UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 20-F/A

(Mark One)

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

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

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

o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-17434

DRAXIS HEALTH INC.

(Exact name of Registrant as specified in its charter)

CANADA

(Jurisdiction of incorporation or organization)

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

(Address of principal executive offices)

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

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

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

NONE

(Title of Class)

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

NONE

(Title of Class)

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

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

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

Yes o No x

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

Yes o No x

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 x No o

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

Item 17 o Item 18 x

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

Yes o No x

Explanatory Note

PART I

Item 5. Operating and Financial Review and Prospects

PART III

ITEM 19 Exhibits

	12.1*	Certification of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002
	12.2*	Certification of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002
	13.1*	Certification of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002
	13.2*	Certification of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002

Explanatory Note

DRAXIS Health Inc. (the “Company”) is filing this Amendment No. 1 on Form 20-F/A to its Form 20-F for the year ended December 31, 2006, originally filed on March 30, 2007 (“Original Form 20-F”) for the purpose of amending Item 5 within the Original Form 20-F to remove the EBITDA references. We hereby replace Item 5 beginning on page 52 of the Original Form 20-F with the amended Item 5 included in this Amendment No. 1.

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

Item 5. Operating and Financial Review and Prospects

The following discussion and analysis of the financial condition and results of operations of DRAXIS Health Inc. (the “Company”) should be read in conjunction with the Company’s audited consolidated financial statements for the referenced periods and notes thereto.

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

Readers are cautioned not to place undue reliance on forward-looking statements contained in the following Operating and Financial Review and Prospects since actual results could differ materially from what we expect if known or unknown risks affect our business or if an estimate or assumption turns out to be inaccurate. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See “Forward-Looking Statements” on page 75 of the Original Form 20-F, filed with the U.S. Securities and Exchange Commission on March 30, 2007.

The discussion and analysis contained in the following Operating and Financial Review of Prospects are as of February 23, 2007.

Overview

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

The Company is increasingly focusing on the use of GAAP measures both in reporting externally and monitoring management performance. Specifically, the key metrics the Company uses to evaluate divisional and consolidated performance are gross profit margin, operating income, net income and operating cash flow.

Termination of Amortization of Anipryl® Deferred Revenues

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

2006 Financial Results

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

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

· During 2005, the Company benefited from a contingent milestone payment from Shire BioChem Inc. (“Shire”), which contributed approximately 1.4 cents to EPS for 2005.

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

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

Consolidated Results of Operations
Years ended December 31,
(in thousands of U.S. dollars except share related data) (U.S. GAAP)

	2006			2005			2004

Revenues
Product sales	$	83,545		$	72,989		$	61,693
Royalty and licensing	2,121			3,143			4,326
Anipryl® deferred revenues	3,301			3,301			3,301
	$	88,967		$	79,433		$	69,320

Product gross margin	$	36,462		$	26,153		$	21,900
% of Product sales revenues	*43.6*		%	35.8		%	35.5		%
Royalty and licensing revenue	5,422			6,444			7,627
SG&A	(19,425		)	(16,185		)	(13,266		)
% of Product sales revenues	*-23.3*		%	-22.2		%	-21.5		%
R & D	(2,372		)	(2,103		)	(1,948		)
Depreciation and amortization	(5,135		)	(4,545		)	(4,457		)
Operating income	14,952			9,764			9,856
% of Total revenues	*16.8*		%	12.3		%	14.2		%

Financial
—Foreign exchange translation	282			(398		)	(374		)
—Other	347			(29		)	(296		)
Other income	—			—			96
Income tax provision	(4,034		)	(1,553		)	(1,301		)
Minority interest	—			—			(4		)
Loss from discontinued operations	—			—			(61		)
Net income	$	11,547		$	7,784		$	7,916

Net income (loss)
—From continuing operations	$	11,547		$	7,784		$	7,977
—From discontinued operations	—			—			(61		)
	$	11,547		$	7,784		$	7,916

Basic income (loss) per share
—From continuing operations	$	0.28		$	0.19		$	0.20
—From discontinued operations	—			—			(0.00		)
	$	0.28		$	0.19		$	0.20

The following provides a high level overview of the consolidated results of the Company. Please refer to the segmented results for more detailed explanations.

Comparison of Years Ended December 31, 2006 and 2005

The financial results for the year ended December 31, 2005 were negatively affected by the extended shutdown period that occurred in the sterile products area of the Company’s contract manufacturing. Accordingly, all comparative variances on a consolidated basis and in the contract manufacturing section reflect the impact of the extended shutdown in 2005.

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

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

Radiopharmaceutical product sales grew 12% driven by radioiodine sales in the U.S. including diagnostic capsules which were introduced in the U.S. market place in the second quarter of 2006.

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

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

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

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

Depreciation and amortization expense for the year ended December 31, 2006 increased by 13% over 2005 following the commencement of depreciation charges on the Company’s contract manufacturing capital upgrades.

The majority of the costs of the Canadian operations are denominated in Canadian dollars. As the level of revenues denominated in U.S. dollars and other foreign currencies increases relative to the underlying cost structure, the Company’s overall gross profit margins and SG&A expenses are affected. The impact is not material on the overall financial performance for the year.

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

Net financial income for 2006 was $347,000 compared to an expense of $29,000 in 2005 due to significant interest income generated from surplus cash.

For the year ended December 31, 2006, the Company recorded an income tax expense, expressed as a percentage of pre-tax earnings of 26%. The Company’s effective tax rate will vary from the statutory tax rate depending on the mix of income combined with the statutory rates in the respective jurisdictions in which the Company operates. The level of tax credits generated from R&D activities in the radiopharmaceutical business also has the impact of lowering effective tax rates. Benefits related to loss carryforwards not previously recognized were not material in 2006 compared to 2005.

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

The basic weighted average number of common shares outstanding during 2006 was 41,592,507 and increased from 41,471,798 for 2005, primarily as a result of the exercise of stock options offset by the shares purchased for cancellation under the Company’s Normal Course Issuer Bid.

Comparison of Years Ended December 31, 2005 and 2004

Consolidated revenues of $79.4 million for the year ended December 31, 2005 represented an increase of 15% compared with 2004.

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

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

Since increased revenues related to growth in the sterile contract manufacturing operations and sterile product margins generally are lower than radiopharmaceutical margins, the overall result is that the increased volumes do not result in an overall increase to consolidated gross profit margins. Accordingly, the Company believes that product gross margins are best reviewed at the segmental level.

Absolute product gross margins increased for the year ended December 31, 2005 relative to 2004 as a result of a stronger Canadian dollar and its positive impact on margins for products priced in Canadian dollars. However, the impact is largely offset by the increase in SG&A costs strictly related to foreign currency translation. Since almost all SG&A expenses are incurred in Canadian dollars, the strengthening of the Canadian dollar beginning in early 2004 has resulted in an increase in SG&A expenses in 2005 relative to 2004. Changes to foreign exchange rates did not, however, have a material impact on product gross margin percentages or net income.

For the year ended December 31, 2005 compared with 2004, royalty and license revenues decreased 16%; however, the impact of the completion of the amortization of the deferred revenue related to the SpectroPharm product line as of January 31, 2005 was partially offset by the receipt of $0.9 million in contingent milestones from Shire, which the Company earned in the first quarter of 2005.

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

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

For the year ended December 31, 2005, R&D costs increased 8% relative to 2004 due to activities related to FIBRIMAGE® and INFECTON®. The increased expenditures were primarily attributable to clinical trial activities for INFECTON®, coupled with costs associated with the detailed review of FIBRIMAGE® Canadian Phase III results and the assessment of optimal Phase III protocols for the U.S. by the expert medical advisory panel assembled by the Company.

Depreciation and amortization expenses for the year ended December 31, 2005 increased 1% over 2004 following the completion of the installation and the validation of the Company’s second lyophilization unit. This expense was offset by the completion of amortization of intangibles related to the SpectroPharm product line.

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

Interest expense and bank charges decreased for the year 2005 compared to 2004 due to repayment of third party debt at the end of 2004.

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

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

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

RADIOPHARMACEUTICALS
Years ended December 31,
(in thousands of U.S. dollars) (U.S. GAAP)

	2006			2005			2004

Revenues
Product sales	$	21,508		$	19,290		$	17,172
Royalty and licensing	(3		)	9			—
	$	21,505		$	19,299		$	17,172

Product gross margin	13,433			11,593			10,028
% of Product sales revenues	*62.5*		%	*60.1*		%	*58.4*		%
SG&A	(4,380		)	(4,660		)	(3,906		)
R & D	(2,372		)	(2,103		)	(1,948		)
Depreciation and amortization	(1,110		)	(1,047		)	(949		)
Operating income	$	5,568		$	3,792		$	3,225
% of Revenues	*25.9*		%	19.6		%	18.8		%

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

Comparison of Years Ended December 31, 2006 and 2005

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

On January 13, 2006, the Company received approval from the FDA regarding its supplemental new drug application for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral. These diagnostic Sodium Iodide I-131 capsules are intended to be used by physicians to perform radioactive iodide uptake tests to evaluate thyroid function prior to treatment with stronger therapeutic doses of Sodium Iodide I-131. The Company introduced the new diagnostic capsules into the U.S. marketplace during the second quarter of 2006 to qualified/approved nuclear physicians and/or radiopharmacists.

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

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

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

Operating income increased 47% to $5.6 million for 2006 as compared to 2005 driven by increased volumes and margins as described above.

Depreciation and amortization expense for this segment was relatively unchanged in nominal dollars in 2006 compared to the year ended December 31, 2005.

Radiopharmaceutical Product Development Strategy

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

The following summarizes the status of current significant initiatives:

DRAXIMAGE® Sestamibi

As announced on February 2, 2007, DRAXIMAGE submitted an ANDA to the FDA for its generic kit for the preparation of Tc-99m Sestamibi for injection (“DRAXIMAGE® Sestamibi”), a nuclear medicine imaging agent used in myocardial perfusion imaging (“MPI”) to evaluate blood flow to the heart in patients undergoing cardiac tests.

According to AMR/Arlington Medical Resources, in 2005 there were more than 7 million cardiac studies conducted in the U.S. out of a total of over 15 million nuclear medicine procedures, making MPI the most widely performed nuclear medicine scan. Recent market research indicates that existing MPI products generate revenues in excess of $500 million annually in the U.S. and that the imaging agent most often used in conducting MPI procedures is Sestamibi labelled with the radioactive isotope Tc-99m.

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

Technetium Generators

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

European Entry

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

initiate the Mutual Recognition Procedure (“MRP”) in pursuit of further regulatory approvals for this product in several additional European Union countries.

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

INFECTON®

For the medium term, the key opportunity being pursued by DRAXIMAGE is the continued development of INFECTON®, a novel diagnostic radiopharmaceutical product for imaging infection. Three Phase II clinical trials were completed and a fourth was discontinued due to a change of market focus. Studies to define the target market population and appropriate clinical trial applications are now being used to guide preparations for further development studies. An expert panel, comprised of respected nuclear medicine specialists and microbiologists, was assembled and this expert panel reviewed the preliminary scientific and clinical data together with the outcome of the market research studies. The role of the expert panel was to assess the results to date, review potential target markets, and advise DRAXIMAGE on the design of future clinical studies and appropriate indications. The preliminary report of the expert panel recommended that the product be reformulated for orthopaedic-related indications and the assessment of such potential formulations is under way.

Others

DRAXIMAGE has also identified additional new product opportunities in the area of non-radioactive contrast media that are used in the medical imaging field and is pursuing potential product development strategies to leverage both its position in the marketplace and its preferred access to appropriate production process expertise. Contrast media products are injectable liquids produced in highly-specialized cGMP sterile production facilities, such as those in place at DRAXIS’ facilities that are currently used to produce certain diagnostic imaging products marketed by DRAXIMAGE. The North American market for contrast media has been estimated to be valued at approximately $1.6 billion and it is believed to be growing, driven largely by the continued growth of computer tomography (“CT”) and enhanced magnetic resonance imaging (“MRI”) procedures.

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

DRAXIMAGE will provide I-131 MIBG for two clinical trials approved by the FDA under a recently submitted Investigational New Drug (“IND”) application. One trial is a Phase II study in which I-131 MIBG will be administered with intensive chemotherapy and autologous stem cell rescue for high risk neuroblastoma patients. The second trial is a Phase I study in which irinotecan and vincristine, two common chemotherapy agents, will be administered in combination with I-131 MIBG to determine safety and tolerability in patients with resistant/relapsed high risk neuroblastoma.

Comparison of Years Ended December 31, 2005 and 2004

Revenues for the year ended December 31, 2005 increased 12% compared with 2004, primarily as a result of higher product sales from radioiodine products and, specifically, Sodium Iodide I-131 sales to the U.S. The increase was related to higher volumes resulting from greater U.S. market penetration.

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

regulatory approvals for this diagnostic imaging product in additional European Union countries. This approval was a key milestone in the strategic plan to introduce several additional DRAXIMAGE branded products into a number of European markets.

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

R&D 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 increased expenditures were mainly for clinical trial activities for INFECTON® coupled with costs associated with the ongoing detailed review of FIBRIMAGE® Canadian Phase III results and activities of the expert medical panel related to the strategy for the further product development and design and assessment of Phase III clinical trial protocols for the U.S.

The report and recommendations of this expert panel were used to assess the strategy for further development of FIBRIMAGE® and design and assessment of Phase III clinical trial protocols for the U.S. No significant work related to FIBRIMAGE® took place following the recommendations of the expert panel in 2006.

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

The Company incurred approximately $457,000 of one-time costs associated with the exit of the brachytherapy business during 2005. Over 60% of the costs incurred related to accrual of license termination costs related to the business and is included in SG&A expense. The remainder of the exit costs related to unused inventory components is included in cost of goods sold. The majority of capital equipment used in the BrachySeed® product line, specifically the robotic equipment, is being redeployed in both the radiopharmaceutical and contract manufacturing segments.

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

CONTRACT MANUFACTURING
Years ended December 31,
(in thousands of U.S. dollars) (U.S. GAAP)

	2006			2005			2004

Revenues
Product sales	$	64,731		$	54,743		$	46,461

Product gross margin	23,215			14,628			11,530
% of Product sales revenues	*35.9*		%	26.7		%	24.8		%
SG&A	(6,487		)	(5,086		)	(3,492		)
Depreciation and amortization	(3,688		)	(3,105		)	(2,417		)
Operating income	$	13,040		$	6,437		$	5,621
% of Revenues	*20.1*		%	11.8		%	12.1		%

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

Comparison of Years Ended December 31, 2006 and 2005

As stated in prior disclosures, beginning in March 2006, production run rates in the sterile area were back at levels expected for the contract manufacturing operations prior to the shutdown issues of late 2005 and actually exceeded previous normalized levels in part due to the contribution of the second lyophilization unit, which came on line in 2005. The impact of the extended shutdown in 2005 also negatively affected results for the fourth quarter of 2005. Since the shutdown for 2006 was completed in the third quarter of 2006 as planned, fourth quarter results for 2006 as compared to 2005 are significantly stronger.

For the year ended December 31, 2006, revenues increased by $10 million or 18% over 2005. The increase was due to increased commercial production of Hectorol® Injection for Genzyme Corporation (“Genzyme”), growth in GlaxoSmithKline (“GSK”) volumes and increases in lyophilized product production.

For the year ended December 31, 2006, sterile volumes accounted for 80% of product revenues compared to 76% for 2005.

Product gross margin percentage for the year ended December 31, 2006 increased to 36% compared to 27% for 2005, driven by a higher ratio of sterile to non-sterile product revenues and the dilutive impact of the extended shutdown on 2005 product gross margins. The extended shutdown period in 2005 negatively affected product gross margin percentage by at least 5% during the second half of 2005.

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

Depreciation and amortization for the year ended December 31, 2006 increased 19% over 2005, due principally to completed capital projects in 2005, which provided for increased lyophilization and autoclave capacity.

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

While the Company’s success has been driven by its strategy to focus on higher margin sterile products, the Company also believes there is opportunity to benefit from the unused capacity in its non-sterile area. The Company is currently in the advanced stages of negotiations to secure significant new non-sterile business but has not yet concluded contractual arrangements for such business. It is difficult to predict when contractual arrangements will be finalized if the negotiations are successful as such arrangements can take months to negotiate and close. Disclosure of the nature of any contractual arrangements will be made upon signing of a definitive agreement.

Comparison of Years Ended December 31, 2005 and 2004

The Company had originally planned to shut down its sterile operations in contract manufacturing for a period of two to three weeks for regular maintenance in the third quarter of 2005, as is its normal practice. Near the end of this planned shutdown, it became necessary to upgrade additional pieces of equipment in the sterile area, including in its lyophilized products area. This required further cleaning and validation of the facility’s sterile core, thus extending the planned shutdown period to approximately seven weeks. The Company took these significant measures as a result of its internal quality standards. However, as a result of having to recalibrate sterile production schedules based on discussions with clients, which continued into mid to late November 2005, the quality control process required for sterile products prior to shipment, and a delay in receiving component parts from a third party manufacturer in the fourth quarter of 2005, product sales in the second half of 2005 were negatively impacted relative to 2004. However, production levels in the sterile area returned to pre-shutdown levels by November 2005.

Revenues for the year ended December 31, 2005 increased $8.3 million or 18% over 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 and products under the Company’s GSK contract. GSK production rose throughout 2004 as GSK obtained regulatory approvals for products manufactured by the Company in additional foreign markets. Throughout 2004 and into 2005, the Company increased its output capacity through additional production shifts for its sterile business and intends to continue to do so as a result of increasing demand.

Sterile products have accounted for all of the product sales growth on a year-to-date basis. Sterile products represented 76% of manufacturing revenues on a year-to-date basis in 2005 compared to 67% for 2004.

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

Product transfer and validation activities are necessary as a precursor to significant commercial volumes and do not create significant revenues, although they consume significant available capacity. Revenues from the second lyophilization unit increased beginning in 2006 and are expected to increase more significantly into 2007 since the Company refocused activities back to new product introductions and new contract negotiations in 2006.

Product gross margin percentage for the year ended December 31, 2005 increased to 27% from 25% compared to 2004. The increases were related to volume growth, principally of higher margin sterile products, that had taken place prior to the extended shutdown period. The volume growth was made possible by increasing the capacity for manufacturing sterile products through the introduction of additional production

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

Excluding the impact of foreign currency translation, the increase in SG&A expenses for the year ended 2005 compared to 2004 related to the investment in process improvement initiatives and severance costs of $250,000 related to steps taken to reduce the overhead cost structure in contract manufacturing. The Company has embarked on process improvement initiatives aimed at enhancing information systems and information technology to improve efficiency and productivity in the key processes of production planning, manufacturing and quality control product release. We believe the process improvement initiatives will, over time, increase throughput of volumes within the existing manufacturing footprint and thereby increase capacity. Furthermore, the Company expects to increase operating margins over time through the application of more efficient processes.

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

Depreciation and amortization increased 29% for the year ended December 31, 2005 over 2004, due principally to completed capital projects including additional autoclave capacity, and following the completion of the installation and validation of the Company’s second lyophilization unit in the second quarter of 2005.

The Company announced on September 1, 2005 that it renewed its production outsourcing arrangement with Pfizer Canada Inc., Pfizer Consumer Healthcare division. The new three-year manufacturing agreement became effective as of January 1, 2005 and will allow the Company to continue to produce several non-prescription products as one of a select number of approved suppliers to Pfizer Consumer Healthcare Canada. On December 20, 2006 the Company was advised that Johnson & Johnson, Inc. had purchased Pfizer’s Consumer Healthcare business and that the agreement was assigned to Johnson & Johnson, Inc.

CORPORATE AND OTHER
(in thousands of U.S. dollars) (U.S. GAAP)

	2006			2005			2004

Revenues
Product sales	$	295		$	499		$	274
Intercompany eliminations	$	(2,989	)	$	(1,543	)	$	(2,214	)
Royalty and licensing	2,124			3,134			4,326
Anipryl® deferred revenues	3,301			3,301			3,301
	$	2,731		$	5,391		$	5,687

Product gross margin	(186		)	(68		)	342
% of Product sales revenues	NM			NM			NM
SG&A	(8,558		)	(6,439		)	(5,868		)
Depreciation and amortization	(337		)	(393		)	(1,091		)
Operating (loss) income	$	(3,656	)	$	(465	)	$	1,010
% of Revenues	*-133.9*		%	-8.6		%	17.8		%

The Corporate and Other segment comprises: amortization of deferred revenues, royalties and expenses associated with the Company’s business agreements with Pfizer Inc. with respect to Anipryl®; revenues related to royalties and milestones from Shire in connection with the divestiture of DRAXIS Pharmaceutica; non-allocated corporate expenses and intercompany eliminations. The Company follows a policy of not allocating its central corporate expenses to its operating business segments.

Comparison of Years Ended December 31, 2006 and 2005

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

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

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

Comparison of Years Ended December 31, 2005 and 2004

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

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

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

SG&A expenses increased $571,000 for the year ended 2005 compared with 2004 due to incremental spending on corporate business development activities, regulatory compliance costs related to the Sarbanes-Oxley Act of 2002 and the impact of foreign exchange in the translation of Canadian denominated costs to U.S. reporting dollars. Aside from the impact of foreign currency, none of the factors noted increased SG&A expenses by more than $200,000 individually. As a result of the strengthening of the Canadian dollar versus the U.S. dollar since early 2004, approximately $438,000 of the SG&A expenses for 2005 were related solely to foreign currency translation.

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

LIQUIDITY AND CAPITAL RESOURCES
(in thousands of U.S. dollars) (U.S. GAAP)

	2006			2005			2004

Cash and cash equivalents	$	21,446		$	12,390		$	5,926
Restricted cash	—			—			$	428
Non-financial working capital (net)(1)	$	21,247		$	18,890		$	18,397
Total debt (current and long-term)	—			—			—

Cash flows from operating activities	$	16,450		$	9,717		$	5,129
Cash flows used in investing activities	$	(5,993	)	$	(4,380	)	$	(4,290	)

(1) Excluding cash and cash equivalents, restricted cash, current portion of deferred revenues and customer deposits.

	Feb 23, 2007		2006		2005		2004

Common shares issued and outstanding	41,837,140		41,522,138		41,588,005		41,015,326
Warrants issued and outstanding(2)	—		—		1,526,718		1,526,718
Stock options outstanding	2,362,993		2,257,995		2,652,620		2,753,232
Outstanding options as a % of outstanding shares	5.6	%	5.4	%	6.4	%	6.7	%

(2) Each whole warrant entitled the holder to acquire one common share at a price of CDN$8.50, subject to certain adjustments, any time prior to April 24, 2006. All warrants expired unexercised on April 24, 2006.

Cash and cash equivalents as of December 31, 2006 totalled $21.4 million as compared with $12.4 million as of December 31, 2005 and $5.9 million as at December 31, 2004. The increase is attributable to the increasing cash earnings of the Company and proceeds from the exercise of stock options offset by capital expenditures and funds used to buy back the Company’s shares under the 2006 Issuer Bid. In management’s opinion, the Company has sufficient funds to meet its present working capital requirements.

The Company follows a policy of investing its surplus cash resources in high quality, liquid, short-term commercial paper and government treasury bills and money market mutual funds that invest in high quality short-term securities. All investments as of December 31, 2006, 2005 and 2004 had less than three months maturity. As at December 31, 2006 there were no restrictions on the flow of these funds nor have any of these funds been committed in any way.

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

Non-financial working capital, comprising accounts receivable, inventories, prepaid expenses, current deferred income tax assets, accounts payable and accrued liabilities, as at December 31, 2006 increased compared to December 31, 2005 and December 31, 2004 due mainly to increased receivable levels related to volume growth and timing of collection of receivables.

Capital expenditures for the year ended December 31, 2006 are mainly attributable to expenditures to improve operating efficiencies in production areas, increase manufacturing capacity and infrastructure upgrades, namely to the Company’s information technology and SAP platforms. Infrastructure upgrade expenditures from existing programs are expected to continue into the first half of 2007. Capital expenditures for 2004 and 2005 were mainly to due to the installation and validation of the Company’s second lyophilization unit.

All third party debt was repaid at the end of 2004 (see Bank Financing).

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

The following table summarizes the Company’s major contractual cash obligations as of December 31, 2006:

	Payment due by end of:
Contractual Obligations	Total	2007	2008	2009	2010	2011	Thereafter
Operating leases	45	16	16	11	2	—	—
Service contracts	370	271	82	17	—	—	—
Milestone obligations	1,100	150	150	150	150	250	250
Total contractual obligations	1,515	437	248	178	152	250	250

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

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

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

Bank Financing

The Company has the following credit facilities available, expiring June 2007:

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

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

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

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

Amounts drawn under both credit facilities would be secured by specific assets of DRAXIS Specialty Pharmaceuticals Inc., and shares and guarantees of certain other subsidiaries.

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

Off-Balance Sheet Arrangements

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

Research and Developments, Patents and Licenses

In accordance with SFAS No.2 Accounting for Research and Development Costs, research and development costs are expensed in the period in which they are incurred. Acquired research and development having no alternative future use is written off at the time of acquisition. The cost of intangibles that are purchased from others for a particular research and development project that have no alternative future use is written off at the time of acquisition.

In the last three fiscal years ended December 31, 2004, December 31, 2005 and December 31, 2006, the Company has spent $1,948,000, 2,103,000 and 2,372,000 respectively on Research and Development expenses.

SELECTED ANNUAL INFORMATION
(in thousands of U.S. dollars, except share related data) (U.S. GAAP)

	2006		2005		2004

Revenues
Product sales	$	83,545	$	72,989	$	61,693
Royalty and licensing	2,121		3,143		4,326
Anipryl® deferred revenues	3,301		3,301		3,301
	$	88,967	$	79,433	$	69,320

Net income (loss)
—From continuing operations	$	11,547	$	7,784	$	7,977
—From discontinued operations	—		—		(61		)
	$	11,547	$	7,784	$	7,916

Basic income (loss) per share
—From continuing operations	$	0.28	$	0.19	$	0.20
—From discontinued operations	—		—		—
	$	0.28	$	0.19	$	0.20

Diluted income (loss) per share
—From continuing operations	$	0.28	$	0.18	$	0.19
—From discontinued operations	—		—		—
	$	0.28	$	0.18	$	0.19

Total assets	$	105,962	$	95,820	$	88,785
Total long-term financial liabilities	990		308		—

SUMMARY OF QUARTERLY RESULTS
(in thousands of U.S. dollars, except share related data) (U.S. GAAP)

	Q4, 2006		Q3, 2006		Q2, 2006		Q1, 2006		Q4, 2005		Q3, 2005		Q2, 2005		Q1, 2005

Revenues
Product sales	$	23,106	$	19,788	$	23,003	$	17,648	$	17,273	$	16,034	$	19,176	$	20,506
Royalty and licensing	465		617		437		603		562		598		470		1,514
Anipryl® deferred revenues	825		825		825		825		825		825		825		825
	$	24,396	$	21,230	$	24,265	$	19,076	$	18,660	$	17,457	$	20,471	$	22,845

Net income	$	3,687	$	2,604	$	3,564	$	1,692	$	1,067	$	1,069	$	2,353	$	3,295

Basic income per share	$	0.09	$	0.06	$	0.09	$	0.04	$	0.03	$	0.03	$	0.06	$	0.08

Diluted income per share	$	0.09	$	0.06	$	0.09	$	0.04	$	0.03	$	0.03	$	0.06	$	0.08

MAJOR TRENDS IN QUARTERLY NUMBERS

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

Commencing in the second quarter of 2003, the contract manufacturing segment began a significant ramp-up of shipments of Hectorol® Injection for Genzyme and products under its GSK manufacturing agreements. This resulted in a positive upward trend in revenue mainly in contract manufacturing and increasing margins due to the higher margin sterile business and the financial benefits of improved capacity utilization. The major trend in revenues has been the shift in business in contract manufacturing where sterile product revenue occupies a higher share of overall revenue driven by the GSK and Genzyme business. This trend continued through 2004 and into the third quarter of 2005. The result was increasing volume and associated product gross margins in contract manufacturing.

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

However, during the third quarter of 2005, the Company’s contract manufacturing operation extended its scheduled shutdown period at the beginning of the third quarter in the sterile area in order to correct an electrical panel failure and make associated repairs. The decision to revalidate the entire sterile area following these repairs and to recalibrate production schedules had material financial implications that hindered third and fourth quarter results in 2005. Finalizing and executing on production schedules in the fourth quarter of 2005 were further hindered by delays in receiving some component materials from suppliers. Production in contract manufacturing was ramping up towards normalized production levels by the end of the third quarter of 2005. The overall effect of the extended shutdown was to negatively affect the Company’s key financial metrics over the second half of 2005 and offset the significant growth achieved over 2004 in the first half of 2005. The impact on product gross margins in the second half of 2005 was approximately 5%. The peripheral impacts of the extended shutdown specifically as it related to production scheduling impacted overall results into February 2006.

Beginning March 2006, the Company returned to normalized production volumes. The contract manufacturing segment began achieving significant volume growth beginning with the second quarter of 2006 and extending to the end of 2006. The growth was driven by the sterile products area, in particular, by volume from two major customers, Genzyme and GSK. In addition, the Company benefited from the effects of the contribution of additional lyophilization capacity for 2006, which increased sterile lyophilization volumes in 2006 relative to 2005. Third quarter results for 2006 reflected the impact of a normal shutdown period in contract manufacturing. As the 2006 shutdown was completed on plan, the Company was able to return to volumes achieved in the second quarter of 2006 by the fourth quarter.

In the radiopharmaceutical segment, volumes have increased since the first quarter of 2003, related to the introduction of Sodium Iodide I-131 to the U.S. In the fourth quarter of 2004, a change in customer purchasing patterns occurred, which lowered cold kit sales to the U.S. below traditional levels in October and November. Cold kit sales returned to more traditional levels in 2005 and the primary driver for growth in 2005 remained the increasing penetration of Sodium Iodide I-131 in the U.S. Radioiodine sales (Sodium Iodide I-131) continued to drive sales growth in 2006 via increased U.S. market penetration including the introduction of diagnostic capsules into the U.S. marketplace. Overall, margins increased over 2005 due to the decision in late 2005 to discontinue sales of brachytherapy products.

Apart from the impact of foreign currency on the Company’s Canadian denominated SG&A spending, SG&A spending increased in 2005 due to costs of process improvement initiatives commencing in the second quarter of 2005, one-time costs associated with the exit of the brachytherapy product line, which occurred in the fourth quarter of 2005 and severance costs in the fourth quarter of 2005. Effective January 1, 2006, the Company has included stock-based compensation costs in SG&A expenses as a non-cash item. This had the effect of lowering EPS by 2.3 cents for 2006 relative to 2005 or 0.6 cents per quarter during 2006. Fourth quarter 2006 results were impacted by accruals for long term incentive plan awards based on the Company’s financial performance in 2005.

Depreciation and amortization costs continue to rise over time. This reflects the capital expenditure programs implemented since 2002. This trend continued, specifically, as the second lyophilization unit was fully installed and validated in the first half of 2005.

Foreign exchange has impacted EPS to the extent of the strengthening of the Canadian dollar and its affect on the Company’s net monetary position held in U.S. dollars for 2005 resulting in a foreign exchange loss during 2005. The Canadian dollar weakened late in 2006 resulting in a foreign exchange gain on U.S. dollar denominated net monetary items.

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

The Company’s effective tax rate has been significantly below the statutory rate due to the recognition of previously unrecognized loss carryforwards. The Company’s ability to execute on tax planning opportunities has expanded as a result of the increased operating profits of its contract manufacturing segment, the amalgamation of its two core businesses effective January 1, 2005, and the purchase of all minority interest shareholdings of its contract manufacturing business on April 22, 2004. This trend is not expected to continue in the long term and the effective tax rate is expected to return closer to statutory levels, subject to the amount of R&D spending. Over the short term and specifically in 2005, the Company benefited from the recognition of the lower effective statutory tax rate attributable to milestone payments received, and through withholding tax refunds received in the year but not previously estimated to be recoverable and changes to statutory tax rates resulting in one-time adjustments to the deferred income tax values. As expected, during 2006 income taxes moved closer to statutory levels less the positive impact of tax credits received on R&D expenditures.

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

Capital expenditures tend to rise during and after shutdown periods (usually in the third quarter) when most installation activities take place. Information technology and SAP spending to upgrade both platforms accelerated in the second half of 2006.

OUTLOOK

The following section contains numerous forward-looking statements specifically pertaining to guidance. Management has included a narrative of the underlying factors and assumptions on which the forward-looking statements are based. While management believes that the basis for these forward-looking statements is reasonable, they are based on information currently available to management and, accordingly, actual results could differ materially from the forward-looking statements (see Forward-Looking Statements below for factors that could cause our results or performance to differ materially from a conclusion, forecast or projection in the forward-looking statements).

The Company’s ability to forecast revenue over shorter-term periods, especially quarterly targets, is very difficult and less accurate during periods in which significant changes are made to production schedules, whether due to production issues or changes to the size or timing of customer demand. While delays in receiving component parts are not unusual, when combined with production issues or customer timing changes, they can significantly impact revenues compared to forecasts for a given period. Furthermore, due to the complexity of sterile manufacturing and the rigors and demands of the quality testing and release process, anticipated shipment dates and the accompanying revenues can change from period to period based on the independent quality control process. Accordingly, the Company does not and does not plan to provide specific quarterly guidance.

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

demand, which are out of the control of the Company, can result in revisions to production schedules. In addition, unforeseen production problems can potentially cause variations from revenue forecasts and ultimately EPS estimates. Customer forecasts can change positively or negatively based on several factors such as the ability of our customers to obtain regulatory approval, the success of the product produced for them in the marketplace and regulatory changes affecting product demand (see Forward-Looking Statements).

Consolidated Guidance

2006 Guidance Achievements

The Company originally provided EPS guidance of between 23 and 27 cents for 2006. In conjunction with the release of the results for the third quarter of 2006, the Company then expected to achieve EPS closer to the higher end of its original guidance range. The final results for 2006 not only achieved the higher end of the guidance range but exceeded it by 1 cent. The Company was able to exceed the guidance range mainly due to strong fourth quarter production performance and the timing of customer demand in the contract manufacturing business as well as foreign exchange gains on U.S. dollar denominated monetary items. The stronger than anticipated volumes in 2006 due to the timing of requirements from our major customers, including Genzyme and GSK, have resulted in lower preliminary volume forecasts from these customers for 2007 relative to 2006. These preliminary volume forecasts are considered in our guidance range for 2007. The actual volume requirements will be determined by the timing of end-user demand and supply chain management decisions and can vary materially from preliminary forecasts. Both factors are outside of the Company’s control.

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

2007 Guidance

As indicated in prior disclosures, substantially all revenues related to the amortization of previously received Anipryl® milestones (see Corporate and Other) terminated on December 31, 2006. The amortization of these deferred revenues has previously resulted in non-cash revenues of $0.8 million per quarter or $3.3 million per year. The termination of the amortization of deferred revenues had no effect on cash flows but had the impact of contributing 7 cents a share to 2006’s reported EPS.

As of February 23, 2007, the forecast information received by the Company from several major customers includes variable factors and assumptions, such as size of requirements and timing of regulatory approvals, that significantly impact overall forecast reliability to a degree that the Company is unable to provide reasonable revenue guidance. However, based on the current information available, EPS is expected to range between 23 and 27 cents for 2007 as compared with 21 cents in 2006 adjusted for the exclusion of the amortization of Anipryl® deferred revenues. This is the same guidance range we gave for 2006 but now excludes approximately 7 cents of EPS from Anipryl® deferred revenues.

While the Company does not plan to provide quantitative quarterly guidance, the Company expects the first quarter results for 2007 to be weaker compared to the fourth quarter of 2006. The main reason is a delay in receiving component parts related to Hectorol® Injection creating a production delay for this product. Due to sufficient customer inventory levels, the delay does not create any issues in the end-user market. However, it will have an impact on short-term results of the Company and the contract manufacturing segment. This has been factored into our overall consolidated guidance range.

The Company’s formal contractual arrangements with Genzyme for the production of Hectorol® Injection will terminate in March 2008. The Company expects continuing production of Hectorol® Injection for Genzyme beyond this date. The actual volumes expected to be produced and shipped are dependent on the usual factors affecting end-user demand including reimbursement policies and customer supply chain management practices. Accordingly, Hectorol® Injection volumes are subject to a high degree of variability between now and 2009. While the Company may continue producing Hectorol® Injection over a long-term

period, the Company is planning for the eventual phase out of Hectorol® Injection volumes over time with such capacity to be eventually filled by other products and customers.

Since the Anipryl® deferred revenues represent a non-cash source of earnings in 2006, the Company believes that net operating cash flow is a reasonable metric to measure growth on a year-over-year basis. Net operating cash flow is expected to be at least $20 million for 2007 subject, as always, to working capital requirements to support business growth.

Sources of Future Growth

The Company’s guidance for 2007 represents core growth in operations. The Company believes that future additional growth for 2008 and beyond will come from the success of one or more of the many initiatives that have been developed over the past few years and that we continue to develop. The following potential opportunities do not include any potential merger and/or acquisition activities and are not listed in any particular order as the potential financial impact of each can vary materially over time:

· Conclusion of a strategic alliance with a commercial partner in Europe for the sales and marketing of the four product files currently under review by the European regulatory authorities. These are files for products currently sold in the U.S. or Canada.

· The filing for approval of a generic form of Sestamibi in the U.S., Europe and Canada followed by its introduction into those marketplaces.

· Completion of the development of proprietary technology for a second-generation Technetium Generator and licensing it to others for distribution.

· Clinical trials for a new formulation of INFECTON® targeted to orthopaedic indications subject to final analysis and recommendations of an expert panel.

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

· Completion of clinical trials for I-131 MIBG for the diagnosis and treatment of neuroblastoma and related malignancies and its subsequent sale and distribution in North America.

· Completion of negotiations followed by product transfers for the manufacture of a new portfolio of non-sterile products.

· Development and approval of additional generic imaging products that have now ceased or will shortly cease to be protected by patent.

· Expansion of manufacturing capacity at the Montreal facility to accommodate new business opportunities.

Other

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

ACCOUNTING MATTERS

Critical Accounting Policies and Estimates

The foregoing discussion and analysis of the financial condition and results of operations is based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of Consolidated Financial Statements requires the Company to make estimates and

judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related 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 of the significant accounting policies and methods used by the Company in the preparation of its Consolidated Financial Statements is included in Notes 2 and 3 to the 2006 audited Consolidated Financial Statements. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.

Recognition of Licensing Revenue

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

Deferred Tax Assets

Realization of the net deferred tax assets is dependent on the Company’s ability to generate sufficient taxable income in certain tax jurisdictions. Management believes that it is more likely than not that the assets will be realized, based on forecasted income. On a quarterly basis, the estimates and assumptions underlying the forecasted income are reviewed by management to determine whether additional valuation allowances are warranted or valuation allowances are still required. The Company has taken valuation allowances related to tax loss carryforwards in jurisdictions where taxable income is no longer generated, it is not likely to generate sufficient taxable income 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 by taxation authorities and the ability to execute on tax planning opportunities can significantly affect the amount of valuation allowances.

Allowance for Doubtful Accounts

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

Provision for Inventory Obsolescence

Provisions for inventory are charged against income when it is determined that specific inventory items do not meet the defined quality and regulatory requirements for sale. The Company does not make general provisions for inventory obsolescence.

Foreign Exchange Risk

The Company’s reporting currency is the U.S. dollar. The functional currency for its Canadian operations—which include the radiopharmaceutical segment, the contract manufacturing segment and royalties and milestones related to product rights sold to Shire—is the Canadian dollar. Accordingly, the Company’s foreign exchange exposure for accounting purposes mainly relates to U.S.-denominated monetary assets of these operations. The Company currently does not actively hedge this exposure, but reduces the exposure by maintaining the minimum level of U.S.-denominated cash available to meet its short-term cash requirements.

Recent Accounting Pronouncement

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

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

FORWARD-LOOKING STATEMENTS

This MD&A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and as contemplated under the Private Securities Litigation Reform Act of 1995 and other applicable securities legislation. These statements are not guarantees of future performance. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from such statements or from any future results or performance implied thereby. Factors that could cause the Company’s results or performance to differ materially from a conclusion, forecast or projection in the forward-looking statements include, but are not limited to:

· the achievement of desired clinical trial results related to the Company’s pipeline products;

· timely regulatory approval of the Company’s products;

· the ability to comply with regulatory requirements applicable to the manufacture and marketing of the Company’s products;

· the Company’s ability to obtain and enforce effective patents;

· the non-infringement of third party patents or proprietary rights by the Company and its products;

· factors beyond our control that could cause interruptions in our operations in our single manufacturing facility (including, without limitation, material equipment breakdowns);

· reimbursement policies related to health care;

· the establishment and maintenance of strategic collaborative and commercial relationships;

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

· the disclosure of confidential information by our collaborators, employees or consultants;

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

· the Company’s ability to grow the business;

· the fluctuation of our financial results and exchange and interest rate fluctuations;

· the adaptation to changing technologies;

· the loss of key personnel;

· the avoidance of product liability claims;

· the loss incurred if current lawsuits against us succeed;

· the volatility of the price of our common shares;

· market acceptance of the Company’s products; and

· the risks described in “Item 3. Key Information—Risk Factors” in this Annual Report.

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

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

PART III.

Item 19. Exhibits

Exhibit No.			Description

	12	.1*	Certification of CEO required by Section 302 of the Sarbanes-Oxley Act of 2002
	12	.2*	Certification of CFO required by Section 302 of the Sarbanes-Oxley Act of 2002
	13	.1*	Certification of CEO required by Section 906 of the Sarbanes-Oxley Act of 2002
	13	.2*	Certification of CFO required by Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

	DRAXIS HEALTH INC.

Date: August 15, 2007	By:	/s/ MARK OLEKSIW
		Chief Financial Officer

	By:	/s/ MARTIN BARKIN, M.D.
		President and Chief Executive Officer

Draxis Health (DRAX) Inactive 20-F/A2006 FY Annual report (foreign) (amended)

Explanatory Note