $3,150payment allocated to the modifications of future royalty entitlements has beendeferred and is being recognized as revenue on a straight-line basis over theperiod to December 31, 2013.

 

The portion of the $3,150payment referable to the minimum royalty entitlement for the three-year periodending December 31, 2001 was recognized as revenue in the fourth quarter of2001. The portion referable to the third three-year period ending December 31,2002 was deferred and recognized as revenue on a straight-line basis during2002.

# ** **

# **15.          CREDITFACILITIES**

 

During 2004, the Companycompleted the arrangement of new credit facilities with its bankers, theNational Bank of Canada, to replace all existing facilities at the subsidiarylevel as follows:

 

•                       CDN$15 million or US$equivalent operatingfacility payable within 364 days upon drawing upon the facility. The operatingfacility can be extended by one year upon agreement with the lender. As atDecember 31, 2005, no amount was drawn under this facility.

•                       CDN$10 million or US$equivalent termfacility, repayable in full at the end of the term (June 2007). As at December31, 2005, no amount was drawn under this facility.

 

Interest under the creditfacilities (both term and operating) is based on the bank’s prime lending rateprovided the Company meets certain ratios, which as at December 31, 2005, weremet.

 

These facilities expire inJune 2007.

 

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

# ** **

# **16.          OTHERLIABILITIES**

 

In connection with the discontinuanceof the brachytherapy product line, the Company recorded in selling, general andadministration expenses an amount of $457, of which $252 is payable inquarterly installments of $19 with the first payment on April 30, 2006 and thefinal payment on January 31, 2010.

# ** **

# **17.          MINORITYINTEREST**

 

On April 22, 2004, theCompany completed the acquisition of the 32.7% interest in the Company’smanufacturing subsidiary, DRAXIS Pharma, that was previously owned by SGF SantéInc. (“SGF”). The $9.6 million (CDN$13.0 million) cash acquisition has beenaccounted for by the purchase method of accounting and allocated toidentifiable assets and liabilities based on their estimated fair values asfollows:

 

| Minority interest              |   | $      | 3,992  |   |
|--------------------------------|--------|--------|--------|--------|
| Property,  plant and equipment |   | 6,785  |   |
| Deferred  income tax liability |   | (1,220 | )      |
| Total  purchase price          |   | $      | 9,557  |   |

 

The estimates of fair valuewere determined by the Company’s management based on an independent valuationof Property, plant and equipment.

 

F-18

----

 

# **18.          SHAREHOLDERS’EQUITY**

## *** ***

## ***(a)          ***Common Share Offering

On April 22, 2004, theCompany closed its offering of 3,053,436 units at a price of $4.82 (CDN$6.55)per unit for proceeds net of related expenses of $13,385 (CDN$18,213). Each unitconsists of one common share of the Company and one-half of one share purchasewarrant. Each whole warrant will entitle the holder to acquire one common shareof the Company at a price of CDN$8.50 at any time prior to April 24, 2006.Included as a component of shareholders’ equity is $916, which represents thefair value of the warrants issued. The fair value of the warrants wasdetermined based on the price of the offering using the Black-Scholes optionmodel.

## *** ***

## ***(b)          ***Stock Repurchase Program

On December 8, 2005, theBoard of Directors of the Company authorized the repurchase for cancellation ofup to 3,522,530 of its common shares through a Normal Course Issuer Bid (the“Issuer Bid”), which represented 10% of the public float on December 6,2005.  In accordance with the rules of TSX such purchases may be madebeginning on December 15, 2005 and ending no later than December 14, 2006.

 

During 2005, 75,600 shareshad been repurchased and cancelled at an average price of $4.37 for totalconsideration of $331. The excess of $176 over the stated capital of theacquired shares was deducted from additional paid-in capital.

 

F-19

----

 

# **19.          STOCK-BASEDCOMPENSATION PLANS**

## *** ***

## ***(a)          ***Stock Option Plan

On February 3, 1988, theshareholders approved a stock option plan to permit the Board of Directors togrant options to purchase common shares to directors, officers, employees andarm’s length consultants of the Corporation and subsidiaries so as to linkcorporate compensation to enhanced shareholder value. The Board of Directorsdetermines the price per common share; the number of common shares which may beallotted to each designated director, officer, employee or arm’s lengthconsultant; the period during which any option may be exercised; and all theterms and conditions of the option in accordance with the applicablerequirements of any relevant regulatory authority or stock exchange. Theoptions are exercisable for a period not exceeding 10 years from the date ofthe grant and generally options vest one third on each of the first, second andthird anniversaries of grant.

 

The maximum number ofoptions for issuance under the stock option plan is 7,500,000. The Board ofDirectors has adopted a guideline limiting the aggregate number of commonshares that can be issued at any point in time, either through the exercise ofoptions or the conversion of employee participation shares, to 13% of theCompany’s outstanding common shares. As at December 31, 2005 the aggregatenumber of shares issuable pursuant to outstanding options represented 6.4%(2004 – 6.7%) of the outstanding common shares.

 

The following is a summaryof the maximum number of common shares issuable pursuant to outstanding stockoptions and available for future issuance:

 
| ** **                                  | ** ** | **Outstanding** | ** ** | **Available  for  issuance** | ** ** |
|---------------------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **2005**        | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2005** | ** ** |
|                                        |       |            | ** ** |                         |       |   |   |   |   |
| Balance, beginning of year                  | ** ** | **2,753,232**   | ** ** | 3,097,942                    |       | 3,314,109 |   | 1,177,894 |   |
| Increase (decrease) resulting from:         |       |            | ** ** |                         |       |   |   |   |   |
| Granted                                     | ** ** | **565,000**     | ** ** | 360,000                      |       | 775,000 |   | (565,000 | ) |
| Exercised                                   | ** ** | **(648,279**    | **)**      | (609,177                     | )          | (240,334 | ) | — |   |
| Cancelled                                   | ** ** | **(17,333**     | **)**      | (80,333                      | )          | (255,000 | ) | 17,333 |   |
| Expired                                     | ** ** | **—**      | ** ** | (15,200                      | )          | (495,833 | ) | — |   |
| Balance, end of year                        | ** ** | **2,652,620**   | ** ** | 2,753,232                    |       | 3,097,942 |   | 630,227 |   |
|                                        |       |            | ** ** |                         |       |   |   |   |   |
| Exercisable at December 31                  | ** ** | **1,501,898**   | ** ** | 1,721,565                    |       | 1,911,331 |   |   |   |
|                                        |       |            | ** ** |                         |       |   |   |   |   |
| Weighted-average exercise price of options: |       |            | ** ** |                         |       |   |   |   |   |
| Outstanding, end of year                    | ** ** | **CDN$3.94**    | ** ** | CDN$3.41                     |       | CDN$3.25 |   |   |   |
| Exercisable, end of year                    | ** ** | **CDN$3.65**    | ** ** | CDN$3.40                     |       | CDN$3.39 |   |   |   |
| Granted                                     | ** ** | **CDN$5.79**    | ** ** | CDN$4.67                     |       | CDN$2.42 |   |   |   |
| Exercised                                   | ** ** | **CDN$3.07**    | ** ** | CDN$3.37                     |       | CDN$3.23 |   |   |   |
| Cancelled and Expired                       | ** ** | **CDN$5.06**    | ** ** | CDN$3.03                     |       | CDN$3.28 |   |   |   |

 

F-20

----

 

The following tablesummarizes information about stock options outstanding at December 31, 2005:

 
| ** **                   | ** ** | **Options Outstanding** | ** **   | **Options Exercisable**                                     | ** ** |
|------------------------------|------------|-------------------------|--------------|-------------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number  Outstanding** | *** *** | **Weighted-Average  Remaining  Contractual Life(in years)** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                         |       |                    |         |                                                        |       |   |   |   |   |   |   |
| CDN$2.01 -  $2.50            |       | 572,995                 |         | 5.37                                                        |       | CDN$2.36 |   | 194,772 |   | CDN$2.35 |   |
| CDN$2.51 -  $3.00            |       | 45,833                  |         | 6.31                                                        |       | $ | 2.70 |   | 8,333 |   | $ | 3.00 |   |
| CDN$3.01 -  $3.50            |       | 360,000                 |         | 0.77                                                        |       | $ | 3.14 |   | 346,667 |   | $ | 3.14 |   |
| CDN$3.51 -  $4.00            |       | 627,125                 |         | 0.94                                                        |       | $ | 3.73 |   | 627,125 |   | $ | 3.73 |   |
| CDN$4.01 -  $4.50            |       | 220,000                 |         | 2.14                                                        |       | $ | 4.25 |   | 136,667 |   | $ | 4.22 |   |
| CDN$4.51 -  $5.00            |       | 200,000                 |         | 4.36                                                        |       | $ | 4.70 |   | 56,667 |   | $ | 4.70 |   |
| CDN$5.01 -  $6.65            |       | 626,667                 |         | 5.27                                                        |       | $ | 5.76 |   | 131,667 |   | $ | 5.38 |   |
|                         |       | 2,652,620               |         | 3.36                                                        |       | CDN$3.94 |   | 1,501,898 |   | CDN$3.65 |   |

## *** ***

## ***(b)          ***Deferred Share Unit Plan

Under the Company’s DeferredShare Unit Plan, members of senior management can elect to receive up to 20% ofbase salary and up to 100% of any bonus payable in respect of that year indeferred share units (“DSUs”) in lieu of cash compensation. An election must bemade by December 1 of each year in respect of base salary and bonus for thefollowing year. The elected amount is converted to a number of DSUs equal tothe elected amount divided by the closing price of the common shares on TSX orNASDAQ on December 31 of each year, based on a purchase commitment as ofDecember 1 of the prior year. Participants are not entitled to receive any DSUsuntil cessation of employment with the Company for any reason. The value ofDSUs redeemable by the participants will be equivalent to the market value ofthe common share at the time of redemption. The DSUs must be redeemed no laterthan the end of the first calendar year commencing after the date of cessationof employment. The DSU liability is re-measured at the end of each reportingperiod based on the market price of the Company’s common stock. The netincrease or decrease in the value of the DSUs is recorded as compensation costincluded in selling, general and administration expense. During 2005, as aresult of the change in the value of the DSUs, a recovery in the amount of $117was recorded (2004 – $284 expense; 2003 – $378 expense). During 2005, 9,555(2004 - nil; 2003 - 51,442) DSUs were issued, and none have been redeemed. Inaggregate, as of December 31, 2005 there were 199,868 DSUs (2004 - 190,313;2003 – 190,313) issued and outstanding.

 

F-21

----

 

# **20.          SEGMENTEDINFORMATION AND MAJOR CUSTOMERS**

 

**IndustrySegmentation**

For purposes of operatingdecision-making and assessing performance, management considers that itoperates in three segments: Radiopharmaceuticals, Manufacturing, and Corporateand Other. Executive management assesses the performance of each segment basedon segment income. The segments, particularly operating segments, areidentified as reporting segments based on the distinct management teams,customer base, production process and regulatory requirements of each. TheCorporate segment includes revenues earned via royalties and milestones,inter-segment eliminations and corporate expenses. The accounting policies usedto determine segmented results and measure segmented assets are the same asthose described in the summary of significant accounting policies.

 
| ** **                                        | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| ***PRODUCT SALES REVENUES***                      |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **19,290** | ** ** | $          | 17,172   |       | $ | 14,564 |   |
| Manufacturing                                     | ** ** | **54,743** | ** ** | 46,461     |       | 26,985   |       |
| Corporate  and Other                              | ** ** | **(1,044** | **)**      | (1,940     | )          | (1,014   | )          |
| ** **                                        |       | **$**      | **72,989** |       | $          | 61,693   | ** ** | $ | 40,535 |   |
| ***ROYALTY AND LICENSING REVENUES***              |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **9**      | ** ** | $          | —   |       | $ | 1,521 |   |
| Manufacturing                                     | ** ** | **—** | ** ** | —     |       | —   |       |
| Corporate  and Other                              | ** ** | **6,435**  | ** ** | 7,627      |       | 7,137    |       |
| ** **                                        |       | **$**      | **6,444**  |       | $          | 7,627    | ** ** | $ | 8,658 |   |
| ***TOTAL REVENUES***                              |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **19,299** | ** ** | $          | 17,172   |       | $ | 16,085 |   |
| Manufacturing                                     | ** ** | **54,743** | ** ** | 46,461     |       | 26,985   |       |
| Corporate  and Other                              | ** ** | **5,391**  | ** ** | 5,687      |       | 6,123    |       |
| ** **                                        |       | **$**      | **79,433** |       | $          | 69,320   | ** ** | $ | 49,193 |   |
| ***PRODUCT GROSS MARGIN***                        |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **11,593** | ** ** | $          | 10,028   |       | $ | 8,631 |   |
| Manufacturing                                     | ** ** | **14,628** | ** ** | 11,530     |       | 3,393    |       |
| Corporate  and Other                              | ** ** | **(68**    | **)**      | 342        |       | 789      |       |
| ** **                                        |       | **$**      | **26,153** |       | $          | 21,900   | ** ** | $ | 12,813 |   |
| ***SELLING, GENERAL AND ADMINISTRATION EXPENSE*** |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **4,660**  | ** ** | $          | 3,906    |       | $ | 2,944 |   |
| Manufacturing                                     | ** ** | **5,086**  | ** ** | 3,492      |       | 2,309    |       |
| Corporate  and Other                              | ** ** | **6,439**  | ** ** | 5,868      |       | 4,651    |       |
| ** **                                        |       | **$**      | **16,185** |       | $          | 13,266   | ** ** | $ | 9,904 |   |
| ***RESEARCH AND DEVELOPMENT EXPENSE***            |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **2,103**  | ** ** | $          | 1,948    |       | $ | 1,594 |   |
| Manufacturing                                     | ** ** | **—** | ** ** | —     |       | —   |       |
| Corporate  and Other                              | ** ** | **—** | ** ** | —     |       | —   |       |
| ** **                                        |       | **$**      | **2,103**  |       | $          | 1,948    | ** ** | $ | 1,594 |   |
| ***SEGMENT INCOME (LOSS)(1)***                    |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **4,839**  | ** ** | $          | 4,174    |       | $ | 5,614 |   |
| Manufacturing                                     | ** ** | **9,542**  | ** ** | 8,038      |       | 1,084    |       |
| Corporate  and Other                              | ** ** | **(72**    | **)**      | 2,101      |       | 3,275    |       |
| ** **                                        |       | **$**      | **14,309** |       | $          | 14,313   | ** ** | $ | 9,973 |   |
| ***DEPRECIATION AND AMORTIZATION***               |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **1,047**  | ** ** | $          | 949      |       | $ | 843 |   |
| Manufacturing                                     | ** ** | **3,105**  | ** ** | 2,417      |       | 1,448    |       |
| Corporate  and Other                              | ** ** | **393**    | ** ** | 1,091      |       | 996      |       |
| ** **                                        |       | **$**      | **4,545**  |       | $          | 4,457    | ** ** | $ | 3,287 |   |
| ***OPERATING INCOME (LOSS)(2)***                  |       |       | ** ** |       |       |     |       |
| Radiopharmaceuticals                              | ** ** | **$**      | **3,792**  | ** ** | $          | 3,225    |       | $ | 4,771 |   |
| Manufacturing                                     | ** ** | **6,437**  | ** ** | 5,621      |       | (364     | )          |
| Corporate  and Other                              | ** ** | **(465**   | **)**      | 1,010      |       | 2,279    |       |
| ** **                                        |       | **$**      | **9,764**  |       | $          | 9,856    | ** ** | $ | 6,686 |   |

 

----

*(1)**   **Segment income(loss) fromcontinued operations before depreciation and amortization, financial expense,foreign exchange loss, other income, income taxes and minority interest.*

*(2)**   **Segment income (loss) fromcontinuing operations before financial expense, foreign exchange loss, otherincome, income taxes and minority interest.*

* *
| ***IDENTIFIABLE ASSETS*** |       |       |       |   |   |   |   |
|---------------------------|------------|------------|------------|--------|--------|--------|--------|
| Radiopharmaceuticals      | ** ** | **$**      | **12,340** |   | $      | 12,354 |   | $ | 11,424 |   |
| Manufacturing             | ** ** | **52,664** |       | 50,103 |   | 40,953 |   |
| Corporate  and Other      | ** ** | **30,816** |       | 26,328 |   | 24,176 |   |
| ** **                |       | **$**      | **95,820** |   | $      | 88,785 |   | $ | 76,553 |   |

 

F-22

----

 
| **Geographic Segmentation** | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|------------|------------|----------|------------|----------|------------|
| ***REVENUES(3)***           |       |       |       |     |       |     |       |
| Canada                      | ** ** | **$**      | **39,026** |     | $          | 33,609   |       | $ | 22,755 |   |
| United  States              | ** ** | **39,612** |       | 35,310   |       | 26,031   |       |
| Other                       | ** ** | **795**    |       | 401      |       | 407      |       |
| ** **                  |       | **$**      | **79,433** |     | $          | 69,320   |       | $ | 49,193 |   |

* *

----

*(3)**   **Revenues are attributable tocountries based upon the location of the customer.*

 

***LONG-LIVED ASSETS***

 

Substantiallyall of the Company’s property, plant and equipment, goodwill and intangibleassets are located in Canada.

*** ***
| **Expenditures for Property,  Plant and Equipment** | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Radiopharmaceuticals                                | ** ** | **$**     | **461**    |     | $          | 835      |       | $ | 383 |   |
| Manufacturing                                       | ** ** | **4,119** |       | 3,928    |       | 3,138    |       |
| Corporate  and Other                                | ** ** | **39**    |       | 38       |       | 15       |       |
| ** **                                          |       | **$**     | **4,619**  |     | $          | 4,801    |       | $ | 3,536 |   |

 
| **Product Sales Revenues  By Major Product Groups** | ** ** | **2005**   | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Radiopharmaceuticals                                | ** ** | **$**      | **19,290** |     | $          | 17,172   |       | $ | 14,564 |   |
| Manufacturing  - Sterile                            | ** ** | **41,488** |       | 31,270   |       | 15,959   |       |
| Manufacturing  - Non-Sterile                        | ** ** | **13,255** |       | 15,191   |       | 11,026   |       |
| Corporate  and Other                                | ** ** | **499**    |       | 22       |       | 986      |       |
| Inter-segment  eliminations                         | ** ** | **(1,543** | **)**      | (1,962   | )          | (2,000   | )          |
| ** **                                          |       | **$**      | **72,989** |     | $          | 61,693   |       | $ | 40,535 |   |

 
| **Major Customers** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Customer A          | ** ** | **23.0** | %          | 20.0     | %          | 15.0     | %          |
| Customer B          | ** ** | **22.0** | %          | 18.0     | %          | 15.0     | %          |
| Customer C          | ** ** | **13.0** | %          | 17.0     | %          | 11.0     | %          |
| ** **          |       | **58.0** | **%**      | 55.0     | %          | 41.0     | %          |

 

F-23

----

 

# **21.          COMMITMENTSAND CONTINGENCIES**

** **

**Operating Leases and ServiceContracts**

The operating leases relateto the rental of office space, office equipment and some ancillary lab andproduction related equipment. Service contracts relate to a portion ofinformation services outsourced to a third party.

** **

**Royalty and Milestone Payments**

The Company is obligated tomake certain royalty payments based on related product sales and milestonepayments based on the achievement of certain specified events.

 

The Company is committedunder various contractual commitments requiring minimum annual payments asfollows:

 
| ** **                     | ** ** | **Payment due by end of:** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**    | ** ** | **Total**                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
| Operating leases               |       | 66                         |       | 66 |   | — |   | — |   | — |   | — |   |
| Service contracts              |       | 447                        |       | 192 |   | 192 |   | 63 |   | — |   | — |   |
| Milestone obligations          |       | 1,558                      |       | 308 |   | 327 |   | 327 |   | 327 |   | 269 |   |
| Total contractual  obligations |       | 2,071                      |       | 566 |   | 519 |   | 390 |   | 327 |   | 269 |   |

 

All contractual obligationsrelated to 2005 and 2004 were fully paid as of December 31, 2005 and December31, 2004, respectively.

** **

**Agreement Pertaining to DRAXISPharma**

All potential contingent paymentobligations to SGF expired on April 22, 2005, in connection with theacquisition of the 32.7% interest in DRAXIS Pharma from SGF, with no furtherpayment required.

** **

**Legal Proceedings**

From time to time, theCompany becomes involved in legal proceedings and claims which arise in theordinary course of business.

 

The Company considers thatthe ultimate liability with respect to any known actions will not materiallyaffect the business, financial position, results of operations or cash flows ofthe Company.

 

In July 2005, a claim wasfiled before the Ontario Superior Court of Justice against the Company togetherwith other defendants alleging that *Permax®*,a drug that the Company distributed in Canada for a third party manufacturerprior to July 2003, causes “compulsive/obsessive behaviour, includingpathological gambling”. The plaintiff is seeking to have this action certifiedas a class action. The Company believes this claim against it is without meritand intends to vigorously defend this proceeding and any motion forcertification. No amounts have been accrued in the accounts pursuant to theclaim.

 

F-24

----

 

# **22.          RELATEDPARTY TRANSACTION**

 

Significant related partytransactions and balances in the accompanying financial statements are asfollows:

 
| ** **                                                                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Rent paid to a company jointly controlled  by a member of the Board of Directors included in selling, general and  administration expenses | ** ** | **$**    | **123**    |     | $          | 125      |       | $ | 130 |   |
|                                                                                                                                            |            |          |            |          |            |          |            |  |  |  |

 

The aforementionedtransaction is in the normal course of operations, is measured at the exchangeamount, which is the amount of consideration established and agreed to by therelated parties, and has been fully paid as of the balance sheets date.

# ** **

# **23.          FINANCIALINSTRUMENTS**

 

**Fair Value**

The fair values of cash,accounts receivable, accounts payable and accrued liabilities are equivalent totheir carrying values because of the short-term maturity of those instruments.The Company is not party to any derivative instruments.

** **

**Credit Risk**

The Company is subject tocredit risk through trade receivables and short-term cash investments. Creditrisk with respect to trade receivables is limited given the creditworthiness ofthe counterparties. The Company invests its excess liquidity in high qualitygovernment securities and short-term commercial paper, bank deposits and moneymarket mutual funds, which are invested in high quality, short-term securities.

** **

**Currency Risk**

The Company’s foreignexchange exposure for accounting purposes mainly relates to theU.S.-denominated monetary assets of the Canadian operations of the Company.Changes in the exchange rate may result in a decrease or increase in theforeign exchange gain or loss. The Company does not actively hedge thisexposure but reduces the exposure by maintaining the minimum level ofU.S.-denominated cash available to meet its short-term cash requirements.

# ** **

# **24.          COMPARATIVEINFORMATION**

The Company has reclassifiedcertain prior years’ information to conform with the current year’spresentation.

 

F-25

----